The objective of this chapter is to analyse the impact of recent tax reforms implemented by newly elected governments in Chile, Colombia and Peru, with special emphasis on the extractive industries. We focus on the need to improve the domestic capacity of tax and other revenue collection if the United Nations Sustainable Development Goals are to be achieved.Tax reform projects are an important tool for natural-resource-rich countries as they allow them to promote tax progressivity by levying wealth and capital income, as stated at the First Latin American Summit for an Inclusive, Sustainable and Equitable Global Tax Order, held in Cartagena, Colombia in July 2023.This chapter analyses the results of the various policies, the difficulties encountered, the need to reach a consensus for tax reforms to be approved, the link between tax reforms and international proposals, and the extent of the changes needed to increase tax collection in order to meet outstanding social and environmental challenges.
The role tax expenditures play in fostering or facilitating illicit financial flows has so far not been studied extensively. We provide an explorative overview of the linkages between tax expenditures and illicit financial flows in both source and recipient countries. In a second step, we focus on three kinds of mechanisms. In source countries we analyse the role of special economic zones and tax expenditures that target the extractive sector. In recipient countries we 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 with which to shift profits away from source countries, and add 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.
States play a crucial role in the capture and allocation of commodity revenues shaping development outcomes. This chapter examines their capacity to address illicit financial flows and better finance development programmes, focusing on energy transition revenues. It first reviews the main findings about state capacity to harness commodity revenues to reach key Sustainable Development Goals. It then explores the complex interplay between state capacity, commodity-based financial flows, and development processes in the context of the energy transition. Highlighting the diversity of state capacities among commodity-dependent countries and possible energy transition trajectories, the chapter discusses opportunities and challenges resulting from changes in the volume, type and price volatility of commodities, and associated illicit financial flows associated with the energy transition. State capacity must anticipate and respond to shifts in dependence on fossil fuels to energy transition minerals and renewable energy production in order to avoid repeating illicit financial flow patterns associated with the ‘resource curse’ and poor development outcomes.
Establishing a more transparent, effective and equitable and framework for trade and taxation is crucial to enabling commodity exporting states to mobilise domestic resources for sustainable development. The current drive to reform the global governance of taxation offers opportunities, but takes place in the context of heightened North–South tensions, reduced trust in multilateralism and calls for deeper decolonisation. Drawing on a six-year multidisciplinary research project involving academic institutions from commodity exporting and trading countries, this chapter presents a research framework that the authors used for the study of illicit financial flows associated with commodity trade. It discusses major findings, and recommendations as to how to counter the ensuing tax base erosion in resource-rich developing countries. The latter can consider a range of policies and innovative measures to rein in commodity trade mispricing. But this is not enough. States hosting major trading and financial centres have to simultaneously address a range of pull factors. At the global level, fair taxation reform is key and must preserve a sovereign policy space, in which commodity exporting states may adopt context-specific solutions aligned with their institutional capacities. Finally, this chapter introduces the thematic volume of International Development Policy on illicit financial flows in the commodity sector and beyond.
‘Prescriptive’ pricing methods, which employ reference prices and fixed margins for tax purposes, have gained prominence as a pragmatic approach to combatting commodity trade mispricing and tax evasion, especially for countries with limited tax administration capabilities. While these methods hold promise for facilitating enforcement, reducing administrative burdens, and curtailing abusive tax avoidance practices, concerns have arisen about their potential deviation from established international rules and principles. The perceived risk of legal liabilities and investor claims, including ‘unfair treatment’ under investment treaties, acts as a significant uncertainty factor in the adoption of such methods. Thus, the present chapter addresses the legal aspects of ‘prescriptive’ pricing methods within the parameters of international investment law, offering a multifaceted perspective on challenges involving the scope of defence arguments that states can mobilise under international investment law to justify such methods and exploring the right and duty of states to regulate corporate conduct and economic activities under human rights law, as well as the practical limitations to this approach in present lawmaking practices.
This chapter presents multidisciplinary perspectives on a unique barter trade arrangement—the Gold-for-Oil (G4O) policy initiated by the government of Ghana in November 2022. First, it uses econometric analysis to examine the economic motivation for the policy, that oil importation is the major driver of the depreciation of the domestic currency against the US dollar. Second, it provides a political economy overview of the policy, highlighting the governance issues surrounding the policy’s formulation and implementation processes. Third, it examines existing legal and regulatory frameworks, asking if due process was followed in these processes. The econometric analysis shows that although there is a positive and statistically significant long-run relationship between Ghana’s domestic currency depreciation and oil imports, the effect size is not large (the long-run oil import elasticity of the exchange rate is about 0.20), suggesting that even under the best case scenario of policy implementation within the right legal regime, the G4O initiative will not be a panacea for the perennial exchange rate volatility problem. The political economy and legal analyses highlight issues of insufficient consultations, disregard for legal foundations that might facilitate illicit financial flows (IFFs) through smuggling and illegal gold trade, the lack of transparency in the implementation of the policy and the pricing mechanisms that could increase the risk of IFFs through mispricing, and insufficient operational clarity. To enhance the policy’s effectiveness, it would be necessary to establish a comprehensive legal framework, foster stakeholder engagement, ensure transparency, and coordinate efforts among all parties. There should also be a general focus on reducing unnecessary importations and boosting exports. All these could reduce the risk of IFFs and ensure that Ghana’s natural resources are optimally utilised for the benefit of the population.
This chapter offers a simplified approach to assessing the potential impact of metals streaming and royalty financing on government revenues. Subject to the availability and quality of information, a revenue impact ratio can be determined by comparing the potential revenues to the government from more traditional forms of financing with potential revenues to the government from metals streaming or royalty financing.The chapter considers the key features, advantages, and disadvantages of these alternative funding options for mining projects, and then develops an illustrative model to demonstrate their potential impact on government revenues. This forms the basis on which to identify the key challenges, and the policy considerations when addressing them.While metals streaming provides upfront capital and a potential hedge against price risk for producers, it could also limit the upside potential for both the mining company and the host government. On the other hand, royalty financing offers stable income streams and diversification opportunities for investors but may lack direct exposure to metal price increases.The ultimate risk faced by resource-rich governments as a result of an increase in the use of metals streaming and royalty financing arrangements is a suboptimal share of the potential benefits that will accrue from the mining operations. Specifically, the risk is of a reduction in taxable income and royalty revenue.At the heart of the policy considerations pertaining to resolving these challenges and risks is reducing information asymmetry between the government, the mining company and the streaming or royalty company. One important way to do this is to strengthen tax legislation and enforcement mechanisms. Implementing anti-avoidance rules, such as interest limitation rules, can limit the ability of metals streaming and royalty financing companies to exploit tax and other loopholes. Other features with which to strengthen the legislation include clear minerals pricing rules, and clearer provisions regarding withholding taxes.
Illicit financial flows (IFFs) deprive low-income countries of essential revenues while donors’ willingness to fund aid budgets dwindles. IFFs related to foreign direct investment and trade include transfer mispricing, trade mispricing and profit shifting. Policy options to curb IFFs range from short-term fixes to mid-term measures that adjust legal instruments and improve coordination between countries, to more fundamental structural reforms that require a longer time horizon. Which policies are effective and should be pursued is a highly contested point, slowing down the progress of reform. This is unsurprising as reducing IFFs involves a distributional conflict: more for those deprived of revenues now means less for those who currently benefit. We conduct a Q-methodology study among IFF policy experts. We use Q-methodology to reveal participants’ policy preferences and tease out lines of contestation and areas of agreement to identify the policy space available in which to advance reform. We find tensions existing amid preferences for short-term fixes and for more comprehensive structural reforms; tensions regarding the question of extending legal liability to those facilitating and assisting in the creation of IFFs; and tensions over whether and to what extent host countries should be empowered to curb IFFs using their legislative sovereignty. Policy measures to increase targeted transparency that is directly actionable to tax administrations in host countries are the most likely to garner approval from all stakeholders.
The Association of Southeast Asian Nations (ASEAN) has emerged as one of the fastest growing collective economies in Asia. This fast growth is, however, accompanied by various challenges, including the trade-related illicit financial flows (IFFs) that deplete the tax revenues of the Association’s Member States. This chapter aims to shed light on the status of the trade-related IFFs present in the scale of trade mispricing that occurs between the ASEAN community and its global trade partners. To better interpret its findings, the chapter provides a legal framework analysis that highlights gaps in efforts to address these financial challenges in the region. Notwithstanding these gaps, certain Member States with substantial non-tax revenue streams have reduced reliance on conventional taxation, allowing for unique fiscal strategies. A comparative analysis of readiness among ASEAN Member States, meanwhile, reveals disparities, with advanced economies demonstrating robust legal systems while developing countries face challenges in implementing complex tax regulation. The chapter also examines the vulnerability of countries that lack robust legal frameworks, using the Lao People’s Democratic Republic (PDR), a landlocked, least-developed country dependent on extractive resources and agricultural exports, as a case study. By estimating the magnitude of trade mispricing of selected mineral and agricultural product exports, the chapter tries to present the consequential impact on potential tax revenue erosion and the economy. Its findings underscore the critical role of legal foundations in addressing the issue of IFFs, including the importance of transfer pricing rules in preventing trade mispricing. Based on these findings, this study encourages less economically developed, tax-revenue-reliant nations like Lao PDR to continue developing a transparent legal system, improve current trade databases, and enhance cooperation with international bodies. This study also suggests such countries explore alternative methods, such as simplified approaches, of estimating tax liabilities and curbing trade mispricing.
A major source of illicit financial flows (IFFs) out of developing countries accrues from the under-invoicing of commodity exports. This erodes the tax base of resource-rich developing countries, and hence their capacity to mobilise domestic resources for development. The Sustainable Development Goals (SDGs), adopted in 2015, specifically call on states to reduce IFFs and enhance domestic resource mobilisation. Yet a weak capacity to assess the magnitude and drivers of the phenomenon has limited the ability of developing countries to effectively curb IFFs. This has been compounded by a lack of consensus over IFF definitions together with poor data and weak methods. Drawing on six years of interdisciplinary research into commodity trade–related IFFs, this chapter examines novel data sources and recent methodological advances that researchers and regulators can draw upon to better capture and eventually reduce IFFs. It situates such advances within the fast-expanding literature on domestic resource mobilisation, taxation and IFFs, focusing on three major channels; namely, trade mispricing, abusive transfer pricing and tax evasion through wealth offshoring. The chapter concludes by discussing the scope for improved data collection and evidence generation. This, together with global taxation reform, can greatly contribute to effectively enhancing domestic resource mobilisation in developing countries.
