International Development CommitteeWritten evidence submitted by Forum Syd

Forum Syd gathers 175 Swedish civil society organisations collaborating for human rights and global justice.

Forum Syd works in the area of tax justice and capital flight from developing countries. In 2011 it released the report Bringing the billions back: how Africa and Europe can end illicit capital flight.

1. Forum Syd believes that a properly functioning tax system—one based on good tax policy, and an efficient tax administration—is critical to the functioning of a stable, prosperous state that responds to the needs and wishes of its citizens.

2. DFID should invest in capacity-building to assist with the formulation and administration of tax legislation, in particular in the area of international taxation. Technical assistance should at all times be driven by demand from developing countries themselves, in line with the Paris principles on aid effectiveness.

3. We urge DFID to take a more active role in the coordination of tax capacity building work, through both the support of HMRC projects in these countries, as well as through its country offices, in conjunction with the aid agencies of other countries, and via multilateral organisations and the technical assistance programmes they offer.

4. The European Commission has identified the role of Non State Actors in holding governments to account for how they raise and spend revenues. DFID should continue to support such initiatives such as Governance and Transparency Fund and should support the International Budget Partnership and the Tax Justice Network in its efforts to expand this work.

5. However, the ability of states to mobilise revenue is undermined by Illicit Capital Flight. Our report, Bringing the Billions Back (2011) highlighted that every year huge unreported flows of money are leaving developing countries, ending up in rich countries or tax havens. If properly reported this illicit capital flight would generate at least US$160 billion per year in tax revenue—more than one and a half times the total annual aid to the developing world. These are resources that could be crucial in the fight to combat poverty.

6. Contrary to popular belief, only a small share, three to five percent, of illicit capital flight stems from corruption. Instead, almost two thirds originate from multinational companies evading to pay tax, and one third is a result of criminal activities such as trade with humans, drugs and weapons.

7. As a percentage of GDP, capital flight from Africa is larger than from other parts of the world. But Africa cannot stand alone to end it, cooperation and political will is required by decision makers in Europe as well as in Africa.

8. Forum Syd believes that such illicit capital flight is exacerbated by financial secrecy in tax havens and corporate secrecy allowing multinational companies to shift profits out of developing countries to tax havens.

9. Developing countries often have a limited say in norm setting at the international level. DFID should support fora such as the UN Tax Committee which provides a legitimate forum for developing countries to contribute to initiatives such as the model tax convention and transfer pricing guidelines.

10. DFID should work across the UK government to promote policy coherence in the area of tax and development. The UK’s stance in multilateral negotiations should consider the impact of domestic resource mobilisation in developing countries.

11. In particular, the UK should support the expansion of the ECs proposals on extractive transparency to other sectors and should support in inclusion of information about profit, production figures, staff levels and subsidiaries. Such transparency in the reporting of multinational companies would serve to combat corruption and tax evasion and avoidance.

12. The UK should also support the expansion of information exchange treaties between countries and encourage its Overseas Territories and Crown Dependencies to share information with other states, moving towards an international standard which enshrines the automatic exchange of relevant tax information through one multilateral agreement. This would give developing countries a possibility to detect illicit capital flight.

13. Finally, the UK should follow the recommendation of the IMF, OECD, UN and World Bank which recommended that G20 countries conduct “spillover” analysis of changes in their own tax systems. This should urgently be applied to the UK reform of its Controlled Foreign Company Rules and its agreement with Switzerland regarding offshore account holders—both of which are likely to have a negative impact on the revenues of developing countries.

February 2012

Prepared 21st August 2012