Development finance institutions and responsible corporate tax behaviour

Where we are and the road ahead

10 November 2016 | Reports

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A fully-formatted  PDF version  of this briefing is also available.


Development Finance Institutions (DFI) are not doing enough to avoid becoming accomplices in harmful corporate tax practices. This is the finding of an analysis of publicly available policies of nine DFIs related to corporate tax payments, which suggests that DFIs are doing too little to encourage responsible corporate tax behaviour. This analysis highlights the role DFIs should play in promoting responsible tax practices by companies.

This briefing paper outlines how a selection of DFIs are largely failing to use their influence as investors in companies operating in developing countries to ensure that those companies restrict or eliminate their use of tax havens or to reduce the risk of corporate tax avoidance, while others have taken important steps forward. There is a particular need for DFIs to play this role, given the scale of global tax dodging, the fact that DFIs largely use public money and since DFI investments in developing countries are significantly increasing.

DFIs are government-owned institutions that invest in private sector projects in developing countries. In Europe, 15 bilateral DFIs are members of the Association of European Development Finance Institutions (EDFI) and are among the bodies that implement their governments’ development cooperation policies. Several multilateral DFIs are also major investors in the private sector, notably the World Bank Group’s International Finance Corporation (IFC), the EU’s European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the regional development banks in Africa, Asia and Latin America.

This analysis of DFIs’ publicly available policies on tax finds that some DFIs are significantly lagging behind in preventing their funds supporting aggressive tax planning – albeit unintentionally. Some aspects of their investments remain shrouded in secrecy, although transparency is crucial in order to establish public confidence, as DFIs are using tax payers’ money. All DFIs need to continue to make improvements in public access to information to ensure accountability.

European governments are making private finance central to their international development efforts, and DFIs are playing an ever more central role in channelling investments from North to South. The role of DFIs in development finance has increased dramatically. Globally, the IFC is the biggest player in this field and its investment commitments have increased six-fold since 2002. In Europe, the consolidated portfolio of EDFI members increased nearly four-fold between 2003 and 2015, from €10bn to €36bn.

Investees of DFIs include both small- and medium-sized enterprises and large transnational corporations (TNCs). The latter are a particular focus for this briefing because, due to their crossborder nature, they have a greater ability than domestic companies to practice tax avoidance, especially by using tax havens.

Tax revenues form the basis of a sustainable economy and are crucial for developing countries that seek to invest in poverty reducing services while also becoming less dependent on foreign aid. However the United Nations trade body, the UN Conference on Trade and Development (UNCTAD), estimates that developing countries lose at least $100bn a year due to one type of corporate tax avoidance alone.

Corporate tax dodging by TNCs and the persistent presence of tax havens in the international system represents a major obstacle to combatting a modern scourge – that of deep and rising global inequality. One of the most effective ways of fighting inequality in societies is through greater tax justice, and dedicated efforts by governments to realize human rights and achieve the Sustainable Development Goals (SDGs). There will be a significant need for more public finance to be mobilized domestically to help deliver the SDGs in all countries. This will require national tax systems that are efficient and fair, ensuring that taxpayers, including corporations, contribute according to their means.

Under their human rights obligations, states are required to mobilize the maximum available resources to finance the progressive realization of economic, social and cultural rights, as well as to advance civil and political rights and the right to development. The financing gap to achieve the SDGs is estimated at $2.5 trillion. Undoubtedly the private sector will need to play a role to complement public financing for sustainable development. The private sector will also need to contribute to domestic resource mobilization through corporate tax payments. DFIs and private sector lending by publicly backed banks should play a crucial role in ensuring this.

This research analyses the policies of nine DFIs, assessing them against some key indicators that would help ensure they promote responsible tax practices and avoid possible complicity in company tax avoidance strategies. Key findings include the following:

  • Eight of the nine DFIs list their entire portfolios of investments on their websites. None of the DFIs report what proportion (or which) of their investments goes to TNCs.
  • Seven of the nine DFIs fail to routinely state the country of incorporation of all their investees. Four of the nine DFIs do not list these at all, while three list the domicile for only some of their investees, usually the funds in which they invest, and two list all countries of incorporation. At least seven of the nine DFIs invest in companies or financial intermediaries incorporated in tax havens, such as Mauritius and the Cayman Islands. In addition, DFIs invest in many companies that use tax havens in their corporate structures.
  • Eight of the nine DFIs have some sort of policy and standards in place specifically regarding their tax policies and the use of tax havens. However, most are reliant on the ratings put forward by the Organisation for Economic Co-operation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes; argued for many years by NGOs to be insufficient. Only a few take steps beyond legal compliance and the Global Forum.
  • DFIs vary in having tax risk and impact assessment and few provide public information on this. Most DFIs have some framework for monitoring tax payments as part of their projects, but this is usually not situated in a framework of monitoring key tax risk factors that can result in abusive practices.
  • Eight of the nine DFIs include tax as an indicator when measuring their development impact. However, those DFIs reporting the tax payments of the companies in which they invest provide only limited information publicly.
  • DFIs do not fully highlight the importance of tax in their public annual reporting. In their most recent (2015) annual reports, four DFIs make no mention of tax at all. Others make brief mentions of taxes paid by their investees while only one (Swedfund) has a considerable section on its tax policy and payments.
  • This research has not been able to identify any of the nine DFIs that is encouraging or requiring concrete, responsible tax practices by its investees. As a general rule, DFIs simply require investees to abide by the law.
  • All nine DFIs require their private sector clients to identify their beneficial owners as part of their screening process. Yet none of the DFIs appear to make this information public.
  • None of the DFIs require the companies they invest in to report publicly (or to the DFIs) on a country-by-country basis on the profits, losses, number of employees, taxes paid and other forms of economic performance.


The following set of recommendations contains a wide range of actions that DFIs can undertake to secure more responsible corporate tax behaviour from their clients and business partners. Some are immediately implementable (and perhaps already being implemented by some), while others may only be implemented over a longer period. For all the recommendations, DFIs can take the first step of acknowledging publicly the challenges related to TNCs and aggressive tax planning and their commitment towards continuously improving practices to meet these.

Use of tax havens

  • DFIs should not use tax havens to channel their investments to developing countries. When an intermediary jurisdiction is used, DFIs should demonstrate that the use of a third jurisdiction was superior in advancing its development mandate when compared with a targeted developing country for domiciliation.
  • When tax havens appear in the corporate structure of a client or partner of DFIs, heightened tax due diligence should be applied in addition to the regular requirements. DFIs should deliver an impact assessment to document that development effects are not negatively affected, including documenting impacts on domestic resource mobilization.
  • DFIs should ensure that these and other recommendations outlined here apply to the financial intermediaries through which DFIs invest, as well as to investee companies and sub-clients of financial intermediaries.

Tax behaviour of client companies

DFIs should:

  • Require all clients to have and publish a responsible corporate tax policy approved by its board. The policy should be published on the company’s website. This should acknowledge the important role of tax in society and commit the company to avoid engaging in harmful tax practices, including avoiding the use of tax havens.
  • Require all clients to make the following elements available to the DFI risk assessment team and subsequently to be made public, if eligibility for investment is granted:
    • a commitment not to practice aggressive tax planning, and to engage in tax risk and tax impact assessment in key identified areas;
    • country-by-country information on the turnover, assets, full-time employees, profits and tax payments in each country in which it operates;
    • information about beneficial ownership and company structure and purpose;
    • all discretionary tax treatment they receive that affects the tax base or taxable profits; including tax incentives, any tax planning schemes that are under mandatory notification (e.g. UK DOTAS) in any country where the company operates, advance pricing agreements or advance tax rulings that substantially affect either the tax base or taxable profits;
    • tax risk and tax impact assessment in their analysis of challenges to domestic resource mobilization; to prevent aggressive tax planning, irresponsible tax behaviour as well as its potential for a negative impact on human rights.
  • Ensure that these and other recommendations outlined here apply to financial intermediaries through which DFIs invest, as well as to investee companies and sub-clients of financial intermediaries.

Transparency and reporting

DFIs should:

  • Develop in consultation with civil society organizations (CSOs), and publish, a taxresponsible investment policy, which includes a commitment to promote domestic resource mobilization and responsible corporate tax behaviour. Once adopted, this should be applied to existing as well as new investments.
  • Publish a full list of investments that includes: (a) the investee companies (and sub-clients of financial intermediaries); (b) their countries of incorporation; (c) their corporate structure; and (d) their beneficial owners.
  • Publish figures on the proportion of the DFI’s portfolio that goes to: (a) transnational corporations (including through financial intermediaries); and (b) small- and medium-sized enterprises (SMEs).
  • Give the reporting of tax payments a prominent place in annual reports, and/or develop a separate tax responsibility report, including analysis of their development impacts.
  • Report the tax payments of investee clients and each investment’s expected and actual tax payments and ask companies to explain deviations in relation to economic activities.
  • Engage openly and in a transparent manner with stakeholders on tax issues and tax impacts of its investments. This could include assessing and reporting on the impacts of tax practice; assessing whether value creation corresponds to economic reality; how to prevent and mitigate potential negative impacts and tracking performance and communicating on this.

Measuring development

DFIs should:

  • Include tax in the development indicators and explain how they are measured and what importance is attached to tax indicators in relation to other indicators for development.
  • When evaluating projects ex-ante, periodically and ex-post, include corporate tax payments as a separate indicator in addition to total payments to governments. Measure tax risk and impact based on key themes: where practices have the greatest impact on revenue, human rights and good governance. Measure tax payments in absolute figures and also relative to the investment.

Internal issues

DFIs should:

  • Devote sufficient resources to developing optimal policies and implementing best practice.
  • Enable full transparency toward and constructive engagement with CSOs on new policies and the evaluation of existing policies.
  • Ensure in-house capacity to oversee these activities to ensure there is no dependency on external advisers who might have a conflict of interest. This could include hiring capacity to look at taxes beyond legal compliance and to improve engagement of staff to help contribute to sustainable development and human rights.

This paper was written by Sara Jespersen (Oxfam IBIS) and Mark Curtis (Curtis Research) in collaboration with ActionAid; Christian Aid; Counter BalanceDiakoniaEURODADKepa; Latindadd; Tax Justice Network Africa; Oxfam and the Bretton Woods Project.