This chapter is included in the book “Missing Dollars – Illicit Financial Flows from Commodity Trade”.
The role tax expenditures play in fostering or facilitating illicit financial flows has so far not been extensively studied. Illicit financial flows (IFFs) are cross-border transfers of money or assets that have an illegal origin or are either illegally transferred or used in at least one of the jurisdictions concerned.(1) They can be related to income generation as well as income management. The former refers to illicit cross-border activities that produce income, including, for instance, the shipment of illegal drugs. The latter includes illicit transactions that transfer funds that have a licit origin, as well as flows stemming from licit activity that are used in an illicit way (see UNCTAD and UNODC, 2020, 7–8). IFFs are known to severely affect the fiscal space and drain public revenues of many low- and middle-income countries through a variety of mechanisms (Mbeki et al., 2015).
In this chapter, the authors argue that a specific element of public finance systems—the use of tax expenditures (TEs)—can play an important role as an enabler or facilitator of IFFs. The authors provide an explorative overview of linkages between tax expenditures and illicit financial flows in both source and recipient countries. In a second step, the authors focus on three kinds of mechanisms. In source countries they analyse the role of special economic zones and tax expenditures that target the extractive sector. In recipient countries they study the use of patent boxes and related mechanisms to attract intangible assets. Bilateral tax treaties, meanwhile, can act as facilitators of illicit financial flows because they provide legal devices to shift profits away from source countries. Subsequently adding another layer of complexity to the tax system. To address the use and abuse of tax expenditures in this context, the transparency, tax certainty and simplicity of tax systems should be strengthened by any government trying to protect its tax base.
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1.See Musselli and Bürgi Bonanomi (2020) for a discussion of different conceptualisations of IFFs. The authors argue in favour of a broad interpretation of what constitutes illegal activity, including infringements of domestic doctrines or standards and of rules and legal principles that have gained widespread international recognition.
Carbonnier, G., F. Brugger, E. Bürgi Bonanomi, F. M. Dzanku and S. Insisienmay (eds) (2024) Missing Dollars. Illicit Financial Flows from Commodity Trade, International Development Policy | Revue internationale de politique de développement, 17 (Geneva, Boston: Graduate Institute Publications, Brill-Nijhoff), DOI: 10.4000/poldev.6067
Contributors: Ama A. Ahene-Codjoe, Angela A. Alu, Latdaphone Banchongphanith, Fritz Brugger, Elisabeth Bürgi Bonanomi, Humberto Campodónico, Gilles Carbonnier, Fred M. Dzanku, Christian von Haldenwang, Adubea J. Hall, Sthabandith Insisienmay, Philippe Le Billon, Victor S. Mariottini de Oliveira, Rahul Mehrotra, Armando Mendoza, Lucas Millán-Narotzky, Irene Musselli, Irma Mosquera Valderrama, Ekpen J. Omonbude, Joschka J. Proksik, Agustín Redonda, Viriyasack Sisouphanthong, Latdavanh Songvilay, Abigail A. Tetteh.
Forthcoming paperback version: https://brill.com/display/title/69256