Measuring Illicit Financial Flows

05.08.2019

Measuring Illicit Financial Flows Task Force Meeting at the United Nations in Geneva with WIFO Economist Simon Loretz

From 16th to 17th July 2019 the United Nations Conference on Trade and Development (UNCTAD) and the United Nations Office on Drugs and Crime (UNODC) organised a Task Force meeting on statistical methodologies for measuring illicit financial flows. WIFO economist Simon Loretz presented his findings on aggressive tax planning indicators.

It is safe to assume that countries lose substantial resources through illicit financial flows. These flows differ across countries and regions, and may originate from several sources, such as illegal activities, money laundering or tax avoidance. This undermines their ability to mobilise domestic resources and hampers economic and social development.

These risks have been recognised in the United Nation in their 2030 Agenda for Sustainable Development in the Sustainable Development Goal (SDGs) and by 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime. As part of the process to reach this goal UNCTAD and UNODC are responsible to develop the SDG indicator total value of inward and outward illicit financial flows (in dollars).

However, no globally-accepted methodology to monitor illicit financial flows yet exists. To develop such methodologies and guidelines a task force has been established. Following up on previous expert consultations the meeting in Geneva aimed to develop statistical definitions and typologies of illicit financial flows, take stock of available data and discuss methodologies to measure various types of illicit financial flows.

WIFO economist Simon Loretz presented the results of the "Aggressive Tax Planning Indicators" study. The focus was on the question, whether the results can be generalised to a (sub‑)indicator for illicit financial flows for all countries. While the study includes a number of indicators, some of them providing reliable hints for substantial tax avoidance, the challenge remains to derive one common indicator.

Further information about the Task Force Meeting
 

Publications

Simon Loretz, Richard Sellner, Bianca Brandl, Giampaolo Arachi, Valeria Bucci, Maarten van't Riet (CPB), Ali Aouragh (CPB)
Taxation Papers – Working Paper, 2017, (71), 181 pages, https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation_papers_71_atp_.pdf
The aim of this study is to provide economic evidence of the relevance of aggressive tax planning (ATP) structures for all EU countries. The study relies on economic indicators available at macro level and on indicators derived from firm-level data. The objective is indeed to look at the relevance of ATP for all EU countries through these two complementary angles. For each indicator, the study identifies outliers based on a consistent methodology. None of the indicators provides per se an irrefutable causality towards aggressive tax planning. However, considered together, the set of indicators shall be seen as a "body of evidence". While there is some data limitation, the study provides a broad picture of which country appears to be exposed to ATP structures, and how it impacts on their tax base (erosion or increase). The discussed ATP structures can be grouped into three main channels: ATP via interest payments, ATP via royalty payments, and ATP via strategic transfer pricing. In addition to general indicators assessing the overall exposure to ATP, we also derive specific indicators for each of the ATP channels. In combination, these indicators allow to classify entities within multinational enterprises into three types: target entities, where the tax base is reduced; the lower tax entities where the tax base is increased but taxed at a lower rate; and conduit entities which are in a group with ATP activities but no clear effect on the tax base is observable.
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Simon Loretz

Research groups: Macroeconomics and European Economic Policy
© Jean-Marc Ferré/UN Photo
© Jean-Marc Ferré/UN Photo