Tax Abuse and Human Rights – Is There a Connection?

Governments that fail to take steps to curb illegal tax evasion and aggressive tax avoidance (collectively, “tax abuse”) and multinational corporations (MNCs) that carry out tax abuse could be violating international human rights.

According to a report LINK released October 8 by the International Bar Association’s (IBA) Human Rights Institute Task Force on Illicit Financial Flows, Poverty and Human Rights, the violation could arise because of the relationship among tax abuse, poverty, and human rights.

“Simply put, tax abuses deprive governments of the resources required to provide the programs that give effect to economic, social and cultural rights, and to create and strengthen the institutions that uphold civil and political rights,” the report says. “Actions of states that encourage or facilitate tax abuses, or that deliberately frustrate the efforts of other states to counter tax abuses, could constitute a violation of their international human rights obligations, particularly with respect to economic, social and cultural rights.”

The focus on human rights and their relationship to tax abuse brings a new dimension to the debate over the use of sophisticated tax structures and offshore jurisdictions to greatly reduce the tax bills of multinational corporations and high net-worth individuals.

By tying the failure to confront or eschew tax abuse with possible human rights violations, governments could feel pressure to take steps such as more vigorously monitoring aggressive tax avoidance schemes or creating legislation blocking specific tax avoidance opportunities; while MNCs could feel hesitant to undertake legal tax planning strategies, even those not yet labeled as illegitimate or unfair.

Alex Prats, Principal Economic Justice Advisor at Christian Aid in the U.K. told Tax Analysts that his organization welcomed the analysis and recommendations of the IBA report.

“Christian Aid agrees that tax abuses…deprive governments of the resources required to make progress towards the realization of most fundamental rights, such as those to food, health and education,” he said. “In addition, they undermine the state and civil society’s ability to create and strengthen institutions that uphold civil and political rights.”

“So tax is a human rights issue, as well as a development issue – and governments and businesses should ensure their tax policies and practices fully respect their human rights duties,” Prats said.

Human Rights and Legal Tax Avoidance

But Philip West of Steptoe & Johnson LLP questioned the inclusion of illegitimate but legal tax planning within the tax abuse-human rights nexus. He said that while illegal tax evasion is clearly a focus and legitimate tax planning is not, the situation with illegitimate but legal tax planning is more problematic.

“The term ‘tax abuse’ [in the report] also includes tax practices that may be legal, strictly speaking, but are currently under scrutiny because they avoid a ‘fair share’ of the tax burden and have negative impacts on the tax revenues and economies of developing countries. So the report starts from the proposition that legal tax planning is abusive if it meets undefined notions of ‘fair share’ and negative impact,” West said, noting that all tax planning, whether “legitimate” or “illegitimate," reduces revenue.

West questioned the “fair share” standard as vague and suggested that if fair share is not specifically defined in law than it must be trumped by whatever is specifically defined in law. “The law must be followed rather than a vague notion of ‘fair share,’” he said.

“In fact, if a U.S. taxpayer tried to pay a foreign government a ‘fair share’ that was in excess of what the law requires, [U.S.] tax regulations would deny that taxpayer a foreign tax credit for the foreign taxes. U.S. law requires taxpayers ‘to reduce, over time, the taxpayer’s liability for foreign tax,” he said.

Eamonn Butler, Director of the Adam Smith Institute in London, called equating legal tax avoidance with human rights violations a silly and illiberal idea. “The idea that paying less tax makes you a human rights violator, because it means governments have less to spend on their UN commitments, is shockingly absurd,” he said.

“Tax avoidance means obeying the tax rules, and working within them to limit your tax liability. If governments want to end tax avoidance, they should make their tax rules simpler and clearer,” he said.

Butler called on governments that want taxpayers to contribute more revenue to change the rules or raise tax rates rather than attack those obeying the law.

“If you pay all the tax you are required to pay, you have met your legal obligations, and governments have no right to demand more. It is an abuse of government to orchestrate public abuse against those who are obeying the tax rules but not paying as much tax as the politicians would like. The politicians set the rules, so they must take the consequences.”

Canadian international lawyer Lloyd Lipsett, Rapporteur for the IBA committee, told Tax Analysts that the human rights violation argument relies on a “chain of causation” that starts with tax abuse that removes tax revenue and therefore blocks potential spending on poverty reduction programs. The failure to reduce poverty, in turn, can lead to a country violating its human rights obligations. Governments must evaluate their policies in the light of the chain of causation.

“The concept gaining traction is policy coherence – coherence between international human rights law and a country’s tax policy. For example, a tax holiday may not be justified if it is incoherent with human rights,” Lipsett said.

British journalist Nicholas Shaxson, author of the 2011 book Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, applauds the effort to equate tax abuse with human rights violations, focusing his view on offshore tax havens used by both corporations as well as high net-worth individuals.

“The secrecy that is the hallmark of the offshore system automatically generates a range of massive, and direct, assaults on human rights,” he said. “Secrecy undermines accountability of wealthy elites, allowing them to float free above their societies. The importance of this cannot be underestimated.”

In terms of the connection to poverty, Shaxson said that “secrecy helps elites shake off the tax burden, reducing the provision of water, education, health and…basic human requirements.” He noted that this is particularly the case in the developing world because elites are the only members of some societies to have enough income to be taxed.

Lipsett echoed Shaxson’s focus on the need to stop the undermining of a country’s tax base through tax avoidance, however he also said that the IBA report does not include individual taxpayers. However he added that the linking of tax abuse with human rights can have a strong impact on individual taxpayers and hopefully urge them to view their tax avoidance practices within a larger view of the moral contract between themselves and society.

Tax abuse – Poverty - Human rights violations

The link between tax abuse and human rights exists because each is related to poverty, especially extreme poverty (defined by the World Bank as living on $1.25 per day). Tax abuse exacerbates poverty by limiting the ability of governments to provide adequate food, clothing, housing, healthcare, clean water, sanitation, and education. The provision of these services is a human rights obligation explicitly recognized by the United Nations Covenant on Economic, Social and Cultural Rights. The covenant came into force in 1976 and currently has 160 signatories, including offshore secrecy jurisdictions such as Switzerland and Luxembourg.

According to a report by Global Financial Integrity, a Washington DC-based non-profit organization, between 2001 and 2010 developing countries lost $5.86 trillion in potential tax revenue to illicit outflows of cash, 80 percent of which was tied to corporate tax avoidance and evasion, especially transfer pricing related schemes.

“Many governments of poor countries are severely resource-constrained,” said Thomas Pogge, professor of philosophy and international affairs at Yale and chair of the IBA committee that authored the report.

“They do not have enough money to underwrite the ordinary functions of government and also to ensure that all citizens have secure access to the objects of their human rights. Typically, these governments would be less severely resource-constrained, or not resource-constrained at all, if they did not lose substantial amounts of revenues through tax abuse. Here the tax abuse disables the fulfillment of human rights,” he said.

But Stan Veuger, resident scholar at the American Enterprise Institute, told Tax Analysts that the report’s underlying idea that less tax revenue, meaning smaller government, leads to more poverty which leads to more human rights violations is “silly at best.”

In evaluating the tax abuse-poverty-human rights nexus, Veuger called the connection between less revenue and increased poverty “problematic,” but acknowledged that higher poverty rates can means more human rights violations “if you adopt the broad notion of human rights the authors adopt.”

But he argued that this position would lead to some absurd outcomes: “Not working full time reduces tax revenue and is therefore a human rights violation. Purchasing health insurance and not paying the individual mandate tax reduces tax revenue, and is therefore a human rights violation.”

Butler agreed that the logic of the argument leads to absurd outcomes. “The logic of the argument would require you to pay over 100 percent of your income to escape being charged as a human rights violator, since governments could always spend more money on this cause, no matter how much revenue they pull in.”

“This is the problem with positive rights,” added Tom Worstall, writer and senior fellow at the Adam Smith Institute. Worstall argued that human rights should not be seen as positive but rather as negative rights only because of the obligation created by a positive right to carry out an action.

“Positive rights cost money to provide, unlike negative ones. So, by refusing to cough up to pay for the positive rights to be enjoyed by others one is now violating their human rights. This is of course a philosophical absurdity but it all stems from that initial decision to entertain the notion of positive rights as human rights.”

As to whether tax abuse could constitute an actionable legal human rights violation, Pogge said there has yet to be any precedent.

“Whether this is a legal human rights violation depends on whether a competent court would find it to be one. I know of no cases where a court has made such a finding. But it is certainly within the realm of possibility,” he said. “A court might find that tax abuse in a poor country is analogous to disabling necessary infrastructure, e.g. sabotaging a population’s clean water supply.”

But Stephen Cohen, Georgetown law professor, former assistant secretary of state for human rights in the Carter administration, and another member of the IBA committee told Tax Analysts that in the end the question of a whether there is a legal violation is not important.

“Whether, as a technical matter, tax abuses constitute a violation of internationally recognized human rights, it is indisputable that tax abuses impede the fulfillment of internationally recognized human rights,” he said.

The link between extreme poverty and human rights was articulated by the United Nations in the September, 2012, Guiding Principles on Extreme Poverty and Human Rights adopted by the UN Human Rights Council. These principles codified the obligation on governments to undertake measures to address extreme poverty under human rights law.

The Principles’ preamble states:

The present Guiding Principles are premised on the understanding that eradicating extreme poverty is not only a moral duty but also a legal obligation under existing international human rights law.

Paragraph 96 of the Principles explicitly includes taxation within the overall strategy that government must use to fight extreme poverty:

States should ensure policy coherence between their human rights obligations and other policies, including international trade, taxation, fiscal, monetary, environmental and investment policies.

Furthermore, according to the UN Special Rapporteur on Extreme Poverty and Human Rights, cited in the IBA report, 14 specific human rights listed by the 1948 Universal Declaration of Human Rights, as well as all key human rights principles (right to life, food, health, education, social security, and principles of non-discrimination, participation, transparency and accountability), are undermined by extreme poverty.

Dalibor Rohac, Policy Analysts at the Cato Institute’s Center for Global Liberty and Prosperity took exception to the link between tax evasion and tax avoidance, and the lack of sufficient public revenue to provide basic public goods.

“At most, tax evasion and tax avoidance are symptoms of overly complex – and possibly predatory – systems of taxation and regulation. The cause for concern is not tax evasion or tax avoidance as such; instead, it is the tax and regulatory system that incentivizes individuals and firms to join the gray economy on a large scale (tax evasion) or to seek ways around the existing tax rules (tax avoidance).”

Rohac said that governments need to abandon efforts to repress tax avoidance and instead to “foster entrepreneurship and private initiative…through friendlier tax rules, [and] lighter business regulation….”

Developing World Impact

Due to such factors as weak (sometimes corrupt) government; limited training in countering sophisticated tax planning; weak and non-diverse economies (often based on a single or small number of commodities); and a larger proportion of taxpayers in poverty or extreme poverty, the tax abuse-poverty-human rights violation link has particular resonance in the developing world, a reality echoed in the focus of the IBA report.

Cases of extreme poverty are more prevalent in the developing world, creating a greater potential for human rights violations. In the extractive industries, resource-rich countries with inadequate domestic sectoral development look to foreign expertise to provide the technical means to harvest the resources. The goal is to then capture the benefits through the tax revenue paid by the foreign firms.

But large multinational corporations use their lopsided bargaining power to negotiate tax holidays or other tax incentives which serve to eliminate much of the potential tax revenue. Furthermore, corporations will use transfer pricing tools to move much of the revenue to an offshore low-tax jurisdiction leaving local tax authorities, often ill-equipped to counter the sophisticated transfer pricing scheme used, with even less potential tax revenue. Additionally, money removed is not only untaxable, but is lost to potential reinvestment in the local economy.

Lipsett added that with the lack of enforcement capacity in many developing countries and the overwhelmingly lopsided bargaining power enjoyed by multinational corporations, in many instances the company takes on a larger role than the domestic government in making local tax policy, and is no longer simply a passive recipient, but rather a creator, of local tax law.

The IBA report also cites offshore tax havens with strong bank secrecy regimes as contributing to human rights violations through facilitation. “Actions of states that encourage or facilitate tax abuses…could constitute a violation of their international human rights obligations,” the IBA report says.

In a July 24 story LINK in Worldwide Tax Daily, Cohen wrote that offshore tax havens that facilitate the hiding of corporate income share responsibility for any potential violation of human rights. The degree of culpability, he wrote, is determined by the kinds of structures tax havens have in place to facilitate the tax abuse.

There are also varying degrees of state responsibility for the offshore accounts within its jurisdiction. The degree of responsibility may depend on whether a state enacts bank secrecy laws criminalizing the disclosure of financial information to tax authorities, fails to apply a withholding

tax on offshore accounts at a rate sufficient to deter their use for tax evasion, evades requests for information about offshore accounts from other governments conducting taxpayer investigations, or otherwise limits efforts to allow for more extensive automatic information exchange.

But Rohac questioned the supposed link between tax avoidance/tax evasion and the inability of developing world governments to raise the funds necessary to meet what he called “UN-enunciated positive rights” that are related to poverty.

“[The relationship] is not convincing – after all, we already know why some countries are poor. It is not because of tax avoidance but because of domestic economic mismanagement and bad institutions which stifle private initiative and economic growth.”

What about MNCs?

The relationship between corporations and human rights usually involves direct practices by companies such as the treatment of employees. Furthermore, most corporations involved in significant tax avoidance schemes are careful to remain within the letter of the law – creating the problem of legal tax avoidance discussed above. However recent trends have dispensed with legality and have instead criticized companies for acting immorally when using sophisticated tax avoidance strategies. (Prior analysis LINK.)

Major multinationals like Apple, Google, Starbucks, and Amazon have been targeted by politicians and customers in the U.S. and U.K. for taking advantage of the tax avoidance possibilities embedded in the tax law, and for refusing to pay their “fair share” of tax. In the U.K. some criticism has taken the form of customer boycotts, making those companies who sell directly to retail customers more vulnerable.

The drive has had a profound effect on one company, Starbucks, which actually agreed to pay £20 million in taxes that they could legally avoid. Some observers see this as a worrying development in that it reduces what should be a law-based tax transaction into essentially a charitable donation, and moves tax power away from government tax authorities and into the hands of the general public, particularly the customers of corporations dependant on the retail sector. (Prior coverage LINK.)

Butler took umbrage at the idea that taxpayers should be pressured to pay anything above the legally mandated amount.

“There is a view around that any money that individuals and companies make, somehow belongs to the government, which generously allows [the taxpayer] to keep a small part of it. [But] wealth has to be created, and costs time, energy, ingenuity and effort to create; it therefore rightly belongs to its creators,” he said.

“Individuals and companies may willingly contribute to a central authority to provide the essential services, such as defense and justice, which allow the wealth-creation process to proceed smoothly. But that rests on their consent, not on some prior right of ownership of their wealth by governments.”

As to whether a corporation could face a legal action for violating human rights, Pogge said that the same criteria would apply as for governments – it would depend on a competent court finding an actionable violation. But as the Starbucks case shows, public opinion can also be powerful.

“By cheating poor countries out of tax revenues, individuals and corporations risk being branded as human rights violators,” Pogge said. “This could happen even when the tax abuse is legal thanks to the fact that the offending agent has used its influence to get the rules suitably adjusted. For example a multinational corporation gives 15 luxury cars to a country’s government and, in exchange, receives a 12-year exemption from taxes on its profits in that country.”

Lipsett welcomed the greater public attention, saying that traditionally taxation, although affecting everyone, has been ignored by much of the public under the perception that “tax is too complicated for me.”

“Putting a human rights face on the taxation discussion makes it more accessible to public discussion [and can] move the discussion of very fundamental issues to the level of public policy. A human rights-based analysis can contribute to this.”

Lipsett added that many corporations will welcome this discussion. “Companies pay a lot of tax,” he said, “and those that don’t abuse [the system] should get credit for the resources they provide.” He pointed out that Rio Tinto, a huge extractive industry multinational, has been at the forefront of country-by-country reporting and greater transparency, a key goal in international tax policy.

International organizations have taken steps to codify the expectations for multinational corporations. Chapter XI of the OECD Guidelines for Multinational Enterprises includes the following guidance for company tax policy:

It is important that enterprises contribute to the public finances of host countries by making timely payment of their tax liabilities. In particular, enterprises should comply with both the letter and the spirit of the tax laws and regulations of the countries in which they operate… [t]ax compliance includes…conforming transfer pricing practices to the arm’s length principle.

The UN Guiding Principles on Extreme Poverty and Human Rights similarly offers company guidance which more explicitly ties human rights and poverty to business practice:

Businesses should adopt a clear policy commitment to respect human rights, including those of persons living in poverty, and to undertake a human rights due diligence process to identify and assess any actual potential impacts on human rights posed by the company’s own activities and by business partners associated with those activities.

Government Spending

Arguing that the removal of tax revenue from government coffers serves to reduce efforts to alleviate poverty and is therefore a violation of human rights assumes that the government in fact spends its resources to alleviate poverty. It is hard to argue that a human right violation has occurred if the lost revenue would not have been used to address poverty.

It’s not that the human rights violation is gone – people are still in extreme poverty – but the nexus to tax abuse has been severed. In this way, connecting tax abuse to human rights violations requires that the government goes beyond the mere opportunity to take steps to alleviate extreme poverty and must actually spend the revenues in a meaningful way.

But Pogge questioned the spending argument, calling it dubious. He analogized the situation to the existence of two fences around a village. Each violates the inhabitants’ freedom of movement, but the builder of each fence says that he is not violating the right, given the other fence (i.e. if either were removed the right would still be violated). “The right conclusion is…that each of the two fences violates the villagers’ human rights,” Pogge said, not neither.

“When tax abuse renders a government unable to fulfill human rights and this government is also disposed to spend additional revenues on luxuries, then both parties (rather then neither) – the tax dodgers and the government – violate human rights,” he said. The only exception would be if a government specifically uses tax revenue to violate human rights. “In such a case, it can be permissible to dodge one’s taxes or, perhaps more plausibly, to exit the country in question.”