Global Tax-Evasion Crackdown Sidestepping Poorest Countries

Washington – While a major global campaign to cut down on tax evasion is picking up momentum, anti-poverty advocates say the initiative overlooks the world’s poorest countries.

Last week, 51 countries from four continents agreed to systematically exchange tax information by 2017, with the aim of allowing authorities to quickly register any disparities. Several dozen additional countries – 89 in total – said they would follow suit by the following year, according to the Organisation for Economic Cooperation and Development (OECD), a grouping of wealthy countries that is spearheading the project.

Global tax evasion has risen to the top of the global agenda in the aftermath of the 2007-08 financial crisis and the resulting financial constrictions felt by governments around the world. Though last week’s pledges will still need to be underpinned by separate bilateral agreements, the new accord is being lauded as a major step forward on the issue.

“This great success in the fight against international tax evasion would have been unthinkable only a few years ago,” Wolfgang Schauble, Germany’s finance minister, wrote Monday for a newspaper here. “We need to make sure that creative tax planning in the form of profit-shifting and artificial profit reduction is no longer a lucrative business model.”

The new pledges were made at the annual meeting of an OECD-organised grouping known as the Global Forum on Transparency and Exchange of Information for Tax Purposes. At the meeting, in Berlin, the forum’s 123 members also formally endorsed a new OECD blueprint, known as the Common Reporting Standard, detailing what information will be collected, by whom, and how it will be exchanged.

Yet the list of those asked to participate in the new pledging includes almost solely developed countries or known tax havens, which rich governments have been particularly keen to address. This is cause for concern for some, given that the impact of illegal financial dealings is felt particularly by weaker economies.

“The new OECD standard on automatic information exchange is a big first step towards tackling illicit financial flows,” Andres Knobel, an analyst with the Tax Justice Network, a British advocacy group, said in a statement.

“However, serious obstacles to the inclusion of developing countries and a number of unresolved loopholes will prevent its effectiveness, allowing rich individuals with plenty of options to avoid reporting.”

Select invitations

While the Global Forum on Transparency includes 123 members, just 95 of these were asked to take part in the new automatic exchanges. And just one of those, the Pacific island nation of Vanuatu – widely known as a tax haven – is considered by the United Nations to be a least developed country.

OECD officials say that many developing countries weren’t invited to take part in this initial round of pledging due to concerns over institutional capacity.

“The developing countries which do not have financial centres have indicated their difficulties on account of low capacity to implement [the automatic exchange of tax information] on such an ambitious timeline,” Monica Bhatia, the head of the Global Forum secretariat, told IPS.

“These countries were nevertheless encouraged to participate with a more flexible timeline and support was offered to facilitate their participation … by way of pilot projects. Already six developing countries have requested pilot projects and the Global Forum is committed to helping other developing countries who come forward as well.”

Yet others suggest that, capacity notwithstanding, all countries should be able to receive tax information about whether their own citizens have undeclared overseas bank accounts.

“Under the current agreement, tax-haven countries that don’t have an income tax for their own people don’t have to reciprocate this information,” Heather Lowe, senior counsel with Global Financial Integrity (GFI), a Washington-based watchdog group, told IPS.

“That makes some logical sense, but the organisers won’t even consider a similar phase-in period for the least developed countries. Do we really think that there are many Brits or Americans with money in, say, Nigeria? Probably not. But is there likely a lot of Nigerians with money in the U.S. or U.K.? Yes.”

GFI has published pioneering data estimating that developing countries could be losing a trillion dollars a year from a variety of shady financial dealings. While all such activities contribute to crippling public-sector coffers, the new plan covers only tax evasion.

“While a portion of illicit financial flows is driven by tax evasion, much of it is also propelled by other crimes such as drug trafficking, sex slavery, corruption and fraud,” Lowe says. “The current framework risks either missing these other major forms of crime, or keeping that information locked up by tax authorities and away from government investigators and prosecutors.”

Starting with Africa

The Global Forum says it wants to bring as many developing countries as possible into the new exchange system, and maintains that multiple initiatives are currently underway to do so. Last week, the grouping announced the most significant of these, a project aimed at strengthening outreach and capacity on the issue in Africa.

The African Initiative, overseen by the Global Forum, the World Bank Group and others, will initially focus on 17 countries, around a third of the continent. Yet an OECD factsheet says this number could be “significantly increased” through the three-year programme.

As yet, there is no parallel initiative in Asia or Latin America, though the Global Forum says such projects could still be created.

“The impetus for the Africa Initiative came from our African member countries … in the wake of increased focus on the problem of illicit financial flows from African countries of which tax evasion forms a significant component,” Kathryn Dovey, a tax policy analyst with the Global Forum, told IPS in an e-mail.

“The Global Forum is committed to working with all developing countries and would be happy to seed and support similar initiatives in other regions. If countries and organisations from the region and relevant international organisations come forward to collaborate, the Africa Initiative could be replicated in other key geographies over time.”

Still, GFI’s Lowe says that capacity-building could be a secondary goal after bringing in poorer countries on a non-reciprocal basis.

“Africa is a strong place to start, because investment in Africa has been growing significantly over the past few years and there are many governments in the continent that are really starting to engage on this issue,” she says.

“But I don’t see why we can’t start with non-reciprocal information for least-developed countries and then work on these capacity-building programmes to allow for reciprocation to happen later. Let’s start with the practical.”