“Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations’ civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance.”

This is the guiding principle and raison d’être for the recently formed Independent Commission for the Reform of International Corporate Taxation, thankfully referred to as ICRICT. ICRICT had its first meeting in March of this year after being established by a coalition of civil society groups including Oxfam, Christian Aid and the Council of Global Unions. Their aim, which is evident in their name, is to reform the global tax structure to put an end to tax loopholes and dodging.

Tax dodging, or tax evasion, occurs in a myriad of different ways, some quasi-legal and some entirely criminal. One of these, known as the separate entity concept, treats subsidiaries of multinationals as legally independent and allows the corporation to effectively shift profits away from high tax countries to regions with low or no taxes. This simultaneously reduces their tax burden and steals government revenue.

Complicated and arcane, international tax law does not spark much interest. However, it has massive implications for poverty rates and economic development around the world.

The reasons why are simple. Expounding on the guiding principle of ICRICT, the resources that are undermined by tax dodging would allow governments to invest more in public goods, specifically healthcare and infrastructure. A lack of quality education, public utilities and other government goods work against the poor and are an underlying reason why people remain in poverty.

The numbers are staggering. Africa, which received slightly less than $56 billion in official development assistance in 2013, loses more than $60 billion a year in “illicit financial outflows.” Another report estimates that for every dollar Africa receives in international aid, two dollars are lost due to tax evasion. A report by IMF researchers estimates that tax avoidance costs developing nations $213 billion a year. Globally, governments are robbed of over $3 trillion every year.

It is uplifting to realize that the window of opportunity for reform is ajar. The recent inception of ICRICT was preceded by America’s Foreign Account Tax Compliance Act, the OECD’s creation of a Common Reporting Standards and their Convention on Mutual Administrative Assistance in Tax Matters. These efforts are bringing attention and solutions to the problem.

As the window opens, the first sight on the horizon is the Third International Conference on Financing for Development, which is to take place in just over a month in Addis Ababa. The conference will make critical decisions on how the Sustainable Development Goals will be financed. Clamping down on tax dodging would uncover a huge source of funding.

In the ever-evolving arms race between regulators and thieves, the dedication and perseverance of international governing bodies and those that advise them may have tipped the balance in favor of the regulators. If successful, these anti-tax avoidance measures will harness and utilize billions of dollars for poverty reduction measures.

– John Wachter

Sources: Wall Street Journal, The Guardian 1, The Guardian 2, The Economist, ICRICT, United Nations
Photo: Flickr