Conditionality

Background

Combating tax flight: ending evasion and reducing avoidance

Seminar at World Bank, 10 October 2008

11 October 2008 | Minutes


Notice: Undefined variable: briefing_cover in /var/www/web130/web/wp-content/themes/bretton-woods-project/library/template-fragments/article.php on line 70

Heidemarie Wieczorek-Zeul, German Development Minister

Though this is in the Monterrey consensus, it hasn’t been a major focus since. But it has recently gained momentum, in both developed and developing countries.

Tax evasion undermines developing countries efforts to raise resources, and developed countries’ aid. Loss is around $500bn per year. Instead of being used to meet MDGs, the money goes to tax havens. This injustice must end. We must make this a major issue: it’s a common agenda for developed and developing countries. Developed countries are losing a similar amount.

Donors need to help developing countries establish transparent and efficient tax systems to (a) make tax evasion impossible and (b) to close loopholes to stop tax avoidance.

Developing countries often lack the resources to keep up with complex international capital transactions. This links to the credit crisis – we have global movements of capital, but no real rules or regulations. Question is how can international agreements help developing country tax authorities and how can we use forums to strengthen best practice? This also creates a new relationship between governments and tax payers; helps to create responsible and accountable governance.

Germany wishes to take action on tax evasion, and would like to discuss an international tax compact, and to develop new cooperation at national, regional and international levels. The credit crisis gives us new opportunities; now everyone is in favour of better regulation

Michael McIntyre, Professor of tax law, Wayne State University, Detroit

Invloced since 1970s when consulting to UN Secretariat dealing with tax matters (Ad Hoc group on international cooperation on tax matters.) He was the only consultant, the group’s budget was tiny. Helped to get this group converted into a committee. How did this happen?

Monterrey consensus has very little on international cooperation – but the early draft had a lot of text, including a proposal for an international tax organisation. Strange process as this text disappeared before the conference, unclear how this happened. There was a change of administration in US – many think this was decisive. Aggression opposition from international organisations, including the WOrld Bank and the OECD. UN Secretariat tried to put forward a proposal for upgrading expert committee instead. Impossible to have redistributive income tax without cooperation between states – this is true of pretty much any tax. It becomes hard to have any tax if your neighbour doesn’t have it, and particularly hard if they actively try to help people evade tax. Helped to get this group converted into a committee.

How to make it political issue? Compares it to other moral issues, like slavery, rights for women – have to view tax fraud and aggressive avoidance as a moral problem. You have to be on the right side or not be accepted part of international community. That’s the goal of the code of conduct.

The tax committee was captured by OECD because (a) they have technical competence (b) reduced the role of the secretariat by eliminating all consultants and making the secretariat ‘neutral’ – made OECD expertise more dominant. He’s been on a sub-committee at the request of developing countries. Prepared draft code of conduct for geneva meeting in October. If this is approved, it will be sent to ECOSOC for endorsement. They could then forward to the General Assembly. This wouldn’t change it from a technical to moral and political issue – will need efforts from people all round the world. Norwegain initiative is a dramatic change. Views of banks have changed radically. Challenge ahead of us is enormous.

Ismael Momoniat (sp?) Head of tax policy, South Africa, Treasury

Tax flight is a problem, but skills flight is a bigger problem for Africa. Tax flight’s not such a problem, because of the low tax base in Africa. Challenge in Africa is to develop the tax base. There’s currently an over-reliance on trade revenue, which also impacts on inter-Africa trade. Until we break that reliance, we won’t make much progress. Some countries like Rwanda have tried to move away from trade taxes. South Africa does have a developed tax base; inconceivable that you could develop a country without a tax base.

Not just tax flight, but avoidance, particularly around extractives. EITI needs to be developed to improve transparency – increasingly important as the tax base is developed. SA decision to create South African Revenue Service (SARS) as an independent body, was a key move. Collects most tax in SA, though there are some local taxes. Huge challenges for countries to develop similar systems.

Tax flight is a problem. Usual problems from MNCs such as transfer pricing means we spend an enormous amount of time investigating. (a) not clear they are paying their due (b) enormously complex structures make investigation difficult. Exchange controls in SA mean so far banks have been little affected by crisis. When corporates have applied to redomicile, we learned belatedly that this was an important issue. ALso need to develop a more transparent way of knowing how companies divide their tax payments by country.

Carlos Braga, Director of economic policy, World Bank

He works closely with WB colleagues in the public sector department, who are the experts on this issue.

WOrld Bank co-founder of international tax dialogue (with IMF & OECD, IAB joined later) in 2002. WB supported this in order to make sure it went beyond OECD countries. Particular focus has been putting together a knowledge base – 3,000 key documents, helps with Technical Assistance, advancing exchange of information (OECD guidelines are now international standard).. A platform to look into best practices.

Questions have been with us for a long time – tax flight was debated at founding of League of Nations. Debate now is different because of scale of global flows, information technology, but also because the topic is at the core of development issues. There is a wide range of estimates of scale, but we know they are large – comparable to ODA.

But must remember that tax regimes in developing countries are very different from developed countries. Not just about tax, but also about burdensome regulations e.g. DOing Business report estimates that in Brazil filling in 3 main tax forms takes 2,600 hours per year – compared with 7 hours per year in Norway.

Hakon Arald Gulbrandson, Minister, Norway

An extraordinarily important topic, a core issue for FfD. Focus for Norway for the last years. Task Force on Illicit Financial FLows has had two meetings – last meeting is due in 2 weeks (28/10 – 3/11) in Oslo. Will come up with recommendations, including wording for DOha and how to work beyond Doha.

This is not rocket science. Boils down to political will – how to reduce illicit financial flows. Group will make suggestions like making UN Tax Committee more robust; country by country reporting by multinationals to show what they earn in every country. Main issue is transparency; so tax havens are important. Secrecy jursidictions facilitate much of the illicit flows of which tax evasion is a big part. Need to open up the secrecy and get more transparency for tax havens.

Financial Action Task Force (FATF) 40 recommendations are good – issue is how to implement them.

Also a connection with human rights – if governments are not getting money, it creates a development deficit; reducing capability to meet human rights challenges.

Teresa Ter-Minassian, Head of fiscal affairs department, IMF

2000 – Fund introduced assessment programme for offshore financial centres.

Agree that tax flight can be an obstacle to tackling poverty, and important for social compact. Consensus that tax flight is very large, but there is debate about its size. Pervasive bank secrecy requirements make it difficult to estimate flows, even when not illicit. Estimates of loss of tax revenue range from $50bn (Oxfam) to $500bn. Lack of agreement is likely to hamper efforts to tackle the problem.

Fund technical assistance – over past 5 years IMF has done hundreds of missions to middle and low income countries. Objective is to create fair and efficient systems – simplified tax codes, greater transparency, better exchange of information etc. Many examples of successful implementation – which have led to revenue gains, reduced compliance costs and more equitable sharing of tax burden. EMphasis on strengthening capacity in revenue policy and implementation. INcludes placement of long and short term technical advisers.

Recent international seminar on resource revenue taxation. Try to promote cooperation and information exhange between tax authorities. Need to strengthen existing iniatives such as EU savings directive. Promote information exhange. VOluntary adoption of a code of conduct in combatting tax flight would be helpful. More support from donors to revenue authorities in developing countries.

Best approach is to build on existing initiatives and build on existing knowledge, not launch new ones. International tax dialogue is well placed – 180 countries are members. Already held two major conference, with a third on relationship between tax regulations and financial markets due next year in China. COuld help estimate scale, and build support for international code of conduct. ENcourage UN to become a member of the dialogue.

Discussion and comments from the floor

Most secrecy jurisdictions are associated with anglo-saxon legal traditions

Tax is just one of the problems of ‘regulatory havens’ – tax is one issue, corruption, financial instability etc also important. Offshore world lies at the heart of the current credit crisis; collapsing banks have many offshore vehicles. Also important has been differences in capital gains and income taxes – led to huge flight to tax havens.

Voluntary initiatives don’t work in financial sector – financial incentives are too strong. Need for high profile political initiative.

Very different philosophy between OECD countries, who want to tax based on residence, and developing countries, who want to tax at source not residence.) This may change as a result of the crisis.

Global Financial INtegrity New study out next week to examine totality of illicit flows – $800bn annually from developing countries, using figures from all countries. Trade component is in region of $500bn.

France Ministry of FInance representative said they were – willing to push this issue for the Doha conference as EU president. Asked if we should consider a name and shame approach for tax havens again?

Responses

World Bank – Embarking with Norway on project to get better handle on figures. $800bn would be 8% of GDP of developing countries. Seminar in Oslo in two weeks time. WIll be a conference in Washington in the SPring; publish a book based on study hopefully.

Norway – Transparent contracts between companies could help tackle transfer mispricing. Could make it impossible for companies operating in secrecy jurisdcitions to trade with others unless they can prove they’re really doing business there. Inpdendent COmmission looking into roll of tax havens – will make recommendations in June.

South Africa – Important that Germany succeeds on Leichtenstein – it would set a precedent.

IMF – Very complex problem, can’t be solved with a simple bullet. Need to get a code of conduct, then implement it. Need to isolate more tax havens, strengthen national tax authorities – technical assistance crucial.

Professor McIntyre – Name and shame a great idea, but not the answer. CUt down number of offenders, then take coercive measures. Easy to do, as Banks rely on governments. Europeans need to take on their own tax haven problems. Must have comprehensive tax reports for companies, need to change international accounting standards. Crisis has shown how ridiculous these are – you can get a clean bill of health then go out of business the next week.

Germany – Name and shame of Leichtenstein and people using it was important. But have to keep going as people will continure to try to avoid tax. Thinks there is a new climate compared with Monterrey – have had positive reactions from developed and developing countries – it got most support of FfD issues listed by secretariat. Not proposing new forum; but should be more inter-connection between existing fora, and upgrade them such as making the UN committee a commission. Should use FfD to put forward these initiatives. Register for corporations – what kind how much, in which country etc – this transparency would be very helpful.