Development Finance Institutions and Responsible Corporate Tax Behaviour: Where we are, and the road ahead | Taxes | Tax Haven

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Many Development Finance Institutions (DFIs) are not doing enough to eliminate the risk of public money being complicit in tax avoidance schemes. This is the finding of an analysis of publicly available policies of nine DFIs related to corporate tax payments, which suggests that DFIs are doing too little to encourage responsible corporate tax behaviour. Some DFIs have taken important steps forward, which this paper documents
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  JOINT AGENCY BRIEFING PAPER 10 NOVEMBER 2016 DEVELOPMENT FINANCE INSTITUTIONS AND RESPONSIBLE CORPORATE TAX BEHAVIOUR WHERE WE ARE AND THE ROAD AHEAD This analysis shows how many DFIs are still not doing enough to eliminate the risk of public money being complicit in tax avoidance schemes. Some DFIs have taken important steps forward, which are documented here, however, many DFIs are falling behind. Even less is being done to ensure that their clients meet the highest standards for responsible corporate tax behavio u r and full transparency. This briefing includes recommendations for how DFIs can take a much-needed and long overdue proactive role in ensuring tax payments and domestic resource mobilization in developing countries follow from their investment decisions.  2 Contents SUMMARY ..................................................................................................................................... 3   Recommendations ...................................................................................................................... 5   INTRODUCTION ............................................................................................................................ 7   The increasing role of DFIs.......................................................................................................... 8   DFIs and corporate tax payments ................................................................................................ 9   Box 1: Research on DFIs and corporate taxes by NGOs ....................................................... 10    ANALYSIS OF DFI POLICIES ON TAX ........................................................................................ 11   Transparency in portfolio and monitoring what type of companies benefit from the funds .......... 11   Beginning to gauge the risk: countries of incorporation .............................................................. 12   Box 2: Oxfam‟s definition of tax havens  ................................................................................. 13   DFIs‟ own policies on tax or tax havens  ..................................................................................... 13   Box 3: Problems with the Global Forum ................................................................................. 14   Risk assessments on corporate tax payments ........................................................................... 17   Reporting on tax payments ........................................................................................................ 18   Requirements for responsible corporate tax practice from clients .............................................. 19   Box 4: What is responsible corporate tax behaviour? ............................................................. 20   RECOMMENDATIONS ................................................................................................................. 21   Use of tax havens ...................................................................................................................... 21   Tax behaviour of client companies ............................................................................................ 21   Transparency and reporting....................................................................................................... 22   Measuring development ............................................................................................................ 22   Internal issues ........................................................................................................................... 22    ANNEX: summary table ................................................................................................................ 23   NOTES ......................................................................................................................................... 24    3 SUMMARY Development Finance Institutions (DFI) are not doing enough to avoid becoming accomplices in harmful corporate tax practices. This is the finding of an analysis of publicly available policies of nine DFIs related to corporate tax payments, which suggests that DFIs are doing too little to encourage responsible corporate tax behaviour. This analysis highlights the role DFIs should play in promoting responsible tax practices by companies. This briefing paper outlines how a selection of DFIs are largely failing to use their influence as investors in companies operating in developing countries to ensure that those companies restrict or eliminate their use of tax havens or to reduce the risk of corporate tax avoidance, while others have taken important steps forward. There is a particular need for DFIs to play this role, given the scale of global tax dodging, the fact that DFIs largely use public money and since DFI investments in developing countries are significantly increasing. DFIs are government-owned institutions that invest in private sector projects in developing countries. In Europe, 15 bilateral DFIs are members of the Association of European Development Finance Institutions (EDFI) and are among the bodies that implement their governments‟ development cooperation policies. Several multilateral DFIs are also major investors in the private sector, notably the World Bank Group ‟s International Finance Corporation (IFC), the EU‟s European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the regional development banks in Africa, Asia and Latin America. This analysis of DFIs‟ publicly available policies on tax finds that some DFIs are significantly lagging behind in preventing their funds supporting aggressive tax planning  –  albeit unintentionally. Some aspects of their investments remain shrouded in secrecy, although transparency is crucial in order to establish public confidence, as DFIs are using tax payers‟ money.  All DFIs need to continue to make improvements in public access to information to ensure accountability. European governments are making private finance central to their international development efforts, and DFIs are playing an ever more central role in channelling investments from North to South. The role of DFIs in development finance has increased dramatically. Globally, the IFC is the biggest player in this field and its investment commitments have increased six-fold since 2002. In Europe, the consolidated portfolio of EDFI members increased nearly four-fold between 2003 and 2015, from €10bn to €36bn.  Investees of DFIs include both small- and medium-sized enterprises and large transnational corporations (TNCs). The latter are a particular focus for this briefing because, due to their cross-border nature, they have a greater ability than domestic companies to practice tax avoidance, especially by using tax havens. Tax revenues form the basis of a sustainable economy and are crucial for developing countries that seek to invest in poverty reducing services while also becoming less dependent on foreign aid. However the United Nations trade body, the UN Conference on Trade and Development (UNCTAD), estimates that developing countries lose at least $100bn a year due to one type of corporate tax avoidance alone.  4 Corporate tax dodging by TNCs and the persistent presence of tax havens in the international system represents a major obstacle to combatting a modern scourge  –  that of deep and rising global inequality. One of the most effective ways of fighting inequality in societies is through greater tax justice, and dedicated efforts by governments to realize human rights and achieve the Sustainable Development Goals (SDGs). There will be a significant need for more public finance to be mobilized domestically to help deliver the SDGs in all countries. This will require national tax systems that are efficient and fair, ensuring that taxpayers, including corporations, contribute according to their means. Under their human rights obligations, states are required to mobilize the maximum available resources to finance the progressive realization of economic, social and cultural rights, as well as to advance civil and political rights and the right to development. The financing gap to achieve the SDGs is estimated at $2.5 trillion. Undoubtedly the private sector will need to play a role to complement public financing for sustainable development. The private sector will also need to contribute to domestic resource mobilization through corporate tax payments. DFIs and private sector lending by publicly backed banks should play a crucial role in ensuring this. This research analyses the policies of nine DFIs, assessing them against some key indicators that would help ensure they promote responsible tax practices and avoid possible complicity in company tax avoidance strategies. Key findings include the following: ã Eight of the nine DFIs list their entire portfolios of investments on their websites. None of theDFIs report what proportion (or which) of their investments goes to TNCs. ã Seven of the nine DFIs fail to routinely state the country of incorporation of all their investees.Four of the nine DFIs do not list these at all, while three list the domicile for only some of their investees, usually the funds in which they invest, and two list all countries of incorporation. Atleast seven of the nine DFIs invest in companies or financial intermediaries incorporated in taxhavens, such as Mauritius and the Cayman Islands. In addition, DFIs invest in many companiesthat use tax havens in their corporate structures. ã Eight of the nine DFIs have some sort of policy and standards in place specifically regardingtheir tax policies and the use of tax havens. However, most are reliant on the ratings put forwardby the Organisation for Economic Co-operation and Development (OECD) Global Forum onTransparency and Exchange of Information for Tax Purposes; argued for many years by NGOsto be insufficient. Only a few take steps beyond legal compliance and the Global Forum. ã DFIs vary in having tax risk and impact assessment and few provide public information on this.Most DFIs have some framework for monitoring tax payments as part of their projects, but thisis usually not situated in a framework of monitoring key tax risk factors that can result in abusivepractices. ã Eight of the   nine DFIs include tax as an indicator when measuring their development impact.However, those DFIs reporting the tax payments of the companies in which they invest provideonly limited information publicly. ã DFIs do not fully highlight the importance of tax in their public annual reporting. In their mostrecent (2015) annual reports, four DFIs make no mention of tax at all. Others make brief mentions of taxes paid by their investees while only one (Swedfund) has a considerable sectionon its tax policy and payments. ã This research has not been able to identify any of the nine DFIs that is encouraging or requiringconcrete, responsible tax practices by its investees. As a general rule, DFIs simply requireinvestees to abide by the law.
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