The art of not paying taxes

The equity of a tax system can be estimated by analysing who has to bear the heaviest burden. The tax systems in the Latin American countries characteristically exert low tax pressure and are highly regressive. These countries do not collect much, and the contribution of population sectors that have less is greater.

Carlos Bedoya

LATIN America is the most unequal region in the world. Some governments, like those in Bolivia and Ecuador, have started to change how they deal with big enterprises so as to increase their tax income and finance the process of widening coverage and improving public services, but most people still have much lower incomes than the top strata of society.

The Latindadd network of social organisations reports that the poorest 20% of the population in Latin America receive only 3.5% of the income while the richest 20% take 56.9%.

Tax policy is a powerful tool to reduce inequity, and according to the Peruvian tax expert Luis Alberto Arias, although this debate has not really got under way in this part of the world, in Europe tax adjustment has been used effectively to bring countries' Gini ratings (which measure inequality in societies) down by several points.

In Latin America, tax pressure is approximately 20% of Gross Domestic Product (GDP) but in Europe the figure is double this. That is to say, for every 100 dollars produced in our region only 20 go into taxes, while in Europe 40 of the dollars created go to the coffers of the state.

This shows how powerful taxation policy can be as an instrument to reduce poverty. This is the logic of imposing higher taxes on those who have higher incomes or more property, and spending more on state services for the whole population, with an emphasis on the most vulnerable sectors. This is how a policy to promote equity works.

It is true that Europe is passing through a period of severe economic difficulty due to the global crisis that has hit the continent extremely hard, but still its taxation systems are among the most progressive in the world. No one would dispute that the crisis has more to do with speculation and bad management in the financial field than with tax systems.

Regressive taxation

According to Luis Moreno, an economist in the Latindadd technical team, the Latin American countries prefer to levy more taxes on consumption than on income, partly because indirect taxes are easier to collect and partly to save on the monitoring costs involved in taxing the profits of big enterprises and investors. Thus the people who actually pay more are those with middle and low incomes. This kind of system is called regressive.

On the other side of the coin are taxes on wealth and property, direct taxes, which yield relatively less than indirect taxes.

In Latin America, direct taxation accounts for only 17% of total tax income, whereas what we all have to pay when we buy something amounts to some 40% of total income from taxation.

With this in mind, it is clear that tax policy in the region is 'pro-rich' and not 'pro-poor'. In other words it is regressive, not progressive. This is one of the main causes of the huge inequalities prevailing in this part of the world.

The notion that 'investment and exports' is the only option for a country to develop is still the guiding ideology when it comes to levying taxes. And with this philosophy underlying state policies, it is no surprise that the transnational enterprises are regularly granted advantages that range from tax stability contracts to tax evasion mechanisms such as 'transfer pricing' and 'tax havens'.

Avoiding tax

There are many ways in which the big enterprises can evade the taxes they should pay. This is called taxation planning, and it normally requires the expertise of lawyers who know the ins and outs of the tax regulations in each country. However, when it comes to international trade, not only do the transnational enterprises evade certain taxes by using tricks to get round the legal regulations, they also manipulate prices and buy from and sell to their own subsidiaries in other countries, thus making a mockery of tax systems and lining their own pockets.

This is called 'transfer pricing'. According to Rodolfo Bejarano, an economist with links to Latindadd, this is how, at the present time, some 60% of world trade is carried out: it consists of transactions between enterprises involved in the same matrix.

Bejarano explains that when a transnational group controls enterprises that are on both sides of a commercial transaction, it is easy for them to avoid paying taxes, and the countries in question can do nothing about it. This is why there is a close connection between price manipulation by transnationals and the developing countries losing tax income.

By using this mechanism these enterprises can transfer their profits under cover. They assign unreal prices to their transactions involving goods or services, understating the value of sales or overstating purchases to suit their needs. Or they simply invent fictitious business operations.

How much are we losing?

The British NGO Christian Aid has estimated that the developing countries lose approximately $160 billion per year as a result of these bad practices. By the same calculation, Latin America is losing $50 billion a year in the same way. According to a study by Global Financial Integrity, Peru is losing $275 million a year as a direct result of these manoeuvres.

There is no easy way out. The transnationals would have to provide timely information about all their operations and this would necessarily have to pass through an international tax control system with global accounting standards that could check the big enterprises' trade operations to ensure they are legitimate. In other words, what is needed is global political will.

Tax havens

The dynamic of transfer pricing makes no sense unless the system is underpinned with tax havens. In the world today there are more than 70 places where tax opacity makes it possible for the big fish to hide their ill-gotten gains from whatever organisation is investigating them. That is to say, places that not only have low taxes or none at all, but where persons or legal entities enjoy strict banking, professional or commercial secrecy, and where this is guaranteed by the law.

Alberto Croce of the SES Foundation in Argentina says these havens ought to be called 'tax sewers'. They also serve to hide the losses of banks and large enterprises with classified investment accounts, which are very profitable. We were given a glimpse of these kinds of arrangements when the dirt on the world financial crisis, or some of it, came out.

The first tax haven was Switzerland: in 1934 the Swiss decreed banking secrecy for their foreign clients. Since then these havens have been proliferating. There are some in the Latin American region, but without doubt the most efficient are the United States and five European countries.

It was not for nothing that the Swiss ex-banker Rudolf Elmer gave WikiLeaks lists with the details of 2,000 people, financial institutions and multinationals in various countries that use banking secrecy to evade taxes. He said that the world should be aware of what he himself has always known in his day-to-day work. In the near future some very revealing information is going to emerge.                                        

Carlos Bedoya is a Peruvian lawyer and journalist. He is a member of the central Latindadd team. This article originally appeared in Spanish in Agenda Global (20 January 2011).

*Third World Resurgence No. 247, March 2011, pp 10-11