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A research conducted by ActionAid in 2020 revealed that 20 countries from the global south could be losing out on almost $2.8 billion in tax revenues from Facebook, Google and Microsoft alone due to unfair global tax rules.
The said $2.8 billion in taxes is enough to employ 1.7 million nurses in these 20 countries within three years. This would meet the World Health Organization (WHO) benchmark target of 40 nurses per 10,000 people in these countries. India, Bangladesh, Kenya, South Africa, etc., are some of the countries mentioned in the ActionAid research.
The research revealed that Facebook, Google and Microsoft are exploiting the tax loopholes in the poorest countries to avoid paying taxes. It says that a fairer tax regime would make just these three companies liable to pay 2.8 billion dollars. ActionAid, founded in 1972, is a „Global federation working for a world free from poverty and injustice“.
ActionAid: „just the tip of the iceberg“
The report came at a time when the Covid-19 pandemic highlighted the need for increased funding for the healthcare systems around the world. „The Covid-19 pandemic has confirmed the urgent need to reprogram our tax systems,“ said Alex Cobham, CEO of the Tax Justice Network in a statement to Organized Crime and Corruption Reporting Project (OCCRP). His comments came in response to the report released by ActionAid. While the Covid pandemic has led to closures of local businesses and loss of livelihood across the world, the tech giants have registered soaring revenues. According to reports, Facebook, Google, Apple, Microsoft and Amazon collectively made more than $320 billion in Profits on $1.4 trillion in sales in 2021.
However, the size of revenues generated by these companies in the global south is not reflected in the amount of taxes that they pay there and the said $2.8 is „just the tip of the iceberg“, according to ActionAid. In fact, according to another report released by ActionAid in 2021, just India, Brazil, and Indonesia could be losing out more than the US $3.8 billion annually in tax losses from Alphabet, Amazon, Facebook, Microsoft, and Apple.
Highest gaps in India, Indonesia, Brazil, and others
The figures in the 2020 ActionAid report are based on modeling and estimates. Currently, multinational corporations are not required by law to publicly disclose how much tax they pay in some developing countries. The methodology used to calculate the $2.8 billion „tax gap“ was based on the share of the three tech giants’ global profits, relative to their number of users. It was adjusted according to the per capita GDP of the 20 countries studied in the report. According to ActionAid, India, Indonesia, Brazil, Nigeria, and Bangladesh are the countries with the highest tax gap.
ActionAid claims that the US $2.8 billion could be used to pay for 770,649 midwives, 729,010 nurses, or 879,899 school teachers ANNUALLY in the 20 countries studied across Asia, Africa, and South America. In fact, according to ActionAid, had the global taxes been fair, enough taxes could be raised from Alphabet alone to employ 244,360 nurses in these 20 countries which would transform the public health response to Covid-19.
Need for global reforms
There are several challenges in taxing the digital economies. According to David Archer, who is a spokesman for ActionAid, the outdated global tax regimes and regulations in the countries in the global south allow the big tech firms to move the profits they make to the tax haven locations. Another major challenge in taxing the digital economy is „in establishing exactly where profits are made.“ As companies like Google or Facebook could generate revenues from Indian users (for instance) without physically being there, these companies could easily argue against paying the corporate taxes in these countries.
In the „Western“ countries also, there is a huge discourse on the need for a better tax regime in order to tackle tax evasions by the tech giants. In fact, the 2021 ActionAid report claims that the OECD, G7, and EU27 countries are potentially losing out on US$27.97 billion, US$20.77 billion, and US$7.92 billion annually respectively. Consequently, countries like the United Kingdom, Italy, and France have introduced digital tax laws at their respective national levels in order to generate more revenues from the tech giants. The difference seems to be that these countries are more successful in making the tech companies pay higher taxes.
For instance, companies like Facebook, Google, Amazon, and Apple have settled their tax disputes with the French tax authorities. Google is reported to have paid 1 billion Euros to French authorities to end a tax probe. Facebook agreed to pay 106 million Euros to France as a payment in back taxes. However, the countries in the global South lag far behind in forcing the tech giants to pay their share of taxes.
A different story on the ‚other side‘
Under the given laws in several countries in the Global South, the tech companies are not required to disclose how much taxes they are paying, therefore very little is known in this regard. According to Archer, „billion could be at stake“.
Individual countries on their part have attempted to tackle the tax avoidances by the big tech firms. Nigeria, for instance, attempts to do this in two ways. First, is the Indirect Value-added Tax (VAT) levied on every digital service. This is part of the Nigerian Finance act since 2019. The second approach is to tax these companies on the profit they make. However, both approaches have their own problems.
According to Mustapha Ndajiwo, founder of the African Centre for Tax and Governance (ACTG) in Nigeria, these complex regulations are not easy to implement. As far as the indirect tax approach is concerned, he says: „Companies can immediately pass the taxes on to the consumer.“ But Ndajiwo called taxation of profit the „main problem“, as this approach still doesn’t address the issue of shifting of profits to the tax havens.
India introduced a „Google tax“ in 2020
India is facing a similar issue. India introduced an Equalisation Levy or what is popularly known as the ‘Google tax’ in April 2020. Under this tax, the advertisers which operate on platforms such as Google and Facebook had to deduct a 6% levy before making any payments to these platforms. The said levy is imposed even if both the advertiser and the platform are not based in India. What is required is that the advertisements are visible in India.
However, there were fears that these platforms may „push costs on to customers“, said Neeru Ahuja, Partner, Deloitte India. And not surprisingly, in 2021, Google announced that it will pass the burden of the said levy on the clients who post their advertisements visible in India on Google.
Fears of retaliatory tariffs from the US
African Tax Administration Forum (ATAF), which is based in South Africa, has been working on introducing a digital tax. So far, it has aided almost 38 countries in Africa regarding issues concerning tax. ATAF is also working with the African Union.
„From discussions with our members, we know that some other African countries are considering introducing a digital service tax,“ says Logan Wort, ATAF’s executive director. However, as the countries are considering imposing the digital tax, they fear that the US would act in retaliation. „However, some members have concerns about possible US retaliation against them,“ Logan told Deutsche Welle. „That could lead to the imposition of tariffs on exports from those countries to the US.“
These fears are justified. In 2019, after France considered introducing a digital tax, the US announced a punitive tax against it. However, the new US administration under Joe Biden recently agreed that tech companies should pay a more significant share of their revenues in the countries where they operate.
OECD – a „club of rich nations“
David Archer stressed the importance of a global tax regime while commenting on the Action Aid report released in 2020. However, he claimed that it is the OECD countries that are the biggest roadblock to achieving this. „It’s a club of rich nations that don’t care that much about the needs of developing countries.“
In October 2021, after years of negotiations, the OECD finalized a deal to reform the international taxation rules. The deal was agreed upon by 136 countries and jurisdictions worldwide representing more than 90% of the global GDP. According to the OECD website, the reforms introduced would „ensure that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.”
The said deal also introduces a two-pillared reform package. Pillar one would ensure a fairer distribution of taxing rights on more than $125 billion in profits by relocating the taxing rights among the countries over the largest Multinational Enterprises (MNEs). According to these reforms, taxing rights would arise in the countries where the revenues are generated, even if an MNE does not have a physical presence in that country. Pillar two introduces a 15% global minimum corporate tax rate on companies with revenues above EUR 750 million.
ActionAid: „minimum tax rate between 25 to 30 percent“
However, the deal has come under heavy criticism from ActionAid. In 2021, ActionAid Nigeria, supported the Nigerian government’s decision to not sign the said deal by criticizing the 15% tax rate under the new deal as too low. In a statement released by ActionAid Nigeria in July 2021, it said, „Nigeria set up rules and regulations with the corporate tax at 30 percent for big and multinational companies. The average Corporate Tax Rate for African countries is 28 percent. However, the 15 percent minimum corporate rate is too low and therefore inadequate to stop the race to the bottom.“
ActionAid said: „For a moderate stand, Nigeria, like most other African countries will need the global minimum tax rate to stand between 25 percent to 30 percent“.
ActionAid was also critical of „negotiations carried out by rich countries for their benefit.“ It criticized the call by the said OECD deal on all countries to remove or take back the unilateral or national tax laws to tax the digital economy. „It is fundamentally unfair to ask countries in the global south to trade-off their unilateral taxation of the digital economy, in lieu of implementing a deal they were not part of negotiating, coupled with the fact that they will only marginally benefit from it“.
Picketty: „an enormous scam“
ActionAid also criticized that the deal would take effect earliest in 2023 and that the first review of the rules within the deal could only take place in 2030. Highlighting the urgency of the requirement of funds for better health care systems around the world, the statement said: „Revenues are desperately needed in the global south to tackle the challenges posed by the COVID-19 pandemic and to fight poverty and inequality. Companies operating within the digital economy need to be compelled to pay their fair share of taxes.“
As early as 2019, the economist Dr. Thomas Picketty, author of the book ‘Capital’ and a member of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), also criticised the then ongoing global tax negotiations. He termed the new plan for a global tax regime as „an enormous scam“, and demanded a minimum corporate tax rate of 25%.
Contrary to popular opinion, the 15% global minimum tax rate is a major step backward. Up until 1980, „corporate tax rates around the world averaged 40.11 percent„. Until 1990, the global corporate income tax rates for low-income, high-income, and middle-income countries were almost between 39% and 45%. Since then the rates have fallen drastically and continuously. In 2018, the tax rate for high-income countries was almost 22%, it was 24% for middle-income countries, and 29% for low-income countries. The 15% tax rate under the new deal sets the global corporate tax rate dangerously low, especially for low-income countries which need the highest taxes.
Colonialism yesterday and today
In today’s digital economy, multinational corporations generate immense revenues from the global south. However, these companies do this without paying their due share of taxes to the countries, thus causing huge income losses. By way of tax avoidance, wealth is extracted from the countries in the global south all the while using up and exploiting the resources of these countries. This extraction is reminiscent of colonial eras when similarly the wealth was extracted directly rendering the colonized countries poor and impoverished.
The said $2.8 billion in loss due to tax avoidance by the tech companies in fact forms a very small section of huge overall losses in revenues in the global South due to tax avoidances. According to OECD, the overall total value of the annual tax avoidance losses to Africa is somewhere between 50 to 80 billion US-dollars. This even exceeds the amount of the value of development aid given to Africa yearly.
In 2019, the total Aid to Africa from Development Assistance Committee (DAC) countries totaled almost $49 billion. DAC is an international committee acting under the auspices of the OECD and is made of the USA and mostly the countries from the European Union. However, according to The United Nations Economic Commission for Africa (UNECA) the value of losses due to tax evasions in Africa is even higher at about $89 billion.
Call for a change in the global tax regime
While terming the new OECD deal as „disappointing“, ActionAid called for „more comprehensive reforms of the international tax practices and treaties“. ActionAid says that only such reforms would grant these countries from the global south an equal voice on the negotiating table with the richer countries.
Further, in a statement released after the 2020 report, it also claimed that the governments in the global south urgently need this money to fund public services such as healthcare and social protection for the billions of people affected by the Covid-19 pandemic.
It said, „given the urgent needs of women and young people impacted by Covid-19, hunger, and unemployment, governments should take steps to tax tech companies, in lieu of a global deal being agreed. These taxes should be progressive, targeting the enormous profits of tech giants, ensuring the costs aren’t passed to the users.“
Digital Colonialism
This article is part of a series on Digital Colonialism. We will cover different issues pertaining to the dominance of digital space in the global south by a handful of powerful countries and major tech companies. Over the past several years, scholars and activists have been increasingly writing on how this handful of firms make use of digital technologies to create dominance which extends itself to socio-political and economic space undermining the sovereignty and local governance in countries of the global south.
These scholars term this phenomenon as digital colonialism. They argue, that while the mode, scale, and contexts may have changed, colonialism’s underlying function of empire building, value extraction, exploitation of the workforce, and appropriation, remain the same
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