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Africa/Global: Rich Without Borders

AfricaFocus Bulletin
May 31, 2013 (130531)
(Reposted from sources cited below)

Editor's Note

"For every country losing money illicitly, there is another country absorbing it. These outflows are facilitated by financial opacity in advanced Western economies and offshore tax havens. Implementing transparency measures to curtail tax haven secrecy and anonymous shell companies is crucial to curtailing illicit flows." Raymond Baker, Global Financial Integrity

With austerity pummeling European economies, and the call for deficit reduction at the expense of public interests still dominating U.S. political discourse, governments and media in rich countries are focusing new attention on income that escapes national taxation by both illegal and legal mechanisms. Apple, for example, has recently been exposed as avoiding taxation by registering income earned elsewhere in Ireland that ends up being taxed by nobody, and companies in industries as diverse as Starbucks and Amazon exploit a variety of loopholes to minimize what they pay to any government. Oil companies are notorious for their opaque agreements with oil-producing countries around the world.

The same mechanisms are at work in African countries, with even more damaging consequences. And this is now catching the attention of not only radical critics but also of more and more mainstream analysts and institutions. The bottom line: if economic development is to benefit the majority rather than a privileged few, civil society and governments have to follow the money, to ensure that a fair share goes to benefit the society rather than escaping scrutiny in tax havens that serve the "rich without borders."

This AfricaFocus Bulletin contains a recent report from ActionAid making this point. Other sources confirming this reality are multiplying day by day.

For one example, see a just released report from the African Development Bank and Global Financial Integrity on Africa's net capital transfers to the rest of the world, see

For the Africa Progress Panel's report last month, strongly emphasizing the same point, visit

An international group of non-governmental organizations working on these issues is the Financial Transparency Coalition, at

For previous AfricaFocus Bulletins on illicit capital flows, tax havens, and related topics, visit

See particularly

For a special issue of the Bulletin of the Association of Concerned Africa Scholars on the topic, see

++++++++++++++++++++++end editor's note+++++++++++++++++

How Tax Havens Plunder the Poor

ActionAid May 2013

Executive summary

Tax havens have recently become big news, as well as big business. But amidst all the scandals of ministerial Swiss bank accounts and celebrity tax avoiders, there has been much less discussion of the impact of tax havens on the poorest countries in the world.

This briefing aims to fill that gap. It shows the primary role of the UK's and the G8's own tax havens in a global merry-go-round that helps keep

1.3 billion people in poverty and hunger, while denying developing countries the ability to benefit from their own wealth, and raise the public funds needed to fight poverty.

1) New analysis by ActionAid reveals that just under one in every two dollars of large corporate investment in developing countries is now being routed from or via a tax haven.

A third of these developing country tax haven flows are being routed through tax havens under the jurisdiction of countries represented at the G8.

2) While not proof of tax avoidance, such routing can often result in billions of dollars of tax foregone by both developed and developing countries, through three key mechanisms outlined in detail below. In just one case we examine, the Indian revenue authority has claimed that a single offshore transaction deprived it of an estimated US$2.2 billion of tax revenues -- almost enough money to pay for a year's subsidised midday meals for every primary schoolchild in India -- a transaction that the Indian supreme court ruled could not be taxed because it took place offshore.

3) New data recently published by ActionAid about the presence of the UK's largest multinational companies in tax havens confirms the scale of this mismatch between where global business actually takes place, and where it appears on paper. Nearly four years after G20 leaders announced "an end to tax havens"

Every new entrant to the FTSE100 ([n index of the 100 largest companies on the London Stock Exchange] since 2011 has tax haven operations. Collectively the FTSE100 now has more companies registered in Jersey than in China; more in the Cayman Islands than in India.

Ninety-eight of the 100 FTSE100 have companies in tax havens, 78 of which also have operations in developing countries. In two cases that we analyse in greater detail, over 60% of the firms' tax haven companies are linked to operations in developing countries.

While the number of overseas companies owned or controlled by FTSE100 firms has shrunk since 2011, the proportion of those companies in tax havens has actually slightly risen. Over 38% of the 21,771 overseas subsidiaries and associate companies of the largest 100 UK-listed multinational groups are now located in tax havens. The proportion is largest amongst FTSE100 real estate firms: 80% of their overseas subsidiaries and associates are registered in tax havens -- nearly 60% in UK- linked havens alone.

4) Multinationals' use of tax havens continues to be opaque. Existing transparency measures are not working.

One in 10 of the UK's largest multinationals failed in 2011-12 to disclose their subsidiary and associate companies until ActionAid pointed out the non-compliance to Companies House, despite this being a requirement of UK company law and often the only way to determine the existence and ownership of tax haven companies. This is despite the UK government back in 2011 promising an inquiry and possible legal action against companies keeping their subsidiaries secret.

5) However, our research also finds that not every profitable multinational is addicted to tax havens, or to secrecy. Two of the FTSE100 (Hargreaves Lansdown and Fresnillo) are still tax-haven free, despite operating in sectors -- mining and financial services -- that are no strangers to 'offshore'. Some companies now have tax policies that specifically avoid the use of tax structures or strategies deemed risky by revenue authorities. Others are going further than their legal requirements to disclose their tax structures and positions around the world, either in their public reporting or on request.

As chair of the G8, the UK cannot credibly lead action on tax havens without addressing its own network of tax havens -- larger than any other country in the world. The UK is responsible for one in five of the tax havens we identify in this paper -- more than any other single country. Indeed, the countries represented at the UKhosted G8 Summit in June are collectively responsible for 40% of these tax havens. G8 members have started in recent months to force tax havens to open up to their own tax authorities, but so far developing countries have not been offered participation in these initiatives or their benefits.

The G8 have the opportunity and the responsibility to ensure the solutions to tax evasion and avoidance produced at the G8 Summit are of benefit to the rest of the world, not just wealthy countries themselves. This briefing sets out why, and how.


Professor Jeffrey Sachs (Director of the Earth Institute, Columbia University)

When G8 leaders meet this June, they have a responsibility to end one of the biggest and most dangerous scams in the world economy: the global web of tax and secrecy havens that they so lovingly have nurtured over the years. These havens facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities.

The public did not really know the facts until recently. The rich and powerful kept the public distracted when stock markets were rising and budgets were full. Yet the tax haven system was eating away at the roots of the world economy, making it increasingly easier for wealthy individuals, corrupt businesses, money launderers, political parties, and of course the ever-more-powerful banks, hedge funds, and multinational companies to protect their profits from taxation.

But recently, the veil has started to fall, and the sight is not lovely. Mitt Romney ran for US President with vast wealth in the Cayman Islands, and he was never willing to account for that wealth. The French Budget Minister, and then the Socialist campaign finance manager, got caught with their own offshore accounts. Rich Greeks with secret accounts abroad are on IMF-provided lists. Senior Spanish officials have been caught receiving stipends from secret, offshore party accounts. And this is only the tip of the iceberg. The International Consortium of Investigative Journalists has recently begun to release the names of rich and powerful offshore banking customers, with much more to be revealed.

Cyprus exposed the macroeconomic risks of this nefarious system. Everybody knew that Cyprus was a tax-and-secrecy haven especially for Russian funds, but few people anticipated that the Euro would almost die in a blowup of the Cypriote banks. But why shouldn't they have known? This is par for the course when a country is home to bank assets and liabilities that are many times larger than the country's national income. The banks have no backstopping. How many times do we really need to learn the lesson?

Thanks to wonderful writing by many advocates and eyeopening (indeed eye-popping) books such as Treasure Islands by Nicholas Shaxson, we also come to appreciate better that the havens are not the un-pluggable gaps of a well-regulated global economy, but are actually part of the core design of the global system. Switzerland and the United Kingdom essentially invented much of the system during the early to mid 20th century, and the US became its great champion more recently. The Caribbean havens -- Bermuda, the British Virgin Islands, and the Caymans -- are British Overseas Territories. The US is itself increasingly a haven for foreign investors, especially in Delaware, and it is also the great proponent of the Caribbean haven system.

And how absurd and dangerous this system has become. The Caymans have around 57,000 people, but 92,000 companies. The BIS estimates that $1.4 trillion in bank assets and liabilities are there. This is a time bomb, not a financial system. And not surprisingly, the so-called 'boards' of many tax haven shell companies, which are supposed to 'govern' the companies, are routinely filled with individuals who sit on dozens, or even hundreds of boards. The governance situation is absurd, dangerous, and out of control.

The politicians continue to protect their exorbitant privileges, or listen to their billionaires and continue to wink at mega-tax evasion, or listen to their major companies and continue to tolerate unpardonable games of transfer pricing into the havens, are playing with fire. The days of high living are over. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.

Developing countries are also saying that enough is enough. For decades they've been on the receiving line of lectures about good governance. For decades, the hypocrisy has been out of control. The tax havens have served the purpose of paying bribes to potentates, and providing easy ways for elites in poor countries to keep their money safe from tax collectors. Yet it is the rich countries that have fostered that system. And now poor countries understand it clearly. They are the ones insisting more than anybody to turn off these abuses. After all, the governments of the poorest countries are trying to invest their oil, copper, gold, diamond, and other earnings. But they can't succeed if the money just makes a beeline for the havens, all protected and supported by Wall Street, the City of London, Swiss banks, and the rest of an industry all too happy to move money unaccountably and irresponsibly around the world.

On top of this basic affront to the capacity of states to provide for their citizens' wellbeing, the same facilities of secrecy and tax-free income make possible much of the illicit financial flows at the heart of money- laundering, grand corruption and the financing of transnational crime. And as Nigerian Finance Minister Ngozi Okonjo-Iweala and IMF chief Christine Lagarde have pointed out, tax havens have provided a regulation-free platform for many of the opaque and toxic financial vehicles which, together with 'cosy financial regulation' onshore, have posed such serious threats to the stability of the global financial system itself.

This new study provides powerful evidence that four years after world leaders promised an 'end to tax havens' in the wake of the financial crisis, the scale of tax havens' hold over developing economies, and the systematic exploitation of their facilities by wealthy investors and businesses in those economies, has only increased. Put simply, the revenue lost as a result could enable developing countries to finance their own futures free from poverty.

It is the world's wealthiest countries that have the capacity to end this global injustice and end it now. Powerful countries can sometimes track down the income and assets siphoned offshore by individuals and businesses in tax havens, or as America's bilateral FATCA agreements have shown, crack open secrecy through threatening to limit tax haven banks' access to their taxpayers. For developing countries with much smaller administrative resources and economic clout, it is virtually impossible to do the same on their own.

The world's most powerful countries also have a unique responsibility. They created this system. It's their job to end it. Taxes worldwide need to be paid, not hidden or absurdly sheltered; banks, hedge funds, and nonfinancial companies need to be domiciled where they can be properly overseen and regulated, not in small islands that can't possibly oversee these businesses; and hot money and corruption need to be brought decisively under control.

The politicians need to understand that their publics are now on to the game. There is no more time to delay.

Small businesses bear the brunt

Last year ActionAid met Caroline Muchanga, a small business owner in Mazabuka, Zambia, who sells sugar produced by a UK-controlled sugar company, zambia Sugar, a few kilometres from her stall. While Caroline has no choice but to pay the business tax collected from her stall every day, the multinational company next door has had its Zambian corporate tax bill shrunk to little or nothing in recent years: partly through legitimate capital allowances, but also through special tax incentives, and by routing fees, loans and dividends through tax haven sister companies, which has -- perfectly legally -- saved the group millions of dollars of zambian withholding taxes. Faced with her own unavoidable tax bill and rising wholesale sugar prices, Caroline told us simply: 'Our profits are not enough.Zambia Sugar should be paying more tax than us.' Some UK business leaders are starting to agree: Andy Street, CEO of high- street retailer John Lewis, has argued that companies avoiding taxes via tax havens risk driving others out of business: 'they will out-invest and ultimately out-trade'.

Introduction: money on an island

Tax havens are jurisdictions around the world that make wealthy taxpayers from other countries an offer that is hard to refuse: a combination of low- or no-tax rates for many types of income deriving from outside their borders, and near-complete financial and corporate anonymity. Caricatured as 'sunny places for shady people', tax havens are often criticised by public and politicians for playing host to money- laundering and celebrity tax evasion. But tax havens have another side too: they are depriving some of the world's poorest countries of vital resources to fight poverty.

Some estimates suggest that the concealment in tax havens of financial assets alone may constitute a loss to developing countries' public revenues of some US$120-160 billion a year. This is nearly three times the estimated cost of the agricultural investment needed to achieve a world free from hunger, and twelve times the cost of ending the global scourge of malnutrition, which each year claims the lives of 2.3 million children.

While wealthy countries' tax authorities struggle to chase money through these opaque places, their less wellresourced counterparts in developing countries have neither the resources, nor the economic or political muscle, to obtain the information they need about wealth squirrelled away in tax havens by companies and individuals.

Illegal tax evasion is not the only drain on the fragile public finances of developing countries. Billions of dollars are also lost through legal tax avoidance by multinational companies and wealthy investors, also enabled to a large extent by the world's tax havens. Tax havens make it possible and profitable for many multinationals to shift profits out of poor countries where real business takes place, and into associated companies in tax havens -- sometimes with no real staff or business activities, and where those profits go largely untaxed. Other havens act as conduits, with special tax regimes allowing income to pass tax-free through their shores and on to other havens or tax-exempt companies, while avoiding other cross-border taxes. Much of this 'profit- shifting', 'treaty shopping' and use of 'letterbox' conduit companies, while not illegal, takes abusive advantage of loopholes and weaknesses in complex and outdated international tax rules. And evidence suggests that multinational profit-shifting into and via tax havens is even more prevalent in developing than in developed countries.

This not only deprives developing countries of public revenues needed to fight poverty, but may also be hindering those countries' domestic businesses from flourishing. Unlike their multinational competitors and contractors, domestic businesses and investors -- which may generate 90% of all investment in developing economies10-- generally cannot shrink their tax bills by taking advantage of cross-border tax haven transactions. This tilts the playing field against them in competing for market share, and for better terms of trade.

Likewise making investment profitable in developing countries depends on functioning infrastructure such as roads and airports, and on a healthy and educated workforce. When global businesses and investors use tax haven structures and offshore profits to avoid paying taxes in poor countries, they are both undermining their own long-term financial prospects, and free-riding on other individuals and businesses in developing countries that do not have access to tax havens, and which shoulder an excessive share of the tax burden.

The cost to the poorest countries of such activity is difficult to calculate, precisely because of the secrecy usually involved in these operations. Individual examples, however, indicate that globally the foregone tax runs to billions of dollars every year.

Without governments themselves ending the opacity and preferential tax regimes of tax havens, multinationals with internationally-mobile capital have little incentive not to take advantage of the facilities they offer. Nor is voluntary compliance going to help stop straightforward tax evasion by wealthy individuals around the world hiding wealth and assets offshore.

The UK government has publicly promised action on tax havens at this year's G8 summit. Prime Minister David Cameron has said that, '[t]here are too many tax havens, too many places where people and businesses manage to avoid paying taxes.' responding to ActionAid's findings about tax avoidance in Zambia by subsidiaries of the UK multinational Associated British Foods, Chancellor George Osborne has called for particular protection for developing countries: 'often the poorer a nation is, the more it needs the tax revenues, but also the weaker its capacity to tackle tax avoidance'.

The UK is uniquely placed to put an end to this drain on the poorest countries' public finances. The UK is responsible for one in five of the tax havens we identify in this paper -- more than any other single country. Indeed, the countries represented at the UK- hosted G8 Summit in June are collectively responsible for 40% of these tax havens. yet measures promised so far have failed to materialise. In November 2011, for instance, G8 members were among the G20 countries committing to a new Multilateral Convention to crack down on tax evasion by sharing tax information with other countries, including some developing countries; and in July 2012 were among G20 leaders calling on all jurisdictions to sign up too. yet no G8-linked tax haven has yet joined, severely limiting the utility of the Convention. And despite the UK government telling parliament it has been 'encouraging' its own Crown Dependencies and Overseas Territories to join, none has yet done so. Meanwhile UKand G8-linked tax havens have begun in recent weeks to agree to open up their hitherto secret financial institutions and share tax information with other G8 members, through the US' 'FATCA' deals and the 'G5' information-exchange deal between the UK, France, Germany, Italy and Spain.16 But developing countries are so far not included. It is incumbent on the G8 not to keep the benefit of these deals for themselves; but to make them, and the information they will generate about wealth and assets held in tax havens, available to the rest of the world too.

We've heard good words and goodwill. Now it's time for action.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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