Global Policy Forum

By Nuria Molina

In October 2009 European NGOs prompted their Executive Directors at the World Bank to request strong action to stop investing in companies that are registered in tax havens. In response to the NGO request, the Executive Board took swift action and issued, on April 2010, a public position on "Off-shore financial centers and tax evasion in World Bank operations." In this note, the World Bank Group states its commitment to "the integrity and transparency of global financial markets" and expresses concerns on the "the issue of offshore financial centers (OFCs) and about the potential risk of tax abuse and the threat to good governance that they present."

However, the Bank fails to take concrete measures to ensure that IFC investments stop supporting companies that benefit from the opacity of secrecy jurisdictions to evade taxes owed in poor countries, which contributes to the bleeding of more than $600 billion every year. In fact, the World Bank justifies the use of tax havens by companies the IFC sponsors for "legitimate purposes when partners and sponsors act with integrity. For example, jurisdictions may be used to avoid double taxation of investments in developing countries, or may provide legal infrastructure that a given host country lacks."

What do NGOs demand?

The World Bank Group, as an institution mandated to support the development of poor countries, should stop supporting companies that use secrecy jurisdictions and thus hide crucial information on profits made and taxes paid in their operations in developing countries. Although the public note is a step in the right direction, NGOs believe that this is not quite enough to curtail illicit flows from developing countries that amount to six times global ODA every year. An institution that is genuinely committed to eradicating world poverty should not take away with one hand what it gives with another.

As a minimum, the World Bank group must strengthen the criteria to be met by the companies they support when they use these secrecy jurisdictions. To ensure that they comply with the highest standards of transparency and prove that they are not evading or avoiding their tax dues, when using secrecy jurisdictions all companies supported by the WB IFC should:

* provide evidence that they are conducting activities of real economic significance in the secrecy jurisdictions where they are domiciled;
* disclose beneficial ownership of all legal structures based in these jurisdictions;
* disclose information on income earned, taxes paid and number of people employed in each country where they operate, including in the legal structures registered in tax havens.

Eurodad, Tax Justice Network, CRBM and Global Financial Integrity sent a letter to the IFC to convey these demands and argue that neither the problems of double taxation nor the need for a solid legal infrastructure for companies that operate in poor countries are sound enough arguments to let companies get away with secrecy and hide how much they earn, how many people they employ, and much tax they pay in the countries where they operate.

Aware of these arguments - put forward by companies using tax havens and by public development institutions supporting these companies' investments in the South - Eurodad, Tax Justice Network and several of their network members published a report last month, Investments for development: derailed to tax havens, which spells out why these arguments are not up to the mark. However, the IFC does not seem persuaded - yet.

What does the World Bank IFC really think of the use of tax havens?

In response to the NGO letter, a meeting took place recently between NGOs and the IFC to discuss the issues at stake.

The IFC expressed concern about ensuring the financial transparency and integrity of the companies they support. However, beyond general statements, some concerning issues came across in the discussion with NGOs:

* Some of the staff were neither convinced nor aware of the negative developmental effects that the use of tax havens have on the capacity of developing countries to raise and retain much needed domestic resources to finance their development. They insisted that more figures on the magnitude of the problem are needed;
* Staff also cited disagreements among IFC's shareholders on these issues to justify a lack of progress on this matter within the institution; and
* They also disagreed that the IFC should go beyond existing processes at the OECD and set higher standards on the use of tax havens by the companies they support.

Why should the IFC do more?

The IFC is a public institution with a development mandate. The OECD processes, if successful, will hopefully address the problem of lack of transparency and dishonesty of companies worldwide investing in the South. However, this will take time. In the meantime, taxpayers' money and sovereign guarantees that back IFC investments should not go to companies that make use of jurisdictions that are not sufficiently transparent. Public development institutions such as the IFC should care, first and foremost, about the positive developmental impacts of the investments they make: they should set higher standards of financial integrity and pull companies to the right direction.

The IFC staff think that more data is needed to provide evidence on the impact of the use of tax havens on poor countries. If they are right that more data is needed to justify a stronger IFC policy on the use of tax havens, then they should start collecting data and not waste more time. Until then, the least the IFC should do is put an immediate moratorium on all investments going through tax havens. The burden of proof should be on the companies that hide their information - it should be they that justify their usage of tax havens, instead of NGOs or public institutions having to prove that companies that hide information are doing so to dodge taxes. What else would explain the lack of transparency?