Illicit Financial Flows and Tax Havens: a CSR Blindspot?

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Illicit Financial Flows and Tax Havens: a CSR Blindspot?
Anneke Zwart, Student (University), Netherlands

Although illicit* transfer flows and tax evading are often seen as a problem resulting from corruption in developing countries, it is mainly a political and legal problem that needs to be addressed by politicians, governments and international organizations.
But Dobers and Halme (2009) argue that also the field of Corporate Social Responsibility (CSR) is responsible for addressing and dealing with illicit transfer flows and tax evading.
A large share of total illicit financial flows is caused large businesses: Dober and Halme point out that estimates show that only 3% of illicit transnational transfers can be assigned to corrupt politicians. A much bigger share - 60% - is tax evasion by large companies in the form of for example tax havens, fake transactions and mispricing.
Developed countries have often designed certain mechanisms to transfer incredibly large amounts of money from developing countries to the West; Western countries have exploited legal loopholes that encourage illicit financial flows.
The weak and often corrupt legal systems in developing countries open the door for developed countries to make large profits by evading taxes. The legal system remains a problem that politicians, governments and international institutions should deal with. However, it is a wrong assumption that corrupt elites are the main cause of illicit transfer flows and tax evasion.
Large companies in developed countries “legally misuse” developing countries’ legal systems. As a result, this problem should be incorporated in the field of CSR.
Source: Dober, P, and M. Halme (2009) “Corporate Social Responsibility and Developing Countries” in: Corporate Social Responsibility and Environmental Management Vol. 16 pp. 237-249
* Editor: note that illicit is an adjective that can have 2 meanings: 1. not legally permitted or authorized; unlicensed; unlawful. 2. disapproved of or not permitted for moral or ethical reasons.

The Problem is not the Tax
Bernhard Keim, Business Consultant, Germany
1. There will always be problems about the height of taxes, as different countries have different needs on financing their budgets.
2. As different countries charge different taxes there will always be more and less advantageous tax domiciles.
3. The question should not be whether the tax must be high or low, but who fosters economic well being better: the private or the public sector. If you think the government does a better job to provide growth than the private sector - increase taxes. If you think the government does a lousy job in generating wealth, reduce it.
4. Wealthy individuals don't keep their assets in cash (normally). They invest it, they generate jobs by it etc.
5. The question is who provides the more productive workplaces: the government or the private people.
6. Taxes are there for financing the state.
7. Income redistribution is not the goal, but only a consequence of taxation.
8. Taxes are a secular form of "sale of indulgences".

Should the Field of Corporate Social Responsibility Deal with Illicit Financial Flows and Tax Havens
Jeremy Anderson, USA
The question here is if the field of Corporate Social Responsibility should deal with illicit financial flows and tax havens or if it should be left entirely to the legal systems of various involved countries to fight and close existing legal / tax loopholes.
I believe indeed this could be a welcome idea, since apparently loopholes exist resulting in major illicit tax avoidance and the legal systems are either unable or unwilling to fix them.

There Will Never Be a Uniform, Worldwide Tax Code
Bernhard Keim, Business Consultant, Germany
@Jeremy Anderson: As every country has different budget needs, a uniform international tax code will never be. Why should there? There will be always countries that need less and others that demand more taxes. As long as there are different taxes, there will be the possibility to operate from countries with a lower tax burden.

Illicit Transnational Financial Flows and Tax Havens
Jaap de Jonge, Editor, Netherlands
@Bernhard Keim: I agree we probably will not have a global uniform tax system anytime soon. But I'm not sure the reason for tax haven countries is that they have lower budget needs. Look at tax havens such as Liberia and Nauru. These are poor countries. They are either so underdeveloped that they are unaware of the complex issues, or forced to be very creative with their legal and tax systems or to look the other way to at least get some foreign currencies and legal specialists into their country.
If certain large multinationals, their accountancy firms and their legal advisors are taking advantage of such countries in the form of illicit transnational transfers etc., that could be countered by widening the scope of global corporate responsibility. Because even if such illicit tax practices are legally acceptable, morally they are not.
Note that the OECD is also active in this field.

OECD and G20 Pursue Efforts to Curb Multinational Tax Avoidance and Offshore Tax Evasion in Developing Countries
Jaap de Jonge, Editor, Netherlands
22/09/2014 - The OECD and its Global Forum on Transparency and Exchange of Information have been mandated by the G20 to develop toolkits to support developing countries addressing base erosion and profit shifting (BEPS) and to launch pilot projects to assist them to move towards automatic exchange of information. This mandate comes in response to two reports:
- A Report on the Impact of Base Erosion and Profit Shifting in Low Income Countries (Part 2); and
- A Roadmap for developing country participation in the new global standard for the automatic exchange of information between jurisdictions.
For more, see OECD's Centre for Tax Policy and Administration.


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