Toward Addis and a long, hot summer ahead

There are two pressing concerns facing us in 2015.

First, the increased crackdown on multinational corporations reportedly using offshore tax hubs to avoid taxes will make summer 2015 the make or break season for the global economy. On the one hand, the argument is made that firms such as Apple, Google, Amazon, Rio Tinto and Microsoft should pay their fair share as part of their corporate responsibility to society. While another credible argument is that the eventual recovery and health of the global economy does not depend on stronger governments, but on stronger multinationals that can sustain profitability after meeting their tax obligations.

Contemporaneous with this debate is the second issue. How do we shore up the global financing for development agenda to meet the sustainable development goals?

All eyes will be on the third International Conference on Financing for Development, which runs July 13-16. The Addis Ababa Accord will set out an ambitious global development agenda, which will shape all efforts going forward.

A workable solution can be found this summer, but it will be a long, hot one. The U.N. Economic and Social Council, the Department of Economic and Social Affairs, and the Organization for Economic Cooperation and Development’s Task Force on Tax and Development have already been pioneering work on international tax cooperation and development. The recently concluded ECOSOC special meeting, held April 22, further coalesced efforts toward the issue of tax incentives.

While there are no quick fixes or easy solutions, the opportunity exists for us to broaden this agenda, turning erstwhile tax avoidance into sustainable development financing. The Addis Ababa Accord and its follow up mechanisms can be critical to this effort.

Solving a supply side problem

There is a vast supply side challenge in financing the SDGs. Simultaneously, developed countries have struggled to meet their 0.7 percent commitments over the years. Existing proposals for a “crackdown on tax havens” by themselves will not guarantee that these additional resources will be directly channeled toward development financing.

Global tax avoidance legislation is very a contentious issue, something we were reminded of recently at the World Economic Forum in Davos. The opportunity exists for developed country governments to meet — and even exceed — their 0.7 percent commitments through partnerships with the private sector, instead of seeking to rely on the teeth of legislation, which usually have gaps and develop cavities anyway.

The time is right for development finance incentive mechanisms to be worked out with multinationals that reduce their direct tax liabilities in exchange for contributing trillions to financing the SDGs.

Global tax incentives for development

While there might be initial philosophical and logistical disagreements, globally governed incentives for development finance remain among the most practical ways of efficiently and effectively financing the SDGs at this time. Unlike traditional tax and development programs, which the OECD rightly concludes are often opaque and ineffective, there are at least two merits to this approach worth exploring.

At the national level, incentives to multinationals can significantly help shore up the bilateral resources of the U.S. Agency for International Development, U.K. Department for International Development, European Commission’s EuropeAid and Japan International Cooperation Agency, among others, toward exceeding their 0.7 percent commitments.

If the tax obligations of multinationals are incentivized alongside increased contributions to bilateral aid agencies where these multinationals have reasonable levels of economic activities, it would obviate the need to pass and enforce complex transnational tax legislation and treaties.

At the multilateral level, they can help finance a multiwindow global development finance trust fund. This fund could, among other things, provide resources for sovereign debt refinancing for middle-income countries, some of which are heavily indebted and do not qualify for the enhanced Heavily Indebted Poor Countries Initiative, the Multilateral Debt Relief Initiative or the Catastrophe Containment and Relief Trust.

Upper-middle-income countries have been the source of leverage for multilateral development banks, and so a global development finance trust fund could be accessible through existing MDBs, as well as new players such as the New Development Bank and the China-led Asian Infrastructure Investment Bank. A lucrative and captive market for this sovereign debt refinancing facility already exists throughout Latin America and the Caribbean.

Pursuing global tax incentives for post-2015 development financing could directly access the trillions of dollars multinationals can contribute to the global community. It is likely to disincentivize tax avoidance and further help meet the SDGs.

The Addis Ababa Conference will be the chance to right — and write — our development destiny.