Saturday, March 28, 2009

False Profits: robbing the poor to keep the rich tax-free

Christian Aid's new extensively researched report with the above title provides more staggering evidence of the scale of illicit flows and the offshore system. It looks at trade mispricing, which can either happen within a multinational company (when it is called transfer mispricing) or in secret deals between unrelated companies.

Here is just one snippet, which will complement our page outlining the main measurements of the problem of global cross-border illicit flows and offshore wealth transfers:

"Between 2005 and 2007, the total amount of capital flow from bilateral trade mispricing into the EU and the US alone from non-EU countries is estimated conservatively at more than £581.4bn (€850.1bn, US$1.1tn). It breaks down specifically to £229.7bn (€335.8bn, US$441.2bn) into the EU countries and £351.7bn (€514.3bn, US$673.6bn) into the US. All conversion rates in this report are calculated at the average inter-bank rate for the year in question — the most accurate measure available.

If tax was levied on this capital at current rates, non-EU countries could have raised £190.8bn in revenue (€279.0bn, US$365.4bn) between 2005-2007, or £63.6bn (€93.0bn, US$121.8bn) per year."

The report uses data produced by the world trade pricing expert Simon Pak, president of the Trade Research Institute and associate professor at Penn State University in the US, who has advised US Congress on this issue.

Christian Aid adds, ominously:

"In spite of the enormous sums Professor Pak’s research exposes, they are just the tip of the iceberg. For he could only analyse publicly available trading data. Information held by tax havens, whose stock in trade is banking secrecy, would, if known, reveal a far more serious picture."

The report offers two main policy approaches.
  • Country-by-country reporting. A lack of this means that 60% of world trade disappears from view.

  • Automatic exchange of information between countries, with strong global rules to enable developing countries to determine whether they have been paid the right amount
    of tax, in the right place, at the right time. With sanctions for abusers.

7 Comments:

Blogger Henry said...

Christian Aid would do well to promote the teachings of the Catholic Church in this matter - these are nicely summed up in clauses in John XXIIIs encyclical Mater et Magister of 1961

19. Secondly, private ownership of property, including that of productive goods, is a natural right which the State cannot suppress. But it naturally entails a social obligation as well. It is a right which must be exercised not only for one's own personal benefit but also for the benefit of others.

43. Concerning the use of material goods, Our Predecessor declared that the right of every man to use these for his own sustenance is prior to every other economic right, even that of private property. The right to the private possession of material goods is admittedly a natural one; nevertheless, in the objective order established by God, the right to property cannot stand in the way of the axiomatic principle that "the goods which were created by God for all men should flow to all alike, according to the principles of justice and charity."

74. As Our Predecessor Pius XII observed with evident justification: "Likewise the national economy, as it is the product of the men who work together in the community of the State, has no other end than to secure without interruption the material conditions in which the individual life of the citizens may fully develop. Where this is secured in a permanent way, a people will be, in a true sense, economically rich, because the general well-being, and consequently the personal right of all to the use of worldly goods, is thus actuated in conformity with the purpose willed by the Creator."

From this it follows that the economic prosperity of a nation is not so much its total assets in terms of wealth and property, as the equitable division and distribution of this wealth. This it is which guarantees the personal development of the members of society, which is the true goal of a nation's economy.


One of the implications of this is the need for the taxation of property, meaning land. Were this teaching to be followed, then not only would the huge profits, which mostly comprise the economic rent of land, would be made available for public revenue, but also the opportunities for tax avoidance would be blocked, since land cannot be shifted to a tax haven.

2:11 pm  
Blogger Georges said...

TJN isn't interested in real tax abuse via MP expenses?

1:45 pm  
Anonymous Anonymous said...

Richard, an interesting report, but have you actually read the data tables? There are many inconsistencies which are distorting the figures: for example, the figure for flows from Turkey to the EU27 moved from EUR1.4bn in 2005, to EUR1.6bn in 2006, to a massive EUR77bn in 2007.

The notes to the report indicate that this relates to the export of SEVEN MILLION shearing machines to Spain in2007. This is clearly an error, as is indicated in the research. Yet this figure is allowed to stand. The trend outlined above would indicate a corrected figure of around EUR1.8m in 2007, suggesting an overstatement in the EU section of around EUR75bn, which represents around 22% of the total claimed in the report for the EU.

Look also in table 1 -the total capital flows to the US are GBP84bn in 2005, GBP91bn in 2006 yet a staggering GBP176bn in 2007. Similarly, the EU figures move from GBP56bn in 2005, GBP51bn in 2006, to GBP123bn in 2007. There is no explanation for why these figures have increased so dramatically in 2007 - something is clearly wrong here.

Remember the old maximum - garbage in, garbage out. I'm sure the broad principles and conclusions are correct, but the extrapolation of the raw data figures into the assumptions Christian Aid have made, and which you have quoted with approval, seem to me to have little validity.

Ian

1:33 am  
Anonymous TJN said...

The last comment started "Richard". We assume this refers to Richard Murphy. Just for the record, Richard never writes any TJN blogsalthough we do refer to his work a lot, and he does copy TJN blogs onto his own from time to time.
Read his excellent blog here.
http://www.taxresearch.org.uk/Blog/

2:12 am  
Anonymous David McNair said...

Christian Aid's report uses an academic peer reviewed methodology to estimate capital flight from non-EU27 countries to the EU, US, UK and Ireland. Using the most complete trade datasets from the EU and US, trade expert Prof. Simon Pak, President of the Trade Research Institute in the US analysed trade in everything from nuclear reactors to cornflakes, and on the basis of recorded trades, estimated the normal prices for these products. Where prices lay outside the normal 'arms length' price this capital is considered to be mispriced.

There are three mutually exclusive explanations for an abnormally priced trade:

1. Product heterogeneity for a given product classification (this was addressed in the report in terms of high-end, mid-range, low-end products)
2. Recording error, such as misclassified commodity, erroneous quantity and value, etc. (The report states that only Customs Authorities/Gov’t agency can investigate this and as stated on page 4, we assumed the data are free from this type of error.)
3. Deliberate/intentional mispricing by the trading parties involved.

There are a number of significant jumps in the data and there are two important points to make here:

1. Mispricing of trade does not follow consistent yearly patterns but is dependent on the mispriced transactions which occurred between countries in these years. This may result in significant variations.

2. Where significant variations were identified, we looked at specific cases of capital transfer and provided an explanation for the jumps. Where recording error may have been an issue, we provided explanations in the footnotes.

On this basis, having explained the limitations of the data, we stand by our report as a robust analysis of the data provided by the US and EU.

In relation to the specific examples you mention:

" figure for flows from Turkey to the EU27 moved from EUR1.4bn in 2005, to EUR1.6bn in 2006, to a massive EUR77bn in 2007.

The notes to the report indicate that this relates to the export of SEVEN MILLION shearing machines to Spain in2007. This is clearly an error, as is indicated in the research. Yet this figure is allowed to stand. The trend outlined above would indicate a corrected figure of around EUR1.8m in 2007, suggesting an overstatement in the EU section of around EUR75bn, which represents around 22% of the total claimed in the report for the EU.”

We have highlighted what appears to be a reporting error. But again, the analysis is conducted on the basis that data provided by the US and EU is robust.

The total capital flows to the US are GBP84bn in 2005, GBP91bn in 2006 yet a staggering GBP176bn in 2007. Similarly, the EU figures move from GBP56bn in 2005, GBP51bn in 2006, to GBP123bn in 2007. There is no explanation for why these figures have increased so dramatically in 2007 - something is clearly wrong here.

The report does supply an explanation of this in footnote 25:

"This large increase over 2005 and 2006 results from Malaysia’s 2007 export of fixed resistors in large quantities multiple times at prices much lower than one cent. This resulted in an estimated undervalued amount of more than US$164bn while the corresponding undervalued amount during 2006 is only US$283m. Given that there are at least 18 low priced transactions, this does not seem likely to reflect a one-time recording error.

David McNair
Christian Aid

10:16 am  
Anonymous Anonymous said...

David, thanks for your comprehensive response.

Frankly, whether or not this is an "academic peer reviewed methodology", and whether or not the research is "conducted on the basis that data provided by the US and EU is robust", any responsible researcher would surely qualify their findings by clear reference to the risk that their extrapolated conclusions might be distorted by incorrect data.

The report makes a bold and headline-driving conclusion concerning the level of mispriced trade, yet - as I mentioned in my earlier post - around 22% of the total value claimed for the EU27 is seemingly based on the assumption that the Turkey actually did export seven million shearing machines to Spain.

Perhaps they did, but I somehow doubt it.

Regarding Malaysia's supposed export of USD164bn worth of fixed price resistors at less than one cent each, doesn't that imply that they made 16 trillion such items in one year? Don't you think that is an awful lot of resistors - I wonder what are they used for?

Given that I doubt this data is correct, in my view the conclusions must also be suspect. I will leave readers to form their own views on this.

Sadly, research driven by a desire for headlines does not gain my respect.

Regards
Ian

3:08 pm  
Anonymous David McNair said...

Ian,

Thank you for your response.

I agree that responsible researchers should identify risks regarding assertions being made and we have done so.

The report is clear regarding the methodology of how we arrived at the findings and the potential weaknesses in the data.

But whether or not the EU and US trading data accurately recorded the exports of resistors to Malaysia or the export of shearing machines to Spain, the findings are still very clear.

Billions of pounds of illicit capital are being shifted from the world's poorest countries to the world's richest countries each year.

Our view is that this is immoral and unjust and it's time something was done to address it.

But I will leave readers to form their own views on this.

David

2:01 am  

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