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News, 6/18/2012

Tax revenue lost by States under investigation

The Tax Justice Network, KEPA and the Ministry for Foreign Affairs organised an international expert seminar in Helsinki from 13 to 15 June. The seminar concentrated on current transfer pricing principles and their alternatives. Minister for Foreign Affairs Erkki Tuomioja and Minister for International Development Heidi Hautala opened the seminar.

Tax evasion by multinational corporations causes difficulties to developing countries. The most common method for companies to avoid taxes is to abuse transfer pricing, i.e. to trade between sister companies at artificial prices. Profits are transferred to tax havens or to countries with low tax rates.

Timo Lappalainen of KEPA, International Development Minister Hautala, Foreign Minister Tuomioja, and Matti Kohonen of the Tax Justice Network discussed the principles of transfer pricing at the seminar arranged in Helsinki. Photo: Eero KuosmanenTimo Lappalainen of KEPA, International Development Minister Hautala, Foreign Minister Tuomioja, and Matti Kohonen of the Tax Justice Network discussed the principles of transfer pricing at the seminar arranged in Helsinki. Photo: Eero Kuosmanen

In practice, this means that the company can sell the raw materials produced in the country of origin at a low price to its sister company located in a tax haven. From there, the products are sold at a high price to a company located in a third country. In this way, no tax needs to be paid in the country of origin or in the country where the product is sold to consumers.

The OECD estimates that about 60 per cent of world trade consists of intra-group transfer pricing. Owing to the abuse of transfer pricing, the tax revenue lost by developing countries exceeds the development aid they receive.

Problems in the global North

In his address, Minister for Foreign Affairs Erkki Tuomioja linked the tax evasion problem to the European debt crisis. “The Ministry for Foreign Affairs also supports the seminar because we want to avoid crisis meetings,” he explained. In addition to measures against tax havens and tax evasion, Minister Tuomioja advocated the financial transaction tax as a means of stabilising the economy.

Tuomioja pointed out that the EU Member States are also part of the problem. “We have countries in the EU where tax avoidance has been characterised as a national sport,” the Foreign Minister said.

Minister for International Development Heidi Hautala stressed that the challenges existing in the utilisation of natural resources and taxation are also associated with the global North. An example is the mining boom in Lapland. “A new treasure hunt has started,” she warned. Timo Lappalainen of KEPA (Service Centre for Development Cooperation) reminded the audience that Finnish companies also use tax havens and avoid taxes.

Proposals for solutions

Minister Tuomioja underlined that solving the problem of tax evasion requires that the issue of tax havens be tackled. Among the means he proposed were stricter reporting obligations and automatic exchange of tax information. Tuomioja also stressed in his address that companies should understand that they, too, benefit from tax payments: “Everyone pays and everyone benefits.”

“We must close the loopholes that prevent developing countries from benefiting from their natural resources,” said Minister Hautala in her opening address at the seminar on transfer pricing on Wednesday morning.

“Finland is ready to increase direct budget support to countries that try to build workable tax systems,” Minister Hautala explained her view. She also underlined the importance of civil society and the freedom of the media.

Efficient transfer pricing rules are one element in eradicating tax evasion. Minister Tuomioja said that the seminar does not necessarily result in a common view of workable transfer pricing. Multi-stakeholder cooperation, applied in the Helsinki Process, is extremely important for attaining results.

“We want a system that is equal and does not distort the market to the benefit of large, multinational corporations,” John Christensen, Director of the Tax Justice Network International Secretariat, said in defining the policy. Most would probably agree with him on that.
 

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Updated 6/18/2012

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