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The World Bank: in thevanguard of an infrastructureboomBY NANCY ALEXANDER

The World Bank and the IMF havefinally begun to connect the dotsbetween tax havens, tax losses byactivities of multinationalenterprises (MNEs), and growinginequality, including genderinequality. They loudly trumpeted anew UN, OECD, IMF and WorldBank “Platform for Collaboration onTax”, the week after the Bank &Fund spring meetings in April,announcing it as civil societygathered to influence the UN’sFinancing for Development (FFD)follow-up negotiations in New York.

Tax avoidance and evasion are notnew issues to the IMF. As early as2001, the former head of the IMF’sFiscal Affairs Department (FAD)described MNEs’ tax practices as“fiscal termites”, though noconcrete steps were taken at thetime to identify the scale of thelosses or to address them. It took afinancial crisis before the G20requested the OECD to focus ontax havens in 2009 by forming theGlobal Forum on Transparencyand Exchange of Information forTax Purposes (known as theOECD Global Forum), followed upby the OECD’s G20-mandatedBase Erosion and Profit Shifting(BEPS) project initiated in 2012 to

address the issue of corporate taxlosses. 2014 and 2015 studies bythe IMF estimated tax losses innon-OECD countries due to MNEactivities at between $100 and$300 billion annually, with“especially marked and important”losses for developing countries.The new joint Platform finallyprovides an explicit developingcountry angle for this work andintends to pick up the momentumfrom the July 2015 Addis AbabaFFD Conference that placeddomestic resources such as taxrevenues at the heart of fulfillingthe Sustainable Development Goal(SDG) financing gap of $2.5 trillion.

Has Bank and IFC lendingbecome more tax responsible?

In 2011 the World Bank finallyadopted a policy on the use ofOffshore Financial Centres(OFCs), with the main objectivethat they “are not used for taxevasion”. The policy suffers fromthe lack of a specific list of high-riskjurisdictions or practices. Instead itadopts a weak process of peerreviews and assessments by theOECD Global Forum. For examplethe British Virgin Islands, whichhas a “largely compliant” status

The IMF and the World Bank, including the IFC, areincreasingly engaged with the challenge of addressinghow tax avoidance and evasion affect developingcountries. However, their approach needs to go muchfurther to address the role played by multinationalenterprises and tax havens in exacerbating inequalityand undermining countries’ domestic revenues.

Matti Kohonen is thePrincipal Advisor on thePrivate Sector at thePolicy and PublicAffairs Department atChristian Aid. Havingjoined in 2014, Mattipreviously worked onprojects involving LatinAmerican, African andAsian tax anddevelopment issues.He holds a PhD inSociology from theLondon School ofEconomics and PoliticalScience, looking at thesocial values ofbusinesses.

AUGUST 2016

At issueAt issueWorld Bank and IMF: Where do theystand on progressive andresponsible taxation?

according to the Global Forum,hosts over half of the offshorecompanies mentioned in the‘Panama Papers’ scandal in 2016that exposed wide-ranging taxsecrecy. Using a broaderdefinition of a ‘tax haven’ fromthe Tax Justice Network’sFinancial Secrecy Index, a 2015report by Oxfam highlighted that25 per cent of the InternationalFinance Corporation (IFC, theBank’s private sector arm)investment projects in the sub-Saharan African region wereagreed with companiesincorporated in tax havens, suchas Mauritius, the Netherlands orJersey.

In a 2015 analysis the investmentanalyst MSCI found that 22 percent of the companies analysedpaid a tax rate substantiallybelow the weighted average,concluding that these companiespresented a significant risk toinvestors due to both reputationaland tax litigation risks.Reputation risks are apparent inthe case of the MineraYanacocha S.R.L., one of thelargest gold mines in LatinAmerica, 51 per cent of which isowned by Newmont MiningCorporation, with PeruvianBuenaventura holding 44 percent and the IFC 5 per cent. A2015 report by Peru-based LatinAmerican regional CSO networkLATINDADD highlighted that theaverage annual tax levy onincome from the operation ofYanacocha in the period 2006-2013 was $196 million on anaverage net income of $5.7billion. LATINDADD concluded

that, while they cannot accusethe company of illegal behaviour,the corporate tax paymentsremained small due to“inexplicable distortion betweencosts and prices”. The reportindeed raised more questionsthan answers due to the lack ofgreater tax transparency.

Further reviews of the IFC’sportfolio reveals it invested in2012 in Stora Enso, a Finnishforestry MNE, for projects in anumber of countries, includingChina, and for provision ofadvisory risk services in Laos.Stora Enso was reported byinvestigative journalists in 2012to have avoided taxes through itsDutch subsidiary office inAmsterdam, which hadgenerated half of the group'sprofit with less than two per centof the group's turnover in years2005-2010. The journalists alsofound that most of the profits onthe cellulose originating fromBrazil remained in theNetherlands, where the averageeffective tax rate for 2005-2010was 1.5 per cent due to anadvantageous Advanced PricingAgreement (APA) between StoraEnso Amsterdam and the Dutchtax authorities. The ruling is noton public record, but the latestagreement ran up to 2014.Again, the behaviour has not todate been found to be illegal inBrazil, the Netherlands orFinland, but it raises seriousquestions concerning profitshifting and its impact on thedomestic revenues of developingcountries.

The IMF: walking its own talkon tax?

NGOs have for many yearshighlighted that IMF tax advicehas promoted regressive taxpolicies that only create moreinequality by advising countriesto lower their trade and corporatetaxes, while increasing value-added taxes where the incidenceis mostly on the poor. A shift inunderstanding on tax issues maybe detectable at the IMF, inparticular on the impact of taxavoidance on developingcountries’ revenues and onquestions of income and genderinequality. A 2014 policy paperstated that: “fiscal policy is theprimary tool for governments toaffect income distribution” andthat “the Fund should be mindfulof how macroeconomic policies(including fiscal policies) affectincome distribution and theirconsistency with the distributionalgoals of country authorities.”Notably, the policy paper was notapproved by the board, but ratherdiscussed in an “informalsession”. Therefore this paper,along with the Fund’s recentresearch, does not representboard-approved IMF policy.Nevertheless, gender inequalityand women’s economicparticipation were included as‘macro-critical’ subjects in a 2013IMF Staff Discussion Note whichemphasised the importance ofunderstanding the impact ofgender through the broader lensof income inequality – includingtax policies.

World Bank and IMF: Where do they standon progressive and responsible taxation?

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But has this guidance been put inpractice? Looking at a 2016assessment of Thailand, the IMFrecommended increasing VATfrom 7 to 10 per cent onceeconomic recovery wasunderway, while also in the sameevaluation commenting thatlowering corporate income tax isgood for growth andcompetitiveness withoutreference to the evidence theIMF itself has developed whichcontradicts, or at leastcomplicates, such a statement.Meanwhile, in Costa Rica’s 2016Article IV evaluation IMF staffwelcomed a rise in marginalincome taxes (albeit from a verylow rate of 20 to 25 per cent),while also recommendingincreases in VAT, however, “withtargeted support to offset theimpact on lower-incomehouseholds”. Looking at existingcapacity building and the

diagnostics toolson offer, itappears that theIMF’s focus isstill largely onindirect taxesfollowing thisassessment.

Some welcomesigns of a shift inpolicy might beevident in Coted’Ivoire’s 2016Article IVevaluationwhere IMF staffrecommendedreducing taxincentives in aneffort to raise

more revenue, which was metwith resistance by the Ivorianofficials who “expressedconcerns regarding the impact ofcutting exemptions on Côted’Ivoire’s investmentattractiveness.” This statementraises questions over thecontinued use of the WorldBank’s Doing Business Report(DBR) to rank investmentattractiveness of developingcountries. The DBR’s taxindicator still awards positivepoints for a lower total tax rate forcompanies, and thus explicitlyrewards the lowering of corporatetaxes, while the IMF’s researchon spillover effects cited abovefound that tax competitionremains a key challenge fordeveloping countries.

The emphasis in tax policyadvice also needs to considerspending, not just revenues,

especially in addressing genderinequalities. The 2015 Article IVIMF evaluation of Chilecongratulated the country for itsreforms to “improve (female)labour force participation - and inturn equity - by extending thelength of maternity leave,employment subsidies for lowincome women and youth, andemployment support and trainingservices, albeit not used upextensively”. However, the IMF’sadvice was more generic onboosting female labour marketparticipation without an explicitpolicy recommendation forextending maternity leave. Itseems that IMF staff lackexperience in gender orinequality analysis of fiscalpolicies’ impact, and this bringsinto question how and whetherthe IMF’s new thinking andevidence are being put intopractice. Experience from budgetmonitoring work by theInternational Budget Projectmembers in South Africa hasshown that only by conductingsuch gender analysis can fiscalpolicies address a specificgender bias.

Ensuring policies areimplemented

Looking ahead there isconsiderable potential for theFund and World Bank Group toaddress some of theirproblematic tax policies. It isessential that the Bank revisits itsOFC policy and establishes abroader tax policy for its lendingoperations that enables it to drawred lines in terms of high risk

Tanzania Revenue Authority, Photo: Christain Aid

jurisdictions especially in offshorefinancial centres, while alsoallowing it to engage on acontinuous basis, especially forthe IFC’s private sectorinvestments. A 2015 joint reportby international NGOs ActionAid,Christian Aid and Oxfam titledGetting to good,addressing taxresponsibility ofcompanies, highlightedindicators for goodbehaviour across eightareas that should beutilised by the IFC: taxplanning practices; publictransparency and reporting;non-public disclosure;relationships with tax authorities;tax function management andgovernance; impact evaluation oftax policy and practice; taxlobbying; and tax incentives. Thereport placed tax in a frameworkof corporate responsibility, andallows for stakeholders to identifykey areas of tax risk and impacton wider society.

The Bank should put progressivetax policies that reduceinequality, and in particulargender inequality, at the heart ofits offer of technical assistanceunder the InternationalDevelopment Association (IDA,the Bank’s low-income countryarm) 18th replenishment round.IDA 18 has a priority area on tax,governance and public financemanagement. Technicalassistance should prioiritisesupport to the identification ofkey gaps in legislation including

gender bias in tax andexpenditure legislation, policiesand capacity includingstrengthening tax audit andlitigation, negotiation of bothdouble tax treaties and bilateralAdvanced Pricing Agreements to

better protect revenue, andrationalisation of tax

incentives in terms ofcost and benefit.Additionally, theBank shouldchange the DoingBusiness indicator

on total taxcontribution towards a

tax transparencyindicator of companies’

behaviour that promotes rule oflaw rather than low taxes.

In terms of the Fund, it has madewelcome steps in identifying boththe issue of tax havens and taxlosses by MNEs, but has furtherwork to do in terms of linking upgender and equality impactissues to its tax policy analysis.The Fund still has gaps in itswork on illicit financing thatcurrently only touches on thecriminal and corrupt aspects ofthe problem, ignoringcommercial transactions offacilitating corruption such as taxevasion and trade mispricing.The Fund should consider thesewider issues in its research andpolicy advice work. Independentestimates by Global FinancialIntegrity consider that $1.1 trillionof illicit financial flows leavedeveloping countries every year.Fairness and tackling illicit

financial flows should be at theheart of the Fund’s upcomingwork “strengthening the capacityof national tax administrationsand the deepening of its work oninternational tax issues ofrelevance for developingcountries” in 25 countries to beidentified over the course of2016. It will be interesting to seeif this emphasis shifts in theFund’s Tax AdministrationDiagnostics Tool (TADAT),launched in 2013. The key taskbecomes putting the IMF’s oftenground-breaking research intopractice, and to developdiagnostic tools for developingcountries on corporate taxcapacity. In addition to the tools ithas already developed to assessinternational spillovers the IMFshould be focused on how theytoo can be applied to and usedactively by developing countries.

It is these and other issues thatbrought the Platform forCollaboration on Tax intoexistence and it should be utilisedas a space not only to promotethe agenda of the OECDcountries, as occurred too muchunder the OECD-led BEPSprocess, but to bring theconcerns of developing countrieson to the table to be addresseddirectly.

A fully referenced version of thisarticle is available on the BrettonWoods Project website at:tinyurl.com/IFIsTaxPlatform

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World Bank and IMF: Where do they standon progressive and responsible taxation?

The Platformfor Collaboration on Tax ... should be … a space to

bring the concerns of developingcountries on to

the table