Why do Development Finance Institutions use offshore financial centres?

Research reports and studies
October 2017
Paddy Carter

Taxation is at the centre of global development policy. It is widely recognised that a major improvement in the ability of developing countries to raise tax revenues will be necessary, if not sufficient, to achieve the Sustainable Development Goals.

At the same time, the tide of public opinion in Organisation for Economic Co-operation and Development countries continues to turn against tax evaders, and governments are introducing new legislation to crack down on tax evasion and avoidance, and increase transparency. The role that offshore financial centres (OFCs) can play in enabling tax evasion and avoidance is widely recognised, and it is easy to see why they attract such condemnation. The popular argument is simple and powerful: tax havens are used by the corrupt and duplicitous to avoid paying their fair shares of taxes, thus draining billions of dollars in public revenue from cash-strapped developing countries. Therefore, government agencies that exist to promote development should have nothing to do with them.

Such arguments may hold the greatest sway in public debates, but matters of principle fall outside the domain of research and evidence. This report is concerned with the pragmatic consequences of the use of OFCs by Development Finance Institutions (DFIs) from a development perspective. In other words, why do they use OFCs and do the costs outweigh the benefits?