Task Force on Financial Integrity and Economic Development » Resources

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.

OECD: Tax revenues stabilise in OECD countries in 2010

Task Force — Wed, 30 Nov 2011 21:46:15 +0000

OECD countries acknowledge that taxes must play a role in the process of fiscal consolidation as they battle unprecedented budget deficits. New OECD data in the annual Revenue Statistics publication show that the majority of OECD governments have stabilised their tax to GDP, with the average ratio moving up slightly from 33.8% in 2009 to 33.9% (1) in 2010. That’s still down from 34.6% in 2008 and well below the most recent high point of 2007 when tax to GDP ratios averaged 35.2%.

Total tax revenue as percentage of GDP, 2009
Countries have been ranked by their total tax revenue to GDP ratios

Source: Revenue Statistics,1965-2010, 2011 Edition.

Click here to access underlying data

The underlying message from these comparisons is complex, as changes in tax revenues reflect not only changes in economic activity but also policy measures.

In those European countries most affected by the financial crisis and subsequent recession there was an initial sharp fall in tax revenues, but then a small recovery in the tax to GDP ratio in 2010.

The data collected also show that in a period when all levels of government have seen pressure on expenditure and revenues, the average tax ratio for state, regional and local governments has remained steady since 2007 while that for central government has declined.

In the latest edition

Out of 30 OECD countries for which provisional 2010 figures are available, tax-to-GDP ratios rose in 17 and fell in 13.
Compared with 2007 pre-crisis tax to GDP ratios, the ratio in 2010 was still down more than 3 percentage points in six countries. In Spain it declined from 37.2% to 31.7% and in Iceland from 40.6 to 36.3%. Chile, Israel, New Zealand and the United States showed declines of 3-4 percentage points over the same period.
Historically, tax-to-GDP ratios rose during the 1990s and the highest ratio on record was 35.3%, in 2000. They fell back slightly between 2001 and 2004, but then rose again between 2005 and 2007 before falling back following the crisis.
The proportion of tax revenues accounted for by social security contributions rose from 25% to 27% between 2007 and 2009 whereas the shares of taxes on corporate income and capital gains fell from 11% to 8% over the same period. The shares of the other major tax categories were largely unchanged.
Denmark has the highest tax-to-GDP ratio among OECD countries (48.2% in 2010), followed by Sweden (45.8%).
Mexico (18.7% in 2010) and Chile (20.9%) have the lowest tax-to-GDP ratios among OECD countries. The United States has the third lowest ratio in the OECD region at 24.8% with Korea at 25.1% and Turkey at 26.0%.
The tax burden increased from 31.4% to 34% between 2007 and 2010 in Estonia. Two other countries; Luxembourg and Turkey showed increases of 1-2 percentage points over the same period.

To obtain a copy of Revenue Statistics please e-mail news.contact@oecd.org.

For further information please contact OECD’s Centre for Tax Policy, Jeffrey Owens at + 331 45 24 91 08 or Stephen Matthews at + 331 45 24 93 22.

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.

OECD: Proceeds from bribery can – and must- be accurately calculated in order to impose appropriate penalties, finds a joint OECD/StAR Study

EJ Fagan — Mon, 28 Nov 2011 15:04:37 +0000

Law enforcement must be able to impose appropriate penalties when companies bribe officials to win contracts or gain undue advantages. But calculating and confiscating the proceeds of this crime is difficult. To help governments meet this challenge, the OECD and the World Bank/UNODC Stolen Asset Recovery Initiative (StAR) released today a new study on the Identification and Quantification of the Proceeds of Bribery.

“Countries’ ability to seize and confiscate the gains from bribery is integral to the international fight against bribery and corruption, ” said Mark Pieth, Chair of the OECD Working Group on Bribery, made up of representatives from the Parties to the Anti-Bribery Convention. “It’s a requirement of all countries that join the OECD Anti-Bribery Convention and the UN Convention against Corruption.”

When a company pays a bribe to win a contract, the proceeds can only be confiscated if they are calculated accurately. So far, a small but growing number of courts have managed to apply methods to confiscate or recover the proceeds that companies and individuals have obtained by bribing officials.

The Identification and Quantification of the Proceeds of Bribery examines existing methods for calculating the gains made by companies that pay bribes. Drawing from cases in Indonesia, South Africa, the United States and others, it shows the most accurate methods for calculating gross and net profits, as well as what can be recovered within a particular legal regime.

“This report is important because it is the first one that categorizes the main methods used in calculating ill-gotten gains across different legal systems,” stressed Jean Pesme, StAR Coordinator. “In many countries, the idea of penalizing bribery is perceived as too complicated to be seriously pursued. This book lays out in practical terms, and for all potential scenarios, well established practices that can be followed by practitioners”. This report builds on these experiences to provide real-life examples to show how the proceeds of bribery can be calculated and recovered by governments.

The report can be accessed at: www.oecd.org/daf/nocorruption. For more information about StAR, please visit: www.worldbank.org/star.

About StAR
The Stolen Asset Recovery Initiative (StAR) is a partnership between the World Bank Group and the United Nations Office on Drugs and Crime that supports international efforts to end safe havens for corrupt funds. StAR works with developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets.

About the World Bank Group
The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which together form the World Bank; the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world. For more information, please visit www.worldbank.org, www.miga.org, andwww.ifc.org.

About the OECD Anti-Bribery Convention
The OECD groups 34 member countries committed to democracy and the market economy. It provides a forum in which governments can compare and exchange policy experiences, identify good practices and promote decisions and recommendations. The Organisation’s mission is essentially to work for a stronger, cleaner, fairer world economy.

The OECD is also home to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the first and only international instrument designed to tackle the supply side of bribery. The OECD Working Group on Bribery in International Business Transactions monitors the implementation of the OECD Anti-Bribery Convention by State Parties through a rigorous system of peer review. More information about the Anti-Bribery Convention is available online at:www.oecd.org/daf/nocorruption/convention
Contacts:

In Washington:
Beata Plonka
Phone: (202) 458-5991
E-mail: bplonka@worldbank.org

In Paris (OECD):
Mary Crane-Charef
Phone: (33)1 45 24 9704
E-mail: Mary.Crane-Charef@oecd.org

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.

G20 action on tax and development: A progress report card

Christian Aid — Mon, 14 Nov 2011 22:05:47 +0000

Back in September I was sitting in the salubrious office of an official from one of International Financial Institutions – when he slouched back in his chair, sighed and said ‘I can’t even bear to read those G20 communiqués – they are so vacuous.’ That evening, I found myself at a dinner hosted by DC law firm Jones Day where former Mexican President Zedillo branded the G20 ‘a disappointment.’

But last week Christian Aid welcomed the G20′s bold pronouncements on tax havens, financial transparency and development. President Sarkozy went as far as to say that havens that didn’t comply would be excluded from the international community. A whole programme of work on tax and development was agreed.

This was a major coup for organisations like Christian Aid and the Tax Justice Network that just three years ago were struggling to garner political support for these issues.

But haven’t we been here before? Back in 2009, the G20 declared ‘the era of banking secrecy is over.’ Yet this year the UK and Germany agreed to deals with Switzerland in lieu of tax from offshore account holders. Why didn’t the UK and Germany just get the information and pursue these individuals for what they owe? Banking secrecy, of course. It is alive and well. These deals, branded a disgrace by Christian Aid, were applauded by the Swiss bankers association for preserving their treasured ‘privacy’; read secrecy.

Meanwhile, the G20’s development working group took forward a piece of work on Domestic Resource Mobilisation – helping developing countries to raise their own taxes.

Of course the G20′s role is high level political statements and policy coordination. We shouldn’t expect it to deliver the world. But has it delivered anything?

Of course NGOs are always going to push for more. But are the G20 even following the advice they have requested from international experts? Last year the G20 asked intergovernmental organisations and international financial institutions to write a report. And the report is pretty good. It makes recommendations on exchange of information, transfer pricing, compliance of multinationals and capacity building for tax administrations – all important issues which we have been pushing.

Our scorecard compares the recommendations made, with what the G20 actually delivered. The scores that we attribute to the G20 simply evaluate their response to that expert opinion.

On this objective analysis of tax issues, the G20’s welcome political commitment has been translated to decisive action on only one of twelve suggested actions, while some tentative progress has been made on only three other issues.

‘Passes’

The G20 has urged Multinationals to improve transparency and full compliance with applicable tax laws. This sends a strong political message to Multinationals that tax dodging is no longer OK in developing countries and provides civil society and governments with the political backing to stand up to companies.

‘Could do better’

The G20 agreed on strong support for capacity building for designing and efficient managing of tax administrations and revenue systems. But they failed to commit any finance to make this a reality.

All G20 countries agreed to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters – a tool to facilitate exchange of tax information – and have offered to exchange information automatically, although only on a voluntary basis. While this sends a strong signal that the crackdown on tax evasion is a priority, loopholes and caveats within the agreement mean that it could remain ineffective. We need evidence that this agreement is actually working and that secrecy jurisdictions will be strongly invited to participate before we know whether it is worth developing countries signing on. And of course, without tax havens signing on, it remains of limited value.

The G20 has encouraged International Organisations to strengthen their programmes to assist developing countries diagnose their transfer pricing legislative needs and adopt, and then effectively implement, transfer pricing rules. This is clearly something that many developing countries want and need in order to challenge the abusive transfer pricing which costs billions in lost revenue every year. But the G20 failed to commit any resources to this.

‘Failures’

The G20’s major opportunity lay in pressurising tax havens to share information with developing countries to live up to its 2009 commitments. This is a missed opportunity for the world’s leaders to take a leadership position and ensure that their commitment to ending banking secrecy is delivered.

The International Organisations suggested that the G20 look into the feasibility of making further improvements to the transparency in reporting tax information by MNEs taking into account existing regulatory proposals for the extractive industry developed by the US and EU. Yet the G20 failed to make recommendations on as issue which is already law in one G20 country and is likely to be implemented in many others across the EU very soon.

Similarly the report recommended that G20 countries disclose information on tax exemptions in their own countries thus showing a leadership position on transparency – a crucial tenet of tax reform – but this proved too difficult for the G20.

Finally, the International Organisations recommended G20 countries undertake an analysis of the impact of G20 countries’ tax policies on other countries. This is particularly relevant because corporate tax reform – such as the UK’s review of its controlled foreign company rules- could have a significant impact on developing countries by increasing the incentive for UK companies to shift taxable profits offshore. But again the G20 failed to act.

Next steps?

Not a great score this time – but the political momentum generated should not be underestimated. To have the G20 recognise the harmful impact of illicit capital flight and the importance of tax for development is a significant coup. Civil Society Organisations will keep pushing G20 countries to deliver on their commitments with concrete supporting actions. So as the road to Mexico begins, we shouldn’t be surprised if the voice of civil society and governments in both the North and the South becomes much stronger.