What does tax have to do with ending poverty?
Governments in all countries need revenue to provide basic infrastructure and services to their citizens. A significant amount of this revenue comes from taxes.
Developing countries often don’t have enough money to provide the things that we take for granted here, like schools, hospitals and roads, so aid plays an important role. However, if developing countries were able to gain their fair share of tax revenue, they would be better able to provide for the needs of their citizens and decrease their reliance on foreign aid.
There’s no doubt that tax is powerful. A Save the Children report found that if developing countries were to mobilise 20% of GDP in tax revenue 287,000 more child deaths could be avoided each year and 72 million more people could have access to clean water. Right now, developing countries are losing out because of tax dodging.
How do companies avoid paying their taxes?
Large multinational companies (MNCs) are able to exploit the loopholes in the international tax system. There are a couple of common practices:
Profit shifting: All countries have their own tax laws and different tax rates. In theory, companies should pay taxes in the countries in which they conducted their business. Because of a lack of transparency in the international system, they’re able to shift profits to countries that have low company tax rates (commonly known as tax havens or secrecy juristrictions), and avoid paying taxes in countries that have higher tax rates.
Transfer (mis)pricing: This is a tricky and complex way through which multinational companies will shift their profits from high to low tax jurisdictions or tax havens through misrepresenting where the costs of their business lie.
Often when companies avoid paying their taxes they are not actually engaging in illegal activity but rather an unethical practice.
If tax avoidance is legal, why is it wrong?
When multinational companies tax dodge, it means that they’re not paying taxes in the countries in which they earned their profits.
When MNCs set up their operations in developing countries, they’re essentially using resources to turn a profit - infrastructure, natural resources and the skills of the local workforce. They therefore have a responsibility to give back to the communities that they work in - just like local companies.
Take the example of SAB Miller, the beer company that makes Peroni, Grolsch and Castle. SAB Miller has breweries all across Africa, turning profits of hundreds of millions of dollars. But they also have subsidiaries set up in known tax havens like Switzerland and Mauritius. By shifting profits from the countries where the breweries are to these tax havens, SAB Miller avoids paying taxes on their vast profits.
So one of the biggest breweries in the world, SAB Miller, owning a large operation in Ghana, reported no profits and paid no tax there. We think there’s something wrong with that picture.
Because there is a lack of transparency in the global tax system, it’s difficult to put an exact figure on the amount of money that’s lost due to tax avoidance.
Reports from Oxfam, the Tax Justice Network and Christian Aid estimate that developing countries lose between $150 and $160 billion dollars. That’s enough to end world hunger 3 times over.
How can the G20 tackle tax dodging?
Tax dodging by Multinational Companies is able to take place because of a lack of transparency in the international tax system. There are three key policies that the G20 can implement that would go a long way in addressing these issues. It’s as easy as A-B-C.
Automatic exchange of information
The issue: individuals can escape tax liability because foreign jurisdictions do not share their information on taxable income with each other.
The Solution: Create a system of the automatic exchange of information that allows countries to easily exchange information about taxation with each other. There has been some progress on this, but we need to insure that the system is inclusive of developing countries.
Disclosure of real Beneficiaries
The issue: companies registered in tax havens do not have to disclose who their actual beneficiaries are – making it incredibly easy for companies to avoid being credited with the profits earned by subsidiaries registered in tax havens.
The solution: create legislation that make it mandatories for companies registered in tax havens to disclose their beneficiaries.
The issue: currently companies are only required to report their stats (e.g. profit) on the basis of three regions throughout the world - the Americas, Europe, Middle East and Africa, and Asia. Each of these regions contain a huge amount of countries and a number of tax havens, so it makes it almost impossible for consumers and authorities to see whether or not a company is paying their taxes where they're due.
The Solution: require that companies report their tax stats on a country by country basis.
What part does Australia play?
Australia, as chair of the G20, will influence the agenda. To make sure that extreme poverty is on there, we need everyday Australians behind us, and we need commitment from our leaders. The End Poverty Campaign is about raising awareness about the issue of extreme poverty and make sure that our leaders commit to policies that benefit, not harm, the world’s poor.
But it doesn’t end with the G20. Australia delivers life-saving aid to developing nations around the world. Last year alone, Australia's foreign aid saved at least 200,000 lives, put more than half a million children in school, and provided emergency relief for over 10 million people around the world.
This year, 7.9 billion dollars was slashed from the Aid budget. Australia hasn’t kept its promises to the world’s poor. Cut, after cut, progress has been stifled. We believe that Australia should give it’s fair share to help end extreme poverty.
Does aid work?
Australian aid saves lives. In 2012, Australia's foreign aid saved at least 200,000 lives, put more than half a million children in school, and provided emergency relief for over 10 million people around the world. Australian aid helped eradicate polio in the Pacific. Aid does make a huge impact on the lives of those living in extreme poverty.
The Australian Government currently gives a mere 35 cents in every $100 of national income - with the latest cuts, this will decrease to just 29 cents. Imagine the impact we could have around the world if Australia gave our fair share of aid – just 70 cents in every $100.
Australia can afford to both keep the promise to give aid overseas to save lives, and still keep more than 99% of our wealth for ourselves.