Government weakness has allowed tax dodging to flourish, CIPFA conference told

Governments share the blame for the estimated $ 3.1 trillion lost to tax evasion and avoidance globally, two tax experts told the CIPFA annual conference recently.

Speaking during a workshop on responsible tax, Diarmid O’Sullivan, tax justice policy advisor for ActionAid UK, and Milt Isaacs, president of the Association of Canadian Financial Advisors who was speaking on behalf of ‘Funding Democracy’, highlighted the role governments play in facilitating corporate tax avoidance.

“It’s not just about clever companies,” O’Sullivan stressed. “Somebody has to create the tax haven for profits to be shifted in to, and many governments are willing to do that.”

He pointed out that, contrary to the typical perception of a tax haven as a small Caribbean island, some of the biggest destinations for corporate tax avoidance are in the OECD. They include Luxembourg, the Netherlands, Delaware and other US jurisdictions, Ireland and the UK’s overseas territories.

With many countries acting in their own national interest and “playing the game” themselves, collective action becomes a problem, he said.

He highlighted a recent proposal by the European Commission intended to combat corporate tax avoidance in the bloc. While “weak” from the outset, he said this was further “blown apart” by member states until there was “almost nothing left”.

“They’ve announced it as a triumph, but it’s not. It’s rubbish,” he said.

Another issue is many governments are “ambivalent” about collecting corporate tax, he continued. It is common for nations to offer low tax rates and tax breaks in an attempt to lure investment, despite the evidence linking the two being weak.

This point was echoed by Isaacs, who pointed to the global trend towards corporate tax cuts. He used Canada as an example, where tax rates have fallen from 28% in 2000 to 15% in 2012.

While the government had claimed that putting more money in the hands of investors and businesses would mean more jobs, Isaacs said the job creation rate in Canada is at its lowest since 1946.

The net worth of the richest 20% in the country has increased, along with shareholders dividends, while the poorest have seen no change in income.

He noted that the tax cut has saved companies around $ 630 billion. Over the same period, Canada has accumulated an equal amount in national debt ($ 600 billion), he highlighted.

Isaacs stressed that Canada’s government deficit could be “wiped out just by collecting what is owed” from companies who have evaded or avoided their tax.

“This is not just a Canadian problem,” he said. “You will find the same trends in your country.”

He added that taxes are not just about collecting wealth, but about redistributing income and preventing extreme inequality. But today the gap between rich and poor is “unmatchable and growing”.

The world’s richest 85 people now own 50% of global wealth, while 80% of the global population lives in poverty.

He warned that those with money also have an undue influence on the democratic process – a trend also hinted at by O’Sullivan.

For example, tax advisors often help developing country governments write tax policy, then later advise their private sector clients on how to implement it. Isaacs called this is an example of “corporate capture”.

The effect on developing countries of corporate tax avoidance is substantial, with the International Monetary Fund estimates the cost at $ 200 billion.

Across the world, governments often shift the tax burden onto individuals in order to address this imbalance. In developing countries, this tends to fall on the very poor.

Isaacs pointed out that if just 10% of the lost $ 3.1 trillion could be collected, it would be enough to provide every person in the world with clean water and sanitation for good. (Source: http://www.publicfinanceinternational.org/)