Tax Justice for Promoting Equality and Social Justice
I recently attended and spoke at a conference with the above title in Nairobi from 12-14 March 2019. The conference was organised by the Jesuit Conference of Africa and Madagascar and the Jesuitenmission in Germany and sponsored by Global Financial Integrity and Misereor. An interesting aspect of the conference was that it used Catholic Social Teaching as a tool for discussing issues of tax justice.
Speakers at the conference included representatives from revenue authorities throughout Africa, politicians, representatives from the OECD, Tax Inspectors Without Borders and the EU Commission, academics, members of Civil Society and religious leaders.
There will be a longer write-up of the presentations and discussions on the official conference website in due course so I have set out here only some high-level comments and my thoughts on what emerged. A more detailed write up of the presentation I gave can be found here.
The tone of the conference was constructive, trying to understand the challenges and looking at practical ways forward. Perhaps this was helped by an introduction from Charles B Chilufya, Director Justice and Ecology of the Jesuit Conference of Africa and Madagascar, who emphasised at the start that ultimately the conference was not about discussing money but a passion for human life and a desire that everyone can live well and that no one is left behind. This, he said, is the driver behind the need to work together to fix the international tax system.
Dr Chris Kiptoo, Principal Secretary State Department of Trade, Government of Kenya, made the opening keynote address highlighting Kenya’s “Big 4 Agenda”:
- increase the level of manufacturing from 8.3% to 15%, creating 1 million more jobs and increasing foreign direct investment five times;
- create 500,000 affordable homes;
- a 54% reduction of out of pocket medical expenses as a share of household income; and
- 100% food and nutrition security.
Clearly these ambitions require both increasing domestic revenues and ensuring a system which encourages inward investment. Some of the challenges where then outlined by Pascal Pax Andebo, Research and Advocacy, Jesuit Hakimani Centre, who presented a report on Kenya. This highlighted and increasing wealth gap and a resulting increase in poverty. It was noted that 14.7 million people live below the poverty line. Furthermore 19 million would be considered poor by measurements which look at the ability to fully participate in society.
Alvin Mosioma, Executive Director, Tax Justice Network Africa, noted the potential tension between having a “business friendly” tax regime and raising revenue. He thought that, in Africa, sometimes tax was seen as primarily an instrument to support business and there was a need for an open debate about the purpose of tax.
This does raise the question about when can tax be used as a legitimate tool of economic policy and when does it become unfair tax competition or result in unnecessary cuts and incentives.
What concerns were raised?
Concerns were raised about tax avoidance, manipulation of transfer pricing and illicit financial flows (IFFs) - see below. As an example, Prof. Dr. Thomas Pogge, Yale University showed statistics showing that even in countries with a high voluntary tax compliance rate such as in Scandinavia it is believed that the richest avoid 30% of their tax liability. The fact that developing countries have often given tax incentives to encourage investment was raised. There was also a significant concern that multinational companies (MNEs) were able to lobby to ensure that rules were stacked in their favour – although statistics which were given were US based rather than relating to Africa or other parts of the world.
However, it was not only MNEs which came in for criticism. There was widespread concern about corruption in governments and tax authorities. The size of the informal economy was mentioned; for example Prof. Dr Attiya Waris, Commercial Law Department, University of Nairobi, noted that 17 million Kenyans voted in the last election but there are only 2.4 million registered taxpayers which includes companies and public employees. This suggested only around 1 million Kenyan individuals are voluntarily filing a tax return.
Illicit financial flows
There was a breakout session discussing IFFs as well as a plenary session. Dr. Tom Cardamone and Dr Raymond Baker of Global Financial Integrity defined IFFs as funds which are illegally earned, transferred or utilised. They explained there are three sources of IFFs: corruption, criminal and commercial. There are then a number of ways to move the money, including mis-invoicing. Global Financial Integrity are primarily interested in trade mis-invoicing as it falls under both headings – ie it serves both to generate illegal funds and to move them. They believe there is a value gap of $1 trillion between amounts declared as exports and as imports. The loss to governments is tax (e.g. VAT or customs duties) on this amount. Interestingly, it was admitted that the data does not show to what extent the mis-invoicing is carried out by MNEs or small and medium-sized enterprises.
Suggestions for addressing the issue included ensuring that mis-invoicing is illegal (apparently it is not at present in some countries); improving regulation - such as on public procurement or requiring registers of beneficial ownership; using a multi-agency approach so that different ministries within government communicate and share information; and a tool which Global Financial Integrity have developed for tracking trade mis-invoicing.
During discussions some delegates thought that tax avoidance should be included in the definition of IFFs. Others however argued strongly that IFFs should only cover illegal actions. Deliberate mis-invoicing (whether to reduce a tax liability or to move “dirty money”) is fraudulent, tax evasion, and a criminal offence. This should not be confused with a transfer pricing dispute where there is a genuine argument about the value of an intercompany transaction. Furthermore, confusing legal actions (even if they amount to aggressive tax planning and are considered undesirable) with illegal action undermines the rule of law and distracts attention away from reaching a coordinated coalition of the willing to tackle evasion, corruption and other illegal activity or business practices.
Inevitably, in such a conference there were some facts presented which were potentially misleading or where wrong conclusions had been drawn. One delegate lamented the fact that the amount of profits distributed by quoted UK companies has increased over the years from 10% to 70% so the profits are “not being re-invested in wages” – forgetting, presumably, that wages are deducted in establishing the profits.
Another example was a slide which was put up showing the number of US equities which are held through “tax haven” entities which was used to indicate the level of tax avoidance in the US. This led to an interesting discussion about the impossibility of using such a structure for avoidance purposes given that the US companies would have to deduct 30% withholding tax on any dividends paid to a “tax haven”. It was pointed out that the graph probably showed the extent of equities held through mutual investment funds – ie through structures blessed by the US tax authorities - and whereby any taxable ultimate beneficiaries would be declaring the income on the tax returns.
Another interesting dynamic was a debate about the role of tax advisers. It was suggested by a couple of delegates that a tax advisor’s role was to do the best for a client by finding all legal ways of minimising tax. Furthermore this was not a criticism; it was suggested this was part of the tax landscape. Campaigners should accept this role and it was up to governments to try and stop the tax planners “artistry”. In response I argued most MNEs and advisers I know, including KPMG, do not subscribe to the statement that “as long as it’s legal I can do”. Doing what is best for a client does not mean finding any legal way to reduce tax - for a whole host of reasons including complexity, cost, sustainability, relationship with the tax authorities, reputation, and the client’s own approach to tax management. There is a debate about what is acceptable planning and unacceptable avoidance and different stakeholders will see the line in a different place. What is important is to have an open debate about this.
Prof. Dr. Willy Moka, PhD, Dean of Faculty for Philosophy, Loyola University, Kinshasa, Zaire, proposed a high level framework rather than specific solutions. He noted that philanthropy and corporate social responsibility are not substitutes for tax. He highlighted that tax needed to be considered within the principles of solidarity and subsidiarity. Proportionality is key and tax systems need to be measured against the effect on the poor. It particular it should:
- raise the resources required for social welfare;
- be proportional and help reduce inequality; and
- people below the poverty line should not pay.
Another key point which was raised is that looking at expenditure is as important as looking at how tax is raised.
Joseph Stead, Senior Policy Analyst, Centre for Tax Policy and Administration, OECD outlined some of the tools produced by the OECD and the Platform for Collaboration on Tax which can be of assistance to developing countries. These include the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement to enable exchange of information. He also highlighted some of the Base Erosion and Profit Shifting (BEPS) Action Points which could be adopted.
Other proposals raised during the conference included:
- increasing tax on wealth through wealth taxes, IHT or VAT on luxury goods;
- improving tax administrations; and
- strengthening enforcement.
Dr Fanwell Kenala Bolosi, Chief Executive Officer, AFRODAD, Harare, Zimbabwe noted how the private sector could be part of the solution for development, and this included local SMEs not just MNEs. He noted they create jobs which pay salaries which contribute to economic growth as well as resulting in income tax payments. Business can also address problems of development directly. Controversy tends to arise where there is an overlap with public services and investment and there is debate in Africa about public private financing initiatives. Prof. Dr. Thomas Pogge noted that there is no intrinsic problem with privatisation. However society needs to pay privatised companies for desired outcomes; for example a water company should not be incentivised to make as much money as possible for investors but rewarded for providing running water for everyone in the catchment area.
A case study from Zambia
The former finance minister of Zambia, Hon Felix Mutati MP, gave an insightful case study concerning mining operations in Zambia. In the 1990s the copper mines were government owned but were losing significant amounts of money. A decision was taken to privatise the industry but it was found, at the time, that it was necessary to offer tax holidays and duty-free import facilities to potential investors. After privatisation employment doubled and exports tripled but the government found that tax revenues were insufficient and the situation was unsustainable. In the mid 2000s the government therefore renegotiated the development agreements for the privatized mining assets (owners). They were able to show that due to lack of tax revenues there was insufficient investment in infrastructure, roads and the energy industry which was actually increasing operating costs for the mines. The result of the discussion was agreement to cancel the exemptions in order to raise more tax and to invest in infrastructure.
Some concluding remarks
Overall the conference was very useful and enabled a dialogue between a broad spectrum of stakeholders, although it would have been good to have had more representatives from the private sector attending. Some of the key thoughts I took away from the conference are:
- there is a on-going need to really understand the issues, international tax complexities, and the different perspectives of all stakeholders;
- more work needs to be done on identifying and addressing IFFs and this should concentrate on stopping illegal activity (whether that is tax evasion, corruption, counterfeiting, drugs or terrorism related);
- there needs to be an ongoing debate about the purpose of tax, and where the line lies between acceptable planning and unacceptable avoidance;
- there are a significant number of tools and processes already available for improving tax systems and capacity - whether through the OECD, Inclusive Framework, or Platform for Collaboration on Tax - and these need to be better understood and more widely applied.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...