The IFI’s approach to tax avoidance and evasion

17 February 2011 | Inside the institutions

The World Bank and the IMF formally recognise tax avoidance and tax evasion as a critical problem for developing countries’ domestic resource mobilisation. The Bank’s public position on tax evasion and tax havens does not however identify concrete measures to stop investing in companies practicing tax avoidance. The IMF addresses tax policy under its surveillance mandate and in its technical assistance, but does not have an explicit framework or clear approach to deal with tax evasion.

The World Bank Group (WBG) generally coordinates its technical assistance for tax issues with other international organisations, such as the IMF and OECD, including through the OECD-led Global Forum on Transparency and Exchange of Information. In April 2010, the WBG made a public statement on Offshore financial centres and tax evasion in World Bank operations.

The statement affirms the WBG’s commitment to “the integrity and transparency of global financial markets” and articulates concerns on “the potential risk of tax abuse and the threat to good governance that they present.” It says that “key avenues” for the group’s engagement regarding offshore financial centres (OFCs) and tax evasion “are support for strengthening tax systems and domestic resource mobilisation and due diligence in private sector investment operations”, including “support for countries to meet the internationally agreed standard for tax transparency”. The statement emphasises that the WBG “exercises due diligence to confirm that the structures in which it invests are chosen for legitimate reasons and are not being used for tax evasion, tax abuse, or other illegitimate purposes.”

The statement justifies the use of tax havens and secrecy jurisdictions by companies the International Financial Corporation (IFC, the Bank’s private sector lending arm) sponsors for “legitimate purposes when partners and sponsors act with integrity. For example, jurisdictions may be used to avoid double taxation of investments in developing countries, or may provide legal infrastructure that a given host country lacks.”

The IMF has never agreed an institutional policy for dealing with tax evasion or tax haven activity. Under its surveillance mandate, the IMF has a Financial Sector Assessment Programme (FSAP) and produces Reports on the Observance of Standards and Codes (ROSC, see Update 35) in cooperation with the Bank.

FSAPs and ROSCs, introduced in the late 1990s, promote adherence to voluntary standards to ensure financial stability and reassure investors. The list of standards and codes does not include whether a country overrides bank secrecy in tax matters, requires the automatic reporting of information or engages in automatic exchange of information in tax matters (see Update 49).

In June 2000, after pressure from rich countries, the IMF agreed to “extend its work to include assessments of the vulnerabilities stemming from the use of offshore financial centres”. The agreed policy, Offshore financial centres – the role of the IMF, called for frequent and comprehensive assessment of OFCs within the framework of FSAP. This new programme was aimed at monitoring OFCs’ compliance with global financial regulatory standards, but lacked a sanction mechanism. Overall 16 reports were produced. In May 2008, the IMF abolished the separate workstream on OFCs and integrated the programme in its regular FSAP framework, making assessment voluntary and less frequent.

More generally, the IMF addresses tax policy and revenue administration in its technical assistance (TA) to member countries. TA is provided to member countries on a voluntary basis, and public disclosure only occurs in agreement with the client government. To pay for its TA on domestic resource mobilisation, the IMF is in the process of launching a new topical trust fund (see Update 61) on tax policy and administration. An October 2010 draft programme document for the trust fund identifies “the corrosive impact of tax evasion and illicit outflows” as a problem to be addressed, without outlining concrete measures.

The IMF’s 2002 publication, Tax policy in developing countries, does not address the problem of tax avoidance and evasion. Similarly, the issue is not dealt with in a 2011 IMF policy paper on domestic resource mobilisation in low-income countries, to be discussed by the board in February.