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Are developing countries at risk of being left behind by global tax decisions?

Global tax

​The challenges facing the global economy have seen many analysts call for unified action from some of the world's biggest financial players, with almost every member of the G20 in agreement that the recent Panama Papers leak, combined with the threat of a global economic slowdown, needs a more encompassing approach.

However, there are now concerns that such actions risk leaving many developing countries behind, despite suffering just as much from the issue of tax avoidance.

Tove Maria Ryding, a representative from the Financing for Development (FfD) Group, told journalists recently that there was currently not enough dialogue between richer nations and developing countries, adding that the process instigated by the 34 member Organisation for Economic Cooperation and Development (OECD) is “extremely undemocratic".

The Group of 77 and China, which currently represents 134 UN member states as already pressed the UN on the idea of taking a greater role in global tax co-operating, adding that such an approach would help to place the debate on a more equal footing.

That proposal was dismissed at the UN's 2015 summit on Financing for Development, which Ryding fears will continue to leave many developing countries out in the cold.

One situation that, according to Ryding, best demonstrates this disparity is when a large company operates in more than one country. OECD rules currently dictate that the taxes should largely be paid in the country where that organisation is based.

Given that in a majority of cases the headquarters of these companies tend to be located in OECD countries, it leaves developing countries largely disadvantaged and having to comply with rules that they have had no say on drawing up.

The case for a global tax body

Ryding's analysis is likely to add to the growing calls for a united global tax body, which has already been touted as one of the potential solutions for the current scale of tax avoidance, which is estimated to be the equivalent of eight per cent of the world's total financial assets.

Experts have unsurprisingly cited tax avoidance as key factor stifling efforts to reduce global poverty and strengthen international systems of sharing.

According to research by Global Financial Integrity, developing countries could lose around $1 trillion a year in illicit capital flows, with a majority of that cash being stored away as the result of tax havens.

Furthermore, UNCTAD estimates that developing countries could lose $100 billion a year in revenue from corporate tax avoidance alone - a figure far higher than the GDP of many countries.  

Some experts have suggested that given the shortcomings of the current system will governments should reconsider the proposal of a UN tax body, in order to create a system that is transparent and coherent, while also helping to level the playing field and replace the complicated treaty systems that are currently in place. 

There is a real feeling that the UN is the only forum that is capable of delivering the inclusive and democratic process needed to address such issues.

While the move is widely backed by civil society groups, there is little enthusiasm among OECD countries, with the European Commission instead proposing public tax transparency rules for multinationals on a country-by-country basis, although there are doubts over their potential effectiveness.

Solving the issue could literally save the planet

Confronting tax avoidance could have implications beyond reinforcing the the economies of developing nations, with the recent Paris Climate Agreement serving as a reminder that the battle against climate change is being denied vital funds.

A fragmented approach to the issue meant there was a disappointing outcome in terms of finding a unified approach to tackling environmental issues at a summit in Ethiopian capital Addis Ababa last July, with follow-up negotiations also seemingly also failing to reach a solution.

With efforts to reduce reduction and climate change underfinanced, the scandal of the Panama Papers has shown how the existence of loopholes and ease in finding tax havens has once again highlighted how much money is being siphoned away from worth causes and into the hands of companies and individuals.