Tax Justice for Social Justice

By Martina Neuwirth and Thomas Kattnig

[This blog article published on July 9, 2015 is translated from the German on the Internet, http://blog.arbeit-wirtschaft.at.]

June 23 was the international day of public services. Did you know that? Provision of these services – water, hospitals, schools, culture, energy, streets, public transportation and a good administration – is important for all citizens along with a functioning state. But financing these services has become harder and harder! Every year states lose billions in tax revenues through the aggressive tax evasion practices of international corporations. At the same time corporations profit from these public services whose financing is left to the citizens.

DOES TAX BURDEN DETERMINE THE LOCATION DECISION? REALITY IS MORE COMPLEX

In the decision over location, many questions like public safety, medical services, training workers, independent legal systems, public transportation and a well-functioning administration play a crucial role. Therefore the tax tricks of Amazon, Google, Ikea and McDonalds trigger an international wave of indignation on account of their harmful effect on society.

In Austria, financing the planned wage tax reform is now controversial. This wage tax reform with a relief of five billion euros for employees is a massive rebellion against the austerity policy carried out almost religiously across Europe to increase purchasing power and stimulate the economy. In addition, a fair distribution of the tax burden is imperative. Our tax system favors international firms and the propertied. On the tax payments of US corporations, these corporations have paid between 1.8 and 9.4 percent of their profits to the treasury since 2005.

TAX FRAUD AND TAX AVOIDANCE OF BUSINESSES ON AN IMMENSE SCALE

1 trillion euros a year are missing from public European budgets through tax fraud and legal tax evasion according to the EU Commission’s estimate. This problem is not limited to Europe. Every year $50 billion are smuggled from Africa – more than the continent receives in development assistance. Over 60% of that involves tax flight and tax evasion of firms. This is possible through a global network of tax havens (like Luxemburg) and an industry of consulting businesses that tailor tax-saving models for their clients. An international tax system makes this first responsible and is to blame.

WHAT MUST BE DONE?

Finally, there are now measures against the tax-sparing profit-shifting practices of multinationals. Negotiations over these intrigues are occurring in the OECD, the “club of rich countries.” An expert function is only awarded to the UN. Past reform initiatives only scratched the surface. The self-interests of the OECD governments and the lobbying of big businesses and their tax adviser firms are simply too great. In the meantime, the tax competition between countries that makes global tax revenues fall again and again cannot be stopped.

For a just tax system, we need:

• Global solutions: All countries, even poor developing countries, must jointly craft global tax rules in the framework of the UN.
• More cooperation: the disastrous international tax competition must end.
• Taxation according to economic activity: international corporations with their complex impenetrable structures must be considered as a unity. Taxation must occur where the profits are actually amassed – and not where it is fiscally most advantageous. Therefore businesses in the future should show separate sales, profits and paid taxes for every country (national reporting). This information should be available to the public and not only to the tax authorities. Only this way can expenditures be scrutinized and special agreements between individual corporations and finance ministries at the expense of citizens (e.g. Luxemburg) stopped. In the past, only banks and mammoth raw material corporations had to make such information statements.
• More transparency: The automatic information exchange of tax authorities must be really global. Gaps promote tax loopholes. More information about international firms, a publically accessible business register – must be available to a broader public. The use of pseudo-constructions for tax evasion should be made difficult.

UN CONFERENCE AS A POSSIBLE “GLIMMER OF HOPE”

Unions and non-governmental organizations worldwide urge the conversion of these demands on the national, OECD-, EU- and UN planes. The next test case will be the UN development financing conference from July 13-15 in Addis Ababa (Ethiopia). For months, UN member states have negotiated whether the formation of the international tax system should be left to the OECD or whether the UN would be better. However many industrial countries, especially the US, are strictly against the proposal of a UN tax organization. No agreement could be reached in the past. Will the UN states in Addis with the encouragement of the UN set the points for a fair international tax system deserving its name?

RELATED LINK:

“Offshore Shell Games 2014,” Citizens for Tax Justice, June 2014, 56 pp
http://ctj.org/pdf/offshoreshell2014.pdf

Many large U.S.-based multinational corporations avoid paying U.S. taxes by using accounting tricks to make profits made in America appear to be generated in offshore tax havens—countries with minimal or no taxes. By booking profits to subsidiaries registered in tax havens, multinational corporations are able to avoid an estimated $90 billion in federal income taxes each year. These subsidiaries are often shell companies with few, if any employees, and which engage in little to no real business activity.

Congress has left loopholes in our tax code that allow this tax avoidance, which forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.

Companies can avoid paying taxes by booking profits to a tax haven because U.S. tax laws allow them to defer paying U.S. taxes on profits they report are earned abroad until they “repatriate” the money to the United States. Corporations receive a dollar-for-dollar tax credit for the taxes they pay to foreign governments in order to avoid double taxation. Many U.S. companies game this system by using loopholes that let them disguise profits legitimately made in the U.S. as “foreign” profits earned by a subsidiary in a tax haven.