By Zayda Manatta, Head of the Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes
One small change can make a big difference in the fight against illicit financial flows.
Illicit financial flows (IFFs) deprive developing countries and regions of much-needed resources to finance and achieve their development agendas (e.g. the African Union’s Agenda 2063) and the global Sustainable Development Goals. They prevent countries from raising legitimate revenues essential for financing basic services such as social, educational and healthcare systems, and spurring economic development.
The ongoing COVID-19 pandemic has underlined how vital it is for countries to have well-financed medical infrastructure and efficient healthcare systems. The economic crisis resulting from the health crisis is undermining public finances the world over. While preserving a business climate favourable to economic recovery, long-term post-crisis strategies will likely have to encompass increased domestic revenues. Improving domestic resource mobilisation and advancing the fight against illicit financial flows needs to be at the forefront of developing countries’ political agendas.
Tax evasion is a significant component of illicit financial flows. It is closely related to other financial crimes like corruption and money laundering, which are sources and channels of illicit financial flows. While tolerance towards tax avoidance and evasion is generally declining, the design of fairer tax systems should remain a high priority for many developing countries.
The past decade has proven that tax transparency and exchange of information (EOI) are powerful weapons in the fight against illicit financial flows. Since 2010, the 161 member countries of the Global Forum on Transparency and Exchange of Information for Tax Purposes have responded to over 250,000 requests for information and recovered nearly EUR 7.5 billion additional revenues, by significantly expanding their information exchange networks (up to 8,000 bilateral relationships in 2019). In 2017, automatic exchanges of financial information were introduced, further strengthening these exchanges. Even prior to the first automatic exchanges, voluntary disclosure programmes and offshore tax investigations had already helped identify EUR 102 billion additional revenues globally (tax, interest and penalties).
The quick enlargement of exchange of information networks has made the fight against tax evasion and other illicit financial flows much more efficient. A single wing flapping, a multilateral instrument, the Convention on Mutual Administrative Assistance in Tax Matters, has brought about major progress. Covering 137 jurisdictions to date, it includes all developed countries, financial centres and over 60 developing economies. It provides for the most varied forms of administrative assistance between tax authorities and covers a broad range of taxes.
Although the Convention is open to all jurisdictions, a number of developing countries have not yet taken steps to participate. Many of these countries have a limited treaty network to allow effective information exchange and creating bilateral relationships can be long and costly. Participating in the Convention is the best path for countries to fast track and develop an effective information exchange network, stem illicit financial flows and improve domestic resource mobilisation. Indeed, for any aspiring country, the arithmetic is simple: 1 signature + 1 ratification = 137 bilateral relationships.
African countries have managed to significantly broaden their bilateral relationships for exchange of information by joining the Convention. These have increased to 3262 in 2020 compared to 913 in 2014 (see the recently published Tax Transparency in Africa 2020), leading to an eightfold increase in the number of requests for financial information sent by African countries. In turn, these requests have yielded USD 189 million of additional revenue between 2014 and 2019. The growing success of the Convention and the rising share of African countries involved, largely explain these gains. The expansion of developing countries’ exchange of information networks is by itself not enough to stem illicit financial flows. However, it demonstrates political commitment and gives tax auditors the tools they need to tackle cross-border tax evasion.
A new Toolkit for Becoming a Party to the Convention on Mutual Administrative Assistance in Tax Matters launched today, aims at providing detailed guidance for countries preparing to join the Convention by demystifying the process. It outlines the benefits of joining the Convention, provides an overview of its main provisions, its relationship with other treaties and legal instruments that facilitate administrative co-operation in tax matters. Its most important aspect is the detailed step-by-step guide to becoming a Party to the Convention, from the early preparation stage to the signature and deposit of instruments of ratification, acceptance or approval.
By breaking down the process of joining the Convention, the Toolkit can help more developing countries fast track their participation to better combat tax evasion and other sources and channels of illicit financial flows. It also provides a gateway for the implementation of the Common Reporting Standard for the automatic exchange of financial information, and the OECD/G20 Base Erosion and Profit Shifting Actions relating to exchange of information (spontaneous exchange of information on tax rulings and automatic exchange of country-by-country reports).
In short, tax co-operation will be instrumental for post-COVID-19 recovery and fiscal consolidation. Participating in the Convention on Mutual Administrative Assistance in Tax Matters can bring impressive changes: the implementation of effective exchange of information units, capacity building for tax officials and auditors, and ultimately the recovery of millions of dollars that countries need to achieve their development goals.