The IFC and Tax Havens: The need to support more responsible corporate tax behaviour

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Oxfam analysis reveals that 51 of the 68 companies that were lent money by the World Bank’s private lending arm in 2015 to finance investments in sub-Saharan Africa use tax havens. Together these companies, whose use of tax havens has no apparent link to their core business, received 84 percent of the International Finance Corporation’s investments in the region last year. As the World Bank and IMF prepare for their Spring Meeting in Washington 13–15 April, and in the wake of the Panama Papers scandal which reveals how powerful individuals and companies are using tax havens to hide wealth and dodge taxes, Oxfam is calling on the World Bank Group to put safeguards in place to ensure that its clients can prove they are paying their fair share of tax.
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  OXFAM BRIEFING NOTE 11 APRIL 2016 www.oxfam.org  THE IFC AND TAX HAVENS The need to support more responsible corporate tax behaviour Oxfam analysis reveals that 51 of the 68 companies that were lent money by the World Bank’s private lending arm in 2015 to finance investments in sub-Saharan Africa use tax havens. Together these companies, whose use of tax havens has no apparent link to their core business, received 84 percent of the International Finance Corporation’s investments in the region last year. As the World Bank and IMF prepare for their Spring Meeting in Washington 13–15 April, and in the wake of the Panama Papers scandal which reveals how powerful individuals and companies are using tax havens to hide wealth and dodge taxes, Oxfam is calling on the World Bank Group to put safeguards in place to ensure that its clients can prove they are paying their fair share of tax.  2 INTRODUCTION Inequality is rising around the world and it is increasingly recognised that this not only has a multitude of negative impacts on women and men globally, but also on economic growth 1 . Fighting inequality must be an integrated priority for everyone in development, to promote and achieve sustainable development. One of the most effective means to fight inequality in societies is through greater fiscal  justice. However, a major threat to states’ sovereignty to do this is the corporate tax dodging of multinational enterprises (MNEs or MNCs) and the persistent presence of tax havens in the international system. The World Bank president has himself characterized tax dodging as ‘a form of corruption that hurts the poor’ 2 . The International Monetary Fund (IMF) has calculated that profit shifting of MNEs should be a bigger concern of developing countries 3 . Meanwhile, the financing gap to reach the sustainable development goals (SDGs) is estimated at US$2.5 trillion. Undoubtedly the private sector will need to play a role to complement public financing for sustainable development. Development finance institutions (DFIs) and private sector lending by publicly backed banks will play a crucial role in this. However, Oxfam is greatly concerned that these institutions currently do not do enough to shield themselves from being potential accomplices in harmful tax practices and appear to be doing too little to encourage responsible corporate tax behaviour. This briefing uses new research to show that a significant proportion of the International Finance Corporation’s (IFC) investments are linked to tax havens. Oxfam has undertaken research to map the institution’s exposure to MNEs. The findings place MNEs at the centre of the majority of the IFC’s investments. Looking at IFC investments in sub-Saharan Africa (SSA) over the past six years, there is a consistently high level of association with MNEs in these investments. Furthermore, the vast majority of these MNEs have an indisputable presence in tax havens. Oxfam’s analysis of the IFC’s portfolio shows that there is significant risk that the IFC is supporting MNEs that might be engaged in aggressive tax planning. This leaves the IFC and other DFIs with an important task and opportunity. First, the IFC needs to be able to ensure that it does not support MNEs that are engaged in harmful tax practices. Second, the IFC needs to do a better job of supporting responsible corporate tax practices.   3 INEQUALITY, TAX HAVENS AND DEVELOPMENT Rising inequality and its effects The global inequality crisis is reaching new extremes. Oxfam research has shown that the richest 1% in the world now has more wealth than the rest of the world combined. Power and privilege is being used to skew the economic system to increase the gap between the richest and the rest. 4  Gender inequality is a cause and consequence of economic inequality. When workers lose wealth and power, women – who are already over-represented in low paid, informal, vulnerable, and precarious work – lose the most. However, progressive fiscal policies which enable these investments can support equality between women and men; addressing tax avoidance to support domestic resource mobilization is a crucial part of this. Box 1: Oxfam’s Even It Up campaign 5   Research by Oxfam recently revealed that the top 1 percent have now accumulated more wealth than the rest of the world put together. Such extreme inequality makes no moral or economic sense and is hampering efforts to end extreme poverty. Decades of experience in the world’s poorest communities have taught Oxfam that poverty and inequality are not inevitable or accidental, but the result of deliberate policy choices. Inequality can be reversed. When Oxfam launched its Even It Up campaign in 2014, calling for action on taxation, investment in public services and decent jobs and wages for all to tackle the rising tide of extreme inequality, it joined a groundswell of voices calling for action. These include the diverse voices of faith leaders, individual billionaires and the heads of institutions such as the IMF and the World Bank, as well as trade unions, social movements, women’s organizations and millions of ordinary people across the globe. These voices are all calling for world leaders to take action to end extreme inequality. Some people claim that concerns about inequality are driven by the ‘politics of envy’. They often cite the reduction in the number of people living in extreme poverty as proof that inequality is not a major problem. But this is to miss the point. As an organization that exists to tackle poverty, Oxfam is unequivocal in welcoming the fantastic progress that helped to halve the number of people living below the extreme poverty line between 1990 and 2010. Yet if inequality within countries had not grown during that same period, an extra 200 million people would have escaped poverty. That could have risen to 700 million had poor people benefited more than the rich from economic growth. We cannot end extreme poverty unless we tackle extreme inequality. The role of corporate income tax for development  Achieving the ambitious SDGs has been estimated to require an additional $2.5 trillion 6  a year in developing countries. Tax revenues will be a critical part of this financing, alongside international trade, aid and private finance; all of which should fulfill the criteria of sufficiency, equity and accountability 7 .  4 Tax revenues derive from a variety of sources; however for developing countries MNEs is a very significant one. MNEs account for a very large part of the tax base in developing countries; their tax payments are thought to be roughly twice as important as they are in rich countries as a share of total tax revenue 8 . This means that MNE tax payments in developing countries already contribute to government revenue and thereby the financing of essential services such as free, quality education, health services, and much more. Burkina Faso: Tax revenues and essential services Photo; Aristide Ouedraogo  Arsene is a 46-year-old farmer from Bérégadougou in Burkino Faso. Like many in his country, he is deeply concerned about the lack of many basic services in his community: the absence of doctors which means a 30 km round trip to get even a simple prescription; the reliance on private schools whose fees put education out of reach for so many families; and a lack of infrastructure which means many families are forced to walk at least one kilometre to fetch drinking water. And while Arsene dutifully pays his taxes, many multinational companies across Africa are doing everything they can to avoid paying their fair share – depriving governments of millions of dollars in revenues which are desperately needed to tackle poverty and inequality. However, tax administrations across the world are challenged to ensure effective tax payments by MNEs, as MNEs increasingly engage in complex corporate tax structures and aggressive tax planning measures. This might not always be technically unlawful behavior, but it significantly challenges the collection of corporate tax and the tax bases of countries, in particular for developing countries. The IMF has recently estimated that the costs of tax base erosion and profit shifting by MNEs which avoid paying their taxes where their economic activities take place are 30 percent higher in developing countries than in OECD countries. Tax havens play a crucial role in facilitating this. Why tax havens matter for development Paying taxes will always involve a number of choices no matter what the tax system is. Tax regulation between countries is particularly vulnerable to such choices, as the rules in the different countries might allow for exploring loopholes or mismatches between the different sets of regulations. Multinational companies have a particular responsibility to clarify what and how they make such choices with tax impacts, as they have the option, from being in more than one country, to structure their operations in multiple ways. They can often also negotiate special
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