Tax-motivated illicit financial flows: A guide for development practitioners

January was a busy month and so this is my first blog of 2014. I didn’t intend for my comeback to be a self-promotion post, but that’s how the timing has worked out!

Last year I was pleased to be able to work with the U4 anti-corruption centre in Norway on an introductory briefing on illicit financial flows, which has just been published. U4’s main audience is people working for development agencies such as DFID or Norad, and so we wanted to briefly cover all the areas that such people might find it helpful to know about, without assuming any prior knowledge. We tried to offer up an even-handed summary of the different viewpoints, rather than coming down on one side or the other. I’m sure not everyone will think we achieved that even-handed balance, but you can’t please all of the people all of the time!

Also recently published is a short policy briefing by Mick Moore at the University of Sussex on the G8/G20 tax reform agenda and developing countries. He also picks two areas of priority for developing countries to address by themselves, outside these international processes: tax incentives and property taxes.

One point that both papers make is about the lack of coherence in developed countries’ tax policies. Mick says this:

experience suggests that the governments of the economically and financially powerful OECD countries will behave ambiguously. They find it relatively easy to close some international tax loopholes by pressuring jurisdictions that have little geo-political clout, like Ireland, Luxembourg, Switzerland, and tiny Caribbean tax havens. They are less likely to accept limits on their own capacities to attract investment and ultra-rich tax immigrants by granting tax ‘incentives’ of many kinds. Virtually all governments compete heavily for investors and investment, and are willing to forego quite a lot of their potential tax revenue in the process. While the British Prime Minister has been promoting the G8/G20 tax reforms, the UK Treasury has continued actively to develop new tax ‘incentives’, such as reduced corporate taxes on income attributable to intellectual innovation, to attract capital from abroad.

Whereas in the U4 paper we put the point as follows:

it would be paradoxical for a donor government to devote billions of dollars each year to overseas aid when much of this aid is plugging a revenue gap that could be closed through its own tax policies. In some instances, such as the negotiation of tax treaties with developing countries, this is a matter of adopting an enlightened approach to international tax that supports development priorities. In many other cases, however, developed and developing country governments have a shared interest in tackling illicit capital flight. The challenge is to develop sustainable, multilateral solutions that allow poorer countries to use taxation to raise public revenue for investment in economic development, to direct private wealth into productive investments, and to distribute the proceeds of growth fairly.

We’ll all think more about how to do this in the coming year, I hope!

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One thought on “Tax-motivated illicit financial flows: A guide for development practitioners

  1. Pingback: Tax and development: Some essential reading on taxation of multinationals | Andrew Goodall

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