Task Force on Financial Integrity and Economic Development » Document

The End of Banking Secrecy? An Evaluation of the G20 Tax Haven Crackdown

EJ Fagan — Mon, 23 Jan 2012 21:36:33 +0000

In August 2009, France and Switzerland amended their tax treaty. The new treaty stated that the two countries would from now on exchange upon request all information necessary for tax enforcement, including bank information otherwise protected by Swiss bank secrecy laws. In the following months, one of France’s richest persons and her wealth manager were taped discussing what to do with two undeclared Swiss bank accounts, worth $160 millions. After a visit to Switzerland, the wealth manager concluded that keeping the funds in Swiss banks or bringing them back to France would be too risky. He suggested that the funds be transferred to Hong-Kong, Singapore, or Uruguay, three tax havens which had not committed to exchange information with France. After the tapes were made public, they were widely commented in French newspapers and eventually the funds were repatriated to France.

The amendment to the French-Swiss tax treaty was part of a global initiative to combat tax evasion. Since the end of the 1990s, the OECD has encouraged tax havens to exchange information with other countries on the basis of bilateral tax treaties, but until
2008 most tax havens declined to sign such treaties. During the ﬁnancial crisis, the ﬁght against tax evasion became a political priority in rich countries and the pressure on tax havens mounted. At the summit held in April 2009, G20 countries urged tax havens to sign at least 12 treaties under the threat of economic sanctions. Between the summit and the end of 2009, tax havens signed more than 300 treaties. This is the largest coordinated action against tax evasion the world has ever seen.

The eﬀectiveness of the G20 tax haven crackdown is highly contested. A positive view asserts that treaties signiﬁcantly raise the probability of detecting tax evasion and greatly improve tax collection (OECD, 2011). According to policy makers, “the era of bank secrecy is over” (G20, 2009). A negative view, on the contrary, asserts that the G20 initiative leaves considerable scope for bank secrecy and brings negligible beneﬁts (Shaxson and Christensen, 2011). Whether the positive or the negative view is closer to reality is the question we address in this paper.

Brookings: Foresight Africa, Top Priorities for the Continent in 2012

Task Force — Wed, 11 Jan 2012 22:32:56 +0000

This past year, Africa and the rest of the world witnessed many significant events that have created consequential challenges for the future of Africa and the global economy. Most notably, these included the economic slowdown in Europe and the United States, the Arab Spring in the Middle East and North Africa, instability and unrest in a number of Sub-Saharan African countries, and severe drought and famine in the Horn of Africa. While 2011 has certainly proven to be difficult for Africa and other regions, there were also developments that have helped many African countries manage the negative impacts of these challenges. These developments included: high commodity prices, which helped boost trade returns in Africa’s commodity-rich countries; economic and governance reforms in several African states, which helped strengthen democratic rights and improve livelihoods; and a deepening of regional integration efforts, which helped stimulate growth across the continent.

Looking at 2012, experts from the Brookings Africa Growth Initiative (AGI) and colleagues from think tanks based in the region have come together to produce this year’s issue of Foresight Africa, where they outline the top priorities for the continent for 2012 and beyond. AGI scholars assess what they see as the major challenges for Africa in the coming year and provide policy recommendations on how to manage these challenges and leverage opportunities to catalyze and reignite growth in 2012. Similarly, AGI and its partner think tanks identify country-specific challenges in Nigeria, South Africa, Senegal and Kenya.

World Bank: How corruption and tax evasion distort development

Task Force — Tue, 06 Dec 2011 18:28:26 +0000

When it comes to confronting the issue of ill-gotten money (through corruption or tax evasion, for example) and its negative impact on development outcomes, we development professionals have often been guilty of tinkering at the edges of the problem, while avoiding confronting its root cause. Through recent work, we are attempting to rectify this dilemma.

In a study conducted between November 2010 and February 2011 on ill-gotten money and the economy, the Financial Integrity team looked at the experiences of Malawi and Namibia. We approached the project with an open mind and without any assumptions, finding that for Malawi, corruption and tax evasion as a percentage of GDP represent a significant drag on economic development. Corruption is estimated at 5% of GDP and tax evasion, at a whopping 8-12% of GDP. Meanwhile, we estimated that tax revenue actually collected by the Malawi Revenue Authority is only 22% of GDP. Thus, if the national tax authority had successfully collected all the taxes it was due, government revenue would increase by 50 percent. This is approximately about how much Malawi receives in foreign aid (11.7 percent of GDP). As one Malawi Revenue official stated when being interviewed during the study: “if we collected all the taxes, we will then not have to depend on foreign aid”.

The Namibian tax evasion situation is no better, as uncollected taxes are equivalent to about 9% of the GDP. This is larger than education’s share of the economy and almost as large as the mining sector—which generates most of the country’s export income. What makes things worse is that Namibia suffers from the highest income inequality in the world: The Gini co-efficient, which measures the gap between rich and poor, is estimated at 70.7. Tax evasion siphons away money that could be invested in productive resources needed to diversify the economy and address urgent social problems.

Furthermore, the revenue lost through corruption and tax evasion represents a diversion (“leakage”) of financial resources away from the national budget toward private spending. And these private expenses or expenditures have much lower “multiplier effects” than expenditures on, for example, agricultural fertilizers, education, health, and infrastructure.

There are four key things that practitioners can take away from the new World Bank study “Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia”.

Losses caused by corruption and tax evasion are powerful examples of how criminal activities can potentially have tremendous negative effects on economic development.
Ill-gotten money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few.
Policymakers in governments and development institutions such as the World Bank cannot afford to ignore issues that stand in the way of achieving economic progress, because it means that many people remain in poverty. So, in the case of Malawi and Namibia, addressing corruption and tax evasion should be part of a continuing dialogue with the two governments in our engagement with policymakers.

The study confirms the importance for developing countries to adopt, for their own benefit, customized legal regimes and institutions to go after dirty money. The regimes should reflect local political, economic and social contexts.

As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or a bloated public sector—is our responsibility. No matter how contentious or uncomfortable it may be, we should avoid ignoring this “elephant in the room” and not look the other way when we know that any of these big issues are affecting a client country. We should explore initiatives that target the root of the problem—helping governments implement solutions to critical problems like tax evasion in the short-term, and exploring behavior-changing programs by educating youth on the perils of corruption in the longer term. We hope that policy makers will take our findings into account and do the same.

Transparency International: 2011 Corruption Perceptions Index Released

Transparency International — Thu, 01 Dec 2011 17:08:43 +0000

BERLIN – Corruption continues to plague too many countries around the world, according to Transparency International’s 2011 Corruption Perceptions Index released today. It shows some governments failing to protect citizens from corruption, be it abuse of public resources, bribery or secretive decision-making.

Transparency International warned that protests around the world, often fueled by corruption and economic instability, clearly show citizens feel their leaders and public institutions are neither transparent nor accountable enough.

“This year we have seen corruption on protestors’ banners be they rich or poor. Whether in a Europe hit by debt crisis or an Arab world starting a new political era, leaders must heed the demands for better government,” said Huguette Labelle, Chair of Transparency International.

Corruption Perceptions Index 2011: The Results

The index scores 183 countries and territories from 0 (highly corrupt) to 10 (very clean) based on perceived levels of public sector corruption. It uses data from 17 surveys that look at factors such as enforcement of anti-corruption laws, access to information and conflicts of interest.

Two thirds of ranked countries score less than 5.

New Zealand ranks first, followed by Finland and Denmark. Somalia and North Korea (included in the index for the first time), are last.

“2011 saw the movement for greater transparency take on irresistible momentum, as citizens around the world demand accountability from their governments. High-scoring countries show that over time efforts to improve transparency can, if sustained, be successful and benefit their people,” said Transparency International Managing Director, Cobus de Swardt.

Most Arab Spring countries rank in the lower half of the index, scoring below 4. Before the Arab Spring, a Transparency International report on the region warned that nepotism, bribery and patronage were so deeply engrained in daily life that even existing anti-corruption laws had little impact.

Eurozone countries suffering debt crises, partly because of public authorities’ failure to tackle the bribery and tax evasion that are key drivers of debt crisis, are among the lowest-scoring EU countries.

Contact:

Transparency International
Press Office
Berlin, Germany
T. (+49) 030 3438 20 666
E. press@transparency.org

TJN: The Cost of Tax Abuse

Tax Justice Network — Tue, 29 Nov 2011 14:30:03 +0000

Tax evasion is the illegal non-payment of tax to the government of a jurisdiction to which it is owed by a person, a company, trust, or other organisation who should be a taxpayer in that place.

It is largely people’s desire to to evade taxes that creates most of the so called ‘shadow economy’ that is hidden from officialdom’s view to make sure that tax is not paid.

In this report, we first estimate the absolute size of a country’s shadow economy based on its own published estimate of its GDP and recently-reported data on the size of shadow economies published by the world bank. This, and other data we use, is what we think the best currently available for the purpose of this report and, as such, should provide the best estimates possible.

By the definition used here, economic activity in the shadow economy of a country will be tax-evading. So we next calculate an estimate of the amount of tax lost as a result of the existence of that shadow economy. We do this by looking at how much taxes are on average in the state as a share of GDP, and then apply the same tax share to the shadow economy, to reveal our estimates of lost taxes by state. We then compare these lost taxes to health care spending in each country surveyed. This data has also been compared by continent.

Huge Cost of Tax Evasion Revealed as Campaign to Tackle Tax Havens Launches

Tax Justice Network — Fri, 25 Nov 2011 15:11:11 +0000

New research published by the Tax Justice Network shows that tax evasion costs 145 countries, representing over 98% of world GDP, more than US$3.1 trillion annually.

In the UK for instance, a staggering £69.9 billion a year is lost to tax evasion in the ‘shadow economy’ – that is, 56% of the country’s total healthcare spend.

Tax havens are a major part of the tax evasion problem – and these new findings come as the Tax Justice Network launches Tackle Tax Havens, a new campaign aimed at the general public that highlights the critical role that these secretive states play in corrupting the global economy.

The issue of tax collection is rising fast up the political and social agenda, as countries across the world make deep cuts in public spending and increase taxes in ways that hurt the poor and the middle classes the most.

This new research demonstrates how important it is to tackle tax evasion and the tax havens that help wealthy individuals and organisations escape from contributing to the services that directly benefit them – from the health and education systems that support their workforces, to the roads that ship their goods to markets, to the courts of law that enforce their contracts or to the police who protect their property.

But tax havens are not just about tax: they cause colossal damage on many fronts. Tackle Tax Havens aims to arm the general public with a solid working knowledge of the offshore system and the problems it causes — and to show what we can do about it.

Other key findings of the new report include:

Europe as a whole loses the equivalent of 87% of its total healthcare budget to tax evasion, while Africa loses 98% and South America 139%
Over the 145 countries surveyed, an unweighted average of 110% of the annual healthcare budget was lost to tax evasion
119 of the 145 countries surveyed are losing over half of their healthcare budget to tax evasion
In 67 countries, tax evasion losses are larger than their entire health budgets
In Bolivia, tax evasion is more than four times as large as that oil rich country’s health spending. In Russia, it is more than three times the size
More than $1 in every $6 earned in the world is not subject to tax because those earning it have deliberately ensured that their income is hidden from the world’s tax authorities
In Greece and Italy, where economic collapse currently looks possible, more than €1 in €4 is hidden in the shadow economy

Quotes:

John Christensen, Director of the Tax Justice Network:

“Tackling tax havens is a crucial part of ending the culture of tax evasion. Tax evasion is crippling public finances across the world but governments aren’t doing nearly enough to end this cancer.”

“Tax havens are engaged in economic warfare against the tax regimes of sovereign countries, and these estimates reveal the human cost in terms of the impact on health services.”

Richard Murphy of Tax Research UK, who undertook the research for the Tax Justice Network:

“New data from the World Bank published last year on the size of countries’ shadow economies let us prepare this estimate of tax lost to criminal tax evasion annually. The findings add a new policy agenda to public debate on the world’s financial crisis. For example, Italy loses €183 billion to tax evasion a year. Its current debt of €1.9 trillion represents just over 10 years tax of tax evasion on this basis. If only more had been done to tackle rampant tax evasion, Europe would not be facing a crisis today.”

“Tax havens can be beaten using three simple measures. First we demand that all tax havens put details of the ownership of all companies and trusts located there, and the accounts of those organisations, on public record. Second we demand that all multinational companies publish accounts that reveal their use of tax havens. Last, we believe that all tax havens should be required to exchange information each year on the income recorded within them belonging to the citizens of other countries with the places where those people really live.”

“These measures would shatter the secrecy of tax havens for good, and that means those committing tax crimes will no longer have places to hide the proceeds of their crimes. Nothing could make a bigger contribution than this to solving the world’s financial crisis right now.”

Please note:

Tackle Tax Havens website: www.tackletaxhavens.com
Campaign video: http://www.youtube.com/watch?v=4d5FZU64Bnw
Twitter: @tackletaxhavens
Facebook: www.facebook.com/tackletaxhavens
Download full research findings and methodology: http://www.tackletaxhavens.com/Cost_of_Tax_Abuse_TJN_Research_23rd_Nov_2011.pdf
To discuss the research findings please contact Richard Murphy of Tax Research UK who undertook the research on behalf of the Tax Justice Network richard.murphy@taxresearch.org.uk / +447775 521 797
All other enquiries: please contact rich@taxjustice.net / +447968 082 921

Exposing the lost billions: How financial transparency by multinationals on a country by country basis can aid development

Eurodad — Wed, 23 Nov 2011 16:16:28 +0000

The international community has repeatedly stressed the need to mobilise domestic resources in developing countries, as the most sustainable way of financing development and ending aid dependency. Yet, many developing countries are affected by a number of challenges that limit their capacity to collect taxes. One such challenge is multinational companies’ lack of accountability regarding their operations and more specifically regarding the taxes they pay. This report explains how the cross border nature of multinational companies’ operations combined with the absence of adequate transparency regulations have very damaging implications for a country’s ability to mobilise domestic resources. Although this is relevant for both developed and developing countries, the report focuses on the impacts for developing countries, which have weaker capacities to face this challenge.

Section 2 of the report describes the problem of illicit financial flows with a specific focus on those stemming from tax dodging by multinational companies (MNCs) which account for more than half of the total estimated illicit financial flows from developing countries. Companies use subsidiaries located in tax havens in order to dismantle the added value they are producing, concentrating their profits in tax havens and current accounting rules allow them to obscure this.

Section 3 of the report analyses the existing regulatory framework for MNCs financial transparency. It explains current regulatory initiatives on country-by-country reporting in the extractive sector such as the Extractive Industries Transparency Initiative (EITI), and the recent stock exchange reporting regulations in the US and in Hong Kong. It explains why the civil society proposal for full country-by-country reporting, contributes to addressing tax dodging by MNCs, which the current regulatory initiatives fail to do.

Section 4 focuses on the European agenda, it shows that implementing ambitious standards is a matter of political will. The review of the transparency and the accounting directives in 2011 and 2012 provide a unique opportunity to make real progress by proposing ambitious measures on country-by-country disclosure requirements for European companies. The European Union also has a key role to play by pushing this within the G20, OECD and International Accounting Standards Board (IASB). Section 5 outlines civil society’s proposal for a truly effective country-by-country reporting that would contribute to address MNC tax dodging. Section 6 shows that such country-by-country reporting is feasible and is also desirable for a wide range of stakeholders including CSOs, tax administrations and investors. It provides statements from investors arguing in favour of this disclosure.

Part 2 of the report develops in detail two case studies of companies operating in developing countries the brewery SABMiller, operating in Ghana and Swiss mining company Glencore operating in Zambia. These examples show how country-by-country reporting would have enabled the identification of illegal and ethically questionable tax practices that deprive developing countries of much needed tax revenues.

Informe Anual de la Conferencia 2011 (En Espanol)

EJ Fagan — Mon, 21 Nov 2011 20:47:15 +0000

Los días 6 y 7 de octubre de 2011, con motivo de la tercera conferencia anual del Grupo de trabajo sobre integridad financiera y desarrollo económico (en adelante, Grupo de trabajo) se reunieron en parís, Francia, representantes de la sociedad civil, gobiernos, políticos, académicos, periodistas y el sector privado.

La conferencia del Grupo de trabajo consistió en dos días de presentaciones, mesas redondas y sesiones paralelas que se centraron en las acciones que se pueden adoptar para que el sistema financiero mundial sea más transparente y responsable. los debates giraron en torno a las cinco recomendaciones del Grupo de trabajo para promover una mayor transparencia en beneficio de los países en desarrollo y, cada vez más, los países desarrollados:

Intercambio automático de información fiscal
Restricción de la facturación fraudulenta
Información por país de los beneficios e impuestos pagados por las empresas multinacionales
Publicación de los usufructuarios de las cuentas financieras
Armonización de los delitos subyacentes de la legislación contra el blanqueo de capital

En un esfuerzo por favorecer un intercambio productivo de ideas, las sesiones paralelas profundizaron en temas concretos relacionados con la transparencia y el desarrollo. Dichas sesiones contaron con la participación de expertos en: el Grupo de trabajo de acción financiera (FaTF, por sus siglas en inglés), inversión socialmente responsable, el índice 2011 de secretismo financiero de Tax Justice network, la elaboración de mensajes para medios de comunicación, la primavera Árabe, desigualdad y derechos humanos, y el contrabando de bienes y servicios prohibidos.

la conferencia contó con un grupo de expertos oradores, que debatieron los temas en gran profundidad. los ponentes de este año incluyeron a Ingrid Fiskaa, del ministerio de asuntos Exteriores de noruega, Jon lomøy, de la organización para la cooperación y el Desarrollo Económico, Jeffrey sachs, de la universidad de columbia, philippe meunier, del ministerio de asuntos Extranjeros y Europeos de Francia, y abdalla Hamdok, de la comisión Económica de las naciones unidas para África.

CMI: Extractive sectors and illicit financial flows: What role for revenue governance initiatives?

Task Force — Mon, 21 Nov 2011 15:07:19 +0000

Most countries do not reap the full benefits from their wealth in natural resources. One of the major causes is illicit financial flows (IFF), that is, money that ends up benefiting local and foreign elites rather than the general population. Much of this money is generated by corruption, illegal resource exploitation, and tax evasion.

There are currently at least a dozen international initiatives that seek to curb IFF. One of the most prominent is the Extractive Industries Transparency Initiative, focusing on financial flows between companies and governments. Individual countries have also taken measures. For example, one recent case resulted in a US$1.2 billion settlement between US authorities and oil and gas service companies accused of corruption in construction of a liquefied natural gas plant in Nigeria. Recently, given high commodity prices and record profits by resource companies, frustration with this issue has been growing—not only among the public in producing countries, but also among donor countries concerned with improving public finances in the midst of economic crisis.

This U4 Issue Paper looks at the potential of these initiatives to reduce illicit financial flows from extractive sectors, particularly those initiatives that target resource revenue governance. Section 2 provides a brief overview of resource governance challenges and the nature of illicit financial flows in extractive sectors, highlighting consequences for development in poor countries. Section 3 summarises international initiatives to improve resource revenue governance, focusing on information disclosure and certification. It also discusses their comparative achievements and factors for success. Section 4 sums up the potential for these initiatives and suggests priorities within them as well as the possible need for additional actions.

Tax Justice Network: Building a Fair, Transparent and Inclusive Tax System in Sierra Leone

Tax Justice Network — Thu, 17 Nov 2011 16:50:14 +0000

This report is part of an initiative to create a comprehensive, and globally representative series of country reports that touch on diverse tax justice issues. The production of this report is the collective effort of all of the organisations involved.

The Tax Justice Network promotes transparency in international finance and opposes secrecy. TJN was initiated at in 2002, and is dedicated to high-level research, analysis and advocacy in the field of tax and regulation. Tax Justice Network Africa was launched in 2007 with the aim of bringing tax issues to the foreground of the broader development agenda. We work to map, analyse and explain the role of taxation and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens.

The Budget Advocacy Network (BAN) is a network of CSOs who believe in rights-based approaches to development, promoting pro-poor, inclusive, gender-sensitive and equitable generation and use of national resources through research, analysis, social mobilization and advocacy. BAN has conducted an analysis of policies and financial statements of the 2008-09 Budgets, completed a study on District Budget Oversight Committees, developed the ability to track the flow of resources in the health sector, and cultivated strategic relationship with oversight bodies.

The National Advocacy Coalition on Extractives (NACE) is a coalition of leading national and international non-governmental organisations . NACE envisions a Sierra Leone society where there is a maximum return and benefits from natural resources endowments (mining, forestry, marine). NACE advocates for the implementation of the extractive industry transparency initiative (EITI), empowering CSOs and building a critical mass of local activists to engage on government and mining companies policies and practices. As a national platform for policy dialogue on extractive issues, NACE has established a solid reputation on engaging with mining contracts reviews, influencing mining legislations and policies and publishes evidence-based research report to inform mining policies reviews for change.

The report itself draws on months of research conducted in June- July 2010 by Wilson Prichard and Samuel Jibao. The report was written by Wilson with enormous contributions from Samuel Jibao, Amadu Sidi Bah and Kadi Julia Jumu. We owe a debt of gratitude to all those who contributed their time and knowledge to this report. Finally special thanks are due to former Coordinator of BAN, Mr. Patrick Zombo, NACE coordinator, Cecilia Christiana Mattia for their valuable contributions and ideas that enriched the contents of the report. Our thanks also go to the Mr. Tijani Hamza, Ibis Country programme director and to Mr. Mark Curtis whose work on the mining sector provided significant data for the report. We would like to acknowledge the support provided by the Integrated Public Financial Management Reform Project Unit, the National Revenue Authority, the Ministry of Finance and the host of civil society organisations that participated actively during the validation exercise of the report. We also acknowledge with thanks that this report is produced with funding support from Christian Aid UK, Ibis, UK Department for International Development (DfID) and Tax Justice Network- Africa and Trust Africa.