As
of this writing, the US has placed sanctions on over 30 countries,
close to one-third of the world’s population. When the pandemic started,
the US vetoed the $ 5 Billion emergency loan that Iran had requested
from the IMF to buy equipment and vaccines from the foreign market. The
Caesar sanctions against Syria, put in place in 2020, have
caused a tremendous humanitarian crisis, with 80% of the population
having fallen below the poverty line. Studies show that the sanctions on
Iraq in the 1990’s caused the death of almost half a million children.
The US has repeatedly sanctioned Venezuela’s food distribution program,
CLAP, in an effort to bring about the overthrow of the Government of
Nicolas Maduro.
Assets being frozen is another extension of
Western sanctions. In 2021, about $ 9 Billion of reserves held by
Afghanistan in banks across the US and Europe were frozen when the
Afghan government fell to the Taliban that year. Since the Revolution in
1979, Iranian assets blocked by the West and which remain in Western
financial institutions are estimated at about $ 100 Billion. Venezuela’s
gold remains frozen in the Bank of England in spite of repeated appeals
by the Government of Nicolas Maduro to have the gold returned. And more
recently, Russia’s sovereign wealth of about $ 300 Billion has been
frozen by the collective West.
Due to these sanctions, almost
one-third of the World’s population has been unable to access medicines
that are essential to their survival. Article 25 of the Universal
Declaration of Human Rights specifies that “everyone has a right to a
standard of living adequate for health and well-being” which explicitly
includes medical care even in times of conflict. Both international law
and the ethical principle of justice require guaranteed access to
healthcare, regardless of the person’s nationality or citizenship.
Why Tax Avoidance by Western Multinational Companies (MNCs) is another form of Sanctions
A subject that is not sufficiently discussed or debated is the issue of tax avoidance by Western MNCs which itself acts as a form of sanctions on the developing countries or the Global
South. A recent report published by the European Union, The Global Tax
Evasion Report 2024, provides an insight into the problem.
The report states that close to 35% of all profits booked by
Western MNCs annually are shifted to tax havens. According to the
report, the profit that was shifted to tax havens in 2022 alone was
close to $ 1 trillion, and US multinationals were responsible for about
40% of that. That means that US MNCs very likely paid little or no taxes
on close to $ 400 Billion of profits in 2022 alone. And this is a practice that has been going on for decades.
According to the IMF, the implications of this profit shifting by
Western MNCs to the developing countries is profound and deeply disturbing.
The Fund estimates that the tax losses to the developing countries as a
result of this profit shifting by Western MNCs is at least $ 200
Billion a year. Page 21 of the report estimates the tax losses for both developing countries and developed countries as a result of this profit shifting. Since this study was done some years back, the actual tax losses that developing countries suffer annually could be even higher than the $ 200 Billion referred to in the report.
If we consider that taxes are an investment in a country’s
future, whether it be for education, environment, health care, and other
critical needs, this also means that the developing countries are
losing at least $ 200 Billion of investment annually – revenue that
rightfully belongs to them. Instead, these funds are routed or transferred
to Western MNCs and through them to the collective West. If the IMF
estimates of annual tax losses are correct then it also means that over a ten-year period developing countries have lost tax revenue of over $ 2 trillion over the last decade. If this is not another form of extractive colonialism, then what is?
From the perspective of the developing countries, one could argue
that the global tax architecture is rigged in favor of the West to
shift or expropriate tax revenues that rightfully belong to them. The current international tax system was created almost a century ago by the League of Nations. At that time much of the Global South was still under colonial rule and
had little or no say in the design of the system. This system was
further codified by the post-Bretton Woods institutions that came into
place after the Second World War and it continues to this day. The net
result is that it deprives the developing countries of investments that are critical to their future. It should therefore not be surprising that many of the developing countries are in debt to the IMF, the World Bank, and to Western financial institutions for essential borrowings just to survive. In effect, while these countries have political independence they do not have economic independence.
What can the Global South do to counter this trend? The feasibility of Reverse Sanctions
The Global South can fight back by telling Western MNCs that wish
to do business in their jurisdictions that they need to play by rules
that are both equitable and reciprocal. At a fundamental level the
Global South countries must demand that there be no more tax avoidance
by Western MNCs and that there be complete transparency to their operations.
The developing countries need to ascertain how much is properly taxable
in their jurisdictions and ensure that these taxes are paid to them
instead of being siphoned or redirected to tax havens beyond their reach through sophisticated tax schemes that are difficult to challenge. Going forward this needs to be the condition of doing business in the Global South.
In the past, the developing countries were not in a position to
insist on these conditions. The technology and capital of the West was
needed by the developing countries to bring their people out of
poverty. So they acquiesced to whatever conditions the Western companies
required of them. And this resulted in the emergence of an
international tax architecture where profit shifting away from
developing countries became the new norm.
But times have changed. Today, the Global South has the leverage to fight back.
A new paradigm is emerging. We are moving away from a unipolar
world. The Bretton Woods structure is outdated, and the IMF and the
World Bank are no longer the answer to the financial and economic needs
of the Global South. Other sources of finance, capital, energy, and food
security are now available to the Global South. As of November 2023,
the BRICS had only five members (Brazil, Russia, India, China, and South
Africa), but that month four more members were added (Iran, Egypt,
Saudi Arabia, and the UAE). There are now 59 countries that have applied
for membership in BRICS.
In addition to BRICS, much of the Global South is now a participant
in China’s Belt and Road Initiative (BRI). As of December 2023, 151
countries had become members of BRI. The BRI, sometimes referred to as
the New Silk Road, is a global infrastructure development strategy
adopted by China in 2013 to invest in more than 150 countries and
international organizations. And a number of developing countries have already benefited from this initiative.
As an alternative to the IMF and the World Bank, the BRICS now have their own New Development Bank. The purpose of this Bank is
to help mobilize resources for infrastructure and sustainable
development in the Global South. Trade is taking place in currencies
other than the dollar, resulting in less control and mandates by legacy
Bretton Woods institutions. As a result, the Global South has leverage today that it has never had before. It can assert
the conditions for MNCs to do business in their jurisdictions. If they
assert this leverage effectively they can stem (if not stop) the
corporate tax avoidance that has been taking place for decades.
Specific actions that the Global South can take vis-a-vis Western MNCs to level the Playing Field?
On June 7, 2024, the United Nations published a draft Terms of Reference (ToR) on a UN Convention on International Tax Cooperation.
This sets out the basic parameters for a future tax convention that
will address priority areas that affect developing countries. These
include the taxation of the digitalized and globalized economy,
taxation of income derived from cross-border services, tax related
illicit financial flows, and prevention and resolution of tax disputes.
The Global South should be fully engaged with the UN on the new Tax
Convention even though the United States and much of the Collective West opposes it. The UN Convention is the opportunity now for developing countries to take control of their own tax destiny and to move it away from the policy making bodies of the OECD.
In addition, the Global South should pursue certain additional steps to help reduce tax avoidance by MNCs. These include:
(a) Country by Country Reporting, whereby MNCs would be
required to disclose their activity in each jurisdiction where they do
business. This will bring transparency to the use of tax havens, and the
profit shifting that may be taking place currently. This should be a condition for doing business in the Global South.
(b) Formulary Apportionment and Unitary Taxation: This
involves the quantification of certain apportionment factors to help
determine the revenue that is properly taxable in each jurisdiction. Developing
countries can demand that this formula be applied to MNCs doing
business in their jurisdictions. It is the most fair way to ensure that
profit shifting is not taking place.
(c) Impose withholding taxes on all payments to subsidiaries of MNCs that are located offshore. Payments
to related subsidiaries in tax havens is perhaps the most common way
for MNCs to shift income from developing countries. By imposing a
withholding tax on such payments, developing countries protect revenue
that is rightfully theirs.
(d) Bilateral investment treaties should be phased out. These treaties lock
the developing countries into certain payment mechanisms that are not
always favorable to them. They generally favor the investing country. Since 2016, India has terminated 77 of its Bilateral investment treaties. Other countries can learn from this experience and revisit their own existing treaties.
(e) Review of long-term agreements with MNCs to
ensure that they provide both the developing country and the MNC a fair
share of benefits from the underlying project. Whether it is mining,
refining, or other aspects of the value chain, it is important to ensure
that no tax abuse has crept in since the project was initiated and that
it remains a win-win for both parties.
Conclusion – Negotiating fair practices, not seeking confrontation
The approach that is being suggested
above is one of negotiating fair practices that are equitable to both
sides and not to seek confrontation. It is important that developing countries take control of their own tax future, and take concrete steps to stem the current tax avoidance. Otherwise
they will continue to lose access to investments that are critical for
their future. As the global economy moves to a more multipolar world, and the West is not the only game in town, it is time for developing countries to assert their own conditions for western MNCs that wish to do business in their jurisdictions. The annual tax loss of about $ 200 Billion is not small change, it rightfully belongs to the developing countries, and should not be routed to tax havens.
If Western MNCs do not wish to abide by these rules, they can exercise the option of going to other jurisdictions. But the reality is
that developing countries hold most of the resources that the Western
MNCs need. That was true during the colonial era, and remains largely true now. So the options for the MNCs to go elsewhere are also somewhat limited. While such a step might be seen by some as ‘imposing sanctions in return’ the
fact is that this is perhaps the only way for the Global South to
access resources that are rightfully theirs. It is the only way for them to protect and sustain their own future.
Krishen Mehta is a former partner at PwC, and now a Senior
Global Justice Fellow at Yale University. He is also a co-editor of a
book, Global Tax Fairness, published by Oxford University Press.