There is no denying that the global financial system is broken. A recent report by UNESCAP shows that income inequality has grown in almost 40 percent of all Asia-Pacific countries, coinciding with an increased concentration of wealth. Massive levels of economic inequality in Asia-Pacific have exacerbated pre-existing social divides by disproportionately impacting marginalized communities in the region. Reforms have also been responsible for reducing the role of the state in being able to raise and mobilize taxes to bridge this gap.
Global standards and norms on international tax are designed by OECD and the G-20 and are not representative of the interests of developing countries. Instead, developed countries have hegemonic control over designing and driving the mandate on international tax. For example, tax treaties determine inward investment opportunities for developing countries. Because of poorly negotiated tax treaties, developing countires are often forced to relinquish their taxing rights and their sovereign space. With regressive tax systems and the dwindling state of budgetary interventions in sectors like health and education, countries are also involved in an intense “race to the bottom.” This competition is fueled by how taxing rights are generally divided or allocated between developing countries.
More importantly, developing countries are especially impacted by the phenomenon of illicit financial flows (IFFs). Estimates show that annual tax abuse losses from developing countries amount to nearly $416 billion. Illicit finance stalls and retrogresses any advancements made toward economic, social, civil, and political rights by draining countries of the necessary revenue. As this is essentially a cross-border issue, it requires significant levels of cooperation among countries to arrive at solutions that work for all. There is geopolitical weight in who gets to make the rules.
Recent Progress on Strengthening Tax Cooperation
Taxation is a multilateral issue and requires meaningful cooperation among countries on an equal footing. In the absence of a global platform for negotiating, debating, and informing the rules and norms of the international tax system, region-wide processes have to lead the way.
On October 21, the G-77 countries and China introduced a draft United Nations resolution recognizing international cooperation to combat illicit financial flows and to strengthen good practices on recovery of lost assets due to such practices. The resolution has two important developments.
First, the resolution recognizes “that illicit financial flows associated with profit-shifting practices can have a damaging impact on tax revenues, particularly in developing countries.” Second, it calls for “upgrad[ing] the Committee of Experts on International Cooperation in Tax Matters to an intergovernmental body with experts representing their respective Governments.” This has been a long-standing demand of developing countries to establish a democratic platform where all countries can debate and form rules on international tax on an equal footing.
The resolution, amid negotiations, is expected to be adopted by end of November.
It is important to note that the Asia-Pacific specifically lacks region-wide political momentum to act on illicit financial flows. This is in part due to the fact that the region does not have a tax body that focuses on its development needs, unlike Africa and Latin America and the Caribbean. Backed by a political mandate, Africa as a region has actively challenged the issue of IFFs from their region. African governments too have collaborated with different global processes, keeping the momentum alive. The diversity and geographical expanse of the region is another difficulty.
In a recent proposal made toward strengthening regional tax cooperation, the UN Economic and Social Commission for Asia and the Pacific has proposed a working group “which would report to it, to explore actionable opportunities for strengthening tax cooperation in the Asia-Pacific region, in close consultation with existing sub-regional tax cooperation platforms and key stakeholders.” This will be the first intergovernmental initiative in the region under the aegis of UNESCAP on tax matters. An earlier proposal made in 2016 to form a pan-Asia-Pacific tax forum for sustainable development was shot down by member states. It remains to be seen how member states respond and react this time.
A working group on tax matters would initiate close collaboration among countries on how much the region is losing in revenue through IFFs. Further, it would arm countries with effective ways to plug such loopholes.
Without adequate public financing, realizing the redistributive needs of a society will remain unfulfilled. Asia-Pacific countries need to act fast in order to catch up with other regions to push for a global momentum on tackling illicit finance.
Sakshi Rai works on tax justice, illicit financial flows, and geopolitics with the Centre for Budget and Governance Accountability.