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LATIN AMERICA / THE CARIBBEAN
Capital flight
Latinamerica Press
10/23/2014
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Countries in the region lose billions of dollars to illicit financial flows.

From 1970 to 2011, US$2 trillion from Latin America and the Caribbean have been funneled to offshore tax havens. It’s money that moves behind the scenes, in illicit financial flows (IFF). These transnational transfers come from three sources of illegal funds: corruption (bribery), money laundering (contraband, trafficking of drugs, weapons, humans, among others) and commercial transactions from major corporations (tax evasion and avoidance, and fraudulent billing).

Year after year, the numbers have increased. According to estimates from the Latin American Network on Debt, Development and Rights (LATINDADD), in 2011 IFF totaled $947 billion in developing countries. Of that, $116 billion left Latin America and the Caribbean.

Seven countries in the region —Brazil, Chile, Costa Rica, Mexico, Panama, Paraguay and Venezuela— were among the 25 countries with the highest levels of capital flight between 2002 and 2011.

The data was released during an annual conference of the International Transparency Coalition (ITC), “Hidden Money, Hidden Resources: Financing Development with Transparency,” held in collaboration with LATINDADD in Lima, Peru, on Oct. 14-15.

“From 2002 to 2011, the IFF cost developing countries $5.9 billion, of which 20 percent results from criminal activity and corruption, while 80 percent results from commercial transactions,” LATINDADD noted, citing studies by Global Financial Integrity (GFI).
 
Tax havens 
One of the keys to understanding IFF is offshore tax havens, where trillions of dollars are hidden. These jurisdictions apply favorable tax structures for companies and non-residents, invoking banking secrecy laws and refusing to cooperate with other tax administrations or foreign legal entities.

Several Caribbean nations are in the Financial Secrecy Index of 81 countries created by the Tax Justice Network, a group of researchers and activists who work on the negative impacts of tax avoidance. Included are independent countries as well as US, British, French, and Dutch territories like the Cayman Islands, Bermuda, the Virgin Islands, Barbados, Bahamas, Aruba, Curacao, Anguilla, St. Vincent and the Grenadines, Turks and Caicos, St. Lucia, Antigua and Barbuda, Grenada, Dominica, St. Kitts and Nevis, and Montserrat. Also on the list are Brazil, Costa Rica, the Dominican Republic, Guatemala, Panama, and Uruguay.

According to the Tax Justice Network, “the money routed through the IFF goes, in the majority of cases, through tax havens. These territories or jurisdictions with high fiscal opacity are home to $21-$31 trillion, a figure equivalent to the gross domestic products of the United States and Japan combined.”

One way local subsidiaries of multinational companies evade taxes is through the creation of shell companies in tax havens, where the money is transferred before being sent to headquarters. Jorge Gaggero, director of the Tax Justice Network in Latin America, said that in Argentina, capital flight in 2012 was $28 billion, an amount “equivalent to 4.7 percent of the country´s GDP or 20 percent of the state´s annual investment.”

LATINDADD said that in Peru, the country’s tax authority, SUNAT, found that from 2007 to 2012, operational transfer pricing (the price agreed between two companies related to the transfer of, among other things, goods, services or rights) reached $370 billion, of which 65 percent were international transactions.

The organization said that according to SUNAT, in 2013 income omitted by manipulating transfer prices represented $350 million — meaning $105 million in taxes not paid.

Tax evasion
A report by journalist Raúl Wiener and accountant Juan Torres Polo, released during the ITC meeting, showed that mining firm Yanacocha — a division of multinational US company Newmont Mining and Peruvian company Buenaventura —, avoided $1.2 billion in taxes in its 20 years of operating in the country, including $136 million in 2013 alone. Yanacocha, considered to be South America’s leading gold mining company, is behind the controversial Conga project in the Andean department of Cajamarca, which the local population strongly opposes because of its environmental impact.

“Allegedly, Yanacocha has systematically inflated its accounting costs in order to reduce their tax contribution in the period when gold prices reached the highest peak in the international market,” the report says. “Investment and expenses related to the Conga project (new investment) have been charged to Yanacocha’s operations and recorded before profits and taxes, which means that the state and the [Cajamarca] region have not been receiving part of their taxes to fund the controversial project.”

Last year, the mining firm reported a loss of $562 million on earnings of $1.5 billion; to support this result, it consigned outside of its so-called “normal” costs an exceptional expenditure of more than $1 billion, —which affected 70 percent of its revenues— under the category “Depreciation of long term assets.” This cannot be anything other than one year of the Conga project assets’ depreciation, since Yanacocha has no new assets and is in the process of depleting the ore vein, Wiener y Polo said.

Both ITC, LATINDADD and the Tax Justice Network agree that to tackle capital flight and tax evasion, greater oversight is needed, as well as joint regional policies to push developed countries to take more drastic measures against tax havens and shell corporations. —Latinamerica Press.


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In addition to destroying the environment, South America?s largest gold mining firm Yanacocha failed to pay millions of dollars in taxes to Peru. (Photo: LATINDADD)
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