Charities say graft, tax evasion hold back poor countries' development

Wed Apr 10, 2013 4:54pm IST

French gendarmes stand near an anti G20 demonstrator who takes part in protest against globalisation and tax havens at the French-Monaco border in Cap d'Ail, southeastern France, November 3, 2011. REUTERS/Eric Gaillard

French gendarmes stand near an anti G20 demonstrator who takes part in protest against globalisation and tax havens at the French-Monaco border in Cap d'Ail, southeastern France, November 3, 2011.

Credit: Reuters/Eric Gaillard

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NEW DELHI (AlertNet) - Many charities are expanding from their traditional development work to focus more on the economic rights of the poor and campaigning against wrongs such as graft and tax dodging, forging closer links between aid, poverty alleviation and the need to boost poor nations' revenues.

Christian Aid, Oxfam, ActionAid and Save the Children are just some of the aid groups that are increasingly calling for curbs on illicit money flows, which they say are draining desperately needed funds from developing countries that could otherwise be used to help the poor improve their lives.

The developing world loses around $1 trillion every year through practices like tax evasion, corruption and money laundering, mainly by multinational corporations, according to the Task Force for Financial Integrity and Economic Development, a global coalition of non-profit groups that campaign for transparency in the financial system.

In comparison, the global foreign aid budget is about $1 billion per year, the Task Force says.

"Illicit capital flows touch all parts of the economy and, quite frankly, so many issues that charities work on. There's a big movement now to consider economic rights as human rights and to really make that connection," says Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a Washington D.C.-based think tank which heads the task force coalition.

"If people cannot rise out of poverty as a nation, it really affects people's human rights directly. It also affects the basic provision of social services such as health, education, water and sanitation, which a lot of organisations work on. It's so integral and really underpins the work that many charities are doing."

Charities say that over the last 50 years, the global shadow financial system has expanded to include tax havens, secrecy jurisdictions, anonymous corporations and trust accounts, numbered bank accounts and fraudulent foundations.

This also includes trade mispricing mechanisms - where a subsidiary of a multinational sells an asset at an artificially low price to another subsidiary of the same multinational in order to lower its tax bill - as well as money laundering and legal loopholes that allow corrupt, criminal and commercially tax-evading money to move across borders.

CAPTURING REVENUES

Charities say that while some of the illegal money leaving the developing world is related to corruption, by far the largest amount is through trade mispricing.

According to Christian Aid, poor countries lose an estimated $160 billion a year of corporate taxes through trade mispricing.

Some of the biggest illicit money outflows are from countries such as China, India, Nigeria, Russia, Ethiopia and Malaysia.

Charities say this is money that many of these nations can ill afford to lose and could, if coupled with effective policies, help tackle key humanitarian challenges such as child malnutrition, maternal mortality and access to clean water and food security.

"The way that the development path is supposed to work in economic theory is that developing countries start at the lower end of the industrial cycle and should work up from there," says Joseph Stead, Christian Aid's senior economic justice adviser.

"Part of being able to do that is by generating returns on the industries that are built up, but if you don't generate the tax revenue to invest in the infrastructure, education, healthcare and the rule of law, it becomes very difficult to develop and you become dependent on aid."

Stead cites the example of India which, although its Gross National Income more than doubled between 1995 and 2010, is still home to one-quarter of the world's undernourished people.

He says there are a whole range of measures India could take to tackle hunger, but it is unable to do so as, with a low tax to GDP ratio of 17 percent, it does not have the finances to make substantial interventions.

Aid groups are now lobbying for greater transparency from multinational corporations in the developed world.

This can be through stricter accounting rules and standards for pricing goods and services, ensuring companies publicly report their sales, profits and taxes where their subsidiaries are, and lifting the secrecy of cross-border taxation by allowing for information exchange between countries.

"You have to start with transparency," says Global Financial Integrity's Lowe. "Part of that is making sure there is transparency within corporations so that you can figure who is behind companies, where they are actually from, to ensure that they aren't hiding assets and are taxed appropriately."

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