Public procurement — the next frontier for tax justice campaigning?

Matti Ylo?nen

This guest blog by Matti Ylönen is partly based on an academic article Cities as World Political Actors: “Tax haven free cities” initiative and the politics of public procurement.

Public procurement — the next frontier for tax justice campaigning?

The international movement for tax justice and tackling secrecy jurisdictions has come of age. Many of the demands that were deemed impossible a decade ago have reached the political mainstream, even though progress has often been painstakingly slow, sometimes hindered by loopholes that have weakened even the most progressive initiatives.

Where are the next frontiers for tax justice campaigning? It is interesting to draw a comparison with other, much older strand of campaigns on reforming the international trade rules.

For decades, these trade campaigns have progressed along two distinct paths.

First, some trade campaigners have called for more development-friendly trade agreements, or fought against new trade treaties that would hurt labor rights or the environment. Second, there has also been a somewhat separate but partly overlapping consumerist movement for “fair trade,” which has led to the development of the Fair Trade label and other similar initiatives.

These labeling systems are far from perfect and they have been criticized on many grounds. Still, the fair trade movement has had an unquestionable role in raising the awareness of social justice issues and helped to elevate many producers and communities from poverty.

A further feature of fair trade consumer activism has recently been the strong role of cities. Since 2000, more than 2000 towns around the world have proclaimed themselves as “Fair Trade cities,” committing to using fair trade products and promoting them. The potential is huge: for example, public purchases of goods and services now correspond to 16 per cent of GDP in the EU.

The much younger tax justice campaign has focused predominantly on pushing legislative reforms in national and international forums. This situation may be changing. Year 2014 saw the launch of the Fair Tax mark in the UK, a voluntary labeling system that aims to set “a new standard in responsible tax practice – from the smallest shop to the biggest multinational.”

In the past few years, several cities in Europe have also shown their interest in adopting tax- and transparency-related provisions in their public procurement tenders. However, cities have found that using public procurement for promoting tax justice is easier said than done.

Helsinki and Malmö have been two cities where the issue has reached the city council. Both cities commissioned feasibility studies on reforming their procurement rules. The results of were not encouraging: civil servants concluded that it would be very difficult to show that payment of taxes or transparency of corporate structures are characteristics of the products or services that are being procured.

However, it is unlikely that we have heard the last word yet. After all, the introduction of fair trade related criteria was also a contested issue few years ago. In 2008, the Dutch province of Noord Holland issues a procurement tender for the supply and management of automatic coffee machines from 1 January 2009 onward.

This contract notice provoked the European Commission (EC) to send a formal complaint to the Kingdom of the Netherlands on 15 May 2009. According to the EC letter, the specifications stipulated that the contract infringed the EU’s public procurement directive (2004/18) by demanding that the suppliers of tea and coffee adhere to the MAX HAVELAAR and EKO labels.

The Court ruled that Noord Holland had violated the procurement directive by demanding that the service providers had to obtain a particular label for their products. In addition, the Court noted that “there is no requirement that an award criterion relates to an intrinsic characteristic of a product, that is to say something which forms part of the material substance thereof”.

Essentially, this meant that it was possible to use fair-trade-related procurement criteria as these criteria were understood to be “invisible” characteristics of the product, but only when these criteria were listed in the tender without demanding that the products offered should carry a particular label (Paragraph 99). This was in line with the guidelines provided in the EC communication.

Now, a question arises: would it be possible to formulate tax or transparency related procurement criteria that could also be deemed as “invisible characteristics” of procured goods or services?

Possibly, but not without help from “emergent entrepreneurs” who could provide the necessary expertise in tax law, accounting, and procurement rules.

In this regard, the “fair tax” campaign is in a similar situation where the broader tax justice campaign was when it started to evolve. This could not happen before the required technical expertise was in place, provided by people who knew the ins and outs of the offshore industry.

The Fair Tax mark can be seen as a crucial first step to this direction, though its model is not directly applicable to public procurement.

Given the huge volume of procurement activities, potential gains can be huge. However, the road to consumer activism is not without pitfalls. The biggest threat is that the consumer campaigns lead into a situation where binding reforms become stalled in favor of voluntary corporate responsibility.

Still, it is interesting to see whether procurement professionals and tax justice advocates find each other in the future. Currently, the EU member states are adopting the most recent revision of EU’s procurement directive, and the wordings in national legislation can have a big impact for potential future work.

Moreover, the procurement directive itself is being updated regularly, and its next revision round would provide avenues for even greater impacts. Last time, the tax justice issues did not feature in the submissions to the draft directive.

Maybe next time will be different?