The Imperative for Strengthening International Tax Co-operation
John Langmore and Perrin Wilkins
When delivering the eighth WIDER Annual Lecture on rethinking growth strategies in 2004 Dani Rodrik explored means of building the rate of economic growth in poor countries and suggested ‘trying to identify the most binding constraints on economic growth. What we should be after are the distortions that hurt the most at any point in time’.
One vast distortion which official agencies refuse to study is international tax evasion. We have been dependent on skilful NGOs and a few scholars for the best available estimates. The most recent study, published in July is by James Henry, former McKinsey chief economist who was commissioned by the Tax Justice Network to measure long-term unrecorded cross-border private financial capital flows and stocks, which erode national tax bases, especially in developing countries.
Henry estimated the overall global offshore financial assets at between US$21 trillion and US$32 trillion, of which US$12 trillion was managed by the 50 top global private banks. This latter figure had grown at an annual rate of 16 per cent during the previous five years. Total global wealth was estimated at US$231 trillion in mid 2010, so these ‘invisible’ assets are about ten per cent of total global wealth. Furthermore, Henry estimated that nearly half of all offshore wealth is owned by the world’s 91,000 richest people, just 0.001 per cent of the global population. Almost all of this ‘offshore’ wealth has been managed so as to avoid all income and estate taxes, involving a revenue loss of almost US$200 billion a year for states around the world.
Henry also estimates that at least 25-30 per cent of these funds have come from developing countries at levels averaging several hundred billion a year since the 1970s. To put this calculation in context it might be helpful to remember that the OECD overseas development assistance (ODA) totalled around US$134 billion in 2011. Not all of these flows are to the well-publicised tax havens in tropical islands or European statelets. Much is to OECD countries, perhaps partly to increase personal security but also because some of them give elaborate income and estate tax preferences to ‘non-resident aliens’ or ‘non-domiciled foreigners’ who are allowed to reside there while paying very low taxes. This is one reason why London is a tax haven. Other legal subterfuges offering secrecy and tax advantages (called ‘limited liability corporations’ or ‘asset protection trusts’) have made Delaware, Nevada and South Dakota ‘onshore’ tax evasion centres.
A huge ‘black hole’
So there is a huge ‘black hole’ in the world economy that has never been comprehensively measured officially, generating vast amounts of untaxed income involving tens of billions of lost revenue to developing and also, of course, developed countries. It is clear that the inaction is due to the large amounts of financial support which the financial corporations in the City of London and Wall Street contribute to the major political parties and the influence that goes with that, including the expectation of being the source of senior political appointees.
If governments were as serious about equitable means of increasing revenue and reducing public deficits and debt as they claim to be there is much they could do. It is clear that to achieve these declared goals countries would have to co-operate to win control of these uncontrolled hoards. In April 2009 the G20 declared that they had taken sufficient action to ensure that ‘the era of bank secrecy is over’ but the available evidence suggests that this is not so. Indeed, with the majority of OECD members considered ‘secrecy jurisdictions’ the possibility of reform led in large part by government remains unlikely. Nevertheless, substantial steps to increase transparency are essential and for this reason civil society has an increasingly important role to play.
One simple measure championed by civil society involves the introduction of country-by-country reporting required for both individual and company taxation. This reporting standard would require transnational corporations to include in their annual reports and tax returns, their sales, profits and taxes in each jurisdiction in which they operate. A step towards this was taken in the 2010 US Dodd-Frank Act which includes the Cardin-Lugar amendment which requires oil, gas, and mining companies listed on the NYSE to publish the payments they make to foreign governments broken down to project level. The European Commission is also considering amendments to its transparency and accounting directives. Country-by-country reporting could be introduced generally by the independent, accounting standard-setting body, the International Accounting Standards Board (IASB).
Ways forward in the UN
The issue is far wider than the extractive industries though. There is still dispute between the Global North and Global South about the appropriate method of taxing TNCs. The standard OECD bilateral taxation convention is ‘residence-based’, that is it taxes income of corporations in their home countries. The UN Model Double Taxation convention is ‘source-based’, recommending to governments that they tax companies where they operate. The convention also states that ‘the authorities of the Contract States shall exchange such information as is necessary … in particular for the prevention of fraud or evasion of such taxes’, which is much tougher than the OECD standard, and was inserted mainly at the suggestion of developing countries. The 2009 UN Commission on the International Monetary and Financial System (the ‘Stiglitz Commission’) recommended that such exchange of information should be automatic and not have to wait for a request. This difference points to the need for a capable global tax co-operation agency.
The 2001 High-Level Panel on Financing for Development (the ‘Zedillo Commission’) recommended the establishment of an international tax organization. Its purpose would not be to collect tax, but could include developing international norms for tax policy, maintaining surveillance of tax developments, taking a lead in restraining tax competition, and sponsoring a mechanism for multilateral sharing of tax information so as to curb the scope for evasion of taxes. A step in this direction would be the proposed upgrading of the UN Committee of Experts on International Co-operation in Tax Matters. The UN Secretary-General acknowledged in 2011 that there is as yet ‘no single entity with the global legitimacy, resources and expertise to serve as a single co-ordinating body for international tax cooperation’. Increased resources for the Committee, and any successor, are essential. Such an agency could extend the work of the existing OECD and UN bodies, with technical support from the IMF.
As well as such high priority institutional reform, national governments could simply enforce, and where necessary strengthen, tax legislation relating to exported assets and income earned internationally. Much stronger sanctions could be used, perhaps not only involving much larger fines and imprisonment but also the threat of loss of a banking licence for any bank proven to have been involved in ‘wealth management’ which included tax evasion. Legislation of such a threat might quickly change advertising messages. More fundamentally, concerted research into these hidden trillions by the IMF is long overdue, associated with comprehensive analysis and proposals for ensuring that such wholesale tax evasion becomes impossible. For it is only fair that the wealthiest are required to make an equitable contribution to the common good of the societies that have enabled them to prosper so luxuriously.
John Langmore is a Professorial Fellow in the School of Social and Political Sciences at the University of Melbourne. He was previously a member of the Australian House of Representatives and then Director of the Social Policy and Development Division in the UN Department of Economic and Social Affairs in New York.
Perrin Wilkins has recently graduated Ll. B. and BA (Hons) from the University of Melbourne after writing a thesis on international tax evasion.
 Tax Justice Network, 2012, The Price of Offshore Revisited: New Estimates for ‘Missing’ Global Private Wealth, Income, Inequality, and Lost Taxes, http://www.taxjustice.net/cms/front_content.php?idcat=148
 Estimate by Credit Suisse: https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/2011_global_wealth_report.pdf
 Tax Justice Network, Financial Secrecy Index 2011, http://www.financialsecrecyindex.com/
 Kofi Annan, ‘Momentum rises to lift Africa’s resource curse’, International Herald Tribune, 14 September 2012
 UN Secretary-General, 2011, Strengthening of institutional arrangements to promote international cooperation in tax matters, including the Committee of Experts on International Cooperation on Tax Matters
 Department of Economic and Social Affairs, 2012, World Economic and Social Survey 2012: In Search of New Development Finance, United Nations, New York, E/2012/50/Rev.1