Finance ministers from the Group of 20 (G20) countries on Friday received a previously requested strategy under which the world’s largest economies could crack down on international tax avoidance, particularly on the part of multinational corporations.

The 15-point action plan was created by the Organisation for Economic Cooperation and Development (OECD), a Paris-based think tank funded by the world’s richest countries. The G20 requested the study in February, as tax avoidance has moved to the top of the global agenda, particularly in the context of governments struggling to fill state coffers in the aftermath of the global economic downturn."When multinational corporations game the system – and the evidence shows that they are – everyone else loses." -- Nicole Tichon of the Tax Justice Network USA

Yet some analysts have also suggested that, against the backdrop of countries such as Brazil, China, India and Russia quickly becoming some of the world’s most powerful economies, the current exercise could be developed countries’ last attempt to steer the conversation on international tax policy.

“The joint challenges of tax evasion and tax base erosion lie at the heart of the social contract,” Angel Gurria, secretary-general of the OECD, said Friday in Moscow, where he handed over the new blueprint to government officials gathered ahead of the G20 summit in September, which Russia is hosting.

“Our citizens are demanding that we tackle offshore tax evasion by wealthy individuals and re-vamp the international tax system to prevent multinational enterprises from artificially shifting profits, resulting in very low taxes or even double non-taxation and thereby eroding our tax base.”

The OECD strategy would now seek to strengthen coherence among its members’ tax systems, aimed at filling the gaps between those systems – through which multinational corporations, in particular, have become adept at slipping.

A major thrust of the new strategy deals with ways to corral the new powerhouses of the digital economy, which in recent years have become adept at extremely complex – some say only marginally legal – tax strategies. Such companies, making use of extensive offshore subsidiaries, have recently been the focus of a strengthened tax-avoidance discussion here in the United States and in Europe.

The action plan, which the OECD says it will roll out over a two-year rulemaking process, also tries to increase transparency. It would require companies to engage in country-by-country reporting of profits, for instance, in order to make it more difficult for phony “shell” offices to quietly shift profits made in one country to another that offers lower or nonexistent tax rates.

On Friday, Gurria noted that these 15 actions would “result in the most fundamental change to the international tax rules since the 1920s!”

Built on an earlier general report, the plan received widespread initial plaudits from government officials. Russian Finance Minister Anton Siluanov “commended” the report for hewing to “the basic tenets of fairness – that it allows multinational corporations to prosper without loading a higher tax burden on domestic companies and individual taxpayers.”

U.S. Treasury Secretary Jacob J. Lew also “welcomed” the action plan, which he said was created in part with U.S. participation.

“This is a major step toward addressing tax avoidance by multinational firms in the global economy and represents a concerted effort to raise standards around the world,” Lew noted in a statement sent to IPS. “We must address the persistent issue of ‘stateless income’, which undermines confidence in our tax system at all levels.”

Entrenching global inequality?

Yet the plan received a more cautious appraisal from certain civil society organisations, with some warning that the OECD’s membership has led it to overlook the importance of developing countries in combating tax avoidance in today’s context. Indeed, it is in these countries where illicit outflows of capital are having major, damaging impacts on already strapped governments’ abilities to fund their public sectors.

“We are encouraged to see this unequivocal acknowledgement that when multinational corporations game the system – and the evidence shows that they are – everyone else loses: governments, citizens and other businesses,” Nicole Tichon, executive director of the Tax Justice Network USA, an advocacy group here, told IPS.

“We agree that this is a global problem and will require a global solution, but this plan needs to more carefully consider the additional plight of developing countries.”

One of Tichon’s colleagues in Africa expanded on this point.

“In poor nations we are largely failing to capture tax revenue from major international corporations which should be harnessed to ensure better social and economic opportunities for citizens,” Alvin Mosioma, the director of Tax Justice Network Africa, says.

“This is why the current OECD reform process needs to include at its heart serious representation from developing nations rather than keeping them to the margins. That developing countries are kept out of this key process runs the real risk of further entrenching global inequality.”

Others are taking issue with the new plan’s failure to recommend that country-by-country reporting of corporate profits – seen as a critical tool in halting the currently rampant shifting of earnings among multinational companies – be made public.

According to the OECD’s top tax official, the action plan does recommend such reporting, but he admits that those reports would not be publicised.

“This country-by-country reporting will be for tax administrations and not [the] public,” Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, told IPS.

“What matters is that tax inspectors have the information. Confidentiality issues [could stop] countries from agreeing to public country-by-country reporting.”

Indeed, a similar fight is currently taking place here in the United States, which last year instituted a landmark regulation requiring multinational companies to publicly report all payments made to foreign governments. Yet earlier this month a court overturned that rule in part because of the requirement that these reports be made public.

Some anti-poverty groups are going so far as to suggest that the OECD’s tax fixes are already obsolete, having been far outstripped by the decentralised model that the most aggressive modern corporations have been able to follow.

“This plan is papering over the cracks in a broken system, rooted in an outdated and irrelevant model of corporate taxation,” Murray Worthy, a tax campaigner at War on Want, an advocacy group, said in a statement. “It might be able to tackle the worst of corporate tax dodging, but it won’t fix the system.”

Blessol Gathoni (r), an activist with the Kenyans for Tax Justice campaign talks to residents of Shauri Moyo about the government's proposed VAT bill. Credit: Zahra Moloo/IPS

By Zahra Moloo
NAIROBI, Jun 14 2013 (IPS)

On a side street in Nairobi’s bustling neighbourhood of Shauri Moyo, Faisal Ngila shouts to street vendors, motorbike taxi drivers and pedestrians. “Do you know taxes are increasing in Kenya?” he asks, handing out flyers urging Kenyans to say “no to Unga (maize flour) tax” by dialling a phone number that will register their signature on a petition.

Ngila is one of 17 activists involved in the campaign Kenyans for Tax Justice, speaking out against a new Value Added Tax (VAT) Bill, known popularly as the “Unga tax bill”. In trains, buses, football stadiums and community centres, the activists are trying to raise awareness and compile a petition against the bill.

The bill seeks to apply a 16 percent value added tax rate on basic commodities that have remained untaxed until now. These include rice, bread, maize flour, processed milk and sanitary pads. When the bill was introduced to parliament in 2012, citizen welfare groups strongly opposed its adoption. But it is now up for debate in parliament.

Many ordinary citizens in Kenya are worried about the bill’s impact on their already-meagre incomes. “I am not really working. Sometimes I do casual labour washing dishes and clothes,” Julia Njoki, a mother of four, tells IPS. “If they add tax to maize, bread and milk, I will not be able to buy anything.”"If a poor person buys a small packet of milk every day, they are paying VAT every day and, in the long run, they end up paying more tax than the rich.” -- Sarah Muyonga

Blessol Gathoni, one of the activists from Kenyans for Tax Justice, tells IPS that they are aiming for 20,000 signatures on their petition, which will be presented to members of parliament on Monday Jun. 17. So far, around 9,000 people in this East African nation of 42 million have signed it.

“Tax is not very sexy to discuss, so the first issue is to get people to think about how this bill will affect them and if they’re moved, they can go ahead and call the number (to add their names to the petition),” she says. “People do not know that they are actually supporting the economy and that they should be demanding their rights.”

VAT and the economy

Value Added Tax was introduced to Kenya in 1990 and since then has been subject to numerous amendments, including the introduction of tax refunds and zero rating on basic articles like food and imports used for manufacturing.

It accounts for 28 percent of total tax revenues in Kenya, second after income tax.

The International Monetary Fund (IMF) has backed the new VAT bill on the grounds that it will increase the government’s sources of revenue. 

According to the National Treasury, under the country’s current tax regime, Kenya loses 11 billion shillings (129 million dollars) in revenue and the current VAT structure is “complex, inefficient and unproductive.”

The Kenya Revenue Authority’s Commissioner for Domestic Taxes Pancrasius N. Nyaga tells IPS that the VAT bill as it stands must be overhauled to seal loopholes that may create tax leakages in the economy.

“Zero rating on goods is actually benefiting the manufacturers and not the consumers or the common people,” says Nyaga.

“If you look at the Thika road project, you will find that the contractors were granted zero-rated status and purchase commodities without paying VAT. That creates a loophole. If they buy a lot of cement, the government loses VAT and it can be sold on the black market, undercutting genuine traders.” Thika road, the main highway in Nairobi, is being expanded from four to eight lanes.

Nyaga adds that those mobilising against the bill are not seeing the overall positive impact on the economy.

“I think the whole issue has been misunderstood and people are trying to gain political mileage out of it. The pricing is not such a big deal. When VAT is spread evenly across all commodities, it will be self-regulating, and prices will not impact negatively on everyone.”

But Kwame Owino, chief executive officer at the Institute of Economic Affairs Kenya, a public policy think tank, tells IPS that while the VAT bill will create predictability in tax revenue collection, it will also raise the prices of basic goods.

“Its justification is not an increase in tax, but if you are expanding the number of goods to which VAT applies, then it necessarily means that you are increasing taxes,” he says.

But in a country where, according to the World Bank, the average person earns 1,700 dollars a year, such price increases may have serious implications for ordinary citizens.

According to Sarah Muyonga, policy and advocacy manager at Tax Justice Network Africa, which supports transparency in international finance, low-income earners are likely to bear the burden of the tax increases.

“I consider it a myth that the rich consume much more than the poor. The poor consume more regularly in smaller quantities. If a poor person buys a small packet of milk every day, they are paying VAT every day and, in the long run, they end up paying more tax than the rich,” she tells IPS, referring to the fact that poor people spend a larger percentage of their income on taxable goods than rich people do.

Kenya’s tax incentives cost billions

The activists mobilising against the VAT bill say they want to use the campaign to highlight the government’s hypocrisy in taxing ordinary citizens, while “multi-billion shilling companies” are “given tax breaks and holidays.”

Government estimates place Kenya’s lost revenue from tax incentives to foreign investors at 100 billion Kenya shillings (1.1 billion dollars).

Tax Justice Network Africa estimates that in 2010 and 2011, the government spent more than twice the country’s health budget on providing tax incentives. Kenya’s health budget for 2010/2011 was 485 million dollars.

However, a 2006 report by the IMF states that investment incentives and, in particular, tax incentives, are in fact “not an important factor in attracting foreign investment.”

Nyaga says the government is looking to overhaul its tax incentive regime. However, he adds, tax incentives have nothing to do with the proposed VAT bill. “With this bill, we are not targeting low-income people at the expense of the large corporations as suggested. We will be addressing all deficiencies in the tax,” he says.

However, the international organisation against poverty, The Rules, is not convinced and has said that ongoing talks between the City of London and the Kenyan government are “aimed at modelling Kenya’s financial system on the City of London,” a “hub of the global tax haven system through which billions in untaxed profits flow every day.”

“The Kenyan government has hired the most aggressive financial liberalisers in the world to advise them,” Martin Kirk, global campaigns director for The Rules, tells IPS.

“So vague promises of overhauling tax incentives sound pretty hollow in the face of evidence. Taxes have to be paid. If some people don’t pay, others are forced to. What we’re seeing with the Unga tax is an example of that. Tax theft by the rich is costing Kenya billions of shillings every year, so the poorest are being told to pay more to pick up the tab.”