Speeches & Transcripts

Speech by World Bank Managing Director and COO Sri Mulyani Indrawati at Event on Tax Evasion and Development Finance

April 17, 2015

World Bank Managing Director and COO Sri Mulyani Indrawati Washington, D.C., United States

As Prepared for Delivery

Thank you. Leonard. It is a great pleasure to join you here today to discuss this very important topic.

This year is a crucial year for us and our many partners: At the United Nations the international community will define the new Sustainable Development Goals, which will be the next-generation scorecard of our combined efforts to end poverty.

And while we are discussing how we can finance our fight to end poverty and to promote sustainable development, we cannot afford to leave a single stone unturned.

We know already that development aid, by itself, will not be sufficient. It will take the private sector and domestic resources to finance the development agenda. Increasing tax revenues will be one of the key factors in that process.

To fight tax evasion, countries must have transparent policies, administrative capacity to identify suspicious transactions, and the ability to carry out effective tax supervision.

UNCTAD estimates that more than 60 percent of global trade occurs within multinational groups. That creates the potential for failing to declare profits and to shift profits from high-tax to low-tax jurisdictions. This is often done through illegal tax evasion.

But sometimes it is also done through legal forms of tax avoidance and manipulation – including trade and transfer mispricing; dubious payments between parent companies and their subsidiaries; and profit-shifting mechanisms designed to hide revenues.

A recent UNCTAD study indicates that about $100 billion in annual tax revenue is lost to developing countries in transactions directly linked to offshore hubs. The total “development finance” loss – counting both revenue and reinvested earnings – is estimated in the range of $250 to $300 billion. This prevents developing countries from stopping the outflow of money – which thus bleeds them of essential resources.

For the schoolchild in Haiti, the new mother in Malawi, or the farmer in Bangladesh, these losses have a real impact: They result in classrooms that are overcrowded, health clinics that are never built, and water that is never delivered. People’s opportunities are being stolen from them – because tax revenues are not collected.

Fortunately, the international community has woken up. An initiative of African finance ministers, chaired by former South African president Thabo Mbeki, is investigating the issue on the continent, where up to $1.4 trillion was lost to illicit outflows over the last three decades.

Most recently, the G-20 has begun to call for global action. In 2013, the G-20 launched the Base Erosion and Profit Shifting Program, and it asked international organizations to analyze the impact of fiscal incentives on revenue lost versus the benefits gained.

Moreover, the G-20 has asked its member countries to “lead by example” on beneficial ownership and to take concrete steps to ensure greater accessibility.

This is good news, particularly for the world’s poorest. But many roadblocks remain. To help confront those obstacles, we should focus on three critical issues:

First, developing countries – and especially resource-rich countries – must build effective institutions with sound and enforceable tax policies. They must also adopt policies that promote good governance and implement effective tax systems that embed clear and transparent rules.

Make no mistake: These problems are not unique to developing countries. These problems are global in nature. There is no denying that undeclared earnings, diverted from poor countries, often end up in the world’s most sophisticated financial centers, which have become quasi-enablers.

That is why it requires international cooperation to address the demand for and the supply of tax havens as well as the cover-up of illicit financial transfers.

Second, regulations that identify the true owners of funds need to be enforced. Once assets are parked in opaque companies, they are often beyond the reach of tax authorities and investigators, and they are shielded from disclosure by laws and regulations that inadvertently protect criminals. These practices must stop.Third and finally, a system for automatically exchanging tax information among countries would limit the places where tax evaders and money launderers can easily hide money.

Almost 90 countries have now committed to begin, as early as 2017, cross-border data exchanges. Sharing this information could help authorities identify the proceeds of corruption and illegal transactions.

More action is certainly needed. At the World Bank Group our experts on integrity; governance; trade and competitiveness; macroeconomic and fiscal management; finance and markets; as well as the initiative to recover stolen assets are already working with our clients to improve governance systems, collect taxes, and fight corruption. Our work will benefit enormously from the current drive for more international cooperation.

So, I am very glad that you have come here today to discuss this important topic. My colleagues and I look forward to hearing your ideas about solutions to this complex and urgent issue for development.

Thank you very much.