Too late, too little? The IMF and international tax flight

When key decision makers of the International Monetary Fund (IMF) gather in Washington DC for the IMF’s annual meeting in October, one thing that would merit more attention is the mismatch between the IMF’s recent alignments against international tax flight and the tax policy advice it gives to its member states.

Recent years have seen increasing interest on the development impacts of different forms of international tax flight, from illegal tax evasion to questionable tax avoidance. To highlight one example, United Nations Conference for Trade and Development UNCTAD estimated in 2015 that developing country tax losses related to tax haven-related investments are annually around US$100 billion.

In a recent WIDER working paper, I analysed the policy advice that the IMF had given to Panama, Seychelles and the Netherlands since 1999. The results? Despite the IMF’s recent efforts after 2011 to scale up its work against international tax flight, the outcomes have been disappointing.

New alignments against international tax flight

To start with the good news, years of pressure from civil society, some IMF member states, and the broader policy community have resulted in new alignments against international tax flight. After a modest headway in 2011, the IMF has signed international calls for action and addressed the problems created by international tax avoidance and evasion in the resolutions of its key decision-making committees.

To highlight one example, in April 2014, the ministerial-level International Monetary and Financial Committee of the IMF noted the need to enhance data provision, ‘fiscal transparency, and fight cross-border tax evasion and tax avoidance’, as well as improving ‘the transparency of beneficial ownership of companies and other legal arrangements, including trusts’.

The country offices of the IMF have also showed some signs of getting more active in this front. Whereas the loan documents and other country reports published in the early 2000s barely commented on the notorious tax haven practices of Panama and Seychelles, these problems have started to gather more attention during the 2010s.

Inconsistent treatment across countries

One interesting point highlighted by the case studies of Panama and Seychelles was the way in which IMF relied on thematic recommendations from smaller international organizations and its own specialized departments.

In Panama, the IMF’s recommendations in the 2010s have drawn from thematic reports written by the Fund’s legal and capital market departments. However, in Seychelles, in its recommendations the IMF also relied on a stern report that the OECD’s Global Forum had issued on the country.

The OECD’s Global Forum focuses on the obstacles of international tax information exchange, which is a broader topic than anti-money laundering rules. The Global Forum had also produced a similar report on Panama in 2010, but for some reason the IMF has mostly ignored it, apart from some vague remarks.

In other words, Panama was treated more lightly than Seychelles. It is difficult to find any objective reasons for this, especially given that Panama is a much more important player in the global offshore industry than Seychelles. Panama ranks 12th in the Financial Secrecy Index of the Tax Justice Network, while Seychelles ranks 72nd. Panama’s higher ranking comes mostly from being a heavyweight in the global offshore industry, but it has also been deemed to be more secretive than Seychelles.

The Netherlands is also a very interesting case. The Dutch authorities have no significant problems in enforcing anti-money laundering rules and they are also forthcoming in international tax information exchange when it comes to tax evasion. However, several studies have highlighted the role that the Netherlands plays in structures of international corporate tax avoidance, originating from rich and developing countries alike.

The reports produced from the IMF’s annual country visits to the Netherlands have paid no attention to these problems. On the contrary, the Netherlands has been regularly applauded for its commitment to international development goals.

It would be easier to understand this approach if the IMF’s new alignments had focused only on the structures and mechanisms of tax evasion. However, as pointed out earlier, they have explicitly called for more attention to tackle tax avoidance as well.

Policy diffusion between international organizations

Theoretically, these case studies highlight an under-studied phenomenon in international relations — namely, policy diffusion between international organizations. While there have been lacunae in research on policy diffusion and convergence in international arenas, the focus has almost always been on how ideas diffuse between countries or from international organizations to their member states.

Policy-wise, my findings call for more nuanced and sober-headed discussion within the IMF and its constituencies on how it could live up to its new commitments in tackling international tax flight. Special attention needs to be paid to not excluding individual countries based on their international reputation in other areas.

In practical terms, the IMF needs to utilize the analyses produced by other international organizations to a fuller extent in all countries. However, this alone is not enough to fulfill the IMF’s own alignments, given the gaps and loopholes in the existing initiatives. The IMF could be the right actor to address some of these gaps, but this is not necessarily so. This would call for a broader discussion on the division of labour between the IMF, the UN, the World Bank, the OECD, and other actors in global tax governance.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.