GFS report: tax losses due to trade fiddles. Sorry, valueless report

Or if you prefer, here\’s today\’s Ritchie!

Developing countries are losing approximately $100 billion dollars every year due to trade mispricing, according to a new report from Global Financial Integrity (GFI).

Ooooh, my! So, what does the report actually say?

Well, they measure the amount of trade they think is mispriced, then look at corporate tax rates, click the calculator and say multiply one by the other and you\’ve got the tax lost.

Now, umm, where have we seen a similar technique then?

Ah, yes, Richard Murphy\’s estimate of the tax gap, wasn\’t it?

And GFS do in fact say that their new report is based upon a Christian Aid one….which was written with the aid of Richard Murphy and John Christansen. And another one from the Tax Justice Network which is essentially the same two people again.

Let us remind ourselves of what the problem with Ritchie\’s calculation was. You cannot take headline tax rates and compare them to tax collected and then claim (or assume, assert) that the gap between the two is because people are being very naughty boys.

For governments deliberately and specifically put into the tax code allowances for certain activities they think desirable which reduce taxes legally owed from those headline rates. In the case of our domestic UK corporate tax system we\’ve got R&D allowances (125% of amount spent on R&D from memory), various odd depreciation thingies, training allowances and for all I know a turkey dinner for Tom Cobbleigh allowance.

This means that the observed gap between headline rate as a percentage of profits and the amount collected cannot be assigned to naughtiness. We have to strip out those entirely legal, legitimate and just as Parliament intended, allowances first.

Which Murphy, you might recall, did not. Indeed, he gets very touchy when you point out this to him.

So, what do GFS do? Yes, they look at headline rate and tax collected and assume the gap is because someone\’s being a naughty little girl.

They entirely ignore that some countries have tax subsidies (even rebates in some places) for exports. Entirely ignore that some (indeed, many) countries have tax free holidays for exporters and new companies.

In short, they make Ritchie\’s mistake. They do not account for the things which governments deliberately put into their tax codes in order to encourage behaviours they deem desirable.

As such their report is as value and content free as Ritchie\’s original was. No surprise that he praises it then and insists that this requires action, eh?

Click here to download a full copy of the report, which adds to the growing literature on this subject and stresses the urgent need for action to tackle this abuse.

Me personally I\’d like to see action against people who lie to us for political and ideological reasons….

6 thoughts on “GFS report: tax losses due to trade fiddles. Sorry, valueless report”

  1. Brian, follower of Deornoth

    “the amount of trade they think is mispriced”

    So let me get this right: we should be paying tax on the difference between what we sold it for and what Ritchie thinks we ought to have sold it for?

  2. Pingback: FCAblog » Murphy on transfer pricing

  3. Yes, they look at headline rate and tax collected and assume the gap is because someone’s being a naughty little girl.

    But…it’s always worth looking for naughty little girls, preferably about 21 and living out of the parental nest. Even if it’s a long shot. So cut them some slack!

  4. Pingback: GFS report: tax losses due to trade fiddles. Sorry, valueless report | Tax Resources Dai Tax

  5. Tim:
    I am the author of this paper and I’m compelled to reply to your blog post as it currently lacks both facts and accuracy. Before I reply, I would also note that I had hoped we could have a respectful, intellectual debate on this issue; indeed, I am wide open to criticisms of my methodology when they are in good spirit and when they are grounded in data, facts, and logic.

    I want to start by correcting you on my methodology. Contrary to what you wrote, my estimates are not based on the gap between “the headline rate and tax collected.” The paper does not make a single mention of a country’s “tax collection.” At the end of the paper, I compare my figures to government revenue, which may be the source of your confusion, but that is exclusively for reference and has nothing to do with estimation. In my methodology, I take each country’s estimate of outflows due to trade mispricing and each country’s corporate tax rate, then “click the calculator,” and the result is the amount of tax revenue lost on that profit that was shifted abroad.

    If you want to take issue with the underlying figures, on the trade mispricing side then you should refer to Global Financial Integrity’s Illicit Financial Flows report, which was released last year. If you have issue with the corporate tax rates, I am all ears. My data comes from two primary sources: PriceWaterhouseCoopers and the Heritage Foundation. If you have better figures for any country, let me know. I list all of the rates that I used in the Appendix and discuss those rates and discrepancies in detail on pages 9-12.

    On your note about the fact that I do not take into account tax subsidies or tax free holidays, you are correct. But you have not done any significant sleuthing to come up with that juicy tidbit. In fact, you probably just read pages 13-14, which is my section on empirical and data limitations. You left out, however, that I also omit tariffs, in the form of import taxes, which would also bias my figures upwards. However—and just as importantly—I also leave out customs duties, tariffs, and value added taxes, which will make my estimates too low. In addition, I don’t consider subsidized exchange rates and same invoice faking, which would also bias my estimates downwards. These could not be included because of the underlying data set I was working with. I cannot attest as to a net position on these errors. If you have any suggestions on how to include this data in a future study, I would be glad to hear it.

    Before I sign off, I would like to note that our organization is GFI, not GFS – as you repeatedly reference above. If you can’t get my organization’s acronym right, how can I trust you to understand the methodology of my paper?


    Ann Hollingshead

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