[Salon] The Blunt Instrument of Western Sanctions



The Blunt Instrument of Western Sanctions

https://usrussiaaccord.org/acura-viewpoint-krishen-mehta-the-blunt-instrument-of-western-sanctions/

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.
(https://www.taxobservatory.eu/www-site/uploads/2023/10/global_tax_evasion_report_24.pdf)
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.
(https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Base-Erosion-Profit-Shifting-and-Developing-Countries-42973)
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 countriesThese 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 theto 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. 


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