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Meld. St. 25 (2012-2013)

Sharing for prosperity

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8 Illicit financial flows from developing countries

Globalisation creates new and closer links between countries and regions. Although national policy forms the basis for fair distribution and growth in individual countries, globalisation gives rise to new opportunities and challenges.

Foreign investments contribute to increased tax revenues, which enables the authorities to implement good distributive policies, and provide health and educational services as well as social safety nets. Corruption, tax evasion and other forms of economic crime exacerbate inequality and poverty and threaten democracy, however. Illicit financial flows from poor countries, as well as the use of tax havens and other international structures, means that huge amounts of money are siphoned off instead of being used for the common good.

Figure 8.1 Tax havens make it possible to conceal huge financial flows from public disclosure.

Figure 8.1 Tax havens make it possible to conceal huge financial flows from public disclosure.

Photo: Ryan Morrison.

8.1 The relationship between illicit financial flows and tax havens

Illicit financial flows are transboundary financial transactions involving money that has been earned, transferred or spent illegally. Calculations carried out by Global Financial Integrity on the basis of figures from the World Bank and the OECD show that the estimated illicit financial flows from developing countries amount to about ten times the total amount given in official development assistance.1 According to these calculations, tax evasion by commercial companies accounts for the lion’s share of the illicit financial flows from developing countries. Another important source is money that belongs to the state and the country’s citizens, but that is stolen by corrupt politicians and civil servants. Large amounts also stem from activities of a criminal nature, such as financing of terrorism and trafficking in people, arms, endangered species, natural resources and drugs. This leads to enormous hidden financial flows, while the activities in themselves also cause great harm. Given the nature of these activities, it is impossible to determine the exact amounts that disappear illegally. There will always be uncertainty attached to such estimates. Since several factors, such as smuggling and trade in services, are not included in the estimate in Figure 8.2, it is reasonable to assume that it is a conservative estimate.

Figure 8.2 Illicit financial flows from developing countries compared with the amount of aid received by the same countries in 2010.

Figure 8.2 Illicit financial flows from developing countries compared with the amount of aid received by the same countries in 2010.

Source Global Financial Integrity and the OECD.

Attempts will often be made to transfer money obtained illicitly – whether it stems from corruption, crime or tax evasion – to somewhere it can be safely concealed and laundered. The main enabling factor is financial secrecy. This is made possible by a global financial structure that includes tax havens, secret trusts, shell companies and anonymous accounts.

Tax havens make corruption and economic crime more profitable and attractive by making it possible to conceal the proceeds of tax evasion and other criminal activities. They contribute to lower productivity in the private sector, because the system makes it profitable to invest a lot of effort in tax planning instead of in productive activities.

Textbox 8.1 tax haven or secrecy jurisdiction?

classic tax havens are often associated with small island states that offer low tax rates. however, at least as important is the fact that they also offer secrecy. the term “secrecy jurisdiction” is therefore more accurate than “tax haven”.

“offshore financial centres” is another term that is used to describe them. “offshore” can also give the impression that they are all island states, but the designation “offshore” alludes to the fact that the activities that make a country a closed jurisdiction do not comply with the regulations that apply to the rest of the country’s economic activity.

a typical characteristic of such jurisdictions is that their own citizens who are engaged in business in the country usually have to pay taxes and publish their accounts. foreigners, on the other hand, are offered highly advantageous tax conditions for capital and tax domicile for companies whose operations and actual management take place in other countries. they are typically not permitted to operate locally or to use the local currency, but they can form companies that will largely be exempt from the obligations to which domestic companies are subject.

“secrecy jurisdiction” is not a widely used term, however, and this white paper therefore uses the term “tax haven” for the sake of simplicity.

There is reason to believe extensive assets have accumulated in tax havens over the years. According to one estimate, more than NOK 190,000 billion could be concealed in such jurisdictions, and one third of this amount may come from elites in developing countries. This is twice as much as the sovereign debt of those same developing countries.2

Tax Havens

There is no unambiguous definition of what a “tax haven” is. The OECD points to the following characteristics: 1) very low or no tax on capital income, 2) a special tax regime for shell companies, 3) a lack of transparency concerning ownership and/or lack of effective supervision, and 4) no effective exchange of information on tax matters with other countries and jurisdictions.3

Banks and financial institutions can function as closed structures. Together with services provided by auditors and lawyers, this creates ample opportunity for arranging expedient company registrations. While Norway and most other well-developed states that respect the rule of law pass legislation that largely regulates conditions in their own countries, about one third of the states in the world offer secrecy mechanisms, company structures, banks, mailbox addresses and registration by computer from another jurisdiction, all specially designed to hide income that stems from activities in other states. It is estimated that 50% of all international positions held by the world’s banks as deposits, loans and securities are held by banks in Offshore Financial Centres.4

Textbox 8.2 Where are the tax havens?

There is no universally agreed list of tax havens. The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes is an international collaboration between 120 member countries, in which the measures taken by member countries to increase transparency and the exchange of tax information are assessed. The member countries, including Norway, are assessed on the basis of their compliance with the recommendations of the Global Forum. The process is scheduled to conclude in 2015, and the preliminary assessment will not define whether or not the individual member countries are tax havens. The list of countries that so far achieve a low score for implementation of the recommendations includes wealthy countries, developing countries and small island states considered by many to be “classic” tax havens.

A network of NGOs focusing on these issues, the Tax Justice Network, publishes its Financial Secrecy Index every two years. The network produces an index of harmful secrecy by looking at the degree of secrecy and the individual countries’ importance and size in relation to the world economy. Wealthy countries, developing countries and small island states are all among the countries at the top of this list.

By granting tax domicile to companies whose operations and actual management are in other countries, tax havens undermine other countries’ tax bases, in addition to facilitating transfers and safe-keeping of the proceeds of crime.

Multinational companies can also use tax havens, which offer services such as registration as holding companies and trusts, as conduit states. They can be used for investments in third countries without any actual activity taking place in the conduit state. Ingenious and intricate chains of companies that include several tax havens can make it virtually impossible to uncover illegal activity and find out who is behind it. Multinational companies can have hundreds of subsidiaries in different jurisdictions in which they have little or no activity. This is not illegal in itself, but, because transparency is so limited in tax havens, it makes it possible to conceal transactions that would not have taken place if they had to be carried out openly. The purpose of such hidden transactions can, for example, be tax evasion, the financing of terrorism, or concealing the proceeds of crime.

The world’s ten biggest extraction companies have a total of more than 6,000 subsidiaries, one third of which are located in tax havens.

The structure of such a company is shown in Figure 8.3 to illustrate how complex a multinational corporation can be.

8.2 How tax havens operate

Figure 8.3 Example of the corporate structure of a multinational corporation.

Figure 8.3 Example of the corporate structure of a multinational corporation.

Mispricing of intra-group transactions is one way of using tax havens. Approximately 60% of world trade takes place within groups of companies, between parent companies and subsidiaries. The accounting rules that apply to transfer pricing follow from what is called the arm’s length principle, which means that transfer prices between group companies shall be set in the same way as if the transaction had taken place between two independent parties. Both revenues and expenses have a bearing on the size of profits or losses. The smaller the profit, the less tax has to be paid. The total tax load can be minimised by transferring profits to a jurisdiction with low or no tax.

Manipulation of the prices of goods and services traded between entities within the same group of companies is rife. It is difficult for the tax authorities in developing countries, whose administrative capacity is often very limited, to prove that the prices stated are incorrect in relation to the real market prices. Moreover, it can be virtually impossible to obtain information from tax havens. One way of shifting profits is to sell goods from the company in the country of production at an artificially low price to a group company registered in a tax haven. The goods can then be sold on at market price. This method is illustrated in Figure 8.4.

Figure 8.4 Shifting profits deprives the country of production of its fair share of taxes.

Figure 8.4 Shifting profits deprives the country of production of its fair share of taxes.

Source Ny Tid magazine, United Nations Association of Norway/International Money Laundering Information Network (IMoLIN).

Another effective way of transferring profits from the country of production to low-tax regimes is what is known as derivatives trading. Derivatives are often used to hedge a company’s revenues and thereby reduce the risk associated with price fluctuations. Such price hedging as part of a company’s risk management is perfectly legal. However, derivatives trading can also be misused to transfer profit from the country of production by deliberately making a loss on a derivatives trade. If the hedged price has been intentionally set lower than the market price, the country of production can lose tax revenues because the company’s income has been reduced compared to what it would otherwise have been as a result of entering into the derivatives contract. The group of companies, on the other hand, does not have to make a loss, since another group company can enter into contracts with the opposite effect in another country, for example in a tax haven. The group can thus transfer untaxed assets out of the country of production.

Documentation is usually voluntary in tax havens. Taking legal action to obtain access to information about bank accounts or companies can therefore be to no avail. Rules often apply that ensure that the customer is notified if an investigation is being prepared by the authorities in the customer’s home country. Moving companies quickly from one tax haven to another makes it extremely difficult to get to the bottom of a case or to seize funds. In addition, there are many ways of concealing the identity of the people behind an account or a company. New companies can be formed quickly, often without banks or financial institution in any way investigating who the customer or beneficial owner is.

8.3 Transparency against secrecy

Norway is a leading country in the international efforts to improve control of international financial flows and to combat tax havens and illegal international financial transactions. Norwegian Official Report NOU 2009: 19 Tax havens and development helped to put the fight against illicit financial flows on the international agenda, and the report is used by many countries and multilateral organisations. The Commission’s mandate was to look into the connection between tax havens and capital flight from developing countries. The Commission described the characteristics of various tax havens and their effect on developing countries, documented the extent of illicit financial flows and proposed a number of measures. Many of the Commission’s proposals have been followed up in this white paper.

Textbox 8.3 Beer profits pouring out of Ghana

Transfer mispricing can result in no profit being left to tax in the country of production. One such example is the brewery company SABMiller’s activities in Ghana. The company has eliminated profit by charging expenses to the company in Ghana. The company’s trademark is registered in the Netherlands, which is a conduit country for investments. SABMiller has an advantageous tax agreement with the Dutch authorities. SABMiller in Ghana has to pay high royalties for use of the trademark. The company also has to pay a company registered in Switzerland management service fees. The price is high, and the profit is further reduced. Beer destined for South Africa is sold via Mauritius. This is a financially attractive arrangement because the tax rate there is 3%, compared with 25% in Ghana. In addition, a loan is taken out from the company in Mauritius. The loan must be repaid with interest, which further reduces the profit and thus the tax payable in Ghana.

The result of all this is that profits are eliminated and that SABMiller, one of the world’s largest brewery groups with large production in Ghana, paid less income tax to the authorities than small local beer outlets. The group’s management denies that anything illegal has taken place.

Source From the report Calling Time: why SABMiller should stop dodging taxes in Africa, Action Aid, November 2010.

Ongoing work against secrecy

Through programmes such as Tax for Development and Oil for Development, Norway helps individual countries to develop more robust tax systems that can reduce the extent of illicit financial flows from these countries.

Norway is an active participant in the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is one of the most important international financial transparency initiatives. The Global Forum has 120 member countries, including most tax havens. The Global Forum carries out a peer review of all affiliated countries in which their legislation and practice is compared with the OECD standard. The process is scheduled to conclude in 2014, and the evaluation will conclude by assigning countries to one of four categories: 1) Compliant; 2) Largely compliant; 3) Partially compliant; and 4) Non-compliant. The Global Forum only deems the first two categories to be acceptable.

Countries are evaluated in relation to three dimensions: i) the availability of reliable information (in particular bank, ownership, identity and accounting information); ii) the authorities’ access to correct information about the tax-relevant circumstances of persons and companies; and iii) the existence of mechanisms for the effective exchange of tax-relevant information with other countries and relevant institutions.

Textbox 8.4 Hunting for hidden assets is demanding

The case of shipping magnate Anders Jahre’s estate illustrates how difficult it is to find and repatriate hidden fortunes placed in tax havens, such as the British overseas territory of the Cayman Islands. For more than 20 years, the deceased’s estate brought a number of legal actions in Norway and abroad to repatriate the assets. Many in-court settlements were entered into, and a total of approx. NOK 1 billion was paid to the estate. During the 20 years, the estate incurred legal fees of around NOK 600 million. The estate concluded its work in 2012, and more than NOK 400 million was transferred to the Norwegian tax creditors. The outcome was a success in the sense that the repatriated amount exceeded the costs of the process. The case was also important as a cautionary example. Such an extensive process can be very demanding for poor countries without international support.

The process in the Global Forum puts strong pressure on tax havens, as they wish to be classified as compliant. Many countries have therefore implemented significant reforms and become more transparent over the past two to three years. Among other things, many tax havens have entered into agreements for the exchange of tax information with many new states, including the Nordic countries. However, they have not been under any pressure to enter into such agreements with developing countries, despite the fact that many of the investments that take place via tax havens are in poor countries.

The developing countries that have joined the Global Forum have the same claim and right to enter into transparency agreements as other countries, but may have a greater need than industrialised countries for clear and satisfactory standards from the forum. In the longer term, Norway will consider revised evaluation criteria for the forum in order to strengthen developing countries’ access to tax-relevant information. There is a particular need to strengthen the mechanisms for the effective exchange of tax and company information between jurisdictions that function as third countries and the countries where investments actually take place.

The Financial Action Task Force (FATF) was established by the G7 in 1989 as a forum for combating money laundering. FATF has published 40 recommendations concerning measures against money laundering and the financing of terrorism, and these recommendations are the most recognised international standards in this field. Norway holds the presidency of FATF from July 2012 to July 2013.

The IMF makes extensive efforts to combat money laundering and the financing of terrorism. These efforts include work on reforms, including the development of anti-money laundering legislation, training and support for implementation, and research. Norway is one of the largest financial contributors to the World Bank and UNODC’s Stolen Asset Recovery Initiative (StAR). The purpose of StAR is to contribute to the repatriation of proceeds of corruption that have been removed from developing countries. The Government has also been an important driving force behind the establishment of Draining Development, a research programme that has produced 15 special studies of various aspects of illicit financial flows for the World Bank.

Textbox 8.5 The work of the Commission on Capital Flight from Developing Countries

The Commission on Capital Flight from Developing Countries produced the report NOU 2009: 19 Tax havens and development. The Commission’s mandate was to examine the function of tax havens in relation to capital flight from developing countries. The following are among the proposals that the Government has followed up:

  • increase the efforts to strengthen and improve tax regimes and anti-corruption work in developing countries

  • study whether country-by-country reporting can be required of Norwegian multinational companies

  • appoint an interdepartmental working group to look into matters relating to tax havens and development

  • the proposal for the establishment of an international convention on economic transparency (discussed in this white paper)

  • prepare new guidelines for Norfund’s investments via third countries

  • the proposal to establish a national centre of expertise has been replaced by a special research programme for tax havens and capital flight.

Through the OECD, Norway has taken the initiative for the Oslo Dialogue on Tax and Crime, one of the main objectives of which is to reduce criminal networks’ access to financial systems by means of increased financial transparency and more effective criminal investigations.

Norway has now entered into bilateral agreements for the exchange of tax-related information with nearly all of the 44 countries that the OECD deems to be tax havens. The agreements do not allow for the automatic exchange of information, but ensure access to information upon request to the extent that information has been registered and is available. The agreements that have entered into force have given the Norwegian authorities access to information in many cases where they would otherwise not have been able to obtain information. The OECD also works actively to prevent countries’ tax bases from being eroded as a result of multinational corporations shifting profits between different jurisdictions.5

The US Government has adopted the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report financial information about people and companies that are subject to tax in the USA directly to the US authorities. Pursuant to the US regulations, withholding tax at a rate of 30% will be levied on payments from the USA to financial institutions that choose not to comply with FATCA’s reporting requirement. As part of the implementation of this Act, the USA has agreed with several countries, including Norway, to sign agreements that will provide legal authority for such measures. The Norwegian and US authorities have reached agreement on automatic reporting between the two countries’ tax authorities concerning accounts in financial institutions. This agreement will ease the reporting obligations of Norwegian financial institutions.

Once the agreement for the implementation of FATCA has been signed by Norway and the USA, the financial institutions’ reporting obligations will be eased in that they can submit information to the Norwegian authorities, which will then forward it to the appropriate US authority. The agreement means that no withholding tax will be levied on Norwegian institutions. For the Norwegian tax authorities, the agreement means that they will automatically receive information about all accounts held by Norwegian taxpayers in US financial institutions. The agreement is scheduled for signature in 2013. The agreement considerably strengthens transparency on financial matters. It also makes a substantial contribution to increasing the prevalence and international acceptance of agreements for the automatic exchange of information.

The USA has signed a Memorandum of Understanding on FATCA-related agreements with Switzerland and Japan. Under this model, Swiss financial institutions, for example, will be obliged to submit information about US taxpayers directly to the US tax authorities. For bank clients that refuse to accept the exchange of such information, the bank will submit information at an aggregate level without specifying it for named customers. Switzerland nevertheless undertakes to accept group requests from the USA on the basis of aggregate information received, which means that the US tax authorities could gain access to detailed information in such cases as well.

The Government has distributed a draft bill for consultation. It proposes a duty for lawyers and other third parties subject to professional secrecy to provide information to the tax authorities about money transfers, assets and other outstanding balances in client accounts.

However, the nature of the work of combating international structures that facilitate the concealment of illicit financial flows is such that it requires extensive international cooperation. The goal must be a set of international norms and binding agreements that ensure transparency.

In the future, the Government will place even greater emphasis on mobilising the resources of the multilateral systems in the fight against tax havens. Better coordination of all the different measures is required if these efforts are to result in global norms and binding international obligations. Civil society organisations and networks, such as Publish What You Pay and the Tax Justice Network, play an important role in providing documentation and proposing possible measures. Norway will contribute further to the work of such agents of change.

Initiative for a possible convention on financial transparency

The Government will initiate an international dialogue on the development of stricter rules for financial transparency, for example in the form of a convention or agreement. This will be a long-term effort aimed at advancing the normative agenda for greater financial and economic transparency.

Through this dialogue, the Government will build a common understanding with like-minded countries and development partners about what such rules might entail. The aim is to prevent illicit financial flows. This may involve obligations to register and exchange information about cross-border financial transactions, and to provide mutual legal assistance in tracing financial flows in order to uncover criminal activities.

A convention or agreement could be a valuable supplement to ongoing work in multilateral forums. The extent to which the goal of stricter rules for financial transparency can be promoted within the framework of existing forums will also be considered. Progress in such forums is primarily based on consensus, however, and the processes can therefore lag behind negative developments in tax haven structures, concealment techniques and other illicit financial flows. Although there are a number of guidelines for how states should behave and cooperate, there are still not many legally binding rules in this area. A convention or agreement would thus break new ground.

The dialogue will therefore assess the need for, and structure of, a possible convention or agreement. It will seek to identify relevant forums for the development of rules, subsequent enforcement and impact, as well as strategic alliance partners. The precise obligations must be adapted to domestic legislation and obligations under other instruments, such as EU/EEA regulations. Objections of a procedural nature, including that a convention or agreement could entail expenses for states and financial institutions by imposing new reporting obligations on them, must be considered.

Experience from other processes, for example the development of the conventions on anti-personnel mines and cluster munitions, suggests that the content of a convention or agreement will be considerably changed during a negotiation process. It is desirable to unite the large group of countries that wish to see more rapid progress in transparency efforts. It is unlikely that tax havens will initially be interested in joining. However, the work could contribute to highlighting the unfortunate activities that take place in these jurisdictions.

If it gains support, a convention or agreement could be an important instrument in the fight against international crime on many levels. It could be of interest to a broad range of actors, including in the fields of law enforcement, anti-terrorism and the financing of terrorism, drug trafficking, human trafficking, illegal arms trade, illegal trade in minerals, as well as money laundering and tax fraud.

The added value of a convention or agreement would be that it is legally binding. This will be particularly important to developing countries, many of which are not covered by legally binding instruments and have a weak bargaining position when it comes to agreeing on satisfactory bilateral solutions.

The Government will initiate an international dialogue on the development of stricter rules for financial transparency, for example in the form of a convention or agreement. Such a process will be time-consuming, and it will initially take place outside the established forums. The Ministry of Foreign Affairs is responsible for this work on Norway’s part. The extent to which the issue of a convention or agreement for financial transparency should be raised in multilateral forums will have to be clarified as the process moves forward, and it will depend on whether there is sufficient international interest.

Textbox 8.6 High-Level Panel on Illicit Financial Flows from Africa

A high-level panel chaired by Thabo Mbeki, former president of South Africa, was established in spring 2011 by the United Nations Economic Commission for Africa (UNECA) and the African Union (AU). The purpose of the panel is to:

  • determine the nature, pattern, scope and channels of illicit financial outflows from Africa

  • sensitise African governments, citizens, policy makers, and development partners to the problem

  • mobilise support for putting in place rules, regulations, and policies to curb illicit financial outflows and influence national, regional and international policies and programmes on addressing the problem of illicit financial outflows from Africa.

Norway contributed to the establishment of the panel and is the only non-African country to be represented on it.

The high-level panel’s report is scheduled to be delivered in late 2013. Its meetings are held in different regions of Africa in order to ensure maximum awareness of the issue among the authorities, civil society, the private sector and academia. The panel will submit its recommendations to the AU and act as a mouthpiece for Africa in the international arena.

EITI

Today, the best instrument for ensuring greater transparency between companies that extract natural resources and national authorities is the Extractive Industries Transparency Initiative, known as EITI. EITI partner countries are obliged to make public the tax revenues they receive from companies in the oil, gas and mining industries, thereby contributing to transparency between extraction companies and the authorities. The users are society at large. Joining the initiative is voluntary.

So far, Norway is the only OECD country to be an implementing EITI partner country. EITI is currently carrying out a process to strengthen and expand its rules. This is an important process, as long as it strikes a balance with companies’ legitimate need to protect commercially sensitive information and the administrative burden that reporting imposes on the parties.

Country-by-country reporting (CCR)

CCR means that companies are obliged to provide information about their activities to each of the jurisdictions they are active in, either directly or via dependent companies. There are no separate Norwegian rules or EU legislation currently in force that require companies to report operational information in individual countries, nor any requirements to disclose payment flows to the authorities in countries where the companies operate. The Government’s Action Plan for Combating Economic Crime states that the Government supports the introduction of common EU rules in this area. While the Government believes it will be sensible to wait and see how things develop in the EU, the action plan does not rule out the possibility of considering whether there is a basis for introducing such rules in Norway on an independent basis.

The EU Commission submitted a proposal for CCR provisions in 2011. According to the proposal, large companies, and all extraction and forestry companies listed on the stock exchange, will have to prepare a special annual report on payments made to the authorities in each country in which the companies operate, as well as about whether the payments relate to individual projects. The purpose of this regulation is, among other things, to make the authorities in the countries where these enterprises operate accountable for the use of revenues from natural resources and to promote good governance. According to the proposal, national rules implementing the provisions of the directive shall enter into force no later than on 1 July 2014. In spring 2013, the EU Commission’s proposal is under consideration by the Council of the European Union and the European Parliament.

The Ministry of Finance distributed the Commission’s proposed CCR regulations for consultation in 2011. The consultation bodies were generally positive in their attitude to the proposal for CCR regulations, but they were divided as regards the detailed contents of the provisions, and whether Norway should speed up implementation compared with the introduction of such rules in the EU. Based on the opinions submitted in the consultation, Norway has supported the EU Commission’s work to formulate CCR requirements, but, at the same time, argued that the proposal under consideration by the Council of the European Union and the European Parliament should be strengthened in some areas, for example by making it more difficult to evade the rules and ensuring that CCR can make a greater contribution to combating tax evasion.

The Government has set itself the goal of ensuring that Norwegian CCR rules will enter into force from 1 January 2014, even if the EU rules are not introduced until a later date. The Ministry of Finance appointed a working group in December 2012 to look into the introduction of CCR requirements in Norwegian legislation. The working group will submit its report and a proposal for Norwegian CCR rules by 1 May 2013.

Transparency guarantee

The Government will promote an initiative for the development of a transparency guarantee to be used by the authorities in developing countries. This guarantee should ensure that the authorities in developing countries have sufficient access to information from extraction companies. The transparency guarantee will be promoted through relevant development programmes.

Professional secrecy and tax havens are used to restrict the authorities’ access to documents. The purpose of a transparency guarantee is to ensure that documents that are relevant to a developing country’s authorities are made available as case documents, and that any dispute concerns the interpretation of the documentation, not obtaining access to it. A transparency guarantee should ensure that the authorities gain access to documents from companies abroad in connection with transactions that span multiple companies in the same group. It should contribute to transparency between the individual extraction companies and the authorities to which the company reports – primarily, but not limited to, the tax authorities.

At present, the tax authorities’ right of access largely stops at transactions relating to a company’s activities outside the country. In developing a transparency guarantee, the aim is that the tax authorities should be able to gain access to the relevant documentation from a series of transactions within a business group, called an audit trail. For example, for minerals that are sold, this means that the tax authorities, on request, can follow the sale from the country of extraction via subsidiaries in several countries, including tax havens, to the first recipient outside the group of companies. Important issues that need to be addressed when developing the transparency guarantee include how far the companies’ duty of disclosure and risk of sanctions extend.

A transparency guarantee should ensure that goods can be traced all the way until they are sold on the open market. This will give the tax authorities a basis for assessing whether the income that the company declares in its tax return is correct. The same will apply to the audit trail for a deductible expense.

Textbox 8.7 Task Force on Financial Integrity and Economic Development

In 2007, Norway and other interested countries and NGOs took an international initiative to establish a forum that subsequently developed into the Task Force on Financial Integrity and Economic Development.1 The Task Force is led by leading civil society actors and academics, and it does not necessarily represent the opinions of Norway or other member countries.

Countries that join the initiative give their general support to financial transparency and integrity for the benefit of economic development in general and developing countries in particular. The initiative focuses on research, campaigns, the media, providing advice to individual countries and lobbying the G20 and multilateral organisations. The five main goals are: 1) curtailment of mispricing in trade imports and exports; 2) country-by-country accounting of sales, profits, and taxes paid by multinational corporations; 3) transparency of beneficial ownership of corporations and trusts; 4) automatic cross-border exchange of tax information on personal and business accounts; and 5) harmonization of predicate offenses under anti-money laundering laws.

1 Since the initial publication of this white paper, the Task Force has changed its name to the Financial Transparency Coalition.

Violation of the transparency guarantee should lead to sanctions if a company has access to the information requested. The sanctions must be proportional to the breach, and it must be possible to subject them to judicial review. It is possible that, in extreme cases, a breach of the transparency guarantee could result in an extraction licence being revoked. The sanctions must be reasonable, however, and they must be predictable and verifiable for the companies concerned. A transparency guarantee should apply to all companies equally. It is up to each individual country whether to implement the guarantee through a model agreement or by law. The purpose of the transparency guarantee will be undermined if it becomes a matter for negotiation between the authorities and individual companies, with the result that different transparency requirements apply to different companies.

In many developing countries, the companies with the poorest transparency standards have a competitive advantage. The goal of developing a transparency guarantee is that it shall contribute to forcing companies to comply with a common standard and result in fairer competition, better tenders and less room for corruption.

Upgrading of the UN Committee of Experts on International Cooperation in Tax Matters

There is currently no intergovernmental UN agency for tax matters. Instead, there is a group of 25 members who participate in their capacity as experts on tax matters,6 not on behalf of their country of origin. The Norwegian member is from the Ministry of Finance.

The OECD is still the leading organisation internationally on tax matters. At the same time, the work on Financing for Development has increasingly emphasised mobilising developing countries’ own resources. This development requires consideration of the UN’s role in this field.

Many countries want to upgrade the UN Committee of Experts on International Cooperation in Tax Matters to an intergovernmental body. The matter has been on the agenda of meetings in the United Nations Economic and Social Council (ECOSOC) at the proposal of the G77. The Government supports this.

Open Government Partnership

The Open Government Partnership (OGP), initiated by US President Barack Obama, was launched at the UN in 2011. The OGP is intended to promote accountability, transparency and empowerment as the basis for strengthening civil society, democracy, the rule of law and the facilitation of economic and social development. Participating states are encouraged to practice transparency about public budgets, anti-corruption measures, freedom of information measures and facilitation of civil participation, including safeguarding civil and political rights. The use of new technology and social media to promote democracy, participation and the accountability of public authorities is important.

Norway’s OGP Action Plan contains measures to improve transparency in public administration, increase women’s participation in politics and public life, and increase transparency about resource management, the Norwegian Government Pension Fund Global, and tax matters.

Every year, the Government publishes information about all aid projects it has funded on Norad’s website, in both Norwegian and English. Those who wish can download detailed overviews containing information about individual projects. The information is reported to the OECD’s Development Assistance Committee (OECD-DAC), which also publishes the information on its website.

As part of our OGP commitments, the Government will further increase transparency in the administration of aid. During 2013, the Government will report to the International Aid Transparency Initiative (IATI). This is a new transparency initiative that is intended to ensure that information about aid-funded projects is quickly made public. The Government will also launch a new portal to provide a continually updated overview of Norwegian aid funding.

Improving expertise in developing countries

Most of the work on combating illicit financial flows is based in Western countries. The Government wishes to facilitate increased involvement by developing countries in this work. It will therefore take an initiative for the establishment of a network of authorities, NGOs and scientists. The purpose will be to increase the dissemination of knowledge about the harmful effects of illicit financial flows, and to propose solutions that are adapted to conditions in individual developing countries. The research and documentation communicated must be of high quality. The network must involve relevant actors in different developing countries.

Debt relief: More accountability – on both sides

The World Bank and the IMF have joined forces on two important debt relief initiatives:

  • the Heavily Indebted Poor Countries/HIPC Initiative, introduced in 1996

  • the Multilateral Debt Relief Initiative (MDRI), introduced in 2005

These initiatives have ensured that 34 of the 39 poorest and most heavily indebted countries now have manageable debt burdens. The reduced debt burden appears to result in increased investment in poverty-reducing measures, thereby making it an important factor in the efforts to promote more fair distribution and reduce poverty.

Norway is at the forefront of the efforts to provide debt relief for the poorest countries through active bilateral debt relief, through being a strong supporter of multilateral debt relief schemes, and through debt policy innovations. The Government has a separate Plan of Action on Debt Relief for Development.

For developing countries that are eligible for debt relief, the size of the debt in relation to the country’s GDP and annual export revenue will determine how much of debt is cancelled. The Government believes that non-economic variables should also be discussed, for example how the debt was incurred and the terms of the loan. Debt relief is not only about how much debt a country can handle, but also about justice.

Contingent on the Storting’s approval, the Government has decided to cancel all of Myanmar’s debts to Norway. Norway’s claims against Myanmar amount to approx. NOK 3.2 billion. This debt relief was announced following the Paris Club’s negotiations with Myanmar in January 2013. Norway played a crucial part in ensuring that an agreement was reached with Myanmar, with a satisfactory result for the Myanmar government. The member countries of the Paris Club will cancel half the debt and restructure the remaining half. In cancelling all Myanmar’s debt, Norway is going further than the other members of the Paris Club.

The Government is concerned with preventing poor countries from accumulating new unmanageable debts. In the wake of international debt operations, it is imperative that both the creditor and the debtor act responsibly. Irresponsible lending today could result in what some refer to as illegitimate debts in future.

The concept of illegitimate debt is controversial. Too strict criteria could reduce access to much needed capital for developing countries and be an obstacle to their right to self-determination. Norway emphasises a combination of normative long-term work and an active policy of leading by example. An example of the latter is the Government’s unconditional cancellation in 2007 of debts stemming from the Norwegian Ship Export Campaign (1976-80). This has attracted considerable international attention.

The Government’s proposal to cancel Myanmar’s debts means that cancellation will take place without burdening the aid budget, without other allocations being made and without ODA reporting. Nor are there any conditions attached to the cancellation. This is because the claims stemmed exclusively from the Ship Export Campaign.

In 2012, a Norwegian-funded UN project under the auspices of UNCTAD launched principles for responsible sovereign borrowing and lending. These principles are intended to make both lenders and borrowers more responsible, and thereby reduce the risk of sovereign debt crises.

Norway will carry out a debt audit in order to highlight responsible lending and illegitimate debt. The criteria used in this audit will include both the current requirements for furnishing loans and guarantees and the UN Principles for Responsible Sovereign Lending and Borrowing launched in 2012. The audit covers claims totalling NOK 961.7 million divided between seven countries and 34 contracts. The work will be carried out on the basis of an international competitive tender procedure, and is scheduled for completion in 2013.

The Government will:

  • work for more strategic coordination of the various international initiatives to combat tax havens and financial secrecy

  • initiate an international dialogue on the development of stricter rules for financial transparency, for example in the form of a convention or agreement. This will be part of a long-term effort to push forward the normative agenda for greater financial and economic transparency.

  • support individual countries in establishing more robust tax systems with a view to preventing illicit financial flows out of the country

  • increase its support for NGOs and other bodies that are engaged in advocacy against illicit financial flows and tax havens

  • promote the establishment of a South-based network to combat illicit financial flows

  • strengthen and expand the Extractive Industries Transparency Initiative (EITI) rules

  • aim to bring into force legislation on country-by-country reporting as of 1 January 2014, even if such rules do not come into force in the EU until a later date

  • promote an initiative to develop a transparency guarantee that can be used by the authorities in developing countries to ensure that they have access to the information they need from extractive companies

  • establish a system for reporting Norwegian aid to the International Aid Transparency Initiative (IATI)

  • launch a portal to provide a continually updated overview of Norwegian aid funding

  • support the proposed upgrade of the UN Committee of Experts on International Cooperation in Tax Matters to an intergovernmental body

  • raise the question of compliance with the United Nations Conference on Trade and Development (UNCTAD) guidelines for responsible sovereign lending and borrowing with all the creditor countries that take part in multilateral debt operations.

Footnotes

1.

Global Financial Integrity is a research and advocacy organisation that has documented illicit financial flows for many years. The figures for illicit financial flows are taken from its report from December 2012, Illicit Financial Flows from Developing Countries: 2001-2010.

2.

From the report The Price of Offshore Revisited from July 2012, written by James Henry, former chief economist with the consulting firm McKinsey, for the Tax Justice Network.

3.

OECD, Harmful Tax Competition: An Emerging Global Issue, 1998.

4.

IMF estimate, 2000.

5.

OECD, Addressing Basic Erosion and Profit Shifting (BEPS), February 2013.

6.

The Committee of Experts on International Cooperation in Tax Matters.
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