Friday, January 17, 2014

The new Tax Justice Network website and blog is now live

We have a completely new website!

It's in the same place as before.

Please take a look.

From now on our blog will be integrated into the new site. We won't kill this blogger site that you're reading now: but it will become a static site. All the old blogs will still be available, but we won't be updating the blog here any more.

We're told that all the old links from the old site will continue to work, though there may be exceptions. Please let us know if any don't work - or any other problems you encounter.


TJN site disruption

We are in the middle of launching a new TJN website. There may be some disruption to the site over the weekend.  We will bring you any updates on this blog.


Public Eye Awards: Help put FIFA in the Hall of Shame!

A while ago we wrote about something quite reprehensible from world football's governing body FIFA. This Tax Bubble that FIFA created around the South African world cup - despite FIFA's being a gargantuan, unaccountable billionaire monopolist based in Switzerland - was a particularly shameful example of their anti-democratic rent-seeking behaviour.

And they are going to do it again and again

Now the Public Eye Awards, which draw attention to particularly egregious corporate misbehaviour, have sent us this. Please sign it today. 
Help put FIFA in the Hall of Shame!
Vote NOW for FIFA as the worst corporation of the year at the Public Eye Awards and spread the word:

For the Campaign Dismantle Corporate Power,
FIFA should be considered the Worst Corporation of the World because:

Although it is called a ‘non-profit organization’ FIFA uses its World Cup agreements with host countries to protect the investments of its corporate sponsors; corporations who are given exclusive rights to sell their products during the tournament. This is a situation that has a major impact on local economies, street vendors and waste pickers who are blocked from venues and persecuted for conducting their regular business during the tournament.

Brazil’s “World Cup General Law” is a key example of FIFA’s capture of government policy. FIFA forced the government to introduce legal reforms, resulting in the loss of rights for the Brazilian population. One example was the attempt by FIFA to suspend half price admission for Brazilian youth and elderly people to cultural events during the tournament and to make world cup games completely inaccessible to those who cannot afford inflated ticket prices. While the current Brazilian laws prohibit the sale of alcoholic beverages in stadiums, according to FIFA’s rules, they are suspended to allow only Budweiser beer to be sold in the stadiums.

The World Cup General Law allows FIFA to regulate retail operations, advertising and propaganda in special “zones of exception” that surround stadiums and tournament events spaces in a two kilometer radius. Some of the Transnational corporations that have exclusive rights to operate in these buffer zones are: food and beverage companies Coca Cola, McDonalds, Budweiser and Brazilian supermarket giant Seara. For a complete list of sponsors for the 2014 world cup follow this link:

Private security army G4S, which operates in occupied Palestine, is FIFA’s favorite option when it comes to repression during the.FIFA’s events. The British company faced a boycott campaign during the South African World Cup games Cup in 2010.

The Global Campaign to Dismantle Corporate Power and Stop Impunity is supporting the nomination of FIFA by ANCOP for the Public Eye Awards. The Campaign stands in solidarity with:

- Women movements who are denouncing the commodification of the female body and image through sports entertainment and FIFA’s public relations messages;
- The Boycott Sanction and Divestment (BDS) Campaign on TNCs operating in occupied Palestine;
- Peasants movements that resist agribusiness and supermarket corporations and promote food sovereignty; - Networks and movements that denounce the abuses of financial sector;
- Environmental justice networks supporting communities that have been evicted directly or indirectly because of the world cup;
- Civil society groups fighting for democracy and right to protest in Russia, country of the FIFA next World Cup (2018);
- Migrant workers subjected to unjust labor standards in Qatar who are building infrastructure for the 2022 FIFA World Cup.
- Street vendors in South Africa who were criminalized by FIFA in the World Cup 2010 and other communities affected by FIFA legacy;
 - Athletes that love sports and culture and resist the corporate takeover by the entertainment industry

Vote NOW! for FIFA as the worst corporation of the year at:
Update April 2014:  for more information on corporate tax see here.


Thursday, January 16, 2014

Links Jan 16

The time is now: European Parliament to vote on the Anti-Money Laundering Directive Eurodad
See also: Member states split on proposed transparency for trusts legislation IFC Review / European Voice

Finance lobbies OECD for flexibility in tax regulation The Sydney Morning Herald

Israel: PM’s Office: No wrongdoing in Netanyahu’s offshore bank account The Jerusalem Post
"Netanyahu used tax haven while overseeing agency responsible for reducing use of such accounts by Israelis." See also: Netanyahu held tax haven bank account Globes

Greece: Offshore Companies and Huge Bank Accounts for Golden Dawn’s Members Greek Reporter

Australia’s going for the foxes in charge of the henhouse approach to corporate tax collection Tax Research UK

Head of Swiss financial regulator steps down swissinfo
... to be succeeded by former UBS senior executive who testified before the U.S Senate on the bank’s role in aiding US tax evaders, and headed the Japanese securities unit involved in Libor rate rigging.

Switzerland probing banker who is helping U.S. tax investigations Politico
"The Swiss contend they’re merely upholding their privacy laws, but some say the investigation sends a message to bankers: Keep quiet or else."

Even U.S. Banks Must Aid IRS Hunt For Offshore Accounts Forbes
Reciprocity seen as critical to implementing FATCA. See also: US Court Dismisses Challenge To IRS Reporting Rule Tax-News, and US banks’ challenge to tax info exchange fails Compass Cayman

Indian High Court Pressed On Vodafone Transfer Pricing Case Tax-News,

Latest update: Release Of Offshore Records Draws Worldwide Response ICIJ

Argentina to clamp down on taxpayers with undeclared assets in Panama STEP
See Spanish language version here.

Argentina Imposes Withholding Tax On Exports Tax-News
Measures adopted by the Argentinian government to tackle transfer pricing abuse

Mexico scrutinizes multinationals for tax evasion Thomson Reuters

Resource Blessing, Revenue Curse? Domestic Revenue Effort in Resource-Rich Countries IMF

Finland: President critiques corporate tax evasion, public sector growth Yle

Canada: Tax Evasion Hotline Offers Bounty For Cheaters Huffington Post

Analysts divided on impact of Qianhai-BVI move on Hong Kong South China Morning Post

An eye-opening message about the culture of denial in the tax industry David Quentin's tax & law blog

Double taxation agreements - one-sided profit? TJN Germany Blog (In German)

Taxing the Behemoths TaxProf

U.S.: Obamacare Website Fixer Has Thing for Tax Havens Bloomberg

New York Times Letter to the Editor: End the Corporate Tax? Citizens for Tax Justice
See also our recent blog Time to abolish the corporate tax? Part 2: Only fools or shills would agree

Cayman: Tempura lawyer reinstated Cayman News Service
Latest twist in the corruption case highlighting alleged misgovernance between Britain and its offshore financial centres

An indictment of financial crime enforcement Thomson Reuters

Beanie Babies creator Ty Warner won't serve prison time for tax evasion CNN

Bernie Ecclestone 'will face criminal charges' as position at head of Formula One comes under serious threat The Telegraph

Mo Farah Applies to Become Tax Exile from the UK Runner's World

Revenue scouring Facebook and Twitter for tax cheats Irish Independent


New TJN website: coming very soon

Very soon we will be launching a completely new TJN website to replace our current one.

It will have the same address as before: you will click on and suddenly you will notice that everything has changed. The old links will remain alive, at least for most of them.

The blog is going to be integrated into the new website.

But don't worry: we're not going to kill this site. These blogs will remain available, just as before. It's just that we won't be adding new ones here, but at


Tuesday, January 14, 2014

Links Jan 14

"BEPS Action Plan: Update on 2014 Deliverables"- Live Webcast Thursday 23 January OECD

Hellenic EU Presidency Outlines Priorities Tax-News
"Greece will press for the extension of automatic information exchange procedures as part of its six month European Union (EU) Presidency."

India wants G20 & OECD nations to adopt its transfer-pricing policy The Financial Express

Alcoa in $384m deal to settle Bahrain bribery charges Financial Times (paywall)
Alcoa admits links to "corrupt international underworld" via havens Guernsey, Luxembourg, Liechtenstein and Switzerland.

Kazakhstan Exempts EDRB From Taxes Tax-News

Sleuths Hunt for Kazakh Bank’s Missing $6 Billion Bloomberg

From Spanish Royals To American Tax Protestors, Tax Evasion Can Mean Jail Forbes

Mauritius: Authorities announce new unit against financial crime and new powers to sanction offshore entities Financial Secrecy Media Monitor
Their proclamations sound good, but how much is spin?

A rising tide of dark money The Washington Post

Should It Bother Us that Boeing Says It Needs a Tax Incentive to Make Its Planes Safe? Citizens for Tax Justice

Israeli bank data disc aids German investigation swissinfo

RBC accused of stalling during U.S. tax evasion court case The Toronto Sun

Prada Mimics Dolce & Gabbana Tax Trouble, Should Copy Apple & Google Instead Forbes


Monday, January 13, 2014

Jersey: A Case Study in Path Dependence

Update April 2014: For more information on secrecy see here.

This blog is part of a series highlighting the narrative reports from a number of secrecy jurisdictions around the world, explaining how they became offshore financial centres.
Jersey ranked ninth on the 2013 Financial Secrecy Index.  This ranking is based on a combination of its secrecy score of 75 (poor) and the island's tiny share of the global market for offshore financial services.  For decades the island has pursued a development strategy which has given primacy to offshore finance.  It is now victim to The Finance Curse.  Any attempt to diversify away from financial services will need to grapple with a host of issues arising from what development economists term the island's 'path dependence', the biggest of which are the extraordinarily high cost of living and the narrow skills base of the island's workforce.
French protestors spell out their vision of Jersey

The Jersey financial centre: history and overview
Jersey, the largest of the Channel Islands, lies 135 kilometres south of the UK and just 45 minutes by jet from London. Proximity to the UK means that the island’s financial centre is intimately linked to London and the majority of inflows to Jersey are ultimately destined to the City.
Despite its tiny size, with a population of around 95,000, the island hosts a major offshore financial centre in its capital, Saint Helier, with a sophisticated cluster of international banks, trust companies and law firms – including many top players in the self-styled ‘Offshore Magic Circle’.  
For decades offshore trusts have been a mainstay of the island’s wealth management sector, which attracts capital inflows from around the world. Jersey also hosts hedge funds, shadow banks and has specialised in offshore securitisation of loans.
With its tiny population and economy, and a long history of weak political governance, Jersey is 'captured’ by the financial services sector. Despite regular protestations that it is clean and transparent, Jersey’s very high secrecy score and large financial sector means it fully deserves its place in the top ten global secrecy jurisdictions.
For centuries, part-British Jersey has taken advantage of its peculiar constitutional relationship with Britain to maintain its fiscal autonomy. It was a relatively early entrant to the offshore financial services market.  In the 1920s UK high net worth individuals either emigrated to the island or shifted their wealth to Jersey registered offshore trusts and companies for estate planning purposes. Income tax was originally introduced in 1928 at a rate of 2.5 percent, but subsequently raised to 20 percent in 1940 by the German military government. The personal income tax rate remains 20 percent, but corporate profits and capital gains are not taxed. As academic researchers have noted (Offshore Finance Centres and Tax Havens, p181): “a large proportion of the transactions conducted in Jersey are tax driven (that is, transactions that are booked there without the requirement of adding value so that there is little real activity) which is a key identifier of a tax haven.”
Before the abolition of British exchange controls in 1979 under Prime Minister Margaret Thatcher, all banks in Jersey came under the Bank of England exchange control regulations, but the Bank of England has historically been relatively content to operate a regime of benign negligence with respect to Jersey. Offshore banking expanded rapidly from the 1960s as London-based secondary banks expanded their offshore Euromarket activities: Hill Samuel from 1961, then Kleinwort Benson and Royal Trust of Canada in 1962, Hambros Bank in 1967 and then the first U.S. bank, First National City, the following year.  Within a decade 30 international banks were operating from Saint Helier, including Citibank, Bank of America, Deutsche Bank, Banque Nationale de Paris, Barclays Wealth, HSBC and Bank of India.
The link with Britain and the City of London
A British Crown Dependency since the 13th Century, Jersey’s key officials, including senior law officers, the president of the States of Jersey (the legislature), and the island’s Lieutenant Governor are all appointed by the British monarch. 
One commentator describes (The offshore Interface, p154) Jersey’s relationship with Britain as “within and yet without, of being under the UK umbrella and yet with the space to have a surprising amount of freedom”.  Jersey Finance, the self-styled Voice of the International Financial Centre, admits:
“For many corporate treasurers, institutional bankers and treasury specialists, fund promoters, brokers and other corporate financiers, Jersey represents an extension of the City of London.”
All legislation agreed by the island’s legislature must be ratified by the UK monarch’s Privy Council before being enacted.  And yet politically Jersey is not part of the UK and, through smoke and mirrors, regularly projects itself as being free from UK interference.  This provides comfort to British elites using Jersey for tax cheating, while at the same time reassuring them that if the worst arises they can protect their interests through appeal to the UK Supreme Court.  This odd relationship with the UK is echoed in the peculiar relationship between Jersey (and its fellow Bailiwick of Guernsey) and the European Union.  Strictly, Jersey is inside the Customs Union for the purposes of trade in tangible goods, but is not party to EU Directives or treaties such as the Single Market Act or the Maastricht Treaty. 
This inside-outside relationship with Britain is also reflected in the island’s culture and social relations.  Superficially the island feels very British, but with Norman-French street names.  And, as author Nick Shaxson notes in his book Treasure Islands, the tiny scale amplifies many of the problems of contemporary Britain: conflicts of interest and corruption are rife, social inequality has corroded all sense of community, and the elite have made their own interests synonymous with the interests of the entire population.  In the near-absence of opposition politics and independent media this is a recipe for stifling dissent – especially when it challenges the dominant offshore financial sector.
Sun, sea and secrecy
Although Jersey does not have formal banking secrecy backed by criminal law (as is the case in Switzerland or the Bahamas, for example) secrecy is provided in various other ways, including via Jersey trusts, offshore companies and, since 2009, foundations.  These legal arrangements, combined with judicial separation from the UK, provide an effective secrecy space that attracts illicit financial flows from across the world.  While the funds were flooding in during the 1980s and 1990s the island’s regulatory authorities did little to intervene to prevent dirty money from rushing through Saint Helier en route to London. On September 17, 1996, in a searing article about an accumulation of scandals in Jersey, the Wall Street Journal described this secrecy jurisdiction as “an offshore hazard . . . living of lax regulation.” Two years later, in response to a major regulatory failure involving the Jersey subsidiary of Swiss banking giant UBS and a convicted foreign exchange dealer operating from offices in the island, New York assistant district attorney John Moscow was quoted in the Financial Times:
“The Isle of Man authorities see their job as keeping the bad guys out.  Jersey sees its job as co-operating with criminal authorities when the law requires it, without necessarily keeping the bad guys out.”
Such articles are usually met by a frenzy of public relations activity, along the line ‘we are clean, well regulated and cooperative; and our critics are motivated by foul motives.’  In addition, when major wrongdoing has been uncovered and publicised, Jersey authorities argue that this kind of activity all happened a long time ago, and point to their position (alongside nearly every other secrecy jurisdiction) on the OECD’s failed 2009 white list.  
Matters became particularly bad in the 1990s and 2000s amid a phase of management buyouts, whose financial arrangements meant that the directors of trust companies were under tremendous and unprecedented pressure to maximise short-term financial performance. This led to a wave of particularly unscrupulous practices and tolerance of a wave of financial criminality.  In more recent years, however, Jersey has had to respond to changes, which in some cases have led to reforms of its offshore sector. These pressures have come in several forms. First, external pressure from the OECD, the Financial Action Task Force, the European Union and other groupings have forced Jersey to make some changes. Second, the global financial and economic crisis has impacted Jersey’s financial sector, although the response has typically be to respond to falling revenues by increasing taxes on local people. Third, these external pressures have to some extent weakened the inter-relationships of a previously closely intertwined and mutually protective élite among the owners of Jersey trust companies and other offshore firms, somewhat mitigating though not eliminating a feeling of impunity in the face of potential criminal actions against them.  Insiders also tell us that cultural changes now underway in Jersey have made some practitioners, particularly younger ones, less tolerant of some of the more egregious and illegal acts. One other change of the past few years is that the Jersey Financial Services Commission, previously an unresponsive rubber-stamp, has started to become more aggressive (and hence more unpopular) in trying to stamp out some of the more outrageous practices.
The 2013 Financial Secrecy Index demonstrates through undisputed legal facts and assessments by international financial institutions, that these repeated claims of probity and transparency, don’t hold water.  Jersey’s sophisticated wealth management structures, notably its trust industry, keeps the island open to tax-evading/tax-avoiding and other illicit financial flows from around the world.
In addition, the OECD-backed Global Forum on Transparency and Exchange of Information for Tax Purposes in a (leaked) Peer Review report on Exchange of Information (EOI) shared our view when it started to look at the detail of how Jersey actually implements tax information exchange: 
“The highlighted provisions in some of Jersey’s EOI agreements may limit the effectiveness of information exchange. Further, in one case to date, the interpretation applied by Jersey appears to be inconsistent with the definition of ‘criminal tax matters’, and is preventing the exchange of information under that TIEA.
Jersey’s domestic legislation which provides access powers to obtain information for exchange contains impediments which may significantly affect access to relevant information although to date they have not restricted access.”
Even less reassuring is the fact that Jersey chose to remain outside the EU’s automatic information exchange process, even though fellow Crown Dependencies Guernsey and Isle of Man signed up since 2009.  Local officials justified this on the grounds that they felt the need to be “internationally competitive”, though this raises questions about what they are competing for.  Legitimate activities have no need to hide behind ineffective tax information exchange agreements.
Foundations: a new step backwards
Our concerns that Jersey remains largely an unreconstructed secrecy jurisdiction have been reinforced by the recent adoption of foundations into Jersey law.  Private foundations do sometimes have legitimate purposes, but they can also provide a particularly malign form of secrecy.  As an offshore law firm in Panama puts it:
Foundations were designed not by the rich but by the super rich to protect their assets, insulating them from seizure and confiscation. These asset protection tools are so good they should be illegal but they are not illegal. The big difference between a trust and a foundation is the foundation is a separate judicial person. The term judicial person means an unnatural person.” 
The Jersey Foundations (2009) Law, which mimics similar laws in Liechtenstein and Panama, appears to be an attempt in part to move in on Asian wealth management markets, amid rising pressure from European countries seeking to tackle their own domestic tax evaders.
Another angle on the adoption of the Jersey Foundations Law was provided to us (hat-tip to Richard Murphy at Tax Research UK) by an experienced and highly qualified industry insider:
. . . the main reason for the foundation law was to avoid fiduciary responsibility. A number of court decisions in Jersey held trustees responsible for the activities of the corporations they controlled. Obviously this increased trustee risk to a very high level. When a foundation is involved the new foundation law absolves the agents creating and managing them from responsibility.
This interpretation of the rationale for enacting the Jersey Foundations Law illustrates the insidious nature of the offshore-led regulatory race to the bottom: when managing agents are effectively absolved of responsibility for the activities of the legal entities they create and manage, legal protection of third parties effectively ceases to exist.
Enactment of this new law has directly fed through into an increase in the island’s secrecy score and is clear evidence of the authorities’ commitment to maintaining a development strategy based largely on providing secrecy and lax regulation to non-residents.
The lack of an alternative development strategy should be a cause of great concern, not least for the islanders themselves.  Jersey is already highly dependent on its role as a secrecy jurisdiction and has all the hallmarks of a captive state.  The offshore financial centre in Saint Helier accounts for over 50 per cent of gross value added in the local economy, and virtually every other sector operates downstream of its activities.  In such a monoculture economy, and without any serious prospects to break free from such extreme economic dependence, Jersey’s authorities are loath to introduce effective regulation to curtail illicit financial flows and tax evasion.  As researchers have recently argued, they are locked into a political economy over which they have little control:
“They have limited scope for reducing their dependence on offshore financial services. With approximately one quarter of its economically active population directly employed in the OFC, and the majority of the remaining workforce employed in secondary sectors like construction, distributive trades and catering, there is virtually no alternative skills base on which new industries can draw. This path dependence has been reinforced by the extraordinary high costs of land and labour, which have crowded-out pre-existing industries. Taking measures to diversify the local economy will therefore require politically unpalatable steps to significantly reduce the domestic cost base.” 
For all of the above reasons, plus the continued lack of transparency of Jersey trusts and offshore companies, and despite the flurry of tax information exchange agreements signed since 2009 (which are highly ineffective anyway), Jersey is assessed with a secrecy score of 75 and clearly well deserves its position at number nine in the overall ranking.
Sources and further reading
-          Hampton, M (1996), The Offshore Interface: tax Havens in the Global Economy, Palgrave Macmillan: Basingstoke.
-          Hampton, M and Abbott, J (eds.) (1999), Offshore Finance Centres and Tax Havens: The Rise of Global Capitalism, Palgrave Macmillan: Basingstoke.
-          Shaxson, N (2012), Treasure Islands: Tax Havens and the Men who Stole the World, Vintage Books: London.

[i] This narrative report is based on information up to date at 21st October 2013, however all references to FSI scores or ratings reflect the 2013 results. 


Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue

From the Center for American Progress (hat tip: AABA), in the context of news reports of trillions of dollars in U.S. overseas profits "trapped" overseas, just waiting to be invested in the struggling U.S. economy - if only it could somehow be "unlocked" (such as through a corporate tax amnesty.) Our quote of the day:
"There is something trapped on the balance sheets of U.S. multinationals. But it is not corporate profits—it is federal tax revenue."
Quite so. It's important to understand what's going on here.  This U.S.-focused issue afflicts many other capital-exporting countries too.

(Update April 2014: For more information on corporate tax see here)


Just Money: how society can break the power of finance

From Commonwealth publishing:
An e-book by the acclaimed economist Ann Pettifor, Just Money: How We Can Break the Despotic Power of Finance. In it she explores the role of credit in the economy and its relationship with the money supply. She goes on to set out a set of policies to bring the economy back under substantial democratic control. 
This is not, strictly speaking, a core tax justice issue. But we have recently been doing a lot of work on the political economy of financial centres - not least with our Finance Curse analysis. "Breaking the power of finance" is certainly something that interests us.

Available here (only, for the time being).

(Update April 2014: For more information on the Finance Curse see here)


Friday, January 10, 2014

Quote of the day: fracking tax positions

From David Quentin's Tax and Law blog, just mentioned in our Links:
Vodafone’s 2013 “Tax Risk Management Strategy” paper, for example, concedes in its small print that Vodafone happily adopts filing positions which “will not meet the more-likely-than-not standard but would still be tenable”.
If the mining of tax risk may be understood in extractive terms, a policy of habitually adopting merely “tenable” filing positions is about as sustainable and responsible as fracking.
Well said. And the whole post is well worth reading.

(Update April 2014: for more information on tax and corporate responsibility see here).


Architect behind Eurozone's biggest tax haven wants to be EC president

This is a very dangerous development. From Euractiv:
"Former Luxembourg Prime Minister Jean-Claude Juncker, the EU's longest-serving elder statesman, threw his hat into the ring yesterday (9 January) for the presidency of the European Commission to succeed José Manuel Barroso.

Juncker, 59, who governed for 19 years until a general election defeat last October and also chaired eurozone finance ministers for eight years from 2005 to 2013, told Germany's Inforadio: "I would be willing (to do the job), in principle, if the election programme and other things work out."
That is a declaration of intent, if ever there was one.

Juncker has been an appalling defender of financial secrecy in Europe, cosying up with Switzerland to help kill emerging European transparency initiatives, as we have documented on many occasions.

It would be appalling if Europe were led by an apologist for - indeed an architect of one of the world's most pernicious tax havens. Number two on our Financial Secrecy Index: just look at its record.

(Update April 2014: For background in Offshore History see here.)


Links Jan 10

How the tax profession and business reacted to the wider tax avoidance debate in 2013 David Quentin's tax & law blog

Swiss Court Blocks Julius Baer Client Data Transfer to U.S. Bloomberg Businessweek
See also: Baer clients reprieved by Swiss court STEP, and Swiss Bank Helped 400 Americans Dodge Taxes On $600 Million ThinkProgress

Glencore boss speaks out over tax windfalls swissinfo

India in Talks with Mauritius and Cyprus to Prevent Tax Base Erosion India Briefing
See also: End of tax treaty shopping for India? smartinvestor

Denmark billed as ‘perfect’ tax haven The Copenhagen Post

Croatia: Government intensifies international cooperation in exchanging tax information dalje

German minister wants speedy crackdown on tax avoidance Reuters

Armenia: Offshore Scandal: More Than a Mere "Chain of Coincidences" hetq

Pakistan’s politicians set a poor example arab news

Gambia: Let's Pay Tax allAfrica / The Daily Observer

JPMorgan Chase Cannot Deduct $1.7 Billion Madoff Settlement Payment TaxProf

U.S. IRS Continues To Attack Offshore Captive Insurance Forbes


The twilight of the international tax consensus

That's the headline of a provocative article by U.S. rock star tax expert Lee Sheppard, which states boldly in the opening column:
"Someone else’s multinationals are unfairly skipping out on their corporate tax obligations to OECD member and observer countries. That was the genesis of the OECD base erosion and profit-shifting project, which has produced an action plan that is designed to repair and preserve the fragile international consensus in the short run, but may end up upsetting it in the long run.

In the long run, the international consensus is dead, and everyone knows it, but BEPS has to be tried and allowed to fail first."
Fiery stuff, and almost certainly correct. What will replace it?

Well, there is a long-running campaign to abolish the corporate tax altogether, based on particularly pathetic evidence and analysis - plus massive lobbying firepower. That can't be allowed to succeed, as a first order of priority.

What is the international consensus? Sheppard answers:

It is a century old, mostly European gentlemen’s agreement to give residence countries tax jurisdiction over income earned by their residents in source countries. Legally, the source country has the superior right to tax income earned within its borders, so the consensus required countries to agree to be deprived of tax jurisdiction.

For "residence countries" read rich, OECD countries (where multinationals are resident) and for 'source countries" read all countries where income is really earned, including developing countries. She continues:
"It has been an open secret for some time that multinationals — led by the Americans and their huge tax departments — have abused these privileges. The affected countries are no longer limited to corrupt, badly governed, resource-exporting countries. They now include European states with sophisticated tax administrations and the home governments of multinationals.

Every country is just another country to be exploited."
We could not have said it better ourselves. And then there's this:
"The United States and its overbanked crony, the United Kingdom, used the OECD as a vehicle to push their agendas. . . . The United States and Europe still think they run the world."
And to cut a long story short:
"A new consensus cannot be built until the old one dies, weakened by
impossibility of administration.

In the short run, U.S. multinationals will pay some more tax to some foreign governments, but not the U.S. government. In the long run, we already know what the outcome will be — apportionment of multinationals’ profits based on sales.
. . .
The old order has to fail completely first."
Radical stuff. Unitary taxation (profit allocation with formula apportionment) is on its way - though not just yet. We'd argue that it's worth engaging to try and improve the OECD's fatally flawed model, as an interim step before unitary comes. But, we think, we will see it in our lifetimes. We just need the OECD and others to accept that fact.

In fact, of course, it's already here: lots of places are already using it, and as Prof. Picciotto notes, it's even tacitly part of the OECD toolkit - even if their aversion to the concept is so extreme that they'd never admit it.

Update: more from Andrew Goodall on this issue just out, here.

(Update April 2014: For resources on transfer pricing, and on unitary taxation, see here.)


Thursday, January 09, 2014

Do tax cuts promote growth? Part MCXIV

The world's economists have been arguing over this question for decades. Which is odd, because the evidence is rather clear on this point. Corporate tax cuts, or overall tax cuts (or hikes) just seem to have a neutral effect on economic growth.

Which is quite unsurprising, given that (as we never tire of reminding people) taxes are not a cost to an economy, but a transfer within it. Why should an internal transfer necessarily change overall growth. It might, but there's no obvious reason at the outset why it should. But whole swathes of the learned economics profession start out with this 'fact', and then create studies to prove it. The evidence-tickling out there is a sight to behold.

Let's start with a little graph we just made, which updates earlier work by others. This takes the prosperous western democracies, above a certain income level (so that we're not comparing apples with oranges), and compares their per capita GDP growth with their absolute levels of tax in GDP. Here it is.

That trend line is, for all intents and purposes, as flat as a pancake. Ireland is an outlier, as is Luxembourg - but these are small tax havens with their own special dynamics so we should probably have excluded them. Anyway, the flatness of this graph is quite striking: despite truly massive differences in tax revenues per capita from below 30 percent to nearly 55 percent, they've nearly all grown at roughly the same speed.

This isn't definitive proof of anything, but it's a bulwark against the tax-cutters' arguments. Perhaps an even bigger bulwark - though still far from definitive proof - is that economic growth during the 'golden age of capitalism' quarter century after the Second World War, a very high-tax era, was much higher around the world than in the tax-cutting era that followed. For example in the 1950s top marginal tax rates in the U.S. were 90 percent and real per capita GDP increased annually by 2.4%; in the 2000s that tax rate had fallen to 35 percent and real GDP per capita was less than one percent.

But there is plenty more. Not least our two recent blogs on the importance of the corporate income tax, Part 1 and Part 2 which provide a whole slew of insurmountable factors that simply have to be taken into account in any study of the effects of corporate tax-cutting - and which conveniently aren't considered in any of those studies that purport to show that tax-cutting is the golden elixir of growth. 

Now take this latest article from Citizens for Tax Justice in the U.S., veterans of this scene. (We have just quoted them on a rebuttal they did to an appalling campaign in the New York Times claiming -- on the basis of a huge and unworldly mess of an economic model -- that it's a great idea to abolish the corporate income tax.) CTJ point to new reports from the nonpartisan U.S. Congressional Research Service (CRS), which “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”

Some of the reports they cite aren't online, though this one is. CTJ pokes fun at of some of the tax-cutters' ridiculous and unworldly models and notes:
"While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”

So how much did the Bush tax cuts help? They cite CRS:
“The models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth. 
The reports debunk (yet again) the laughable Laffer curve (pictured, at top), and also refutes the ill-advised 'incidence' argument which is wielded by the shriller tax-cut shills as in their campaign to abolish the corporate income tax. (Or, as one blogger summarises: "CRS teaches the American Enterprise Institute how to do panel regressions".)

CTJ also makes another important point about bamboozlement:
These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.
In fact, there's so much in the short CTJ article worth reading, that we would urge you simply to go there

(Update April 2014: for resources on taxing corporations see here).


Links Jan 9

Tell Barclays To Clean Up its Act ActionAid

The G20 and the taxing issue of making big business pay The Conversation

Dirty Money, Rich Smell The Economist

In U.S., efforts to fight offshore secrecy hit snags ICIJ

Court ruling outlines US case against Julius Baer swissinfo
See also: Ex-UBS banker pleads not guilty in US tax case swissinfo

Switzerland news: Bribes in Greek defense corruption scandal deposited in Swiss banks Financial Secrecy Media Monitor

Switzerland news: Financial roundtable of banking experts manages not to discuss tax Financial Secrecy Media Monitor

Bahamas Enjoys Swiss Private Wealth 'Influx' Tribune242

Unable to bank on Switzerland, India intensifies pressure for information on tax evaders, account holders The Economic Times
Switzerland promises India transparency - then offers peanuts. Possibly in discretionary trusts so assets not technically "Indian"

Nokia's Indian Tax Row Escalates Tax-News

Google faces £24m British tax bill over share scheme routed through Ireland The Irish Times

Pressure to end digital ‘tax bonanza’ Financial Times
"Seven US technology giants, including Appleand eBay, paid just £54m in UK corporate tax in 2012"

British Virgin Islands: Latest data confirms downward trend in company incorporations Financial Secrecy Media Monitor

It's time Britain made mining giants reveal their hidden profits and owners to help end this $160billion tax rip-off of poor countries Daily Mail

Spain's Princess Cristina charged with tax fraud, money-laundering Reuters

The year that almost saw a clampdown on tax evasion EUObserver

Paris wants to remove Bermuda and Jersey from tax haven list EurActiv

Federal government’s tax evaders whistleblower program delayed

Singapore figured out how to tax bitcoin—treat it like a product, not money Quartz

Simon Johnson Reminds Us That the Banks’ Quiet Coup is Still Very Much in Place naked capitalism

Drugs and the city: an open secret, so why no testing? The Conversation

UK: Hedge funds that now own 30% of Co-op Bank channel majority of their investments through offshore tax havens This Is Money


Wednesday, January 08, 2014

New report: how Finnish multinationals use tax havens

Our partners at Finnwatch have just published an important new report looking at the activity of Finnish multinational corporations in tax havens. The report is in Finnish, but they have provided an abstract in English, below. It conforms to the pattern, seen elsewhere, of large numbers of subsidiaries in tax havens  - particularly the Netherlands, Belgium and Luxembourg - as well as some good evidence on round-tripping, and on the limits of voluntary company reporting.

Holding companies or shell companies are established by multinational companies to govern their other companies and financing. Motive for this is often tax planning, and shell companies have rarely any substantial business activities.

The Netherlands is a country that offers several possibilities for big companies to avoid taxes and return thus acquired profits back to their home countries. One of the OECD’s four criteria for a tax haven is the absence of a require- ment that the activity be substantial, and in the Netherlands there are more foreign-owned holding companies than anywhere in Europe.

We found that the twenty biggest Finnish companies, measured by turnover, have 225 subsidiaries in the Netherlands, Belgium, Luxembourg, and in other tax havens that offer services for foreign companies. Of those, 124 companies are not situated in Belgium or the Netherlands.

In this report, we used the tax haven list prepared by NBER research institute into which we added Belgium and the Netherlands that are important places for Finnish companies’ holding companies operations. This same list is used by the US authorities.

Furthermore, we traced subsidiary companies in tax havens through Orbis financial database. From there, we listed 438 Finnish companies that had a subsidiary in a tax haven. Nearly half of those, 205 companies, were situated in the Netherlands or Belgium.

According to the companies’ accounts and Orbis database, Finnish companies have also many subsidiaries in the small tax haven islands, like the Cayman Islands, Cyprus and British Virgin Islands. There is hardly any public information available from subsidiaries situated in those mini states.

International and Finnish investment statistics support the picture given by the account analysis. We will present the Bank of Finland’s statistics from 2008 to 2012 concerning the use of holding companies. In addition, we ordered from the National Bank of the Netherlands (DNB) previously unpublished records of holding company investments in the years 2008–2012.

Statistics reveal that almost 90 percent of the direct investments from Finland to the Netherlands are done into holding companies. In practice, these investments are just bypassing the holding companies on their way to the final investment targets. Same phenomenon is repeated in the direct investments from the Netherlands to Finland - out of which more than 70 percent comes from holding companies. This is a major issue for Finnish national economy because the Netherlands is one of our biggest trading partners.

According to the Bank of Finland, by 2012 there were done into various holding companies in different countries 5.8 billion euros worth of such investments that were routed back to Finland. There is little research on this kind of ”round tripping” but international examples suggest that part of this involves tax evasion.

We will furthermore examine the tax reports from Fortum and Terveystalo, the two com- panies that published their own voluntary tax reports. Even though the voluntary tax reporting is a welcome opening, the reports by these two companies show the limits of voluntary reporting. Fortum does not include in its report the holding companies in the Netherlands, Luxembourg and Belgium that have tens of millions of euros of business activities.

In Terveystalo’s tax report, there is no mention of what the company did to its tax schemes that gained large publicity in 2012. In any case, these voluntary reports offered narrow basis to asses how responsible these two companies were in their tax planning.

The European Union is reforming the Parent-Subsidiary directive in 2014. Finland should press in the negotiations effective interference into aggressive tax planning. Furthermore, we need a legally binding country-by-country reporting on companies’ central financial data, and before that a broad voluntary tax reporting by the state-owned companies. This must be done more thoroughly than in the present models.

(Update April 2014: for information on corporate tax see here.)


If Ireland is not a tax haven, what is it? A bagel?

From the Treasure Islands blog, reposted with permission.
Ireland continues to annoy me. Not Ireland the country, of course: it's just the tax haven industry that has grown up there. It annoys me because there are so many influential voices there that deny Ireland is a tax haven. All tax havens deny being tax havens, but Ireland seems to have taken it to extremes of huffing and puffing: a veritable industry of tax haven deniers has grown up there. I guess it is the sheer scale of the dishonesty that riles me.
All this exactly fits a pattern I describe in Treasure Islands:
“Skittish financiers dislike places that are chaotically corrupt, as do onshore regulators. Secrecy jurisdictions steeped in sleaze confront this by putting on a strenuous performance of rectitude, a theatre of probity that involves repeatingly projecting the essential message – ‘We are a clean, well-regulated, transparent and cooperative jurisdiction’ – burnished by carefully selected comments and praise from toothless offshore watchdogs."
Now I've just spotted an article from Marty Sullivan, a rock star in the world of U.S. tax experts (alongside Lee Sheppard), entitled If Ireland Is Not A Tax Haven, What Is It? It's from 2013, but perfectly valid today. It begins:
"It would be hard to overstate the importance of reputation in international tax. Cross-border tax planning involves extremely arcane and technical rules that only brainy experts can understand. But the opinion of regular people matters, too. If, as in the United Kingdom, the general public perceives that corporations are abusing tax rules, then democratically elected governments may have to stop pandering to footloose multinational businesses and start cracking down on them. And as much as corporate CEOs fear reporting lower after-tax profits to Wall Street, they fear even more that their company’s name will appear in a Wall Street Journal article implying that they’re not paying their fair share.
That theatre of probity. Sullivan continues:
No jurisdiction, except perhaps Bermuda, has more at stake per capita in the international tax game than Ireland. Again, reputation is central. Corporate boards and CEOs don’t want their prestigious brands smeared by association. They cannot have their regional headquarters located in a jurisdiction that–whether fairly or unfairly–has obtained a reputation for less-than-aboveboard business dealings. The label “tax haven” implies sunny beaches and shady business. If Ireland wants to continue to attract investment by the world’s most respected companies, it desperately needs to avoid the tax haven label. It must also avoid incurring the wrath of the citizenry of the European Union, who want Ireland to stop using low-tax rates to steal jobs and investment from their countries."
And then he nails the performance of rectitude very nicely:
"Irish politicians, business leaders, and newspapers are ardent defenders of the country’s corporate tax regime. And any hint that you think Ireland is a tax haven will set off a storm of protest. They point out that Ireland does not meet the OECD’s definition of tax haven. Well, that’s a low standard if there ever was one."
Look back at that paragraph from Treasure Islands, and see how close that is to the above paragraph. Not only that, but look how close this is to the 'captured state' phenomenon I describe in the 'Ratchet' chapter of Treasure Islands, or in my more recent work on the Finance Curse. And there are some remarkable further insights and research into the theatre of probity, from the horse's mouth, here. And if you want to know how Ireland became a tax haven, read this sorry tale.

Sullivan's article goes on at some length explaining why Ireland is a tax haven, and I could basically paste it all up here: but go off and read it. It's fairly easy to understand. He finishes:
We all understand perfectly well why the Irish will never accept their country being called a tax haven. But if we cannot use that label we must have a term for a country whose extremely generous tax rules allow it to attract enormous amounts of foreign capital. Hmmm, if not a tax haven, let’s just say Ireland is a bagel.
Or perhaps merely a big jam doughnut.

(Update April 2014: for information on the Race To The Bottom see here.)