Andrew Goodall

Most tax gap estimates are flawed, academics claim

Oxford researchers highlight 'shortcomings' but civil society groups were forced to produce estimates in the absence of research by international institutions, say campaigners

Information regarding revenue losses in developing countries caused by tax evasion and avoidance is very limited, partly due to a lack of data and partly due to "methodological shortcomings of existing studies," according to new research.

Clemens Fuest and Nadine Riedel of the Oxford University Centre for Business Taxation prepared the report – entitled Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the existing literature – for the UK's Department for International Development (DFID).

The report's publication came as the UK Treasury was reported to be preparing to voice support for country-by-country reporting. Christian Aid has been lobbying the big four accounting firms to use their influence at the International Accounting Standards Board to argue for the reform. The charity has estimated that tax revenue lost by developing countries due to "trade mispricing" by multinationals amounts to US $160bn a year.

Fuest and Riedel concluded that some of the existing estimates of revenue losses due to tax avoidance and evasion by firms – in particular, some studies on corporate profit shifting – "systematically overestimate the losses".

They added: "Other studies are based on assumptions which are so restrictive that the results are difficult to interpret. Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data.

The report recommended a number of possible directions for further research to "improve our understanding of tax avoidance and evasion and the implications of these activities for revenue mobilisation in developing countries".

The Tax Justice Network's research was among the papers reviewed in the Oxford report. Responding to the report, the TJN pointed out on its blog that "in the absence of any useful research emanating from the IMF, World Bank, and indeed academic bodies far better funded than we are, almost all of the literature under review here originates from civil society organisations".The TJN had been “forced” to produce estimates based on whatever datasets become available “in order to challenge those institutions which should be taking these issues seriously to produce estimates of their own,” it said.

The current issue of Tolley's Practical Tax newsletter (3 July) has more on this and other very recent developments including:

• Private residence relief claimants under fire – but HMRC guidance spells out how longstanding exemption written into tax law saves capital gains tax
• Finance Bill progress
• HMRC has 'serious problems' with online trust returns
• 'Vodcast' shatters accountant stereotype, claims ACCA
• New SAYE bonus rates offer 'almost no return'

MPs’ expenses: a statement from Cafod director Chris Bain

Cafod has published on its website a detailed statement from Cafod director Chris Bain in response to a recent Daily Telegraph article about the expenses of Paul Goggins MP. His statement does not appear to have been picked up by the Telegraph or any other major national paper as I write. Why I am linking to this? As a taxpayer and tax journalist I am, as I have said, outraged by the behaviour of some of our MPs. But it is of course important, especially in the present atmosphere, that MPs and others who may be cited in news stories have the opportunity to explain their position and, where necessary, set the record straight. As a Cafod schools volunteer I was particularly interested in this story. Chris Bain has set out his position and concluded by saying: "I hope that the above explains that Paul Goggins and I acted in good faith and that we will make good anything which is considered inappropriate."

A good day for civil society and peaceful protest

The Put People First coalition that organised today's march in London ahead of the G20 summit has a long and impressive list of supporters (see below). The PPF is an alliance of more than 150 unions and environment, charity, faith and development groups, formed "in response to calls for a fair, sustainable route out of recession".

The coalition calls on the UK government to "create a 'Green New Deal' to create jobs in the environmental sector; invest in essential services including social housing; provide emergency funding to countries that need it to protect jobs and provide social protection; tackle tax havens – especially those linked to the UK; insist on democratic reform of the World Bank and IMF; make all financial institutions and multinational corporations transparent and accountable; ensure that poorer states are allowed to take responsibility for managing their own economies rather than having liberalisation measures forced upon them; introduce robust regulatory requirements and financial incentives at national level and push for them at international level to stop climate chaos; and commit to substantial new resource transfer from North to South to support low carbon development".

Here is the list from the PPF website:

Media partner: New Internationalist Supporter organisations: ACORD ActionAid AJCC ADD ACTSA Advocacy International Akina Mama Wa Africa AMREF UK Article 12 in Scotland ASLEF ATL Avaaz BECTU BIF BOND BOVA BRAC UK Bretton Woods Project Cafédirect CAFOD CCC CBM CDD CAWN CSP Change is Coming Childhope Christian Aid CEL CND COIN Compass Concern Worldwide (UK) Co-operative News Connect CWU Dalit Solidarity Network UK Defend Council ousing DoSomethingAboutIt Down2Earth EAP ECCR Ekklesia Engineers Against Poverty EQUITY Everychild Fairtrade Foundation Fatima Women's Network FBU Find Your Feet Footprint Friends Friends of the Earth GardenAfrica GCAP GMB Green New Deal Group Greenpeace Health Unlimited HelpAge International Hives Save Lives Interact Worldwide InterHealth International Service John MacMurray Fellowship Jubilee Debt Campaign Justice for Colombia LabourStart Lattitude Learning for Life Merlin Micah Challenge UK MRDF Musicians Union Muslim Council of Britain NAPO NASUWT NCVO NEF No weat NPJG Novas Scarman NPC NSC NUJ NUS NUT One One World Action 100 Months Operation Noah Oxfam Pants to Poverty PCS People and Planet Performers Without Borders PSG Plan UK Priced Out Progressio Project Hope UK Prospect Red Pepper RHM RMT Salvation Army Save the Children SCIAF SEAD Share the World's Resources Shelter Sightsavers Skillshare International SOAS Activists' Forum SoR SPEAK Stamp Out Poverty STOP AIDS Campaign Stop Climate Chaos Sudanese Women for Peace Synergy Centre Tax Justice Network Tax Research LLP Teach a Man to Fish Tearfund The Bihar Development oundation UK The Other Tax Payers' Alliance The Rights Practice Thirty-eight degrees TFSR Tourism Concern Trade Justice Movement TUC Trading Visions Traidcraft Transnational Institute TSSA UCATT UCU UK Aid Network UNISON UNITE United Nations Association UPSU USDAW VSO War on Want WCIA WILPF Womankind Worldwide WOW World Development Movement World Vision WWF

Tax haven secrecy and the World Bank

The Tax Justice Network has said in response to my post last week that I was right to question the World Bank's apparent reluctance to conduct its own research into the impact of tax evasion, one of the many components of illicit cross-border capital flows, on developing countries. The TJN also suggested that the World Bank (whose website proclaims that it is "working for a world free of poverty") has, along with others, "utterly ignored" what the TJN calls an astonishing information gap.

Just now the bank appears, understandably, to be focusing on the immediate impact of the current financial crisis. But capital flight is hardly a new problem. And as the OECD secretary general said last month, while tax may not have been a major cause of the financial crisis, tackling tax havens – which facilitate evasion – is part of the solution. He told ministers:

Tax may not have been one of the main causes of the crisis but I do believe it should be an integrated part of the long-term solution. We cannot expect tax payers to fund the bailing out of failed financial institutions and at the same time allow these institutions to facilitate offshore non-compliance by using tax havens.

Raymond Baker claimed in 2005 that the World Bank's "failure to ask the right questions" marked its "most glaring shortcoming" as an institution. He challenged the bank to undertake a thorough research study, drawing on its own extensive resources and those available from the IMF, the UN, the WTO, the OECD and its member countries, the EU and the Bank for International Settlements. The primary aim of the study would be to estimate the total amount of criminal, corrupt, and commercial dirty money, "in all its various forms, including tax-evading money", coming illicitly out of developing and transitional economies (see below regarding his own estimates).

But Richard Murphy's response to my post was to suggest that now is the time to focus on solutions, given that the World Bank has declined to do the study that Norway offered to finance:

Even if we were 50% out and had doubled the right figure the result would still be revenues lost that exceeds the global aid budget and the cost of the Millennium Development Goals. In that case isn't it time to stop worrying about greater precision, which will always to some degree be spuriously accurate, and instead we need to focus on solutions, now. Isn't this where the research money needs to go now?

I am inclined to agree, given the present circumstances. Ben Craddock commented:

I think that the only real way to appreciate the magnitude of illicit capital flight, tax evasion and embezzlement is to bring down the secrecy provisions first and then investigate.

I don't think the TJN should give up trying to get the World Bank to do a study at some stage in the not too distant future.

But there is an urgent need for governments to act together effectively to lift the veil of secrecy that has enabled tax havens to flourish.

Let me make one thing clear in response to Ben Craddock's "straw man" comment – it's a valid point. I am no advocate of tax haven secrecy and I recognise the risk flagged by the TJN:

Why not measure all this? Why on earth not? Don't take our word for it. Measure it, and publish! With one proviso: make sure your methodology and your data sources are transparent - for you can be sure there will be malign interests out there very happy to see a new set of fiddled numbers out there to support their cases.

The estimates

Baker's own summary at pages 172-173 of Capitalism's Achilles Heel provided a "low-end" estimate of $539bn (rounded down to $500bn, the figure quoted last week in the TJN blog) for what he called "cross-border flows of global dirty money" coming out of developing and transitional economies. He estimated the global total at $1 trillion.

This $539bn comprised (i) "commercial" dirty money of $350bn (including mispricing between unrelated parties $100bn, abusive transfer pricing between related companies $100bn and fake transactions $150bn), (ii) and $189bn of "criminal and corrupt" dirty money (including drugs, counterfeit goods and smuggling).

The $160bn figure in Christian Aid's report earlier this year was the charity's estimate of corporation tax lost to developing countries due to two of these activities, namely mispricing and abusive transfer pricing. In arriving at this figure, Christian Aid used Baker's 2005 estimate that seven per cent of trade volumes "is illicit capital movement".

The World Bank, absolute poverty and tax evasion

Is the World Bank content to allow a handful of committed individuals and a few NGOs to provide the only meaningful research into the impact of tax evasion on developing countries? It appears so.

Ten days ago SOMO, the Centre for Research on Multinational Corporations based in Amsterdam, published Taxation and Financing for Development examining:

some of the main problems that undermine direct tax revenues in developing countries, with a focus on tax evasion and aggressive tax avoidance by multinational corporations

A key estimate in that report is the "loss of corporate taxes to the developing world" resulting from transfer mispricing and false invoicing. SOMO did not produce any estimate of its own – it said:

Christian Aid calculated that as a result of transfer mispricing and false invoicing alone, the loss of corporate taxes to the developing world is currently running at US$ 160 billion a year.

This is the estimate that I mentioned here (was that really five months ago?) Christian Aid based its findings on Raymond Baker's estimate that seven per cent of trade volumes involves these two forms of activity. The charity cited Baker's book Capitalism's Achilles Heel; Dirty Money and How to Renew the Free-Market System. It is clear, having read Baker's book, that very little research has been done in this area and there are no official estimates. Christian Aid's prediction – that "illegal, trade-related tax evasion alone will be responsible for some 5.6 million deaths of young children in the developing world between 2000 and 2015" – seems to have been based largely on one man's research, a signficant element of which comprised

550 anonymous interviews with heads of trading companies in 11 countries – all on condition of anonymity

More worrying, even the World Bank seems content to leave to a handful of campaigners the task of estimating the cost of illicit financial flows out of developing countries. As the tax campaigner Richard Murphy has recently pointed out, the work of John Christensen, Raymond Baker, Alex Cobham at Christian Aid and Murphy himself seems to be the only work that World Bank has to go on. The World Bank has suggested that better methodologies could be used but "showed no interest" in doing the work itself, Murphy said.

In the meantime, Christian Aid continues to claim that

trade-related tax evasion alone will be responsible for [the deaths of] almost 1,000 [young children in the developing world] a day. Half are already dead.

It's a simplistic, emotive – and no doubt, for some readers, counter-productive – message, and it is clear that it's based on insufficient research. It's simplistic because, as Cobham himself has said:

It is not ... possible to make a simple connection between taxes paid and the availability of funds with which to finance development.

I don't blame Baker or anyone else for trying to assess the impact of capital flight. If, as suggested, it exceeds aid flows from developed countries by a considerable margin, then we really are living in a mad mad world. I understand that we will see more from Baker in the near future. But more and better research is needed, and fast.

Mining project 'imposed' on community

CAFOD is claiming that a nickel project run by mining company BHP Billiton has been "imposed on a Philippine community through bribery and poor information". Islanders claim that BHP Billiton’s joint venture partner AMCOR and Philippine government officials "have offered members of the community bribes in return for supporting the proposed mine and to silence opposition". CAFOD said: 

“Kept in the Dark” ... reveals how the Macambol community has been kept in the dark about the proposed mine and how the process to secure indigenous people’s consent for it, as required under Filipino law, was seriously flawed.  It also highlights how the project - known as the Hallmark project - could lead to increased soil erosion, landslides and flash-floods and pollution from mine waste or chemicals could endanger the livelihoods of the 65,000 people living near Pujada Bay.

The Telegraph and BBC News have picked up the story. CAFOD is calling on BHP Billiton to let communities in the Philippines have a say over their future.

Added 25 October: The BBC quoted BHP Billiton as saying:

BHP Billiton has a strict code of conduct governing all aspects of our business conduct, including relationship with joint venture partners.  We take the allegations of bribery extremely seriously and, as noted in their report, Cafod acknowledge they have no evidence to suggest BHP Billiton has been involved in such activity. As also acknowledged in the report, BHP Billiton is in dispute with Amcor and until this issue is resolved we are not in a position to further address the allegations in the report.

This is a disturbing report although the ongoing dispute between the joint venture partners clearly isn’t helping matters. As CAFOD says, modern industrial societies “could not function without metals and therefore without mining”. But mining may be posing an unacceptable risk to local communities and the environment in some cases.