Tamira Gunzburg / Feb 2016
Pierre Moscovici, European Commissioner for Taxation. Photo: European Union
Last week, the European Commission published a proposal to implement rules for the biggest multinational companies to declare more tax information to revenue authorities. As governments scramble to respond to the growing public disapproval over various tax scandals, one story remains untold. That of the poorest countries, who also feel the burden but risk remaining out in the cold with these new measures.
Each year, developing countries lose $1 trillion to illicit financial flows, which include tax evasion. At the same time, the poorest countries rely on foreign aid to provide many essential services like education and healthcare. And they are in a race against time to achieve the Global Goals to end extreme poverty by 2030, which the world collectively committed to just a few months ago. But developing countries won’t be able to achieve these goals with aid alone, so it is critical that leaders stem these illicit flows and unlock domestic funding for development.
Leaders of the world’s wealthiest nations – the Organisation for Economic Cooperation and Development (OECD) – have already shown that there are ways to tackle tax evasion in their countries. Last year, they agreed to make the biggest multinationals report their tax information on a country-by-country basis to revenue authorities. The idea is that revenue authorities in the OECD countries would then share the information amongst each other. Sounds good, but the catch is that poor countries are excluded from the club, and the reports will remain secret.
Instead, what could really make the difference is transparency. Making the reports public would allow tax authorities in developing countries to get hold of information on companies operating on their soil, without having to jump through administrative hoops that are too expensive for them. Citizens, civil society, journalists and parliamentarians would also be able to follow the money and make sure the revenues are collected and spent responsibly.
This concept is not new of course. The European Union has already shown its understanding of the power of transparency in unveiling corruption. Three years ago, it passed historic legislation obliging European oil, gas, mining and logging companies to publish their payments to governments abroad. Since then, countries like Norway and Canada have passed similar rules and the USA are defining theirs too. A global standard is emerging, pioneered in part by the EU. And the results are starting to show: transparency in the extractive sector has already led to increased revenues in a number of cases.
Take for example Azerbaijan, where citizen monitoring of the spending of oil revenues revealed major leakages, leading to a government investigation and the recovery of €34 million in 2008. Or Angola, where civil society exposed a corrupt deal that had siphoned away €750 million of state oil revenues and pressed for policy reforms. The list goes on with similar stories from Ghana, Nepal and other countries.
Meanwhile, European banks are now also obliged to publicly report their taxes on a country-by-country basis. The European Commission is currently considering extending these public reporting requirements to all other sectors. The European Parliament has called for this repeatedly, as have several European governments including the Netherlands and most recently the UK. While the proposals are still in the works, several Commissioners including Pierre Moscovici and Margrethe Vestager have already indicated that they are ‘personally in favour’ of public disclosure. It raises the question who, then, remains ‘personally against’ measures that could unleash unprecedented domestic resources in developing countries and ultimately reduce their dependency on aid?
With EU Member States’ budgets under pressure, alternative sources to finance development must be found soon. In a world where the Global Goals will not be met with aid alone, this kind of win-win legislation that benefits both Europeans and citizens of poor countries without any budgetary effort is precisely what we need to finance the fight against extreme poverty. The EU has led the way before, and we fully expect this new Commission, Presidency and Parliament to do so again.