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Tax competition & avoidance "inconsistent with human rights"

June 28, 2017

Last week, a key UN human rights body made its most definitive statement yet that corporate tax dodging – and the policies which encourage it – are incompatible with governments’ legal duties to guard against business-related human rights abuses, even when committed beyond their borders. This landmark development represents the latest signal that human rights protection bodies are increasingly poised to hold governments and companies to account for tax injustice.

 The UN Committee on Economic, Social and Cultural Rights – mandated to oversee compliance with the International Covenant on Economic, Social and Cultural Rights (binding in over 160 countries) – released its General Comment 24, the most recent authoritative interpretation of States’ human rights obligations in the context of business activities since the UN Guiding Principles on Business and Human Rights were adopted in 2011.
“Lowering the rates of corporate taxes with a sole view to attracting investors encourages a race to the bottom that ultimately undermines the ability of all States to mobilize resources domestically to realize Covenant rights,” affirms the Committee. “As such, this practice is inconsistent with the duties of the States Parties to the Covenant.”
The General Comment details governments’ legal duties to prevent and address the adverse impacts of business activities on human rights including, significantly, when these occur outside of the country’s territory. Combatting corporate tax abuse—which robs government coffers of billions every year—remains an under-explored yet crucial aspect of ensuring businesses respect human rights, as CESR has argued in various human rights and development fora.
As the SwissLeaks, Luxleaks and Panama Papers scandals all laid bare, corporate tax dodging has huge implications for governments’ ability to resource human rights. CESR research has shown, for example, that tax dodging via Switzerland by multinational copper firms operating in Zambia may amount to as much as $326 million annually, equivalent to about 60 percent of the country’s health budget. In India, meanwhile, just one Swiss bank helped high-net-worth individuals dodge taxes at a cost of up to 6 percent of total social sector expenditure in 2016. This is the price of particular tax and financial policies put in place by particular governments to allow and even encourage companies to increase their profits by shrinking their tax costs.
Historically, the human rights protection system has been reluctant to engage in matters of tax policy, particularly cross-border tax abuse. Slowly but surely, however, human rights treaty-monitoring bodies mechanisms are growing increasingly adept at analyzing and holding governments to account for enabling corporate tax abuse. Heeding findings and recommendations submitted by CESR and partners across the tax justice and human rights fields, last year the UN Committee on the Elimination of All Forms of Discrimination against Women (CEDAW) and the UN Committee on Economic, Social and Cultural Rights both ruled last year that the financial secrecy laws and lax corporate reporting standards of Switzerland and the United Kingdom, respectively, were inconsistent with their human rights duties under international treaties. What’s more, the UN Committee on the Rights of the Child released a General Comment on public spending in 2016 which addresses the need to tackle tax abuses as a means of mobilizing resources to fulfil children’s rights in compliance with the Convention on the Rights of the Child.
Building on the legal interpretation of the UN Special Rapporteurs on Extreme Poverty and Foreign Debt, the new Comment by the UN Committee on Economic, Social and Cultural Rights urges governments to “encourage business actors whose conduct they are in a position to influence to ensure that they do not undermine the efforts of the States in which they operate to fully realize the Covenant rights, for instance by resorting to tax evasion or tax avoidance strategies in the countries concerned.” Recognizing that international tax rules are governed through bilateral treaties, the expert body confirms that: “States Parties must ensure that they do not obstruct another State from complying with [human rights] obligations under the Covenant. This duty is particularly relevant to the negotiation and conclusion of […] tax treaties.”
The Committee characterizes tax competition and tax secrecy as antithetical to international cooperation. In addition to condemning the race to the bottom on corporate taxes as “inconsistent with the duties of the States Parties to the Covenant,” it cites the earlier treaty body findings on Switzerland and the UK to affirm that: “Providing excessive protection to bank secrecy and permissive rules on corporate tax may affect the ability of States where economic activities are taking place to meet their obligation to mobilize the maximum available resources for the implementation of economic, social and cultural rights.”
The Committee points to a broader policy reform agenda towards ending corporate tax abuse, indicating that governments have international legal duties toward meaningful tax cooperation. This includes re-thinking the current international tax rules which allow multinational companies to avoid taxes by treating them as if they were composed of hundreds of distinct companies in favor of taxing multinational companies as what they are: unitary entities. “To combat abusive tax practices by transnational corporations, States should combat transfer pricing practices and deepen international tax cooperation, and explore the possibility to tax multinational groups of companies as single firms, with developed countries imposing a minimum corporate income tax rate during a period of transition.”
CESR has played a leading role in raising awareness amongst human rights bodies at the national, regional and international levels of the key links between tax policy and human rights, and to ally with the tax justice community in creative research and advocacy projects to channel the power of invoking human rights for progressive and systemic tax reforms. At a time of entrenched fiscal austerity and growing economic inequality, the Committee’s Comment is one more important step towards highlighting the human cost of corporate tax abuse. Importantly, it explicitly names tax abuse as a type of corporate activity that undermines rights within and beyond borders, and identifies the types of policies that permit or prevent it. This gives human rights and tax justice advocates more concrete standards to which countries and companies can be held accountable for the human rights consequences of their tax behavior.