MAC: Mines and Communities

Zambia: State to probe siphoned corporate taxes

Published by MAC on 2012-12-27
Source: Times of Zambia, statements (2012-12-20)

The report can be downloaded at: http://iff.gfintegrity.org/iff2012/2012report.html

State to probe siphoned K40trn

By Kaiko Namusa

Times of Zambia

20 December 2012

Chikwanda - Government will institute investigations into reports that the country lost a shocking K40 trillion from 2000 to 2010 in tax evasion and corruption, mainly in the mining sector. *

Finance Minister Alexander Chikwanda said the Government would study the matter.

The minister said in an interview yesterday that he had only learnt of the news in the media and would give a comprehensive reaction at an appropriate time.

Washington-based group, Global Financial Integrity, in its report revealed that more than £5 billion (K40 trillion) had been illegally siphoned out of Zambia over 10 years, with most of it ending up in offshore banks and tax havens.

This is according to a report by financial transparency campaigners.

"I have only seen this in the Times of Zambia. We have to study this matter seriously and it will be investigated," Mr Chikwanda said.

The report indicated that the lost money, most of which could be traced to multinational copper mining operations, was equivalent to almost half of Zambia's Gross Domestic Product.

"The big global mining companies are robbing the opportunities for the countries to advance; it [the money] could have been used to build hospitals and schools and lift the economy out of poverty," said Dev Kar, an economist and co-author of the report.

Dr Kar said it was difficult to track where the money went, but noted that most of it ended up in offshore banks and tax havens.

Sarah Freitas, the other author of the report, said $4.9 billion of Zambia's lost funds could be traced to trade misinvoicing in which importers pretended to pay more to foreign companies than they actually did, with the remainder slipped into offshore bank accounts.

* I Zambian Kwacha= US$0.0002


New Report Finds Crime, Corruption, and Tax Evasion at Near-Historic Highs in 2010

Illicit Financial Outflows Cost Developing World $859 Billion in 2010, Rebounding Rapidly from Financial Crisis

Nearly $6 Trillion Stolen from Poor Countries in Decade between 2001 and 2010

17 December 2012

WASHINGTON, DC - Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010, just below the all-time high of $871.3 billion set in 2008-the year preceding the global financial crisis. The findings are part of a new study released today by Global Financial Integrity (GFI), a Washington-based research and advocacy organization.

The report, "Illicit Financial Flows from Developing Countries: 2001-2010," is GFI's annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI's reports to include data for the year 2010.

Co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, the study is the first by GFI to incorporate a new, more conservative, estimate of illicit financial flows, facilitating comparisons with previous estimates from GFI updates.

"Astronomical sums of dirty money continue to flow out of the developing world and into offshore tax havens and developed country banks," said GFI Director Raymond Baker.

"Regardless of the methodology, it's clear: developing economies are hemorrhaging more and more money at a time when rich and poor nations alike are struggling to spur economic growth. This report should be a wake-up call to world leaders that more must be done to address these harmful outflows."

Methodology

As developing countries begin to loosen capital controls, the possibility exists that the methodology utilized in previous GFI reports - known as the World Bank Residual Plus Trade Mispricing method - could increasingly pick-up some licit capital flows.

The methodology introduced in this report - the Hot Money Narrow Plus Trade Mispricing method - ensures that all flow estimates are strictly illicit moving forward, but may omit some illicit financial flows detected in the previous methodology.

"The estimates provided by either methodology are still likely to be extremely conservative as they do not include trade mispricing in services, same-invoice trade mispricing, hawala transactions, and dealings conducted in bulk cash," explained Dr. Kar, who previously served as a senior economist at the International Monetary Fund. "This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates."

Findings

The $858.8 billion of illicit outflows lost in 2010 is a significant uptick from 2009, which saw developing countries lose $776.0 billion under the new methodology. The study estimates the developing world lost a total of $5.86 trillion over the decade spanning 2001 through 2010.1

"This has very big consequences for developing economies," explained Ms. Freitas, a co-author of the report. "Poor countries lost nearly a trillion dollars that could have been used to invest in healthcare, education, and infrastructure. It's nearly a trillion dollars that could have been used to pull people out of poverty and save lives."

Dr. Kar and Ms. Freitas' research tracks the amount of illegal capital flowing out of 150 different developing countries over the 10-year period from 2001 through 2010, and it ranks the countries by magnitude of illicit outflows. According to the report, the 20 biggest exporters of illicit financial flows over the decade are:

China ....................... $274 billion average ($2.74 trillion cumulative)
Mexico ..................................... $47.6 billion avg. ($476 billion cum.)
Malaysia .................................. $28.5 billion avg. ($285 billion cum.)
Saudi Arabia ........................... $21.0 billion avg. ($210 billion cum.)
Russia ....................................... $15.2 billion avg. ($152 billion cum.)
Philippines ............................... $13.8 billion avg. ($138 billion cum.)
Nigeria ...................................... $12.9 billion avg. ($129 billion cum.)
India ......................................... $12.3 billion avg. ($123 billion cum.)
Indonesia ................................. $10.9 billion avg. ($109 billion cum.)
United Arab Emirates .............. $10.7 billion avg. ($107 billion cum.)
Iraq ......................................... $10.6 billion avg. ($63.6 billion cum.)2
South Africa ........................... $8.39 billion avg. ($83.9 billion cum.)
Thailand ................................. $6.43 billion avg. ($64.3 billion cum.)
Costa Rica ............................... $6.37 billion avg. ($63.7 billion cum.)
Qatar ........................................ $5.61 billion avg. ($56.1 billion cum.)
Serbia ....................................... $5.14 billion avg. ($51.4 billion cum.)
Poland .................................... $4.08 billion avg. ($40.8 billion cum.)
Panama ................................... $3.99 billion avg. ($39.9 billion cum.)
Venezuela ................................ $3.79 billion avg. ($37.9 billion cum.)
Brunei ..................................... $3.70 billion avg. ($37.0 billion cum.)

For a complete ranking of average annual illicit financial outflows by country, please refer to Table 2 of the report's appendix on page 36, or download the rankings by average annual illicit outflows here [PDF | 51 KB].

Also revealed are the top exporters of illegal capital in 2010, which were:

China ..................................................... $420.36 billion
Malaysia .................................................. $64.38 billion
Mexico ...................................................... $51.17 billion
Russia ...................................................... $43.64 billion
Saudi Arabia ............................................ $38.30 billion
Iraq........................................................... $22.21 billion
Nigeria ..................................................... $19.66 billion
Costa Rica.................................................. $17.51 billion
Philippines ............................................... $16.62 billion
Thailand.................................................... $12.37 billion
Qatar ........................................................ $12.36 billion
Poland ...................................................... $10.46 billion
Sudan ......................................................... $8.58 billion
United Arab Emirates ................................ $7.60 billion
Ethiopia ..................................................... $5.64 billion
Panama ...................................................... $5.34 billion
Indonesia .................................................... $5.21 billion
Dominican Republic ................................... $5.03 billion
Trinidad and Tobago .................................. $4.33 billion
Brazil ........................................................... $4.29 billion

An alphabetical listing of illicit financial outflows is available for each country in Table 9 on pg. 62 of the report. You can also download the alphabetical listing of illicit financial flows data for each country here [PDF | 64 KB].

Connections to Previous GFI Studies

China, the largest cumulative exporter of illegal capital flight, as well as the largest victim in 2010, was the topic of an October 2012 country-specific report by GFI's Kar and Freitas. Using the older methodology, "Illicit Financial Flows from China and the Role of Trade Misinvoicing," found that the Chinese economy suffered $3.79 trillion in illicit financial outflows between 2000 and 2011.

"Our reports continue to demonstrate that the Chinese economy is a ticking time bomb," said Dr. Kar. "The social, political, and economic order in that country is not sustainable in the long-run given such massive illicit outflows."

Mexico, the second-largest cumulative exporter of illicit capital over the decade, was also the topic of a January 2011 GFI report by Dr. Kar. The study, "Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy," found that Mexico lost a total of $872 billion in illicit financial flows over the 41-year period from 1970 to 2010. Moreover, illicit outflows were found to drive Mexico's domestic underground economy, which includes-among other things-drug smuggling, arms trafficking and human trafficking.

Possible Solutions

Global Financial Integrity advocates that world leaders increase the transparency in the international financial system as a means to curtail the illicit flow of money highlighted by Dr. Kar and Ms. Freitas' research. Policies advocated by GFI include:

Funding

Funding for the report was generously provided by the Ford Foundation.

###

Notes to Editors:

Contact:

Clark Gascoigne
+1 202 293 0740, ext. 222

EJ Fagan
+1 202 293 0740, ext. 227

--

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org.


A forthcoming report by Global Financial Integrity finds that Zambia lost US$8.8 billion in illicit financial outflows from 2001-2010

By Sarah Freitas

Financial Task Force

13 December 2012

Sarah Freitas is an Economist at Global Financial Integrity in Washington, DC and a co-author of "Illicit Financial Flows from Developing Countries over the Decade Ending 2009," a December 2011 report from GFI.

In our newest report, Illicit Financial Flows from Developing Countries 2001-2010, we look at illicit financial flows-the proceeds of crime, corruption, and tax evasion-leaving the developing world. Illicit financial flows are a type of capital flight, and have been a persistent plague on the developing world for some time now.

Our new report will be released on Tuesday morning. But for today, I want to focus more narrowly on Zambia, one of the poorest nations on earth and one of the clearest examples of the damage caused by both illicit and licit capital flight.

Our research finds that $8.8 billion left Zambia in illicit financial flows between 2001 and 2010. Of that, $4.9 billion can be attributed to trade misinvoicing, which is a type of trade fraud used by commercial importers and exporters around the world.

This is a very serious problem. Zambia's GDP was $19.2 billion in 2011. Its per-capita GDP was $1,413. Its government collected a total of $4.3 billion in revenue. It can't afford to be hemorrhaging illicit capital in such staggering amounts.

In previous reports, we've proven that illicit financial flows drive the underground economy. This means that as criminals and tax evaders avoid law enforcement and move their money overseas, it becomes easier for them to operate in Zambia. The underground economy becomes bigger, which makes it even more difficult for Zambia's government to collect taxes. This in turn drives illicit financial flows further, completing the vicious feedback loop.

These illicit outflows come on top of tremendous outflows from legal corporate tax avoidance. $2 billion is lost yearly to tax avoidance by multinational corporations operating in Zambia, according to Zambian Deputy Finance Minister Miles Sampa. Most of this tax avoidance is due to abusive transfer pricing-which is a type of quasi-legal trade misinvoicing-in the mining sector.

According to Minister Sampa, of all the major multinationals that export record amounts of copper and other metals out of Zambia, just "one or two" officially recorded a profit, and therefore pay no corporate tax. A new law to close corporate tax avoidance loopholes is estimated to raise $1.5 billion per year. Minister Sampa asks, "How many hospitals can that build? How many roads can that help us develop?"

The type of tax avoidance that Minister Sampa is referring to will not be picked up by our illicit financial flow estimates, both because the activity is not explicitly illicit and because it occurs between two branches of a multinational corporation, and therefore isn't reflected in the IMF Direction of Trade statistics that we use to calculate illicit financial flows.

Tax revenue loss from capital flight means less to spend on not only education and transportation infrastructure, but also on fighting HIV/AIDS, providing clean water, and generally building up society. It means more money has to be borrowed from abroad, and it strains aid budgets. If Zambia were to collect an extra $2 billion per year in revenue from curtailing both illicit financial flows and legal tax avoidance, they could increase their government's budget by 46%.

But on top of the tax revenue lost, the Zambian people need Zambian wealth to stay in Zambia. When a mining company moves money out of the country instead of paying corporate tax on earnings, it drains much-needed capital from the economy. Money that stays in the country will provide a compounding boost to the Zambian economy every single year, as it will be invested in the private sector.

Zambia has the natural resource wealth to dig (literally and figuratively) its way out of poverty, but only if the West acts at the same time. Zambia can't do this alone. The extra money could be siphoned off to the offshore bank accounts of corrupt public officials, or companies could find new ways to legally pretend that their profits were made elsewhere.

The global shadow financial system - a network of secrecy laws, tax havens, shell corporations, and banks like HSBC without real money laundering controls - facilitates both illicit financial flows and pernicious corporate tax avoidance. We need to break this system down. We can start by reforming international customs and trade protocols to detect and curtail trade misinvoicing and requiring the country-by-country reporting of sales, profits and taxes paid by multinational companies.

 

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