1. The thin line between illegal and illicit
ECA
The thin line between illegal and illicit
Gamal Ibrahim, Chief, Finance and Private Sector Section, Macroeconomic Policy Division, Economic Commission for Africa
October 11, 2017 Nairobi, Kenya
5th Pan-African Conference on Illicit Financial Flows
And Tax

2. STRUCTURE OF THE PRESENTATION
Background
Defining illicit financial flows: what is at stake?
Development, not just law enforcement perspective
Why is tackling aggressive tax avoidance a priority?
Why should illegal and non-illegal activities be tackled together?

3. But no agreement on what counts as IFFs?
BACKGROUND
The international community has decided to collaborate to tackle illicit financial flows:
Included as a target in the Sustainable Development Goals and in Addis Ababa Action Agenda
But no agreement on what counts as IFFs?
Parallel processes on BEPS and IFFs
at global level show that these are being considered separately

4. DEFINING IFFs – WHAT IS AT STAKE? (1/2)
UN ‘custodian’ agencies for indicator on IFFs for SDG monitoring – UNODC & UNCTAD – not sure if it should include aggressive tax avoidance
Excluding tax avoidance from SDG indicator would incentivise actions aimed at achieving SDGs to ignore aggressive tax avoidance
This would be a major missed opportunity

5. DEFINING IFFs – WHAT IS AT STAKE? (2/2)
Political momentum, funds and initiatives to achieve SDGs should also be leveraged to tackle aggressive tax avoidance
Due to importance of tackling the phenomenon & synergies with IFFs
Will show this in the rest of this presentation

6. DEVELOPMENT, NOT Just LAW ENFORCEMENT PERSPECTIVE (1/2)
As the High Level Panel on Illicit Financial Flows from Africa emphasised, IFFs should be considered as a development issue, not just law enforcement
Means that we should consider IFF to be what is harmful to countries’ development, not just what is illegal
Assessing legal but harmful actions can help to do cost- benefit analysis of current policies that allow these actions
In any case, linguistic meaning of illicit goes beyond illegal

7. DEVELOPMENT, NOT LAW ENFORCEMENT PERSPECTIVE (2/2)
Oxford English Dictionary: illicit = “not authorized or allowed; improper, irregular; esp. not sanctioned by law, rule, or custom; unlawful, forbidden”
Given public outrage at aggressive tax avoidance it is clear that aggressive tax avoidance is considered by ordinary language as both improper & not sanctioned by custom

8. WHY IS TACKLING AGGRESSIVE TAX AVOIDANCE A PRIORITY (1/2)
According to Alex Cobham’s latest estimates (with Peter Jánsky), Africa (excl. North Africa) lost at least 2 % of GDP from aggressive tax avoidance in 2013; North Africa lost at least 1% of its GDP
At current GDP levels, this means around $40 bn lossess annually
According to GIZ/BMZ, Africa’s annual infrastructure financing deficit is $60 bn annually – aggressive tax avoidance is around 2/3
According to the World Bank, filling this deficit could add 2 percentage points to Africa’s growth

9. WHY IS TACKLING AGGRESSIVE TAX AVOIDANCE A PRIORITY (2/2)
The idea that taxes affect economic growth has become politically contentious and the subject of much debate.
Some might say – taxing MNCs would discourage FDI.
Hoverer, tax incentives have high fiscal cost, reduce opportunities for public spending on priority development areas with no demonstrable effects on investment.
Incentives ranked 11th out of 12 location factors in a survey of 7000 firms in 19 African countries. (UNIDO 2011). WB’s Investor Motivation Surveys in Tanzania, Rwanda, Uganda, and Burundi show that over 90 percent of investors would have invested even if incentives were not provided (WB 2013).
High Level Panel identifies many areas where African countries can usefully clamp down on aggressive tax avoidance (e.g review double tax treaties, cost-benefit analysis of tax incentives)

10. WHY SHOULD ILLEGAL AND NON-ILLEGAL ACTIVITIES BE TACKLED TOGETHER
Economies of scope in tackling aggressive tax avoidance and other types of IFFs.
E.g. measures to analyse data on trade mis-pricing for illegal activities – same data can and should also be used for transfer pricing analysis – if a project to collect such data only makes use of it vs. illegal activities, it is a waste
If anti-IFF funds will support measures to prevent transfer of funds to financial secrecy jurisdictions (anti-illegal) will be efficient if they are extended to prevent transfer to excessively low-tax jurisdictions to prevent aggressive tax avoidance

11. WHY SHOULD ILLEGAL AND NON-ILLEGAL ACTIVITIES BE TACKLED TOGETHER
Separate processes on tax & IFF may lead to duplication of efforts OR things falling through the cracks
Practical issue for measurement – when estimating tax abuse, difficult for the analyst to tell ex-ante whether the tax shifting was illegal (evasion) or legal (avoidance)
Therefore the current focus is on abusive techniques, such as reducing revenues through investment conduit jurisdictions, or mismatch between allocation of profits reported and allocation of economic activities
Only way to estimate tax abuse is to consider evasion and avoidance together

12. WHY SHOULD ILLEGAL AND NON-ILLEGAL ACTIVITIES BE TACKLED TOGETHER
Inclusion of aggressive tax avoidance under IFF instead of BEPS will shift the burden of responsibility – developed countries that have a role in facilitating aggressive tax avoidance will be obliged to help African countries to tackle it.
>Implications for automatic exchange of tax information – OECD countries might be obliged to share it even if African countries don’t have the capacity to reciprocate
This contrasts with status quo where under BEPS, automatic exchange of tax info is on a reciprocal basis

13. Illicit financial flows should include aggressive tax avoidance
CONCLUSION
Illicit financial flows should include aggressive tax avoidance
Very important in order to leverage political momentum and funds to tackle this scourge, which is causing substantial losses for Africa (2/3 infrastructure financing deficit)
Priority area for both policymakers and researchers (importance, synergies with rest of IFFs, shared burden of responsibility on tax issues.

14. more info: Ibrahim-eca@un.org
THANK YOU!
more info:
UNECA.ORG