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False Profits: robbing the poor to keep the rich tax-free

Children beside a houseAs the G20 meet in London to discuss a way out of the global economic crisis, new research commissioned by Christian Aid shows how billions of pounds are lost each year to countries both rich and poor through tax dodging.

False Profits is a shocking indictment of a financial system that allows such abuse to thrive. 

Author Dr David McNair, Christian Aid’s senior economic justice adviser, says: ‘Paying as little tax as possible, regardless of the social consequences, has for many become an acceptable way of doing business.

‘The money lost could be used to provide schools, hospitals and better living conditions worldwide.’

Read our report

By the books?

False profits reveals the devastating impact of ‘trade mispricing’, an accounting practice that involves manipulating figures to keep profits low in countries where they will incur a higher level of tax.

It leads to transactions which, on paper, seem almost farcical. 

In 2007, Spain imported 40 million fridge-freezers from China at a cost of just €0.27 (18 pence) each.

Two years previously, the UK imported 35,000 sharpening machines from Autralia. Priced 2-3p each, this resulted in an estmated shift of £164.89 million to the UK.

‘Much of the money flows via tax havens into the pockets of shareholders in the industrialised world,’ says Dr. McNair.

‘All too frequently, the victims are poorer countries where the tax authorities have neither the expertise nor the resources to fight back.’

Lost billions

The research, broken down by country and by trade sector, shows that between 2005-2007 the total amount of capital flow from bilateral trade mispricing into the EU and US alone from non EU countries was an estimated £581.4bn (€850.1bn, $1.1tn).

If tax had been levied on this capital at current rates, non-EU countries would have raised £190.8bn (€279.0bn, $365.4bn) in revenue.

Christian Aid says that the findings are consistent with its recent global estimate that trade mispricing deprives the developing world of $160bn in tax each year.

If allocated in the war against poverty according to current spending patterns, that sum could save the lives of 350,000 children under the age of five annually. 

What we want

Christian Aid is calling for a new accounting standard that would force companies trading to reveal how much profit they make, and how much tax they pay in every country where they operate. That way manipulated figures could be quickly spotted.

It also wants the G20 to agree on a truly multilateral deal on automatic exchange of tax information between jurisdictions with strong sanctions against those that won’t cooperate.

This, Christian Aid says, will bring an end to the secrecy that tax havens at present offer.

Anything less will not deliver the change that developing countries so desperately need.