Updated | For as long as companies and individuals hide their wealth in offshore firms, developing countries will continue to lose money that could provide basic public services to help lift people out of poverty, experts say.
On Sunday night, 11.5 million secret documents, alleged to be connected to Panama-based law firm Mossack Fonseca, were leaked after an anonymous source passed them to the German newspaper, Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ).
The files show the myriad ways that the rich can exploit secretive offshore tax regimes.
A host of celebrities, British politicians and the global rich are implicated in the leak. Some of the most high-profile names include the President of Ukraine, Petro Poroshenko; Ex-prime minister of Iraq, Ayad Allawi; and the former President of Sudan, Ahmad Ali al-Mirghani.
Some newspapers have called Sigmunder Gunlaugsson, the former Prime Minister of Iceland, who resigned today, the “first victim of the Panama papers.”
But experts and charities have warned that the game of tax avoidance and evasion does not only involve the elite. The true, unwitting victims are the people worldwide whose net worth amounts to less than $1 million and are categorised as part of the “Everyone Else” in the Tax Justice Network’s table of global wealth.
“It abuses human rights,” John Christensen, director and co-founder of the U.K.-based Tax Justice Network, tells Newsweek: “The victims are ordinary people, like you and I. It goes back to the simple rule of law—if the rich and powerful pay less tax, then the rest of us end up paying more. And there is evidence of that, look at what has happened in Britain. The rich get richer and the poor get poorer, we see an increase in VAT and we lose much needed public services.”
Global efforts to help developing countries, such as Nigeria and Malawi, are also seriously hindered by tax avoidance. This occurs because tax avoiders often route money through countries that they know have unfair tax treaties—which also tend to be the poorest. They are left with little right to tax this money, meaning they have less to spend on education, healthcare and safe roads.
This “hemorrhage” of wealth seriously outweighs what they receive in foreign aid.
In its simplest form, this manipulation involves a corporation working in a developing country setting up a subsidiary to their company in a tax haven. Then, they sell their product at an low price to this subsidiary, which enables them to owe minimal tax to that country. Finally, their subsidiary in the tax haven sells the product at the market price, for comparatively huge profits coupled with a low tax rate—or none at all.
In other words, corporations manipulate prices to avoid paying taxes and the result sees the country with the unfair tax system plunging further into poverty because they are unable to feed their own economies. In the case of Africa, this practice is estimated to account for 60 per cent of the nation’s capital flight. A massive “hemorrhage.”
Last year, Oxfam launched a campaign in which it blasted tax dodging as “a corporate plague” and it has continued to fight the cause.
Malawi is one of the world’s poorest countries, with half of its 16 million people living in poverty.
A spokesman tells Newsweek: “Tax revenue that should be helping to fund public services in Malawi and other poor countries is disappearing at an alarming rate.
“As much as 30 per cent of all African financial wealth is estimated to be held offshore in tax havens, costing an estimated $14billion in lost tax revenues every year.
“This is enough money to pay for healthcare for mothers and children that could save four million children's lives a year and employ enough teachers to get every African child into school.”
Raymond Baker, the Director of non-profit organization Global Financial Integrity, based in Washington, has called this exchange of money across borders the “ugliest chapter in global economic affairs since slavery.”
“Nigeria has probably experienced the greatest illegal outflow as a percentage of gross domestic product. Here we have an oil-rich country of 140 million people with 70 percent of its population— that’s 100 million people—living on $1 to $2 a day,” Baker said during a conference in Washington last year.
“Congo has had the longest rip-off of any country, going on for two centuries now. The best available estimate of incremental deaths in Congo, above normal mortality rates, since 2000 is 4.5 million. Illicit money flowing out of poor countries kills people.”
In short, for every major company that is not paying its fair share of tax, there are scores of teachers and nurses that cannot be employed, roads that cannot be repaired, schools that cannot be built, and hospitals without lifesaving equipment. And that is in the already wealthy countries.
The global nature of the tax avoidance game has even bigger consequences in developing nations where the missing tax dollars could be used to improve basic infrastructure needs such as roads, healthcare and education, allowing these countries to one day become self-sufficient and no longer dependent on international aid.
Correction: This article originally stated there are 9.3 billion people with net worth less than $1 million. That figure has been removed.