In the 1980s Van Halen famously included in their tour contracts the demand for bowls of M&Ms to be provided backstage at every concert— with all the brown ones removed. This, it turns out was not rock star ridiculousness, but was a quick and visible reassurance that the concert venue had paid attention to every detail of the instructions on how to safely assemble the band’s elaborate lighting and stage set-up. The debate on responsible tax is as complex as a Van Halen light show, with many misconceptions that can trip up the unwary.
One example is the oft-stated figure that developing countries lose three times more to the tax avoidance by multinational companies than they receive in aid. It has been quoted by aid agencies and in the media, as well as Parliamentarians such as Margaret Hodge, and has been influential in shaping a belief that huge sums of in could be unlocked, in the poorest countries through international corporate tax reforms. As Action Aid put it:
“The appalling truth is that developing countries lose three times more money to tax dodging than they receive in aid every year. Imagine what a difference that money could make if it was funding schools, hospitals and roads across Africa rather than being spirited away to the offshore accounts of multinational companies. It could be transformative – helping poor countries to become self-sufficient and stand on their own two feet.”
However the figure (sometimes with attribution to the OECD) seems to contradict economic reality. The potential to collect more tax depends on underlying economic activity. Poor countries are mainly not being exploited by the world’s largest companies but being bypassed by them.
As the analysis by the number crunching NGO Development Initiatives makes clear, the poorest developing countries rely more on aid, and attract less foreign investment than richer middle-income countries.
The implication is that while China, India or South Africa might well lose more from corporate tax avoidance than they get from aid (simply because they attract much more international investment than aid), this does not hold true for Mali or Bangladesh.
The ‘three times aid’ figure has been repeated so often that it is assumed to be meaningful and credible. However, not only is the comparison with global aid less than enlightening, the underlying figure itself is based on a misunderstanding and is misleading.
The original source is a single sentence in a Guardian Op Ed from 2008, where Angel Gurria wrote “developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid”. In fact, Gurria (and Jeffrey Owens, then head of Tax at the OECD, who developed the figure) were not offering an estimate of tax loss here, or even talking about multinational corporations at all. The sentence relates to funds held offshore by citizens of developing countries – gross amounts whose interest might be taxed. It is simply not, and never was an estimate of revenue loss due to multinational tax avoidance.
Recently the OECD has tentatively estimated that total revenue losses from base erosion and profit shifting amounts to 4-10% of corporate tax revenues or $100- $240 billion worldwide – largely related to developed countries. These are big numbers, but nowhere near what is implied by ‘three times aid’ (which suggests $480 billion related to developing countries alone – or around 200% of their corporate tax revenues ).
When “three times more than aid” is used to frame policy debates and recommendations on multinational taxation it stands out like a rogue brown M&M. Picking it out is not just a question of attention to detail for its own sake. Policy recommendations based on exaggerated perceptions are dangerous in that they overplay potential gains and underplay impacts on investment. Ultimately finding the right balance is critical. In countries where GDP amounts to a handful of dollars per person a day the potential for governments to collect more of this in tax is severely limited, unless the economy itself is able to grow through productivity enhancing investment.