If on this day in 2016 you’d placed a bet on Leicester winning the Premier League title, the United Kingdom voting to leave the European Union, and Donald Trump ascending to the Presidency, you would find your 2017 self quite considerably wealthier. Such was the nature of 2016.
If there is one safe political bet that you could have made twelve months ago, it would be that tax avoidance would remain a major concern: in Parliament, in the media, and amongst the public. Although admittedly, the odds wouldn’t have been quite so attractive.
Yet again last year, the Institute of Business Ethics found that the British public ranked corporate tax avoidance as their number one concern when it came to business ethics. Public anger about business dodging tax is playing into the growing anti-establishment phenomenon, but also goes further: polling from ActionAid and Christian Aid found that some 85% of British adults deemed tax avoidance by large companies as being morally wrong, even if legal.
Such public concern isn’t misguided. Despite years of political scrutiny, media exposés and public pressure, some businesses continue to employ aggressive tax strategies, and avoid paying their fair share of tax.
The negative impact on UK revenues is well established. But what attracts considerably less attention is the fact that corporate tax avoidance disproportionately impacts developing countries. Lower income countries rely on corporate income taxes to twice the extent that wealthier countries do, and revenues are urgently needed to fund basic services like healthcare and education, and for investment in modern infrastructure.
The opaque nature of the global tax system means that calculating the scale of the problem isn’t straightforward. However the IMF estimates that corporate tax avoidance costs developing countries some $200 billion annually.
Tax havens are a major – and growing – part of the problem. New research from ActionAid shows that some $12.5 trillion of foreign direct investment was made via tax havens in 2015. This compares to $11.8 trillion in 2013 – an increase of $700 billion.
Poorer countries are some of those most exposed to tax havens. ActionAid estimates that in 2015 $132 billion of corporate investment in India was routed via tax havens, $106 billion in Indonesia and $35 billion in Nigeria. Companies can use these havens to shift profits away from developing countries in which they are doing business, to jurisdictions with a tax rate at, or close to, zero.
The opacity of the system is such that whilst we know there is a significant problem, we can’t necessarily establish its true scale. Furthermore, since we can’t always tell which companies are guilty of pursuing aggressive tax strategies, we can’t differentiate between those companies playing fair, and those that aren’t.
It is for this reason that ActionAid is campaigning for greater tax transparency. Specifically, we are calling on the Government to use its new power to legislate for public ‘country-by-country reporting’, requiring companies to document revenue, profit and tax paid, in every jurisdiction in which they have a presence.
This greater level of transparency will allow civil society organisations, the media and the public to better understand the nature and scale of the problem; identify the worst offenders; and hold them to account. From the perspective of businesses paying their fair share of tax, it will allow them to demonstrate their responsible credentials.
Some progress has been made, and we welcome the leadership that the UK Government has shown on the issue of tax transparency. We were the first G20 country to introduce a public register of beneficial ownership; and the Prime Minister recently announced tougher penalties for advisers facilitating tax avoidance.
But without full public disclosure on a country-by-country basis, we won’t have the full picture, so ActionAid is calling on the Government to take the next step, legislating for more comprehensive transparency for companies operating across multiple jurisdictions.
The public purse will benefit from a clampdown on the worst offenders, whilst responsible businesses will benefit from a more level playing field. Furthermore, those businesses seeking to do the right thing on tax will benefit from being in a position to demonstrate their responsible approach, thus strengthening their ability to rebuild trust amongst the public.
From ActionAid’s perspective, lower income countries stand to benefit from new sources of revenue. Provision of health services and education for all doesn’t come free: the importance of this revenue to some of the poorest countries in the world cannot be understated.