Ghanian Shop Owner Marta Luttgrodt pays more actual income tax for selling SAB Miller beer than the entire multinational corporation
By Raina Davis and Katherine Philipson
In his State of the Union Address last month, President Obama expressed concerns about the effects of tax evasion on American small businesses. He stated, "Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change."
Around the world, corporate tax evasion unfairly shifts the burden of taxation onto small businesses and individuals, and limits governments’ revenue to spend on necessities and development. In the United States, two-thirds of American corporations paid no income tax at all between 1998 and 2005.
Activists in the United States and the UK are starting to wake up to the fundamental principle of tax justice. As harmful as tax evasion is to developed nations, corporate tax evasion may be even more burdensome in low-income countries where individuals and small businesses have less capacity to pay the taxes imposed to fund a country’s budget.
Governments of developed nations receive on average about a quarter of their GDP from personal income tax. Low-income countries tend to rely more heavily on indirect taxes, such as VAT (value added tax). These regressive taxes end up especially hurting poorer people because they represent a greater proportion of their annual income. Greater revenue from corporate income tax would free governments to spend money on providing basic necessities to their people and lessen dependence on international aid. In 2009, half of Ghana's government revenue came from taxes; 8% from personal income tax, 17% from VAT, and only 7% from corporate income tax. Christian Aid estimates that developing countries collectively lose US$160 billion collectively in tax revenues as a result of international tax evasion, more than all official development assistance combined.
How does all this evasion work? The most common two methods are transfer pricing and transfer mispricing. Transfer pricing, which is legal, occurs when a multinational corporation sets up subsidiary companies in countries that have very low tax rates, called tax havens. These subsidiary companies charge fees for intangible services such as brand use, procurement, insurance, management, and trademarks. The overhead costs of such a subsidiary are minimal and the profit, which comes directly out of the annual income of the parent company, is subject only to the tax rates of the tax haven. Transfer mispricing, which is illegal, occurs when subsidiaries of a parent company sell goods to each other at artificially inflated or deflated prices. Again, parent companies can manipulate the location of their profits in order to minimize taxes.
This type of large-scale tax evasion is only possible if a company already has access to substantial funds. Small businesses cannot afford to front their entire inventory before actual sales, nor set up dependents in other countries. As a result, many small, local businesses throughout the world are paying heavier taxes than their large-scale competitors. For example, one woman selling beer outside SABMiller’s brewery in Ghana paid more actual local income tax last year than the entire multi-million dollar brewery.
Local investors also lose as they only profit from subsidiary they are directly linked to. A significant proportion of the Accra Brewery in Ghana is owned by locals. Between 2007 and 2010, the Brewery received 63.3 million pounds from sales in Ghana, yet the company reported a pre-tax loss of 3.07 million pounds. SABMiller worldwide, which owns the Accra Brewery, profited substantially each year.
ActionAid recommends a number of policies to close international tax loops: country-by country financial reporting, better international tax information exchange, stronger taxation rights for developing countries, investment in tax authorities, and global political cooperation.
Enabling governments around the world to retain their rightful portion of profits earned within their borders will build up their ability to provide basic services and invest in development. This in turn will help avoid the need to take out new sovereign loans and the dangers of unsustainable debt. For this reason, Jubilee USA is joining with the Tax Justice Network in an attempt to stem the massive illicit flow of resources from South to North. Watch for actions to come.
Make Sure to Stay informed: Visit Tax Justice Network and Jubilee USA Network, sign up for email updates and visit our blogs for the latest on the movement for economic justice.
Image by Jane Hahn courtesy of ActionAid
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