Financial Transparency Coalition

By Neeti Biyani (Centre for Budget and Governance Accountability) and Alvic Padilla (Christian Aid)

In the space of a few weeks, our highly interconnected world was brought to its knees by the COVID-19 pandemic. The resulting human, social and economic crises are the worst we’ve seen in a century. Job losses, unemployment and business closures have already eclipsed those in the aftermath of the financial collapse of 2007-08. The devastating impacts of the pandemic are pervasive, but they are worse for countries in the Global South, disproportionately affecting marginalized sections of the population, such as people living in poverty, informal workers, women, migrants, refugees and the elderly. Increasingly, people are turning to their governments for intervention, but will these resources be adequately directed to those who need it the most?

Governments are responding to the crises with fiscal plans amounting to trillions of dollars, with some countries spending more than 20% of their GDP in stimulus packages. While countries are pursuing paths of direct benefits transfers and wage subsidies directed at the poor and wage earners, big businesses and multi-national corporations (MNCs) are receiving the largest share of bailouts – and this is a cause for concern.

‘For whose benefit?’

First, corporate bailouts divert public funding from micro-, small- and medium-sized enterprises (MSMEs) which rarely have more than a month’s worth of operational reserve but employ the biggest chunk of the working population in developing countries. This is sure to result in cascading unemployment and business closures in the medium term, if by some stroke of luck, MSMEs survive initial shocks of the lockdowns.

Second, big businesses and MNCs have historically contributed less than their fair share to government coffers and by extension, to public services, social protection and the realization of human rights. They benefitted from decades of tax competition and granting of overly generous and unnecessary tax incentives.

Third, with the help of an industry of facilitators and enablers of illicit finance like the Big Four accounting firms, MNCs and big businesses have notoriously mastered the art of tax abuse and arbitrage to offshoring profits to tax havens, thus, bailing out on their own tax obligations to countries in which they operate.

Poor targeting, lack of a demonstrable link to desired policy outcomes and lack of transparency on bailouts will render them prone to misuse and abuse by big businesses and MNC. These bailouts to corporates are especially questionable in the light of receding labour protections and their collective rights.

‘Identifying the layers of financial secrecy’

A few countries, like Argentina, Belgium, Denmark, France, Italy and Poland have announced that companies found to be registered in tax havens would be ineligible for government bailouts. While this is a step in the right direction however determining what qualifies as a tax haven is contentious considering there is no political consensus on the issue yet. It would seem obvious for EU countries to follow the EU checklist for blacklisted jurisdictions – historically criticized for targeting small jurisdictions while leaving out nasty tax havens in its own backyard: EU member states such as Luxembourg, Malta, the Netherlands and Switzerland.

The tax conditionalities on bailouts should go further to ensure transparency and accountability on part of MNCs receiving them. Instead of using arbitrary and politically motivated tax haven lists, governments should rely on impartial rankings such as Financial Transparency Coalition member, Tax Justice Network’s Financial Secrecy Index or the Corporate Tax Haven Index. Companies with subsidiaries in any of the top ten ranking jurisdictions, that cannot prove legitimate activity through publicly reported country-by-country data should be ineligible for government bailouts. Corporations that have been named in tax and financial scandals such as the Panama Papers, Paradise Papers etc. should be disqualified from receiving any such compensation or bailout. Further, companies receiving bailout money should be made to mandatorily declare their country-by-country financial and operations data, as well as their corporate ownership and beneficial ownership data publicly. Companies offering dividend income while slashing wages or laying off employees should be ineligible for a bailout.

Meaningful and democratic international cooperation on offering, monitoring and reporting on bailouts is crucial, especially for countries in the Global South who are cash-strapped. Efforts to narrow bailout eligibility criteria by countries in the Global South will be futile if they do not have access to information that is outside their jurisdiction.

Cooperation on eligibility criteria for bailouts is also important to ensure that companies do not receive bailouts from multiple governments – something that is currently legally possible due to the wonders of structures such as Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs).

Finally, cooperation on tax matters should also ensure transparency and accountability around bailouts, and should certify if bailout funds are indeed being used for protecting jobs and livelihoods.

An opportunity to discuss tax and transparency measures to raise countries’ revenues ensuring they reach intended beneficiaries to respond to COVID crisis, is happening on May 28^th, in the virtual conference, Health versus Wealth? Tax and Transparency in the Age of COVID-19.