23rd October 2009, UNLEASHING ECONOMIC POTENTIALS. COPENHAGEN

ENDING TAX EVASION AND ILLICIT FINANCIAL FLOWS

John ChristensenDirector, International Secretariat

For each dollar of aid that goes into Africa, at least five dollars flows out under the table. The time has come to confront the tax haven monster.

“

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Dirty Money Flows Distort Our EconomyAnd Corrupt Democracy

30th May 2007

“Any survey of the

main uses of offshore

funds would have to

conclude that low tax

is not the main benefit

at all; the real

attraction is their total

confidentiality. This

makes them perfect

places to lodge capital

in flight from tax,

politics or the law.”

Financial Times

18 January1997

Mission Statement

In an era of globalisation, the

Tax Justice Network is

committed to a socially just,

democratic and progressive

system of taxation.

TJN campaigns from an

internationalist perspective for

a tax system which is

favourable for poor people in

developing and developed

countries, and finances public

goods and taxes harmful

activities  which pollute and

cause unacceptable inequality.

The economic

transformationSince the 1970s:

exchange controls have been

eliminated

trade tariffs and taxes have been

significantly reduced

there has been a massive expansion of

cross border trade and investment

increased income from foreign sources

capital mobility now virtually

unimpeded

the number of secrecy jurisdictions has

tripled since the 1970s

In 2006 developing countries lost an estimated US$858.6 billion - $1.06 trillion in illicit financial flows. Between 2002 and 2006 the volume of illicit financial flows increased by 18.2 per cent: the situation is deteriorating

Illicit financial flows include the proceeds from both illicit activities such as bribery and embezzlement, criminal activity, and the proceeds of licit business which become illicit when shifted across borders in contravention to applicable laws and regulatory frameworks (most commonly for tax evasion purposes)

Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 Sub-Saharan African countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end-2004.

Their net external assets (accumulated flight capital minus accumulated external debt) amounted to approximately $398 billion over the 35-year period.

• loss of revenue for public expenditure programmes• increased reliance on external debt• need to offer incentives to foreign investors• conditions imposed by aid donors

• reduces investment in public goods – education, training, physical infrastructure, research & development

• switch of tax burden between factors of production• worsens inequality• raises cost of labour relative to capital• reduces consumption of domestic produce and increases imports of luxury goods and services

• creates micro-economic distortions• the free-rider phenomenon• corporate responsibility begins with paying tax

Wrecking Opportunities for Mobilising Domestic Resources – direct impacts

“Aggressive tax avoidance is a serious cancer eating into the fiscal base of many countries”

Pravin GordhamFinance MinisterSouth Africa, 2009

greatly increases tax administration costs

threatens the viability of weaker states, and increases reliance on external players – this has an entirely negative impact on democracy building

tax dodging undermines public confidence in the rule of law and the integrity of public systems, institutions and rules. It should be classified as a predicate crime under the UN Convention Against Corruption

tax dodging is a crime against society and should be ranked as grand corruption because it generally involves privileged elites

Wrecking Opportunities for Mobilising Domestic Resources – further impactsUS$160 billion

€110 billion

The estimated annual cost to the people of developing countries of tax evasion by multinational companies

The expanding credit crisis has helped

underline the dangers of a lack of transparency

in international finance, poor regulation and

insufficient cooperation . . Yet the world risks

wasting political capital on the wrong targets.

We are pursuing the timorous policies of a past

age to tackle tax havens.

Comment: Stop this timidity in ending tax

haven abuseJohn Christensen and David Spencer, 5th March

2008

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Replace the OECD black/grey/white list with TJN’s Financial Secrecy Index (to be published 1st November)

Adopt automatic information exchange as a multilateral standard, and sanction non-cooperative jurisdictions

Adopt an International Financial Reporting Standard on country-by-country reporting

Require full public disclosure of beneficial ownership of trusts, companies, foundations and similar legal entities

Adopt a General Anti-Avoidance Provision accompanied by purposive legislation

Strengthening transparency and governance “We should endorse sharing information and bringing tax havens and non-cooperating jurisdictions under closer scrutiny”

Manmohan SinghPrime Minister of India, 2009

Strengthen international cooperation with a primary objective of ensuring that national tax systems do not have negative external impacts on tax sovereignty elsewhere (UN Tax Committee proposals under Monterrey Consensus)

Define tax evasion as a corrupt activity within the scope of the UN Convention Against Corruption, and as a predicate crime under AML regimes

Negotiate a multilateral framework to allow states to tax multinationals on a global unitary basis (using formulary apportionment) with appropriate mechanisms to allocate tax revenues across borders

Enhanced global cooperation“Action by the international community is required to ensure that the potential tax base of developing countries is not undermined through tax evasion”

African Tax Administrator’s Forum, Pretoria, South Africa, 2008

more info: taxjustice.net

taxjustice.blogspot.com

taxresearch.org.uk/blog

contact: john@taxjustice.net