G7 fails to stop the dirty money trail, tax evasion

Dirty money resulting from crime, corruption and tax evasion is estimated to cost over one trillion dollars every year.

It exacerbates poverty and inequality, and should be regarded as one of the most pressing issues globally.

An Oxfam report found that G7-based companies and investors cheat Africa out of tens of billions of dollars every year.

Yet every time world leaders hold another summit, it gets referenced only in passing and hand-balled off to another conference or summit where it inevitably will be ignored again.

Over the weekend the Group of Seven (G7) – leaders from the United States, Canada, Britain, Germany, France, Italy and Japan – met to discuss tax evasion, among other topics including turmoil in Greece and climate change.

The communique reaffirmed their commitment to tackle multinational tax evasion through greater information sharing and the OECD Base Erosion and Profit Shifting (BEPS) project, which is due to be handed down in October.

But who is looking after a plan to stop trillions of dollars of illicit flows through under-developed nations?

The OECD already has too much on its plate with the BEPS project.

Its automatic exchange of information and country-by-country reporting measures – both of which are basically aimed at getting more detailed information about who pays tax and where – are useless without sign-up from under-developed nations where crime and corruption are rife.

Moreover, since information collected and shared between tax authorities will be kept private, despite community pressure to make it public, how can there be genuine transparency?

The G7 says it recognises the importance of “combating tax evasion, corruption and other activities generating illicit flows of finance” but has no strategy for doing so. It’s committed only to giving another update next time they meet.

A study released last week by Washington-based advocacy group Global Financial Integrity (GFI), which has been leading the policy debate on illicit financial flows, found that dirty money drains roughly US$1 trillion ($A1.3 trillion) from developing and emerging economies each year.

Its study tracks illegal outflows between 2008 and 2012 from 82 of the poorest countries in the world. It found, unsurprisingly, that in African, Asian and Latin American countries where inequality and poverty levels are high, illicit financial flows are also high.

Twenty of the nations analysed, including Indonesia, had illicit flows amounting to more than the combined total of foreign aid and foreign direct investment.

GFI managing director Tom Cardamone said it was disappointing that the G7 had missed an opportunity to tackle illicit flows, describing it as “the most damaging economic problem plaguing the developing world”.

Another report by Oxfam released last week found that G7-based companies and investors cheat Africa out of tens of billions of dollars every year.

It cites a recent UN Economic Commission for Africa report that found multinational companies avoided paying tax on US$40billion (A$51.9 billion) of income in 2010 through a practice called “trade mispricing” – where a company artificially sets the prices for goods or services sold between its subsidiaries to avoid tax.

Oxfam said that with corporate tax rates averaging 28 per cent in Africa this equates to $US11 billion (A$14.3 billion) in lost tax revenues.

“Africa is haemorrhaging billions of dollars because multinational companies are cheating African governments out of vital revenues by not paying their fair share in taxes,” Oxfam International’s executive director, Winnie Byanyima, said in a statement.

“If this tax revenue were invested in education and healthcare, societies and economies would further flourish across the continent.”

The Oxfam report found that tax breaks provided to the six largest foreign mining companies in Sierra Leone equal 59 per cent of the total budget of the country, and eight times the country’s health budget.

Byanyima said Africa needed to halt to tax exemptions for foreign companies, and G20 governments needed to ensure that underdeveloped nations were brought into the OECD plan to fight tax evasion.

“Existing international efforts to tackle corporate tax dodging such as the BEPS process will leave gaping tax loopholes that multinational companies can continue to exploit across the developing world,” she said.

“Many African nations have been shut out of discussions on BEPS reform and will not benefit from them as a result.”

The G7 also committed to greater transparency about the beneficial owners of business entities.

Currently, shell companies – also known as phantom firms and dummy corporations – are used to facilitate illicit transfers, making it hard for regulators to trace the source. There’s speculation that Islamic State, for example, is getting its money from individuals and/or companies involved in the illicit trade of oil.
The man who is leading the BEPS project at the OECD, Pascal Saint-Amans, has previously told Fairfax Media that while country-by-country reporting would be implemented, such information was too “commercially sensitive” to be made public and could jeopardise the progress already made.

“For the potential benefit of NGOs to know this you may deprive tax administrations of all this information,” he said.

But having such information made public wouldn’t just benefit NGOs.

It could help shine a light on the world’s most corrupt – criminals who have been able to thrive and survive because of a tax system shielded in secrecy and world leaders who largely ignore their damaging existence.