TAX AND CHILD RIGHTS GUIDE 1 - Resource Centre...6 TAX AND CHILD RIGHTS GUIDE TAX AND CHILD RIGHTS GUIDE 7 Arm’s length principle. ... analysis of BEPS highlights certain areas in

1TAX AND CHILD RIGHTS GUIDE

32 TAX AND CHILD RIGHTS GUIDETAX AND CHILD RIGHTS GUIDEPhoto © SavetheChildren

54 TAX AND CHILD RIGHTS GUIDETAX AND CHILD RIGHTS GUIDE

List of Acronyms

Glossary

Abstract

1.0 Introduction 1.1 Tax,missedtaxationopportunitiesandchildrights:Definitions 1.2 Implicationsonimprovinginvestmentinchildrenandchildrights 1.3 Thelinkbetweentaxationandchildrights 1.4 Structureoftheguide

2.0 Key concepts in taxation 2.1 Whatistaxjustice? 2.2 Whytaxjustice? 2.3 Taxpolicymakingstandards 2.3.1 Efficiency 2.3.2 Equity 2.4 Rolesoftaxation(the5Rs) 2.5 Taxminimisationpractices 2.6 Generalanti-avoidancerules 2.7 Taxhavens,secrecyjurisdictions,andharmfultaxpractices 2.8 Mutualassistanceandinformationexchange 2.9 Allocationoftheinternationaltaxbase 2.10 TaxtreatiesandBEPS 2.11 Transferpricingandmispricing 2.12 Thincapitalisation 2.13 Baseerosionandprofitshifting 2.14 Taxcompetitionandtaxincentives

3.0 The nexus between tax and child rights

4.0 Advocacy: Tax justice and child rights: Who is doing what 4.1 Institution-buildingreformsindevelopingcountries 4.1.1 Reformstotargetcorporatetaxavoidanceandevasion 4.1.2 Reformstotargettaxavoidanceandevasionbyindividuals 4.2 Internationalcooperation 4.2.1 AdvocacyOpportunities

5.0 Conclusion References

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Table of Contents

©TaxJusticeNetwork-Africa2016©SavetheChildren

TAX AND CHILD RIGHTS GUIDEThisdocumentwasdraftedbyCephasMakunike,KwesiObeng,BobMuchabaiwaandJuneNyauchi.

Alvin Mosioma, Jared Maranga and Robert Mwanyumba areappreciatedfortheirinvaluablecontributions. We would also like to acknowledge the efforts of other Save theChildrenandTaxJusticeNetwork-Africastaffinvolvedinthedrafting,layoutandvalidationofthisdocument.

ThecontentofthispublicationisthesoleresponsibilityofTaxJusticeNetwork-AfricaandSavetheChildren.

As copyright holders, TJN-A and Save the Children request dueacknowledgementandacopyofthepublicationinwhichitiscited.Foronlineuse,weaskreaderstolinktheoriginalsourceonTJN-AandSavetheChildrenwebsites.

Acknowledgments


Arm’s length principle. The arm’s-length principleis an international standard that compares thetransfer prices charged between related entitieswith the price in similar transactions carried outbetween independent entities at arm’s length. Itinvolvestheestablishmentofpricesintransactionsof goods and services between related entitiesbasedonthepriceschargedinsimilartransactionsbetweenunrelatedentities.Taxtreatiesandtransferpricing regulations generally state that transferpricing transactions within a group of companieswill only be recognised for tax purposes to theextent that theyobserve thisprinciple. It requiresthatthetermsof thesetransactionsbeconsistentwith those that would have been arrived at byindependentcompanies.Thisisintendedtopreventcompaniesfrommanipulatingtheirtransferpricingtransactionstoreducetheirtaxbills.

Arm’s length price. A price set for a transfer ofgoodsorservicesbetweenrelatedentitiesbasedonthepriceschargedinsimilartransactionsbetweenunrelatedparties.

Abusive/aggressive transfer pricing. A practiceinwhich twocompanies, subsidiariesof thesamemultinational company,buyand sellproductsandservices to each other and artificially inflate ordeflate prices so that nearly all profits are madewheretaxesarelowerorevenatzerolevel.

Automatic exchange of information. A systemby which relevant information about the wealthand incomeofa taxpayer - individualorcompany- is automatically passed by the country wherethe income is earned to the taxpayer’s countryof residence. As a result, the tax authority of ataxpayer’s country of residence can check its taxrecords to verify that the taxpayer has accuratelyreportedtheirforeign-sourceofincome.

Base erosion and profit shifting (BEPS).Accordingto the OECD (2013), this refers to “tax planningstrategies thatexploitgapsandmismatches in tax

5Rs Revenue,Repricing,Redistribution,Representation,Re-organisationAAAA AddisAbabaActionAgendaATAF AfricanTaxAdministrationForumAU AfricanUnionBEPS BaseerosionandprofitshiftingCFC ControlledforeigncompanyDRM DomesticrevenuemobilisationEAC EastAfricanCommunityECA EconomicCommissionforAfricaECOWAS EconomicCommunityofWestAfricanStatesEoI ExchangeofInformationFFD3 ThirdFinancingforDevelopmentConferenceG20 GroupoftwentymajoreconomiesGAARs Generalanti-avoidancerulesGFI GlobalFinancialIntegrityIBFD InternationalBureauforFiscalDocumentationIP IntellectualPropertyMDGs MillenniumdevelopmentgoalsMNCs MultinationalcompaniesOECD OrganisationforEconomicCorporationandDevelopmentPE PermanentEstablishmentSAARs Specificanti-avoidancerulesSCI SavetheChildrenInternationalSDGs SustainabledevelopmentgoalsTJN-A TaxJusticeNetwork-AfricaVAT ValueAddedTaxWHT WithholdingTax

List of Acronyms Glossary

rulestomakeprofits‘disappear’fortaxpurposesortoshiftprofitstolocationswherethereislittleornorealactivitybutthetaxesarelowresultinginlittleor no overall corporate tax being paid.” TheBEPSproject coordinated by the OECD, also involvingG20 countries, seeks to reform international taxstandards that have become open to exploitationbymultinationalfirms.

Base company.A companygenerally situated inalow-orno-taxcountry,typicallyataxhaven,whichisusedtocollectincomethatwouldotherwiseaccruedirectly to the taxpayer, thereby reducing taxes inthetaxpayer’shomecountry.Thetaxpayerisoftenable toenjoy theeconomicbenefitof the incomeby, e.g. being able to direct its disposition by thebasecompany.

Beneficial ownership.Alegaltermusedtodescribeanyone who has the benefit of ownership of anasset (for example, bank account, trust, property)andyetnominallydoesnotowntheassetbecauseitisregisteredunderanothername.Amechanismis needed to provide tax authorities and citizenswith information about ‘who owns what where’.This should take the form of a public registry inevery country - including every tax haven – ofthe real owners of all the trusts, foundations andcompanies established within its borders, whichbothgovernmentsandcitizenscanaccess.

Controlled foreign company (CFC). This term isgenerally used in the context of tax avoidanceand anti-avoidancemeasures designed to combatthe diversion by resident taxpayers of incometo companies they control and that are typicallyresident in countries imposing low-orno taxation.Under these rules income of the controlledcompany is typicallyeitherdeemedtobe realiseddirectly by the shareholders or deemed to bedistributedtothembywayofdividend.Oftenonlypart of the controlled company’s income is dealtwith in thisway, typically, passive income suchasdividends,interestandroyalties(“taintedincome”).


MostCFCregimesprovideexemptions,e.g.wheretheCFCderivesactivebusinessincome,wheretheCFCdistributesaminimumproportionofitsincome(“acceptabledistributionpolicy”(UK)),orhasbelowacertainleveloftaintedincome(“deminimistest”),etc.

Controlled foreign company rules. Rules thatrequire the passive income and certain othertaintedincomeofforeigncompaniescontrolledbyresidentshareholderstobeincludedintheincomeofthoseshareholderswhetherornotsuchincomeisdistributed.(i.e.,deferraliseliminated).

Country by country reporting.Countrybycountryreporting would require multinational companiestoprovideabreakdownofprofitsearnedandtaxespaidineverycountrywheretheyhavesubsidiaries,including tax havens. Ideally it would requiredisclosure of the following information by eachmultinational corporation in its annual financialstatement:

• the name of each country in which itoperates;

• the names of all its companies trading ineachcountryinwhichitoperates;

• the tax charge included in its accounts forthecountryinquestion;

• detailsofthecostandnetbookvalueofitsphysicalfixedassetslocatedineachcountry;

• details of its total gross and net assets foreachcountryinwhichitoperates;and

• its financial performance in every countryin which it operates, without exception,including:

oitssales,boththird-partyandwithothergroupcompanies;opurchases,splitbetweenthirdpartiesandintra-grouptransactions;olabourcostsandemployeenumbers;ofinancingcostssplitbetweenthosepaidtothirdpartiesandthosepaidtoothergroupmembers;andoItspre-taxprofit.

Double tax avoidance agreements (DTAAs)/Double taxation treaties (DTTs).Thesearebilateralagreements between two countries that aresupposedtohelpeliminatethepotentialfordoubletaxation on cross-border investments. Avoiding

doubletaxationisasensibleaim,butDTAscanhaveoutcomesthatgobeyondwhatwasintended.Manyinvestors seek to ‘treaty shop’ and channel fundsthrough countrieswith especially favourableDTAsinordertoavoidtaxes.DevelopingcountrieshaveoftenagreedtoDTAsthatsubstantiallyreducetheirscopetoraiserevenue.

Illicit financial flows (IFFs). The cross-bordermovement of funds that are illegally acquired,transferred or used. The sources of thesecross-border transfers may be bribery, theft bygovernmentofficials,thetraffickingofdrugs,armsand humans, smuggling, commercial tax evasion,trademispricingorabusivetransferpricing.

Passive income.Atermusedgenerallytodescribeinvestment income. The termmay be so used inthe context of anti-avoidance measures such ascontrolledforeigncompanyrules.Thetermisalsoused specifically (US) to refer to income from apassiveactivitysuchasrentalincomeorbusinessinwhichtherecipientdoesnotmateriallyparticipate.

Permanent Establishment (PE). This concept ininternational taxstandardsdefinewhenacountryis entitled to tax a foreign resident company thatis earning income within its borders. Becausethe PE definition limits a developing country’scapacitytotaxoverseasinvestors,itisakeyareaofdisagreementintax treatynegotiations.TheOECD’sanalysis of BEPS highlights certain areas in whichthePEruleswithinitsmodel treatyarevulnerabletotaxplanningbymultinationalfirms.Thetermismostcommonlyusedintaxtreatiesbutmayalsobefoundinsomecountries’domestictaxlaws.Whenusedinthecontextoftaxtreaties,aPEisgenerallyconstitutedbyafixed place of business.ExamplesofPEincludeaplaceofmanagement,abranch,anoffice,afactory,aworkshop,amine,anoilorgaswell, a quarry or any other place of extraction ofnaturalresources,orabuildingsiteorconstructionor installation project that exists formore than acertainperiod(typically6to12months).

Progressive taxation.Aprogressivetaxisonethatplaces the biggest burden on thosemost able topay.Mostoftenappliedintheformofincometax,a progressive tax is one where the tax rates riseas incomes increase, so that thosewhoearnhigh

incomeshaveagreaterproportionoftheirincomestakenastax.

Regressive taxation. Aregressivetax,incontrasttoaprogressivetax, isonewhereeveryonepaysthesameamountoftax,regardlessoftheirincomeortheirability topay.This results in thepoorpayingrelatively more of their income on the tax thanthosewithgreaterabilitytopay.Round-tripping. Domestic investors sometimesobtainbenefits intended foroverseas investorsbychannelling their investment through an offshorejurisdiction. A widely cited example is Indianinvestors’ use of Mauritius to avoid capital gainstax:thetermsoftheIndia-MauritiustreatypreventIndia from taxing capital gains by a resident ofMauritius,evenifthisisashellcompanysetupbyanIndiannational.

Safe harbour. It may be defined as an objectivestandardormeasure,suchasarange,percentage,or absolute amount,which can be relied on by ataxpayerasanalternativetoarulebasedonmoresubjective or judgemental factors or uncertainfacts and circumstances. A safe harbour cannotnormallybeusedtothedisadvantageofataxpayer.A common use of a safe harbour is in relation tothin capitalisation where a minimum proportionofequitytodebtmaybeusedasanalternativetodemonstrating what an independent party wouldhavebeenpreparedtolend.

Secret financial jurisdictions.This isanother termused todescribe a taxhavenbecauseof thehighlevelsofsecrecytheyoffer.Secrecyjurisdictionsarethose that intentionally or unintentionally enableindividuals or corporations to escape regulationelsewhere, by concealing either fully or partially,relevant information. The secrecy provisionsofferedbysomejurisdictionscanhelpindividualsorcorporationsevadeoravoidtaxes.Itcanalsohelpcriminalsandcorruptofficialstohidetheirill-gottenmoneyfromauthoritieselsewhere.Theconceptofa secrecy jurisdiction and tax haven are howevernotidentical.

Tainted income. Income of a controlled foreigncorporation that is taxed to the residentshareholdersofthecorporationwhenearnedbytheforeign corporation rather thanwhen distributed.

Generally, tainted income consists of passiveinvestmentincomeandbasecompanyincome.

Tax arbitrage.Taxarbitragereferstopracticesthatexploitthedifferencesbetweentwocountries’taxsystems:ataxpayerusesthedifferenttaxtreatmentsofatransactionorentitybythetwojurisdictionstoobtainadvantagesinbothcountries.

Tax avoidance. Thepracticeofseekingtominimisethe tax one pays using methods that are illegal.Taxavoidanceseekstoreducethepaymentoftaxby arranging affairs in a way that fits within theletterofthelaw,(thoughnotnecessarilywithinthespiritof the law).Asaresult, taxavoidancemightbe legal, but it is not risk-free for the taxpayer.Therefore, tax avoidance implies acceptinga levelof riskwhenseeking to reducetaxpayments.Theterm‘aggressive’taxavoidancedescribesthemostextreme form of this practice, where the levelof risk of legal sanctions is significantly higher.Examplesoftaxavoidanceincludelocatingassetsinoffshorejurisdictions,conversionofincometonon-orlower-taxedgains,spreadingofincometoothertaxpayerswith a lowermarginal tax rate, splittingofbusinessactivitiestoavoidvalueaddedtax(VAT)registrationandleaseandlease-backarrangementstotakeadvantageofearlyinputtaxdeduction.

Tax evasion. It is an illegal or fraudulent non-paymentorunder-paymentoftax.

Tax exemptions.Thisisanexceptiontothestatutorytaxratewhichmaybeprovidedforcertainactivitiesor to group of taxpayers. Governments use thesetoincentivisecertainbehaviouraswellastoshieldpoorerpartsof thepopulation fromanotherwiseregressive tax (forexamplevalueadded tax (VAT).Tax exemptions for investors (“tax incentives”)covervariouscorporatetaxesandare intendedtostimulatedomesticandforeigninvestmentincertainsectorsorgeographicareas,althoughcompetitionbetween developing countries through taxincentivesappearstohavehadalimitedimpactonactuallevelsofinvestment.Wheretaxexemptionsaregrantedtocompaniesonadiscretionarybasis,especiallywherethere is lackof transparencyandscrutiny,thereisasignificantriskofcorruptionandillicitfinancialflows.


Tax haven. Countries, states or territories thatprovide financial secrecy and generous tax rulesthatunderminetheregulationofanothercountry,stateorterritoryfortheprimarybenefitof,anduseby, bodies (individuals, companies, organisations,etc.) that are not resident there. The twodistinctfeaturesofa taxhavenarehigh levelsoffinancialsecrecy and very low or zero levels of tax forcompanies registeredthere.Note that there isnointernationalagreementonthecriteriabywhichtodefineataxhaven.

Tax holiday.Anagreementbetweenacompanyandagovernmentthatspecifiesaperiodduringwhichacompanyinvestinginacountrydoesnothavetopaytax.

Tax incentives.Specialtaxbreaks-thatis,reductions–offeredbygovernmentstoencourageinvestment,usuallyforeigninvestment,bycompanies.

Tax planning.Thisreferstotaxstrategiesdesignedto prevent a tax liability from arising. Unlike taxevasion and tax avoidance, tax planning does notcontravene either the letter or the spirit of thelaw. We have used the term to refer to a rangeof activities, from those explicitly intended orcondonedbythegovernment(forexample,takingadvantageofataxincentive)tomore“aggressive”activitiesthatnonethelessdonotmeetthetechnicaldefinitionoftaxavoidance(forexampletailoringabusiness’spresenceinacountrytopushthelimitsof the definition of permanent establishment).Precisely, “tax planning is an arrangement of aperson’sbusinessand/orprivateaffairsinordertominimisetaxliability”1.

Trade mispricing.Thisisthetermusedtodescribebothtransferpricingabusebetweenrelatedparties,and false invoicing between unrelated parties.Christian Aid estimates that developing countrieslose$160billionayearthroughmispricing2.

Transfer price. Basedonthearm’slengthprinciple,it is the establishment of prices in transactionsof goods and services between related entitiesbasedonthepriceschargedinsimilartransactionsbetweenunrelatedentities.

Transfer pricing. This refers to the priceof transactions occurring between relatedcompanies, in particular companies within thesame multinational group. Governments setrules todeterminehowtransferpricingshouldbeundertakenfortaxpurposes,predominantlybasedonthearm’slengthprinciple.Muchofthedebateontax-motivatedIFFsrevolvesaroundtheformulationand enforcement of transfer pricing regulations,theirshortcomings,andthewayinwhichtheyareabusedfortaxevasionandavoidancepurposes3.

Treaty shopping. A taxpayer can obtain a taxadvantageinacross-bordertransactionbyseekingoutoneormorejurisdictionswhosetaxtreatiesgivemorefavourabletreatmentandroutingtransactionsthrough them. A treaty shopping structure maytakeadvantageoftheallocationoftaxingrightstoajurisdiction–frequentlyataxhaven–thatchoosesnottotaxverylightly.

Windfall taxes. These are taxes that are leviedon companies if theymake above average profitsusuallyduetounforeseeneconomiccircumstanceslikechangesinmineralprices.

1 InternationalBureauforFiscalDocumentation(IBFD)(2015).InternationaltaxGlossary.SeventhRevisedEdition.2 The$160billionfigurewasChristianAid’sestimateoftheamountoftaxlosttodevelopingcountriesgloballyeveryyearwhichappearedinDeath

andTaxes:thetruetolloftaxdodging.ChristianAid2008.FurtherdetailedresearchontrademispricingwasconductedbySimonPakinFalseProfits:RobbingthePoortokeeptheRichTaxFree,ChristianAid,2009.

3 Hearson,M.(2014).TaxmotivatedIllicitFinancialFlows.AGuideforDevelopmentPractitioners.

4 Forexample,treatyshoppingandroundtrippingpracticesbymultinationalcompanies.5 TaxJusticeNetwork–Africa(TJN-A)andSavetheChildrenInternational(SCI)havepreviouslyconductedstudiesinKenya,Sierra-LeoneandZambia

whichdiscoveredhighincidencesofmissedtaxationopportunitiestoimproveinvestmentinchildrenrelatedbasicservicessector.TheconsistentrootcausesfortheseisBEPSrelatedtoillicitfinancialflowsamongotherpractices.Thecompositereportisavailableat:http://resourcecentre.savethechildren.se.

Tax revenue can assist governments to financedevelopment and reduce dependence on foreignaid, debt and foreign direct investment amongother volatile sources of finance. Moreover taxrevenue can be used to increase investment inchildren related activities/sectors and therebyhelping governments better the livelihoods ofchildren, and also secure and guarantee a brightfuture for children and their countries. However,tax-motivatedillicitfinancialflowsandbaseerosionandprofitshiftingpracticessuchastaxevasion,taxavoidance4, aggressive tax planning, underminethese efforts thereby eroding the tax base andweakening the ability of African governments tomobilisedomesticrevenue.ThisultimatelyresultinAfricangovernmentscollectinginsufficientrevenueto improve investment in children related public

Abstract

services sectors such as education, health andsecurity.Bysodoingitcontributesto‘missedtaxationopportunities’.5Non- specialistsmayfind that thecomplexdiscussionontaxationandchildrightsandlost taxation opportunities to improve investmentin children in Africa is further complicated by thelackofcleardefinitionsofrelevantconcepts,andbytheoftenalienatednatureofpolicydebates. Thisguide explains the terms and helps tax and childrightspractitionersnavigatethetaxandchildrightsdebates. Italsogivesanoverviewof the interplaybetweentaxrevenuelossesandlostopportunitiesto improve investment in children. It furtherdiscusseshowclosureof tax loopholescouldhelpimprovetaxrevenuesandgiveagreaterplatform/potential for African governments to improveinvestmentinchildren.


Domestic revenue mobilisation throughtaxation is the key and sustainable sourceof revenue to finance public expenditure

and ultimately the transformation of Africa6. Tax is an issue of fundamental importance fordevelopment and this is supported by the ThirdFinancing for Development Conference (FFD3)outcomedocumentalsoknownastheAddisAbabaAction Agenda (AAAA). The AAAA emphasisedthe centrality of domestic revenue mobilisation(DRM) to finance the Agenda 2030/SustainableDevelopment Goals (SDGs) and this outlined theglobal recognitionof taxrevenueas themainandkey source of domestic revenue mobilisation. Tomany developed countries, lower taxes may justmeanlessrevenue,butformanyAfricancountries,thishasadirect impacton the livesofmillionsofpeople’s access to healthcare; basic education;propernutrition;waterandsecurity7.However,taxrevenuemobilisationfacesathreatfrompracticesthat undermine the growth of the tax base. Suchphenomena include tax policieswhich developingcountries adopt, which usually create conduciveconditions for base erosion and profit shifting(BEPS)andalsoallowforillicitfinancialflows(IFFs)tothrive.

TaxmotivatedIFFsandprofitshiftingcanseriouslyunderminedevelopingcountries’effortstomobilisemore domestic resources through taxation. As aresultdevelopingcountriesfind itdifficult toraiseadequate revenue to finance public expenditure.This guide confines itself to public expenditureon children related activities or sectors such aseducation,healthandothersocialamenitieswhich

1.0INTRODUCTION

affect child rights. This guide also emphasizes thefact that an increase in tax revenue mobilisationaloneisnotsufficienttoaddresspublicexpenditureon children but that it also hinges on the needfor governments to accord a fair share of publicexpenditure to children related activities in linewith various child rights conventions which theyratifiedaswellastheprovisionsonchildrenrightsenshrinedincountryconstitutions.

Tax JusticeNetwork–Africa (TJN-A) and Save theChildren joint studies carried out in Kenya, SierraLeoneandZambiapointtothefactthattherearealotofmissedtaxationopportunitieswhichwouldhelp improve investment in children related basicpublicservicessectors.Thestudiesrevealthatthemissed taxation opportunities are mainly due toissuessuchaspoortaxpolicies(taxloopholes)andIFFs which have resulted in tax base erosion andprofit shifting and hence significant tax revenuelossesacrossdevelopingcountries.

This document is designed as a guide for taxand child rights practitioners who wish to betterunderstandthenexusbetweentaxandchildrights.

1.1 Tax, missed taxation opportunities and child rights: DefinitionsThe term “missed taxation opportunities” in thisguide refers to potential tax revenue which wasnot collecteddue to various issues in the countrytaxsystems.ExamplesareillustratedintheTaxandChildRightssynthesisreport8whichstudiedvariouslosttaxationopportunitiescases,inthreecountriesnamelyKenya,SierraLeoneandZambia.Themissed

6 TheAddisAbabaActionAgendaoftheThirdInternationalConferenceonFinancingforDevelopment(alsoreferredtoastheFfD3OutcomeDocument),July2015.Thisisavailableat:http://www.un.org/esa/ffd/ffd3/wpcontent/uploads/sites/2/2015/07/Addis-Ababa-Action-Agenda-Draft-Outcome-Document-7-July-2015.pdf

7 TakingonBigBusiness:DoesAfricaneedonetaxmantocountersmartmultinationals?http://mgafrica.com/article/2014-11-04-taking-on-big-business-does-africa-need-one-taxman?utm_source=eNewsletter&utm_campaign=e606d47287-ICTD_Update2_4_2015&utm_medium=email&utm_term=0_ad86b52f5e-e606d47287-285635705&ct=t(ICTD_Update2_4_2015)&mc_cid=e606d47287&mc_eid=ae02daf142Accessedon5February2015

8 The“MissedTaxationOpportunitiestoImproveInvestmentinChildreninAfrica”synthesisreportisavailableat:http://resourcecentre.savethechildren.se/.

Photo © SavetheChildren


taxationopportunitieswerearesultofanumberofloopholesandweaktaxpoliciesbeingimplementedinthesecountries.Examplesof loopholesareasaresult of lopsided Double Tax Agreements (DTAs)signed by these countries and tax incentivesamongothers.OtherleakagesinthetaxsystemasreflectedinthethreecountrycasestudiesareasaresultofBEPSbymultinationalcompanies(MNCs)throughpracticesthatincludetrademispricingandaggressivetaxplanning.

The term child rights in this guide refers to anyhuman rights related to children as enshrined inAfrican countries Constitutions and Internationalhuman rights conventions and legal frameworks(whichacountryhasratified).

AsBlankenburgandKhan(2012)note,indevelopingcountriesthelegalframeworkfortaxesmaynotbeanadequateguide for identifying IFFs. Inadditiontax incentives9 andDTAs10may present loopholesfor tax dodging such as round tripping and treatyshopping.

There may be some value for policymakers informulating tax policies and reforms which closetax loopholes and also participating in variousinternational tax initiatives which are aimed ataddressing base erosion and profit shifting11. Inthemeantime, for the purposes of this guidewehaveadoptedabroaddefinitionofmissedtaxationopportunities that incorporates IFFs and practicessuch as lobbying for tax incentives, transfermispricing, trade mispricing, and exploiting taxtreatiesfortaxavoidance.Thisissimplysothatwecan familiarise the reader with tax concepts anddebatesthatcouldbeusefultotaxandchildrightspractitioners.

Itisworthnotingthattheboundariesbetweentaxpractices thatare legalor illegal, licitor illicit, areconstantly shifting andmaybedefineddifferentlyby different stakeholders. An active public debate

is takingplace inmany countries as towhat levelof tax minimisation is legitimate for businessesand wealthy individuals to undertake. The otherhot debate taking place in many countries is ontaxjusticeandsocialjusticeaswellasfinancingfordevelopmentwiththerealizationthatotherformsof finance such as aid, foreign direct investment(FDI) and debt are not predictable nor are theysustainable. As part of the international debate,tax is increasingly being recognised as the mostpredictable and sustainable source of domesticrevenue mobilisation to finance development. Itisworthkeepingthisdebateinmindwhenreadingthefollowingsections.

1.2 Implications on improving investment in children and child rightsWhy should tax and child rights practitioners beinterested in the connection between taxes andchildrightsaswellastaxrevenuemobilisationandtaxexpenditure?

Taxesclearlyhavehugesocialjustice/humanrightsand development significance. The most obviousreasonisthatwhiletaxationispotentiallythelargestsource of public revenue to spend on investmentin children/ human rights related projects, thispotential is only partly exploited: ‘the missedtaxation opportunities to improve investment inchildreninAfrica’synthesisreporthighlightedthatmost developing countries generate tax revenuesequivalentto15percentofgrossdomesticproduct(GDP) or less, comparedwith two or three timesthisinothercountries(e.g.OECDcountries).

Revenue fromtaxation ismorestableandreliablethanthatfromothersourcesandlessvulnerabletotheshiftingagendasofaiddonors,inparticular.

Moreover,taxhasseveralnon-revenuebenefits.Asameans of income redistribution, it ensures thatthebenefitsofeconomicgrowtharesharedmorefairly across the population. This is an important

tax justice and social justice objective especiallywhen some impressive growth rates achievedin some developing countries12 have failed totranslateintoareductionofpovertyandinequality.Tax reformcanalsobeusedasa tool topromotetax justice and economic development. Taxationcan shape incentives13 and change behaviour,whilechangesintaxpolicyandadministrationcancreate better business environment. Finally tax isseen as ameans of building the state, increasinggovernment accountability to citizen-taxpayers,andstrengthening thesocial contract (Brauttigam,Deborah,Fjelstad,&Moore,2008).

In summary, while taxes are potentially a keychild rights/social justice tool, missed taxationopportunities undermine efforts to realize thispotential.

9 TaxincentivesoftengetabusedwhichresultinthemenablingofIFFs.10 DTAsformostAfricancountriestendtoincludeprovisionsthatencourageIFFssuchasprovisionstoremoveorlowerwithholdingtaxeson

managementfeesandremovelimitationsonintracompanyloanswhicherodeAfricancountries’taxingrights.11 Examplesofinternationalinitiativesincludecountrybycountryreporting,beneficialownership,automaticexchangeofinformationandOECDBEPS

process.OtherregionalinitiativesincludetheAfricaTaxAdministrationForumprocessessuchastheATAFAgreementonMutualAssistanceinTaxMatters(AMATM),ATAFPracticalGuideonExchangeofInformationforDevelopingCountriesandtheATAFmodelDoubleTaxAgreement.MoreinformationcanbeobtainedfromanATAFdiscussionpaperentitled:“IllicitFinancialFlowsandTradeMisinvoicing:ThechallengesforAfrica”pp.12-20.

12 Africaisexperiencingarapidrateofeconomicgrowth—supportedbyurbanisation,reconstruction,discoveryofpreciousresources(likenaturalgas)andindustrialisation.In2001,TheEconomistbrandedAfrica“theDarkContinent”butthatsentimenthaschanged.Thesamepublicationin2013sawthecontinentas“AfricaRising”.Africaistheworld’sfastestgrowingcontinentatthemomentandgrowthisexpectedtobenorthof5%overthenextdecade.

13 RefertotheTJN-A&SCMissedTaxationOpportunitiestoImproveInvestmentinChildreninAfricasynthesisreport(pp.26-28)forthefindingsontaxincentivesbasedontheKenya,SierraLeoneandZambiacasestudies.

14 Weaktaxationreferstotaxsystemswhichhaveloopholesandhencepronetoabusivetaxpracticesandtaxrevenueleakages.Unfairtaxationreferstoregressivetaxsystemswhichtaxthepoormorethantherichwhilstaggravatinginequality.

15 TheDakarCommitmentstipulatesthatgovernmentsshouldspentatleast9percentoftheirannualbudgetsonpubliceducationby2010.16 TheAbujadeclarationstipulatesthatgovernmentsshouldspendatleast15percentoftheirannualbudgetsonpublichealth.

Box 1: Underinvestment in children related basic public services sectors

TJN-A& SCI synthesis report (pp.13-14) revealedunderinvestment in children relatedbasic public servicessectorsinKenyaSierraLeoneandZambia.Manychildreninthesecountriesstillexperienceseveredeprivationsleadingtomalnutrition,stuntingandinfantmortality.InSierraLeone,forexample,fortheperiod2007-2011,anaverageof51.7percentofthepopulation,includingchildren,livedonlessthanUS$1.25perday.TheEbolaoutbreakthathitSierraLeoneandotherWestAfricancountries in2014is likelytoworsenthesituationofchildrenandthisalsodemonstratesunderinvestmentinthehealthsector.InKenyaandZambia,thepopulationlivingonlessthanUS$1.25perdayisestimatedat43.4percentand74.5percentrespectivelyforthesameperiod.Manychildreninthesecountriesdonothaveaccesstocleanwater,basicsanitation,decenthousing,healthcareandqualityeducation.AllthethreecountriesarespendingbelowtheDakarandAbujaDeclarationcommitmentsoneducationandhealthrespectively.Forexample,in2012KenyaandSierraLeoneallocated5.9percentand11.7percenttohealthrespectivelywhichisbelowthe15%commitment.

This is not withstanding that all three countries have ratified the Convention on the Rights of the Child(CRC),theAfricanCharterontheRightsandWelfareoftheChild(ACRWC),theDakarCommitmentonpublicexpenditureoneducation15and theAbujaDeclarationonpublicexpenditureonhealth16.Therefore in linewithArticle4oftheCRCthesethreegovernmentshavetheresponsibilitytoinstituteandstrengthen,whererequired,policy,legislativeandinstitutionalmeasuresthatwillenablethemtocollectallpossibletaxrevenuetoimproveinvestmentinchildren.

Source:TJN-AandSCI(2015,pp.13-14)

1.3 The link between taxation and child rightsChild rights fall under the general umbrella ofhuman rights. Every government in theworldhascertain responsibilities regarding its citizens. Thehuman rights legal framework spells out thoseresponsibilities. Human rights encompass issuessuchassocialandpoliticalrightsaswellaseconomicandsocialrights.Theminimumrequirementsforthefulfilmentofeconomicandsocialrightsincludestheprovisionofavailablefoodstuffsforthepopulation,essential primary healthcare, basic shelter andhousing, and the most basic forms of education.Stakeholders working on human rights should beconcerned about how rights are realized throughthebudget,andhowtheyareviolatedwhenstatesareunabletomeettheirobligationsthroughweak or unfair taxation14.


In 1986 theUnitedNationsmadeexplicit the linkbetween this right and the resources required tofundit.Morerecentlythemillenniumdevelopmentgoals (MDGs) and currently the sustainabledevelopmentgoals(SDGs)areanattempttocreatea practical benchmark for states towork towardsimplementinghumanrights.

MDGs and SDGs campaigners often focus onpushingcountriestofulfiltheiraidpledges,aimedatmeetingtheMDGs(inthepast)andSDGs.Whilethisisimportant,thereisanincreasingrecognitionthat the progressive realization of rights, in thelongterm,requiresdomesticresourcemobilisationthrough tax. The recent case studies by TJN-A& Save the Children (2015) on missed taxationopportunitiestoimproveinvestmentinchildreninKenya, Sierra Leone and Zambia showed a strongrelationship between high levels of tax collectionand increased investment in children relatedactivities such as health and education and theviceversa.AnotherrecentstudybytheTaxJusticeNetwork-Africaalsoshowedastrongrelationshipbetween African countries with high levels of taxcollectionandthosemakingprogresswithregardtoMDGs.17

The key question is whether the resources arebeingmobilised to ensure that governments fulfiltheir responsibilities towards the progressiverealizationof rights. If not, a governmentmay befailing in its human rights obligations andmaybeheldtoaccountfordoingso.Therefore,aspointedout above there is a strong connection betweentaxationandthecapacityforincreasedinvestmentinchildrenandthesehaveanimpactonchildrights.

1.4 Structure of the guideBasedontheaforementionedissues,itisimportantto outline the content of the tax and child rightsguide. It will be crucial to answer questions like;whyarecertaintax issuesrelevantandconnectedto child rights? To understand missed taxationopportunities and related tax issues we have tofirst understand the basic principles underlyingdomesticand international taxation. The guide isthereforeorganisedasfollows:

• Section 2–Keyconceptsintaxation• Section 3–Thenexusbetweentaxandchild

rights• Section 4–Advocacy:Taxjusticeandchild

rights:Whoisdoingwhat?• Section 5–Conclusion

17 ResearchcitedinAfricanTaxJusticeSpotlight,Number4,December2010,Nairobi:TaxJusticeNetwork-Africa.



This section outlines some of the mostimportant concepts and policy andadministrative instrumentsrelatedtomissed

taxationopportunitiesindevelopingcountries.

2.1 What is tax justice? Taxjusticeisabroadlybasedconceptwhichrelatestoindividuals,alltaxableentitiesandtaxsystemsasawhole.

Taxjustice-thetaxpayerandtaxcomplianceFortheindividualtaxpayer,taxjusticeisabouttaxcompliance.Thishappenswhentheindividualseeksto pay the right amount of tax (but notmore) intherightplaceattherighttimewhererightmeansthat the economic substance of the transactionstheyundertakecoincideswith theplaceand forminwhichtheyreportthemfortaxationpurposes18

(Murphy,2010).

TaxandSocietyMuchmore than the individual, tax justice is alsoabout the existence of tax systems that promotesocial well-being within and between societies. Itisaboutthecreationofenvironments inwhichall people(includingchildren)canprosper.

That essentially means that the state institutionsand business that meet the needs of people canalsoprosper. Itadditionallymeansthatthosewhofailtoprosperareprotectedfrommisfortuneuntilsuchtimeastheycanprosperagain.

Therefore, tax justice is about four things aboveand beyond the duty of the individual to be taxcompliant. First it is about understandingwhywetax.Second it isaboutdefiningtheattributesofagood tax system. Third it is about understandingtheprocessthatdeliverstaxjusticeandfinallyitisaboutunderstandingtransparency–withoutwhichtaxjusticeisnotpossible.

2.0KEY CONCEPTS IN TAXATION

ThesixstepstotaxjusticeTaxjusticecanbedefinedasasixstageprocessasfollows:1. Define the tax base. This is thefirst essential

step in creating progressive taxation and inpromoting the better use of resourceswithinsociety;

2. Findwhatistobetaxed.Ifthetaxbasecannotbe accurately located then there is no pointtryingtolocateit;

3. Countthetaxbase.Unlessthetaxbasecanbequantifieditcannotbetaxed.

4. Tax the tax base at the right rates of tax. Intheprocessmakingsuretheinter-relationshipbetween the various tax bases is properlymanagedtoensurethattheessentialrevenueraising,repricingandredistributivequalitiesofajusttaxsystemisvital;

5. Allocatetheresultingrevenuesefficientlyandtothebest social effect;and

6. Report – governments must be accountablefor what they do with tax revenues or thedemocraticprinciplefails.

TheelevenstepstofinancialtransparencyTax justice cannothappenby chance. Informationis required to achieve tax justice. That means allpotentiallytaxablepeople,whethertheyarehumanbeingsorlegalentitiescreatedunderlaw,mustbetransparentaboutwhattheydo,areandhavedone.Financial transparency exists when the followinginformation is readily available to all who mightneed it to appraise transactions they or othersmightundertakeorhaveundertakenwithanothernaturalorlegalperson:1. Whothatpersonis;2. Wherethatpersonis;3. What right the person has to enter into a

transaction;4. What capacity thepersonhas to enter into a

transaction;

And with regard to entities that are not naturalpersons:5. Whatthenatureoftheentityis;6. Onwhosebehalftheentityismanaged;7. Whomanagestheentity;8. Whattransactionstheentityhasenteredinto;9. Whereithasenteredintothosetransactions;10. Who has actually benefited from the

transactions;and11. Whether all obligations arising from the

transactionshavebeenproperlyfulfiled.

CreatingtaxjusticeTax justice is not simple, as is already apparent.However, tax justice is possible: that is what isimportant. These five criteria, tax compliance onthepartoftaxpayers,andthefoursetsofattributeson which just tax systems are built19, are thefoundations of tax justice. Together they create aworldinwhichtaxjusticecanprevailforall.Thatiswhattaxjusticeseekstoachieve.

2.2 Why tax justice?Tax justice can createaworld inwhich social andeconomic as well as social and political justiceprevailsforall.Taxjusticeleadstoimprovedsocialservices.

2.3 Tax policy making standards2.3.1 EfficiencyAtaxisefficientifitminimisestheextenttowhichitinfluencestheeconomicdecisionstaxpayersmake.Forexample,ataxisinefficient:ifitencouragestaxplanningwherebytaxpayersobtainalowerratesimplybystructuringthewaytheirincomeisearned(thiswouldresultindifferenttaxtreatmentbasedonataxpayer’swillingnessorabilitytoengageintaxplanningasinsteadofbeingbasedonthetaxpayer’schoiceofincomegeneratingactivity;ifitcreatesadisincentivefortaxpayerstoearntypesofincomewhicharetaxedatahigherratethanothersandifitfacilitatesIFFssinceitencouragesunproductivebehaviour.Moreover,internationaltaxrulesallowBEPSiftheyencourage

businessestoconcentratehigh-value-addedgroupservicessuchasmarketingandaccountancy,aswellaspatents,trademarks,andotherintellectualproperty(IP),inlowtaxjurisdictions.Moregenerally,capitalflightthroughinternationaltaxavoidanceandevasionleadstotheconcentrationofcapitalinlow-taxjurisdictionsratherthanintheeconomiesfromwhichthecapitaloriginates.

Itshouldbenotedhoweverthattheinfluencethatcertaintaxpolicieshaveonthedecisionswhichtaxpayersmakemaynotdepictinefficiency.Examplesofsuchtaxpolicywhichisnormallymeanttodeliberatelyshapebehavioursare“sintaxes”ontobaccoandalcohol(thesearedesignedtoreduceconsumption)and“greentaxes”(designedtoshiftbehaviourtowardsmoreenvironmentallyfriendlyactivities.Therefore,theconceptofefficiencyreferstotheunintended effects oftaxpolicy.

The10CsofagoodtaxsystemAnefficienttaxsystemhasnineattributeswithoverridingcharacteristictowhichtheyallcontribute.Anefficienttaxsystemis20:1. Comprehensive–inotherwords,

broadbased;2. Complete–withasfewloopholesas

possible;3. Comprehensible–itisascertainasis

reasonablypossible;4. Compassionate–ittakesinto

accountthecapacitytopay;5. Compact–itiswrittenas

straightforwardlyaspossible;6. Compliantwithhumanrights;7. Compensatory–itisperceivedasfair

andredistributesincomeandwealthasnecessarytoachievethisaim;

8. Complementarytosocialobjectives;9. Computable–theliabilitycanbe

calculatedwithreasonableaccuracy;

18 ThiswasextractedfromthenoteontheFoundationsoftaxjusticewhichwaswrittenbyRichardMurphyforTaxResearchLLP@2010.

19 Thefoursetsofattributesonwhichjusttaxsystemsarebuiltarethe5Rs,10Cs,the6stepstotaxjusticeand11stepstofinancialtransparency.20 ThecontributionmadebyRichardMurphytothe10Csofagoodtaxsystemisgratefullynoted.


Allofwhichfacilitatethechancethatitwillbe:10. Competentlymanaged.

Incombinationthesearekeyattributesofagoodtaxsystem.

2.3.2 EquityPrinciplesofequityarethattaxobligationsshouldbefair.Thisideologyispremisedontwoperspectives:theability to pay principle(thetaxpayer’srelativewealthorlevelofincomedefineshisorherobligations)andthebenefits principle(taxobligationsarelinkedtothetaxfundedpublicservicesprovidedtoataxpayer).Oneinstanceinwhichthe

benefitsprinciplemayseemattractivetodevelopingcountriesisasajustificationforthetaxationofforeigninvestmentatthesource.Inthiscasethetaxobligationofaforeigninvestorcanbeconceptuallylinkedtothepublicservicesfromwhichitbenefitsinthesourcecountry–theeducationandhealthcareofthecompany’sworkforceandtheirfamilies,transportinfrastructure,security,etc.IFFscanunderminetheabilitytopaybyallowingsometaxpayerstoreducetheirtaxliabilityrelativetootherswiththesameincomeandalsotakeadvantageofopportunitiesthatareonlyavailabletowealthyindividualsandlargercompanies.21

Box 2: Illicit Financial Flows

AccordingtotheHighLevelPanelReportonIFFsfromAfrica22,itisestimatedthatAfricalosesapproximatelyUSD 50 billion annually in illicit financial flows resulting from illegal activities enacted by individuals andMNCs.Global Financial Integrity (GFI) further estimates that Sub-SaharanAfrica lostoverUSD675billionbetween2004and2013inIFFs.Foracontinentthatfacesamultiplicityofchallengessuchasseverepovertyandinsecurity,thisissignificantandisfurthermagnifiedgiventheresourceconstraintfacingmanycountriesonthecontinent.

Source:AU/ECA,2015&GFI,2015.

Box 3: Google’s Tax Planning

In2010,BloombergMediapublishedareport24describinghowGoogleusedtwowell-knownschemes,the“Double Irish”and“DutchSandwich”tobooktheprofits fromitssearchenginebusiness inBermudaeventhoughitsstaffwerebasedinIreland.

“Toreduceitsoverseastaxbill,Googleusesacomplicatedlegalstructurethathassavedit$3.1billionsince2007andboostedlastyear’soverallearningsby26percent.Whilemanymultinationalsusesimilarstructures,Googlehasmanagedtoloweritsoverseastaxratemorethanitspeersinthetechnologysector.Itsratesince2007hasbeen2.4percent”.(Bloomberg,2010).

ThedoubleIrisharrangementwasataxstrategythatsomeMNCsusedtolowertheircorporatetaxliability.Thestrategyhasceasedtobeavailablesince1January2015,thoughthosealreadyengaginginthearrangementhave until 2020 to find another arrangement. The strategy used payments between related entities in acorporatestructuretomoveincomefromahigher-taxcountrytoalowerornotaxjurisdiction.ItreliesonthefactthatIrishtaxlawdoesnotincludetransferpricingrulesasdoestheUnitedStatesandthoseofmanyotherjurisdictions.Specifically,Irelandhasterritorialtaxation,anddoesnotlevytaxesonincomebookedinsubsidiariesofIrishcompaniesthatareoutsidethestate.

Sources:Drucker(2010)andtranscriptofUKParliament’sPublicAccountsCommitteeevidenceSessions,12November2012and16May2013.

21 AnexampleofasituationthatbreachestheprincipleofbothequityandefficiencyistheuseofBEPStechniquesavailabletomultinationalcompanies(MNCs)butnottotheirdomesticcompetitors.

22 Thereportisavailableat:http://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf 23 ThecontributionmadebyAlexCobhamtothe5Rsoftaxationisappreciativelynoted.

2.4 Roles of taxation (the 5 Rs)Therearefivereasonsfortaxation23.Taxisusedto:1. Raiserevenue;2. Reprice goods and services considered to

be incorrectly priced by the market such astobacco,alcohol,carbonemissions,etc.;

3. Redistributeincomeandwealth;4. Raise representation within the democratic

process because it has been found that onlywhenanelectorateandgovernmentareboundbythecommoninterestoftaxdoesdemocraticaccountabilityreallywork;andtofacilitate:

5. Reorganisationof theeconomythroughfiscalpolicy.

Iftaxjusticeistosucceedtaxesmustbesettakingalltheseconsiderationsintoaccount.

2.5 Tax minimisation practicesThesepractices includetaxevasion, taxavoidanceand other tax minimisation categories. They aredesignedtoreduceataxliabilityandarearrangedalong a legal spectrum. At one end is illegal tax evasion, which consists of actions by a taxpayerto escape a tax liability that has arisen under acountry’s law. This usually involves concealingfrom the revenue authority the income onwhichthe tax liabilityhasarisen. If the taxpayer falsifiespaperworkthenthisistaxfraud.Taxevasion,unliketaxfraud,isnotacriminaloffenceineverycountry,thisdistinctionisimportant.

At theotherendof thespectrum is tax planning. This is designed to prevent a tax liability fromarisinginthefirstplace.Theleastcontroversialtax

planningactivitiesare thoseexplicitly intendedorcondonedbygovernment,suchastakingadvantageofataxincentivebyengaginginthebehaviouritisdesignedtoencourage.

Between tax planning and tax evasion lies tax avoidance.Taxavoidancehascometobeunderstoodinmanycountriesaspracticesdesignedtogainataxadvantage by contravening the intention but nottheletterofthelegislation.Thisdrawsaboundarywith tax planning, which is consistent with, or atleastneutralwith respect to, the intentionof thelegislation. Anti-avoidance rules, discussed in thenextsection(2.6.),canbebasedonthisdistinction.

Thistechnicaldefinitionoftheterm“taxavoidance”hasbecomeconfusedbyitsrecurrentuseinpublicdiscourse to refer topractices that are not illegal but are perceived to be unethical. It is importantto note that many of the examples that havegenerated debate around the tax practices ofmultinational companies (MNCs) may not havebeen“taxavoidance”inthetechnicalsense.

For an informed debate, finding a suitablecategorization and terminology for such activitiesisofparamountimportance.Devereux,Freedman,andVella(2012)suggestthreesuchcategories:1. Ineffectiveavoidance,whichcanbeprevented

through the courts, provided it is discovered

andactionistaken;2. Effectiveavoidance,whichcannotbeprevented

inthiswaybecauseitresultsfrom“adefectinthe legislationorother failure in theway thelegislationiswritten”;and

3. Using legislation or the international taxsystemtoone’sadvantage inamannerwhichmayresultinaverylowtaxbill,butisnottaxavoidanceassuch.

Thethirdcategoryincludesaggressivetaxplanning,atermthatisusuallyusedtoexpressthesensethatanactivitypushesanethicalboundaryandshouldbeaddressedthroughchangesinlegislation.

Concepts in international tax related to taxavoidanceandaggressive taxplanning include tax arbitrageandtreaty shopping.Taxarbitragerefersto practices that exploit the differences betweentwo countries’ tax systems: a taxpayer uses thedifferent tax treatments of a transactionor entityby the two jurisdictions to obtain advantages inboth countries. In treaty shopping, the taxpayerobtains a tax advantage in a cross-bordertransaction by routing the transactions throughoneormore jurisdictionswhose tax treatieshavemore favourable characteristics. TJN-A & Savethe Children studies in Kenya, Zambia and SierraLeoneestablishedtreatyshoppingpracticeswhichcontributedtobaseerosionandprofitshifting.

24 Thearticleisavailableat:http://www.bloomberg.com/news/articles/2010-10-21/the-tax-haven-thats-saving-google-billions.


2.6 General anti-avoidance rules One way of preventing tax avoidance is throughlegislative instruments known as specific anti-avoidancerules(SAARs)andgeneralanti-avoidancerules(GAARs).SAARsaretailoredtospecifictypesofabuseandmayincludeanti-avoidanceclausesintaxtreatiesor controlled foreign company (CFC) rulesthatpreventsimpleprofitshifting intotaxhavens.GAARsprovideamoregeneralizeddefinitionofthekindsof taxavoidancearrangementswhoseeffectthe tax authoritymaydisregardwhen assessing ataxpayer’saffairs.AweakerversionoftheGAARisthegeneralanti-abuserule,whichsetsahigherbarbeforeitisinvoked,usuallybasedontheartificialityof arrangements. An artificial arrangement or anartificialseriesofarrangementsis/areputintoplacefor theessentialpurposeofavoiding taxationandlead to a tax benefit and they are an abusive taxpractice.

2.7 Tax havens, secrecy jurisdictions, and harmful tax practicesThereisoftenasignificantlinkbetweentaxhavens,secrecy jurisdictions and harmful tax practices.Harmfultaxpriceslinkedtotaxhavensandsecrecyjurisdictionsaredrivenormotivatedbytheexistenceofloworzerotaxregimesandtheinherentopacityassociatedwithtaxhavensandsecrecyjurisdictionsrespectively.

The OECD (1998) report defined tax havens as“countries that are able to finance their publicservices with no or nominal income taxes andthatofferthemselvesasplacestobeusedbynon-residentstoescapetaxintheircountryofresidence.”TheInternationalBureauforFiscalDocumentation(IBFD)TaxGlossary(2015)arguesthatthetermtaxhaven“doesnothaveaprecisetechnicalmeaning”andalsoadoptstheOECD(1998)definition.

In addition to the aforementioned features, theOECDhasidentifiedtypical‘confirming’featuresofataxhavenasfollows:1. Lackofeffectiveexchangeofinformation;2. Lackoftransparency;and3. Norequirementofsubstantialactivities.

The Tax Justice Network (2013) defines secrecyjurisdictionsas:

Looselyspeaking,asecrecyjurisdictionprovidesfacilitiesthatenablepeopleorentities[to]escape(andfrequentlyundermine)thelaws,rulesandregulationsofotherjurisdictionselsewhere,usingsecrecyasaprimetool.

In this case it means that themain tool used bysecrecy jurisdiction is secrecy. Hearson (2014)proposesthat;

Classifyingjurisdictionsastaxhavensisan important tool that countries can use toprotectthemselvesfromillicitfinancialflowsandexerteconomicandpoliticalpressureonlabelledjurisdictions.

The recent Panama Paper Leaks25 (2016)demonstrated the magnitude of illicit financialflows from developing countries to tax havensand secrecy jurisdictions. Additionally, secrecyjurisdictions are cities, states or countries whoselaws allow banking or financial information to bekept private under all but few circumstances andmaycreatealegalstructurespecificallyfortheuseofnon-residents.TheoriginatorsofIFFsmayneedtoprevent theauthorities in thecountryoforiginfrom identifying them (e.g. if the money is theproceedsoftaxevasion),inwhichcasetheflowwillbedirectedtoasecrecyjurisdiction.BecausethosedirectingIFFsseekoutlowtaxes,manytaxhavensarealsosecrecyjurisdictions,buttheconceptsarenotidentical26(AU/ECA,2015).

2.8 Mutual assistance and information exchangeIBFD (2015) defines mutual assistance as a shorthand expression that is used to refer tothe administrative assistance provided betweenstates for the collection of their respective taxes,as well as assistance in the form of exchange of information on tax matters. Provisions relatingtoboth kindsof administrativeassistancemaybefound in tax treaties, althoughmutual assistance ismorecommonlyprovidedforbywayofseparate

agreement(sometimesreferredtoasataxrecoveryagreement).27TheAfricanTaxAdministrationForum(ATAF)alsoidentifiesexchangeofinformation(EoI)as one of the measures to curtail IFFs and trademisinvoicing in Africa. According to ATAF (2015),“cooperationbetweentaxadministrationsinAfricais critical in the fight against tax evasion”. ATAFidentifies EoI as a key aspect and critical tool tofight crossborder taxevasionand IFFs inAfrica28. ItisimportanttonotethattheATAFhasworkedoninitiativessuchastheATAF Agreement on Mutual Assistance in Tax Matters (AMATM), the first ofitskind inAfrica. Itallowssignatoriestoexchangeinformation, with limitations, either on request,spontaneously or automatically and also allowssharingofexpertiseandconductingjointauditsandinvestigations.

Furthermore,theATAFdevelopedtheATAF Practical Guide on Exchange of Information for Developing Countries, assistedby theOECDGlobal ForumonTransparencyandExchangeofInformationandtheOECDTaskForceonTaxandDevelopment.29

2.9 Allocation of the international tax baseAllocationof the international ‘tax cake’ is oneofthe most contentious issues today. The greatestchallenge that is faced by countries across theglobe, especially developing countries, is to usethe current broken international financial systemand international tax architecture to allocate thetax base fairly between countries. This challengeis hugely a result of “the international commonprinciplesdrawnfromnationalexperiencestosharetax jurisdictionmay not have kept pace with thechanging business environment”30 (OECD, 2013).There are international business activities whichprovidethepossibilityoftwoormorecountriestotaxasimilartransaction.Whenthishappensthereis need to use international tax rules to allocateor apportion taxing rights between the countriesinordertoeliminate juridicaldouble taxation31ordouble non-taxation32. Juridical double taxation

is generally viewed as a stumbling block to crossbordertradeandinvestment.

International tax rules on jurisdiction to tax canseriously affect developing countries’ capacity toraise tax because the tax jurisdiction rules affecttheshareofthetaxbaseattributedtodevelopingcountries,andhencethetaxrevenuesthattheycanraise. However, their impact may extend beyondthissimpleallocationrole.

RecentreportsbytheAU/ECAandtheOECDnotethat,tax-motivatedIFFsdependonmovingincomeandwealthbeyondthe jurisdictionof thecountryfrom which they originate to the jurisdiction ofanotherstatewithzeroor lower tax rates.Wheretherulesarenotdesignedwell,orwheredevelopingcountries don’t have the appropriate safeguards,this creates opportunities for IFFs (Hearson,Tax Motivated Illicit Financial Flows. A guide fordevelopmentPractitioners,2014).

There are a number of critical concepts thatunderpin the regime that countries can use toapportion the taxbase.A countryhas jurisdictiontotaxacorporateorindividualtaxpayerundertwocircumstances:(i)ifthetaxpayerisataxresidentofthatcountry,or(ii)ifthetaxpayerearnsincomeinthat(source)country.Ifataxpayerwhoisaresidentof one country earns money in another, thesetwo principles can clash, creating juridical doubletaxation. To minimise this, countries generallyagree to restrict the circumstances in which theyapplytheresidenceandsourceprinciples,throughunilateralmeasuresintheirowntaxesandthroughbilateral andmultilateral agreements. In the caseofindividuals,adevelopingcountrymaywellhavesome interest in taxingnon-residentworkerswhoare employed in the country by multinationalcompanies or nongovernmental organisations(NGOs). The key issue of interest concerningIFFs, however, is wealthy individuals who are taxresident in a developing country but who earn

25 ThePanamapapershave“liftedtheveilonasecretworldinwhichtaxhavensareusedtoshiftbillionsoutoftheworld’spoorestcountriesinAfrica”(WorldEconomicForum,2016).Thisisavailableat:https://www.weforum.org/agenda/2016/05/africa-is-rich-in-resources-but-tax-havens-are-keeping-its-people-poor.

26 AU/ECA(2015)–HighLevelPanelReportonIFFsfromAfrica.Thisisavailableat:http://www.uneca.org/sites/default/files/publications/iff_main_report_english.pdf

27 OECD(2010).OECDModelTaxConventiononIncomeandonCapital(Article26).SeealsoEU(2011)MutualAssistanceDirective(2011):CouncilDirective2011/16/EUof15February2011onadministrativecooperationinthefieldoftaxationandrepealingdirective77/799/EEC,OJL64(2011)EULawIBFD.

28 ThemaindriveroftheexchangeofinformationcampaignhasbeentheOECDGlobalForumonTransparencyandExchangeofInformation.29 FormoreinformationrefertoATAF(2015).AdiscussionpaperonIFFsandtrademisinvoicing:ThechallengesforAfrica.pp.16-1730 TheOECD(2013)reportisavailableat:http://www.oecdilibrary.org/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en.p.731 Judicialdoubletaxationisascenarioinwhichataxpayeristaxedonthesameincomemorethanonce.32 Doublenon-taxationreferstoascenariowherebyneithercountryisabletotaxcross-borderincome.


incomeabroad.This incomeisusuallytheintereston savings and investments that may have beentransferredoutofthecountryillicitly.33

In the caseof companies, adeveloping country isusually in thepositionof taxing incomeatsource.It can levy taxes on the profits of companiesoperating in its jurisdiction, but it may also taxforeign residentswho earnmoney in the countrythrough the proceeds of shareholdings, loans,technicalservices,orintellectualpropertylicensing.Developing countriesdo thisbywithholding taxeslevied on dividends, interest payments, royalties,andfees.34

Countrieslimittheirrighttotaxatsourceindividuallyorthroughnegotiationsintwoways:1. They may limit the circumstances in which

theytaxaforeign-ownedcompany’sprofitsbylimiting this right to situations in which a PEexists. If amultinationalhasnot incorporateda local subsidiary in order to carry on itsbusiness, the PE test generally requires aphysicalpresenceinthecountryforaspecifiedperiod of time, with exceptions for certainkinds of activities.One key area of tax treatynegotiations concerns the length of timerequiredtomeetthistest35.

2. Countries limit the right to tax at source byloweringtheirwithholdingtaxrates,themostvisibleoutcomeoftaxtreatynegotiations.ManyAfricancountriesare losingtheirpotentialtaxrevenueduetoloworzerowithholdingtaxesintheirtreaties36.

AccordingtoHearson(2014)thereasoningbehindlimitingtaxationatsource isthatcountriesontheother side of the transaction,where the taxpayerresides, agree to forfeit some of the right to taxtheir resident multinationals’ income earnedoverseas.Thecountriesmaydothisas follows: (i)bydeductingtaxespaidoverseasfromacompany’sprofits and calculating its domestic tax liability onthebasisofitspost–foreigntaxincome;(ii)bygivingcompaniesacreditfortaxespaidoverseasagainst

theirdomestictaxbill;or(iii)byexemptingforeign-earnedincomefromdomestictaxaltogether.

Theabovediscussionbringstotheforetheseriouscomplications that the current international taxarchitectureisassociatedwith.AttheendofthedayitisdevelopingcountrieswhicharebearingmostoftheburdenfromBEPSstrategiesthatmultinationalcompanies are using to take advantage of thecurrent broken international financial and taxarchitecture.Developingcountriesstillrelyheavilyoncorporatetaxationtoraisetaxrevenues.

2.10 Tax treaties and BEPSWhilsttaxtreatieshaveapositiveroleinrestrictingcountriessourceandresidencetaxationrightsinacompatiblemanner,alleviatingdoubletaxationandallocatingtaxingrightsbetweentheparties,theycanalsobedriversandenablersofIFFs.Inmostcases,atreatybetweenadevelopingcountryandacountryfrom which it receives investment will shift thebalanceoftaxingrightsawayfromthedevelopingcountry.Suchtreatyprovisionscreateopportunitiesfor treaty shopping by foreign investors. The AU/ECA (2015) report on IFFs from Africa, observed‘troublesomeprovisions’ inherent inmanyAfricancountries’ DTAs such as those that pursue toremoveorlowerwithholdingtaxesonmanagementfees and remove limitations on intracompanyloans.ThecontentofDTAsreflectsthecomparativenegotiatingstrengthofthepartners.However,theAU/ECA(2015)reportnotedthatAfricancountrieshaveweakcapacitiesandstartoutatadisadvantageinnegotiatingDTAs.TheAU/ECA(2015)thereforelenditssupporttotheATAF Model Treaty.

TheOECDModeldoesnotallowwithholdingtaxeson royalties andmanagement feeswhich actuallyerodes the tax bases of developing countries.The Tax Model version produced by the UN TaxCommitteegivesstrongerrightstotaxationatsourcewhichisabigplusfordevelopingcountries.TheAU/ECA(2015)reporthighlightsthat“thecaseofDTAsunderlines the need for Africa to build capacityto negotiate economic contracts effectively. This

33 Hearson,2014.34 Ibid.35 TaxJusticeNetworkAfricastudyentitled“Taxtreatiesinsub-SaharanAfrica:acriticalreview.”ISBN9789966185440.Thisversionavailableat:http://

eprints.lse.ac.uk/67903andMakunike,C,2016;TheNexusbetweenTaxTreaties,TransferPricingandBEPS.LessonsforAfricanTaxPolicyMakersandAdministrators”,AfricaTaxResearchNetwork(ATRN)WorkingPaperSeries.Thisisavailableat:http://atrnafrica.org/atrn/documents/2016.

36 Ibid.

willenablethemtoprotecttheirtaxingrightsandstrengthendomesticrevenuemobilisation.

Two ways in which tax treaties can enable IFFsor base erosion and profit shifting are throughallowing treaty shopping and round trippingpracticesbyMNCs.First,accordingtoIBFD(2015),

Second, a relatedpractice, round tripping is a taxavoidanceschemethatinvolvesthetransferoffundsbetweenoramongsttheparties,which,directlyorindirectly, results in a tax benefit and significantlyreduces, offsets or eliminates any business riskincurredbytheparties(IBFD,2015).Itinvolves,forexample,structuringdomesticinvestmentsthroughanoffshorejurisdictiontogaintreatybenefitsthatare not available to domestic investors. (Hearson,Tax Motivated Illicit Financial Flows. A guide fordevelopment Practitioners, 2014). A commonlyusedexampleisthatofMauritiusinwardinvestmentintoIndiawhichisoftensaidtobearesultofroundtrippingbyIndianinvestorsseekingtoavoidcapitalgains tax (CommissiononCapitalFlight fromPoorCountries,2009).38

2.11 Transfer pricing and mispricingThe‘elephantintheroom’39hereishowtodistributethetaxbaseofamultinationalcompany,operating

treatyshoppinghasbeendescribedasthesituationwhereapersonwhoisnotentitledtothebenefitsofataxtreatymakesuse–inthewidestmeaningoftheword–ofanindividualorofa legalpersoninordertoobtainthosetreatybenefitsthatarenotavailabledirectly.An illustrationof thisscenario isasshowninBox4below:

Box4:AssociatedBritishSugarAccusedofTreatyShopping

Oneof the examples in theActionAid report37 published in 2013 contended thatAssociatedBritish Sugarcompanyusedtreatyshoppingarrangementsdesignedtoavoidwithholdingtax(WHT)thatwouldhavebeenpaidtotheZambiangovernment(Lewis,2013).Inthiscase,aZambiansubsidiaryofAssociatedBritishFoodstookoutaloanfromaUKbasedbank.BecauseofthetermsofZambia’staxtreatywiththeUK,theinterestpaymentson this loanwouldhave incurreda10percentwithholding tax.Asanalternative, the loanwasmadefromtheUKbanktoanothergroupcompany,registeredinIreland,whichinturnloanedthemoneytotheZambiancompany.Zambia’staxtreatywithIrelandpreventedZambiafromcharginganywithholdingtaxoninterestpaymentsandIrelanddoesnotchargewithholdingtaxtoEuropeanUnion(EU)companies.Inthiscaseitmeansthatthisloanescapedwithholdingtaxcompletelyasaresultofthetreatyshoppingscheme.

ItisimportanthowevertonotethatZambiaiscurrentlyrenegotiatingitsDTAwithIrelandinordertoclosethe inherent tax loopholes which erode its tax base.

Source:Lewis2013.

37 Thisreportisavailableat:http://www.actionaid.org.uk/sites/default/files/doc_lib/sweet_nothings.pdf. 38 Thisreportisavailableat:http://www.regjeringen.no/upload/ud/vedlegg/utvikling/tax_report.pdf. 39 Thebigissuetoconsider.

acrossmanytaxjurisdictions.Thisgenerallyaffectsdevelopingcountriesbecausemanyoftheirlargestbusinesses are part of multinational companies,althoughagrowingnumberofcompaniesbasedindevelopingcountriesarebeginningtoinvestabroad(e.g. SouthAfrica’sMTN).Muchof thedebateontax-motivatedIFFsrevolvesaroundtheformulationand enforcement of transfer pricing regulations,their shortcomings and the way in which theyare abused for tax evasion and tax avoidancepurposes. Governments set rules to determinehow transfer pricing should be undertaken fortax purposes because the level of transfer pricingaffectsthetaxableprofitsofthedifferentbranchesor subsidiaries of the company. Transfer pricing ismainlybasedonthearm’slengthprinciple.Transferpricing and mispricing and arm’s length principleare defined and explained in the glossary above.Tax planning is one of the strategieswhichMNCsusetomanipulatetransferpricingrules.


Box5:TaxPlanning–SABMillerCase

In 2010, ActionAid published a report suggesting that amultinational company (SABMiller) had avoided£20millionintaxliabilityinAfricaandIndia((Hearson&Brooks,CallingTime:WhySABMillerShouldStopDodgingTaxesinAfrica,2010).ThiswasdonethroughtransferpricingarrangementswhichActionAidsaidshiftedover£100millionoftaxableprofitstoMauritius,SwitzerlandandNetherlands.Thetransactionsweredescribedasfollows:

1. RoyaltypaymentsfortheuseoftrademarksregisteredinNetherlandsincludingtheCastlebrandthathadbeendevelopedinSouthAfrica.TheDutchcompanyconcernedpaidalmostnotaxonitsprofits.

2. ManagementfeepaymenttoacompanyinSwitzerland,wherethetaxratewasaround6percent.Thecompany said that these payments covered, “financial consulting”, “personnel strategy”, “businessadvisory services”, “marketing” and “technical services”, but conceded that they had been “routed”throughtheSwisscompanywhichdidnotitselfprovidetheservices.

3. AnarrangementthroughwhichrawmaterialsusedbysomeoftheoperatingcompanieswereprocuredviaacompanyinMauritiuswheretheeffectivetaxrateis3percent.ThegoodsdidnotappeartophysicallypassthroughMauritiusduringtheprocurementprocess.

4. InterestpaymentsonaloanfromthesameMauritiancompanytotheoneinGhana,whichActionAidarguedconstitutedthincapitalisation.

Source:HearsonandBrooks2010

SABMillerdeniedthatthesetransactionsweremotivatedbyadesiretominimisetaxpayments.AsubsequentanalysisbyaformerOECDTaxOfficialarguedthat,onthebasisoftheevidenceprovidedbyActionAid,thefinancialflowscouldhavebeenpreventedthroughproperenforcementofthearm’slengthprinciple(Schatan,2012).

SeeanexampleinBox4below:

2.12 Thin capitalisationThisisgenerallyanissuetodowiththecapitalisationofacompanywhichordinarilyisafunctionofdebtto equity ratio. A company is said to be “thinlycapitalized”whenithasahighproportionofdebt capital in relation to its equity capital. There area couple of references which are given to thisrelationship namely capital gearing, gearing,leveraging, or debt/equity ratio. The two mostcommon tests for determining whether this ratioistoohighare,(i)byreferencetothearm’slengthprinciple (theassumptionbeing that a thirdpartywouldnotbepreparedtolendtoathinlycapitalizedborrower) and, (ii), by reference to a fixed ratioof debt to equity. The two may sometimes becombinedwhereby thefixed ratiooften functionsas a safe harbour. Many countries have rulesdesigned to discourage thin capitalisation, mainlyinaninternationalcontext.Excessivedebtfundingof companies from abroad is viewed by these

countriesasleadingtoanunacceptableerosionoftheir revenue base.40 Generally, under such rulesthe interest on the amount of debt that exceedsthepermittedlevelisnon-deductible.Additionally,in some countries the debt is re-characterised asequity and the interest treated for tax purposes(includingWHT)asadividend(IBFD,2015).

2.13 Base erosion and profit shiftingBEPS refers to tax planning strategies that exploitgaps andmismatches in tax rules tomake profits“disappear” for tax purposes or to shift profits tolocations where there is little or no real activitybutthetaxesarelowresultinginlittleornooverallcorporatetaxbeingpaid(IBFD,2015).

2.14 Tax competition and tax incentivesTax competition refers to competing policiesbetween tax jurisdictionsbywayof tax incentivesand concessions to attract businesses and

40 Theinterestondebt,incontrasttodividendsbeinggenerallytaxdeductible.

individuals to locate in a particular jurisdiction.Tax competition indeveloping countrieshasoftenproventoposemoreharmthangoodasitturnsoutmostly to be harmful competition than beneficialcompetition.

Taxincentivesindevelopingcountriesaregenerallyinvestmentincentives.Theyareusedtoattractlocal

orforeigninvestmentcapitaltocertainactivitiesorparticularareasinacountry(IBFD,2015).

They may include an investment allowance, orinvestment credit, special forms of depreciationallowances,suchasfreedepreciationoraccelerateddepreciation. Tax incentives can be drivers andenablersofIFFs(AU/ECA,2015).

Box6:TaxCompetition,TaxIncentivesandtheRacetotheBottom

Thereisarealnexusbetweentaxcompetition,taxincentivesandtheracetothebottomastheTaxJN-AandActionAid2015studiesontaxincentivesintheEACandECOWASrevealed.

1. A2015reportontaxincentivesbyTaxJusticeNetwork-AfricaandActionAidshowedthatWestAfricamaybelosingupto$9.6billionayearofvitalpublicrevenuebygovernmentsprovidingcorporatetaxincentives,causinga‘racetothebottom’astheregion’sgovernmentsvietoattractforeigninvestment.ThereportcalculatesthatGhanaislosingupto$2.27billionayear-threetimesitsbudgetallocationtohealth-andthatNigeriaisforegoing$2.9billionayear-morethantheFederalGovernment’sbudgettoeducation.Thereport,examinestaxincentivesamongcountriesintheEconomicCommunityofWestAfricanStates(ECOWAS)region,withafocusonNigeria,Ghana,Côted’IvoireandSenegal.Itrevealsthatgrantingtaxincentivestoinvestors,notablyforeigncompanies,isdeprivinggovernmentsofmoneytopayforessentialpublicserviceslikehealth,educationandinfrastructure,hinderingregionalintegration,andfailinginthestatedobjectiveofattractingnewforeigndirectinvestment.

2. The2016reporton tax incentivesbyTJN-AandActionAid in theEastAfricanCommunity (EAC) foundoutthattheEACGovernmentshavetakensomepositivestepstoreducetaxincentives,especiallythoserelatedtoVAT,whichisincreasingtaxcollectionsandprovidingvitalextrarevenuesthatcouldbespentonprovidingcriticalservices.However,theyarestillfailingtoeliminateallunnecessarytaxincentives,includingthosesuchascorporateincometaxincentivesgiventocorporations.Althoughprecisefiguresare impossible toprovideduetoa lackof transparencywhen itcomestonumbersandvitalstatisticsonincentives,evidencegatheredsuggeststhatcollectively,figuresfromthefourEastAfricancountriesfocusedoninthisreportcouldstillbelosingaroundUS$1.5billionandpossiblyuptoUS$2billionayear.

Sources:TJN-A&ActionAid2015&2016.


Governments in Africa are duty bound torespect, protect and fulfil the rights ofchildren and to ensure the delivery of

essential services such as schools, quality healthcare, social assistance and access to the justicesystem as well as protection from violence andabuse. Governmentsneedtaxrevenuetobeabletoprovidetheseservices.

Tax is strongly linked to positive outcomes forchildren,taxandotherfiscalinstrumentsaretools

3.0THE NEXUS BETWEEN TAX AND CHILD RIGHTS

41 Watkins,K.Quattri,M.(2016).ChildPoverty,InequalityandDemography:WhySub-SaharanAfricaMattersfortheSustainableDevelopmentGoals.42 OECD,(2014).DevelopmentCo-operationReport2014:MobilizingResourcesforSustainableDevelopment,OECDPublishing.Retrievedon15thJuly

2016fromhttp://dx.doi.org/10.1787dcr-2014-en.9accessedon15October201443 SavetheChildren(2014).Tacklingtax,Savinglives.London

RevenueTax is the most sustainable source of revenuefor governments42; while aid and borrowing cancontributesignificantlytotheaggregaterevenueofgovernments,itcanbeinconsistentandconditional.

REVENUE Resourcingessentialservicesnecessaryforthesurvivaland

developmentofchildren.

REDISTRIBUTION Taxisapolicyinstrumentthatcanbeusedtoaddress

inequality,throughprogressivetaxationandredistributionofrevenuetothepoorestand

excludedthroughgovernmentbudgets.

REPRICING Taxpolicycanbeusedtoinfluencepricesofgoodsand

services.

REPRESENTATION Strengtheningtherelationshipbetweenthestateand

childrenascitizens.

which when used to maximize the efficient andquality delivery of essential services for childrencan contribute greatly to enhanced quality oflife for all children— tax addresses child povertywhereby children face elevated risks ofmortality,malnutrition,lackorfailureineducationandearlyentryintochildlabour,girlsfaceadditionalrisksofchild marriage and pregnancy.41 The connectionbetween tax and child rights can be summarizedin four R’s commonly associated with tax anddevelopment.

Increase intaxrevenueacrosstheglobehasbeenlinkedtoimprovedchildwellbeing,asaresultoftaxbeingchannelledtochildfocusedsectors43suchaseducation, health and social protection. Notably,increase in tax revenues is associatedwith better



outcomes in key measures of child survival andwell-being—lowandmiddleincomecountrieswithgreater tax revenues have exhibited lower under-fivemortality44.

By2013only7countriesinAfricahadatsomepointmettheAbujacommitmentfor African governments to allocate at least15%oftheirbudgetstohealth,akeychildfocusedsector.45 Out of the 7 countries,3ofthesecountriesRwanda,Malawi,andMadagascarareamongthe top ten countries in the world with the greatest percentage decline in their under-fivemortalityratesfrom1990-2011decreasingby65.4%,63.6%,and61.8%respectively46.Markedly,thethreecountriesGDPexpandedduringthis period with an average growth rate of5.75%,2.90%and3%respectively,atestamentofthecorrelationbetweenincreaseddomesticrevenuebeinginvestedinkeychildfocusedsectorssuchashealthandtheresultingpositiveoutcomes for children.

Redistribution Tax is a gamechanger if effectivelyandefficientlycollectedandutilized,wealthcanberedistributedthrough tax especially to low income groups,hence, tackling issues such as inequality, inequityand child poverty. Through progressive taxation,ideally designed to reduce income disparities,higher income individuals pay proportionallymore of their income on tax than lower incomeindividuals. Subsequently, increased income leadstoimprovementinafamily’sabilitytoprovidefood,shelter, clothing, books, and other expenditure-relatedinputstoachild’sdevelopment.Byreducing

stress and conflict, more income helps to fosteran environment more conducive to healthy childdevelopment.47

Another goal of redistribution is to providegovernment with the means to redistributeincome,which they can then redistribute throughgovernmentbudgetstothepoorandmostexcludedand marginalized.48 Governments can then raisethe income of the poor through social-typeexpendituressuchashousingorhealthandsafetythatbenefitchildrenmost’.49

RevenueinMalawihasbeensubstantiallyincreasing as a result of progressive tax reforminitiativessinceindependencewhoseobjectivesincludedincreasingrevenuegeneration;improvinglevelsofinvestmentandexports;improvingtaxcollectionefficiencyandfairness;implementingandsupportingGovernmentdevelopmentobjectivesandplans.Therevenuecollectionin1970registered12.0percentoftheGDPandreached20.3percentin1995:declinedto11.8percentin2002beforereaching20.9percentin2010.50Subsequently,thehealth expenditure per capita increased formUS$12in1998/1999toUS$25in2005/2006,asaresult,thepercentageoftotal health expenditure from households directout-of-pocketpaymentsdecreasedfrom26%in1998/99to12.1%in2005/2006.51

Childrentendtobedisproportionatelypoorerthanadults, their poverty rate tends to be significantlyhigher than overall poverty rates52, child povertycan have long-term impacts on a family’s and a

country’slevelofdevelopmentacrossgenerations.Children in poor communities accumulate lowlevelsofhumancapital,consequently,productivityandearningsasanadult are correspondingly low,making these children likely to be poor. If poorfamilies tend to live in poor communities, thenthechildrenofpoorparentsare likely tobepoor,yielding substantial intergenerational persistenceforlowincomefamilies.Poorcommunitiesreceivingredistribution, exhibit lower intergenerationalpersistence of economic status than withoutredistribution, indicating a reduced probability ofstayingpoorintothenextgeneration.53

RepricingTax is a tool for re-pricing goods and servicesessential for children’s survival and developmentsuch as staple food items.54 Re-pricing increasesthecostofgoodsandserviceswhichdonotreflectsocialandeconomicorenvironmentalrealities55;ataxsystemisconsequentlydesignedtobenefitthesocietybymakingitexpensivetoengageinactivitiesconsideredundesirable suchasuptakeof alcohol,tocurbaddictionordamagetohealthwhilemakingit lessexpensivetoengageinactivitiesconsideredvaluabletothesociety.

Re-pricingalsoapplies todiscouragingspeculationon essential goods and services, which leads toincreases in pricing, making these goods andservices less accessible to children.56 Speculationcomprises of complex forms of gambling usinginnovative and under-regulated financial productssuchascurrencies,stocksorcommodities—wheremost traders have little interest in the productbeing traded other than its ability to reap themquickfinancialrewards.Speculationhasthepowerto destabilize the global economy, push up thepriceofessential goods, and increasehungerandmalnutrition in low-income countries. Excessivespeculation significantly contributed to the rise in

foodpricesthatreachedrecordlevelsin2008,andagain peaked in early 2011. Better regulation isneededongamblingoffinancialproducts,andafairshareoftheexcessiveprofitsfromthesetransactionsredistributedtofundpovertyeradicationorclimatechangemitigation.57

Speculationinthedomesticmarketfollowinghighinternationalfoodprices58 isoneofthekeyfactorsthatled to an increase in the rates of child malnutritioninMalawiin2008-2009.InearlyOctober,2008,theMalawiVulnerabilityAssessmentCommitteereleasedareportestimatingthat1.5million rural households had run out of maize and were forced to purchase their residual food requirements at prices thatwereextremelyhigh.Thedataonmalnourished children at feeding centres signalled a rapid increase in admissions at feeding centres. While in the pre-crises 2006thisnumberaveragedaround500-800childrenamonth,itreachedthelevelofaround1500inearly2008and2000inearly200959

RepresentationAneffectivetaxationsystemisanindicatorofoverallgovernancecapabilitytoachievepositiveoutcomesforchildren.This,inpart,isduetothestrengtheningof the ‘fiscal social contract’betweencitizensandthestate—whengovernmentsaredependentontheircitizensformoney,theyaremorelikelytoactin their interest. In turn, citizens are also justifiedtodemandaccountabilityfromtheirgovernment.60

Children are not just future citizens but arecitizens of here and now with the right to givetheir opinion and participate in civic and culturallife— to participate in decisions that affect them

44 SavetheChildren(2014).Tacklingtax,Savinglives.London45 ACPF(2013).AfricanReport46 AfricaLeadershipforChildSurvival.(2012).CommittingtoChildSurvival:Apromiserenewed47 Milligan,K.Stabile,M.(2008).DoChildTaxBenefitsAffecttheWellbeingofChildren?EvidencefromCanadianChildBenefitExpansions.NBERWorking

PaperNo.1462448 Hartman,D.A.(2002).PolicyReport:TheRoadMaptoTaxReform.DoesProgressivetaxationre-distributeIncome?InstituteforPolicyInnovation

CentreforTaxanalysis.Vol.16249 Tanzi,V.(2013).Re-distributingincomethroughthebudgetinLatinAmerica.50 Kenani,J.(2014).TaxationPolicyandPerformanceinMalawisinceIndependence 51 Walker,Z.E.,Kiriga,O.,Zawaira,J.,Magombo,F.F.andKataika,E.(2010).HealthFinancinginMalawi:EvidencefromNationalHealthAccounts

Retrievedfrombmcinthhealthhumrights.biomedcentral.com/articles/10.1186/1472-698X-10-2752 NationalPovertyCentreUniversityofMichigan.(2016).PovertyintheUnitedStatesFrequentlyAskedQuestions.Retrievedon9thAugust2016from

www.npc.umich.edu/poverty

53 Cooper,JS.andJohnF.(1998).KennedySchoolofGovernmentHarvardUniversity54 SavetheChildren.(2015).MissedTaxationOpportunitiestoImproveInvestmentinChildreninAfrica.CaseanalysisofKenya,SierraLeoneandZambia55 Mwaura,G.(2015).WhyAfricamustfightillicitfinancialflows56 ChristianAidandSOMO(2011).TaxJusticeAdvocacy:AToolkitforCivilSociety.57 SharetheWorld’sResources(2012).Factorswhichdeterminethedemandofgoodsandserviceswithspecialattentiontoprices.Financingtheglobal

sharingeconomy,partthree(I):taxingfinancialspeculation. 58 Chirwa2009,FEWSNet2008b59 G,Cornia,Deotti,LandSassi,M.(2012).FoodPriceVolatilityovertheLastDecadeinNigerandMalawi:Extent,SourcesandImpactonChild

Malnutrition.UNDP60 SavetheChildren.(2014).Policybrief:UsingtaxationtoimproveinvestmentinChildren-Savethechildren


not only in the home, but also in wider society,whetherasindividualserviceusers,asgroups,orinparticipatoryprocesseswithgovernmenttoshapesociety.61Children’scivilrightshavewidelynotbeenrealized—extensively, childrenhavenoaccess tocomplaints mechanisms and are excluded frompublicdecisionmaking.Thesystemicdenialoftheircivil rights disempowers children and contributesto theirabuse,exploitationandmarginalization insociety.62 Children are entitled to the civic rightsto engage in civic actions holding duty bearersaccountable for their commitments to implementchildren’s rights63, including commitments oneffectiveandequitableutilizationoftax.

The June 16 1976 Uprising that began inSoweto,SouthAfricaandspreadcountrywideprofoundlychangedthesocio-politicallandscapeinSouthAfrica.Events that triggered the uprising canbetracedbacktopoliciesoftheApartheid government that resulted in theintroductionoftheBantuEducationAct in 1953.The Bantu Act included clausesseparatingthefinancingofeducationforAfricansfromgeneralstatespendingandlinkedittodirecttaxpaidbyAfricansthemselves,withtheresultthatfarlesswasspentonblackchildrenthan on white children. The rise of the BlackConsciousnessMovement(BCM)andtheformationofSouthAfricanStudentsOrganization(SASO)raisedthepoliticalconsciousnessofmanystudentswhileothersjoinedthewaveofanti-apartheidsentimentwithinthestudent

community.On16June1976between3000and10000studentsmobilizedbytheSouthAfricanStudentsMovement’sActionCommitteesupportedbytheBCMmarchedpeacefullytodemonstrateand protest against the government’s directiveTheaftermathoftheeventsofJune 16 1976 had dire consequences for the Apartheid government. Images of the policefiringonpeacefullydemonstratingstudentsledaninternationalrevulsionagainstSouthAfrica,givingmoreimpetusto the struggle against Apartheid.64

ConclusionTax when used equitably and effectively can berevolutionary in addressing child poverty andprovisionofessentialneeds forchildren. Taxasafarreachingandsustainablesolutiontoinvestinginchildrenneedstobeprioritizedandstreamlinedtoguaranteepositiveandpracticalchangesinthelivesofchildren.

61 ChildrenAreCitizens:Helpingyoungchildrengainasenseofcitizenshiptobeginparticipatingindemocracy.Retrievedfromhttp://www.pz.harvard.edu/projects/children-are-citizens#sthash.kIsYPflG.dpuf1/9/2016HarvardGraduateSchool

62 Inter-agencyWorkingGrouponChildren’sParticipation.(2008).ChildrenasActiveCitizensaPolicyandProgrammeGuide:CommitmentsandObligationsforChildren’sCivilRightsandCivicEngagementinEastAsiaandthePacific.

63 Jamieson,L.Pendlebury,S.Bray,R.(2011).Childrenascitizens64 SouthAfricanHistoryOnline.(2016).TheJuneSowetoYouthUprising.Retrievedfromhttp://www.sahistory.org.za/topic/june-16-soweto-youth-

uprising#sthash.YYfRH8BP.dpuf



4.1 Institution-building reforms in developing countriesEffective tax systems are a prerequisite for broad-based development, raising revenue to fund public services and basic infrastructure. There is a long list of organisations funding and conducting work at national level on tax and development issues.

This includes multinational institutions such as the World Bank, IMF and the World Bank; global institutions such as the Financial Transparency Coalition (FTC), the UN Tax Committee and the Global Alliance for Tax Justice (GATJ). There are also southern-based and northern-based organisations and networks pushing for reforms including institution-building changes in developing countries.

Earlier in 2015, an international initiative, the Independent Commission for Reform of International Corporate Taxation (ICRICT) was established to provide alternative approaches to not only the ongoing aggressive profit shifting activities of companies but also propose ways to bridge the equity gap behind prevailing rules and principles.65

4.1.1 Reformstotargetcorporatetax avoidance and evasionThere are currentlyanumberofreformstargetingcorporatetaxavoidanceandevasioninbothdevelopinganddevelopedcountries.TheEuropeanCommissionhassinceJune2014beeninvestigatingwhethercertainarrangementsinIreland,Luxembourg,andtheNetherlandsconstituteprohibitedstateaid(taxavoidanceandevasion).Thisinquiryhasbeenexpandedtoallmemberstates.Additionally,theEuropeanUnionhasagreedtoaddananti-abuseclausetoitsprovisiontopreventdoubletaxation

4.0ADVOCACY: Tax Justice and Child Rights: Who Is Doing What?

withinmemberstates,whichmayhaveimplicationsforthesearrangementsinthefuture.

4.1.2 Reformstotargettaxavoidance andevasionbyindividualsSomeoftheseEUinitiativesabove(6.1.1.)alsotargettaxavoidanceandevasionbyindividuals.Butincreasinglyself-interestmeasuresadoptedbypowerfulcountriesthreatentoderailattemptsatreformingtherulestomakethemmoretransparentandcompanies(aswellaswealthyindividuals)accountable.ForexamplewhileendorsingtheOECD’sBaseErosionandProfitShiftingproject,BritaininJanuary2013introducedanewsetofrulestoattractmultinationalswithoffshorefinancialsubsidiaries.

AnumberofcompaniessuchasVodafonewhichoperatesinahostofAfricancountriesandheadquarteredinLondonhaveusedsuchrulestosuppressthetaxburden.Thisinpartexplainstheglobaluproarovertherecentintroductionoftheso-called“patentbox”taxbreakforresearchanddevelopmentcompanieswhichdecidetolocatetoBritain.

4.2 International cooperationMore than ever it has become clear that developing country governments are overlooked in international tax issues and negotiations. Presently, developing countries are not formally a part of the international tax reform processes taking place under the rubric of the OECD. But it is essential that countries across the globe engage and cooperate on international taxation. The UN Tax Committee where developing country can best be represented and their concerns

best articulated has received very little support and attention compared to the club of rich countries, the OECD countries.

4.2.1 AdvocacyOpportunitiesKeyglobalopportunitiesThereexistsanumberofopportunitiestoarticulateandpromotetaxjustice.UNGeneralAssemblymeetingsandforaorganisedbyspecialisedagenciesoftheUnitedNationsaswellasregionalblocssuchastheEuropeanUnionCommissionofferampleopportunitytoarticulatetheconnectionbetweentaxjusticeandchildrightsissuesaroundtheworld.

Regional Attheregionallevel,thesummitsofHeadsofStateandGovernmentandannualmeetingsofotherpolicymakersprovideopportunitiestoraisetheissueof

65 CounciloftheEuropeanUnion,Parent-SubsidiaryDirective:CouncilAgreestoAddAnti-AbuseClauseAgainstCorporateTaxAvoidance,December9,2014,http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/146127.pdf.

taxjusticeandchildrights.InthespecificcaseofAfrica,theannualjointmeetingofAU/UNECAMinistersofFinanceConferenceisonesuchopportunity.

NationalactivitiesAtthenationallevel,parliamentarycommitteesessionsprovideavenuestoraisedomestictaxjusticeandchildrightissues.

Writingofnationalpoliticalpartymanifestoscouldalsoserveasarenastomaketheconnectionbetweentaxjusticeandchildrightsissues.

SotooistheprocessesleadingtothedrawingofnationalbudgetsinmanydemocraticAfricancountries.


Action Aid & Tax Justice Network-Africa.(2016).Stillracingtowardthebottom?CorporatetaxincentivesinEastAfrica.Nairobi:ActionAid.

ActionAid & Tax Justice Network-Africa.(2015).TheWestAfricanGiveaway:Use&AbuseofCorporateTaxIncentivesinECOWAS.Nairobi:ActionAid.

ATAF.(2015).IllicitFinancialFlowsandTradeMisinvoicing:TheChallengesforAfrica.Pretoria:ATAF.

AU/ECA. (2015). IllicitFinancialFlows,ReportoftheHighLevelPanelonIllicitFinancialFlowsfromAfrica. AddisAbaba:AU/ECAConferenceofMinistersofFinance,PlanningandEconomicDevelopment.

Blankenburg, S., & Khan, M. (2012).“Governanceand Illicitflows.” InDrainingDevelopment?ControllingFlowsofIllicitFundsfromDevelopingCountries,editedbyPeterReuter,21-68.Washington,DC:WorldBank.

Brauttigam, Deborah, Fjelstad, O.-H., & Moore, M. (2008).eds.TaxationandStateBuilding inDevelopingCountries:CapacityandConsent.Cambridge:UK:CambridgeUniversityPress.

Commission on Capital Flight from Poor Countries.(2009).TaxHavensandDevelopment:Status,AnalysesandMeasures.Oslo:GovernmentofNorway.

Devereux, M. P., Freedman, J., & Vella, J. (2012).TaxAvoidance.Oxford:UK:OxfordUniversityCentre forBusinessTaxation.

Drucker, J. (2010, October 21). “’DutchSandwich’SavesGoogleBillionsinTaxes.”.BloombergBusinessweek,p.http://www.nbcnews.com/id/39784907/.

Hearson, M.(2014).TaxMotivatedIllicitFinancialFlows.AguidefordevelopmentPractitioners(IssueNo.2ed.).London:CHR.MichelsonInstitute/U4.

Hearson, M.(2015).Taxtreatiesinsub-SaharanAfrica:acriticalreview.Nairobi:TaxJusticeNetwork-Africa.

Hearson, M., & Brooks, R.(2010).CallingTime:WhySABMillerShouldStopDodgingTaxesinAfrica.London:ActionAidUK.

IBFD.(2015).InternationalTaxGlossary(7thReviseded.).Amsterdam:IBFD.

Lewis, M.(2013).SweetNothings:TheHumanCostofaBritishSugarGiantAvoidingTaxesinSouthernAfrica.London:ActionAidUK.

Makunike, C.(2016).TheNexusbetweenTaxTreaties,TransferPricingandBEPS.LessonsforAfricanTaxPolicyMakersandAdministrators.AfricaTaxResearchNetwork,WorkingPaperSeries,1-20.

Murphy, R.(2010).TaxBriefing.TheFoundationsofTaxJustice.London:TaxResearchLLP.

OECD.(1998).HarmfulTaxCompetition:AnEmergingGlobalIssue.Paris:OECD.

OECD. (2013). Addressing Base Erosion and Profit Shifting. Paris: OECD.

Schatan, R. (2012, January 9). “Tax-Minimizing Strategies and the Arm’s-Length Principle.”. Tax NotesInternational,p.121.

Tax Justice Network-Africa & Save the Children International. (2015).Missed Taxation Opportunities toImproveInvestmentinChildreninAfrica.CaseAnalysisofKenya,SierraLeoneandZambia.Nairobi:TaxJusticeNetwork-Africa.

Children are the future. It is therefore important that African governments prioritise child rights such as economic, cultural and social rights in order to guarantee the future of their children. These rights precisely include guaranteed access to basic public services such as health, education, portable water and security. These rights can only be achieved if African governments raise enough domestic resources (particularly through tax) to finance investment in children related basic public services sectors. By so doing the African governments will also enhance their chances of fulfilling Sustainable Development Goals.

5.0CONCLUSION

It should however be noted that raising tax revenue in Africa continues to be threatened by vices such as illicit financial flows, base erosion and profit shifting among others. African governments therefore need to pay particular attention to these enablers and drivers of illicit financial flows, base erosion and profit shifting for them to strengthen their capacity to mobilise sufficient domestic resources.

References


Paying taxes is perhaps the most fundamental way in which private and corporate citizens engage with broader society. Tax revenues are the lifeblood of the social contract.ChristensenandMurphy:TheSocialIrresponsibilityofCorporateTaxAvoidance:TakingCSRtotheBottomLine,DevelopmentJournal,vol47(3)2004p37-44

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TAX AND CHILD RIGHTS GUIDE 1 - Resource Centre...6 TAX AND CHILD RIGHTS GUIDE TAX AND CHILD RIGHTS GUIDE 7 Arm’s length principle. ... analysis of BEPS highlights certain areas in