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World Bank’s content-free report shows need for a rethink of its policy on tax havens

Added 08 May 2014
On 7 April, the World Bank Group published a report on the first year of implementation of its policy on the use of Offshore Financial Centres (OFCs) – commonly known as tax havens – in its private sector operations. The report, which comes after repeated calls from civil society organisations for a stronger policy, fails to include the necessary information to make a proper assessment of the Bank’s implementation efforts. Once again, it exposes the inadequacies of the current policy in terms of tackling tax evasion and avoidance. 

The World Bank Group’s current policy, which was adopted in November 2011, requires its private sector lending arm, the International Finance Corporation (IFC), to report to its Board of Directors on the implementation of its policy towards OFCs. This first such report is only one page long. It was released only after the IFC’s presentation to the Board and fails to deliver on civil society demands for increased transparency regarding the IFC’s offshore-structured investments. 

Eurodad and members argue that, as a public institution with a development mandate, the IFC should publicly disclose all data – with a strictly limited regime of exceptions – to assure citizens that its investment behaviour is not contributing to negative activities associated with OFCs, such as tax evasion, tax avoidance, terrorist financing and money laundering. 

Unfortunately, the current policy is based on the seriously flawed Organisation for Economic Co-operation and Development (OECD) Global Forum on Transparency and the Exchange of Information for Tax Purposes, which was launched in September 2009. Countries that are part of this process have to undergo detailed assessment against ten evaluation criteria in relation to availability of and access to tax information, and tax information exchange. 

Based on this process, the IFC board determines whether or not it will invest through a specific intermediate jurisdiction. However, so far the OECD Global Forum has proven to be ineffective in tackling tax evasion and avoidance, since it currently rules out automatic tax information exchange and country-by-country reporting. On top of this, the IFC’s policy prescribes that the World Bank Group is allowed to make exceptions if it is satisfied that the jurisdiction is making “meaningful progress”. This makes it impossible to know exactly how the Group is planning to take measures without further substantial clarification. 

Absence of evidence

While the IFC claims that it is “committed to advancing the international tax transparency agenda”, the absence of evidence in its latest report shows that the Bank is not taking this commitment too seriously. Given the length of the report, it is not surprising that the IFC fails to shed light on some crucial issues. 

The report claims that “during the first year of implementation, IFC’s investment operations in the Latin America and Caribbean regions were impacted as a number of transactions were found not to comply with the Policy and therefore did not proceed”. However, the report does not further elaborate on the number, volume and sectors of the proposed investments that were not approved. In addition, it is still unclear for which specific reasons these proposed investments were found to be non-compliant. This information is key to evaluating the policy’s real impact on the IFC’s investment activities. 

Secondly, the report states that, as of November 2013, “6 additional jurisdictions were deemed to be ineligible as Intermediate Jurisdictions under the OFC policy”. This comes as a result of the new Global Forum ratings after the peer reviews of 50 jurisdictions. As it might be expected, the report states that “the impact of the new ineligible jurisdictions may affect IFC transactions in East Asia and the Pacific and Europe and Central Asia”. However, the report does not mention which jurisdictions it is referring to, how the World Bank Group is planning to respond to the new ratings, and how specifically the aforementioned regions will be impacted. 

Towards a meaningful policy 

A recent study by Eurodad’s partner, the Bretton Woods Project, entitled Follow the money: The World Bank Group and the use of financial intermediaries, once again shows that the current policy is highly ineffective and in need of an immediate and fundamental review. The study finds that, between 2009 and 2013, at least $2.2 billion was channelled through secrecy jurisdictions where no meaningful economic activity by the IFC’s clients takes place because of their attractive low-tax, low-regulation environments. The study also states that the IFC’s commitment to the OECD Global Forum process is insufficient to achieve its policy’s stated goals, i.e. “to improve transparency” and to “ensure that its private sector operations are not used for tax evasion”. 

The implementation report raises a red flag about the effectiveness of the current policy and makes clear that the IFC should adopt a stronger policy. This should be accompanied by a stronger commitment to implementation, which ensures that its projects are not based in jurisdictions where no meaningful economic activities by its clients are taking place. 

Civil society organisations have called on the IFC to implement the following recommendations: 

  • The IFC should promote developing countries’ right to mobilise domestic resources and fully endorse Article 7 of the UN Model Convention dealing with business profits, which allows for taxation of certain profits in the source country instead of the residence country. 
  • The IFC should move beyond the existing OECD Global Forum process and take concrete steps towards an alternative approach that focuses on enhanced transparency about the users of tax havens and not only on states requesting information. Therefore, the IFC must pressure financial intermediaries and multinational companies to provide relevant and necessary information about their identity, beneficial ownership, activities, economic performance and taxes paid in each country. 
  • The IFC needs to implement country-by-country reporting requirements for companies to ensure that companies follow domestic rules and are in no way involved in transfer pricing practices that result in a misallocation of profit out of the relevant jurisdictions.  
If the IFC aims to be the lead development finance institution targeting the private sector, its commitment to investing in this sector should be accompanied by an even stronger commitment to transparency and tax justice. What is needed is an immediate and open review process that leads to a progressive policy that is in line with the IFC’s development mandate.