Climate and Taxes

A duo on a world tour

04.10.2024, Climate justice, Finance and tax policy

Without the polluter-pays principle, international climate policy cannot be funded – without tax justice, it is not feasible. A mini-world tour with an unequal but perhaps soon symbiotic duo.

Dominik Gross

Expert on finance and tax policy

Delia Berner

Expert on international climate policy

More and more activists and multilateral forums around the world are linking demands for tax and climate justice. Protesters at the Fridays for Future parade in Berlin, 20 September 2024. © Keystone / EPA / Clemens Bilan

It is really immediately clear – to be able to afford transitioning away from fossil fuels without major social dislocations, we must raise the requisite funds from those industries that were the first to enrich themselves from them, namely, the fossil fuels industry. Studies show that more than half of all worldwide emissions since 1988 can be attributed to the exploitation of fossil fuels by just 25 companies. No one has ever paid up for the long-term costs being engendered by these emissions, which are causing climate change. At the same time, the profits and dividends accruing to those trading in these fuels have risen continuously. Thanks to the price increases triggered by Russia's invasion of Ukraine, the 2022 profits of oil and gas companies skyrocketed to four trillion dollars

Make polluters pay

It is therefore no surprise that in the context of the urgent need for climate funding for the Global South, and in keeping with the polluter pays principle, the call is growing louder for additional taxation of these companies. This goal has long been present in international civil society under the slogan "Make polluters pay". A current study by the Heinrich Böll Foundation shows that in this very decade, a CO₂ tax on the production of coal, oil and gas, called a Climate Damages Tax, would yield 900 billion dollars in OECD countries for managing the climate crisis.

The call for international CO₂ taxes is almost as old as the Framework Convention on Climate Change itself. As early as 2006, the then Swiss Federal President Moritz Leuenberger used the Climate Conference to call for a global CO₂ tax. Concrete agreement at the UN never stood a chance, however. But in view of the UN negotiations on a new climate finance target at the COP29 this coming November in Baku, pressure is growing for the available funding to be increased. This has recently prompted a range of players and countries to call for international CO₂ taxes or other methods of financing based on the polluter-pays principle. The approaches vary widely, spanning national tax on profits from oil extraction, voluntary contributions from the extraction industry, and legally requiring enterprises to accept climate accountability. All approaches to international taxes will, however, require political will at the national level. Switzerland, too, should levy "polluter-pays" taxes on enterprises that profit from the fossil fuels business, in that way increasing its contributions to international climate finance.

The "gilets jaunes" – or how not to do things

Additional funds could be raised for ecologically restructuring our societies not only by levying additional taxes on fossil fuel producers, but also if governments asked their consumers to pay more. However, if the restructuring is to be not just ecological but also social, caution is advised when deciding on the right type of CO₂ consumer tax. France, for example, has unpleasant memories of the violent street clashes between the "gilets jaunes" (yellow vests) and the police about six years ago in the middle of Paris. Those protests were triggered simultaneously by an increase in the fuel tax (eco-tax) that the French President wanted to levy on every litre of diesel being dispensed by that country's petrol pumps. By his reckoning, it would have garnered an additional 15 billion euros in revenue for the State. But this tax would have affected everyone equally: rich and poor, including people racing their Porsche TDI along empty French country roads, as well as those living in far-flung, non-metropolitan parts of France badly served by public transport and dependent on their rickety diesel vehicles in everyday life. The "gilets jaunes" movement was therefore supported not only by climate deniers and automobile enthusiasts, but also by many people whose already tight monthly budgets would have been busted by this diesel tax. This toxic mix constituted political dynamite. The liberal French government backed down and also slowed the pace of its climate policy agenda. At the same time, President Macron further renounced the reintroduction of a "solidarity tax" on high net-worth individuals, which had been introduced in the 1980s by the long-standing socialist President François Mitterrand, and which Macron had abolished as one of his first official acts in power. That would possibly have taken the social policy wind out of the sails of the "gilets jaunes".

No climate justice without tax justice

Today there is a highly progressive wealth tax with a social and environmental dimension, among other places, on the agenda of the G20 countries. In a report published in November 2023, the NGO Oxfam International concludes that a global wealth tax on all millionaires and billionaires would raise 1700 billion dollars annually worldwide. An additional penalty tax on investments in climate-damaging activities could bring in a further 100 billion dollars. Combining these measures with a 60-per cent income tax on the 1 per cent with the highest incomes would generate an additional 6400 billion. Depending on business cycle and price trends, an excess profits tax can also generate massive amounts of additional revenue. According to Oxfam, such a tax would have raised another 941 billion dollars in each of the years 2022 and 2023 when inflation was high. These measures therefore have the potential to garner an additional tax take of at least 9,000 billion in a single year.

The premise of the 2024 report on the funding of sustainable development published by the United Nations Department for Economic and Social Affairs (DESA) is that the funding and investment shortfalls in connection with the UN Sustainable Development Goals of the 2030 Agenda amount to 2500 to 4000 billion US dollars. Using just the tools mentioned above, the 2030 Agenda could therefore be easily funded up to 2030 – to say nothing of reforms in other areas of development finance. Unlike Macron's diesel tax, a global wealth tax would certainly be in line with the polluter-pays principle within the meaning of international climate policy. According to Oxfam, in 2019, the world's richest 1 per cent accounted for 16 per cent of all global CO₂ emissions. This meant that they produced as much CO2 as the poorer 66 per cent of the world's population, that is to say 5 billion people.

Climate and tax justice on a world tour: an overview of some global approaches and initiatives

Washington D.C. – Climate Damages Tax: Current study by the Heinrich Böll Foundation on a CO2 tax on coal, oil and gas production. While some of the proceeds would be earmarked for the UN fund to cover climate-related loss and damage, another portion would go towards managing the climate crisis domestically. Producing countries in the Global South could also introduce the tax and use the proceeds in their own countries. Increasing the tax annually would also create an incentive to phase out fossil fuels. Civil society endorses this concept.
Nairobi – Africa Climate Summit: Already a year ago, African countries called for global CO2 taxes on the trade in fossil fuels, on marine and air traffic, and also for a global financial transaction tax, in order to boost investment in climate protection.
Baku – Climate Finance Action Fund: As President of COP29, Azerbaijan is keen to build up a climate fund that is fed by voluntary contributions from coal, oil and gas producers. The fund's Board of Directors would decide on the distribution of the monies raised from the participating production industry. The previous COP host, the United Arab Emirates, proved that this is not a good idea. Climate Home News recently uncovered the fact that resources from their newly founded climate fund were being invested in natural gas projects and airports.
Paris – Task Force for Global Solidarity Taxes: Last year, France, Barbados and Kenya formed a task force to work together with other interested countries on ideas for global solidarity taxes applicable to the fossil fuels industry, financial transactions, as well as marine and air traffic. Civil society observers in France, however, view this as both international image cultivation by President Macron and a diversion from international negotiations on climate finance or the UN Tax Convention.
London – Excess profits tax on oil and gas production: Following the outbreak of the war in Ukraine, the United Kingdom introduced an excess profits tax on companies producing oil and gas in the UK, and raised 2.6 billion pounds in the first year. The new Labour Government is planning to further increase the tax rate. The proceeds go into government coffers.
Pari Island (Indonesia) – Lawsuit against Holcim: Pari Island is being flooded with growing frequency and is being swallowed up by the sea, metre by metre. Four residents have initiated litigation in the Zug Cantonal Court against the Holcim cement company over its climate responsibility, and are demanding that the company reduces its emissions, pay compensation for the climate damage they have suffered, and contribute financially towards adaptation to global warming.
Rio de Janeiro – Global wealth tax: In late June, G20 finance ministers discussed a model for the global wealth tax devised by the French economist Gabriel Zucman. In principle, it reflects what Oxfam proposes in its report (see text). As President of the G20 this year, Brazil raised the idea in the club of the world's 20 leading economies. After much fanfare in the early stages, the summit's final declaration could only produce fine-sounding rhetoric. The project had reportedly been hampered, among other things, by disagreement among participants over the question of whether the UN or the OECD should be tasked with working out such a tax.
New York – UN Tax Convention: Negotiations between the 197 UN member governments on the Terms of Reference (ToRs) of a Framework Tax Convention concluded successfully in mid-August. From the very beginning, many countries – especially those in the Global South – had come out in favour of including in the ToRs the creation of more effective climate and environmental taxes as an aim of the Convention in its own right. Despite having been highly controversial, this point is now embodied in the text and promises long-term global progress on climate-related taxes with redistributive effects. Elaborating a global wealth tax with a climate-related dimension would be best placed in the hands of the UN, where the prevailing majority dynamics will ensure that such a taxation model would also reflect the specific interests of the countries in the Global South.
Berne – Initiative for a Future: The Young Socialists wish to impose a 50-per cent tax on inheritances of more than 50 million francs. The Confederation and cantons would then use the proceeds of the tax to "combat the climate crisis in a socially equitable manner and to fund the complete overhaul of the economy that this would require." This is stated in the text of the initiative. As it is well known that the climate crisis cannot be tackled strictly within the borders of Switzerland, the initiative also provides for additional contributions by Switzerland towards the funding of the UN Sustainable Development Goals worldwide.

COP29 – Climate Conference

In November, UN Member States will negotiate a new collective funding target for supporting the countries in the Global South in dealing with the climate crisis. Funding in accordance with the polluter-pays principle is also a part of this discussion. The funding gap is growing dramatically and financial support is simply a necessity if the countries in the Global South are to continue their development using climate-friendly technologies, and avoid more loss and damage thanks to adaptation measures. The pressure for an ambitious funding target is accordingly great, and rich countries are challenged to increase their contributions significantly in the years ahead.

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Article

Eurocentric elation

07.12.2021, Finance and tax policy

In October, the OECD and G20 approved the new international minimum tax for multinational corporations. Hailed in Europe and North America as a historic success, the decision is being sharply criticised in Africa, Asia and Latin America.

Dominik Gross

Expert on finance and tax policy

Pecunia non olet ("Money doesn't stink"): At the G20 summit in Rome at the end of October leaders met in front of the Fontana di Trevi to throw a euro coin minted especially for them into the fountain.
© Roberto Monaldo/Keystone/APA/laPresse

In mid-October, the over 120 member states of the OECD “Inclusive Framework on BEPS”, and ultimately also the G20 countries, decided to introduce a new international minimum tax. Phrases like “Historic agreement!”, “Global tax revolution!”, “Paradigm shift!” rang out in the European or North American public arenas. The enthusiasm was less on other continents: tax justice NGOs from Africa and Asia decried the OECD agreement as a “Tax deal of the rich” and the G24 countries – an alliance of African and Latin American governments from developing and transition countries – were critical of the loss of national tax autonomy that would come with the new rules. It will mean that countries that retain their unilateral digital taxes or introduce new ones would face the pressure of OECD sanctions. In reaction to what the South deems an inadequate deal, the content of which was largely shaped by a compromise between the USA, Germany, France and the leading corporate tax havens such as Ireland, Holland, Luxembourg and Switzerland, the G77 countries (the group of developing countries at the UN) tabled a resolution calling for an intergovernmental body under the UN umbrella to take over political leadership in international tax policy matters from the OECD and which would embody much better representation of former colonial States in the Global South.

OECD minimum tax ineffective from a development policy standpoint

From the standpoint of the Global South, the reform is inadequate for two main reasons. First, the entire commodity trading industry and financial sector have been left out of the tax base redistribution. This means that countries in the Global South, which are heavily dependent on the exploitation of raw commodities, will obtain no additional rights to tax the profits of the commodities industry. Moreover, Pillar One (redistribution of corporate profits from countries of domicile to market countries) applies only to corporations with an annual turnover of 20 billion dollars and profitability of over 10 per cent. Globally, this affects only about 100 corporations – in Switzerland, presumably only such giants as Novartis, Roche, Nestlé and Schindler. This redistribution will benefit mainly rich countries with huge domestic markets like the USA or Germany. Second, the minimum tax rate of 15 per cent foreseen under Pillar Two is set far too low and can only be applied by countries where the head office of the particular corporation is domiciled. And even so, only when these corporations report an annual turnover of more than 750 million. For the Global South, what it sees as the failed OECD reform spells disaster: developing countries are suffering badly from the corporate profit shifting that is possible under the current tax system. According to a calculation done by the economists Petr Janský und Miroslav Palanský (2019), those countries are losing tax revenue of about 30 billion dollars annually through profit shifting to corporate headquarters in the North. But better domestic revenue mobilisation – as defined also by Switzerland among the goals of its technical development cooperation — can only succeed if the outflows of taxable revenue to low-tax jurisdictions are halted. For 40 years now, multinational corporations have been constantly expanding these tax avoidance practices, kindly assisted by their countries of domicile in the Global North. The reform pillars now approved by the OECD and G20 countries will change nothing about this.

Nestlé, Glencore, Socfin: new tax avoidance cases in Switzerland

The insufficiency of the new OECD rules has been borne out by recently revealed tax avoidance cases involving corporations like Socfin (palm oil and rubber trade), Glencore (oil, copper, coal and other commodities) and Nestlé (food) in each of which low-tax jurisdiction Switzerland plays a key role. The study entitled “Cultivating Fiscal Inequality”, recently published by Bread for All, the German Tax Justice Network and Alliance Sud, shows that Socfin declares the bulk of its profits for taxation in Freiburg in Switzerland. Most of the work of the corporation, however, takes place on plantations in Sierra Leone, Liberia or Cambodia, which is where, by extension, value is created. The example of Nestlé in Morocco shows just how indispensable it is to have a strong national fiscal administration: owing to unfair transfer pricing calculations, the tradition-rich Swiss corporation could be liable for record-breaking supplementary tax payments of 110 million dollars. Had the tax authorities been unable to look closely at the corporation’s dealings, this would not have been possible. Yet this is precisely the type of resources that many developing countries lack. Another report published in late October by CICTAR (Centre for International Corporate Tax Accountability and Research), a research NGO, shows profit shifting by the Glencore commodity company from Australia to the Canton of Zug, linked to its coal business. Although there is no direct development policy context in this instance, the study shows how Glencore’s canton of domicile derives direct tax benefit from one of the most climate-damaging businesses in existence. Through its low-tax jurisdictions for multinational concerns, Switzerland is hampering the equitable environmental transformation of global society not only in economic terms but also directly through policy.

Switzerland as advocate for corporations at the OECD

In a coalition with other low-tax jurisdictions like Ireland, Luxembourg, Holland or Hungary, Switzerland always favours the most lax possible reforms in fiscal policy negotiations at the OECD. The country did so again during the most recent reform process. This is revealed in a letter, now made public, sent by SVP Finance Minister Ueli Maurer to the new OECD Secretary-General Mathias Cormann in August. In it, Maurer demands deductions from the minimum tax for members of conglomerates that undertake Research & Development (which favours the interests of the Basel pharmaceutical giants) and suggests an additional rule whereby multinational corporations could deduct from their profit taxes any CO2 taxes they have paid. A preposterous suggestion, considering that through their tax avoidance practices, multinational corporations are undermining global efforts to counteract the climate crisis and would at the same time be compensated for their incentive taxes, which are targeted precisely at climate-damaging practices so as to encourage companies to invest in green technologies.

Cormann’s reply reveals the crazy nature of Maurer’s suggestion. “Carbon taxes are taxes on inputs [what is taxed is the CO2 emitted during production, DG’s note] not income [i.e. corporate profits, DG’s note] and therefore do not fit with the conceptual or design framework of the two pillars”. It is all the more remarkable that Maurer was obviously more successful with his first demand, that of introducing new deductions from the minimum tax for pharmaceutical corporations. In the wake of the OECD agreement, the Federal Department of Finance proudly announced the following in the Handelszeitung as a Swiss success in Paris: by being able to treat personnel and infrastructure costs as deductions, corporations reduce their taxable income by 10 or 8 per cent over the first five years following the introduction of the minimum tax (and thereafter by 5 per cent each time). These deductions will be at the expense of the Swiss tax administration. Not only is the responsible State Secretariat for International Finance (SIF) in the Federal Department of Finance (FDF) not representing the interests of a global community at the OECD, it is not even representing the national interests of Switzerland as a whole, but quite simply and exclusively those of the multinational corporations domiciled here. What this shows is that anyone in Switzerland who stands up for a more just global tax policy and a paradigm shift in the local low-tax jurisdiction cannot rely either on the OECD or on the Federal Council. This is an opportunity for progressive political forces and civil society.

How Switzerland could enhance the OECD reform

The encouraging aspect of this is that the minimum tax calculated by the OECD could be improved with relatively few technical changes such that it would also benefit even poor countries where production takes place. The vehicle for this would be the Minimum Effective Tax Rate (METR) for multinationals – developed by civil society players in international cooperation with economists and tax lawyers. Basically, it relies on the same technical concepts as the minimum tax of the OECD. But first it remodels the OECD’s minimum tax in such a way that the METR can be implemented by individual countries or jointly by groups of countries. Unlike the implementation of the OECD’s Pillar Two, this would not require a new multilateral agreement or changes to existing bilateral double-taxation agreements – yet another flaw in the OECD concept. Second, the METR is equally applicable to countries of domicile of corporations, countries that are sales markets and those where production takes place. This entails first calculating a corporation's total undertaxed profits. Undertaxed profits are defined, as in the OECD proposal, in terms of a minimum tax rate. Whatever falls below this rate is deemed undertaxed. Whereas the OECD’s Pillar Two prescribes a minimum tax rate of 15 per cent, the METR would presuppose a rate of 25 per cent, being guided by the current global average, which is just below that.

In a second step, these undertaxed profits would thus be allocated to those countries in which a corporation effectively creates its value. This is based on formulary apportionment, which considers (a) the capital base (physical assets), (b) payroll, and (c) sales of a corporation in a particular country.

In a third step, individual countries could autonomously tax the profits apportioned to them in accordance with their national tax legislation. This would ensure, at least in part, that a multinational corporation’s profits are in fact also taxed in the place where a certain profit-generating value is produced (in the countries of production) or sold (the market countries). The question arises however, as to whether countries that implement the new OECD rules can simultaneously introduce a minimum tax rate higher than the 15 per cent OECD rate. This would have to be a condition, if the METR is also to benefit developing countries, most of which currently have profit tax rates above 25 per cent. But it is left up to the free will of member countries of the OECD Inclusive Framework to decide whether they wish to introduce the OECD minimum tax rate.

Assuming that Switzerland were politically prepared to rethink its basic business model for dealing with multinational corporations, the country would be predestined for the introduction of the METR. As a leading host country to multinational corporations, it possesses the requisite information about their business practices to be able, at the fiscal policy level, to press ahead with implementing the METR. Besides, the country would be well-placed to find partner countries for this system, as Switzerland’s corporate taxation considerably influences the fiscal situation of a great many countries that are linked to this country through the respective multinational corporations. Were Switzerland to seek these partners, for example among the countries in the Global South where its corporations exploit commodities, or among emerging countries that serve as market outlets for Swiss consumer goods producers of the likes of Nestlé or Procter & Gamble, introducing the METR would considerably enhance the efficaciousness of Switzerland’s development policy.

Article

New tricks with the tonnage tax

03.10.2022, Finance and tax policy

What the Federal Council and corporate lobbies are portraying as innocuous support for the shipping industry could prove the biggest tax loophole for Swiss commodities groups and circumvent the new OECD minimum tax.

Dominik Gross

Expert on finance and tax policy

The commodities sector benefits from the crisis – and soon from lower taxes in Switzerland?
© Stefanie Probst

In the view of advocates of Switzerland’s low-tax policy, commodity trading companies in Switzerland have come up somewhat short in recent years. Under the most recent corporate tax reform in 2019 (tax reform and AHV financing, TRAF), the Confederation scrapped the old tax privileges for holding and mixed companies (whereby Swiss corporate profits generated abroad were subject to zero taxes), from which the commodity groups had benefited substantially in the past. While the conservative majority in the federal parliament created new and special deductions for pharmaceutical and consumer goods companies custom-tailored to these industries to compensate for the old privileges, the commodities industry was left empty-handed. This is now to be corrected through the “tonnage tax”. Ostensibly, it is merely a tax break for Swiss shipowners, but as noted by the Federal Council in its dispatch on the tonnage tax, there are very close ties between them and commodities traders. Besides, it is already the case today that, if a commodities trader allows its intra-group shipping company to charge inflated freight rates – which cannot be detected in practice – profits of other companies in the same group can be reduced and taxes avoided in that way.

Rebirth of a concept already written off

During the most recent company tax reform, the Federal Council had removed the tax from the options, primarily out of concerns over constitutionality. With the tonnage tax, vessels are no longer to be taxed on the basis of the profits they earn for their operators, but based on net tonnage. The “net profit” thus obtained from navigation is then imputed to a firm’s profits from its other fields of activity. As this would mean that the taxation of certain companies would in principle diverge from the regular profit taxation method, the Federal Council at the time questioned its compatibility with the constitutional principle of taxation based on economic performance, and commissioned two legal opinions on the matter. In 2015, they both reached opposite conclusions. Robert Danon from Lausanne reached a negative conclusion, while Xavier Orberson from Geneva confirmed the constitutionality of the approach. Both law professors, by the way, hold lucrative mandates with business law firms that undertake tax optimisation for corporations. The key difference between the two opinions is that, unlike Danon, Orberson sees an existential threat to Switzerland’s maritime shipping industry and therefore considers the introduction of this flat rate taxation to be warranted under article 103 of the Swiss Federal Constitution as a structural policy measure. Considering the enormous importance of shipping to the world economy and how closely it is intermeshed with commodities traders – which are among Switzerland’s biggest and most profitable companies – that is a rather odd statement. At the time, the issue was too much of a hot potato for the Federal Council, whereas today, that body has obviously overcome its doubts even though the constitutional backdrop remains unchanged. In addition to misgivings about its constitutionality, the proposed law raises two other key problems:

Taxation level: This would diminish significantly across all Swiss cantons compared with the regular profit tax rates. As the legal scholars Mark Pieth and Katrin Betz show in their new book on Switzerland’s shipping industry, the introduction of the tonnage tax means an average effective profit tax rate of roughly 7 per cent. That is substantially below the 11 per cent accorded to Glencore and other companies by Zug the commodity hub – and Switzerland’s fiscally most advantageous canton. In addition, the more environment-friendly the propulsion systems of vessels, the greater the tax relief the Federal Council is prepared to grant. If the maximum assessment of 20 per cent is accorded, average taxation can fall to as low as 5.6 percentage points. What is especially scandalous about this is that the Federal Council wishes to exclude profits subject to the tonnage tax from the new OECD minimum tax, which is designed to ensure that multinational corporations in Switzerland are taxed at a rate of at least 15 per cent. The introduction of a tonnage tax therefore circumvents international efforts to stop the “race to the bottom” in corporate taxes at what is already a very low level.
Lacking environmental and labour standards on ships: The Federal Council and, up to now, also the Economic Affairs Committee of the National Council (the latter body is not expected to complete its discussion of the matter until 15 November) have been reluctant to tie the new tax privilege to what is known as a flag State requirement. That requirement would mean that shipping companies could benefit from the tonnage tax only in the case of ships sailing under the Swiss flag or the flag of a European Economic Area member State (EU countries plus Iceland, Norway and Lichtenstein). That would be an incentive to shipowners not to transfer their vessels to so-called flags-of-convenience countries, which constitute quasi-legal vacuums in the shipping industry, where they hardly need to comply with any government requirements in order to pursue their business. In the case of ships sailing under the Swiss flag, operators could be held to better environmental and labour standards. Pieth and Betz are of the view that “however problematic the tonnage tax may be,[…] it would still have indirect advantages: anyone having to register at least 60 per cent of their fleet under flags from the European Economic Area or the Swiss flag would potentially be subject to EU rules against unregulated scrapping in south Asia. However, the debate around corporate social responsibility in Switzerland also shows that the desire for higher standards in terms of the economy and human rights is rather modest within the ranks of the conservative majority in Federal Berne.

Constitutionally questionable, circumventing the OECD minimum tax and devoid of labour and environmental standards – introducing the version of the tonnage tax that is currently under discussion in the National Council’s Economic Affairs Committee would do credit to Switzerland’s dubious reputation as a tax haven for corporations. Besides, the companies that would stand to profit most are the very ones that garnered record profits on the back of the war and the energy crisis. Based in Baar in Zug, Glencore – the world’s second biggest oil trader (after Vitol, also headquartered in Switzerland) – generated a record profit of US$12 billion for the first half of 2022. Rather than provide additional scope for tax dumping by these war profiteers, the National Council and Council of States should bring in an excess profits tax to tap into these war profits and use the proceeds to help fight the multiple global crises.

Press release

Tax optimisation at the expense of the poorest

20.10.2021, Finance and tax policy

The agribusiness group Socfin shifts profits from commodity production to the low-tax canton of Fribourg. This tax avoidance goes hand in hand with profit maximisation at the expense of the population in the affected regions in Africa and Asia.

Dominik Gross

Expert on finance and tax policy

+41 31 390 93 35 dominik.gross@alliancesud.ch

Tax optimisation at the expense of the poorest

The rubber plantation of the Salala Rubber Corporation (SRC) in Liberia covers about 4500 hectares of land.
© Brot für alle

A report by Bread for all, Alliance Sud and the German Network for Tax Justice on the tax strategy of agribusiness corporation Socfin reveals how multinational companies can shift profits from countries where they produce commodities in Africa and Asia to tax havens like Switzerland. These strategies are highly unjust, even if they may comply with OECD rules. Tax avoidance of this nature is tantamount to extracting profits at the expense of people in the countries of production.

Download the Report: Cultivating Fiscal Inequality: The Socfin Report

Publication

The upcoming referendum on corporate tax reform

22.01.2019, Finance and tax policy

On 19 May, Switzerland votes again on its corporate tax reform, which Parliament has linked to additional funding of its pension system (AHV). From a development policy point of view, the tax proposal does not represent any significant progress.

Dominik Gross

Expert on finance and tax policy

The upcoming referendum on corporate tax reform

The linking by Parliament of two not related subjects - corporate taxation and AHV financing - is widely referred to as horse-trading. (in German: cow-trading)
© Pixabay

After the 50‘000 necessary signatures for a referendum against the STAF (Steuervorlage und AHV-Finanzierung) have been submitted, the Swiss voters will again decide on the pending corporate tax reform. Alliance Sud's tax policy analysis (available in German only) shows that, from a development perspective, the proposal does not represent any significant progress compared with Corporate Tax Reform III (USR III), which was rejected two years ago. Once again, the old special tax regimes that are detrimental to development are to be replaced by new ones.

The current proposal would bring Swiss corporate taxation into an internationally accepted form and finally abolish the old special tax regimes exclusively for foreign group profits taxed in Switzerland. This is very welcome from a development point of view. At the same time, however, it creates new opportunities for multinational corporations to shift profits. By shifting profits to low tax jurisdictions such as Switzerland, multinationals are depriving developing countries of an estimated 200 billion dollars of potential tax base every year.

Alliance Sud's detailed analysis of new tax dumping vehicle within the STAF shows that the envisaged new Swiss corporate tax policy is not compatible with the goals for sustainable development set out in the UN Agenda 2030 (Sustainable Development Goals SDG). As the country with the highest per capita density of headquarters of multinational corporations, Switzerland has a special responsibility in the fight against global social inequality and for adequate financing of Agenda 2030.

Due to the tax dumping of low-tax jurisdictions such as Switzerland, corporate taxation has been falling worldwide for decades. This prevents the most urgent public provision of health, education and infrastructure services to disadvantaged population groups in developing countries. Switzerland is not a freerider on the train that is pulling global corporate taxation into the abyss - it is rather one of the locomotives and will remain so with the STAF.

Despite the considerable shortcomings in the tax section of the bill, Alliance Sud refrains from a voting recommendation. The AHV part of the bill concerns a domestic policy issue that goes beyond the organization's development policy mandate. At the same time, the Alliance Sud members have different views on the question of the extent to which a developmentally just corporate tax reform is also possible beyond the current proposal. It is clear that such a reform remains necessary regardless of the result of the May vote.

Article, Global

New York instead of Paris!

18.06.2023, Finance and tax policy

In 2016, the OECD promised to reform the international tax system such that it would also serve the interests of the Global South. Seven years on, the OECD has clearly fallen short of its own ambitions. It may now be time for the UN to step in.

Dominik Gross

Expert on finance and tax policy

"Let’s keep the money in Switzerland". This is what could be seen on the posters of those supporting Switzerland's introduction of the OECD minimum tax. With this simple slogan, and the kind assistance of the centre-right parties, the business associations economiesuisse and SwissHoldings were able to win the vote on 18 June. As of 1 January 2024, the Federal Council can enact the minimum tax. Should it in fact generate substantial amounts of additional revenue in Switzerland, those funds will go towards promoting Switzerland as a business location. This would be tantamount to channelling the additional revenue back to the very corporations in Switzerland that extract more than USD 100 billion annually in taxable funds from other countries, thereby assuring Switzerland's low-tax cantons like Zug and Basel City of generous profit tax revenue. The mere possibility of implementing the minimum tax in such a way is evidence of the failure of efforts by the Paris-based Organisation for Economic Cooperation and Development (OECD) over the past decade to shape a more just worldwide tax system. That is hardly surprising. For although more than 140 countries took part in negotiating the minimum tax, including some emerging and developing countries, once again it was the interests of the rich countries in the Global North that prevailed in this framework.

Level playing field only at the UN

The history of the "inclusive framework" created in 2016 by the OECD is also a factor at play. What was promised at the time was a level playing field for all countries. But the condition for admission to this OECD framework is adopting the rules against "Base Erosion and Profit Sharing" (BEPS), which were worked out in the preceding years exclusively by the OECD's 39 Member States (mainly rich countries of the Global North). More than 100 developing countries were excluded from this process. As a result, these rules are tailored to suit the countries of the North, and the price of "inclusive framework" membership for developing countries is therefore high. The countries of the Global South, where the bulk of production is located in today's global economy, will see very little of the roughly 250 million in additional revenue being anticipated by the OECD as a result of introducing the minimum tax.

An alternative is now needed, and it is currently taking shape in New York. At the end of last year, the UN General Assembly adopted a resolution put forward by the African group of countries and the G77 (comprising all developing countries), designed to launch the groundwork for a draft UN convention on tax cooperation. Like the UN Climate Convention, which has influenced the pace and direction of global climate policy since 1992, it would create a truly inclusive multilateral framework for international tax policy. This would pave the way for elaborating and negotiating global tax policy principles for the world, and which would redress the fundamental imbalance between North and South in today's global tax system. A UN tax convention would lay the groundwork for multilateral rules on a tax system that is grounded transnationally, and hence no longer based on bilateral treaties. Under the present system, a few multilateral treaties do in fact supplement rules that are enshrined in bilateral double taxation agreements (DTAs), which ultimately determine just how countries divide up the taxable revenue generated from cross-border financial flows in the world economy. This often takes place at the expense of developing countries which, given their economic weakness, often lose out in bilateral negotiations of DTAs with countries in the North.

Time for global taxation

A UN framework convention on tax policy would also be a condition for effectively working towards the global taxation of multinational corporations. The present tax system treats individual subsidiaries of multinationals in different countries like separate companies. Accordingly, corporations should be taxed in each country based on the profits they generate there. For decades now, profit-shifting has indeed been a major problem for countries with relatively high tax rates. Many countries are losing billions in tax revenue each year because multinational corporations do not declare their profits for tax purposes in the places where they actually create value, but instead where profit tax rates are the lowest. A global unitary taxation with formulary apportionment would render profit-shifting obsolete, as individual subsidiaries of multinational corporations would no longer be taxed by country, and corporations would therefore no longer have an incentive to book their profits in places with the lowest tax rates. Instead, all profits from all countries where a corporation is active would be added up and the profit tax base allocated to each country according to a formula that considers the number of workers per country, sales, and physical assets (such as factories). Countries would in turn tax these profits in keeping with their domestic tax regulations.

The Office of UN Secretary-General António Guterres is currently drafting a report on the creation of a tax convention, and this will be tabled in September in New York following consultations with UN Member States and stakeholders. The Global Alliance for Tax Justice (GATJ) and the European Network on Debt and Development (Eurodad), of which Alliance Sud is a member, are very actively involved in this process.

Switzerland opposes it

Switzerland did vote in favour of the resolution in the General Assembly. However, in replying to an interpellation from National Councillor Fabian Molina, the Federal Council stressed that while it supports "a review of the institutional framework for international cooperation in tax matters" at the United Nations, it is opposed to the creation of a UN tax convention. The Federal Council is obviously convinced that it knows better than the developing countries themselves what is good for them. Thus, writing very much in the old colonial and paternalistic style, it states: "On the other hand, the Federal Council deems the usefulness of a United Nations tax convention to the position of developing countries to be questionable."

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Corporate taxation

Switzerland is a world-leading location for multinational corporations and, with its very low profit taxes, a popular destination for profit shifting.

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What it is about

Each year, Swiss corporations shift profits worth more than 100 billion dollars to the low-tax jurisdiction that is Switzerland. This boosts tax revenues in the cantons of Zug, Basel Stadt, Vaud or Geneva. In countries that cannot afford to promote aggressive tax avoidance, such revenues decline dramatically. Profits are not taxed where they were generated, but where company tax rates are the lowest.

Switzerland has reformed its corporate taxation law several times since 2016. Yet, the scope for corporations to shift profits has hardly diminished. This substantially reduces the tax base mainly of countries in the Global South. Alliance Sud is committed to ending this tax avoidance through greater transparency and better cooperation, especially with countries in the South.

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