9 Recommendations of the Commission

Tax havens make it more expensive for developing countries to collect taxes, lead to inefficient use of resources, undermine the workings of the tax system and make it possible for power elites to enrich themselves at the expense of the community. The most important damaging effect is perhaps that tax havens help to give power elites incentives to weaken public institutions, institutional quality and governance in their own country. Economic research has shown that institutional quality in the broad sense is an extremely important factor for economic growth. The negative impact of tax havens on a country’s institutions accordingly contributes to ensuring that growth in poor countries is substantially lower than it could have been. The secrecy practised in tax havens has also created information asymmetry between investors and consequently reduced the efficiency of international financial markets. That has led to higher risk premiums and thereby increased borrowing costs for both rich and poor countries.

The Commission has been asked to recommend measures which could contribute to a greater extent to identifying capital flows to and from developing countries via tax havens, and to make recommendations which could help to limit the illegal flight of capital and laundering of money from developing countries via tax havens. In this chapter, the Commission presents measures which could be adopted to limit such harmful effects. Recommendations are also made on Norfund’s use of tax havens. See the discussion in chapter 7.

9.1 National initiatives

9.1.1 Development policy

The Commission recommends that:

1. The Norwegian development assistance authorities should increase their commitment to strengthening initiatives which aim to improve tax systems in developing countries and official registries. Norway has substantial expertise in such matters. The commitment in this field should be broad-based and deal with conditions related to tax administration, utilisation of various tax bases and the formulation of contracts between multinational companies and developing countries on resource exploitation issues. Norway should contribute to and strengthen the African Tax Administrative Forum (ATAF), which was established in 2009 at the initiative of a number of African tax administrators in cooperation with the OECD. The ATAF aims to be a prime mover in the work of strengthening tax systems in its member countries.

2. The Norwegian development assistance authorities should continue to give weight to the work of strengthening democratic processes in developing countries. Strong democratic institutions are an important factor in the fight for sustainable economic development.

3. Norwegian development assistance should continue to support organisations and institutions working for greater transparency, democratisation and accountable government. This should be pursued both through economic support and by demands from Norway in its dialogue with governments that civil society should have a place and that the press should be free to do its work. A stronger commitment should also be made to improving the quality of the economic and financial press in selected developing countries, particularly in Africa.

4. The Norwegian development assistance authorities should strengthen the anti-corruption network financed by Norway.

5. The Norwegian government must ensure, across ministry structures, that industrial policy and the exercise of Norwegian state ownership do not undermine development policy goals. This is particularly important in respect of large Norwegian multinational companies with high levels of state ownership and for an investment institution such as Norfund, because their behaviour can contribute to setting good examples for developing countries.

A number of considerations underlie these recommendations, which coincide in important areas with the government’s proposals in Report no. 13 (2008-2009) to the Storting: Climate, conflict and capital. The existence of tax havens makes it simpler for power elites in developing countries to conceal the proceeds of corruption and other economic crime, and weakens tax revenues to the detriment of public investment and collective benefits. Chapters 4 and 5 have also shown that strengthening the tax system is one of the principal challenges faced by developing countries.

Both research and individual cases show that the political and economic elite in countries with weak institutional and democratic control mechanisms can easily enrich itself at the expense of the popular majority with little fear of being discovered and brought to justice. These experiences show that the power elite in countries with high levels of corruption consciously seek to weaken control mechanisms, in part by avoiding or undermining legal provisions, cutting back or inadequately financing public institutions, and working against those seeking to combat corruption.

Strong institutional and democratic control mechanisms are crucial for combating economic crime. The fight against the use of tax havens to conceal the theft of resources from developing countries must also be pursued by developing countries through a purposeful commitment to strengthening and building up such institutions as the tax authorities, the judiciary and anti-corruption agencies. At the same time, it is important that developed states combat bribery committed by companies domiciled in their own jurisdictions but which have operations in developing countries.

Norwegian development assistance has contributed for many years to strengthening the institutional capacity of and anti-corruption efforts in the countries with which Norway collaborates. However, the results have been mixed. In a number of cases, the authorities in the relevant countries have been unwilling to adopt the necessary measures. This does not mean that Norway should give up, but rather indicates that, in the Commission’s view, the work should be reinforced. At the same time, countries receiving government-to-government aid must be required to increase their commitment to combating economic crime.

9.1.2 National legislation, advisors and facilitators

The Commission recommends that the government consider the opportunities for taking the following actions.

1. All Norwegian companies and individuals who facilitate or establish companies and accounts in tax havens should report this to a separate register linked, for instance, to the Norwegian Register of Business Enterprise in Brønnøysund. The Commission recommends that such a register should be open to public inspection. The duty to register would also apply to companies which act as intermediaries for facilitators located outside Norway. The Commission would specify in connection with this proposal that a list must be compiled of countries to which the duty of registration would apply. In formulating the regulations, it will be important to ensure that both sides – in other words, both the owner and the facilitator – have an independent responsibility for ensuring that the correct details are recorded in the register. The registration must contain the name of the person or company with their personal identity/organisation number. This reporting and registration duty should extend from 2004.

2. The recommendations in section (a) call for changes to the law. The Commission accordingly recommends the establishment of a domestic law commission to study the details of the registration requirement recommended in section (a). This commission should also consider the following:

   • The fundamental problem with companies registered in tax havens is the opportunities for misuse offered by the legislation, and the damage this misuse causes to other states. As a result of their registration, these companies are subject to the jurisdiction of the tax haven in crucial areas such as accounting and tax even though the companies do not generally pursue any real commercial activity there. The consequence is that companies/owners avoid legislation in the countries where their real activities take place, and where their business is pursued and the owners reside. At the same time, public and private interests in these states are denied access to information in the country in which the company is registered. The law commission should consider measures directed against companies with no activities in tax havens in order to prevent owners from using pure registration exercises to circumvent important interests and legislation where the services are provided or production is carried out.

   • Enterprises established in tax havens are often holding or sub-holding companies with limited or no local activity. Among other considerations, experience shows that holding companies are often misused to conduct transactions through chains of tax treaties, both because the requirements for activity are limited and because the activities are subject to strict secrecy rules which make it impossible to know what is actually happening. The law commission should consider whether special reporting obligations should be imposed for such holding companies in those states where the services are actually provided and production is carried out.

   • The concept of domiciliary or home state are key classification criteria for determining where enterprises should be taxed under both domestic law and tax treaties. The law commission should investigate possibilities for formulating simpler and more easily enforceable criteria than those which apply today.

   • Experience shows that transactions are also conducted in group structures for purposes of misuse (in practice between related companies onshore and offshore). Most multinational companies have established a large number of subsidiaries in tax havens. In practice, each state affected by the group’s operations currently has no opportunity to secure an overall view of intragroup transactions, in part because of tax haven secrecy rules – in the broadest sense. The law commission should study how greater transparency can be secured in order to reveal the substance in the transactions carried out.

   • Artificial and sham transactions, both circuitous and circular, are often used to conceal the connection between their beginning and end, and thereby to circumvent important third-party interests. The law commission should consider the imposition of information duties which ensure that affected third-parties can obtain an overview of the whole transaction chain, in order to prevent legitimate public and private interests from being thwarted by the lack of opportunities for accessing information.

   • Advisors are often instrumental in organising the use and misuse of tax havens. The law commission should consider whether special duties or sanctions should be imposed on advisors who facilitate harmful structures.

   • The introduction of special compensation rules and/or sanctions should be considered, including rules on the burden of proof related to the misuse of tax havens.

The Commission has shown earlier in this report that an overview of the amount of capital hidden in tax havens and of the identities of companies that make use of such jurisdictions is difficult to obtain. The recommendations above will help to highlight the activities of Norwegian companies and facilitators related to tax havens. This could encourage other countries, including developing countries, to follow Norway’s example and adopt similar regulations.

9.1.3 Norwegian accounting legislation

The Ministry of Finance introduced new regulations in December 2007 on the documentation of transfer pricing. As an extension of these rules, the Commission recommends that the government consider whether it would be possible to require that Norwegian multinational companies specify in their annual accounts:

• the countries in which they have legal equity interests in companies and other entities

• the size of this equity interest

• the number of employees in the company

• the gross income and taxable profit of each company in each country

• how much tax is paid by each company in each country as a percentage of the taxable profit

The Commission would point out that multinational companies, in their reporting and on their websites, often claim to have ethical guidelines and broad corporate social responsibility. In line with such goals, the Commission believes that it would be appropriate for multinational companies to document publicly, to a greater extent than they do today, where they have operations and what they contribute to the community in the form of tax payments. The recommended reporting would have a double function in that variations between expressed goals and realities would attract negative attention. It would also make incorrect pricing of intragroup transactions a less profitable activity for a company. In addition, such reporting standards could influence other countries to adopt similar measures.

9.1.4 Transfer pricing

The Commission has established in various parts of its report and in Appendix 3 that incorrect pricing of intragroup transactions with the intention of transferring profits to low-tax countries is a major problem for both rich and poor countries. Accordingly, the Commission makes the following recommendations:

1. The government takes the initiative on and supports work in Norway aimed at improving the rules of domestic Norwegian law so that the arm’s-length standard is supplemented with a broader set of instruments for determining when internal prices are being manipulated. In this context, the US rules on determining internal price manipulation should be considered.

2. The government should work to ensure that the OECD, the UN and the World Trade Organisation (WTO) consider the desirability of a broader set of indicators to determine manipulation of transfer pricing than those currently in use.

The Commission takes the view that the transfer pricing issue provides guidelines for the shaping of corporate taxation, leads to extensive competitive distortions between national and multinational companies, and can cause a substantial loss of tax revenues. All these considerations are very important in developing countries, both for government tax receipts and for the ability to develop national commercial activity.

To document how big a problem transfer pricing might be for developing countries, the Commission has commissioned a research team at the Norwegian School of Economics and Business Administration/Institute for Research in Economics and Business Administration to study the behaviour of multinational companies in Norway. See Appendix 3. The hypothesis is that if the problem is substantial for a country with such good tax controls as Norway, it will be considerably greater in developing countries. The research team demonstrates on the basis of Norwegian enterprise data, that multinational companies transfer profits to low-tax jurisdictions. Estimates suggest the tax loss could be on the order of 30 percent of the potential revenue from foreign multinational enterprises. The study also finds that multinational companies in Norway have a profit margin one and a half to four percentage points lower than comparable national enterprises.

As mentioned above, new regulations on the documentation of intragroup transactions and transfer pricing were introduced by Norway in 2007. These mean that the OECD’s guidelines on transfer pricing by multinational enterprises have been given a more formalised status as a source of law in the Norwegian legal system. The arm’s-length principle is the basis for transfer pricing in the OECD’s guidelines. In the Commission’s view, the opportunities to utilise a broader set of methods than those enshrined in the OECD’s model tax agreement and Norwegian domestic law need to be studied. The Commission finds that the US tax authorities have made considerable progress in utilising various sets of regulations to determine incorrect pricing of transactions. Among other things, the US has applied the “comparable profits method”, whereby profits are compared between companies in the same industry. If a subsidiary of a multinational company reports profits which are significantly lower over time than the average for the industry, this could provide evidence of transfer pricing. Under specified conditions, the company will have its taxable profits adjusted to a normal level. The Commission takes the view that it could be useful to consider the adoption of this and other methods for determining whether intragroup transactions are incorrectly priced.

The Commission also takes the view that the need to reform the legal regime must be carefully considered, including changes to company law, accounting law and legislation related to securities and key rules of civil law. Large Norwegian multinational companies, some with a considerable proportion of state ownership, have substantial operations in developing countries. Norwegian legislation in this area is accordingly important for developing countries.

9.1.5 National centre of expertise

The Commission has found that the public sector knows too little about research related to internal prices and tax evasion. Such knowledge is also associated with a general understanding of tax systems and has great social value. The Commission accordingly recommends the following:

1. The establishment of a national centre of expertise to draw on the disciplines of economics, law and social sciences. Such a facility could secure leading-edge expertise for Norway on international tax questions, transfer pricing, tax havens and capital flight, and will be able to support the Ministry of Finance, the Ministry of Foreign Affairs and Norad on such issues.

2. A centre of expertise of this kind should have strong links to the tax authorities, the National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway, and the Ministries of Finance, Justice and Foreign Affairs in order to exploit the experience gained by these institutions on various tax issues and to contribute to a mutual build-up of expertise through their networking function.

3. The centre should collaborate with researchers and research institutions in developing countries.

4. The centre should possess or forge links with institutional expertise on developing countries, and have general empirical knowledge.

5. The centre should contribute to the education of people from developing countries.

6. A facility of this kind should be closely affiliated with or form part of a productive research milieu in order to ensure that existing expertise is utilised by the specialist institutions and to lay the basis for further expertise development and innovative research.

A general problem for all nations, but particularly for developing countries, is that expertise related to tax evasion techniques and transfer pricing primarily exists in the private sector, where the willingness to pay for such knowledge is great. The public sector, including higher education institutions, have weak incentives to develop such expertise, and public-sector pay levels – particularly in developing countries – are very low. That helps to draw specialist expertise to the private sector in attractive areas such as taxation and law. A Norwegian centre of expertise could contribute to alleviating this problem by helping to educate people from developing countries in these areas. The Commission would emphasise that the desire and need for a long-term approach means that funding for a centre of this kind must be secured through an annual basic appropriation independent of the programmes pursued by the Research Council of Norway.

9.2 International measures

The Commission has been asked to recommend measures which invite other development partners to adopt a common approach to the use of tax havens in connection with investment in developing countries. The various recommendations are outlined below.

9.2.1 Cross-ministry working group

The Commission proposes that:

1. the Ministry of Foreign Affairs appoints a cross-ministry working group to develop networks with similarly minded countries on reducing and eliminating the harmful structures found in tax havens

2. this working group should aim to influence international development and financial institutions dedicated to helping poor countries, such as the World Bank Group (including the International Finance Corporation) and the African Development Bank

The Commission considers it important to promote an understanding of the effects that tax havens have on development in poor countries among the countries with which Norway has traditionally had a good dialogue on development issues. Norway is an important contributor to a number of international development and financial institutions dedicated to helping poor nations, and it is important that these partners understand the damaging impact of tax havens and that they contribute through constructive measures.

9.2.2 Tax treaties

The Commission has pointed out that tax treaties can make it more profitable for foreign investors to use tax havens, while such agreements can also contribute to reducing tax revenues for poor countries. In the Commission’s view, the recommendation of tax treaties by the G20 countries can meet some of the requirements of the industrialised states for accessing information in tax havens, but the strong focus on such agreements diverts attention from the economic forces which make tax havens damaging for rich and poor countries alike. Accordingly, the Commission recommends:

1. that the requirements for a legal entity to be regarded as domiciled in a tax haven must reflect activity of real economic significance to a greater extent than the present rules require

2. such activity requirements, and their scope, should be expressed in international tax conventions and treaties

3. Norway should take an international initiative on new rules for assigning the right to tax

Tax treaties contain provisions on assigning the right to tax between two jurisdictions. They also provide for information exchange upon request. The Commission nevertheless takes the view that the use of tax treaties does not eliminate the harmful structures in tax havens. Signing a tax treaty with such jurisdictions does not lead to the establishment of official company and owner registries with a duty to keep accounting information, or to the introduction of substantial genuine audit provisions. Nor will a tax treaty lead a tax haven to change its practice of ring-fencing parts of its tax system so that foreigners secure better tax terms than nationals. Re-domiciling, or moving funds between tax havens once tax-relevant information has been requested about them, will persist. So will exemption schemes for companies and trusts which are made available because these structures will only have effect in other states. Since none of these issues is affected by tax treaties, the tax havens will have no incentives to exercise control over the extensive opportunities for abuse inherent in the exemption system.

Although tax treaties increase opportunities for accessing tax-relevant information, they are only effective if the requesting state has relatively precise knowledge that specific persons are concealing specific assets in a specific company in a tax haven. Such precise knowledge is difficult to obtain because secrecy rules often prevent third parties from gaining access to the necessary paper trail. (A case in point is Switzerland’s UBS bank, which concealed income and assets for more than 50 000 US taxpayers.)

Tax treaties between tax havens and poor countries show that the latter are in a weak negotiating position when such agreements are formulated. Poor countries want the capital which tax havens can offer and are willing to forego tax revenues in exchange by reducing their tax rates for many of the income categories which a tax treaty covers. Paradoxically, tax treaties contribute to making tax havens a more favourable location than would be the case without such agreements. Tax treaties can cause more harm than good unless they are followed by measures to reduce the harmful structures identified by the Commission. In that connection, it is important to ensure that tax treaties do not constrain further action against tax havens.

Formal legal considerations applied in tax treaties mean that a foreign investor can in reality have a company which is regarded as domiciled in the tax haven even though the company conducts no meaningful activity there. A good example is provided by locally appointed representatives at the vice president and director levels in the tax haven who give an impression of activity. These front persons often represent hundreds (in some cases thousands) of companies which are engaged in widely differing operations and which therefore have very different requirements for expertise. Such expertise requirements cannot be covered by a single executive officer who spreads their time across hundreds of companies. This shows that locally appointed representatives do not have a real function in the companies they represent other than to give an appearance of local affiliation. Had they possessed influence, it would have meant lower profits and inefficient operation of companies located in tax havens and reduced the attraction of company registration in such jurisdictions.

In conclusion, the Commission would point out that tax treaties could nevertheless be important for authorising access to tax-relevant information. They are also a necessary component in establishing fund structures in fund and investment companies which bring together a number of owners from other jurisdictions. However, this requires that tax treaties also exist between the countries in which the fund is placed and those in which the investors are located.

9.2.3 Convention for transparency in international economic activity

The Commission makes the following recommendations:

1. Together with a group of like-minded nations, Norway takes the initiative on preparing an international convention which will prevent states from developing secrecy structures likely to cause loss and damage to other jurisdictions. Such a convention should define unacceptable practice.

2. Work on a transparency convention should be incorporated in Norwegian foreign policy and be coordinated by the Ministry of Foreign Affairs.

3. A working group is appointed under the auspices of the Ministry of Foreign Affairs to work on drawing up the convention.

The Commission would emphasise that, even though a number of countries are unlikely to accede to such a convention, experience with other conventions which many countries have refused to sign is promising. Examples include the conventions banning the use of anti-personnel mines and cluster munitions. These have established norms, and even countries which have not signed up have applied them in various contexts and in a constructive manner. The Commission takes the view that it is important to attract and maintain international attention related to the problems posed by tax havens. A convention would create a dynamic which would persist and, hopefully, contribute to the elimination of harmful tax structures.

A convention should be general, apply to all countries and be directed against specific harmful structures. It should include at least two principal components. First, it must bind states not to introduce legal structures that, together with more specifically defined instruments, are particularly likely to undermine the rule of law in other states. Second, states which suffer loss and damage from such structure must have the right and duty to adopt effective countermeasures which will prevent structures in tax havens from causing loss and damage to public and private interests both within and outside of their own jurisdiction.

The Commission would emphasise that the right of state self-determination (the sovereignty principle) must be fully respected. Fiscal or other regulations adopted by a state within its own jurisdiction for its own citizens and sources of tax revenue must be determined by relevant bodies in the jurisdiction concerned. The introduction of legislation which exclusively or primarily will have effects in other states is not the exercise of sovereignty, but a major encroachment on the sovereignty of others.

9.2.4 OECD outreach programme

The Commission takes the view that:

• The Norwegian authorities should secure increased financial support for the OECD’s taxation outreach programme for non-OECD economies.

This programme aims to promote international collaboration on tax policy and administration. It represents an important element in the global dialogue on taxation by functioning as a meeting place where the tax authorities from different countries can share experience and lay the basis for a new tax policy. The programme is also a potentially important forum for promoting the development of international standards for good tax practice through multilateral and bilateral collaboration.

The programme’s strength lies in its focus on practical tax policy and current challenges. Relevant issues discussed at meetings under the programme’s auspices include transfer pricing, auditing of multinational companies, exchange of information between tax authorities, and the negotiation, formulation and interpretation of tax treaties between countries. These meetings are attended by experts with special knowledge of relevant tax policy and administrative areas. The object of the meetings is to contribute to illuminating issues of particular relevance for countries which do not belong to the OECD. In the Commission’s view, the outreach programme represents an important measure for professionalising tax administrations in developing countries by contributing to an international tax dialogue through the sharing of information and experience with counterparts from OECD countries.

9.3 Guidelines for Norfund

The Commission has been asked to make recommendations which can be incorporated as elements in the operational guidelines for investment activities by the Norwegian Investment Fund for Developing Countries (Norfund). It has also been asked to assess the extent to which transparent investments via tax havens contribute to maintaining the structures used to hide illicit capital flows from developing countries. The Commission accounts below for its conclusions on these issues and provides recommendations concerning Norfund’s operational guidelines.

9.3.1 The Commission’s recommendations on Norfund’s investment activities

1. Guidelines and reporting

1. In dialogue with its owner, Norfund should develop and publish ethical guidelines for its choice of investment location.

2. Norfund’s operations divide naturally into two components: (i) fund investments in which the institution joins forces with other investors to establish a fund which acquires shares in or lends money to companies, and (ii) direct investment in companies in developing countries in the form of loans or share purchases (often in combination – in other words, loans to and shares in the same company). The Commission believes that Norfund should report the following:

   • the proportion of Norfund’s capital invested in funds and direct investments respectively, and the return on these two categories as well as on the sub-categories of loans and shares before and after tax

   • where the funds are registered

   • a breakdown by country of the investments made by the funds in which Norfund invests (overview of how much goes to each country and continent)

   • co-owners of the funds

   • for both funds and direct investment, how the investments break down proportionately between loans and shares

   • for fund investments, Norfund’s share of tax paid as a proportion of its share of the capital in the fund.

3. Norfund should work to ensure that the funds in which it invests have publicly accessible accounts.

Most of the type of information which the Commission believes Norfund should present under section (b) is easily available and very useful for owners, investors and the financial market in general. Some of the data are also available today, either on Norfund’s website or in its report on operations. In the Commission’s view, this type of information should be brought together in one place and positioned centrally so that stakeholders can readily identify the principal features of Norfund’s investment strategy.

Norfund has previously reported that it contributed NOK 3.2 billion in tax revenues to developing countries in 2008 (Norfund’s website, see also chapter 7 above). If, on the other hand, that figure is weighted by Norfund’s share of the risk capital, tax payments come to only NOK 66 million in the same year. The Commission takes the view that Norfund should report in the future on its weighted contribution to tax paid by the companies as a proportion of the total risk capital. In addition, Norfund should report what it has paid in tax deducted at source as a proportion of its own share of the investments.

2. Analysis of investment locations

The Association of European Development Finance Institutions (EDFI) adopted a recommendation in May 2009 on guidelines for the use of offshore financial centres by its member institutions. Norfund and other state-owned funds which invest in developing countries belong to the EDFI. The main thrust of the guidelines is that members of the association should avoid investing in or via jurisdictions which fail to satisfy certain minimum standards. These requirements relate mainly to systems for combating money laundering (the FATF’s recommendations) and information sharing on tax issues (OECD agreements). The guidelines also include requirements related to involvement in capital flight from developing countries, but these have no specific content. As a result, the Commission recommends that:

1. Norfund should conduct country analyses of the jurisdictions it utilises

2. such analyses should include a detailed assessment of the relevant legal system, including legislation on tax, company and enterprise registration, banking and finance, money laundering and anti-corruption

3. Norfund should assess whether African countries can be found which do not have the harmful structures associated with tax havens and which can function as investment locations.

3. Choice of commercial jurisdiction

The Commission would make the following recommendations concerning Norfund’s choice of commercial jurisdictions:

1. The institution’s goal should be that the investment funds in which it is a partner will be registered in the country, or one of the countries, where the companies in receipt of the investments are located. This will ensure a better tax base for the developing countries and will send an important signal globally that a genuine desire exists to eliminate the damaging effects created by tax havens, regardless of the costs this might be incurred in the short term. Such investment could moreover make a positive contribution to improving relevant legislation and to developing the banking/financial sector in the investment country.

2. The Commission takes the view that Norfund can choose to participate in funds based outside the countries in which the companies receiving the investments are located when good reasons exist for so doing. In that context, Norfund should make proposals on investment countries which are considered and approved by the owner. It follows from the Commission’s discussion in chapters 2 and 3 that such jurisdictions should as far as possible possess credible public company and owner registries, no secrecy regulations, and legal structures which create as little asymmetry as possible and which are directed at undermining the rule of law in other states as little as possible. When choosing investment jurisdictions, Norfund should endeavour to find at least one African country. It is also anticipated that Norfund will involve its sister organisations in this work.

3. Norfund is one of many investors in various funds, and often has a relatively small holding. The Commission has discussed what view to take on this, and has decided that it would be desirable in the long term for Norfund to invest together with investors who do not wish to use tax havens. However, the Commission is aware that it could be difficult to find such partners in the short term. It accordingly recommends a transitional arrangement whereby Norfund gradually reduces new investment via tax havens to zero over a three-year period after the Commission’s recommendation take effect. That length of time will give Norfund and the Norwegian authorities time to work on the investors with whom Norfund invests so that these give their support to the work of combating harmful tax regimes.

4. The Commission takes the view that no purpose would be served by requiring Norfund to withdraw from existing investment funds currently registered in tax havens. This is partly because the institution would lose money on such a withdrawal, particularly in those cases where the lifetime of the funds is relatively short, and also because such sales would reduce the size of Norwegian development assistance funds.

4. Cooperation with Norfund’s sister organisations

The Commission takes a positive view of the fact that the EDFI, through its guidelines on the use of offshore financial centres, demonstrates a view that its members should take account of the role of tax havens in relation to developing countries. However, it also believes that these guidelines are not suitable for excluding locations with harmful structures, and accordingly recommends that:

• Norfund works for a revision of the criteria for selecting investment locations to bring them into line with the criteria specified in sections 1 and 2 above.

9.3.2 Consequences

The Commission has also assessed the consequences of the recommendations outlined above. As mentioned, Norfund’s activities divide naturally into two components:

• fund investments where the institution, together with other investors, establishes funds which acquire shares in companies or lend money directly to enterprises

• direct investments in companies in developing countries in the form of loans or share purchases.

About 81 percent of Norfund’s total NOK 4.8 billion investment portfolio was invested (directly or indirectly) via tax havens in 2008. The consequences of reducing Norfund’s new investment through such jurisdictions over three years will probably be that it invests a larger amount directly in companies in developing countries. This assumes that Norfund’s co-investors continue to use tax havens to a certain extent, so that fewer relevant funds will be available for Norfund participation. An increase in Norfund’s direct investment does not necessarily mean that the institution is prevented from investing in the same companies as the funds in which it is currently a co-investor. One possibility would be to use the same advisors as the funds, and another would be to make parallel investments.

It is unclear how direct investments affect Norfund’s profitability because good profitability calculations are not available from the institutions for its fund and direct investments. The Office of the Auditor-General has moreover called attention in its audit report to deficiencies both in profitability reporting and in the way tax revenues for host countries are reported. The Commission cannot see that Norfund has taken adequate account of these comments. 1 It would particularly emphasise that Norfund’s profitability reporting by the various investment categories should be improved, and that the goal here should be to achieve the same standard as commercial funds.

Furthermore, the Commission takes the view that, since Norfund has goals related to contributing to value creation and tax revenues in developing countries, the pre-tax return on its investments should be the most important investment parameter. Managing in accordance with the post-tax return means that Norfund would devote resources to minimising its tax payments in developing countries. This is not reconcilable with the institution’s object of contributing to development in poor countries.

The Commission takes the view that risk capital is essential for sustainable development. Norfund’s investment activities make an important contribution in that respect. When determining transitional arrangements, the owner must take account of the possibility that new rules could impose additional costs on Norfund and limit its investment opportunities.

On the other hand, account must be taken of the damaging effects of maintaining structures used to conceal illicit capital flows from developing countries. The Commission has established that tax havens represent an important hindrance to growth and development in poor countries, and that they make it opportune for the political and economic elites in developing countries to harm the development prospects of their own states. Accordingly, putting a stop to the damaging activities of tax havens is important. The Commission takes the view that a short transitional period for Norfund will send an important signal on the significance of not utilising tax havens. Against the background of current processes in other countries, other actors are expected to adopt similar restrictions. Norway accordingly has an opportunity to take a leading role in this work. In the longer term, the new guidelines for Norfund could also contribute to the creation of more venues for locating funds in African countries without harmful structures.