Center for Global Development Blog Posts - Europe

On Taxes, Trade, Transparency—and Turf

alexcobham — Mon, 22 Apr 2013 18:01:04 +0000

This is a joint post with Owen Barder.

In January, David Cameron nailed his colours to the mast with a speech in Davos that set out the three Ts agenda for the UK’s chairing of the June G8 meeting: taxes, trade and transparency. Since then, there has been much discussion of how serious the agenda is and what the G8 can actually deliver.

There have also been some raised eyebrows among the cognoscenti about a fourth T: turf. Some worry that a Cameron-led G8 effort might step on the toes of the G20 and its existing working groups, perhaps stimulating production of “not invented here” antibodies that would make it hard for the initiative to gain global traction.

We’ve been thinking about this issue, what G8 members should see properly as their collective responsibility, and what could be considered a success. Because the majority of the world’s cross-border financial services are provided by G8 members –even without including their satellite jurisdictions – progress on transparency at the G20 will be much more likely if the G8 members first get their own houses in order. Early action by the G8 should be welcomed by all concerned.

Still, we see two risks. The first is that G8 countries might introduce increased transparency within their home jurisdictions but be unwilling to apply the same higher standards to offshore secrecy jurisdictions (‘tax havens’) that are more or less directly under their influence (think Jersey or Cyprus, perhaps, or Cayman or Monaco). This would not only undermine the effectiveness of the initiative but cause outsiders – especially the non-G8 members of the G20 – to regard the entire effort with scepticism.

The second risk is that G8 countries might introduce arrangements but be unwilling to open these up to developing countries. This would make it difficult for G8 members to claim that they were acting in a wider interest than their own narrow (and primarily fiscal) concerns. Apart from the lack of development progress entailed, it would likely make it much harder for the G8 to mobilise any subsequent progress from other secrecy jurisdictions such as Singapore to which illicit flows might gravitate.

Here’s a couple of pages outlining our thinking so far. To sharpen our thinking, we have written these as a draft “Fermanagh Declaration” (in reference to the county of Northern Ireland where the G8 leaders will convene on 17-18 June). We would be delighted to receive comments, either below or directly by email (to Europe@cgdev.org).

Authors:

Alex Cobham

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Illicit Financial Flows and the Three Ts of the G-8 Agenda – Alex Cobham

Lawrence MacDonald — Tue, 16 Apr 2013 13:11:24 +0000

The day before we recorded this Wonkcast news broke of an agreement between the United Kingdom, France, Germany, Italy, and Spain to pilot “multilateral automatic tax information exchange.” My guest, research fellow Alex Cobham, explains why this is so important, why financial secrecy and international tax law seem suddenly to be at the top of the global economic policy agenda—and why this could be especially good news for developing countries.

Alex, who joined us recently as a CGD research fellow based in our European office in London, is an expert in trade, tax and transparency—the so-called “Three Ts” that UK prime minister David Cameron has said will be his priorities during the 2013 UK presidency of the G-8. I tell Alex that while Cameron’s plan to push on these issues is understandably news in the UK, I haven’t seen much evidence that the issues are gaining traction in the United States.

Related Content

Blog post: Horse or Beef? Why We Should Know Who Owns Companies and What the G-8 Can Do
Blog post: Render Unto Caesar
Blog post: The ‘End of Tax Havens’ – but will development countries benefit?
Expert profile: Alex Cobham
Policy Paper: What’s Yours Is Mine: New Actors and New Approaches to Asset Recovery in Global Corruption Cases

“Give it time,” Alex replies. “It’s an agenda that’s been building slowly and it’s finally starting to be appreciated—not only for developing countries but for places like the UK and the US.”

To explain why trade, tax, and transparency matter so much for developing countries, Alex offers a story about research he conducted for the World Bank, and the findings with respect to Zambia which were featured in the Why Poverty documentary Stealing Africa.

A few years ago Zambia was on the brink of crossing into middle-income status, but eight out of ten people still lived on less than $2 a day and Zambia was—and remains—heavily reliant on earnings from the country’s main export, copper. For complex reasons involving the three Ts, Zambia has reaped only a fraction of the potential benefits from its copper exports.

“In 2008, if Zambia had received the price for its copper that Switzerland declared on re-exporting the exact same copper, then Zambia’s GDP would have nearly doubled,” Alex says. In fact, the vast majority of the copper never even transits Switzerland.

What seems to have been happening is this—though the process is far from transparent: A Zambian company, or a Zambian subsidiary of a Swiss company, sells the copper it mines to a Swiss-registered company at prices greatly below the market value. The Swiss-registered company then resells the same copper at world prices (and in some cases declares a price far above the world price), taking the difference as profit in low-tax Switzerland, and in the process depriving Zambia of both export earnings and tax revenue on the sale.

Despite the efforts of a new Zambian government to strengthen enforcement of trade and tax laws, Alex says, this sort of tax evasion continues to be rampant. “Zambia is still losing an enormous amount of corporate tax revenue,” he says. Although there are now controls on export prices, other avenues of profit shifting remain. Of the many copper mining companies in the country, only two have declared profit in the last two years, a time of booming copper prices. “Prices are at the highest they’ve ever been,” Alex says. “If these companies aren’t making a profit now there’s no reason for them to be in Zambia at all.”

This Zambian case is but one example of trade mispricing, a widespread problem that is attracting growing attention across the globe, Alex says. In recent blog posts on tax haven secrecy and anonymous company ownership, Alex explains how these problems are exacerbating the fiscal problems of rich countries. “That’s why we’re starting to see interest in this,” Alex says. “It’s not just a development issue; it’s an issue for all of us and I think we’re going to see real progress in the next year or so,” he adds.

The promise of progress is exciting, especially given the scope of the problem and the impact it has on developing countries. Though estimates of the size of illicit flows through mispriced trade vary widely—the practice is after all secret and illicit by nature—Alex suggests that illicit outflows from developing countries are about eight to ten times larger than official development assistance (ODA).

I’m astonished. On one hand, many development advocates focus their efforts on maintaining and increasing foreign assistance, arguing that foreign assistance is both the right thing to do and the smart thing to do. Yet on the other hand, there is a lively debate among development economists—and a general lack of consensus—about whether or not aid boosts growth or otherwise helps countries to develop (for a recent chapter on this debate, see this award-winning CGD paper.

But if what Alex is saying is true, then foreign assistance is but a tiny fraction of the wealth that flows out of developing countries through financial secrecy jurisdictions often under the control of the very countries that pride themselves on being generous aid donors—for example, the UK has responsibility for Crown Dependencies and Overseas Territories including Jersey, Guernsey, the British Virgin Islands, and the Cayman Islands.

I ask Alex: “Does this mean we in the rich world are assisting it the pillaging of developing countries, even as we pride ourselves on giving aid?”

Historically, Alex says, that isn’t far from the truth. Taking the UK as an example, Alex explained that 30 to 40 years ago, the UK encouraged small island states under its control to pursue the tax haven route to economic growth, fearing that without growth the islands would always be dependent on the UK. What happened, he says, was the opposite: the City of London, the UK financial hub, became very dependent on the large financial flows coming through those island states.

A similar relationship exists today between India and Mauritius, Alex says. Unilateral efforts to increase transparency could lead to short-term volatility for a number of developed and emerging countries, he says.

Given the interests at stake, I ask, is there any hope for reform? After all, recent US history shows that the financial sector has been extremely effective in fighting off unwelcome regulation, even after overly risky practices set off at financial crisis that placed the global economy in jeopardy and required billions of dollars in public funds to bail out struggling financial institutions.

Alex replies that he is nonetheless optimistic. “What we’re seeing now is a combination of the problem being very well recognized in developing countries, and rich countries increasingly feeling fiscal pressures themselves,” he says. “This combination of interests … has the potential to overcome … all of the interests on the other side.”

Alex points out that some of America’s biggest companies—he named Google, Amazon, and Starbucks—have recently been criticized for the impact of their tax practices. US-based multinationals in total declared nearly half their profits in five tiny jurisdictions with limited transparency and advantageous tax rules: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. This sort of activity, he says, is prompting public criticism and pushing rich countries to reconsider international tax rules.

The solution? A further movement towards unitary taxation is one option we discussed. Under this approach, a multinational company would be treated as a single entity and it’s global earnings would be taxed based on the location of economic activity, rather than where it may choose to declare profit. Other options and solutions are being considered by the Organisation for Economic Cooperation and Development (OECD) and the G-8, Alex tells me.

Looking ahead, Alex tells me he plans to delve deeper into these issues, in blogs and forthcoming research. Stay tuned.

My thanks to Alex Gordon for editing the Wonkcast and Catherine An for providing a draft of this blog post.

Authors:

Lawrence MacDonald

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The ‘End of Tax Havens’ – But Will Developing Countries Benefit?

alexcobham — Thu, 11 Apr 2013 13:12:25 +0000

News broke on April 9th of agreement between the UK, France, Germany, Italy and Spain to pilot “multilateral automatic tax information exchange.” In France, President Hollande went further – announcing a draft law aimed at ‘moralising’ French public life, as former budget minister Jerome Cahuzac was expelled from the governing party for repeatedly denying the existence of his Swiss bank account. Hollande was explicit about his intentions at a press conference: “tax havens must be eradicated in Europe and worldwide.”

We interrupt this blog to bring you this diversion from your work, entirely in keeping with the ramped-up rhetoric. (h/t @benphillips76)

Rhetoric around shutting down tax havens – most famously, at the 2009 London meeting of the G20 group of nations – is not new. There are two reasons for wariness. First, the language implies that there is a group of jurisdictions which are the problem – so that by implication all others are unblemished. The Financial Secrecy Index, published by the Tax Justice Network and Christian Aid, presents a different point of view: that there is a spectrum of financial secrecy, including major powers as well as the usual suspects, and that we can use a set of objective criteria to consider the relative importance of each in contributing to what is a global problem. Needless to say, G20 nations also feature on the FSI.

The second reason for wariness is of course the absence of appropriate practical steps to follow. And that is why current developments are promising. Rhetoric on shutting down or eradicating anything aside, a multilateral tool for automatic information exchange would be the central element to ending tax secrecy (and with it, the core element of the tax haven offer).

The 5-way agreement announced yesterday is intriguing, however. The question is, why not use the EU Savings Tax Directive which is by some distance the biggest multilateral, automatic information exchange instrument in the world, and in which all these countries participate, and which is being enhanced even as we speak; or the Mutual Administrative Assistance…[name continues for some time but I’ve lost the will]… Convention, which does not mandate automatic exchange but explicitly condones and allows for it, and has a broader than EU membership, so could be the basis for a global auto exchange instrument.

Two thoughts occur.

Glass half-empty: It’s basically political and pragmatic: the respective governments mainly wanted to be able to announce something, and as they’re all already making this commitment (and accepting any associated compliance costs) in their FATCA agreements with the US, it may have seemed most straightforward simply to agree to the same terms with each other.
Glass half-full: It’s a bit more considered: recognising that (a) a very great many jurisdictions, including lots of the ‘usual suspect’ havens, are signing up to FATCA with the US, and (b) that the Mutual etc Convention and the EUSTD have their own, rather cumbersome processes for change and for including other countries, perhaps the signatories here decided that having a straight FATCA replica was the best way to create something that could quickly grow: ‘everyone’ has already to meet these terms with the US, so it’s most straightforward just to demand the same multilaterally in a new, specifically-created vehicle; and the absence of cumbersome arrangements may mean the founding group can drive through extension to multiple jurisdictions in a short space of time.

Related Content

Blog post: Horse or Beef? Why We Should Know Who Owns Companies and What the G-8 Can Do
Blog post: Render Unto Caesar
Podcast: Illicit Financial Flows and the Three Ts of the G8 Agenda – Alex Cobham
Policy Paper: What’s Yours Is Mine: New Actors and New Approaches to Asset Recovery in Global Corruption Cases
Expert profile: Alex Cobham

Itai Grinberg, a law prof at Georgetown and formerly a tax man at the Treasury, has a fascinating paper from early last year on the way that different processes do and don’t fit together. Today, the Tax Justice Network welcome the momentum but raise an associated concern that the new process might take the wind out of the sails of the EUSTD reform.

Here’s my worry. In neither case (1) or (2) is there any reflection of the importance of including developing countries in automatic information exchange. Case (2) looks better, again, for this, but in fact there are currently no developing countries among those listed by Treasury as having negotiated bilateral treaties to make FATCA work. (As an aside, it’s also worrying that the FATCA treaty options include a non-reciprocal one: so that countries would not necessarily get any benefit in terms of US transparency from signing up.)

So it’s not clear how quickly developing countries could join. And that is the question that the G8, and perhaps the UK chair in particular, should be asked. And then the ball passes to the G20…

Authors:

Alex Cobham

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Are OECD Countries "Getting Away with Murder" on Aid Figures?

owenbarder — Thu, 11 Apr 2013 08:31:26 +0000

Richard Manning was a highly respected chair of the Development Assistance Committee (DAC) - the development committee of the OECD, the rich countries' think-tank. So we should pay attention when he says in the FT that the OECD is

encouraging OECD finance ministries to get away with murder as they seek to massage reported aid upwards at minimum cost.

(Here is the letter without the paywall.)

The definition of aid requires that loans are 'concessional in character' - in other words, that they are not simply commercial loans. There are two problems with this. The first, which Manning identifies in his letter, is that the rules that the OECD applies for measuring whether this test is met are not fit for purpose. Many loans fall with the current test even though they involve no concession. The second problem is that if a loan is regarded as concessional then the whole of the loan, and not just the concessional part (or 'grant element') is counted as aid. So if a government gives a $10 subsidy to a $100 loan to a developing country, then the whole $100 counts as aid.

There is a parallel problem with the way debt relief is counted. If you are not servicing your debts, then your financial position is not improved if I write that debt off my books. The aid value of debt relief should be the value of the debt service payments which are no longer made as a result, not the whole outstanding book value of the loan.

There is a broader case for thinking again about how ODA is defined. This would be an opportunity to address long-standing anomolies, such as the treatment of debt relief, student subsidies, dumping of surplus food, and the choice of countries which are eligible. My own view is that the current definition creates an unhelpful disincentive to invest in global public goods, such as peacekeeping costs or global health surveillance. (Jean-Michel Severino and Olivier Ray discussed this a few years ago in a CGD Working Paper.) But the reason why Manning is outraged about the treatment of loans is that the way the rules are applied is inconsistent with the existing definition of ODA to which OECD countries have signed up. They are not obeying their own rules.

Manning finishes with a striking thought:

If the OECD cannot do a professional job on this, the UN should take over the reporting for international aid flows.

Coming from a former chair of the DAC, that is a comment which should not be lightly dismissed.

Authors:

Owen Barder

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Congratulations to Michael Clemens on Receiving the Royal Economic Society Prize

Nancy Birdsall — Thu, 04 Apr 2013 18:21:44 +0000

I and all my colleagues at the Center for Global Development (CGD) are thrilled with the announcement today that CGD senior fellow, Michael Clemens, has won this year’s Royal Economic Society prize - a prize awarded annually to the author(s) of the best non-solicited paper published in The Economic Journal (read the journal or ungated version). Michael shares the prize with three former CGD staff: Steven Radelet, now at the Georgetown School of Foreign Service, Rikhil Bhavnani of the University of Wisconsin, and Samuel Bazzi of Boston University. Michael is in the United Kingdom to accept the award on behalf of his co-authors at a ceremony that took place today at the Royal Economic Society annual conference.

Michael and his co-authors asked a much debated question: Does foreign aid contribute to economic growth in relatively poor countries? In “Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth”, the authors reassessed that question using the same data and the same regression analyses of the three most influential prior aid-growth studies – for the first time distinguishing between types and timing of different kinds of aid. Their work suggests that increases in aid have indeed, been followed on average by increases in investment and growth, with the magnitude of the relationship being modest, varying greatly across recipients, and diminishing at high levels of aid.

An award of this kind vindicates the emphasis at CGD on supporting rigorous research that meets the highest academic standards – as an investment in the people and ideas that will have impact far beyond any particular news cycle.

I am delighted that the paper --the result of world-class research-- has been honored in this way. I also want to thank two supporters of the research: the William and Flora Hewlett Foundation and the John D. and Catherine T. MacArthur Foundation.

Michael Clemens with Prof. Richard Blundell, president of the Royal Economic Society, at the 2013 RES Annual Meeting

Authors:

Nancy Birdsall

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Waste Not, Want Not

owenbarder — Mon, 01 Apr 2013 11:00:00 +0000

A consortium of donors, NGOs, supermarkets and agro-businesses are working on plans to use surplus food, currently wasted in industrialised countries, to the developing world to tackle hunger.

According to some estimates, 1.2 billion tonnes of all food produced is never eaten – because of losses in harvesting, storage, transportation and poor labelling. This is between 30-50% of all food produced: yet at the same time, about 900 million people will go to bed tonight hungry.

In a new public-private partnership, donor agencies and supermarkets are planning to work together to develop ways to ship this surplus to Africa. Food that is approaching its use-by date will be bought by donor governments at cost and repurposed to tackle hunger in countries that need it most. Officials are working with the merchant navy to develop a European equivalent of the US Cargo Preference Act so that the food is carried in nationally-registered vessels.

The UK Government Big Society unit is developing plans to put specially-marked donation centres on street corners, so that families with surplus food can donate it directly. UKAid will then be used to transport the food to countries with the highest rates of hunger.

Under the current definition of Official Development Assistance (ODA), the market value of the food which is purchased by government and the cost of shipping it will count towards the international definition of aid. This means that the scheme will contribute to the UK Government’s target of 0.7%, which Britain is meeting for the first time in 2013. The Treasury is thought to be enthusiastic about the scheme because it helps the UK to meet the target without additional public spending. The scheme is regarded in government as a way to leverage Britain’s growing aid budget to support British farmers and firms while providing additional food for the world’s poor.

Ministers see the new scheme as a win-win. According to one Development Minister:

“I remember my mother telling me to eat all my dinner because people were starving in Africa. It always seemed to me we should ship them the food instead. Well thanks an innovative new partnership, we will be able to do that. This shows we can do well while doing good. We will create jobs for British farmers, food companies and for our hard-pressed merchant navy, while showing the world that we are serious about fighting hunger. Furthermore, this is an opportunity to spread the word globally about the quality of British cuisine.”

NGOs, who are focusing on reducing hunger in 2013, have given a cautious welcome to the scheme:

“Hunger is the world's most shocking problem and our toughest challenge. One in eight people on this planet lives with the pain of hunger. And yet our planet provides enough food for everyone. It's unfair, it's unjust, and - it's totally preventable. We can reduce hunger without putting any additional pressure on the planet’s resources IF we ship unwanted food to people in poor countries.”

Even so, at the Center for Global Development we have significant reservations about the idea. The reason people are hungry is because they are poor, not because there is not enough food. Though this became widely accepted in the 1980s, in recent years some campaigners and governments seem to find it easier to portray hunger as a problem of food production rather than poverty.

The programme will be piloted in Africa. The first Africa Pilot for Repurposing International Leftovers (APRIL 1) is expected to commence this month.

Authors:

Owen Barder

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Render unto Caesar

alexcobham — Mon, 25 Mar 2013 20:28:43 +0000

An obscure reference to reforming the taxation of multinationals in the UK budget speech might be more important for developing countries than the big increase in aid that was announced at the same time. Mandatory ‘combined reporting’ by multinationals could enable countries to tax multinationals properly.

For developing countries, the most important part of last week’s UK budget might not be the confirmation that Britain is at last reaching the 0.7% international aid target. In the long run, the more significant announcement might turn out to be this part of the Chancellor of the Exchequer’s statement:

"And this year, we are leading international action on tax avoidance, through our presidency of the G8, with the OECD and at the G20.

We want the global rules governing the taxation of multinational firms to be updated from the 1920s when they were first written, and made relevant to the global internet economy of the twenty first century.”

Academics and tax experts have long been aware that the international tax rules need to be updated but it marks a striking shift to hear such direct language from a senior policymaker from an OECD country – especially from the country currently setting the G-8 agenda. A shift in international tax policy could yield substantial benefits for the great majority of countries, regardless of their level of per capita income.

The IF campaign is targeting George Osborne to deliver tax reform for developing countries through the G8. Photo: CAFOD CC BY-NC-ND

Reform would not involve countries giving up their sovereignty over tax: on the contrary, it would enhance the ability of countries to set meaningful corporate tax rates, reflecting the preferences of their citizens; and at the same time reduce the economic distortions caused by the current system, including the substantial cost of lawyers and accountants paid to help companies minimise their tax within the current rules. We don’t need a global agreement on tax rates and allowances: but we do need some common agreements and information sharing about the tax base on which those rates are applied.

The challenge is to find an appropriate way for national governments to tax global businesses. In the past tax authorities have treated multinational companies as if they were a collection of separate companies which happen to have a common owner. But this does not reflect the reality that profits are realised by the global business as a whole, and so cannot readily be attributed to the activities of any particular part of the company.

Tax is not supposed to be voluntary

The current OECD rules attempt to separate the different parts of the business on the “arm’s length principle”. This requires that when there is a transaction between two companies which are part of the same multinational group, they should be accounted as if the transaction were occurring between unrelated parties (hence, at “arm’s length”). But in reality it is very hard to find or construct these arm’s length prices. In practice companies working within the same group have broad discretion over the way internal transactions are recorded, enabling them to organise their affairs so that their profits are recorded in low tax jurisdictions, even if this does not reflect the underlying reality of their businesses.

Allowing this degree of discretion so that companies can record their profits where they choose is bad for both developed and developing countries. If companies can easily shift their profits to places where taxes are very low, even if that is not where the economic activity is taking place, then no country has real sovereignty over its tax. No less a radical firebrand than the Financial Times notes that corporate tax has become ‘a largely voluntary gesture’, which it thinks ‘scandalous’. The problem is particularly acute for developing countries. Because OECD countries have more political power and more technical capacity, they can exert more pressure on multinational companies. If rich countries are able to demand that multinational companies make at least some contribution in tax, global companies will tend to shift their reported profits to those countries, at the expense of countries with poor tax administration and weak bargaining power.

How big a problem is this really?

We do not know for certain how big a problem this is, and I’ll be participating in a detailed research project on this starting soon. In the meantime here are some indicative statistics. A couple of years ago (see the first two minutes here) I used some data on US multinationals’ profits to explore whether they might be under-declaring in developing countries.

I compared the distribution of where US companies declare their overseas profits with the distribution of world GDP. Of course, there are lots of reasons why companies might be earning a bigger share of their profits in one country rather than another, but overall the results do suggest that many companies are declaring profits in places other than where those profits are being earned.* In “secrecy jurisdictions” such as Switzerland profits are about 6 times more than we might expect, given the distribution of world GDP, and in the small secrecy jurisdictions (basically, the small island financial havens) the profits are 14 times larger. The biggest losers are not G-7 countries, in which the share of profits is only a little lower than their share of world GDP. The problem is in the rest of the world, where companies are declaring less than half the profits we might expect.

Larger secrecy jurisdictions accounted for 5% of world GDP, but 30% of US companies’ profits; and smaller secrecy jurisdictions accounted for less than 1% of world GDP but 14% of profits. It seems most unlikely that US companies are really making 14% of their profits in Liechtenstein or Bermuda, even if they are acting legally by organising their accounts in such a way that it looks as if they do.

It is possible that these difference partly reflect genuine differences in the distribution of where profits are earned around world; but it certainly suggests the possibility that companies are under-declaring their profits in developing countries, and shifting them to the secrecy jurisdictions.

Two years after I presented this data, the Congressional Research Service uncovered an even more dramatic picture: showing that in 2008, US companies declared 43% of their profits in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland, on the basis of just 4% of their overseas workforce and 7% of their overseas investment.

Is there a better way?

There is broad and growing recognition that the ‘arms length principle’ is no longer fit for purpose as the basis for working out where multinational companies should pay tax. The alternative is to tax multinationals as a single unit rather than continue to treat them as if they were a series of unconnected national businesses. This approach - which is known as ‘unitary taxation’ – requires some common approach to how much of the companies’ profits should be taxed in each jurisdiction so that it is fair to the countries in which the businesses operate and is also fair to the companies and their shareholders.

The OECD already offers a ‘profit-split’ approach, which allows allocation either (i) by a percentage based on an evaluation of the contributions made by each affiliate using suitable `allocation keys’, or (ii) by applying one of the other methods and then apportioning the `residual’. The Chancellor of the Exchequer’s statement about the reform of international taxation appears to be taking is further in this direction.

That doesn’t mean an immediate switch to a globally agreed ‘formulary apportionment’, whereby all countries commit to using the same formula (perhaps a combination of sales, employment and assets) to allocate each multinational’s profits between them. But the OECD’s ‘Base Erosion and Profit Shifting’ initiative, set up in response to growing frustration among member states at cases like Starbucks, Amazon and Google, may set the course for a gradual move towards unitary taxation, without requiring formal coordination. This would reflect the reality that many countries are increasingly relying on profit-split methods, given the manifest problems with arm’s length pricing.

If the world is moving in this direction, it is important that the OECD countries do not develop a new set of rules for international taxation that protect their own interests but neglect the need for developing countries to be able to defend their tax base, since it appears to be developing countries who are currently suffering most from the absence of an effective system of international tax. It’s no coincidence that the UN Economic Commission for Africa was writing about the potential benefits back in 2004.

What needs to happen next?

The most important next step is to require multinationals to provide a ‘combined report’ setting out global profits and the scale of their economic activity in each jurisdiction – hardly a wild step in transparency, though long resisted. Interestingly, this possibility was raised recently (£) by Professor Paul Collier, who is currently advising the UK government on their agenda for the G-8 meeting. Combined reporting has been required by US States such as California for several decades, but is voluntary elsewhere; it has never been required by national governments. Requiring combined reports would provide the basis to determine the tax base on which nation states could exercise their tax sovereignty.

British Prime Minister David Cameron says that the UK priorities for the G-8 meeting are ‘three Ts’: tax, trade and transparency. Requiring a combined report from multinationals is a basic step towards transparency that would start to tackle a major distortion in world trade and the allocation of the tax base, and to reverse a significant obstacle to development. What’s not to like?

* This comparison of profit shares with shares of global GDP is of course illustrative. We are implicitly assuming that any difference between the distribution of the share of US companies overseas profits from the distribution of world GDP reflects a choice about where to declare profit, rather than differences in where those profits actually arose. This makes the heroic assumptions that US multinationals are sufficiently large in number and in investment volume, and sufficiently profit-driven that we could expect their total overseas investments to be proportional to the amount of economic activity in each non-home market; and that with efficient markets the (expected) profit rate on those investments would be the same in each location. The revealed deviations are sufficiently large, and sufficiently closely related to financial secrecy, to suggest that the distribution of (declared) profit is determined at least in part by choices made by multinational companies.

Authors:

Alex Cobham

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Bob Geldof: From Activist to Investor

owenbarder — Fri, 22 Mar 2013 23:00:00 +0000

Celebrity activists who campaign about development are often sneered at by development economists and by commentators; they are variously accused of ignorance, of exploiting a cause to further their own career, or even of wanting to perpetuate poverty to justify their own public profile.

Bob Geldof has given an extended interview on Development Drums about his work over three decades; you can judge for yourself if this criticism of celebrity activists is fair. (But beware: the language is colourfully and characteristically explicit in places.) You can listen to the 35 minute version here, or listen to the entire extended interview. Alternatively you can read the transcript.

Geldof's interview confirmed my impression that he is passionate, well-informed, and thoroughly decent. What's more, I think he has done as much as anyone I know to make the world a better place.

I was living in Ethiopia in the early 1980s as the famine there unfolded; and I remember how Michael Buerk's report on the BBC on 23 October 1984 brought it to the world's attention. But that would have been just another news report without Bob Geldof who (with Midge Ure) brought together a group of pop stars, called Band Aid, to record a charity single, Do They Know It's Christmas? (It still makes me cry when I hear it.) The following year Geldof organised the Live Aid concerts in London and Philadelphia. I believe these concerts and the surrounding publicity played a decisive role in mobilizing public opinion behind efforts not only to address the famine, but to find ways to make sure that nothing like this could ever happen again. Bob Geldof did more than raise money for a good cause.

In retrospect it seems extraordinary that a Conservative government led by Margaret Thatcher would send planes from the Royal Air Force to Ethiopia, then under a marxist military government, to deliver emergency food aid to remote parts of the country. I don't believe this would have happened without the pressure of public opinion that Bob Geldof mobilised and to which he gave voice.

It seems to me that there is a direct thread connecting these events in the 1980s to the national consensus in Britain in support of a generous and effective development policy. It was this consensus on the need to do a better job of tackling global poverty which led to the establishment of the Department for International Development (DFID) in 1997 - which Tony Blair would later say was the greatest achievement of his government; it led to the cross party consensus on the need to protect the aid budget; and it culminated in the announcement in yesterday's budget that Britain will this year meet the international target of spending 0.7% of GNI on foreign aid. Geldof has remained engaged throughout, playing a key role in the Gleneagles summit in 2005, and in helping to shape Conservative Party policy on development in 2005.

I am not saying that Geldof was single-handedly responsible for Britain's national support for development. There are many organisations and individuals who have contributed to this movement over the years, and they all deserve credit. But as you will hear in the podcast, Geldof deliberately played a particular role, agitating, mobilizing and disrupting in ways which helped capture the public imagination.

Geldof has more than his fair share of enemies. He is accused of misrepresenting Africa as a basket case, a continent of begging bowls. There have been insinuations - for which retractions and apologies were subsequently extracted - that the money raised by Band Aid was somehow used to support the civil war in Ethiopia. He has been accused of being a publicity-seeking celebrity, exploiting the misfortune of others. I put all this to Geldof in the course of the interview, and he replies robustly. I find him convincing and credible.

Geldof's latest venture is a private equity firm, 8 miles, which makes investments exclusively in Africa. In the podcast he talks optimistically about the opportunities for investment in Africa, and the scale of the changes he is seeing. But he does not accept the suggestion that his campaigning, and the aid which he helped to raise, harmed Africa's prospects for private investment and growth: on the contrary, he argues that they were, and remain, essential complements to investment as Africa gets to its feet.

Whether you admire Bob Geldof or distrust him, if you are interested in what Band Aid and Live Aid achieved, and how celebrities have helped to build and sustain public interest in development, I hope you'll listen to his interview on Development Drums. (Edited version | Full interview)

Authors:

Owen Barder

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Britain Joins the G-0.7

owenbarder — Wed, 20 Mar 2013 21:42:26 +0000

The budget presented today by Britain's ruling coalition confirmed that the UK will meet the 0.7% target on foreign assistance in 2013. This means that Britain will join Sweden, Norway, Luxembourg and Denmark as a member of the small club of countries which meet the UN target - first agreed in 1970 - of spending 0.7% of Gross National Income (GNI) on Official Development Assistance (ODA). (The Netherlands, which has been above 0.7% every year since 1975, looks likely to leave the club in 2013).

Meeting the target entails a substantial increase in the DFID budget. According to the budget documents (page 69 of the Red Book), the DFID spending limit will rise from £7.8 bn in 2012-13 to £10.7 bn in 2013-14. As far as I know, there is no peacetime precedent for a 37% increase from one year to the next in the budget of a UK government department.

The Government has also confirmed - I believe for the first time - that the protection for the ODA budget will be continued into 2015-16. (See page 3 of the Red Book). For readers not familiar with the UK's budget system: these budget proposals are formally subject to approval by Parliament in July in the Main Supply Estimates; but Parliament normally approves the provision sought by the Government.

In absolute terms, the UK will overtake Germany to become the world's second largest aid donor, with a budget of about $17 billion; a long way behind the United States which spends about about $31 billion a year. (US foreign assistance, while large in absolute terms, is just 0.2% of national income.) This increase in aid, in the context of a difficult fiscal position, is the result of a remarkable cross-party political consensus in Britain about the importance of development cooperation. This commitment has grown significantly since the establishment of DFID in 1997. (If you are interested, my 2005 Working Paper describes the reform of UK foreign assistance which helped establish this cross party agreement, in the context of British aid since colonial times.)

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Owen Barder

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Development and the Death of Aaron Swartz

owenbarder — Tue, 15 Jan 2013 20:20:13 +0000

Aaron Swartz, who died on January 11th, worked and fought for key freedoms of our time: the right to information, to share knowledge and ideas, and to speak freely. He did not just campaign: he built the RSS standard which enables blogs and websites to share information, the Web site framework web.py, the architecture for the Open Library, the link sharing platform Reddit, and he helped to design the Creative Commons licence. He co-founded the online group Demand Progress — known for its campaign against the Stop Online Piracy Act (SOPA). He died, apparently by killing himself, aged just 26. Aaron Swartz faced 13 felony charges for having downloaded millions of academic journal articles from the online repository, JSTOR, allegedly with the intention of publishing them freely online.

The death of Aaron Swartz has made me think about how important it is for development that we continue to fight his fights, and continue to build what he began.

We know that sharing ideas, technology and data are essential to enable poor countries to close the gap with rich counties. Yet we have made it progressively harder for companies in poor countries to adopt new technologies, through protection of intellectual property, copyright and trademarks. We allow pharmaceutical companies to keep secret the data from clinical trials, for fear that it might be useful to other companies developing new medicines. Western philanthropists fund a big exercise (the Global Burden of Disease project) to establish the main causes of death and disease around the world, but allow the western academics to withhold the data they have collected (often from governments and public bodies) so that they have a head-start on writing journal articles which they need for their academic prestige. We continue to put most academic research behind paywall in subscription journal articles, beyond the reach of academics and civil society organisations in developing countries. Accountability of developing countries to their own citizens is undermined by our secrecy about what we give in aid, or our companies pay in tax and royalties. Information about money we spend in developing countries - what has been spent, where, and for what - is still not easily available.

Some of this is changing. The UK Department for International Development Open Access policy is a huge step forward: it requires that research funded by DFID must be made available free online, and any data must be published within one year of collection. The International Aid Transparency Initiative (IATI) - which was consciously modelled on Aaron Swartz's work on RSS - is gradually being adopted to enable information about aid to be widely accessible, and here too DFID is leading the way.

Here are some suggestions for what more we can do:

Researchers and academics working in development should put pressure to open up academic publishing by refusing to do peer reviews except for open access journals; and commit to publishing all their data and code online (at the Center for Global Development we have a good policy like this).
All research funders should require that all publicly funded research is open access with open data and open code.
Donors should adopt a policy of 'public money - public code' - requiring all software that they finance to be open source. Aid agencies should not be paying for proprietary public sector IT systems (such as public financial management or education management systems).
All donors, NGOs, foundations and suppliers of services funded by aid should fully implement the International Aid Transparency Initiative.
Governments should not pursue the Anti-Counterfeiting Trade Agreement (ACTA).

The first strand of CGD's Europe Beyond Aid initiative will focus on the policies of European countries on technology, research and development and intellectual property, and we are looking forward to working with a wider range of experts to develop these and other policy ideas. If you have specific suggestions to add to this list, I hope you will put them in the comments.

Aaron Swartz fought to make the world a better place: and he achieved more in a few years than most of us will achieve in much longer lives. The world is changing, in the direction in which he was leading us, but we still have a long, hard fight against those who who want go control information and use it to exercise power.

Authors:

Owen Barder

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