On the way to Addis Ababa: Funding development goals

The Third UN Conference on Financing for Development will take place in Addis Ababa in July 2015. The key question will be how to finance the Sustainable Development Goals.

In September 2015 the UN will finalize the new global Sustainable Development Goals (SDGs). The political negotiations within the Open Working Group (OWG) have produced an ambitious catalogue of 17 main goals and numerous sub-goals, all of which focus equally on economic, social and environmental aspects of sustainable development. It is yet to be seen whether the goals put forward by the OWG will be watered down by the time the negotiations are over. Several countries have already announced their opposition to specific proposals.

Also not clear is the question of how the future goals are to be funded. The one sure thing is that their implementation will cost the poorest developing countries more than they can afford on their own. The countries in the South have therefore insisted that as early as July 2015, in other words two months before the final SDG negotiations, a high-level UN conference be convened in Addis Ababa on the subject of financing for development. One key goal of this conference will be for industrialized countries to confirm the target of investing 0.7% of gross national income in official development assistance and that they commit to a binding new implementation date. The fact is that the 0.7% target should already have been reached by 2015.

Innovative funding sources and illicit financial flows

At the UN Conference on Financing for Development in Addis Ababa, the industrialized countries themselves will no doubt be pushing mostly for measures that also benefit their own enterprises abroad as well as their well-to-do citizens. This includes for example, the establishment of public-private investment funds to finance start-up companies in developing countries. Also up for discussion are government-sponsored risk guarantees for investments by multinational corporations in all developing countries that are regarded as politically fragile and/or economically risky.

The problem with these measures however, is that they promote the private sector exclusively. While those who stand to benefit include not just large multinational groups but also local companies in developing countries, the proposed mechanisms will not fund important public services such as education, health and infrastructure building and maintenance. Developing countries are still urgently in need of higher official revenues for these key government tasks.

Another topic at the Addis Ababa conference will be illicit financial flows, which account for billions in shortfalls in the budgets of developing countries each year. These have to do with the shifting of assets to foreign accounts so as to avoid taxes or conceal corruption and other illegal activities. The amount of these illicit transactions is generally estimated to outstrip official development aid spending by industrialized countries by several times. In addition, losses are sustained by developing countries because multinational corporations transfer their profits to foreign tax havens. Stopping these outflows would be crucially important to supporting the countries concerned in funding the Sustainable Development Goals.

Switzerland's role

As the world's largest financial centre in offshore private banking, Switzerland continues to bear responsibility. It has in fact made some progress, but many legislative proposals that could benefit developing countries are still pending in Parliament. Below is an overview of the situation:

  • Assets of politically exposed persons: Internationally, Switzerland still has the dubious reputation of being a haven for ill-gotten assets. Lacunae in the money laundering law and the fact that individual banks fall far short of fulfilling their statutory duty of care make it possible for such assets to keep on entering Switzerland. The latest example are the now frozen millions from the entourage of overthrown Ukrainian President Yanukovych. Switzerland has nevertheless made marked progress over recent years when it comes to blocking and returning such funds. Following the overthrow of foreign rulers, Switzerland is always one of the first countries to freeze their assets. Besides, it provides considerable support to countries of origin in formulating requests for legal assistance, which will ultimately lead to the recovery and return of funds. A new law is now to place this practice on a firm legal footing. It will come before Parliament in early 2015.
  • Tax evasion: Switzerland is still having difficulty when it comes to the action needed to address tax evasion from developing countries. The implementation of the 2009 undertaking to provide extended administrative assistance in tax matters to all developing countries is not going smoothly. The list of countries to which Switzerland communicates the necessary banking information in the event of well-founded suspicion of tax evasion currently includes just seven developing countries, alongside numerous industrialized countries. It is therefore all the more gratifying that in October the Federal Council sent into consultation a law that should provide some help in this regard. The draft law provides for the unilateral granting of extended administrative assistance to another 50 developing countries. This would make sense, but politically there is virtually no chance of the Federal Council also offering automatic information exchange to the countries concerned. Such exchange would sometimes provide fiscal authorities in developing countries with the very first indications of possible cases of tax evasion.
  • Tax avoidance: As pertains to tax avoidance practices by multinational corporations, the cantonal tax privileges for holding companies and other special companies should be abolished. Fortunately, this is already envisaged under Corporate Tax Reform III, which is now in the consultation phase. The Federal Council, however, wants to create new incentives for companies to repatriate untaxed to Switzerland their profits made abroad. The planned measures – license boxes and general corporate tax cuts – would be OECD-compliant, unlike the provisions in place to date for holding companies.

Unfinished homework

Without new funding mechanisms, the Sustainable Development Goals will amount to nothing more than a paper tiger. At Addis Ababa therefore, Switzerland should advocate for effective measures to address tax evasion by private persons and profit shifting by multinational corporations for tax purposes. Switzerland undoubtedly needs to act on the domestic policy front in this regard.

By Mark Herkenrath, Alliance Sud.

Source: Alliance Sud .