False Profits: Christian Aid nails the charges to the door

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It’s a busy morning for publishing. Christian Aid has a new report out today that reveals in detail by country and trade sector, how much non-EU countries are loosing to the EU, US, UK, and Ireland as a result of trade mispricing.

In Death and Taxes: the true toll of tax dodging (May 2008) Christian Aid showed the importance of tax to development, and the international obstacles caused by a lack of transparency in corporate accounting and secrecy jurisdictions (tax havens).

In The Morning After the Night Before (November 2008), Christian Aid showed how the same lack of financial transparency underpinned the crisis, and how that was hitting developing countries hardest.

Now in False Profits: robbing the poor to keep the rich tax free, Christian Aid uses the most robust, peer-reviewed academic methodology and the most comprehensive trade dataset to show just how much developing countries are losing to tax abuse. What this shows is that the developing country members of the G20 lose billions on their trade with the other members.

As the report says:

In this report, we quantify for the first time the damage done to individual countries by trade mispricing. It’s massive.

We commissioned international trade pricing expert Simon Pak, president of the Trade Research Institute and associate professor at Penn State University in the US, to analyse EU and US trade data and estimate the amount of capital shifted from non-EU countries into the EU, the US, the UK and Ireland through bilateral trade mispricing.

Professor Pak, who has advised US Congress on this issue, analysed bilateral trade in every product between 2005 and 2007, calculated the parameters of the normal price range for products traded between countries, and estimated the amount of capital shifted by trades that are outside that normal price range.

The totals he arrived at included prices that had either been artificially depressed or artificially inflated for tax purposes. Some of the prices, he warns, would primarily have been doctored for money-laundering or capital flight purposes, but even in those cases, there would have been a tax consequence. His findings are also based on the assumption that the data analysed was free from reporting error.

In spite of the enormous sums Professor Pak’s research exposes, they are just the tip of the iceberg. For he could only analyse publicly available trading data. Information held by tax havens, whose stock in trade is banking secrecy, would, if known, reveal a far more serious picture. Such jurisdictions are favoured by many multinational corporations.

And what is that enormous figure?

Between 2005 and 2007, the total amount of capital flow from bilateral trade mispricing into the EU and the US alone from non-EU countries is estimated conservatively at more than £581.4bn (€850.1bn, US$1.1tn). It breaks down specifically to £229.7bn (€335.8bn, US$441.2bn) into the EU countries and £351.7bn (€514.3bn, US$673.6bn) into the US. All conversion rates in this report are calculated at the average inter-bank rate for the year in question ‚Äî the most accurate measure available.

If tax was levied on this capital at current rates, non-EU countries could have raised £190.8bn in revenue (€279.0bn, US$365.4bn) between 2005-2007, or £63.6bn (€93.0bn, US$121.8bn) per year.

Among the low-income countries, the biggest tax losses between 2005 and 2007 lay in Nigeria (£502m), Pakistan (£305m), Vietnam (£251m) and Bangladesh (£186m).

The cost is, of course, much more than the funds required to achieve the Millennium Development Goals. What do they recommend to deal with this?:

 

• The introduction of a requirement that businesses operating transnationally must reveal publicly how much profit they make, how many people they employ and what they pay in tax in every country where they do business. That way abuses can be identified quickly. Such country-by-country reporting would show if a company was declaring unexpectedly high or low profits in different jurisdictions, including recognised tax havens. This would enable developing-country tax authorities to prioritise which financial flows need further investigation.
• Strong global rules to enable developing countries to determine whether they have been paid the right amount of tax, in the right place, at the right time. The rules would require all states to exchange automatically the information they hold from companies and individuals. Compliance would be evaluated objectively, with sanctions against states that refuse to part with the information.

Country by country reporting can transform the well-being of the world’s poor. The argument is beyond dispute.

So why isn’t the profession calling for it? Tell me someone from KPMG, PWC, E&Y, Deloittes because in the meantime I’m saying those deaths are at least partly your responsibility.