THE “DOUBLE THEFT” FROM ILLICIT FINANCIAL FLOWS
Corporate tax abuse and other illicit financial flows (IFF) are taking a toll on people’s health and depriving millions of essential services. The urgent need to address IFF as a systemic problem was underscored recently in the report of the FACTI Panel or the United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda.
“Illicit financial flows represent a double theft: an expropriation of funds that also robs billions of a better future. Taking action to recover hidden outflows could reduce inequalities everywhere, improving peoples’ well-being, as well as socioeconomic and health outcomes. It could give developing countries the ability to provide their citizens basic social services, such as adequate water, sanitation, electricity, healthcare, and housing,” says the FACTI Report, Financial Integrity for Sustainable Development published in February 2021.
The FACTI Report notes that “IFFs — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development. They worsen inequalities, fuel instability, undermine governance, and damage public trust. Ultimately, they contribute to States not being able to fulfil their human rights obligations."
It is estimated that the global loss to governments from profit-shifting by multinational enterprises may come to (US)$650 billion a year. “As much as 10 per cent of the world’s GDP might be held in offshore financial assets. An estimated $7 trillion of the world’s private wealth is funneled through secrecy jurisdictions and haven countries. Taking into account just one sub-type of illicit financial flows – corporate profit-shifting, or the shopping around for tax-free jurisdictions by multinational corporations – such practices cost countries where these profits are actually made on the order of $500 to $650 billion a year, according to some estimates.”
The FACTI Report estimates that recovering the annual estimated loss to tax evasion would allow Bangladesh to expand its social safety net for the elderly, from 4 million people of those above the age of 60 to 13 million elderly, while increasing the size of the cash transfer to $58 a month (from the current $6).
In India, recovering tax avoidance losses could cover the hospital treatments for 55 million low-income patients annually.
In Thailand, the $1.1 billion estimate lost to corporate profit shifting annually would have been able to augment its social welfare program, providing its 12 million recipients an additional $100 a year.
“Illicit financial flows are a systemic problem that requires a systemic solution,” states the FACTI Report. The FACTI Panel was convened in March 2020 by the 74th President of the United Nations General Assembly and the 75th President of the Economic and Social Council.
“There must be greater fairness, especially in tax cooperation and in the recovery of stolen assets of States. All taxpayers should pay their fair share, including a minimum global corporate income tax rate on profits. Fair and impartial mechanisms should be ensured to adjudicate disputes. A multilateral mediation mechanism can help resolve difficulties in asset recovery and return. The global financial system must be reformed, redesigned and revitalized so that it conforms to four values – accountability, legitimacy, transparency, and fairness,” recommends the FACTI Report.
In the course of formulating its findings and recommendations the FACTI conducted a series of consultations across the world which drew participation from policymakers and government officials, representatives of international agencies, academics, the private sector and civil society.
Earlier, the report The State of Tax Justice 2020, released by the civil society group Tax Justice Network, analyzed data on how much tax revenues are lost to international corporate tax abuse and private tax evasion. “The world is losing over US$427 billion in tax a year to international tax abuse. Of the $427 billion, nearly $245 billion is lost to multinational corporations shifting profit into tax havens in order to underreport how much profit they actually made in the countries where they do business and consequently pay less tax than they should. The remaining $182 billion is lost to wealthy individuals hiding undeclared assets and incomes offshore, beyond the reach of the law,” according the State of Tax Justice 2020. (https://www.taxjustice.net/reports/the-state-of-tax-justice-2020/)
A finding that stood out, with the world grappling with the Covid19 pandemic, was the proportion of moneys lost to tax havens vis a vis health spending. Globally the equivalent of nearly 34 million nurses’ annual salaries is lost to tax havens each year. On average, the losses come to nearly 8.4 per cent and nearly 52.4 per cent of the health budgets of higher income countries and lower income countries, respectively. Asia was found to have lost over $73.3 to multinational tax abuse and private tax evasion every year. The tax lost is equivalent to 6.48 percent of the region’s combined health spending or paying the yearly salaries of 11,371,221 nurses.
The Asian Peoples’ Movement on Debt and Development joins civil society calls for systemic reforms in the international financial architecture. APMDD, through its membership in the Financial Transparency Coalition, organized the 2019 Asian Conference on Illicit Financial Flows. The conference communiqué, “Stopping Robbers and Pirates”, states in part that “the abusive tax practices of corporations and the generous tax incentives they enjoy greatly drains our economies of foregone revenues which could and should have been used to finance development. “
(Full Communiquéavailable on https://www.apmdd.org/programs/development-finance/iff/communique-of-the-asian-conference-on-illicit-financial-flows)
Among the ways forward identified in the Asian Conference was to advocate and work for reforms in the international financial architecture, particularly setting up an inclusive UN inter-governmental tax commission and an international tax convention, which together ensures effective international tax cooperation and transparency.