The United Nations has estimated a hefty funding requirement of over 3.5 trillion to 5.0 trillion dollars per year for the implementation of its ambitious post-2015 development agenda, including 17 Sustainable Development Goals (SDGs), approved by world leaders in September.

But at least one key question remains unanswered: how will the UN convince rich nations and the world’s multinational corporations to help raise the necessary trillions to reach those global goals, including the eradication of poverty and hunger by 2030?

According to the UN, there is at least one “hidden source” for development funding, primarily for the world’s most impoverished continent: capturing the illicit financial outflows from Africa, estimated at over 50 billion dollars annually.

James Zhan, Director of Investment and Enterprise at the UN Conference on Trade and Development (UNCTAD), told delegates that tackling illicit financial flows was essential for Africa to achieve the Sustainable Development Goals.

The estimated resources leaving Africa in the form of illicit financial transfers, he pointed out, was nearly 530 billion dollars between 2002 and 2012.

“That was a huge cost for the continent’s development as those resources could have been invested into Africa’s economic development and structural transformation.”

He said illicit financial flows undermined institutions, drained the state of much needed economic resources, reduced the development resource base and led to higher domestic tax burdens to fill the resource gap.

The 17 SDGs also include quality education, improved health care, gender equality, sustainable energy, protection of the environment and global partnership for sustainable development.

Bhumika Muchhala, Senior Policy Researcher, Finance and Development Programme, at the Third World Network (TWN), told IPS the three key causes of illicit financial outflows are widely held to be commercial tax evasion, criminal activity and government corruption.

She said tax evasion and avoidance, as well as transfer mispricing (trade mis-invoicing) practices of multinational corporations (particularly in the extractives sector), constitute the leading problem, along with money laundering practices and criminal activity such as trafficking in drugs and labour.

As many social movements, non-governmental organisations (NGOs), academics and policymakers point out, this does not happen by accident, she said.

Many countries and their institutions actively facilitate, and reap enormous profits from, the theft of massive amounts of money from developing countries.

“This undoes decades of economic development and sabotages the chances of future generations to grow beyond the need for economic aid,” she added.

Following an investigation last year, a High-Level Panel on Illicit Financial Flows from Africa had concluded that combating such flows was no longer a choice; it had become an imperative.

The Panel, established by the Economic Commission for Africa (ECA), called upon the African Union (AU) to engage with its partner institutions to elaborate on a global governance framework to determine the “conditions under which assets are frozen, managed and repatriated.”

Ambassador Oh Joon of South Korea, President of the Economic and Social Council (ECOSOC), told delegates at a UN panel discussion last month that Africa, like other regions, would have to mobilize resources from within the continent.

And the illicit outflows of finance represented an important loss of foreign exchange reserves, an erosion of legal tax base and bygone investment opportunities from natural resource rents, he added.

With an estimated 50 billion dollars per year in illicit financial flows, the effectiveness of domestic resource mobilization would be significantly curtailed if such illicit flows continued, he argued.

Addressing the high level segment of the General Assembly in September, the President of Senegal, Macky Sall, said illicit financial flows from Africa virtually exceeded official development assistance (ODA) to the continent (which amounts about 50 to 55 billion dollars annually).

“If 17 per cent of those assets were recovered, African countries could pay off their entire debts and finance their own development.”

UNCTAD’s Zhan said Africa was the only region where illicit financial flows reached about 5 per cent of gross domestic product (GDP).

He urged transparency and accountability through the strengthening of civil society and called for the promotion of institutional reforms and the creation of anti-corruption commissions.

He said African governments had a big responsibility to tackle the problem but so did the international community.

But African countries could not do it alone. Multinational companies and foreign direct investment (FDI) were also an important part of the solution. United Nations agencies such as UNCTAD could offer advice to African governments to design investment policies and handle tax avoidance and illicit practices by multinationals, Zhan said.

Muchhala told IPS while many organisations highlight the urgent need for reforms in information-sharing and transparency policies in the European Union and the United States, the Tax Justice Network, a key social movement comprised of various NGOs, has been stressing the need to counter tax evasion and tax avoidance.

To this extent, an advocacy campaign to establish a UN global tax body, with the universal membership of the UN, was carried out during the 2014-2015 negotiations for the third Financing for Development (FfD) conference.

The conference, held in Addis Ababa in July 2015, failed to garner consensus for a global tax body due to the resistance of developed countries.

While this is a major disappointment, she said, the push for a global tax body by both developing countries and global social movements, will persist both inside and outside the UN.

This article is part of IPS North America’s media project jointly with Global Cooperation Council and Devnet Tokyo.

The writer can be contacted at thalifdeen@aol.com

Jomo Kwame Sundaram. Credit: FAO

By Jomo Kwame Sundaram
ROME, Aug 5 2015 (IPS)

The Addis Ababa Action Agenda is widely seen as a major disappointment for developing countries as well as others hoping for adequate means of implementation to realise national development ambitions and the Sustainable Development Goals (SDGs).

It has become clear that the South, including the least developed countries, should not expect any serious progress to the almost half century old commitment to transfer 0.7 percent of developed countries’ economic output to developing countries. But to add insult to injury, developing countries cannot expect to participate meaningfully in inter-governmental discussions to enhance overall as well as national tax capacities.In the vast majority of countries in sub-Saharan Africa and Latin America, the tax to GDP ratio has actually stagnated or declined as tariffs and export duties, which accounted for the largest share of tax revenue, declined with trade liberalisation.

While OECD countries agree that taxation is the only viable strategy for developing countries to exit foreign aid dependency in the long run, they have refused to accede to the latter’s desire for a full-fledged inter-governmental body for international tax cooperation under United Nations auspices.

The ability to pursue development policies depends crucially on available fiscal space, which relies mostly on domestic revenues, especially taxes. However, tax revenues in most low- and lower middle-income developing countries are low.

The average tax-GDP ratios in low-income and lower-middle income countries are around 15 and 19 per cent respectively, compared to over 30 percent in high income countries.

Low- and lower-middle-income countries should take steps to increase their revenues; but the main approach in recent decades has been to increase tax rates only if unavoidable. It was presumed that lower rates would ensure better compliance with tax laws, and thus raise revenue.

The prevailing tax wisdom also favoured broadening the tax base, even when taxation capacities are modest. Thus, indirect taxation has tended to increase while direct taxation of corporations and individuals has tended to decline. The latter was supposed to be good for investment and growth although the empirical support for this presumption is dubious.

In the vast majority of countries in sub-Saharan Africa and Latin America, the tax to GDP ratio has actually stagnated or declined as tariffs and export duties, which accounted for the largest share of tax revenue, declined with trade liberalization. Unfortunately, other taxes have not grown to compensate for the lower trade taxes.

There is an urgent need to reverse this trend, with greater commitment to revenue generation in order to improve social protection, create employment and otherwise contribute to sustained economic recovery.

With their different economic circumstances, it does not make sense for developing countries to simply try to emulate developed economies in trying to generate revenue. Even among developing countries, no one size fits all.

And certainly not for all time, as tax systems must evolve with changing economic circumstances. A key question is: which taxes are most likely to meet the requirements of implementability, buoyancy and stability?

Domestic Taxes: Direct or Indirect?

The revenue to GDP ratio can rise in the following ways: the domestic tax base is widened; tax avoidance and evasion are reduced; and new sources of international taxation are found.

There is no reason to be overly pessimistic about direct taxation as tax reform has significantly improved the contribution of direct taxes to overall revenue in many countries. It is certainly possible to enhance tax revenues by increasing the share of direct taxation of the wealthy through more progressive income taxes in developing countries.

However, there should also be a greater effort to ensure better compliance with, and higher collection of existing taxes.

Limiting the discretionary authority of tax officials could also help improve compliance and reduce evasion. Computerisation of tax administration can help limit corruption, as it makes it harder to tamper with records. But government computerisation alone cannot ensure effective introduction of the much-touted value-added tax (VAT), an indirect tax largely responsible for facilitating the shift from direct to indirect taxation.

Improved tax administration can increase the share of personal income taxes in total tax revenue. Expansion of the scope for tax deduction at source has been very effective in taxing those otherwise hard to reach.

Every individual who is a house owner, vehicle owner, club member, credit card holder, passport, driving licence or identity card holder and telephone subscriber can be required to file a tax return.

Excise taxes are another important source of revenue in developing countries as they have a buoyant base and can be administered at low cost. They are typically levied on products such as alcohol, tobacco, petroleum, vehicles and spare parts.

From a revenue perspective, they are convenient, involving few producers, large sales volumes, relatively inelastic demand and easy observability.

Excises may be levied on quantities leaving the factory or arriving at ports, thus simplifying measurement and collection, ensuring coverage, limiting evasion and improving monitoring. Excise taxes currently amount to less than 2 per cent of GDP in low-income countries, compared to about 3 per cent in high-income countries.

Globalisation and Tax Evasion

Revenue losses due to globalisation need to be addressed. There are three main reasons for revenue losses: first, capital movements increase opportunities for tax evasion because of the limited capacity that any tax authority has to check the overseas incomes of its residents; evasion is easier as some governments and financial institutions systematically conceal relevant information.

Where dividends, interest, royalties, and management fees are not taxed in the country in which they are paid, they more easily escape notice in the countries where the beneficiaries live. There have been large non-resident aliens’ bank deposits in some countries like the U.S. that imposes no taxes on interest from such deposits.

Second, avoidance (not evasion) may increase, given international differences in tax rules and rates, because of the choice of tax regime that international-tax-treatment of enterprise income commonly offers. This is more likely for taxation of profits from corporations’ international operations.

Transfer pricing for goods, services and resources – moving among branches or subsidiaries of a company – provides opportunities for shifting income to minimise tax liability.

Third, international competition for inward foreign direct investment has lead governments to reduce tax rates and increase concessions to foreign investors. The tax rates that governments can impose are thus constrained by international competition.

Hence, they are reluctant to raise rates or to tax dividend and interest income for fear of capital flight although it is well known that direct tax concessions have little effect in diverting international investment, let alone in attracting such flows. Hence, such tax concessions constitute an unnecessary loss of revenue.

Not surprisingly, income tax rates, both on corporations and on individuals, have fallen sharply since the 1980s. Beggar-thy-neighbour policies have led to losses of revenue for many developing countries in a larger race-to-the-bottom also involving labour and environmental standards and conditions, which also undermines the possibility of balanced, inclusive and sustainable development.

Finance ministries and tax authorities in developing countries need to cooperate among themselves and with their counterparts in the OECD economies to learn from one another and to close existing loopholes in their mutual interest. With the huge and growing size of public debts as well as the real and imagined fiscal constraints to sustained global economic recovery, such cooperation is more urgent than ever.

Edited by Kitty Stapp

Excerpt:

School children in a classroom in Gao, Mali. Advocates of a global tax body say revenues lost in tax havens could go to the building of much-needed schools, clinics, and roads and provide clean water and electricity to help combat poverty and boost development. Credit: UN Photo/Marco Dormino

By Thalif Deen
UNITED NATIONS/ADDIS ABABA, Jul 10 2015 (IPS)

When the four-day-long international conference on Financing for Development (FfD) concludes in the Ethiopian capital later this week, one of the lingering questions in the minds of departing delegates may well be: did we really achieve anything concrete after years of negotiations?

As Oxfam International rightly points out, 2015 is a big year for major global conferences – on combating poverty, inequality, environmental degradation and climate change.“Setting up a tax body is a crucial first step towards a better global financial system which works to uplift the majority and not further enrich the wealthy." -- Lidy Nacpil of APMDD

But in the first of these big conferences – in Addis Ababa, July 13-16 – decisions will be made about how money is delivered and spent by governments to tackle poverty and inequality.

One of the major sticking points during the negotiations in New York was the creation of a global tax body, including international tax reforms.

The final decision, however, will be made by ministers and high-level officials from 193 governments in Addis Ababa, the third in a series, the first FfD conference being held in Monterrey, Mexico in 2002 and the second in Doha, Qatar in 2008.

If you look at the big finance-related issues that are in the media these days, says Oxfam, “we read about economic crisis, government budget cuts, major tax dodging scandals, and countries in debt crisis. All of these are issues that fall under the financing for development agenda. “

Therefore, if the FfD conference is to be a success it could mean a rebalancing of power and a new cooperation with developing countries, which would get to have a voice in the international financial system.

The FfD conference could be a once in a decade opportunity to ensure that efforts to fight climate change, poverty and inequality are funded fairly.

“Unfortunately, current signs indicate that it will far from deliver on that promise. Negotiations (in New York) have seen more and more eroded from these ambitions,” said Oxfam in a statement released here.

McKinley Charles, media coordinator for ActionAid in Addis Ababa, told IPS its primary focus will be on tax reforms, more specifically the international tax body that is still currently being negotiated.

“We are working to improve and democratise the international tax body so that regulations can be put in place to stop tax dodging which robs developing countries of billions of dollars of revenue every year.”

These are revenues, she pointed out, that could have gone to the building of much-needed schools, clinics, and roads and provide clean water and electricity to help combat poverty and boost development.

“Addis is a big opportunity since it looks as if a decision on the international tax body will be made there,” she added.

Charles also said ActionAid, as part of its efforts, will be involved in a number of side events on tax justice, including panel debates.

ActionAid is also fielding some 12 tax policy analysts and campaigners from Europe, South Africa, Kenya, Zambia and Mozambique “to get our messages out to the policy makers and the public influencers.”

Asked whether the success or failure of the FfD will largely depend on tax reform, Alison Holder, Oxfam’s policy advisor on tax reform, told IPS the tax body issue will be a litmus test of whether this FfD conference is really about building a new common agenda and whether it is about real reform to address the international barriers that prevent developing countries from raising sufficient tax revenue.

The tax body raises the question of whether rich countries recognise that if the world is able to finance ambitious development goals, “then we need to see some shift in the balance of power”, she said.

“Without the commitment to create a truly global tax body, any outcome from these negotiations will continue to place all of the burden of financing for development on developing countries’ own doorsteps. They would be told to improve their own tax systems and live with current broken tax system.”

Holder also said rich countries are refusing to recommit to their decades-old promise to deliver 0.7 percent of their national income in aid – which would release an estimated 250 billion dollars a year.

Official development assistance (ODA) is declining and countries need taxes to fill the gap.

“There is still a real chance that all of the months of negotiations on this FfD conference will come to nothing, and that no agreement will be forged. But this doesn’t have to be the way it turns out,” she declared.

Some of the world’s major multinational corporations are accused of shifting their profits out of countries where they make their money and hide it in tax havens, increasing their profits and leaving the poorest countries with an estimated loss of 100 billion dollars a year.

But the rich countries want to retain their status quo, where global tax rules are set within the Organisation for Economic Cooperation and Development or OECD, long described as a rich man’s club based in Paris.

The Asian People’s Movement on Debt and Development (APMDD), one of more than a thousand organisations which are part of the Global Alliance for Tax Justice (GATJ), said it is joining the call for the establishment of a global tax body.

“Civil society groups in Asia are criticising the United States and European Union for opposing a global tax body that would be more democratic than the OECD and G20, where rich countries dominate,” said Lidy Nacpil, coordinator of APMDD.

“Setting up a tax body is a crucial first step towards a better global financial system which works to uplift the majority and not further enrich the wealthy. It can level the playing field against tax evaders and provide more funds for developing countries,” she added.

Meanwhile, the European Union, the United States, UK, Germany, Netherlands, Finland and Sweden are expected to announce a new tax initiative, which aims to strengthen the capacity of developing countries’ tax authorities.

The initiative aims to double the collective overseas development aid available to help developing countries build more progressive tax systems and improve the collection of national taxes; support them in their efforts to clamp down on tax dodging practices by multinational companies; and increase their capacity to engage in global fora which deal with international tax reform.

Called the Tax Inspectors without Borders (TIWB) initiative, it will be jointly launched by the OECD and the U.N. Development Programme (UNDP) at a side event during the FFD3.

The initiative aims to help build tax audit capacity in developing countries by providing tax audit experts to work alongside local officials of developing country tax administrations – this should help developing countries identify cases of tax evasion and avoidance and claim back the revenue they are owed.

The TIWB programme aims to support 200 expert tax deployments between 2016 and 2019.

Holder told IPS Oxfam welcomes both initiatives to help build the capacity of developing countries’ tax administrations.

Less than 1 per cent of total aid budget is dedicated to support domestic resource mobilisation yet fairer and progressive tax systems are vital to reduce poverty and inequality. However, developing countries need more from Addis, she noted.

“Developing countries are not claiming the tax revenues they are entitled to because of a broken international tax system. This system allows multinational companies to cheat poor nations out of billions of dollars in taxes. Despite this, rich countries, led by the OECD, have denied them an equal say at the international negotiation table on new global tax rules.

“The Addis tax initiative includes the objective to increase the capacity of developing countries to negotiate global rules and to facilitate their presence at e.g. OECD-lead international tax meetings. This cannot replace the need for a truly inclusive global tax body where all countries can participate on equal footing to negotiate global tax rules. The same countries that initiated the Addis tax initiative have spent months blocking the creation of such a new intergovernmental tax body in Addis.”

Oxfam called on all countries to walk the extra mile in Addis and ensure that developing countries will be able to increase their tax revenues and build fairer tax systems at the national and global levels.

They should agree on the establishment of a U.N. tax body that will enable developing countries to claim their fair share of global corporate tax revenues, Holder declared.

Edited by Kitty Stapp

The writer can be contacted at thalifdeen@aol.com

A fairer more cooperative global tax structure is needed to help achieve Post-2015 development goals. Credit: Eoghan OLionnain CC by SA 2.0 License https://creativecommons.org/licenses/by-sa/2.0/.

By Lyndal Rowlands
UNITED NATIONS, Mar 20 2015 (IPS)

Public funds are vitally important to achieving the Sustainable Development Goals (SDGs), making corporate tax avoidance trends a pressing issue for post-2015 Financing for Development discussions.

A draft agenda circulated this week for the Financing for Development (FfD) post-2015 Development Conference to be held in Addis Ababa in July places domestic public finances as a key action agenda item.“This is no longer an issue about developing countries versus rich countries. I think you have to get beyond geography and start thinking about this as a battle between wealthy elites and everybody else.” -- Nicholas Shaxson

The agenda acknowledges the need for greater tax cooperation considering “there are limits to how much governments can individually increase revenues in our interconnected world”.

Over 130 countries, represented by the Group of 77 (G-77), called for greater international tax cooperation to be included on the agenda, in recognition of the increasingly central role of tax systems in development.

These calls come in light of the Luxembourg Leaks and Swiss Leaks, which have revealed in recent months how some of the world’s biggest multinational corporations avoid paying billions of dollars of taxes through deals with ‘tax havens’ in wealthy countries.

Two reports out this week, from Oxfam and the Tax Justice Network, both look at the impacts of corporate tax avoidance on global inequality.

Catherine Olier, Oxfam’s European Union policy advisor, told IPS, “Corporate tax avoidance is actually a very important issue for developing countries because according to the International Monetary Fund, the poor countries are more reliant on corporate tax than rich countries.”

Olier said that considerable funds are needed to make the SDGs possible.

“If we look at what’s currently on the table in terms of Official Development Assistance (‘international aid’) or even leveraging money from the private sector, this is never going to be enough to finance the SDGs,” she said.

“Tax is definitely going to be the most sustainable and the most important source of financing,” Olier said.

Oxfam’s report called on European institutions, especially the European Commission, to “analyse the negative impacts one member state’s tax system can have on other European and developing countries, and provide public recommendations for change.”

Nicholas Shaxson from the Tax Justice Network told IPS that tax havens are predominantly wealthier countries, but that they negatively impact both rich and poor countries.

“This is no longer an issue about developing countries versus rich countries. I think you have to get beyond geography and start thinking about this as a battle between wealthy elites and everybody else,” he said. “That’s where the battle line is, that’s where the dividing line is.”

He added that corporate taxes were particularly important to developing countries, in part because it was more difficult to leverage tax revenue from a poorer constituency.

“In pure justice terms, in terms of a large wealthy multinational extracting natural resources or making profits in a developing country and not paying tax, I think that nearly everyone in the world would agree in their gut that there’s something wrong with that situation,” Shaxson said.

Shaxson is the author of the Tax Justice Network’s (TJN) report: Ten Reasons to Defend the Corporation Tax, published earlier this week.

The report argues that trillions of dollars of public spending is at risk, and that if current trends continue, corporate headline taxes will reach zero in the next two to three decades.

Meanwhile, Oxfam reported in January that the “combined wealth of the richest 1 percent will overtake that of the other 99 percent of people next year [2016] unless the current trend of rising inequality is checked.”

Oxfam is calling for a Ministerial Roundtable to be held at the FfD Conference to help facilitate the establishment of a U.N. inter-governmental body on tax cooperation.

Olier told IPS that while developing countries have expressed support for greater tax cooperation, there has so far been less support from Organisation for Economic Co-operation and Development (OECD) member countries, including European countries and the United States.

Follow Lyndal Rowlands on Twitter @LyndalRowlands

Edited by Kitty Stapp

There is a broad spectrum of potential avenues for the illegal skimming from or shifting of profits in developing countries, carried out by criminal entities, corrupt officials and dishonest corporations. Credit: epSos .de/cc by 2.0

By Carey L. Biron
WASHINGTON, Dec 16 2014 (IPS)

Developing countries are losing money through illicit channels at twice the rate at which their economies are growing, according to new estimates released Tuesday. Further, the total volume of these lost funds appears to be rapidly expanding.

Findings from Global Financial Integrity (GFI), a watchdog group based here, re-confirm previous estimates that developing countries are losing almost a trillion dollars a year through tax evasion, corruption and other financial crimes. Yet in a new report covering the decade through 2012, GFI’s researchers show that the rate at which these illicit outflows are taking place has risen significantly.“If we take [these] findings seriously, we can address extreme poverty in our lifetimes.” -- Eric LeCompte

In 2003, for instance, cumulative illicit capital leaving developing countries was pegged at around 297 billion dollars. That’s significant, of course, but relatively little compared to the more than 991 billion now estimated for 2012 – a record figure, thus far.

In less than a decade, then, these illicit outflows more than tripled in size, totalling at least 6.6 billion dollars. GFI reports that this works out to an adjusted average growth of some 9.4 percent per year, or twice the average global growth in gross domestic product (GDP).

One of the most common mechanisms for moving this money has been the falsification of trade invoices.

“After turning down following the financial crisis, global trade is going up again and so it’s increasingly easy to engage in misinvoicing – a lot more people are coming to understand how to do this and are willing to indulge,” Raymond Baker, GFI’s president, told IPS.

“These rates are not only growing faster than global GDP but also faster than the rate of growth of global trade.”

Further, these estimates are likely conservative, and don’t cover a broad spectrum of data that is not officially reported – cash-based criminal activities, for instance, or unofficial “hawala” transactions.

Baker emphasises that these capital losses are a problem affecting the entire developing world. Yet given that illicit outflows run in tandem with a country’s broader interaction with global trade, these rates are particularly strong in the world’s emerging economies, led by China, Russia, Mexico and India.

There are also significant differentials between regions, both is size and the rate at which they’re increasing. In the Middle East and North Africa, for instance, illicit financial flows are growing far higher than the global average, at more than 24 percent per year.

Even in sub-Saharan Africa, home to some of the world’s poorest communities, these rates are growing at more than 13 percent per year. Such figures eclipse both foreign assistance and foreign investment – indeed, the 2012 figure was more than 11 times the total development assistance offered on a global basis.

“If we take [these] findings seriously, we can address extreme poverty in our lifetimes,” Eric LeCompte, an expert to U.N. groups that focus on these issues, said Monday. “Countries need resources and if we curb these illicit practices, we can get the money where it’s needed most.”

Lucrative misinvoicing

There is a broad spectrum of potential avenues for the illegal skimming from or shifting of profits in developing countries, carried out by criminal entities, corrupt officials and dishonest corporations. And for the first time, certain of these key issues are receiving new and concerted international attention.

Multiple nascent multinational actions are now unfolding aimed at cracking down particularly on tax evasion by transnational companies. New transparency mechanisms are in the process of being rolled by several multilateral groups, including the Group of 20 (G20) industrialized nations and the Organisation for Economic Cooperation and Development (OECD), a Paris-based grouping of rich countries.

Such initiatives are receiving keen attention from civil society groups, and would likely constrict these illicit flows. Yet in fact, GFI’s research suggests that the overwhelming method by which capital is illegally leaving developing countries is far more mundane and, potentially, complex to tackle.

This has to do with simple trade misinvoicing, in which companies purposefully use incorrect pricing of imports or exports to justify the transfer of funds out of or into a country, thus laundering ill-gotten finances or helping companies to hide profits. Over the past decade, the new GFI report estimates, more than three-quarters of illicit financial flows were facilitated by trade misinvoicing.

And this includes only misinvoicing for goods, not services. Likely the real figure is far higher.

Experts say that stopping misinvoicing completely will be impossible, but note that there are multiple ways to curtail the problem. First would be to ensure greater transparency in the global financial system, to eliminate tax havens and “shell corporations” and to require the automatic exchange of tax information across borders.

Efforts are currently underway to accomplish each of these, to varying degrees. Last month, leaders of the G20 countries agreed to begin automatically sharing tax information by the end of next year, and also committed to assist developing countries to engage in such sharing in the future.

GFI’s Baker says that developing countries need to bolster their customs systems, but notes that other tools are already readily available to push back against trade misinvoicing.

“There is a growing volume of online pricing data available that can be accessed in real time,” he says. “This gives developing countries the ability to look at transactions coming in and going out and to get an immediate idea as to whether the pricing accords with international norms. And if not, they can quickly question the transaction.”

Development goal

There is today broad recognition of the monumental impact that illicit financial flows have on poor countries’ ability to fund their own development. Given the centrality of trade misinvoicing in this problem, there are also increasing calls for multilateral action to take direct aim at the issue.

In particular, some development scholars and anti-poverty campaigners are urging that a related goal be included in the new Sustainable Development Goals (SDGs), currently under negotiation at the United Nations and planned to be unveiled in mid-2015.

Under this framework, GFI is calling for the international community to agree to halve trade-related illicit flows within a decade and a half. The OECD is hosting a two-day conference this week to discuss the issue.

“We’re not talking about an aspirational goal but rather a very measurable goal. That’s doable, but it will take political will,” Baker says.

“We think the SDGs should incorporate very specific, targetable goals that can have huge impact on development and helping developing countries keep their own money. In our view, that’s the most important objective.”

Edited by Kitty Stapp

The writer can be reached at cbiron@ips.org

While a major global campaign to cut down on tax evasion is picking up momentum, anti-poverty advocates say the initiative overlooks the world’s poorest countries.

Last week, 51 countries from four continents agreed to systematically exchange tax information by 2017, with the aim of allowing authorities to quickly register any disparities. Several dozen additional countries – 89 in total – said they would follow suit by the following year, according to the Organisation for Economic Cooperation and Development (OECD), a grouping of wealthy countries that is spearheading the project."Do we really think that there are many Brits or Americans with money in, say, Nigeria? Probably not. But is there likely a lot of Nigerians with money in the U.S. or U.K.? Yes.” -- Heather Lowe, senior counsel with Global Financial Integrity

Global tax evasion has risen to the top of the global agenda in the aftermath of the 2007-08 financial crisis and the resulting financial constrictions felt by governments around the world. Though last week’s pledges will still need to be underpinned by separate bilateral agreements, the new accord is being lauded as a major step forward on the issue.

“This great success in the fight against international tax evasion would have been unthinkable only a few years ago,” Wolfgang Schauble, Germany’s finance minister, wrote Monday for a newspaper here. “We need to make sure that creative tax planning in the form of profit-shifting and artificial profit reduction is no longer a lucrative business model.”

The new pledges were made at the annual meeting of an OECD-organised grouping known as the Global Forum on Transparency and Exchange of Information for Tax Purposes. At the meeting, in Berlin, the forum’s 123 members also formally endorsed a new OECD blueprint, known as the Common Reporting Standard, detailing what information will be collected, by whom, and how it will be exchanged.

Yet the list of those asked to participate in the new pledging includes almost solely developed countries or known tax havens, which rich governments have been particularly keen to address. This is cause for concern for some, given that the impact of illegal financial dealings is felt particularly by weaker economies.

“The new OECD standard on automatic information exchange is a big first step towards tackling illicit financial flows,” Andres Knobel, an analyst with the Tax Justice Network, a British advocacy group, said in a statement.

“However, serious obstacles to the inclusion of developing countries and a number of unresolved loopholes will prevent its effectiveness, allowing rich individuals with plenty of options to avoid reporting.”

Select invitations

While the Global Forum on Transparency includes 123 members, just 95 of these were asked to take part in the new automatic exchanges. And just one of those, the Pacific island nation of Vanuatu – widely known as a tax haven – is considered by the United Nations to be a least developed country.

OECD officials say that many developing countries weren’t invited to take part in this initial round of pledging due to concerns over institutional capacity.

“The developing countries which do not have financial centres have indicated their difficulties on account of low capacity to implement [the automatic exchange of tax information] on such an ambitious timeline,” Monica Bhatia, the head of the Global Forum secretariat, told IPS.

“These countries were nevertheless encouraged to participate with a more flexible timeline and support was offered to facilitate their participation … by way of pilot projects. Already six developing countries have requested pilot projects and the Global Forum is committed to helping other developing countries who come forward as well.”

Yet others suggest that, capacity notwithstanding, all countries should be able to receive tax information about whether their own citizens have undeclared overseas bank accounts.

“Under the current agreement, tax-haven countries that don’t have an income tax for their own people don’t have to reciprocate this information,” Heather Lowe, senior counsel with Global Financial Integrity (GFI), a Washington-based watchdog group, told IPS.

“That makes some logical sense, but the organisers won’t even consider a similar phase-in period for the least developed countries. Do we really think that there are many Brits or Americans with money in, say, Nigeria? Probably not. But is there likely a lot of Nigerians with money in the U.S. or U.K.? Yes.”

GFI has published pioneering data estimating that developing countries could be losing a trillion dollars a year from a variety of shady financial dealings. While all such activities contribute to crippling public-sector coffers, the new plan covers only tax evasion.

“While a portion of illicit financial flows is driven by tax evasion, much of it is also propelled by other crimes such as drug trafficking, sex slavery, corruption and fraud,” Lowe says. “The current framework risks either missing these other major forms of crime, or keeping that information locked up by tax authorities and away from government investigators and prosecutors.”

Starting with Africa

The Global Forum says it wants to bring as many developing countries as possible into the new exchange system, and maintains that multiple initiatives are currently underway to do so. Last week, the grouping announced the most significant of these, a project aimed at strengthening outreach and capacity on the issue in Africa.

The African Initiative, overseen by the Global Forum, the World Bank Group and others, will initially focus on 17 countries, around a third of the continent. Yet an OECD factsheet says this number could be “significantly increased” through the three-year programme.

As yet, there is no parallel initiative in Asia or Latin America, though the Global Forum says such projects could still be created.

“The impetus for the Africa Initiative came from our African member countries … in the wake of increased focus on the problem of illicit financial flows from African countries of which tax evasion forms a significant component,” Kathryn Dovey, a tax policy analyst with the Global Forum, told IPS in an e-mail.

“The Global Forum is committed to working with all developing countries and would be happy to seed and support similar initiatives in other regions. If countries and organisations from the region and relevant international organisations come forward to collaborate, the Africa Initiative could be replicated in other key geographies over time.”

Still, GFI’s Lowe says that capacity-building could be a secondary goal after bringing in poorer countries on a non-reciprocal basis.

“Africa is a strong place to start, because investment in Africa has been growing significantly over the past few years and there are many governments in the continent that are really starting to engage on this issue,” she says.

“But I don’t see why we can’t start with non-reciprocal information for least-developed countries and then work on these capacity-building programmes to allow for reciprocation to happen later. Let’s start with the practical.”

Edited by Kitty Stapp

The writer can be reached at cbiron@ips.org

(1) Tax evasion and fraud join forces in Latin America to exacerbate inequality in the region. Credit: Marianela Jarroud/IPS

By Marianela Jarroud
SANTIAGO, Oct 14 2014 (IPS)

Corruption and tax evasion are flagrant violations of human rights in Latin America, where they contribute to inequality and injustice in the countries of the region, according to studies and experts consulted by IPS.

“Tax evasion means that those who are most vulnerable are denied the full enjoyment of their economic and social rights, including health and education,” said Rocío Noriega, an adviser on governance, ethics and transparency for the United Nations Development Programme.

“Corruption has a negative impact on the enjoyment of human rights,” she added. It also constitutes “a threat to democracy, because it systematically violates the foundation of citizenship by perpetuating inequality based on access by the few to power, wealth and personal connections,” she told IPS.

Corruption, as a way of distributing public resources for purposes other than the common good, is a serious violation of human rights, experts agreed.

In 2013 the Office of the United Nations High Commissioner for Human Rights said that, since corruption can occur in many different forms and contexts, it is almost impossible to identify all the human rights that are violated.

They added that corruption is an obstacle for the development of societies, but is also a serious problem for strengthening the legitimacy of democracy, because its prevalence and the perception of citizens of its incidence in public affairs and institutions can greatly undermine support for democratic regimes.

The 2013 Latinobarómetro poll indicates that 26 percent of all Latin Americans said they were aware of at least one case of corruption in their country in the past 12 months. A similar percentage said that nearly everyone in their government was corrupt.

Venezuela and Mexico top the ranking for perception of corruption, with 39 percent making these statements, followed by Paraguay (38 percent) and Chile (35 percent). Among the countries with the lowest perception of corruption were Uruguay (19 percent), Nicaragua (17 percent), Honduras Guatemala and Brazil (16 percent), and El Salvador (eight percent).

Francisca Quiroga, a political analyst and expert on public policies at the University of Chile, told IPS that both corruption and tax evasion are directly correlated to inequality and injustice.

She said: “Tax policies are a potential instrument for distributing resources and funding the development of social policies.

“The underlying rationale is the duty to combat inequality and to redistribute resources, as well as to build more sustainable economies,” she said.

“When talking about human rights and social rights, in particular, one of the elements to take into account is taxation policy, and the institutional mechanisms to ensure the legitimacy of the decisions taken,” she said.

High inequality is one of the most distinctive characteristics of Latin America’s social situation.

According to the Economic Commission for Latin America and the Caribbean (ECLAC), income distribution inequality in the region is substantially higher than in other global regions, with an average Gini coefficient of 0.53.

The Gini coefficient is a measure of income inequality, expressed as an index between zero and one. Zero represents perfect equality, while a value of one represents complete inequality.

For example, the least unequal country in the region is more unequal than any non-Latin American member of the Organisation for Economic Co-operation and Development (OECD), or than any country in the Middle East and North Africa, according to a report titled “Evasión y Equidad en América Latina” (Evasion and Equality in Latin America) by the ECLAC Economic Development Division.

The five Latin American countries with the worst income distribution, according to the report, are Brazil, Guatemala, Honduras, Paraguay and Chile, in that order.

In Chile, most employed people earn around 500 dollars a month, in a country where bread costs two dollars a kilo, while the richest 4,500 families live on more than 30,000 dollars a month.

“Tax evasion is a form of fraud that undermines equality, there is no doubt about it,” sociologist Marta Lagos, the head of Latinobarómetro, told IPS.

“There is massive empirical evidence that shows that income distribution improves when taxes are paid,” she said.

“The lack of formality of our state agencies allows tax evasion to occur,” and this may happen in powerful and wealthy circles as well as among ordinary citizens, she said.

She calls this phenomenon “social fraud,” pointing to its basis in customs overwhelmingly regarded as acceptable in social practice, so that the state is unable to eradicate it. “It is customary, however wrong, illegal and immoral,” she said.

Lagos stressed that social fraud may be wrong, immoral or illegal. Wrongness refers to offences that are not legally penalised but affect coexistence, such as parking a vehicle badly and paralysing traffic. Immoral acts include situations like eating something while shopping in a supermarket and not paying for it.

Illegal social fraud, in turn, may occur on a mass scale and covers those who avoid paying for a bus ticket, use state subsidies improperly, or evade paying taxes.

In Chile, as in other Latin American countries, it is common practice for retail outlets in outlying neighbourhoods not to issue receipts for every purchase, said Lagos, and this is wholly accepted by the population.

“I don’t really care,” Bernarda, a middle-aged woman who buys bread every day from a small store near her home in La Florida, a mainly middle class suburb southeast of Santiago, but who does not always receive a formal receipt for her purchase.

“I have known this woman (the store owner) for years and I know she is honest,” she said. “It’s all the same to me,” said another neighbour beside her. “What do I want a tax receipt for? Anyway, everybody does it,” she said.

This behaviour is widespread in the region and is reflected daily in the question that retailers and service providers in many countries constantly ask consumers when it is time to pay: “With IVA (value added tax) or without IVA?”

Lagos said that over the past decade tax evasion has come to be seen as increasingly legitimate, since corruption in high places “increases people’s perception that it is acceptable not to pay taxes, because the money is being stolen and misspent.”

Quiroga, however, believes the time has come for citizens to realise that their political and social rights are infringed whenever the system allows tax evasion and corruption to become common practice.

“This is the only way we are going to be able to overcome this scourge,” she said.

Edited by Estrella Gutiérrez/Translated by Valerie Dee

New analysis suggests that developing countries are losing a trillion dollars or more each year to tax evasion and corruption facilitated by lax laws in Western countries, raising pressure on global leaders to agree to broad new reforms at an international summit later this year.

These massive losses could be leading to as many as 3.6 million deaths a year, according to the ONE Campaign, an advocacy group that focuses on poverty alleviation in Africa. Recovering just part of this money in Sub-Saharan Africa, the organisation says, could allow for the education of 10 million more children“Whenever corruption is allowed to thrive, it inhibits private investment, reduces economic growth, increases the cost of doing business, and can lead to political instability. But in developing countries, corruption is a killer” – ONE Campaign
 a year, or provide some 165 million additional vaccines.

“Whenever corruption is allowed to thrive, it inhibits private investment, reduces economic growth, increases the cost of doing business, and can lead to political instability. But in developing countries, corruption is a killer,” a report on the findings, released Wednesday, states.

“When governments are deprived of their own resources to invest in health care, food security or essential infrastructure, it costs lives, and the biggest toll is on children.”

The new analysis focuses on a spectrum of money laundering, bribery and tax evasion by criminals as well as government officials. The lost money is not development aid but rather undeclared or siphoned-off business earnings – immense tax avoidance resulting in a decreased base from which governments can fund essential services.

International trade offers a key point of manipulation, the report says, with the extractive industries particularly vulnerable. In Africa alone, exports of natural resources grew by a factor of five in the decade leading up to 2012, offering clear prospects for growth alongside lucrative opportunities for corruption on a mass scale.

“Between 2002 and 2011 we saw an exponential increase in illicit financial flows across the globe,” Joseph Kraus, a transparency expert at the ONE Campaign, told IPS.

“Yet while we’re all familiar with corruption in developing countries, it takes two to tango – that money often ends up in the financial centres of the Global North. Those banks, lawyers and accountants are all essentially facilitators of that corruption, so in order to get at the root of this issue we need to go after the problems there.”

Real opportunity

Advocates including the ONE Campaign are currently stepping up pressure on industrialised countries to institute a series of across-the-board transparency measures. Some are aimed at corruption in developing countries, such as strengthening disclosure laws impacting on the extractives industry and bolstering “open data” standards to allow citizens increased oversight over their governments’ dealings.

Several other reforms would need to be carried out by developed countries, particularly those housing major financial centres such as the United States and United Kingdom. These would include new standards requiring governments to automatically exchange tax information, to mandate the publication of full information on corporate ownership, and to force multinational corporations to report on their earnings on a country-by-country basis.

In certain circles, such demands have been percolating for years. But current circumstances could offer unusual opportunity for such changes.

“In the last two years we’ve seen an acceleration of this agenda,” Kraus says. “Eighteen months ago, no one was talking about phantom firms or anonymous shell companies. But these issues have gained a lot of momentum in a short period of time, and there is real opportunity coming up.”

This new energy has been motivated particularly by concerns in advanced economies over shrinking government budgets in the aftermath of the global economic downturn. Yet developing countries arguably stand to benefit the most from substantive reforms, provided they’re structured accordingly.

Advocates of such changes are now looking ahead to a summit, on Nov 15 and 16 in Australia, of the members of the Group of 20 (G20) world’s largest advanced and emerging economies as well as two major meetings of finance ministers in the run-up to that event.

The G20 represent about two-thirds of the world’s population, 85 percent of global gross domestic product and over 75 percent of global trade.

The members of the G20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.

The G20 has taken on a primary role in issues of global financial stability and, more recently, in pushing the automatic exchange of tax information between governments. A new global standard on such exchange could be approved by the G20 ministers in November, among other actions.

“For too long, G20 countries have turned a blind eye to massive financial outflows from developing countries which are channelled through offshore bank accounts and secret companies,” according to John Githongo, an anti-corruption campaigner in Kenya.

“Introducing smart policies could help end this trillion dollar scandal and reap massive benefits for our people at virtually no cost. The G20 should make those changes now.”

Coordinated response

In fact, many G20 countries have instituted some of these reforms on their own. The U.K. government, for instance, has taken unilateral action on publicising information on corporate ownership, while the United States was the first to pass strong transparency requirements for multinational extractives companies.

While such piecemeal national legislation can spur other countries to action, many feel only a comprehensive approach would have a chance at having a substantial impact. Further, many governments have pledged to act on these issues, but have yet to actually follow through.

“Illicit financial flows are a perfect example of a transnational problem, in that you have two legal regimes in which loopholes are being exploited,” Josh Simmons, a policy counsel at Global Financial Integrity, a Washington watchdog group that supplied data for the new ONE Campaign report, told IPS.

“So when an international cooperative body is able to identify these loopholes, they can get member countries to move in sync to address the situation. But if only one country tries to do so, businesses would probably just move elsewhere.”

Others are looking even more broadly than the G20. A paper released last month by researchers with the Center for Global Development, a think tank here, calls for the inclusion of anti-tax-evasion aims in the new global development goals currently being negotiated under the United Nations.

Indeed, even while there could be real movement at the G20 on several of these issues this year, the work on the other end of this equation – in developing countries – remains onerous.

“We need to get developing countries’ tax systems up to speed, strengthen their financial intelligence units and get their anti-laundering laws up to code. And that is proceeding, but much more under the radar given its complexity,” Simmons says.

“Still, that’s where people are actually bearing the brunt of this problem. Tax avoidance in the United States contributes to the national debt, but in developing countries it’s literally causing people to go hungry.”

Edited by Ronald Joshua

Capital flight from developing countries of the South. Credit: Tax Justice Network

By Emilio Godoy
MEXICO CITY, Jul 4 2014 (IPS)

The U.S. Foreign Account Tax Compliance Act is unlikely to contribute much to combating persistent tax evasion in Latin America, which will require more national and multilateral instruments, experts say.

FATCA, as it is better known, was approved in March 2010 and finally came into force on Jul. 1 after a number of delays. It is a reciprocal agreement, which means that other countries may learn which of their citizens have accounts in the United States.

The law requires governments and financial institutions worldwide to report to the Internal Revenue Service (IRS) financial information about U.S. citizens who are resident or have assets abroad.

“The limiting factor for developing countries is that it is bilateral. Mexico, for example, would benefit from receiving information about its residents who have accounts in the United States, but these residents may also have accounts in other jurisdictions,” analyst Andrés Knobel of the London-based Tax Justice Network told IPS.

Knobel and other experts consulted by IPS say that tax evasion and avoidance have reached such proportions that firm national policies and multilateral instruments will be needed to combat them. FATCA could coexist with and support these.

Knobel also complained that, although there is reciprocity between the U.S and its partners, the exchange is unequal.

The U.S.  “demands more information from its partners but gives less. The information is supposed to be for tax purposes, but the authorities decide what they use it for,” he said.

Under FATCA, banks, investments funds and other financial institutions must identify U.S. citizens’ accounts abroad and notify the IRS of their account numbers, balances, names, addresses and U.S. identification numbers.

The law covers investments greater than 50,000 dollars. Institutions that fail to comply risk the withholding of 30 percent of any payments originating in or passing through U.S. territory.

The IRS has registered over 77,000 institutions worldwide out of a total of between 200,000 and 400,000 that should adhere to FATCA. In Latin America 3,800 institutions have come to an agreement with the IRS so far, while 800 have not.

The U.S. has signed bilateral agreements with over 70 countries, in two categories.

The first requires financial institutions to report information about U.S. citizens to their national tax authority, which is to advise the IRS. The second calls for the financial agency to report the information directly to the IRS.

“FATCA has potential for preventing tax evasion, but better mechanisms are needed to process the information quickly and take action as a result,” academic Benito Rivera, of the Faculty of Higher Studies at the National Autonomous University of Mexico, told IPS.

“Agreements have been signed, but fiscal paradises have not been touched, although some transactions have been identified,” he said.

In its report on Tax Administration 2013, the Organisation for Economic Cooperation and Development (OECD) said that in Chile, taxpayers’ fiscal debt had increased continuously between 2005 and 2011.

Average growth during this period was 13 percent. The country has a tax burden of nearly 20 percent of GDP.

Mexico, with a tax burden of 18 percent, had similar growth figures, although data since 2010 are lacking. This is also the case with Brazil, which has a tax burden of 32 percent, and Colombia, with 17 percent.

In Argentina the tax burden has fallen by 48 percent, although the level of tax debt is still high. Its present tax burden is 33 percent.

The OECD estimates that at least 500,000 individuals in Latin America have a combined fortune of seven trillion dollars, with no certainty that they are paying appropriate taxes.

The Economic Commission for Latin American and the Caribbean (ECLAC) puts income tax evasion at nearly 50 percent in Argentina, 47 percent in Chile, 64 percent in Ecuador and 42 percent in Mexico.

The International Monetary Fund (IMF) has also warned of tax avoidance and evasion by means of “financial engineering.”

In the document “Spillovers in International Corporate Taxation,” published in May, the IMF indicates that foreign direct investment (FDI) that leaves Brazil turns up in known fiscal paradises like the Cayman Islands, the British Virgin Islands, the Bahamas, the Netherlands and Luxemburg.

In another example, it says that FDI arriving in El Salvador comes from countries like Panama and the Cayman Islands.

“With FATCA, more information will be available, but there will be loopholes for rich companies and individuals to avoid the exchange of their information,” Knobel said.

He recalled that “for a long time, organisations have been asking for automatic information exchange. We asked for public registers of final beneficiaries, the real owners of any financial activity that takes place.”

The U.S.-Mexico FATCA agreement, signed in November 2012, shows the disparity in the information provided. Mexico is required to report the total amount of interest, dividends and other income generated and paid by the account assets, as well as total income from sales of possessions that are recorded in the account.

But the U.S. will only inform Mexico of the total amount of interest paid on a deposit account, dividends or any other source of income.

In the case of Chile, the national tax authority must ask U.S. account holders for their tax identification number and written consent. It must report annually to the IRS the number and balance of non-consenting accounts.

Under the agreement, the U.S. “shall cooperate with Chile to respond to requests to collect and exchange information on accounts held in U.S. financial institutions by residents of Chile.”

There are at least 60 tax havens in the world, including U.S. territories like the northeastern state of Delaware, which has big tax discounts. For this reason, Washington has negotiated favourable bilateral agreements.

The Tax Justice Network’s 2013 Financial Secrecy Index ranks the U.S. in sixth position, behind Switzerland, Luxemburg and Hong Kong, among others. In Latin America, only Panama is placed among the top 20.

In February, the U.S. Senate’s Committee on Homeland Security and Government Affairs criticised the FATCA in its report “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.”

The report criticised the thresholds for reporting accounts, the failure to aggregate data from different institutions and potential tax evasion through offshore shell companies.

The law will not solve the problem of reporting information; its regulations have created a number of loopholes, the report says.

“It will take a few years for it to meet its goals. It would be desirable for the competent authorities to meet regularly to analyse procedures and speed of action,” Rivera said.

The staff at the International Monetary Fund (IMF) has issued an unusually stark warning over the lack of harmonised global tax policies, pointing out that these gaps are allowing for widespread tax gaming by corporations with particularly negative impacts for developing countries.

Anti-poverty advocates are lauding a new staff paper from the fund released Wednesday. Its findings not only coincide with civil society calls for major taxation reforms at the national and international levels, but also repeatedly push back against longstanding tax-related dogma, including that offered by the Washington-based IMF itself.“As tax dodging knows no border, it makes sense to move to the international level to create such a worldwide entity.” -- Catherine Olier of Oxfam

“This is, frankly, a revolutionary paper,” Jo Marie Griesgraber, the executive director of the New Rules for Global Finance Coalition, a Washington-based international network, told IPS.

“It looks very carefully at many aspects of tax planning, and each time says that this has very negative impact on developing countries … Ultimately, it says that traditional tax theory is essentially uninformed by empirical knowledge.”

The paper is the result of a new focus on tax-dodging among the Group of 20 (G20) industrialised countries, which directed the fund to undertake related research. The findings are particularly notable in their sustained focus on the impacts on developing countries.

“Our technical assistance work in developing countries frequently encounters large revenue losses through gaps and weaknesses in the international tax regime,” Michael Keen, deputy director of the IMF’s Fiscal Affairs Department, said in a statement.

“The sums involved for them can be large, not just relative to corporate tax but relative to all tax revenue: 10-15 percent in some cases. The paper reports new evidence that these effects are in fact systematically more important for developing countries.”

Corporate tax rates in all countries have plummeted in recent decades, the paper notes.

Low-income countries have seen these rates degrade from near 50 percent in 1980 to under 30 percent last year. Others have seen similar plunges, with high-income countries seeing corporate taxation fall from around 40 percent three decades ago to little more than 20 percent today.

Such trends have been tracked for years. Yet in the aftermath of the global financial crisis, rich and middle-income countries have begun actively discussing how to maximise their tax revenues, with a focus on ending corporate accounting gimmickry.

Rich companies and individuals could be stashing away as much as 20 trillion dollars overseas in order to escape national taxation, according to some estimates.

“Developed countries today need more income and are mad because not everyone is paying their taxes,” Griesgraber says.

“And that anger is also translating into public pressure. People who pay their taxes even during a difficult recession are even madder than the governments.”

“Meaningless” designations

According to the IMF data, developing countries should perhaps be the most incensed by the impacts of today’s global taxation hodgepodge. The paper offers new findings on the ramifications of what the fund terms “spillover effects” – the ways in which one country’s tax rules impact on another country, which can also be thought of in terms of tax competition between countries.

This phenomenon has been significantly exacerbated as multinational companies have increasingly learned how to legally “move” their operations – largely on paper – for tax benefit. Such companies appear to be based in countries with low taxes, despite doing most of their work in another country that, in turn, is unable to place levies on the company’s full earnings.

“Current international tax arrangements rest on concepts of companies’ ‘residence’ and the ‘source’ of their income, both of which globalization has made increasingly fragile (some would say meaningless),” the paper states.

“At its core, a key issue in assessing any international tax arrangement is how it divides the rights to tax between source and residence countries … The allocation of rights is especially important for low-income countries, however, as flows are for them commonly very asymmetric – they are essentially ‘source’ countries.”

The fund staff found that the impact of these spillover effects on corporate tax bases are “significant and sizable” but are “especially pronounced for low-income countries”. Compared to rich countries, the paper notes, “the base spillovers from others’ tax rates are two to three times larger” in developing countries, and “statistically more significant”.

Particularly problematic has been the extractives industry, though the fund also calls out telecommunications companies. The paper recounts IMF experiences in multiple countries where corporate tax trickery has eaten up much of a project’s revenue, such as a “gold mining sector in which USD 100 billion has been invested over the last decade, but which is almost entirely debt financed”.

The fund ultimately goes so far as to suggest that countries should be extremely careful about signing any bilateral tax treaty, urging developing country governments instead to signal openness to investment by other means. Through such agreements, countries can sign away their right to levy full tax rates and give an upper hand to foreign corporations.

“The IMF analysis raises some very worrying concerns about the impact of tax rules and practices in rich countries on the ability of poor countries to raise their own revenues,” Diarmid O’Sullivan, a tax justice policy advisor with ActionAid, a watchdog group, said Wednesday.

“We see a clear message to … major capital-exporting countries to review their tax rules and make sure they are not harming the ability of poor countries to raise the revenues they need for their development.”

Comprehensive approach

One key step being pushed by governments and civil society today to cut down on corporate tax avoidance entails the automatic exchange of tax information between governments. Doing so, proponents say, would quickly clear up the discrepancies that can be exploited by tax-dodgers.

In February, the Organisation for Economic Co-operation and Development (OECD), comprised of 34 rich countries, unveiled just such a proposal. Still, anti-poverty campaigners have warned that developing economies were not included in discussions around the OECD plan – though a roadmap is due by September on facilitating poor countries’ participation in such exchanges, an OECD official told IPS.

Some are now hoping that this new flurry of work could be leading towards the formalisation of a stricter international framework on tax policy, in line with the globalised environment of today’s multinational corporations. Indeed, the IMF’s new paper notes that “the case for an inclusive and less piecemeal approach to international tax cooperation grows.”

Indeed, a decade and a half ago an IMF official proposed the establishment of a World Tax Authority, an idea that campaigners are now hoping to revive.

“As tax dodging knows no border, it makes sense to move to the international level to create such a worldwide entity,” Catherine Olier, a policy advisor with Oxfam International, an advocacy and humanitarian group, told IPS.

“Modalities about its functionalities and mandate would remain to be determined, but it could have a role in setting minimum standards to avoid harmful tax competition between countries – and, if ambitious, an international dispute mechanisms to fight countries that deliberately put in place tax policies with too much negative spillover effect on others.”

The IMF and OECD reports will both go before the G20 at a summit in November.

An informal, used tyre shop at a residence in Harare's Hatfield suburb. Zimbabwe has 2.8 million micro, small and medium businesses — 85 percent of which are unregistered. Credit: Tatenda Dewa/IPS

By Tatenda Dewa
HARARE, Apr 24 2014 (IPS)

Zimbabwe’s extensive informal sector could help boost government revenue if regularised, but this won’t happen unless the government creates incentives for the informal sector to register, economists say.

“Formalisation of the informal sector would significantly improve revenue inflows through taxation on employees’ salaries, import duty, property fees and other forms of taxes on the sector. However, there is need to create incentives for the informal sector to register,” Eric Bloch, a Bulawayo-based economist, told IPS. Many businesses would be reluctant to pay taxes because of concerns that “taxes collected will not be used in the national interest”.

A 2013 FinScope survey, which is now being used by government officials as reference, indicates that 2.8 million micro, small and medium businesses — 85 percent of which are unregistered — have created 5.7 million informal jobs. These businesses generate an estimated turnover of 7.4 billion dollars, according to the survey.

Finance and Economic Development Minister Patrick Chinamasa has already cast a light on the growth of the informal sector and its significance to the economy in this southern African nation.

Responding to questions in parliament in February, Chinamasa said: “Our economy is now informal…That is the reality of our economy and it is a reality we must recognise and take measures on how to tap into this sector.”

Godfrey Kanyenze, an economist and director of the Labour and Economic Development Research Institute of Zimbabwe, a think tank of the Zimbabwe Congress of Trade Unions, explained that the government was failing to fund public programmes because the treasury struggled to mobilise money from existing industry and labour.

“There is no way the government can maximise on revenue collection in the informal sector if it is not regularised. Government must come up with a working strategy to ensure that the informal sector is formalised and taxed to improve revenue collection, which is currently in a sorry state,” he told IPS.

He said the government was also losing out because the Zimbabwe Revenue Authority (ZIMRA) was struggling to tax registered small to medium enterprises.

The formal sector has been negatively affected for more than a decade by the withdrawal of investment, low investor confidence, rampant power outages and a struggling economy that was marked by hyperinflation and acute shortages.

Kanyenze said that to ensure effective monitoring, the government must organise the informal sector into clusters based on the services or products they supplied or produced. He said the government should also offer business development and training services to the sector and devise mechanisms to protect and promote them.

Economist John Robertson told IPS that formalisation of unregistered enterprises would bring a host of other advantages.

“Besides improving revenue collection and encouraging better public sector performance, formalisation of the informal sector would hopefully ensure better working conditions for the millions said to be employed there. They would enjoy benefits associated with the formal sector such as medical aid schemes, pension, better work safety and the ability to negotiate salaries,” he said.

Tapson Mandiziva, who works as an assistant carpenter at an unregistered furniture-making firm in Glenview, a low income suburb in Harare, does not enjoy such benefits.

“I don’t have an employment contract and my boss pays me as and when he likes. Sometimes he makes huge profits from the sale of wardrobes and the kitchen furniture that we manufacture but uses the money to buy cars and personal items and does not pay us. When he does, the money is too little and he has dismissed workers on flimsy grounds,” Mandiziva, 31, told IPS.

In the three years he has worked for the furniture firm, the highest salary he has received is 200 dollars a month. But Mandiziva says he can go for as long as four months without receiving a wage and does not receive backdated payments.

The police and municipal authorities periodically raid backyard industries like the one Mandiziva works for. They have been accused of confiscating products or extorting bribes from companies operating without licences. There are also allegations that they sell the seized goods at office auctions where the officers or local authority officials are the only buyers.

Innocent Makwiramiti, an economist and former chief executive officer of the Zimbabwe National Chamber of Commerce, told IPS that the illegal raids could be avoided if the informal sector was regularised.

“The police officers, municipal and ZIMRA officials are collecting thousands of dollars in bribes from the informal traders and, in some cases,  are forcing traders to surrender part of their earnings as a protection fee against the raids.

“Part of this money could be going to the treasury had the informal sector been registered and compelled to observe company and taxation regulations,” he said.

However, formalisation and taxation of the informal sector will not be easy, according to experts.

“The biggest constraint is reluctance by small businesses to register. They tend to suspect that formalisation would open them to too much scrutiny that would affect their income generation. Since most of them are run by individuals and families that view adhering to labour laws as a burden, they would rather remain as they are,” said Bloch.

The February edition of the Public Administration and Development Journal shows that there are numerous hurdles the government faces in its attempts to harness taxes from the informal sector and registered SMEs. This includes the manpower and administrative constraints of ZIMRA.

According to the report, many businesses would be reluctant to pay taxes because of concerns that “taxes collected will not be used in the national interest”.

Many are also disgruntled over poor service delivery and the fact that some politically-connected businesspeople were being let off the hook for failing to pay tax.

Augustine Tawanda, the secretary general of the Zimbabwe Crossborder Traders Association, which comprises informal entrepreneurs whose businesses involve sourcing for resale or selling goods in neighbouring countries, told IPS: “There is plenty of money circulating in the informal sector and it is possible to innovate a win-win situation with the government.”

However, his organisation is opposed to registration of informal businesses, preferring that the government just includes them in its data base only for purposes of taxation rather than formalisation.

“The main problem is that the government is only concerned about taxing us, rather than making us grow as businesses. It does not have clear policies for formalisation and has not shown how it is going to incentivise informal traders,” he said.

A major grouping of rich countries has unveiled a new model for the automatic exchange of certain individual financial information between countries, aimed at significantly cutting down on offshore tax evasion.

Advocates of stronger financial transparency measures are lauding the move, announced Thursday by the Organisation for Economic Cooperation and Development (OECD). But anti-poverty campaigners are warning that developing economies were not included in discussions around the new common reporting standard.“Just five years ago you couldn’t get anyone to talk about this issue – most people called it a pipedream.” -- Heather Lowe

Indeed, the new standard has yet to offer clarity on how it would include poor countries, despite the fact that developing economies are among the hardest-hit by global tax evasion.

“This is a real game changer. Globalisation of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence,” OECD Secretary-General Angel Gurria said Thursday.

“This new standard on automatic exchange of information will ramp up international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”

The new proposal comes in the context of rising public frustration around the world, particularly in the aftermath of the global financial crisis, with reports of rich companies and individuals stashing as much as 20 trillion dollars overseas in order to escape national taxation. That public sentiment coincides with increasingly strapped government coffers, new enforcement of painful austerity measures, and officials looking for ways to strengthen national revenue streams.

The OECD developed the new standard after being requested to do so last fall by the Group of 20 (G20) of developed and emerging economies. It will now be formally presented to a G20 ministerial meeting in Australia later this month, and potentially adopted at a G20 summit in September.

If adopted, the changes would mark a sea change in global financial transparency, and one that advocates say came about with astounding speed.

“Just five years ago you couldn’t get anyone to talk about this issue – most people called it a pipedream,” Heather Lowe, director of government affairs for Global Financial Integrity (GFI), a Washington watchdog group, told IPS.

“So it’s fantastic and amazing that we’ve gotten to the point where everybody recognises that the automatic exchange of tax information is necessary in order to fill those holes in the international financial system that allow illicit money to hide out.”

Truly global

The OECD common reporting standard would see participating countries automatically share information on foreign bank accounts, capital gains and other interest earned. Previously, such information would have needed to be formally requested by governments, an often cumbersome process that could be easily stonewalled.

Significant parts of the new standard reflect landmark U.S. legislation, known as the Foreign Account Tax Compliance Act (FATCA), which the OECD says played a “catalytic role” in the creation of the new model. Since its enactment in 2010, FATCA has been roiling international discussions by requiring overseas financial institutions to turn over information about U.S. customers.

“Today’s announcement underscores that promoting tax transparency is a global priority and we are proud to lead the charge on this pressing issue by implementing FATCA and collaborating closely with our G20 partners,” the U.S. Treasury told IPS in a statement.

“We expect the G20’s endorsement of the common reporting standard to add further momentum to our network of intergovernmental agreements, as countries see the extent to which our model agreements reflect this new international standard.”

Already, the OECD says more than 40 countries have agreed to adopt the new standard. Yet poor countries have thus far been largely left outside of the process, despite a high-level summit last year declaring that a prime motivation for any strengthened exchange of tax information would be to assist developing countries collect the taxes due to them.

“This model is being billed as a global standard, but it won’t be global unless all countries can sign up to it, and that includes developing countries,” GFI’s Lowe says. “Otherwise, we could easily create a system in which rich countries get richer and poor countries get poorer, because their wealthy officials and businesspeople continue putting money abroad where tax authorities can’t reach it.”

Other groups are decrying the fact that developing countries were excluded from the negotiating process surrounding the new OECD model.

“Up to nine trillion dollars is thought to be hidden offshore from the tax authorities in developing countries. Those governments need information just as much as [developed countries], but they are being told they will have to wait,” Joseph Stead, a senior economic justice adviser for Christian Aid, a British charity, said Thursday.

“We want to see the U.K., OECD and G20 commit to a process which enables developing countries to be part of the new system and to start benefiting from it before they are burdened with costs.”

Reciprocity and reluctance

The OECD plan outlines two G20-directed processes mandated to figure out how to bring developing countries in under the tax information-sharing umbrella. The first of these blueprints are to be released in September, and will show “how developing countries can overcome obstacles to participation in the automatic exchange standard and to assist them in meeting the standard”.

While necessary, there will likely be at least two obstacles in the attempt to begin regular exchange of tax information with developing countries.

First and foremost, while the OECD model calls for information-sharing “reciprocity”, many developing countries currently lack the basic technical capacity to make such information available. While programmes to offer both financial and training assistance are already going forward, GFI and other groups are calling on multilateral institutions and G20 donors to prioritise such work as the model goes forward.

A second obstacle could be reluctance on the part of certain governments or individual officials in developing countries to open their systems up to greater scrutiny, over concerns of past or future corruption.

“This is clearly a very tricky issue, but in certain cases it won’t be a question of what a government wants but, rather, what’s right for the people in developing countries,” GFI’s Lowe says.

“Fortunately, I think there’s a growing movement among populations around the world about illicit money and tracing it and returning it to developing countries. So as that continues to grow, the pressure will be on developing country governments to take part, and it will be up to others to support those grassroots movements.”

Developing countries are likely losing more than a trillion dollars a year in “illicit financial flows” stemming from crime and corruption, according to new estimates. This fast-rising figure is already 10 times the total amount of foreign aid these countries are receiving.

Between 2002 and 2011, governments in the developing world are thought to have lost a total of almost six trillion dollars, largely due to poor governance and lax regulation, according to Global Financial Integrity (GFI), a Washington-based watchdog. Included in its estimates are ill-gotten wealth from purposefully incorrect trade invoices, the use of shell companies and tax havens, and other accounting gimmicks.

“This gives further evidence to the notion that illicit financial flows are the most devastating economic issue impacting the global South,” Raymond W. Baker, GFI’s president, stated in the introduction to a report released Wednesday, calling the numbers a “wake-up call to world leaders on the urgency with which illicit financial flows must be addressed.”

Particularly worrying is the fact that the rate at which these outward flows have been growing appears to be increasing substantially."Illicit financial flows are the most devastating economic issue impacting the global South."
-- Raymond W. Baker

In 2002, for instance, the earliest year that GFI’s researchers have examined, illicit financial flows are thought to have been around 270.3 billion dollars. By 2011, the latest year for which estimates are available, that figure had grown to 946.7 billion dollars, and has likely increased since then.

When adjusted for inflation, this translates into an average growth of more than 10 percent a year, while the 2011 number constituted a 13.7 percent increase over 2010.

“Outflows have certainly been increasing,” Dev Kar, GFI’s chief economist and a co-author of the new report, told IPS. “During the economic crisis both imports and exports declined, but as economic activity has recovered so too have these outflows.”

Kar also cautions that the GFI estimates are likely conservative. They include neither unofficial (“hawala”) financial flows nor large-scale cash transactions, and as such are unable to offer a glimpse of broader underworld economies, including drug or human trafficking.

Asia is seen as having the most significant problems, accounting for around 40 percent of all illicit outflows from developing countries. While Africa’s share was only around seven percent in 2011, the continent did have the highest ratio of average illicit flows to gross domestic product, at around 5.7 percent.

With Africa also the world’s most aid-dependent region, an increasing concern for many is how to staunch the flow of some of this illicit capital so it can be ploughed back into public sector spending such as on health, education and public infrastructure.

Shadow systems

Major development institutions have started paying attention to such discrepancies. The humanitarian group Oxfam estimates that some 32 trillion dollars are currently sitting in tax havens around the world, for instance, and suggests that taxes on this sum could raise nearly 190 billion dollars a year.

“Governments should agree to end global hunger by 2025 and an end to tax havens, which could help pay for this and much more,” Stephen Hale, advocacy head for Oxfam, said in a statement. “Tax-dodging effectively takes food from hungry mouths.”

The past year has actually seen notable moves by the international community to close down certain avenues used to hide or shield unreported wealth from prying states. Major multilateral groupings including the Group of Eight (G8) rich countries and the Group of 20 (G20) industrialised countries, for instance, have put tax abuse at the top of their list of priorities.

This summer, a high-level United Nations panel negotiating the next phase of the Millennium Development Goals (MDGs), for which the deadline is 2015, stated that one of its highest priorities would be tackling the abuse of offshore tax havens and illicit financial flows.

The following month, nearly a dozen EU members agreed to the world’s first multilateral system of tax information exchange, based on similar bilateral U.S. requirements passed three years ago.

“The fact that illicit financial flows are being mentioned in the G20 and other international organisations – that didn’t exist before,” Brian LeBlanc, a junior economist with GFI and a co-author of the new report, told IPS. “Earlier, these issues were seen solely as a developing country problem but now we’re seeing developed countries taking action. So we’re making some progress.”

Yet transparency advocates urge that far more needs to be done, and GFI’s Kar says that he expects the moves that have been taken so far will have little impact on illicit financial flows in the near term.

“The G20 has basically not tackled the shadow financial system, which remains largely intact – there have been no moves to improve transparency, not much has been done on tax havens or blind trusts,” he says.

“Importantly, much of the conversation currently focuses on developed rather than developing countries. We believe that governance factors are the main engines of illicit flows, and in the major countries governance is simply not improving – in fact, it’s deteriorating in many countries.”

GFI has now put out research on illicit financial flows for several years in a row. Yet Kar says the startling estimates presented appear to have made little impact on government officials in many developing countries, even as state coffers in those countries continue to struggle in the aftermath of the global financial crisis.

“In most countries it’s had almost zero impact, with government officials refusing even to acknowledge that this is a problem. Malaysia, for example, will only say that our estimates are overstated,” Kar says, noting that Malaysia ranked fourth on GFI’s list of the largest exporters of illicit capital.

“There remains a powerful, corrupt nexus between politicians and business, covering the financing of elections, non-transparency of business conduct, kickbacks in government contracting,” Kar added.

“These are huge issues, and we expect a long process before countries come to accept the fact that illicit flows are a problem – and then to move to implement policies to deal with the situation.”

A Swiss village has decided to reject tax money from the firm Glencore and to instead donate it to charities. Other towns may follow, sending a strong signal to the government to follow the U.S. and the EU and introduce transparency rules for the extractive industry.

It’s rush hour in the city of Zug in Central Switzerland as Mrs Sandra Räppli struggles to raise her voice over the traffic noise. About 35 people listen as she lectures about commodity extraction and trading companies based in the city and the neighbouring town of Baar.

Räppli talks about complex company structures and tax optimisation, finally asking the audience: “Could you follow my explanations? Did you understand?” Then she smiles: “You couldn’t? No problem, because that is what those companies intend.”“Even as a member of parliament I can't be sure that things are handled correctly if the government on any occasion hides behind the tax secret.”

Once a month, actress Maria Greco slips into the role of Sandra Räppli and guides groups of inhabitants and visitors through the streets of Zug. The canton counts 116,000 inhabitants and more than 30,000 companies, 105 of which belong to the commodity cluster formed by GlencoreXstrata, Northstream, Rusal and Gazprom, to name just a few.

Privileged taxation for holding, domicile and mixed companies brought these firms here. Holding companies are exempt from cantonal income tax, and pay almost no capital tax. Incomes of management companies generated abroad are hardly taxed, too.

Critics say Zug’s tax environment is an invitation to ‘transfer pricing’, a method to allocate a corporation’s net profit before taxation; in other words a means for tax evasion. Despite sales of 214.44 billion dollars in 2012, Glencore paid no tax on earnings at all in the canton of Zug last year.

The commodity cluster as a whole is estimated to have paid only 40 million dollars in cantonal and communal taxes.

Under official secrecy rules, exact taxes paid by Glencore and other companies are not available. Statistics on the number of companies or their employees is also lacking, even at the national level.

“That  lack of transparency is a major problem,” says Andreas Hürlimann, a parliamentarian with the Green-Alternative party in Zug. “Even as a member of parliament I can’t be sure that things are handled correctly if the government on any occasion hides behind the tax secret.”

Hürlimann finds Zug’s tax regulation deeply unfair. “It makes us rich, while people in extraction countries suffer, as the companies evade taxation there.” He says that Zug bears at least some moral responsibility.

At the end of her tour, Sandra Räppli stops in front of Zug’s town hall. “Our politicians are hand in glove with Glencore’s managers,” she tells her audience. “Only if people get active can something be done about these companies.”

Räppli has just ended her second season of city tours. She’s happy that the attendance has remained high – by Swiss standards. Media reports and a campaign run by the Swiss non-governmental organisation Berne Declaration have clearly increased popular interest in the commodity sector.

In the nearby canton of Zurich, these efforts have yielded fruits. Several villages are up in arms against Glencore. The corporation’s flotation on the stock market in 2011 had filled the pockets of CEO Ivan Glasenberg, leading to a huge one-time tax inflow for the canton. That money was redistributed to the communes.

But in several communes, residents were appalled by profiting indirectly from what they call “Glencore’s dubious business conduct abroad.” They collected signatures and demanded that at least 10 percent of the “Glencore money” be donated to charities who support affected communities in extraction regions.

In Hedingen, a village of 3,500, voters approved the donation of 120,000 dollars to charities. Samuel Schweizer, a member of the local citizens’ committee, explained that success to IPS: “Our proximity to Zug was crucial, people could relate to Glencore. Also, we’ve managed to build a broad committee.”

Schweizer explained that donating only 10 percent of the “Glencore money” instead of the whole amount further helped to find a majority.

At least five more communes will soon decide upon similar initiatives. In Affoltern for example, 180,000 dollars are at stake. In Hausen, it’s 80,000 dollars.

There, Franz Schüle of the local initiative committee is optimistic. “We live in a rural area. When I explain that in Colombia the surface of the land belongs to the farmers, while everything below can be owned by extraction companies, people can relate to the problem easily.”

“Direct democracy has hit Glencore,” says Oliver Classen, spokesperson of the Berne Declaration. He’s aware that these communal initiatives are only a drop in the ocean and a one-time effort. “However, Hedingen has a huge political signalling effect,” Classen tells IPS.

This summer, the European parliament introduced the Transparency and Accounting Directives that force mining, oil and gas companies to publish their payments to governments; country by country and project by project. The Swiss government has remained hesitant so far and will present its own measures next spring.

Oliver Classen demands transparency on payments and human rights obligations for commodities companies producing or trading abroad.

GlencoreXstrata neither commented on the tax initiatives nor responded to accusations ranging from tax avoidance to violating basic human rights in extraction countries. Its spokesperson Charles Watenpuhl sent IPS a statement.

“We believe that Glencore’s global presence and economic strength have a predominantly positive impact on the communities in which we operate. We seek out, undertake and contribute to activities and programmes designed to improve quality of life for the people in these communities.

“Glencore’s tax strategy and payments play a vital role in our intention to achieve long-term sustainable development. We are committed to full compliance with all statutory obligations, full disclosure to tax authorities and reporting transparently in the tax payments that we make to the governments of the countries in which we operate.”

Finance ministers from the Group of 20 (G20) countries on Friday received a previously requested strategy under which the world’s largest economies could crack down on international tax avoidance, particularly on the part of multinational corporations.

The 15-point action plan was created by the Organisation for Economic Cooperation and Development (OECD), a Paris-based think tank funded by the world’s richest countries. The G20 requested the study in February, as tax avoidance has moved to the top of the global agenda, particularly in the context of governments struggling to fill state coffers in the aftermath of the global economic downturn."When multinational corporations game the system – and the evidence shows that they are – everyone else loses." -- Nicole Tichon of the Tax Justice Network USA

Yet some analysts have also suggested that, against the backdrop of countries such as Brazil, China, India and Russia quickly becoming some of the world’s most powerful economies, the current exercise could be developed countries’ last attempt to steer the conversation on international tax policy.

“The joint challenges of tax evasion and tax base erosion lie at the heart of the social contract,” Angel Gurria, secretary-general of the OECD, said Friday in Moscow, where he handed over the new blueprint to government officials gathered ahead of the G20 summit in September, which Russia is hosting.

“Our citizens are demanding that we tackle offshore tax evasion by wealthy individuals and re-vamp the international tax system to prevent multinational enterprises from artificially shifting profits, resulting in very low taxes or even double non-taxation and thereby eroding our tax base.”

The OECD strategy would now seek to strengthen coherence among its members’ tax systems, aimed at filling the gaps between those systems – through which multinational corporations, in particular, have become adept at slipping.

A major thrust of the new strategy deals with ways to corral the new powerhouses of the digital economy, which in recent years have become adept at extremely complex – some say only marginally legal – tax strategies. Such companies, making use of extensive offshore subsidiaries, have recently been the focus of a strengthened tax-avoidance discussion here in the United States and in Europe.

The action plan, which the OECD says it will roll out over a two-year rulemaking process, also tries to increase transparency. It would require companies to engage in country-by-country reporting of profits, for instance, in order to make it more difficult for phony “shell” offices to quietly shift profits made in one country to another that offers lower or nonexistent tax rates.

On Friday, Gurria noted that these 15 actions would “result in the most fundamental change to the international tax rules since the 1920s!”

Built on an earlier general report, the plan received widespread initial plaudits from government officials. Russian Finance Minister Anton Siluanov “commended” the report for hewing to “the basic tenets of fairness – that it allows multinational corporations to prosper without loading a higher tax burden on domestic companies and individual taxpayers.”

U.S. Treasury Secretary Jacob J. Lew also “welcomed” the action plan, which he said was created in part with U.S. participation.

“This is a major step toward addressing tax avoidance by multinational firms in the global economy and represents a concerted effort to raise standards around the world,” Lew noted in a statement sent to IPS. “We must address the persistent issue of ‘stateless income’, which undermines confidence in our tax system at all levels.”

Entrenching global inequality?

Yet the plan received a more cautious appraisal from certain civil society organisations, with some warning that the OECD’s membership has led it to overlook the importance of developing countries in combating tax avoidance in today’s context. Indeed, it is in these countries where illicit outflows of capital are having major, damaging impacts on already strapped governments’ abilities to fund their public sectors.

“We are encouraged to see this unequivocal acknowledgement that when multinational corporations game the system – and the evidence shows that they are – everyone else loses: governments, citizens and other businesses,” Nicole Tichon, executive director of the Tax Justice Network USA, an advocacy group here, told IPS.

“We agree that this is a global problem and will require a global solution, but this plan needs to more carefully consider the additional plight of developing countries.”

One of Tichon’s colleagues in Africa expanded on this point.

“In poor nations we are largely failing to capture tax revenue from major international corporations which should be harnessed to ensure better social and economic opportunities for citizens,” Alvin Mosioma, the director of Tax Justice Network Africa, says.

“This is why the current OECD reform process needs to include at its heart serious representation from developing nations rather than keeping them to the margins. That developing countries are kept out of this key process runs the real risk of further entrenching global inequality.”

Others are taking issue with the new plan’s failure to recommend that country-by-country reporting of corporate profits – seen as a critical tool in halting the currently rampant shifting of earnings among multinational companies – be made public.

According to the OECD’s top tax official, the action plan does recommend such reporting, but he admits that those reports would not be publicised.

“This country-by-country reporting will be for tax administrations and not [the] public,” Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, told IPS.

“What matters is that tax inspectors have the information. Confidentiality issues [could stop] countries from agreeing to public country-by-country reporting.”

Indeed, a similar fight is currently taking place here in the United States, which last year instituted a landmark regulation requiring multinational companies to publicly report all payments made to foreign governments. Yet earlier this month a court overturned that rule in part because of the requirement that these reports be made public.

Some anti-poverty groups are going so far as to suggest that the OECD’s tax fixes are already obsolete, having been far outstripped by the decentralised model that the most aggressive modern corporations have been able to follow.

“This plan is papering over the cracks in a broken system, rooted in an outdated and irrelevant model of corporate taxation,” Murray Worthy, a tax campaigner at War on Want, an advocacy group, said in a statement. “It might be able to tackle the worst of corporate tax dodging, but it won’t fix the system.”

Artisanal diamond miners at work in the alluvial diamond mines around the eastern town of Koidu, Sierra Leone. In resource-rich countries, the natural resource sector is usually the main source of illicit financial flows. Credit: Tommy Trenchard/IPS

By Carey L. Biron
WASHINGTON, May 28 2013 (IPS)

Over the past three decades, Africa has functioned as a “net creditor” to the rest of the world, the result of a cumulative outflow of nearly a trillion and a half dollars from the continent.

The new data, to be formally released Wednesday by the African Development Bank (AfDB) and Global Financial Integrity, a Washington-based watchdog group, stands in stark contrast to widely held images of Africa receiving massive amounts of foreign aid."While these figures are amazing, we have to recognise that they’re being directly facilitated by Western banks and tax havens." -- GFI's Clark Gascoigne

Foreign assistance levels are indeed high for Africa – following on a 2005 pledge among the Group of Eight (G8) rich countries, the continent receives more than 50 billion dollars a year, making it the world’s most aid-dependent region. Yet according to the new joint report, the interplay of corruption, tax evasion, criminal activities and other factors resulted in a net outflow of some 1.4 billion dollars between 1980 and 2009.

“In development circles we talk a lot about how much aid is going to Africa, and there’s this feeling among some in the West that after we’ve been giving this money for decades, it’s Africa’s fault if the continent’s countries still haven’t developed,” Clark Gascoigne, communications director at Global Financial Integrity (GFI), told IPS.

“In fact, our research shows that while the West has been giving money to Africa, far more is flowing out illicitly. Further, you can assume that illicit outflows from other regions would likely lead to high net resource transfers from other developing regions, as well.”

In Africa, this trend appears to have particularly strengthened over the past decade, during which time some 30.4 billion dollars every year are thought to have illegally leaked from the continent. Of that, around 83 percent is thought to have come from North African countries alone.

Over the full three decades, perhaps counter-intuitively, dark-money outflows appear to have originated particularly in resource-rich countries, those most prominently engaged in oil, gas and other natural resource extraction. Some of the most notable include Nigeria, Libya, South Africa and Angola.

Such findings are bolstered by a new index, released last week by the Revenue Watch Institute (RWI), another watchdog group, that for the first time systematically correlated governments’ economic dependency on natural resources and low human development indicators.

The RWI index looked at 58 countries responsible for the vast majority of the world’s petroleum, copper and diamond extraction, and reported that the profits of their extractive sectors added up to more than 2.6 trillion dollars in 2010, far outweighing Western aid flows. Yet more than 80 percent of those countries had also failed to put in place satisfactory standards for openness in these sectors – and half hadn’t even taken basic steps in this regard.

“In resource-rich countries, the natural resource sector is usually the main source of illicit financial flows,” the AfDB-GFI study states, noting a finding by the International Monetary Fund (IMF) that Angola’s oil sector in 2002 failed to report around four billion dollars.

“These countries generally lack the good governance structures that would enable citizens to monitor the amount and use of revenues from the natural resource sector. Often, rents and royalties derived from resource management are not used to support the social and economic development of resource-rich countries but instead are embezzled or expended in unproductive ways through corruption and cronyism.”

The impacts of this mass leakage on both African public coffers and foreign development-focused aid are clear.

“The resource drain from Africa over the last 30 years – almost equivalent to Africa’s current gross domestic product – is holding back Africa’s lift-off,” Mthuli Ncube, chief economist and vice-president of the African Development Bank, said Tuesday.

“[But] the African continent is resource-rich. With good resource husbandry, Africa could be in a position to finance much of its own development.”

Halting “absorption”

The new report, which is being released Wednesday at the African Development Bank annual meetings in Morocco, does not look into country-specific drivers of these outflows.

Yet while it is clear that differing levels of strengthening of country-level regulatory mechanisms will be required to ensure that natural resource development in Africa benefits public sector aims, it is impossible to ignore the role of Western countries in this ongoing situation.

“While these figures are amazing, we have to recognise that they’re being directly facilitated by Western banks and tax havens that allow for the creation of anonymous shell companies, by Western governments that don’t share tax information and continue to lack adequate money-laundering enforcement,” GFI’s Gascoigne says.

“While the onus for change is on both national and international players alike, the Western countries can control the international component of this dynamic – the international financial structure.”

The AfDB and GFI analysts are encouraging strengthened alignment of financial policies between African countries and those countries that are “absorbing” these illicit flows. The United States, for instance, continues to be the largest incorporator of shell companies in the world, while Gascoigne says there is also far more that Washington and other Western capitals can do on swapping tax information and refusing to tolerate bank and tax haven secrecy.

In this regard, many observers are eagerly awaiting the G8 summit slated to be held in the United Kingdom in mid-June. The first part of this year has seen unique international momentum build around issues of tax evasion and tax havens, energised particularly by depleted government coffers in the aftermath of the global economic crisis.

British Prime Minister David Cameron, who is hosting the upcoming summit, has taken on the issue of tax evasion as a key priority for his government’s G8 presidency this coming year. He has been widely praised for his recent leadership on the issue, particularly for pushing a new global standard under which governments would automatically share tax information.

European Union countries have now largely aligned themselves with the U.K. stance. But key to watch at the June summit will be whether the United States, Canada, Japan and Russia agree to sign on to a robust new initiative – or choose instead to stand in the way of greater reform.

“Curtailing these outflows should be paramount to policymakers in Africa and in the West because they drive and are, in turn, driven by a poor business climate and poor overall governance, both of which hamper economic growth,” GFI chief economist Dev Kar, formerly with the IMF, said Tuesday.

“The slower growth rate results in more aid dependency, with foreign taxpayer funds filling the shortfall in domestic revenue – to the extent that tax evasion is a part of illicit flows.”

The U.S. government’s main watchdog on Monday reported that U.S. corporations are paying taxes on less than half of their declared income, largely due to dozens of tax breaks that have come under increased scrutiny in recent months.

The Government Accountability Office (GAO) is reporting that U.S. companies received tax breaks worth around 181 billion dollars in 2011, slightly more than what they paid in taxes. That figure would make up the largest such sum since a major rewrite of the U.S. tax code took place in the mid-1980s."With Congress currently trying to figure out how to fund public priorities while bringing down the deficit, it’s just impossible to ignore offshore tax haven abuse anymore." -- U.S. PIRG's Dan Smith

A significant part of these breaks are due to a legal exemption under which U.S. companies are not required to pay taxes on income earned overseas until it is brought back into the country. Yet corporations have increasingly been accused of misusing this exemption, misreporting overseas income or lodging it in countries with low or loose tax regulations.

“It’s extremely important that corporate tax expenditures receive the same level of scrutiny as any spending item,” Dan Smith, a budget researcher at U.S. PIRG, an advocacy group, told IPS.

“Often these things get inserted at the last minute behind closed doors, and the public can’t scrutinise whether they are in the public interest. Some of the largest companies are regularly exploiting these loopholes to make it look as though income they make here is getting made in another country.”

The results are an estimated 150-billion-dollar loss to the U.S. Treasury per year – a massive amount at a time of debt anxiety and austerity measures now threatening to bite heavily into public programmes. Indeed, an important component of the current debt debate here involves overhauling and simplifying the U.S. tax code, including closing loopholes.

Similar discussions are increasingly taking place in capitals around the world, and leading to real new regulation and legislation.

Heating up

Also on Monday, the deadline by which U.S. citizens are required to file their individual taxes, U.S. Representative Lloyd Doggett unveiled a package of legislative proposals, backed by 45 co-sponsors, aimed at closing a series of loopholes in the U.S. tax code and deterring the use of overseas tax havens.

“Over a three-year period, 30 [top] companies devoted more of their monies to lobbying this Congress than they did in paying taxes to the Treasury,” Doggett, one of two members of Congress to request the new GAO report, said in a Congressional hearing Monday. “Some have a negative tax rate. Many of our largest corporations are paying effective rates that are single digits.”

Doggett’s new bill, the Stop Tax Haven Abuse Act, would also require all U.S.-registered multinational corporations to provide annual income reporting on a country-by-country basis. Proponents say doing so would quickly highlight any glaring discrepancies between a company’s reporting and its work on the ground.

Such a requirement would also make it easier for developing countries to ensure that they were receiving proper taxes from foreign corporations working within their territory.

A similar piece of legislation, introduced in February, is currently before the Senate. While versions of both proposals have been introduced previously, U.S. PIRG’s Smith says the bills are today in a far stronger position.

“This issue is definitely heating up – with Congress currently trying to figure out how to fund public priorities while bringing down the deficit, it’s just impossible to ignore offshore tax haven abuse anymore,” he notes.

“And importantly, politicians on both sides of the aisle are starting to see that it’s not in the public interest when corporations can exploit these loopholes. This costs a lot of money, and owners of small businesses end up picking up the tab in cuts to public programmes and higher deficits.”

Public support for regulatory changes appears to be quite strong. According to recent polls, around 80 percent of the U.S. public and 85 percent of small-business owners support strengthened tax regulations that would make it far harder for corporations to exploit offshore tax havens.

Trillion dollars a year

The new momentum to end tax haven loopholes here in the United States joins a similar movement internationally, including at the highest levels of the development community.

Just last week, five members of the European Union – France, Germany, Italy, Spain and the United Kingdom – agreed to the world’s first multilateral system of tax information exchange, based on similar bilateral U.S. requirements passed three years ago. (The United States itself doesn’t tax foreign-owned income in U.S. banks, and hence is one of the world’s largest tax havens.)

Over the weekend, five more countries – Belgium, the Czech Republic, the Netherlands, Poland and Romania – signed on to the pilot project, which is open to all E.U. members.

“There’s a flurry of action going on right now, both domestically and internationally, but this E.U. announcement is huge,” Clark Gascoigne, communications director for
Global Financial Integrity, a Washington watchdog group, told IPS.

“It pokes a massive hole in international bank secrecy and ensures that tax officials will have a lot of the information they need to crack down on tax haven-related evasion. They’re now promoting this as the new global standard on tax information sharing – a major development that will do much to curtail evasion, particularly once it’s expanded to developing countries and emerging economies.”

Indeed, the ramifications of this discussion for developing countries are enormous. Last month, a high-level United Nations panel negotiating the next phase of the Millennium Development Goals (MDGs), the deadline for which is 2015, produced a communiqué stating that one of their highest priorities would be tackling the abuse of offshore tax havens and illicit financial flows.

According to a recent report by Global Financial Integrity, such abuse could be resulting in losses for developing countries as high as a trillion dollars a year. Gascoigne notes this is 10 times the amount that developing countries receive in foreign aid each year.

“This has a devastating impact on global development, and it’s fantastic that this is finally being recognised,” he says.

“There is a severe lack of transparency right now in how multinational companies are structured, and this facilitates extremely high levels of illicit flows out of developing countries. Beyond setting a precedent that these abuses are not acceptable in the United States, the legislative proposals in Congress would force corporations to properly record their profits in developing countries, where they’re producing and selling their products.”

The powerful Swiss commodity sector is under fire here, as citizens fed up with government inaction on charges of corporate corruption, tax evasion and lack of transparency gear up for major protests.

Switzerland is anything but a country rich in raw materials but it is, nevertheless, a major hub for international commodity trade, hosting some of the world’s biggest commodities companies such as Glencore (which specialises in power generation, steel production, oil and food processing); Xstrata (copper, zinc, aluminium, nickel and coal-fired electricity), Vitol (which ships oil products like gasoline, diesel, jet fuel and metals, as well as ethanol and chemicals) and Mercuria (dealing in oil and energy products).

Swiss-based companies are estimated to have a share of 15 to 25 percent of the global commodities trade.

Data provided by the industry reveals that 60 percent of the global metals and coffee trade is done in Switzerland. In sugar, the Swiss sector has a market share of 50 percent and in crude oil and grains it makes up 35 percent of global trade.

Against this backdrop, Swiss critics are preparing for a chance to voice their grievances with these massive commodities giants at the second annual Financial Times Global Commodities Summit to be held in the city of Lausanne, about 60 kilometres northeast of Geneva, on Apr. 15.

But protestors say the summit “is a symbol of exploitation and speculation”.

“While the companies’ profits increase, the local population in mining countries suffers from environmental damage, expulsion, tax avoidance and anti-trade union measures,” Yvonne Zimmermann of MultiWatch, a broad coalition of NGOs, trade unions and anti-globalisation organisations, tells IPS.

An alliance of two-dozen organisations is calling for a demonstration to coincide with the arrival of businessmen in Lausanne on Apr. 15. Speaking on behalf of the protest organisers, Alwin Egger tells IPS the march, which is expected to draw hundreds, will move towards the Hotel Beau-Rivage Palace, where the summit takes place.

A member of the anti-globalisation Association for the Taxation of financial Transactions and Aid to Citizens (ATTAC), Egger says, “In our opinion, it’s the people who should have control over extraction and trade of raw materials, not profit-oriented companies.”

Over the last decade, the commodities business has grown exponentially in Switzerland. In 2011, its net receipts from trade added up to 20 billion Swiss francs (or 21 billion dollars), contributing 3.5 percent to the country’s gross domestic product (GDP). While some corporations are only involved in either commodity trade or extraction, most of them offer services throughout the entire supply chain.

For more than a century, commodity companies have flocked to Switzerland to avail themselves of the country’s low tax rates and the privileged corporate taxation system. Holding companies, for example, are exempt from corporate income tax on cantonal and communal levels as long as they own shares in foreign companies only. Besides, Switzerland offers strong banks, political stability and a high standard of living.

That the country wasn’t a member of the United Nations until 2002 was another factor behind its popularity, as it allowed Switzerland-based companies to avoid U.N. embargoes and sanctions.

The commodities business is known for its discreetness. But as of late, that peace has been disturbed by NGOs such as the Berne Declaration (BD), which published a groundbreaking book in 2011 to shed light on some of the dubious practices the sector constantly engages in.

Accusations range from human rights abuses, ecological destruction, exploitation, to corruption and tax avoidance in developing countries. In 2012, for instance, NGOs accused Glencore of buying copper from intermediaries in the Democratic Republic of Congo that was extracted partly using child labour and under precarious conditions.

Entitled “Commodities – Switzerland’s Most Dangerous Business”, the book found that “trade in oil, gas, coal, metals and agricultural products – particularly via deals made in Geneva and Zug – has grown by an incredible 1,500 percent since 1998…The result: Seven of the twelve corporations with the highest turnover in Switzerland trade in…or mine commodities.”

“As more information becomes available, attentiveness to the issue grows” — and so does criticism, observes Zimmermann, adding that a media spotlight on these practices has dealt a harsh blow to the industry’s public image.

But Economics Minister Johann Schneider-Amman opposes specific, national regulations for the commodities sector. “We don’t want to treat our companies any stricter than other, competing locations do,” he said at a press conference, echoing the standard argument issued every time the corporate tax system is in the line of fire: that Switzerland cannot afford to have companies relocate elsewhere.

For critical experts like Classen, this excuse is not valid since “there are no unregulated alternative business locations” anywhere else in the world.

The Swiss Federal Council has proposed a consultation draft for a transparency regulation similar to the 2010 Dodd-Frank Act in the United States, section 1504 of which obliges companies to disclose their payments to governments for access to oil, gas and minerals. It is still unclear, though, whether payments of commodity trading companies will be included in the Swiss draft regulation.

Fearing new regulations, the Swiss commodities sector has ramped up its lobbying efforts. Associations representing the industry have popped up in the main commodity trading hubs of Geneva, Zug and Lugano.

Glencore recently invited Swiss parliamentarians to hear an explanation of its “engagement for sustainable business, for the health and safety of its employees and for the environment”. Media and NGOs were denied access to the closed-door meeting.

“The sector is concerned that it has become the subject of attentiveness and debates,” says MultiWatch’s Zimmermann, who protested against the recent lobby event.

“As a reaction to criticism, these companies have started to publish sustainability reports”, she said, which whitewash their practices and portray themselves as charities.

The research arm of the U.S. Congress is warning that U.S. corporations’ use of tax havens has risen substantially in recent years, with companies offering massively inflated profit reports from small countries with loose tax regulations.

“Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary from about 10 billion to 60 billion (dollars) per year,” Jane G. Gravelle, a senior specialist in economic policy, writes in a new report for the nonpartisan Congressional Research Service (CRS).

Elsewhere, Gravelle suggests that the revenue losses from this “profit shifting” could reach as high as 90 billion dollars a year, while the cost of evasion on the part of individuals could be as high as 70 billion dollars a year. (Although CRS reports are not publicly released, a copy can be found here.)

Further, these numbers appear to be growing. Extrapolation from the new CRS statistics suggests that U.S. corporate profits reported from, for instance, Bermuda grew by five times during the decade leading up to 2008, the last year for which data is available.

Perhaps the most striking part of the new findings is simply the brazenness with which U.S. corporations appear to have become accustomed to misreporting their overseas earnings. To run her analysis, Gravelle chose five relatively small but well-known tax havens – Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland – and then looked at the percentage of profits U.S. companies reported as having come from those countries in 2008.

Incredibly, notes Citizens for Tax Justice, an advocacy group here in Washington, these countries were found to have accounted for 43 percent of the 940 billion dollars of overseas profits reported by U.S. multinational corporations, despite having made just seven percent of their foreign investments in those same countries.

On the other hand, the five countries where U.S. corporations do much of their overseas business (the United Kingdom, Germany, etc) were reported to tax authorities as having accounted for just 14 percent of overseas profits.

“Obviously they aren’t making their money in these countries – their economies are nowhere near large enough,” Robert S. McIntyre, the director of Citizens for Tax Justice (CTJ), told IPS. He points out, for instance, that U.S. multinationals’ reported profits in Bermuda amounted to 1,000 percent of the island’s economic output.

“This is just more significant proof that we have a really serious problem, both in the United States and in Western Europe,” McIntyre says, noting that the trend has almost certainly continued, if not increased, since 2008.

Food from the hungry

A December report by Global Financial Integrity, a Washington watchdog, found that the developing world lost nearly a trillion dollars in 2010 due to tax evasion, corruption and other financial crimes. That figure is 10 times larger than the 88 billion dollars provided as development assistance to developing countries that year – and, the researchers warned, this figure was almost certainly an underestimate.

“Whether you’re a big, developed country like the United States or a smaller developing country in Africa,” McIntyre says, “if you can’t get tax money out of the businesses operating in your territory, how are you going to pay for infrastructure, health, education and all of the other things you need to maintain and grow an economy?”

On Wednesday, Oxfam International, a humanitarian aid organisation, called for global policymakers to close off loopholes that have allowed for the recent increase in tax evasion. The group is suggesting that just a quarter of the revenue that could accrue from taxing misreported profits would be able to “lay the foundation for ending global hunger”.

“Governments should agree to end global hunger by 2025 and an end to tax havens, which could help pay for this and much more. Tax-dodging effectively takes food from hungry mouths,” Stephen Hale, advocacy head for Oxfam, said in a statement on Wednesday.

The group offers an estimate of 32 trillion dollars currently sitting in tax havens around the world, and notes that taxes on this lump sum could raise nearly 190 billion dollars a year. On the contrary, Oxfam states, “Just 50.2 billion (dollars) a year is estimated to be the level of additional investment needed, combined with other policy measures, to end global hunger.”

Dutch funnel

While the United States’ ability to impose taxes is supposed to span worldwide, that system includes a significant exception, in that foreign profits are not taxed until companies bring their earnings back into the country.

On the ground, the result has been more and more companies looking to keep their profits overseas – or claiming that the money was made in countries that have either strict privacy regulations or lax reporting requirements.

Due to legalities and bilateral treaties, the Netherlands has become a significant transit point for unreported earnings for companies across the world. According to recent estimates, the Netherlands is allowing some 13 trillion dollars to funnel through its financial system en route to classic tax havens such as the Cayman Islands.

Particularly given the current fiscal crunch in Europe, such figures have caught the attention of E.U. policymakers; in December, the European Commission warned that tax avoidance was costing the regional bloc a trillion euros every year. The E.U. is currently trying to put in place a system that would divide up corporate profits among member states before it could, say, end up in the Netherlands and then leave the continent.

Last week, the Dutch legislature took up the issue in what appears to be a broad-based attempt to tweak the country’s laws. Also last week, U.K. Prime Minister David Cameron stated that, when his country takes over the rotating presidency of the Group of 8 (G8) rich countries this year, corporate tax evasion will be one of his central priorities.

In Washington, much of the effort is currently revolving around attempts to lower the U.S. corporate tax rate – at 35 percent, the highest among all developed countries. Beyond this, though, CTJ’s McIntyre warns that there are few allies for any major legislative push.

“Republicans like the fact that these companies are successfully avoiding taxes, while the Democrats are afraid that if they do anything strong, corporate money will go against them in the next election,” he says. “Companies are hoping that they’ll get away with these practices, and currently they have the (tax authorities) outgunned.”

The developing world lost nearly one trillion dollars in 2010 as a result of corruption, tax evasion, and other financial crimes not involving cash transactions, according to a new report released here Monday by Global Financial Integrity (GFI).

The six-year-old research and advocacy group said that global financial corruption has grown steadily over the past decade despite unprecedented efforts by governments and non-governmental organisations (NGOs) to curb it.

It found that illicit financial outflows cost developing countries a total of 859 billion dollars in 2010, the latest year for which trade and other data compiled mainly by the International Monetary Fund (IMF) and the World Bank is available.

That sum was approximately 10 times the roughly 88 billion dollars provided to developing countries in official development assistance (ODA) that same year.

“This means that for every one dollar in economic development assistance going into developing countries, ten dollars are lost via these illicit outflows,” GFI noted.

But the group’s lead economist and report co-author, Dev Kar, stressed that the latest estimate almost certainly underestimated the total amount of illicit flows, in part because it did not include cash transactions and because it was based on a new, more-conservative methodology than GFI used in the past.

The latter method estimated that developing economies lost about 1.14 trillion dollars in illicit outlows in 2010.

“The estimates provided by either methodology are still likely to be extremely conservative as they do not include trade mispricing in services, same-invoice trade mispricing, hawala transactions and dealings conducted in bulk cash,” according to Kar, who previously served as a senior IMF economist.

“This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates,” he added.

The 80-page report, “Illicit Financial Flows From Developing Countries: 2001-2010,” found that China suffered the greatest losses resulting from illicit outflows – a yearly average of 274 billion dollars over the century’s first decade – or 2.74 trillion dollars from 2001 through 2010, and 420.36 billion dollars in 2010 alone.

China was followed by Mexico, Malaysia, Saudi Arabia, and Russia. Mexico averaged yearly losses of 47.6 billion dollars and 51.2 billion dollars in 2010; Malaysia, an average of 28.5 billion dollars but a whopping 64.38 billion dollars in 2010; Saudi Arabia, a 21 billion dollar yearly average and 38.2 billion dollars in 2010; and Russia, a 15.2 billion dollar average and 43.6 billion dollars in 2010.

Other countries that were ranked in the top ten for 2010 losses included Iraq (22.2 billion dollars); Nigeria (19.66 billion dollars); Costa Rica (17.51 billion dollars); the Philippines (16.62 billion dollars); and Thailand (12.37 billion dollars).

While most of the hardest hit economies are middle-income countries, or even high-income nations, such as Qatar and the United Arab Emirates, some of the world’s poorest countries are also victims. In addition to Nigeria and the Philippines, Sudan (8.58 billion dollars) and Ethiopia (5.64 billion dollars) were also among the biggest losers in 2010, while India ranked eighth in average annual losses over the decade (12.3 billion dollars).

“Astronomical sums of dirty money continue to flow out of the developing world and into off-shore tax havens and developed-country banks,” said GFI’s director, Raymond Baker.

“(I)t’s clear: developing economies are haemorrhaging more and more money at a time when rich and poor countries alike are struggling to spur economic growth. This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

The report comes amidst increased global attention to corruption as a hindrance to development. Corruption – and its threats to the long-running rule of the Communist Party – were a major theme at last month’s 18th National Congress in China that transferred power to the new president, Xi Jinping.

Grassroots anti-corruption movements in Russia have spurred a major crackdown, in contrast to India where they have gained the national spotlight. Meanwhile, both traditional aid donors are increasingly conditioning their assistance on how committed beneficiary governments are to eliminating corruption by officials.

According to the GFI report, “trade mispricing” accounted for most of the illicit outflows from developing countries over the past decade.

When, for example, an exporter in a developing country sells two million dollars worth of goods to a foreign company for 1.5 million dollars, the exporter may ask that the extra half million dollars be placed in his or her own private overseas bank account, presumably to avoid taxation.

Conversely, companies may overprice imports and likewise arrange to have the illicit proceeds deposited overseas.

Illicit transfers can also be conducted through related forms of corruption, including bribery, kickbacks, as well as outright theft, according to the report.

Over the 2001-2010 period, the report estimated that developing countries lost an annual average of about 586 billion dollars in such illicit flows – or a total of 5.86 trillion dollars over the decade.

In dollar terms, illicit flows increased in real terms by a yearly average of about 8.6 percent despite the onset of the global financial crisis at the end of 2008. The increase took place in every developing region, with the Middle East and North Africa leading the pack (26.3 percent average annual increase), followed closely by Sub-Saharan Africa (23.8 percent).

The average annual increase for Asia, which accounted about 61 percent of total illicit flows from the developing world, came to nearly eight percent, while, in Latin America and the Caribbean, the increase was lowest – at 2.65 percent.

The latest report did not address cash transactions which are far more difficult to track. In a previous report, GFI estimated that drug trafficking, which is most often conducted in cash, produces annual profits of about 320 billion dollars in both developed and developing countries.

Another illicit industry – counterfeiting of both merchandise and currency – produces another 250 billion dollars a year, although it is generally less reliant on cash, according to GFI. Proceeds from cross-border human trafficking were estimated at about 31.6 billion dollars a year.

In dealing with the problem of illicit financial outflows, the report called for, among other measures, the adoption of new conventions and laws requiring the identification of the beneficial owners of all banking and securities accounts and the “true, human owners of all corporations, trusts, and foundations” when they are formed.

It also called for reforming customs and trade protocols to better detect trade mispricing. Moreover, multinational corporations should be required on a country-by-country basis to report all sales, profits, and taxes paid.

In addition, tax information on both personal and business accounts should be automatically exchanged between countries, according to the report.

Activists at a G20 protest say no to 'welfare for the rich’. Credit: Tim and Selena Middleton/CC-BY-2.0

By Linus Atarah
HELSINKI, Oct 6 2012 (IPS)

The City of Helsinki added its voice to a growing global call against corporate tax evasion with the passage of a new responsibility strategy that leaves no room for unethical business practices.

Last week, 85 city councillors from Finland’s capital voted to sever business ties with companies operating in, or having links to, tax havens.

The resolution – which passed 78-4 in the City Council, the country’s highest decision-making body in charge of local affairs – acknowledged that tax evasion undermines the capacity of municipalities to provide social services.

The council also recognised that tax havens deprive developing countries of vital tax revenues and denies them the opportunity to benefit fully from world trade.

Tax havens are either territories or countries whose authorities allow businesses or individuals to deposit their wealth at very low tax rates or, in some cases, pay no taxes at all.

The London-based Tax Justice Network has identified 10 of the most attractive tax havens around the world, including Bahrain, the Cayman Islands, Jersey, Singapore and Switzerland.

Tax havens are quickly becoming an election issue here, as the country prepares to head to the polls for municipal elections in three weeks. Minister of Finance, Jutta Urpilainen of the Social Democratic Party, flagged the topic during a parliamentary discussion Thursday by supporting the proposal that municipalities boycott companies operating in tax havens.

Protecting the welfare state

The recent decision means Helsinki will no longer provide procurement contracts to companies whose operations are located in tax havens.

With a budget of about four billion euros, Helsinki is Finland’s biggest consumer of goods and services but it must now be more wary of who it chooses to do business with by demanding that companies reveal where they operate.

Taxes from enterprises are the primary source of income for Finnish municipalities, enabling them to provide public services such as education, health, housing and care for the elderly.

“Companies operating through tax havens pose a lethal threat to the welfare state in Finland and in all countries, especially in developing countries,” according to the resolution’s author, Thomas Wallgren, a Social Democratic councillor who has been leading the charge against tax havens.

“They also distort fair competition between companies, thereby threatening the survival of local and national small and medium-sized companies,” Wallgren told IPS.

He cited the example of Accra Breweries in Ghana, owned by South Africa’s SAB Miller. For five consecutive years, this multi-billion-dollar company paid no taxes at all to the Ghanaian government, while people who sold empty bottles on the streets paid, and continue to pay, value-added tax and municipal tax.

Implementation of the city council’s resolution may still run up against obstacles, according to legal experts here, who say the issue is compounded by the fact that European Union competition laws do not allow companies to be denied public procurement contracts on the basis of their location in tax havens.

Murky estimates

“The amount of money in tax havens is a big question mark,” Matti Kohonen, a researcher with the Tax Justice Network, told IPS. “We live in a world of high financial secrecy, which is a direct cause of the financial crisis. We don’t know where the money is and that is a very serious problem,” Kohonen said.

He estimates that global financial transactions that are either illicit, or involve some element of criminality or tax evasion, are in the order of one trillion dollars annually, about one-tenth of the United States’ gross domestic product (GDP).

The lost revenue stemming from these actions is somewhere close to 100 billion dollars, the amount the United Nations says is required to fulfil the Millennium Development Goals.

The Tax Justice Networks also estimates that 21 to 36 trillion dollars, about two to three times the GDP of the U.S., are hidden in tax havens.

Transfer pricing

According to Kohonen, another common method for avoiding taxes is through transfer pricing, a price-setting mechanism for selling goods or services between different departments of the same company or between a parent company and its subsidiary.

An estimate released two years ago by the Organisation for Economic Co-operation and Development (OECD), which sets the tax rules for transfer pricing, says this practice constitutes 70 percent of world trade.

This year the Finnish Tax Administration reported that the government loses 320 million euros of tax revenue annually due to price manipulations in transfer pricing. But Kohonen says that may only be the “tip of the iceberg” because most firms operating in tax havens are shrouded in secrecy.

Rather than have global transfer rules decided by the OECD, Kohonen believes it would be far more democratic for the U.N. to determine these regulations.

“It is a scandal that we have rules that govern world trade but no rules for the world of taxation apart from the rich countries’ lobby group, which is the OECD. We need multilateral rules or some other rules on how to tax multinationals,” he stressed.

Global movement

Helsinki’s initiative is not an isolated case but part of a global campaign to galvanise a groundswell of public support that could in turn create sufficient political will to take action against tax havens.

“The whole point of the campaign is to put additional pressure on national authorities, stock exchange regulators and on the European Union to have more stringent requirements for multinational companies,” Kohonen told IPS.

He says Helsinki’s initiative comes hard on the heels of similar measures taken in two Swedish cities, Malmö and Kalmar, as well as the municipality of Ulstein in Norway, all in an attempt to rein in the activities of tax evading companies.

Eight regions in France, including its wealthiest region, Île-de-France, have recently declared themselves ‘tax haven free zones’.

In spite of the legal obstacles impeding the implementation of Helsinki’s city council decision, Wallgren said many other Finnish municipalities have been encouraged by the momentum and are following suit. The decision is “catching on like wild fire” around cities and municipalities, he said.

“The fight against the tax havens will be a long one but because it is also a fight for the survival of the welfare state it is worth fighting,” he added.

Kohonen likened the current movement in Finland to the Jubilee Debt Campaign of 1990, which forced developed countries to reduce poor countries’ debt.

“Once it becomes the focus of millions of people around the globe, politicians can no longer avoid the problem,” he said.

(END)

European media, political leaders, and the citizenry are bashing bankers again, overtly calling them at best accomplices of numerous illegal activities, at worst downright criminals.

The best example of this new wave of anger against bankers is the use of the portmanteau word “bankster” (a combination of banker and gangster), which has become commonplace in media, even in non English-speaking countries.

The term, first coined in the 1930s during the Great Depression and which resurfaced in British media in 2009, appeared on the front page of the French daily Libération on Jul. 18.

Political leaders critical of banks have so far refrained from using the word but everyone else has been having a field day with it.

In a short white paper on banks’ policies released Jul. 21, the head of Germany’s leading opposition Social Democratic Party (SPD), Sigmar Gabriel, accused bankers of “blackmailing governments and states with the (threat) of domino bankruptcy”, of “complicity with criminal activities”, such as tax evasion and money laundering, and of “screwing their own clients”.

Even those commentators who dismissed Gabriel’s banker bashing as political populism agreed that the managers of international private financial corporations have recently done large disservices to their business and their clients.

The list of genuine grievances is long: the HSBC bank is facing accusations in the U.S. of having laundered money for Latin American cocaine cartels and Muslim organisations allegedly involved in terrorist activities.

In a statement released Jul. 17, the HSBC acknowledged, “In the past, (the bank has) sometimes failed to meet the standards that regulators and customers expect. (We) acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.”

The so-called LIBOR (London interbank offered rate) scandal revealed that numerous leading international banks, including Barclays, Citigroup, JPMorgan Chase, UBS, the Deutsche Bank and, again, the HSBC, conspired to jointly falsify information on the interest rates the banks demand from each other, to lure central banks into reducing their own leading lending rates.

The scandal led to a record 450 million-dollar fine against Barclays, imposed by U.S. and British regulators, and to the forced retirement of Barclays’ CEO, Bob Diamond.

Banks have also been embroiled in massive tax evasion schemes. The independent Tax Justice Network, which investigates international tax evasion and the role of banks in tax havens, estimates that some 11.5 trillion dollars in assets are held illegally in banks’ and funds’ vaults, leading to a global annual loss of tax revenue of about 250 billion dollars.

Similarly, the Organisation for Economic Cooperation and Development (OECD) underlines that “Tax avoidance and tax evasion threaten government revenues,” and recalls U.S. Senate estimates that 100 billion dollars are lost each year due to tax evasion by U.S.-based firms and individuals.

“In many other countries, the sums run into billions of euros,” the OECD says. “This means fewer resources for infrastructure and services such as education and health, lowering standards of living in both developed and developing economies.”

Such assets are held not only in offshore financial centres, such as the British territories of the Isle of Man, Guernsey, and Gibraltar, the Cayman Islands, and the like, but also in banks and funds operating in the city of London, in New York, and in countries like Switzerland, Singapore, and Monaco.

All these crimes have been occurring at a time when states in industrialised countries are facing a dramatic sovereign debt crisis, bringing many to the brink of bankruptcy.

The sovereign debt crisis originated or at least was aggravated after the financial crisis broke out in 2007, precisely because banks had brought themselves to the point of collapse and had to be “bailed out” by states in order to avoid a global financial meltdown.

But the bailout only set in motion a cyclical financial crisis, with Spanish, Greek, and Cypriote banks now demanding rescue from national governments, who are sacrificing their own populations by cutting expenses on crucial public services like education, health, and infrastructure.

And all this is being done so that international financial markets can continue to operate practically unregulated, while the banksters pay themselves princely salaries and massive bonuses.

On Jul. 18, Libération revealed that the four leading French banks alone paid 1.1 billion euros in bonuses to their risk managers in 2011.

The list of banks’ crimes and their employees’ enourmous salaries have led political leaders to urge new regulation and controls on financial markets. The new French minister of finances, Pierre Moscovici, has launched a bank reform, aiming at separating commercial banking from investment banking, and capping salaries.

The SPD’s Gabriel also argued for caps on salaries and bonuses, and for personal liability of bank CEOs and managers in the event of losses caused by highly risky speculative transactions.

Similar measures have been proposed in Britain by the Independent Commission on Banking (ICB), created in 2010 to reform the local banking sector and to promote financial stability and competition.

However, the ICB proposals were not fully considered by the British government’s new plan, announced earlier this month, to restructure the local financial market and which, in any case, will not be implemented until 2019.

This led the ICB chair, distinguished economics professor John Vickers, to complain that the government measures have watered down key parts of his reform package. “International events keep underlining the need for fundamental reform to make banks safer and to shield taxpayers from future risk of loss,” Vickers said in a statement.

Actually, most of the measures discussed in France, Germany, and Britain are included in the so-called Basel III agreement, a banking regulation reform programme triggered by the evidence revealed in the aftermath of the international financial crisis of 2007.

The new regulation, still under debate at the Basel Committee on Banking Supervision, is supposed to be applied step by step starting in 2013, and be fully implemented in 2019.

For independent economists, such delay in establishing new regulation of an obviously rotten industry is proof of the lack of political will among governments to get to the root of the crisis.

“Five years into the worst financial crisis in history, all attempts to regulate banks and funds remain dead letter,” French economist Paul Jorion told IPS. “Despite abundant evidence that (banks and investment funds) cheat all over, again and again, no new rule has been introduced.”

Instead, he added, “the European Union and governments continue to deregulate, pushing their own citizenry into abject misery.”

(END)