How much is tax collection dependent on the policies of one individual country? When discussing tax policy a common tendency used to be to treat it as an exclusively domestic policy matter, one to which only the prerogatives and obligations of the State where the respective taxes are to be collected are relevant. Reality could be nothing further from the truth, as demonstrated by the amounts of revenue that get lost to tax evasion and avoidance by international actors because of their ability to straddle across a diversity of national jurisdictions. As more of such tax maneuvers come to light, international cooperation for tax matters gains more prominence on the development finance agenda.
So much so that, at the Third Financing for Development Conference last year, the biggest issue of contention was whether to establish a body with full participation of developing countries to negotiate rules for tax cooperation. Such a body, developing countries expected, would be able to generate rules that could be more responsive to their interests in collecting a fair share of taxes for activities in their jurisdiction, than is currently the case.
A new publication by RightingFinance addresses the implications for tax policy of obligations of cooperation and assistance for the achievement of human rights. This is the fourth in a series of advocacy tools on tax policy and human rights with the aim of assisting education and dissemination of the standards on tax policy and human rights contained in a 2014 report on tax policy and human rights (“the report”) by the UN Special Rapporteur on Extreme Poverty and Human Rights. Each tool contains normative foundations of the obligations and rights in question, their applications to tax policy – including explanations and references to practical examples – and a set of questions for reflection.
The obligations of states to refrain from any conduct that impairs the ability of another state to comply with its own human rights commitments and to create an international enabling environment for the fulfilment of economic, social and cultural rights, include matters relating to taxation.
The Special Rapporteur was careful to clarify that references to obligations of international cooperation do not mean “absolving any state of its obligation to raise the maximum available resources domestically to ensure the progressive realization of economic, social and cultural rights.”
But, in the absence of global reforms, there are limits to national-level actions. This has been especially so since the advent of globalization: “Globalization and increased cross-border flows of goods and capital have vastly increased the chances that one State’s actions or omissions may affect another State’s ability to raise public revenues, and increased the ways and means that companies and individuals can use to evade and avoid taxes. . . . The tax laws and structures of one State can therefore erode the national tax bases of other States and hamper the application of progressive tax rates and the achievement of redistributive goals, ultimately threatening the realization of rights.”
It follows, the publication says, that the human rights obligations relevant in such cases will not only be those of the state that loses the revenue, but at least in equal part those of any state whose action or omission enabled the cross-border flows to take place.
A typical area that exemplifies the importance of international cooperation is that of transfer mispricing, a practice that enables companies or groups of companies operating across borders to overstate profits where taxes are low or understate them where taxes are high. According to estimates, trade misinvoicing –tantamount to transfer mispricing when parties are related companies– accounts for the majority of the near USD 1 trillion of measurable illicit financial flows out of developing countries. States beyond that where the revenue has been lost may be responsible for lack of transparent and publicly-available information on who owns companies and failure to implement reporting country-by-country. This latter requirement, which calls for companies to disclose activities, profits, paid taxes, and other critical information they provide, disaggregated by country, rather than on a global basis, is crucial for comparing and finding potential gaps between what companies report in different jurisdictions.
Other issues that may concern countries’ obligations of international cooperation and assistance refer to tax competition, tax havens and the tax-related actions by international organizations. On this latter point, the publication quotes the Special Rapporteur: “when a State makes decisions about loans as a member of an international financial institution, careful consideration of human rights obligations would mitigate against imposing conditions regarding fiscal policies that may jeopardize the human rights of the borrower State’s population or undermine that State’s ability to use maximum available resources to realize economic, social and cultural rights.”
Some of the recommended questions for reflection are: Does the state have processes to ensure double taxation agreements are consistent with its human rights obligations, from negotiation to implementation? How about tax stability agreements signed by it or by its companies with other states? What actions has the state taken to avoid its citizens, as well as companies registered or operating in its jurisdiction do not use tax havens to facilitate tax abuse or other illicit activities?