Pravin Gordhan, South African finance minister, has called for a crackdown on tax avoidance and evasion by multinational corporations, arguing the use of such tactics is draining essential revenues from developing countries.
Addressing a British House of Commons committee on Monday, Mr Gordhan deplored the current “catch me if you can attitude” of multinational companies. He warned that the global community needed to introduce more consistent and effective taxation systems.
The issues of transparency and taxation are attracting growing international interest from Western countries facing a growing fiscal squeeze and needing to raise additional revenues as a result of the economic crisis.
Over the weekend, finance ministers from the Group of 20 who met in St Andrews in Scotland welcomed progress towards a multilateral tax information exchange agreement being promoted by the Organisation for Economic Cooperation and Development and other bodies.
The UK is now also supporting moves towards “country-by-country” financial reporting for multinationals in an effort to prevent companies from shifting reporter revenues to avoid taxes.
Stephen Timms, financial secretary to the UK treasury, told the House of Commons meeting on Monday that the UK was backing this “country-by-country” reform because it could bring greater clarity into how companies operate in developing countries.
According to Tax Justice Network a NGO which promotes transparency in international finance, about one third of total global assets are beyond the reach of effective taxation and over half of all world trade passes through tax havens. They estimate that about $11,500bn is held by individuals in offshore accounts.
Mr Gordhan yesterday argued that tax evasion and aggressive tax avoidance, or legal efforts to reduce tax bills, drains developing countries of essential revenue needed to assert their “fiscal sovereignty, [which is an] indispensable part of nation-building”.
He said that there was a “direct relationship” between an increase in tax revenues in developing countries and the creation of the sort of sustainable institutional infrastructure essential for good governance. In recent years, South Africa has increased its tax revenues to almost 29 per cent of GDP, helping the country to cut its deficit. However, most of that improvement has come around as a result of domestic tax reform, rather than clamping down on cross border activity.
The UK Treasury recently issued a report by Sir Michael Foot, a former director of the Bank of England, which called on British offshore financial centres to abide by international regulations.
These include standards on tax information exchange, financial regulation, anti-money laundering and countering the financing of terrorism, as well as ensuring, they put their public finances on a firmer footing by diversifying their tax bases. However such transparency measures are largely opposed by business, in part because of the compliance burden.
