Mario Alejandro Valencia, New Delhi, november 25-26, 2013.
I’m very thankful for the invitation from the Centre of Budget and Accountability, to be here today, sharing a view about the economy and tax issues of Latin America.
Im going to divide my presentation into three parts:
First of all, I´m going to talk about the economic model and inequality in Latin America.
Secondly, I´m going to refer to mechanism to avoid taxes, in particular, Double Taxation Agreements.
Finally, I will give some conclusions.
- 1. The economic model and inequality in Latin America
More than a century ago, capital owners had explored mechanism to avoid taxes everywhere. For this, they invented tax havens, as places to hide their affluence from tax administrations and also created agreements to avoid double taxation: in the country of residence and in the resource country.
Unfortunately this has become a problem for humanity, as many companies and individuals have found a way to never pay taxes.
It`s impossible for nations to exist if they`re not capable to collect taxes. This lack destroy nations and also societies, as is the experiences in my region.
Latin America is a region where citizens are facing the same needs, frustrations, and challenges than citizens in developed countries or even in emerging countries, but with an aggravating factor: According to the World Bank, Latin America is the most unequal region on the planet. Not the poorest one, but the most unequal.
This proves for us that the problem is not related to our geographic location, our climate, our means of production, but with our kind of governance and the economic model adopted by most governments in the region for its citizens, specially two decades ago
The citizens -then- are suffering unemployment, lack of quality education, food insecurity, limitations to access of health services, and falling behind in the development of science and technology. All that suffering looks like poverty, but we are not poor, we have governments who mismanage our riches.
The causes of this situation are well known. Developed countries, especially the United States and those from European Union, constantly seek new forms to create and accumulate riches, sourcing themselves from regions like ours.
Through legal mechanism, these countries achieve their goal, of free trade and free movement of capital, supported by a new category of rights: the rights of investors. Consequently, our constitutions aims to protect investors from the people.
Today we face a problem when explaining our reality. The current generation was born in a planet where neoliberalism is the prevalent economic model. They assume it is a natural phenomenon: like the laws of gravity, like the wind, as if it has always been there. For me as a professor it´s difficult to make my students understand that at some point in our countries we produced food, had industry, a public health sistem, roads were not private, and electricity and potable water state owned.
To them is like science fiction. It´s even difficult to explain to them a simple concept: the United States expend 50 billion dollars in subsidies to produce food. Meanwhile, at the World Trade Organization, their representatives attempt to impose restrictions upon countries like India or Brasil, from doing the same.
If we continue down this path, our nation states will be unviable. If we have economies that produce less and less agricultural and industrial goods, then, we can’t create quality Jobs. As we have less incomes by productive activities, states must translate tax burden into workers that don’t produce added value, increasing inequality. Further, an important part of Latin America countries consumption is supported by credits and depends of foreign investment.
Thereby, we became addicts to foreign capital, and the consequences are the same that a person with an addiction: foreign investment arriving is deteriorating us, but if it doesn´t come, we go into shock.
Let`s take a look into the results: net transfer of capital resources from Latin America to the world, including external debt an foreign investment, in 2012, was 24 billion dollars. Believe it or not, this aspect makes us net exporter of capital.
I mean, developed countries like United States and those from European Union, for example, export investment, and we export revenues. The balance for us is like net loss in our foreign economic relationships.
Besides, current account of the balance of payments for Latin America in 2011, was negative by 75 billion dollars, meanwhile revenues extracted from the region was 113 billion dollars.
For us, the facts prove that improving the environment for foreign investment in extractives activities in oil, gas and mining in general, financial speculation and low cost jobs, do not generate benefits. Foreign investment acts like a hook, to fish riches from our countries and, of course, undermine the tax base.
2. Mechanism to avoid taxes.
It doesn’t happen, generally, by a criminal action. Our governments offer full warranties to capital to operate at will, through measures dictated by the World Bank, the International Monetary Fund, the Organization for Economic Co-operation and Development, the World Trade Organization, and subscribing Free Trade Agreements, Bilateral Investment Treaties and Double Taxation Agreements.
These warranties to foreign investment, mean eliminate performance requirements, provide it legal security and also, let it avoid taxes when it comes in, when produced earning in the country of source and when it comes out to residence countries.
After this context that I consider necessary, I´m going to refer to an instrument to avoid taxes: Double Taxation Agreements:
At the end of the First World War, mechanisms were established to prevent the removal of income, taxing at the same time on residence and on source. The first model of a Double Taxation Agreement was made by the leaggue of Nations in 1929, where they gave to residence full power of taxation, affecting the countries in which riches are created.
This Agreement model coincides with the marked tendency of regions like Latin America , to reduce the tax burden on capital and increase it on the job. For 2009, 51% of tax burden in the region was indirect taxes.
Latin America has 214 double taxation agreements. For Colombia , we have it with Spain, Chile, Switzerland and Canadá, and we are in negotiations with the United States, other European countries, China, Japan, Korea and India. In the agreements of double taxation that my country has negotiated is included the definitions about income taxes, remittances, and municipal taxes. For example, a double taxation agreement with Spain has an annual estimated cost of 600 million dollars which benefits close to 300 Spanish companies that are in strategic sectors of the Colombian economy such as telecommunications and electricity.
As 31% of foreign investment in Colombia comes from tax heavens, this investment when turns into revenues, fail to pay taxes upon entering or exiting the country. It goes like the wind, and does not pay toll. This is not a mistake, that´s the objective of free capital movement.
In addition to normal revenues, we have considered that this kind of mechanism to avoid paying taxes, constituted in an extraordinary income for multinationals, which undermines the income of our nation. It’s, in the end, a subsidy from the poor to the rich.
This coincides with a study by the World Bank in 2012, about the fiscal cost of tax benefits for Colombia. According to the study, “there is no knowledge about the net benefit to society can be derived using” tax benefits.
Another study by the Comptroller General of the Nation, demonstrated than multinational mining companies receive in tax benefits of the state, is twice as much as what they pay in income taxes. The director of tax administration said that, to pay fewer taxes, all extracted Colombian minerals are sold in tax havens, through the pricing transfer mechanism.
¿Which foreign investor wouldn’t want to invest in a country that allows this? In this context, Colombia is like a store in liquidation, like a big dutty free. On mining sector, Buy one, get one free. Are you looking for oil wells? Their cheaper by the dozen.
Financial and tax architecture of some countries in Latin America, was never designed for the well-being of its people, but to facilitated the world wide division of the means of production: capital and technology in developed countries and cheap labor and land in the developing countries. An equation where is mathematically impossible for the positive results to be in our favor.
In so far, as the capital revenues hide in tax havens, states would be unviable. Nations can only exist if they have resources to fulfill their social responsibilities. These resources come from the taxes paid by the workers, but especially by companies.