What is tax spillover?

WHAT IS TAX SPILLOVER?

Corporate tax avoidance is one of the biggest obstacles poorer nations face in trying to generate revenue to fund public services. Multinational companies and their tax advisers exploit profit shifting, usually legally, to avoid paying billions in taxes in the developing world.

Since 2007 Christian Aid has been working to change the rules that govern these tax practices, so that companies are forced to pay their fair share of tax. This infographic aims to explain what tax spillover is, its impact and how current laws might be changed for the better.

01 THE PROBLEM

02 THE IMPACT

When multinational companies use complex financial arrangements and profit shifting to avoid paying taxes on their operations and investments in developing countries it robs developing nations of taxes they are entitled to.

As a result, income to fund public services such as clean water, health and education is lost.

IT’S UNJUST

IT’S HARMFUL

IT’S RISKY

Wealthy multinational companies are not contributing their fair share of taxes to the developing countries they are operating in.

This practice denies poorer states of vital funds to provide citizens with essential services such as healthcare and education.

Companies that exploit loopholes are vulnerable to rule changes that could outlaw those loopholes. Investors also don’t like investing money into companies that may be subject to media scandal.

03 HOW IS IT BEING TACKLED?

04 WHAT NEEDS TO BE DONE?

In 2014 the Irish government commissioned a report to investigate the implications or spillover effects of Irish tax laws on developing countries. The government was under no obligation to do so, and deserve credit for conducting the analysis.

The report concluded that there was no real impact and the effects of Irish tax laws did not warrant any further action.

In our report, we have highlighted what we think are some shortcomings in the analysis. We have also proposed some alternative approaches and data that we believe would produce a more realistic picture of Ireland's tax impact on developing countries.

“The Irish tax system on its own can hardly lead to significant loss of tax revenue in developing countries… Irish [foreign direct investment] towards developing countries plays a marginal role at best in the economies of the developing countries... portfolio investments from Ireland are almost exclusively directed at developed countries.”

Department of Finance Tax Spillover Analysis, 2015

IRELAND’S ROLE

HOW PROFIT SHIFTING WORKS This example illustrates just one of the many tactics used by multinational companies to shift profits and avoid paying taxes.

$500m – $1.6bn PARENT COMPANY

25% Subsidiary Company A

Corporate income tax:

10% Incentive to shift taxable income

Subsidiary Company B

COUNTRY B

COUNTRY A

Corporate income tax:

$860m

WHAT WE HOPE TO ACHIEVE

THE GLOBAL CONTEXT

ated investmen t Estim reland I fr me to income om lowe o c coun in middletrie r and s

$150bn

Total global development aid budget

$200bn

Iris h

d d e v e l o p m e n t ai

Ireland’s annual income from low and middle-income countries (on investments generated or mediated by Ireland) is likely between two and four times larger than Ireland’s overseas aid budget.

IMF estimate of long-run revenue loss for developing countries from corporate tax avoidance (Base Erosion and Profit Shifting)

If Irish development aid is to be regarded as a significant financial flow, then the investment linkages between Ireland and low/middle-income countries should also be considered significant.

Irish investments, trade and services flows with developing countries may well be useful, productive, and not primarily an avenue for tax avoidance. But the tax treatment of the income flowing into Ireland from poorer countries merits attention.

Some structures that involve Ireland can and probably already are hurting developing countries.

THE OUTCOME The Irish government should move immediately to address the gaps in the spillover analysis as identified by this report.

At Christian Aid we feel that this conclusion was incorrect and that the analysis needs to be re-examined.

1

Irish FDI instock to Zambia, 2009 – 2015 Research Methods The years and countries the researchers chose to analyse were limited, looking at just 13 countries in two years.

Other countries and other years have seen much higher financial flows to and from Ireland.

900

4%

800

3.5%

700

Developing countries start to collect the money they are entitled to.

3%

600

2.5%

500

Data points selected for Spillover Analyisis

400

EPORT 2017 R

2% 1.5%

300 200

1%

100

0.5%

2 2009

2010

Data source: IMF CDIS dataset

2011

2012

2013

Zambian FDI ($m)

2014

2015 FDI as % of Zambian GDP

Developing countries move beyond a reliance on aid, to more sustainable sources of revenue i.e. tax.

Visit christianaid.ie for more information.

Written by Mike Lewis — Edited by Sorley McCaughey — Designed by Zero-G — For more information contact Sorley McCaughey at smccaughey@christian-aid.org — With thanks to Mary Cosgrove, Dr. Sheila Killian, Dr. Micheál Collins, Prof. Jim Stewart

Christian Aid Ireland Canal House, Canal Road Ranelagh, Dublin 6 +353 (0)1 496 7040 www.christianaid.ie