We need to get ready for more natural disasters, and for that, multinationals have to pay their fair share of taxes
It’s been a year of natural disasters. After Irma, Maria, Harvey, hurricane Florence left a devastating landscape in the Caribbean. Extreme temperatures across the Northern Hemisphere have caused devastating fires from Europe to the US. Dozens have been killed in Uganda after torrential rains caused the River Suume to burst its banks, triggering landslides. And the worst consequences of climate change are yet to come. It is a huge challenge for rich countries and for developing nations, a Sisyphean task: how to collect enough revenue to respond to major catastrophes, while at the same time trying to lift billions of people out of poverty?
Look at Africa. With climate change, harvests will be affected, threatening agricultural outputs. This could hurt farmers and lead to greater food insecurity. Big cities are also in the eye of the storm. High birth rates and increasing rural-urban migration means Africa has 86 out of 100 of the world’s fastest growing cities. And according to a recent report from risk consultancy firm Verisk Maplecroft, at least 79 of them are faced with “extreme risks” due to climate change, including 15 African capitals and many of the continent’s key commercial hubs.
Natural disasters tend to worsen economic inequality in already critical situations, such as that in Africa. Fast-rising populations act as a risk multiplier in lower-income cities with poor public infrastructure and inadequate disaster response mechanisms, with more people putting strain on limited resources. Kinshasa, for instance, is now home to about 13 million people, but that figure is set to double by 2035.
Addressing all these challenges requires revenue.
It is important to note that the average tax-to-GDP ratio has increased from 15.66% in 2010 to 18.33% in 2015. However, whilst that is an improvement upon earlier years it is still well below the OECD average of 25.1%. Experts consider this level as totally insufficient to achieve sustainable development goals. Africa also faces significant loss of revenues through illicit financial flows. The African Economic Outlook report estimated Africa lost an annual average of $60.3bn, or around 4% of GDP in illicit financial flows between 2003 and 2012. Most of this hemorrhage is the result of tax evasion and tax avoidance by multinationals.
The whole world experiments the continuation of a trend toward corporate income tax rate cuts. While these lower tax rates may attract higher levels of foreign investment, they come at a very high price: less fiscal revenues means less money to construct vital public services and infrastructure, not to mention less money to prepare for the effects of natural disasters.
The only winners in this race to the bottom are multinationals, which end up paying almost no taxes. Vito Tanzi, the former head of the IMF’s Tax Policy Division, has branded such tax-avoiding companies “fiscal termites” for eating away the foundations of tax systems around the world. In his recent book, Termites of the State, Tanzi acknowledges that while no fiscal house is fully insulated from these tax pests, developing countries – especially those with mineral resources – are particularly vulnerable.
Developing economies like African countries rely heavily on corporate income tax bases. The IMF reports that the revenue lost from tax evasion in developing countries is 1.3 times larger, as a share of GDP, than it is in advanced economies.
It’s a tough fight that involves tackling power elites, overcoming deep institutional resistance, pursuing inclusive forms of growth, eliminating unacceptable levels of poverty and building quality health and education systems for all.
But the fight back is underway.
The global debate about the tax dodging behavior of unscrupulous multinationals is beginning to pay dividends. Civil society campaigning has led to the creation of a template for country by country reporting which could eventually expose the scale of tax avoidance in the region. The Independent Commission for the Reform of International Corporate Taxation (ICRICT), of which I am a member, is putting forward a bold agenda of international tax rules from a perspective of global public interest rather than advancing national corporate interest.
In the last decade Africa has made progress towards its sustainable development goals. What a tragedy it would be therefore if this emerging African middle class fails to emerge because multinational companies continue to get away with dodging tax and ransacking these nations of their wealth.
Wayne Swan is the Former Treasurer and Deputy Prime Minister of Australia and a member of the Independent Commission for the Reform of International Corporate Taxation (ICRICT).