The Group of 77 and the fight against tax havens

The Group of 77 (G-77) is playing a leading role in promoting a fairer international fiscal agenda which puts an end to tax havens and gives rise to an intergovernmental tax organization in the framework of the UN.

Rosa Cañete, a specialist in this area and a director of Oxfam, comments on the approach of the G-77 in an exclusive interview.

What are the main motivations of the countries of the Global South for promoting an agenda for tax justice at an international level?

The main motivation of the countries of the Global South is the need to have resources of their own at an international level to guarantee certain rights to their citizens. Obviously, in many countries of the South, the available resources are insufficient. This means, states have not been able to raise sufficient funds to develop public policies which guarantee their citizens’ right to health and education. The issue of the financing of development in the countries of the South is of vital importance, as appropriate financing would allow them to be economically independent. Let’s look, for example, at the context of African countries and the donations and assistance from abroad they receive. Or the current Latin American context, where there is still a significant lack of possibilities of the states to close the gaps of inequality in a region which is growing and is actually not poor.

"In global terms, tax evasion and tax avoidance perpetrated by multinationals through tax havens deprive the countries of 100 billion US dollars every year."

In Latin America in 2013, 11 out of 18 countries did not manage to raise enough funds to meet the Sustainable Development Goals (SDGs). State revenues in these countries are below 20 per cent of their GDP, which is the percentage needed to meet the objectives established in the Millennium Development Goals and later in the SDGs. Therefore, the states in the South are unable to finance policies which could guarantee their citizens’ rights. As a matter of fact, one figure we have been emphasizing a lot in Oxfam is that, in global terms, tax evasion and tax avoidance perpetrated by multinationals through tax havens deprive the countries of 100 billion US dollars every year. If we calculate the cost of education services, this amount could be used to educate 124 million children who are currently not attending school. This money could also finance health care, allowing to save about six million children’s lives. This is the central motivation of the countries in the South for pushing this agenda of international tax justice: the need to increase their revenues and to do so in a fairer way.

As far as the creation of an intergovernmental tax organization in the framework of the UN is concerned, what characteristics should this organization have to play an effective role and guarantee that its objectives are met?

The main reason why we call for the creation of this organization is the need for democratic governance in the redefinition of tax regulations at an international level. Even though there is a general consensus between the countries in the North and in the South, it is necessary to really stop the race to the bottom in the area of taxation of transnational companies and also of the wealthiest individuals, because we are all losing resources.

There are important differences between the interests of the countries in the North and those of the countries in the South when it comes to the redefinition of these regulations. Therefore, until there is no UN organization which maintains a balance and democratic governance, where each country can have a vote and which can generate processes allowing us to move forward, towards certain agreements which guarantee a balance between the interests of both groups of countries, we will not reach our final objective—greater tax justice and equal participation of the countries in the North and the South. This would be the main characteristic of this organization, the capacity to apply more democratic governance when it comes to decisions about the reform of tax regulations, a topic Oxfam has been addressing for years. The initiative about Base Erosion and Profit Shifting (BEPS) promoted by the Organisation for Economic Co-operation and Development (OECD) is an advancement and although it is generating a dialogue and establishes a series of goals to gradually close these loopholes in taxation and agreements, it is still an initiative ruled by the G-20 and the OECD. This is why it won’t close the gaps in the central areas of interest of Southern countries, like tax incentives for companies. This is an issue which is not addressed with emphasis, as one of the functions of the Foreign Ministries in the countries of the North is to support their private sector. And this private sector of countries in the North benefits from mechanisms applied in the South to attract direct foreign investment by reducing tax rates. Thus, as a consequence of this difference in interests, tax incentives are not a topic addressed by BEPS. And this is where the issue of source reporting or principle residence reporting comes up, too.

Obviously, the countries in the North want the companies to pay taxes in the countries where their headquarters are located, while the countries in the South want them to pay taxes where they produce, as many of them have relocated their production to the South. So one of the characteristics of this new multilateral organization should be the democratic participation of all countries, both of the North and the South, and the possibility to push consensus about certain areas, including ways to overcome the obstacles from some countries which obviously find that their interests will be affected. This is a highly important topic.

Finally, another characteristic of such an organization would be that its financing should not depend solely on the states, but it should proceed from the UN budget, so its capacity of action is not restricted every time any state finds that its interests are not taken into due account by the other countries and decides in turn to curb the activity of the organization. These would be key characteristics we should discuss.

Considering the balance of power in the international scenario, what are the real prospects of achieving the creation of an intergovernmental tax organization?

I think that there is still no sufficient balance of power to achieve the creation of an intergovernmental tax organization. Yet, if there has ever been a moment in history with the greatest opportunity to achieve it, I would say it is precisely now.

On the Third International Conference on Financing for Development in Addis Ababa, the participants managed under great efforts to launch topics like the need for a reform of the international tax system and the creation of an organization allowing for the promotion of this reform on the agenda. The project was strongly curbed by the United States and the United Kingdom, and the necessary balance of power was not reached. The relevance of these two countries in terms of the donations the African governments receive ended up carrying away many of the latter, so they did not endorse the possibility to push forward this goal. However, a series of scandals and the role of the media in cases like the Panama Papers, the SwissLeaks or the LuxLeaks, has raised the debate about the topic and has resulted in the states having to answer before their citizens.

The Ecuadorian Presidency of the G-77, which has pushed the formation of a new intergovernmental tax body to a national and international level as a central topic on its agenda and one of the issues it is going to promote, opens a window of opportunity—the greatest we have had so far—to be able to foment the issue and reach the goal or, at least during this one year of Ecuadorian Presidency, take concrete steps forward which will eventually allow us to reach it.

Considering that Latin American countries are facing high levels of tax evasion and tax avoidance on the part of transnational companies and high-income individuals, are there similar proposals for action in the Latin American context?

We must say that in the regional context, it has been more difficult to launch this agenda in spaces of intergovernmental coordination. Promoting this agenda is part of the work of organizations like Oxfam, in alliance with the Tax Justice Network for Latin America and the Caribbean, the Central American Institute of Fiscal Studies (ICEFI) and other organizations. We are also observing that with El Salvador currently chairing the Community of Latin American and Caribbean States (CELAC), a window of opportunity is opening, as we know that tax justice is part of its agenda. We still have lots of regional coordination work ahead of us.

According to calculations of the Economic Commission for Latin America and the Caribbean (ECLAC), an amount equaling 6 per cent of the regional GDP is evaded in the form of corporate and personal income tax and VAT.

On the other hand, there is a regional context which should help attributing greater importance to this topic. Many countries of the region see their tax income affected. It is mainly countries which strongly depend on income from non-renewable resources, like Peru and Mexico, which find that their resources are reduced and affected by the price drop in international markets. Because of this, they obviously have to redefine their domestic tax policies. Furthermore, a great impediment for the countries in Latin America is the race to the bottom to attract direct foreign investment. Thus, being able to promote an agenda which reduces this race is of key importance so that the countries in the region can strengthen their capacity of action to guarantee their citizens’ rights. 

Currently, according to calculations of the Economic Commission for Latin America and the Caribbean (ECLAC), an amount equaling 6 per cent of the regional GDP is evaded in the form of corporate and personal income tax and VAT. Out of the 6 per cent, about 4 per cent are related to corporate and personal income tax. So pushing an agenda in the region which helps all countries restrict the companies’ and individuals’ capacity of evasion and avoidance should be of central importance in a context of economic downturn—especially in Latin America—and thus of a reduction of tax revenues, so the countries can safeguard and further strengthen the achievements made in the region in the first decade of the 2000’s. We are talking about an agenda which is fundamental if they really want to protect and strengthen the progress they have achieved before, because this progress has not been sufficient yet. This issue must be on the agenda of all regional organizations. Many organizations are working on that with civil society. There are very interesting regional experiences like that of the Eastern African Community (EAC), which has developed agreements in which the countries decide to harmonize their tax policies with the objective of eliminating distortions reducing their tax collection capacity. For example, its members have agreed upon a minimum corporate income tax rate (of 30 per cent). This initiative is a success story we must study and analyze how it can be adapted to the Latin American and Caribbean region.

Without regional and global coordination, the actions of the current Trump administration—not signing the multilateral Paris Convention of the OECD, obstructing the implementation of the Dodd-Frank Act or trying to lower the corporate tax rate from 35 per cent to 15 per cent—might cause a domino effect. This means we must reach an agreement to stop the race to the bottom in direct taxation and raise the low level of resources the states have at their disposal to guarantee their citizens’ rights. ###

Rosa Cañete is the coordinator of Oxfam’s campaign “Iguales” against inequality in Latin America and the Caribbean.

Translated from Spanish and adapted for format and style, the interview was first published by Nueva Sociedad, July 2017.