Putting an end to tax evasion, tax avoidance and illicit flows of capital is a key element in mobilizing the financial resources needed to progress toward the goals of the 2030 Agenda for Sustainable Development. In that context, the international challenge of dealing with tax havens is a matter of increasing urgency, as was noted in the Action Plan of the Third International Conference on Financing for Development, held in Addis Ababa in 2015.
The importance of tax havens has grown in recent decades as a result of economic and financial globalization, which has generated vast crossborder flows of trade and finance in a framework of growing financial deregulation, major increases in foreign direct investment and the consolidation of transnational corporations. These factors, together with recent technological advances, have allowed large national and transnational corporations and wealthy individuals to use aggressive tax-planning mechanisms, including tax havens, to take advantage of the lack of regulation, the legal vacuums that exist and the scant information available to national tax authorities. At the same time, financial deregulation, bank secrecy and a lack of transparency have enabled illicit flows of capital to pass through tax havens as well.
These practices take a heavy economic toll and their elimination would provide significant resources for funding the 2030 Agenda. Estimates of the total wealth sheltered in tax havens give a figure of some 7.6 trillion dollars. Annual worldwide revenue losses caused by the evasion of personal taxes total some 189 billion dollars, with Latin American taxpayers accounting for around 21 billion. Similarly, the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) estimate that in 2014, aggressive tax planning by multinational corporations created worldwide revenue losses of between 100 and 240 billion dollars.
ECLAC has estimated that income tax evasion by companies and individuals in Latin America accounts for some 220 billion dollars, or 4.3% of the region’s gross domestic product (GDP) for 2015. If value added tax (VAT) avoidance —calculated at around 120 billion dollars— is added in, total tax evasion rises to 340 billion dollars, or about 6.7% of GDP. ECLAC has estimated that illicit flows related to international trade caused revenue losses of some 31 billion dollars in 2013.
The geographical distribution of tax havens indicates that this is a global problem, not one restricted to developing countries. In fact, the broad array of tax havens that exists includes a large number of developed countries. In both Luxembourg and the Netherlands, for example, foreign-owned assets accounted for 5 trillion dollars in late 2013. In the context of the region’s countries, two small island groups of the English-speaking Caribbean —the Cayman Islands and the British Virgin Islands— are believed to be the main players, handling investments by foreigners that total more than 4 trillion dollars and 1 trillion dollars, respectively.
In recent years, major global initiatives have been put forward to halt illicit flows of capital and to deal with the problems of tax evasion and avoidance and the shifting of profits to tax havens and their concealment there. The signatory countries of the Addis Ababa Action Plan, for example, agreed to “redouble efforts to substantially reduce illicit financial flows by 2030, with a view to eventually eliminate them, including by combating tax evasion and corruption through strengthened national regulation and increased international cooperation”.
Other initiatives include the joint G-20 and OECD Base Erosion and Profit Shifting (BEPS) plan and the United States Foreign Account Tax Compliance Act (FACTA), which involves bilateral intergovernmental agreements for exchanges of information.
One common element in all these initiatives is that they recognize tax evasion, tax avoidance and illicit capital flows as global problems that demand global solutions. They must therefore be addressed by a multilateral approach within the United Nations: one that takes account of the needs and realities of every country and progresses towards the construction of a global fiscal compact that would, among other things, put an end to aggressive tax practices and financial secrecy. Ensuring a genuine multilateral approach requires the creation, under the aegis of the UN, of an intergovernmental forum to design a global fiscal compact that would allow the discussion of global and regional tax issues in keeping with the terms of the Addis Ababa Action Plan: “We stress that efforts in international tax cooperation should be universal in approach and scope and should fully take into account the different needs and capacities of all countries.”
In line with that perspective, the countries of Latin America and the Caribbean should adopt a common voice that would allow them greater influence and presence within global tax-related proposals. Given the current international context, combating tax evasion demands mechanisms for closer cooperation between countries and regional blocs and, in that undertaking, multilateral agencies could serve as forums for reaching agreements and building consensus. That would yield enormous benefits for all the nations of our region.