The staff at the International Monetary Fund (IMF) has issued an unusually stark warning over the lack of harmonised global tax policies, pointing out that these gaps are allowing for widespread tax gaming by corporations with particularly negative impacts for developing countries.

Anti-poverty advocates are lauding a new staff paper from the fund released Wednesday. Its findings not only coincide with civil society calls for major taxation reforms at the national and international levels, but also repeatedly push back against longstanding tax-related dogma, including that offered by the Washington-based IMF itself.“As tax dodging knows no border, it makes sense to move to the international level to create such a worldwide entity.” -- Catherine Olier of Oxfam

“This is, frankly, a revolutionary paper,” Jo Marie Griesgraber, the executive director of the New Rules for Global Finance Coalition, a Washington-based international network, told IPS.

“It looks very carefully at many aspects of tax planning, and each time says that this has very negative impact on developing countries … Ultimately, it says that traditional tax theory is essentially uninformed by empirical knowledge.”

The paper is the result of a new focus on tax-dodging among the Group of 20 (G20) industrialised countries, which directed the fund to undertake related research. The findings are particularly notable in their sustained focus on the impacts on developing countries.

“Our technical assistance work in developing countries frequently encounters large revenue losses through gaps and weaknesses in the international tax regime,” Michael Keen, deputy director of the IMF’s Fiscal Affairs Department, said in a statement.

“The sums involved for them can be large, not just relative to corporate tax but relative to all tax revenue: 10-15 percent in some cases. The paper reports new evidence that these effects are in fact systematically more important for developing countries.”

Corporate tax rates in all countries have plummeted in recent decades, the paper notes.

Low-income countries have seen these rates degrade from near 50 percent in 1980 to under 30 percent last year. Others have seen similar plunges, with high-income countries seeing corporate taxation fall from around 40 percent three decades ago to little more than 20 percent today.

Such trends have been tracked for years. Yet in the aftermath of the global financial crisis, rich and middle-income countries have begun actively discussing how to maximise their tax revenues, with a focus on ending corporate accounting gimmickry.

Rich companies and individuals could be stashing away as much as 20 trillion dollars overseas in order to escape national taxation, according to some estimates.

“Developed countries today need more income and are mad because not everyone is paying their taxes,” Griesgraber says.

“And that anger is also translating into public pressure. People who pay their taxes even during a difficult recession are even madder than the governments.”

“Meaningless” designations

According to the IMF data, developing countries should perhaps be the most incensed by the impacts of today’s global taxation hodgepodge. The paper offers new findings on the ramifications of what the fund terms “spillover effects” – the ways in which one country’s tax rules impact on another country, which can also be thought of in terms of tax competition between countries.

This phenomenon has been significantly exacerbated as multinational companies have increasingly learned how to legally “move” their operations – largely on paper – for tax benefit. Such companies appear to be based in countries with low taxes, despite doing most of their work in another country that, in turn, is unable to place levies on the company’s full earnings.

“Current international tax arrangements rest on concepts of companies’ ‘residence’ and the ‘source’ of their income, both of which globalization has made increasingly fragile (some would say meaningless),” the paper states.

“At its core, a key issue in assessing any international tax arrangement is how it divides the rights to tax between source and residence countries … The allocation of rights is especially important for low-income countries, however, as flows are for them commonly very asymmetric – they are essentially ‘source’ countries.”

The fund staff found that the impact of these spillover effects on corporate tax bases are “significant and sizable” but are “especially pronounced for low-income countries”. Compared to rich countries, the paper notes, “the base spillovers from others’ tax rates are two to three times larger” in developing countries, and “statistically more significant”.

Particularly problematic has been the extractives industry, though the fund also calls out telecommunications companies. The paper recounts IMF experiences in multiple countries where corporate tax trickery has eaten up much of a project’s revenue, such as a “gold mining sector in which USD 100 billion has been invested over the last decade, but which is almost entirely debt financed”.

The fund ultimately goes so far as to suggest that countries should be extremely careful about signing any bilateral tax treaty, urging developing country governments instead to signal openness to investment by other means. Through such agreements, countries can sign away their right to levy full tax rates and give an upper hand to foreign corporations.

“The IMF analysis raises some very worrying concerns about the impact of tax rules and practices in rich countries on the ability of poor countries to raise their own revenues,” Diarmid O’Sullivan, a tax justice policy advisor with ActionAid, a watchdog group, said Wednesday.

“We see a clear message to … major capital-exporting countries to review their tax rules and make sure they are not harming the ability of poor countries to raise the revenues they need for their development.”

Comprehensive approach

One key step being pushed by governments and civil society today to cut down on corporate tax avoidance entails the automatic exchange of tax information between governments. Doing so, proponents say, would quickly clear up the discrepancies that can be exploited by tax-dodgers.

In February, the Organisation for Economic Co-operation and Development (OECD), comprised of 34 rich countries, unveiled just such a proposal. Still, anti-poverty campaigners have warned that developing economies were not included in discussions around the OECD plan – though a roadmap is due by September on facilitating poor countries’ participation in such exchanges, an OECD official told IPS.

Some are now hoping that this new flurry of work could be leading towards the formalisation of a stricter international framework on tax policy, in line with the globalised environment of today’s multinational corporations. Indeed, the IMF’s new paper notes that “the case for an inclusive and less piecemeal approach to international tax cooperation grows.”

Indeed, a decade and a half ago an IMF official proposed the establishment of a World Tax Authority, an idea that campaigners are now hoping to revive.

“As tax dodging knows no border, it makes sense to move to the international level to create such a worldwide entity,” Catherine Olier, a policy advisor with Oxfam International, an advocacy and humanitarian group, told IPS.

“Modalities about its functionalities and mandate would remain to be determined, but it could have a role in setting minimum standards to avoid harmful tax competition between countries – and, if ambitious, an international dispute mechanisms to fight countries that deliberately put in place tax policies with too much negative spillover effect on others.”

The IMF and OECD reports will both go before the G20 at a summit in November.

The Group of 20 (G20) industrialised and emerging economies on Sunday formally expressed frustration with the ongoing inability of the United States to approve a major reform package that would see governance at the International Monetary Fund (IMF) shift more towards developing countries.

The reforms were approved by the IMF in 2010 and have since been ratified by more than three-quarters of the fund’s member governments. Yet while the administration of President Barack Obama has been a key proponent of the reforms, the U.S. Congress has thus far been unwilling to approve the changes."The BRICS are wondering why they put up their money when nothing is happening." -- Jo Marie Griesgraber

Because the United States, with around 17 percent of voting rights (or “quota” shares) has an effective veto within the IMF, the reforms cannot go forward without the U.S. vote. The process has now missed a January deadline, while a second deadline for a subsequent round of changes is looming.

“Given that the U.S. is a big part of the G20, it is no small victory that emerging market and developing countries were able to get IMF reform so formally prioritised,” Kevin P. Gallagher, co-director of the Global Economic Governance Initiative at Boston University, told IPS. “Such pressure is basically the US administration and the rest of the world against the U.S. Congress.”

On Sunday, the G20, which has been a key organiser of the international financial response in recent years, strongly criticised the deadlocked reforms process. It also offered a new deadline for U.S. action.

“We deeply regret that the IMF quota and governance reforms agreed to in 2010 have not yet become effective,” the G20 stated in a communiqué on Sunday, following a ministerial meeting in Australia, which is hosting the grouping this year.

IMF chief Christine Lagarde. The quota changes would significantly increase the currently underweighted influence of fast-rising economies such as Brazil, China, India and Turkey. Credit: World Economic Forum/cc by 2.0

“Our highest priority remains ratifying the 2010 reforms, and we urge the US to do so before our next meeting in April. In April, we will take stock of progress towards meeting this priority.”

IMF Managing Director Christine Lagarde echoed this concern, saying Sunday that the fund “share[s] this view and urge[s] rapid progress on implementation.” The Washington-based institution is considered the world’s “lender of last resort”.

The quota changes would significantly increase the currently underweighted influence of fast-rising economies such as Brazil, China, India and Turkey. It would do so largely by decreasing the cumulative share of European members, considered outsized in terms of gross domestic product.

The Netherlands and Spain, for instance, both have voting shares similar in size to Brazil’s, despite the fact that the Spanish economy is less than two-thirds the size of the Brazilian. Given the problems in the eurozone, the European countries have also been prime beneficiaries of IMF support in recent years.

Under the quota reforms, the so-called BRICS countries – middle-income countries including Brazil, India and China – would see their vote shares expand the most significantly. The 2010 reforms would shift around nine percent of these shares towards developing countries, while also doubling the size of the fund’s overall lending capacity.

“The Europeans love it – they’re gloating. They have excessive power, are significantly overrepresented, and they love that [the United States] is not moving the reforms process forward,” Jo Marie Griesgraber, the executive director of the New Rules for Global Finance Coalition, a Washington-based international network, told IPS.

“On the other hand, the BRICS are wondering why they put up their money when nothing is happening. They’re most unhappy. In the long term, the BRICS countries could say this doesn’t work for them and move more seriously away from the IMF.”

On Sunday, a top Indian finance official warned that the failure to move forward on quota reform was threatening to undermine both IMF and G20 legitimacy.

“This is perhaps the first visible failure of G20. This has reduced the credibility of G20,” India’s economic affairs secretary, Arvind Mayaram, said in Sydney, calling implementation of the 2010 reforms “vital for the credibility, legitimacy and effectiveness of the IMF”.

Alternative institutions

Although an esoteric topic, the IMF governance reforms have received widespread approval from important constituencies in the United States, including major business and financial lobby groups as well as a long list of Republican luminaries.

In fact, President Obama bears some blame for the current situation, having decided in 2012 for political reasons not to request approval from the U.S. Congress. Yet since then, his administration has tried to do so repeatedly.

Each time, however, the Republican-controlled House of Representatives has rebuffed these requests, though apparently less for ideological than for political reasons. The last such attempt took place last month, when Republicans agreed to include the IMF reforms proposal in a major appropriations bill – but only if the Democrats would agree to stop the U.S. Treasury from imposing proposed restrictions on political “dark money”.

President Obama reportedly refused the trade, and there are few legislative options left for moving related legislation through Congress in coming months, particularly as national elections loom at the end of the year. (On Sunday, U.S. Treasury Secretary Jacob Lew told the G20 his office “will continue to work with Congress to pass legislation as soon as possible to secure the 2010 reforms, which are vital to our economic and national security interests.”)

Some observers say that such a situation should only strengthen an ongoing process under which developing countries are building multilateral structures outside the IMF.

“Upcoming Congressional elections may lead to further entrenchment by the U.S. on this issue. Thus it is imperative that the developing world continue to build alternative institutions such as the BRICS bank and the BRICS exchange reserve pool,” BostonUniversity’s Gallagher says.

“Just as important is for these bodies to have more equitable and transparent processes, so they can be held up as models against the arcane structures in the international financial institutions.”

The BRICS countries announced their intention to create a new multilateral development bank last year. Yet since then, progress has reportedly been slow, particularly as ongoing economic roiling is being felt particularly strongly in emerging economies.

“There is good talk about these projects, but most countries remain very reluctant to walk away from the [IMF]. Nonetheless, we are already seeing a gradual erosion in the use of the institution,” New Rules’s Griesgraber says.

“From our perspective, we need to get through this current reform process so we can move on to the larger governance issues that need to be addressed at the fund. Let’s equalise the power, introduce greater transparency around the board, and ensure that likely consequences for poor people are assessed before the IMF acts.”

Aggressive creditors and investors are seriously undermining the ability of poor countries to deal sustainably with debt issues, academics and anti-poverty campaigners told a briefing at the U.S. Capitol on Wednesday.

Further, many of these investors are now based in the United States, after other important financial centres have moved to curtail such practices. As such, national lawmakers and international experts are stepping up calls for Washington both to follow suit domestically and to lead a related international effort.“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy." -- Jubilee's Eric LeCompte

“We need to acknowledge that aspects of the financial crisis could have been prevented if we had basic, common-sense principles on responsible lending and borrowing within the international financial system,” said Eric LeCompte, executive director of Jubilee USA, a network of anti-debt campaigners and a co-host of Wednesday’s briefing.

“In fact, both Northern and Southern countries that have gone through severe external debt crisis may have been saved the severe shocks to their economies and austerity restructuring if these reasonable principles were in place.”

(Jubilee released a full report on these proposed principles last year.)

Maxine Waters, a member of the House of Representatives, agreed, saying in a statement, “The time has come for the world to design a formal, more efficient system for managing the restructuring of sovereign debt.”

At issue is a strategy adopted by a small number of hedge funds to purchase reduced-rate debt from poor countries with little hope of repayment. These firms then file lawsuits against those governments for failure to repay, looking to scoop up government revenues and international aid monies when they eventually start to flow.

Perniciously, these firms maintain the lawsuits even as other investors typically agree to reduce some debts, accepting lower-than-expected returns that nonetheless allow the indebted government to begin to recover. Even a single such “holdout creditor” (also known as a “vulture fund”, for having purposefully sought out governments in fiscal distress) can gum up the entire debt-restructuring process.

“One of the most obvious remedies being discussed is that of collective action clauses, which allow a super-majority of creditors to force holdouts to accept a restructuring,” Rep. Waters noted Wednesday.

“Yet it would be wrong to rely solely on such clauses … This is why I favour the establishment of a formal, institutionalised, and politically recognised mechanism for restructuring the debt of bankrupt sovereigns, which would address all forms of debt.”

Other countries, most notably the United Kingdom, have already put in place restrictions aimed at undercutting the motivation to engage in such “vulture” speculation. Yet the United States has yet to do so.

On Wednesday, Cephas Lumina, the United Nations independent expert on the effects of foreign debt, noted that the U.S. is today a “preferred jurisdiction” for holdout creditors. He called on Washington to take “robust legislative measures … to limit the ability of vulture funds to pursue immoral profits at the expense of the poor.”

High stakes

In the aftermath of the 2008-09 financial crisis, government debt has become an increasingly important topic for all countries. And as austerity measures increasingly impact on poor communities, some advocates suggest that stronger international principles on sustainable lending practices could mitigate some of these ongoing ramifications.

Perhaps improbably, the issue of holdout creditors has heated up considerably here in Washington in recent months. Much of this is due to a landmark legal fight taking place between the government of Argentina and two New York-based hedge funds – NML Capital and Aurelius – that own some of the bonds Buenos Aires, then facing bankruptcy, defaulted on in 2001.

In a widely watched decision, in August a judge ordered the Argentine government to pay the two funds nearly 1.5 billion dollars. But Buenos Aires rejected the decision, saying that it would continue to repay its debts on its own terms (indeed, it is barred from paying the hedge funds, due to a law passed by the Argentine legislature in 2005).

It also warned that agreeing to pay off NML and Aurelius would embolden the 93 percent of Argentina’s other creditors – each of which has agreed to accept lower repayment – to demand their full share. Doing so, Argentina noted, would put the government back in the situation it faced in 2001.

The case has now been appealed to the U.S. Supreme Court. Although the justices refused to take on the issue in October, following a new appeal many observers now see a high probability the court will review the case.

Jubilee’s LeCompte says the stakes are high. Most countries facing holdout creditors, it should be noted, are far poorer than Argentina.

“The outcome could have some of the most far-reaching consequences for global poverty in our lifetimes,” he says.

“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy. With this precedent, the hedge funds will hurt some of the most fragile economies in the world.”

In June, even the International Monetary Fund was planning to file a brief on behalf of Argentina with the U.S. Supreme Court, its first ever such move. That decision was scuttled, however, reportedly due to lack of support from the U.S. government.

Legislative momentum?

Some see the issue’s suddenly high visibility as encouraging for potential legislative action.

“It would certainly be good timing right now, so we’ll probably see something rolling out,” Nathan Coplin, coordinator of the New Rules for Global Finance Coalition, a Washington-based international network of activists and researchers, told IPS.

“This will have a major precedent for sovereign debt for middle income and low-income countries. But there could also be an impact for the United States – given that one holdout creditor can stall the entire [restructuring] process, countries may consider issuing their bonds outside the U.S.”

It is currently unclear how much appetite there is in the U.S. Congress to tighten regulations on holdout creditors. Representative Waters has repeatedly introduced legislation to do so in past years, but none of these proposals was even brought up for a full vote.

Still, despite the significant lobbying power of the U.S. financial services industry, most investors don’t want to have anything to do with “vulture funds”.

“Certainly legitimate investors are in support of having a streamlined process, in which they can restructure the debt and move on,” Coplin says. “Where exactly the pushback is coming from is an interesting question – it’s hard to see how a small group of investors and hedge funds could influence or obstruct any kind of legislation.”

As leaders of the Group of 20 (G20) countries head into a second day of talks at the grouping’s seventh summit this week in Los Cabos, Mexico, calls are strengthening for a new debate around the group’s lack of accountability.

“The G20 has liberally imposed itself over other institutions to mandate those other institutions to take on its agenda,” Gawain Kripke, a researcher with Oxfam America, said in Washington on Monday.

“That’s potentially a problem, when you have this fundamentally unauthorised organisation setting the agenda and work plans for other institutions that do at least have bylaws and so forth.”

Kripke pointed, in particular, to the example of the current debate over a set of reforms being pushed through the International Monetary Fund (IMF). These reforms, which in part would see developing countries significantly increase their voting powers within the Fund, have been spearheaded by the G20 as a signature issue.

While these reforms are widely seen as positive, the fact that the G20 is a non-institutionalised grouping – it lacks a secretariat, for instance, and operates largely on the whim of rotating host countries – is worrying for many, particularly as the group’s scope has widened significantly in recent years.

The G20, which calls itself an “informal forum”, was created in 1998 by the finance ministers of 20 of the world’s most developed countries. In particular, the group included the fast-rising “middle-income” countries such as India, Indonesia, Brazil, Turkey, Russia and China.

For the first decade of its existence, though, the G20 was of little relevance. “No one cared about the G20 – no one wanted to work with them,” Bernardo Lischinsky, a senior advisor at the IMF, told a panel discussion here on Monday, at an event organised by New Rules for Global Finance, a Washington non-governmental organisation (NGO), and the Heinrich Boell Foundation.

In the midst of the 2008 economic crisis, former U.S. President George W. Bush made a surprise call on the G20 to come together for an urgent meeting in Washington. The group was tasked with devising a coordinated response to the unfolding events.

While that leadership proved critical then, Lischinsky said, the G20 has since expanded into numerous other areas. “I think they need to slow down, to go back to what they were doing before the crisis,” he said. “They need to focus on strengthening other institutions.”

Shadowy overreach?

Today, the G20 has expanded its number of working groups to ten. Beyond the group’s core focus of finance, these groups take on a broad swath of issues, including development, food security, trade and the “social dimension of globalisation”.

Yet the agendas, negotiations and even composition of these groups have remained shrouded in mystery.

“There is a whole second G20 agenda on development that gets absolutely no headlines,” said Nancy Alexander, director of the Economic Governance Programme at the Heinrich Boell Foundation in Washington.

“The G20 has created an action plan for development in all 173 countries that are not part of the G20, with no mention of issues such as climate change or equity. This plan does not request or suggest, but mandates actions for 25 national and regional organisations.”

The website of the Economic Governance Programme is considered a treasure trove of documents – otherwise impossible to find – relating to the G20’s inner workings. She added that in simply trying to obtain information on the membership of the development working group, she was turned down by four governments citing “confidentiality”.

“This is wrong – this stifles democracy,” she argued. “The G20’s role should be to give suggestions to qualified bodies. We need to have a discussion on whether the G20 is actually accountable to more representative bodies – the U.N., say, or the international financial institutions.”

Few people realise that the G20 is “actually far less accountable than the IMF”, she pointed out.

The lack of accountability can be particularly problematic given the degree of influence that large-scale corporate interests have recently built up over the G20.

The new working group on transparency, for instance, is comprised entirely of people from the banking industry, according to Jo Marie Griesgraber, the executive director of New Rules for Global Finance. Similarly, until recently, U.S. participation at the G20 was solely through the commerce department.

Los Cabos summit

Monday’s events in Los Cabos were arguably dominated by the so-called B20 – the “business 20” – while Tuesday morning started with a breakfast for heads of state and select business leaders.

Even within the group’s core focus on global finance, critics point out an overly heavy reliance on dogmatic positions. “In times of crisis you need a forum to address macroeconomic coordination,” said Thea Lee, a labour organiser in Washington.

“Unfortunately, the G20 has often come up with the wrong solutions, with an undue focus on neoliberal fiscal solutions – for instance, promoting more austerity when the problem today is a lack of demand.”

In the run-up to the Los Cabos summit, many have pointed out that the space for civil society engagement has very limited, a situation exacerbated by the high level of secrecy.

“The G20 is at heart a negotiating forum, and we have very little sense of how those negotiations proceed,” warned Oxfam’s Kripke.

“We have no understanding of countries’ intentions, positions – the process isn’t subject to public discussion and as such civil society can’t offer any help. Ultimately, that’s less likely to produce a good outcome.”