Monitoring tax spillovers in the Financing for Development Accord

As the second drafting session of the Third International Conference on Financing for Development gets underway next week, CESR's Niko Lusiani presented a proposal at the UN headquarters in New York urging governments to agree to conduct impact assessments of the spillover effects of their tax law, policies and agreements on the achievement of sustainable development goals in other countries. His contribution to the roundtable discussion on domestic resource mobilization and tax cooperation is reproduced below:

Thank you for the opportunity to respond to this rich and varied discussion on the cusp of the Addis Ababa Accord. One particular message emerges from this morning session. The Financing for Development (FfD) agreements must be based on three key principles. Resourcing for sustainable development should be sufficient, generated and spent equitably, and accountably, in line with existing international law and human rights standards. A failure in one of these principles will be a failure in all.

I want to focus on this last tenet of accountability in financing development, and propose a built-in lever to ensure cross-border accountability. But let me start with a story.

Last week I was part of a team of tax experts, accountants and human rights lawyers to investigate tax abuses in the mining sector in a low-income country in Southern Africa – a country where half of its people, men but especially women and children live in grinding poverty despite an abundance of precious minerals which literally hard-wire the global economy (and the ability for us to communicate in this very Trusteeship Council).  It’s a country whose revenue authority—with impressive help from donors—has significantly boosted its capacity to track the losses stemming from tax abuses by international mining companies. Its transfer pricing unit has grown and improved, its administration has become more efficient and digital, natural resource payments have become transparent through EITI, and its mining tax regime has become more robust to improve resource mobilization. In this sense, this is something of a best practice on building the capacity of tax administration.

Yet, at the end of the day, this country’s capacity to mobilize mining resources for sustainable development stops at national borders, while the international mining companies operating under their soil make use of various vehicles and financial secrecy jurisdictions to shield their tax liabilities. We were shown evidence of aggressive tax planning and outright fraud – equaling possibly $2bn of lost revenue in one year alone. To the point that you begin to wonder whether some of these companies’ business model relies on tax avoidance. This loss of precious financing is not just a threat to the government’s starving revenue base, but also undercuts its redistributive capacities to reverse growing economic and gender inequalities. These tax abuses also deepen mistrust in how fiscal policy is governed and thus how effective it can be, especially for the most disadvantaged.

All the best work and money put into equipping revenue authorities to strengthen their tax administration, in other words, works and should be strengthened. But it has its limits. And what has it helped to do? Too often it has helped poorer countries know how much they are hemorrhaging, without providing them the tools needed to actually stem the bleeding. Where this country arguably needs the biggest boost is in concrete actions by those countries directly and indirectly facilitating tax abuse to prevent, investigate and put an end to tax abuse.

The draft Addis Ababa Accord supports public country-by-country reporting by multinational enterprises; public beneficial ownership registries; multilateral, automatic exchange of tax information and the transformation of the UN Committee on Tax Cooperation– all of which are key steps forward to improved international tax transparency. But tax transparency by itself does not guarantee the kind of accountability enshrined under international (and EU) law to ensure that tax policies and practices support—and do not undermine—the progressive resourcing of human rights beyond their borders. This is especially the case in what is a profoundly unbalanced, chaotic, dog-eat-dog international tax regime.

We propose a simple idea to instill more accountability over international taxation. If countries have nothing to hide, then why not conduct periodic impact assessments to show and prove that their tax policies, laws and international agreements have no foreseeable negative impacts abroad? The Netherlands has already conducted this type of exercise, and Ireland is doing so now.

As a first step to ensure true policy coherence for sustainable development, then, member states should agree in Addis to conduct impact assessments to monitor the spillover effects of their tax policies and agreements on the achievement of sustainable development goals in other countries. These should be periodic and independently-verified, with public participation in defining the risks and potential extraterritorial impacts. To live up to the integrated nature of the SDGs, these impact assessments should analyze not only the revenue implications, but also the distributive and governance spillover effects of a country’s tax regime abroad. If and when the main problems are identified, these impact assessments should trigger policy action by including explicit recommendations and clear deadlines for remedies and redress of any negative impacts discovered.

Such spillover analyses could potentially serve as a pillar of the FfD monitoring and review process, providing both regular accountability and remedial action to ensure that all governments—especially the most powerful—are held to account to the Addis Ababa Accord we’re all working so hard to enshrine.

Let’s add another A to the Addis Ababa Accord to make it the Addis Ababa Accountability Accord.