TAX PIRATES AND TAX FAIRNESS
DEVPOLICY CENTRE, CRAWFORD SCHOOL OF PUBLIC POLICY
AUSTRALIAN NATIONAL UNIVERSITY
12 APRIL 2019
I acknowledge the Ngunnawal people, on whose lands we’re meeting today, and pay my respects to their elders past and present.
It is common for forms of serial fiction such as comic books, or film or television franchises, to have a new start of that universe – often called a ‘reboot’.
On occasion, when discarding the previous continuity or plotlines, the rebooting producers will change the tone of the text, perhaps favouring a gritty, realistic tone.
The reboot that I’m hoping Disney will produce next is titled Tax Pirates of the Caribbean. In this action-packed drama, a devilishly handsome team of tax specialists travel to Jamaica. Armed with their rapier wit and a brilliant knowledge of the tax code, they confront the bandits of the Cayman Islands, Bahamas, Bermuda and Saint Lucia, who’ve been luring away the revenue that should be paid to the Jamaican tax administration.
These scallywags have been exploiting the citizens of Jamaica for many years, so the last thing they expect is that a team of accountants will bring their lurks to an end. But in the end, the good guys win, and the people of Jamaica are able to afford to invest in their schools and hospitals.
The script should be easy to write, since the events are playing out right now. The Jamaican tax authority has ‘borrowed’ a bunch of expert tax auditors from Germany. The accountant equivalent of Captain Jack Sparrow is Steffan W. Scholze, who said he ‘jumped at the opportunity to … fight inequalities and give countries added confidence in their dealings with large taxpayers’.
Jamaica put a request for help on multinational tax assistance, and within three week Mr Scholze found himself in Kingston auditing the tax affairs of some of the largest multinational companies operating in Jamaica. They’d been funnelling profits to the surrounding tax havens – until Mr Scholze ensured they paid their fair share of tax. You can almost imagine the scene in a Kingston bar afterwards as the lawyers for the multinationals complained ‘In a fair fight, I’d kill you!’, and Mr Scholze, with his best Johnny Depp smile, wryly retorted ‘Well, that’s not much incentive for me to fight fair then, is it?’.
Last September, I had the pleasure of announcing here at the Australian National University the latest part of Labor’s package to crack down on tax havens. Following the extraordinary leaks in the Paradise Papers and the Panama Papers, the work of United States and Australian Senate Committees, and the campaigning by tax advocacy groups, we’re starting to build up a picture of how multinational firms use shell companies and tax havens to avoid tax.
Every now and then, a new snippet of information appears. For example, did you know that the Bahamas is now the fifth-largest foreign owner of Australian farmland?
Globally, around $600 billion of profits are estimated to be shifted to tax havens, representing almost 40 percent of multinational profits.
There’s at least five reasons to be worried about tax havens.
First, tax havens siphon taxable profits away from jurisdictions like Australia. This means either increasing the tax burden on individuals and businesses, taking on more debt, or cutting social services. Tax havens and similar shenanigans have been estimated to cost Australia US$6 billion each year.
Second, tax havens are the hiding ground for a lot of crooks. Tax havens are used by drug-runners, extortionists and money-launderers. They are used by Al Qaeda, the North Korean regime and Mexican drug kingpins. Around four-fifths of money in offshore bank accounts is there in breach of other countries’ tax laws.
Third, tax havens increase inequality. Offshore wealth held by Australians in tax havens is estimated at around 6 per cent of national income. That equates to over $100 billion in assets held offshore by wealthy Australians. Oh, and when we say wealthy, we mean really wealthy. Globally, it has been estimated that half the money in tax havens is owned by the top 1/10,000th of the population.
Fourth, if the case for a big business company tax cut wasn’t already pretty lacklustre, tax havens make it even weaker. The more that multinationals stash their profits in tax havens, the less it makes sense for advanced nations to engage in a race to the bottom in their company tax rates.
Fifth, poverty rates are high in many tax havens, and nations affected by their activities. Some researchers believe there is such a thing as a ‘Finance Curse’, for developing nations that are overly dependent on the finance sector. The International Monetary Fund reports that the adverse impact of tax havens on corporate tax revenue are worst for developing countries. Managing Director Christine Lagarde observes that developing countries lose about $200 billion in revenue per year, or about 1.3 percent of GDP, due to companies shifting profits to low-tax locations.
It’s that final point I want to elaborate on today – how tax havens hurt other developing countries, and what we can do about it.
One study aims to put a figure on how much revenue each nation loses as a result of tax havens and other multinational tax avoidance. For the US, it’s US$189 billion annually. For China, US$67 billion. As I’ve noted, the figure for Australia is US$6 billion each year.
But as a share of national income, the biggest victims of tax havens are the world’s poorest nations: ‘The intensity of losses is substantially greater in low- and lower middle-income countries: and in sub-Saharan Africa, Latin America and the Caribbean and in South Asia compared to other regions.’
Guyana and Chad lose the equivalent of 7 per cent of GDP annually to multinational tax avoidance. Guinea and Zambia lose the equivalent of 4 per cent. The Philippines, Solomon Islands, Fiji and Laos lose the equivalent of 2 per cent annually. As a share of national income, that’s more than the damage done to the US or China. Or Australia, for that matter.
Multinational tax avoidance places developing countries in a quandary. As the study notes:
When firms respond strongly to profit shifting incentives, increases in tax rates generate little or no increases in government revenue. The inability to contain profit shifting therefore constitutes an effective constraint on tax policy and low rates may be the best feasible policy given this constraint. This illustrates the broader finding that fiscal capacity tends to be low in developing countries
So what is to be done to ensure that developing country governments get their fair share of corporate tax from multinational firms?
The most important international initiative is the OECD and G20’s Base Erosion and Profit Shifting project. Operating since 2013, the project has been working inclusively with over 100 countries and jurisdictions to tackle multinational tax avoidance and close gaps in international tax rules that allow multinational enterprises to legally but artificially shift profits to low or no-tax jurisdictions.
Australia used to have a seat on the Steering Group, but we no longer do. In effect, we’ve now shifted from the front seat into the back seat.
This is a pity. If we win the next election, Labor will seek to play a leadership role in the international efforts to crack down on corporate tax avoidance.
But there’s also a very promising initiative directed at ensuring that developing countries get a better deal.
In July 2015, the OECD and United Nations Development Program joined forces to launch Tax Inspectors Without Borders. This followed detailed policy work by the Tax Justice Network, as well as significant public campaigns on tax evasion by non-government organisations including Oxfam, Global Citizen, the Global Alliance for Tax Justice, Christian Aid and ActionAid.
Tax Inspectors Without Borders facilitates targeted, tax audit assistance programs in developing countries across the globe.
Modestly funded, the initiative has been widely hailed as capable of assisting developing countries mobilize much-needed domestic revenues in support of the Sustainable Development Goals agenda.
The program combines the OECD’s technical competence in tax matters and its network of tax experts with the United Nations Development Program’s country-level presence around the world, access to policy makers at the highest level, and expertise in public financial management.
Tax Inspectors Without Borders consists of four components:
- Host administrations - Tax administrations of (developing) countries seeking expert assistance to build audit capacity.
- Experts - Recently retired, current, or former tax audit experts with experience working in national tax administrations.
- Partner administrations - Tax administrations who offer to contribute, via secondment, currently serving tax officials to be experts for a Tax Inspectors Without Borders program. These include France, Germany, India, Italy, Kenya, the Netherlands, Nigeria, Slovak Republic, South Africa, Spain, and the United Kingdom
- Donors - Organisations providing financial support for Tax Inspectors Without Borders tax audit assistance programmes. Jurisdictions who are donors include Canada, European Union, Finland, Germany, Ireland, Japan, Luxembourg, the Netherlands, Norway, Sweden, United Kingdom, and the United States.
The program is designed specifically to avoid any sovereignty and privacy risks. For example, secondees don’t see private tax affairs.
The program gives host administrations a significant degree of autonomy and control over their own affairs.
To date, the results are stunning. The most recent Tax Inspectors Without Borders annual report found that in many cases, the ratio of revenue raised for host administrations relative to donor costs was 100 to 1.
That’s a return that would make Warren Buffett envious. If you know of another program that raises $100 for every $1 invested, please let me know immediately!
Since 2016, the program has raised over half a billion dollars for developing nations.
As Tax Inspectors Without Borders board member Ngozi Okonjo‑Iweala (also the former Finance Minister of Nigeria) puts it:
According to the World Bank, the average tax‑to‑GDP ratio in 2013 for sub‑Saharan Africa was just 15.8%. Aid is a diminishing factor and more focus on domestic resource mobilisation is becoming central to most African governments... Improving tax policy and administration is also a critical part of the revenue effort. Government has a role to boost trust and accountability of institutions handling public resources and demonstrate prudent fiscal management.
Tax Inspectors Without Borders has made commendable efforts in the past two years, including its increased focus on South‑South co‑operation, towards deploying tax audit experts to host tax administrations in Africa and beyond. …
Developing countries will not be able to deliver on the Sustainable Development Goals without a quantum increase in mobilisation of domestic public resources. Tax Inspectors Without Borders must wholly embrace this task, alongside other development partners.
Secondly, the initiative must continue to play its role as a catalyst to encourage businesses to uphold even higher standards of responsible tax behaviour and avoid the reputational risks associated with aggressive tax planning.
Lastly, it is striking that an initiative with such a high rate of return is still in need of donor funding.
And as the report states, ‘Whilst revenue impact is important, in the last year Tax Inspectors Without Borders has gathered evidence of other long-term outcomes, including on skills transfer, organisational change and taxpayer compliance’.
At present, Tax Inspectors Without Borders is largely based in Paris, and primarily funded by European nations. It mostly uses European expertise.
However, Tax Inspectors Without Borders is expanding into the Asia-Pacific. Currently Papua New Guinea and Vietnam are host administrations with requests for audit assistance.
In fact, it was in December 2018 that Papua New Guinea’s Deputy Prime Minister Charles Abel formally requested a Tax Inspectors Without Borders programme for their Internal Revenue Commission to tackle tax base erosion and profit shifting issues in the mining, forestry and fishing sectors. The audit will begin this year.
So I’m delighted to announce today that if a Shorten Labor Government is elected in May, Australia will become a donor and partner of the program.
In conjunction with my colleague Penny Wong, the Shadow Minister for Foreign Affairs, and in my capacity as Shadow Assistant Treasurer, I can announce that Labor will commit to providing $5 million a year to Tax Inspectors Without Borders on an ongoing basis.
Additionally, we will use a small amount of that funding to assist the Australian Tax Office to second experts at the request of host administrations where appropriate.
Labor’s commitment is significant as it would allow the program to administer an Asia-Pacific hub and dramatically increase its work (which is in demand) throughout our region.
The funding forms a small component of Labor’s proposed increased in the overseas development assistance budget. And like our budgetary approach more broadly, we are funding our promises by tackling multinational tax avoidance and cutting back on unsustainable tax perks.
When it comes to improving Australia’s own laws, Bill Shorten, Chris Bowen and I have developed a strong package of multinational tax avoidance measures.
We will tighten debt-deduction loopholes used by multinational companies, and increase penalties for individuals and entities promoting tax evasion and avoidance. We will crack down on citizenship shopping by requiring all individual Australian taxpayers to tell the tax office if they have residency or citizenship of any other jurisdiction.
We will introduce public reporting of country-by-country reports, provide protection and rewards for tax whistleblowers, and introduce a publicly accessible registry of the beneficial ownership of Australian listed companies and trusts.
We will introduce require companies to disclose to shareholders as a ‘Material Tax Risk’ if the company is doing business in a tax haven, and require all firms tendering for large federal government contracts to state their country of tax domicile. And we will develop guidelines for tax haven investment by superannuation funds.
In fact, the specific Tax Inspectors Without Borders proposal uses funding fully provisioned in our Flights to Tax Havens policy announced last year. Under Labor, travel expenses to and from blacklisted tax havens will be automatically denied by the Tax Office.
A government’s international development policy must accord with Australian values. As Penny Wong recently argued:
Labor’s foreign policy is founded on the belief that we deal with the world as it is and we seek to change it for the better. This means a foreign policy that is not just transactional, but is purposive. Those purposes are defined by our values, interests and identity. We know what we stand for: compassion, equality, fairness, democratic principles and the protection of rights.
We know what our interests are: the security of the nation and its people; the prosperity of the nation and its people; a stable, peaceful region anchored in the rule of law; and constructive internationalism.
And we know who we are – an inclusive, diverse nation which draws strength from the waves of immigrants who have come to our continent and our First Nations’ peoples. Our foreign policy will speak to who we are, the confidence we have in ourselves, the values we believe in and to the region and world we want to live in.
A Shorten Labor Government will increase Official Development Assistance as a percentage of Gross National Income every year that we are in office, starting with our first Budget.
In government, we will rebuild and grow Australia’s international development program and increase Official Development Assistance, and work with the international community to achieve the longstanding funding targets set out in the Sustainable Development Goals.
Development assistance under Labor grew every year when we were last in power, reaching around 0.35 per cent of Gross National Income.
The Abbott-Turnbull-Morrison Governments have slashed the aid budget to 0.21 per cent of Gross National Income in 2019-20. That’s the lowest level on record.
If the aid budget follows its current trajectory, development assistance is forecast to drop to a miserly 0.18 percent of Gross National Income in 2022-23, and to 0.16 per cent of Gross National Income over the medium term.
The Coalition’s cuts have impugned our reputation internationally, undermined our national interests, damaged our efforts to alleviate poverty, and made our region less secure.
Today’s Tax Inspectors Without Borders announcement complements Labor’s practical commitment to ensure more dollars sent to developing nations through remittances make it to the hands of recipients.
Globally, remittance flows are almost a trillion Australian dollars. For many developing nations, remittances are worth more than foreign aid. Some economies would collapse without remittances.
In Tonga, remittances account for more than one-third of national income. Behind that statistic are thousands of hard-working Tongans, putting in a few extra hours at work so they can give some of their paycheck to less fortunate family members.
According to the World Bank, an Australian who wants to send $1000 to a developing country will see $77 eaten up in fees and charges.
Thankfully, there’s an easy solution: full fee transparency. That means requiring remittance providers to tell customers the total cost of their services. By using the benchmark exchange rate - which is the rate you see if you use Google Finance or Yahoo Finance - providers can quickly calculate their total fees. Under a Shorten Government, that will be mandatory.
Labor’s commitment to reducing the cost of remittances illustrates our belief that reducing global poverty must involve a full court press: improving institutions and increasing aid. I’m a strong supporter of the try-test-learn approach, and Labor’s Evaluator General will aim to ensure that we have more randomised trials in our aid program. But unlike the Coalition, we won’t give lip service to innovation in aid while slashing funding.
Under Labor, we won’t just provide more support to developing nations in the Asia-Pacific. We will also ensure they get more remittance flows. And, through Tax Inspectors Without Borders, we will ensure they collect more of the tax revenue that they are owed.
Thirteen years ago, experts at the Tax Justice Network travelled to several African nations to discuss the problem of tax compliance. One tax official told them ‘When we are up against these gigantic companies, we are totally outgunned by their legal teams.’
As their Network’s report noted, ‘You might find a junior auditor with only three or four years of experience of complex transfer pricing issues going up against global companies with half a dozen top tax lawyers and accountants in their team. David against Goliath stuff, but David’s hands were tied because none of the relevant accounting information was being shared with him.’
Things are shifting. As a result of the work of Tax Inspectors Without Borders’ Captain Jack Sparrow, Steffan W. Scholze, Jamaican tax officials are finally getting the upper hand. As one commentator observed to The Economist: ‘Recently a team came back from meeting one company so excited… for the first time ever when dealing with a large taxpayer, our people did the talking and the [multinational representatives on the] other side sat dumb, struggling to answer the questions’.
For Labor, our values don’t stop at the continental edge. Social justice, decent work conditions and human rights aren’t just things we fight for in Australia – they’re also values that inform our dealings with the world.
The same goes for our belief that multinational firms should pay their fair share of tax. Tax fairness isn’t just a domestic policy issue. Under a Shorten Labor Government, we will work with other nations to improve the global rules, and use our aid program to help ensure that the world’s poorest nations are no longer being ripped off by the world’s richest companies.
Authorised by Noah Carroll ALP Canberra.
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