New report reveals the true cost of global tax dodging

By agency reporter
March 27, 2009

As G20 leaders prepare to meet in London to seek a means of maintaining financial stability in the present economic crisis, a new report reveals for the first time the massive global cost of tax dodging by big business.

New research commissioned by the UK-based international development agency Christian Aid shows how both rich and poor countries lose billions of pounds each year.

The report, 'False Profits: robbing the poor to keep the rich tax-free', is a shocking indictment of a financial system that allows such abuse to thrive.

Author Dr David McNair, Christian Aid’s senior economic justice adviser, said today: "Paying as little tax as possible, regardless of the social consequences, has for many become an acceptable way of doing business. The money lost could be used to provide schools, hospitals and better living conditions worldwide."

Known collectively as “trade mispricing” the abuse involves manipulating figures to keep profits low in countries where they will incur a higher level of tax.

The major culprits are subsidiaries of the same parent multinationals which file false figures when they trade with each other and companies that are independent of each other making secret deals to do the same thing.

‘Much of the money flows via tax havens into the pockets of shareholders in the industrialised world,’ said Dr McNair. ‘All too frequently, the victims are poorer countries where the tax authorities have neither the expertise nor the resources to fight back.’

The research, broken down by country and by trade sector, estimates that between 2005-2007, bilateral trade mispricing produced a capital flow of £581.4 billion (€850.1 billion US$1.1 trillion) from non EU countries into the EU and US.

If tax had been levied on this capital at current rates, non-EU countries would have raised £190.8 billion (€279.0 billion, US$365.4 billion) in revenue.

Christian Aid says that the findings are consistent with its recent global estimate that trade mispricing deprives the developing world of US$160 billion in tax each year. If allocated in the war against poverty according to current spending patterns, that sum could save the lives of 350,000 children under the age of five annually.

Examples in 'False Profits: robbing the poor to keep the rich tax-free' include the import into Spain in 2007 of 40 million refrigerator-freezer units from China at a cost of just €0.27 (18 pence) each, and 26 million units at only €0.56 (38 pence) each. This resulted in €8.08 billion (£5.53 billion) being shifted out of China.

In the same year, Malaysia exported huge quantities of fixed resistors (an electronic component) to the US through a total of 18 separate transactions at prices lower than one cent. This resulted in US$164 billion (£81.97 billion) being shifted out of Malaysia.

In two months in 2005, the UK imported more than 35,000 sharpening and grinding machines from Australia. Priced variously at 2p or 3p each, this resulted in an estimated shift of £164.89 million (€241 million) to the UK.

G20 countries from the developing world such as Argentina, Brazil, India and China will be interested to know that in total they lost £119.5bn to the EU and the US in capital flow between 2005 and 2007 due to bilateral trade mispricing. Meanwhile the very poorest countries lost £5.78 bilion.

To combat the abuse, Christian Aid is calling for a new accounting standard that would force companies trading internationally to reveal how much profit they make and how much tax they pay in every country where they operate. That way manipulated figures could be quickly spotted.

It also wants the G20 to agree on a truly multilateral deal on automatic exchange of tax information between jurisdictions with strong sanctions against those that will not cooperate. Christian Aid says this will bring an end to the secrecy that tax havens at present offer. Anything less will not deliver the change that developing countries so desperately need.

Christian Aid’s research was carried out by Professor Simon Pak, president of the Trade Research Institute Inc, in the US who analysed global bilateral trade with the EU, UK, US and Republic of Ireland in every product from nuclear reactors to cornflakes.

He calculated the parameters of the normal price range for products traded between countries, and estimated the amount of capital shifted by trades that were outside that normal price range.

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