Development efforts are frustrated by tax evasion

Africa loses €75 billion to illicit financial flows including tax evasion. [Shutterstock]

Widespread tax evasion causes developing countries to lose more money each year than the total amount of aid they receive. EURACTIV France reports.

Developing countries are most affected by the phenomenon of tax evasion, which deprives states of billions of euros in public revenue every year.

“It is estimated that Africa loses 90 billion dollars [€75 billion] annually due to illicit financial flows, including tax evasion,” Friederike Röder, Director of ONE France, told a conference on tax evasion and development finance. Africa receives $27 billion (€23 billion) in development aid per year, according to the OECD [Organisation for Economic Cooperation and Development].

Held during the “Convergence” Forum, which draws development actors to Paris every year, the conference detailed the latest advances in fiscal transparency and financing for development.

“Every year, developing countries experience a loss of about 1% of their GDP due to tax evasion,” said Anne-Marie Geourjon of the Foundation for International Development Studies and Research (Ferdi).

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In total, development aid worldwide amounts to $130 billion (€107 billion) per year. With the African continent alone losing $90 billion (€75 billion) in tax evasion, the loss far exceeds the funds transferred to the countries of the South.

The majority of the big donor countries, such as the United States, France, and Japan, are now well below their commitment to spend 0.7% of Gross National Income on development aid. On average, member countries of the OECD Development Assistance Committee, which represents the major donors, spend only 0.32% of their GNI.

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National Revenue

Loss of income in developing countries related to tax evasion and to illicit financial flows hinders their development.

On the other hand, competitive fiscal regimes remains a weapon for attracting foreign investors to a number of countries. “In a number of African countries, there are a lot of tax incentives that are enacted to attract foreign companies without real impact studies being done,” says Julien Jarrige of the OECD’s Tax Administration Centre.

In practice, these exemptions, coupled with the low ability to collect taxes in some developing countries, seriously undermine the amount of resources that these countries can devote to their own development.

“In developing countries, tax revenues account for about 20% of GDP in receipts, which is much lower than the average for OECD countries, “explained Anne-Marie Geourjon.

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Slow progress

While tax evasion is a global problem, the fight against it has so far involved mainly developed countries, within the OECD or the European Union.

To reduce aggressive tax practices, several avenues are being explored: country-by-country public reporting, which requires large companies to disclose details of their activities in each country where they report revenues.

One way is to ensure that profits are well declared and taxed in the country where the activity actually takes place, instead of being diverted to a lower-tax jurisdiction.

Another way: declaring the real beneficiaries of trust companies. “Many of these companies are used as empty shells. And still today, many countries do not demand to have the information of the person behind these companies,” explains Friederike Röder.

However, all these different solutions are now being developed at European and OECD levels, making effective participation for the poorest countries difficult. “The least developed countries are struggling to take advantage of the OECD’s progress, automatic data exchange is already a challenge for France. How can these countries benefit from the advances in the fight against tax optimization?” asked the director of ONE France.

“Some developing countries are not yet able to take part in the exchange of tax information but we are investing heavily in training and technical assistance so that they can achieve it,” acknowledged Julien Jarrige. “Today we do not expect developing countries to send in a lot of tax information. The goal is that they can benefit from it,” he explains.