Building a Fair Financial Future for Latin America, José Antonio Ocampo

The forthcoming tax fair summit in Colombia on July 27-28 marks the first step in advancing the interests of Latin America and the Caribbean in international tax negotiations. In the face of growing inequality and tax evasion, governments in the region must create a tax regime based on the principle of shared prosperity.

BOGOTAOn July 27-28, Colombia will host the first ministerial summit on sustainable, inclusive and fair global taxation, supported by Brazil and Chile. The choice of location is not accidental: it reflects Colombia’s commitment to fighting poverty and inequality through progressive taxes.

The flagship tax reform of the Colombian government, initiated by the Ministry of Finance under my leadership and approved by the Colombian Congress at the end of 2022, is a prime example of this commitment. But once implemented, our focus should shift to improving the progressiveness of taxation in Latin America and the Caribbean (LAC), which remains one of the world’s most economically unequal regions.

Latin America suffers from staggering income disparities, with the richest 10% earning 22 times more than the poorest 10%, while the richest 1% account for 21% of the region’s total income. Wealth inequality is even more pronounced, as the richest 10% of the region’s residents own 77% of total household wealth, compared to less than 1% for the poorest 50%.

The LAC countries also have an entrenched regressive tax system, reflecting their longstanding inability to tax high incomes, especially capital income. In addition, widespread tax evasion has deprived governments of the resources they need to increase social spending and mitigate the effects of income inequality.

While aggressive tax competition between countries has been widely hailed as a boon for foreign direct investment and economic growth, the data show that tax breaks and privileges attract financial flows but do not increase real investment, which tends to be driven by other factors such as the quality of institutions, labor skills, and infrastructure. Misconceptions that encourage relentless tax competition between countries must be abandoned in favor of a new growth policy that relies on greater global coordination among tax authorities.

The LAC also shares the general dissatisfaction with the way international negotiations on tax reform have been conducted so far. Few disagree that the global tax system is outdated and unable to adapt to the realities of twenty-first century business models. Multinational corporations have learned to create shell companies to funnel their profits into tax havens. This problem has been exacerbated by the advent of the digital economy, which has made it much easier for companies and wealthy people not to pay their fair share.

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To address some of the most egregious tax avoidance strategies used by multinational companies, the G20 and the OECD launched a Base Reduction and Profit Shifting initiative that culminated in a package of reforms approved by 138 countries and jurisdictions. But early hopes that this process would lead to comprehensive reforms did not materialize. Despite some innovative elements, the measures set out in the OECD’s second global tax agreement may even exacerbate existing inequalities between countries.

While the 15 percent global corporate tax floor for Pillar Two is innovative and promising, its current structure favors countries in the Global North, where the world’s largest corporations are headquartered, and tax havens. The current deal allows these countries to impose a minimum tax on profits made in the Global South, thus collecting taxes on profits that should not have been redirected in the first place.

In addition, the minimum corporate tax rate of 15% is well below the Latin American average of currently 24%. It is also below the 25% minimum rate proposed by the Independent Commission on International Corporate Tax Reform, of which I am a member along with colleagues including Joseph E. Stiglitz, Jayati Ghosh, and Thomas Piketty.

This disappointing result is partly the result of the inability of the LAC countries to approach multilateral negotiations with a strong and unified voice. However, it is important to note that the frustration is not limited to the region: African countries have also called on the United Nations, rather than the OECD, to lead negotiations to reform the international tax system.

To create a fairer regulatory framework that better represents the global South, we must ensure that international governance processes are transparent and fair. The upcoming summit in Cartagena marks the first step in changing the approach of the LAC countries to multilateral negotiations to establish more efficient taxation in the region. The conference, which is supported by the United Nations Economic Commission for Latin America and the Caribbean and includes 16 participating countries, is the result of a long preparatory process characterized by active engagement with the private sector, academia and civil society.

We hope that this historic first summit will serve as a platform for cooperation among the governments of the region, allowing us to protect our common interests, stop competing on tax rates to attract foreign investment, and develop a tax structure for digital services that suits our needs. With rising inequality and tax evasion, Latin American governments must build a fair future based on the principle of shared prosperity.

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