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Intense negotiations are going on at the United Nations about the formulation of the new sustainable development goals (SDGs) and the targets and indicators to be used for specification and measurement. Starting 11 September, the president of the general assembly will host a key event that will feed into the secretary-general’s synthesis report. This is an important opportunity to complement the present SDG draft text with specific reforms against tax abuse, which constitutes a huge headwind against development.
Much fruitful debate has taken place on this problem at the OECD and G20 as well as in academia, civil society and professional associations. The SDGs present a chance to strengthen this momentum and finally bring this scourge under control.
One common form of tax abuse is trade misinvoicing, used by multinational corporations to shift funds among affiliates into jurisdictions that tax profits at lower rates or not at all. The thinktank Global Financial Integrity estimates that $4.7tr (£2.9tr) were thus siphoned out of developing countries during 2002-11, $760bn (£470bn) in 2011 alone. This is five or six times the sum total of all official development assistance flowing into these countries during the same periods. These numbers have been increasing at 8.6% a year. And they don’t even include other important forms of abusive transfer pricing by multinationals that are difficult to quantify.
Even so, Christian Aid calculates that governments of developing countries have lost tax revenues of about $160bn annually – about $2.5tr for the 2000-2015 millennium development goals (MDG) period. “If that money was available to allocate according to current spending patterns, the amount going into health services could save the lives of 350,000 children under the age of five every year,” said the charity’s report on the issue.
Tax abuse is also practised by wealthy citizens of developing countries. Boston Consulting Group estimates that 33% of all private financial wealth owned by people in Africa and the Middle East and 26% of such wealth owned by Latin Americans – $2.6tr in total – is kept abroad. On conservative assumptions, this translates into revenue losses of $26bn annually just for these two continents; the drain is larger still for Asia.
Despite the enormity of the problem, the SDG draft text merely speaks vaguely of curbing illicit financial flows from the developing countries (target 16.4) and of helping them improve their tax collection (17.1) without making any specific demands on richer nations to stop facilitating this drain on development.
Academics Stand Against Poverty has just released a Delphi study synthesising the collective wisdom of 27 illicit financial flows experts with diverse professional profiles from developing and developed countries. Through several rounds of responding to one another’s ideas and arguments, the experts came to agree on some key reforms designed to increase financial transparency at both the domestic and global levels, including that all governments should mandate:
1. Each company, trust or foundation disclose the person(s) who own or control it;
2. Each multinational corporation report profits and other tax-relevant information separately for each country so as to make apparent when tax havens account for a much larger share of its profits than of its operations;
3. National tax authorities automatically exchange tax-relevant financial information worldwide to make it easier to detect and prosecute tax evasion by corporations and individuals;
4. Corporations publicly report on funds they pay to governments for the extraction of natural resources;
5. Tough sanctions, including jail time, be imposed on senior officers of global banks, accounting firms, law firms, insurance companies and hedge funds for facilitating tax evasion.
In addition, the experts agreed that governments themselves should commit to harmonising anti-money laundering regulations internationally. They also said they should carry out clear, reliable, frequent and timely public fiscal reporting and open up their fiscal policymaking process to public participation. Including these objectives as targets or indicators in the final SDG document would boost the prospects of reforms that are essential to curtailing tax dodging as well as embezzlement, money laundering, and other criminal activities.
Massive poverty-related human rights deficits persist. By releasing vastly more revenues than the foreign aid the SDG draft envisions, the proposed reforms would greatly enhance the capacity of developing countries to safeguard their citizens’ human rights. For many people in these countries, this step toward basic global justice would mean far more than any amount of charity.
Never before has there been so much popular support and political will to end the scourge of tax-dodging. Overcoming massive lobbying efforts to prevent or dilute any reforms, we must seize this special opportunity to build a more transparent financial system and thereby to diminish a crucial obstacle to development and poverty eradication.
Thomas Pogge is the Leitner professor of philosophy and international affairs at Yale University. Follow @ThomasPogge on Twitter.
Read more stories like this:
• Money laundering, bribery and tax evasion: how to freeze illicit flows
• Following the money: tracking illicit cash flows from developing countries
• ‘Unsexy’ tax reform can change development dynamics
• From our partner: Maximising aid impact by influencing other financial flows
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