Domestic public resources are identified as fundamental for development financing. One of the ways in which countries can mobilize these resources is by increasing tax revenues, yet this remains a key challenge for some. According to the OECD, in 2015, African countries as a whole had a total tax revenue to GDP ratio of around 19%, with Latin America and Asia averaging at around 22% and 15% respectively, compared to around 34% for OECD member countries. A variety of factors affect countries’ ability to generate tax revenues, including the presence of large informal and subsistence sectors, narrow tax bases, and dependence on volatile export commodities. Domestic revenues are further undermined by tax evasion and tax avoidance. The term Illicit Financial Flows (IFFs) is often used to describe such practices.
There is no universal definition of IFFs, however such flows are commonly understood to fall into three main categories: (i) the acts themselves are illegal (e.g. corruption, smuggling and trafficking in minerals, wildlife, drugs, and people, tax evasion); (ii) the funds that stem from these activities are also illegal; and, (iii) the funds are used for illegal purposes (e.g. organized crime). Global Financial Integrity, a Washington based think-tank working on transparency in the international financial system, estimates that in 2013 US$1.1 trillion left developing countries through IFFs. GFI regards this estimate as highly conservative, as it does not pick up movements of bulk cash, the mispricing of services, or many types of money laundering. The research suggests that about 45% of illicit flows end up in offshore financial centres, and 55% in developed countries.
According to the OECD, between 2008-10, Africa alone had lost US$63.4 billion through trade mispricing and other illicit outflows; more than what it had received in aid and foreign direct investment, which amounts to US$62.2 billion over the same period. Ms. Ngozi Okonjo-Iweala, former Minister of Finance and Coordinating Minister for the Economy, Nigeria and a global advocate for the fight against malpractices in taxation says: “One of the problems developing countries have is that large corporations or evaders of tax have a lot of expertise.” Beyond reducing much-needed resources for sustainable development, IFFs undermine governance, foster corruption and facilitate transnational organized crime. The issue is therefore rightly on the international policy agenda. As such one of SDG 16 targets (to promote peaceful and inclusive societies, and accountability) is to, "significantly reduce illicit financial and arms flows, [and] strengthen the recovery and return of stolen assets and combat all forms of organized crime."
Other sources of revenue leakage include those generated by aggressive tax planning strategies, typically by multinational enterprises (MNEs). MNEs engage in highly complex strategies to shift profits from where they are earned to low or no tax jurisdictions; also known as the Base Erosion and Profit Shifting (BEPS). The problem is exacerbated by knowledge asymmetry between developed and developing countries in terms of identifying, understanding and countering these strategies. According to UNCTAD, an estimated US$100 billion of annual tax revenue losses for developing countries can be attributed to multinationals’ offshore hubs. UNCTAD also notes that MNE contributions to government revenues are around 10 percent in developing countries. Appropriate MNE taxation is central to increasing the domestic resources of developing countries so that taxes are paid where economic activity occurs and value is created.