Etikk i praksis. Nordic Journal of Applied Ethics (2018), 12(1), 43–60
Midas’ gift means death: Tax dodging is the biggest obstacle for global justice
Hans Morten Haugen
Faculty of Theology, Diakonia and Leadership, VID Specialized University
hans.morten.haugen@vid.no
Tax havens and
tax secrecy have risen to the top of the global policy agenda and may
constitute the most important impediment for reducing inequalities. Moreover, complex
corporate structures allow charging for services undertaken in various
countries through one low-tax country. Transferring profits to low-tax
jurisdictions will significantly reduce a multinational corporation’s overall
tax burden. Individuals are assisted in opening shell corporations that officially
own bank accounts where the real owner (beneficial owner) is not revealed. Reducing
this practice of tax dodging (which encompasses both legal tax avoidance and
illegal tax evasion) has proven to be difficult, despite substantial efforts by
several international organizations and states over the last decade. It is too
easy to be removed from the list of tax havens; mere membership in OECD’s
Global Forum on Transparency and Exchange of Information for Tax Purposes
qualifies. Tax dodgers add to global inequalities and severely weaken states’
capacity to undertake their task of creating a solid tax base, embedded in the principle that all actors are
taxed according to the income generated in each country. A weak tax base will
lead to less trust, more violence and more deaths.
Keywords: country-by-country
reporting, EU, OECD, tax avoidance, tax evasion, tax havens
High-profile revelations (LuxLeaks and Panama Papers) prove that a
segment of the population in most countries actually lives in a parallel society,
removed from the norms that others seek to comply with. Using tax advisors, many
of whom work for the “Big Four” accounting firms (Deloite, Ernst & Young,
KPMG, PWC), these individuals do everything possible to enrich themselves
rather than contributing to well-functioning states, crucial infrastructure and
life-saving services.
People working on tax justice issues were not
surprised at these disclosures; on the contrary, these revelations confirm what
has been known for a long time. By contrast, both politicians and the CEOs of financial
institutions in Western countries appeared surprised. Their surprise is
objectively unfounded, as they have had enough information to understand and
act for a long time. Interestingly, decision-makers in developing countries and
countries in transition rank tax avoidance as the most crucial measure to reduce inequality (UNDP 2013: 210). Two
other tax-related issues scored lowest
(taxing finance) and middle (tax
incentives for foreign direct investments), the latter being explicitly warned
against in the 2015 Addis Ababa Action Agenda of the Third International
Conference on Financing for Development (2015 Addis Ababa; United Nations 2015:
paragraph 26).
While inequality was included in the Sustainable
Development Goals (SDGs), as SDG 10, the targets and indicators do not refer
explicitly to tax, which is probably the most important measure for reduced
inequality. The 2015 Addis Ababa does, however, give a broad mandate for “redoubling
efforts to substantially reduce illicit financial flows… by combating tax evasion
and corruption…” (United Nations 2015: paragraph 23). “Country by country
reporting,” specifying profits and other information for each country (EU 2016a),
and automatic exchange of tax information are all recommended (United Nations
2015: paragraph 27; see also paragraph 29). The United Nations is not, however,
the most important international actor; rather the Organization for Economic
Cooperation and Development (OECD; United Nations 2015: paragraph 28) and the
Financial Action Task Force (FATF; United Nations 2015: paragraph 24) specify
states’ obligations in greater detail.
Tax dodging is the term applied in this article; it
encompasses tax avoidance and tax evasion. Tax dodging is the preferred term,
as it is not always initially obvious whether a specific practice is morally
dubious tax avoidance or illegal tax evasion. There are various approaches to
assess the global amount of tax dodging. OECD holds that up to 10 percent of
global corporate income tax revenues
are not being paid due to profit shifting to low-tax jurisdictions or tax
havens, representing a total loss of up to USD 240 billion annually (OECD 2016:
paragraph 68).
This figure is roughly the same as the total income
that is lost by individuals’ fortunes
being hidden from taxes (USD 21 trillion), based on a calculation of an ordinary
tax payment at a 3-percent rate of return on this fortune (Tax Justice Network
2012: 2). The Norwegian Commission on Capital Flight from Developing Countries
(2009: 64) says that illicit capital flows from developing countries alone totaled USD 641-979 billion
annually, referring to Kar and Cartwright-Smith (2008), but the figure used in
their final report is actually USD 850-1000 billion (Kar and Cartwright‐Smith 2008:
vi). Irrespective of this mismatch of figures, they exceed the total Official
Development Assistance (ODA) (142 billion USD; OECD 2017) and migrant workers’
remittances (USD 595 billion; World Bank 2017) to developing countries. Note
that these figures do not include what is lost each year due to corruption,
much of which is also ending up in tax havens.
This article proceeds as follows: First, it presents basic justifications
for taxation, identifying the tax challenges raised by economic globalization.
Second, it identifies the most crucial obstacles for effective tax collection,
particularly for transnational corporations. Third, it reviews OECD, Norwegian,
EU and US measures. Fourth, it reviews how measures against money laundering
and public procurement processes can reduce tax dodging. Next, I identify factors
indicating a higher awareness of tax dodging. I conclude by suggesting an ethical
approach to tax dodging.
This article seeks to answer the research question: How does the widespread practice of tax
dodging contribute to greater global inequalities and weakening of states, and
how can tax dodging be effectively combated?
Basic
justifications for taxation
Taxation has never been popular, but taxes have been crucial for the
formation of the modern state system, as well as for democracy. When people pay
taxes, they demand influence over how the money is spent. As these demands were
gradually addressed, modern parliaments emerged as a result. The slogan “no taxation
without representation” came out of the English Revolution (1689), inspiring cries
for democracy in other countries in subsequent centuries. Moreover, broad-based
taxation creates mutual trust that is decisive for the functioning of state
institutions, so that these institutions are inclusive and not extractive, the
latter designed by the elites “to extract resources from the rest of the
society” (Acemoglu and Robinson 2012: 81).
Given this background, it is easy to agree with U.S.
Supreme Court Associate Judge Oliver Wendell Holmes, Jr., who stated in 1904: “Taxes
are the price we pay for a civilized society” (IRS (Internal Revenue Service) 2016). The best-functioning states, with the lowest levels of
inequalities, are simultaneously the states with the best ability to collect
taxes. Taxation raises the awareness of being a part of a larger community,
with the overall benefits that this implies. Weak states, faulty infrastructure
and poor services are a direct function of inadequate tax collection (Fukuyama
2014; 2011).
This relationship can be illustrated in a positive
spiral (from Johnson 2011):
Tax payment, according to this understanding, is
embedded in social contract theory, where everyone contributes to the public
good, hence enabling public institutions to distribute and invest resources to
facilitate and improve the functioning of individuals and enterprises.
Egalitarianists, represented by Wilkinson and Pickett
(2009) and Piketty (2014) have presented strong arguments on the importance of
distribution through taxation, and particularly Wilkinson and Pickett have been
subject to criticism for selectively choosing countries and variables (Snowdon
2010; Saunders 2010; in support of most of the original findings, see Hiilamo
and Kangas 2014).
Those who express principled criticism of taxation can
come from various ideologies, but the dominant school is libertarianism (Fraser
2000; Rothbard 1982; Nozick 1974). The main argument of all of these critics is
that by taxing its citizens, the state is using force to take something that
belongs to someone and using it for someone else’s purposes. For Nozick this “something”
is part of the fruit of one’s labor,
while for Rothbard it is one’s property.
Fraser, agreeing with both of them, ends up endorsing anarcho-capitalism
(Fraser 2000: 234). The issue of consent is crucial for libertarians. Anyone
who does not agree with the principle of taxation nevertheless has to obey the duty
to pay taxes – as specified and practiced by the majority – with the possibility
of punishment for non-compliance.
The task of tax collection becomes more difficult in a
globalized economy. The multitude of domiciles of multinational corporations
(MNCs) implies that a wide range of bilateral tax treaties have been entered
into, primarily with the purpose of avoiding double taxation. A much bigger
problem, as will be shown below, is the way MNCs are organized and operate, and
how individuals consciously seek to conceal themselves as the real owners
(“beneficial owners”) of bank accounts.
Crucial
obstacles for effective tax collection
MNCs can choose to locate in low-tax jurisdictions or outright tax
havens. The strategies for the two
differ. It is therefore necessary to distinguish between the two, the former
relating to tax avoidance, and the latter relating to tax evasion.
Low-tax jurisdictions are characterized by low tax
rates, and frequently market themselves as such, but are otherwise normally
functioning economies. Relevant examples include Ireland and the Netherlands.
For an MNC that seeks maximum profit, the more overall income that can be
ascribed to these countries, the better. Therefore, taxation is minimized by
having all activities that do not depend on a specific location in the low-tax
jurisdictions. By charging excessively high prices on these services, only
minimal profits are reported in normal-tax jurisdictions where the main part of
an MNC’s activities take place. This strategy thus substantially reduces the
total tax payment by taxing a large part of the total income in low-tax
jurisdictions.
The MNC may manage internal services – such as
marketing, custom relations, design development and intellectual property – in
the low-tax jurisdictions. For example, when Microsoft customers in any country
in Europe or the Middle East pay their invoices to the Microsoft office in Luxembourg for all services done by Microsoft employees, a huge gap exists
between Microsoft’s actual activities in a country like Norway and Microsoft’s
income as reported to Norwegian tax authorities.
This situation makes it almost impossible for wholly
nationally domiciled corporations to compete on fair terms, as their overall
tax burden makes them much less profitable compared to an MNC that can shift
the payment for many of its services to low-tax jurisdictions.
Tax havens are identified by the Financial Secrecy
Index (Tax Justice Network 2018a). The index is composed of 20 secrecy
indicators (Tax Justice Network undated), as well as a global scale weight. The
top three countries in 2018 are Switzerland, USA and the Cayman Islands.
Tax havens are characterized by secrecy, parallel
taxation regimes between nationals and foreigners, and often the prohibition of
substantive activities or owning of properties in the tax havens by foreigners.
Various tax haven lists exist, but the Financial Secrecy Index shows that not
only small island states harbor tax havens.
Tax havens have been the subject of considerable
attention over the last decade. Running the risk of being declared a
“non-cooperative tax haven” has made them eager to enter into agreements on
automatic exchange of tax information with other states. The three last tax
havens on the OECD list of non-cooperative tax havens were all European:
Andorra, Liechtenstein and Monaco. They were removed from this list in 2009.
Some tax havens have specialized in providing services
enabling joint financing of investments taking place in other countries. As an
example, investments from the Norwegian Norfund, the government’s main
instrument for combating poverty in developing countries through private sector
investments, invest in Eastern African countries through Mauritius. According
to Norfund, this makes the investments financially safer, and makes it easier
to co-finance with other investors (Bistandsaktuelt 2016; E24 2016).1
This, and the fact that the Norwegian Pension Fund and
Argentum, a Norwegian government enterprise that holds minority shares in
private equity funds, have increased their investments in tax havens, implies
that the Norwegian government is indirectly legitimizing tax havens.
Tax havens seek to attract foreign capital as a
strategy to improve their nation’s own socioeconomic development. Money
laundering of incomes originating from criminal and other illegal activities is
easy to do through tax havens. Being associated with money laundering not only
harms such states’ overall reputation, but may make them ineligible for investments.
Many governments in tax haven nations are particularly eager to fight money
laundering. The FATF, which also has a mandate relating to terror financing,
has for the last years listed Iran and North Korea as non-cooperative
jurisdictions. Counter-measures against Iran have been suspended since June
2016, but Iran will remain on the FATF Public Statement until the full Action
Plan on anti-money laundering and combating the financing of terrorism has been
implemented (FATF 2018). Despite the fact than many tax havens actively engage
in anti-money-laundering activities, the secrecy that tax havens provide – since
the real owners are hidden, and “board members” can be chosen from a list
provided by the tax haven’s authorities – facilitate money laundering.
Important financial centers like Switzerland or the City
of London might not be able to know who is actually the real
owner of the bank accounts opened in any of their banks. The City of London
Corporation is an “autonomous jurisdiction” of 1.22 square miles (Shaxson 2011:
247) for its 9000 inhabitants and 350 000 daytime employees, having been a
self-governing municipal entity for more than 800 years.
Notwithstanding the differences between the various
tax havens, the overall problem is that they allow money to be hidden from
domestic tax authorities. This implies that many states are either looted by
kleptocrats or depleted of revenues that should have benefited of the
inhabitants, as well as the effective working of its institutions.
Abolishing the system of tax havens would not solve the problems of money being taken from one jurisdiction to another for the purpose of reducing tax, but such “tax competition” would be manageable, unlike the current global system of hiding money.
A full review of all possible measures to curb tax dodging is beyond the
scope of this article. This section will analyze recent initiatives within
country-by-country reporting, where the company must in principle provide
information on activities, profits and revenues in all countries where it operates. There are many exceptions to this,
as will be seen.
The OECD has updated its 1992 Model Convention with
Respect to Taxes on Income and on Capital ten times since its adoption, most
recently in November 2017. The 1998 Multilateral Convention on Mutual
Administrative Assistance in Tax Matters was updated in 2010 to improve the exchange
of information and so far, more than 100 states participate in the Convention
(some have only signed and not ratified). Moreover, OECD oversees the Global
Forum on Transparency and Exchange of Information for Tax Purposes with a total
of 132 members. Merely being a member implies that a state is not considered a
tax haven (Klassekampen 2016). Using a two-phased review, with criteria for
information availability, access and exchange, states are placed in five different categories (ranked
order): complying, largely complying, partially complying, qualifying, and not
qualifying. A map of a state’s results in two “rating rounds” is available
(OECD 2018). We see that the OECD has extraterritorial influence far beyond its
member states.
The OECD’s most recent initiative is known by its
acronym BEPS (Base Erosion and Profit Shifting). This initiative seeks to avoid
the practice of transferring its profits to low-tax jurisdictions. Four of fifteen
identified “Actions” address so-called transfer pricing, which are intra-corporation
transactions where prices are manipulated with the purpose of dodging taxes.
The last BPES Action is to develop a multilateral instrument to modify
bilateral tax treaties so that they include BEPS provisions.
Undoubtedly, the OECD has a strong commitment to fighting
tax dodging. We saw above that two OECD conventions have occurred since the
1990s. Despite these efforts, the Tax Justice Network calculates that the amount
of private wealth kept in tax havens doubled in the years between 2005 and 2010,
representing an increase of 16 percent each year (Tax Justice Network 2012: 2).
This rapid increase happened even though OECD efforts were widely known, at
least among lawyers and tax advisors. Moreover, the exchange of tax information
system requires specific identification of given persons. If the tax
authorities are to obtain relevant information, it is necessary to reveal the
names of the persons suspected of tax dodging.
BEPS Action 13 on country-by-country reporting
apparently has a comprehensive scope, requiring annual reports for each tax
jurisdiction in which companies do business. The report encompasses revenue,
profit before income tax and income tax paid, as well as total employment,
capital, retained earnings and tangible assets. However, this information is only
required to be provided to tax authorities, implying that the information is
not for the public. Moreover, the requirements apply only to MNCs with an annual
consolidated (total) revenue of EUR 750 million or more (OECD 2015: 4). Hence,
most MNCs are exempted.
These weaknesses are obviously a reflection of the
political will among the member states. Norway requires information in line
with BEPS Action 13 (Norway 2013, § 3) if the corporation has a consolidated
revenue of NOK 320 million (USD 40 million), a balance sheet of NOK 160 million
(USD 20 million) and at least 250
employees (Norway 2013 § 1; two of three requirements must be met). As we see,
the threshold is substantively lower than the EU threshold, but nevertheless
rather high. Moreover, the reporting requirement does not apply to
jurisdictions in which the MNC’s subsidiaries only have “supportive functions”
(Norwegian Parliament 2013), which must be understood as tax havens.
While the EU has country-by-country reporting, its
requirements were less detailed than those outlined by the OECD, and limited to
the extractive industries (EU 2013a) and the financial sector (EU 2013b). In
the aftermath of the Panama Papers, the EU decided to initiate
country-by-country reporting for the whole EU, but only for corporations with
an annual turnover of more than EUR 750 million (EU 2016a), similar to the OECD
threshold referred to above.
The USA was the first country to require disclosure of
payment to all governments, but only to those states where the activities take
place. Section 1504 of the Dodd-Frank reform act was challenged by the American
Petroleum Institute (The Guardian 2015), and the US Securities and Exchange
Commission (SEC) has adopted new provisions, effective from 2016 (US SEC 2016).
Hence, while it is too early to evaluate the BEPS
program in each country or on a global level, substantial challenges remain,
primarily as regards secrecy.
Further
changes? Anti-money laundering and tax specifications in public procurements
While legislative changes have so far not been able to curb the practice
of tax dodging, there are several ways to proceed. These relate primarily to
revealing the identities of the real owners of offshore shell companies and
require that the overall corporate structure be revealed.
Anti-money laundering efforts seek to prevent money
stemming from illegal activities from becoming part of the ordinary economy and
thus being impossible to trace. In addition, the EU has since 2004 emphasized
non-fulfillment of tax obligations as a justifiable reason to exclude a
corporation from public procurement contracts, provided that tax payment
obligations are clearly outlined in the tender specification. We will review
these two efforts in this order.
Overall efforts to fight money laundering and
terrorism financing is most comprehensively regulated in the Fourth directive
on money laundering (EU 2015), which applies to financial institutions and
credit institutions, as well as auditors, accountants, tax advisors, estate
agent and public employees, such as notaries. The strictest requirements are
with financial institutions and credit institutions, as specified by Article 19.
Financial institutions and credit institutions involved in breaches of the
obligations outlined in the Directive that are “serious, repeated, systematic, or
a combination thereof” can be subject to pecuniary sanctions of least EUR 5
million or 10 % of the total annual turnover, in accordance with Article
59.3(a).
The main focus of the Directive is “customary due
diligence”, or knowing who is the actual owner of a property, shell company or
bank account. To gain information about the real owners (Article 3.6), a register
of such beneficial owners must be established in each state (Article 30.3).
While this is not specified in the Directive itself, it is crucial that such a register
be open to everyone (Tax Justice Network Norway 2015). Non-governmental
organizations, academics and investigative journalists can all provide critical
assistance, provided that they have adequate access to information.
This article will identify whether specifying the
fulfillment of tax obligations in tenders of public procurements is a
possibility, and whether excluding a corporation from public procurement
contracts is conceivable. At the core of the analysis is how to comply with EU
(and EEA) public procurement obligations.
Already in 2004 the now repealed public procurement
directive (EU 2004) specified in Article 45.2(f):
Any economic operator may be excluded from participation in a contract
where that economic operator […] has not fulfilled obligations relating to the
payment of taxes in accordance with the legal provisions of the country in
which he is established or with those of the country of the contracting
authority.
The
crucial term is “obligations.” What is required to determine that tax payment
obligations have not been fulfilled? The specification that the obligations are
either read out from “legal provisions of the country in which he is
established or with those of the country
To the first question, one might take a legal
positivist approach and say that this is when some given domestic legislation –
such as incorporating a country-by-country reporting requirement and with
specific sanctions for inadequate reporting or tax payment – enters into force.
One might take another approach, based on the evolving international norms of
morality and transparency in tax matters. Since the issue in public procurement
is not about punishing law violators, but rather about instilling tendering
competitions based on fair terms, it seems as if the legal positivist approach
cannot be the only approach. Faced with one or more tenderers who are paying 50
percent less in tax than other tenderers with similar turnovers, this does not represent
fair competition, even if such a practice might not be illegal as specified in the
legislation.
A related question may help to answer question two
above: should a public contractor require an MNC participating in the tender to
provide specific information on the corporate structure in different
jurisdictions, with as detailed information as is required in the BEPS Action
13’s country-by-country reporting requirements and the new EU requirements (EU
2016a)? This is obviously relevant in order for the public contractor to assess
whether the tenderer has “fulfilled obligations relating to the payment of taxes.”
To answer this question, Article 27.1 in the now
repealed Directive 2004/18/EC is interesting. It states that the contracting
authority may provide information on “the body or bodies from which a candidate
or tenderer may obtain the appropriate information on the obligations relating
to taxes.” Hence, the tenderer should be assisted in identifying information on
obligations relating to taxes.
The new public procurement directive that repealed the
2004 Directive specifies with regard to payment of social security
contributions and taxes that “an additional certificate may be required of any registered
economic operator whenever a contract is to be awarded” (EU 2014: Article
64.5). Hence, taxation is considered to be a complex kind of information that
might require the economic operator or tenderer to provide supplementary
information.
We saw that exclusion from public procurement
processes was possible under the previous Directive. A similar provision on
exclusion is also included in the new Directive (EU 2014: Article 57.2), but
only if the contractor “is aware that the economic operator is in breach of its
obligations relating to the payment of taxes…” and requiring that “this has
been established by a judicial or administrative decision having final and
binding effect…” Exclusion can in accordance with the second paragraph of
Article 57.2 also take place if such breach can be “demonstrated” by the
contracting authority. Interestingly, the Norwegian Regulation says that the
exclusion from a procurement processes can take place also in the absence of a
final judicial or administrative decision, unless such exclusion would be
disproportionate (Norwegian Government 2016: § 24-2(3)a). The latter
requirement (“unless … disproportionate”) was not in the draft Regulation
(Norwegian Government 2015: § 18-2(3)a). By including a “proportionality”
requirement, the Norwegian Regulation is more demanding than the EU directive.
The exclusion from public procurement can therefore be
considered to be more difficult under the present EU public procurement
directive as compared to the previous one.
To be able to “demonstrate” breach of obligations
relation to tax payments, public contractors must require the MNC tenderers to
provide a full overview of its corporate structure, and request detailed
information about each of the MNCs subsidiaries, in line with the requirements
of BEPS Action 13. This is possible in accordance with Article 64.5 of the 2014
Directive. It is the level of specificity in the tender announcement, as
formulated by the public contractor, that is decisive. It might be difficult
for the MNC to provide all the information, or the MNC might actually not want
to reveal all the information.
Therefore, the public contractor can specify in the public procurement announcement that it will emphasize the tenderers’ overall tax obligations, by requiring that the totality of the corporate structure be revealed, with detailed information for each subsidiary. This can be justified with arguments relating to fair competition. This requirement might cause some potential tenderers to abstain from applying. When seeing the proposals from the different tenderers, the public contractor can determine that the contractor has adequate information or – if the contractor believes that the information is not adequate – ask an MNC tenderer for more information. This is a way that public authorities can promote tax transparency and fight tax dodging.
Greater
awareness concerning tax dodging
While the previous sections have identified the many
changes in the law in recent years and clarified how tax justice can be
promoted by public contractors, there are real challenges for promoting tax
justice and fighting tax dodging globally.
First, many of
the tax havens with small economies are highly dependent upon their financial
sectors, as they have a non-diversified economy. Second, many tax havens are
found in large economies, such as the United Kingdom (City of London) and the USA
(Delaware and Nevada). These states also tend to be cautious about pushing for
changes that will result in unemployment. Third, economic crimes, with the
exception of narcotics financing and terrorist financing, are simply not given
the necessary attention. Fourth, the fact that the “Big Four” accounting
companies employ some of the world’s leading tax advisors and best financial investigators,
and simultaneously lead the development of international norms’ – particularly
the International Financial Reporting Standards and the International
Accounting Standards – implies that the states depend on these companies for
any progress.
This realistic side of the equation is balanced by
other aspects. First, governments express an increasing acknowledgement of the
dangers of tax dodging for the survival of welfare states and states’ overall
performance. The importance of institutions for economic growth is convincingly
shown in the Norwegian Commission on Capital Flight from Developing Countries
(2009). Moreover, cuts in public spending have been shown in an IMF
(International Monetary Fund) study to lead to reductions in production in the
private sector of one and a half to three times the predicted figure (Blanchard
and Leigh 2013). The concerns over payments in publicly financed welfare
services – some ending up in tax havens – led the Norwegian Parliament in
December 2017 to request the Norwegian Government to establish a public
commission to map “money flows” in these services (Norwegian Parliament 2017a:
5).
Second, consumers have hardly started to “vote with
their wallet” against tax dodgers. For instance, the practice of Den Norske
Bank (DNB) – where the Norwegian state is the main owner – having offices in tax
havens has been known for several years. Nevertheless, it has not acted on
strong recommendations from the Norwegian government, and its customers have
been loyal to the bank. After the Panama Papers revealed that the DNB office in
Luxembourg facilitated a private person’s establishment of shell companies in
the Seychelles for the purpose of not revealing the real owners of bank
accounts in Luxembourg, a survey found that 67 per cent had lower trust in DNB
(VG 2016). Somewhat surprisingly, the drop in trust was lowest among those aged
18 to 29.
Third, the development of digital tools will make it
easier to exchange information and fight tax dodging. Another aspect of digital
development is the increase in digital payments. Reduced use of cash and
increasing use of credit cards does correlate with reduced crime rates in the
USA (Wright and others 2014). A Norwegian study found that only 37 to 47
percent of cash holdings in Norway could be linked to lawful, registered purposes
(Gresvik and Kaloudis 2001; see also Norges Bank 2010). Already in 2002, the
OECD predicted that “money’s destiny is to become digital” (OECD 2002: 7). Hence,
digital payments are good for transparency and preventing tax dodging.
As seen above, tax dodging overwhelmingly takes place due to the inadequacies of regulation at national and global levels. Therefore, when discussing tax dodging practices and how to counter them, it is relevant to emphasize measures in the global context. The social contract argument mentioned above can be linked to egalitarianism, but it applies primarily to the national level and not to the global level.
Is there any applicable social contract theory that
could be applied to the global level? Cosmopolitanism has presented strong
arguments for new global approaches to taxation (Pogge 2014: 77-78; Pogge 2011:
29-30). The crux of cosmopolitanism is that “all human beings, regardless of
their political affiliation, are (or can and should be) citizens in a single
community” (Stanford Encyclopedia of Philosophy 2013). According to Pogge, by condoning “lax
accounting standards” and accepting “illicit deposits” (Pogge 2011: 29), banks
and rich states are complicit in harmful tax and embezzlement practices. He
states that these entities are not doing enough to change harmful practices by
reforming international institutions or by compensating the victims of such
practices. As was seen initially, decision-makers in developing countries and
countries in transition rank tax avoidance as the most crucial measure for reduced inequality (UNDP 2013: 210).
Other cosmopolitans have emphasized a humanity-based
rather than an institutional cosmopolitanism. A review of this line of
reasoning concludes that it is “difficult to specify what duties and costs an
individual should be expected to bear … beyond ‘negative’ duties not to
collaborate with unjust global institutions” (Langford and Darrow 2013: 438). These
negative duties apply to individuals who are in charge of tax obligations of
corporations for which they work, as well as their own tax obligations.
According to Langford and Darrow, Nobel Laureate in
economics Amartya Sen has also presented cosmopolitan thinking, primarily
through his book The Idea of Justice
(2009). His main argument is that the various forms of cross-border exchange
and contacts imply that political considerations cannot be “confined to the
citizenry of any given country, ignoring all others” (Sen 2009: 403). Sen, best
known for his entitlement theory (Sen 1981) and his theory of development as
freedom (Sen 1999), has been widely acclaimed for identifying factors that
impede and enhance development prospects on the domestic level, but his
cosmopolitan thinking remains “undertheorized,” according to Langford and
Darrow (2013: 440).
Hence, this brief review shows that while there are
legitimate concerns over lack of effective participation and influence in
global decision-making, lack of effective sanctions for harmful practices, and
lack of compensation, extending the social contract theory to the global level faces
real challenges. Langford and Darrow’s analysis is embedded in the so-called
extraterritorial obligations of states, defined as:
obligations relating to the acts and omissions of a State … that have
effects on the enjoyment of human rights outside of that State’s territory; and
… obligations … to take action, separately, and jointly through international
cooperation, to realize human rights universally (Extraterritorial Obligations
Consortium 2012: para. 8).
International cooperation and assistance for human
rights realization is already recognized in Article 56 of the UN Charter and
Article 2.1 of the International Covenant on Economic, Social and Cultural
Rights. This definition also identifies acts and omissions with effects outside of the state’s territory.
Within the UN human rights system, it is the Special
Rapporteur on extreme poverty and human rights who has presented the most
comprehensive analysis and recommendations on tax reforms, including
cooperating for enhanced transparency and information exchange (UN Special
Rapporteur on extreme poverty and human rights 2015, paras. 52-53; UN Special
Rapporteur on extreme poverty and human rights 2014). The reports have
emphasized domestic tax policies, including potentially harmful tax incentives
for companies (UN Special Rapporteur on extreme poverty and human rights 2014:
para. 65) and references to states that have adopted taxes on certain types of
cross-border financial transactions (UN Special Rapporteur on extreme poverty
and human rights 2014: para. 96).
The Special Rapporteur on extreme poverty and human
rights has made no specific recommendations on domestically collected taxes for
global purposes. Such taxes or levies are termed “innovative sources of
finances” or “innovative taxation,” and the only such levy currently in
operation is the air ticket levy. Eight countries currently charge this levy
(Unitaid 2018), which provides half of the funding for Unitaid (2017: 15) that has as its motto “Innovation in global health.” A
finance tax on shares, bonds and derivatives was set to be introduced in ten EU
member states in 2016, but has been postponed. Some EU member states claim that
this type of tax must apply to all EU member states (European Parliament 2017;
see also Reuters 2017). Interestingly, the United
Kingdom, being one of the states expressing the strongest opposition to such a tax,
has a long history of taxing the purchase of shares through its so-called
“stamp tax.” While the tax from 2008 only applies to purchases worth GBP1000 or
more (UK Government 2014a), it has collected GBP 125.4 billion since 2000 (UK
Government 2017).
Turning to the other ideological position raised
earlier in this article, namely libertarianism, their main objection is on taxation
at the domestic level. Interestingly, libertarianism is also embedded in human
rights argumentation, primarily the human right to property and to a fair
trial. While selecting a restricted number of human rights to the detriment of
other human rights can justifiably be challenged, it is obvious that a well-ordered society needs respect of property and courts, in case
contracts are not adequately enforced.
Libertarianist views on reducing the share of the
economy that goes through the state for redistribution and investments have
been rejected in principle by two of the world’s richest people. We will use
these individuals as examples in discussing whether tax dodging is an
expression of greed.
Warren Buffet pointed out the irony that he and other
super-rich individuals in the USA paid less in federal taxes, as a portion of
income, as compared to those with ordinary incomes. He therefore called for increased tax payments for the richest individuals. This led
Barack Obama to propose the so-called “Buffet Rule” as part of a tax plan
launched in 2011, setting a 30 percent tax for everyone with more than USD 1
million in annual income. The proposal was stopped in the Senate in 2012 (US
Administration 2012).2
Bill Gates provides another interesting case. His
wealth is partly based on Microsoft’s inadequate tax payments. This is possible
through Microsoft’s overall corporate structure, in which services undertaken
in one normal-tax country are charged in a low-tax country, allowing the whole
Microsoft consortium to avoid billions of dollars in tax each year. Gates says
that “tax systems are the primary thing that asks the most successful to fund
the basics that we would like to have for everybody” (Gates 2015; 1:44-1:54),
but the interviewer does not challenge him on Microsoft’s own tax practices.
While Gates has devoted all his time, energy and money to the Bill &
Melinda Gates Foundation since he stepped down as CEO of Microsoft in 2000, his
attitude nevertheless does appear hypocritical (The Guardian 2014).
Hence, one can be positive to the need to fund the
state in order to enable it to undertake its responsibilities – or in human
rights terminology, to fulfill its human rights obligations – but nevertheless
be complicit in setting up corporate structures that undermine this very
ability of the state.
Such practices of creative corporate structures are
increasingly being challenged. The EU Commission found in 2016 that Ireland was
violating EU rules on state aid, a decision that Ireland has appealed. By its low tax rate, Ireland has granted
undue tax benefits of up to EUR 13 billion to Apple Inc. and must now recover
this illegal state aid (EU 2016b). Even the CEOs in the technology companies
admit that the tax system is flawed and should be reformed (The Guardian 2018).
A new measure to tax digital services – also termed an “equalization levy” – was
proposed by the EU in March 2018 and is expected to lead to an estimated EUR 5
billion in revenues (EU 2018). This proposal does not include measures for
imposing a “source tax,” in other words taxation based on activities and income
generated in each country (Norwegian Ministry of Finance 2018; see also
Norwegian Parliament 2017b). Such a source tax is a step towards so-called
“unitary taxation” or “formulary apportionment” that is promoted by Tax Justice
Network (2018b).
The super-richest individuals, 62 of whom control as
much wealth as the poorest 50 percent of the world’s population, or 3.6 billion
persons (Oxfam 2016), pay very low tax amounts because their capital is hardly
taxed. Concentration of wealth is happening rapidly. In 2010, the 382 richest
persons’ wealth matched that of the world population’s poorest half. Some of
the super-rich themselves want to be taxed more, like Warren Buffet – as seen
above – but politicians prevent such reforms from taking place. Moreover, not
all efforts to reduce one’s tax burdens are illegitimate. For instance,
strategic forms of personal savings that also give tax reductions are fully
within the law, but inadequate reporting and information exchange facilitate
tax avoidance. Hence, both formally legal tax avoidance and formally illegal tax evasion represent considerable challenges.
The Oxfam Report on global inequalities concludes with
five specific recommendations to fight tax havens and end secrecy: agreeing on
a UN tax body; ending the practice of tax incentives (UNDP 2013: 210);
requiring country-by-country reports that are publicly available; establishing
public registers of corporations’ beneficial owners; and creating a
multilateral system for automatic exchange of tax information (Oxfam 2016:
34-35).
Not all aspects of these recommendations can be
comprehensively
assessed, but some critical points will be highlighted. First, when
balancing between representativeness and effectiveness, sometimes effectiveness
should prevail. An intergovernmental body within the UN might not necessarily
be as effective as the OECD has proven to be. To be clear: although the OECD is
not adequately effective, the UN
might not be similarly effective, but the UN must nevertheless strengthen its
work to fight harmful tax dodging.
Second, it is crucial that the financial reports
showing tax payments in all jurisdictions and registries of beneficial owners be
made publicly available. While the Norwegian publishing of tax payments of all citizens was found to violate the human
right to privacy (NRK 2012), one can obtain information on the 100 individuals with
highest incomes in each municipality. Such transparency must also apply to
companies.
Third, it is important that the exchange of
tax-related information should not require tax authorities requiring
information to identify the persons, their identity numbers, and their bank
account numbers. Easing exchange of tax information without such rigid
requirements will make it easier to trace and recover hidden wealth.
Hence, the explanation for the current practices of
tax dodging must be sought in more than merely greed. As indicated at the start
of the article, recent revelations actually show that a large segment of rich
persons and their advisors live in parallel societies. In these parallel
societies taxes are not perceived as ethically important. They might distrust
“big government” and feel that their own interests are not adequately taken
care of. Spending a great deal of time abroad might further contribute to this detachment
from complying with one’s tax duties. Such practices are exacerbated by legal
and institutional inadequacies to counter tax dodging at both national and
international levels.
Conclusion
Hence, while the state does not always contribute to
effective redistribution and is biased toward the rich, it is still the most
effective instrument for overall societal development. The state achieves this through
institutions that improve the functioning of the economy and by building the necessary
trust, both horizontally – between the inhabitants – and vertically – between
inhabitants and decision-makers. This is in turn achieved through the adequate
payment of taxes. While tax dodging is garnering more attention than ever
before, many hurdles must still be overcome for adequate tax payment to take
place, as this article articulates.
The inability of the current tax system to prevent the
increase in global inequalities, by allowing the super-rich to remain super-rich,
is a part of this problem. Tax payments, on the other hand, facilitate crucial
services, better-functioning institutions, increased trust, greater equality
and less potential for violence.
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