NEW HAVEN, Conn. — The United Nations’ proposed global goals for poverty reduction miss much of the story when it comes to trade-related illicit flows — which drain tens of billions of dollars from the world’s poorest countries ever year. A new ASAP study identifies a set of simple reforms that could drastically reduce such outflows and can guide the UN’s efforts as it develops its new Sustainable Development Goals.
The UN’s Open Working Group on Sustainable Development Goals is developing a new set of targets to replace the Millennium Development Goals, which expire in 2015. The Group’s late-stage “zero draft” was released for comment June 2. It outlines some ambitious objectives, including bringing to zero the number of people living on less than $1.25 per day.
The draft also includes the objective of reducing illicit financial flows, but it does not identify any policies to be implemented in order to achieve the reduction. ASAP’s new report outlines reforms that could fill the gap.
ASAP, a global professional association whose membership includes some of the world’s top poverty researchers, has identified six of the most promising reforms through the report, which involved in-depth interviews with global experts in tax, financial governance, and development, as well as a review of the best existing research. ASAP will continue its investigation of the relative merits of these and other reforms, in consultation with over 20 relevant experts, and will deliver additional recommendations in July.
The six reforms identified in the report focus on trade-related illicit financial flows. These include tax dodging, trade misinvoicing, and corporate profit shifting. Illicit flows from developing countries alone totaled an astounding $5/9 trillion from 2002 to 2011, according to the NGO Global Financial Integrity.
“A large proportion of all international trade takes place within this or that multinational enterprise (MNE),” said Thomas Pogge, ASAP President and Leitner Professor of Philosophy and International Relations at Yale University.
“Much of this trade is designed to shift the MNE’s profits into tax havens: jurisdictions that impose low or no taxes on profits. Poor countries with limited administrative capacities find it difficult to curb such profit shifting, which drains them of capital and deprives them of tax revenues. A concerted international solution to this problem could benefit developing countries more than all the development assistance they currently receive.”
Academics Stand Against Poverty recommends that the Open Working Group on Sustainable Development Goals makes the following six reforms central to their efforts to tackle illicit financial flows.
1) Reform the arm’s-length transfer pricing system
The arm’s-length principle (ALP) holds that the price used for an intra-group transaction should match the price that would be paid between two different companies on the open market. In practice, however, subsidiaries of MNEs often charge each other non-ALP rates in order to minimize overall tax burden.
Reform should be aimed at making sure that prices are more closely linked to actual economic activity and value creation. Furthermore, the ALP system should be simplified and make more transparent, two goals the OECD and the UN Committee of Experts on International Tax Matters are currently working on.
2) Reform international accounting standards
Currently, corporations are only required to account for trade with unrelated companies and are therefore able to conceal trade between affiliates of the same company. Country-by-country reporting would require corporations to report all sales, profits, and taxes paid in all jurisdictions in their audited annual reports and tax returns. This would pose little additional administrative burden on corporations, since they already compile such audits for internal purposes. Disclosing this information could be enormously beneficial for tax authorities and make tax havens less attractive.
3) Implement universal automatic exchange of information
Automatic exchange of information is crucial for enabling tax authorities to work more effectively. In 2013, the G20 pledged to implement it among their members by 2015. This commitment to automatic exchange should be made universal in order to include developing countries.
4) Require public registers of beneficial ownership
Disclosure of beneficial ownership, meaning the natural person who is the beneficial owner of a company or an asset, is highly important for authorities to track and regulate financial flows. Requirements in this area should be expanded, including disclosure to the public, so that not just authorities but also civil society can hold companies responsible.
5) Increase the rate of stole asset repatriation
According to a World Bank report, only about $5 billion (or around 1%) of the $300-600 billion of stolen assets from the last 15 years were successfully repatriated. Increased political pressure and internationao co-operation will be necessary to achieve progress in this area. Additionally, the Stolen Asset Recovery program of the World Bank and the UN Office on Drugs and Crime should be scaled up.
6) Increase official development assistance for capacity building on matters of tax
Many developing countries lack sufficient capacity fro dealing with illicit financial flows. International efforts to address tax abuse must therefore be complemented by domestic capacity building.
OECD research has shown that the return on investment for official development assistance (ODA) targeted towards capacity building of developing countries’ tax administrations is very high; currently, however, only a minute fraction of ODA is dedicated to this purpose. Thus, the proportion of ODA dedicated to capacity building on tax matters should be scaled up.
Download the report here.
Concerns over extreme poverty and inequality have led to a number of proposals for the reform of global taxation policy. Such proposals are enjoying serious analysis and, in some cases, implementation. While issues concerning national taxation have long concerned philosophers — invoking core questions about the legitimacy of governments and their appropriate functions as well as about the nature of freedom, coercion, and property rights — issues of global taxation and international tax fairness have not received anything like the same attention. Through a special issue of the journal Moral Philosophy and Politics, co-editors Gillian Brock, Professor of Philosophy at the University of Auckland, and Thomas Pogge, ASAP President and Leitner Professor of Philosophy and International Affairs at Yale, aim to remedy such neglect, stimulating further interest especially among moral and political philosophers who we hope will be motivated to turn their attention to many of the important normative questions that deserve more sustained analysis.
ASAP Italy is the latest ASAP chapter to hold a public launch event. There are now twelve chapters under development in the ASAP network: Austria, Brazil, Canada, Germany, India, Italy, Mexico, Oceania, Spain, United Kingdom, United States, and West Africa.
ASAP Italy launched on May 9-10 in Rome at LUISS University, in collaboration with the Schools of Law and Political Science. The event aimed to bring together both academics and practitioners and to spark a debate over what should be the priorities of the new chapter.
Participants in the meeting identified some early priorities for the new chapters, including encouraging research at the intersection of global justice theory and inequality studies, as well as establishing a global health research hub within ASAP Italy. Participants were also interested in initiating projects related to sustainability and human rights.
Teaching is meant to be a major priority for the new group. One idea that came up in the brainstorming session was to create an interdisciplinary MOOC (Massive Online Open Course) on poverty alleviation in order to offer students a wider perspective on poverty. The MOOC would draw on work from economics, political science, and law.
ASAP is supporting ID100, a collaborative project to identify the 100 most important questions for development after the expiration of the Millennium Development Goals in 2015. Led by the Sheffield Institute for International Development (SIID), ID100 aims to contribute to the discussion of the post-2015 development agenda.
Members sent in 40 questions to be considered for inclusion in ASAP’s submission to ID100. A committee of ASAP global Board members, chapter heads, and staff voted for the five best questions. Here are the winners:
- What are successful business models or partnership models for providing access to clean water? (Submitted by Regina Schönberger)
- What are the socially and morally most desirable interventions to reduce inequalities in income? (Submitted by Regina Schönberger)
- What are the best methods for ensuring that people benefit from the exploitation of the natural resources found on their lands? (Submitted by Jérémie Gilbert)
- How can companies and financial actors be held accountable to pay fair taxes? (Submitted by Jérémie Gilbert)
- What are the most effective policy interventions to address some of the persistent silences affecting the success of MDG 5: girls’ and women’s lack of control over sexuality, fertility and family planning, and access to safe abortion? (Submitted by Colleen O’Manique and Pieter Fourie)
Regina Schönberger works for GIZ in Jakarta in the Responsible and Inclusive Business Hub. Jérémie Gilbert is Reader in Law at the School of Law & Social Sciences, University of East London. Colleen O’Manique is Associate Professor of International Development Studies and Gender & Women’s Studies at Trent University. Pieter Fourie is Associate Professor of Politics at Stellenbosch University.
Thanks to all who submitted questions!
ASAP is supporting ID100, a collaborative project to identify the 100 most important questions for development after the expiration of the Millennium Development Goals in 2015. Led by the Sheffield Institute for International Development (SIID), ID100 aims to contribute to the discussion of the post-2015 development agenda. ASAP plans to submit up to 5 questions from members to ID100. Submit your question(s) by Tuesday, May 27, to be considered for inclusion in the list. (More details here)