Here’s an obvious truth: tax lost to trade misinvoicing in Africa does not equal tax lost to transfer mispricing by multinational corporations in Sierra Leone, which does not equal lost health-care spending. Unfortunately, a policy paper released on Tuesday by Oxfam makes exactly these equivalences. This sort of imprecision is widespread, and it’s not going to help the poor.
The Oxfam report calculates that US $6bn of tax revenue was lost by African countries as a result of transfer mispricing by G7-based firms in 2010. This is based on an assessment of trade misinvoicing from the report of the UNECA High Level Panel on Illicit Financial Flows from Africa (table AIII.4).
The Oxfam paper is primarily misleading because it conflates trade misinvoicing with transfer mispricing, when these are very different things. Trade misinvoicing is the general practice of manipulating the price, quantity, or quality of a good or service on an invoice so as to shift capital illicitly across borders. Transfer mispricing is much more specific; it occurs when two affiliated firms (e.g. subsidiaries of a multinational) are transferring goods or services and this is not priced at the same rate an unaffiliated firm would have had to pay, illicitly shifting capital from one firm to the other.
The figures on trade misinvoicing relied upon by Oxfam relate to both affiliated and non-affiliated firms, and concern local actors as well as multinational corporations. Reducing this complex picture to bad behaviour within multinationals doesn’t help anybody to tackle real problems in taxation.
In addition, Oxfam’s press release, picked up word-for-word by the Guardian, states:
This [US $6bn] is equivalent to three times the amount needed to plug the healthcare funding gap in Ebola-affected countries of [sic] Sierra Leone, Liberia, Guinea and at-risk Guinea Bissau.
This is misleading because it suggests that eliminating trade misinvoicing would provide sufficient resources for health-care reform in countries like Sierra Leone. In fact, the UNECA report relied upon by Oxfam uses figures (Statistical Appendix Table 4) from Global Financial Integrity that suggest that the countries mentioned in the quote above accounted for, respectively, 0.28%, 0.40%, 1.00% and 0.06% of their estimate for trade misinvoicing in Africa from 1970 to 2008. So, even if the lost tax revenue could be recovered by the countries concerned, very little of that money would be available in the countries Oxfam mentions.
The quote also implies that African governments would spend the extra revenue, 1:1, on health. In fact, we know that this would not be the case. Governments spend their money on all kinds of things, and finding financing for development is a complicated problem. We should not suggest that there is a sufficient ‘pot of gold’ to be had by only paying attention to corporate tax avoidance, as we pointed out in a recent CGD blog.
This is not to say that corporate tax avoidance isn’t important. It is: taxation of multinational corporations is a significant source of financing for development, and improvements and reforms in tax policy and implementation could potentially increase this, but it is nowhere near sufficient. When organisations like Oxfam equate misapplied estimates of corporate tax dollars lost to health spending needed, they are enabling policy makers (and tax payers the world over) to avoid the hard questions about where the rest of the money will have to come from to finance development.
A forthcoming CGD working paper by Maya Forstater will look at the “big numbers” that have shaped the tax debate. It will try to separate out the numbers that make sense from those that don’t, with the aim of improving the quality of the debate around tax reform.