It’s time tax-dodging MNCs paid their dues

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 the Philippines after Typhoon Mangkhut triggered 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 Indonesia. Disasters are a familiar tragedy in the world’s fourth most populous nation, with its thousands of islands across hundreds of miles of ocean. This should make disaster risk planning crucial. It is not the case, as the latest earthquake and tsunami showed. Reports revealed that parts of the tsunami alert system didn’t work. In some areas, there were no sirens at all. The death toll is still climbing.

Indonesia is the largest economy in South-East Asia and is projected to become the fourth largest economy in the world by 2050, behind China, the US and the EU. However, this prediction depends on its capacity to secure sufficient public revenue. It is the only way to finance, for example, the preparation and maintenance of earthquake-resistant buildings and infrastructure and warning systems.

Worsening inequality

Natural disasters tend to worsen economic inequality in already critical situations, such as that in Indonesia. While many have been lifted out of poverty in the past two decades, the gap between the rich and the poor has grown faster than in any other South-East Asian country.

The government now has an ambitious medium-term strategy to deal with wide wage disparities and dramatically unequal access to infrastructure, education and health services.

Addressing all these challenges requires revenue. At an average of 17.6 per cent of GDP, tax collection in the Asia-Pacific region is among the lowest in the world, a level regarded by experts as totally insufficient to achieve sustainable development goals. And with big companies paying less and less taxes, most governments have the same answer: austerity. In the past decade, the average corporate tax rate in the ASEAN region has fallen from 30 to 22 per cent, reflecting global trends.

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.

‘Fiscal termites’

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 Indonesia 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 behaviour 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) 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 Indonesia has made great progress towards its sustainable development goals. What a tragedy it would be therefore if this emerging Asia-Pacific middle class fails to emerge because multinational companies continue to get away with dodging tax and ransacking these nations of their wealth.

The writer is Former Treasurer and Deputy Prime Minister of Australia and a member of the Independent Commission for the Reform of International Corporate Taxation

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