“Tax the rich, end the wars, and restore honest and effective government for all”, Jeffrey Sachs [Munk, 2013].
Tax is often considered a dirty word by enterprises. In fact, tax should be celebrated. The business case for tax is that revenue can be invested in public services and infrastructure – both of which are necessary for a healthy, well-educated workforce, to attract investment, and for growth.
A couple of months ago I spent some time in Uganda, working with small and medium sized enterprises (SMEs). A conversation with Jane Nalunga – who works for an NGO named SEATINI Uganda – made me realise that international tax policies are unfair towards developing countries, such as Uganda, where tax revenue is much needed. Especially in my own country of birth – The Netherlands – tax rules are allowing multinationals to get away with tax avoiding practices, on a big scale.
The Netherlands is a Tax Haven
Thousands of international firms are currently guilty of legal tax avoiding practices. In the Netherlands alone, there are more than 14.000 firms set up with the intention to avoid taxes in the country of operation. [OxfamNovib, 2016].
Developing countries tend to be the hardest hit by tax avoidance by multinational corporations, as developing countries tend to be more reliant on corporate tax than developed countries.
Currently, developing countries are losing a shocking amount of around €460 million annually due to tax evasion via the Netherlands. And more than 100 billion annually is lost through tax evasion worldwide [OxfamNovib, 2016]. It is likely that these numbers are even higher as many companies have not disclosed their information. It is currently impossible to know exactly how much money ‘disappears’ by tax evasion, which is exactly why governments should establish international rules that require companies to provide such disclosure.
The Netherlands is no small player. ‘De Volkskrant’ reported in 2014 that there is no other country where such large amount of money has been being funnelled for tax reasons than the Netherlands. For example, the 500 largest US companies – the Fortune 500 – had made investments worth 127 billion dollars by December 31, 2010. 93 billion of this travelled through tax friendly Netherlands. The Netherlands seemed much more popular than notorious tax havens like Bermuda and the Cayman Islands. Knowing this, the PVV (Dutch Party of Freedom) – supported by other political parties such as the VVD and PvdA – rejected a motion which urged the government to qualify the Netherlands as a tax haven. As soon as the government stops denying the problem, we can start to solve it.
Double Tax Treaties
SEATINI-Uganda published a paper in collaboration with Action Aid on Double Taxation Treaties (DTTs) in Uganda in 2014 [SEATINI-Uganda, ActionAid, 2014]. According to this paper, “the network of DTTs is one of the mechanisms used by companies to avoid paying taxes, leading to illicit financial flows and tax losses for Uganda”. Multinational companies are known to set up a subsidiary in a conduit country only to avoid being taxed in the country of operation. This way profit ends up in developed countries, with minimal tax payed in the countries of operation. This phenomena is known as profit shifting. In Uganda many treaties have been signed following a model treaty that was developed by the OECD countries. Unfortunately, those treaties favour OECD countries, rather than developing countries. In developing the new policy on negotiation of DTTs, Uganda could draw on examples of treaties that have gone beyond the UN model – like the ones developed in the Andean region in Latin America [SEATINI-Uganda, ActionAid, 2014].
Renegotiation of DTTs will be a step toward a shift from the current tax policy that continuously adds more taxes to the ordinary citizens who struggle to make ends meet, and will make an end to illicit financial flows and tax losses for countries such as Uganda [SEATINI-Uganda, ActionAid, 2014].
Tax the rich
Transparency on national, regional and local budgets, and on spending and accountability should be encouraged in developing countries. However in order to solve tax evasion, corruption, and fraud, an international approach is needed. Northern governments should reconsider their policies, to ensure that politicians, wealthy individuals and (large) companies operating in developing countries have no opportunity to use countries like the Netherlands to launder their money and / or to evade tax.
Even billionaires and millionaires themselves are convinced that extreme inequality in the world is a big problem. This problem is unlikely to be solved with philanthropic contributions, but rather by greater changes in policy. In the US there is a group called the patriotic millionaires who actively lobby towards the Congress to avoid tax exemptions for the extremely wealthy. They wrote: “in the interest of all our fellow citizens, we ask you tax on income above raise $ 1,000,000” [The Patriotic Millionaires, 2016].
Race to the bottom
One of the main problems is that too many countries want to attract foreign investment. If a company finds out that is could pay lower wages or lower tax elsewhere, it might go off. The Netherlands believes that their tax policies are bringing in money. However, what is often forgotten, is that a lot of tax avoiding companies which funnel money to the Netherlands, also pay too little tax in the Netherlands, which is costing the Netherlands around 5.5 billion euros.
In order to avoid this, The Netherlands could support a European plan to limit tax competition in Europe. Furthermore, it is desirable to see agreements between the Dutch Tax and international companies disclosed.
The European Commission has recently renewed the debate on the desirability of a EU common consolidated corporate tax base (CCCTB) as an EU priority put on the agenda in 2015. A concrete proposal of the European Commission can be expected this month.
In its current policy framework the Netherlands should be classified as a tax haven. More importantly, all governments – including the Netherlands – could make tax laws more fair in order for international companies to pay tax in the country of operation, and in order to reduce inequality. Furthermore, international rules should be implemented which require companies to provide disclosure and which prevent illicit flows of money between countries.
A tax race is a race to the bottom and this should be avoided by international collaboration. Furthermore, developing countries cannot be further marginalised in negotiations, collaborations and other global processes. In order for developing countries to benefit from multinational companies operating in their country, it would be highly desirable to see issues related to DTT’s and tax avoiding practices included on the agendas of politicians worldwide.
Munk, N. (2013) ‘The idealist: Jeffrey Sachs and the quest to end poverty.’ Signal.
OxfamNovib (2016) ‘Nederland Belasting Paradijs’. [ONLINE] Available at: http://www.oxfamnovib.nl/Redactie/Downloads/Rapporten/Nederland_belastingparadijs.pdf [Accessed 07 September 2016].
SEATINI-Uganda, ActionAid (2014) ‘Double Taxation Treaties in Uganda – Impact and Policy Implications, (Kampala: SEATINI-Ugana).
The Patriotic Millionaires (2016) ‘The Patriotic Millionaires.’ [ONLINE] Available at: http://patrioticmillionaires.org/. [Accessed 07 September 2016].