Understanding Tax Tax Justice Toolkit STOP and Development · 2018-05-01 · The problem 6 The importance of tax in the fight against poverty 6 The problem of illicit capital flight

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Tax Justice ToolkitUnderstanding Tax and Development

STOP

2 Understanding Tax and Development

Understanding Tax and Development 3

Understanding Tax and Development

Contents

Introduction 5

The problem 6The importance of tax in the fight against poverty 6The problem of illicit capital flight 9The effects of tax dodging on poor communities 10Multinational companies and tax dodging 13The role of tax havens 17Tax breaks – a race to the bottom 19

The solutions 20Making the system more transparent 20Reforming the system 24

Difficult questions and how to answer them 26

Endnotes 30

This guide provides an introduction to tax as a development issue. It explores how a lack of tax revenues is damaging the lives and prospects of poor people across the world and explains why tax has become so central to the task of ending global poverty. It focuses on a key problem which European civil society can help to address: illicit capital flight and tax dodging by multinational companies – many of them European. While this phenomenon is affecting people everywhere, including in Europe, the following guide highlights its impacts on the world’s poorest countries. It also provides an overview of the different solutions to the problem and the progress towards achieving these.

This guide is one of three which together make up a toolkit for European civil society organisations on tax and development.

The other two guides in the toolkit are:

• Guide 2 Advocacy for European NGOs

• Guide 3 Building a Popular Campaign

Introduction

This toolkit is funded by the European Commission Project ‘Non-State Actors and Local Authorities in Development: Raising public awareness of development issues and promoting development education in the European Union’.


The problem

The importance of tax in the fight against poverty

Around the world, hundreds of millions of people are denied access to healthcare, education, clean water, sanitation, decent housing, public transport and other essential services.

• 2.6 billion people lack basic sanitation.1

• 1.1 billion people have inadequate access to water.2

• 790 million people are chronically under-nourished.3

• 270 million children have no access to healthcare.4

• 72 million children of primary school age do not attend school.5

The key question is: where will the money come from to pay for these services? In Europe essential services are paid for by tax revenues. Following the global financial crisis and problems in the Eurozone, a number of European governments have made cuts to public services (hence the growing public anger in Europe about large companies not paying their fair share of tax). In spite of these cuts, there remains an expectation in most European countries that tax revenues will and should pay for essential services.

In developing countries the situation is quite different. Developing country governments raise very little in taxes – on average only 13 per cent of their gross domestic product (GDP), compared with 35 per cent in most European countries.6 Instead of tax, they rely on aid and loans to pay for public services. Aid and loans are essential in the short term but insufficient and unsustainable in the long term.

AidDeveloping countries will continue to need aid for some time to come. But aid alone is insufficient to cover the costs of providing good-quality basic services to whole populations or to cover the huge costs of adapting to climate change in the coming years (estimated at between $75bn and $100bn a year for the next 30 years7).

Moreover, aid can dry up if the policies of the donor governments change. The global financial crisis of 2008 led to cuts in aid from rich countries. The Eurozone crisis further deepened these cuts. The Organisation for Economic Co-operation and Development (OECD) reports that development aid fell by 4 per cent in real terms in 2012, following a 2 per cent fall in 2011.8 Global aid in 2010 was already $20 billion less than the amount that the world’s richest nations – the G8 – had pledged in 2005.9 Aid (and loans) also frequently come with certain strings or conditions attached. Developing country governments may be required to spend money and adopt policies as demanded by donors and some of the aid is often spent in the donor country – on hardware or technical support.

Ultimately, people living in developing countries – like people in Europe – do not want to depend on aid and hand-outs. We would all prefer to stand on our own two feet and use our own resources to develop.

Loans In addition to aid, in recent decades many countries have had to take out loans from the World Bank or private lenders to pay for public services such as education. But borrowing money is not the solution either. Even after the successes of the global Jubilee Debt campaign in the 1990s, the very poorest countries were still paying a total of more than $12.4bn in annual debt interest payments in 2008 – money which could have been spent on health education and other services.10 Indeed, developing countries currently owe almost US$5 trillion in external debts11.

Given the cuts to many donors’ aid budgets, and the crippling cost of debt interest payments, it makes sense for developing country governments to finance essential services and other poverty reduction efforts not through aid or loans but through an increase in tax revenues.

‘ Paying taxes is being independent’

Motto of the Kenya Revenue Authority


Mopani Copper Mine in Mufulira, Zambia. The mine is largely owned by a subsidiary of the giant multinational company, Glencore. It has been accused of dodging tax in Zambia, an allegation it denies. In addition, it has been accused of causing significant local environmental damage. The Zambian government estimates that it loses up to $1bn in unpaid taxes from mining companies annually.

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Tax revenues Tax revenues have clear benefits:

• Tax is a more reliable and predictable source of finance than aid or loans. This predictability is important for governments trying to deliver essential services such as health or education. Schools require teachers and health services require doctors and nurses. All of these workers need to be paid regularly through what are called ‘recurrent funds’. Unlike aid and loans, tax revenues can provide recurrent funding sources indefinitely.

• Tax helps to ensure that governments are more accountable to their citizens. The higher a government’s tax revenues, the more citizens tend to question how those revenues are spent. And the more a government funds its budget through tax revenues rather than aid, the more accountable a government tends to be to its citizens rather than to foreign donors. An increase in tax revenues can therefore help to promote good governance and more democratic political systems.

• Tax systems determine how wealth is distributed between rich and poor. In progressive tax systems, the rich pay more tax and the poor pay less. Therefore tax is a vital instrument for tackling economic and social inequality, within countries and globally.

Why can’t developing countries raise more tax revenues?There are a number of reasons why developing countries cannot raise enough tax revenues to pay for essential services. They include:

• A large proportion of those living in the world’s poorest countries do not earn enough to pay income tax. Low tax revenues are therefore a product of poverty.

• Developing countries tend to have large informal sectors (for example, market traders, casual labourers, small workshops) where goods and services are paid for in cash, no records are kept, and the business activity is beyond the reach of tax officials.

• Many of the wealthiest individuals in developing countries move their money overseas, often to tax havens, where it cannot be taxed, and also exert influence over the tax system, ensuring that taxes on the wealthy are kept low.

• Tax authorities frequently lack the capacity and resources needed to collect taxes.

• The global trend towards free trade since the 1980s has forced developing country governments to reduce the tariffs they charge on imported goods. Some governments used to rely on such tariffs for up to one-third of their tax revenues.12

• Foreign companies are often given generous tax breaks, supposedly to encourage them to invest (see page 19 for more information on tax breaks).

• Tax dodging by some unscrupulous multinational companies – including European companies – is a significant factor. There is growing consensus that the current system for taxing the global operations of multinationals and the secrecy involved are facilitating tax dodging, as we explain below.

The extent of tax dodging by multinational companies In recent years, the Paris-based OECD, which sets the rules governing how multinational companies pay tax, has acknowledged that developing countries could be losing far more through tax dodging than they receive in aid.

Research by Christian Aid 2008/09 estimated that the tax loss to developing countries through tax dodging by multinational companies was US$160bn a year.13 This is significantly more than the total aid given by the developed countries in the global North,14 which stood at $125 billion in 2012.15 It is also over three times more than the amount required annually to end hunger (US$50.2bn).16


The problem of illicit capital flight

Capital flight from developing countries is a major problem. This is when companies and individuals move huge amounts of money out of the countries where they are operating, instead of investing in the country’s local economy, infrastructure and services. Tax dodging is one of the main drivers of capital flight.

When money is transferred from a country without being reported or registered, it becomes illicit. lllicit financial flows include:

• Money shifted out of a country by unscrupulous multinational companies in order to dodge tax. This represents 60-65 per cent of illicit capital flight.

• Money acquired through corruption by politicians and officials which is then shifted to secretive tax havens where no questions are asked about how the money was acquired. This represents 3-5 per cent of illicit capital flight.

• The proceeds of crime shifted out of a country by drugs and criminal cartels into secretive bank accounts, invariably located in tax havens. This represents 30-35 per cent of illicit capital flight.

The result is wealth shifted out of the countries where 80 per cent of the world’s population live into the countries where only 20 per cent live.17

Raymond Baker, a senior fellow at the US Center for International Policy and a world expert on this issue, has described it as ‘the ugliest chapter in global economic affairs since slavery’.

Illicit financial flows are closely associated with money laundering. Money laundering is the term used to describe the transfer of money to secretive bank accounts (usually in tax havens) in order to conceal the fact that the money was obtained through illegal activities such as drug trafficking, corruption, theft, smuggling and tax dodging. The money is then used to fund legal financial and trading activities.

On average, developing countries lost between US$723 billion and US$844 billion a year through illicit flows in the period 2000-2009, according to the Washington-based

organisation, Global Financial Integrity.18 In recent years Africa has experienced a much greater increase in illicit flows than other world regions, a significant proportion of which has been due to the practices of multinational companies. Research published in 2011 estimated that US$854 billion was illictly moved out of sub-Saharan Africa between 1970 and 2008. This figure is double the amount of aid to the region over the same period and four times the size of Africa’s debt in 2008, thus making sub-Saharan Africa a net creditor to the rest of the world.19

Since tax dodging accounts for such a large proportion of illicit capital flight from developing countries, this guide focuses specifically on the issue of tax.

Swissploitation – the role of Switzerland in illicit capital flightSwitzerland is the leading hub for the trade in global commodities (mainly agricultural, oil, gas and mining products). About 15-25 per cent of commodity trading goes through Switzerland.

In reality, very few of these goods actually pass through Switzerland. Indeed, 90 per cent of the commodities that leave developing countries with Switzerland as their declared destination are not recorded as imports in Switzerland. As a result, developing countries cannot be sure of the real final destination of their exports, which is why tax justice campaigners call it the ‘black hole of Geneva’.

It is estimated that developing countries could have lost US$578bn every year during the period 2007-2010 through illicit capital flight to Switzerland. This was income that should have been taxed in developing countries. Instead it ended up in Switzerland where little tax was paid. It is a phenomenon that has been dubbed ‘Swissploitation’.20


The effects of tax dodging on poor communities

In Europe, news that a number of multinational companies have not paid their fair share of tax has caused widespread public anger at a time when unemployment is high, governments are making cuts to public services, and many are struggling to feed their families. Corporate tax dodging has an even greater impact in the world's poorest countries, given the small amount of tax revenues these countries collect from other sources and the conditions in which the majority of their populations live. It is one of the reasons why so many people in these countries still do not have access to essential services such as health and education.

‘ If tax justice were achieved in Africa, I would not see women dying while giving birth simply because they could not afford to pay for pre-natal medical care. I would not see ten-year-old kids going to work because their parents cannot afford to send them to school.’

Sandra Kidwingira, Tax Justice Network – Africa

The impact of tax dodging on healthcare in ZambiaZambia is the seventh-largest producer of copper in the world. Huge demand for copper from China has seen the global copper price soar. And yet Zambia remains one of the poorest countries in the world, with a life expectancy of only 49 years. Tax dodging is one of the reasons why.

The Zambian government estimates that it loses up to $1bn in unpaid taxes from mining companies annually.21 The 2012 healthcare budget in Zambia was approximately $527m. If Zambia received the correct amount of taxes, it could pay for existing healthcare services twice over.

In April 2012, Christian Aid staff visited a clinic in Zambia’s copper mine region where there is only one doctor serving 45,000 people. In the maternity ward, just one midwife was on duty, even though seven women were in labour. ‘We have land available to extend this clinic,’ Nurse Chali told us, ‘but there’s just no money.’

Nurse Elisheba Chali works in Kabundi East Hospital, near Chingola in Zambia's Copper Belt.

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The links between tax and hungerBoosting small-scale farming holds the key to ending hunger.22 This is because more than 70 per cent of poor people in developing countries live in rural areas and depend directly or indirectly on farming to make a living.23 At least half of the food consumed worldwide is produced by small farms of a few hectares. The problem is that smallholder farmers are often trapped in poverty, not making enough profit to invest in their farms and increase their yields, and not even producing enough to feed their families when harvests are poor.

To combat hunger, governments need to provide smallholder farmers, especially women, with access to cheap credit and seeds. Irrigation and storage facilities are also needed, as well as roads and bridges to create better access to markets. Resilience building, research and advice is also needed in the face of pest and disease, and increasing extreme weather events, caused by climate change. In addition, special schemes such as school feeding programmes are needed to prevent hunger among the poorest families.

All of these measures cost money – money that could be generated through higher tax revenues.

Increased tax revenues could also meet the US$50.2bn that the UN’s Food and Agriculture Organisation (FAO) recently cited as the cost per annum, on top of existing funding, of creating a ‘world free from hunger’ by 2025.24

How lost tax revenues are hampering El Salvador’s plan for agricultureOne in eight people in the Central American country of El Salvador do not have enough food to eat. A third of Salvadoreans live in extreme poverty and one in four children suffer from stunting, a condition caused by malnutrition.

In the 1990s – partly as a result of trade liberalisation and a big rise in cheap food imports from the US – El Salvador suffered a major collapse in its food production and hundreds of thousands of Salvadoreans lost their livelihoods. Today, a large proportion of the country’s food is imported, making the poor vulnerable to global food price rises. The Salvadorean government has recently adopted limited measures to regenerate the agricultural sector. However, only 4 per cent of the government budget – $40m – is devoted to agriculture, which means that the government’s efforts are unlikely to succeed.25

Meanwhile the Salvadorean government estimates that illegal tax evasion costs the country as much as $1.7bn a year.26

Ghana’s free school feeding programme – what taxes could achieveAround one-third of Ghana’s population live on less than US$1.25 a day27 and more than a quarter of Ghanaian children aged under five are stunted, an indicator of chronic malnutrition.28

In 2005 Ghana introduced a free school feeding programme, now providing one hot, nutritious meal a day to more than 1 million pupils from deprived communities. Since 2005, enrolment rates have risen by as much as 30 per cent in some areas. The programme is funded partly by the government and partly by foreign aid, but funding shortages have meant that by the end of 2010, the programme had reached only 67 per cent of those targeted.29

Tax revenues would be the best means of plugging this funding gap. A study of Ghana’s mining sector indicates that about US$36m is lost every year due to tax dodging by multinational mining companies.30 US$36m would cover the shortfall in the free school feeding programme – and more.


Would developing country governments spend increased tax income on combating poverty?There are no cast-iron guarantees about how governments will use their resources; however, research looking at the correlation between tax collection and progress towards the Millennium Development Goals shows that in general, the more tax African countries collect, the better their performance.31

The actions of developing countries that received debt relief in the late 1990s provide us with further evidence that an increase in government revenues tends to lead to an increase in spending on poverty reduction. Contrary to fears that debt relief would be spent on the wrong things or disappear into personal pockets, countries that qualified for the Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative have increased their spending on poverty reduction programmes.

The importance of civil society in ensuring tax revenues are spent on reducing poverty and inequalityIn a growing number of developing countries, civil society groups are playing a key role not only in getting a fair deal from multinationals operating inside their borders, but also in persuading governments that increases in revenue from taxation should be spent on basic services for poor communities and other measures for reducing poverty. At the same time, these groups are promoting progressive domestic tax reforms and educating the media and the public

about the benefits of better tax rules and increased tax revenues.

Clearly, it will be essential for donors in Europe to continue supporting these

activities so as to build the pressure for governments to increase tax revenues and then spend the revenues on reducing poverty.

How Bolivia spent increased tax revenues32

After privatisation of its oil and gas industry in 1996, Bolivia reduced the royalties paid by foreign companies to only 18 per cent. Following intensive campaigning by civil society over many years and a change of government in 2006, a new law was passed requiring foreign companies to pay far more for the oil, gas and minerals extracted. Bolivia now keeps 50 per cent of the value of all its oil and gas production. These reforms increased government revenues from this sector from about US$173m in 2002 to an estimated USD$1.65 billion from royalties and the hydrocarbons specific tax in the first six months of 2013.

The extra revenue has been spent on:

• pensions to relieve extreme poverty among elderly people

• grants to poor families for primary school enrolment

• grants to uninsured new mothers to encourage them to seek medical care during and after pregnancy – to reduce maternal and infant mortality

• school breakfasts for primary school children to guarantee they have one good meal a day.

Tax and education in KenyaTax revenues have increased significantly in Kenya in recent years, from US$2.4bn in 2002 to US$6bn in 2009, largely by bringing more Kenyan citizens into the tax system.

Until 2002, parents had to pay for books and uniforms, and a school building fee. Children whose parents could not afford these things were either ostracised or did not go to school. In 2002, the government introduced universal free primary education. Increased tax revenues have made this possible. Kenya now has the highest secondary enrolment rate in East Africa and the best pupil–teacher ratio for primary education. Moreover, 87 per cent of Kenyans over the age of 15 are literate. In sum, increased tax revenues have created a better-educated population.33


Multinational companies and tax dodging

What types of taxes do multinational companies pay?The most common tax levied on companies is corporation tax, charged as a percentage of a company’s profits. Companies also pay other taxes such as those on imports and exports, on dividends they pay to shareholders, and on capital gains.

Governments also receive tax revenues from the taxes that company employees pay on their incomes (income tax). And regardless of where they are based, governments will collect valued added tax (VAT) on the goods and services sold by companies (paid by the consumer, not the companies).

How multinationals dodge tax – legally and illegallyThere are numerous ways in which multinational companies (MNCs) may

seek to reduce their tax bill in the countries where they operate, particularly with regard to corporation tax.

Legal tax avoidance methods include:

• using special tax avoidance schemes devised by accountants

• demanding tax breaks (see page 19).

Illegal tax evasion methods include:

• falsifying invoices charged to other companies (in order to distort the profits made and the taxes paid on those profits)

• mispricing the transfer of goods and services to subsidiary companies within the same multinational company (again in order to distort the profits made and the taxes paid)

• transferring cash out of the country illegally.

In reality, however, the distinction between legal tax avoidance and illegal tax evasion can be blurred and some MNCs tread a fine line between the two. Tax avoidance schemes are often deemed to be illegal tax evasion upon examination by a country’s tax authorities. Meanwhile, legal tax breaks are often secured by illegally bribing corrupt officials.

Nine-year-old Omar shines shoes every morning in El Alto, Bolivia, earning £1 a day if he’s lucky. In the afternoons, he goes to school.

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Trade mispricing As already noted, it is estimated that developing countries are losing $160bn a year through tax dodging by MNCs. This figure is a Christian Aid estimate based on research into illicit capital flight conducted by Raymond Baker, of the US Center for International Policy, subsequently supported by a detailed analysis of trade data in Europe and the US by Harvard professor Simon Pak. He focused on two forms of tax dodging by multinationals: abusive transfer pricing and false invoicing.34 Together these methods are referred to as ‘trade mispricing’.

Transfer pricing: a transfer price is the price paid for goods and services that are bought and sold between different companies, which are part of the same multinational. Transfer pricing is supposed to be based on the ‘arm’s-length principle’, meaning that companies should buy and sell goods and services from each other at the price those goods or services would fetch on the open market. However, 60 per cent of world trade now takes place within multinationational companies, between their subsidiary companies. With so much trade going on between subsidiaries of the same company, the arm’s-length principle is easily and frequently flouted.

Abusive transfer pricing describes a practice whereby two companies – usually subsidiaries of the same

multinational company – buy and sell products and services from and to each other at a too high or too low cost in order to reduce their profits in countries where they would have to pay tax on those profits. It usually involves buying or selling to their subsidiaries in tax havens where taxes on profits are low or non-existent and no questions are asked.

To provide ‘cover’ for this activity, the subsidiary in the tax haven frequently charges its sister company (the one engaged in real economic activity) for management advice or financial services, or for use of the brand name – anything vague and intangible that could allow the company to increase the price of the goods or services when they are sold on to a subsidiary elsewhere.

False invoicing involves a similar practice, where deals are made between unrelated companies to fiddle invoices and manipulate prices so as to reduce their taxable profits. In other words, the paper invoice does not reflect the actual price paid. False invoicing is difficult to detect in official statistics because it is often based purely on verbal agreements between buyers and sellers, but it is widespread. Such false invoicing, as well as being used for tax evasion, can be used for money laundering, enabling the proceeds of crime and corruption to be shifted out of the country and made ‘clean’.

Trade mispricing: crazy prices, crazy profits

• A leaked draft of an auditor's report recently suggested that multinational giant Glencore (now Glencore Xystrata) had been exporting Zambian copper to Switzerland (on paper at least) for as little as a quarter of the market price. Sold on at its true value, the profit could then remain in Switzerland where it would be subject to little or no tax. Glencore denied any wrongdoing.35

Research undertaken for Christian Aid36 revealed that, on paper:

• 36,000 kilos of Nigerian coffee were exported to the US for 69p per kilo at a time when the world coffee price was $2.35 per kilo.

• A consignment of hairdryers was exported to Nigeria at a cost of $3,800 per hairdryer when the market price of that model was $25.35.


Trade mispricing explained – the banana in your fruit bowlIn reality a multinational company sells and ships your banana directly to a supermarket, which then sells the banana to you.

On paper, the route is more roundabout – via one or more tax havens:

• A company in a banana-producing country sells a banana to a subsidiary company in a tax haven at a very low price – the same price that it cost to grow the banana in the first place.

• As a result, it looks as though no profit has been made, and therefore there is no tax to pay in the country where the banana was produced.

• The subsidiary in the tax haven then sells on the banana to a subsidiary in another country at a very high price, using the cover that expensive financial services were incurred in the tax haven.

• The profits made on the sale of the banana by the company in the tax haven are very high, but the company pays little or no tax on this profit because of low or non-existent tax rates in the tax haven.37

Global flower industry giant found guilty of transfer mispricing in Kenya In 2013 the Kenyan government prosecuted Karuturi Global Ltd, the world’s biggest producer of cut roses, for using transfer mispricing to avoid paying nearly US$11m (about €8m) in corporation tax. This was the first time an African government had taken a large multinational company to court for transfer mispricing through a fully public process. Karuturi had sold roses to a subsidiary in Dubai for one-tenth of the market price, before the subsidiary in Dubai sold them on to Europe at the real market price. Because of this, nine-tenths of the profit from the roses grown in Kenya ended up in Dubai, which is a tax haven.38

See http://allafrica.com/stories/201305101359.html

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How tax havens hide costs

Some unscrupulous companies exploit the financial secrecy provided by tax havens. Costs are artificially created in a tax haven in order to hide the profits made and dodge the taxes owed. This enables companies to dodge taxes in both the country of production and the country of sale. Here is an example of how a banana can travel through various subsidiaries in different tax havens. The money made through the services charged there are not taxed.


Thin capitalisationAnother common practice used to reduce multinationals’ tax bill is `thin capitalisation’. This involves a subsidiary of a multinational company borrowing large sums of money from another subsidiary within the same multinational; the lending subsidiary is based in a tax haven. The company that has ’borrowed’ the money then pays interest on this loan and receives tax relief on the loan in the country where it is based – as was the case for SABMiller’s subsidiary in Ghana, the Accra Brewery (described above). Meanwhile the company in the tax haven that lent the money pays no tax on the interest earned because the tax haven charges very little or no tax at all.

Round-trippingRound-tripping is when a company shifts its profits from a given economic activity in one country to a subsidiary company in a tax haven and then brings this money back into the original country as ‘foreign direct investment’. Because it is supposedly ‘foreign investment’ from overseas, the money coming back into the country can benefit from the generous tax breaks often offered to foreign companies (see section on tax breaks on page 19).

Double tax agreements Bilateral double tax agreements (DTAs) are supposed to help eliminate the potential for companies’ operations in more than one country to be taxed twice

(that is, by both the country from which a company originates and the country or countries in which it operates). While avoiding double taxation is a sensible aim, many companies seek to ‘treaty shop’ and channel funds through countries with especially favourable DTAs (for example, the Netherlands) in order to avoid taxes. Developing countries frequently lack the capacity or the economic muscle to negotiate favourable double tax agreements with developed countries in Europe and elsewhere. As a result, the ability of developing countries to tax companies from developed countries operating in their territory can be significantly reduced.

How SABMiller shifts its profits out of AfricaSABMiller is the world’s second-largest beer company, with interests across six continents. Its brand portfolio includes Grolsch, Peroni and Miller and its global profits amount to £2bn year. In 2010 ActionAid published a report based on a six-month study of SABMiller's Accra Brewery in Ghana and five other African companies owned by the company.39 ActionAid discovered that Accra Brewery had reported a loss and paid no corporation tax in Ghana for two years, even though it is Ghana’s second-biggest beer-seller, sells £29m-worth of beer a year in the country and has seen increased sales in recent years. Every year, the six brewing subsidiaries across Africa transfer millions of pounds to sister companies in tax havens. ActionAid estimated that across all SABMiller's companies in Africa, including those whose accounts were not public, the payments amounted to:

• £43m (about €49m) in royalty payments by SABMiller’s subsidiaries in Africa to a subsidiary company in the Netherlands – to pay for the brand name

• £40m (about €46m) in management service fees to a subsidiary company in Switzerland

• £32m (about €37m) on paper for raw materials supposedly bought by SABMIller's subsidaries in Ghana and Tanzania from a subsidiary company in Mauritius (a tax haven), even though these products were shipped direct from South Africa

• SABMiller’s subsidiary in Ghana also borrowed a large amount of money from its subsidiary in Mauritius and then had to pay interest on this loan amounting to £445,000 (€510,000) a year.

ActionAid estimated that the tax lost by African governments as a result was £18m a year. SABMiller denies that the transactions identified by ActionAid were undertaken for tax reasons. Full details of ActionAid's investigation, and SABMiller's response, at www.actionaid.org.uk/tax-justice/calling-time-the-research


The role of tax havens

Where do tax havens fit into the global economy? Tax havens lie at the heart of the global economy.

• More than half of world trade – at least on paper – passes through tax havens.40

• Over half of all banking assets and one-third of multinational company investments are routed via tax havens.41

• In 2010 the International Monetary Fund estimated that the money on the balance sheets of small island tax havens alone amounted to $18 trillion – about one-third of the world’s financial wealth.42 The Tax Justice Network has estimated that as much as $32 trillion may be hidden in tax havens; this is equivalent to the national wealth of the US and Japan combined.43

What is a tax haven?Definitions of the term tax haven’ differ but most of the world’s 60 or so tax havens share two distinct features:

• high levels of financial secrecy

• very low or zero levels of tax offered to companies registered there

Tax havens are also known as:

• secrecy jurisdictions – owing to their high levels of secrecy

• offshore financial centres – a term preferred by authorities in tax havens.

Tax havens are key players in the business of corporate tax dodging. Some multinational companies use tax havens for legitimate purposes – for example, travel companies with operations in the Caribbean. But many companies use them to hold huge sums of money that would be taxed in other countries. The standard practice is as follows:

• The multinational creates a subsidiary company in a tax haven that receives the profits made in other countries – including developing countries. Most tax havens allow the registration of companies even if they are not engaged in activities of substance.

• The tax haven charges little or no tax on these profits.

• The identity of the parent company that owns both the subsidiary and associated bank accounts and trusts in the tax haven is generally kept secret, so that the true extent of profits made and taxes dodged remains hidden.

The difference that tax havens can make to a company’s tax billIn 2012 Christian Aid analysed the financial and ownership data of more than 1,500 MNCs operating in India, Ghana and El Salvador. This research concluded that those MNCs that have links to tax havens paid on average 28.9 per cent less in taxes than MNCs with no such links.44


Where are tax havens located?A tax haven can be any jurisdiction with its own special laws regarding tax, secrecy and registration of foreign companies. It could be a country, a state, or even a city.

• European tax havens include: Andorra, Cyprus, Luxembourg, the Netherlands and Switzerland.

• Tax havens in Britain's former empire, with the City of London at its centre include: the Cayman Islands, Hong Kong, the Bahamas, Bermuda, Montserrat, the British Virgin Islands and Britain’s Crown Dependencies in the Channel Islands.

• Tax havens shaped around the US zone of influence include: the American Virgin Islands and certain US states such as Delaware.

The role of accountancy firmsA slew of court cases in recent years, particularly in the US, have revealed the involvement of the world's largest accountancy firms in facilitating tax dodging through the tax avoidance schemes they have devised for clients.45

The tax avoidance industry is dominated by four accountancy firms known as the ‘Big Four’: PricewaterhouseCoopers (PWC), KPMG, Deloitte, and Ernst & Young. They have been a driving force behind the creation of complex tax structures and accounting systems for multinationals, involving the routing of profits through multiple subsidiaries in multiple tax havens.

The Big Four help fund the International Accounting Standards Board (IASB) a self-appointed body that devises the rules covering how companies should produce their annual accounts. More than 100 governments worldwide, including those of the UK and all other countries of the EU, tend to rubber-stamp their findings into law. A number of the IASB board members also have an employment history in the Big Four.

Civil society organisations argue that the IASB’s current accounting standards reinforce the lack of transparency and accountability of multinational companies. For example, IASB standards only require multinational companies to provide a global figure for the profits they make and the taxes they pay – rather than a country-by-country breakdown. This can make it easier for less scrupulous companies to hide their profits in tax havens.


Tax breaks – a race to the bottom

Alongside tax avoidance and evasion, tax breaks have played a major part in limiting developing countries’ tax revenues. Some tax breaks are a good thing, designed to encourage or change certain social behaviours – such as tax breaks on savings accounts in order to incentivise saving, or tax breaks on low-carbon transport. But the tax breaks offered to large companies frequently have a negative impact in poor countries.

Since the 1980s, globalisation has led many developed and developing countries to compete with one another to attract foreign investment by offering generous tax breaks to multinational companies. Some have dubbed this tax competition a ‘race to the bottom.’ The most widespread tax breaks are:

• ‘tax holidays’ – a temporary reduction or exemption from paying tax

• ’free trade zones’ or ’special development zones’ for foreign companies.

Many governments believe that tax breaks are necessary to attract foreign investment, which they need in order to bring about economic development and an end to poverty. In reality, lost tax revenues resulting from tax breaks have frequently exceeded the benefits of increased investment.46 Some

countries are losing as much as 5 per cent of their entire national wealth through tax breaks.47 Tax breaks offered to companies in Kenya, for example, are costing the government US$1.1 billion in lost tax revenues – almost twice the total health budget – in a country where 46 per cent of the population live in extreme poverty.48

In addition to offering tax breaks, developing countries are under pressure to keep their corporation tax rates for foreign companies low – again in order to attract foreign investment. The World Bank’s influential annual Doing Business report, for example, actively encourages lower levels of taxation in its recommendations for

improving the investment climate in developing countries, and ranks countries according to their corporation tax rate. The lower its corporation tax rate, the higher a country scores.49

In fact, there is little evidence that tax breaks or low tax rates have ever been the single most important factor in determining whether a company decides to invest in a developing country or not. Business surveys repeatedly find that while taxation matters for foreign investors, other considerations – such as good infrastructure, the quality of the labour force, and good governance (all largely financed by tax revenues) – matter more.50

Oil, mining and gas extraction curse or blessing?In addition to low corporation taxes, companies in the oil, mining and gas sector – known as the extractives sector – are frequently offered low royalty rates (royalties are payments to governments of a fixed percentage of the oil, gas or minerals extracted). Following the privatisation of its copper-mining industry in the late 1990s, for example, Zambia offered mining companies what is believed to be the lowest royalty rate ever set: 0.6 per cent.51

The secrecy surrounding the agreements makes it easier for governments to offer such low royalty rates. This means there is no scrutiny of the agreements by civil society, parliament or trades unions.

A lack of transparency has fuelled high levels of corruption in the extractives sector, involving both governments and multinational companies. This is one of the reasons why many resource-rich countries are racked with extreme poverty, inequality and poor governance. In Africa, for example, mineral exports are worth nine times more than aid52 and yet several of the countries producing these exports are among the poorest in the world. Other resource-rich countries on the continent are among the most unequal.


The solutions

Making the system more transparent

Tax authorities in developing countries have consistently stated that the key to recovering the revenues they are currently losing lies in better access to information about companies’ profits – and where and by whom these profits are being held. At present, tax haven secrecy, combined with a lack of transparency in company accounts, makes it almost impossible for developing countries to detect tax dodging by multinational companies. The solutions listed below would go a long way to ending this secrecy.

Making company accounts more transparent At present, international accounting standards only require multinational companies to give a global figure for their profits made and taxes paid. Without a country-by-country breakdown of the profits made by every subsidiary within a multinational company (including the profits of subsidiaries registered in tax havens), it is difficult to detect tax-dodging abuses such as trade mispricing. Ideally, a country-by-country reporting standard would require an MNC to include in its annual financial statements:

• the name of each country in which it operates and the names of its subsidiaries in each country

• the company’s sales, purchases, labour costs, employee numbers, pre-tax profits and assets in each country

• tax payments to the government in each country.

Country-by-country reporting offers the following benefits:

• Revenue authorities could access the evidence required to detect and stop transfer mispricing and other forms of tax evasion.

• Investors would have more information when assessing the risks (including tax risks) of investing in a multinational company.

• Tax-compliant and responsible companies would be given the opportunity to demonstrate powerful public evidence of their tax payments and their contribution to services and to society.53

The International Accounting Standards Board (see box page 18) has yet to agree to introduce a new country-by-country accounting standard. Unsurprisingly, there is little concrete support for such a standard among MNCs themselves.55 Nevertheless, pressure from both civil society and an increasing number of policy-makers has resulted in some concrete steps towards greater transparency in multinationals’ operations, particularly in the extractives sector.

‘ Any regulation that allowed an international standard for declaring profits of transnational companies would be very useful.’

Erick Coyoy, Guatemalan Economy Minister54


Progress in increasing the financial transparency of multinational companies• In July 2010 the US Congress

passed the Wall Street Reform and Consumer Protection Act (otherwise known as the Dodd-Frank law). This includes a landmark provision that requires energy and mining companies registered with the US Securities and Exchange Commission to disclose how much they pay to individual foreign countries and to the US government for the oil, gas and minerals they extract. Since companies only have to disclose payments to governments rather than a breakdown of profits made, it is more of a tool for detecting corruption than tax dodging. Nevertheless it is regarded as an important first step in the process towards full country-by-country reporting for companies.56

• In June 2013 the European Union [EU] adopted new laws that go further than the US Dodd-Frank legislation, requiring European oil, mining, gas and also logging companies to report on their payments to governments, including taxes and royalties, with regard to any projects worth more than €100,000.

• In 2013, EU banking legislation was reformed in order to require banks to disclose their profits made and taxes paid on a country-by-country basis.

• On 22 May 2013 EU leaders, in response to public outrage at tax avoidance by corporate giants such as Apple and Google, declared their commitment to exploring further opportunities for country-by-country reporting for all large companies, not just those in the extractives sector.

Lifting the secrecy in tax havens Tax haven secrecy is proving to be a major obstacle to detecting tax dodging by MNCs and wealthy individuals. Greater transparency in tax havens is therefore as important as greater transparency in companies.

Automatic information exchangeA multilateral, automatic sharing of information about individuals and companies holding wealth in a given country or tax haven with the country where that wealth originated would equip countries with timely information about where tax abuse is likely to be taking place. Obliging tax havens specifically to share such information automatically with developing countries would be a major step in the battle to end tax haven secrecy.

At present, the OECD requires tax havens to sign at least 12 bilateral Tax Information Exchange Agreements (TIEAs) with other countries if they wish to avoid being blacklisted as non-cooperative jurisdictions. However, TIEAs have proved of little benefit to developing countries for the following reasons:

• To date, tax havens have only agreed to sign TIEAs with a few of the more economically powerful developing countries such as India. Hence the need for a multilateral agreement on information exchange.

• TIEAs only provide for the exchange of tax information ’on request’, not automatically. This means that a tax authority seeking information from a tax haven needs to gather concrete evidence of potential tax dodging by a given company or individual before it can request information from the tax haven. This is a huge task, even for relatively well-resourced European tax authorities. Most developing countries do not have the capacity to do an ‘on request’ appeal for information.

‘ There should be transparency. Particularly the tax havens should cooperate with countries to unearth the ill-gotten resources which are being deposited there.’

Pranab Mukherjee – then Indian Finance Minister – speaking in 201157


Progress in securing automatic information exchange • The EU’s Savings Tax Directive

provides for the exchange of information between EU countries and 15 tax havens outside the EU about individual account-holders (though not about companies). However, some European tax havens have not signed up to the Directive and others have done so only partially.

• In November 2011, all G20 countries agreed to sign up to the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which contains some provision for the exchange of tax information between different countries, including automatic exchange. Although the Convention is relatively weak, this formal backing from the G20 provided a starting point for implementing multilateral

and automatic information exchange in the future. The challenge is to ensure that tax havens sign up to the Multilateral Convention.

• At their summit in 2012, G20 leaders called on countries ’to join the growing practice [of automatic financial information exchange] as appropriate’.58 This reflects a growing view among policy-makers that automatic tax information

Pupils in Northern Ghana collect their school lunch, which is provided through the government's school feeding programme. Ghana loses at least US$36m in taxes through its mining sector alone. If it could collect the tax it is owed, it could reach many more children

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exchange is the standard that all countries – including tax havens – should strive towards.

• The Foreign Account Tax Compliance Act (FATCA), which came into effect in the US in 2013, is a key milestone towards automatic information exchange globally. FATCA requires foreign financial institutions to file information automatically with the US authorities about their US account-holders with foreign-based accounts worth more than $50,000. Financial institutions which fail to comply with FATCA will effectively be locked out of the US financial marketplace. While FATCA creates obligations on financial institutions, it is largely being implemented by agreements between revenue authorities to share information automatically. Although FATCA relates only to individual account-holders, it is helping to erode the secrecy in tax havens and it proves that automatic information exchange is technically possible. It is also enabling European countries (most of which have signed up to a pilot project) to access more information on the assets in tax havens, as EU countries are demanding the same access to information that is required by the US FATCA. However, it is unclear whether any developing countries will benefit from progress being made as a result of the US legislation.

Identifying beneficial ownership ‘Beneficial ownership’ is a legal term used to describe anyone who has the benefit of ownership of an asset (for example, a bank account, trust, or property). Identifying the beneficial owner can be difficult (or even impossible) because anonymous shell companies, nominees and other techniques can enable the real owners to be kept secret. Companies and wealthy individuals frequently hold their wealth in a myriad of trusts, foundations and companies in tax havens, making it almost impossible to trace who the actual owner is.

Alongside automatic information exchange, a mechanism is therefore needed that provides tax authorities and ordinary citizens with information about ‘who owns what where’. This should take the form of a public registry in every country – including every tax haven – of the real owners of all the trusts, foundations and companies established within its borders, which both governments and ordinary citizens can access.

Progress on beneficial ownership: Within the EU, a review of the Anti-Money Laundering Directive (AMLD) is providing a golden opportunity to promote financial transparency, including on beneficial ownership. However the draft proposal published by the European Commission in February 2013 59 falls short of what is necessary. Instead of public registries,

it proposes only that companies hold their own beneficial ownership information and make this available to the relevant government authorities and financial institutions.

Tackling money laundering in the EU The EU must take responsibility for the vast amounts of developing countries’ money that end up in bank accounts in EU countries or European tax havens. In addition to its shortcomings with regard to beneficial ownership (mentioned above) the European Commission’s proposal for the AMLD fails to address the question of sharing information with non-EU countries, even though the legislation applies to laundering the proceeds of crimes regardless of where they happen in the world.

The AMLD also fails to treat tax crimes as full money-laundering offences. Such a definition would represent a key step in the battle against illegal tax evasion. If tax evasion were a so-called ’predicate offence’ on the same level as corruption, for example, banks and other financial intermediaries would be legally obliged to look out for transactions that could be laundered money from tax evasion. Campaigners across Europe are now pushing for more ambitious measures to identify beneficial ownership (ie through public registries) and to tackle money laundering (including tax evasion) than are currently on the table.


Reforming the system

There is a growing view that what is needed is not only greater transparency, but a reform of the system itself, particularly the way in which multinational companies’ activities are taxed.

The basic problem is that the international tax system no longer reflects how multinational companies operate. Current tax rules assume that the different entities that form an MNC act independently from one another. However, recent allegations of tax dodging by Amazon, Google, Ikea, BNP Paribas, Starbucks, Apple and other multinationals suggest that this is not the case. In fact the different subsidiaries that form a multinational group operate as one entity and follow a single business strategy.

One proposal is that MNCs should be treated as just one single entity in a so-called ’unitary approach’, rather than as a sum of independent companies. Under such an approach and on the basis of an agreed formula, the taxes charged to a company would be apportioned to the countries where

the company is economically active. This could decrease the segregation, between where companies’ real economic activities take place and where profits are reported for tax purposes. It could mean that they would no longer benefit from creating fictitious subsidiary companies in tax havens as a strategy to avoid or evade taxes.

Some NGOs are yet to be convinced that a unitary system would benefit developing countries and fear that the formula agreed for apportioning the tax bill within a multinational company might benefit only rich countries. Others believe that a more unitary approach – if designed by and for all countries including developing countries – could enable countries to collect a fairer share of the profits earned by MNCs operating in their territory.

Progress towards developing a new system for taxing multinationalsThe term that the OECD and others use to describe the problem of corporations shifting profits out of countries for tax purposes is `base erosion’ as it results in an ‘erosion’ of the tax base of the countries affected.

In February 2013, the OECD published its initial report, Addressing Base Erosion and Profit Shifting.60 This report acknowledges that base erosion constitutes a serious risk to tax revenues and that multinational companies’ profit-shifting strategies are a fundamental cause of base erosion. It also recognises that the international tax rules drawn up 80 years ago have not kept pace with the changing business environment and are not fit for purpose. It asserts that unilateral action would not solve the problem and that a holistic and comprehensive approach is needed. It calls on governments to think ‘outside the box’ and identify new approaches to the taxation of MNCs.

The OECD’s report is an important milestone in the process to develop a new system for taxing multinational companies. Now we need to ensure that developing countries are given the space in which to defend their interests and are fully included in any process aimed at designing new global tax rules so that the rules do not only benefit rich countries.


Progress in the UK towards tax justiceNowadays media stories about multinational companies not paying their fair share of tax are everywhere – and for good reason. The UK’s tax authority, Her Majesty’s Revenue and Customs, estimates that tax evasion and aggressive tax avoidance – including by big business – is costing the UK purse around £30bn (roughly 35 billion euros) annually.61 In response, the UK prime minister, David Cameron, has told companies they need `to wake up and smell the coffee’.62 This was a reference to the coffee multinational, Starbucks, which paid no corporation tax in the UK for three years, causing a public outcry.

Cameron has pledged to clamp down on UK tax havens such as the British Virgin Islands, by calling for a global standard on automatic information exchange and backing the creation of public registries of the real owners of all trusts and ‘shell companies’ (often created in order to dodge tax). This political shift is partly down to campaigning by NGOs, though not entirely.

Cuts in public spending and job losses in the UK have made ordinary people angry about tax dodging by big companies and this in turn has put pressure on the government to respond. The profile of the issue has been raised further by radical groups such as UK Uncut, who have picketed and occupied the shops and outlets of companies known to have dodged tax in the UK. Although public anger has focused on the impact of tax dodging on the UK, the high profile of the issue has enabled NGOs to expose its effects on developing countries too.

In 2013, more than 200 civil society organisations from the UK’s international development sector came together in a joint campaign to push the UK prime minister and other G8 leaders to tackle the causes of global hunger, including tax dodging. The campaign managed to persuade David Cameron to put tax and transparency at the top of the agenda of the G8 summit of world leaders in 2013 which the UK chaired.

Companies and politicians in the UK have a long way to go on this issue before NGOs can stop campaigning. Nevertheless, the signs are that major change is now a real possibility.


Difficult questions and how to answer them

If companies have to pay more tax, won’t we have to pay more for their goods and services?

It is unlikely that companies will want to make their goods and services less competitive by raising prices, so we should not assume that prices would go up.

If MNCs do raise their prices as a result of paying more tax, there would be more of a level playing field between small and medium-sized enterprises (SMEs) and multinational companies. At present, SMEs are often at a disadvantage as they do not have multiple subsidiaries in tax havens like some of the less scrupulous multinational companies, and therefore pay the full rate of tax. Enabling SMEs to be more competitive could have far-reaching benefits. For example, SMEs generate more jobs than MNCs.

Moreover, any small increase in what we pay for companies’ goods and

services will be balanced by increased tax revenues – money that can be spent on providing improved public services.

Shouldn’t we be focusing on our own problems in Europe in these difficult economic times rather than those of developing countries?

The tax reforms we are proposing are global so they would help European countries as well as developing countries. Whether in Europe or the developing world, tax dodging is damaging national economies. The UK’s tax authority, for example, has estimated that it is losing around 35 billion euros a year as a result of tax dodging.63 In addition, tax dodging hurts the poor most because they depend most on public services.

If companies are forced to pay more tax in Europe, won’t they stop investing here and just go elsewhere? Won’t that have a devastating effect on jobs in Europe?

We are campaigning for a global solution and for measures with which all companies and governments in all countries will have to comply. It will mean there is nowhere for unscrupulous multinationals to hide their profits.

In any case, research shows that the rate of taxation is rarely the decisive factor in determining whether a company invests in a country. Business surveys repeatedly find that while taxation does matter to foreign investors, other considerations such as good infrastructure, the quality and cost of labour, and good governance matter more when it comes to long-term investments.64 Moreover, if large companies have to pay more tax in Europe, small and medium-sized companies could become more competitive, which could then generate more productivity and jobs in these smaller companies.

Will you speak up for the

world’s poorest

at the G20?

Name:

Juan David Valladares Paz

Age:

7Address:

Homeless

Country:

Guatemala

G20 Entry Pass

Project name G20 Tax / Climate ChangeJob number 12-384-F

Item name DL Postcards

Proof stage V1

Client Neale Jones

Proof date 10/02/12

Client team Campaigns

Feedback due 12/02/12

12-384-F G20 DL postcard reprint AW

.indd 1

21/02/2012 12:05

Postcard adressed to the UK Prime Minister ahead of the 2012 G20 Summit asking world leaders to tackle the twin challenges of climate change and tax dodging


Companies will always find ways of dodging tax. You close one loophole, they’ll find another. So what’s the point?

Some multinationals and individuals will always try to find ways to dodge tax. Nevertheless the tax system should make it as difficult as possible for them to do this.

At present the CEOs of big multinationals may feel that if other multinationals are increasing their profitability by dodging taxes, they have to do the same thing. Otherwise they risk being considered unsuccessful by their boards and shareholders.

As citizens of Europe, we need to persuade companies that irresponsible tax practices will damage a company’s reputation. If tax was to be regarded as a core element of multinational companies’ corporate social responsibility policies, there would be less demand from multinational companies for aggressive tax avoidance schemes and less pressure placed on the ‘Big Four’ accountancy firms to find loopholes in the system.

Many tax dodging practices are legal. Who can blame anyone for trying to reduce their tax bill?

If no one paid tax, there would be no public money to invest in education, or health, or the police or judiciary, or in transport, roads or power. We agree with the Swedish Prime Minister that companies have an obligation to society:

There is a difference between avoiding tax in compliance with the law and avoiding tax in a way that violates the original purpose of the law. If a particular tax avoidance scheme can be proved to be contrary to the purpose of the law, the tax authority may rule that it is illegal. This is why the OECD guidelines for multinationals refer to the intention of the law and include tax avoidance, not just evasion.

If governments in poor countries get more tax revenues, won’t corrupt politicians just squander this money? How do we know this money won’t just go into their pockets?

As already noted, there are no guarantees how a government will spend the money raised. However, research has shown that in general, the more tax African countries collect, the better their performance towards the Millennium Development Goals.31

Throughout the world, citizens, parliaments and the media have an important role to play in monitoring government spending, holding governments to account and influencing them to spend the increases in revenue from taxation on reducing poverty and building better societies. If citizens know their governments have more money, they want to know what their governments are doing with it and how they are spending it. An increase in tax revenues can therefore help to reduce corruption.

Of course, it is not only developing governments that have been implicated in corruption. Where large sums of money are involved, big companies have often been exposed for bribing politicians and officials and banks so as to fix systems in their favour.

‘ These companies ask for a lot of investments in infrastructure, in research and development. They want to have well-educated staff members. Well … pay your taxes. Then we can afford all of these investments.’

Fredrik Reinfeldt, Prime Minister of Sweden, 22 May 2013 65

http://www.latimes.com/topic/politics/government/fredrik-reinfeldt-PEPLT00008125.topic


In many poor countries, foreign companies pay money into a social fund to help tackle poverty. Isn’t that better than paying tax?

Social funds often produce short-term benefit to a fixed group of people (for example, the communities in the vicinity of a mine or factory). By contrast, taxation provides governments with a sustainable source of income that they can use to provide services for all citizens. Moreover, there is less accountability built into social funds than there is with services provided by governments, in that governments are accountable to their citizens, whereas companies are primarily accountable to their shareholders.

If we stop tax havens, won’t all the people living there become very poor?

It is worth remembering that in most tax havens, the residents pay similar rates of tax to those paid by citizens elsewhere. Low or zero tax rates are generally only offered to foreign companies and individuals not residing there.

Nevertheless, since many people living in tax havens are employed in the financial services industry, the impact of a tax haven crackdown on the citizens living there needs to be considered. Increasingly, tax havens are becoming a high-risk model for their citizens. The collapse of Iceland’s banks in 2009 and Cyprus’s banks in 2013 demonstrated how toxic debts stashed away in tax havens can become hidden time-bombs for the citizens living there.

At the same time, the growing pressure that world leaders in the G8, G20 and the EU are putting on tax havens to become less secretive is unlikely to go away. Therefore tax havens may face economic and political isolation if they do not change.

Small island economies should consider diversifying their economies into other sectors (for example, by focusing more on tourism) so that they are less dependent on volatile financial services. But it does not have to be the case that tax havens stop offering financial services altogether. It is

more a question of how these financial services are managed and whether they facilitate tax dodging.

Rather than singling out individual tax havens, the real solution is to raise standards everywhere.

Tax authorities in poor countries won’t have the capacity to make use of the additional data that might be provided by country-by-country reporting by companies.

A lack of capacity is a major problem for tax authorities in developing countries. For this reason, civil society organisations are calling on European donors to increase aid and support to developing country tax authorities. However, the most elaborate and well-funded capacity-building programmes will fail if tax authorities do not have the information with which to detect tax dodging. Put simply, information is power.


Meal time in Ethiopia: tax revenues are key to tackle hunger and malnutrition

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Endnotes

1 World Health Organization (WHO), World Health Organisation www.who.int/water_sanitation_health/mdg1/en/index.html

2 Ibid

3 World Resources Institute Pilot Analysis of Global Ecosystems, February 2001

4 UNICEF

5 Educational for All Global Monitoring Report, UNESCO, 2010

6 'Tax in Developing Countries: Increasing resources for development’, House of Commons, International Development Committee, Fourth Report of Session 2012-13, 16 July 2012, p5

7 World Bank figure, www.worldbank.org/ en/news/feature/2011/06/06/economics- adaptation-climate-change

8 The OECD Development Assistance Committee (DAC) reports a 4 per cent drop in real terms in global development assistance for 2012, which followed a drop of 2 per cent in 2011. www.oecd.org/dac/stats/aidtopoorcountriesslipsfurtheras governmentstightenbudgets.htm

9 Based on OECD figures and quoted by Jeffrey Sachs, ’The Facts Behind G8 Aid Promises’, www.guardian.co.uk, 4 July 2010. The figure of $20bn takes account of inflation.

10 Figure from the World Bank. See http://data.worldbank.org/indicator/DT.INT.DECT.GN.ZS

11 World Bank, International Debt Statistics 2013 http://data.worldbank.org/sites/default/files/ids-2013.pdf, p2

12 Figure quoted in Tax Justice Advocacy: A Toolkit for Civil Society, Tax Justice Network, 2011

13 The US$160bn figure was a Christian Aid estimate in the report Death and Taxes, the true toll of tax dodging, 2008, based on work on illicit capital flight by Raymond Baker. It was supported by further detailed research on trade mispricing by Professor Simon Pak in the Christian Aid report False Profits, Robbing the Poor to Keep the Rich Tax Free, 2009.

14 Countries that are members of the Development Assistance Committee (DAC) of the OECD

15 www.oecd.org/dac/stats/aidtopoorcountries slipsfurtherasgovernmentstightenbudgets.htm

16 Figure based on Josef Schmidhuber and Jelle Bruinsma, ‘Investing towards a world free from hunger: Lowering vulnerability and enhancing resilience’, in Adam Prakash (ed), Safeguarding Food Security in Volatile Global Markets, FAO, 2011. Action Contre la Faim/Institute of Development Studies, Aid for Nutrition: Using innovative financing to end undernutrition, undated, p13. See Susan Horton et al, Scaling up Nutrition: How much will it cost? World Bank, 2010, p24.

17 Figure cited by Raymond Baker for Global Financial Integrity, Washington

18 Dev Kar and Sarah Freitas, Illicit Financial Flows from Developing Countries Over the Decade End-ing 2009, Global Financial Integrity, 2011

19 Research published in J Boyce and L Ndikumana, Africa’s Odious Debts, Zed Books, 2011

20 Evidence cited in Who pays the price?, Christian Aid, 2013

21 www.reuters.com/article/2012/02/07/zam-bia-mining-taxes-idAFL5E8D75SN20120207

22 The World Bank estimates that growth in the agricultural sector is three times more effective in reducing extreme poverty than growth in other sectors. See Susan Horton et al, Scaling up Nutrition: How much will it cost? World Bank, 2010, p24.

23 FAO Statistical Yearbook, 2012

24 Food and Agricultrure Organization of the United Nations (FAO) The State of Food and Agriculture 2012, p35, www.fao.org/docrep/017/i3028e/i3028e.pdf.

25 The Salvadorean NGO, FESPAD (Foundation for the Study and Application of the Law) estimates that $1.4bn is needed to regenerate the agriculture sector.

26 Figure quoted in Christian Aid, Who Pays the Price? Hunger: The Hidden Cost of Tax Injustice, 2013, p22

27 UNDP, Human Development Report, 2012

28 Ibid

29 The US$160bn figure was a Christian Aid estimate in the report Death and Taxes, the true toll of tax dodging, 2008, based on work on illicit capital flight by Raymond Baker. It was supported by further detailed research on trade mispricing by Professor Simon Pak in the Christian Aid report False Profits, Robbing the Poor to Keep the Rich Tax Free, 2009. The figure has subsequently been reaffirmed in a paper in a World Bank publication.

30 SEND-Ghana, Investing in Smallholder Agriculture for Optimal Result: The ultimate policy choice for Ghana, 2009

31 Attiya Waris and Matti Kohonen, 2013 The publication is available at http://eadi.org/gc2011/waris-109.pdf

32 The Benefits of Foreign Investment: Is Foreign Investment in Bolivia's Oil and Gas Delivering?, Christian Aid, 2007

33 Development Initiatives, Kenya: Resources for Poverty Eradication Background Paper, Sept 2012 www.devinit.org/wp-content/uploads/Kenya-public-expenditure-background-paper.pdf

34 See endnote 13.

35 Example of alleged trade mispricing by Glencore quoted by EURODAD in How EU country-by-country reporting could tackle tax dodging and why this is needed http://eurodad.org/211928/

36 Christian Aid, False Profits: Robbing the Poor to keep the Rich Tax Free, March 2009

37 Banana example taken from Nick Shaxson, Treasure Islands: Tax Havens and the men who stole the world, Bodley Head, 2011

38 http://allafrica.com/stories/201305101359.html

39 Calling Time: Why SABMiller Should Stop Dodging Taxes in Africa, ActionAid, 2010

http://www.oecd.org/dac/stats/aidtopoorcountriesslipsfurtherasgovernmentstightenbudgets.htm






40 Figure quoted in Nicholas Shaxson, 2011, op cit, based on a statistic which was quoted by the Paris Group of Experts in 1999 and based on research undertaken by J Christensen and M Hampton. Evidence indicates the share has grown since 1999.

41 See Ronen Palan, Richard Murphy and Christian Chavagneux, Tax Havens: How Globalisation Really Works, Cornell University, 2010.

42 IMF Working Paper, WP/10/38, February 2010

43 James Henry, The Price of Offshore Revisited, Tax Justice Network, 2012

44 Who Pays the Price? Hunger – The Hidden Cost of Tax Injustice, Christian Aid, 2013

45 Death and Taxes: The True Toll of Tax Dodging, Christian Aid, 2008, p 27, www.christianaid.org.uk/ images/deathandtaxes.pdf See also Prem Sikka etc

46 International tax expert and OECD consultant reported on this research at a conference in Ghana. Reported in ’Ghana: no incentive needed for investing in the mining sector – tax expert’, Public Agenda, Accra, 25 February 2008, http://allafrica.com/stories/200802251515.html. See also Gordon H Hanson, Should Countries Promote Foreign Direct Investment? G-24 Discussion Paper No.9, 2001.

47 Figure quoted in Bringing Taxation into the post-2015 Development Framework, ActionAid, 2013

48 Tax Competition in East Africa: A Race to the Bottom? Tax Incentives and Revenue Losses in Kenya, ActionAid International, 2012

49 See Approaches and Impacts: IFI tax policy in developing countries, ActionAid/EURODAD, 2011.

50 See Revenue Mobilisation in Developing Countries, Fiscal Affairs Department, IMF, 2011.

51 Thomas Baunsgaard, A Primer on Mineral Taxation, IMF Working Paper WP/01/139, p26, 2001.

52 Figure quoted by Publish What You Pay Europe in 2012.

53 Christian Aid, Shifting Sands: Tax, Transparency and Multinational Companies, 2010, www.christianaid.org.uk/images/accounting-for-change-shifting-sands.pdf

54 Interviewed by Christian Aid in September 2010

55 A survey undertaken by Christian Aid of the UK’s top 100 companies (FTSE100 companies) in 2010 indicated that only 3 of the 38 companies that responded would support a country-by-country reporting standard.

56 www.whitehouse.gov/the-press-office/statement-press-secretary-transparency-energy-sector

57 The minister is quoted in this article, from the Economic Times of India: http://articles.economictimes.indiatimes.com/2011-02-18/news/28615319_1_tax-havens-black-money-tax-information

58 See G20 Communique, Mexico, June 2012

59 http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:52013PC0045: EN:NOT

60 Addressing Base Erosion and Profit Shifting, OECD. See www.oecd.org/tax/beps.htm

61 HMRC, Measuring tax gaps, 2011.

62 Quote from a speech given by David Cameron at the World Economic Forum, Davos, January 2013

63 Figure of £30bn from Her Majesty’s Revenue and Customs, UK

64 See Revenue Mobilisation in Developing Countries, Fiscal Affairs Department, IMF, 2011

65 Reported in: Henry Chu, ‘Pay your taxes, Europe warns multinationals’, Los Angeles Times, May 23, 2013, www.latimes.com/business/la-fi-euro-corporate-tax-20130523,0,5076262.story

http://allafrica.com/stories/200802251515.html

http://allafrica.com/stories/200802251515.html

http://articles.economictimes.indiatimes.com/2011-02-18/news/28615319_1_tax-havens-black-money-tax-information




STOP tax dodging is a joint initiative seeking tax justice. Membership includes organisations such as:

14-770-J1727

This publication has partly been funded by the European Union. The contents of this publication are the sole responsibility of Christian Aid and other member organisations of the STOP tax dodging campaign and can in no way be taken to reflect the views of the European Union.

AcknowledgmentsProject coordination: Mariana PaoliText: Hilary Coulby and Helen CollinsonDesign, editoral: Christian Aid

The authors would like to thank all member organisations of the STOP tax dodging campaign for their valuable feedback and input.

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