The instruments used to counter illicit financial flows at the international level, and their application to matters of taxation

Abstract

Tax-related Illicit Financial Flows (TIFFs) deprive states of much-needed public resources and hinder revenue mobilization from achieving sustainable development efforts. Currently, there is no conceptual clarity on the phenomenon of TIFFs, with different definitions and approaches adopted within different regional and international settings. Remarkably, especially when one considers the scope of the problem, very little coordination exists between the various legal instruments available to counter TIFFs and the conceptual definitions that those instruments use. To address the existing gaps, this paper starts by mapping the diverse qualifications of TIFFs with particular regard to the different legal statuses that can be attached to behavior deemed illicit. This requires a clarification of the conceptual differences between tax evasion and tax avoidance, and more specifically, between criminal law and (criminal) tax law. Curiously enough, under the current patchwork of measures, no instrument exists to counter the gravest forms of tax evasion. This study places emphasis on the fact that while the international tax law agenda has prioritized countering tax avoidance, the issue of tax evasion remains inadequately addressed within the existing framework. Since, despite significant efforts to curb tax avoidance, the problem of tax evasion continues to hamper global economic growth, it is imperative that significant attention be given to the issue of tax evasion to ensure that the international legal framework is sufficiently equipped to tackle this challenge, which represents a significant component of TIFFs. One possible course of action would be that of better aligning the notion of tax crimes as predicate offence for existing criminal law. At the same time, criminal law Conventions can serve as example to establishing an obligation under transnational law to criminalise the most severe cases of tax evasion and TIFFs. In so doing, countries should be allowed to keep their de minimis qualifying rules to ensure flexibility and respect national sovereignty. Finally, this graduated approach tailoring the reaction to the underlying behaviour also ensures proportionality and the respect for taxpayers’ fundamental rights. From that perspective, the paper concludes that a widening of the international cooperation to tackle TIFFs should not be to the detriment of taxpayers’ rights if the underlying behaviour is not deemed criminal or does not reach the de minimis rule in the national setting. For that level, coordination is, however, still welcomed to come closer to the closing of loopholes through international cooperation.

Keywords: Illicit Financial Flows, Transparency, International Tax law, Tax evasion