As the world is increasingly interconnected, international taxation – traditionally more of a niche issue for tax lawyers – is receiving more and more attention in wider discussions on economic development: Double tax treaties, or agreements that two countries sign with one another to prevent multinational corporations or individuals from being taxed twice, have become more common, with more than 3,000 in effect today. And while they may contribute to investment, some have also become an instrument for aggressive tax planning.
Economists tend to agree on the importance of competition for a sound market economy. So what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is that by competing with one another and eroding each other’s revenues, countries end up having to rely on other—typically more distortive—sources of financing or reduce much-needed public spending, or both.
All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome.
Photo credit: Dmitry Karyshev
Armenia was faced with a slowing economy, sinking remittances, and inefficient tax administration. At the same time, ordinary taxpayers had to navigate arduous processes when paying taxes. The Armenian government was eager to reform its tax administration. Below is a transcript of what we learned when we spoke to World Bank experts working with Armenian tax officials to make things better.
Julia: I’m Julia Oliver.
Maximilian: I’m Maximilian Mareis.
Julia: And we have been talking with tax experts around the World Bank to find out about what they do.
Maximilian: So, let’s start with this project in Armenia. Why did we get involved?
Julia: Well, the global financial crisis hit Armenia and its three million people pretty hard. In 2012, when the World Bank began working with policymakers to improve the country’s tax administration, the country faced a pretty bleak picture. Foreign remittances were low, and the domestic economy was slowing. In addition the country had high levels of informal employment.
Tax officials and experts grappled with the issue of tax treaties several weeks ago at the IMF-World Bank Annual Meetings. This arcane subject has now emerged as a new lightning rod in the debate on fairness in international taxation. As citizens demand that corporations pay their fair share of taxes and some governments struggle to raise enough revenues for basic services, tax treaties present difficult issues.
Max Lawson is back again (he seems to have more time to write now he’s Oxfam International’s policy guy on inequality) to discuss tax morality and a bizarre encounter with a Buddhist accountant.
A few years ago I went on a hiking holiday with a number of people I didn’t know, and ended up befriending a tax accountant. He was a very nice man, who had been going through a bit of a mid-life crisis, his children had grown up and left home, his wife was not very interested in him, and he had developed an interest in Buddhist philosophy. Anyhow, after a few days, he revealed to me that over the last five years he had started defrauding a firm he had been working for, to the tune of several million pounds a year. He was not taking the money for himself, but was abusing their trust in him, by not telling them about the latest tax avoidance schemes, meaning that they were systematically overpaying tax to the government.
I was reminded of this surprising suburban Robin Hood figure by the rash of stunning leaks on tax prompted by the whistle-blowers of the last couple of years, starting with the Luxleaks, then Swissleaks, and then the mother of all leaks, the Panama Papers. All have involved incredibly brave accountants or bankers risking a huge amount to get this information into the public domain. The two former employees of PricewaterhouseCoopers who leaked information on tax breaks for major corporates such as Apple, Ikea and Pepsi in the Luxleaks case are facing years in prison. The Swiss Leaks whistleblower has been sentenced to six years in prison in Switzerland in absentia. Finally, the Panama Papers whistle blower has wisely remained anonymous but I imagine is being hunted by a range of private security firms.
I can only guess at the panic in the boardrooms of the investment banks and particularly at the big four accounting firms – Deloittes, PwC, KPMG and Ernst & Young, who between them have almost complete oversight over the business of aggressive tax planning by the major corporations. But no amount of security software can fully protect any firm from increasing numbers of employees no longer feeling morally comfortable with what they are doing, as ultimately the secrecy of the system is dependent on those that run it being able to look in the bathroom mirror in the morning and feel OK about their lives.
Malaysia is already a very competitive country. Today it ranks 18 out of 189 economies in the World Bank Group’s Doing Business Index. Yet, its ambition is to become more competitive. And it wants to overtake some countries on the way up. Malaysia has long recognized that a concerted cross-ministerial and public-private collaboration is needed to do just that.
Malaysia’s Special Task Force to Facilitate Business (PEMUDAH), was established in 2007 to improve the ease of doing business in Malaysia. Testament to its success was Malaysia’s surge to 6th position in the 2014 Doing Business, up from 12th place in 2013 and 18th in 2012, placing it in the same league as Singapore, Hong Kong, and the United States. But since then, Malaysia has been challenged to keep up with the rapid pace of business reforms across the globe.
Katy Wright, Oxfam’s Head of Global External Affairs, stands back and assesses its campaign on inequality.
The most frequent of the Frequently Asked Questions I’ve heard in response to Even it Up, Oxfam’s inequality campaign is “how equal do you think we should be?”
It’s an interesting response to the news that just 80 people now own the same wealth as half the world’s population put together, and the best answer was that given by Joe Stiglitz to a group of UN ambassadors: “I think we have a way to go before we worry about that.”
So how far do we have to go, exactly? The good news is that inequality is no longer just the concern of a small number of economists, trades unions and social justice campaigners. It’s now on the agenda for the international elite.
That partly reflects a growing realisation that inequality may be a problem for us all, not just those at the bottom. The Spirit Level raised questions about the impact of inequality on societies, and the rise of Occupy pointed to a growing political concern.
More recently, research papers from the IMF have demonstrated extreme inequality is at odds with stable economic growth, and that redistribution is not bad for growth. Significantly, this shift in focus from the IMF has been driven by Christine Lagarde. To the outside world, the IMF now officially cares about inequality, as do Andy Haldane at the Bank of England, Donald Kaberuka (outgoing head of the African Development Bank), and Alicia Barcena of the Economic Commission for Latin America and the Caribbean, to name a few.
Photo: Daniel Kozak, World Bank
The first time I came to Bucharest in 2013 the Bank office offered to arrange a pick up from the airport. Being a seasoned traveler, I declined the offer. I reasoned that I had lived and worked in so many countries I could manage the transfer to the hotel without assistance. I was wrong.
I picked up my luggage to find a local cab outside the airport. A taxi driver offered me a ride. I didn’t negotiate the price upfront seeing that he had a meter in the car.
Twenty minutes later we reached the hotel. The meter read Lei 200 - at the that time about $60. That was over twice the going rate but there was little else I could do. I felt cheated as so many tourists do.
I learned from the experience, accepted offers of help from colleagues and paid more attention to rates going forward.
An electronic kiosk had been installed at the airport. Arriving visitors could now press a button to get an estimated wait time to hail a taxi. I took my ticket. It was a smooth ride.
What made the difference?
The new taxi ordering system is now available on mobile phones mirroring, in many ways, the service provided by Uber. Passengers can rate drivers and increase accountability.
Bucharest has gone from being a difficult place to find an honest cab driver to one of the most convenient.
The change has been driven by incentives and improved technology.
From my house in northern Quezon City, I drive more than two hours every day to get to the office in Bonifacio Global City, which is about three cities away where I come from, and two cities away from the capital Manila. It’s a journey that should only take around half an hour under light traffic. That is a total of four hours on the road a day, if there is no road accident or bad weather. It takes me an hour longer whenever I use the public transport system. Along with hundreds of thousands of Metro Rail Transit (MRT) commuters, I have to contend with extremely long lines, slow trains, and frequent delays due to malfunctions. This has been my experience for several years. Many of us might be wondering: why have these problems persisted?