The European Parliament deliberated on a committee report on the findings of an 18-month-long inquiry into money laundering, tax avoidance and tax evasion on Tuesday, prompted by revelations in the Paradise Papers leaks.
Excerpt from the EU Parliament debate on Inquiry into money laundering, tax avoidance and tax evasion committee proceeding. Image Source: EP
German politician and member of the European Parliament , Werner Langen, headed the fact-finding committee which now concludes almost 18 months of inquiries
which commenced after the Panama Papers revelations and as a response to widespread reports on tax evasion mainly through off-shore companies.
Among the findings in the report is that not only does tax evasion affect corporate tax collections but other streams of revenue. The report found that in EU member states the difference between the estimated Value Added Tax collections and actual revenue collected amounts to a $187,86-billion shortfall.
The amount lost in the form of possible 'developmental finance' can climb up to $294.6-billion for poorer countries. This is the lost tax revenue and the reinvested earnings that are lost as profits.
The scope of the committee was broadened to include UN General Assembly resolutions such as the Addis Ababa Action Agenda of the Third International Conference on Financing for Development adopted in 2015 July. In the session there was reference to how global tax collaboration could be approached.
"Efforts in international tax cooperation should be universal in approach and scope and should fully take into account the different needs and capacities of all countries, in particular least developed countries, landlocked developing countries, small island developing States and African countries," the assembly held.
Madagascar is a developing country with unique tax related challenges. It's a tax haven but also one of the countries with the poorest population in the world.
Malagasy corporations intent on dodging tax regulations take their investments to other jurisdictions with low taxes and lax regulations.
The Paradise Papers leaks finger 26 Malagasy residents, linking them to offshore accounts across in other tax havens across the world.
Madagascar has recently joined the Global Forum meeting on Transparency and Exchange of Information for Tax Purposes, a body which provides a multilateral framework for OECD and non-OECD economies allowing them to collaborate on tax information exchange.
The body held a plenary session in Yaoundé, Cameroon in November where Madagascar was admitted as a member. At the meeting it was noted that tax and economic crime poses to a threat to national and international finances, society, and security.
Delegates at the closing session of the meeting in Yaoundé, Cameroon on 17 November 2017. Image: Global Forum
The statement of outcomes from the meeting noted: “The meeting took place in the backdrop of the recently released “Paradise Papers” which once again publicly highlighted the global problem of cross-border tax avoidance and evasion, issues that require an international response to deal with them effectively”.
The body has 147 countries as members that agree to encourage financial reporting transparency among state authorities. The United Nations, the World Bank, the Inter-American Center of Tax Administrations (CIAT) and African Tax Administration Forum (ATAF) are among the observer members monitoring the body’s work.
Gabriel Zucman, author and professor of economics at the University of California, says some companies are able to dodge tax regulations by not reporting to the right authorities.
“An estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultra-wealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities”, he says.
One aspect that makes Madagascar unique among countries with low corporate taxes is that the country does not offer the assurance of a politically and economically stable environment. The country is also vulnerable to adverse weather conditions caused by the impact of global warming and climate change.
Much of the focus on tax havens and illicit financial flows only looks at financial crimes and the different destinations for corporations wishing to minimise their tax contributions. This hides the underlying impact of low tax regimes and loose enforcement regulations on public spending, especially social security spending.
African countries that offer low tax rates as an incentive for foreign investors are sometimes unable to realise the same returns that their counterparts in other regions enjoy.
The Report of the High Level Panel on Illicit Financial Flows from Africa says that some African countries are caught in a trap where they think the only options they have to attract investment is by allowing their rates to spiral downwards.
“Countries grant a host of tax incentives such as tax holidays, investment allowances, tax rate reductions and use administrative discretion in order to attract foreign direct investment. However, in many instances these policy decisions are not guided by proper cost-benefit analyses but rather by the intention of outdoing competitors for foreign direct investment, leading to harmful tax competition and a 'race to the bottom'”.
It is difficult for some countries to regain control of the direction their tax regime will take after they realise that their low rates translate into less revenue for social programmes.
The drop in corporate tax rates in Madagascar from 30% to 20% over the period between 2009-2016 also coincided with a decline in foreign direct investment flows into the country.
In his blog Vitor Gaspar, Director of the IMF's Fiscal Affairs Department, says that with rising public tax might be the only option that many countries have to stabilise their rising public debt, something which he deems important for building a country’s tax capacity and central to viable development.
“On average non-resource related tax revenues in the region have increased over the last few years, but they remain low by international standards and relative to the region’s significant developmental spending needs,” Gaspar said.
An interesting aspect about tax havens is the assumption that they add to the promotion of a better quality of life for citizens. A comparison of the Human Development Index scores of other tax havens with Madagascar shows that the country is far behind.