Tax evasion and avoidance have been calculated to cost developing countries $385 billion, or nearly eight times total international development aid. The German development minister in October 2008 suggested the figure to be $500bn. In DRC, for example, only 30% of timber and minerals exports are taxed.
Some estimates assert that capital flight means for each dollar that goes to the South in aid, more than 7 dollars come back to the North through illicit capital flows: criminal activities such as the drug trade, corruption, and commercial illicit flows through abusive transfer pricing and other tax evasion and avoidance practices. Capital flight from the African continent between 1970 and 2005 is about $400 billion. The 2007 UNCTAD report shows that around $13 billion per year have left the African continent between 1991 and 2004. This represents a huge 7.6% of annual GDP.
An estimate by the World Bank and UNODC suggests developing countries lose between $500 - $800 billion annually to illicit outflows’ with tax evasion alone estimated to account for 40% of this. Other studies have suggested even larger figures for the total of illicit capital flows. But there is little solid evidence for the scale and nature of the problem.
As an overall assessment of the literature on tax gap estimates for the developing world, the study concluded that the available knowledge on tax revenue losses in developing countries caused by tax evasion and tax avoidance is limited. This is partly due to the lack of data and partly due to methodological shortcomings of existing studies. Some of the existing estimates of tax revenue losses due to tax avoidance and evasion by firms systematically overestimate the losses. Other studies are based on assumptions which are so strong that the results are difficult to interpret. Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data.
Moreover, it seems that too much emphasis is put on producing aggregate estimates of tax revenue losses for the developing world as a whole. While aggregate numbers on the volume of tax avoidance and evasion in developing countries do seem to attract public attention, it should be kept in mind that developing countries are very heterogeneous. Research on tax avoidance and evasion as well as policies to achieve more revenue mobilisation should take this heterogeneity into account. More research along the lines described above is needed to improve our understanding of tax avoidance and evasion and the implications of these activities for revenue mobilization in developing countries.