Close tax loopholes to cut out dirty side of Latin American development

Social development and tax justice campaigners point to rampant tax avoidance costing developing countries billions each year. Could a clampdown render controversial damaging projects like drilling for Yasuní oil unnecessary?

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The fate of the Yasuní-ITT Initiative seems to have been finally sealed as of last week. Ecuadorean authorities controversially ruled that campaigners had failed to gather enough valid signatures to call for a referendum on President Rafael Correa’s plans to ditch the initiative, which sought to attract contributions from international society in exchange for the Ecuadorean government leaving an estimated 850 million barrels of crude oil under the uniquely biodiverse Yasuní National Park.

Correa has defended his position, claiming that the world had “failed” Ecuador in only contributing $130m out of a proposed $3.6bn in six years, that his country needed the money that extracting the oil would bring – a factor that lay behind the original contributive element of the Yasuní-ITT Initiative – and that the $18bn or so in potential revenue would all go towards Correa’s popular and apparently effective social programmes and poverty reduction efforts.

Such an argument can be difficult to counter for even the most impassioned proponent of sustainable development and progressive social policy, something that has no doubt helped Correa to get his way having previously committed himself staunchly to the Yasuní-ITT Initiative. However, as a hard-hitting recent report from Oxfam reveals, there is another option for governments and pan-regional organisations to take that could provide such vast sums of money for government spending on popular social programmes, an option that is inherently more sustainable and fair: tackling tax avoidance and closing tax loopholes.

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The Amazon Rainforest, which is coming under increasing threat from oil, mining and agricultural companies and Latin American states seeking to exploit its natural wealth to drive national economies. Photo courtesy of CIFOR (Centre for International Forestry Research), Flickr.

The report, which can be found here (pdf), details how international tax rules allow multinational companies to avoid paying their fair share of taxes, by channelling profits through tax havens to avoid paying the official rate of corporation tax in countries where their economic activities are actually taking place. Oxfam calculate that the total cost of these corporate strategies to developing countries is some $104bn per year, a figure that is higher than Ecuador’s yearly GDP, for example.

Sticking with comparisons of Ecuador, a press release accompanying the report cites figures from an upcoming study by Alex Cobham and Petr Janský which reveal the amount of tax revenue being lost each year by developing countries due to tax avoidance or a lack of progressive tax regimes in those countries. They suggest that “under more progressive corporate taxation rules”, Ecuador would see a 99% increase in its tax base.

As of 2012, tax revenues were equal to 20.2% of GDP, according to OECD figures; with Ecuador’s GDP for 2012 calculated by the World Bank at around $84bn, this represents just under $17bn a year. If we can surmise that Ecuador could feasibly boost its tax receipts by this amount each year by closing tax loopholes and applying more progressive taxes to the companies that exploit Ecuadorean resources (such as oil and minerals), it can hardly escape our notice that the government would be able to raise almost as much revenue in one year as it stands to earn from pushing ahead with plans to extract oil from under Yasuní-ITT over many years.

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A street in Tegucigalpa, the capital of Honduras, which not only suffers from severe rates of poverty and inequality but also misses out on considerable potential tax revenues each year. Photo courtesy of Nan Palmero, Flickr.

There is an argument, then, that there is a far fairer, cleaner, more sustainable and less controversial and divisive way for the Ecuadorean government to raise the money needed to fund schools, housing programmes, infrastructure and welfare programmes, allowing it to leave the pristine ecosystems of Yasuní and the territories and cultural patrimony of its indigenous inhabitants untouched.

Ecuador is not alone among Latin American countries in suffering from loose tax regimes. The same source that suggested Ecuador could increase its tax base by 99% also claimed that the corresponding figure for Honduras was around 400%. Meanwhile, Oxfam’s report cites the example of Peru, which has seen hundreds of companies – mostly foreign ones – siphon away tens of billions of dollars between 2007 and 2012 with the help of a technique known as transfer pricing. An audit of a small fraction (27) of these companies revealed $105m lost in 2013 alone, itself almost enough to fund Peru’s maternal neonatal programme, and Oxfam reckon the true cost to the Peruvian taxman may have been $3.36bn over the course of 2013, equivalent to 84% of the country’s annual education budget.

Meanwhile, a separate study (pdf in Spanish) carried out by the Centro de Economía y Finanzas para el Desarrollo de la Argentina (CEFID – Centre of Economics and Finance for the Development of Argentina) found that the Gini coefficient – used by economists and social scientists to measure the levels of inequality in a given country, with 0 meaning absolute economic equality and 1 meaning absolute inequality – for Argentina rose from its standard value of 0.42, to 0.48 when hidden and offshore wealth was taken into account. As one of the authors of the study, Jorge Gaggero, put it to BBC Mundo, this ‘rise’ in what we should view inequality in Argentina to really be is enough to undo all the progress in the reduction of socioeconomic inequality and poverty achieved by the Argentinean government between 2003 – when the country emerged from a crippling financial crisis – and 2010, under the governments of Néstor Kirchner and his wife Cristina Fernández de Kirchner.

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A slum village in Argentina. Offshore wealth is hampering Argentina’s fight against poverty and inequality. Photo courtesy of Justin de la Ornellas, Flickr.

Like Ecuador, Peru and Argentina and indeed many other Latin American countries have economies that are firmly geared towards the exploitation and export of their natural resources, from oil and minerals to agricultural and timber products. Even with the arrival of numerous left-of-centre governments across the continent, economic growth and social development have to pretty much all of these governments developing a hunger for continued exploitation of these natural resources in order to fund further social policies, as exemplified by the change in Correa’s stance towards Yasuní-ITT. The stark reality is that as their populations grow in number and wealth, and as foreign and state investment floods ever greater parts of the national landscape, governments are increasingly forced to take difficult and often unpopular decisions with regard to these so-called ‘development’ projects, which result in harmful social and environmental side-effects, in order to keep the economy ticking over at a healthy lick.

Yet what the Oxfam report, along with countless others tackling a similar topic, suggests is that Correa et al. have other options at their disposal. The cancellation of the Yasuní-ITT Initiative in Ecuador, the proposed Conga mine in Peru, the TIPNIS highway in Bolivia, the Pascua Lama gold mine on the Chile-Argentina border, and countless other controversial projects across Latin America; these might not be such do-or-die issues for the region’s governments if they were able to close in on tax revenues lost to evasion, avoidance or loose national tax regimes.

Development for emerging economies is always going to throw up certain paradoxes about the apparent ‘necessary evil’ of damaging, polluting development projects in the name of increased wealth for the whole of society, but surely there can be little doubt as to the potential for this development to be a little less dirty if the foreign and multinational companies responsible for such projects were forced to pay their fair share.