Global Policy Forum

OXFAM's Presentation for UN Financing for
Development NGO Hearings

The Financing for Development agenda encompasses a very wide range of issues that impact on the availability of resources to finance sustainable economic growth in developing countries. This presentation will focus on two specific areas that are hampering that process - tax competition and tax havens and debt and liquidity crises involving private creditors. Both areas are inadequately addressed under the current system of global economic governance.

The globalisation of capital markets has massively increased the scope for offshore activity. It is estimated that the equivalent of one-third of total global GDP is now held in financial havens. Much of this money is undisclosed and untaxed - and the rest is under- taxed. Governments everywhere have become increasingly concerned by the implications. But if governments in rich countries see tax havens as a threat to their capacity to finance basic services, how much more serious are the threats facing poor countries?

It is impossible to calculate the financial losses to developing countries associated with offshore activity. In a report published earlier this year, Oxfam estimated that tax havens have contributed to annual revenue losses for developing countries of at least US$50 billion. To put this figure in context, it is roughly equivalent to annual aid flows to developing countries. And this estimate was a conservative one. It is derived from the effects of tax competition and the non-payment of tax on capital flight. It does not take into account outright tax evasion, corporate practices such as transfer pricing, or the use of havens to under-report profit. There are three major ways in which offshore centres undermine the capacity of poor countries to finance sustainable development.

First, through tax competition and tax escape.

Tax havens, and tax competition in general, can provide big business and wealthy individuals with opportunities to escape their tax obligations. This limits the capacity of countries to raise revenue through taxation on both their own residents and foreign owned capital. Tax competition and the implied threat of relocation has forced developing countries to progressively lower corporate tax rates on foreign investors. Ten years ago, these rates were typically in the range of 30 to 35 per cent - broadly equivalent to the prevailing rate in most OECD countries' Today, few developing countries apply corporate tax rates in excess of 20 per cent. Tax competition also extends to efforts to attract foreign portfolio investment. Earlier this year, India was forced to reverse efforts to clamp down on the use of tax havens by foreign institutional investors for channelling funds into the country for fear that future foreign investment would stay away.

Second, the offshore system has contributed to the rising incidence of financial crises.

Tax havens and offshore financial centers are now considered to be central to the operation of global financial markets. Havens and OFCs are used by foreign exchange traders as well as by globally active private financial institutions, such as banks and investment funds, that use them as booking centres for short-term and speculative investment in developing and transition economies. Routing investment via the offshore system can be used to avoid regulation (for example, disclosure requirements), to side-step a country's capital controls, or to reduce the levels of tax paid on profits. Currency instability and rapid surges and reversals of capital flows around the world became defining features of the global financial system during the 1990s. The crises in Mexico in 1995, and more recently in East Asia, have shown how costly such crises can be both in economic terms and in terms of human development.

Third, the offshore world provides a safe haven for the proceeds of political corruption, illicit arms dealing, illegal diamond trafficking, and the global drugs trade.

Havens facilitate the plunder of public funds by corrupt elites in poor countries, which can represent a major barrier to economic and social development. It has been estimated that around US$55 billion was looted from Nigerian public funds during the Abacha regime. To put this figure in perspective, the country is today blighted by an external debt burden of US$31 billion. Northern governments justifiably press southern governments to adopt more accountable and transparent budget systems, but then create incentives for corruption by failing to deal effectively with tax havens and other tax loopholes.

Widespread concern about the offshore problem has given rise to a number of international initiatives. The OECD has taken the lead in an initiative to crack down on han-nful tax competition, LTN agencies are working on curbing money laundering, and the recently-created Financial Stability Forum is looking at the impact of the offshore system on global financial stability. These initiatives are useful up to a point, but they primarily reflect the concerns of Northern governments. They lack a development perspective and can also be accused of being unbalanced. The issue of financial havens goes beyond the 'offshore' activity of small island states to 'onshore' activity in major economies such as the City of London and New York.

The international community needs to adopt a more global approach to the issue of offshore finance. Oxfam believes that such an approach should incorporate the following: a poverty perspective; a genuinely inclusive approach fully involving developing countries in discussions; a multilateral approach to what are truly global problems; and strategies to help small, poor, and vulnerable economies to diversify away from a reliance on harmful tax practices. There are a range of policy options that could help countries stem tax escape, address money laundering and corruption, and foster a more stable economic environment. I will highlight just four:

1. A multilateral agreement to share information on tax matters would help countries, especially poorer ones, to stem tax evasion and illicit activities.

Under such an agreement, states would agree to use their normal administrative and legal powers to obtain and exchange the information necessary to prevent international tax avoidance and to ensure that the proper tax has been paid to each country. Information sharing arrangements are the way the current debate is going - it is essential that such agreements involve as many countries as possible.

2. The international community should also support the proposal for an International Convention to facilitate the recovery and repatriation of funds illegally appropriated from national treasuries of poor countries.

An International Convention of this kind would help countries like Nigeria that often come up against the brick wall of tight bank secrecy laws in Europe in their efforts to recover funds looted and kept abroad.

3. The international community could agree to allow states to tax multinationals on a global unitary basis, with appropriate mechanisms to allocate tax revenues internationally.

A major problem for goveniments taxing TNCs is how to deal with corporations that use transfer pricing in order to under-report profits and reduce their tax liabilities. Under the global unitary approach, governments would require TNCs to calculate the accounts of their local subsidiary as a proportion of the unified accounts of the group as a whole. This would eliminate the internal transactions among related subsidiaries of TNCS, making it far easier to ensure that all profit is taxable somewhere. A formula allocation of profit could then allocate total global profits among the various parts of the company on the basis of where economic activity takes place (for example, based on the value of assets, sales, or employment in each country).

4. A global tax authority could be set up with the prime objective of ensuring that national tax systems do not have negative global implications.

In the first instance a Global Tax Authority could focus on information gathering, be a forum for discussion on international issues related to tax policy, use peer pressure to bring tax free-riders into line, and develop best practices and codes of conduct on tax related issues. If sufficient trust were build up over time its mandate could increase to include the development of mandatory regulations and formal surveillance.

DEBT AND LIQIUDITY CRISES

The integration of many developing countries into global financial markets has vastly widened their opportunities to tap external private sources of credit. The other side of this coin has been the rising levels of external debt owed to private creditors. This, in turn, has become increasingly short-term, and - as bank lending has been eclipsed by bond financing - increasingly spread among a diverse group of creditors.

When countries are struck by liquidity crises - such as in Mexico in 199/95 or East Asia in 1997/98 - or when external debts become unsustainable - as in Ecuador last year or in Nigeria earlier this year - there are no clear rules governing how the international community should respond. Inadequate responses to the 1980s debt crisis resulted in a lost decade for human development. Today, there is a danger that such problems will be repeated.

Oxfam believes that clear multilateral rules on debt restructuring during crises are needed that are based on two key principles. First, debt relief should be based on repayment capacity in the debtor country -incorporating human development needs. Second, there should be a transparent trigger mechanism based on a range of debt and development indicators. These would include debt service indicators, indicators that show the scale of poverty and human development needs, and fiscal indicators, among others.

Any low or middle-income country facing debt servicing problems and meeting the eligibility criteria would have the right to seek assistance through an international debt restructuring initiative. A projection would be made of the debtor country's ability to pay, that incorporated human development needs. An assessment could then be made of the level of debt relief required - including debt restructuring and, where necessary, debt reduction.

These principles could be supported by a set of procedures similar to bankruptcy procedures at the national level. Under the US bankruptcy code, for example, procedures allow for a stay-of-payments on current debt servicing, access to working capital for the debtor, and the restructuring of assets and liabilities. These key insolvency principles could be applied at the international level. Countries facing debt difficulties could impose a standstill on current debt servicing - giving a breathing space in which debt servicing capabilities and debt relief requirements could be assessed. Debt relief arrangements would need to be comprehensive - involving all creditors and all categories of debt, with levels of relief in proportion to exposure.

In the meantime, the official sector could provide new financing to allow the economy to function as normally as possible. This would be provided in much the same way as it is now - only the level of ftmds required would be considerably lower, and those elements of policy conditionality aimed at preventing the exit of private capital - principally high interest rates and fiscal tightening - would be unnecessary.

The establishment of clear principles and procedures such as these would be in the interests of both debtors and creditors. Debtors would avoid the often brutal adjustments required to meet the financing gaps created by withdrawals of private capital, as well as long delays in debt restructuring. Debtor moral hazard would be minimised as countries facing difficulties would have the right, but not the obligation, to seek assistance - not a decision that any country would take lightly. Comparable treatment among creditors would ensure that both the official and private sector share the burden of debt relief fairly. Finally, the timely restructuring of debts during crises could reduce the need for significant debt write-downs at a later stage.

More Information on OXFAM's Policy Papers on Tax Havens

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