David McNair, senior economic justice advisor at Christian Aid and a contributor to this blog, wrote a fantastic essay for politics.co.uk today, in which he highlights the disastrous ramifications posed by tax havens for developing countries and calls for the adoption of country-by-country reporting standards and automatic exchange of tax information.

McNair specifically notes that transfer mispricing alone (an illicit technique used by multinational corporations to evade paying taxes) costs developing countries $160 billion per year according to Christian Aid research. Indeed, the problem is likely even larger than this as Global Financial Integrity has published research demonstrating that developing countries lose roughly $1 trillion through illicit financial outflows, and multiple findings now demonstrate that the money flowing out of developing nations is 10 times larger than the total development aid being provided by Western world.  Needless to say: action needs to be taken to curtail these massive outflows.

From the article:

The levying of proper taxes would help developing countries provide the revenue needed to pay for public education, healthcare and infrastructure. Tax is also ultimately the best route towards ending poor countries’ dependency on overseas aid, which at this time of financial crisis is under pressure.

Current international accounting rules require multinational companies to report their accounts on a global consolidated basis. What this means is that no one – not government revenue departments, investors or civil society organisations trying to monitor the activities of big business – has a full picture of where taxable economic activity is occurring and where profits are declared. This, in turn, makes it easy for companies to shift money from countries where tax rates are high to low tax jurisdictions.

What can best be done about it? Requiring multinationals to publicly reveal how much profit they make, how many people they employ and what taxes they pay in every country where they do business would enable the worst abuses to be quickly identified.

This so-called country-by-country reporting, which has received public support from UK Treasury minister Stephen Timms, would help to identify companies declaring unexpectedly high or low profits in different jurisdictions, including recognised tax havens. This, in turn, would enable tax authorities to prioritise financial flows which need further investigation.

The International Accounting Standards Board is meeting today and has the power to put an end to this devastating practice and implement country-by-country reporting.  Let’s encourage the organization that was today given the Golden Palm award for “Greatest Potential for Reform” to do the right thing and help those individuals who cannot currently help themselves.  Let’s hope that next year we can present the IASB with an award highlightening their courageous decision to end the abuse of transfer pricing techniques.

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