Only the Little People Pay Taxes : Taxation inDeveloping Countries

Matti Kohonen, Tax Justice Network,www.taxjustice.netBrussels, 17 October 2009.I am from the Tax Justice Network, a network of individuals and organisations that promotes transparencyin international finance and state-building in developingcountries. While most of the focus of our campaigning hasbeen with regard to secrecy jurisdictions, as we like to calltax havens, we have a second strand of work through inparticular our African secretariat based in Nairobi, todevelop our approaches towards what tax justice means inAfrica, in Brazil, in Central America, in Bangladesh or otherdeveloping countries and regions where we are currentlyengaged in a three-year programme to put tax not only onthe regulation agenda in the North, but essentially on thedevelopment agenda of the South.In the words of the South African Finance Minister PravinGordham: “Aggressive tax avoidance is a serious cancer

eating into the fiscal base of many developing countries”,and indeed tax losses are enormous by any standard indeveloping countries, as a global figure of €120 billion of lost taxes have been put forward by Christian Aid, out of which an estimated €15 billion for the least developedcountries. This money is lost through illegal activitieslinked to trade mispricing alone. This means that anamount equal to aid is being lost through tax avoidancethrough complex and secretive financing structures of projects, and outright mispricing of imports and exports toreduce the local tax burden in developing countries. Forinstance, bilateral trade mispricing between the US andEU to Kenya cost the country €12 million according to theBritish NGO Christian Aid in the False Profits report. Theylooked into these practices in order to see whatcompanies and what products are involved. We can’t tellfrom the customs data, and if we could, so could theKenya Revenue Authority. To take an example of a financial structure in question,let’s take a power plant in Kenya, a 74 Mw plant called the

Tsavo Power Company, an investment of 85 milliondollars, increasing then the power generation capacity of the country by 31%. It is near the resort and port city of Mombasa. According to a filing at the US Securities andExchange Commission in 2000, its ownership consists of acompany in Mauritius (31%), two Cayman’s listedcompanies (16%), the International Finance Corporation of the World Bank by 1% and the remaining majorityshareholding was held by a US-based investment groupwith 51% of shares. A total of 47% of shares are ownedthrough tax haven structures, which according to the SECfiling are owned by the operator of the plant WärtsiläCompany of Finland. Wärtsilä is a manufacturer of powergenerators, but today makes most of its money notthrough the delivery of power plants, but through long-term operating agreements on the productive capacity of generators. It is this where we expect the most taxavoidance to take place. The question is raised, what are they doing in the CaymanIslands, and why are these secrecy jurisdictions needed