Download Tax havens and development

Tax havens and development
Kick off meeting
TaxCapDev Program, January 18, 2011
Fridtjov Thorkildsen, Norad
From: Paris Declaration on Aid effectiveness 2005
 v. We (the ministers of development)… commit ourselves
to fight:
 Corruption and lack of transparency, which erode public
support, impede effective resource mobilisation and
allocation and divert resources away from activities that
are vital for poverty reduction and sustainable economic
development. Where corruption exists, it inhibits donors
from relying on partner country systems.
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Background (1)
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50 years of aid: results?
Where did the money go?
Tax haven problem not new!
The Jahre Case in Norway: 35 years before
settlement
 Marcos, Abacha…….
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Background (2)
 What’s new?
* Tax Havens’ growing importance in
international economy and crime
* Magnitude of harmful effects for
Developing Countries; ref the case of India
and Mauritius
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Mandate for Norwegian Expert
Commission on Tax Havens and
Development (NOU 2009:19)
 Assess the magnitude of illegal capital flows and the
consequences thereof from a development perspective
 Put forward measures that can curb the harmful effects tax
havens may have on development
Unanimous Commission
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Illicit capital flows
 Illegal capital flows from developing countries is estimated at USD 641941 billion (Kar & Mamadov 2008)
– Even the lowest estimate exceeds the net legal inflow
– Corresponds roughly to ten times the development assistance given
 Rich people (more than 1 million USD in net-worth) hide capital that
corresponds to GDP in the US in tax havens
– Totalled USD 11- 12 000 billion in 2004
– Rich people in developing constitute 20% of this number
– Indications that only 5% of those placing assets in tax havens declare them
for taxation (based on US and UK cases)
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Tax havens and economic development: Seven
ways in which tax havens hamper development
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7.
Tax havens encroach heavily on the sovereignty of other countries
Tax havens harm efficiency in the financial markets thereby increasing risk
premiums (obligations and debt hidden in tax havens)
Undermine national tax systems and increase the costs of taxation
Reduce the efficiency of resource allocation
Make it more profitable to engage in economic crime
May lead to a fall in private income
Hurt institutional quality (bureaucracy at large) and thus economic growth
The negative impact of these factors may be an insurmountable
hindrance to economic development in poor countries
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Tax havens encroach on the sovereignty of other nations
 Tax havens offer tax residency and zero tax conditions for
companies that conduct and manage their business in other
countries (no real activity in the tax haven).
– No exchange of information (secrecy)
– Absence of public registries
– Revenues derived from registration and administration fees
→ Granting tax residency based on no substantial activity means
that tax havens steal other countries’ tax bases
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Tax havens encroach on the sovereignty of other nations (cont.)
 British Virgin Islands (BVI)
– 19 000 inhabitants (low level of education)
– 830 000 registered companies on BVI
– Authorities claim that these companies run and/or manage their
business from BVI and thus are tax residents there
→ There are 43 (=830 000/19 000) companies pr. capita
→ Some BVI residents are board members (and directors even) of hundreds
(and in some cases even thousands) of companies
Illustrative of the lack of activity of substance in tax havens
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Tax havens undermine national tax systems
and increase the costs of taxation
 Tax havens make it harder to tax capital
 Capital is the most important tax base in most developing countries
o Tanzania; The returns from only 286 enterprises contribute to
70% of national tax revenue (Fjeldstad and Moore 2008)
o Developing countries have few alternative sources of tax revenue
 Consequently, tax revenue fall or to compensate, taxes are levied at
a too high rate on the few remaining tax bases: this hampers growth
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Tax havens hurt institutional quality
(public bureaucracy, process of law and democracy etc.)
 Empirical research: Institutional quality is very important for
growth
– Improved institutional quality can increase national income
sevenfold
 Tax havens make it attractive to steal resources from society
(since the booty can be hidden) and thus also provide the ruling
elite with incentives to weaken their own countries’ institutional
quality in order to make it easier to steal from society
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Tearing down institutions (i)
 Mobutu Sese Seko (former president in Congo, 1965- 1997)
– Stole annually approx. 15-20% of the national budget in the 70s
– Money hidden in tax havens
– Income pr. capita in 1992 was half of what it was in 1960
 Sani Abacha (former president of Nigeria); Stole at least 3 billion USD
 Zardari (president Pakistan): 500 billion USD (lowest estimate)
 Suharto-family (Indonesia); 15-35 billion USD (interval estimate)
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Commissions proposals (some of them)
National proposals
International proposals
 Development policy: Help with tax
administration especially on
revenue side
 Multinationals: Inform about
where they have companies and
what they pay in tax where
 Better transfer pricing rules
 National centre of expertise on
international taxation
 Cross-ministerial working group
 Convention on transparency in
international financial transactions
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Norfund
 Gradually cease its investments in
tax havens (nil after 3 yrs)
 Return before tax is the important
yardstick for such funds if the aim is
development
 New studies: dev. Effects??
Recent events
 G20 meetings: 2009 agreement on sanctions against non-cooperative
tax havens
 OECD initiative: Global forum on transparency and exchange of
information for tax havens.
 Peer review process till 2014
 Nest Forum meeting: Bermuda 2011 (co-chair for the Forum)
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Mauritius
 Reaction against Norwegian Government
 Information Exchange agreement with Nordic countries not yet signed
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DFID/Norad programme on Taxation and development
 Focus tax administrations and tax policies in
developing countries
 Mainly Sub-Saharan Africa
 IDC and CMI responsible
 Should be complementary program to TaxCapDev
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