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"The
fundamental problem is to find a social system which is efficient
economically and morally".
J.M.Keynes 1925
While
donor countries continue to neglect their commitment to the 0.7%
for official development assistance, lamenting lack of resources,
these same countries allow the many dark corners of their financial
markets to cause large and increasing losses of fiscal revenues
every year.
Financial markets are not transparent; this implies an enormous
loss of revenue and creates a breeding ground for illicit transactions.
The current international financial system disperses those precious
resources, which could otherwise be used for the implementation
of successful development policies. Unfortunately this issue
has been neglected by the Monterrey Conference on "Financing
for Development", despite its relevance in the pursuit of
development.
Transparency
of financial markets means a correct management of all information
related to capital flows. The benefits of transparency are many,
but most importantly, full tax revenue. Greater public resources
would be available for the pursuit of public policies, amongst
these development and a greater redistribution of wealth. Although
developing countries have often been reprimanded for their insufficient
and malfunctioning financial and tax systems, where the loss
of potential tax revenue decreases their ability to guarantee
social services and defend human rights, they are not the only
guilty parties in the game. Northern countries hold a great responsibility
by allowing vicious mechanisms to contaminate financial markets,
both on a national and international scale, leading to a general
loss of revenue..
On
a European level, there are many examples of tax systems which
allow funds deriving from commercial activities in one country
to flow through a special agent company in their country, before
being transferred to a company registered in tax haven. Various
countries in Europe allow agent companies to operate in their
territory.
The workings are the following. The agent company (A), situated
in one of these particular European countries, is both the mother
company of the active company (C) (situated in a different country) and the daughter
of a company H situated in a tax haven. Given that the agent
company acts on behalf of H, providing only financial services
(i.e the
collection and distribution of the proceeds of the commercial
company C),
said agent company is only allowed to retain a small percentage
of the profits created by C and destined to H. This mechanism
thus allows all the proceeds of C to flow through A and reach
H. H then "pays" A for its services and this amount
is then taxed in the country where A is situated. But the amount
paid to A by H for its services is a very small percentage of
the total sum of funds which it channels.
The implications are various: the commercial company C evades
taxation in its country, thus drastically reducing the tax revenue
for said country; the intermediate country (i.e that of company A) receives a tax revenue which
it would otherwise not receive, given that company A's sole purpose
is that of "providing services" for H (i.e channeling the funds); the large
majority of revenue produced by C ends up in a tax haven where
no (or a
minimal)
taxation is applied. These operations not only distort the fiscal
framework, but also lead to negative fiscal effects in the country
of origin, which, seeing its tax revenue reduced, seeks other
ways of increasing it, by increasing the tax pressure. This causes
general discontent amongst the tax-paying population, thus further
increasing the risk of funds fleeing the country illegally to
avoid such high taxation. A vicious circle sets in.
Another
example of the lack of transparency in cross-border financial
transactions is that of agencies which transfer money worldwide,
using money orders. These entities have a highly widespread network
of offices all over the world. They are used mainly by people
who have moved from a "developing country" to a "developed"
one to find work, and wish to send part of their earnings to
their family, without the complications of opening a bank account.
Considering the number of people which find themselves in such
a situation, it is easy to deduce that the figures involved are
huge, and most importantly, not monitored. Not even the traditional
banking system has a clear idea of its size. It ensues that neither
do the fiscal authorities.
A third
point: bank secrecy toward governmental authorities, including
tax authorities, may enable tax payers to hide illegal activities
and to escape tax. The effective administration and enforcement
of many laws and regulations, including those on taxation, require
access to, and analysis of, records of financial transactions.
Technological advances, particularly in the area of e-commerce
and banking, have made international banking readily accessible
to a wide range of taxpayers, not just the large multinationals
and the wealthy individuals. The elimination of exchange controls
by OECD countries and many non-member countries, also has facilitated
the rapid expansion of cross-border financial transactions. This
new era of "banking without borders" has raised new
challenges for tax administrations around the globe.
Experience has shown over the last fifty years that inadequate
access to bank information has been an impediment to tax administration
and law enforcement. The scope of non-compliance with the tax
laws, that is facilitated by lack of access to bank information,
is difficult to measure precisely because there is insufficient
access to the necessary information.
The
same problem exists in attempting to measure the extent of money
laundering. Nevertheless FATF (Financial
Action Task Force on Money Laundering annual report 1995-96) estimates
that the size of that problem amounts to hundreds of billions
of dollars annually.
The
elimination of tax evasion has never been high on the political
agenda of governments, but the fight against criminal organizations
and illegal trade has. Despite this difference in terms of priorities,
the events of the 11th of September show that the attempt to
use international financial mechanisms, to freeze the financial
assets of those suspected of being involved in the terrorist
network, was not completely successful due to the current structure
of the financial system. Despite the political primacy of the
case, it was not possible to obtain all the information from
banks and other actors involved.. This means that financial mechanisms,
as they stand today, are not able to counteract illegal transactions
when necessary. Greater transparency and stricter rules should
be prioritized by richer countries, not only as a means of fostering
social justice and redistribution of wealth, but also as an instrument
to fight criminal operations and terrorism.
In
this sense, tax cooperation becomes crucial to address all of
the above. However, the political will to put tax cooperation
in place is not yet there. The current international framework
shows the exact contrary, with the proliferation of tax havens
(40 countries
at present).
Tax havens represent the total absence of financial transparency
and impede any form of fiscal cooperation. Tax havens offer many
services with very high added value, whose cost is paid by those
who do not use the services. Financial mechanisms which involve
tax havens can be used for the discrete management of huge family
fortunes, as well as of the revenues of show-business or sports
people; for speculation and fiscal fraud; for fiscal evasion
and the transfer of multinational profits to their off-shore
shell companies; to finance political parties and men; to pay
all kinds of illicit operations.
Tax havens offer a wide range of relatively low-cost financial
services: bank secrecy protected above any juridical request;
absence of exchange controls; the right to stipulate any kind
of contracts, to carry out any transaction and set up any company,
even if fictitious, guaranteeing anonymity; absence of fiscal
pressure; free access in real time to all the worldwide markets;
guaranteed connection with the largest bank circuits, usually
represented on location; weak or non-existent mechanisms for
the repression of financial criminality. Furthermore, their mere
existence encourages people to use them.
The
first draft of the preparatory document in view of the Monterrey
Conference "Financing for Development", prepared by
the former President of Mexico Zedillo, contained a very important
proposal regarding the setting up of a tax organization. This
would have mainly been in charge of addressing tax matters, the
tax-harmonization process, the fight against tax havens and,
more broadly, tax competition.
Moreover, such an organization could have been the right forum
for discussion on the implementation of global taxes, devoted
to financing the Millennium Development Targets contained in
the Millennium Declaration, as agreed upon by Heads of States
and Governments in September 2000.
Along these lines, a currency transaction tax could be a relevant
step forward and a concrete proposal for monitoring cross-border
financial transactions. Moreover, the setting up of a similar
tax system would necessarily require the transparency of financial
flows.
Currently, most financial transactions are carried out through
the SWIFT banking system. Therefore, through the SWIFT itself,
such a tax could be implemented and enforced.
In addition, as an increasing number of civil society organizations
argue, a currency transaction tax would:
reduce short-term speculative currency and capital flows;
enhance national policy autonomy; restore taxation capacity of
individual countries eroded by the globalization of markets;
distribute tax pressure more equitably among different sectors
of the economy; trace movements of capitals to fight tax evasion
and money laundering.
Transparency
will be achieved when the political will to put it in place becomes
reality. Civil society will continue to fight for its achievement,
despite the current lack of such a political will. Transparency
means democracy, and democracy is a vital component of human
development.
"There is nothing more difficult to execute, nor more
dubious of success, nor more dangerous to administer, than to
introduce a new order of things; for he who introduces it has
all those who profit from the old order as his enemies, and he
has only lukewarm allies in all those who might profit from the
new. This lukewarmness partly stems from fear of their adversaries…and
partly from the skepticism of men, who do not truly believe in
new things unless they have actually had personal experience
of them".
Macchiavelli,
The Prince, 1532.
*Published
in Social
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