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.

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.

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”.

1. Losses caused by corruption and tax evasion are powerful examples of how criminal activities can potentially have tremendous negative effects on economic development.
2. 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.
3. 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.

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.

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.

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.

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.

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.

Following the restructuring of the Global Forum, a program of indepth peer reviews was launched in 2010. This 2011 Report on Progress publication describes the progress made since the Global Forum launched its peer review mechanism in 2010.

To date, 59 Phase 1 and Combined reports have been published complemented by seven supplementary reports covering more than half of the Global Forum members. All peer review reports can be accessed through the EOI Portal: www.eoi-tax.org. The EOI Portal contains all the latest information on the Global Forum member jurisdictions, including information on the peer reviews and any recommendations for improvements made, news on what actions have been taken to address deficiencies and comprehensive information on jurisdictions’ exchange of information agreements.

The Global Forum reported the findings of the peer review reports to the G20 Leaders at their Cannes Summit on 3-4 November 2011 and, in particular, the quality of cooperation with the Global Forum, the level of compliance and the unresolved deficiencies. The Progress Report
to the G20 is presented in Part II of this publication after a brief introduction of the Global Forum and its Secretariat (Part I). In addition, Part III includes the report that the G20 also asked for in the context of the G20 Multi-Year Action Plan on Development. Finally, this 2011 Report on Progress includes the statements of outcomes of the two Global Forum meetings held in 2011 (in Bermuda and France).

IFC wants to “create opportunity for people to escape poverty and improve their lives” through private-sector development in poor countries. Oil, gas and mining companies are among those receiving support from IFC. For each project IFC mentioned, the generation of revenues for government in the form of royalties and taxes” are expected as a development outcome. It estimates that authorities in developing countries received 7 billion US dollars from IFC-supported extractives projects in 2009.

This report shed light on the methods IFC’s clients in the extractive sector applied in lowering their tax payment to authorities in the developing countires. A new method is used to categorise and analyse the corporate structure behind each of IFC’s extractive- projects on the basis of tax-planning theory related to foreign direct investments (FDI).

Read the full report here