Platform: Let's put an end to the scam of tax dodging, which hurts all of us

Published on Thursday 1 October 2009 22:18

IN THE wake of the financial crisis, we have all become more savvy about global economics. People may not understand the finer details, but most of us have been left with a nagging feeling of having been fleeced by titanic corporations.

The truth is, that multinational companies have been short-changing governments – and all of us – for years. Lax financial regulations and the lack of transparency offered by tax havens have enabled companies operating in different countries to mask their profits and hide their tax liabilities. Yet, while the UK government could do with a bit of extra revenue, the impact of tax dodging is felt much more acutely in developing countries.

In a new report, The Missing Millions, Christian Aid details how the five countries currently supported by the Scottish Government – Malawi, Rwanda, Sudan, Tanzania and Zambia – lost at least 43 million between 2005 and 2007 through common tax-avoiding practices.

These five countries are amongst the poorest in the world, and for their citizens, tax avoidance by the companies operating in them can mean the difference between lifesaving healthcare and death.

Christian Aid estimates that, overall, developing countries lose $160 billion (100bn) every year due to profit shifting by multinational companies – around one and a half times the global aid budget. If this money were available to allocate according to current spending patterns, the increased investment in healthcare could save the lives of 350,000 children each year.

"Transfer mispricing" is one of the most common tax dodges employed by companies and involves manipulating the price of exports and imports – sometimes inflating, sometimes deflating prices – to reduce profits in specific countries, thereby reducing firms' tax liability.

Listed multinationals only have to account on a global consolidated basis. This means that authorities cannot identify where profits are actually being made, and whether the taxes paid in a country by a company reflect the amount of value added within that country.

This abuse of the transfer pricing system is facilitated by the secrecy offered by tax havens and a lack for transparency in the way companies report the geographical source of their profits.

The fall-out from the financial crisis may have left us with a golden opportunity to tackle these abuses once and for all. As leaders from the world's wealthiest countries discuss how best to prevent another financial meltdown The Missing Millions report highlights that what we need is greater transparency and tighter regulations.

Specifically, the report argues for an international accounting standard that would require companies to declare the names of their operations, profits and tax payments in each country where they operate.

This would allow revenue authorities – in rich and poor countries – to identify potential cases of profit shifting that are worthy of further investigation.

In addition, the role of tax havens in facilitating tax avoidance must be curtailed through a new global agreement on the automatic sharing of tax information to equip revenue authorities with information those who harbour money offshore.

The huge public bailouts, particularly of the banks, have finally forced governments to confront the cost to the public purse of corporate tax-dodging and significant progress has been made by the G20. However, it is imperative these discussions do not result in a partial crackdown on tax dodging that delivers for rich countries at the expense of the developing world.

&#149 Una Bartley is acting communications manager at Christian Aid