In the struggle between developing countries’ tax systems and multinational companies, there are calls for an elite task force of international tax experts to assist the side of national tax agencies. Here is why I believe a new proposal by the OECD to create ‘Tax Collectors Without Borders’ is a good idea.
The dilemma faced by national tax authorities in developing countries: A taleImagine you are the boss of the national tax authority in any small, poor country. A handful of transnational companies have subsidiaries that operate in your country. One of them provides most of the mobile telecoms services. Another dominates the cigarette industry. A third brews much of the nation's (legal) beer.
All these companies submit their tax returns to you on time, and in good order. But their profits are strangely low. They never seem to pay very much in taxes. You suspect that they are manipulating their accounts to relocate most of their profits in tax havens overseas.
It is not too difficult for you to find out that each of the parent companies has a large number of subsidiaries in places like the British Virgin Islands, the Cayman Islands, and Switzerland. You know that the companies have several ways of shifting their accounting profits across national borders from subsidiary to subsidiary. The local telecoms firm buys its equipment at very inflated prices from a sister company registered in Bermuda. The cigarette company “borrows" a great deal of money every month from a related company formally headquartered in Jersey. And it repays those loans equally fast at rather high rates of interest.
The right to use that world famous brand name on locally brewed beer has to be purchased through large annual payments to a group affiliate in Luxemburg. An affiliate that seems to have no other purpose.
You, as a tax official, would like to do a serious audit of the accounts of the telecoms company, Callaphon*. You think you have a good case. If you can produce the evidence to back even 50% of your suspicions, your Finance Minister will be very pleased. Callaphon will pay more tax this year and in future. The other companies will read the signal and begin to declare in your country more of the profits that they actually make in your country.
Will you act like Her Majesty's Revenue and Customs (HMRC) (the tax authority in Britain) and notify Callaphon that it has been selected for a serious audit, and that a six person audit team will arrive to spend three months checking the books?
No, you won’t act this way. Because experience tells you that your chances of pleasing your Finance Minister are poor even if you are sure of the facts of your case. Here’s why:
Why national tax officials can’t audit multi-national corporations, even with good evidenceYou know that Callaphon will import highly paid accountants and lawyers to engage with your team of six auditors without sufficient training, equipment or pay. The company may also hire a couple of your best auditors to come and work for it, on very generous terms. The company doesn’t need their skills. It hires them so they no longer work for the tax authority.
If you decide to go ahead with the audit anyway, you might also upset your best auditors, because they fear being professionally humiliated by the company’s high-powered staff. If the audit fails to generate new revenue, not only will you and your organisation lose face and morale, you will also lose revenue. The audit of Callaphon will occupy your best auditors for several months with this one task, preventing them from going after other cases. The Finance Minister will not be pleased!
Donor organisations and the importance of domestic resource mobilisationBut these days all the aid donors and international development organisations seem to be talking about the importance of “domestic resource mobilisation" in developing countries. Will the donors come to rescue you, the tax official, at the vital moment? The IMF gives extensive advice and support to tax agencies in poor countries. So too does the German aid organisation GIZ (formerly GTZ), HMRC, and quite a few other organisations. Surely they can help?
The answer is yes and no. The donors are already in your tax offices, giving all kinds of support to improve your IT system, establish an effective risk analysis procedure, train staff and try to improve human resources. All of this is all good work. But it does not serve your immediate needs.
You feel like the commander of a small anti-narcotics squad being attached by a large and heavily armed drug militia. What you need is an attack helicopter, not advanced training in battlefield logistics.
Tax Collectors Without Borders as an international ‘attack helicopter force’ to support tax agenciesAs some NGO have long argued, there is a need for some kind of international tax helicopter force to come to the aid of outgunned tax agencies at critical moments. Today, there is a real prospect that such a force will be in place within a few years. The OECD Centre for Tax Policy and Administration, backed by the Task Force on Taxation and Development, have just announced a commitment to try to establish 'Tax Collectors Without Borders'.
The aim of this initiative is to level the playing field a little, by making international tax experts available to support the tax agencies of poor countries in the kinds of circumstances sketched out above.
A great deal of work remains to be done, especially as the OECD very sensibly wants to avoid the easy and “obvious" funding mechanism, which would be to ask a donors to pay the full cost. If it were funded in this way, the complex politics and bureaucratics of the aid business would make it more difficult for “Tax Collectors Without Borders" to survive and thrive. Some aid donors are under contradictory pressures in respect of international taxation. Some donor country governments, and some transnational companies, oppose the changes that the OECD is encouraging.
The OECD hopes to establish Tax Collectors Without Borders as an independent organisation, possibly answerable to international associations of tax professionals, which will be funded at least in part from the charges that it levies for its services.
This is a very sensible initiative, and is considerably overdue. It is well worth the try. No harm can come from providing firepower to tax agencies, and introducing more competition to existing suppliers of technical assistance in the tax field. I wish the OECD the very best.
*The name given to the telecom company, Callaphon, is purely fictitious. Any resemblance to a real person or entity is purely coincidental and unintended.