Unfair Global Tax System Makes Sustainable Development Impossible
The sustainable development goals set by the UN are not sustainable if African governments are not able to secure tax revenue because global corporations hide their taxes in tax havens, says PERI’s Leonce Ndikumana
GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, coming to you from Baltimore.
Former UN Secretary General Kofi Annan passed away last August. Annan was a major promoter of sustainable development. Even after he left his position of Secretary of the UN in 2006, in 2015 Kofi Annan gave an interview to the International Bar Association about the UN’s Sustainable Development Goals, which he contrasts to the Millennium Development Goals this new Sustainable Development Goals is not just the government.
KOFI ANNAN: It’s not just the countries of the South, but it’s a global demand. We hope the private sector will play a role, we hope the governments themselves will go back home and begin to implement it. The Sustainable Development Goals are much more complicated, much more complex –
KOFI ANNAN: … more of them, actually, than the Millennium Development Goals, which were straightforward and simple and were designed in that way. We put it in a simple language that a man or woman in the street in Delhi or Bogota or Hakura will understand.
GREG WILPERT: Since Kofi Annan was born in Ghana, the Economist Leonce Ndikumana published an article this month in memory of Annan in the publication Ghana Business News. The article is titled, Without Tax Justice, There is No Development: Africa’s Voice Must Be Heard. It reminds the readers that Annan’s project for sustainable development must take the international tax system into account. More than that, for countries to develop, this system must undergo fundamental reform. That is, the global tax system is unjust and allows capital to flow from developing countries into global tax havens.
Joining me now to discuss this issue is the article’s author, Leonce Ndikumana. He is a professor of economics at the University of Massachusetts Amherst and Director of the African Development Policy Program at the Political Economy Research Institute, PERI. He is also the co-author of the book, Capital Flight from Africa: Causes, Effects, and Policy Issues. Thanks, Leonce, for joining us today.
LEONCE NDIKUMANA: Thank you for having me.
GREG WILPERT: So you argue, along with Annan, that for development to be sustainable and for countries to fulfill the Sustainable Development Goals, the global tax system is not working for developing countries. Why exactly isn’t working?
LEONCE NDIKUMANA: Thank you very much for the excellent question again. Let me reiterate some of the major points that Kofi Annan had made in that interview and has made many, many times, that development is a global responsibility, it’s global agenda. It’s not just the responsibility of countries in the South, it’s also the responsibility of countries in the North. The second is that development needs to be funded by sustainable sources of financing, and this includes domestic resources. Domestic resources are more reliable, in fact that’s the largest source of development financing, even though the headlines all the time focus on development aid, which is useful but not at the point of equaling domestic resources.
And it is for that reason that the issue of taxation is very, very important, both at the national level but also at the local level. And for taxation to be effective at the national level, there is a need for coordination at the local level. Because what we see now, especially with globalization and the dominance of multinational corporations, which are domiciled in so many places, they have affiliates and branches in many, many countries which are able to take advantage of the fact that tax policy is not coordinated across most of the world, and also which allowed them to basically game the system and locate their revenues in places that charge very low or no taxes, to the detriment of places where actually their activities take place.
Take the case for mining corporations, for example, in African countries whose offices and branches are all over the place, all over the world, in secrecy jurisdictions, in low tax territories. And they are able to show very low or no profits in places where they’re exploiting the natural resources and ensure profits in places where they will only have offices or very minor activities, which provides an opportunity to minimize taxes. And that’s a system that is undermining efforts to achieve sustainable development goals in the sense that it deprives countries with their due right to resources, to revenue from natural resources and their activities.
GREG WILPERT: So how do you propose to reform the global tax system? How would it work, according to your proposal?
LEONCE NDIKUMANA: Another of the things that need to be addressed, one, is the lack of coordination, again, of close countries, and the other is the opaque nature of the way companies file their taxes in the sense that they are able to game the system and pay very little taxes in countries where they actually operate. Because those countries do not know the information about the activities of the company globally. So what is necessary is for companies to be reporting, on a global scale, the activities, by country, showing the production, sales, revenue that are associated with the activities in each territory where operate. In that way, their taxes could be related to the activities based on the geographical location of the activities.
So automatic sharing of information all across countries and companies filing reports that show where the activities take place in every single country. That would help to minimize the tax evasion and tax avoidance by multinational corporations and enable countries to get their due share of the taxes.
GREG WILPERT: Of course, this requires, like you said, a major amount of coordination and cooperation between the countries, especially between North and South, which of course we know is always very difficult. Do you have an idea as to how such a system would come about? I mean, what can be done to bring the richer and the poorer countries together to agree on such a system?
LEONCE NDIKUMANA: Such a system, first of all, needs to be negotiated and debated in a participatory framework where all the countries are represented. Right now, what we have is most of the debates on corporate taxation at the international level are led by, or I should say monopolized by, the OICD. The OICD is a group that includes only developed countries, and when the decisions are made in those groups, they up having an impact on all countries that have not be part of the deliberation. That, to me, is inappropriate. I feel the design of the tax system, proposals for tax reforms should be undertaken in the context of the United Nations, where all countries are at the table and can make an input in the debate.
Also, as I emphasized, the need to be sharing of information. Because right now, most of the negotiations are on a bilateral basis, so rich countries that have the power, the economic power, have the leverage to influence their negotiation to their advantages. An example is how the United States, for example, has been able to push countries that used to be very, very secretive in their banking, such as Switzerland, to report the banking activities by U.S. citizens and residents. And that’s because the U.S., again, has the economic muscle to leverage that. African countries, Latin American countries and other countries in the developing world don’t have that muscle. But if that debate was in the context of the UN, then all of them would be able to be in the room when those debates are being made.
GREG WILPERT: I see. You also mentioned in your article that the colonial and neocolonial legacy that created the groundwork for the exportation of developing countries formerly was done with direct military rule, and today by financial methods. Is a fairer and global tax system something that can be a vehicle for reparations or compensation, or would you separate the two issues from each other in order to make each policy stand on its own?
LEONCE NDIKUMANA: I think both issues are relevant. The issue of reparations for the effects of the colonial exploitation is a major issue, but I think the contemporaneous issue is having a system where every country has access to what is due to it in terms of revenue from exploitation of its economy, resources, whether natural resources or services or manufacturing. That’s where the debate needs to be placed. And a fair tax system would allow to achieve fair distribution of resources and their proceeds of natural resources exploitation between developed countries and developing countries.
And that we have to notice that right now, if you look at the majority of African countries for example, most of the times the natural resource exploitations is done by foreign companies, foreign corporations. So the capital is foreign, which means that the profits are repatriated abroad, and the country is left with bare holes where the mineral resources used to be or devastated forest where the wood used to be. So the value added accrue to those who own the capital. So as long as the countries don’t have a share in the tax revenue, they actually end up with very little proceeds from the exploitation of natural resources. So taxation is really a major instrument for ensuring equity in the distribution of the gains of natural resources exploitation.
GREG WILPERT: Well, we’re going to have to leave it there. I was speaking to Leonce Ndikumana, professor of economics at the University of Massachusetts Amherst. Thanks again, Leonce, for having joined us today.
LEONCE NDIKUMANA: Thank you very much.
GREG WILPERT: And thank you for joining The Real News Network.