Development » Tax Research UK

Report: IFIs and tax policy in developing countries

Jul 142011

Actionaid and Eurodad have co-written an important new report looking at how international financial institutions such as the IMF have been advising developing countries on tax, and how things might be improved.

The paper looks at what has been meant by the Tax ‘Consensus’ – a concept which has been used by several authors to describe a consistent template of interlinked policy prescriptions that the International Financial Institutions have applied in their technical assistance and policy advice on tax policy in developing countries.

Tax reforms under this Consensus became an increasingly important part of the Structural Adjustment Programmes promoted by the World Bank and the IMF in developing countries from the late 1980’s. Key underlying principles of the tax consensus have been neutrality and simplicity; that taxes should not be used to redistribute wealth because this would distort market signals, and that the number of taxes, tax rates and exemptions should be reduced. Key policies have been to promote trade liberalisation and alongside it to recoup the lost revenue from trade taxes through introducing VAT. In addition there has been strong emphasis on administration.

So developing countries have been urged to reduce trade tariffs, introduce VAT, improve tax administration and remove exemptions. The latest paper also looks at the different ways the IFIs have used to influence tax policy, and then looks at the impacts of these policies.

Until early 2011 neither the IMF nor the World Bank had published an official account of their approach to tax policy in developing countries. This is astonishing, especially given that, as an earlier Actionaid report notes, if all developing countries were able to raise just 15% of their national income as tax revenue – a commonly accepted minimum figure – they could realise at least an additional US$198 billion in revenues – almost double the sums spent on foreign aid.

But things started to change in 2011 with the publication of a new and important paper by the IMF’s Fiscal Affairs Department (which the Tax Justice Network commented on here, in a blog entitled “Is the IMF starting to get it on tax and development?“). While the IMF paper didn’t contain many huge surprises, it did give credence to the issue of fairness in tax systems. Which is absolutely crucial.

It also recognised the challenge developing countries face in dealing with transfer pricing techniques used by multinationals and recognised that country by country reporting is a means to improve tax transparency that merits further investigation. These are all core concerns of TJN.

Although Eurodad/Actionaid new paper recognises a progressive shift in IMF thinking, one area of remaining concern is the IMF’s continued preference for regressive impacts of consumption taxes to be remedied through government spending – even though it admits that the IMF has failed to adequately address this in the past.

There are also ongoing problems with the design of the Doing Business indicator on tax, and despite IMF technical assistance on tax policy and administration growing in scale there is still next to no transparency on the actual content of the advice delivered in this context.

All in all, an important contribution to the literature.

Hat tip to Tax Justice Network

Jersey and vulture tourism

Corruption, Development, Jersey, Uncategorized 2 Responses »

Jun 282011

Tony Bellows has written a first rate review of vulture capital’s use of Jersey to purse its claims through the courts in Jersey.

Vulture capitalists – always based in tax havens – buy up third world debt at heavily discounted prices in the market place and then sue for full recovery of the money due on the bond from the developing country that issued it – usually many years ago, under another regime and with the funds having often been lost in the meantime – often with the assistance of tax havens and those who turn a blind eye to such things in such places.

The UK has finally outlawed such actions – but as a result vulture capitalists are now suing through Jersey courts where willing lawyers are more than happy to help, it seems.

As Tony says:

England has a toxic reputation for so-called “libel tourism”. If Jersey doesn’t enact legislation (which despite Senator Le Sueur’s 2007 remarks, is perfectly possible – the UK managed it), then we may well have the unenviable reputation of being a centre of “vulture tourism” as foreign companies pursue claims against third world countries in Jersey courts! While Senator Le Sueur cannot comment on a case under appeal, he can at least get the wheels in motion to pass legislation as soon as possible, even though it will probably now be beyond his tenure as Chief Minister. Let’s hope not commenting is not another means of avoiding the matter, so that it is “simply left to rest”!

I’m not holding my breath. It’s the sort of business that has strong appeal to a place like Jersey.

NB: See Jersey Evening Post comment on this here

You’re Invited to the 2011 Annual Task Force on Financial Integrity & Economic Development Conference

Development, Task Force on Financial Integrity and Economic Developm 2 Responses »

Jun 182011

Tax Research LLP is a member of the Task Force on Financial Integrity & Economic Development so I’m delighted to share the notice for its 2011 Annual Conference. This is:

Tackling the Shadow Financial System
A Working Plan for the G20

October 6-7 | Cercle National des Armées | Paris, France

As the Task Force says:

The 2011 annual conference of the Task Force on Financial Integrity and Economic Development will take place at the Cercle National des Armées in Paris, France from October 6-7.

Illicit financial outflows from developing countries—which total around $1.3 trillion per year—undermine the tax base in poorer countries, eroding the accountability that is essential for good governance and global stability. The same opacity that facilitates these flows is also partly responsible for the budget crises that are plaguing governments in developed countries, which the G20 has been trying to address. The key to curtailing these illicit flows is transparency. Specifically, the G20 should adopt recommendations in its communiqué that would increase the flow of information between multinational corporations, governments, and citizens – across developing and developed countries. Such financial transparency is the key to limiting future crises and to promoting economic growth across the world.

Speakers and panelists at this year’s conference will address the implications of and solutions to the shadow financial system, including: country-by-country reporting, beneficial ownership of accounts, automatic exchange of tax information, curtailment of trade mispricing, and tax evasion as a predicate offense for anti-money laundering. Breakout sessions will focus on the 2011 Financial Secrecy Index, illicit trafficking, socially responsible investing, media messaging, the “Arab Spring”, and more. Together, speakers and participants will craft a message to the G20 member governments ahead of the November 2011 French summit on how they can address the global ills that result from illicit financial flows.

Click here to register for the conference and view a copy of the agenda.

I’ll see you there.

Clinton endorses the tax justice agenda

Corruption, Development, Tax Havens, Tax justice 4 Responses »

May 262011

Hilary Clinton made an extraordinary speech to the OECD on aid today. It went far beyond anything I might have expected. The whole thing is here. The important highlights are as follows, in my opinion:

There are many urgent issues we could discuss today, but I want to focus on two. First, partnering with developing countries on reforms in three interconnected areas – taxes, transparency, and corruption – because focusing on these three will give us the tools needed to enable more countries to fund more of their own development. And second, doing more to support women as drivers of sustainable economic growth.

I apologise that I’ll only concentrate on the first here.

Let me begin with the reforms. This is a very high priority for me. I’ve spoken about the importance of countries and international organizations like the OECD working together on taxes, transparency, and corruption many times in many places, from Pakistan to Ecuador.

Why? Because corruption, lack of transparency, and poorly functioning tax systems are major barriers to long-term growth in many developing countries. Corruption stifles entrepreneurship and it siphons funding away from critical services, hurting the people who rely on those services. Poor transparency makes it difficult if not impossible to determine how governments raise and spend their funds, and therefore, how to hold governments accountable.

So , and let’s not beat around the bush about it, Hillary Clinton is saying that country by country reporting is necessary. And she’s right, of course.

She’s right about this too:

Weak tax systems rob states and citizens of the resources needed. Why? Either because the taxes are not levied at all, or because it’s very easy for people to avoid paying them. Nobody likes paying taxes, but the countries around this table represented know that in the absence of funding public services, it’s very difficult to achieve the kind of outcomes for prosperity, growth, opportunity that we seek.

It’s good to hear someone saying in an international arena saying that tax is a good thing. It’s a statement of the glaringly obvious, and yet it is not said often enough.

Nor is this:

And let’s be very clear – many wealthy people in low-income countries avoid taxes by hiding their money offshore, an outflow that by some estimates comes to more than $1 trillion a year.

That is a direct endorsement by Hillary Clinton of the work undertaken by Task Force on Financial Integrity and Economic Development member Global Financial Integrity. Tax Research LLP is delighted to partner GFI in the Task Force.

Next she went on to endorse automatic information exchange for tax (tax havens, take note):

Now, to some degree, it is logical that low-income countries would raise less revenue internally than others. After all, some of the most common sources of income in developing countries are very difficult to tax, and building strong public institutions is a challenge for any nation. But we also have to acknowledge that wealthy countries share responsibility, so that is why, for instance, the United States is making it easy for other governments to know when their citizens are keeping money in American accounts.

We all have an interest in solving these problems together, to empower governments to collect precious revenues they use to build roads and power lines, to open schools and train teachers, to provide healthcare and invest in all the other drivers in economic activity. Corruption, lack of transparency, and poorly functioning tax systems not only deprive government of revenues; they inflict a quieter and in some ways an even more dangerous cost as well, because they corrode citizens’ trust in each other and in their government. And when those bonds of trust crumble, it becomes much more difficult for communities and countries to make progress.

I promise you, the Tax Justice Network did not write this speech.

And finally, corruption in poorly functioning tax systems put a strain on our partnerships with developing countries. All of us here are supporting development. We’re committed to doing so. And the United States will continue to lead the world in providing assistance. But let me say very openly it is difficult to ask American taxpayers to spend money abroad when the elites in the countries themselves turn their backs on their own people, especially at a time of difficult budgetary decisions. It is not hard to imagine that an unemployed worker or a struggling business somewhere in my country would wonder why we would offer our hard-earned tax dollars to help those who will not reach the social consensus to help themselves.

But this requires a crackdown on tax havens and all those bankers, lawyers and accountants who make up the offshore world that deprives developing countries of the revenues that they desperately need. And I do mean, all of them. Clinton was right, therefore, to go on in the next section to stress the importance of developing countries improving their tax systems. I could not agree more, but she did need to say a little bit more about how they are prevented from doing so by the so-called professions who seek to undermine their revenues through the operation of tax havens.

Nonetheless, the conclusion is also welcome

Other institutions including the G-20, the IMF, the World Bank, and civil society organizations like Oxfam and Transparency International have lent their expertise as well. And all of these efforts are critical and they should continue, but in the end, success will depend on more than funding and sharing expert technical solutions. It will depend on building the political will to implement them. Any kind of change will take hard work, but these reforms will also take courage. Elected leaders will have to look their most powerful supporters right in the eye and tell them, “You need to pay your fair share for the good of your country.” Budget officials will have to make their decisions public, even if it subjects them to tough criticism. And tax collectors will have to speak out against bribery and corruption. In short, behind every success story, there will be a committed group of people who refuse to accept the status quo, who stand up to entrenched interests and take on tough reforms. Without this essential leadership, technical solutions will remain necessary but unfortunately insufficient.

There is a challenge in this for the OECD. There is an even bigger one for the International Accounting Standards Board. Both need to embrace country by country reporting. The European Union is taking the lead on this.

And the OECD also needs to embrace automatic information exchange, which is possible, and deliverable.

But this was a good speech, however looked at. For those of us that have worked for many years to find solutions to poverty in developing countries through improvement in transparency and taxation systems to beat corruption, so much of which is promoted by tax havens, this was a very welcome step forward and an endorsement for all that we have asked for.

Now it is time for the politicians to deliver.

Poorest countries lost $197 bn to illicit financial flows in a decade

Corruption, Development, Transfer Pricing 4 Responses »

May 132011

A United Nations Development Program (UNDP) commissioned report from Global Financial Integrity (GFI) (one of Tax Research LLP’s partners in the Task Force on Financial Integrity and Economic Development) on illicit financial flows from the Least Developed Countries (LDCs) was presented for discussion yesterday at the United Nations Conference on Least Developed Countries hosted by the Republic of Turkey.

Written by GFI Lead Economist Dev Kar, the report, Illicit Financial Flows from the Least Developed Countries: 1990-2008, examines how structural characteristics of Least Developed Countries could be facilitating the cross-border transfer of illicit funds, discusses methodological issues underlying estimates of illicit flows, presents an analysis of the magnitude of such flows, and makes policy recommendations for the curtailment of these illicit flows.

In her opening remarks for the UNDP Conference yesterday, UNDP Administrator Helen Clark said,

Illicit flows seriously impede LDCs’ efforts to raise resources for social and economic development. These flows are often absorbed into banks, tax havens, and offshore financial centers in developed countries.

Key findings of the report include:

Illicit flows divert resources needed for poverty alleviation and economic development.

Approximately US$197 billion flowed out of the 48 poorest developing countries and into mainly developed countries, on a net basis over the period 1990-2008.

The top ten exporters of illicit capital account for 63 percent of total outflows, while the top 20 account for nearly 83 percent.

Based on available data, African LDCs accounted for 69 percent of total illicit flows, followed by Asia (29 percent) and Latin America (2 percent).

Trade mispricing accounts for the bulk (65-70 percent) of illicit outflows from LDCs, and the propensity for mispricing has increased along with increasing external trade.

The top exporters of illicit capital (cumulative outflows) are:

Bangladesh, US$34.8 billion,
Angola, US$34.0 billion
Lesotho, US$16.8 billion
Chad , US$15.4 billion
Yemen, Republic of, US$12.0 billion
Nepal , US$9.1 billion
Uganda, US$8.8 billion
Myanmar, US$8.5 billion
Ethiopia, US$8.4 billion
Zambia, US$6.8 billion

The factors that drive illicit flows from LDCs may be broadly classified into three categories—macroeconomic, structural, and governance-related. It is likely that structural and governance issues are driving the bulk of illicit outflows, but this needs to be examined on a case-by-case basis.

The GFI report on LDCs was commissioned by UNDP as a contribution to the United Nations IV High Level Conference on the Least Developed Countries in 2011.

Floating a company subject to allegations of tax abuse is not good news

Development, Secrecy jurisdictions, Switzerland, Tax avoidance, Tax Havens 2 Responses »

Apr 152011

Glencore is to be floated on the stock exchange. The markets are going wild. Another Swiss recluse brings their shares to the market.

Glencore is, as the Guardian reports, subject to a complaint from five NGOs that have filed a complaint to the Organisation for Economic Co-operation and Development (OECD) against a Glencre subsidiary over allegations that a mine it owns inZambia may not be paying enough tax on its profits.

As the Guardian notes:

The organisations – the Centre for Trade Policy and Development (CTPD), in Zambia; Sherpa, a Paris-based non-profit organisation; Berne Declaration, a Swiss-based NGO; Mining Watch Canada; and L’Entraide Missionaire, also based in Canada – believe the operations of Mopani Copper Mines, in which Glencore has a 73% stake, may be at odds with OECD guidelines for multinational companies.

The complaint has been made to the OECD’s Swiss and Canadian national contact points, based on the findings of an audit report last year by accountants Grant Thornton and consulting firm Econ Pöyry into Mopani, commissioned for the Zambia Revenue Authority. The report, which was leaked, alledgedly identified a series of “problems” in Mopani’s figures related to costs and revenues.

The leaked report first emerged in February. At the time Glencore, which is based in Switzerland, refuted the allegations. In a statement to Christian Aid, a partner of CTPD, it said: “We refute the conclusions of this draft report and we question the reasons for the manner in which it was leaked. This draft report contains factual errors and inaccuracies. It is based on broad and flawed statistical analysis and assumptions.” It repeated its comments when approached by the Guardian on Thursday.

So be it, but the NGOs have a view too:

Savior Mwambwa, executive director of CTPD, said: “For me, the leaked report lends some support to Zambian civil society organisations’ claims that mining companies are depriving us of social and economic benefits which are rightly ours, through tax evasion and avoidance.”

He said he hoped the complaint would “prompt the Zambian government to do a financial audit of all mining companies, so that the Zambia Revenue Authority can update its assessments of the tax they owe. Donor countries such as the UK – which gave Zambia almost £50m in aid last year – should support our government in such an exercise”.

And as Christian Aid added:

David McNair, economic adviser at Christian Aid, said: “We hope that this complaint to the OECD will highlight the huge difficulties developing countries face in determining whether multinational companies are paying the correct amount of tax – and the urgent need for new accounting rules to help deter multinationals from artificially shifting their profits out of those countries.

“It is currently all too easy for companies to use financial secrecy to book their profits where they pay less tax. This is a massive problem for developing countries, which currently lose more to tax dodging by multinationals than they receive in aid.”

Christian Aid is campaigning for more financial transparency around the world and greater support for developing countries in challenging tax arrangements. It is also a member of the End Tax Haven Secrecy campaign, urging G20 to put the issue on the agenda of its meeting in November.

I’m delighted these agencies have made this point at this time.

It’s far too rare that the people of the developing world see the benefit of their natural resources. They seem to end up, far too often, in Switzerland, where Glencore is.

Odd that.

Do tax havens contribute to African poverty?

Corruption, Development, Secrecy jurisdictions, Tax Havens, Tax justice 4 Responses »

Apr 082011

I think you know my answer to that, but I wasn’t asking. Reuters were. As they put it:

Tax havens have been blamed (and lauded in some quarters) for many things. But a new book that is causing quite a stir says they are a key reason behind African poverty and underdevelopment.

“Treasure Islands: Tax Havens and the Men who Stole the World” by Nicholas Shaxson argues among other things that they are “deep drains of development.”

“Poverty in Africa cannot be understood without understanding the role of offshore. The world’s worst war for years has been the civil conflict in the Democratic Republic of Congo, which is tied in with the wholesale looting of its mineral resources via tax havens,” he writes.

As they add:

The broad brush — and this is a simplication of the overall argument — is that tax havens enable the flight of scarce capital from Africa to other regions, stunting the continent’s ability to develop on a range of fronts. Such havens inclue not only tropical destinations like the Cayman Islands but the City of London and the U.S. state of Delaware.

And global efforts to curtail them, a subject we have written on before, have been largely ineffective. Resource-rich countries are also, for a range of reasons, more prone to capital outflows to tax havens and other offshore institutions. And Africa is rich in resources.

Shaxson’s work is in many ways a counter-argument to the “aid is bad” consensus that is taking hold in some quarters.

A counter-argument that has been sorely needed.

Warmly endorsed and now published in USA too.

Why developing countries need a fair deal on tax

Country-by-country, Development Comments Off

Apr 042011

This article by Christian Aid was in the Guardian this weekend.I unashamedly repeat it here.

Developing countries lose an estimated $160bn (£98.5bn) every year ‚ more than the global aid budget ‚ as a result of tax dodging by some companies, according to Christian Aid. This means that for every £2 given in aid, £3 slips out through tax dodging by companies. It is money that could be used to build schools, roads and hospitals, and eventually help poor countries break free from dependency on aid.

Multinational companies need to be held accountable, says David McNair from Christian Aid’s economic justice programme. “If developing countries are able to collect a fair amount of tax from the companies operating within their borders, governments would, in theory, be able to pay for essential services,” he says. “For this to happen, accountancy laws need to be changed to make country-by-country tax reporting a legal requirement.

“Multinational companies are really good at finding new ways to make money. But some go to unethical, even illegal, lengths. By reporting just a fraction of the profits they make in poor countries, and hiding the true amounts offshore, these unscrupulous businesses reduce their tax bills ‚ and cost the developing world billions.”

While governments in countries that are members of the Organisation for Economic Co-‚Ääoperation and Development (OECD) tend to raise about 35% of their GDP in taxes, the record in developing countries is much lower, with an average of 16% in Latin America and Africa. For example, despite having one of the biggest economies in Central America, Guatemala collects little tax, so its social spending is very low. This is one of the reasons why it has such high levels of maternal mortality, illiteracy and child malnutrition.

Tax is fundamental to the development of poor countries, not only in generating revenues, but also because it has been shown to strengthen systematically the extent to which governments are accountable to their citizens. “If a government isn’t receiving revenue in tax from its own citizens, it has little incentive to act in their interests,” says McNair . “It is not only the amount but also the source of revenue that is important.

“Over-dependence on aid and natural resources has, in the past, led to governments being more accountable to aid donors than to citizens ‚ or not accountable at all.” In turn, people are more likely to engage in the political process ‚ demanding services and representation for their taxes.

In Bolivia, one of the poorest countries in South America, Christian Aid partner CEDLA contributed to a campaign that led to fairer taxation. In 2006 the vast majority of companies only paid 18% of the value of Bolivia’s oil and gas to the treasury. CEDLA produced information to raise understanding of the situation. Huge popular protests urged the government to increase oil and gas taxes. The government was forced to listen. Now multinational companies exploiting the country’s huge reserves of oil and gas are paying 50% in tax, helping fund enormous improvements in social welfare. The increased revenues mean that 2.4 million of Bolivia’s most vulnerable people are now receiving direct financial support, schoolchildren are able to buy books and everyone over the age of 60 gets a monthly pension.

One of the other things tax revenues pay for is free school breakfasts. Gabrielo Aro, from La Paz city council, says this is having a real impact on children’s health and concentration levels. “When we started, 37% of children had anaemia,” she says. “This has now dropped to 7.8%.”

Mauricio Corihuanca, an activist who took part in the campaign, adds: “If people are armed with the truth, they can achieve anything.”