The Oxford study on tax abuse in developing countries

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The FT noted yesterday that:

A ‚Ķ study, by the Oxford University Centre for Business Taxation, says tax losses frommultinationals shifting profits that are down to faulty transfer pricing have been "overestimated drastically". It also criticises estimates of tax evasion by rich individuals in developing countries, which some reports have put as high as $124bn (£75bn) a year.

It says: "Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data."

It also questions the view that tax evasion is the main reason for money being shifted out of developing countries, saying political instability and concerns about property rights may be more important. But the study supports the call by campaigners and aid charities for transparency, and says evasion and profit shifting are likely to be problems.

This report was commissioned by the Department for International Development from Clemens Fuest and Nadine Riedel, both based at the Oxford University Centre for Business Taxation and both previously at the University of Munich.

The paper says what the FT reports in the first two paragraphs noted; the last is a generous interpretation of what they say: I can’t find the last sentence reflected in the report.

I do, I fully admit have massive problems with this document. I think it fundamentally flawed. There are a number of reasons, all of them serious, and I’ll be exploring them for a while I expect, such is the significance of this ill-timed attack on the work many in the NGO community are now doing. But let’s start with some obvious ones.

The first is that of the eleven authors whose work is reviewed by the Oxford team nine are personally known to me. Only one was given any opportunity to discuss his work, and that because he asked to do so. I find that very strange. This was not a purely academic review: this was a review of data on a real problem. In that case, why did the researchers not seek to establish the credibility of their own findings by discussing them with us before publishing their report?

Second why, when suggesting future research have they suggested methods for which I can reasonably state that there is no known data available – a weakness which required all of us to use methods of estimation which they dismiss in the report, but which were designed to make optimal use of the best alternative available data?

Third, it seems that they have assumed that absence of the conventional evidence that an academic economist might seek to use is evidence of absence of a problem in this area. This is clearly wrong. It just suggests we need more data which has to be created by more transparency.

Fourth, to suggest that this problem cannot be proven to exist because it does not fit within the modelling capacity of conventional economics does not suggest there is nothing wrong with the world: it suggests that the modelling techniques of economists must be developed in ways we have sought to pioneer.

I hope you’re already beginning to get a feel for my concerns. It would be disastrous if it was concluded on the basis of this deeply flawed report that there was no problem relating to illicit capital flows or transfer mispricing out of developing countries: our work conclusively shows there is, although we entirely accept that estimates of its scale can be refined. But that is the need, and we must not wait until the problem is solved which is the realistic pre-condition of securing the data the Oxford report suggests is required to take their own research forward.

I would hope no one will take this report seriously as a result of these flaws, but equally know the cache attached to Oxford. This is why I’ll be addressing more specific issues today and over time.