A taxing agenda for the IMF

1 April 2008

By Alex Wilks and Marta Ruiz, Eurodad

The irony of the IMF giving a passing grade to Liechentstein on money laundering in the same month that Germany launches a massive investigation into tax evasion based in the Alpine country shows that the Fund has a lot of work to do if it wants to help clamp down on illicit flows that hinder development finance.  Zambia may be showing the way for poor countries.

The concern that the Fund is giving cover to dubious government practices was clear during the Liechtenstein scandal that first emerged in February. The world of private banks was brought into the spotlight with reports of German spies paying €4 million to obtain a CD-Rom with data on individuals with secret accounts in the tiny Alpine state. After arresting high-profile suspected tax dodgers, Germany pressed Liechtenstein to take action, saying it was undermining its budget by facilitating tax evasion.

At the launch of an IMF report on his country in early March Liechtenstein Prime Minister Otmar Hasler picked out the positive messages – that “the praise by the IMF shows that we are on a successful path of reform” and that “most of the IMF’s recommendations will be taken up in our implementation of the Third EU Money Laundering Directive, which is imminent”. In fact the IMF report found “discrete and flexible legal structures, strict bank secrecy and favourable tax arrangements”. Some 90 per cent of the country’s financial business is from abroad and “by its nature, Liechtenstein’s financial sector business creates a particular money laundering risk”.

the Fund is giving cover to dubious government practices

In the UK, parliamentarians pressed IMF managing director Dominique Strauss-Kahn about the potential for the Fund to do a better job policing tax havens during his mid-March visit to London. Strauss-Kahn was reportedly wary of the IMF becoming more involved, saying that the Fund must stick to the mandate it has been given by shareholders. That mandate includes the Fund surveillance programme, Reviews of Standards and Codes (ROSCs), which are assessments of countries’ financial systems including on anti-money laundering and countering the financing of terrorism (see Update 54).

Criticism of the ROSC framework has come from campaigners in the Tax Justice Network (TJN) (see Update 49). On their blog they cite a legal expert who states: “the way the IMF has been conducting its ROSCs has led to turning its offshore financial centre surveillance process into a grant of a seal of approval”. In a March comment in the Financial Times, TJN members John Christensen and David Spencer argued that the current official initiatives, including the IMF’s reviews are “legitimising the illegitimate” because they ignore banking practices that facilitate tax evasion.

TJN has called for companies to provide country by country break downs of where they take their profits to help eliminate the transfer pricing that facilitates tax evasion. This call is echoed by three German NGOs in a report on public finance written by Jens Martens: “The responsibility for reform does not just lie with governments of the South. Only together can governments halt worldwide tax ‘races to the bottom’ and capital flight to tax havens. It is the industrialised countries, particularly the EU, the USA and the institutions that they dominate – the IMF, the World Bank and the WTO who are responsible for the erosion of revenue bases … The effective taxation of transnational corporations, the fight against corruption and the repatriation of embezzled money from foreign bank accounts to countries of the global south can only be achieved via strengthened, multilateral cooperation.”

The paradox is that while the IMF does very little to combat tax evasion and has done very badly in preventing the current banking crisis, it is asking taxpayers to cover the losses. The IMF deputy managing director John Lipsky recently urged policymakers to “think the unthinkable”. Lipsky announced that “governments might have to intervene with taxpayers’ money to shore up the financial system and prevent a ‘downward credit spiral” from taking hold’.

It remains to be seen if the IMF, in its search for relevance, will take up a more vigorous role in policing international tax evasion. Seasoned IMF watchers doubt that the Fund has the guts to stand up to major shareholders such as the UK government which allow secretive accounting and financial practices which should be outlawed in the name of tax justice.

Proposing windfall taxes

It emerged in February that French president Nicolas Sarkozy has asked the IMF to study whether a windfall tax could be levied on corporate profits, according to a statement from French finance minister Christine Lagarde. Sarkozy has asked the Fund to think of a worldwide tax on oil companies’ windfall profits. Companies that the French head of state may have had in mind include Total, the French oil major that saw a 64% jump in fourth quarter profit in 2007. The French are wary of a national tax since that would disadvantage French oil companies on the global market.

The global commodities boom does give new negotiating power to countries that export raw materials. The Zambian government has toughened its treatment of extractive industry contracts that were originally promoted as part of World Bank and IMF conditionality. It is demanding higher royalties from mining multinationals which were given tax concessions as part of Bank-supported efforts to improve the ‘investment climate’.

Zambian president Levy Mwanawasa has announced the cancellation of all tax concessions for copper mining companies operating in Zambia, saying they were “unfair and unbalanced”. In their place “the government has, therefore, decided to introduce a new fiscal and regulatory regime in order to bring about equitable distribution of the mineral wealth.” It will include higher royalties and a windfall profits tax, bringing dramatic change to the expected tax revenue. Without the reforms mining firms would have earned $4 billion in the 2009 financial year but would only have paid tax of $300 million. Tax is expected to reach $650 million after the change.

The World Bank supported the contract re-negotiations in Zambia, but has been reticent to wade further into reform of the global financial architecture which encourages bad deals for developing countries. In September Bank president Robert Zoellick acknowledged that “a study of the development impact of off-shore financial centres would be a valuable contribution to the governance and anti-corruption agenda”. This was following Norway’s request to conduct a study on the more than $500 billion that illicitly flows out of developing countries each year (see Update 57). A serious and objective study on these impacts would help. But in recent weeks it appears that the Bank is backing away from its president’s promise and instead plans instead to organise a conference at the end of 2008, with some unspecified input papers. NGOs will continue to push for a full study with external peer review mechanisms.