Friday, November 28, 2008

New FFD report in Spanish

We recently blogged an important new report from SOMO in the Netherlands, about tax and financing for development. Now the report is available in Spanish, here.

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Links - Nov 28

** Also see TJN's searchable historical news archive; and Offshore Watch for more stories. **

The Return of Larry Summers
Lawrence Summers, the incoming director of the National Economic Council, may push the Obama administration to work with foreign governments to crack down on tax shelters.

Mobuto Sese Seko's funds unfrozen
Nov 23 (news24) – Part of the Swiss fortune of the late African dictator Mobutu Sese Seko will be unfrozen by the middle of December and returned to his family members, and not returned to the country from which they were looted.

UBS poised to name US tax dodgers
Investors heard for the first time that the world's biggest wealth manager looked poised to bow to US pressure and release the names of an unspecified number of US customers who may have committed tax fraud. But in noting the discovery of tax fraud "under both US and Swiss law", Mr Kurer added: "Contrary to the idea conjured up in public discussions, bank secrecy is not absolutely valid. It is not there to protect cases of tax fraud."

Haven on Earth II: Revenge of the Havens
A wealth manager looks at why some of the major tax attract tax dodgers and others: Singapore, Switzerland, Monaco, Luxembourg, France.

Britain's bribery laws to be overhauled
Nov 20 (IHT) - Employers who turn a blind eye to corruption face up to 10 years in jail as part of a radical overhaul of Britain's bribery laws proposed by the British Law Commission on Thursday.

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Thursday, November 27, 2008

Source and residence: the UN and the OECD

Following Angel Gurría's mostly good article in the Guardian today, and in advance of the forthcoming Doha conference, we think it's important to point out a crucial aspect about global taxation. Who calls the shots in the global tax system: the UN or the OECD?

The first answer is neither: they are both badly undermined by the forces of secrecy and abusive taxation, who exert a powerful influence on any body that might be able to act on a multilateral basis.

But these two organisations are, still, very important, and they will become more so. The purpose of this blog is to highlight some crucial differences between them. This is important. But first, a bit of background.

Developing countries have been the big losers from current systems of international taxation in several ways. The recent Christian Aid report outlines some important factors. But here are some things we'd like to draw attention to.

Developing countries are the most vulnerable to the global infrastructure of secrecy (discussed amply by TJN elsewhere) because they have least capacity to use the already very limited global mechanisms available to track and recover stolen or lost public assets. Taxes that have been evaded and avoided, and the larger capital flight that often underlies them, are the largest form of stolen or lost public assets, by a long way. A broad approach to increasing transparency in international taxation is essential, for rich and poor countries alike.

Also, there is a big difference between two models of international tax agreements, with truly huge implications for developing countries. Essentially, there are two ways to levy taxes in cross-border transactions. One is to tax it at source – where the taxable income is generated. The other way is to tax it on a residence basis - where the person who receives the income is based. If you don't know about this, it is worth getting your head around the idea, because it is important. The basic principles aren't that difficult to understand.

Essentially, the countries, with all the capital (the rich ones) prefer the residence-based model of taxation. That is because when one of their companies (let's say an American company, for example) invests overseas, say in a developing country: let's say Tanzania, for example. The Tanzanian subsidiary of the American company makes profits, and then the question arises: who gets to tax the profits? The country that is the source of the profits -- Tanzania? Or the country that is where the company has residence --America? (See here for a TJN briefing paper with a fuller discussion of issues in source- and residence -based taxation.)

It would be unfair to apply both kinds of tax (or tax would be levied twice on the same income) so countries sign bilateral tax treaties with each other -- to reach agreement on how taxes are levied. These treaties are based on two models: the OECD model treaty, which emphasises residence taxation (preferred by capital-exporting rich countries); and the United Nations model treaty, which emphasises source-based taxation, which is more favourable to (capital-importing) developing countries. (the more technical-minded might like to look at this brief slide presentation for more details.)

The way these models are applied has major implications for the Finance for Development (FfD) process, of course. Although a balance has theoretically been reached internationally between the two models, in effect the OECD model favouring capital-exporting rich countries has predominated over the UN model favouring developing countries. So at the end of the day, the rich countries get the lion's share of the taxes generated in poor countries. Is this unfair? Many people think so. As one authoritative analysis put it:

“Developed, capital-exporting countries have stacked the accepted rules of the international tax system in their favor… the source country's superior right to tax the income is a platitude, recited before it is taken away.”


And, reporting on a conference on these issues, the same analysis reported that

“There was nervous laughter when one speaker implied that the United States uses the OECD to do its dirty work in preventing source taxation and other impediments to what other speakers called ’fiscal imperialism.’”

Another analysis told this story:

""Fiscal imperialism," some of the South American hosts hissed at their smug developed-country guests. The OECD model treaty, the chief instrument of this policy, grants superior taxing rights to capital exporting countries, redistributing homeward the tax base of the countries that host their investors."

They seem to have a point. However, a purely source-based model (or a purely residence-based one) would in practice be hard to protect against abuse, so the best option to preserve the revenue bases of both developed and developing countries is a compromise between the two, but one that gives primacy to source-based tax while keeping the option of residence-based tax.

What is really needed is a joint approach by both developing and developed countries, to tackle the problem of avoidance and evasion which affects them all. The UN Tax Committee is mandated to look at, among other things, the tax treaties between developed and developing countries. The main problem with the UN Tax Committee – which could play a very profound role in reducing poverty in developing countries – is a lack of political will to tackle the issues, and a lack of resources to work effectively. This is why it is so essential for international civil society to engage. The UN Tax Committee must now be strengthened, and urgently. Read more here.

There are several ways that these issues could be tackled. One would be to improve the way information is exchanged between tax authorities. Currently, under the prevailing OECD model, information is exchanged only on request. In other words, you must know what you are looking for before you request it. What is more, the models that are used are based on bilateral, not multilateral treaties. Bilateral treaties are certainly better than nothing; but they have been adopted only in a very piece-meal way. While there are thousands of bilateral tax treaties between the world’s rich countries, developing countries (largely because of a lack of capacity) have signed very few indeed, meaning that these mechanisms for protecting their domestic tax bases are not available to them. A multilateral approach that includes developing countries would be far better. The OECD is pushing the bilateral approach: a UN approach could, if designed and used properly, be much more far-reaching.

It is essential to move to a state of affairs where information is exchanged automatically, and on a multilateral basis.

An effective way to bring about co-operation would be to impose witholding taxes at source on payments to countries that do not co-operate. This would need to be done in a co-ordinated fashion (the UN might appropriately play an important role here) in order to avoid the problem where the funds are simply driven to another country, and if done globally it would address a suspicion that only the wealthiest countries would benefit. It would require, among other things, a change in political will on the part of some rich countries (such as Britain and the United States) which attract capital from developing countries to their countries through offering secrecy facilities.

Another promising approach is to tax global businesses such as transnational corportions (TNCs) on a unitary basis, under which their tax basis would be apportioned according to a formula that would fairly take into account how much their activities in each country make to their global profit, which is then taxed accordingly and the resulting tax income shared according to where this is generated. European countries are already working on this.
More generally, it is essential to re-define the goals of the international tax regime. The UN Tax Committee could play a useful role here.

And finally, for this blog, it is essential that the UN formulate a code of conduct on taxation. This has to come from the United Nations, and not from the OECD or any other body. While codes of conduct are "soft", non-coercive measures, they can be enormously influential. A UN code of conduct could become a really important benchark against which the secrecy jurisdictions and the facilitiators: the bankers, accounting firms, legal firms, and so on, can be judged. The UN has now asked Prof. Mike McIntyre to write a draft UN Code of Conduct. This is not something that is to be passed at the forthcoming Doha meeting, but it is coming. The people in the black hats will hate it. McIntyre wrote an article about this for our newsletter, Tax Justice Focus, here. Read it, and support it as strongly as you can as it rises up the agenda.

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The morning after the night before

It's quite astonishing how far and how fast the Tax Justice agenda has spread. It's amply in evidence in an important new report on the financial crisis, just published by Christian Aid, entitled "The morning after the night before: The impact of the financial crisis on the developing world."

Christian Aid prepared this report for the International Conference on Financing for Development, just about to start in Doha, Qatar.

The report contains too many things to boil down and summarise here. Read it. At this stage, we'll just identify a couple of things. The first, and this is crucial:

"However bad it is for richer nations, it is the poor and vulnerable in developing countries who will suffer most from this financial crisis."


We cannot emhasise this too much. And take a look at these:

"Christian Aid has examined the impact of different income streams on poorer countries. In this report we conclude that nations struggling to find a way out of poverty benefit far more from revenues from taxes that they themselves impose and collect than from any other source of income."

Very well said. And we'd highlight these two main points, at the end of the report's summary.

"Before the present crisis struck, experts were already warning that while significant progress towards meeting the MDGs (Millennium Development Goals) was being made, ‘urgent and increased efforts’ were needed, particularly in sub-Saharan Africa. Reforming the global financial system would help answer that rallying cry. The need for that effort is now more urgent than ever.

Two giant steps forward would be:
  • to introduce a requirement that businesses that operate transnationally must reveal publicly what they pay in tax in every country where they do business. That way abuses can be quickly identified

  • To reach a global agreement that will lift the cloak of secrecy that tax havens offer, forcing them to share information with tax authorities in other countries.
With those two measures in place, future crises can be averted and the battle against poverty can take on a new momentum.

Read on.

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Return of the cavalry: OECD attacks tax havens

We have criticised the OECD on many occasions in the past. But it has also done, or tried to do, many good things in the fight for better tax co-operation - though their best efforts have so often been eviscerated by the tax haven lobbyists and, above all, by the U.S. administration of George W. Bush.

If we were making a Western shoot-em-up movie, with baddies in black hats and the forces of good in the white hats, we'd cast the OECD as a flawed character, who loves to hobnob with the rich folk in town but nevertheless wears a white hat.

Angel Gurría is secretary general of the Organisation for Economic Cooperation and Development (OECD.) He has just written an article in The Guardian newspaper, which puts him squarely in the white hat brigade. This is surely a sign that the election victory of Barack Obama has given great courage to the OECD to re-join battle against "harmful tax competition," after being almost entirely sidelined during the last eight years.

His article is well timed too: it comes out just before the start of the summit meeting of world leaders in Doha, Qatar, from November 29.

In fact, we like Gurría's article so much that we will reproduce it in full in this blog (we hope The Guardian won't mind.) Still, we do have some criticisms of the article. Read it first, and we'll comment more, underneath.

The global dodgers
Commitment to aid flows must be combined with a crackdown on tax havens, and Britain can do more

* Angel Gurría
* The Guardian, Thursday November 27 2008

The global economic slowdown will hit the poorest nations hardest. Demand for their exports is falling. Prices of raw materials are plunging. Flows of money from migrant workers to families back home will shrink as unemployment rises elsewhere. In these circumstances it is more important than ever that rich countries deliver on aid promises. That is why the OECD has called on the world's main donors to join an Aid Pledge to stick by their commitments.

As world leaders head to Doha for a UN meeting on financing for development this Saturday, however, another dimension of the issue needs urgent attention: tax systems.

Efficient tax systems underpin development. Rich countries rely on taxes to finance aid flows. In developing countries, locally generated taxes are a much bigger source of development finance than aid. Effective tax systems, based on cooperative relationships between governments, businesses and individuals, are a bedrock for democracy and growth. When businesses and citizens form part of the formal economy, good tax administration can provide for pensions, social security payments and other instruments of the modern state.

But there's a dark side. Tax dodgers in developed and developing countries deprive governments of revenues. Many take advantage of the lack of transparency in tax havens. Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid. If taxes on assets hidden by tax dodgers were collected in their owners' jurisdictions, billions of dollars could become available for financing development.

Fighting tax evasion calls for cooperation between developed and developing countries. At home governments must enact fair and effective policies and make it easy for taxpayers to comply with their obligations. Internationally, they must push for greater transparency in cross-border financial transactions.

As incoming G20 chair, Britain must take up this challenge. It has played a lead role in OECD work on countering tax haven abuse, but more is needed. Ties with Commonwealth countries and dependencies that operate as offshore financial centres make it uniquely well placed to push for improved standards of transparency. At the same time, it can give a lead in helping developing countries improve their tax administration.

We need to be realistic. Developing countries often lack the resources to build effective tax systems. Citizens may be unwilling to pay on the grounds that governments misuse the funds. It can be difficult to implement fair taxation in low-income, agrarian economies. And the poor are often subject to an equivalent of tax, in bribes and informal fees.

But something can be done. The OECD's decade-long drive against tax havens and evasion is bearing fruit in the form of bilateral treaties aimed at improving transparency and exchange of information. The trend is spreading beyond the OECD, with China and South Africa joining this campaign. At the same time, donor countries are helping poorer nations develop fair tax services.

Significantly, developing countries are joining forces too. An African Tax Administration Forum is being developed under the leadership of Botswana, Cameroon, Ghana, Nigeria, Rwanda, South Africa and Uganda. By inviting governments to share good practices, it aims to improve service delivery and taxpayer education. Success will increase accountability, strengthen democracy and combat corruption.

In 2006, only $88m of a total $103bn in official development assistance from OECD countries was dedicated to tax-related tasks. But aid targeted at capacity building in revenue administrations is money well spent. Donor support to the Rwanda Revenue Authority brought a dramatic increase in tax revenue, from 9% of GDP in 1998 to 14.7% in 2005, with an equally significant effect on state accountability. We cannot allow the crisis to undermine such efforts.

The last time we faced a major global downturn, aid budgets fell dramatically - curtailing investment in agriculture, infrastructure, social welfare and political stability. Similar cuts now would be even more damaging, after volatility in commodity prices and a global food crisis have already hit the poor. Cuts may bring short-term savings to donor governments, but they would cost much more in the longer term in extra spending on security and humanitarian aid.

Earlier this week, OECD donors joined in an Aid Pledge to maintain aid flows consistent with promises at Gleneagles and elsewhere. If combined with a joint effort to fight tax evasion, the results for development could be significant. The OECD, as the leading international organisation with a mandate to work on tax policy, is committed to this objective. More effective tax systems in developed and developing countries would help to build a stronger, cleaner and fairer world economy. And they would help the poorest the most.


Here are our points of discord.

First, his assertion that Britain "has played a lead role in OECD work on countering tax haven abuse" is plain wrong. See here, for example. Britain, hosting perhaps the world's biggest tax haven in the City of London, and pimping the biggest network of tax havens in the Crown Dependencies and Overseas Territories, wears a jet-black hat in this area.

Second, he has not mentioned the UN Tax Committee. This is of fundamental importance in the forthcoming Doha event. We explain why here.

Third, a sentence near the end of his article jars with us:

"The OECD, as the leading international organisation with a mandate to work on tax policy, is committed to this objective."

He seems to be saying: we are the top dogs, and leave it to us.

Not so fast. There are two big multilateral organisations with the mandate to tackle this. The OECD is one. The other is the United Nations. The OECD is a club of rich countries. The UN represents, to a far more substantial degree, the developing world. It is time now for the UN to step up to the plate. As we've noted, a first step is this: build up the UN Tax Committee, so that it starts to punch its weight.

Fourth, we object to this sentence:

"The OECD's decade-long drive against tax havens and evasion is bearing fruit in the form of bilateral treaties aimed at improving transparency and exchange of information."

The bilateral treaties that the OECD encourages, especially in their current form which only allow for information to be obtained "on request" (that is, you can only get the information once you are looking for it), are utterly feeble; pathetic, in fact. The answer is automatic exchange of information on a multilateral basis.

Has the cavalry arrived? So far, so good. And we have just seen skirmishing so far. Let's not forget: the black hats are out there, in great force. They are dangerous, well-organised, and armed to the teeth.

Final point: please go to the Guardian article, and post your comments underneath.

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Forget tax havens

The title is the first three words from an article linked to a new Wealth Management Survey, run by an organisation whose output is described by one newspaper as "a must-read for the super-rich."

Forget tax havens? The article describes the problem.

"Unless high-net-worth individuals would prefer to divest themselves of their worth and return to just being individuals, their attention certainly must be directed to the wiser options out there. There are still wise options, and the question of where money is safest is one that can be reasonably answered even in uncertain times.

Perhaps it is best to start with tax havens, where there is plenty of HNW money which may well be less safe, especially now that the OECD is calling for sanctions against those which refuse to commit to greater transparency. The principal problem, however, that large tax havens based in small countries face is one of imbalance: if local banks go under, they take with them more billions than the government could ever hope to cover, let alone repay."


One example is drawn from the Isle of Man, where the demise of a local subsidiary of Iceland's collapsed Kaupthing bank has triggered a tiny depositor protection scheme that has cleaned out half that jurisdiction's reserves. The article gives another example, this time from Jersey:

"The island is debating a deposit protection scheme but it would only be for residents, and even were it to extend to non-residents with accounts in Jersey, there would be a limit grossly insufficient for HNWs. It has £240 billion in trusts managed on the island, and an income of £764 million: should even one or two of the 48 banks on Jersey catch a cold and fall over, there is no hope of full recompense. The arguments between local authorities and experts illustrate just why an HNW should not feel wholly secure in a tax haven."

Jersey's officials, of course, deny this.

"Geoff Cook, the chief executive of Jersey Finance, the non-profit organisation created to promote Jersey’s fiscal capabilities, denies that the imbalance is a problem, saying that banks are sufficiently insulated and that in the unlikely event of failure, customers are protected.

‘The risk-to-asset ratio for capital is 20 per cent higher than the Basel Convention requires; the strength of reserves is about 60 per cent higher,’ says Cook. ‘The liquidity pool is deep. [In the event of failure, the liability] moves upstream to parents, into London companies, and is protected by individual banks.’"

Sounds reassuring, doesn't it? The article continues, teasing out the UK government's response to Cook's words:

"This is not the case according to the Financial Services Authority, which issues a measured denial. Robin Gordon-Walker, a spokesman, says it’s ‘not right at all’ that protection would flow upstream. ‘The Channel Islands and the Isle of Man are separate countries for financial services,’ he says. ‘It’s rubbish — it always turns on who’s the local regulator. The Financial Services Compensation Scheme regulations apply for UK banks only.’"


And the article then quotes someone else whom we know well.

"John Christensen, an economist and director of the anti-tax-haven Tax Justice Network, is more forthright: ‘Jersey is very cheekily looking to governments outside the island, saying: “We’d like you to extend your deposit protection scheme here for [your] residents who have Jersey accounts.” What bloody nerve! Why would anyone agree to that?’ Christensen is also dubious about Jersey’s claims only to have chosen ‘reliable’ banks. ‘Who would have thought that Lehmans would go under?’ he asks."

Who ever could argue with that? The article reaches a more general conclusion:

"There does not appear to be general confidence in the ability of tax havens to withstand shocks, or at any rate to help account-holders to recover from them. Patrick Hamlin, a partner in trusts and succession at Withers, says: ‘Apart from the [deposit protection] schemes, if an investor who holds deposits in an offshore bank loses those funds because of a bank failure, the only redress is to prove for the debt in the subsequent liquidation,’ although he adds that ‘this is not as bad as it sounds’. However, he is ‘not aware of any deposit-protection schemes in the offshore world’, meaning the Turks and Caicos Islands, or the Bahamas, or Andorra are in danger."

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Wednesday, November 26, 2008

INVITATION TO A SIDE EVENT DURING THE OFFICIAL REVIEW CONFERENCE ON FINANCING FOR DEVELOPMENT DOHA, 1ST DECEMBER 2008

For the Doha Financing for Development conference:

On behalf of CIDSE, Latindadd and the Tax Justice Network, representatives from governments, international institutions, NGOs and the private sector are invited to join the discussion on:

TAX JUSTICE AT THE HEART OF THE FFD AGENDA: ETHICAL, POLITICAL AND DEVELOPMENT PERSPECTIVES

Date: Monday, 1st December 2008

Time: 1:15 - 2:45 pm Location: Sheraton Convention Centre, Room 2 - Waterhole/Laffan area, Doha

Purpose: In comparison to debt, trade, aid and investment, taxation has been the subject of very little attention of the international development community. Yet in the current climate of financial instability, increasing inequalities and economic uncertainty there are compelling reasons for taxation to be put at the heart of the financing for development agenda.

The panel will consist of respected actors from the German administration, the Catholic Church, civil society and an academic. Speakers will put forward their views on taxation and development: the key issues, the underlying reasons and recommendations for action to deal with these issues.

Moderator: Bernd Nilles, Secretary General, CIDSE

Panelists:

- Jean Merckaert, CCFD, France and co-author of the new CIDSE publication 'Closing the Gap: Addressing imbalances in global finance': Main findings of the paper

- H.E. Archbishop Celestino Migliore, Permanent Mission of the Holy See to the United Nations: The Catholic Church's perspective on taxation based on Catholic Social Teaching

- Dr. Juergen Zattler, Deputy Director-General Multilateral and European Development Policy and Trade; German Ministry for Economic Cooperation and Development, Germany: International tax cooperation: key issues, main stumbling blocks, role of multilateral actors, steps needed in Doha and beyond

- Patricia Miranda, Fundación Jubileo-Bolivia, Bolivia: The imperative of tax justice from a Latin American civil society perspective

- Jorge Gaggero, CEFID-AR, Argentina: Perspectives from a Latin American economist on steps needed to address problems faced by countries in effectively mobilizing domestic resources

Contacts:
Jean Saldanha saldanha[AT]cidse.org
Jean Merckaert j.merckaert[AT]ccfd.asso.fr

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City of London presentation on tax competition


TJN's senior adviser Richard Murphy gave a presentation on tax competition in the City of London last night. It adds to our analysis of this harmful and ongoing process. The slides are here.

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Tuesday, November 25, 2008

Links - Nov 25

Since the weekend, and at the time of writing, several major stock markets have risen by more than 10 percent. This might be a good day for a cold shower. These links should do the trick.

Is Britain going bankrupt?
Nov 24 (Telegraph) - There is now a palpable fear that global investors may start to shun British debt as the budget deficit rockets to £118bn - 8 per cent of GDP - or charge a much higher price to cover default risk.

Leverage by the numbers
Nov 24 (Optionarmageddon) - An investor has compiled a spreadsheet. "Those are some ugly numbers and I’ll explain why. Citigroup’s leverage ratio of 56 means that the bank has $56 of assets for every $1 of common equity." Click on the link to see the spreadsheet, and get a basic tutorial on leverage.

All US Financials Will be Nationalized in a Year: Manager
All major U.S. financial companies will eventually be under government control because the alternative is so much worse, Hugh Hendry, chief investment officer at hedge fund Eclectica Asset Management, said Friday.

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Doha is imminent

Oxfam, ActionAid, Christian Aid, and Eurodad are preparing an event on tax justice and capital flight at the Doha Civil Society Forum in Qatar later this week. This is a high-level summit meeting on finance for development and it is of the utmost importance.

Details of this event are available on this flyer: please circulate it to anyone who might be interested. In addition, they will be distributing this one-page overview of tax justice issues at the workshop. The text is outlined below, though the attached pdf version is more complete, as it contains all the graphics. As an aside, TJN fully supports this, and especially the recommendations at the bottom. Read more in our Doha special edition of Tax Justice Focus.

TAX, DEVELOPMENT AND CAPITAL FLIGHT
Doha Civil Society Forum
Tax and Development

Tax is the most sustainable source of development finance, providing a domestic, non-cyclical source of revenue for nation states to invest in their own development. Progressive taxation also benefits the poor by redistibuting wealth through society and can limit the consumption of goods which have harmful effects on society or the environment through repricing.

A broad tax base improves representation accountability between state and citizen. Where governments are dependent on their citizens for revenue, they are more likely to act in the interest of their citizens. Governments have a vested interest ensuring economic growth is shared throughout the population because promoting economic development for all means greater revenues for the state.

Capital Flight The scale of the problem It is estimated that between $500bn and $800bn of illicit capital flows from southern countries every year. This is more than total global aid flows to developing countries ($103bn) and Foreign Direct Investment ($240bn) combined. Of this southern countries loose $160bn in tax revenue; one and a half times more than what they receive in aid.

Net financial transfers to developing countries and economies in transition, 1997-2007 (billions of dollars). Source: UN (2008) World Economic Situation and Prospects p xi.

Capital Flight in African countries represents a higher burden as a percentage of GDP than in other regions and presents clear links to external Debt. Foreign debt can cause capital flight by contributing to an increased likelihood of a debt crisis, worsening macroeconomic
conditions and the deterioration of the investment climate.

The cause of the problem Commercial illicit flows account for around two-thirds of the illicit capital outflows from developing countries. This is largely facilitated by transfer mis-pricing where commercial companies sell goods and services to sister companies at inflated or deflated prices to minimise the tax burden. This is facilitated by a lack of transparency and ineffective global regulation of financial flows, as well as bank secrecy and tax havens.

Financial Crisis

The financial crisis has been caused by irresponsibile borrowing, buying and selling of risky debt, and the inability of banks to value assets effectively. Again, this was caused by the lack of transparency and ineffective global regulation of financial flows. Tax havens have played a key role in the current financial crisis by providing opacity necessary to the establishment of special purpose vehicles and speculative financial actors such as hedge funds.

The effects on the south are potentially catastrophic. Falling Aid flows, migrant remittances, and FDI, coupled with falls in export demand for commodities like wheat, mean the poor will be hit first and worst.

Solutions: Financial Transparency
The problems of capital flight and the financial crisis demonstrate clearly that the complexity of global financial flows has grown far beyond the ability of governments to effectively monitor and regulate them. The current regulatory framework is not fit for purpose.

At the Monterrey Financing for Development conference in 2002, governments pledged to encourage “the orderly development of capital markets aimed at addressing development financing needs and foster productive investments”. They agreed, that this “requires a sound system of financial intermediation, transparent regulatory frameworks and effective supervisory mechanisms”. This has yet to be delivered.

Creating an atmosphere of financial transparency and accountability would help to address issues of capital flight and the current financial crisis which will have a huge detrimental effect on southern countries and the possibility of achieving the Millennium Development Goals (MDGs).

REQUIRED OUTCOMES FROM THE DOHA FfD CONFERENCE

a) A clear statement of the pre-eminence of tax as the only sustainable source of public finance for independent development;

b) That the UN Committee of Experts on International Cooperation on Tax Matters (the UN Tax Committee) should be upgraded into an intergovernmental body, tasked with enhancing international cooperation on tax issues and promoting the goal of effective tax information exchange (not least between developing countries and others);

c) That the Tax Committee adopt a ‘UN Code of Conduct on Cooperation in Combating International Tax Evasion and Avoidance’, of which a draft has already been discussed, and which sets minimum standards to countries’ cooperation;

d) International implementation of country by country reporting standards for transnational companies.

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Shelter us from the mess we made

The research and advocacy group Citizens for Tax Justice in the United States have sent a letter to offices in the US Senate and House of Representatives urging them to reverse legislation slipped into the US bailout package which, it has been estimated, will result in tax tax cuts for large banks eventually costing a total of $140 billion. The short letter is well worth reading in its entirety, as an illustration of the tax shenanigans that nobody seemed to be paying attention to during the good times.

CTJ's letter, following earlier work of theirs on the bailout (which we blogged here), refers to an arcane provision, known as Section 382, effectively saying that banks can ignore a provision in the tax code preventing abusive tax shelters. As CTJ explains:

"Section 382 was enacted by Congress in 1986 to stop companies from sheltering their income by purchasing shell companies with losses on their books. Before that time, many mergers took place not because they made economic sense but merely because they offered a tax shelter. Ever since Section 382 was enacted to end these abuses, corporate lobbyists have been promoting its repeal.

This is a classic example of what TJN has pointed to for a long time: again and again offshore abuses do absolutely nothing at all to promote better price or quality for the goods or services being offered. They are simply distortions in the economic system which, every time, tilt the economic playing field in favour of the wealthier sections of society, and undermine respect for the rule of law. They use these systems to preserve towering wealth inequalities during the best of times, and now they want to squirm out of the payback. In its press release CTJ commented on the sheer unfairness of this, achieved through thoroughly anti-democratic means:

"
The change they sought, which costs more than the measures mentioned above, has been accomplished through a two-page notice that directly contravenes the explicit intent of a statute enacted by Congress. . . . . Now it seems those lobbyists have achieved their goal without using the same long and difficult legislative process that lawmakers and advocates face when they want to enact, say, a $3 billion increase in the child tax credit for low-income families. Instead, bank lobbyists achieved their $140 billion goal through an agency action that contradicts the explicit intent of a statute enacted by Congress."

Of course, many people agree that strong stimulus measures have had to be taken to stop this economic mess from spiralling even further out of control. But this seems an unusually egregious, sly, soak-the-poor way of going about it. The Washington Post recently wrote on its dubious legality:

"The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal."


And there are signs that the backlash against this measure, which is now widely noticed, may be strong enough to get it reversed. The New York Times has more.

And one final point from the CTJ letter, which is fundamental to everything we do. It underlines a principle that we wrote about at length in our long essay on corruption in The American Interest.

"These public services are threatened when people stop believing that the tax system that pays for them is fair. It is hard to imagine anything that could cause Americans to question the fairness of their tax system more than an agency telling the world’s largest banks that they can ignore an explicit provision of the Internal Revenue Code to reap a $140 billion benefit. Creating a vast new tax loophole to encourage bank mergers against the explicit intent of Congress should not be one of them."

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The mood is changing in Britain on tax

Britain's pre-budget report yesterday, which outlines the government's medium-term economic and budgetary position, was something of a watershed from a tax justice point of view. As expected, it provided a strong element of economic stimulus: lower taxes, and more spending. But we will focus instead on two other key elements.

First, it represented a re-assertion of progressive taxation: founded on the basic principle that tax should be based on ability to pay - that is, the wealthy should pay higher rates of tax. The Financial Times called it "the most transparently redistributive budget statement of the past 30 years." Polly Toynbee in The Guardian put it like this:

"Following in Obama's footsteps, it is suddenly safe to tax the rich and spend to protect jobs. Keynes and Roosevelt are the world's spirit guides through this crisis, because in a crisis social democracy is what works. Yesterday that faith allowed Labour to shed its disguise and follow its nature in a £20bn shower of spending. Yesterday saw the Conservatives strip off their sheep's clothing too, as (opposition Conservative party shadow finance minister) George Osborne . . . merrily defending the aspirations of the wealthy. Now we can see both parties naked as nature intended, and at last comfortable in their own skins.

In poll after poll, from British Social Attitudes to the Guardian ICM, three-quarters of voters say that the income gap is too wide. The Sun tries a feeble jab at Gordon Brown for "turning his back on wealth creators" - but it lacks conviction. Odd how it has taken near calamity to shake Labour from its craven fear of the hyper-rich."


Second, the report outlined a plan to look seriously at the offshore world, in which Britain is probably more directly and deeply implicated than any other nation on earth: by virtue of the city of London being a large offshore centre in its own right, and by virtue of Britain's extraordinary and enduring links with the Crown Dependencies and Offshore Territories, a large proportion of which are tax havens. This is what the pre-budget report had to say on the matter:

"Many crown dependencies and overseas territories are significant financial centres in their own right and the financial sector plays a vital role in their economies. The Government recognises the progress made by most offshore financial centres to improve financial regulation and transparency, and tackle financial crime. However, crown dependencies and overseas territories, like all offshore financial centres, face challenges and opportunities as the world is changing. In particular, severe financial turbulence has raised questions for all jurisdictions, while there is growing international pressure to line up standards of financial regulation and meet international norms with regards to taxation.

The Government will shortly commission an independent review of British offshore financial centres; their role in the global economy; and their long-term business strategies. The review will not consider changes to the UK’s constitutional relationship. It will work with the crown dependencies and overseas territories to identify current and future opportunities, risks and mitigation strategies, including issues such as:
- financial supervision and transparency;
- fiscal arrangements;
- financial crisis management and resolution arrangements; and
- international cooperation."

This is diplomatically phrased, for it skirts around the criticism that is now increasingly coming their way (in no small measure thanks to us.) And, as TJN's senior adviser Richard Murphy said, "The Tax Justice Network will, of course seek to participate in the review." Powerful interests in Britain will oppose TJN's participation too, of course, and will seek to whitewash the tax havens.

John Whiting, tax adviser at accountants PricewaterhouseCoopers, said that plans to raise the top rate of tax to 45% from 40% was "pretty modest." As The Guardian reported:

"People will most likely grin and bear it," he said. But critics argue there is a large and growing community of tax avoiders who will do anything to deny the exchequer extra tax. That nervousness could also be detected in the Treasury yesterday after the chancellor announced a crackdown on tax havens such as Jersey and the Isle of Man, which he said were benefiting from government guarantees covering the UK financial system without making a financial contribution towards them.

Richard Murphy of Taxation Research (sic), who has advised the TUC on its campaign against corporation tax avoidance, said the chancellor would be better advised to tax the investment income of the wealthy if he wanted to tackle avoidance.

He said a 10% national insurance charge on annual unearned investment income of more than £5,000 would be harder to avoid. "I know its not the purpose of national insurance, but it would be almost impossible to avoid paying the tax because there are no reliefs on national insurance. Income tax can be manipulated and avoided, national insurance cannot. If the income is on their tax return, the national insurance must be paid."

Of course the two elements - fairer tax, and an assault on tax havens, are closely linked, and are a sign of the times. It seems likely that the British government, in this report and in the UK Chancellor's recent comments about the Isle of Man, has been influenced by events in Washington, illustrated by Barack Obama's Stop Tax Haven Abuse Act.




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Monday, November 24, 2008

Soros: what to do about the crisis

George Soros has a long article in the New York Review of Books entitled "The Crisis & What to Do About It." It presents many things we know already, but the perspective is illuminating. And it raises interesting questions from a tax justice perspective. Near the beginning, he says this:

"The crisis was generated inside the system itself. This fact -- that the defect was inherent in the system -- contradicts the prevailing theory that financial markets tend towards equilibrium and that deviations from the equilibrium either occur in a random manner or are cased by some sudden external event."

This is important, if not exactly new. But now consider this.

"Guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that caught the authorities unawares: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. . . . The International Monetary Fund is establishing a new credit facility that allows financially sound periphery countries to borrow without any conditions up to five times their annual quota, but that is too little too late. A much larger pool of money is needed to reassure markets. And if the top tier of periphery countries is saved, what happens to the lower-tier countries? The race to save the international financial system is still ongoing."

In light of this paragraph above, we should point out that another entire area of debate - and a huge one at that - has been neglected by everyone, as far as we can tell, except us: the powerful role that illicit financial flows have played in building up the giant global macroeconomic imbalances that have underpinned this crisis. (We provide a preliminary sketch of this forgotten area here, and we will develop this in due course.)

But back to Soros. He presents (not for the first time) his theory of "reflexivity": a two-way circular feedback loop by which financial markets present a distorted picture of underlying reality; these distortions in the picture feed back to the so-called fundamentals that market prices are supposed to reflect. And this has consequences for regulation too:

"It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis."

Soros believes (and he is not alone) that the "subprime" crisis in the US housing market was merely the detonator for what he calls a "super-bubble" that has been brewing since the days of Ronald Reagan and Margaret Thatcher in the 1980s and prevailing financial market theory.

"This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect."

And he notes something that TJN knows all too well:

"Although market fundamentalism is based on false premises, it has served well the interests of the owners and managers of financial capital. The globalization of financial markets allowed financial capital to move around freely and made it difficult for individual states to tax it or regulate it. Deregulation of financial transactions also served the interests of the managers of financial capital; and the freedom to innovate enhanced the profitability of financial enterprises. The financial industry grew to a point where it represented 25 percent of the stock market capitalization in the United States and an even higher percentage in some other countries. Since market fundamentalism is built on false assumptions, its adoption in the 1980s as the guiding principle of economic policy was bound to have negative consequences."

It would only be a short intellectual step for this arch-capitalist to conclude that tax havens and tax competition are entirely pernicious, and harmful to most of the world's citizens. Soros, after all, is an interesting fellow, who by no means fits the stereotype of the ultra-wealthy speculator: he has provided major support to human rights and pro-democracy movements around the world, and in some countries his support has been helped bolster the most powerful political opposition to tyrannical régimes. Nevertheless, Soros has not taken this step. Perhaps because he knows that to do so would open him to cries of hypocrisy, for many of his wealth-attainment strategies have used offshore vehicles.

Nevertheless, he makes several other points.

"Whenever a crisis endangered the prosperity of the United States—as for example the savings and loan crisis in the late 1980s, or the collapse of the hedge fund Long Term Capital Management in 1998—the authorities intervened, finding ways for the failing institutions to merge with others and providing monetary and fiscal stimulus when the pace of economic activity was endangered. Thus the periodic crises served, in effect, as successful tests that reinforced both the underlying trend of ever-greater credit expansion and the prevailing misconception that financial markets should be left to their own devices. It was of course the intervention of the financial authorities that made the tests successful, not the ability of financial markets to correct their own excesses. But it was convenient for investors and governments to deceive themselves. . . . Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel."

Soros comments on the need for financial services companies to hold sufficient capital cushions, and of the cat and mouse games between market participants and regulators. He has a fair few things to say on this, but one important point is this:

"Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used."


Jim Stewart's piece in the last edition of Tax Justice Focus, on the Dublin International Financial Services Centre (IFSC,) recently looked at this issue, highlighting the ridiculous laxity in letting funds set up, willy-nilly:

"In Ireland, for example, if the relevant documents are provided to the regulator by 3 p.m. the fund will be authorised the next day. A prospectus for a quoted instrument is a complex legal and financial document (a debt instrument issued by Sachsen Bank ran to 245 pages) so it is unlikely it could be adequately assessed between 3 p.m. and the normal close of business (5 p.m.) Even worse, Luxembourg has a new law stating that as long as the fund manager “notifies” the regulator within a month of launch, the fund can enjoy pre-authorisation approval."

Which regulator ever cried wolf about this? Well, the wolf is now at the door, and at least things like this are getting some attention.

Soros, near the end of his article, says this:

"Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical."

Which is exactly what we were talking about in our last blog, on the excess supply of financial services. Finance has been flying too high, and too freely, for too long. It is incumbent on all of us to fight for a re-assertion of democratic controls over this unruly beast.

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Links - Nov 24

Also see Offshore Watch and TJN's searchable historical news archive

Tesco calls for £300m tax break
Nov 24 (FT) - Britain's biggest retailer is calling on the government to give the nation's shopkeepers a £300m tax break by scrapping the annual inflationary rise in business rates next year.

Angry Shareholders Vent Over Barclays’ Investment Plan
Nov 24 (FT) - Mr. Agius, chairman of Barclays, said he declined the government money because the British bailout would have restricted bank policies on dividend payments. But he would not address payouts to other senior bankers, in particular Roger Jenkins, a middleman in the fund-raising who also runs Barclays’s hugely profitable tax arbitrage unit.

Darling unveils £20bn fiscal stimulus
Nov 24 (FT) The UK chancellor said he had asked for a review of how offshore tax havens were regulated within a view to ensuring that the UK did not have to pick up the tab for regulatory weaknesses elsewhere.

Isle of Man resists growing pressure on tax havens
Nov 23 (AFP) - After British finance minister Alistair Darling said "we need to take a long hard look at the relationship between this country and the Isle of Man, a tax haven sitting in the Irish Sea," Chief Minister Tony Brown sought an urgent meeting with the British government, returning with assurances that Britain has no intention of reviewing its constitutional relationship with the island, Brown told AFP that Darling's words were "a misunderstanding".

RAK aims to become offshore tax haven
Sept 18 (Gulf News) - Dubai: The government of Ras Al Khaimah has launched an offshore facility, the second in the UAE, that is expected to lure investors looking for a new tax haven.

UBS Clients Seek Amnesty on U.S. Taxes: Report
Nov 24 (Reuters) - Some wealthy clients of UBS AG are coming forward to make amends with U.S. tax authorities after a former UBS private banker was indicted, a sign that U.S. efforts to battle offshore tax evasion are having the desired effect, the Wall Street Journal reported on its website.

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On the excess supply of financial services

The website Naked Capitalism, written by (among others) insiders in the financial services industry, has a useful post today, which starts with the question "Why are we in the mess we are in?"

They make this observation:

"Finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do."

We would agree. And we would add tax advice, tax law, accountancy, and many other offshore intermediaries to this mix. Some is useful, but when these sectors balloon in size, amid an evolving game of cat and mouse between tax authorities (and regulators) and the wily intermediaries, seeking to find ever cleverer ways to circumvent the spirit of democratic laws using offshore structures, this unproductive tax just keeps growing.

Then they provide this statistic:

"In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total."

This is not particularly new; but it is still eye-watering. Ken Rogoff, former IMF chief economist, said in July this year that:

"the main macroeconomic challenges facing the world today are an excess demand for commodities and an excess supply of financial services?


As a brief aside, related to this, we should also remember the recent words of Mervyn King, governor of the Bank of England:

"I do think it is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career. It’s not a very attractive situation that such a high proportion of our talented young people naturally look at the City and think it is the only place to work in. It shouldn’t be. It should be one of the places, but not the only one."

Naked Capitalism compement this with a more personal element, describing the extreme work pressures of being in the financial sector:

"The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed. And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay."

Reasonable stuff. But then they get to their main point, which is about bailout fever.

"There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire."

Worth remembering, on the day Citigroup gets a $20bn bailout, which Naked Capitalism describes in these terms:

"Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.

And why is that? Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes."

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Sunday, November 23, 2008

Something for Alan Greenspan?


Hat tip: here.

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Links - Nov 23

Also see Offshore Watch, and TJN's searchable historical news archive

Switzerland should abolish bank secrecy Rough English translation here
Swissinfo (Nov 23) - TJN's director, John Christensen, on the role of tax havens in the global economic crisis, and more.

Poor nations threaten to quit key talks
Observer (Nov 23) - The International Conference on Financing for Development starts in Doha, Qatar, on Saturday. The issue of the world's tax system is especially contentious. Poorer countries face a race to the bottom with countries outdoing each other to offer low business taxes as well as tax havens offering zero rates. Equally serious is their inability to match the resources of multinational firms, whose armies of lawyers and accountants make it impossible for the stretched resources of tax officials in developing nations to claw revenue back. A proposal to upgrade the UN tax committee to intergovernmental status to increase its political leverage has become a lightning rod.

Stop this tax haven hell
Le Monde (Nov 22) - A debate between Renaud van Ruymbeke, a crime-fighting French financial magistrate, and Olivier Pastre, a member of the board of IM Bank (Tunisia). Rough English translation here.

Treasury to Review New Tax Break Plan
Nov 18 (NYTimes) - The Treasury Department will review a quiet change in tax policy that may give banks a windfall of $110 billion. The obscure tax break allows banks much greater leeway to use tax losses from banks they acquire.

Tomorrow, Mr Darling must introduce morality into the City
Guardian (Nov 23) - The UK Chancellor (Finance Minister) should announce a major inquiry into British corporate governance. We can't go on with a system in which directors essentially award themselves bonuses for non-performance. I would introduce a financial services bonus tax - 75 per cent for one year bonuses, but tapering downwards to the standard tax system for long-term bonuses.

A Golden Opportunity? How Tanzania is failing to benefit from gold mining
Oct 1 - Gold mining is the fastest growing sector of Tanzania’s economy...Yet the government has implemented tax laws that are overly favourable to multinational mining companies: very low tax revenues, minimal governmental and popular democratic scrutiny, associated with corruption, people in the gold mining areas are barely benefiting and many are being made poorer.

US Treasury to Review New Tax Break Plan
Nov 18 (NYTimes) - The Treasury Department will review a quiet change in tax policy that may give banks a windfall of $110 billion. The obscure tax break allows banks much greater leeway to use tax losses from banks they acquire.

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Friday, November 21, 2008

IMF paper opposes tax competition, tax incentives

A new IMF Working paper has been looking at whether using tax incentives to promote growth is a good idea. It looks at the case from the Caribbean. The paper's preamble says this:

"This paper compares the costs of concessions in terms of revenues forgone with the benefits in terms of increased foreign direct investment. The costs are very large, while the benefits appear to be marginal at best. Forgone tax revenues range between 91⁄2 and 16 percent of GDP per year, whereas total foreign direct investment does not appear to depend on concessions. A rethinking of the use of concessions in the region is needed urgently."

This is what TJN has long argued: see pages 4-5 of a recent edition of our newsletter, Tax Justice Focus (TJF), also looking at tax incentives, which gives a pertinent example:

"Some countries are clearly giving up revenue that could be spent on schools, railways, nurses, and many other public goods. . . . Between 1992 and 2004, the copper industry’s total contribution to the Zambian treasury fell from more than $200m to just $8m – even though copper prices had climbed by more than 25% and copper production was roughly the same."


Zambia was earning in taxes jut 0.7% of the total value of the mineral produced. That is an astonishingly low figure. The editorial in the same edition of TJF quoted from a McKinsey's report:

“Popular incentives, tax holidays, subsidised financing or free land, serve only to detract value from those investments that would likely be made in any case.”

So the new IMF report is in good company. In general terms, it quotes cross-country research, concluding that:

"The emerging consensus from this research is that a country’s overall economic characteristics may be more important for attracting successful investments than any tax incentive; and even if tax incentives play a role in securing an investment, they are not generally cost effective. . . . A broad cross-country analysis shows that FDI is not related to incentives. "

More specifically in the case of the six Caribbean countries it is studying (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines,) it noted:

"In a recent survey of 159 multinational firms operating in the Caribbean, tax concessions were not among the top 15 of the 40 areas that firms considered critical for their investments . . . it is generally considered much more effective for a country to attract investment by building genuine economic advantages and a conducive investment environment."

These studies are looking at "real" investment: that which has local economic substance, and it includes tourism facilities, light manufacturing. We like one of the conclusions:

"A development strategy based on increasing the amount of concessions to investors is unlikely to result in increased investment and growth. A re-evaluation of the strategy of using incentives to promote development is needed, possibly within a regional context. A regional approach to harmonizing concessions would help limit each country’s revenue losses, and avoid the tax competition that has produced a race to the bottom."

This is written almost as if the researchers had been in consultation with TJN. They recognise clearly, as we have done, that tax competition, when taken in overview, is unambiguously harmful.

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OECD to peek at Hen-Wees

The Organisation for Economic Co-operation and Development (OECD) is, rightly or wrongly, the world's most powerful grouping advocating internatinonal co-operation on taxation. We think it is potentially a great force for the good, though we have remarked on its enormous shortcomings on several occasions in the past.

The OECD's Centre for Tax Policy and Administration has just issued invitations for public comments on its discussion paper on High Net Worth Individuals (HNWIs,) or as John Christensen has called them, Hen-Wees. These are commonly described as people with liquid assets worth more than a million dollars.

As the discussion paper notes:

"Tax administrations allocate significant resources to this segment. This allocation is notbecause taxpayers in this segment are necessarily less compliant in their tax affairs but is driven by a range of factors, including the amount of tax at stake, the wealth8 and increasing number of HNWIs and the potential impact of their non-compliance on the community."

The OECD says it's an open question whether Hen-Wees are less compliant than others. A recent US study might provide a clue, though. A news report about the study started like this:

"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. 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."

The preamble to the discussion paper, based on the work of its Focus Group, contains various notable things, such as this:

"the Focus Group recognises that the situation of HNWIs is in many ways significantly different from the situation of large corporate taxpayers. HNWIs are much less homogenous as a group and show higher mobility. Moreover, large corporates are typically subject to a number of bookkeeping, accounting, filing and disclosure rules. They have extensive governance rules and a separation between owners/shareholders and managers. Large corporate taxpayers also have frequent and ongoing interaction with tax administrations (including e.g. VAT, wage tax withholding) while HNWIs may have far less interactions but face different or additional taxes (e.g. wealth taxes, estate and inheritance taxes). . . . furthermore, in the vast majority of cases the interaction between tax administration and HNWI will not be direct but will take place via a lawyer, accountant or other representative (e.g. a member of a “family office”) of the HNWI. Thus, unlike the situation of large corporate taxpayers with “in-house” tax capability, any relationship between tax administration and HNWI is likely to be implemented via the intermediary."

The existence of a pinstripe buffer between the Hen-Wees and our elected representatives carries great risks. And, in all this, we should not forget the political power of the Hen-Wees, described by David Rothkopf in his recent book "Superclass."

"Setting aside both the fanciful and the insidious theories of puppet masters and their cabals, we must recognise that there is something new afoot, a huge imbalance in the global distribution of power that concentrates great influence in among informal clusters of elites. These elites often transcend or supplant the insititutions of the past: national governments, systems of law that could not keep pace with global relaities, and even the earnest but incomplete efforts of the past half century at creating effective multinational organisations."

Will Hutton, writing in The Observer in May this year, before some of the most serious shocks in the current economic crisis, said this:

"The superclass is super-rich - the top 1,000 are billionaires - is super-influential and super-confident. There has not been a gap between the rich and poor on the current scale ever in history, warns Rothkopf. It is unstable. Sooner or later, there will be popular outrage and a political response. For the moment, though, it seems that a spell has been cast over the political process, at least in Britain."

The OECD project on Hen-Wees focuses on what it calls "co-operative compliance." In light of what Hutton and Rothkopf say, it is essential for the OECD to remember that when you are speaking softly, as the OECD has been doing for so many years, it is wise to carry a big stick. And when a crisis appears, use it.

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Thursday, November 20, 2008

Petition on tax havens

Four French Catholic organisations have launched a petition against tax havens, to be brought to the attention of president Nicolas Sarkozy. French residents are urged to sign.

The petition, accompanied by a very short video, is here.

Another French site aiming at tax havens is ArgentSale, run by the Plateforme Paradis Fiscaux et Judiciaires. It contains much background information on the issues, in French.

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Links - Nov 20

Also see Offshore Watch and TJN's historical news archive.

International Finance and Growth in Developing Countries: What Have We Learned?
Commission on Growth and Development(2008) - Despite an abundance of cross‐section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries.

What's wrong with the TaxPayers' Alliance?
The TaxPayers' Alliance is a tremendously successful campaign group. Barely a day goes by without Chief Executive Matthew Elliott appearing in the media, representing the views of "ordinary taxpayers". It boasts an average 13 media appearances a day and puts the links on its website. But it isn't an alliance of ordinary taxpayers at all. It is an alliance of right-wing ideologues.

Pakistan seeks crackdown on tax evasion
Only about 1 per cent of Pakistan’s population of more than 165m pay income tax, while the country’s tax-to-GDP ratio of about 10 per cent is the lowest in south Asia.

US may count more countries as tax havens
Nov 19 (Accountancy Magazine) - President-elect Barack Obama is likely to add three countries to the list of usual suspects in any clampdown on tax havens: Hong Kong, Switzerland and Luxembourg.

PIPSC: Has Canada Become a Tax Haven for Large Corporations?
Nov 18 (Market Wire) - "Canadians are aware that the Canadian government is facing a funding squeeze, but most Canadians are unaware that their government is not assuming its responsibility to ensure large corporations are paying their fair share of taxes" comments PIPSC President Michele Demers. By not properly taxing large corporations, our individual tax burden is increased.

Finnish finance minister says to tackle income tax evasion
Nov 17 (finland.fi) - "I by no means look kindly upon the increasing prevalence in Finland of the impression that people engaged in perfectly normal paid employment may render their earned income into unearned income that is taxed less," Mr Katainen said.

Quote of the day:
I cannot comprehend how we have got to the point where nation states have so profoundly trivialised tax evasion.
Bertrand Bertossa, crime-fighting Swiss magistrate, 2002

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Tuesday, November 18, 2008

A third to a half of the world's tax havens in Europe?

Daniel Lebègue, president of Transparency International France, has been speaking about tax havens. He is (among other things) a former director-general of the Caisse des Dépôts (a French public sector financial institution) and a former vice chairman of the French bank BNP, and should know a thing or two about them. He said (translating from French):

"About fifty tax havens exist around the world, about half in Europe. By "tax haven" I mean a state where there is a very low level of taxes. This state practices secrecy and refuses all co-operation with other countries."

A couple of points about this. First, we recently said in The Guardian newspaper that tax havens provide not one, but three things: low or zero taxes, secrecy, and lax regulation. Lebègue is right and we should add a fourth, which one could treat as separately from the third: a refusal to co-operate with other jurisdictions (see some of the quotes from Eva Joly, for example, to get an idea of how serious this problem can be.) There is some disagreement about how many of these criteria a country needs to exhibit to be called a tax haven, and note that these places (secrecy jurisdictions, we often prefer to call them) routinely try to pretend that they are not tax havens.

Second, it may come as a surprise to see him saying that about half the world's tax havens are in Europe. We have a slightly larger list, on p36-37 of this document, showing 26 European tax havens (which would add up to over half his 50 havens, though our list contains 73 such places, giving the European ones a one-third share of the global total.) This makes the recent remarks by the crime-fighting French magistrate Renaud van Ruymbeke, who said Europe should first "clean out its own rubbish" in the fight against tax havens, especially pertinent. As an aside, TJN recently reduced the number to 72 after removing Nauru, which appears to have changed its ways. As another aside, the methodology used for calculating the number of tax havens involved looking at whether or not jurisdictions carried out effective information exchange (that is, automatic exchange of tax and other information with other jurisdictions) and whether they met the "economic substance" test: that is, non-resident companies must have some real economic substance within the jurisdiction; the OECD dropped its economic substance test some time around 2000, under strong pressure from the International Trade and Investment Organisation (ITIO,) a powerful tax haven lobby group with especially strong British interests.

Lebègue continues:

"Among the 50 sure-fire tax havens there are also banking and financial havens: that is to say states where financial actors are set up and which operate outside all surveillance, and in complete opacity. Four thousand banks are set up there. . . tax havens represent a considerable risk for the international financial system. And hedge funds, two thirds of which are registered in tax havens, are feeding the financial crisis since investors no longer have confidence in these opaque and unsupervised actors."

And he adds:

"There will be no remaking of the international finanancial system, that is to say more transparency, if we leave the black hole of tax havens to persist. Half of international financial transactions transit through them, in effect. The current crisis gives strength to those who want to finish with clandestine finance.

To put things in order, it is necessary now to establish rapidly a list of non-co-operative countries. We will then ask that state no longer provide guarantees or aid to banks which have their headquarters in tax havens, like UBS or Credit Suisse. The same for companies. Why should France provide export credit for companies whose headquarters are situated in the secrecy jurisdictions? And it is necessary to forbid the distribution of hedge funds which do not give information about their shareholdings, their risks, and their off balance sheet financing."

Sensible words.

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Libya's oil money plan: distribute directly

Libya's president Muammar Gaddafi appears to be taking interest in a revolutionary idea which is supported by a number of prominent people, as well as publications like The Economist magazine, and which is already being implemented in a limited form in Sarah Palin's Alaska, where each resident gets just over $2,000 from its permanent oil fund. But take a look at this story:

"Gaddafi, complaining about ineffective ministries and corrupt officials, said in March the government should hand oil wealth directly to the people so they can choose where to get basic services. He also urged a sweeping reform of government bureaucracy, saying most of the cabinet system should be dismantled to free Libyans from red tape and protect the state budget from graft."

It should be noted that the paragraph above involves two separate proposals: one, to distibute the oil revenues directly to the people; second, to overturn the government system and dismantle most of the cabinet system. It is the first one that is most interesting (the second one seems a little strange, but we don't have enough information to know what Gaddafi really means by this.) It would be important to complement it with a second: tax citizens directly on the income they receive. Once you build up direct taxation, you get into interesting territory.

We don't have any more precise details yet, but at this stage it is hard to understate how fundamentally the first part of this proposal, if enacted properly, could change Libya. The idea, which hinges on fundamental relationships of taxation, could catch on elsewhere. Some TJN members support this idea (direct distribution, then direct taxation), and others don't -- so it's not a core TJN position.

If done properly, it would imply a dramatic redistribution of wealth from rich to poor (which should please those on the political Left); it would put money into the hands of private citizens (which should please those on the Right); and -- if Gadaffi intends to complement this with new direct taxation systems to recoup some of the wealth handed out -- it would potentially create an economic system where rulers had to bargain with their citizens for tax revenues (instead of just taxing the oil companies, meaning they could forget about their people); this would, if done rightly, improve accountability and governance.

'Gaddafi said on Tuesday that Libyans should not trust government bureaucrats to manage their money. "Whatever, you have to think about how the oil money will be distributed directly to the Libyans. . . . There is no ruse here. People cannot be fooled. This oil belongs to the Libyans. They have to take the oil money and do whatever they like with it," Gaddafi said.'

This theory in principle has been supported by a fair few economists and others. For example, it was advocated for Iraq in the publication Foreign Affairs a while back (and a TJN blogger more recently had something shorter published in Foreign Affairs and a longer article in the publication International Affairs, touching on this same subject, and presented a long paper at a recent AABA workshop.) It is also supported by the popular economist Tim Harford, and it's discussed at length in this IMF working paper on Nigeria by the senior former IMF economist Arvind Subramanian. The US-based academic Martin Sandbu has also explored this proposal in some detail. This proposal, it should be noted, can be combined with other policy instruments recommended to tackle the "Resource Curse", such as oil savings funds. Norway's oil fund has a limited and specific form of direct distribution involved; it serves to pre-fund public pension spending.

Others in Libya, presumably including a fair number of people who have done well out of the current arrangements thankyou very much, are not happy with this. Not at all. As the FT described it:

"In a country where no dissent is tolerated, viewers heard Farhat Omar Bin Guidara, central bank governor, telling the leader that doling out large sums of money to the masses would fuel inflation, cause the value of the dinar to drop and create a balance of payments deficit."

Others argue that giving people money reduces their incentives to work. These concerns, and others, have been aired many times before. But they are all (at least partly) misplaced, and they can be tackled too. Practical implementation would be hard - but probably not that much harder than, say, organising an election in a poor country, or a mass vaccination campaign. Politicians will resist it - but there are ways this might be overcome - Gaddafi's latest idea being one example. This is a complex and interesting area, and for those interested in pursuing this idea further, the papers mentioned above discuss a number of practical and other issues.

This is all mixed up with the subject of tax and accountability, a subject where TJN is starting to build up a significant programme. See this web section for more. And watch this space.

Update 1: the first comment under this blog provides some extra perspective on this idea. Further comments welcome.

Update 2: it has been suggested that this proposal represents some kind of privatisation. It is not yet clear what Gaddafi has in mind in this particular case; but in terms of the generic idea of direct distribution, this has nothing to do with privatisation, which is about passing management and ownership of business from the public to the private sector. This proposal is about transferring income, not business.

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