"Across the world, citizens who want their governments to implement policies to reduce inequalities, address climate change and looming ecological disaster, provide better public services and amenities, ensure social protection, generate quality employment and so on, are always confronted with one question: where is the money? We are constantly told that governments cannot afford the necessary expenditure; that running fiscal deficits will lead to financial chaos and crisis; and that raising taxes will simply drive away investment. But this is not just misleading; it is simply wrong. Governments are constrained in their resources because they tolerate widespread tax evasion and avoidance. " - Professor Jayati Ghosh, Jawaharlal Nehru University
This AfricaFocus Bulletin contains excerpts from a new report from Christian Aid and allied organizations, calling for a comprehensive rights-based definition of illicit financial flows, including both illegal tax evasion and abusive tax avoidance that uses biased laws and gray-area loopholes to minimize the taxes paid by corporations and the ultra-rich. The report provides a clear argument, supplemented by case studies from Asia, Africa, and Latin America.
The excerpts below include cases of a Irish tax treaty with Ghana and a major Canadian mining company in Zambia, documenting how legal avenues are structured to deprive countries of needed revenue.
This answer to "where is the money" for public needs applies worldwide, but is particularly relevant on the African continent, where tax revenues are the lowest and the needs are the greatest. As the report notes, African civil society and inter-governmental organizations such as the UN Economic Commission for Africa have taken the lead on pressing this case in both national and international arenas. This latest report is a marker of how the common-sense answer is gaining ground internationally as well.
Also included in the AfricaFocus Bulletin is an extensive and well- crafted infographic from the Tax Justice Network making the same case.
For previous AfricaFocus Bulletins on illicit financial flows, visit
For another recent commentary on the need for fundamental corporate tax reform, see "No More Half Measures on Corporate Taxes," by Joseph Stiglitz, in Commond Dreams, October 8, 2019..
Trapped in Illicit Finance: How abusive tax and trade practices harm human rights
[Excerpts only. For full text, including figures and footnotes, visit https://www.christianaid.org.uk/resources/about-us/trapped-illicit-finance-report]
On September 26, 2019, world leaders [gathered] at the UN General Assembly (UNGA) in New York, for high-level talks on finance for development. One burning question on the agenda is the financial chasm facing the SDGs.
Adopted by the UNGA in 2015, the 17 goals offer a roadmap for ending poverty, protecting the planet and ensuring prosperity for all, by 2030. But with little over a decade to go, vast amounts of public and private finance still need to be found if they are to be realised within the timeframe. The funding gap for delivering the goals from private sector sources alone is estimated at $2.5tn.
In this report, Christian Aid and our partners propose a simple solution for plugging some of this funding gap: we must stop tolerating the abusive, unethical, immoral illicit financial flows (IFFs) that rob the poor to enrich the wealthy.
Our estimates show that IFFs cause tax losses of $416bn in the global South. This is money that could enable governments to deliver much-needed public services, and bring us closer to a world where all experience dignity, equality and justice. As eminent economist Professor Jayati Ghosh stated in the report foreword: 'Illicit financial flows - both illegal and legal - may be the major constraint to development and achieving human rights today'.
World leaders have previously committed to fight IFFs. At the Third International Conference on Financing for Development (FfD) in 2015, participants agreed to 'substantially reduce illicit financial flows by 2030, with a view to eventually eliminating them'. A similar commitment was made when the UN 2030 Agenda was agreed.
However - and this is the crucial point - what has been missing until now has been a robust definition of IFFs.
Governments of the global North insist on a legalistic definition that would only capture flows of money universally accepted as being illegal, eg, money laundering or corruption. However, we and many of our partners in the global South believe what matters is not whether flows of money or tax practices are legal, but whether they are abusive, harmful or limit governments' ability to deliver on their human rights obligations. ...
That's why Christian Aid is calling for the debate around IFFs to shift towards a rights-based one. We want the definition of IFFs broadened to refer to 'cross-border flows of money that are either illegal or abusive of laws in their origin, or during their movement or use'. It is not about whether it's illegal, but immoral.
Christian Aid also believes the UN should establish structures to define IFFs based on this rights-based definition. This would require the UN to play a more prominent role in setting the rules and conventions for taxing TNCs, and to expedite international tax cooperation by establishing a UN tax body to decide on taxing rules.
Addressing IFFs is not just about funding the SDGs - important as this is. It is also about addressing the systemic issues that continue to undermine poor countries' abilities to raise revenue and move beyond a reliance on aid. In that respect it is a stand- alone process: one that is not just tied to the 2030 Agenda for Sustainable Development, but which is grounded in justice and equity.
Our estimates show that illicit financial flows strip poorer nations of revenue losses to the tune of $416bn per year.
This is through practices including tax abuses and avoidance by TNCs and wealthy individuals, and tax losses due to tax evasion arising from companies who deliberately misprice goods and commodities to minimise tax liability.
Introduction: Illicit financial flows are a violation of human rights
An exact definition of IFFs has not been agreed internationally; but for the purposes of this report, the term can be defined simply as money that leaves countries where it should in fact be contributing to development efforts and the achievement of human rights. In other words, IFFs may be defined as 'flows of money that are either illegal or abusive of laws in their origin, or during their movement or use'.
These include practices such as tax abuse, abusive tax incentives, abusive use of bilateral and multilateral trade treaties, misuse of double tax treaties, odious debt, abusive use of mutual arbitration procedures, harmful tax practices, unjust investment agreements, money laundering, trade mis-invoicing, abusive transfer pricing, illicit money transfers, crime, bribery, the illicit drugs trade, corruption and the 'offshore' trust industry.
The issue is ultimately about the power of who makes the rules and norms in the global economy regarding these issues. For too long, they have been decided in clubs of countries comprising mainly of, or led by, the global North such as the G7 or the G20, or indeed the OECD that does not take the legitimate interests of countries in the global South adequately into consideration.
Tackling IFFs is not a new concern. For decades, the issue has been discussed either as capital flight or in terms of tax avoidance; and more recently, to understand the activities of multinational enterprises,and in terms of wealth held offshore. The novelty is grouping these practices together within an internationally agreed definition of IFFs, along with transnational crime and corrupt activities.
Combining these practices presents us with a fuller, more frightening picture of how today's global financial system is centred on secrecy jurisdictions and corporate tax havens that facilitate these activities, as well as corruption and transnational organised crime. There is no way to achieve the ambitious 2030 Agenda and the SDGs without stopping the bleeding of hundreds of billions of dollars in IFFs.
The momentum for tackling IFFs is coming from governments, civil society and regional bodies from the global South such as the African Union that have long highlighted the damage caused by IFFs. Notably, in 2015 a coalition of African organisations launched a civil society campaign called Stop the Bleeding in a bid to highlight the billions of dollars illicitly flowing out of Africa each year. Many African governments, and the Group of 77 of countries in the global South in the UNGA, raise the issue of IFFs in their interventions.
The 7th annual Pan Africa Conference on Illicit Financial flows and Taxation, held in Nairobi on October 1-3, 2019, sponsored by the Tax Justice Network-Africa and a wide range of other civil society and inter-governmental institutions, focused on the challenge of taxing digital enterprises, which require new technologies to track and tax profits across borders.
If the definition of IFFs in the 2030 Agenda and the SDGs (an initial draft definition is expected by the end of 2019) includes only activities that are already illegal - such as corruption, crime and tax evasion - there will be no mandate from the 2030 Agenda to tackle tax abuses that far outweigh these other activities in terms of revenues lost from countries in the global South. there is a risk that, under the guise of 'licit' financial flows via tax havens, this will only exacerbate the problem.
Meanwhile, the secretariat of the UN Financing for Sustainable Development Office has analysed the situation and concluded that there is a 'grey zone' in which the dividing line between legal and illegal financial flows is blurred due to a lack of resources, a lack of access to data and discrepancies between how data are reported to tax authorities, the media, and shareholders in private databases.
In this report, we highlight what goes on in this grey zone and propose the use of principles derived from international human rights law to understand practices that constitute harmful activities even though they may not be illegal in all jurisdictions where a TNC has operations; where a transaction is taking place, in terms of trade mispricing issues; or where wealth is held offshore. The problem lies in the mismatches, misunderstandings and lack of commonly agreed principles between the global North and the global South in terms of international economic governance that give rise to IFFs, as seen in Figure 1.
The definition of IFFs is being debated both within international development frameworks and in human rights monitoring bodies. It is an important definition, as it will determine the mandates at the global level to monitor the financial system, national efforts to combat IFFs in the Global South, and international development cooperation as well as south-south cooperation. …
The first definition, which we call 'legalistic', is what is also often described as a narrow definition of IFFs, used by a number of international organisations, including the World Bank, the IMF, the OECD and UNODC. The OECD refers to 'a set of methods and practices aimed at transferring financial capital out of a country in contravention of national or international laws'.
The second definition is what we would call 'normative': it defines IFFs in terms of a normative problem in how laws, rules and regulations are actually established, rather than focusing merely on the letter of the law. … What is considered 'illegitimate' is discussed through case study evidence and covers practices such as corrupt government deals, tax abuse, abusive tax incentives and other concerns that further expand the focus of the discussion on IFFs.
The third definition builds on the first and second definitions, as it tries to define a normative framework around what should be considered 'illegitimate'. …
This definition is supported mainly by UNCTAD, which has analysed IFFs in terms of their economic and development losses. Under this definition, UNCTAD considers that 'the key criterion used is whether such tax-motivated IFFs are justified from an economic point of view'. If considerable tax losses are associated with IFFs, UNCTAD considers that these serve to undermine development outcomes that require greater fiscal capabilities.
Finally, the fourth definition - as proposed by this report - also builds on the first and second definitions, but views the issue through a rights-based lens. The definition therefore includes all aspects of tax abuse and tax avoidance, as these have a significant impact on the availability of public resources for realising human rights and upholding the rule of law. …
[The remainder of the Christian Aid report includes a variety of case studies, including in African countries. Excerpted below are two cases, one in Ghana and the other in Zambia.]
Part one: Tax abuses by transnational corporations
TNCs are essentially companies that operate in multiple countries and autonomous jurisdictions. As these countries and territories have different (at times conflicting) tax and financial laws, the international tax system is a patchwork with loopholes and mismatches that companies (and the wealthy individuals who own them) can exploit to pay less tax - either legally (albeit often through abusive practices) or illegally, in the hope that they will not get caught due to the high degree of secrecy and complexity that characterises the international financial system.
A TNC is taxed separately for each of its legal entities in each territory in which it operates. Thus, if a TNC has 200 different subsidiaries and affiliates, each one of them must file its own tax return. This separate treatment of the different legal entities of TNCs is set out in the OECD Transfer Pricing Guidelines, even though - for strategic purposes, and in the eyes of shareholders who seek to profit from the activities of the entire group, rather than those of its individual parts - the company is essentially a single entity.These separate entities are assumed to be trading at 'arm's length' - that is, as if they were unrelated parties - under the OECD Transfer Pricing Guidelines.
Meanwhile, human rights norms - such as the UN Guiding Principles on Business and Human Rights and various laws on mandatory human rights due diligence in Europe - establish that companies should be treated as single entities in light of their human rights obligations for their entire global operations, including their supply chains. Corporate accountability efforts also point in this direction, including the EU Non- financial Reporting Directive, the US Dodd- Frank Act and the UK Modern Slavery Act. The tax and human rights angle on treating corporates as single strategic entities has thus far had little impact on the cross-border tax treatment of TNCs; but it is logical to treat companies as single taxable entities with respect to international human rights norms.
TNCs - for good reason - pool some of their resources in shared intra-group functions, such as financing, procurement, sales, human resources, brands, patents and management services, which are held in a specific subsidiary or subsidiaries and sold on to other subsidiaries as corporate services. If these 'transfer prices' are established at abusively low or high levels, they can be used for 'profit shifting', which often aims to reduce profits in high-tax countries and jurisdictions and report profits from such collective functions in low-tax countries and jurisdictions. TNCs may seek to maximise their profits (often post-tax profits rather than pre-tax profits) at a global level by routing trade, financing and investment through countries and jurisdictions that present tax advantages.
This type of behaviour is the focus of the OECD's Base Erosion and Profit Shifting (BEPS) project, which aimed to end such practices, but has largely failed to do so due to a lack of agreement on how to tax TNCs globally. At present, the UN only has an expert committee on international tax matters, whose members are restricted to commenting on such matters in their expert capacity as individuals, rather than proposing plans for new rules and regulations on the taxation of TNCs. Countries in the global South have called for the establishment of a UN-based tax commission (or a UN tax body) to negotiate how best to tax TNCs and improve transparency and accountability in international tax matters.
The taxation of cross-border transactions such as interest, royalty, dividend and other intra-firm payments is often governed by double tax agreements (DTAs), such as the Ireland-Ghana DTA and the Mauritius-India DTA discussed on the next few pages. The applicable tax rates are often set at ever-lower levels in the hope that this will increase investment, despite the lack of evidence to support this view. …
Irish double tax agreement threatens revenue losses in Ghana
By Mike Lewis
This case study tells a political story rather than a technical one. It shows how some governments are continuing to ignore new international anti-avoidance standards, and the advice of their own civil servants, in pursuing tax agreements that may create new avenues for tax avoidance and deprive countries in the global South of taxing rights.
DTAs can resolve tax dilemmas for companies and citizens living and working between two countries, or investing in one country's economy from another. If they are incautiously or exploitatively drafted, however, DTAs can unfairly deprive countries in the global South of taxing rights that are vital to reduce aid dependency, protect their citizens' rights and develop their economies. They can also open up new loopholes for profit shifting and other forms of cross- border tax avoidance. In 2014, usually conservative IMF tax policy staff advised that 'developing countries...would be well advised to sign treaties only with considerable caution'.
Ireland is expanding its network of DTAs. As this already encompasses numerous agreements with developed economies, Ireland is now particularly focused on signing new treaties with emerging economies. Of eight treaties currently awaiting final signature and/or ratification, five are with countries in the global South. As part of its new Africa strategy launched in 2011, Ireland targeted four emerging African economies for new DTAs, including Ghana.
Ghana is the lowest-income of Ireland's current prospective DTA partners. A booming middle-income economy, it is also a vulnerable one which is still a (small) recipient of Irish aid. Over one in 20 Ghanaian children still die before their fifth birthday; and despite major improvements, almost 4 million Ghanaian children still live below the poverty line.Ghana's tax revenues also remain vulnerable: Ghana collects only around 16% of its GDP in tax revenues, compared to 25-30% for most European economies.
Although, from Ireland's perspective, Ghana may be a relatively small investment and trading partner, the new Ireland-Ghana DTA matters greatly to Ghana, because according to Ghanaian statistics, since 2012 Ireland has become Ghana's largest source of FDI. By 2016 (the most recent year for which Ghanaian-reported FDI data are available), Irish FDI constituted one-third of Ghana's entire reported FDI stock.Limiting Ghana's taxing rights over income, profits and economic activity between Ireland and Ghana may thus have a significant impact on Ghanaian tax revenues.
Both parties signed the DTA in February 2018. Although approved by Ireland's Parliament in October 2018, it still requires approval and ratification by the Ghanaian Parliament, meaning that the DTA's entry into force now rests on whether Ghanaian institutions find it abusive or harmful, and request further changes to the treaty.
Imbalances of the Ghana-Ireland DTA
* The DTA will cut Ghanaian withholding tax on royalties to Ireland from the domestic 15% rate to 8%, and on (closely related) technical services fees from 20% to 10%. …
* The DTA will deny Ghana the right to tax capital gains from the sale of assets in its territory (other than immovable property), if the sale is executed through the offshore sale of shares in an Irish holding company. This contradicts the recommendations of both the IMF and the UN Tax Committee.Since Ireland appears, according to Ghanaian statistics, to be the largest single source of direct investment in Ghana's economy, this provision could potentially deprive Ghana of very large tax revenues when valuable Ghanaian assets change hands.
* The DTA lacks any of the anti-avoidance provisions which OECD member states, including Ireland, agreed in 2015 were necessary to provide 'the minimum level of protection against treaty abuse'. It is therefore fully non-compliant with the OECD's BEPS project against tax avoidance and profit shifting, which Ireland has repeatedly pledged to implement in full. ...
These features arguably contradict the Irish government's own commitments in Ireland's international tax strategy: to support 'improvements in domestic resource mobilisation [tax revenues] in partner [developing] countries', including through Ireland's own domestic tax policies;and to fully implement the OECD's BEPS project to prevent corporate tax avoidance.
Part two: Lost tax due to trade mispricing and trade mis-invoicing
International trade is not what it seems. Trade mispricing has become a multibillion-dollar industry, in which trade handling companies identify the least costly way to make a paper trail of payments for goods, which often has nothing to do with their physical movement. Unrelated importers and exporters utilise offshore tax havens to route trade on paper to reduce the taxes paid on border transactions, as they provide secrecy for practices such as double invoicing and mis-invoicing - sub-categories of the umbrella term 'trade mispricing'.
When we talk about imports and exports, many think that goods flow from one country to another relatively directly; and this is what is shown in the international trade data maintained by the UN Comtrade database and the IMF's Direction of Trade Statistics (DOTS). There are some legitimate discrepancies in the import value reported for the same set of imports in the receiving country and the export value in the exporting country that relate to shipments via transit countries, regarding how goods are declared in value ('Free on Board' is often used, but not by all countries).
The volumes of potential trade mispricing are absolutely eye- watering. A representative sample of 30 African countries from 1970 to 2015 revealed that these countries lost a combined $1.4tn through capital flight over the 46-year period; including interest earnings lost on capital flight brought the cumulative amount to $1.8tn.The average outflow from Africa for the years 2010 to 15 was estimated at $63bn under this methodology, lost mainly from oil-rich African nations. …
The best estimates of tax losses due to trade mispricing come from GFI, which has estimated that trade mispricing (encompassing both illicit outflows and illicit inflows) in 2015 caused losses of $940bn, based on the UN Comtrade data, while higher IMF DOTS would show a loss of $1,690bn.Both of these figures, attempt to estimate mismatches between the declared import price and the export price in the same pair of countries or vice versa.
Zambia's copper sector mispricing abuses
By Prof Attiya Waris
First Quantum Minerals (FQM) is Zambia's largest mining company and largest single taxpayer, and has been lauded as contributing more than one-third of the Zambian government's income.The 2015/2016 Extractive Industry Transparency Initiative (EITI) data reveals that the Kansanshi mine provided 22% of tax revenue, while 7% was provided by another subsidiary. The main types of taxes that FQM pays in Zambia are mineral royalties, followed by other types of taxes. It is evident that the collection of mineral royalties is relatively simple; the debate thus centres on the declaration of correct production volumes and payments to governments, including in EITI reporting.
Kansanshi Mining PLC, a subsidiary of Canadian mining and metals company First Quantum Minerals Ltd. (FQM)
FQM is listed on both the Toronto Stock Exchange and the London Stock Exchange, and operates mining projects globally. It has a number of local affiliates in Zambia, all with separate accounts. The available data reveals discrepancies between the information regarding FQM registered with the Zambian companies registry and that held in the Orbis database. For instance, while cover investments is shown to have been incorporated in Zambia in one database search for FQM and Operations Ltd, in the Orbis database there is no record of cover investments.
The Zambian Revenue Authority is reportedly accessing information from Orbis and other proprietary company information databases in order to improve its audits.The FQM data sheet, on the other hand, indicates that the company is incorporated in Ireland. These discrepancies make tax audits and tax assessments more difficult in the absence of full country-by-country reporting under the OECD initiative, due to the lack of information exchange with other revenue authorities. The quickest way to facilitate full country-by-country reporting would be to make the filings mandated by the OECD public and available to all, including the revenue authorities of countries in the global South.
FQM and its subsidiaries in Zambia are subject to various taxes, from employee income taxes to VAT, mineral royalties and corporate taxes, among others. However, the EITI disclosure for the year 2016 is not sub-divided by the types of taxes paid, so sensitive tax information - such as corporate income tax payments per country of operation - is unavailable.From the corporate structure of FQM, depicted in Figure 8, we can see that its Zambian operations involve offshore companies in the British Virgin Islands (BVI) and Ireland.
The current lack of transparency affords abundant opportunities for transfer pricing abuses. According to a claim before the Lusaka High Court, between 2007 and 2014, FQM directors ordered over $2.3bn of Kansanshi profits to be borrowed to FQM Finance Limited, which performs treasury functions for the group.FQM Finance then alledgedly started investing these funds from the Kansanshi mine to grow the group without the consent of the government- owned local minority shareholder, ZCCM-IH. According to sources close to ZCCM-IH, its claim includes $228m in interest on the $2.3bn, as well as a further 20% of the principal amount ($570m). FQM and the Kansanshi Mining PLC state that they are firmly of the view that the allegations are untrue. The proceedings are still underway in the Lusaka High Court as of August 2019.
[another case] involving FQM was revealed in March 2018, when FQM received an $8bn charge relating to unpaid import duties arising from misdeclarations.The assessment concerned the under-declaration and non-declaration of import duties on capital items, consumables and spare parts for use at the Sentinel mine from January 2013 to December 2017.Following a five- year tax investigation, the losses were calculated at $540m, which was found to amount to smuggling in the form of misdeclared customs duties. In the case of smuggling charges, criminal fines may be imposed.
The fine sought to be imposed on FQM has been duly calculated at $2.1bn, as smuggling is punishable by a threefold fine in addition to the assessed amount, with a further late payment charge of $5.7bn, according to the company's own disclosure. FQM refuted the assessment. In July 2019 a settlement was reached for an undisclosed amount.…
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