27th Oct 2016

EU tax havens drain money from developing nations

Tax havens in countries such as Luxembourg are zapping billions of euros from the coffers of developing countries and forcing weak governments to rely on dwindling international development aid, experts say.

Charles Abugre, the Africa regional director for the United Nations Millennium Campaign, says multinational corporations and the legal structures behind tax havens in EU member states prevent nations from developing and perpetuate a cycle of poverty.

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“The very concept of a jurisdiction selling secrecy as its competitive advantage is killing democracy,” he told this website in Brussels on Wednesday (12 November).

“Not only does it undermine wealthy countries, it totally destroys democracy because the essence of democracy and democratic accountability is transparency.”

The issue is of particular relevance for EU lawmakers, who on Monday evening in a closed-door meeting, were unable to reach a consensus on “beneficial ownership” in the draft EU anti-money laundering directive.

Beneficial ownership requires full disclosure of the people behind legal entities like anonymous companies and trusts. The structures are often set up by criminals to hide their true identities.

The schemes have been much criticised by pro-transparency experts and MEPs who want member states to reveal the true identities of people behind the firms and make the data accessible via a public register.

“This is one of the main problems and it hasn’t been resolved yet,” an EU source told this website following the talks.

Member states are reluctant to make the registers public arguing that family trusts, for example, carry a low risk of money laundering.

Both the Czech Republic and Luxembourg recently introduced ‘trusts’ into their national legislation after agreeing to abolish anonymous bearer shares.

But the European Network on Debt and Development (Eurodad), a Brussels-based NGO, says trusts could provide new options for anonymous ownership in the two countries.

For Abugre, trusts are just another huge loophole used by corrupt politicians and European-based corporations to enrich themselves.

“Anybody in political leadership is quite happy to create an entity, registered as a trust, in a secret jurisdiction,” he says.

Aburge, who is from Ghana, has plenty of examples.

“So I am a president. I’ve created a shady trust in Luxembourg. This company arrives back in Ghana as a foreign company to negotiate with me, the president, who co-owns this shady trust, on how we share the revenues in the oil and gas sector. This is what happens,” he says.

The origins of the dubious tax schemes date back to structural adjustment programmes in the 1980s when African governments were told to create big tax exemptions for foreign companies wanting to exploit natural resources.

“This was also incorporated in the EU-Africa agreements, which is the so-called Post-Lome agreement,” says Aburge.

Other problems include price transferring, corporate tax breaks, and the lack of country-by-country reporting.

Transfer pricing allows big firms operating in Africa to hide their profits from local governments.

“If you cannot verify the cost of structure of the operation then the only profit that you have to negotiate is what has been declared by the company,” says Aburge.

Country-by-country reporting would require companies to provide a breakdown of profits earned and taxes paid and accrued. It is an idea that the former governments in Germany and Sweden have opposed.

Aburge is not the only one to raise the red flag.

Cephas Makunike, a research and policy advisor at Tax Justice Network-Africa, a pan-African initiative set up in 2007, says rich countries have consistently ignored the concerns of poorer nations on taxes.

Makunike complains that international tax models set up by the OECD hurt poor nations because they have no say in the matter.

Pressure is mounting for a new model to be set up under auspices of the United Nations.

It has gained little support among EU member states.

According to Eurodad, only Poland backs the idea while all other member states are either hostile or ambivalent about giving poorer countries a say in a tax regime that directly affects development, poverty, and justice.

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