Brief (2015) which introduces proposals for how Development Finance Institutions (DFI) can actively engage with and promote the responsible tax agenda.

As this paper will show, the concept of tax and corporate responsibility is solidifying and is now part of the new development agenda. Now is the time for all relevant actors to think about what this means for them. While a clear definition of “responsible tax” beyond just legal compliance is still developing, DFIs should consider how they can support this evolution.

Multilateral DFIs bridge private financing and public policy by encouraging investments that yield development impacts. They target investments in the private sector and seek to mobilise additional private finance. This paper looks at three DFIs; the International Finance Corporation part of the World Bank Group, the Inter-American Development Bank, and the African Development Bank.

In the run-up to the 3rd UN Financing for Development Conference in Addis Ababa, tax was higher on the agenda than ever before. The shift of focus from simply legal compliance towards the notion of “responsible tax” is clearly part of the new development agenda that is forming this year. There is also increasing awareness of tax and corporate responsibility in the private sector. Impact investors and regular investors are beginning to quantify and measure the risk that tax issues pose. As investors, DFIs should be at the forefront of this movement and begin thinking about how to respond to these evolving perceptions of tax and corporate responsibility.

All three DFIs have significantly increased their private sector operations in the past 10 years. This includes significant support to small and medium sized enterprises (SMEs), but also significant engagement with multinational corporations (MNCs). It is concerning that none of the three DFIs could specify how large a part of their portfolios are linked to MNCs and that they do not appear to monitor this. DFIs have significant potential to use their influence over MNCs to insist they meet the right standards and contribute to advancing development objectives. This requires political support from their governing boards, which are largely made up of countries that are very concerned with fighting aggressive tax planning.

A first look at whether the DFIs in question are adopting to this new agenda in their relations with MNCs gives a mixed picture. The DFIs seem to all recognise going beyond legal compliance in relation to the challenges to domestic resource mobilisation though to different degrees. They all have indicators to measure tax. However, none of the DFIs have sufficient safeguards or even incentivising policies to encourage responsible tax behavior when partnering with or investing in MNCs.

Development banks should take progressive steps to adapt their policies and practices to contribute to this new agenda, and communicate effectively about their efforts and engage in structured dialogue with their stakeholders. This discussion paper recommends how.

Read the report:

Development Finance Institutions and the responsible tax agenda – fit for purpose?

prepared by IBIS