BRICS Goa: Can the summit drive discourse on international taxation and lead black money chase?
Closing in on tax loopholes that are exploited by corporates to move their profits to low tax jurisdictions requires concrete international and regional cooperation; BRICS should lead the way
Marking the beginning of new geopolitics in 2006, BRICS has managed to maintain its relevance on global matters. The BRICS coalition represents about 40 percent of the world’s population and 17 percent of world trade.
Troubled with widening inequality, each of the BRICS countries continue to lose revenue through tax evasion and avoidance practices. Global Financial Integrity reported that in 2013 alone, developing countries lost $1.1 trillion to illicit financial flows.
Illicit financial flows (IFFs) (or black money) are funds that are illegally earned, transferred and utilised. In the wake of the recent disclosure of information by way of the Panama Papers and the Bahama Leaks, the call for legal reforms in international taxation and financial institutional architecture has never been louder. Closing in on tax loopholes that are exploited by corporates to move their profits to low tax jurisdictions (more popularly known as tax havens) requires concrete international and regional cooperation.
Accounting for almost 30 percent of the global GDP, BRICS countries share this responsibility in calling for financial transparency conducive for sustainable development. After the global financial crisis of 2008, concerns regarding corporate secrecy were openly addressed at the G20 London summit. Weak domestic tax administration in developing countries poses constraints that make it difficult for governments to trace information regarding intricate corporate structures.
Thereon, in an effort to lift the veil of secrecy, the Organization for Economic Cooperation and Development (OECD) introduced their mandates on tax avoidance matters through the Base Erosion and Profit Shifting (BEPS) project and Automatic Exchange of Information (AEOI).
Backed by the G20, Action 13 of the BEPS initiative requires multi-national companies (MNCs) to report their revenue, profit and loss before tax, tax paid, stated capital, accumulated earnings, number of employees and tangible assets on a country by country basis, termed Country-by-Country Reporting (CbCR).
The AEOI standard looks to confront the absence of high quality data on offshore financial centres. Using this information, respective state authorities of one country can propose agreements with major tax havens and trading partners to defend their fiscal revenue space. Since 2013, BRICS countries have had an affirmed position by pushing for international standards on transfer pricing and effective exchange of information.
India in fact, was one of the early adopters of Automatic Exchange of Information and has also implemented the CbCR standard. Other BRICS nations too, must implement standards of financial transparency to address illicit financial flows and financial secrecy.
Many developing countries however, also continue to demand for a more democratic platform than OECD, and their concerns are not unfounded.
Since 2012, G77 and China have been of the position that the United Nations Committee of Experts on International Cooperation in Tax Matters should be upgraded into an intergovernmental body, to ensure the democratic participation of all countries – developed and developing – in shaping norms of international taxation that directly affect them.
The Third International Conference on Financing for Development (FfD) in 2015 was also used as an opportunity by G77 and China to make a collective call for global action for providing fairer rights and equal representation to developing countries, re-asserting their demand for a democratic and inclusive intergovernmental tax body under the auspices of the United Nations.
India being one of the emerging world economies belonging to both the G77 and BRICS co-operation, was of the following position at the FfD conference:
“The reform of international financial system to make it more democratic and representative and more responsive to the needs and interests of developing countries must be pursued with great vigor. […] Policy coherence also has a geo-spatial dimension, whereby developing countries must have the requisite policy space to pursue their development objectives […]. We are deeply disappointed, however, that the spirit of multilateralism and universality did not go far enough when it came to global discussions on key issues like taxation.”
“The position of the Group is also on record that there remain a number of issues of principle that are important to, and fully endorsed by the Group that have not been adequately accommodated in the current text, including, but not limited to […]the need to fully upgrade the Tax Committee into an intergovernmental body.”
Domestic resource mobilisation provides countries with a stable source of revenue to invest in sustainable development. Developing countries are currently heavily reliant on indirect methods of taxation that are regressive, and disproportionately affect the poor.
Further, developing countries often offer tax incentives to businesses to attract investment. In the debate between ‘source based taxation’ over residence-based taxation, it has been argued that most MNCs are headquartered in OECD countries; while their subsidiaries are based in developing countries where value is actually created.
Source-based taxation gives state authorities power to tax businesses where profits or incomes are accrued as a result of value creation in that territory. BRICS nations themselves have prioritised the need for source-based taxation.
The annual BRICS Summit being held in Goa should thus be used as an opportunity by BRICS to take leadership in establishing a transparent and just global financial system.
(Sakshi Rai works with Centre for Budget and Governance Accountability (CBGA), New Delhi. She can be reached at email@example.com)
Switzerland has started a process for putting in place a mechanism for automatic exchange of tax information with foreign jurisdictions