WITT: Misplaced criticism of multinationals

Calls for tax hikes on foreign business hurt investment in developing nations

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Governments of all sizes and shapes have been chronically short of cash since the global financial meltdown five years ago. The result: From the United Kingdom to Zambia, lawmakers have been under constant pressure to reduce their budget shortfalls. Their inclination lately has been to, among other things, increase taxes on corporations, compelled by a popular belief that multinational companies are not paying their fair share.

Not only is that assertion false in most cases, but it’s also a misreading of history. Governments, especially in developing countries, have successfully lured investors from more established nations by promising not to double-tax their income and to keep their domestic taxation in line with other countries. Such calculated restraint and strict adherence to the laws on the books have allowed once-impoverished regions of the world — from Central Asia to sub-Saharan Africa — to grow and even thrive because international investors have felt welcome and secure there.

Study after study has shown that taxation has a growing influence on decisions by multinational corporations about where to locate their production facilities, their jobs and their investments. From 2009 to 2011, 51 percent of foreign direct investment went to developing and emerging economies. This scarce and precious money flowed in part because of a proliferation of pro-investment tax treaties and supportive domestic tax laws, according to a new study by the Vienna University of Economics and Business and the International Tax and Investment Center.

More than 3,000 bilateral tax treaties are currently in place. These treaties eliminate double-taxation between countries, provide predictability for foreign investors and create a framework within which tax authorities can minimize disputes and resolve them when they arise to protect the tax base. Other things being equal, multinational companies tend to favor a country with a good treaty network. The relationship between an international treaty and domestic law is also important. Tax treaties are only as effective in attracting new business as their in-country tax codes allow them to be. They have to work in tandem or not at all.

Unfortunately, nongovernmental organizations — some backed by trade unions — have fueled demagogic attacks that threaten to rewrite tax treaties and laws in ways that would destroy the trust that countries have worked so hard to build. Mining and oil companies are accustomed to such assaults. Lately, President Obama has joined the international chorus to dismantle oil company tax breaks. All manner of corporations are now feeling the heat.

ActionAid in Zambia has made a spectacle of its assertion that Associated British Foods, a major sugar producer, is avoiding large amounts of taxes that could otherwise educate African children, maintain roads and purchase medicine. The complaint is heart-rending, but untrue. The company is simply following the statutes and treaty obligations that were designed to make Zambia acceptable to legitimate corporations. Associated British Foods is not depriving Zambia of revenue. On the contrary, it’s producing jobs, millions of dollars in other assistance and, indeed, tax revenues in the way it’s supposed to.

Even Britain has gotten into the act. A parliamentary committee recently labeled as “outrageous” efforts by corporations such as Google, Amazon and Starbucks to minimize the amount of taxes they pay. In response, the companies argued, quite reasonably, that they were merely following the law.

It’s never easy to balance domestic needs and international obligations. Clearly, some rebalancing and a review of international tax arrangements are appropriate if ballooning and unsustainable sovereign debts are ever to be brought under control. Steady, predictable tax regimes have proven to boost capital investment, expand exports and protect — not diminish — tax bases. Citizens, especially in the still-developing parts of the globe, have gained because of the certainty provided by these tax rules and the productive partnership with businesses that they enshrine. The recent controversy about tax avoidance by multinationals should be leavened by this fact and seen in the light of the many benefits that foreign investment brings.

Daniel A. Witt is president of the International Tax and Investment Center.

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