Tax justice campaigners in Kenya. Credit: Zahra Moloo/IPS

By Tharanga Yakupitiyage
UNITED NATIONS, Apr 12 2016 (IPS)

The financial secrecy and tax evasion revealed by the Panama Papers has an extraordinary human cost in developing countries and threatens the realisation of the UN’s ambitious Sustainable Development Goals.

The ongoing leak — made public by media outlets including German newspaper Süddeutsche Zeitung, the International Consortium of Investigative Journalists (ICIJ) — has already prompted protests and investigations around the world. The papers connect thousands of prominent figures to secretive offshore companies in 21 tax havens and reveal the inner workings of the offshore finance industry.

The documents focus on Panamanian law firm Mossack Fonseca, with its 210,000 entities, and has led to allegations that the firm aided public officials and multinational corporations to avoid taxes. Mossack Fonseca say that media reports have misrepresented the nature of their work and its role in global financial markets.

In one case, leaked emails contained in the Panama Papers suggest that the Heritage Oil and Gas Ltd Company (HOGL), sought help from Mossack Fonseca to sidestep tax laws in Uganda. According to ICIJ, upon the sale of an oil field, the company received a tax bill of $404 million. In an effort to avoid paying the taxes, the entity fought the Ugandan courts and meanwhile tried to relocate to Mauritius, according to the leaked emails.

Mauritius has a double tax agreement with Uganda, allowing companies such as HOGL to only pay taxes in one of the two countries. In 2000, the International Monetary Fund (IMF) listed Mauritius as a preferred location for companies due to its minimal tax laws.

These havens deny developing countries such as Uganda of much needed tax revenue for essential services, Oxfam’s Senior Tax Policy Advisor Tatu Ilunga told IPS.

“Tax havens are at the heart of a global system that allows large corporations and wealthy individuals to avoid paying their fair share, depriving governments – rich and poor – of the resources they need to provide vital public services and tackle rising inequality,” said Ilunga.

In Uganda, approximately 37 percent live on less than $1.25 per day. The East African nation also has one of the highest rates of maternal and under-five mortality rates in the world. According to the World Health Organisation (WHO), Uganda is one of the top ten countries that account for the majority of global maternal deaths.

In a country that lacks access to health services, HOGL’s $404 million in taxes represents more than the country’s health budget.

Former governor of Nigeria’s oil-rich Delta State James Ibori was also implicated in the Panama Papers,allegedly using Mossack Fonseca as an agent for four offshore companies in Panama and Seychelles. These entities provide anonymity, hiding true owners’ names and actions and thus allowing for finances and assets to be undeclared and untaxed. 

Though he was detained in 2012 for diverting up to $75 million out of the country, Nigerian authorities estimate that Ibori stole and stored over $290 million in tax havens.

Like Uganda, Nigeria ranks low in health indicators, contributing to some 10 percent of global maternal, infant and child deaths. Poverty has increased in the country with 61 percent living below the poverty line, according to the most recent Nigerian Bureau of Statistics report.

The Niger Delta region in particular, despite being a significant contributor to the country’s economy through oil production, remains the poorest and least developed region in Nigeria. In Ibori’s Delta state alone, 45 percent of people live in poverty. The UN Development Programme (UNDP) report found that the majority of people in the region lack access to potable water, electricity, health facilities and infrastructure including roads and telecommunications.

“Have you seen any taps here?…Water used to run in public taps, but that had stopped 20 years ago. We basically drink from the river and creeks…hygiene is secondary,” a Niger Delta Resident told UNDP.

Though Ibori’s stashed money represents only a slice of Nigeria’s budget, it is indicative of a global and pervasive problem that goes beyond Mossack Fonseca.

Transparency International’s Senior Policy Coordinator Craig Fagan told IPS: “If you think about the millions of files that have been released and the number of high profile individuals [in the Panama Papers], this is just one law firm in Panama.” .

“We can be certain that there are many other law firms whether in London, Hong Kong, New York, Miami that are operating similar structures,” he said.

According to Oxfam estimates, at least $18.5 trillion is hidden in tax havens worldwide. The organisation found that two thirds of this offshore wealth is hidden in European Union related tax havens while a third is in UK-linked sites where it is left undeclared and untaxed.  Oxfam said that their estimate is a conservative one.

The Swiss Leaks, also released by ICIJ in 2015, revealed how over 106,000 clients from Venezuela to Sri Lanka hid more than $100 billion in Swiss HSBC bank accounts.

Another analysis from Tax Justice Network (TJN) reveals that between $21 to $32 trillion is being diverted into offshore companies.

This has enormous effects in developing countries, costing poor nations over $100 billion in lost tax revenues every year, according to Oxfam. The charity also found that tax dodging by multinational corporations alone costs the developing world between $100 billion and $160 billion per year. Added with profit shifting, approximately $250 billion and $300 billion is lost.

This “missing” money could lift every person above the $1.25 per day poverty threshold three times over, according to Brookings Institution calculations.

Oxfam added that for every $1 billion lost through commercial tax evasion, 11 million people at risk across the Sahel region could have enough to eat, 400,000 midwives could be paid in Sub-Saharan Africa which has the highest maternal mortality rates, and 200 million insecticide-treated mosquito nets could be purchased to reduce child mortality from malaria.

In addition to lost development finance, Ilunga also noted to IPS that such actions have exacerbated inequality in the world, stating: “This is the same rigged system that has created the situation where…the wealth of the richest 1% surpasses the combined wealth of the rest of the world.”

Though the use offshore companies is not illegal, Ilunga asserted that the legality of such actions is precisely the issue.

“Tax dodging exists in a legal gray area with some activities clearly violating the spirit of the law even though those activities are not technically illegal. But the fact that these activities are legal is precisely the scandal we are most concerned with,” Ilunga said.

Fagan told IPS that it does not matter whether it is legally acceptable to have tax avoidance schemes.

“Just because it’s not illegal does not mean it is not a form of manipulation, form of corruption,” he said.

Ilunga and Fagan noted that the Panama Papers are a wake-up call and urged governments to end harmful tax practices and close loopholes. They highlighted the need to institute a public registry which lists companies’ true owners, where money is being earned and how much is being earned.

Ahead of the United Kingdom’s anti-corruption summit to be held in May 2016, Oxfam and TJN also called on the U.K. to lead the fight by halting their large network of tax havens including in the British Virgin Islands and the Cayman Islands.

“The anti-corruption summit provides an opportunity to dismantle the financial secrecy that threatens the [Sustainable Development Goals’] progress against poverty before it even begins,” said Oxfam Policy Advisor Luke Gibson and TJN’s Director of Research Alex Cobham in a briefing paper.

Cobham told IPS that though global reforms are essential, domestic stakeholders must ensure that tax revenues will be used to help meet the recently adopted Sustainable Development Goals (SDGs).

Included in the SDGs are commitments to reduce illicit financial flows and corruption by 2030 and to strengthen domestic resource mobilization including improving capacity for tax and revenue collection.

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

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

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.