International Tax Competition, Anti-Money Laundering Efforts and Capital Flow: Implications for South Asia as part of the Global South

Abstract

In the last few decades, numerous tax experts from international organisations such as the Organisation for Economic Co-operation and Development, the European Commission and G20 have declared a ‘war on anti-tax competition’. However, this paper asserts that the efforts of these organisations have not been successful in lowering international tax competition. Conversely, there has been an increase in functioning tax havens in the Global North that enforce an umbrella of strong anti-money laundering efforts (AMLEs) within their jurisdictions. Conceptualising this paradox as “anti-money laundering efforts in tax havens”, this paper argues that AMLE can secure the interest of these jurisdictions of easing inflow and preventing outflow of capital. Capital is often retained with a ‘carrot and stick’ approach, given AMLE provisions and robust financial institutions. Yet, in contrast with these tax havens, the Global South countries, including those in South Asia, lack such a strategy. This may explain why long-term capital has not been flowing to the South, despite increasing economic liberalisation. For South Asia, this phenomenon can hinder long-term capital retention and have spill-over effects in the economy unless AMLEs are strengthened.