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Opaque government deals mean developing countries may be paying more than they need to for vital projects and services, and they might also cover up corrupt practices where public money is siphoned into private coffers. What is the real scale of the problem? What are the implications for global development? And what can be done to make governments contract more transparent?
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Governments of mining countries are vulnerable to investors manipulating transfer prices as a means of avoiding paying taxes. This paper looks at whether special practices in the oil sector that provide materially greater protection against transfer pricing risk could be applied to hard rock minerals. These are (1) administrative pricing, where government, rather than the taxpayer sets the price for crude oil; and (2) the no-profit rule, which prevents joint venture partners from charging a profit mark-up on the cost of providing goods and services to the group.
Earlier this year, The Centre for Research on Multinational Corporations (“SOMO”; a Dutch NGO) issued a report about an international mining company they said had avoided paying $232 million USD in taxes in Mongolia. The Oyu Tolgoi mine is considered a big deal in Mongolia and has been subject to lengthy negotiations on how to split the risks, costs, and profits of the project between the company and the government. While this question is of primary interest to the people of Mongolia, I think that delving into the detail of individual cases like this is also important for clarifying the broader debates and understanding of tax issues.
The SDGs include a target to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime”. However, there is no globally agreed upon definition for “illicit financial flows.” My new CGD paper looks at why there is so much disagreement and confusion over this term.
Regulatory pressure on international banks to fight money laundering (ML) and terrorist financing (TF) increased substantially in the past decade. We find countries that have been added to a high-risk greylist face up to a 10% decline in the number of cross border payments received from other jurisdictions, but no change in the number sent. We also find that a greylisted country is more likely to see a decline in payments from other countries with weak AML/CFT institutions. We find limited evidence that these effects manifest in cross border trade or other flows. Given that countries that are placed on these lists tend to be poorer on average, these impacts are likely to be more strongly felt in developing countries.
Both academic research and public policy debate around tax havens and offshore finance typically suffer from a lack of definitional consistency. Unsurprisingly then, there is little agreement about which jurisdictions ought to be considered as tax havens—or which policy measures would result in their not being so considered.
Over the past couple of weeks Malawi has become the latest poster child for UK campaigns arguing that changes to the international tax system can deliver outsize returns for development. Specifically, Action Aid is calling on the UK government to renegotiate a 60-year-old tax treaty. Questions were also raised about this issue in the House of Commons.
Rules to name, shame, and punish banks, whose clients may funnel money to terror groups, are denying much-needed funds to developing countries. It’s a clash of two sets of sound policies, says Clay Lowery, former assistant secretary for international affairs at the US Treasury and the chair of a CGD working group on this problem of “de-banking.”