Developing countries lose billions of dollars every year through tax avoidance and evasion. Tax havens play a pivotal role in this by providing low or no taxation and by promising secrecy, allowing businesses to dodge taxes and remain largely unaccountable for their actions.
Development Finance Institutions (DFIs) are government-controlled institutions that, as this report shows, often support private sector projects that are routed through tax havens, using scarce public money. By supporting projects in this way, DFIs are helping to reinforce the offshore industry as they are providing income and legitimacy.
This report, which covers three multilateral and 14 bilateral DFIs, looks not only at DFIs’ use of tax havens, but also at their standards when deciding where to channel their money. It also looks at the level of due diligence and portfolio transparency of these institutions as a way to assess civil society’s ability to hold them to account.
This report finds that:
- DFIs are still supporting a large amount of investments routed through tax havens. For example:
- At the end of 2013, a massive 118 out of 157 fund investments made by the CDC Group plc (CDC) – the UK’s DFI – went through jurisdictions that feature in the top 20 of Tax Justice Network’s Financial Secrecy Index (FSI). Between 2000 and 2013, these funds received a total of $3.8 billion in original CDC commitments, including $553 million in 2013 alone.
- As of 4 June 2014, the Belgian Investment Company for Developing Countries (BIO) was involved in a total of 42 investment funds, 30 of which were domiciled in jurisdictions that feature in the FSI’s top 20. These investments amounted to $207 million.
- At the end of 2013, Norway’s Norfund had 46 out of a total of 165 investments that were channelled through jurisdictions that appear on the FSI’s top 20. These investments amounted to $339 million.
- Of the 46 investment projects involving German DFI Deutsche Investitions- und Entwicklungsgesellschaft (DEG) as of 31 December 2012, at least seven were structured through major tax havens such as the Cayman Islands and the British Virgin Islands.
- Most DFIs have internal standards in place on the use of tax havens. However, in a few cases, these standards are not publicly available. In most cases they are not part of an explicit policy to inform a broad range of stakeholders by, for example, making these documents available in the official languages of the developing countries in which they operate.
- The majority of the publicly disclosed DFI standards are highly dependent on the ratings put forward by the Organisation for Economic Co-operation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes. This forum has severe limitations, as it uses unambitious criteria and excludes many developing countries – the very same countries that face particular difficulties in controlling corporate tax dodging.
- It is not standard practice for DFIs to require the companies they invest in to report on a country by country basis about the profits, losses, number of employees, taxes paid and other forms of economic performance. If they did, it would allow DFIs to know where their investee companies are making profits and help tax authorities to verify where taxes should be paid.
- Most DFIs fail to publicly disclose vital portfolio details, such as beneficial ownership of the companies they invest in. This information would allow for public scrutiny and a reality check in terms of implementation of their policy.
The current political momentum towards tax justice presents DFIs with a great opportunity to set an example of best practice in establishing the highest standards of responsible finance. This is doubly important when considering that DFIs are institutions that aim to reduce poverty and contribute to sustainable development in developing countries.
Therefore, Eurodad urges DFIs to make the following changes:
- In order to ensure appropriate implementation of their current and future policy standards, DFIs should only invest in companies and funds that are willing to publicly disclose beneficial ownership information and report back to the DFI their financial accounts on a country by country basis. As an intermediate step, this country by country data should then be forwarded by the DFI to the relevant tax authorities. Ultimately, the data should be placed in the public domain for all stakeholders to access.
- DFIs should ensure that the funds in which they invest are registered in the country of operation. Where that is not possible, DFIs should be explicit about the reasons why a third jurisdiction was preferred over a targeted developing country for domiciliation purposes, and how this, among other things, allowed them to advance towards their development objectives.
- DFIs should be fully accountable for their own operations and those of their clients. In order to do so, DFIs should make their current and future standards easily accessible for all citizens. This means that standards should be available on their respective websites and on request, as well as being translated into the official languages of the targeted developing countries. DFIs should also work towards full portfolio transparency to ensure proper accountability.
In addition, Eurodad urges national governments to:
- Establish an intergovernmental tax body under the auspices of the United Nations with the aim of ensuring that developing countries can participate equally in the global reform of existing international tax rules. This forum should take over the role currently played by the OECD to become the main forum for international cooperation in tax matters and related transparency issues.
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