While leaders of the rich world have been meeting this weekend to discuss the economic crisis, a British aid agency has launched a report highlighting the way in which derisory tax rates deprive poor countries of billions in lost revenue.
For decades, the governments of developing countries, under pressure from the World Bank and International Monetary Fund, have charged multinational companies seeking to exploit their natural resources very low tax rates, says the UK- based development NGO, Christian Aid.
The argument has been that without advantageous tax rates, the multinationals will simply take their business elsewhere. The result has been a ‘race to the bottom’ between countries vying for their business, the charity says.
With the G20 summit considering how to prevent a recurrence of the recent global economic crisis, Christian Aid is urging world leaders to focus on the damage poor tax policies cause to development.
Claire Kumar, author of the Christian Aid report Undermining the Poor explained: "Tax is the most sustainable source of finance for development, but the amount that poor countries are able to collect is often derisory - much less than their true entitlement.
"The race to the bottom, the secrecy offered by tax havens, and tax dodging by companies trading internationally all cause huge damage. It’s time the G20 faced up to facts – missing tax revenues amount to far more than countries receive in aid. What rich countries give with one hand, they take away with the other," she declared.
The report, 'Undermining the Poor', focuses on the tax policies of three countries in Latin America - Guatemala, Peru and Honduras.
It says that Guatemala is a particularly stark example of a country suffering real hardship because of poor taxation policies. While the average tax take for Organisation for Economic Cooperation Development (OECD) countries was 35 per cent of GDP, in Guatemala in 2008 it was just 11.3 per cent.
Although classed as a middle-income country, half of all children under five there suffer from chronic malnutrition, while in some areas the rate is as high as 80 per cent.
According to UNICEF data from 2007, Guatemala has the highest percentage of chronically malnourished children in Latin America, and the fourth highest in the world.
"Even as the food crisis deepens in Guatemala, much needed revenue which could be used to alleviate malnutrition is being lost through the woefully inadequate tax rates charged to companies mining precious minerals," said Ms Kumar.
She added: "The World Bank and IMF made trade and aid conditional on governments lowering their tax rates. Such policies should now be reversed."
Christian Aid has sent an emergency task force to one particularly badly hit part of the country after a combination of adverse weather, poor soil and the affects of the global economic downturn prompted the Guatemalan president, Alvaro Colom, to declare a state of national calamity earlier this month.
Globally, Christian Aid says, just one form of tax dodging, in which companies trading internationally artificially depress the profits they make in developing countries to lower their tax liabilities, deprives those countries of around US $160 billion a year.
The agency suggests that if made available, and used according to current spending patterns, that money could provide health services which would annually save the lives of 350,000 children under the age of five.
In Peru, research commissioned by Christian Aid, which was carried out by Simon Pak, an international trade pricing expert, found that the practice of undervaluing mineral exports – thereby artificially depressing profits – led to an illicit capital outflow of $388.6 million, with around $116 million in lost tax contributions from the minerals sector over the past three years.
But unfortunately this is just the tip of the iceberg. The figures relate solely to trade between Peru, and the European Union and the US.
A far greater proportion of Peruvian exports go to China and Switzerland – but the amount of tax lost through these markets is impossible to quantify, say analysts.
Christian Aid is calling on the G20 leaders to implement new accounting standards to force multinational companies to declare publicly the profits they make and the taxes they pay in every country where they operate. This would ensure the speedy identification of trade pricing anomalies.
It wants automatic exchange of information between all revenue authorities to puncture the secrecy that tax havens offer.
It also urges the G20 to use its influence on the World Bank and IMF to persuade them to end the ‘race to the bottom’ in tax rates and to provide financial and technical assistance to developing countries to help them renegotiate tax deals with multinational corporations.
The report is available (in *.PDF format) at: http://www.christianaid.org.uk/images/undermining-the-poor.pdf