Taking global action against illicit financial flows
The scope of the issue and how can the international community act in
support of the 2030 Agenda
By Radha Kulkarni. Project
Advisor, Tax Inspectors Without Borders and Development Finance, Strategic
Policy Unit, UNDP
2008-10 Africa had lost US$63.4 bn to illicit financial flows, US$1.2 bn more
than what it has received in aid and foreign direct investment. Photo: Stuart
Price / UN IST
Domestic public resources are identified as fundamental for development
financing. One of the ways in which countries can mobilize these resources is
by increasing tax revenues, yet this remains a key challenge for some.
According to the OECD,
in 2015, African countries as a whole had a total tax revenue to GDP ratio of
around 19%, with Latin America and Asia averaging at around 22% and 15%
respectively, compared to around 34% for OECD member countries. A variety of
factors affect countries’ ability to generate tax revenues, including the
presence of large informal and subsistence sectors, narrow tax bases, and
dependence on volatile export commodities. Domestic revenues are further
undermined by tax evasion and tax avoidance. The term Illicit Financial Flows
(IFFs) is often used to describe such practices.
There is no universal definition of IFFs, however such flows are
commonly understood to fall into three main categories: (i) the acts themselves
are illegal (e.g. corruption, smuggling and trafficking in minerals, wildlife,
drugs, and people, tax evasion); (ii) the funds that stem from these activities
are also illegal; and, (iii) the funds are used for illegal purposes (e.g.
organized crime). Global Financial Integrity, a Washington based
think-tank working on transparency in the international financial system, estimates that in 2013 US$1.1 trillion left
developing countries through IFFs. GFI regards this estimate as highly conservative, as it does not pick up movements of
bulk cash, the mispricing of services, or many types of money laundering. The
research suggests that about 45% of illicit flows end up in offshore financial
centres, and 55% in developed countries.
According to the OECD, between 2008-10, Africa alone had lost
US$63.4 billion through trade mispricing and other illicit outflows; more than
what it had received in aid and foreign direct investment, which amounts to
US$62.2 billion over the same period. Ms. Ngozi Okonjo-Iweala, former Minister
of Finance and Coordinating Minister for the Economy, Nigeria and a global
advocate for the fight against malpractices in taxation
“One of the problems developing countries have is that large corporations or
evaders of tax have a lot of expertise.” Beyond reducing much-needed resources
for sustainable development, IFFs undermine governance, foster corruption and
facilitate transnational organized crime. The issue is therefore rightly on the
international policy agenda. As such one of SDG 16 targets (to promote peaceful
and inclusive societies, and accountability) is to, "significantly reduce
illicit financial and arms flows, [and] strengthen the recovery and return of
stolen assets and combat all forms of organized crime."
Other sources of revenue leakage include those generated by aggressive
tax planning strategies, typically by multinational enterprises (MNEs). MNEs
engage in highly complex strategies to shift profits from where they are earned
to low or no tax jurisdictions; also known as the Base Erosion and
Profit Shifting (BEPS). The problem is exacerbated by knowledge
asymmetry between developed and developing countries in terms of identifying,
understanding and countering these strategies. According to UNCTAD, an estimated US$100 billion of annual tax
revenue losses for developing countries can be attributed to multinationals’
offshore hubs. UNCTAD also notes that MNE contributions to
government revenues are around 10 percent in developing countries. Appropriate
MNE taxation is central to increasing the domestic resources of developing
countries so that taxes are paid where economic activity occurs and value is
working to increase confidence in national tax systems, the international
community can help strengthen the tax capacities of developing countries.
What can be done?
Countries could commit to set nationally-defined revenue collection
targets, work to increase domestic financial transparency, address excessive
tax incentives, and build their revenue collection capabilities through
modernized, progressive tax systems, improved tax policy, and more efficient
tax collection. This would help to increase confidence in national tax systems.
The international community meanwhile can help strengthen the tax
capacities of developing countries, including through Official Development
Assistance (ODA). The Addis Ababa Action Agenda pledged the doubling of aid for taxation efforts from
around $222 million in 2015 to almost $450 million by 2020. A recent Oxfam report, however, concludes that donors are
not on track to fulfil this promise. There has been some progress at the
international level on improving transparency. International initiatives
include the UNDP-OECD joint-initiative Tax Inspectors Without Borders, and on automatic
exchange of tax information through initiatives as the OECD’s
Global Forum on Transparency and Exchange of Information for Tax Purposes,
the BEPS Action Plan and the G20 Development
Working Group’s participation in the Automatic Exchange of Information (AEOI) roadmap.
More can be done to tackle anonymity and build the capacities of tax
administrations in developing countries, yet to tackle the subject globally,
international dialogues and policy-making processes on tax matters must be
inclusive and include all countries.
In September 2018, the UN Secretary-General set out a strategy at the high-level meeting on
financing the 2030 agenda, with actions that the United Nations will take to
help accelerate and deepen the transformation of financial systems. This
represents an opportunity for countries to work collaboratively in addressing
weaknesses in legal and regulatory regimes, developing common goals of fairness
and transparency, and continue building an international discourse on taxation
issues to increase domestic revenues and finance development.