Covid-19 — will tax justice finally triumph?
The corona crisis is the story of health workers working around the clock to save lives and a health system pushed to the brink by budget restrictions. But it is also the story of money lost because of tax evasion and tax avoidance practices.
Sophie Lemaître — Senior Advisor at U4 leading on illicit financial flows (IFF)
The Covid-19 pandemic has exposed the deprived state of health systems around the world and the struggle faced by health workers. It has shown the poor conditions under which they must work due to the shortage of beds, protective equipment, and the lack of medicine. How did we end up here?
Over the past few years, government health expenditures have been dramatically cut in a drive to reduce public spending. In 2013, national health expenditure was below 5% of gross domestic product (GDP) in many countries. In Africa, countries have cut their social expenses to access financial support. They now lack sufficient human and financial resources to face the crisis. For example, Mali has three ventilators per million people, while in Sierra Leone, the government has only one ventilator for the whole country.
Mali has three ventilators per million people; Sierra Leone has only one ventilator for the whole country
The race to the bottom
While slashing health budgets, governments around the world have aggressively reduced taxes, such as those on wealth or corporate income. They have at the same time offered numerous tax incentives to attract investment. Yet, the Panama Papers, the Paradise Papers, and the Mauritius Leaks have shown how creative some companies and individuals are when it comes to avoiding taxes. The global loss of revenues due to corporate tax avoidance is estimated to be around US$ 500 billion annually.
In the UK, 25% of tax corporate revenues are estimated to be lost because profits from companies are shifted to tax havens. The UK was identified by Tax Justice Network ‘as part of an “axis of tax avoidance” consisting of the UK, Switzerland, the Netherlands and Luxembourg that costs EU countries over £27 billion a year in lost corporate tax to profit shifting’. The recent announcement of the creation of ten new free trade zones in 2020 by the UK government will likely boost this axis of tax avoidance. Freeports are well known to provide tax avoidance opportunities and be at high risk of money laundering.
Health and tax avoidance, an interlinked story
The link between tax avoidance and the health system is clearly illustrated in an interesting piece of research published last September by the World Health Organization (WHO). Here, Bernadette Ann-Marie O’Hare compared estimates of international corporate tax avoidance and domestic government health expenditure for 2013 from 100 countries. She showed that revenues lost from corporate tax avoidance were bigger than government health expenditure. If the revenues lost to tax avoidance were allocated to the health sector, ‘the annual government health expenditure could increase from US$8 to US$24 per capita in low-income countries and from US$54 to US$91 per capita in lower-middle-income countries’. In other words, if governments were to recover taxes lost due to tax avoidance, they could fund public hospitals, improve the quality of health care, as well as provide the necessary means to health workers to do their work under good conditions.
If governments were to recover [lost taxes], they could fund public hospitals, improve … health care, [and] provide the … means to health workers to do their work under good conditions
Since the beginning of the Covid-19 outbreak, numerous companies and wealthy individuals have made large donations to help fighting the coronavirus (e.g. France, Italy, and Spain). Their actions are welcomed, and their efforts should be commended. However, we should not forget that some of them were named in recent scandals revealed by investigative journalists for their suspicious tax practices. For example, Barclays and HSBC, two banks that have had their tax practices questioned over the years, announced large donations to support vulnerable people impacted by the pandemic in the UK. The Kering Group has recently made different donations in France and Italy, while the group agreed to pay 1.25 billion euros in May 2019 to settle a dispute with Italian authorities over its tax practices.
‘It has become evident that those who do not pay taxes do not only commit a felony but also a crime: if there are not enough hospital beds and artificial respirators, it is also their fault’, said Pope Francis on March 18, quoting an article from Fabio Fazio. This should remind us of the important impact of tax avoidance practices on the ongoing crisis.
We already know the solutions: over the last decade, experts, researchers, and civil society organisations have proposed options to end tax injustice. But will governments, finally, have the willingness and courage to tackle this issue? Will they dedicate the resources and finance to fight tax evasion and avoidance practices, to recover funds and allocate them to essential public services such as the health system? Will they take appropriate tax measures to recover from the Covid-19 outbreak, implement and enforce them, and avoid adopting measures that could increase inequalities?
Will governments, finally, have the willingness and courage to tackle this issue?
In late April, several governments made sensational announcements (e.g. Denmark, Poland, Belgium, and France): companies which are (or have subsidiaries) registered in tax havens will not be eligible to benefit from any aid programmes. Companies are now expected to pay their fair share of taxes.
These announcements are laudable. However, the efficiency and impact of these measures will largely depend on which countries are identified as ‘tax havens’. Already, countries such as the Netherlands, Luxembourg, Switzerland, Hong Kong, or Singapore — which have been named in many scandals for their role in facilitating tax evasion and avoidance practices — have been excluded from the list of countries identified as tax havens by Denmark, Poland, Belgium, and France. These measures may well just be purely cosmetic.
Can the era coming after Covid-19 be a new era for tax justice? Let’s hope so!
A version of this blog was first published in Le Monde:
All views expressed in this post are those of the authors, and do not necessarily reflect the opinions of the U4 partner agencies, or CMI/U4.