Giant multi-national firms holding their revenue overseas to avoid paying American taxes has become commonplace in recent years. But now activists, and the United Nations, are saying that developing countries are among the hardest hit by these practices, losing an estimated $100 billion annually to dubious tactics employed by multinationals.
Ahead of G7's annual summit that begins Sunday, aid groups are calling on its wealthy member countries to overhaul the global tax system and staunch the hemorrhaging of much needed income from the developing world — in particular Africa. Several African leaders — including Ethiopia's Prime Minister Hailemariam Desalegn, Liberia's president Ellen Johnson Sirleaf, and Nigeria's newly elected President Muhammadu Buhari — will attend the summit, hosted by the German government in Dresden.
Activists and diplomats say helping African nations and other developing countries capture more of their taxable income will allow them to rely less on foreign aid. Claire Godfrey, a policy advisor at the international aid group Oxfam, told VICE News Oxfam was pressuring the G7 to include developing countries in any plans to tackle tax dodging, which is often illustrated by the toll it takes on American, European, or other wealthy governments. She said developing countries would benefit from a global institution, like the World Trade Organization, that would establish fair taxation practices — and one where their voices could be heard.
"We believe it is time that global governance of taxation, tax rules and tax reform be government by a single intergovernmental body," said Godfrey.
On Tuesday, Oxfam issued a report written by Godfrey, which highlights corporate practices in Africa, where the means of avoiding local taxes are plentiful. One of the preferred methods of lowering bills, said Godfrey, is the mis-pricing of assets that are sold among a company's various subsidiaries. If an Africa-based entity pays inflated prices to one in another country with lower tax rates, she said, it can maintain balance sheets that indicate much lower profits than what is actually being accrued locally, and thereby lower what African countries can tax.
Groups seeking reform are stressing that the money lost in Africa — including an estimated $11 billion in lost tax revenues resulting from trade mis-pricing in 2010, according to UN data — leaves massive holes in national budgets that could otherwise be spent on infrastructure, education, and medical care — for instance, in areas affected by the recent Ebola outbreak. Of that $11 billion, $6 billion was attributed to G7-based companies, a figure Oxfam pointed out is "more than three times the amount needed to plug the funding gaps to deliver universal primary healthcare in the Ebola-affected countries."
Oxfam was this week joined in calling for global tax reform by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), an umbrella group that issued its own report on Tuesday.
"Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations' civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance," said the group.
ICRICT's main point of contention is what it calls the "artifice that a company's subsidiaries and branches are separate entities entitled to separate treatment under tax law." Income, it said, should be more reflective of "where the intellectual property was developed, or, if sold, apportioned according to objective economic factors such as sales and employment."
In March, the UN estimated countries across the developing world lose roughly $100 billion in potential tax revenues annually to corporations that seek tax havens in an effort to maximize profits. One IMF estimate cited by the ICRICT report put the total even higher, at nearly $213 billion in the long run.
"This is a staggering sum, which represents untold damage to the public services needed by people living in poverty in developing countries," Toby Quantrill, an adviser at Christian Aid, said in a statement.
By comparison, total foreign direct investment in developing African countries totaled $57 billion in 2013, according to figures maintained by the UN's Conference on Trade and Development (UNCTAD). The same year, foreign aid to African countries earmarked for development totaled $28.9 billion.
Developing countries rely heavily on corporate tax receipts from affiliates of multinational corporations to meet their budgetary needs. Across the developing world, taxes from such affiliates average around 10 percent of total government revenues, double the rate in developed countries. The figure for African countries, meanwhile, is 14 percent, according to UNCTAD.
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In 2010, the non-governmental organization ActionAid pointed to the case of international brewer SABMiller to exemplify the trend. The UK-based company, the second largest brewer in the world, sells many of Africa's most popular beers, including South Africa's Castle and Chibuku Brands. But those brands were officially owned by Dutch-based parts of the company, and the African subsidiaries paid millions every year to them in royalties. In essence, SABMiller paid itself, and was able to shift profits from Africa to the Netherlands, where the tax code is lenient on revenue from royalties. ActionAid alleged that the company further shifted profits from African countries and India by having its entities there pay for management services provided by a SABMiller entity in Switzerland, where corporate tax rates are considerably lower. ActionAid estimated the two ventures resulted in tax losses of nearly £20 million in India and Africa.
Since ActionAid's expose, SABMiller has taken steps to increase transparency on its tax affairs, said Godfrey. She added, however, that for every spotlight shone on companies like SABMiller, there are countless that continue to operate similar schemes.
In May, the Organization for Economic Co-operation and Development (OECD), a 34-member economic bloc of wealthy and middle-income countries, announced plans to clamp down on companies that engage in "extremely aggressive" tax avoidance. But activists say that letting the OECD take the lead on tax reform risks ignoring voices from the developing world.
"The OECD is just accountable to OECD members," said Godrey. "With globalization, everyone trades with everyone, and assistance becomes fragmented. Obviously the G7 members would prefer to have the OECD be the leading organization on the reform of tax rules, because they have a power base there."
Follow Samuel Oakford on Twitter: @SamuelOakford