There are admittedly many important avenues to advance tax justice in this world. We believe that for pragmatic reasons, under the present as well as the emerging legal and cooperative frame-work, advancing joint tax audits could be an important step that would be relatively easy to implement – if the political will exists.
The usefulness of this instrument to uncover tax related misbehav-ior is confirmed by experience, from its use in developed countries so far, including in Germany and Bavaria. This article puts forward the argument that this tool can also potentially achieve the desired objective to increase tax revenues in developing countries.
Notes
1 Dr. Jörg Alt SJ, MA, BD worked for 15 years with the Jesuit Refugee Service and is now attached to the Jesuitenmission-Office in Nuremberg, the developmental agency of the Jesuit Order in Germany. Charles B. Chilufya, SJ, MRes Business Economics and Management Sciences, is the Director of the Justice and Ecology Office of the Jesuit Conference of Africa and Madagascar (JCAM), the coordinating office for the Jesuits in Africa.
joint tax audits | 177 2 More information on the project and its partners can be accessed online at taxjus-ticeand-poverty.org. For specific information about the research methods see Alt et al. (2017).
3 For more information on this example see Alt (2016b).
4 For more information see Alt (2016b).
5 See Forum on Tax Administration (2010: 5), Bundesministerium der Finanzen (2017), and Eisgruber and Oertel (2017).
6 See www.tiwb.org/.
7 See OECD Task Force on Tax and Development (2013: 21n17).
8 ‘The EU’s Mutual Assistance Directive (Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation), together with Germany’s EU Mutual Assistance Act (EU-Amtshilfegesetz), form the main legal bases that German tax authorities follow when carrying out mutual assistance in tax matters with other EU member states’. Quoted in: Chapter 4 of ‘Tax information exchange: international standards’ (2014, October 15). Article from the Ministry’s August 2014 Report. Retrieved from www.bundesfinanzministerium.de/Content/
EN/Standardartikel/Topics/Taxation/Articles/2014-10-14-tax-information-exchange.html.
9 In earlier times those clarifications had to be sought in subsequent steps and were extremely time consuming: Findings of one tax administration needed to be clari-fied with another, their agreed result had to be cross-checked with others etc.
10 See ‘Söder: 3 Jahre Internationales Steuerzentrum: 180 Mio. Euro mehr Steuern.
(2016, July 13). Retrieved from www.bayern.de/soeder-3-jahre-internationales- steuerzentrum-180-mio-euro-mehr-steuern-kontakte-zu-11-staaten-bayern-wird-competent-authority-fuer-italien/.
11 The AMATM is signed by 22 African states and is acknowledged to be the best legal framework existing for joint audits. It ‘allows for the exchange of informa-tion, sharing of expertise, mutual administrative assistance and also for joint tax audits and investigations among African countries’ (Burgers and Criclivaia, 2016: 317).
12 State tax administrations in Germany indeed have as prime responsibility the col-lection of revenue, while political responsibility for developmental aid and economic cooperation with developing countries is located on the federal level and organized via the German GIZ. It would therefore be at the federal level where discussions regarding assistance for developing countries would occur and from which tax audi-tors would then have to be requested, and seconded by, the German states.
13 The authors wish to thank Erika Siu, JD, LLM, co-editor of this book, for the valu-able information provided for this section of the chapter.
14 According to the respective website ‘115 jurisdictions currently participate in the Convention, including 15 jurisdictions covered by territorial extension’. Information accessed on December 4, 2017. See www.oecd.org/ctp/exchange-of-tax-information/
convention-on-mutual-administrative-assistance-in-tax-matters.htm.
15 According to the respective website, this instrument was signed by 96 states as of 10 November 2017. Information accessed on December 4, 2017, see www.oecd.org/
ctp/exchange-of-tax-information/MCAA-Signatories.pdf.
16 According to the respective website, this instrument was signed by 67 states as of November 10, 2017. Information accessed on December 4, 2017, see www.oecd.
org/tax/beps/CbC-MCAA-Signatories.pdf.
178 | jörg alt and charles b. chilufya
17 The Netherlands did this in the case of 23 developing countries, see Steinglass (2013).
18 See, for details, the interactive graphic at www.actionaid.org/tax-power.
19 NB: These are audits under the present legal framework! One may guess that joint audits generate even more surplus revenue!
20 Regarding Bavaria, those accusations are not only raised by the political opposi-tion in the Bavarian State Parliament, but also research such as Alt (2016a) or Bach (2016).
21 While one interview partner talked of investment inside Bavaria, e.g. the Munich housing market, this has been studied more closely for investment flowing into the United Kingdom via the Jersey tax haven. See Capital Economics (2013).
References
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Alt, J., 2016a. Wir verschenken Milliarden – Erkenntnisse aus dem Forschungsprojekt
‘Steuergerechtigkeit und Armut’. Würzburg: Echter.
Alt, J., 2016b. Germany IX: The Case of Ferrostaal. [Online] Available at: http://tinyurl.
com/tjp-GER-IX.
Alt, J., Kabinga, M., Okonga, V. and Tendet Kiprotich, E., 2017. Methods, Resources and Scope of the Project. [Online] Available at: http://tinyurl.com/tjp-02methods-scope.
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World Tax Journal, 8(3), 306–355.
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8 | T A X A V O I D A N C E I N D E V E L O P M E N T F I N A N C E: T H E C A S E O F A F I N N F U N D I N V E S T M E N T
Lauri Finér
1Executive Summary
Development finance institutions (DFIs) are publicly owned vehicles meant to support private sector development in develop-ing countries. The goal of a DFI is to enhance the development impact related to projects it invests in by bringing in know-how related to the development aspects of business and by comple-menting and attracting private funding. The development impact of DFIs is often measured in terms of numeric financial indicators such as the amount of tax income generated in the developing countries. In this chapter, a tax avoidance case study shows how the development impact of a DFI can turn negative if its tax policy is not in line with its development goals. The case study involves Finnish DFI Finnfund’s investment in a Malaysian timber planta-tion. Analysis of the case study shows that Finnfund’s tax policy was vague and its own tax reporting did not include assessment of tax avoidance. It also shows that the anti-tax avoidance legis-lation in Malaysia was inadequate to protect its tax base. Based on the analysis, the chapter presents a list of policy actions that would improve the fiscal behavior of DFIs and eventually benefit the developing countries in which they invest. The list includes actions involving increased transparency, better-formulated policy goals, and more robust DFI corporate governance by the govern-ments that own them. Also presented is a list of actions that would allow developing countries to independently tackle the tax avoid-ance presented in the underlying case study.
1. Introduction
Development finance institutions (DFIs) are specialized vehicles meant to support private sector development in developing countries
tax avoidance in development finance | 181 (OECD, 2017). DFIs are usually majority-owned by national gov-ernments and source their capital from public official development assistance (ODA) funding. In this chapter, the impact of DFIs’ tax plan-ning on development is presented through a tax avoidance case that involved the Finnish development finance company Finnfund. The case was revealed by the non-governmental corporate responsibility research organization Finnwatch in March 2017 (Finnwatch, 2017a).2
DFIs’ financial support takes different shapes as they fund private companies directly in the form of loans and equity as well as indi-rectly through, for example, investment funds. DFI investments are of a temporary nature, which means their target is to exit funding projects when the business is running solidly on its own. DFIs also expect returns on investment, as do the private investors involved in the same projects. This means concessionary terms are not necessar-ily involved. The goal of a DFI is to enhance the development impact related to these projects by bringing in their know-how related to the development aspects of business and by complementing funding where private investment is lacking.
The role of private sector development funding has increased substantially as a tool to channel ODA. This has made DFIs major development players globally. For instance, the annual funding channeled through multilateral DFIs has increased from US$ 5 bil-lion in 2000 to more than US$ 100 bilbil-lion in 2015 (Ylönen, 2016:
73). This ‘private turn’ of development funding has also received criticism from many (Romero, 2016).
DFIs have been the subject of broader discussion on the efficiency of ODA, as different development vehicles, including civil society organizations, are often fighting for the same public funding (Kepa, 2017). Some believe that private sector funding has been used as a development tool based on wishful thinking rather than as a strate-gic approach with a specified causal relation between funding DFIs and real development implications (Ylönen, 2016: 71). Some have even argued that DFIs have been used as instruments to channel ODA to support local business interests, as DFIs often fund projects involving companies in their home country (Ylönen, 2016: 71). Still, many governments such as Finland’s seem to have a strong belief in the ability of private investment to foster development (Donor Committee for Enterprise Development, 2010).
However, there seems to be a consensus that the evidence regard-ing the efficiency of DFIs in creatregard-ing development is negligible
182 | lauri finér
(Griffiths et al., 2014). The problem has become apparent in public evaluations of DFIs, due not only to methodological difficulties of evaluating DFIs’ impact on development, but also to lack of trans-parency related to their investments (Ministry for Foreign Affairs of Finland, 2016; Independent Evaluation Group, 2014).
The development impact of DFIs is often measured in terms of numeric financial indicators such as the amount of tax income gener-ated in the developing countries. However, much of the discussion on the efficiency of DFIs has been at a general level. In contrast, this chapter presents a detailed case study of Finnfund’s tax avoidance that allows for analysis of whether DFIs are efficient users of ODA.
Section 7 of this chapter incorporates this analysis into policy actions that would allow turning DFIs into tools that tackle tax avoidance that harms developing countries. Section 8 presents recommenda-tions for developing countries to independently protect their tax base from tax avoidance arrangements.