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Lifting the Veil of Secrecy: Perspectives on International Taxation and Capital Flight From Odd-Helge Fjeldstad • Sigrid Klæboe Jacobsen Peter Henriksen Ringstad • Honest Prosper Ngowi (Eds) Lifting the Veil of Secrecy Perspectives on International Taxation and Capital Flight from Africa Lifting the Veil of Secrecy Perspectives on International Taxation and Capital Flight from Africa LIFTING THE VEIL OF SECRECY 3 CONTENT CONTENT Contents Acknowledgements 6 About the book 7 Tax Havens, capital flows and Africa – an introduction 9 1 Tax and tax justice 13 Articles: 25 • Janvier D. Nkurunziza: Capital flight and poverty reduction in Africa 26 • Alex Cobham: The Financial Secrecy Index: Country level vulnerability to illicit financial flows 29 Lifting the Veil of Secrecy • Guttorm Schjelderup and Armando José Garcia Pires: The Panama Papers – what did we learn? 33 Perspectives on International Taxation and Capital Flight from Africa • Nimmo Elmi & Stig Jarle Hansen: The tax dilemma: How to create legitimate tax systems in Somalia 36 Copyright © Chr. Michelsen Institute 2017 2 The scope and consequences of capital flows from developing countries 41 Articles: 53 P. O. Box 6033 • Annette Alstadsæter, Niels Johannesen & Gabriel Zucman: What do tax havens cost in terms of lost tax renevue? 54 N-5892 Bergen • Raymond Baker: Illicit financial flows from Africa: Their loss; not our gain 57 Norway • Maya Forstater: Are the big numbers on illicit financial flows misleading, and does it matter? 60 • Alex Erskine & Ameth Saloum Ndiaye: Improving methods and data for estimating illicit financial flows (IFFs) 64 [email protected] Layout and design: Kristin Skeie Antoine 3 The tax avoidance industry and law enforcement 69 Articles: 81 • Brooke Harrington: Above the law? Offshore and the politics of libertarian anarchy 82 • Attiya Waris: International financial centres in developing countries 85 • Prem Sikka: Beware: Accountancy firms at work 87 • Kari K. Heggstad & Odd-Helge Fjeldstad: With a little help from the banks 90 • Odd-Helge Fjeldstad: Capital flight, tax policy and lobbyists in Africa 93 4 Natural resources and capital flight from Africa 97 Articles: 103 • Rabah Arezki, Gregoire Rota-Graziosi & Lemma W. Senbet: Natural resources and tax avoidance 104 • Olav Lundstøl: Mines and tax in Africa: Fair benefit sharing or exploitation in the wake of liberalisations? 108 • Andre Standing: Confidentiality and financial secrecy in the fisheries sector 112 • Andre Standing: Case study: The EMATUM scandal 115 • Léonce Ndikumana: Capital flight from Africa: Trade misinvoicing as the remaining hiding place 116 • Odd-Helge Fjeldstad, Caleb Fundanga & Lise Rakner: The rise and fall of the mining royalty regime in Zambia 120 5 International initiatives and their relevance for Africa 125 Articles: 139 • Sol Picciotto: Corporate tax avoidance, evasion and the offshore system 140 • Sara Jespersen: Development finance institutions and tax havens – still too cosy a couple 143 • Lovisa Möller: Tax treaties and illicit capital outflows from Africa 147 • Annet Oguttu: The financial secrecy of tax havens 150 Glossary 155 Organisations and institutions working on tax justice issues in Africa 158 References 160 Editors 167 4 LIFTING THE VEIL OF SECRECY LIFTING THE VEIL OF SECRECY 5 ACKNOWLEDGEMENTS ABOUT THE BOOK Authors The book, excluding the articles, has been written by Odd-Helge Fjeldstad (CMI and ATI), About the book Sigrid Klæboe Jacobsen (TJNN) and Peter Henriksen Ringstad (TJNN). This book is produced as a part of the research project Taxation, Institutions Editors and Participation (TIP). TIP investigates the effects of tax havens on domestic revenue systems, institutions and on citizen participation in African countries. Odd-Helge Fjeldstad, Sigrid Klæboe Jacobsen, Peter Henriksen Ringstad, Honest Prosper Ngowi (Mzumbe University), Åse Johanne Roti Dahl (CMI) and Ingvild Hestad (CMI) The project aims to generate new, contextualised evidence on the political economy of domestic revenue mobilisation, institutional development and state legitimacy in Copy-editing countries exposed to large scale capital flows. TIP is led by Chr. Michelsen Institute (CMI), and funded by the Norwegian Research Council. Anna Gopsill (CMI), Åse Johanne Roti Dahl and Ingvild Hestad The book is based on research and interaction with colleagues in research institutions, Layout and Design civil society organisations, tax administrations and the private sector in Africa. It is developed in close collaboration with Tax Justice Network - Norway (TJNN). Kristin Skeie Antoine, KSA Design We want to thank the many researchers and experts who have contributed articles to the book. We extend our special thanks to participants in the advisory and editorial committees for their valuable contributions: Michelle Mbuthia (Tax ISBN 978-82-8062-669-1 Justice Network Africa), Bakar Khamis (KEPA Tanzania), Sarah Shija (Norwegian Church Aid - Tanzania), Justin Damian (Tanzania Tax Writers Network – TAWNET), and Dr Caleb Fundanga (Institute for Finance & Economics, Lusaka & MEFMI, Harare). Odd-Helge Fjeldstad, Sigrid Klæboe Jacobsen, Peter Henriksen Ringstad, Honest Prosper Ngowi, Åse Johanne Roti Dahl and Ingvild Hestad. 6 LIFTING THE VEIL OF SECRECY LIFTING THE VEIL OF SECRECY 7 INTRODUCTION Tax havens, capital flows and Africa – an introduction Increasing domestic revenue is a priority for most African countries. An effective tax system is central to sustainable development. African governments need to mobilise revenues to finance public spending. Tax is key to growth and redistribution. Mobilising the domestic revenue base is crucial for African countries to escape from foreign aid or natural resource dependency. Widespread tax avoidance and evasion undermine the domestic tax bases in most African countries (IMF 2011). It limits the amount of resources available for the government and undermines economic efficiency, income distribution, and the government’s legitimacy. It is estimated that African countries, relative to the size of their economies, lose more in corporate tax evasion than countries anywhere else in the world (Crivelli et al. 2015). The international tax system facilitates tax avoidance and evasion. There are a number of examples of multinational companies, particularly in extractive sectors, that pay little tax by transferring profits to tax havens. Similarly, there are major challenges in the taxation of renewable natural resources, such as fisheries, forestry, and wildlife. In these cases, only limited revenues reach the treasury in many African countries. Recent information leaks also show that Africans with great wealth hide it in tax havens beyond the reach of their national tax and judicial authorities. In 2015, a list of clients of the HSBC bank with secret accounts in Switzerland became public. The Swiss leaks revealed that residents in sub-Saharan Africa held huge amounts of money in secret accounts. It is a global network of offshore financial centres (OFCs) – popularly known as ‘tax havens’ or ‘secrecy jurisdictions’ – that makes it possible for rich elites and large multinational companies to drain large amounts of wealth out of Africa. Tax havens include both small tropical islands such as the Cayman and the British Virgin Islands which feature in popular images of ‘tax havens’, and rich OECD countries such as Ireland, the Netherlands, Luxembourg, Singapore, Switzerland, the United Kingdom and the USA. Tax havens are legal jurisdictions that offer a combination of low tax rates, limited regulations, and secrecy about the ownership of registered corporations and individual assets. National bank secrecy laws are designed to prevent the sharing of information about clients, thus facilitating secrecy about account ownership and registration of “shell corporations” – legal corporations that have few or no substantive activities in the country (Sharman et al. 2012). Designed to attract foreign wealth and corporations, these mechanisms disguise the identities of their owners, conceal transactions, and 8 LIFTING THE VEIL OF SECRECY LIFTING THE VEIL OF SECRECY 9 INTRODUCTION INTRODUCTION move the assets beyond the reach of national authorities while maintaining an In recent years, there has been a significant expansion of research on illicit financial appearance of a respectable business environment. flows, largely focusing on estimating the scale of flows (Zucman 2014; Boyce and Ndikumana 2012; Kar and Cartwright-Smith 2010; Kar and Spanjers 2015) Estimates of the magnitude of wealth held in tax havens remain imprecise, as most of it and the role of international tax havens in facilitating tax evasion and other illicit is hidden and scattered across a vast network of secrecy jurisdictions. Gabriel Zucman activities (Palan et al. 2010). However, our understanding of the ways tax havens (2014) estimates that USD 8 trillion of the personal financial wealth is in offshore affect taxation, political institutions and citizen participation is less developed. accounts. This figure captures only financial wealth, and excludes tangible assets like How is the taxpaying behaviour of domestic taxpayers affected by the elites’ and property, jewellery and artwork. Other estimates of total wealth held overseas are as transnational companies’ use of tax havens? How do large scale (illicit) capital flows high as USD 32 trillion (ICIJ and CPI 2013). That figure would imply that roughly affect domestic tax policies and practices, and what role do international accounting 20% of the total global wealth is held offshore. Zucman argues that the share is even firms play in this process?
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