It is no secret that multinational companies and high-net-worth individuals regularly make use of tax havens, but most people do not expect a similar stance from the World Bank. But despite this expectation, the World Bank’s International Finance Corporation has connections to tax havens via its investments in companies that use them.
A new study suggests that of the aid that the World Bank provides to governments, five percent may end up leaking into tax havens. The management team at the World Bank have expressed shock from those findings, but they are not the only problem.
That study examined public sector funds, but Oxfam examined the private sector lending arm as well. This is the International Finance Corporation (IFC) of the World Bank. According to Oxfam’s research, a substantial portion of that funding ends up in tax havens via deposits.
Some of the research from Oxfam is not new, but it has become prominent again due to the other study mentioned. The research was initially released in 2016, around the same time as the Panama Papers. That research indicated that 84 percent of the lending IFC did to Sub-Saharan Africa ended up going to companies that operated within tax havens that had no apparent link to the core business. An example would be if the IFC provides funding to a company to complete a project in Zambia, but the company channels its business through Mauritius or another tax haven.
Two Sides of the Situation
On the one hand, a large portion of foreign investments goes through tax havens. This reduces the tax bills of investors and is standard practice. Additionally, funneling funds via tax havens does not automatically mean that the money involved is stolen, wasted, or used illegally. In most cases, it is funneled through a tax haven, but the money does eventually get spent in the country where the project occurs, which is the intention of the IFC.
However, the host country ends up with less money than it would have otherwise because of the companies involved using tax havens to avoid paying their taxes. This means that although the country still benefits from a project funded by the IFC, the tax revenues that the country gains are reduced.
Tax Havens Should Be Against the World Bank’s Goals
As the World Bank aims to help countries around the world fight poverty, the IFC’s use of tax havens can be counterproductive. Avoiding taxes is technically legal as it exists in a gray area that even the tightest tax regulations have difficulty fighting.
This is problematic because the World Bank’s Sustainable Development Goals rely on governments being able to improve their tax collection, both in terms of fairness and quantities. Those taxes are then used to fund essential health services and education. The World Bank encourages domestic resource mobilization in addition to aid, as the latter is not enough.
The World Bank’s Potential Actions
At the moment, the World Bank is reviewing the Offshore Financial Centers Policy. This policy governs the IFC’s ability to let money travel through tax havens and the conditions in which that occurs.
Those who are concerned about the World Bank’s connection to tax havens offer a few potential solutions or actions that the organization should take to minimize the problem. They suggest that the World Bank adopt the international standards fighting against tax havens that are the strongest. This could involve changing the transit of its funding, so it does not go through tax havens. Avoiding those countries would theoretically encourage tax havens to make changes.
Those against tax havens also argue that the World Bank should adjust its Doing Business Index not to include the tax rate indicator, as this encourages countries to reduce taxes as a way to attract business.
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