From corporate capture to capturing the corporate

The roughly 80,000 transnational corporations operating across the world are responsible for approximately 80 per cent of global trade flow. Their own interests are protected by wide-ranging investment regulations, but transnational companies resist binding rules when it comes to human and workers' rights, where they generally call for self-regulation and as few contractual obligations as possible.

Experience has shown that voluntary approaches only work to a limited degree: extreme working hours, inadequate pay, gender-based violence and restrictions on labour rights are common features of the daily conditions within the global supply chains.

And the contribution by transnational corporations to overall welfare has also proven to be modest. National regulatory tools and instruments are unable to guide global financial flow. Moreover, inadequate regulations and lack of transparency allow for legal tax avoidance, but also tax evasion on a massive scale. Through trade misreporting and tax arbitrage, Africa has lost over 1 trillion US dollars since the 1970s, according to one study. If retained and invested, this capital could have accelerated the progress towards the continent’s poverty reduction target by up to 2.5. per cent.

Nothing seems to stand in the way of the economic and financial strategies of transnational corporations, as they lobby to impact political decisions and cause massive economic, social, environmental and political effects at both local and global levels.

In 2016, the Friedrich-Ebert-Stiftung (FES) launched a project called Corporate Capture or Capturing the Corporate, which aims at shaping a reformed global agenda on democratic control and due diligence of transnationals.

“We want to shed light on an important topic in the discussion about the relationship between democracy and capitalism, the influence that multinational corporations have in shaping the perception about democracy,” explains Claudia Detsch of Nueva Sociedad, a regional project of FES in Latin America, publishing a namesake printed and online newspaper for dialogue between politics and science. Contributing from Buenos Aires, the Nueva Sociedad team is one of the FES offices behind the project on transnational corporations.

“Corporate Capture or Capturing the Corporate is one of the first global projects by the department for international cooperation of FES that brings together offices and partners from four continents,” said Alexander Geiger, project coordinator based at the FES headquarters in Berlin, where he recently hosted a two-day international event as part of the project.

Economy and human rights, investment protection treaties, illegal financial flows and corruption, and taxation reform for international companies were at the crux of the debates during the event that took place from 24-25 April in Berlin.

“In addition to a public panel discussion, we held an international conference that helped us collect experiences and perspectives to start shaping a comprehensive reform agenda on regulating multinationals,” explained Geiger. “Such a reform agenda can lead to policy and regulatory solutions in protection of employees and human rights, while ensuring just taxation and combating tax evasion.”

What would such a comprehensive reform agenda look like, what elements would it consist of, and how can they take shape? Would a legally binding instrument on transnational corporations and human rights stand a chance of becoming effective? What is a viable way to reform international corporate taxation? Why should we worry about illicit financial flows across the globe and how can we address them?

Three participants and panellists at the April conference contributed their expert opinion.

The working world is one of the realms where the impact of activities by multinational and transnational enterprises are greatly felt, in contexts where we find absence and violation of labour rights. It also determines how unions experience the implementation of international control mechanisms regulating the activities of transnational corporations.

Formulating a legally binding instrument with respect to human rights and business enterprises at the United Nations offers a major opportunity for trade unions to counter the key players in the global capitalist economy, i.e. multinational corporations. It strengthens trade unions in their efforts to do more to curb the power of companies.

In June 2014, under the auspices of the governments of Ecuador and South Africa, the Human Rights Council (HRC) adopted Resolution A/HRC/RES/26/9, “Elaboration of an international legally binding instrument on transnational corporations and other business enterprises with respect to human rights”. Since then, the Open-ended Intergovernmental Working Group held two sessions, in 2015 and 2016.

An intervention in this UN process is of strategic importance for the international trade union movement, as trade unions are key players in the activities confronting transnational enterprises at the national and international level.

Trade unions are still the main tool for representing the interests of all workers. Without giving up their presence and influence in the ILO, trade unions need to complement their strategy and address the power of business enterprises by adopting a binding instrument on companies and human rights within the United Nations.

At the moment, there are two international proposals for the reform of international corporate taxation. I leave aside here the border adjustment tax proposal by the Trump administration, a proposal that will completely blow apart the existing international tax system. Like the recent health reform proposal, I don’t expect the tax one to proceed.

The Base Erosion Profit Shifting (BEPS), a mainstream agenda launched by OECD in 2013 restricts its ambition to patching gaps of the existing international tax rules and leaves in place the fundamental principle on which the current international corporate tax system rests - the arm’s length principle. Based on this principle, a multinational company is treated as if it were not more than the sum of its parts, consisting of subsidiaries which, then, trade with each other as independent market participants. The prices they bill each other, for components sold among the subsidiaries, are set as if the subsidiaries of the same multinational were fully independent market participants. As a result, the current international corporate tax system is based on a fiction, not reality.

Unitary taxation is a proposal by ICRICT, the Tax Justice Network and civil society more broadly. It treats multinational companies as a single unit and looks at corporate groups in an integrated fashion.

The problem with the arm’s length principle is that it allows multinationals, through manipulation of prices, to shift their profits to wherever tax rates are lowest. Consequently, they can declare losses in higher-tax nations, in developing countries, also in OECD countries, and at the same time declare high profits in tax havens where they are not paying any tax. Unitary taxation would do away with these shenanigans because it will look at the overall group accounts and then allocate the profits made by the group as a whole to the different components in the different countries where the group is operating, according to indicators of real economic activity, such as turnover, staff, fixed capital assets, such as machinery or factories. Then, each country will be free to apply their own tax rate to their share of the profit of the multinational.

Now, the main obstacle for implementation is the combination of corporate lobbyism against fundamental reforms and the lack of political will and courage on behalf of major blocs or economies. And, the ideology underpinning both, which is the ideology of tax wars – of a necessary race to the bottom, that countries need to engage in competitive tax rate policy and reducing their tax race to attract investment. The empirical base for that claim is very thin indeed. To the contrary, it has become increasingly clear that growth is a function also of robust tax systems and of corporate tax payments.

The problem to overcome is the lack of robust evidence and data that policymakers need to simulate and calculate what a unitary tax system may yield. To make that calculation robust enough, we need public country-by-country reporting. At the moment, there is no single accounting standard that requires country-by-country breakdown of the activities of multinationals. Therefore, the really challenging question is how to convince a government that the switch of the system in the net-effect will yield as much or more revenue as the current system. That is why public country-by-country reporting is a necessary intermediate step before we can proceed with unitary taxation.

Any country could proceed on unitary taxation – there is no need for a global agreement on a formula how to allocate the profits. At the moment, public country-by-country reporting is being discussed at the European Union level. So far, the European Parliament is very much in favour of a sound proposal, unlike the Commission. We have to see how this fight will unfold: corporate lobbyists are right now busy trying to influence the Parliament to not require mandatory public country-by-country reporting for multinationals no matter where these are based.

The OECD country-by-country reporting is a useful project, but it’s not public. This is its main flaw. It will exacerbate the unfair distribution of taxing rights between developed and developing countries given that the access to that information is severely restricted by the OECD and will make it very hard for developing country authorities to use that data.

Without public data, it is very difficult to hold tax authorities to account in that case. They can enter into sweetheart deals and choose not to tax multinationals, which happens very often on the coattails of the ideology that presents as necessary competition in tax terms and thereby actually eclipsing real market competition.

Recent estimates indicate that US$1.1 trillion of illicit financial flows (IFFs) leaves developing countries each year (which is itself an under-estimate). Each year, Africa, for example, loses an estimated 80% of the annual financing needed to fill its infrastructure deficit through IFFs, undermining governance as officials are stretched tackling IFFs or themselves seek to retain a share.

A range of actors are involved, including perpetrators and those combating IFFs. Among the former, firms are important. Hundreds of billions are lost across the globe through mis-invoicing of licit goods, either to hide profits or expenditure to evade taxes or to conceal a transfer of illegally-earned funds on behalf of criminals. Multinational corporations are involved in the abuse of transfer-pricing between their affiliates to reduce their tax bills and are signing unequal contracts with governments. Criminals transfer illegally-earned funds abroad for multiple reasons. A host of actors such as Government officials, banks, tax lawyers and accountants aid this process in return for a cut of the illicit funds.

In response, a global coalition of governments, civil society and international organizations is needed to combat IFFs. Initiatives such as the High Level Panel on IFFs from Africa can mobilize political will to tackle the problem, through strengthening regulations –Africa has already mobilized hundreds of millions of extra tax dollars in this way – building enforcement capacity (to identify trade mis-invoicing, transfer pricing abuses and suspicious financial transactions, inter alia), international enforcement co-operation (including through information exchange), repatriating stolen assets and transparency, including country-by-country and project-by-project reporting by multinationals.

###