Friday, February 29, 2008

Dutch multinationals: questions in parliament

Something rather similar is emerging in Britain and the Netherlands: a series of debates and comments in the newspapers, and questions in both countries' parliaments, about how multinational companies use offshore structures to avoid tax. Our last blog described efforts by British MPs to expose Britain's tax avoidance culture. Now we have something very similar emerging in the Netherlands. We blogged very recently on this: an investigation by the high-brow newspaper NRC on how little tax some multinationals pay.

Now, as NRC reports again, we have questions being asked in the Dutch parliament. If you read Dutch, you can follow the debate itself here. Otherwise, you will have to be contented with TJN's informal translation of some excerpts from the NRC article. It concerns questions put to Jan Kees de Jager, Dutch State Secretary for Finance, who said he disagreed with some aspects of the previous NRC article (adding that it was "undesirable" that tax officials had discussed these things with NRC.) He said that a law introduced last year called “werken aan winst” had led to some hollowing out of the tax base, but that this hole had been repaired.

That does not mean that no hollowing-out of the tax base takes place, but that has to do with international develpoments. Companies make increasing use of interest deductibility and financial constructions.” The development that less tax is paid through this hollowing-out worries de Jager. It could be that the government should think about measures he said “but the picture that has been painted that only five of the 23 AEX companies pay tax – I want to forcefully refute.”

The parliamentarian Paul Tang demanded more information about how much tax multinationals pay compared to smaller companies; previously de Jager had not answered written questions on the subject. NRC continued:

The parliamentary parties all want more transparency. Kees Vendrik (Green Left) called for a “lifting of the veil” – “who pays how much?” Multinationals should, even if not voluntarily, have to give information in their annual reports about how much they pay in each country.

De Jager has promised to provide more information.

Country by country reporting - now there is a thing. This is what TJN has been campaigning for. If achieved, it could change the world. Read more about it here.

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A nation of "spivs, swindlers, cheats and cads"

This headline draws its inspiration from a line in a big comment piece in Britain's Guardian newspaper with a strong tax justice theme, and it refers to the contradition between Britain's own self-image: tolerance, fair play, decency, honesty and a polite reticence, and the reality of Britain's own financial sector, whose morals and approach to life are almost the complete opposite. Polly Toynbee writes:

We boast with great arrogance of the pre-eminence of our world-beating City of London, with its probity and professionalism - but others call it a world-beating haven for global world-cheating. Gordon Brown boasted in his Mansion House speech of "our competitive tax environment", while other see it as the playground for global kleptocracy.

Ever since the Big Bang Loadsamoney 1980s, a British culture of excess has welcomed the wealthy with no questions asked. We have embraced a politics of taxation where all tax is a burden and all tax avoidance a duty.


We could quote sentence after sentence of this article. We would urge you, instead, to read it.

The world of tax havens has a long history - a history with the British Empire at its heart: British companies, British-associated tax havens which endure today, from the Cayman Islands, British Virgin Islands and other British Overseas Territories, to Jersey, Guernsey and the other Crown Dependencies - not to mention the City of London.

For decades, Britain's politicians have been talking the talk of liberal ecomomics: free and perfect market competition, while walking a very different walk: distorted markets, underhand direct and indirect subsidies, and beggar-my-neighbour policies to attract money on any terms - mistaking this for entrepreneurship. TJN's John Christensen has been making this point to senior Treaury officials for years: that a policy of seeking to boost economic growth by attracting capital on any terms will undermine the entrepreneurial culture: the result is not genuine innovation but financial engineering to boost share values. And, for an interesting and well-written exploration of what the City of London really means for British people, read this.

The latest editorial responds to some reporting by the Guardian newspaper about the supermarket chain Tesco. TJN's Richard Murphy has a comment piece in the Guardian today, which explores the corporate social responsibility implications of this, and looks at what might be done to improve matters.

Finally, don't forget that all this is not only relevant to Britain and the world's rich countries. As Polly Toynbee's editorial says:

Money lost through corruption far exceeds aid for poor countries: it needs international transparency to deny safe hiding places for cash from bribes, drugs and dictators' stolen fortunes. Protecting offshore trust secrecy to keep Britain's non-doms happy also protects the world's brigands and killers

Read more here.

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Thursday, February 28, 2008

UK MPs call for tax justice inquiry

We blogged yesterday about the excellent investigation by the Guardian newspaper into the tax tricks of the supermarket giant Tesco. Now we have British parliamentarians asking the questions that are only right in a democratic society.

MPs and Lords called for a crackdown on tax avoidance yesterday following the Guardian's revelation that Tesco was using an elaborate corporate structure involving offshore tax havens.

Vince Cable, the Liberal Democrat shadow chancellor (Finance Minister) said:

This exposé shows the depth of the tax avoidance culture. They must crack down seriously on it, as the tax burden is now falling disproportionately on low and middle income taxpayers, rather than the very rich. The government must also answer why British dependent territories are being allowed to offer large-scale tax avoidance schemes at the expense of the Treasury. If Germany can crack down on Liechtenstein, why can't Britain do the same with territories for which it is directly responsible?"

And he went on:
Tesco's behaviour makes a complete nonsense of any claims that it makes about corporate social responsibility. The Government must also answer why British dependent territories are being allowed to offer large-scale tax avoidance schemes at the expense of the Treasury. If Germany can crack down on Liechtenstein, why can't Britain do the same with territories for which it is directly responsible?"

In a leader article, the Guardian looked at this issue of corporate responsibility further.

Avoidance or efficiency or planning - whatever euphemism you use, paying the bare minimum in taxes is becoming part of Britain's business culture. That leaves more of the nation's tax bill to be footed by the rest of us. In the past decade, while corporation tax has been squeezed, income tax and national insurance has grown as a proportion of the country's tax take from 42.9% to 47.6%. Tax avoidance is a worldwide curse.

The Financial Times seems to have pretty much ignored the story, although it has done some good reporting on other matters in the past. Nevertheless, we are reminded of this FT story, which shows the Guardian investigation to be just part of a wider picture.

The article outlines some useful steps that the British government should take. It also quotes TJN's Richard Murphy. Read the article. As we have been saying a lot recently, the mood is shifting.

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Wednesday, February 27, 2008

Doha: Financing for Development

TJN is closely involved with preparations for the Follow-up International Conference on Financing for Development (FfD) to Review Implementation of the Monterrey Consensus. Recently David Spencer, a practising tax attorney in New York and a senior adviser to TJN, made a short presentation at one of the events feeding into the process, which will culminate in the meeting in Doha, Qatar from November 29 - Dec 2. Read his comments here.

We have only remarked occasionally on this so far, but shortly on this blog and on TJN's main web site we will be presenting a series of more detailed proposals and campaign themes on the Doha process, as well as a special edition of Tax Justice Focus looking at this.

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Tesco's tax tricks


Following their fabulous "Tax Justice Goes Bananas" investigation last November into the tax practices of the world's biggest banana companies, Britain's Guardian newspaper has followed this up with another superb piece of work: an investigation into the tax tricks of Tesco, which the BBC has described as the UK's first supermarket superpower.

The BBC asked: "how did this struggling store chain transform itself into a supermarket giant?" Their answers only told the obvious part of the story. The Guardian has given us the more interesting answer. Their headline story goes like this:

Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1bn of tax on profits from the sale of its UK properties. The complex new structures uncovered by a six-month Guardian investigation include a string of Cayman Island companies, each named after a different colour, from aqua to violet. These are being used by the supermarket giant as it proceeds with its announced programme to sell and lease back £6bn worth of its UK stores.

A second story entitled "Every little bit helps" looks in more detail into Tesco's tax gymnastics, setting up, for example, a "transparent tax vehicle" whose tax liabilities are incurred not by the partnership itself but by its 99.9% controlling partners - and those partners are two companies set up in the Cayman Islands. More contortions followed (read the story for the grisly details) and the net result was that "99.9% of the profits on the deals arose in the Cayman Island companies and are not liable to UK taxation." An audio version is here.

The most worrying thing about tax avoidance is the corporate thinking it illustrates. Read this Guardian editorial on the issue, which explores these issues further.

There are many things we could say about this. The first is this: these issues drive a coach and horses through the prevailing debates on corporate responsibility. TJN's position on corporate responsibility is this: corporate social responsibility should start with tax compliance. If corporations don't pay their taxes, someone else has to pay them, and they gain an unfair advantage - in effect, a subsidy - that does nothing to enhance competitive markets. (Richard Murphy's recent comment article explains more.) Vince Cable of the Liberal Democrat party, who always has interesting things to say, agrees:

Tesco's behaviour makes a complete nonsense of any claims that it makes about corporate social responsibility. The Government must also answer why British dependent territories are being allowed to offer large-scale tax avoidance schemes at the expense of the Treasury. If Germany can crack down on Liechtenstein, why can't Britain do the same with territories for which it is directly responsible?"

Tesco, in response, said it had a duty to organise its affairs in a "tax-efficient" manner. These are weasel words (read what Richard Murphy has to say about this euphemism for tax avoidance here.) John Christensen, director of the Tax Justice Network, said:

When Tesco directors talk about operating as "tax-efficiently" as possible they demonstrate a lack of corporate responsibility and a lack of commitment to the communities which sustain their profits. Aggressive tax planning through offshore structures also provides the big supermarket groups with a financial advantage that is not available to their smaller competitors, further tilting the playing field away from fair and competitive markets. The government needs to act decisively to counteract this regressive trend.

The directors of Tesco claim in their corporate responsibility statement that they use their size and success to be “a force for good” in the communities where they operate. Their aggressive tax planning shows their intentions to be the exact opposite.

John remembers the annual corporate responsibility conference at the Royal Institute for International Affairs in London in 2004. He had prepared himself by wading through the corporate responsibility statements of 150 companies worldwide, and found the word "tax" in only two - without relevant detail. So he stood up and asked: "Would the panelists tell the audience what position their Boards take on paying tax in the countries where they operate?" - followed by one of the most uncomfortable silences he can remember, pregnant with accusing glares. It is time for companies to mention the unmentionable word in their corporate responsiblity statements.

Various stories have been emerging recently about how little tax companies pay. Tesco is right to claim that it is not the only company playing these tax tricks: we have already noted how other British firms, as well as Dutch ones, get out of paying tax . (Perhaps we should call Tesco a "Transparent Tax Justice Vehicle" - highlighting how Tesco's main purpose in this case is not so much as a direct target as a vehicle allowing the Guardian to tell a wider story about corporate tax abuse and the structures that encourage and facilitate it.)

In the United States, there has also been much discussion about how the retailing giant Wal-Mart has been using its own nefarious tax tricks to minimise its taxes. In Wal-Mart's case, the issue was partly about whether what it was doing was legal: for one of its tax tricks, for example, a North Carolina judge ruled that it was not. The Guardian is not accusing Tesco of acting illegally. But the key point here is that this question of legality is not the point.

It is now time to change people's mindsets so that they no longer think that what is legal is OK and what is illegal is beyond the pale. Both kinds of abuse are unacceptable. Tax havens are central to our concerns. And, as another Guardian story today points out, we are seeing the start of a major global backlash against these pernicious jurisdictions.

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Tuesday, February 26, 2008

Capital flows: be braver, and don't forget secrecy

We would like to point out a new FT comment piece, entitled "We must curb international flows of capital," by the well-known economists Dani Rodrik and Arvind Subramanian.

As far as it goes, it contains many good things. It looks at different reasons, historically and in the present day, for large flows of capital across the world. It highlights the by now well-known dangers inherent in willy-nilly international financial liberalisation and contains much else that is sensible, such as this:

As long as the world economy remains politically divided among different sovereign and regulatory authorities, global finance is condemned to suffer deformations far worse than those of domestic finance. Depending on context, the appropriate role of policy will be as often to stem the tide of capital flows as to encourage them. Policymakers who view their challenges exclusively from the latter perspective will get it badly wrong.

This problem of disconnects in the international financial architecture is close to TJN's heart, and in light of the evidence, the conclusion is hard to argue with.

They also offer other sensible ideas that many members of the broad TJN network would agree with, pointing to, for example, huge liquidity in east Asia and the oil-exporting countries, contributing to potentially destabilising cross-border financial flows. One recommendation to reduce these is:

Some variant of petrol tax in the main oil-importing countries (including the US, China and India) is essential to cut demand and reduce oil prices and hence the current account surpluses of oil exporters. That such measures should be taken for environmental reasons or that they would reduce the size of sovereign wealth funds only adds to their attractiveness.

We agree, and have said this elsewhere. They continue:

Measures needed for when capital flows downhill are likely to take a different form. When appetite for emerging market debt is strong, neither prudential regulation nor macroeconomic policies does much to stem capital inflows. Developing nations need to rely on a broader set of instruments, targeting the capital account directly. Deposit requirements on capital inflows and financial transaction taxes are some of the tools available.

Financial transaction taxes are derided by many actors in financial markets - who, like any special interest group, don't want to pay them. Such taxes certainly offer interesting possibilities and must be explored further. The few such schemes that have been implemented financial transaction taxes have been quite successful: witness Brazil's CPMF (Provisional Contribution on Financial Transactions - which is admittedly slightly different because it focuses generally on domestic transactions) Until it was recently shot down by vested interests the CPMF raised $17-22bn a year: to a large degree because, according to The Economist, "it makes tax evasion harder, by giving the revenue service information on money moving between accounts."

It is what the authors have left out of this article that concerns us. The first problem is that the word "secrecy" is nowhere to be found. There are, as the authors point out, many reasons why capital flows across borders - but they fail to note that secrecy is one of the most powerfully pernicious incentives. The capital that flows in pursuit of secrecy is generally the most harmful form: it leads to tax evasion and a loss of tax revenues (leading to greater reliance on foreign aid in poor countries), but, just as importantly, it undermines the integrity of nation states and democratic bargains between rulers and citizens.

We are talking about a lot of money here with respect to cross-border flows of money in pursuit of secrecy. The United Nations Office of Drugs and Crimes and the World Bank, in their StAR Report of June 2007, estimate that the cross-border flow of illicit funds from corruption, criminal activity and tax evasion is between US$1.0 trillion and US$1.6 trillion annually, about one-half from developing and transitional economies.

A second problem with the article is that they focus their attention too heavily on domestic policy-makers' tools and adopt a rather fatalistic approach towards international regulation, calling approaches aiming at better regulation "too optimistic." They seem to take the current international financial architecture as a given, then conclude that regulation generally cannot work too well in light of the current set-up. That may be partly true in light of today's international financial system - the result of ideologies that took hold especially from the 1980s - but why not also call now for much deeper change in an international context? The current unwinding of international financial imbalances will fundamentally alter worldwide acceptance of the old ideologies, and radical change to the international architecture is now becoming possible. Throw in Europe's fast-emerging debates about the international corruption promoted by the pirate state of Liechtenstein, for example, or the OECD's latest (admittedly not-good-enough) efforts against tax havens, or consider Senator Barack Obama's Stop Tax Haven Abuse Act, and it is easy to see that the political climate is changing fast, and this trend appears to be accelerating.

Some have gone as far as to propose a World Tax Organisation to work against international financial secrecy. This inevitably provokes cries of "Big Brother" from many people, but in reality such an organisation (or other form or forum of international co-operation) need not be nearly as intrusive as other international bodies like the World Trade Organisation are: what it would do, instead, would be to promote transparency in international finance, and especially transparency with respect to tax.

What we want to see is a move away from current systems favoured by the OECD and others of "information exchange on request" (that is, tax authorities must already know what they are looking for before requesting it) towards automatic (and multilateral) exchange of tax information between tax authorities. When the American economist Harry Dexter White and his British counterpart John Maynard Keynes were preparing the ground for setting up the Bretton Woods organisations, initial drafts of the documents they drew up contained a strong requirements for international co-operation on capital flows between national authorities, and particularly exchange of information between countries. This requirement was strongly lobbied against by Wall Street institutions, and the final IMF Articles of Agreement were watered down so that co-operation was merely permitted rather than required. More on all this in future blogs.

In summary, we like Rodrik's and Subramanian's latest piece. But we urge its authors to factor secrecy more centrally into their analyses, and to be braver about what might now be possible.

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Monday, February 25, 2008

Britain: being a tax haven is risky

A little while ago we noted on a couple of occasions (such as this one) a palpable shift in the world's mood about tax, generally, with influential people on both left and right arguing about the dangers of demonising tax and encouraging tax-dodging: a practice that has been so feebly challenged for so long.

In the last couple of weeks we have seen a dramatic sea change in Europe in particular on something very closely related: the dangers tax havens pose to the world. The mood shift is currently strongest in Germany, as evidenced by the German Finance Minister's recent comments:

It is not just about Liechtenstein. We are also talking about Switzerland, Luxembourg and Austria. We want to launch a battle against all tax havens in Europe.

Our recent blog, Blockade the Tax Havens, contains some examples, and questions are now being asked with more frequency all over the world - the Netherlands is the latest case in point - about whether the giant distortions in international taxation are acceptable in democratic societies.

Now we'd like to point out a nice article in Britain's Observer magazine by the commentator Nick Cohen. It starts like this:

The wealthy have got away with financial crimes for so long they no longer regard them as crimes. When they are caught breaking the rules others must obey, they denounce the timid attempts by governments to enforce common standards as a shocking assault on a natural order in which tax is optional for those with the money to buy exemptions.

While we wouldn't seek to demonise "the wealthy" across the board as this article seems to be doing, we agree that Cohen identifies an important truth about Britain here. With reference to the emerging news from Liechtenstein, where, it turns out, British, American, Dutch and other authorities are seeking (timidly, in Britain's case) to avail themselves of this whistleblower's evidence, Cohen continues:

Maybe for the first time in a generation, governments are seeing the irresponsibility of the rich as a threat as dangerous to a nation's well-being as terrorism or drug trafficking and treating it accordingly.

In Germany, the decision by tax fraud investigators to... er... investigate tax fraud has turned the letters page of the Financial Times into a wailing wall for funny money men the world over.

For our part we would be a little less harsh on the Financial Times, which has hosted a series of wonderful editorials and comment pieces in recent months (like this one) very much in line with TJN's thinking. Once again, however, Cohen has a powerful point: describing "the City (of London) in open revolt against the notion that foreign billionaires should pay a little more towards the costs of the country that protects them." Cohen then goes on to quote TJN:

All missed the point that tax havens are inherently criminal and would go under without the proceeds of crime. As John Christensen, director of the Tax Justice Network, puts it, they are enemy states, pirate islands that have declared economic war on the rest of the world. It's not just that they happen to be used by individual criminals - drug dealers, kleptomaniac African dictators - they are criminal entities themselves that survive by sucking potential revenues out of wealthy and destitute countries alike. If rich citizens obeyed the law, or tax havens ended their secrecy, offshore banking wouldn't exist.

As he points to Germany's efforts to crack down on tax havens, he points out what everyone in Britain should be asking:

I cannot imagine Gordon Brown or David Cameron talking in the same way about Jersey and the Isle of Man. The idea that David Miliband would authorise MI6 to find informers in offshore banking systems feels equally far-fetched. Britain is a country where councils can bug the phones of fly-tippers and put spy cameras in litter bins, but tax inspectors cannot bug the offices of fraudsters or send spies into Jersey.

Britain, it turns out, was offered data from Liechtenstein but turned it down at first. All this secrecy, shiftiness, in the pursuit of Britain's interests in the financial sector. If we are to believe the FT's Wolfgang Munchau, reliance on this sector may turn out to have been a rather unpleasant mistake.

In the next few years, I expect the UK economic miracle to be exposed for what it was: an overlong joyride on the back of an overlong asset price bubble.

He also foresees some political fall-out, with wide-ranging implications.

The greater the extent of public bail-outs or bank nationalisations, the greater will be the public’s regulatory revenge.

Perhaps the worst thing will be that working in finance will no longer be regarded as cool, as it has been over the past 15 years. Finance will be once again what economic theory always told us what finance should be: a necessary activity, requiring some technical skills, but rather dull in the absence of bubbles.

It's like what we pointed out in a couple of articles in our last edition of Tax Justice Focus: betting your country's future on being a tax haven looks like being a risky gamble. Britain may be about to find this out: the hard way.

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Sunday, February 24, 2008

Foreign language news

TJN is a very small organisation but as we have pointed out before, interest in our issues is growing extremely fast, and we are beginning to be able to provide a little more information than before. Occasionally - for the moment it won't happen all that often because of limited resources, but this will hopefully change - we will be putting up brief English translations of stories in other languages. The last blog concerned some remarkable stories in the Dutch newspaper NRC about how little tax some Dutch multinationals pay. We also have a relatively new web page with news highlights from around the world - and we are beginning to put up occasional short translations of foreign-language stories relevant to TJN which might not otherwise be accessible to English speakers.

Here are our latest ones. (On the web page, you can scroll down for other stories or use CTRL+F or its equivalent to find stories relevant to you. )
Where there's no will, there's no way (Wo kein Wille ist, ist auch kein Weg)
Feb 24 - Frankfurter Rundschau – by Nicola Liebert - Governments still accept the existence of tax havens with the same fatalism as medieval societies lived with robber barons, possibly because they tacitly allow their industries to use tax havens to win a competitive edge in international trade. The story goes on to list the negative effects on wealth distribution and the finances of developing countries. In German.
An attack on the rich (Angriff auf die Reichen)
Feb 24 – Frankfurter Rundschau - Summarising an action plan to close down tax havens put forward by the activist group Attac, including a quote by the former Christian Democrat health and family affairs minister, Heiner Geißler, according to whom "democracy isn't put at risk by Zumwinkel. It is imperiled by the inactivity of the politicians of the western world and in particular the EU finance ministers." In German.

War of the Tax Havens (Krieg der Steueroasen)
FT Deutschland – by Detlev von Larcher (a TJN rep in Germany) - Criticising the German government for its hypocrisy in the Zumwinkel tax evasion case: it was the government in the first places that put so many tax loopholes in place, while at the same time making savings on tax investigators. The state has already surrendered to international tax competition and global capital mobility, lowering taxes for corporations and wealthy individuals and shifting the burden onto ordinary wage earners and consumers. Instead of taking necessary action against tax havens, the German government is hiding behind the toothless OECD list of tax havens and EU tax directive. In German.

Das Monster ist außer Kontrolle (The Monster is Out of Control)
Feb 21 - Die Zeit - An interview with Richard Murphy of TJN looking at the Liechtenstein tax evasion scandal in a wider context. In German.

Watch this space.

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Friday, February 22, 2008

Dutch multinationals hardly pay any tax

Last August, we (and many others) noticed a big story in the Financial Times newspaper, entitled "A third of UK’s big business pays no corporation tax" It quoted Bill Dodwell of Deloitte, who said this "shows the giant contribution of small companies. It is probably because many are less international and so have different planning opportunities.” Quite: this ability of big multinationals to hop offshore to cut their tax bills, penalising the smaller firms, is one of TJN's core concerns. More recently, TJN's Richard Murphy released a report for the UK Trades Union Congress (TUC) showing how the public purse loses £13 billion a year through tax avoidance by the wealthy and £12 billion a year through tax avoidance by corporations.

Well now a similar story has emerged in the Netherlands. Our attention has been drawn to some excellent reporting by the quality Dutch newspaper NRC Handelsblad. If you read Dutch, you might click on this link entitled Multinationals betalen vrijwel geen belasting, and associated stories. If you don't, our fine partner organisation SOMO, who has investigated this before (and who are organising a tax justice conference in Amsterdam on May 21), has kindly sent us an abridged informal translation of some selected parts of the NRC stories. This is what SOMO said:

Three large articles in the Economics section of NRC describe in detail how changes in the corporate tax law, introduced in 2007, created new tax avoidance and arbitrage opportunities for large multinationals. The articles are based on investigations by NRC journalist Joep Dohmen, who interviewed professors in tax law and anonymous tax officials. A summary of the articles is provided below.

Senior tax officials told the newspaper that an increasing number of Dutch multinationals pays no or very little corporate tax in the Netherlands. The companies use tax avoidance schemes permitted by the new Corporate Income Tax Act, called ‘Working on Profit’, which came into effect on January 1, 2007. The Act was intended to enhance the business climate in the Netherlands and it lowered the general corproate tax rate from 29.1 to 25.5 percent. Multinationals, however, would effectively pay much less. In October 2007, tax officials warned Deputy Minister of Finance Kees de Jager, who is responsible for tax policy, about undesirable effects of the new Act. They insisted on repairing the law because it favoured a small group of large multinationals. In reaction, De Jager tightened the law on January 1, 2008, mentioning that this was ‘unfortunately absolutely necessary to prevent large damage to the treasury.’

According to Edwin Heithuis, a tax law professor, the new loopholes have been exploited on a large scale. He said that the Ministry should not have been surprised about this, however, because it had created the legal basis for the tax avoidance constructions. "It is incredible that Parliament accepted this," he said. At a congress for tax experts in 2006, Heithuis already argued that major tax loopholes had been created for multinationals, but the Ministry had not appreciated this. Jaap Zwemmer, another proferssor in tax law, confirms that the issue is politically sensitive. "There is a fear in The Hague of being labeled a tax haven internationally. So everything should be as low-profile as possible."

Three quarters of the constructions involve intra-group interest payments or arbitrage in the classification of equity and external capital. Frank Engelen, part-time professor in international tax law and tax advisor at PricewaterhouseCoopers, estimates that the average Dutch multinational pays 15 to 20 percent tax on profits in the Netherlands. However, multinationals told one tax official that ‘they considered €0 a fair share’ because they already generate a lot of employment. ‘Out of the twenty largest companies, not even five pay corporate tax in the Netherlands.’

Information on the true corporate tax payments in the Netherlands of multinationals are not publicly available. In January 2008, parliamentary questions were asked about the average effective tax rate on the domestic income of Dutch multinationals, but the Ministry's answer was evasive. An examination of effective corporate taxes on the global income of publicly listed Dutch multinationals shows that most of them pay less than 25.5 percent. Philips and Arcelor Mittal, for example pay between 11 and 12 percent, and SMB Offshore, with one of its offices in Monaco, also pays low rates.

The newspaper lists six main tax avoidance schemes.
1. The 2007 Act allowed tax deductibility of interest paid from a Dutch company to a subsidiary in a country with a tax rate of 10 percent, such as Cyprus.
2. Some forms of hybrid capital qualified as equity in the Netherlands are qualified as loans in other countries, including France. Related interest payments are deductible abroad but considered as tax-exempt dividends in the Netherlands.
3. A ‘Patent box’ introduced in 2007 provides for a low tax rate of 10 percent on certain kinds of royalty income.
4. A ‘Group interest box’, which has not yet entered into force because it is being investigated by the European Commission, provides for a 5 percent rate on intra-group interest income.
5. US-based multinationals can use so-called BV1/BV2 constructions, with two Dutch corporations of which one is classified as a transparent entity by the US tax authority, deducting interest in the Netherlands or abroad, while the corresponding interest income is not taxed anywhere.
6. Companies can compensate losses with profts from the previous year. This so-called “carry-back” option was restricted from three years to one year by the new Act, but even the one year carry-back is rather unique at the international level.

Several of these contructions are described in the SOMO reports
The Netherlands: A tax haven?
and
Tax Haven and Development Partner: Incoherence in Dutch Government Policies?

And you can be sure that Britain and the Netherlands are not the only countries affected.

Update - we are grateful for a comment which we will highlight here:

"A rather interesting discussion on this matter is evolving in the weblog of this newspaper. Reactions of parliamentarians, tax professors and others can be read on http://weblogs.nrc.nl/weblog/geld/2008/02/21/betalen-multinationals-belasting-3/ and http://weblogs.nrc.nl/weblog/geld/2008/02/14/betalen-multinationals-belasting-2/ (in Dutch)."

(Update, Feb 28: questions have now been asked in the Dutch parliament. Read more here.

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Blockade the Tax Havens

The Liechtenstein scandal has brought out a number of wonderful editorials in newspapers across Europe and beyond, from left to right. We particularly like this uncompromising one called Blockade the Tax Havens, by the Financial Times columnist Willem Buiter, by no means a left-leaning ideologue. He is, as his blog describes, "Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions." The whole article is worth reading, but here are some nice excerpts.

Tax havens are to those engaged in tax evasion what fences are to thieves.

Well said.

It is time that the more determined, if not yet sufficiently aggressive, attitude and actions of the civilised world towards money laundering is extended to tax evasion through off-shore tax havens and the corrupt states/entities that live off this trade.

Absolutely.

Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board.

Well, this goes beyond what we have been saying, but we applaud it.

The special status of these strange entities is not cute; it’s an enabler and facilitator of unethical and illegal behaviour. The EU should adopt a directive on bank secrecy that would end the nefarious practices of Luxembourg and Austria. Belgian dentists will just have to get used to paying taxes. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively).

Strong stuff. Right on the money.

The activities engaged in routinely and as a matter of course by these tax havens are hostile acts towards all countries whose tax bases are undermined by them.

This is just what Richard Murphy has been arguing. It is amazing how quickly the mood is changing in Europe. But there is more. The OECD's Secretary-General Angel Gurría said this, in a press release:

Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in the relations between democratic societies," he stated.

But there is still more.

Disclosures concerning alleged widespread tax evasion by German citizens through Liechtenstein highlight a much broader challenge in today’s globalised economy: how to respond to countries and territories that seek to profit from tax dodging by residents of other jurisdictions.

Now the interesting thing here is this: the OECD used the word "tax dodging". This language is immensely encouraging, for it means that the OECD is implicitly including legal forms of avoiding tax, as well as criminal tax evasion, in its assessment of the harm that tax havens cause. Gurría also wrote a comment piece in the FT agreeing with TJN on many points, and the FT, in a separate story, described his comments like this:

The forceful language used by the OECD suggested that it had returned to the offensive, according to the Tax Justice Network, a campaign group.

And Gurría himself argued:

Jurisdictions characterised by strict bank secrecy and a policy or practice of non-co-operation with law enforcement in other countries prosper by attracting brass plate banks, anonymous financial companies and asset protection trusts. But they do so to the detriment of the integrity of the world financial system and such be
haviour is no longer acceptable.

We applaud this statement, although the OECD paints a picture of real progress to date on cracking down on tax havens: in reality that progress is feeble. Gurría seems to think that the answer is for Liechtenstein to establish "a network of bilateral tax agreements" with other countries. This is, again, a weak-kneed suggestion. How likely is is that Liechtenstein is going to establish a bilateral tax agreement with Tanzania, say, or Haiti? These countries are especially vulnerable. No, the answer is a dose of far stronger medicine: automatic exchange of tax information on a multilateral basis. This is what David Spencer, a New York-based tax attorney and senior adviser to TJN, told a February 14th meeting at the United Nations in New York, in his role on the NGO Committe on Financing for Development.

We return to Buiter's article now. It finishes like this:

It is time to stop being polite about it. If the EU, the US, Canada and Japan were to take a united line on this, things could change very quickly.

Quite so. It is time for a sea change in the world. South African Finance Minister Trevor Manuel recently illustrated the worries that poor countries have about this. The mood may soon be right in America too: witness what Barack Obama has been up to. And if you read the comments underneath the Buiter article, you will see the usual comments from the offshore nutcases, comparing Germany's behaviour to that of the Nazis (as the Swiss have just, rather foolishly, done) as well as a couple from TJN. Important people are gearing up for action. Angela Merkel, Germany's Chancellor, accused the principality’s banks of “encouraging lawbreaking” in Germany and warned that the German parliament could block Liechtenstein’s entry in November into the European Union’s border-free Schengen zone.

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Wednesday, February 20, 2008

Granite: a nice piece of Rock (but for whom?)

Tax Justice, and TJN, are hitting the news in Britain again, even before the latest furore over the domicile rule has died down. Take the latest heated exchange in Britain's House of Commons, prompted by work from TJN's Richard Murphy. Here is an excerpt from Hansard (the official record of events in the British parliament.) They are talking about legislation concerning the nationalisation of the bank Northern Rock following a bank run last year and ensuing crisis.

From my reading of the Treasury Committee’s brief reference to Granite and the advice received from accountants in the tax justice campaign, my understanding of the scheme-even its name suggests that it was a great wheeze-is that several of the directors at Northern Rock established an offshore vehicle to avoid tax.

In effect, it seems that they might have failed to include Granite, one of Northern Rock's off-balance-sheet vehicles, in the nationalisation. The government gets the poor quality part of Northern Rock's loans, while someone else unknown gets the filet mignon. As the Conservative MP Philip Dunne explained:

Guess who will pay the bill, if Granite is not included in the nationalisation? The taxpayer.

As Richard says, action is needed. The BBC explains it here in an article entitled " Taxpayers 'to get Rock rubbish'" Read more about this from Richard himself here, and the full excerpt from Hansard here.

(Update: some of the fears expressed by opposition MPs and recorded in this blog appear not to have been warranted. The other fears are entirely warranted.)

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PRESS RELEASE - Liechtenstein

Germany, Europe and the OECD must now act decisively on tax haven abuse

Tax Justice Network, Februry 20, 2008

Germany is in the throes of its biggest ever tax scandal. On the occasion of the visit to Berlin of Liechtenstein’s Prime Minister Otmar Hasler, the Tax Justice Network demands that Germany and Europe now act decisively against Liechtenstein and close it down as a tax haven forever. As a first step, Germany should publicly commit itself to handing over all relevant tax information that it now possesses to the authorities of all the other jurisdictions that have been victims of Liechtenstein’s activities. This scandal must also spur decisive efforts by Germany and Europe to invigorate hitherto feeble international efforts against tax havens by the OECD and others.

Worrying signs are emerging that Germany’s response risks being as weak-kneed as other international schemes. Torsten Albig, a spokesman for German Finance Minister Peer Steinbrück, recently said that

The problem is not the possibilities in Liechtenstein, but the problem is the criminal energy of German tax evaders.

Tax evasion and other forms of financial crime have a demand side – in this case German tax evaders – and a supply side, the international infrastructure that promotes and harbours evaded taxes and other criminal money, and the lawyers, bankers, accountants and others who make the secrecy work. While the wider context for Albig’s statement is more nuanced, the comment itself is unambiguous. The Finance Ministry must repudiate it and declare that it is the “possibilities in Liechtenstein,” not the German tax evaders’ criminal energy, that are the main problem.

Liechtenstein’s tax system harms not only Germany, but the whole world. Many billions of dollars of dirty money have fled Africa and elsewhere into Liechtenstein in pursuit of its secrecy, leaving poor governments starved of tax revenues and draining local economies of vitally important investment capital. Liechtenstein, for example, played a central role in the “Elf Affair” where French investigating magistrates discovered money from France’s former African colonies being used for illegal, corrupt purposes around the world. Bribes have been allegedly funnelled through Liechtenstein foundations by American oil companies in pursuit of lucrative oil licences in Kazakhstan. But these and several other cases cases are just the tip of an iceberg. If Germany has to use its intelligence services to bribe an insider to obtain basic tax information then weak nations in Africa and elsewhere are especially vulnerable: they effectively have no chance of securing the information they need to prevent corrupt politicians and others undermining their states’ revenue bases.

The right political climate for a serious worldwide crackdown on tax havens is now at hand. Public revulsion in Germany at this emerging scandal will promote action in Europe, and the recent co-sponsoring by U.S. Senator Barack Obama of the Stop Tax Haven Abuse Act reflects a fast-changing political climate in America. In Britain, arguably now Europe’s leading tax haven, a dramatic public backlash has emerged recently weeks against legislation allowing wealthy “non-domiciled” citizens to escape proper taxation. Germany, Europe, the OECD and others should take this opportunity to start cracking down seriously on tax havens at last.

John Christensen, director of the Tax Justice Network, said:

It is an international disgrace that these tiny jurisdictions continue to abuse their privileged status. Liechtenstein is a clear example of a pirate state. We have a prince running his own bank, and Lichtenstein where he wields power is clearly and systematically abusing its offshore secrecy status to undermine other nation states and abuse their citizens. When élites remove themselves from the tax regime, they subvert democratic processes and undermine respect for the integrity of laws and institutions. Evaded taxes are stolen public assets, and tax evasion is corruption at its worst.

Richard Murphy, senior adviser to the Tax Justice Network said:

This affair shows that tax havens set out to create structures whose only use is to subvert the taxation and regulatory systems of other countries. That’s a form of international aggressiuon to which the states affected must respond. But they have to go beyond that. They must also tackle the lawyers, accountants, banks and trust companies providing these services. Many of these are household names, facilitating corruption and yet still expecting to be held in high regard in the states that suffer the cost of their actions.


NOTES:


International initiatives on tax havens are inadequate.

The European Union has made some progress on tackling tax havens. But its current efforts focus on business taxation and the taxation of interest income. This leaves enormous gaps such as trusts, which are notorious vehicles for tax abuse and which are widely exploited by tax evaders and other criminals.

The OECD in 2000 identified 35 jurisdictions as uncooperative tax havens but only three remain: Liechtenstein, Andorra and Monaco which refuse to exchange even limited tax information with other jurisdictions. Some progress has been made. Yet many countries effectively declared clean by the OECD, like Switzerland and the UK, still offer of tax structures that facilitate large-scale tax abuse. (See an in-depth research report into Switzerland by the American research organisation TaxAnalysts here.)

What is a tax haven?

The OECD in 1998 defined a tax haven as a place that offered at least two of: a) No or only nominal taxes. b) Lack of effective exchange of information. c) Lack of transparency. d) No substantial activities in the location recording a transaction.

Thinking has moved on since 1998 but these definitions remain broadly relevant. A simpler way of thinking about tax havens is:

A tax haven creates laws and other measures that it knows can be used to evade or avoid the tax laws or regulations of other jurisdictions and which have little or no other purpose.

How is Liechtenstein a tax haven?

Using the OECD criteria Liechtenstein is a tax haven. In fact, it is one of the world’s most secretive jurisdictions. Tax evasion is not a criminal offence in Liechtenstein so normal international cooperation agreements on criminal matters do not apply.

The Liechtenstein foundation is its main tax haven product. There is almost no official record of its activities as long as it is set up for personal or family use by a non-resident. The name of the person creating the foundation is not recorded. The foundation must have a constitution but many foundations do not require registration to acquire their legal identity: they are known only to the lawyers and bankers supplying services to them, who are legally bound by absolute secrecy. Even where registration is required, no information about the foundation is available to the public. Liechtenstein foundations trading only outside Liechtenstein are not required to keep accounting records, and no accounts ever have to be sent to any authority. A small tax charge is paid annually. Liechtenstein is part of the EU Savings Tax Directive whereby jurisdictions either exchange tax information with others or they require paying agents to apply a witholding tax (currently 15%) on interest income which is then mostly passed in bulk to the relevant national authority. Liechtenstein has taken the witholding tax route, so it does not have to exchange tax information with other authorities.

About the Tax Justice Network.

The Tax Justice Network is led by tax experts and economists and it campaigns for greater transparency in international finance and opposes abusive tax practices. It advises and works with governments, international bodies and non-governmental organisations in matters of international taxation and corruption.

www.taxjustice.net

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Monday, February 18, 2008

How much does Germany's finance ministry care about Liechtenstein's promotion of crime?

We have already blogged about the emerging tax scandal between Germany and Liechtenstein, and of some of the strange things that happen there. One of the most surprising comments comes from Torsten Albig, a spokesman for Germany's finance ministry, who is quoted as saying.

"It is all about criminality ... the problem is not the possibilities presented by Liechtenstein, the problem is the criminal energies of German tax evaders," he said.

This is a shocking statement. Taken at face value, the part "the problem is not the possibilities presented by Liechtenstein" appears to mean that Germany's finance ministry is saying that the corruption and criminality that Liechtenstein allows and promotes is not the issue to be tackled. Now we have tracked down the original quote in German, and it seems that his comments are more nuanced when taken in a wider context. But the comment itself is unambiguous. And we reject its implication that Liechtenstein is not beyond the pale.

And, while we're one the subject of strange statements, try this for size from Liechtenstein's ambassador in Germany, Prinz von und zu Liechtenstein (quoted by Der Spiegel from a TV interview with the prince and translated by TJN): He emphasised that tax evasion isn't legal in Liechtenstein, either: "This is often overlooked in this heated debate. We also don't invite anybody from abroad to it." And then he added that tax evasion is, however, dealt with differently in Liechtenstein. "When somebody evades taxes here it's as though you breach the traffic rules. It's then simply settled." (Richard Murphy has blogged this, ending it with: "I stand by my suggestion that Liechtenstein is a corrupt state that knowingly supports the supply of corruption services.")

Endnote: Richard Murphy has written a series of blogs on this. One is his investigation into how the Big Four accountancy firms seem to be embarrassed about their presence in Liechtenstein. He also looks into Liechtenstein and how its secrecy works, and on the ethics of using a paid informant to crack bank secrecy. He notes a similarity between Liechtenstein laws and those in the UK. He asks, tongue in cheek, why the Center for Freedom and Prosperity, a defender of tax havens, is so curiously silent on this scandal. He also notes a refreshingly harsh new tone from the OECD and points to a nice FT editorial looking at all this.

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Friday, February 15, 2008

Liechtenstein: an emerging scandal

Germany appears to have what Suddeutsche Zeitung has called the republic's "biggest tax scandal in its history" on its hands. This involves about 700 people who are under investigation, and a possible 3.4 billion Euros at stake - as well as a prince whom we have recently written about. He is, as we described him,

Prince Hans-Adam (Johannes Adam Ferdinand Alois Josef Maria Marko d'Aviano Pius von und zu Liechtenstein to you, or "His Serene Highness") and he owns the Liechtenstein Global Trust (LGT), with $100 billion in assets.

We also noted, among other things, his rather large conflicts of interest leading to a wholesale subversion of democracy in this vicious little tax haven. In 2003 a referendum was called to allow Prince Hans-Adam II (who already had powers to dissolve parliament and call elections) to hire and fire governments at will. Ahead of the referendum, Sigvard Wolhwend of the country's Democratic Secretariat Party, warned that granting the prince more power could turn Liechtenstein into a dictatorship. State capture by offshore interests is a hallmark of secrecy jurisdictions like Liechtenstein.

Suddeutsche Zeitung quoted Handelsblatt as saying:

The investigators have received loads of files from LGT Bank. The newspaper quoted an investigator as saying: “We have cracked the whole bank”

and added that "Liechtentenstein is favoured by tax dodgers because the country very rarely assists German investigators."

In a related story, Reuters reports that Klaus Zumwinkel will resign as chief executive of German mail and logistics group Deutsche Post after prosecutors said they suspected him of dodging about a million euros in taxes by transferring money to Liechtenstein. This micro-state was rocked by another scandal just a week ago, when Liechtenstein-based LLB Bank issued a statement saying that it has been the target of a blackmail campaign since 2003 after an employee threatened to publish the secret account details of German clients.

If Swiss banking secrecy is strict, it's even stricter in Liechtenstein. Germans evade an estimated 30 billion Euros in taxes each year, the German Tax Union estimates. It is interesting in this case to note that Finance Minister Peter Steinbrück admitted paying an informant for the information that allowed them to crack the scandal, with Der Spiegel newspaper saying that investigators had handed over five million euros to an informer who contacted the BND secret service in early 2006 (see Richard Murphy's comments on the ethics of this here.) This shows how helpless the German authorities are in general, in the face of this state-sponsored criminality: they have to rely on unusual subterfuge to get the information.

The FT quotes TJN's Richard Murphy as saying that Liechtenstein was "completely committed to secrecy and ignores all international norms." John Christensen, director of TJN, said:

Liechtenstein has for years resisted cooperation with the OECD – one of only three countries still listed as one of the OECD's non-co-operating jurisdictions. It is an international disgrace that these tiny jurisdictions continue to abuse their privileged status. Liechtenstein is a clear example of a pirate state. We have a prince running his own bank, and Lichtenstein where he wields power is clearly and systematically abusing its offshore secrecy status to undermine the German republic and abuse its people.

When élites remove themselves from the tax regime, they subvert democratic processes and undermine respect for the integrity of laws and institutions. Tax evasion is theft of public assets, and it is corruption at its worst.


This reminds us of the words of American Senator Carl Levin, co-sponsor with Barack Obama of the Stop Tax Haven Abuse Act. Tax havens, Levin said, have "in effect declared war" on honest taxpayers.

This story will grow, and we will be following it.

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Wednesday, February 13, 2008

Domicile Hysteria

The UK Chancellor (Finance Minister) Alistair Darling has backed down in response to lobbying from Britain's business community to continue subsidising wealthy foreign "non-domicile" taxpayers, by allowing them to pay minimal taxes and keep their foreign tax affairs secret. This is an important matter. As The Guardian puts it:

There are 120,000 registered non-doms, most of them wealthy City workers and super rich individuals who live in the UK, who keep much of their earnings and assets offshore. A further six to eight million people, mostly on low incomes, are believed to be living in the UK but registered oversees for tax purposes.

TJN and especially Richard Murphy have taken a lead role in getting the domicile issue onto the public agenda. The campaign has been a great success: Britain's newspapers today are positively fizzing with the story. Responses range from hysterical worries that Britain's richest people will leave in droves, to those who rightly point out the damage that such abusive taxation structures cause to the country, let alone to other nations. Let's have a look at some of the commentary about this.

Vince Cable, treasury spokesman for the opposition Liberal Democrats, said this:

The government has made an unholy mess of this issue and is being made to look thoroughly foolish, now it has been demonstrated that ministers haven't thought through the implications of their own policies. However, there has been some outrageous special pleading from the City with wildly exaggerated accounts of the damage that would be done by taxing non-domiciled residents. British taxpayers do not understand why they should pay 40% top rate tax, while the super-rich may pay little more than council tax on houses worth tens of millions.

and in the FT he added:

The generous tax treatment of non-doms is still a scandal requiring action. Ordinary taxpayers are angry that rich people can use loopholes and expensive lawyers to avoid paying tax at up to 40 per cent like the rest of us. For a millionaire, 40 per cent is not a penal rate.

The (rather right-wing) Daily Mail seemed to agree.

The idea that the investment banks and private equity princelings will remove themselves to Switzerland or Monaco is empty. On the same day as Trade Minister Lord Digby Jones was rebelling against his own government on nondoms, one of the world's largest financial groups, GE Money, with assets of £100bn and revenues of £13bn, gamely announced it would move its headquarters to London. I suggest the CBI chieftains, Lord Digby Jones and all the other opponents of the non-dom tax, buy themselves a cold compress and cool down. London's leadership as a financial centre is not endangered.

The Guardian, in a leader article, said:

The risk to revenue points to pressing ahead with care, not abandoning the plan. There is little reason to think the current proposals will provoke a mass emigration.

The commentator Will Hutton had these words to say:

The prime minister is said to be worried at Labour losing its "pro-business" reputation - as though knowledge economy entrepreneurs in west London or manufacturers in Yorkshire require foreigners to pay no tax as evidence of Labour's pro-business credentials. I doubt it.

The Treasury misread the politics and thought it could seize the moment to do something long needed; to win powers to look at the income generated by UK based residents and non-residents held in overseas trusts. Anybody who thinks that every penny put through these trusts is honest needs to be taken away to the funny farm; they are long standing means of avoiding UK tax as everybody knows. If they were clean their owners could not object to being required to submit details to the Inland Revenue. If the City's pre-eminence is based on tax avoidance, it will not long survive - a counter-argument that could and should have been made.

However with a weak trade union movement, little wider intellectual support and no prior preparing of mainstream opinion for a long overdue change, the Treasury has been bullied into abandoning its proposed powers to investigate offshore trusts. It is a bad moment for everybody. It shows the City at its self-interested tax-avoiding worse; inflames anti-foreigner sentiment through characterising them as wanting to take but not give; and politically allows the chancellor's enemies to declare that he is weak. In truth some ground has been won and long overdue tax will be paid because the non-dom levy will remain - but how much better it would have been to
have judged the politics correctly from the beginning, sold the package properly and to have resisted the bullying.

Neal Lawson added this:

I spent too many of the post 1997 years being a business lobbyist. It happened because the years in the opposition wilderness turned desperation into capitulation. In the yearning to win, I forgot for a while why we needed to. When power becomes everything, principle takes a back seat. Too many stopped believing there was any inherent conflict between labour and capital and that any tensions could be spun or "triangulated" away. Like frogs boiling in water, you don't know what's happening until it is too late. The New Labour tent could be so big that politics itself could be contained. It would be the end of left and right division and a new modern era of "what works".

Eventually, democracy itself is diminished. If politicians are only about the preservation and promotion of business interests, and not about a vision of the good society, then what is the point of voting? The people aren't stupid. They turn away, leaving just the lobbyists. The capture is complete. Politics becomes an examination of MPs' expense accounts, while the real issues like the growing gap between rich and poor or the news that more and more are being forced to choose between eating or heating are left untouched.


Richard Murphy weighed in:

Financial services are growing rapidly and ate highly profitable: it appears to have no need for a subsidy at all. The south east of England has an over-heated economy. It likewise appears to have no need for a subsidy. Losing some new entrants into both of these overheated sectors may be of benefit to our economy.

He added this:

The domicile rule as used in UK taxation discriminates between people on the basis of their place of national origin. Since 2003 this has been illegal in the UK on the basis of amendments passed that year by the UK government and consistent with discrimination law across the whole of Europe. Do we really want a tax system based on such a profoundly unethical, as well as illegal, rule?

And this

This £30,000, it must be stressed is not a payment of tax. No other country will recognise it as such under double tax treaties. This is sure evidence it is not tax. In that case, what is it? I’d call it a payment to secure a favour: the favour is not paying tax. In that case a bribe is the closest thing I can think it akin to. After all, they’re very often a payment to a government to ignore the legal obligation normally imposed upon a person and to turn a blind eye to what is actually happening. We see this sort of payment in many countries in the world where benefit is secured by payment of a sum to obtain advantage unwarranted under the law. And we call it corruption.

We should add the analysis we have been making on the damage that being a tax haven can cause to your society, which is further developed in an article in our newsletter, Tax Justice Focus. This is bolstered by a wonderful recent article entitled "Cityphilia" in the London Review of Books, about how money from the City of London has affected the capital.

In London, the effect of that money has become almost entirely toxic. I'm not talking here a
bout middle-class envy - the resentment increasingly expressed about the 'middle-class poor' about how unfair it is that these bankers get paid so much for contributing so little. That resentment seems to me to be largely hypocritical, a middle-class resentment of one of the few forms of inequality that doesn't benefit them. But City money is strangling London life. The presence of so many people who don't have to care what things cost raises the price of everything, and in the area of housing, in particular, is causing London's demographics to look like the radiation map of a thermonuclear blast. In this analogy only the City types can survive close to the heart of the explosion.

The Comedian Ricky Gervais, star of The Office ends this blog on a related theme. Celebrities who live offshore for tax purposes are "a disgrace", he says. "There's something unsavoury about tax exiles," said the comedian. Gervais himself loves to pay tax: "It helps justify how much I earn," said Gervais, who often speaks of his embarrassment at his earnings.

Sympathy for the non-domiciled of Britain is running out, as Richard Murphy points out. Add it all up, and it is clear that the domicile rule should go.

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Friday, February 01, 2008

Missing Billions

TJN’s Richard Murphy has made a splash in the UK with a new report he researched and drafted for the Trades Union Congress (TUC), entitled “The Missing Billions” which concludes that £25 billion (almost $50 billion) is lost each year from tax avoidance: £13 billion from tax avoidance by individuals, and £12 billion from the 700 largest corporations. A further £8 billion is lost from tax planning by the wealthiest members of the UK community. Tax avoidance is defined in the UK as legal (as opposed to tax evasion which is illegal) but there is a very large grey area between them.

The report starts like this:

Few issues can be more important to a modern democracy than the integrity of its tax system. It is deeply troubling, therefore, to discover that the tax system is being increasingly undermined by the practice of tax avoidance. The sheer extent of money lost to these practices must add to the growing sense that a small group of wealthy individuals and organisations are operating beyond the normal rules of society that the rest of us believe to be fundamental to a fair and civilised life.

Quite. It also makes a series of recommendations about what can be done.

This report gathered quite a bit of attention. The Independent quotes Angela Beech, a senior tax accountant, as saying: "The Revenue is not geared up to properly deal with the challenges it faces." The Financial Times quotes TUC Secretary-General Brendan Barber as saying: “Most people think that we have a progressive tax system but it has now been hollowed out by so many loopholes and allowances that too much tax is now voluntary for the rich” and adds this:

The TUC believes it is tapping into a growing mood of resentment about the super-rich. The view, prevalent in the 1990s, that targeting the wealthy would be seen as a politically unpopular attack on people’s aspirations, is fading.

The Guardian notes that the unpaid tax costs every British worker £1,000 a year, and followed this up with a strong comment piece, looking at why half of all investment tax is paid by people who are apparently very low earners, or non-earners.

The Times quotes Brendan Barber again:

It's time for a new campaign for a fair tax system, a campaign that can unite the vast majority of the population who do play by the rules and have nothing to fear from our proposals.

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