Thursday, October 30, 2008

Why has the World Bank not come up with figures on illicit flows?

Perhaps one answer to the question in our headline is that the World Bank is embarrassed that it finances tax evasion- and corruption-systems in Lebanon and other secrecy jurisdictions.

The Task Force on Illicit Flows -- which, to be honest, the World Bank only agreed to join up to after Norway forced their hand -- met last week in Oslo for its final meeting (Richard Murphy has more here.) Within this framework, the World Bank was commissioned by Norway to carry out research on illicit financial flows. At the time, the idea was welcomed by the World Bank's President, Robert Zoellick, who said "a study of the development impact of off-shore financial centers would be a valuable contribution to the governance and anti-corruption agenda."

However, as the Task Force met for the last time last week, it now turns out that the Bank will not deliver what Zoellick promised. How come?

Perhaps it is because the anti-corruption and transparency agenda is not followed consistently by all World Bank departments. There is new evidence showing that the Bank financed information technology for a commercial register in Lebanon which in turn is used for managing and merchandising corruption- and tax evasion-vehicles. Take a look at what follows.

Lebanon offers a certain type of “Offshore Company” which is barred from engaging in domestic activity. Click here. This company is tax exempt. Furthermore, there is no sign whatsoever that the commercial register of Lebanon is publicly available online. It is rather confidential, it seems. The World Bank, through its funding of the registry’s development, (we can't find the matching link on the World Bank's site, though it wouldn't necessarily be there) supported the commercialization of these companies and allowed that these “Offshore Companies” can be registered in a “special registry at the Commercial Registry”. Why, if not for secrecy reasons, would one even consider let alone institute a ‘special registry’ for offshore companies in a (usually public) commercial registry?

It was precisely such “offshore companies” that the OECD categorised as constituting harmful preferential tax regimes or “tax havens” in its 1998 report. In conjunction with the banking secrecy laws in Lebanon it would be interesting how such “special” corporate registries and the abusive behaviour they facilitate fit in the World Bank's overall “governance and anti-corruption agenda”.

This demonstrates a lack of coherence. And that’s why one or both of the following has to go: either the buzzwords of “governance and anti-corruption agenda” or the tacit complacency in tolerating and even promoting corporate tax looting from poor countries through secretive and unaccountable corporate veils. The World Bank needs to decide quickly which option it wants to follow. The spirit of Doha demands it.

(written by a guest blogger, who prefers to remain anonymous.)

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UN Tax Committee - why it matters; UK backs Liechtenstein

We recently published a letter TJN has sent to Britain's Financial Secretary to the Treasury expressing our anger at Britain's attempts to obstruct the upgrade of the UN Tax Committee. For those not familiar with this Committee, it is important, and we will explain why. This blog below was written by Professor Sol Picciotto, who attended a meeting of the UN Tax Committe in Geneva last week. This provides some background, and we'll be writing more on this before too long.

Last week marked a watershed for the UN Committee of Tax Experts, which was holding the 4th annual meeting since it was upgraded from an Ad Hoc Group of Experts. It became a standing Committee of Experts following the Monterrey UN conference on Financing for Development (FfD) held in Monterrey, Mexico, in 2002, recognising the key importance of taxation for providing self-sustaining resources for developing countries. But this upgrade was a relatively minor change, falling far short of the original proposal in the Zedillo report for an International Tax Organisation (here's an interesting document published in preparation for that 2002 meeting).

Overall, the UN Committee can only be said to have made relatively minor achievements in the past four years. Most of its efforts have been spent on finer points of drafting the revised UN Model Treaty and its Commentaries, although much of this work has just followed in the slip-stream of the OECD, whose tax department is far better resourced and whose Model Tax Treaty is more favourable, unsurprisingly, to OECD countries. While focused on the finer points of detail, the UN Committee has neglected the much wider agenda it should be concerned with, in the interests of all countries: strengthening tax capacity to provide sustainable financing for states, especially developing countries, and establishing effective international cooperation to combat tax evasion and avoidance. This lack of attention to the big issues has been due partly to its serious lack of resources, and above all to the reluctance of some states to make political commitments for its work. TJN will continue to press for a new approach, at the forthcoming Doha conference and beyond.

Although it was given a relatively wide mandate the Tax Committee has in practice stuck to the relatively narrow and technical work of its predecessor, trying to agree the text of a Model tax treaty especially suited to developing countries. Developing country members have found it hard to participate fully even in this narrow range of work, due to lack of resources. They are usually officials, holding down big jobs in their own countries. UN funds are available for only one meeting of 5 days per year, and the time of less than two support staff. So much of the work during the year (done through subcommittees to prepare reports) is done by members from developed countries, and even outside experts, often from the big accountancy firms. This obviously poses the risk that developing countries will see rules tilted in ways they would not like.

So TJN is supporting a major effort to press for a further upgrading of this Committee, at the Doha FfD Review conference. This has received widespread support from developing countries, and civil society organisations like TJN. The proposed upgrade headed the agenda of the Tax Committee’s meeting which began in Geneva last Monday, 21st October. Having explained the issues, the chairman proposed that a letter be sent to the UN from the Committee supporting the upgrade.

What followed was an amazing process of obstruction. First, the observer from Liechtenstein raised a number of `questions’: what would be the nature of the new body, would it be universal (with representatives of all states) or a limited membership, experts or politicians? This tactic was obviously disingenuous. A quick look at the Ecosoc website would have revealed that the umbrella body in the UN under which the Tax Committee sits is the Economic and Social Council (Ecosoc), which has several Commissions dealing with technical and complex issues, such as Population or Narcotic Drugs, which are also recognised as politically important.

The next surprise came when Andrew Dawson, the UK Expert member of the committee, said that he agreed with Liechtenstein! Although such experts are supposed to serve in their personal capacity, they usually follow the line of their government, so Andrew Dawson, who is a Treasury official was presumably following the UK government line.

In addition to the developing countries, some of the developed country participants supported the upgrading with cogent arguments. The German representative in particular stressed that becoming an intergovernmental committee would give international tax issues more political importance and visibility, and improve the transparency of the committee’s work. On a vote called by the chairman a majority of 8-3 supported the upgrading, the minority being Ireland, Switzerland and the UK. The UK member continued to obstruct, and insisted in no uncertain terms that the letter should give the voting figures, including abstentions - obviously aiming to water down its impact.

In subsequent discussions with TJN observers at the meeting, Dawson defended his position, saying that he feared an intergovernmental committee might start to "lay down international tax rules". This is pandering to the populist line taken by some politicians, that international cooperation on taxation somehow reduces national sovereignty. In fact, as TJN has repeatedly pointed out, it does exactly the opposite: improved international coordination and cooperation on taxation are essential to preserve sovereignty by maintaining national tax capacity of states, especially in the face of economic globalisation. We challenge Mr Dawson to defend his opposition to the upgrading of the UN Tax Committee. As mentioned, we have also written to his boss, UK Treasury Minister Stephen Timms, asking for an explanation.

The rest of the Committee’s work last week continued its narrow agenda of revision of the UN Model tax treaty. Even here, it is hampered from developing the broader perspective which could enhance its work, since it mostly plays catch-up with the OECD. This is especially harmful in discussions of the principles for international allocation of tax rights, where the UN Model historically gave a higher priority to source taxation, to protect capital-importing countries. The distinction between source-based and residence-based taxation is important. We have written a TJN Briefing Paper on the subject, but a simplified example helps illustrate it.

Imagine a British engineering company working on construction sites in Zambia. The profits it makes on this work are made in Zambia, which is the source of those profits. The company is based in the UK, which is its residence. Who gets to collect the taxes on those profits: Zambia, or Britain? Source or residence? It is clearly unfair for both countries to tax the same income, so countries sign bilateral tax treaties with each other to agree how the taxes are levied.

A fully source-based model would give Zambia the tax revenues in this example, and a residence-based model would see them flow to Britain (in fact, this example is oversimplified, and in the real world you tend to get a mixture of both; it's a question of emphasis - but even that can have big impacts. Business profits are taxable at source if earned through a "Permanent Establishment". This is defined more narrowly by the OECD Model, which would not cover work done on temporary sites, especially if not owned by the company concerned. The UN Model has a broader definition, which is preferred by capital-importing countries.

The richer, capital-exporting countries prefer the residence principle, especially of income from capital or international investment, and the OECD model reflects this. However, as discussed in the TJN briefing paper on source and residence taxation (TJN here: we'll write more on this shortly), residence-based taxation is easier to avoid, by routing foreign income through entities in tax havens. The UN model, more representative of the wishes of developing countries, likes it the other way around.

So it was surprising to find that a subcommittee proposed that the UN Committee should delete article 14 of the UN Model, which allows source taxation of income for independent personal services. OECD had already made this deletion in 2000, on rather technical grounds. The subcommittee’s report did mention that one of its members preferred to retain article 14 "in the circumstances of his country”, but the report gave little consideration to the arguments for this. In fact, this opposition to deleting Article 14 had come from the Chinese expert, who at the meeting had given comprehensive and cogent reasons for the retention, and he was supported in this by representatives from India, Vietnam, Malaysia and others (the expert from Tunisia had been unable to take part in the work of the subcommittee due to lack of resources.)

This subcommittee’s proposal to delete the article 14 clearly showed how the views of the OECD countries tend to dominate, even though they have only 10 of the 25 members of the UN Committee, and it is supposed to formulate an alternative to the OECD treaty, suitable for developing countries. Many would argue that far from abandoning article 14, it should be revised to strengthen tax at source of income from services. A new subcommittee was set up to consider this, but the work is likely to take several years.

Much more relevant and important was the Committee’s work on strengthening exchange of information. This is clearly in the interests of all countries, except tax havens! The Committee finalised its work on revision of Article 26 of the Model, which significantly expands the scope for information exchange. In particular, it now makes it clear that information should be supplied that would be helpful in combating tax avoidance, and that a state cannot refuse to supply information solely on the grounds of bank secrecy, or because it relates to ownership interests in a legal person. This wider scope could be very important, but of course much depends on the willingness of states not only to include these provisions in their treaties, but also to develop effective mechanisms for putting them into practice.

The Committee also approved proposals for a Code of Conduct on cooperation in combating tax evasion, which had been drawn up by Prof. Michael McIntyre (who wrote about this for TJN here), and which TJN strongly supports. However, several of the participants quibbled about some of the principles, which suggests that even developing a non-binding Code will meet some difficulties.

It was very timely that the Geneva meeting overlapped with the conference on the fight against international tax evasion and avoidance, organised in Paris by 17 OECD countries. Some of the committee members had come on to Geneva from the Paris meeting, notably the French and Mexican experts, and they emphasised the strong nature of the conclusions of that meeting, and their backing by Ministers of Finance. The Swiss newspapers that morning had headlined the statement by the German Finance Minister that sanctions would be considered especially against Switzerland, if it continued to use bank secrecy to refuse to provide information to combat tax avoidance. A number of representatives at the Geneva meeting announced that their country would insist that tax treaties now include the new provisions for information exchange that are broader in scope.

The Liechtenstein representative limited himself to noting that these proposed provisions are in the context of double-taxation treaties. The implication of this was that they have limited relevance to the main tax havens (such as Cayman Islands or Lichtenstein), which have no such treaties - unless the OECD countries would be willing to extend treaty benefits to them, in exchange for some information exchange. This is an issue that has been raised by the havens in the negotiations which OECD countries have been attempting with them (so far with little success) to sign free-standing Tax Information Exchange Agreements (TIEAs: “free-standing" means that they are not part of a wider treaty for preventing double taxation).

It seems clear that the only way to make progress on penetrating the havens’ secrecy is to activate the threats of sanctions against them, which have been more strongly expressed in the declaration of conclusions from the Paris meeting.

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International News - Oct 30

** Also see here for a permanent list of past story summaries; see Offshore Watch for more stories. **

We have created a new web page
Economic crisis and Offshore.” It seeks to put various different analyses that are emerging into a single space.

The tax haven debate - on TV
Oct 23 (TJN) - Daniel Mitchell of the Cato Institute has taken part in a lively debate on France 24 international television, along with Alex Cobham of Christian Aid, Andreas Missbach of the Berne Declaration, and Jean Meckaert of the Comité Catholique contre la Faim et le Développement (CCFD.)

A letter to Britain's Financial Secretary to the Treasury
TJN sends a letter to Rt Hon Stephen Timms, MP, Financial Secretary to the Treasury, House of Commons, about Britain obstructing the upgrade of the UN Tax Committee.

Sunday Herald on tax havens and the economic crisis
Oct 26 (TJN) - More people are waking up to the link between tax havens and the current economic crisis, following our seminal article in The Guardian and statements by leaders and politicians around the world.

Apartheid companies, sanctions-busting and tax havens
Oct 29 (TJN) - We've been sent an interesting report about how South African companies eased their tax burdens, during and after the Apartheid era, getting special tax breaks, using shell companies in tax havens, and so on. Featuring Jersey and many others.

New study: Rich Cheat More On Taxes
Oct 29 (TJN) - Forbes magazine quotes a new study based on unpublished U.S. Internal Revenue Service data showing the rich are different when it comes to paying taxes: They hide more of their income.

More people waking up to the link between tax havens and the financial crisis
Oct 23 (TJN) - We have made the case clearly why tax havens, and tax and regulatory competition, are right at the roots of the evolving financial crisis. We recently noted officials at the IMF and the OECD, and the leaders of France and Germany lining up behind our analysis.

The Effects of the Candidates' Tax Plans on Households at Different Income Levels: Examples
New Report from Citizens for Tax Justice
October 29 (CTJ) - Examines hypothetical households representing different income groups to determine how they would fare under the tax plans proposed by the presidential candidates. Those in the top one percent would have a tax increase that would be fairly small (as a percentage of their income) under Obama's tax plan, but they would receive breathtaking tax cuts exceeding $270,000 under McCain's plan.

Senator Obama calls time on the tax havens
Oct 29 (TJN) – TJN looks at McCain and Obama’s tax records.

Subverting corporate responsibility
Oct 29 (TJN) - Take a look at the "corporate social responsibility" section on Wikipedia. Scroll through it for the word "tax." It suggests that CSR is, or even should be, a good way to distract us from tax and regulation.

Nazis and bank secrecy again
Oct 29 (TJN) - Recently we had Liechtenstein slinging the Nazi allegation at Germany, after the German finance minister, Peer Steinbrück, understandably criticised the little Alpine secrecy jurisdiction for helping wealthy German citizens evade taxes. Now we've got a new Nazi slur, this time in the form of a communiqué from the right wing SVP party in Switzerland.

Is this what democray is made of?
Oct 29 (TJN) – A look at offshore funding for Britain's Conservative Party.

Time for lobbying transparency
Oct 29 (TJN) -On an event to be held on November 5th in London. It's from a group called the Alliance for Lobbying Transparency, whose primary aim is the introduction of a mandatory Parliamentary register of lobbyists, similar to the system in the States, alongside other measures to prevent undue influence and privileged access.

Tobacco Underground: the booming trade in smuggled Cigarettes
Experts estimate that contraband accounts for 11 percent of all cigarette sales. The cost to governments worldwide is massive: a whopping $40 billion to $50 billion in lost tax revenue during 2006.

Profiting from the recession
Oct 29 (Guardian, by Prem Sikka) - The deepening recession is bad news for most people, but accounting firms must be rubbing their hands. They are going to make a lot of money from insolvencies. Now a fairy godmother in the shape of the US Treasury has appeared.

'Non-dom' globetrotter Robert Gaines-Cooper faces huge tax bill
Oct 29 (Times) - In a ruling yesterday that will be keenly studied by other “non-doms”, A globe-trotting entrepreneur is facing a multimillion-pound tax bill after failing to persuade senior judges that he has non-domiciled status because his home for more than 30 years has been a Seychelles villa.

Sovereign Society's toadies, liars, charlatans
Oct 22 (TJN) - We have, predictably, come under attack from certain well-funded quarters. Here are our retorts (the smears, we will just leave as a sign of people who have lost the argument).

The OECD encourages tax competition
Oct 22 (TJN) - Grace Perez-Navarro, deputy-director of OECD’s Centre for Tax Policy and Administration, has been speaking about the organisation's work on transparency and tax matters.

Juncker's TV courage
Oct 23 (TJN) - Luxembourg has a nasty little tax haven racket running in the centre of Europe. Now Arlette Chabot, information director for French TV station France 2, has written - perhaps was forced to write - a craven apology to the Luxemourg Prime Minister, Jean-Claude Juncker, after her station had the temerity to suggest that not all is well in the little tax haven state.

Rerum Novarum - a letter from Rome
Oct 25 (TJN) – John Christensen in Rome, and his adventures as a guest of the Pontifical Council for Justice and Peace at the Vatican.

Tax and state-building in fragile states, new report
http://taxjustice.blogspot.com/2008/10/tax-and-state-building-in-fragile.html
Oct 27 (TJN) - A short new report is available from the Danish Institute for International Studies. It's called Taxation and state-building with a (more) human face. This fits into a broader body of new research which is emerging, and in which TJN is involved.

UK resists global governance
http://taxjustice.blogspot.com/2008/10/uk-resists-global-governance.html
Oct 27 (TJN) - It's getting almost boring how often we have to take the UK to task over its resistance to any kind of international governance in the field of global finance. It's not just us saying it, though.

You've been robbed - short film
http://taxjustice.blogspot.com/2008/10/youve-been-robbed-short-film.html
Oct 27 (TJN) - Please watch this short tax justice film, entitled "You've Been Robbed." And pass it on.

SOMO's new report on tax and development
Oct 28 (TJN) - In a month’s time, the follow up International Conference on Financing for Development will be held in Doha. This is a good time to consider tax problems for developing countries.

Lawsuit claims Barclays is guilty of fraud
Oct 26 (Independent) - Barclays is being sued by a French asset manager in a New York court over the collapse of two investment vehicles designed in London and managed out of the tax havens of Jersey and Guernsey.

DEVELOPMENT: Poor Hit by Recession and Tax Havens
Oct 27 (IPS) - With signs of a recession preoccupying policy-makers in industrialised countries, prospects for the success of an international conference on providing finance to the world's poor do not appear high.

Rich Cheat More On Taxes, New Study Shows
Ocr 21 (Forbes) - A new study based on unpublished Internal Revenue Service data shows the rich are different when it comes to paying taxes: They hide more of their income.

Wish you were here (Part 1)
Oct 25 (Sunday Herald) - Banks bailed out by UK taxpayers control hundreds of firms in tax havens

Wish you were here (Part 2)
Oct 25 (Sunday Herald) - Time for government to insist that tax haven loopholes are closed.

Tiny Tax Cheats, Giant Shortfalls
Oct 27 (Barrons) - Many small businesses help themselves to lower taxes.

The Fund faces up to competition
Oct 21 (FT) - For weeks, the headlines have been dominated by banks faltering and countries propping them up. But we have entered a new phase of this crisis in which countries themselves are starting to struggle.

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Wednesday, October 29, 2008

Time for lobbying transparency

We've written a lot about Britain recently. In this context, we should draw your attention to an event to be held on November 5th in London. It's from a group called the Alliance for Lobbying Transparency

The Alliance's primary aim is the introduction of a mandatory Parliamentary register of lobbyists, similar to the system in the States, alongside other measures to prevent undue influence and privileged access - so the recording of all meetings between lobbyists and officials, a slowing down of the revolving door, and tougher rules on Members' interests.

Here's a copy of their flyer:

Averting the Next Crisis: Why transparency in lobbying matters

The Alliance for Lobbying Transparency invites you to a public meeting on lobbying.
5th November, House of Commons.

It is widely accepted that the current financial crisis has been exacerbated by a lack of regulatory oversight. To what extent has this been caused by sustained lobbying and high level access to Government by the financial industry? In the context of this and other current political issues, such as airport expansion, nuclear and food policy, the debate will ask: Do we have a right to know who is lobbying Government? Would greater transparency in lobbying lead to more Government accountability? And should Parliamentarians have financial interests in lobbying firms? Come and share your views on these and other timely questions.

Chaired by David Hencke, Westminster correspondent, The Guardian

Speakers

* Robbie MacDuff, Chair, Association of Professional Political Consultants
* Robert Siddall, CEO, Airport Operators Association
* Peter Facey, Director, Unlock Democracy
* Prof David Miller, Director, SpinWatch
* Guido Fawkes, prominent Westminster blogger

6 -7pm, 5th November
Committee Room 6, House of Commons
Sponsor, John Grogan MP
www.lobbyingtransparency.org

Expect fireworks!

For more information: tamasin@spinwatch.org

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Senator Obama calls time on the tax havens

The coming presidential election is being fought on economic issues, and with record budget deficits and crumbling infrastructure its not suprising that tax is right at the centre of the agenda.

A scan of Senator McCain's voting track record shows that he aligns with the incumbent's record of approving tax cuts for rich people and tax breaks for the large corporations. He has also publicly aligned himself with American companies that make extensive use of loopholes and offshore financial services provided from the tax haven of Bermuda.

Senator Obama has staked out a quite different territory. He advocates tax cuts for middle and lower income people, and closure of the loopholes used by rich people and powerful corporations to avoid tax. This is how he confronts Senator McCain on taxation:

"If he wants to defend a tax code that's more than 10,000 pages long, filled with loopholes written in by corporate lobbyists, like the ones running his campaign, he has every right. He has every right to defend offshore tax havens that allow companies to avoid paying taxes here in America. But I say its time to close offshore loopholes and shut down the tax havens and restore balance and fairness to our tax codes."

(Also take a look, if you will, at this new report from Citizens for Tax Justice in the US. It goes into details of the candidates' proposals.)

PS To all those gutless politicians and party strategists who lack the courage to confront the tax lobbyists head on (yes, Alistair, that includes you), take a look a this extract from Obama's recent speech in Indianapolis and see how strongly the public reacts to his call for tax justice. And why not follow that up with a quick scan of the Stop Tax Haven Abuse Act, which pretty much does what is says on the tin. The zeitgeist has shifted: Obama has sensed the change of public mood and he recognises that tax havens have played a major role in promoting injustice. And he's not alone.

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Is this what democray is made of?

Political donations are a problem, the world over. We know. Maybe it's unfair to single any particular party out (but we're going to do so in this blog, anyway.) This time, it's Britain's Conservative Party. No laws were broken, apparently (and the newspaper's lawyers surely insisted on that one, in holy fear of Britain's libel laws) but reading the article makes you kind of sick to the stomach.

We're interested, unsurprisingly, in the offshore angle in this recent Observer article. Here are a couple of excerpts:

"Big Ben Films' immediate parent company is Boldergate Ltd, registered in the British Virgin Islands. Boldergate in turn gives its ultimate parent company as Business Management Services Nominees Ltd, registered in another tax haven, the Antilles. The company's sole director is Johan Eliasch, a Swedish-born businessman who lives in London. He is reputed to be worth £355m and openly supports the Tories.

Michael Hintze, formerly a star trader at the investment bank Goldman Sachs, lent the Tories £2.5m in May 2005 through a Jersey-based trust called Morain Investments. A Liechtenstein trust, the Medlina Foundation, lent the Tories £950,000 in 2004 via the bequest of a deceased supporter of the party.
. . .
A donation of £50,000 was given in June this year by Sleepwell Hotels UK, which is owned by a trust in the Isle of Man. Latest accounts from 2006 show that it has not traded. Denham Eke, managing director of the trust, said the business was now trading and this would be reflected in future accounts."


You need to read the whole article to get a sense of this particular hole in British democracy. And this doesn't even take into account the shenanigans of Lord Ashcroft, the Conservative Party's top fundraiser, from his hidey-hole in sleazy Belize. The current Labour government is entirely captured by the world of secrecy jurisdictions. Could its political opponents, the Conservatives, ever be impartial on the offshore issue?

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A letter to Britain's Financial Secretary to the Treasury

TJN recently sent this letter:

Rt Hon Stephen Timms, MP
Financial Secretary to the Treasury
House of Commons
London
SW1A 0AA
24th October 2008


Dear Treasury Secretary

Re. Britain obstructing the upgrade of the UN Tax Committee

The Tax Justice Network (TJN) is greatly concerned that this week a British government official has sought to actively block international attempts to upgrade the United Nations Committee of Experts on International Cooperation in Tax Matters (the UN Tax Committee) from its current expert status to inter-governmental status. We consider this position to be wholly at odds with the Prime Minister’s recent comments to the UN General Assembly when he is quoted as saying: "We must now build a new global financial order founded on transparency not opacity, rewarding success not excess, responsibility not impunity and which is global not national."

The proposal to upgrade this Committee is a significant element in the current draft of the Doha Outcome Report currently under negotiation in the run-up to the Doha review of the Monterrey Consensus (as outlined in paragraph 10 the draft Doha Outcome Report). The proposal is supported by developing countries and many European Union countries.

The upgrade of the UN Tax Committee to inter-governmental status would inject an important political element into the work of the Committee, which is charged with responsibility for strengthening international cooperation in tax matters, for example through development of international norms for tackling tax evasion and trade mispricing.

TJN has discussed this issue with the British official and we are dissatisfied with the explanations offered for blocking this upgrade proposal.

On behalf of TJN I am seeking an urgent meeting with you to clarify whether the position articulated by the British official attending the fourth session of the UN Tax Committee in Geneva this week represents the position of HM Government or was the personal position of the official acting in his personal capacity. We consider the upgrade of this Committee to be an essential part of the Financing for Development process and we urge the UK government to support the proposal.

I look forward to hearing from you.

Yours sincerely,

John Christensen
Director


An official pdf version of this letter is here. We'll bring you more details on the UN Tax Committee shortly.

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Nazis and bank secrecy again

Recently we had Liechtenstein slinging the Nazi allegation at Germany, after the German finance minister, Peer Steinbrück, understandably criticised the little Alpine secrecy jurisdiction for helping wealthy German citizens evade taxes.

Now we've got a new Nazi slur, this time in the form of a communiqué from the right wing SVP party in Switzerland. Loosely translating an automatic translation, here's what the Swiss newspaper Blick had to say (original text here):

"Just a few days ago, the German finance minister Steinbrück, in the context of Swiss banking secrecy and a tax dispute between Switzerland and the EU, threatened to unleash his whip hand against Switzerland. Yesterday Steinbrück reiterated his stance and again took Switzerland to task for its lack of cooperation on tax evasion by German citizens.

Apparently the SVP had just been waiting for such harsh words from the neighboring country. Now they have decided to provoke back. On its website, the party writes: "With his whipping threats, Steinbrück reminds us of the Nazis in the 1930s."


Then, a note of moderation from the newspaper, with a wonderfully smoky turn of phrase:

"This is strong tobacco. Did the SVP really need to invoke the Nazi angle in the tax dispute with the Germans?"

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New study: Rich Cheat More On Taxes

Forbes magazine quotes a new study based on unpublished U.S. Internal Revenue Service data showing the rich are different when it comes to paying taxes: They hide more of their income.

"Those with true incomes of $200,000 or more received 25% of all income, but accounted for 40% of net underreported income and 42% of underreported tax in 2001, the new analysis finds."

and it added this:

"The previously unreported study estimates that taxpayers whose true income was between $500,000 and $1 million a year understated their adjusted gross incomes by 21% overall in 2001, compared to an 8% underreporting rate for those earning $50,000 to $100,000 and even lower rates for those earning less."


and this:

"The main reason for the income-related cheating disparity: Higher income folks receive more of their income from sources that are easier to hide, including self-employment earnings; income from rents, partnerships and S corporations; and capital gains."

We can't find a link to this study, unfortunately; apparently it has not been officially endorsed or even released by the IRS. Political dynamite, you see -- at a rather sensitive time.

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Subverting corporate responsibility

Take a look at the "corporate social responsibility" section on Wikipedia. Scroll through it for the word "tax."

At the time of writing (Wikipedia is changing all the time - and we encourage readers of this blog to go out and edit this entry now,) this was the most substantial section on tax:

"Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments and the wider public that they are taking issues such as health and safety, diversity or the environment seriously, and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay."

The only other one worth mentioning is this one:

"Critics of CSR also point out that organizations pay taxes to government to ensure that society and the environment are not adversely affected by business activities."

And that's it. Take a look again at the first one. What??? This Wikipedia entry suggests that CSR is, or even should be, a good way to distract us from tax and regulation. Astonishing!

As you might imagine, we have our own views. Our short web section (which we will expand in due course) starts like this.

"Tax is the missing element in corporate responsibility debates. Corporate responsibility should start with tax compliance."

Read on.
There's a revolutionary new approach to corporate responsibility out there. It's now time to grasp it.


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Tuesday, October 28, 2008

Apartheid companies, sanctions-busting and tax havens

We've been sent an interesting report about how South African companies eased their tax burdens, during and after the Apartheid era, getting special tax breaks, using shell companies in tax havens, and so on. Here's a sample:

"Historically, the largest transnational South African corporations possessed investment or paper companies in tax havens such as Jersey, the Cayman Islands, Bermuda, Luxembourg and – as will be briefly discussed below - the Netherlands."


The tax section is most detailed from page 17 onwards. It's a fascinating piece of history, looking at how these companies dodged exchange controls, expanded internationally in the face of international sanctions, and much more.

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SOMO's new report on tax and development

Guest blogger: Maaike Kokke, SOMO.

In a month’s time, the follow up International Conference on Financing for Development will be held in Doha. As one of the major forums where international tax issues are on the agenda, it is an important opportunity to consider tax problems for developing countries. This topic has not yet got as much attention as other key development financing topics such as trade, aid and debt. A good moment too, to bring it to the attention of a wider audience.

Developing countries lose an estimated $500 billion every year, just in illegal private outflows. This is and enormous amount when you compare it to foreign public aid inflows of $50 to $100 billion annually in recent years.

SOMO has published a new background paper on tax and financing for development. This paper (also click here) summarises tax problems in financing for development, and gives an overview of recent developments in international taxation. Focusing on corporate taxes, the paper explains common tax avoidance strategies in a detailed but non-technical manner, enabling civil society staff and policy makers to get familiar with tax issues and the importance of a fair international tax system that is supportive to development.

Since a lack of effective regulation and cooperation is a main cause of international tax problems, the paper includes recommendations regarding the policies of the OECD, UN, IMF, World Bank, EU, IASB and TG-7. Among the recommendations, we would like to highlight the development of a country-by-country financial reporting standard for all multinational corporations, since this would substantially increase transparency for investors.

TJN's comment: recommended.

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Monday, October 27, 2008

You've been robbed - short film

Please watch this short tax justice film, entitled "You've Been Robbed."

And pass it on.

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UK resists global governance

It's getting almost boring how often we have to take the UK to task over its resistance to any kind of international governance in the field of global finance. It's not just us saying it, though. Here's Willem Buiter, a highly respected economist and columnist in the Financial Times, delivering his latest (very welcome) broadside:

"The UK under Chancellor of the Exchequer Gordon Brown continued the tradition established by the Conservative Party since Margaret Thatcher of opposing any strenthening of the global coordination of national financial regulatory regimes. Brown, like the Conservative Chancellors before him, opposed with special vehemence, and and all initiative for common regulation, let alone supranational regulation in the one arena where it could have been delivered most easily: the EU."

In case you didn't see it, a recent blog of ours, written by John Christensen after a meeting of the UN Tax Committee in Geneva, gave a specific example of the UK's truly shameful stance:

"In light of the appalling growth of inequality, the steady decline of the ability of governments in poorer countries to fund essential services, and the social damage caused by tax evasion, the case for strengthening cooperation on tax matters is stronger than ever. Sadly, however, in Geneva on Tuesday I witnessed the sordid spectacle of three major tax haven countries, Belgium, Ireland and the United Kingdom, voting against a proposal to strengthen the role of the UN Tax Committee, flying in the face of the wishes of the developing countries, who voted en masse in favour. It is fair to say that the majority of the expert members, observer countries and civil society participants at the Geneva meeting seethed with anger at the naked power play by these tax haven economies."


Let's not forget, British Prime Minister Gordon Brown told the United Nations General Assembly in September that "we must now build a new global financial order founded on transparency not opacity." Yet Britain remains committed to obstructing progress in this important area.

Back to Willem Buiter:

"The UK, under Chancellor of the Exchequer Gordon Brown became a lead player in the regulatory race to the bottom through which nations tried to poach financial service industry activity from competing national centres or to stop their own financial enterprises from relocating abroad.

It is surprising that someone who was such a compulsive micro-tinkerer in the domestic labour market, in the domestic tax, transfer and subsidy structures and in the regulation of industries producing mainly non-traded goods and services, would when it came to financial markets and institutions, become such a devoted disciple of Alan Greenspan - the guru of self-regulation by financial institutions and of deregulation of financial markets and activity across the board. Indeed, Chancellor Brown even appointed Greenspan a special Adviser when Greenspan retired from the Chairmanship of the Fed early in 2006."

Adding this:

"the UK, under Gordon Brown as Chancellor of the Exchequer, became the leading protagonist, often even ahead of the USA, of self-regulation wherever conceivable for banks and other highly leveraged institutions, and at most light-touch regulation (i.e. soft-touch regulation) where self-regulation blatantly made no sense."

And, goodness, even more bile:

"Given Gordon Brown’s ruinous fiscal and financial stability legacy, Paul Krugman’s question in his October 12 New York Times column, “Has Gordon Brown, the British prime minister, saved the world financial system?”, can only be answered one way: no he has not. He has left a ruinous legacy of financial instability and lack of fiscal restraint at home. He has been one of the principal cheerleaders for the competitive international deregulation of international financial markets and of border-crossing financial institutions. He is one of the fathers of the crisis."

Phew! Here is a man who doesn't mince words.

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Tax and state-building in fragile states, new report

A short new report is available from the Danish Institute for International Studies. It's called Taxation and state-building with a (more) human face. This fits into a broader body of new research which is emerging, and in which TJN is involved. See more here.

The new report's new recommendations, aimed at people working in fragile states, are:
  • Tax issues should be dealt with up-front in post-conflict states, even if revenue yields may be modest to start with. "the challenges of building an effective state, a robust economy and a durable peace are closely related."

  • Taxes that suit local circumstances should be identified and tapped, even if they may notit the current global ‘best practice’ advice. "Currently advocated approaches to tax reform may not be appropriate. These emphasise the use of broad-based consumption taxes (e.g. VAT), simplified tax designs and improved tax administration, but shy away from using taxation to pursue issues of redistribution. An urban property tax, for example, is therefore often not part of the tax agenda. Yet, it targets the relatively well off, is presently often relatively low and is one of the few taxes available to urban authorities starved of funds (but not of tasks) by central government. Innovative ways of taxing the informal sector are important too."

  • Reduce/abolish tax exemptions for donors and their contractors/NGOs. "If donors are serious about state-building they should agree to pay part of their contribution to the recipient countries by paying taxes and duties just like everyone else."
The last recommendation, of course, will be controversial in the donor community.

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Sunday, October 26, 2008

Sunday Herald on tax havens and the economic crisis

More people are waking up to the link between tax havens and the current economic crisis, following our seminal article in The Guardian and statements by leaders and politicians around the world.

Scotland's Sunday Herald has published an excellent in-depth report on this. Part 1 looks at the fact that banks that have come under state (or partial state) ownership now, and should not be working to fleece the taxpayer through offshore tricks. They've been digging around, and found out things like this:

"The Royal Bank of Scotland Group, one of the so-called "jewels" of the Scottish economy, has beneficial shareholdings in at least 128 companies incorporated in tax havens, according to its annual return; included in its portfolio are 62 firms in the Cayman Islands, 29 in Jersey, 11 in Guernsey, seven in the British Virgin Islands (BVI) and four in the Bahamas."

TJN is quoted, of course. It's Part II which looks at the links with the economic crisis. It's right on the nail. Read it; we'll just highlight a couple of sentences:

"Even as the UK government has taken substantial stakes in the major banks, it has not challenged the use of the offshore tax havens which played such a prominent role in turbo-charging the credit bubble. As we reveal today, the network of offshore banking operations which have lost the taxpayer hundreds of millions, if not billions in much-needed tax revenue, are still in existence - now being bankrolled by the British taxpayer. Yes, we are paying banks to avoid paying UK taxes. The government's blind eye to these offshore scams has made a nonsense of attempts to regulate the banks and control irresponsible lending. The only politician who seems to understand what has been going on is the Liberal Democrat finance spokesman, Vince Cable, but his has been a lone voice calling for an end to tax haven status."


Well said. Note the language that runs through this edition: whereas many newspapers have been happy to play along with the offshore weasel words and phrases like "tax efficiency" and "tax innovation," we are heartened to see more thoughtful language being deployed: "derisory" tax rates, banks "connived" with wealthy clients, "offshore casinos" and so on.

The comments underneath this are worth looking at: almost all in favour of more transparency and other good things. We'll highlight a couple of ones we like:

"Well done to the SH for raising this issue. I get so sick of hearing people banging on about single mothers and benefits scroungers. Very rarely do we ever hear about tax evasion."


And

"An excellent article . . . which deserves a major newspaper campaign."

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Saturday, October 25, 2008

Rerum Novarum - a letter from Rome

Hotel Cisterna, Trastevere

23rd October

From John Christensen

I have just spent a remarkable day as guest of the Pontifical Council for Justice and Peace at the Vatican. Hosted by His Eminence Cardinal Martino, and chaired by Oscar de Rojas, executive secretary of the UN Financing for Development Conference, the study day brought together around a dozen experts on poverty alleviation, financial markets, governance and development issues to discuss the Holy See's preparations for the forthcoming Doha follow-up international conference.

In his opening address the Cardinal noted the moral and ethical dimensions of the current crisis. "The world today is overshadowed by a fragile peace and marked by broken promises" he said. "Too many people live lives without hope, with little opportunity toward realising a better future for themselves, their children and future generations." He also cited the first great social encyclical letter, Rerum Novarum, on capital and labour, issued 15th May 1891, in which Pope Leo XIII offered the following thoughts on development:

"Every programme geared to increased production must have no other end in view than to serve the human person, namely: to lessen inequalities, to remove discrimination, to free men from the bonds of servitude and to enable them to improve their condition in the temporal order, achieve moral development, and perfect their spiritual endowments. When we speak of development, care must be given both to social progress and economic growth."

It is worth reflecting on how far development studies, particularly the crude, mathematically based economics of the past century - rightly lampooned by the post-autistic economists - have strayed from this inspirational advice. Listening to Cardinal Martino, I was struck by the enormity of the gap between the sentiments of the early economists -- many of whom rooted their studies in the field of moral philosophy -- and the debased ethics of Capitalism v2.2, which were superbly summed up by TJN's friend and colleague Raymond Baker, who has described the current state of globalisation as follows:

"For the first time in the 200-year run of the free-market system, we have built and expanded an entire integrated global financial structure the basic purpose of which is to shift money from poor to rich. [It is] the ugliest chapter in global economic affairs since slavery . . ."

Neither Raymond nor I are anti-globalisation, far from it, we both favour free and fair trade, but the globalisation model pursued since the late 1970s has drastically over-emphasised capital market liberalisation and de-regulation, and we are now witnessing the inevitably outcome of this lack of understanding of how financial capitalism can run amok.

Much of today's discussion has focused on the financial market crisis, which is increasingly tending towards catastrophic proportions for many poorer countries. There was complete agreement that lax and fragmented regulation had exacerbated the irresponsible behaviour of the banking community. Tax havens were identified as a weak link in global regulation, forcing the process of the deregulatory 'race-to-the-bottom.'

Tax evasion was also discussed at length, and the audience were visibly shocked by the scale of this problem and its impact on poor people. I am hopeful that the Holy See will have some strong words to say about the morality of the tax evasion and avoidance industry. In his summing-up Oscar de Rojas commented that international tax cooperation must be made a central feature of Capitalism v3.0.

In light of the appalling growth of inequality, the steady decline of the ability of governments in poorer countries to fund essential services, and the social damage caused by tax evasion, the case for strengthening cooperation on tax matters is stronger than ever. Sadly, however, in Geneva on Tuesday I witnessed the sordid spectacle of three major tax haven countries, Belgium, Ireland and the United Kingdom, voting against a proposal to strengthen the role of the UN Tax Committee, flying in the face of the wishes of the developing countries, who voted en masse in favour. It is fair to say that the majority of the expert members, observer countries and civil society participants at the Geneva meeting seethed with anger at the naked power play by these tax haven economies.

Despite the fine words of Prime Minister Gordon Brown, who told the United Nations General Assembly in September that "we must now build a new global financial order founded on transparency not opacity", Britain remains committed to obstructing progress in this important area. Deeds, as always, count more than words, and the rich and powerful countries remain committed to a global financial order that is neither stable or progressive.

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Thursday, October 23, 2008

Blood, tax and oil

Today's blogger has a long letter published in the US publication Foreign Affairs, focusing on the governance problems faced by troubled mineral-rich states such as Nigeria or Iraq. It responds to an earlier headline article by Michael Ross about the so-called "Resource Curse" or "Paradox of Plenty" whereby money from minerals like oil not only seems not to have brought prosperity, but has actually made things worse in producer countries, especially the poorer ones.

The letter's analysis of the phenomenon has a strong tax element, but it also overlaps significantly with TJN corruption analysis, which is steadily becoming more widely disseminated. The relevant section of the Foreign Affairs letter goes like this:

"The essence of the problem can be summed up in one word: fragmentation. In many resource-rich countries, politics involves vertical relationships of dependence based on the central source of wealth, and factions compete (or fight) for their share in a grand zero-sum game. This behavior is highly divisive, politically and socially; it reinforces existing fractures, such as ethnic, religious, or regional rivalries, and generates new schisms. As resources flow (or trickle) downward, politics splinters at all levels, from the high echelons of power to the village and even the family level. Other sources of economic rents and aid can have similar effects.

Contrast this with a country such as Denmark or the United States, where wealth is widely distributed, leading citizens to cooperate through trade and in markets and form horizontal relationships that compensate for natural fragmentation. In such countries, governments tax citizens directly, which provides an institution-building stimulus and creates the "no taxation without representation" political bargain that helps build accountability and consensus -- and further counteracts fragmentation. In oil nations, where rulers mostly tax oil companies and can ignore their citizens, no such repairing happens.

Civil war is an obvious result of the fracturing effect of oil, but it is not the only one. Corruption, which involves the promotion of personal or factional interests at the expense of the wider or national interest, is another. Oil-fueled fragmentation, by reinforcing narrow interests and weakening broader ones, is at the heart of the bad governance prevalent in oil states. The degeneration of a nation such as Nigeria into widespread corruption is analogous to the collapse of a well-ordered queue and the ensuing scramble of people trying to get to the front -- the participants have lost faith in one another and in the system. Since this breakdown of social trust is systemic, neither enlightened leadership nor law enforcement measures can solve it.

Rulers in oil-dependent states seek to repair the fissures either by carefully deploying resource-based patronage (buying off restive factions by allocating goods to them) or by exercising greater authoritarianism, which is relatively easy as oil wealth funds their instruments of repression. Oil, poured over Iraq's existing political divisions, helped make Saddam Hussein so brutal. Thus, in oil-dependent nations, conflict, corruption, authoritarianism, and the poverty that results are best understood within an overarching framework of fragmentation and lost social trust.

Systemic approaches and ones that address the tax problem directly -- such as the proposal to distribute oil revenues directly to a country's citizens, which was advocated by Nancy Birdsall and Arvind Subramanian in these pages a few years ago ("Saving Iraq From Its Oil," July/August 2004) -- can be fruitful. The standard remedies, such as oil funds, economic diversification, transparency, and even the Chinese-style barter that Ross mentions, may help at the margins, but nowhere have they decisively reversed the oil curse.

The many objections raised against direct oil-wealth distribution are mistaken, except for one: it would be a tough thing to do. Direct distribution would be inappropriate or impossible for many countries and hard to implement in the places where it might be done. But reversing the effects of the oil curse in poor countries without direct distribution would be harder still. It is time for someone to assess how and where to try direct distribution in a developing country, then do it, and show it can work. It will then get easier to implement elsewhere -- and at last the turmoil, corruption, and brutality can be curbed."

This argument about direct distribution is a personal view, and does not necessarily reflect (or not) the core views of the Tax Justice Network. Comments and criticism, as always, are most welcome.

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The tax haven debate - on TV

Daniel Mitchell of the Cato Institute, whom we have blogged several times recently, has taken part in a lively debate on France 24 international television, along with Alex Cobham of Christian Aid, Andreas Missbach of the Berne Declaration, and Jean Meckaert of the Comité Catholique contre la Faim et le Développement (CCFD.)

The debate, entitled "Should Tax Havens be Banned?" is in English. (Part II is here.) Enjoy.

An e-mail from someone who watched it said this:

"I think this was the real Dan Mitchell, as I interviewed him once myself, but otherwise I would have had trouble believing he was real, and not some comic impersonation. He argued for protection of the tiny number of people who happen to have a lot of money from what he calls `the tyranny of the majority'!! Well done France24, I wish the BBC would have this kind of debate."

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Juncker's TV courage

Luxembourg has a nasty little tax haven racket running in the centre of Europe. Now Arlette Chabot, information director for French TV station France 2, has written - perhaps was forced to write - a craven apology to the Luxemourg Prime Minister, Jean-Claude Juncker, after her station had the temerity to suggest that not all is well in the little tax haven state.

How about this for an apology?

"Our report was facile; even in bad taste. I beg you not to consider our report as a new example of French arrogance, but rather as a professional lapse . . . in light of your availability, and your courage in the face of journalists' questions, I must apologise."

Poor Mr. Juncker, having to answer questions in front of journalists. See the original report, and the letter, here. Not so long ago we blogged Juncker's weasel words, highlighting his eagerness to fight against efforts to increase transparency in Europe.

"I look forward to many years of fascinating and fundamental discussions."

At the time, we said this:

"Shame on Mr. Juncker. This is perhaps the main tactic - delay - that the secrecy jurisdictions and purveyors of global crime and corruption will wield in their fight against transparency and in their efforts to continue undermining the rights of fellow sovereign nation states to decide their own tax affairs."

This time, we will just say this: Shame on you, Arlette Chabot, or whoever put you up to it.

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More people waking up to the link between tax havens and the financial crisis

We have made the case clearly why tax havens, and tax and regulatory competition, are right at the roots of the evolving financial crisis. We recently noted officials at the IMF and the OECD, and the leaders of France and Germany lining up behind our analysis.

Today, the FT has this:

"As recriminations fly over the world’s banking crisis, the role played by flawed tax policy may not escape scrutiny for much longer. Tax breaks that encourage debt and risk-taking may not be the prime cause of the conflagration but there is plenty of evidence that they added fuel to the blaze."

And then, a bit later, this:

"Tax havens are also facing criticism for oiling the wheels of the shadow banking system. They provided a tax-neutral platform for creating the off-balance-sheet structured investment vehicles that played a big role in the late stages of the credit bubble. The offshore centres can argue they were not the root cause of the crisis. But they are implicated in the wider failings of the regulatory system and financial institutions that used them."

We have had the legendary crime-fighter Robert Morgenthau agreeing with us. Now there's Jeffrey Owens, head of the OECD's tax department, saying:

"Jeffrey Owens, head of the tax policy unit at the Paris-based Organisation for Economic Co-operation and Development has called on governments to consider tax reform as part of their policy response, arguing that offshore centres should come under renewed scrutiny. “The key words are transparency and integrity,” he says."

Plenty of the offshore cheerleaders, such as from the Sovereign Society (whom we blogged yesterday) continue to brand all of these bodies - including the OECD, for goodness' sake, "leftist".

An offshore counter-attack is, inevitably brewing. The United Kingdom, according to Accountancy Age magazine, is scrambling to find ways to fight the pressure. They recently put in a shocking -- quite shocking -- performance at a meeting of the UN Tax Committee this week (which some TJN members attended; we will tell you about it before too long.)

Switzerland's newspaper 24heures had this to say:

"The 17 OECD states that declared the tax paradise hunt open will certainly target Switzerland," it said. "Nothing in this world lasts for ever – not even Swiss banking secrecy!"


Sovereign Society this morning, while peddling its "Swiss Secrets" captured the spirit:

"Take action concerning offshore financial matters rather quickly -- because time and your liberties may be running out. You really do need to think hard about what you should do now."

It's not going to be pretty. If enough people wake up, and stand up against this menace, the world may end up a better place.

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Wednesday, October 22, 2008

The OECD encourages tax competition

Grace Perez-Navarro, deputy-director of OECD’s Centre for Tax Policy and Administration, has been speaking about the organisation's work on transparency and tax matters. She said:

"We’re not preventing it – we encourage tax competition. We like to see competition on the basis of rates, the economy, and the services that countries provide."

We have already demonstrated on several occasions (see here, and associated links, for example) that the widely propagated notion that because market competition is good, tax competition must be good too, is entirely bogus. It rests on an economic fallacy, and anyone who has given it some thought would agree. Don't listen to us, though: here are words from Martin Wolf, the Financial Times' chief economics commentator.

"The notion of the competitiveness of countries, on the model of the competitiveness of companies, is nonsense."

It should be noted that ever since the OECD launched its Harmful Tax Competition initiative in 2000, and the change of administration in the US the following year, the OECD has been back-pedalling ever since, under tremendous pressure from George W. Bush's government.

TJN's director, John Christensen, has confronted OECD officials several times in the past and asked them outright: where does harmful tax competition end, and where does beneficial tax competition begin? It is, of course, a trick question: it is all harmful, for it is an amorphous, depersonalised set of forces in the international economy which forces countries to change their laws, usually against voters' wishes. Nevertheless, no officials from the OECD have ever been able to answer his question.

TJN calls on the OECD's tax department to answer Christensen's question, providing detailed reasons why they believe they are right. We won't hold our breaths.

In fairness, and as Perez-Navarro explains, the OECD is trying - timidly, in the face of ferocious lobbying from the secrecy jurisdictions (some of which are OECD members) at least to try and roll back some of the secrecy. This is commendable, though progress has been feeble so far.

Also in fairness to the OECD, its Secretary-General, Angel Gurría, was entirely frank in giving reasons for a lack of progress. Speaking in Paris yesterday, he said:

"The OECD work was initiated by G7 Finance Ministers in 1996. The intention was to identify tax havens, list them, and apply countervailing measures quickly, but tax havens persuaded us to move to a more co-operative approach."

And we also welcome these words from him, speaking at a conference on tax evasion:

"The OECD has been undertaking exhaustive (and exhausting) studies on defensive measures. We know what works and what doesn’t work and we have ideas on what new measures could be taken. It is now for you to decide how to create the political climate that will convince the tax havens that have not implemented these standards to do so and to do so quickly. Your political leadership is called upon to make change happen."

And it is very welcome, too that he noted this:

"It is important to recognize that this is a problem, not just for the rich countries, but also for the poor countries of the world, as can be seen from the fact that cross-border tax evasion will figure very prominently in the debate in Doha in six weeks’ time."

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Sovereign Society's toadies, liars, charlatans

(Update: Tax Haven debate with Dan Mitchell on TV.)

We have, predictably, come under attack from certain well-funded quarters, particularly as a result of our analysis showing how tax havens and tax and regulatory competition lie behind the emerging global economic crisis. (See this Guardian article, for example.)

One such attack yesterday came from the so-called Sovereign Society. They don't disclose who is behind them but we believe that at least one offshore bank is involved. The advertisement at the end of the column, saying "I tell you Where To Stash Your Cash" and "If you're interested in Switzerland, Click here for Swiss Money Secrets" - gives us some clue where they might be coming from.

This kind of attack on us is no bad thing, really, for the force of it comes in the form of smears. It revels in words and phrases such as:

"toadies, loonies, liars, seriously insane, blatant lies and phony statistics, "concerted global force of legions of tax collectors, backed by police state might," anti-capitalist, far left, drivel, "leftist journalists regurgitate this, while lazy editors fail to question," screed, load of rubbish, socialist charalatans, grabbing a free publicity ride . . ."

And so on. There's also a nice picture of a tax collector with horns, which we reproduce in this blog. We're quite happy with this kind of attack, because smears are the refuge, and the mark, of people who have lost the argument.

This isn't the only attack, though. Sovereign Society (a strange name for an organisation that seeks to promote people and organisations that undermine the sovereignty of nation states around the world) has also quoted the friendly Dan Mitchell of the Center for Freedom and Prosperity, who has also taken us to task for the same article. Mitchell, to his credit, seeks to engage with our arguments directly -- though he isn't averse to a smear or two.

We'll reproduce Mitchell's contribution here, and supply our answers to his points. First, though, a few words.

Mitchell's approach, in several areas, is to misrepresent our position, and create an Aunt Sally which he can then knock down. Also, he and his friends have, for years, actively and aggressively set out to undermine the frameworks for international co-operation that might have helped mitigate or even avert the current crisis, and which have contributed to the widening inequality that threatens social stability. He also seems to premise his argument on the simple formula regulation = bad, deregulation = good. We would suggest that he reads a few newspapers. Not many people would agree with you these days.

We should also note that "leftist" is a common smear tactic - but what's leftist about TJN? We favour transparency, and we oppose corruption and secrecy, and we want to fix global markets so that they work better, with fewer distortions. What's leftist about that? As Richard Murphy said:

"This is not a left / right issue. This is an issue for all those who want to create effective market economies. And it is one for all those who realise that a pre-condition of effective market economies is a fully functioning government."


We have any number of answers to each of Mitchell's points, and for brevity's sake we'll only include a few here. The bits below, entitled TJN1 in small print are from our original article; we then reproduce his responses in italics, and follow it with our own responses, under TJN2.

1. TJN 1: The global economic crisis means financial re-regulation is, finally, on the agenda. Most agree it is needed on a global level.

Mitchell: Since the financial services industry already is subject to very heavy regulation, it is strange to state that re-regulation is on the agenda, but it certainly is true that politicians will use the turmoil that they created as an excuse to impose more red tape and restrictions. The more troubling phrase is this passage is the assertion that regulation is needed on a "global level." This would be a spectacularly bad idea since it would increase systemic risk. In short, if all nations get dumped into a one-size-fits-all regulatory straitjacket, then the inevitable government mistakes will have a negative impact on the entire world's financial system (in much the same way, for instance, that the global Basel rules encouraged over-securitization).

TJN 2: This is just plain wrong, for several reasons. First, it confuses specific regulations (the stuff that got usinto this mess) with all regulation. Indeed, there is plenty of regulation out there. But the banks that got us into this mess side-stepped specific parts of this – the bits that, say, required them to hold adequate capital. They did this through off-balance sheet manoeuvres (which doesn’t necessarily have to be done offshore, but in practice was always done offshore, where they could escape the regulatory constraints that they didn’t like.) Competition between jurisdictions to outdo each other on laxity pushed the offshore model deeper and deeper into the onshore jurisdictions – the City of London being a case in point.

Second, he says regulation at a global level “would increase systemic risk.” It is easy to swallow this, if you don’t think about it too hard. Take a system, any system. Try to regulate it, to guard against systemic risk. There is no point trying to regulate just a part of it: you have to regulate it all. If there is a part of the system that allows the players to escape the regulation, then . . . well, the regulation against systemic risk will fail. It’s really quite simple. When dodgy loans in Florida blow up Iceland's economy, you clearly need a co-ordinated, systemic approach. Who ever disagrees with this? Here is just the latest of many statements about global regulation, this time from the French Prime Minister: "Today there are financial institutions that escape regulation. Certain banks aren't regulated at all. Today there are tax havens that avoid all rules. Today there are prudential rules that aren't the same from one country to another, from one continent to another. And that creates imbalances and competitive distortions." And if you think this is just a French thing, the same Reuters story quotes the Canadian Prime Minister as saying pretty much the same thing, just as many others have done. Or ask Tom Davis, the senior Republican on the congressional committee now looking into the mess. What allowed the crisis, he said, was "the mish-mash of regulations and regulators, each with too narrow a view of increasingly integrated national and global markets." It is probably a stretch, even for you, to call this leading Republican a leftist. It’s a no-brainer, Dan Mitchell. TJN's advice: when you're in a hole, stop digging.

2. TJN 1: the essence of the problem: tax havens. The offshore world created the conditions that led to this crisis, and unless the offshore world is tackled, it will undermine all efforts to deal with it.

Mitchell: Morgenthau may want to bring a charge of plagiarism against the TJN guys, since they copy his tactic of blaming offshore centers while providing zero evidence.

TJN 2: Evidence? Evidence? Look around you, Dan Mitchell, and take your pick. See here, here and here, just for example. It’s like coming to the scene of a car pile up, on a road covered in black ice, and watch more cars skidding and colliding. Then saying “where’s the evidence that black ice caused this? The problem is that the cars were driving too fast.” Well, yes, and it probably depends on what you mean by "evidence."

3. TJN 1: tax havens set out deliberately to "undermine the impact of legislation passed in other jurisdictions". This is their core business, and this is the threat they pose to the world. The impact of this is now visible in the economic crisis.

Mitchell: So-called tax havens did not set out to "undermine" the laws of other nations. Indeed, most offshore centers have always had low taxation and privacy protections. What's changed is that politicians in "onshore" nations have become progressively more greedy, and this is causing an exodus of jobs and capital.

TJN 2: This is a trick routinely used by CFP – if you say it often enough, many people will believe you. Ok, then let's put it like this. Tax havens deliberately set out to undercut, and hence undermine, legislation passed in other jurisdictions." Happier now? If you don’t believe that tax havens deliberately undermine the laws of other nations, and that is their very reason for existence, then you’re simply blinded by ideology and unwilling to think for yourself. It's what they do for a living! Here’s just one example from Jersey, which amended its laws in 2006 to allow the creation of “sham” trusts – laws which involve “enhanced protection of Jersey trusts from adverse foreign court judgments” and “barring the application of all foreign laws to the determination of any of these issues." Or see here, for another example.

4. TJN 1: The banking system has ceased to function because banks do not trust their peers' finances, structures and accounting disclosure. Opacity has been at the heart of the matter, and it is secrecy jurisdictions that create this opacity.

Mitchell: This is an amazing claim. Onshore financial institutions have bad assets. Everyone knows which assets are bad. The problem is that nobody knows the market price of these assets, in large part because governments are hindering market forces. Yet somehow this is the fault of privacy laws in the offshore world! The Guardian is a leftist newspaper, but certainly they must have some standards for the columns they feature. If they print this drivel, apparently not.

TJN 2: Everyone knows which assets are bad? Check the financial pages over the last few months. Go on, read them. Leftist? Is it leftist to worry about crime and corruption? Is it leftist to seek to fix markets and nation states’ capabilities to deliver the tax and regulatory systems that their voters want? Is it "leftist" to want to make markets function properly and cleanly? Are the IMF and the OECD “leftist” (see here)? Only if you are so far to the extreme right do these institutions seem leftist. Which must be the case: Mitchell has accused the OECD (in particular) of being this way.

5. TJN 1: they create uncertainty about who owns what. Offshore entities were used to isolate ownership of financial vehicles from onshore parents to secure higher credit ratings.

Mitchell: The ultimate owner of a bad mortgage is irrelevant. Indeed, to the extent that foreigners (in the offshore world, China, or anyplace else) own some of the toxic assets, they can be faulted for making bad investments. But that's hardly a sin. Moreover, if onshore regulators do not count the assets and liabilities of foreign subsidiaries, that's hardly the fault of the jurisdictions where those subsidiaries operate.

TJN 2: “The ultimate owner of a bad mortgage is irrelevant” Is it really? Now that half the banks in the rich world have collapsed, can you really make that claim? “if onshore regulators do not count the assets and liabilities of foreign subsidiaries, that's hardly the fault of the jurisdictions where those subsidiaries operate.” Is that so? Indeed, governments should try harder to regulate those subsidiaries. But the fact is, they haven’t. Why not? In large part because of the poisonous deregulatory ideology spilling out of organisations like the Center for Freedom and Prosperity (which should really be called the Center for Freedom and Prosperity, But Only For Our Friends,) and partly because of competition between jurisdictions – meaning that onshore centers quail at applying such measures for fear of scaring away the free-riding hot money. But Mitchell has been cheering on this competition between jurisdictions! If he believes onshore regulators should count the assets and liabilities of foreign subsidiaries, and stop tax haven abuse that way, then he should say so! (And we’d agree with him.) What is the generic answer to a free-rider problem? Co-ordination! Which, in this case, can only mean one thing: a global response, and global co-operation.

6. TJN 1: Companies have spread complex structures across jurisdictions to exploit regulatory gaps. Even if each haven's claim to be properly regulated were true, the regulation of such firms falls between stools, since each jurisdiction only accepts responsibility for what happens in its domain. Regulation cannot function in such a world - a fact the failing banks exploited.

Mitchell: As Sarbanes-Oxley and other initiatives indicate, nations have plenty of ability to impose regulations. And those regulations can be an extensive and as intrusive and as costly as politicians desire. Moreover, there is nothing to stop politicians from imposing regulations that require domestically-based companies to treat foreign-based activities as if they were domestic-based. The only thing that regulators cannot do is impose their policies on foreign entities operating in foreign jurisdictions. This, needless to say, is a good thing. It protects sovereignty and forces governments to compete with each other since they learn that senseless regulatory burdens simply drive economic activity to jurisdictions with better policy.

TJN 2: See our answer in point 1 about confusing specific regulations (the stuff that got usinto this mess) with all regulation, and take if from there. It applies just as well here. And see the last point, too.

7. TJN 1: we must gear up for a global fight against tax havens. In the long term this push must stop regulation being embedded in a context riddled with powerful actors deliberately aiming to undermine it. More immediately, it must help policymakers address the crisis's fallout by giving them back powers to tax wealth and capital properly.

Mitchell: The authors get credit for honesty in the conclusion. They admit their real goal, which is to attack free-market jurisdictions. Moreover, notwithstanding the alleged concern about regulatory gaps, they further admit their real goal is to give politicians more power to increase the tax burden and worsen the tax bias against income that is saved and invested.

TJN 2: Mitchell gets credit for honesty in his response. He admits his real goal, which is to attack democracy by stopping governments from having the freedom to respond to voters’ choices, and to worsen the tax bias against ordinary folk who work hard for a living.

A last word from TJN's Richard Murphy:

"Free markets work on the basis of open access to markets and free availability of information. Remove those conditions and you get ones in which monopoly survives i.e. market abuse. This is exactly what secrecy jurisdictions seek to create: an environment in which there is inequality of access to capital, information and markets by the creation of secrecy and artificial factors of production providing some an unfair advantage to ensure they make super normal profits, so undermining the credibility of the market system as a whole. The actions I promote are intended to create effective, workable, efficient markets. Not the monopoly advantage for a select few that the Sovereign Society promotes."

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