The World Bank in Washington, D.C. Photo: Pixabay

The controversial departure of its chief economist highlights the need for a coherent policy on tax and development.

Last month, word got out that the World Bank’s Chief Economist Pinelopi Koujianou Goldberg was planning to leave her position after just over a year on the job. It’s the second transition in leadership in the last few years—a troubling sign given Goldberg’s predecessor only lasted roughly the same amount of time.

But while Paul Romer’s departure was tied to the controversial Doing Business Index, the speculation is that Goldberg made her decision for a different reason: The withholding of a controversial new study that suggested that 5 percent of World Bank aid to governments may be leaking to tax havens.

The IFC is investing in companies using tax havens

While Bank management appeared to be shocked by these findings, they might be more disturbed to know there is another tax havens problem going on right under their noses.

While this Elite Capture of Foreign Aid study only looked at public sector funds, Oxfam’s research found that a very large share of the World Bank’s private sector lending arm, the International Finance Corporation (IFC), finds its way to tax havens because of one curious fact: the IFC deposits it there directly.

That’s right folks—when the IFC funds a company to do a project in, say, Zambia, that company is often using a tax haven like Mauritius through which to channel its business. Released right around the same time the Panama Papers were leaked in 2016, our research found that 84 percent of IFC lending to Sub-Saharan Africa went to companies that used tax havens with no apparent link to their core business.

The IFC’s situation is not unique. A large share of foreign investment flows through tax havens to minimize investors’ tax bills, among other reasons. In the IFC’s defense, this approach does not necessarily mean the money is wasted or stolen. While transiting through the tax haven, the money is eventually spent in the project country.

But what the IFC’s lending modality does do is undermine the ability of the host country to collect much needed corporate tax revenues from companies that avoid paying taxes by using these kind of offshore financial centers. The result? We get the IFC-funded project in the country, yes, but we don’t necessarily see the same level of tax revenues going to the host government that we would see otherwise—leaving governments to rely on less progressive options to fund their budgets. (On a side note, it is entirely plausible that the Elite Capture study’s finding of “leakage” from the other arms of the Bank also reflects tax avoidance—in this case by the recipient governments’ private sub-contractors—rather than corruption.)

Why tax havens make it harder to fight poverty

Is any of this illegal or even corrupt? Tax avoidance lies in a legal gray zone by stretching the interpretation of tax breaks intended by government or not. Even the best tax administrations are hard-pressed to police that gray zone. Investors often get away with paying less tax than they owe.

That should be a concern for the Bank. The Sustainable Development Goals are predicated on the ability of governments to improve tax collection (more and fairer) to pay for things like education and basic health services. Aid just won’t be enough—that’s why domestic resource mobilization (DRM) has become an important Bank objective as we saw in the latest IDA19 commitments.

It is critical that Bank policies and procedures be coherent with that goal. Alas they are not. In fact, they continue to be in direct conflict.

How the World Bank can crack down

The World Bank is currently reviewing its Offshore Financial Centers Policy, which governs the conditions under which the IFC lets its money transit through tax havens.To maintain its credibility, the Bank must get ahead of the curve and adopt the strongest international standards against tax havens. The IFC may have to redirect its funding through non-haven transit countries as a result. That will encourage tax havens to shape up.

A second thing the World Bank can do is to remove the tax rate indicator from its Doing Business Index. Governments are keen to improve their ranking on this index in order to attract foreign investment. One way they can do that is to lower their tax rates, but that flies in the face of the Bank’s stated goals for DRM and Illicit Financial Flows. As I argued elsewhere, the tax rate is not even a good indicator of the ease of doing business anyway.

Thirdly, the World Bank should develop new safeguards to ensure that it does not encourage governments to offer costly tax incentives to companies implementing its projects.

Simply put, the World Bank can do more to tackle tax dodging. It is great to fund DRM projects—for which it claims being the world’s largest provider. But it should start with getting its own house in order.

Share your thoughts with Didier Jacobs on Twitter @DidierPJacobs.