Without IFIs, There are no tax havens

17 April 2009 | Guest comment

Two main agreements reached by the G20 in its recent meeting held in London that should be welcomed: The reliance on a renewed leadership of the IMF and Multilateral Development Banks to support the countries that will be affected by the world recession within a new regulatory framework of international finance; and the final elimination of tax havens all over the world, aiming at protecting fiscal income.

Latin America has suffered the ideological attacks of the IMF in association with the World Bank and Inter American Development Bank (IDB) trough the implementation of policy recommendations that were pernicious for tax collection, such as the following:

  • Tax reforms focussing on improving the efficiency of tax management rather than increasing taxes.
  • Achieving fiscal balance by means of streamlining public expenditure rather than by increasing fiscal income.
  • Arguing that fiscal decentralisation may put the fiscal discipline that demanded so much effort from Latin American states at risk, so a fiscal policy should be re-centralised.

These policies have brought as a consequence an ill-fated competition between countries in Latin America over which one has the best and most efficient tax collection system, instead of coordinating a regional policy aimed at levying a tax on excess-profits earned by transnational companies in highly profitable economic sectors such as mining, oil, and in recent years – owing to financial speculation – the food sector.

Thus, IFIs have been contributing to the advent of tax havens in the region. According to a study by Christian Aid, in spite of it not being possible to consider some Latin American countries as tax havens, it has been shown that several of these countries have established privileged tax systems to promote foreign direct investment (FDI). Another study carried out by the Tax Justice Network, has shown that some of the currently known tax havens (according to the recent list published by the OECD) are well integrated into the trade system of raw materials between Latin America and Europe, thus helping large corporations to avoid payment of taxes necessary for the development of the region.

Finally, IFIs have constantly recommended Latin American governments streamline social expenditure with supposedly unbiased instruments such as the focalisation of expenditure, instead of letting Latin American governments introduce changes to their tax systems in order to collect more taxes to finance their expenditure. If any of these governments dared to discuss or propose this, IFIs pointed out that they were introducing ‘political noise’ to the model, thus immediately making the country less attractive for FDI and for the loans that IFIs may continue to grant them. With this kind of discourse, the IFIs managed to supress any specific initiative aimed at fairly increasing fiscal income by governments.

The immediate consequence of these processes is that there has not been an effective redistribution of domestic income, thus increasing inequality. Social conflicts have been a clear example of this discontent, to the point that the IDB has identified this stage of the Latin American economic boom – without improvements in terms of redistribution – as an unhappy growth paradox. This is a problem that could have been avoided provided a fiscal decentralisation policy aimed at further linking local governments to their citizens had been implemented. However, IFIs recommended greater centralisation in order to ensure fiscal balance at the expense of the decentralisation process.

In short, until now IFIs have promoted a growth model without redistribution for Latin America. On the other hand, tax havens have proliferated, have been reinforced and have been presented as an aim to be reached by developing countries. In this sense, the perspective proposed by the G20 – given the previous experience of the region – is quite illusory since it appears to be contradictory. Unless the reform of IFIs is true, and finance is put at the service of humankind.