Profit Shifting & Illicit Financial Flows: Evidence and Agenda

Public Finance &
Illicit Financial Flows:
Evidence and Agenda
Ah Maftuchan - Researcher at PRAKARSA – Jakarta, Indonesia
Presentation in Session 2 of Reversing the Resource Curse Conference
Accra, Ghana; August 25-27, 2013
• Introduction – financing development
• Overview of illicit financial flows (IFFs)
• Evidence of IFFs in global & selected area (Asia / Africa)
• Public financing and illicit financial flows  relations &
• Research and advocacy agenda
Financing for development
• Development financing is one the heated topics in the debate of
global development because it involves huge amount of money;
• Sources of development financing: domestic & foreign
financing. Domestic financing (tax and non-tax revenues) and
foreign financing (assistance/donations, foreign investment,
international trade, foreign debt, remittance etc);
• If a poor country cannot finance their own development
(because its national revenues is very small), others countries
could give assistance/ODA in form of technical assistance or
• ODA cannot be the only source of development financing
because it is not sustainable and insignificant (especially for
emerging countries). Therefore, mobilization of domestic
resources is urgent.
Tax and Public Finance
• Tax is one of the most heated issues in policy debates in many
countries, and it has become a transnational issue;
• Domestic resources such as taxes and remittances of migrant
workers are more significant for financing development
(Greenhill and Prizzon, 2012);
• Taxes are the main revenues for the government. However,
taxation often faces political pressure and illicit financial flows
(tax evasion, money laundering, and secrecy jurisdictions),
which are now perceived as important obstacles to
Illicit Financial Flows?
• Illicit financial flows (IFFs) refer to money that is ‘illegally
earned, transferred, or utilized. If it breaks laws in its origin,
movement or use it merits the label’ (Global Financial Integrity /
• The money which are moved across borders originate from
three major sources: corruption, criminal activity, and cross
border tax evasion (Tax Justice Network, 2011);
• This money is strategically shifted from developing economies
into the global shadow of financial system to facilitate kickbacks, bribery, and other forms of grand corruption, thereby
making basic day-to-day services more expensive and less
efficient (ASAP, 2012);
• Illicit financial flows is dirty business practices, an informal
economy with a jurisdiction that facilitate the practices of tax
evasion/avoidance, as exemplified by the existence of many
countries categorized as tax havens (Fuest & Riedel, 2009).
The most common sources of IFFs and the patterns
of circulation of illicit and licit funds
Licit Sources
Illicit Income
(e.g., drug trafficking,
smuggling, domestic
tax evasion)
Avoidance &
Tax Evasion
conducted by
the criminals
involved in the
illicit activities
which licit
funds are
circulated &
become illicit
through which
illicit funds are
circulated to be
by criminals
Source (adapted): Fontana & Hansen-Shino, 2012.
Evidence: Global #1
• It is estimated that about 60-70 % of international trades
take place within multinational corporations: that is,
across national boundaries but within the same corporate
group (Tax Justice Network, 2012);
• Trade mispricing was found to account for an average of
80,1% and corruption, bribery, criminal activities account
for an average of 19,9% of cumulative illicit financial
flows from developing countries over the period 20012010 (GFI, 2012).
• Conservatively estimated, illicit financial flows have
increased in every region of developing countries. From
2001 to 2010, developing countries lost US$ 5.86 trillion
to illicit outflows (GFI, 2012).
Evidence: Global #2
• In average, from 2001 to 2010, developing countries lost US$
586 billion/year to illicit financial outflows (GFI, 2012);
• Conservatively estimated, from 2001 to 2010, developing
countries lost potential taxes US$ 190 billion/year because of
the operation of “tax havens” (ASAP, 2012);
• Conservatively estimated, from 2001 to 2010, developing
countries lost potential taxes US$ 100 bilion/year, if Tobin
Tax is implemented (ASAP, 2012);
• For every US$ 1 that goes into developing countries as
foreign assistance (ODA), US$ 10 goes out through these
illicit means (GFI, 2012);
• Every US$80 of illicit financial flows is equal to US$ 1 spent
on basic social services (ASAP, 2012).
Illicit Financial Flows in Real Terms 2001-2010;
Regional Shares in Developing World Total 1/ (Kar & Freitas, GFI, 2012)
IFFs of 33 Sub-Saharan African countries (1970 –2010):
US$ 814 billion
Source: “Capital Flight from Sub-Saharan African Countries: Updated Estimates, 1970 –
2010” (JK. Boyce & L. Ndikumana, 2012)
Overview of Indonesia Tax System
Ministry of Finance of the Republic of Indonesia, 2012
Number of Indonesian taxpayers over time
Source: Ministry of Finance of the Republic of Indonesia, 2012.
Indonesia is a “lower middle income country” with GDP US$ 878.0 billion (2012), GNI per capita (PPP) US$ 4,480 (2011) and with total
population 246.9 million (2012). But, total number of taxpayers (individuals and corporation) only 20,4 million taxpayers (2010). Based on
the data, number of taxpayers is very low. The potential taxpayers can be increased until 50 million (individual-wealth person, employed,
self-employed, and corporation).
Evidence: Indonesia’ #1 (Tax Ratio)
Indonesia’s tax ratio is less than low income countries
The average tax ratio of low
income countries
tax ratio
tax ratio
The average tax ratio of middlelow income countries
The average tax ratio of middlehigh income countries
The average tax ratio of high
income countries
Sources : IMF 2011, APBN 2012,
Prakarsa Policy Review March 2012
• Indonesia is a member of G20 with the lowest tax
ratio among the G20 members;
• Indonesia’s tax ratio (per-GDP) in the last five years
has been less than 14%  2007 (12,4 %), 2008
(13,3 %), 2009 (11,0%), 2010 (11,3%), 2011
(11,8%), 2012 (12,7%);
• The Indonesia’s tax ratio shows that the government
performance in collecting tax is not optimal. It also
shows that there is no significant expansion of tax
base and that the awareness of the people to pay tax
is still low (Budiantoro & Prastowo, 2012).
Evidence: Indonesia’ #2
• Self-employed individuals are not captured by the
withholding system, and no systematic approach
exists for assessing their tax liabilities as a
substantial scope for broadening the tax base;
• Tax revenue does not reflect the principle of
justice. Wealthy people contributing 1,2% of total
tax reveneue and employees contributing 18,6%
of total tax reveneue (2010);
• The wealthy individuals do not give significant
contribution while the employees give more
significant contribution.
Indonesia’s tax structure compared OECD & ASEAN
(as % of GDP, 2010)
Evidence: Indonesia’ #3
(High Illicit Flows)
• Indonesia ranks 9 among 20 countries that
have the highest illicit financial flows in the
• From 2001-2010, the total amount of
Indonesia’s illicit financial outflows was
around US$ 123 billion (GFI, 2012);
• Annual illicit financial outflows from Indonesia
is US$ 10,9 billion (± Rp 110 triliun/year).
Top 20 Countries’ Cumulative Illicit Financial Flows 2001-2010
(Kar & Freitas, GFI, 2012; US$ billions)
Effect of IFFs
• The effect of illicit flows i.e.:
 The amount of illicit flows exceed flows from aid to developing
countries: lower revenues  greater reliance on aid & loans;
 Corruption probably accounts for a larger proportion of illicit flows
coming out of the least-developed countries that are dependent on
aid  eroded tax base  fewer public goods & services
 Illicit flows have much greater negative economic impact, including
on the functioning of the state in developing countries  more
financial ‘burden’ to legitimate business  incentives to bribe or to
 Illicit flows are a central component of the world economy, and
corruption cannot be fought effectively in developing countries
without developed countries playing their part to stop the ‘illicit
CSOs Proposed Agenda
• consolidating CSOs working groups at the national,
regional and global level to address tax issues;
• developing practical tools for research & advocacy on
tax and IFFs;
• capacity building for CSOs and think-tank groups on
research-monitoring-estimating IFFs  country by
country, regions and worldwide;
• developing global partnership between governments
and CSOs to counter illicit flows as proposed in the Post
2015 development financing agenda;
• corporate accountability and transparency advocacy.
Thank you for your attention
Ah Maftuchan
Social Policy & Governance Specialist
Perkumpulan Prakarsa
Komplek Rawa Bambu I Blok A No 8-E RT 010 RW 06
Pasar Minggu | Jakarta Selatan | Indonesia | 12520
Phone: +62 21 7811-798 | Fax: +62 21 7811-897 | Mobile: +62 852 7777 4448 | Email: [email protected] | [email protected] | Twitter:
@AhMaftuchan | Website:

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