Climate Hells vs. Tax Havens: The Next Century's Dividing Injustice
Image By: University of Birmingham
In 2021, Charles Rettig, former commissioner of the Internal Revenue Service (IRS), the agency responsible for levying tax in the US, estimated that $1 trillion was lost through tax evasion. By comparison, the US federal government deficit of the fiscal year 2023 was estimated to be $1.5 trillion. According to the think-tank Brookings, funding of the IRS has gone down 15% from 2008 to 2017, while each dollar invested into the overall IRS budget was estimated to yield more than $5 in recovered tax revenues. Much of this tax evasion was lost through complex tax schemes involving off-shore companies in tax havens. How come developed countries like the US do not use their significant influence to push tax havens—that are often tiny atolls—into respecting fiscal conventions to recover these vast sums?
Besides, developing countries are much more vulnerable to these tax evasion schemes. This is particularly unfair if one considers the colonial history that led them, and still contributes to their economic hardships. This dimension intersects with the historical responsibility that developed countries hold in their former colonies’ climate mitigation and adaptation burden.
A deluge of capital
Every year, between $500 and $600 billion of corporate tax revenues globally escape from the hands of governments because of tax havens. Of these, $200 Bn come from the hands of low-income countries that desperately need these revenues to fund development programs and climate change mitigation and adaptation policies. For comparison, this is more than the $150 Bn of foreign aid they receive yearly. To this hefty bill must be added tax losses incurred by individuals, but these are very difficult to estimate as the essence of a tax haven is, of course, its secrecy. Depending on the estimation, total financial wealth stashed in tax havens ranges from $9 to $36 trillion, representing around 10% of global GDP. This estimate does not even include off-shore real estate which is even harder to estimate. All of this unreported wealth results in a yearly loss from individuals that roughly equals $200 Bn. These estimates can be made thanks to partial samples of document leaks—namely the notorious Panama Papers—channeled to the public through consortiums of investigative journalists like the ICIJ. Other methods include extrapolating from direct foreign investment origins and discrepancies in tables of national accounting.
A case-study of tax-evading schemes is the “Base erosion and profit shifting.” It begins with the establishment of company A in a country with standard taxation, followed by the creation of subsidiary B in a tax haven. The process involves accruing expenses within company A while channeling profits into subsidiary B, as exemplified by Apple, which, faced with a 35% tax rate on its U.S. profits, strategically decided to pay substantial royalties to its Irish subsidiary (subject to a 2% tax rate) for patents and brands, and subsequently transferred these profits from Ireland—where transfers are not taxed for foreign investors—to another tax haven. Still, developed OECD countries are proportionally less vulnerable to this corporate tax evasion than developing countries whose limited capacity to levy taxes is much more reliant on the corporate tax collected on foreign multinational firms.
innocent, accountable
In 2015, according to an Oxfam report, the richest 10% were responsible for 49% of GHG emissions while the poorest 50% were responsible for 7%, and this carbon footprint is still expanding. Although developing countries have a vastly inferior historical responsibility in greenhouse gas emissions, they are at the center of climate change’s environmental consequences. Tropical and equatorial regions are associated with an ever-increasing climate vulnerability to natural disasters: stronger heat waves, hurricanes, monsoons, floods, droughts, and rising sea levels. These regions are also associated with lower incomes, inducing a reduced capacity to fund adaptation policies. According to risk-management firm Aon, the global economic costs of the 421 natural disasters in 2022 were $313 billion. These disasters, combined with economic reliance on rain-fed agriculture, mean that depending on whether the emission scenario is high or low, these 40 countries (deemed “fragile and conflict-affected states” by IMF) risk losing 5 percentage points of per capita GDP. Still, when accounting for GHG emissions, developed countries are quick to point out their counterparts’ responsibilities in national emissions. Only, the irony is that the emerging countries’ responsibility is a consequence of their substantial exports to developed countries. This underlying responsibility of wealthy countries is better reflected in their carbon footprint, as well as their companies’ investments in fossil fuel projects abroad. If emerging economies are to be put under the spotlight, it should be to stress the growing importance of preventing a carbon lock-in. Indeed, China and other BRICS’ continuous investments in coal in the coming decade, could “lock us in” a fossil fuel infrastructure system, and exhaust our carbon budget for the century. That is why developed countries need to incentivize developing countries to focus their sizeable energy infrastructure investments in clean technologies right now whether it is through climate change adaptation funds subsidies or through fostering climate justice by other means.
guilty, unaccountable
How can we explain the developed countries’ passivity in the face of such stakes? Fighting tax avoidance and competition, a negative-sum game, should be in everyone’s interest, and heads of state regularly make declarations showcasing their determination to crackdown on this injustice. Although developed countries have both the coercitive and legal power through the OECD to stop this situation, we have yet to see results: scandal after scandal, tax losses seem bottomless. The OECD is responsible for establishing international taxation norms and enforcing cooperation with recalcitrant taxation agencies through common information reporting standards while the UN can only give advice on fiscal policy. Still, since the Panama Papers scandal, we have seen significant progress in reporting standards that allowed for the reporting of 70% of wealth held in tax havens, and a subsequent decrease in tax evasion. In 2021, a G20 international agreement to enforce a minimum 15% corporate tax rate was reached to ‘end tax competition’.
However, the OECD is merely a reflection of the shortcomings of its 38 member states, consisting of developed countries that advocate for their own interests. Maintaining the status quo in taxation has advantaged developed countries for decades: it favors their firms and still allows them to recover some taxes (comparatively more than developing countries who have less means of fighting tax evasion). Recently, weakening clauses like tax credits and accounting loopholes were added to the 15% minimum corporate tax deal that are estimated to decrease the expected increase in global corporate tax from 10 percentage points to 5. Indeed, the imperfect norms of taxation that put the emphasis on a multinational’s legal headquarters in developed countries are an old legacy of their historical recourse to using colonial subsidiaries since the end of the 19th century. The Panama Papers and ulterior scandals have revealed how elites, both financial and political, continue to profit from tax evasion. It is thus reasonable to think that together with lobbies they attempt to slow down an already difficult progress in their own interests, albeit, against the public good. The fact remains that recent progress has shown that unfair tax competition is not a fatality, policy solutions exist and have already been trialed and assessed. In view of the climate justice challenges ahead, it is urgent to act to push for their implementation so that developed and developing countries can finally come together in the fight against climate change.