Briefing Paper

Financing for development series: Increasing domestic resource mobilization by tackling tax flight

Kapoor, Sony
Briefing Paper (14/2008)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Tax flight from developing countries is estimated to be several times higher than aggregate inflows from development assistance. It severely weakens domestic resource mobilisation and undermines good governance.
The main actors and mechanisms are companies that are mis-pricing trade transactions or financial transfers; banks, companies or individuals that are mis-reporting financial transfers; and outright smuggling of high value commodities. Tax flight is driven by a complex web of facilitators who exploit an increasingly sophisticated but poorly regulated international system to their advantage.

Tax flight could be reduced by decisive and internationally coordinated actions at the source, in transit, and at the destination of illicit transfers. This would entail the obligatory recording of beneficial ownership information of bank accounts, trusts, companies, foundations and other legal vehicles by financial centres including ‘tax havens’.
On the international level tax flight could be tackled by information sharing agreements among countries, by compensating ‘tax havens’ for reduced income, and by including tax flight as a criminal offence in international regimes and code of conducts. Institutionally, there is a need for a permanent structure to help increase effectiveness, clout and institutional memory in tackling tax flight.