Unsafe haven? New IFC tax haven policy questioned

7 February 2012

Guest analysis by María José Romero, LATINDADD/Task Force on Financial Integrity and Economic Development

A new report finds widespread use of tax havens by clients of the World Bank’s private sector arm, the International Finance Corporation (IFC), while the new Bank policy is criticised for having major loopholes (see Update 74, 73).

According to a recent report by Danish NGOs DanWatch and IBIS, “57 per cent of the companies analysed in the IFC’s extrac­tives portfolio from 2010 have channelled their investment in developing countries through an intermediate hold­ing company in a tax haven.” Additionally, “more than a third of the countries hosting [the] IFC’s extractive projects have no specific policies on thin capitalisation,” which means that IFC’s extractive-industry clients can minimise tax payments in developing countries by injecting as much debt and as little equity as possible into their operating subsidiaries.

The report highlights the case of Minera Yanacocha S.R.L., one of the largest gold mines in Latin America, 51 per cent of which is owned by Newmont Mining Corporation, with Peruvian Buenaventura holding 44 per cent and the IFC 5 per cent (see Update 79). Newmont’s stake in Yanacocha is held by an intermediate holding company called Newmont Second Capital Corporation located in Delaware, where corporate secrecy rules contributed to the US being ranked 5th in Tax Justice Network’s financial secrecy index.

New policy on slippery ground

In November last year, the World Bank Group released a new policy on the use of offshore financial centres (OFCs). It aims at “advancing the international tax transparency agenda by addressing the potential risks posed to its private sector operations and to the global financial system by jurisdictions with weak regulation, low or no tax, and a lack of transparency.”

The policy is largely built upon the results of the Organisation for Economic Cooperation and Development (OECD) Global Forum peer review process, launched in September 2009. As part of this process, countries will undergo detailed assessment against 10 evaluation criteria in relation to availability of and access to tax information, and tax information exchange. The reports of the Global Forum will inform the IFC board on whether to invest in a company operating in an OFC.

However, civil society organisations say this peer review process has shortcomings. According to a report by French NGO CCFD-Terre Solidaire, “of the 59 reports published in 2011, only eight fulfilled all the transparency criteria established by the Global Forum.” Moreover, there are no quantitative indicators to measure progress on transparency and cooperation. Finally, no sanctions have been envisaged to date for jurisdictions not complying with transparency requirements and it is still unclear what next steps will be taken once all the reports have been completed.

An alternative approach is needed

Civil society organisations have demanded changes in the IFC policy in order to ensure that investing in private sector companies has a positive impact on development.  According to Alvin Mosioma from Tax Justice Network, “the IFC should stop channelling public funds to companies using secrecy jurisdictions.” To make effective and measurable progress towards financial transparency, the DanWatch report also recommends that “companies supported by IFC should present their annual accounts on a country-by-country and project-by-project basis, which would en­able host governments and civil society to iden­tify tax avoidance and evasion.”