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21.07.2015 Feature Article

Unresolved Global Tax Body Could Hamper Domestic Tax Mobilisation To Achieve Sdgs

Unresolved Global Tax Body Could Hamper Domestic Tax Mobilisation To Achieve Sdgs
21.07.2015 LISTEN

The post 2015 development agenda is a critical point in eradicating poverty in poorest part of the world. Achieving that requires significant amount of capital to undertake projects, therefore financing the issues of development and climate change in the developing world, particularly Africa, requires more than just aid, but the ability to raise revenue domestically through sources such as taxation.

This is essential to ensure the world’s poorest countries have the resources they need to meet respective development and climate goals. Many civil society organisations describe the present approach with regard to decisions taken by the developed countries dominated by the Organisation for Economic Corporation and Development (OECD) mainly composed of the United Kingdom, the United States of America, among others as backward to address illicit financial flow. This approach means that countries that are poor are totally excluding from the influence while the system works in favour of rich countries and multinationals seeking to avoid tax.

As global leaders gathered in Addis Ababa, Ethiopia for the 3rd Financing for Development Conference, (13 to 16 July 2015) many civil society organisations and the G77 group of developing countries called for an establishment of an UN inter-governmental tax body to solve tax loopholes that matter most to developing nations. The agreement, referred to as the Addis Ababa Action Agenda failed to establish the UN inter-governmental tax body as envisaged by civil society organisations and developing countries.

"This is not only a tragic day for the world’s developing countries, who will now have to accept that global tax standards will get decided in a closed room where they are not welcome, ” says Tove Maria Ryding, Policy and Advocacy Manager of the European Network on Debt and Development.

"A global tax system where half of the world’s countries are excluded from decision making will never be effective. As long as our governments keep failing to cooperate on tax matters, multinational corporations will be able to dodge taxes. At the end of the day, the Addis Ababa failure will impact us all,” Ryding explained.

According to Ryding, the final outcome instead introduces some minor changes to the existing UN expert committee. This means that the OECD will remain the only inter-governmental body that adopts global standards on tax matters, Ryding says.

"This came down to power. The powerful simply did not want to cede one ounce of their authority to the rest of the world, and they succeeded in preserving their control,” stated Alvin Mosioma, executive director of the Tax Justice Network Africa.

Pooja Rangaprasad of the Financial Transparency Coalition said developing countries have fought hard for this body but today’s agreement will do nothing but keep them in a patronising system where a group of 34 countries hold all of the power. He adds that: "Rich countries decided to maintain a system where money goes from south to north, but the rules follow the opposite route.”

The president of the Latin American Network on Debt, Development and Rights, Jorge Coronado, said: "This is a dangerous failure of the multilaterialism and a triumph for a few. The agreement will simply continue to allow the powerful to dictate rules for the entire globe.”

The Addis Ababa Action Agenda intends to help combat illicit flows through the invitation of the International Monetary Fund (IMF), the World Bank and the United Nations to assist both source and destination countries.

Again, the Action Agenda will invite appropriate international institutions and regional organizations to publish estimates of the volume and composition of illicit financial flows. In addition, the agreement will identify, assess and act on money-laundering risks, including through effective implementation of the Financial Action Task Force standards on anti-money-laundering/counter-terrorism financing.

"At the same time, we will encourage information-sharing among financial institutions to mitigate the potential impact of the anti-money-laundering and combating the financing of terrorism standard on reducing access to financial services,” the agreement says.

"It was a painful moment to see the developed countries celebrating the fact that nothing will change and everything will remain the same. This sets a terrible precedent for the post 2015 and climate negotiations. This was never a negotiation in good faith and the developed countries have consistently refused to even discuss the issues on the table,” added Ryding.

The Addis Ababa Action Agenda recognises the need to eliminate safe havens that create incentives for transfer abroad of stolen assets and illicit financial flows.

"We will work to strengthen regulatory frameworks at all levels to further increase transparency and accountability of financial institutions and the corporate sector, as well as public administrations. We will strengthen international cooperation and national institutions to combat money-laundering and financing of terrorism.

"We encourage countries, in accordance with their national capacities and circumstances, to work together to strengthen transparency and adopt appropriate policies, including multinational enterprises reporting country-by-country to tax authorities where they operate; access to beneficial ownership information for competent authorities; and progressively advancing towards automatic exchange of tax information among tax authorities as appropriate, with assistance to developing countries, especially the least developed, as needed, ” the agreement says.

UN Secretary-General Ban Ki-moon said, “This agreement is a critical step forward in building a sustainable future for all. It provides a global framework for financing sustainable development.”

He added, “The results here in Addis Ababa give us the foundation of a revitalized global partnership for sustainable development that will leave no one behind.”

Oxfam’s tax policy advisor, Alison Holder noted that the Base Erosion and Profit Shifting (BEPS) negotiations are dominated by rich countries and corporations and the majority of developing countries - two-thirds of the world’s governments – have no formal role in the negotiating process.

"As a result, many of the tax loopholes that matter most to developing nations are not on the agenda. For example, BEPS gives scant attention to the agribusiness, telecommunications and extractives sectors that are central to developing economies. Neither will it ensure that that multinational companies pay taxes where they do business (which would benefit developing nations) rather than where they base their headquarters (which largely benefits the developed world).

"Billions of dollars are needed to fund the SDGs and climate adaptation and all efforts to build a fairer, more prosperous and safer world for us all. Greater commitments to Official Development Assistance (ODA), clamping down on illicit financial flows, improvements in tax revenue collection, and public financing of development programs can all contribute to sustainable development and poverty reduction. Overseas aid money should not be wasted on private projects that result in dubious outcomes for the poorest and most vulnerable people. And private finance must not be promoted as a substitute for ODA,” Alison noted.

The Mbeki High Level Panel on illicit Financial Flows report launched this year reveals that Africa lost in excess of US$50 billion annually between 2000 and 2008. The level of illicit financial outflows from Africa exceeds the official development assistance to the continent, which stood at US$46.1 billion in 2012. The effect of this practice include the draining of foreign exchange reserves, reduced tax collection, cancelling out of investment inflows and worsening of poverty.

According to Alvin Mosioma, executive director of the Tax Justice Network Africa, African countries are suffering most from illicit financial flows, adding, "they are in dire need of the resources to finance economic development.”

He says many of the multinational corporations act across borders undermining one tax policy to the other, playing through the tax system, so the only way to tackle the problem is through establishing a global tax governance framework to ensure countries collaborate and work together to bring more transparency in the system.

The United Nations Conference on Trade and Development (UNCTAD) Secretary-General, Mukhisa Kituyi says statistically the nature of investment by major transnational entities have been influenced by tax regimes, with most developed countries investment in the developing world going by tax havens.

"Although tax havens play an important investment role in structuring negotiation in investment agreement, we have seen substantial profit shifting that shows avoiding certain tax legitimately which should be paid at the host country of investment.

"So we saying that the governance of investment agreement and activity internationally should have coherence with tax governance in a way that reduce the leakages of resources that could sustainably contribute to financing economic development and avoid financing gaps,” Kituyi emphasised.

The United Nations Under-Secretary-General for Economic and Social Affairs, Wu Hongbo says the UN attach great importance to the specific measures that can stop illegal financial flows.

According to Hongbo, many member states believe that the taxation could generate more financial resources for sustainable development agenda. This rests in countries own ability to mobilise financial resources including public money and private finance.

"The national mobilisation of financial resources needs to be supported with revitalised international partnerships. Revitalised because in the past the definition of international partnership simply means the commitment of some governments to help poor countries but this time we are talking about sustainable development agenda that covers much wider area such as economic, social and environmental,” he says.

The conference provided policy recommendation on financing the sustainable development goals. The amount of money required to implement the post 2015 development agenda is enormous, which is about US$1.5 trillion annually. The sustainable development goals are 17 in total making it an ambitious in nature.

They include to end poverty in all its forms everywhere (Goal 1), end hunger, achieve food security and improved nutrition, and promote sustainable agriculture (Goal 2), ensure healthy lives and promote wellbeing for all at all ages (Goal 3), ensure inclusive and equitable quality education and promote lifelong learning opportunities for all (Goal 4) and achieve gender equality and empower all women and girls (Goal 5), among others.

Wu Hongbo said, "the outcome document will provide a follow up mechanism which was not available for the Millennium Development Goals, without follow up, no matter how good the plans are, they cannot be carried out.”

The ODA providers reaffirmed their respective commitments, including the commitment by many developed countries to achieve the target of 0.7 per cent of ODA and Gross National Income (GNI) and 0.15 to 0.20 per cent of ODA/GNI to least developed countries, in the Addis Ababa Action Agenda.

"We are encouraged by those few countries that have met or surpassed their commitment to 0.7 per cent of ODA/GNI and the target of 0.15 to 0.20 per cent of ODA/GNI to least developed countries. We urge all others to step up efforts to increase their ODA and to make additional concrete efforts towards the ODA targets,” the Addis Ababa Action Agenda stated.

The Senior Advisor for the European Centre for Development Policy Management (ECDPM), James Mackie explained: “If the degree of consensus achieved in the conference process is anything to go by the omens look good for the post-2015 agenda and the agreements to be achieved this year on a new set of global development goals, the Sustainable Development Goals.”

The Outcome Document recognises the importance of private finance and gives pride of place to an extensive discussion on domestic public resources.

However, there was still a focus on ODA, Mackie added: “The European Union’s commitment to achieve both the overall 0.7% ODA/GNI target and the 0.2% ODA/GNI to Least Developing Countries (LDCs) within the time-frame of the post-2015 agenda gets specific mention.

“Despite various European Union members agreeing to spend 50% of ODA in the LDCs, the narrative retains a strict distinction between ODA and South-South cooperation. We are not yet moving away from the dominant North-South model of international cooperation,” Mackie stated.

“The major sticking points were resolved largely behind the scenes. Perhaps this reflects a sense that the overall post-2015 process has been relatively comprehensive and by now the arguments, positions and scope for agreement are well known,’’ he said.

“If so, the momentum could carry the process on through the UN General Assembly with a similarly smooth agreement of the SDGs. Whether that momentum will be adequate to also carry the process through to an ambitious agreement at the COP21 is another matter,” Mackie added.

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