International Tax and Money Laundering

The finance sector caused the crisis and should bear the costs! In August 2009 the President of the British Financial Services Authority, Adair Turner, therefore proposed the introduction of a financial transaction tax,49 and French and German government circles supported the idea. Before the Pittsburgh summit, non-governmental organisations wrote to the G-20 that a tax of this kind should be introduced and the income used for development purposes. The motion was not discussed seriously either in Pittsburgh or in Istanbul.

International tax evasion and illicit capital flows

The high money requirements to finance the economy stimulation measures and the bank bailouts were certainly one reason for stepping up the campaign against international tax evasion. However, the measures introduced to date largely bypass the needs of the developing countries.

Most talked about were the black and grey lists drawn up by the G-20 in conjunction with OECD. Any country which did not have at least 12 double taxation agreements (DTAs) or tax information exchange agreements (TIEAs) with other countries was blacklisted. These agreements must, at least, meet the OECD minimum standards for mutual exchange of tax information on request. The lists were updated continually (OECD 2009a). OECD presents a review of its efforts in the struggle against tax evasion in an informative brochure published in October 2009. In the meantime, according to OECD, the offshore centres monitored have signed 90 new agreements for improved exchange of information since April and over 60 are currently being negotiated. New ones are being added continually. OECD argued that the developing countries would also benefit from them.

The fact is, however, that these agreements on the exchange of information on tax affairs exclusively concern transactions between the tax havens and OECD States and not the developing countries. Many of them have not yet been brought into operation. Developing countries have also contracted far fewer bilateral DTAs than the industrialised countries. DTAs and TIEAs are bilateral agreements between two States without multilateral power of legal implementation. The OECD standard for the exchange of information is not enforceable under international law.

The OECD and G-20 initiative therefore remains insufficient for the developing countries. The Tax Justice Network (2009) has set out in detail why the exchange of information on request is not sufficient, why an automatic exchange of information is necessary and why multilateral rules are essential, precisely for developing countries.

But an enhanced exchange of information in tax matters would not be enough either. Various studies in recent years have shown how the offshore centres foster corruption, capital and tax flight. According to the latest estimates, between USD 800 and 1,000 billion of illicit flows are leaving the developing countries (Global Financial Integrity 2009). Contrary to expectations, criminal dealings or bribery and corruption payments do not account for the greater part of these illicit flows. Two-thirds derive from commercial transactions. Particularly targeted is internal transfer pricing by multinational group concerns. Approximately 60% of world trade is effected within multinational enterprises. By under-invoicing or over-invoicing, book profits and losses can be shunted around virtually at will. This is linked with tax evasion on a grand scale. The English charity Christian Aid (2008) estimates this at over USD 160 billion annually. Four specialised non-governmental organisations demanded six immediate and trenchant measures by letter to the G-20 (Global Witness et al. 2009). The G-20 should prepare for the transition to the automatic exchange of information. The rules on the identification of bank clients must be tightened up. Tax evasion should be declared a preliminary to money laundering. The G-20 should show ways of combating abusive transfer pricing. The ownership structure, control and invoicing of offshore enterprises, trusts and foundations should be disclosed. In particular, the multinational enterprises should be bound to detailed, public, country-by-country reporting on their subsidiaries and the associated turnovers, investments, profits, taxes paid as soon. The Task Force on Financial Integrity and Economic Development (2009) and the Tax Justice Network have also vigorously upheld this country-by-country reporting.

It is striking that the Norwegian government has also come out in favour. It set up a special commission whose report on capital flight from the poor countries was published in June 2009 (Commission on Capital Flight from Developing Countries 2009). The study proposes a more demanding development policy that will assure the developing countries sufficient tax income and root out corrupt practices that lead to flight of capital and taxes.

Finally, at end-October the Tax Justice Network published an extensive electronic database listing over 60 tax havens and secrecy jurisdictions, which is being expanded and updated continually (Tax Justice Network 2009a). Each of these havens was examined according to 12 indicators, selected to provide information on the degree of transparency and the spheres of secrecy. Based on this, the Tax Justice Network will shortly also publish a new “Financial Secrecy Index”.50 This should mark a significant step towards improved financial transparency.