Globalization and international tax justice: Are developing countries losing faith in the international tax system?

States need money to foster economic development, to provide security and meet the basic needs of their citizens. Traditionally, governments collect taxes from individuals and businesses to generate public revenue. However, globalization has challenged many of the traditional instruments of revenue extraction. Global tax competition has made it more difficult to levy taxes on mobile capital as it might simply flow to low tax areas. Consequently, the tax burden has been shifted towards less mobile factors of production. The emerging ‘tax justice’ movement argues that unfair international tax rules have undermined the public finances of low-income countries by facilitating tax evasion and avoidance by wealthy companies and individuals. Existing international tax rules have created, either by accident or by design, a system characterized by extensive secrecy, excessive complexity and widespread loopholes and may also have contributed to deepening existing inequalities. In other words, globalization has to some extent undermined the fiscal capacity of the nation state. The most striking manifestation of this system has been the growth of a global system of offshore financial centers – better known as ‘tax havens’ – which have offered a destination for both wealthy individuals and multinational corporations seeking, among others things, to disguise their wealth and profits. While most governments face such problems, they pose a particular threat to developing countries, where capacity to implement complex rules about international economic transactions remains limited. The same rules have generated new opportunities for corruption, through the complex structures of transnational enterprises, tax havens, secret bank accounts, and secretive legal arrangements to obscure the real ownership of assets.

The presentation focuses on how international tax rules affect developing countries, including effects on domestic revenue mobilization and income distribution, and possible ways the current challenges can be mitigated. In particular, it seeks to address the following question: Are developing countries losing faith in the international tax system?