May 12, 2016

Tax dodging is a crime against developing countries

Five hundred Indians have been named in the Panama Papers revelations about the rich and powerful's use of tax havens, including well-known film stars and politicians. Research group Global Financial Integrity (GFI) previously estimated that India lost a whopping $51 billion to tax evasion in the form of illicit financial flows – transfers of funds that are illegally earned, transferred or used – every year between 2004 and 2013. This would have been more than enough to provide electricity to every home in India, which 40 percent of rural households are still without, as well as a primary health centre and a proper school in every village. No wonder ordinary Indians are so outraged at the latest revelations. 

If governments across the world are serious about ending global poverty and meeting the UN’s Sustainable Development Goals agreed last year, they will have to find more fiscal resources. So now, more than ever, taking a hard look at tax dodging is absolutely critical. This week [12 May], when the UK hosts an international summit on tax and corruption, the focus should once again be on the murky world of offshore tax havens. 

The Panama Papers reveal just how easy not paying tax can be if you’re rich and powerful – whether through illegal tax evasion or schemes that exploit loopholes and variations in tax systems to contravene the intention, even if not the letter of the law. And the activities uncovered in these leaks are just the tip of a humongous iceberg, with grave consequences. 

Tax havens and offshore financial centres are at the heart of the problem. They create environments that allow non-residents – rich individuals or corporations – to avoid paying taxes in the places where they actually live and work or operate. They also provide secrecy, so that law enforcement agencies never get to know about activities recorded there. 

Tax havens don’t have to be sovereign states. In fact, some of the biggest and most influential are within countries, like the states of Delaware, Nevada or Wyoming in the United States, or even the City of London in the United Kingdom. The UK’s Crown Dependencies and Overseas Territories like the British Virgin Islands are at the heart of this network. So if the global community – and especially the G7 countries – really do want to crack down on tax dodging, it should be easy for them to begin at home, by tightening the rules and regulations on allowing and recording offshore transactions and enforcing greater transparency. 

If they don’t, then developing countries – and especially their poorest citizens – will continue to be the biggest losers. A huge amount of money flows from elites and companies operating in poor countries to tax havens. GFI found that developing and emerging economies lost as much as US$7.8 trillion in illicit financial flows between 2004 and 2013. Even worse, the volumes accelerated over time, increasing at an average annual rate of 6.5 percent, nearly twice the rate of global GDP growth. Most of these flows were “tax-motivated,” designed to exploit loopholes to shift transactions and funds around so as to minimise tax liabilities at home. 

And these estimates do not even include the huge fiscal resources that are lost due to perfectly legal “tax avoidance.” According to Oxfam, corporate tax dodging and use of offshore banking by rich individuals costs the developing world at least $170 billion every year.   

To tackle the problem, the OECD is trying to bring in mechanisms to control corporate strategies to avoid tax such as “base erosion and profit shifting” – but so far they have been ineffective. Tighter laws and implementation in tax havens are essential – but so is sharing information and much greater transparency. Sadly, rich countries have not really stepped up to these challenges.  And the developing countries that are the worst victims of this are still not given seats at the high table of the decision-making bodies that are supposed to address this problem. 

 

Written by By Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, New Delhi 

 

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