Exposing the lost billions

Added 17 Jan 2013

Oygunn Sundsbo Brynildsen, Senior Policy and Advocacy Officer with Eurodad, wrote this article  for Third World Network’s monthly magazine Third World Resurgence.

IN early December the coffee-shop chain Starbucks was all over the international media headlines. Citizens' movements in the UK found it unfair that their local coffee shop had to pay taxes while multinational Starbucks got away without any tax contributions. Following public campaigning, Starbucks agreed to pay 'a significant amount of tax' over the next two years.1

This case is a telling example of how rich corporations, with the help of good lawyers, accountants and complex company structures, can shift their profits to countries in which taxes are low or absent. Google and Amazon are other giant companies whose tax-dodging practices have made it to the headlines.

What is less covered by international media and public debate are the billions of dollars illicitly flowing from developing countries to the Global North every year. These lost billions are the result of the same tax-dodging mechanisms. It is paradoxical that while many European countries are struggling with tight budgets and cuts in essential services, the European Union is not showing enough political will to put in place regulations that would help uncover tax dodging and make companies pay their fair share of taxes in the countries where they operate - be it in Europe or in developing countries. 

$1 trillion flowing out from developing countries every year

It is true that citizens in Europe are suffering from an unregulated global financial system. However, developing countries are the real losers from the lack of proper regulations. Every year, around $1 trillion illicitly leaves developing countries. In 2008 the figure was a little higher at $1.26 trillion, while in 2009 illicit flows from developing countries were estimated at around $850 billion.2 Although there was a decrease between 2008 and 2009 following the downturn in international trade, the long-term trend has been towards rising levels of illicit financial flows. To put the figures in perspective, the illicit financial outflows from developing countries are around nine times the total amount of development aid from OECD countries, or around 20 times the extra $40-60 billion the World Bank estimates poor countries will need annually to meet all the United Nations Millennium Development Goals which aim to halve poverty by 2015.3

According to Christian Aid, 'since the United Nations Millennium Development Goals (MDGs) were set in 2000, the developing world has lost an estimated $160bn a year in tax revenues as a result of transfer mispricing within transnational corporations and false invoicing between business accomplices. That is significantly more than the amount of development aid given each year during the same period'. Christian Aid shows that these revenues lost to tax evasion would be enough to save 1,000 children a day if they were added to developing countries' budgets without any change in spending priority.4

Looking at sub-Saharan Africa, researchers L‚once Ndikumana and James Boyce found that the region has lost $700 billion to illicit capital flight since 1970.5 A major part of this is due to untaxed wealth. If countries could start to recover their untaxed wealth, it could have an enormous development impact. Tax evasion is far from being a victimless crime.

Corporate practices are behind the majority of illicit outflows

Corruption is often at the centre of political discussion and rightly a high priority amongst harmful practices to clamp down on. However, corruption makes up less than 5% of cross-border illicit financial flows from developing countries. Criminal activities such as drug trafficking and human trafficking account for around 35%. The remaining 60% of illicit flows out of developing countries are due to commercial activity.6

Four years of losses in Ghana, and still gaining markets7

A larger-scale parallel to the Starbucks-vs-local-coffee-shop comparison in the UK is found in Ghana. ActionAid shows how the owner of a small beer outlet in Ghana's capital Accra pays her share of taxes every month while her neighbour Accra Brewery, which is a subsidiary of the world's second largest beer company SABMiller, hardly pays any taxes in Ghana. Accra Brewery is Ghana's second biggest beer producer and controls some 30% of the country's beer market. Yet, from 2007 to 2010 it recorded an overall pre-tax loss of œ3.07 million. For three of these four years it paid no corporate tax at all.

SABMiller worldwide, by contrast, showed profits of œ2 billion a year. Africa is where it dominates the brewing industry, but the group has more tax haven companies - a massive 65 - than it has breweries and bottling plants in Africa. ActionAid estimates that governments in developing countries may have lost as much as œ20 million to SABMiller's expert tax dodging, enough to put a quarter of a million children in school. Yet, researchers found no illegalities in SABMiller's accounts, a fact that calls for serious regulations and closure of tax-dodging loopholes.

Why Switzerland is the largest importer of copper from Zambia

Another example of corporate behaviour causing illicit outflows is the Mopani copper mine in Zambia. The story about the second largest mine in Zambia - which in 2010, after 10 years of mining, still claimed it had made no profit in the country - is now going worldwide in the BBC documentary Stealing Africa.

Mopani is majority-owned by the commodity trading corporation Glencore located in Switzerland. According to the World Trade Organisation (WTO), in 2008 over half of Zambia's copper exports went to Switzerland. A report by Counter Balance which looks into Mopani's accounts and practices states: 'It is very unlikely that this was all for Swiss consumption, and as the WTO report modestly states, these exports probably have more to do with accounting operations than with real transfers of minerals.'8

How corporations dodge taxes9

Corporate practices and lack of proper transparency requirements are at the heart of the massive illicit capital outflow from the Global South to the Global North. The absence of adequate transparency regulations allows multinational companies to hide the added value they are producing, concentrating their profits in low-tax jurisdictions or tax havens. Tax havens, or secrecy jurisdictions, are the core enablers of such practices. These countries or jurisdictions deliberately create legislation to ease transactions undertaken by non-residents. As a result, there is often very little real economic activity in tax havens. By providing banking secrecy, tax havens make it almost impossible to find out who owns an account, how much money it contains and where this money comes from.

The OECD estimates that 40-60% of world trade is intra-group trade occurring between related companies.10 Intra-group trade enables a multinational corporation to shift profits within companies in its own group to make sure the accounts show high profits in low-tax jurisdictions. While some of the corporate practices used to dodge taxes are clearly illegal, such as false invoicing and trade mispricing, in many cases these are difficult to prove, given the lack of adequate instruments to effectively regulate them. Other means of shifting profits intra-group are legal or semi-legal yet ethically highly questionable.

Setting the prices for intra-group trade

While trading parties usually seek the best prices for their individual companies, in intra-group trade there is an incentive to set a price that will yield the best overall result for the group. A company may therefore export or import goods or services at a low or high price in order to shift profits from jurisdictions with higher tax rates to other jurisdictions with lower taxation. This is the case with Mopani in Zambia, where copper was sold at systematically below market prices to headquarters in Switzerland and then sold on for a higher price from Switzerland, leaving the corporate group to make its profits in a low-tax jurisdiction.

According to the OECD 'arm's length principle', goods and services should be exchanged at market prices between the subsidiaries of a group, as if these were independent entities. Most countries apply the arm's length principle and can consider this transfer mispricing as tax evasion and thus illegal.

However, there are serious difficulties in implementing the OECD's interpretation of arm's length, particularly for developing countries. 'The taxation of international transactions, in particular transfer pricing, has become increasingly difficult,' states the African Tax Administration Forum's founding communiqu‚.11 Transfer pricing typically involves huge and expensive databases and high-level expertise to handle, which developing countries cannot match.

Use of holding companies

Many multinational companies set up so-called holding companies in low-tax jurisdictions in order to pay less or no tax on their capital income (royalties, dividends, capital gains). Holding companies play the intermediary role between the parent and its subsidiaries and can indeed own most of the subsidiaries without having any actual activities other than collecting the tax-free dividend income from subsidiaries and reinvesting it in the parent company or the head office. The Netherlands is a well-known destination for holding companies.12 

Thin capitalisation: Borrow from yourself and deduct interest payments

In most countries' legislation, interest paid on loans is deducted when calculating the taxable profits. One way of decreasing taxable profits is therefore to make sure that companies in high-tax jurisdictions take on expensive loans from other subsidiaries in the group. In the case of SABMiller, Accra Brewery got a loan that was more than seven times its capital, from an SABMiller subsidiary in Mauritius. ActionAid estimates that the interest costs on this loan will wipe out œ76,000 of Accra Brewery's tax liability each year. In some cases interest rates can be overinflated in order to increase the subsidiary's costs in the high-tax country, resulting in a form of transfer pricing.

Intangibles: Assets that do not physically exist

Some countries have very favourable tax laws on revenues (royalties or licence fees) from intangibles such as intellectual property, including copyrights and trademarks. As a result, many companies make sure to register activities such as procurement services, legal and financial fees and the right to intellectual property and brand use in these jurisdictions.

In theory, transfer pricing rules protect against the use of such structures to shift profits; the arm's length principle says that intra-group trade must reflect regular market prices. However, even if the rules are followed (or rather, if the revenue authority is unable to contest the arrangement), companies frequently manage to arrange affairs such that high-value functions are located in low-tax jurisdictions in a way that shifts profits from operating companies. Michael Durst, a former senior official at the US Internal Revenue Service, puts it this way: 'A trademark is an imaginary product, an estimate of what value consumers place on the product on the basis of a name at best. How you record its value in your books is subjective.'13

Management and technical services: Paid for to a low-tax jurisdiction

A growing trend among multinational businesses is to centralise business functions such as accounting and marketing across the group. Because they are services, a business has a lot of leeway in deciding where to locate them, and will commonly choose to do so in a tax haven. Companies based in higher-tax jurisdictions increase their costs by buying these services.

Again, SABMiller can serve as an example. SABMiller's African subsidiaries pay huge 'management service fees' to sister companies in European tax havens where effective tax rates are lower. In Ghana, the fees amount to 4.6% of the company's revenue every year; in India, they are enough to wipe out taxable profits entirely.  When asked about the management service fees paid by its operating companies to what appeared to be a skeleton company in Switzerland, the company conceded that the payments were only 'routed' through that company, which did not itself provide any services at all. ActionAid estimates that management fee payments by SABMiller companies in Africa and India amount to œ47 million each year, depriving these governments of œ9.5 million of tax revenue.14


Between 2000 and 2009, Mauritius was the largest investor in India. Much of this investment is suspected to be due to so-called round-tripping. Many countries offer various incentives to foreign direct investment, including tax cuts. This gives incentives for local companies to move offshore and reinvest as foreign investors back in their home country in order to benefit from such tax incentives. Since 2006 the Indian government has been assessing the revenue lost due to tax incentives to foreign investors. It estimates that the country lost some _10 billion due to tax incentives for large businesses in 2008 and 2009.

Plugging the leaks: How transparency regulations would help

Tax haven secrecy is key to making all of this possible. The examples of SABMiller, Mopani and Starbucks show a complete geographical disconnect between the companies' real activities and the story told in their accounts. Multinational companies are allowed to report their accounts on a global level, and hence can use the abovementioned methods to shift their profits from where the productive activities take place to their subsidiaries in secrecy jurisdictions. Increased transparency regarding real sales, profits, assets and employees would increase tax collectors' chances of discovering illegal tax evasion, and would shed light on the legal or semi-legal but nevertheless morally unacceptable tax avoidance practices.

Moreover, it is difficult, often impossible, to know who the real owner of a company is. Secrecy around who benefits from and controls corporate vehicles is another feature that helps keep money untaxed. A video by Al Jazeera, Robbing Africa, shows how two journalists pretending to be a Zimbabwean diamond dealer and his lawyer easily manage to establish a company group whose explicit aim is to be the secret link between diamond dealers and high government officials. 'I haven't heard anything of what you said the last two minutes,' says the facilitator who willingly helps the undercover journalists set up a corporate structure which complexity makes it practically impossible to trace the real owners.

Forthcoming research by Eurodad (the European Network on Debt and Development) shows how ownership secrecy and opaque legal structures also frustrate other transparency initiatives such as international cooperation through tax information exchange. The veil of corporate secrecy means the taxpayer cannot be identified; as such, it is harder to identify which country to share the information with and the information shared is much less useful.

Small steps towards more transparency

Lawmakers should therefore require corporations to report their accounts on a country level. This would make information available to tax collectors, media and the interested public.

The idea of country-by-country reporting is slowly gaining ground. Section 1504 of the Dodd-Frank financial reform act adopted by the US Congress in 2010 requires publicly traded oil, gas and mining companies in the US to report payments they make to any government on a country-by-country and project-by-project basis. This will cover around 1,100 companies.

The petroleum sector has strongly protested against the law, and the American Petroleum Institute has filed a lawsuit to undo the rules. Together with the US Chamber of Commerce they demanded that implementation of the law be put on hold until the court case is over. The US Securities and Exchange Commission - which is the federal body in charge of the regulation - has however rejected the oil companies' demand. Hence, companies will be required to report according to the new law starting in 2014.

… but more information needed

While these are positive steps, particularly in making it easier to detect corruption between extractive industries and governments and to see how much these companies contribute to the state, Section 1504 is of limited use for uncovering tax dodging. To know what a realistic tax base would be, it would be important to know more than what payments a company makes to the government.

Lawmakers should therefore require a company to report: 1) the name of each country where it operates, 2) the names of all its companies in each country, and 3) its financial performance in each country (sales, purchases, labour costs, employee numbers, financing costs, pre-tax profits, tax charges, costs and value of assets).15 Such information would make it possible to discover mismatches between real activity and tax payments in a country.

… in more sectors

Moreover, as the Starbucks and SABMiller cases show, country-by-country reporting should be required beyond the extractive industries sector. All companies operating in more than one country should be required to report their financial data on a country-by-country basis.

Although some private sector actors strongly oppose the proposal of country-by-country reporting, others do voluntarily implement country-level reporting. A study done by Christian Aid shows not only that tax is seen as a growing area of risk and that there is a reputational risk attached to the way in which companies operate, but that there is also support for the proposal from several private sector actors.16

European Union: Progressive language, but is there political will for implementation?

At the European Union level, much has been said in favour of increased transparency measures and support for domestic resource mobilisation in developing countries. However, it remains to be seen if political will is strong enough to put weight behind the words.

During the Spanish presidency of the EU in the first half of 2010, European leaders confirmed that tackling illicit financial flows from developing countries was a priority and committed themselves to 'pushing for a more development-friendly international framework' in order to address tax evasion and harmful tax practices, and to increase cooperation and transparency. They recommended for the first time that 'country-by-country reporting [should be established] as a [reporting] standard for multinational corporations'.17

In 2011-12 EU member states and Members of the European Parliament have had a unique chance to make a real difference through renewing the EU Accounting Directive. Questions of country-by-country reporting beyond the extractive industries sector and beyond only payments to governments have been debated. In this respect, it is a positive step that the lead committee at the European Parliament has voted in favour of country-by-country reporting of payments to governments (only), not only in the logging and extractive industries but also in the banking, construction and telecommunication sectors. However, the final Directive, which could come out in early 2013, is likely to prove less progressive and likely to suffer from the same limitations as Dodd-Frank Section 1504 when it comes to tackling tax dodging. The resistance among several member states and some Parliamentarians to going beyond payments to governments and including more sectors has been strong. Hence, even as an amount equivalent to the aggregate EU health budget illicitly flows out, EU member states are dragging their feet and not showing enough will to put in place regulations that would shed light on the illicit practices.

A new opportunity for the EU to clamp down on tax haven secrecy will come up in early 2013 when the EU begins renewing its Anti Money Laundering Directive. Forthcoming Eurodad research shows how anti-money-laundering frameworks provide an opportunity to secure transparency around who owns and controls companies and other corporate vehicles, by revealing the real people that own and control bank accounts and legal structures such as companies, trusts and foundations. It also shows how such frameworks could address illegal tax evasion by deterring and punishing the companies and professionals who facilitate it, and how greater transparency around beneficial ownership disclosure and harmonisation of laws would make it easier to understand legal or semi-legal aggressive tax planning and avoidance schemes.

International anti-money-laundering standards, including requirements to disclose the real owners of companies and other corporate vehicles, are set out by the Financial Action Task Force (FATF). In 2012,  the FATF came up with a new set of recommendations. Just like the EU, several countries will be translating these recommendations into national law. This provides a unique opportunity to ensure legislation that makes it more difficult to hide illicit money in secrecy jurisdictions. Following the HSBC and other banking scandals, in November the US announced that it will review all legislation relating to money laundering.

Not only the revenues

It is promising that awareness of illicit financial flows is increasing, particularly of the enormous sums of capital illicitly being transferred from the South to the North every year, and there is a growing acknowledgement that these flows are largely driven by insufficient regulations and dodgy corporate behaviour. The public mobilisation against Starbucks' tax-dodging practices is a noteworthy example.

Policymakers have also begun to pay greater attention to the issue. The G20 major economies grouping and the EU have issued statements expressing clear ambitions to clamp down on tax havens, the key facilitators of illicit financial flows due to their veil of non-transparency covering the origins of illegal and immoral money. The EU, while concerned about member states' budgets and the pressing need to increase revenues, also strongly emphasises the crucial role of domestic resource mobilisation in its development policies.

Bringing the now illicit flows back into the tax net would yield enormous benefits to governments in terms of increased fiscal revenues that can be spent on pro-poor measures such as health, education and infrastructure. However, tax has multiple functions whereof revenue is only one aspect. Tax is also an efficient tool for redistribution through its progressivity and how tax revenue is spent. Not least, taxation strengthens democracy and a government's accountability to its citizens. As citizens demand that their taxes are spent wisely and for their benefit, this leads to greater public participation in a country's political process.

Uncovering the illicit flows and who is behind them and ensuring that multinational companies pay their fair share of taxes in the countries where they operate requires an end to corporate secrecy. Country-by-country reporting of financial data by all multinational companies will greatly improve tax administrations' ability to discover any irregularities and enable the public to scrutinise the behaviour of corporations in their countries. It would also shed light on the various tax-dodging mechanisms and hence help lawmakers close harmful legal loopholes and strengthen monitoring. Requiring financial institutions to know who they are doing business with is key to knowing who is actually controlling and benefitting from illegal or dodgy behaviour. Public registers of who owns and controls companies, trusts and foundations would again help public scrutiny and be crucial for legal cases, as was underlined by Baltasar Garzon Real, the Spanish judge famous for his high-profile investigations into crimes against humanity, at the 2001 International Anti-Corruption Conference.18

Against this backdrop and following its progressive rhetoric and commitments to contributing to international development, the EU should lead in implementing the transparency regulations set out above. Adequate transparency regulations in the form of country-by-country reporting and requirements to reveal the real owners of companies, trusts and foundations are feasible and would be major steps towards shedding light on harmful  tax  practices  diverting  money away from slim European budgets and, more importantly, robbing developing countries of billions of dollars every year. They would help tax collectors to uncover irregularities and make multinational companies pay their fair share of taxes in the countries in which they operate. Implementing such regulations is a matter of political will.                             


1     See UK Uncut:

2     Global Financial Integrity, 2011: 'Illicit Financial Flows from Developing Countries: 2000-2009'. See

3     World Bank: 'The Costs of Attaining the Millennium Development Goals'. See

4     Christian Aid, 2008: 'Death and taxes: the true toll of tax dodging'.

5     Ndikumana and Boyce, 2011: Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent

6     Global Financial Integrity, 2011: 'Illicit Financial Flows from Developing Countries: 2000-2009'. See

7     The information about SABMiller in this section draws heavily on ActionAid, 2010: 'Calling time: Why SABMiller should stop dodging taxes in Africa'. See

8     Counter Balance, 2010: 'The Mopani copper mine, Zambia: How European development money has fed a mining scandal'.

9     This section's explanation of tax-dodging mechanisms is drawn from the Eurodad report 'Exposing the lost billions: How financial transparency by multinationals on a country by country basis can aid development', written by Marta Ruiz and Maria Jos‚ Romero, 2011. See

10   OECD Economic Outlook, 'Intra-industry and intra-firm trade and the internationalisation of production', 2002. See:

11   International Conference on Taxation, State Building and Capacity Development in Africa, Pretoria Communique, 2008. tax_communique.pdf

12   SOMO, 2006: 'The Netherlands: A tax haven?' See

13   ActionAid, 2010: 'Calling time: Why SABMiller should stop dodging taxes in Africa'.  See

14   Ibid.

15   For more information, see Eurodad, 2011: 'Exposing the lost billions: How financial transparency by multinationals on a country by country basis can aid development' ( cent20report.pdf); and Tax Justice Network:

16   Christian Aid, 2010:  'Shifting sands: Tax, transparency and multinational companies'. See

17   EU Council conclusions on tax and development. Cooperating with developing countries in promoting good governance in tax matters. 14 June 2010. Available at: foraff/115145.pdf 

18   The text of Garzon Real's speech at the conference is available at