According to an upcoming report that estimates the magnitude of illicit money leaving developing countries, the Philippines lost US$142 billion between 2000 and 2009.  The amount of illicit money that left the economy puts the Philippines in the top 15 countries in outflows during the period.  The report, titled Illicit Financial Flows from Developing Countries Over the Decade ending 2009, will be published by Washington, DC-based research group Global Financial Integrity on December 15.

The study found that the majority of the illicit outflow, US$113.7 billion, is due to the mispricing of imported and exported goods. Trade mispricing is a phenomenon where individuals and corporations use fraudulent commercial invoices to smuggle money out of the country, usually in order to facilitate tax evasion. A large corporation or very wealthy individual in the Philippines will trade with a counterpart in another country, but will manipulate the price and quantity of exported goods to send more money offshore than represented by what they report to the government. The individual or corporation then collects the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

This means that while the Philippines has seen significant outflows from corruption, bribery, and kickbacks, their biggest priority when addressing illicit capital flight should be to tackle trade-related tax evasion. Tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share. We believe that the very real cost in human suffering and loss of life from tax evasion in the Philippines, and elsewhere throughout the developing world, is massive.

The Philippines is a country with enormous economic potential. It has a high literacy rate and significant economic growth over the past decade. However, growth failed to keep pace with many of the Philippines’ neighbors. To make matters worse, much of the economic gain in the country has gone to relatively few people.  Income inequality in the Philippines, as measured by a Gini index of 45.8, ranks among the worst in the region. These same wealthy Philippine citizens are the ones who are likely using trade mispricing to move money out of the country. This helps explain why despite economic growth, tax revenue as a percentage of GDP has been declining since 1990.

Unfortunately, the Philippines cannot solve their tax evasion problem alone. The shadow financial system that facilitates tax evasion is international in nature. Corporations and individuals use a combination of tax havens and loose accounting practices to hide money abroad. The international community, namely the G20 countries, needs to support new transparency measures such as country-by-country reporting so that multinational corporations will report revenues and costs for their network of subsidiaries in each individual country. This will help Philippine authorities effectively tax multinationals.  Concrete steps must also be taken to establish a worldwide system of automatic tax information exchange so that the Philippine tax authorities can effectively track their citizens who keep their money abroad. These reforms will help the country reverse trends of declining revenue, and provide the public services necessary to fulfill its enormous potential.

Editorial Note: Thursday, December 15th, Global Financial Integrity will release its new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” measuring illicit financial flows out of 160 different developing countries.  Revealing more data from the upcoming report, Ms. Freitas has written three other blog posts highlighting illicit financial outflows from Russia,EthiopiaandSyria.Sign up here to receive notices when new GFI reports are released.

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