Human Rights and Just Taxation

Thomas Pogge

The subsidiaries of multinational corporations (MNCs) in poor countries routinely pay little or no taxes, thereby gaining a substantial advantage over their uni-national competitors. MNCs achieve this by creating additional subsidiaries in tax havens and then instructing their poor-country subsidiaries to contract with their tax-haven subsidiaries into money-losing arrangements involving trade misinvoicing, abusive transfer prices as well as inflated consulting and trademark fees. These arrangements diminish the taxable profits of the poor-country subsidiaries while increasing the untaxed profits of the tax-haven subsidiaries. As a result, MNCs avoid paying taxes on their profits, while poor countries see their economies drained of capital, their governments deprived of revenues and human rights remaining unfulfilled.

The magnitude of this drain is enormous. Global Financial Integrity estimates that corporate tax abuse accounts for 80% of all illicit financial outflows from less developed countries, or about $4,700 billion during the 2002–11 period and $760 billion in 2011 alone.[1]  This is five or six times the sum total of all official development assistance flowing into these countries during those periods.[2]  Christian Aid calculates that, through these profit- and tax-diminishing capital outflows, governments of less developed countries have lost tax revenues in the order of $160 billion annually — $2,500 billion for the Millennium Development Goals period (2000–2015).[3]

MNCs say that they are merely legally avoiding, not illegally evading, taxes. This distinction is often hard to draw in practice. More importantly, MNCs often lobby very hard for inserting into the law the very loopholes they then adduce in justification of their conduct. In many countries, the interests of the ruling elite are poorly aligned with the needs of the general population, and leading politicians are often willing to sell out their people for personal gain, especially in countries where democracy has only a token presence. Such politicians also make their countries available for the disposal of hazardous wastes as well as for medical and sex tourism, involving the harvesting of organs from poor people entrapped into debts and the sexual exploitation of women and children. In all these cases, the mere legality of such activities surely does not make them right.

MNCs say that, even if, like their uni-national competitors, they paid taxes in the poor countries commensurate to their operations there, the money would likely be siphoned off by corrupt elites and thus would make little or no difference to the impoverished population.

This is an ethically questionable argument. If it were sound, it would enable two parties jointly to inflict great damage that neither party is responsible for: the MNCs supposedly bear no responsibility because the corrupt elites would misappropriate the tax revenues if they received them; and the corrupt elites bear no responsibility because they never have possession of the tax revenues that could do so much for the population.  And yet, these two parties are the only ones involved in preventing the population from benefiting from MNC tax payments. How can they both be innocent in the harms they together produce?

The argument is empirically questionable as well. Christian Aid has calculated that, if the tax revenues that the less developed countries lost due to illicit financial flows were available to them and allocated according to current spending patterns, the increased health care expenditures alone would annually save the lives of 350,000 children under five.[4] Elites siphon off only some, not all, of the incoming tax revenues. Moreover, we must not forget the much larger capital outflows that MNCs instigate in order to diminish their profits. If this capital were kept in the poor countries rather than drained into tax havens, it would through multiplier effects contribute to national economic growth, employment and prosperity.

MNCs say that they would like to be better citizens in poor countries but that they are constrained by their fierce competition with one another. If they did not instruct their lawyers, accountants and lobbyists aggressively to minimize their tax obligations, they would not be able to prevail against other MNCs issuing such instructions. Lawyers, accountants and lobbyists themselves make an analogous argument: if we don’t help our clients aggressively to minimize the taxes they pay, we will lose these clients to less scrupulous competitors.

This argument has some force. It shows that a single actor’s unilateral refusal to participate in injustice can have a high, perhaps prohibitive cost to this actor. But this should not prevent such an actor from proposing a joint commitment to standards that would fairly constrain the conduct of all. Such a commitment is easiest to achieve in the accounting industry, which is dominated by just a few dominant firms. Progress may also be achievable among tax lawyers, given the large role that ethics plays in the self-conception of the legal profession.[5] Finally, progress can also come from concerted action among MNCs themselves. Like accounting firms, the MNCs competing within some industry (mining, beverages, energy, pharmaceuticals, etc.) are often few and therefore capable of entering into credible agreements. And their motivation to do so can be substantially enhanced through pressure from the citizens, shareholders and governments of the affluent countries on which these firms depend for their economic success.

In this age of globalization, the tax regimes of poor countries as well as their real-world effects are heavily dependent on institutional arrangements, policies and practices prevailing elsewhere. We are living now under an extremely complex and influential global network of rules and procedures whose overall structure is still heavily dominated by the affluent states. This gives the citizens and governments of these countries a special responsibility for injustices in this network. Their governments should intensify their offensive against illicit financial flows and their associated tax havens, shell companies and secrecy jurisdictions — not merely to promote tax justice at home, but also to promote tax justice in the poorer countries. The citizens of the affluent countries should pressure their governments to make progress, partly by showing that they care about tax justice, also internationally. They should sanction egregious tax dodging wherever it occurs and thus help MNCs as well as their lawyers and accountants do the right thing. And they should highlight and fight any tax-haven features of their own country.[6] Curtailing illicit financial flows stands to bring great gains around the world: not merely for tax justice, but also against terrorism, human and drug trafficking and many other forms of criminality. Much progress is here clearly within reach.

 

 

[1] Dev Kar and Brian LeBlanc, Illicit Financial Flows from Developing Countries: 2002-2011 (Global Financial Integrity, December 2013), pp. iii, vii, x.http://iff.gfintegrity.org/iff2013/2013report.html.

[2] http://mdgs.un.org/unsd/mdg/SeriesDetail.aspx?srid=569&crid=

[3]Christian Aid, False Profits: Robbing the Poor to Keep the Rich Tax-Free (Christian Aid, March 2009), p. 3. https://www.christianaid.org.uk/Images/false-profits.pdf

[4] Christian Aid, “False profits,” 3.

[5]  See in this spirit International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty and Human Rights, Tax Abuses, Poverty and Human Rights (International Bar Association, 2013). http://www.ibanet.org/Article/Detail.aspx?ArticleUid=4a0cf930-a0d1-4784-8d09-f588dcddfea4

 

[6]Prominently including the City of London, the IFSC in Dublin, and the states of Delaware and Nevada in the US.

This is a unique website which will require a more modern browser to work! Please upgrade today!

Translate »