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'

Christian Aid doorsteps Taxation awards and posts interviews on YouTube

Several guests at last month's LexisNexis Taxation Awards found themselves featured on YouTube, answering questions put to them by Christian Aid campaigners as they arrived at the event. Christian Aid has lobbied the big four accountancy firms in its campaign for country-based tax reporting. The charity invited many of the guests arriving at London's Park Lane Hilton to answer questions about corporate "tax dodging" which, it claims, costs developing countries $160bn a year.

The charity declared that "while the accountancy industry celebrated its achievements in tax-bill-minimisation, we held our own awards ceremony outside". The "winners" included Barclays, which the charity described as "tax haven enthusiast of the year". Christian Aid posted two videos on YouTube, featuring its "alternative" tax awards and the filmed reaction of several guests to questions put to them outside the Hilton. While some respondents were clearly in the "no comment" camp, others appeared more sympathetic. One said: "I don't know where you get your figures from, but if that's correct it's not going to make anyone feel very good."

"The majority of people we spoke to were positive about our campaign," the charity said. In this week's issue of Tolley's Practical Tax newsletter Madeleine Brand, a chartered tax adviser and Christian Aid volunteer, calls on tax advisers to support the charity's Big Tax Return campaign.**

See related posts in the Christian Aid category of this blog. The current issue of Tolley's Practical Tax newsletter ( 5 June) has more on this and other very recent developments including:

• HMRC discusses regulation of tax agents and possible penalties for "poor behaviour"
• Finance Bill "aggravates" long and complex tax code, says Tax Faculty
• OECD watching havens "like a hawk"
• Tax authorities agree "new co-operation" plan
• Chartered Institute of Taxation launches green tax report

** TPT reported on 22 May, having invited each of the big four firms for their reaction to Christian Aid's campaign, that:

PricewaterhouseCoopers said in a statement that it had "led the profession" in promoting more transparency in tax and wider corporate reporting. "PwC has met with Christian Aid to discuss our shared interest in improving corporate reporting of tax information and indeed subsequently continued this dialogue in writing," said Barry Marshall, the firm's UK head of tax. "We have a common interest to continue to improve corporate reporting of tax information. However we do not believe that the introduction of the kind of country-based reporting proposed by this campaign would meet this ambition." PwC added that its total tax contribution (TTC) framework was "designed to improve communication and understanding of a company's tax position" and "gaining traction and support around the world". The firm would "continue to support its development, in conjunction with our corporate reporting colleagues, to continually improve business reporting generally". The firm's website promotes TTC in the light of increasing scrutiny of the amount of tax paid by large businesses which, it adds, "pay considerably more in tax than it might first appear". It suggests that "a business's tax contribution and its tax strategy should be looked at from the point of view of all the taxes it bears and collects" ...

A KPMG spokesperson told TPT: "We have received a large volume of mail from Christian Aid supporters and we are listening to what they have to say." Ernst & Young told TPT: "We are aware of the campaign but are not commenting further." Deloitte declined to comment.

HMRC service problems frustrate small practitioners

A third of smaller tax practices taking part in a recent survey noted a significant increase in time and costs as a result of HMRC service problems over the previous 12 months, according to a leading tax body. The ICAEW's Tax Faculty reported widespread concern among smaller tax practices that HMRC's efficiency programme had reduced the efficiency of services on the ground, resulting in "considerable wasted time and costs for taxpayers, agents and HMRC". This week's Tolley's Practical Tax newsletter has more on this and other developments, including:

• Expatriates – Amanda Sullivan reports on the many issues discussed at the April 2009 meeting of HMRC's Joint Forum on Expatriate Tax and NICs;
• Finance Bill is incomplete 'because of time constraints' – Treasury admits that time pressure resulted in omission of 'points of detail' in foreign profits reforms;
• Venture capital scheme changes required to avoid 'suspension';
• Timms asks governments to 'heed Isle of Man's example';
• Christian Aid lobbies big four firms on country-by-country reporting.

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.