Give a little, take more

The financial crisis is hitting the poor countries the hardest. Action Aid expects that Africa’s loss of income will come up to a total of $49 billion during the period from the crisis started in 2007 through to the end of 2009. This means that the continent will have a 13 per cent decrease in the amount of money coming in . Some countries are hit harder than others. South Africa, a country that is well incorporated into the world economy, is expected to lose 20 per cent of its income from abroad. Oxfam estimates that the crisis will force 100 million people into poverty in 2009 alone. (2)

In general, African countries have small chances of introducing counter-cyclical policies. They do not have enough independent means or access to loans. An increasing number of countries are expected to go into debt crisis as a result of the financial crisis. Poor countries risk ending up caught between decreased export incomes, falling prices for raw goods and less foreign aid at the same time as multinational companies cut production costs and demand tax reductions.

Money Coming in is all Fine and Well

At the G20 summit on 2nd of April, the world’s most powerful countries voted to grant USD$1.1 trillion for handling the financial crisis. These funds are to be distributed between the International Money Fund (IMF), multilateral development banks and trade financing. Norway contributes NOK 30 billion to the IMF. The G20 promises that $50billion of these funds will be available to low income countries. This may help the situation some in these countries, but there are many questions tied to the way the funds are used.

First, it is unclear how much of the funds provided are additional to existing foreign aid. The risk is that much of the money will be reported as foreign aid, thereby inflating the aid budgets. The total amount of funds has not been disclosed either. Another crucial question relates to the terms under which the IMF and the World Bank will give loans to developing countries. Will counter-cyclical policies be allowed, or will the recommendations to the IMF be the same as they were during the Asia crisis in 1997: retrenchment? The answers are crucial as to whether the G20 funds will in fact help the developing countries or make matters worse.

Money Out Means More

The biggest question is why the G20 have not votes for measures that can stop the pouring money out of developing countries. Every year between $859 billion and $1.06 trillion disappear from developing countries untaxed. (3)

According to Christian Aid, $160 billion of this money is lost tax revenue caused by wrongful internal pricing or faulty billing. (4) This is possible because of a network of tax havens, secrecy and inadequate accounting rules.

Secrecy No Longer Complete

The result of the meeting was the establishment of black, gray and white lists of tax havens under the auspices of the OECD. An individual country’s place on the list depends on the number of bilateral tax agreements it has regarding the sharing of information. Countries that have signed less than 12 such agreements go on the OECD’s black list. Countries that have signed less than 12 agreements but intend to sign more than 12 such agreements go on the gray list, while countries with more than 12 signed agreements go on the white list.

The fact that the secrecy is no longer complete is a positive thing. It means that Norway will now be able to prosecute people or companies that do not pay taxes in tax havens with which no such agreement exists. The premise is that there is cause for suspicion. In other words, there is no automatic exchange of information. Acquiring information about ownership from many tax havens remains difficult; for example, Jersey authorities claim that the USA made only four inquiries regarding such information last year. Even Norway will not be able to monitor companies and individuals with assets in tax havens. Under these terms, the OECD list is somewhat misleading. The tax havens still exist, but access to them is somewhat better, and it is possible for well prepared lawyers to acquire information.

Means Little to Developing Countries

This system of bilateral agreements will have little or no value for developing countries. Negotiating agreements is time consuming and costly. In order to make good use of them, one needs a well developed tax system.
Tax expert Raymond Baker from the Global Financial Integrity think tank says this about the results of the G20 summit:”Increasing financial aid will be inefficient as long as the global financial shadow economy is intact; consisting of tax havens, secrecy and a host of other techniques designed to move assets illegally across national borders.” Baker claims that this global network is responsible for resource leaks ten times bigger than all foreign aid combined. (5)

Demanding Complete Transparency

The key to breaking this system is more information and complete transparency. Bilateral agreements offer the opportunity to catch individuals and companies, but the large flow of money that disappears untaxed into tax havens cannot be reached with such agreements.

One solution to improving information is better accounting standards. The G20 aim to improve existing standards with the goal to reach a common global standard, but there is no mention of country to country reporting. See the last edition of the news letter.

Sharing Tax Information

When it comes to tax rules, a system for automatic sharing of information that is relevant for collecting taxes must be developed. Such a system demands a multilateral agreement that applies to all countries – not a network of bilateral agreements – and a set of sanctions to punish countries that do not abide by the rules.

Establishing such an agreement is fully possible. Through the EU savings directive the union has the chance to exchange account information between countries. In Norway, we are used to the Norwegian Tax Administration automatically acquiring information about each of us in connection with our tax return. The same should be the case for assets located in other countries. As already mentioned, such a system means an increase in income for developing countries equal to one and a half times the public development aid combined. (6)

Rich countries will also win with such a system when it comes to national income. Senator Carl Levin estimates that the USA loses $100 billion per year as a result of tax evasion through the use of tax havens7. On 4 May President Barack Obama announced efforts to limit this, claiming it will increase the national income by $95.2 billion over the next 10 years. One of the efforts is demanding that all countries automatically exchange information with US tax authorities, the IRS (Internal Revenue Service) (8)

Now What?

With its black list and demands for more transparency, the G20 has made a step in the right direction. There is great consent regarding the problem as well as attention and political will, but the time has come to do something that is actually worth while.

The world will get its chance at the UN conference on the financial crisis 1-3 June. The negotiated document draft states among other things that ”well-regulated economies must be protected from competition from (states with) insufficient or inappropriate regulative regimes”. Furthermore, tax havens and financial centres in  poor and rich countries which do not have basic standards on transparency, the exchange of information and regulation must give strong incentives in order to change their practice, for instance by limiting transactions between such jurisdictions and better regulated countries”  (9)

Giving power and meaning to such formulations is crucial if poor countries are to mobilize those resources which after all do exist and handle an economic crisis that hits the weakest in society hard.

• Written by: Kjetil Abildsnes, Adviser on Development Policy Issues, Norwegian Church Aid. Contact information:
   

1. Action Aid, March 2009. Where does it hurt? The impact of the financial crisis on developing countries.  Available at  www.actionaid.org.uk/doc_lib/where_does_it_hurt_final.pdf.
2. Based on Global Economic Prospects 2009 forecast update, 31th March 2009, and the World Bank’s estimate that for every percent point lost in economic growth in developing countries increases the amount of people living in extreme poverty by 20 million. Quoted from Oxfam, April 2009. What Happened at the G20?, Oxfam Briefing Note. Available at http://www.oxfam.org/sites/www.oxfam.org/files/bn-what-happened-at-G20.pdf.
3. Global Financial Integrity, January 2009. Illicit financial flows from developing countries. Available at  http://www.gfip.org/storage/gfip/executive%20-%20final%20version%201-5-09.pdf
4. Christian Aid, May 2008. Death and taxes: the true toll of tax dodging. Available at  http://www.christianaid.org.uk/images/deathandtaxes.pdf.
5. Common press release from Global Financial Integrity and Global Witness 2nd April, 2009. Available at http://www.gfip.org/index.php?option=com_content&task=view&id=181&Itemid=70.
6. In 2007 the world’s total development aid was $103,7 billion.
7. Press release from the US Senate. ”Levin, Coleman, Obama introduce Stop Tax Haven Abuse Act (S. 681): bill targets $100 billion in lost tax revenue each year from offshore tax dodges”, 17th February, 2007.
8. Press release from the White House, 4th May, 2009. http://www.whitehouse.gov/the_press_office/LEVELING-THE-PLAYING-FIELD-CURBING-TAX-HAVENS-AND-REMOVING-TAX-INCENTIVES-FOR-SHIFTING-JOBS-OVERSEAS/
9. The draft of a declaration from the UN conference on the World Financial and Economic Crisis and its effects on development available at: http://www.un.org/ga/president/63/interactive/financialcrisis/outcomedoc.pdf