Tax evasion hurts poor nations

Washington. Releases of secret documents, like the whopping 11.5 million Panama Papers, are designed to result in a cascade of scandals. Since Sunday’s revelations, Iceland’s prime minister has stepped down, and Britain’s Prime Minister David Cameron admitted on Thursday that he had profited from his father’s offshore account.

Leaders in Russia, China and other parts of the world have come forward to either claim the leak is a conspiracy, censor online speculation, or simply deny any illicit dealings or tax impropriety.

As journalists take a fine comb through the 2.6 terabytes of data obtained from the servers of Mossack Fonseca, the world’s fourth biggest “offshore law” firm, they are sure to uncover more and more of the web of dealings that tie politicians, businesspeople, celebrities and their kin to that tax haven and others.

But what’s so scandalous about the Panama Papers isn’t just that there’s a nexus of rich people, some elected, who make profits by evading taxes. It’s that so much of the money moved through tax havens would otherwise be taxed by some of the world’s poorest, most revenue-hungry governments.

That tax evasion disproportionately affects the poor shouldn’t come as a surprise, and it certainly isn’t a secret. Angel Gurría, the secretary general of the Organisation for Economic Cooperation and Development (OECD), an economic organisation consisting of the world’s richest nations, once estimated that developing countries lose three times as much to tax evasion as they receive in foreign aid.

The Tax Justice Network, pointing out that data on tax evasion is murky at best, says the real figure may be closer to 10 times.

Tax revenue is one of the strongest indicators of an economy’s health. In many developing countries, with poor and/or rural populations, collecting tax is expensive for the government and unaffordable for the majority of citizens, who may work in the “informal economy” anyway.

Therefore, much of the tax revenue is expected to come from commercial transactions and foreign investment. But a report by ActionAid, released in 2013, shows how almost half of all investment in developing countries is funneled through tax havens.

The United Nations Economic Commission for Africa estimates, in a recent report, that African governments lose between $30 billion and $60 billion per year to tax evasion, or other forms of what they call “illicit financial flows.” But that figure doesn’t account for examples like that of Tullow Oil above. Matt Salomon, chief economist at the Global Financial Integrity, told the Canadian Broadcasting Corp that he thinks the amount siphoned, mostly legally, from developing economies into tax havens is around $1 trillion.

That loss of tax revenue is a destabilising force in poorer countries, as well as a challenge to their sovereignty. For most low-income countries, tax revenue represents less than 20 per cent of their GDP, whereas the average among richer countries is above 30 per cent. Without tax revenue, less savory options present themselves - think foreign aid with strings attached, or resource extraction at the expense of people and the environment.

When the United Nations Financing for Development conference was held in Ethiopia’s capital Addis Ababa last July, African nations in particular pushed Western countries to close tax loopholes and shut tax havens.

Many countries offered to forgo aid if their Western counterparts would oblige. Under heavy pressure from governments like David Cameron’s in Britain, the major tax reform breakthrough of that conference was the Addis Tax Initiative, in which donor countries pledged to double their levels of aid, so as to strengthen tax systems in developing countries, without so much of a word about their own systems. (Washington Post)