Politics of the European Union too often have damaging consequences for developing countries. Fair Politics EU wants to give developing countries a fair chance at development. - Fair Politics NOW!

Fair Taxes: working towards a fair tax system


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Topic: Fair Taxes


Providing opportunities for developing countries!

The focus of development cooperation is usually on the amount of money transferred as aid from the North to the South. However a tremendous amount of money is leaving developing countries in the form of illegal financial flows. There is actually more money leaving developing countries than is received by overseas development aid.

Recent research shows that in 2010 developing countries lost $859 billion through illicit financial outflows, which is an increase of 11% compared to 2009. [1] Therefore on one hand the EU is supporting developing countries by its development policy and aid programmes, but on the other hand the EU and in particular its Member States are enabling corporations to escape their tax responsibilities in developing countries [2]. This is a flagrant case of incoherent policy.

Problem 1: Market Liberalisation

The IMF and the World Bank have introduced strict conditions on loans for developing countries. One of these conditions is the elimination of tariff barriers. Besides the IMF and the World Bank, the EU in terms of its trade agreements with developing countries, is forcing developing countries to liberalise great parts of their economies. For developing countries this means they can no longer generate taxes from tariffs or export taxes. [3]

Problem 2: Foreign Direct Investment

Along with market liberalisation comes Foreign Direct Investment (FDI) , which of course does provide for important opportunities for developing countries. FDI does not only provide more inflow of foreign currency, but it also transfers skills and provides jobs for the local population. However, as many developing countries are very eager to attract FDI, they have started to compete with one another, in order to attract more investments, by introducing tax holidays (a period in time when tax rates are lower) or tax-free areas (a specific area in which taxes are lower). Yet these incentives only have a short term effect, because neighbouring countries are likely to reduce their tax rates as well, creating a race to the bottom between various developing countries. Besides, it has been estimated that the positive effect of FDI can in most situations not exceed the loss in tax revenue.[4]

Problem 3: Tax havens and tax evasion

Tax evasion is when companies deliberately use illegal schemes to evade paying taxes at all in the country where the profit is being made. Large MNCs have many daughter branches all over the world, they sell their products from one to another, and manage to shift money from one place to the next. It is estimated that 60% of international trade occurs within MNCs.[5] Tax evasion is done by transfer pricing (manipulate the price to a level which creates the highest fiscal advantage), or companies use false invoices to import or export goods at manipulated prices.
Tax havens are territories with low tax rates, where transferred money is being protected from the scrutiny of foreign tax administrations. Multinational Corporations are responsible for 64% of the illicit financial flows, and are thus taking advantage of the situation in developing countries.[6]

European Development Policy

Policy Coherence for Development, both has a political (European Consensus on Development) and legal basis in the EU. In article 21 of the Treaty of the European Union (TEU) it is given a legal status, by stating that The Union shall ensure consistency between the different areas of its external action and between these and its other policies[7]. Moreover in article 208 on development policy it is also stated that The Union shall take account of the objectives of development cooperation in the policies that it implements which are likely to affect developing countries. However when the EUs taxation policy and development policy are put next to one another, there is still little coherence.

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(Photo: EpSos.de)