Bloomberg Tax
May 25, 2023, 8:45 AM

Foster Human Rights by Eradicating Multinational Tax Avoidance

Don Griswold
Don Griswold
Digital Economist

In need of a reputation makeover in the wake of its multibillion-dollar tax abuse scandal in the UK, multinational telecom giant Vodafone Group Plc has since 2012 voluntarily made public much of the country-by-country reporting of tax data that it’s legally required to report privately to His Majesty’s Revenue & Customs (the British IRS).

Vodafone is among only a handful of multinationals to volunteer the public country-by-country reporting that, led by Australia, likely will be mandated worldwide within a few years. It quietly concedes that it doesn’t make public the juicy bits, such as “significant uncertain tax positions” or intercompany profit-shifting into tax havens, that would enable civil society to name and shame avoiders. But its disclosures are welcome because they facilitate enlightening high-level economic analysis.

Tax Compliance Saves Lives

Based on Vodafone’s data—and aiming to measure the positive human rights impact of corporate taxes paid rather than avoided—researchers at Scotland’s University of St. Andrews and the African Centre for Tax and Economic Studies recently examined the potential for good when huge multinationals actually pay their taxes. (The researchers didn’t examine whether Vodafone is or isn’t an avoider today.)

Focusing on six countries in sub-Saharan Africa—and using the United Nations Sustainable Development Goals as a good proxy for human rights—the researchers examined the annual impact of the portion of Vodafone’s recent tax payments these nations spent on access to sanitation, drinking water, education, health services, and child/maternal mortality.

Each year, corporate income taxes that Vodafone paid to Democratic Republic of Congo, Ghana, Kenya, Lesotho, Mozambique, and Tanzania enabled more than 966,000 people to access clean water, nearly 1.4 million people to access basic sanitation, and more than 858,000 children to attend school.

Corporate tax payments from Vodafone, the 250th largest company in the world by revenue, saved the lives of 54,275 children under the age of 5. And 3,655 mothers who would have died survived. The positive human impacts are cause for reflection.

A pedestrian walks past a Vodafone store in central London on May 16, 2023.
Photographer: Adrian Dennis/AFP via Getty Images

Targeting Illicit Financial Flows

A UN Human Rights Council study defines three types of tax-related illicit financial flows, which the UN General Assembly resolved to combat toward the end of last year to help foster sustainable development.

First, tax evasion by high-net-worth individuals is openly illegal behavior that often uses anonymity-providing shell companies to hide income in secrecy jurisdictions. Second, commercial tax evasion, also openly illegal, is trade misinvoicing in shipping by multinational corporations. The third type is “tax avoidance schemes used by transnational corporations”—“multinational” is the more common term.

Why does the UN include corporate tax avoidance as one of its three types of human rights-harming illicit financial flows? According to the study, large multinationals’ “highly complex tax optimization activities” are illicit because they artificially exploit legally questionable gray zones with the express intention to make it “very difficult for tax authorities” to uncover sufficient factual proof that the avoidance strategies contravene law. And the practical effect is to reduce the corporate tax base “in a way not intended by domestic policy.”

The UN has concluded that “curbing illicit financial flows and tax abuse is essential not only for realizing human rights, but also for achieving the Sustainable Development Goals.”

These goals, “a shared blueprint for peace and prosperity for people and the planet,” address climate resilience, clean water, sanitation, education, health, no poverty, zero hunger, affordable and clean energy, and gender equity. They also address decent work and economic growth, reduced inequalities, responsible consumption and production, strong institutions for peace and justice, sustainable communities, and more.

The UN Secretary-General estimates it may take $7 trillion a year to achieve the SDGs by 2030. So it’s no surprise that the UN concerns itself with the “human rights implications of illicit financial flows, which divert resources from activities that are critical for poverty eradication and sustainable economic and social development.”

Cross-border tax-related transactions account for the majority of all illicit financial flows; nearly $500 billion in global tax revenue is lost each year to tax abuse. Indeed, “curbing tax-related illicit financial flows has the potential to make the largest fiscal impact and would enlarge domestic resources available for the realization of human rights.”

Tax Abuse Undermines Human Rights

But curbing tax abuse is more than a revenue raiser for the UN; it’s a human rights development target in itself. Why? Because most human rights depend more on social cohesion than on adequate funding.

The SDGs are founded on the Universal Declaration of Human Rights. Equality, non-discrimination, personal liberty, and safety rights depend on healthy democratic processes, political participation, and high citizen morale. Equal protection rights such as fair judicial process and presumption of innocence depend on respect for the rule of law.

Civil and political rights—such as privacy, free movement, family, property, belief, and expression—require empathy for others. While economic, social, and cultural rights are heavily dependent on adequate funding of governmental services, the final set of rights—to a free and fair world social order—depend (like most of the other rights) on widespread respect for the social contract.

What does tax justice have to do with the social contract on which human rights protection relies? Everything.

The NYU Center for Human Rights and Global Justice explains that “tax policy, like human rights law, is at base about the relationship between individuals and the state.” Society experiences a virtuous spiral when its tax system is widely perceived to be fair: “When designed and implemented well, taxes can reinforce representative democracy.”

In contrast, tolerance of corporate tax avoidance and other illicit financial flows—inviting widespread perception that the system is “rigged” in favor of huge corporations and the ultra-wealthy—undermines respect for the rule of law, on which human rights ultimately depend.

Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.

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