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Tax evasion: why does it matter for children?

David McNair, Save the Children’s Head of Growth and Livelihoods, argues that the UK must tighten up lax tax laws in its own Dependencies and Overseas Territories if it is to lead the world in fighting tax evasion.

Despite child mortality almost halving in the past two decades (12 million in 1990, 6.9 million in 2011), there are still too many children dying of preventable diseases such as diarrhoea and pneumonia, too many mothers and children dying in child birth.

Much of this comes down to a lack of public finance to invest in health systems and hospitals alongside basic interventions such as teaching children how to wash their hands. Having a trained health worker to deliver a baby dramatically improves the chance of survival of mother and child, and yet there is a global shortage of 350,000 midwives, primarily due to a lack of funds.

Aid has played an important role in supporting low-income countries to provide these services, and it is right that the UK is maintaining its commitment to spend 0.7% of GNI on lifesaving interventions that help the poorest people in the world.

In the long term, public services need to be financed by people and companies paying tax. Even in the poorest countries, tax revenues provide on average 3% more as a proportion of GDP than aid and in middle-income countries such as India this is much greater.[1]

But tax revenues are still not sufficient to pay teachers’ salaries, build schools and roads, and to invest in health systems that can administer lifesaving vaccines and deliver babies safely. Low-income countries collect around 13% of GDP in tax in comparison with 35% in rich countries.

International tax dodging

Part of the reason for this is international tax dodging. Poor countries are estimated to have lost as much as $859bn to ‘illicit financial flows’ in 2010 – dwarfing the global aid budget. A fraction of this – just $10 billion a year- could fund interventions that would save the lives of the 2.3 million children that die of malnutrition every year.

So how can the UK help deal with this problem and help provide sustainable finance for poorer countries?

In the short term, aid can be used to  train tax officials, put in place IT systems to help governments track tax dodgers and strengthen the legal systems that prosecute those companies and individuals once charged.  In these ways, the UK government invests its aid in strengthening tax systems, underlining the vision for ending aid dependency.

Secret bank accounts and bogus companies

But such an entrenched problem requires more than just investment. There is a great deal more that rich countries can do. Much of the money that leaves developing countries ends up in secret bank accounts in tax havens, or is channeled through bogus companies.

Suppose I was a criminal who wanted to give someone money for a dodgy deal, or to evade tax? How would I do it without the authorities finding out?

I could hand over suitcases of money, but that would be high risk, especially if I had to travel through airport security, and carry the money through dark streets in unknown cities. I could go online and transfer funds from my bank account to someone else’s. But my bank would know about it and might tell the police.

Tax havens and their lax rules around who owns a company or bank account are a dream come true for criminals and unscrupulous organisations that want to hide their paydays from dodgy deals from the authorities.

Murky behaviour in UK-linked tax havens

The ideal scenario for those so inclined is to use a bank account that no one can link to them as the true ‘beneficial’ owner. The uncomfortable truth is that many G8 countries, and many UK-linked tax havens, such as the British Virgin Islands, allow for this kind of murky behaviour.

And this is not just a theoretical problem. As the Guardian newspaper exposed last week, tax haven secrecy facilitates tax evasion, corruption and undermines the ability of governments to mobilise revenue to invest in life-saving essential services. In 2011, the World Bank reviewed 213 significant cases of corruption between 1980 and 2010.[2] Tellingly, more than 70% of them relied on anonymous companies.

African governments are angry that we are not doing more.

Ngozi Okonjo-Iwela, Nigerian Finance Minister, said a few weeks ago, “I’m really frustrated at these illicit flows… What would it take for G8 and G20 countries to take some specific steps to put pressure on those countries acting as tax havens?”

The good news is that the UK is committed to lead this agenda by taking concrete action on secret companies and forcing them out into the open. This would make it much more difficult for criminals and tax dodgers to hide their money from the governments that so desperately need them to pay tax.

Get our own house in order

But for the UK to lead the world on this agenda, we need to get our own house in order. We need to make sure that the lax tax laws in many of the UK Crown Dependencies and Overseas Territories are tightened. While these territories have their own governments, past precedent – and indeed their constitutions – make it clear that the UK is responsible for their good governance and can intervene in certain circumstances.

This is why Save the Children wrote to the Chancellor last week, asking him to host a tax haven summit ahead of the G8.

This summit would push the kinds of policy changes that would shine a light on these opaque practices, helping poor countries to recover billions in revenue that  can be invested in healthcare and essential nutrition interventions that could save the lives of millions of children.

Just as we urge greater transparency on the part of governments in developing countries, we should apply that same standard to ourselves and our dependent territories.

[1] Tax constitutes 13% of GDP in low-income countries and 20.7% in upper middle income countries.  Aid, constitutes around 10% of GDP in low-income countries and less in middle income countries. IMF, Revenue Mobilization in Developing Countries, 2011, http://www.imf.org/external/np/pp/eng/2011/030811.pdf. P12. World Bank data, cited in Concord (2013) Global financial flows, aid and development (forthcoming)

[2] Puppet Masters, a report by the Stolen Asset Recovery Initiative (of the World Bank) and UNODC


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