Memorandum from Christian Aid
Christian Aid works in nearly 50 developing
countries worldwide, supporting local organisations to deliver
urgently needed services directly to poor communities, and to
scrutinise and hold their own governments and the international
community to account.
Finance is fundamental to development, since
without sustainable revenue for governments there is no prospect
for sustained, independent development. Poorer countries typically
have revenues around 10-15% of GDP, compared to more than 40%
in the UK. Taxation is also at the heart of citizen-state relations,
and has been shown to significantly strengthen channels of political
There are many different obstacles to effective
taxation systems, and Christian Aid is increasingly working with
partners to address these domestically where possible. Even absolute
success domestically would not come close to a solution, howeverbecause
the international financial system as it stands represents an
insurmountable barrier to effective taxation in developing countries.
The role of offshore financial centres (OFCs) is central to this,
and therefore we welcome both the fact that the committee is to
examine OFCs, and also the opportunity to make this submission.
Our submission will focus on the role that OFCs
play in preventing the international transparency that developing
countries need in order to prevent corruption and to ensure their
taxation systems are effective, and on measures that the Treasury
could take to reduce the damage done by OFCs. OFCs provide opacity
to international flows of capital, which prevents developing countries
from taxing wealthy individuals and businesses where appropriate,
and from taking steps to prevent grand corruption.
Christian Aid has estimated that one form of
corporate tax evasion alone (via trade mis-pricing) is responsible
for a revenue loss to developing countries of around $160 billion
a yearmore than one and a half times total aid flows. The
World Bank quotes estimates of illicit capital outflows from developing
countries of $500-$800 billion annually, of which 3% relates to
corruption and bribery and 60-65% to commercial tax evasion.
Since the UK has a substantial role in, and
historic responsibility for, the system of OFCs, this means that
the UK is responsible for taking with one hand (via facilitating
corruption and tax evasion) what it gives with the other hand
(as aid). Estimates of the scale of the former strongly imply
that developing countries are net losers from this arrangement.
It also follows that the money of the UK taxpayer is not being
spent effectively for development.
UK GOVERNMENT ARE
We welcome DFID's existing support for the capacity
of tax authorities and of civil society groups to hold governments
to account on taxation issues, and hope that the latter in particular
can be scaled up and given greater priority.
We also welcome Treasury's recent statements
about the need for "strong co-operation and exchange of information
between Governments and tax authorities around the world",
and look forward to concrete actions. We make the following recommendations.
First, the UK government must lead multilateral
efforts to ensure automatic exchange of information between
jurisdictionssince exchange of information on request only
is manifestly insufficient to address the problem.
Second, the UK government should call on the
International Accounting Standards Board to prepare an accounting
standard on country-by-country financial reportingwhich
would provide the other element of transparency necessary.
1. Christian Aid's mission is to challenge
and change the structures that keep poor men and women marginalised,
and this motivates our deep concern with the role of offshore
financial centres. From a development perspective, offshore financial
centres (OFCs) represent a significant obstacle to effective taxation.
2. There are many legitimate concerns about
the impact of OFCs beyond that on developing countries. The members
of the Tax Justice Network (a Christian Aid partner) have recognised
international expertise in this area, and their submission sets
out a broader range of concerns. We do not duplicate here their
technical analysis of the functioning of OFCs, but instead highlight
key areas in which OFCs undermine development specifically.
3. Leading academics, such as Prof E.V.K.
FitzGerald (Director of the Department of International Development
at the University of Oxford) have also made submissions highlighting
important development concerns.
4. From Christian Aid's perspective, and
given our emphasis on the structures that maintain global poverty,
the role of OFCs is most important in relation to two particular
areas: the international nature of corruption, andwhich
is not unrelatedthe ability of developing countries to
create effective taxation systems.
5. Corruption is a global phenomenon, and
one that hinders development at many levels. Petty corruption
can require poor people to pay bribes out of incomes that are
already insufficient to meet their basic needs, and can also undermine
their ability to obtain goods and servicesor political
representationfrom the state.
6. Grand corruption is decidedly international
in its character. The World Bank cites estimates that corruption
and the bribery of public officials is responsible for illicit
capital outflows from developing countries of $15-24 billion a
7. These outflows, that deprive developing
countries of much needed funds for development, do not occur in
a vacuum. Often, the money reflects illicit payments by companies
involved in bidding for large public contracts. Whatever its origin,
as it leaves developing countries it is channelled through banks
and other financial institutions, with the assistance of a range
of finance professionals from accountants to lawyers.
8. Corruption is not therefore a problem
of developing countries alonethe responsibility for facilitating
corruption, for handling the proceeds of illegal actions, also
rests firmly in certain industries in rich countries.
9. The secrecy provided by OFCs (or secrecy
jurisdictions) is important to the process, since it is typically
this that prevents greater visibility to those in the countries
which suffer the corrupt outflows. The World Bank's Stolen Asset
Recovery Initiative, which we commend, is aimed at addressing
this problem, by tracking down the proceeds of corruption, through
complex layers of financial transactions that occur not in poorer
countries but in the financial systems of rich countries and in
OFCs in particular.
10. However, the share of illicit capital
outflows from developing countries is dwarfed by the estimated
value due to commercial tax evasionwhich Christian Aid
also sees as fundamentally corrupt, since it is illegal and directly
undermines the functioning of the state. The same analysis that
finds corruption and bribery of public officials to be responsible
for $15-24 billion of outflows a year, indicates that commercial
tax evasion results in outflows of $300-$500 billion a year.
11. The importance of effective taxation
for developing countries is increasingly widely recognised. Taxation
contributes to development through the "four Rs".
12. Revenues. Most obviously, tax is necessary
to provide developing country governments with sufficient revenues
to deliver basic services to their citizens. In low-income countries,
and even in many middle-income countries, tax revenues are often
less than or close to 10% of GDP, compared to around 40% in the
richest like the UK. One definition of a fragile stateie
one that cannot or will not meet its citizens' needsis
simply of having revenue below 15% of GDP.
The alternative to states with the revenue capacity to deliver
development is the vacuum of power (and of development opportunities
for citizens) that is seen in conflict countries.
13. To meet the Millennium Development Goals
by the target date of 2015, the World Bank has estimated that
an extra $40-$60 billion a year of development finance would be
necessary. Given the lack of progress in many countries thus far,
and the failure of the international community to deliver on aid
commitments, this now seems to substantially under-estimate the
problem. Ultimately, the only sustainable source of development
finance is domestic tax revenues (as emphasised in the Monterrey
Consensus)and this is also the only exit strategy from
aid. It is vital then that development efforts by donors, including
the UK, are geared towards building effective taxation systems.
14. Redistribution. Taxation is also the
tool by which states can address inequalities that exist, or that
arise from eg the liberalisation of trade or of financial markets.
Market incomes in much of Latin America, for example, are characterised
by similar inequality to that seen in the richer OECD countries.
The difference is that post-tax inequality in the latter is much
lower, because tax systems are capable of delivering redistribution.
It is estimated that the poorest people in Brazil spend more than
a quarter of their income on VAT, compared to less than 10% for
Only recently has the government been able to mobilise sufficient
revenue to start a programme of targeted cash transfers to help
the poorestand most developing countries are poorer than
Brazil and simply lack that capacity.
15. Re-pricing. Tax systems also play the
role of ensuring that the private costs and benefits of production
and consumption decisions are aligned with the social costs and
benefits. For example, the UK places a high tax burden on tobacco
and on petrol, because of the health and environmental damage,
respectively, that these cause. This can leadfor exampleto
a competitive race to the bottom in which polluting industries
are concentrated in poor countries with weak tax systems, since
the social costs of their production may not be effectively costed
16. A broader international concern should
be the ability of developing countries to deliver on commitments
that are likely to be required under the UN Framework on Climate
Change Convention negotiations. If the agreement due to be reached
in 2010 is to be effective in cutting global emissions, then governments
in every country must be able to pass on appropriate incentives
to their households and businessesand that will only happen
17. Representation. Finally, and perhaps
most importantly, taxation is the fundamental link between states
and citizens. Research shows that effective, non-coercive taxation
is what drives citizens to hold governments to account for their
expenditures and thereby improves governance and promotes political
Analysis of historical data for many countries shows that the
share of tax revenues on government expenditure is systematically
associated with democratisation,
and direct taxation (tax on income and profits) is most important.
18. DFID has taken positive steps to help
build the capacity of developing countries' tax revenue authorities,
and we welcome this where it reflects the demands of those countries.
In particular, this must move beyond the "tax consensus"
which has dominated the thinking of aid donors for more than two
decades, but consistently failed to yield benefits in terms of
the four Rs. More recently, DFID have shown interest in building
civil society capacity to hold their governments to account for
taxation decisions, and we strongly welcome this.
19. Improvements in developing countries,
however, are completely insufficient to deliver effective taxation.
This is because of the large scale of tax evasion that occurs
through the international system, over which developing countries
have little control. At the heart of the problem is a lack of
transparency. This prevents developing countries from raising
the appropriate level of revenues, since taxable income streams
that arise within their jurisdiction are hidden in OFCs and beyond.
20. This creates a fundamental inconsistency
in UK government policy. On the one hand, UK taxpayers provide
substantial sums to be used as aid. Much of this is provided as
budgetary support to developing country governments. On the other
hand, the international structure of OFCs is responsible for directly
undermining the revenues of those governments.
21. Since the UK has a substantial role
in, and historic responsibility for, the system of OFCs, this
means that the UK is responsible for taking with one hand (via
facilitating corruption and tax evasion) what it gives with the
other hand (as aid). Estimates of the scale of the former strongly
imply that developing countries are net losers from this arrangement.
22. It also follows that the money of the
UK taxpayer is not being effectively spent to support development,
since this incoherence of broader policy on OFCs and international
financial regulation undermines the value of the aid given.
23. Transparency is required in two main
areasfirst, in the financial accounts of multinational
companies, which are able to shift profits out of developing countries
and hence reduce their tax liabilities there. Christian Aid has
estimated that one form of tax evasion alonethat which
occurs through the mis-pricing of trade, including abusive transfer
pricing by multinational companiesis responsible for $160
billion a year in lost revenues to developing countries. This
value far exceeds the total flow of aid, and could potentially
deliver the Millennium Development Goals (two to four times over,
if the World Bank estimates are used as a basis). On conservative
estimates, allowing for existing levels of corruption and inefficiency
in public expenditure, and for existing patterns of allocation
of public expenditure, those revenues wouldamong other
thingssave the lives of almost 1,000 children under five
in developing countries, every day.
24. The other key area in which transparency
is lacking is through the offshore financial centres. As the revelations
from Liechtenstein earlier this year showed, EU countries like
the UK have been unable to effectively tax their citizens because
of the secrecy provided by such jurisdictions. Even a revenue
authority as well resourced as HMRC is relatively powerless against
the barrier of secrecy. Last month, a Treasury official made just
25. "There is a strong economic and
social case for strong co-operation and exchange of information
between governments and tax authorities around the globe, and
particularly within the EU, in order to meet the challenges being
posed by globalisation, not just for economies as a whole, but
also specifically for national tax systems.".
26. In effect, the statement highlights
the problems of retaining national tax sovereignty in light of
the ease of international financial flows and the secrecy provided
by some jurisdictions. This analysis applies much more deeply
to poorer countries, where the capacity to trace the income streams
of individuals or businesses, especially international ones, is
much more limited. The need for additional revenuesto provide
basic services to citizens and to invest in infrastructure to
support growth and broader development aimsis also much
clearer in the poorest countries.
27. Information exchange between jurisdictions
on request has not been effectivesince it has not been
possible generally for the revenue authority of poorer countries
to provide sufficient information to OFCs for the latter to deliver
the corresponding data.
28. Only automatic (and comprehensive) exchange
of information between all jurisdictions can ultimately enable
developing countries to levy the appropriate amount of tax on
the income and profits earned there. There are certainly capacity
constraints to how that information could be used if it were provided
tomorrowbut without any prospect of receiving that information,
there is of course no incentive for countries to invest in the
relevant capacity. The first step is to ensure that the information
29. The secrecy provided by OFCs is a fundamental
obstacle to effective taxation, and to the prevention of grand
corruption, in developing countries. As such, OFCs play an important
role in the international structure that restricts the opportunities
for development and escape from poverty of poor men and women
in those countries. The UK government must confirm its commitment
to development, and the coherence of its policies, by ensuring
that it acts to address the damage done by OFCs.
30. We welcome DFID's existing support for
the capacity of tax authorities and of civil society groups to
hold governments to account on taxation issues, and hope that
the latter in particular can be scaled up and given greater priority.
31. We also welcome Treasury's recent statements
about the need for "strong co-operation and exchange of information
between Governments and tax authorities around the world".
We now look forward to concrete steps to support this sentiment
and to ensure policy coherence with DFID. We make the following
recommendations to ensure the tax transparency that will benefit
developing and developed countries alike.
32. The UK government must lend its support
to multilateral efforts to ensure automatic exchange of information
between jurisdictionssince exchange of information on request
only is manifestly insufficient to address the problem. The UK
is uniquely well placed to lead on this, because of its historic
responsibility and great influence over the Crown Dependencies
and Overseas Territories which are such important OFCs, and because
of the importance of the City of London as a global financial
33. Finally, the UK government should address
the other main aspect of international financial opacity that
undermines development by allowing multinational companies to
avoid and sometimes evade taxation in poorer countries. The first
step is to call on the International Accounting Standards Board
to prepare an accounting standard on country-by-country financial
271 This analysis draws extensively on our May, 2008
report, Death and Taxes: The true toll of tax dodging,
which is available via our website: http://www.christian-aid.org.uk/. Back
Baker, R., 2005, Capitalism's Achilles Heel, Wiley: London. Back
Cobham, A., 2005, "Tax evasion, tax avoidance and development
finance", Queen Elizabeth House (University of Oxford)
Working Paper 129. Back
Stewart, F., G. Brown and A. Cobham (forthcoming, 2008) "The
distributional implications of fiscal policies in post-conflict
countries," CRISE (University of Oxford) Working Paper. Back
Quak, E.-J., 2007, "Money on the move", The Broker,
quoting UNAFISCO, Brazil. Back
Moore, M., 2007 "How does taxation affect the quality of
governance?", Tax Notes International (2 July); and
Brautigam, D., M. Moore and O.-H. Fjeldstad (eds.), Taxation
and State-building in Developing Countries, Cambridge University
Press: Cambridge. Back
Ross, M., 2004, "Does taxation lead to representation?",
mimeo., Dept of Political Science, University of California. Back
Mahon, J., 2005, "Liberal states and fiscal contracts: Aspects
of the political economy of public finance", paper presented
at the annual meeting of the American Political Science Association. Back
DFID (2006), White Paper: Making governance work for the poor,
HMSO: London. Back
Christian Aid, 2008, Death and Taxes: The true toll of tax
Robertson, J., "The challenge of globalisation for tax policy
in the EU", presentation given at conference on "Harmonizacja
czy koordynacja-przyszlos«c« podatko«w w Unii Europejskiej",
Warsaw, 15 May 2008. Back