IFI to the forefront on tax evasion.

Let us take the intentions in the G-8 communique on tax evasion seriously (while being aware that so far there are only intentions, no timelines, no firm commitments). Then the G-8 countries will be the standardbearers for other multinational for a, especially the G-20 (the next summit this fall will be chaired by Russia) and the OECD to ramp up the fight against tax evasion and against intransparent corporate structures where the beneficial owners is hiding behind a series of companies registered in “tax havens”.

Why is this so important, and why does this importance go far beyond the G-8 self-proclaimed “rulers of the world”? Because less developed and emerging countries lose, according to Tax Justice Network estimates, several hundred billions of Euros of potential taxes, about twice as much as they receive in official development assistance, through tax avoidance and tax evasion with the help of offshore registrations of companies in third countries, which are neither the countries where the economic activity takes place nor where the company owner resides.

Driving tax evasion (used in the broadest sense of the term, including legal and illegal activities) are two facts: one is greed, or the wish of the beneficial owner of a company to reap as high net returns on his activities as possible; the second one is countries’ competition for investment funds, which drives down corporate income taxes, because it is deemed that low taxes are one of the major determinants of foreign direct and financial investments. While the latter may look rational for an individual country, on a global or regional level, it is a fight to lure away investors from another location, thus a zero-sum game. In this vain, it has been shown that e.g. within the EU, this  has led to an more or less pari passu lowering of corporate income tax rates while the hierarchy between countries has remained more or less constant. This then leads to tax structures which put the burden more and more on income taxes (from dependent and independent labor) and regressive consumption taxes, with negative effects on jobs.

Tax havens not only facilitate tax evasion, but also make regulatory arbitrage possible and make it much more difficult to identify beneficial owners of companies. This was the reason, why the G-20 in 2009 and now the G-8 in 2013 made this a priority for their agendas.

International Financial Institutions, whose remit is to finance these countries’ projects and policies, and see themselves also of advocates of these countries’ interests in the global arena, should be at the forefront of the recent attempts of the G-8 and G-20 to sniff out tax havens and thus facilitate that (corporate) taxes are paid where the economic activity takes place. After all, the World Bank with its private sector arm IFC, the European Investment Bank, the European Bank for Reconstruction and Development (and many more) have as their most important shareholders the G-8, the EU, the G-20 countries.

But: they are not. While they all have policies to that effect, in their actual implementation they lag behind. All of the refer (rightly) to specialist bodies to identify “tax havens” and do not engage in “blacklisted” jurisdictions. But the relevant specialist organization, the quasi-OECD Global Forum and the Financial Action Task Force, have only very bad countries on their blacklist:

EBRD relies mainly on FATF, with the purpose to combat money laundering and terrorism financing, thus largely ignoring the tax issue. And so far, not even the EBRD board has been able to extract from top management a list of EBRD-financed projects which involved registration in offshore jurisdictions. The recent rescue operation for Cyprus, where many of Russian and other Ex-Soviet project sponsors register their companies, has started to change this, because the specifics of the Troika operations also endanger the funds of many EBRD clients. Thus, the review of EBRD’s offshore policy, which had been promised for 2013, is under way. But: in spite of all the international clamor about tax evasion and tax havens, the mindset of EBRD (and probably IFC and other) bankers has always been: if we disallowed or discouraged offshore activities, we would lose market shares and investment projects. This is an unconvincing argument, however, since a public-sector bank owned by (in EBRD’s case) 64 countries and the EIB and the EU, does not need to compete with private sector banks, does not need to meet any volume criteria, but, according to its mission, should finance projects which promote the transition towards a sustainable market economy.

Arguments in the other banks are similar. The existing policies do not discourage offshoring, do not set standards which later on commercial banks could be following, do not – in general – nudge their clients to relocate into acceptable jurisdictions.

Let me be clear: I understand that project sponsors from countries where the judicial system does not follow the rule of law, where a very close connection exists between politics and business, where also the services required to implement successfully such projects, that these sponsors do not want to register their activities “at home”. But: why does it have to be Cayman Islands, the British Virgin Islands, Jersey, or the like? Why not France, Germany, Austria?

Public sector banks, owned by the taxpayers of their shareholder countries should be the paragons of rectitude. They should, at nearly all cost, avoid going with the flow and thus violate the global interests in tax justice and transparency, and especially their client countries’ interests in receiving their fair share of taxes. There is a long way to go. Shareholder countries must exert pressure on “their IFI” to lead in transparency. Let us see whether the welcome activities by the G-8 and G-20 will spill over to these important development and transition banks.

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Filed under Crisis Response, Financial Market Regulation, Global Governance, Socio-Economic Development

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