Bitter losses

cy is over,” was one of the statements in the declaration of the G-20 summit in London in April last year. The OECD had drafted a black list of uncooperative countries that are considered tax havens. The list was used to put pressure on the countries concerned. Tax havens do not impose taxes or only very low rates and therefore attract capital from countries where stricter tax laws are enforced.

The costs of capital flight and tax evasion are high, especially for developing countries. The US-based organisation Global Financial Integrity estimates that up to $ 1 trillion dollars from developing countries flow into tax havens every year – and $ 854 billion are said to come form Africa. The organisation states that large firms make two thirds of the transactions to bank accounts in tax havens. According to OECD-estimates, about 60 % of world trade takes place within multinational corporations today. There are no exact figures, however, because there is no comprehensive register of all subsidiary companies.

“Developing countries lose about $ 100 billion of taxes each year,” says Georg Stoll of Misereor, a Catholic charity. He is also a board member of the Tax Justice Network. “Year after year, the losses rise,” he adds. In 2002 it was $ 64 billion dollars. In 2006, $ 125 billion. By comparison, global official development assistance amounted to $ 120 billion last year.

At the global level, most taxes are lost because firms cleverly pit different tax systems against each other. They manipulate prices in inner-corporation international trade, for instance, placing subsidiaries between sellers and buyers. The goal is to define transfer prices in a way to maximise profits in low-tax companies and generate losses in high-tax countries. In such schemes, a prefabricated house may cost less than two dollars whereas a simple fan may cost $ 3,800. Of the 100 largest stock-exchange listed firms in the USA, 83 have subsidiary firms in tax havens.

For developing nations, it was good new that the G-20 proclaimed to fight tax havens. But what are the results? Soon after the summit in April 2009, the OECD black list was empty. The reason was that countries slid onto a grey list once they promised to cooperate in future. “A simple letter did the job,” says Jens Martens of the non-governmental Global Policy Forum Europe.

Today, the grey list is empty too. To move on to the OECD’s white list, a country needed agreements on information exchange with at least twelve other countries. From the G-20 summit in Washington at the end of 2008 to May 2010, the number of such pacts rose from 44 to 505. Critics say, however, that the list has become meaningless, because many tax havens signed agreements with other tax havens, for instance Luxemburg with Bahrain or Lichtenstein with Monaco. This way, they fulfilled the OECD criteria without substantial change.

In order to achieve more transparency, non-governmental organisations demand compulsory, country-specific accounts. “Currently firms only have to reveal total figures, so their internal transactions cannot be checked,” says Stoll.

Martens says that the G-20 are more concerned with the stability of the world’s financial system than the interests of developing countries. Nonethteless, he considers some developments positive, for instance that trends and taxes are increasingly understood to be inter-related. In January, the OECD Committees for Development (DAC) and Taxation (CFA) met for the first time. A joint task force is addressing the topics of information sharing, transfer prices and country-by-country reporting. The next meeting will be in November. At the European Commission, staff of the Directorates General for Development and Taxes similarly met and wrote a joint paper. “Unfortunately, the recommendations are rather general,” Martens says.

The work of the International Tax Compact, which is supported by the German Development Ministry (BMZ), is also considered fruitful. This initiative hopes to mobilise development cooperation partners against tax evasion.

In the long run, experts think that multilateral approaches are best. One example, explains Martens, is the UN Committee of Experts in International Cooperation in Tax Matters, which runs under the United Nations Department for Economic and Social Affairs. (cir)