According to the realist school of political science, the global political system is essentially anarchic; there is no ultimate global legal authority. “Realists” see a world governed by the law of the jungle.
We have the United Nations, but it has limited enforcement power. The United States sometimes assumes the role of global cop, but enforces global norms selectively.
For many of us who grew up in the western middle-class, the world can seem a well-ordered environment where the rule-of-law prevails. But revelations from the Panama Papers pulled back the curtain on what – even in the 21st century – can be a lawless international tax system, and one in which some western elites are deeply implicated.
The lack of a cohesive, comprehensive international tax system is an excellent example of the essential lawlessness of the global system. The hodgepodge of initiatives and fora tasked with addressing the problem of moving money illegally from one country to another (IFF or Illicit Financial Flows as they are usually known) includes the Global Forum for Transparency and Exchange of Information for Tax Purposes (OECD), the Multilateral Convention on Mutual Cooperation in Tax Matters (OECD), the Extractive Industries Transparency Initiative (EITI), Base Erosion and Profit Shifting project (OECD + G20), the United Nations Tax Committee … I could add half a dozen more but fear your attention may wander.
But although within this proliferation of organisations there is important work being done, there is little coordination and many gaps, making it easy to avoid regulations and oversight. Estimates vary, but Global Financial Integrity states that in 2013 developing nations lost $1.1tn to IFFs.
And illegality is only part of the problem. As President Obama said recently: “The problem is that a lot of this stuff is legal, not illegal.” The lack of a coherent global tax infrastructure allows some global elites to avoid paying taxes, without breaking the law. When there are Panama, Luxembourg, and Nevada-size holes in international tax law, there’s no need to act criminally.
Companies and individuals can act with impunity, mainly because of gaps in tax law. The Panama Papers show that the majority of tax avoidance is technically legal. The International Consortium of Investigative Journalists (ICIJ) state that Mossack Fonseca, the Panama-based firm at the center of the scandal, is hardly scorned by respectable society. ICIJ points out that the firm, “has worked closely with big banks and big law firms in places like the Netherlands, Mexico, the United States and Switzerland, helping clients move money or slash their tax bills,” adding, “More than 500 banks, their subsidiaries and branches have worked with Mossack Fonseca since the 1970s to help clients manage offshore companies. UBS set up more than 1,100 offshore companies through Mossack Fonseca. HSBC and its affiliates created more than 2,300.”
While most of us get on with the dull but necessary job of filling out forms or visiting accountants during tax season, prime ministers, princes, and presidents in rich and poor nations fortify their off-shore companies and shift money to their preferred tax haven.
There have been a flurry of recommendations on how to build a more coordinated global tax system. But there is disagreement on where a global tax authority should be based. Some civil society organisations call for the UN to be the global tax forum. Others have focused on strengthening existing regional anti-corruption organiations such as the Organization for Economic Cooperation and Development (OECD).
The exit of the UK from the EU further complicates an already difficult process of coalescing global tax policy and the increasing calls for more tax transparency. Some analysts have stated that the Brexit could lead to a diminution of the UK’s “strong voice within the EU pushing for measures to 1) increase transparency …2) reduce international tax avoidance … and 3) reduce corruption. To the extent that the EU position on these issues matter, that may slow progress across the world.”
In April, the UN, OECD, International Monetary Fund, and World Bank announced “The Platform for Collaboration on Tax” to build on previous OECD efforts. While it was promptly criticised by some advocates, there’s no doubt that the Panama Papers increased momentum for fairer global tax policy.
The good news is that, in spite of the volatile international context, ideas and campaigns on this subject are beginning to converge at last. Save the Children is part of this convergence – in the developed and developing worlds – committed to addressing IFFs. The recently launched Every Last Child campaign includes fair finance as a central component in reaching the world’s excluded and vulnerable children.
For its part, Save the Children is committed to making finance – at multiple levels – fairer so that the world’s vulnerable children are able to survive, thrive, and enjoy secure lives. The Panama Papers revealed that the weakness of the global tax infrastructure, but the outrage it sparked could lead global tax policy to be less like the “Wild West” and more like tax season.