Monday, October 04, 2010

Letter to the CEO of the International Finance Corporation on the use of tax havens

The following letter to Lars Thunell of the International Finance Corporation welcomes the fact that the World Bank Group recognises civil society concerns about the use of tax havens by their client institutions, but calls on the IFC to deepen its policy position, for example by requiring public disclosure of the beneficial ownership of legal structures, adopting country-by-country reporting requirements, and ensuring that legal entities domiciled in tax havens have a genuine economic purpose rather than merely serving as vehicles for tax avoidance.

Here is the full text of the letter, which is co-signed by directors of Eurodad, the Campaign for the Reform of the World Bank, Tax Justice Network, and Global Financial Integrity -

M. Lars Thunell
Executive Vice-President and CEO
International Finance Corporation
212 Pennsylvania Avenue, NW
20433 Washington DC

October 1, 2010

Dear Mr. Thunell,

Re: WBG policy statement on offshore financial centres

We are writing to you in response to the IFC policy position on the use of offshore financial centres by client institutions of the IFC as expressed on April 30, 2010.

We welcome that the IFC and the World Bank Group have issued a public position on the matter, as requested by our organisations to the World Bank board. Yet, we would like to express some concerns regarding the likely effectiveness of this position to adequately fight the abusive use of secrecy jurisdictions by multinational companies and financial institutions. In this regard, we believe that the new policy position is not sufficiently in line with recent positions and statements by major WBG shareholders in the fight against illicit flows and tax avoidance (see here and here), including the G20 commitment to clamping down on illicit outflows.(see here)

In particular, we are concerned about how this policy will effectively reduce problems associated with the use of secrecy jurisdictions by financial intermediaries and private equity funds which are increasingly benefiting from IFC support – up to 40 per cent of IFC commitments. Furthemore, in the last few years the IFC has played a much stronger role in advancing developing countries in financial services liberalisation. In this context we believe that the IFC is well-seated to play a more influential role in the fight against tax havens by orienting markets towards onshore activities. It is our view that the new WBG policy position should therefore be revisited.

The World Bank group claims that “The involvement of offshore financial centers in transactions backed by IFC and MIGA may be for legitimate purposes when partners and sponsors act with integrity. For example, jurisdictions may be used to avoid double taxation of investments in developing countries, or may provide legal infrastructure that a given host country lacks.” We consider that these arguments are flawed for the reasons we outline below.

1. Do tax havens really help MNCs avoid double taxation in developing countries?

As stated by the Norwegian Commission on capital flight from developing countries in its 2009 report Tax havens and development:

Tax treaties between tax havens and poor countries show that the latter are in a weak negotiating position when such agreements are formulated. Poor countries wantthe capital which tax havens can offer and are willing to forego tax revenues in exchange by reducing their tax rates for many of the income categories covered in the treaty. Paradoxically, tax treaties contribute to making tax havens a more favourable location than would be the case without such agreements. Tax treaties can cause more harm than good unless they are followed by measures to reduce harmful structures, as those located in tax havens.

In this regard, and along the lines of the recommendations put forward by this commission, we believe that the following criteria should be met by WBG beneficiaries when they use these intermediate jurisdictions:

• that the requirements for a legal entity to be regarded as domiciled in such jurisdictions must clearly reflect real economic activity or real economic significance to a greater extent than the current rules require;

• that such activity requirements, and their scope are expressed in an comprehensive framework by the WBG;

• that beneficial ownership of legal structures based in these jurisdictions is automatically disclosed (publicly? On a website?);

• that the company discloses information on income earned, taxes paid and number of people employed in each country where they operate, including in these legal structures.

2. Do tax havens really provide appropriate legal structures for use by investment funds?

Onshore developed-country private equity investments use onshore as well as offshore pooled investment vehicles and funds and these depend largely on the sources of the investment funding they are using. Therefore, the prima facie case for using offshore funds for developing country investment is not clear when IFC funding all comes, tax free, from developed countries. The absence of promotion by the IFC of the creation of suitable structures within developing countries to allow these funds to be located in these places provides little indication of a commitment to the development of this type of investment expertise in developing countries. The claim is predicated on the additional claim that investing through funds is the most effective mechanism for encouraging development, and the secondary claim that investing as a consortium is of greater benefit than direct investment.

Need for an enhanced due diligence procedure

The WBG also states that IFC and MIGA already carry out “heightened scrutiny” of projects and now also apply “heightened due diligence” of all transactions involving intermediate jursidictions, including OFCs. While the WBG position is a very welcome step we believe that an “enhanced due diligence” procedure should be used for both screening projects and transactions involving intermediate jurisdictions (see footnote a below).

3. A country by country reporting requirement for IFC beneficiaries

The World Bank has recently submitted a contribution (see here) to the International Accounting Standards Board (IASB) fully supporting civil society proposal for a country by country reporting standard in the extractive industry sector. This is one key mesure that CSOs are proposing as a means to identify ilicit tax practices by MNCs, such as transfer mi-pricing and porfit shifting to secrecy jurisdictions which deprive developing countries of much needed resources (footnote b).

Therefore, we believe that the IFC should follow the World Bank’s view on the usefulness of such a standard and introduce it as a requirement for its clients.

We hope that these points will be taken into consideration during the forthcoming discussions with the Board of Directors of the WBG in the next months and look forward to further exchanges. We believe that these are necessary steps to be taken if real progress is to be made in the fight against cross border tax evasion and tax abuse. We will be glad to discuss these points further in a meeting with you in Washington during the Annual meetings, at your best convenience.

Yours sincerely,

Nuria Molina, Eurodad Director
Antonio Tricarico, CRBM Director
John Christensen, Tax Justice Network Director
Tom Cardamone, Global Financial Integrity


(a) Indeed, under existing anti money laundering requirements bankers should automatically apply EDD during due diligence processes whenever a PEP is involved.

(b) According to Christian Aid estimates, developing countries are losing up to $US 160 billion each year in lost tax revenues as a result of transfer mispricing practices by MNCs.


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