New report: Europe's role in capital flight from developing countries
"Tax-related capital flight is a significant structural problem in the world economy that needs to be addressed first and foremost by more financial and corporate transparency as well as a much more inclusive approach to fixing the real cracks in the system.Update 2014: For resources on capital flight and illicit flows see here.
The report finds that there is a significant discrepancy between tough political rhetoric from the governments surveyed and their actions. This is something that the EU leaders’ summit later this week will confirm when the lack of progress on the commitments made back in May will be discussed. However, the summit is not likely to report this, but rather leaders will continue to talk tough without the action to back it up. One issue unlikely to be on the agenda is how this problem is having a particularly damaging impact on developing countries, who arguably are in the most urgent need of raising resources to fight poverty.
It is incomprehensible that European leaders fail to meet this extraordinary challenge at a time when poverty levels are rising in Europe and the failure to deliver on aid commitments to the poorest countries in the world is apparent. At the summit this week it will become obvious that on multiple counts the leaders of the EU are failing. This is partly due to “hosting the wolves in the sheepfold” as MEPs put it at the plenary debate in Strasbourg last week, referring to the fact that some EU member states are tax havens themselves, blocking progress on a number of key proposals and thereby undermining all efforts to move forward.
While the European leaders are failing to deliver, a global civil society movement is forming and tax solidarity within and across societies in the world is building. With it come demands for more transparency and accountability from politicians as well as from the corporations that benefit from the societal results of taxes – namely infrastructure, educated and healthy workforces and administration.
The opportunities missed
Kofi Annan has named transparency as a tool to develop peaceful and prosperous societies. The EU have two concrete opportunities on the table for consideration. Firstly, knowledge of the beneficial owner of companies, trusts and foundations – basically knowledge of who really controls the money - is crucial in order to reveal money laundering activities as well as expose how corporate legal structures are used in tax speculation schemes where profits are moved among jurisdictions to save and reduce taxes. The ongoing negotiations over the 4th revision of the anti-money laundering directive offers a unique chance to harmonise European approaches to this challenge, and ensure public access to this data.
Secondly, country-by-country reporting is another vital first step to gain clarity on corporate activities and structures, and thereby reveal instances of tax dodging. This is currently being considered in the context of a revision to the Accounting Directive.
Unfortunately, our new report reveals that when it comes to beneficial ownership and country-by-country reporting, many EU member states are still sitting on the fence and failing to deliver on their political ambitions.
The global perspective
While transparency is an important first step, there are big challenges that need to be solved to move towards global tax justice. Countries in the global south no longer want to be at the mercy of corporate tax planners operating from behind their desks in the rich countries of this world. There is a political opportunity now to create the change that citizens will support. However, the way forward proposed by the OECD and endorsed by the G20 is hugely unsatisfying for the majority of the world’s citizens .
The Eurodad report uncovers a persistent adherence to the OECD, the rich country club, as the leading forum for setting global standards for the international tax regime. This effectively blocks the ability to ensure greater reform, which is urgently needed. It should be remembered that the political momentum for change has occurred because existing standard setters have failed to provide solutions. If a more inclusive approach is not developed then more widespread ownership of the solutions will not be ensured. Without bringing in all countries affected by the existing flawed system to meet the challenges we cannot expect to generate sustainable solutions. Furthermore, without a thorough and serious assessment of its effect on developing countries and the poorest people within them, we cannot expect useful change. Rather, the likelihood is that the same mistakes will be repeated. If we do not make changes now, this will mean that Europe will continue to give with one hand and take with the other."