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Urgent global action needed to tackle tax avoidance

01 October 2014

​Illicit financial flows are now worth nearly $800 billion per year, according to CCFD-Terre Solidaire.

Global action to close tax loopholes and tackle tax avoidance was high on the agenda at the UNCTAD Trade and Development Board this year, as experts discussed the challenge of financing the post-2015 development agenda and the need to bolster public revenues.

New figures from French NGO CCFD-Terre Solidaire showed that illicit financial flows are worth €800 billion each year, compared to €80 billion of official development assistance. Experts at the Trade and Development Board, which ended last week, praised civil society organisations for the role they have played in improving fiscal governance and transparency.

UNCTAD's 2014 Trade and Development Report shows that approximately 8-15 per cent of the net financial wealth of households is held in tax havens, mostly unrecorded. The resulting loss of public revenue amounts to $190?$290 billion per year, of which $66?$84 billion is lost from developing countries.

The main vehicle for multinational companies to avoid or evade tax in developing countries is the misuse of "transfer pricing", which is when international firms price the goods and services provided to different parts of their business to create profit-loss profiles that minimize tax payments. The report estimates that developing countries may be losing over $160 billion annually to transfer pricing.

Mathilde Dupre, Corporate Social Responsibility Advocacy Officer at CCFD Terre Solidaire said that civil society can be a strong ally of the state as it confronts the private sector. Civil society organisations led the way on international initiatives such as the Extractive Industries Transparency Initiative, which defines acceptable standards of disclosure of contracts, control of revenues by parliament and published estimates of tax expenditure.

However, fiscal haemorrhaging due to corporate tax evasion was not just a problem in extractive industries. She described how multinational firms such as Google operate subsidiaries in many different jurisdictions, enabling them to have customers, employees and to book sales in different locations. The international tax architecture has failed so far to adapt to this reality, she said.

The European Union and the G20 and OECD had developed information exchange agreements and international tax agreements, but so far there was no requirement for information to be made public, and rules were to be implemented by national tax authorities rather than an international body.

Multilateral measures were of utmost importance to establish clear and shared rules that ensure firms pay taxes in the countries where they actually conduct their activities and generate their profits. She suggested that more authority be given to institutions such as the United Nations Committee of Experts on International Cooperation in Tax Matters to develop an international convention against tax avoidance and evasion.

Some developing countries discussed the difficulty of raising tax revenue within the current governance regime. The increased mobility of capital and use of fiscal havens had made it more difficult to tax income and wealth. Countries were also competing to attract or retain foreign investors by lowering tax rates. Corporate and income tax rates have declined in developed and developing countries, while value added tax and other indirect taxes have increased, so poor people bear a disproportionate tax burden in both developed and developing countries, said Professor Giovanni Cornia of the University of Florence.

Sangheon Lee, senior economist at the ILO, urged countries to find new sources of tax revenue, including taxes on financial transactions and property, and a carbon tax that could be used to subsidise clean energy. A progressive tax regime would reduce inequality, boost aggregate demand and avoid secular stagnation - weak growth and low real interest rates - in developed countries, he said.