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September 23, 2013
EU Tax Dodging Costs Developing Nations $100 Billion Each Year, NGO Report Says
by Stephanie Soong Johnston

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Developing countries are losing out on at least $100 billion in tax revenues each year because of EU corporate tax dodging resulting from inadequate international tax policies, according to a report published September 18 by a coalition of European nongovernmental organizations.

In its "Spotlight Report on EU Policy Coherence for Development," the European NGO Confederation for Relief and Development (CONCORD) says multinational companies operating in developing nations are taking advantage of lax international regulation and that $859 billion to $1.1 trillion exited developing countries as illicit financial flows in 2010 alone. An estimated $430 billion to $569 billion was the result of profit shifting by multinational corporations, the report says.

"If these illicit financial flows were taxed instead of escaping developing countries, they would generate at least as many resources for a country as the aid it receives," the report adds.

CONCORD is calling for the EU to improve its fiscal policies and align them with development objectives identified by the EU Council after the May 14 meeting of the Economic and Financial Affairs Council. The council stressed the importance of unity to fight aggressive tax planning and affirmed support for efforts to move toward automatic exchange of tax information at the EU, G-8, G-20, OECD, and global levels, and for the implementation and enforcement of beneficial ownership information standards for tax purposes.

The CONCORD report recommends that the EU support a global regime of multilateral automatic exchange of tax information, extending the system beyond European borders to developing nations. At the same time, the EU should help developing countries bolster their tax administrations to enable them to implement the new regime, and give those administrations access to tax information without full reciprocity, at least temporarily, it says.

CONCORD also recommends that the EU introduce a binding, comprehensive definition of tax havens and pressure jurisdictions that qualify as tax havens to sign on to the new regime, imposing countermeasures on jurisdictions that refuse to join. At minimum, tax haven status should take into account secrecy surrounding banks and legal entities and the presence of "harmful tax measures" such as domestic legislation that prevents automatic exchange of tax information with other governments, the report says.

Another major recommendation is that the EU should require multinational corporations in all industries to adopt country-by-country reporting, further building on progress made in the forestry and extractive sectors with the accounting directive and in the banking sector with the capital requirements directive.

That move would make it mandatory for companies to be more transparent about their economic performance, publish real figures for all their subsidiaries in every country in which they operate, and demonstrate full details of their tax affairs, including amounts owed and amounts that were actually paid, the report notes.

CONCORD also urges the EU to create centralized public registries to promote greater transparency about beneficial ownership of corporations, foundations, and trusts, and to allow tax authorities to access that information without tipping off the subjects.

Moreover, the EU should add tax crimes to the list of predicate offenses for money laundering, in line with recent Financial Action Task Force recommendations, CONCORD says.

"Making tax crime a predicate offense for money laundering will mean that all financial professionals will have to consider and report on a greater range of risk factors in their due diligence, such as transactions with tax havens," the report says. "Improved due diligence will make it harder for tax evaders, whether from another member state or a developing country like Zambia, to get their money into the EU's banking system."

Sarah Kristine Johansen, policy officer for CONCORD, told Tax Analysts that while the report is the third of its kind, this is the first time it addresses the role of financial issues -- particularly the effect of tax evasion by multinational companies -- on developing countries.

The $100 billion figure is a conservative estimate based on other sources from NGOs, such as ChristianAid and Global Financial Integrity, she said. "This amount is 13 times the size of what the EU gave in development aid in 2012," Johansen said. "This is really undermining countries' ability to finance their development."

As for CONCORD's recommendation to support true multilateral automatic information exchange, Johansen acknowledged that the EU is moving in that general direction, but said more needs to be done.

"We're in the middle of a paradigm shift, but the question is now, what is the new paradigm that we've built up, and does it take into account developing countries from the very beginning?" she said. "Otherwise we're just building yet another structure for multilateral automatic exchange of information between EU member states and some tax havens."

In general, Johansen says the European Commission has done a good job of trying to include developing countries in automatic information exchange, but she says the European Council and the EU member states, many of which are tax havens themselves, "have not been very progressive . . . when it actually comes down to action."

In a September 18 blog post, European Commissioner for Development Andris Piebalgs welcomed CONCORD's report, pointing out that its publication comes ahead of the EU Commission's own report on policy coherence for development.

Piebalgs acknowledged that the report raises some critical points but took issue with its claim that the EU has not accomplished much in the fight against tax evasion and avoidance to benefit developing countries. He cited some examples of recent EU legislation, including the accounting and transparency directives, which he called a "recent success."

"The accounting and transparency directives . . . promote the disclosure of payments made to governments by the European extractive and forestry industries," Piebalgs said. "More concretely, all payments to governments over €100,000 by large companies in the extractive industry will need to be publicly disclosed."

Piebalgs also noted that most EU member states offer bilateral technical assistance to developing countries to help strengthen their tax systems.

"This will provide civil society in resource-rich countries with the information they need to hold governments to account for any income made through the exploitation of natural resources," he said.

Piebalgs added that he values the report "as an important input to our discussions and as part of our constant -- and fruitful -- exchange with civil society on development policy and [policy coherence for development]."

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