Consequences

148

relatively short, and also because such sales would reduce the size of Norwegian development assistance funds.

4. Cooperation with Norfund’s sister organisations

The Commission takes a positive view of the fact that the EDFI, through its guidelines on the use of offshore financial centres, demonstrates a view that its members should take account of the role of tax havens in relation to developing countries. However, it also believes that these guidelines are not suitable for excluding locations with harmful structures, and accordingly recommends that:

− Norfund works for a revision of the criteria for selecting investment locations to bring them into line with the criteria specified in sections 1 and 2 above.

149 resources to minimising its tax payments in developing countries. This is not

reconcilable with the institution’s object of contributing to development in poor countries.

The Commission takes the view that risk capital is essential for sustainable

development. Norfund’s investment activities make an important contribution in that respect. When determining transitional arrangements, the owner must take account of the possibility that new rules could impose additional costs on Norfund and limit its investment opportunities.

On the other hand, account must be taken of the damaging effects of maintaining structures used to conceal illicit capital flows from developing countries. The Commission has established that tax havens represent an important hindrance to growth and development in poor countries, and that they make it opportune for the political and economic elites in developing countries to harm the development prospects of their own states. Accordingly, putting a stop to the damaging activities of tax havens is important. The Commission takes the view that a short transitional period for Norfund will send an important signal on the significance of not utilising tax havens. Against the background of current processes in other countries, other actors are expected to adopt similar restrictions. Norway accordingly has an

opportunity to take a leading role in this work. In the longer term, the new guidelines for Norfund could also contribute to the creation of more venues for locating funds in African countries without harmful structures.

150

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155 Appendix 1

Why are tax havens more harmful to developing countries than to other countries?*

Memorandum written for the Commission to the Government Commission on Tax Havens

Date: 15th May 2009 By Ragnar Torvik Department of Economics

NTNU

ragnar.torvik@svt.ntnu.no

Summary

This memorandum provides a survey and a discussion of why tax havens are more harmful to developing countries than to industrialised countries. Many of the effects of tax havens are common to both groups of countries. There is a discussion of why the negative consequences are nonetheless greater for developing countries. Lower government income has the greatest social cost in countries that have the greatest need for public spending at the outset. However, the memorandum argues that the damaging effects over and above the mechanisms seen in industrialised countries are more dramatic. It demonstrates why and how the opportunities for private income represented by tax havens in reality contribute to lower, not higher, private income in developing countries. There is no conflict between the public and the private sector – tax havens are damaging to both. There is a discussion of why and how institutions have a decisive importance for growth and development. The damaging effects of tax havens are particularly great in countries with weak public institutions, in countries with a presidential system of government, and in countries with unstable democracies.

At the same time, institutions cannot be regarded as given by nature. Tax havens give the agents in the economy incentives to change institutions – for the worse rather than for the better. It becomes more attractive for political agents to weaken public

institutions, to establish a presidential form of government, and to undermine

democracy. For developing countries, the growth effects of putting a stop to the use of tax havens are great.

*) I am grateful for comments from Poul Engberg-Pedersen, Stein Ove Erikstad, Helge Mjølnerød and the members of the Commission on Tax havens. The views presented in this appendix are those of the author.

156 Contents

In document Tax havens and development (sider 149-157)