Tuesday, March 31, 2009

TJN Germany blog is live

A rich new source of tax justice information will now be made available in German.

Click here.

A new TJN web page will be emerging too.

Click here.

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Links - March 31

** Also see our searchable archive of past story summaries; and Offshore Watch. **

UK plans to ban use of offshore centres
March 30 (FT) - Banks operating in Britain will be banned from using tax havens if they sign up to a draft code of practice drawn up by the government to address a row over their aggressive tax planning. The code will only succeed if the government is able to persuade all banks, including UK branches of overseas banks, to sign up to it.

White House announces tax reform task force
March 25 (The Hill) - The Obama administration announced Wednesday that it is creating a task force to examine ways to simplify the tax code, close tax loopholes, lessen tax evasion and reduce corporate welfare.


Brown plans global scrutiny of tax havens
March 23 (Guardian) – ‘Tax havens will be forced to submit themselves to international scrutiny under plans to tackle their culture of secrecy being proposed by Gordon Brown.’

UEFA Considering Tax On Super-Rich Football Clubs
March 27 (Taxnews) - UEFA, the governing body for European football, has announced this week proposals to introduce a tax on big-money transfers in order to try to support struggling clubs forced into debt by their rich, often investor-backed, counterparts.

Sardinia To Scrap Wealth Tax Regime
March 27 (Tax News) - Sardinia’s new governor, Ugo Cappallacci, has announced this week that he is to retract his predecessor’s luxury tax regime. The sunny island off the coast of Italy, which hosts numerous VIPs and HNWIs, currently levies substantial taxes on private yacht and flight arrivals.


Brown snubbed over tax
March 29 (Times Online) – ‘GORDON BROWN’S carefully laid plans for a G20 deal on worldwide tax cuts have been scuppered by an eve-of-summit ambush by European leaders.’

UBS says Swiss tax move does not weaken it in U.S
March 27 (Reuters) – ‘UBS said on Thursday a decision by Switzerland and other offshore centers to cooperate more on tax evasion did not weaken the Swiss bank's stance in an ongoing U.S. tax dispute.’

Berlin Takes on the Tax Havens
March 27 (Spiegel) – ‘The German government is applying pressure on offshore tax havens. It is also taking action against German banks operating in Switzerland, where they maintain accounts for shadowy Liechtenstein foundations. In a time of economic crisis, Berlin needs all the tax euros it can get.’

Hell Nay, We Won’t Pay
March 27 (NY Times) – ‘Thanks to “Cracking the Code” which, by his count, has spawned “CtC Warrior” support groups in 48 states — author Peter Hendrickson has found, as he puts it, “a more productive” way to fight the income tax. Rather than mail a bomb to the I.R.S., he has taught thousands of Americans how to send the I.R.S. and state tax agencies what he calls “educated returns” — and what the I.R.S. calls fraudulent ones. A tale of tax deniers.

The mystery of the phantom 7236 clients of UBS
March (Le Temps) - ‘The documents delivered to the American courts by a former employee revealed that the bank has lost contact with thousands of customers. Ten years after the affair of the dormant, Switzerland has adopted no specific legislation on the subject.’

The Quiet Coup
May (The Atlantic) – ‘The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If we are to prevent a true depression, we’re running out of time.’

Switzerland: Lacking the Political Will
March (Le Temps) – ‘When the panel that I chair has submitted a bill in 2004, international pressure had disappeared. Switzerland kept the feeling of having been unjustly mistreated,’ said Luc Thévenoz, Professor of Law at Geneva University.

Zambia parliament approves scrapping windfall tax
March 28 (Reuters) – ‘Zambia's parliament has agreed to abolish a controversial 25 percent windfall tax to reduce pressure on foreign mining firms hit by the global financial crisis, Mines Minister Maxwell Mwale said on Saturday.’

Island ‘likely to escape’ G20 blacklist inclusion
March 26 (This Is Guernsey) – ‘GUERNSEY is set to reach the finish line in its efforts to escape being blacklisted by the G20, the chief minister believes.’

FACTBOX: What is the G20?
(Reuters) - Leaders of the G20 major economies are due to meet in London on Thursday to review progress in tackling the biggest economic crisis since the 1930s. Following are some details of the group's origins and achievements so far.

Tax havens feel the heat
March 30 (FT) - Officials are exploring the possibility of moving negotiations on information exchange on to a multilateral basis. Developing countries are acutely aware of how much tax revenue they lose to evasion. “I don’t think it’s overstating it to say it’s the dawn of a new era” said John Riches, deputy chairman of STEP Worldwide, a professional body for wealth advisers.

Swiss to give Britain bank papers in bribery case
March 30 (AP) - Swiss authorities will provide bank account details to Britain in a multimillion dollar Nigeria bribery case involving a subsidiary of Halliburton Co., court rulings said Monday.

Combating Global Climate Change: Why a Carbon Tax is a Better Response to Global Warming than Cap and Trade
March (Stanford Environmental Law Journal) - A carbon tax could be implemented and enforced without the need for a complex new regulatory scheme and would provide an immediate carbon price signal. In addition, revenue from a carbon tax could support research and development of alternative energy and ease any regressive effects of the tax.

Swiss To Sign Model Treaty With US, Japan,
March 29 (Tax News) - Swiss Finance Minister Hans-Rudolf Merz has underlined Switzerland’s strategy in conforming to OECD’s standards through the signing of double tax agreements, providing for the exchange of information upon request. It is understood that the first two revised treaties will be signed with Japan and the US.

China Implements Measures To Combat Tax Evasion
March 29 (Tax News) - The Chinese State Administration of Taxation has removed tax privileges afforded under various double taxation treaties to foreign investors who misuse the system of 'special purpose vehicles' as a means of reducing their tax liabilities or circumventing exchange controls.

French Parliament Rejects Proposal To Tax The Rich
March 29 (Tax News) - Members of France’s National Assembly have nevertheless voted to reject four amendments to the much trumpeted “bouclier fiscal” or tax shield, including proposals to “suspend” the tax shield for 2009 income, and to increase tax on high-income earners, as a sign of solidarity in a time of crisis.

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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.

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Friday, March 27, 2009

A reminder: what corruption really is

Last year we published a long article on corruption in The American Interest. Until TJN came along, and as far as we can tell, nobody had ever articulated this completely new take on corruption, though obviously the odd aspect popped up from time to time.

This is nothing to do with Transparency International and its Corruption Perceptions Index, though TI, or at least many people in TI, are catching on.

If you want to understand what corruption really is all about, click here.

And more is coming on this subject, before too long. Watch this space.

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Secrecy vs Confidentiality

A frequent justification trotted out by defenders of tax havens is that wealthy people need privacy. Not surprisingly, it is being pleaded all over the place now, as tax havens have come under pressure. So in the Financial Times we read a story about how the `ferocious campaign unleashed against investors who hide their money in secrecy jurisdictions' is impacting also on clients of private banking specialists even if they `have never been tempted to dodge taxes'.

Apparently they have all sorts of motives for wanting privacy: religious reasons, or concealing their wealth from family members, or from potential kidnappers.

It is said that the outrage from banks which blocked the proposals in 2001 for the US to require banks to report interest payments to non-residents, so that the information could be passed to US treaty partners, was because of fears that `sensitive financial information could fall into the wrong hands'.

Nothing to do with tax evasion, you understand.

However, banks in every country in the world have a strict legal obligation to keep customers' information confidential. There is no difference in this respect between a bank account in London or Lichtenstein, which could be with the same bank. The key difference is that in some countries the tax authorities can obtain information from the banks, for tax purposes. Not family members. Not kidnappers. Not religious zealots.

It's usually fairly easy for, say a kidnapper, to identify rich people. They are the ones who have large houses and flashy cars, and own football clubs. Magazines like Forbes publish estimates of their wealth.

The FT story claims that the fees for managing trusts `will go through the roof', yet in spite of the costs the clients are `diversifying' by setting up trusts in various jurisdictions, so that `If they are revealed as the ultimate beneficiary in one jurisdiction, they can fall back on another.'

All this apparently has nothing to do with tax. It's all about religion, or predatory or vulnerable family members, or kidnappers.

Pull the other one.

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The subsidy to hedge funds

Hedge funds attract a great amount of suspicion. Tax is at the core of why this should be so.

A while ago, the FT published a letter by TJN Senior Adviser Prof. Sol Picciotto and a colleague, Prof.David Campbell, saying that hedge funds owe their popularity to their special tax treatment. The inevitable reply came from a hedge fund manager, David Beddington, pouring scorn on the professors’ credentials. However, he also mustered an argument. He said that hedge funds do not receive a sizeable public subsidy:

"Hedge funds are customarily set up as offshore non-distributing funds, meaning that UK tax-resident investors who invest in them are taxed on their gains as income when they realise the profit. If the same investors were in an onshore fund they would pay corporation tax within the fund or capital gains depending on the specific structure. . . definitely no subsidy."

Amid the complex language here, he has in fact confirmed that hedge funds themselves pay no tax on the profits of the funds. This is because they are treated as 'resident' and earning their income offshore. 40% of all hedge funds are formed in the Cayman Islands. This is the case even though their investment decisions are taken by advisers onshore, and the work done offshore of placing their trading orders may entail no more than providing a letter-head.

Tax authorities in countries such as the US and the UK have accepted this state of affairs, although they could challenge it under existing international tax rules. Why have the revenue authorities in the UK and the US adopted such a lax interpretation of residence and source rules? It is “for fear of offending [US] banks” in the words of tax specialists Lee Sheppard and Marty Sullivan (Tax Notes International 14 Jan. 2008).

But Beddington’s reply also said that hedge fund investors are taxed – as soon as they “realise the profit” – that is, bring them back onshore. Here is another of the big myths of the offshore system. Since the funds are treated as resident offshore, their distributions are not subject to a witholding tax because they are treated as income that is not from a UK source. The trick is to find a way to get at that money without it triggering the tax charge that would ordinarily result if the income were brought back onshore. This can be done in several ways. For example:
  1. UK residents who claim non-domicile status can avoid all taxes on this income unless they actually bring it back to the UK. But there are many ways that they can enjoy this tax-free income: for example, use a company formed in another tax haven to buy a house in the UK for their use, or a yacht, or a private plane, or even a football club….

  2. British citizens can become non-resident, and enjoy such offshore income, while continuing to keep up an active business and social life in the UK, by exploiting the residence rules. Many own houses or apartments in tax havens like Monaco - they can still come regularly to the UK and keep outside the residence rules. Many such people come in to London on Monday morning and return Wednesday or Thursday evening, and count only two or three 24-hour periods, which they can do for 30-40 weeks and keep under the 90-day limit. The Revenue tried to change the rule to count any part of a day, but had to withdraw the proposal.

  3. Of course, the offshore status of hedge funds also provides strict secrecy, so that revenue authorities are unable to identify the beneficial owners of such income. This secrecy is an open invitation to tax evasion. As the evidence from Lichtenstein last year showed, it is a temptation which even the most highly-paid and apparently respectable seem unable to resist. Now we read that the Revenue is proposing to offer a `deal’ to thousands of British `investors’ with up to £3b stashed in Liechtenstein alone.
The subsidy is there, quite obviously. The subsidy has to go. (And let's scrap the domicile rule while we're at it.)

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Tax havens and the economic crisis - a reminder

As a reminder to those who aren't familiar with our website, we have a relatively new section dedicated to looking at the links between the global economic crisis and tax havens. This short summary at the top contains a few core themes; underneath that we have pasted a number of documents and articles supporting the case. This section is growing all the time.

Many of the roots of the current global economic crisis trace back to offshore financial centres located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg (see examples of why this might be so here and here.)

These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of main ways.

First, they offered what has been called a "get out of regulation free" card to businesses that abuse them.

Second, unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may have staunched the crisis.

Third, tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.

Fourth, “satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are often conduits for illicit and other financial flows, often from developing countries into the wealthy financial centres like London, New York, which provide their own incentives for these flows too, and these contributed to large-scale macroeconomic imbalances. The entire mainstream economics profession has neglected to measure most of these vast flows.

Fifth, one of the most important features of the crisis is that the financial system has become frozen as a result of mutual mistrust and impenetrable complexity making it impossible for partners to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, have played a major part in this.

Sixth, they provided the ideal situation for all manner of fraudulent business models - such as those offered by Bernie Madoff - to proliferate, adding to the mayhem. (Other themes, which we will add shortly, are in TJN's Action Programme Ending the Offshore Secrecy System which we will incorporate in due course.)

Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.

Click on the section to read more.

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New study - Britain and the U.S. may be the dirtiest tax havens

Switzerland's Le Temps newspaper has just pointed out a remarkable new study by Jason Sharman, an offshore expert (he wrote a book on the OECD project against tax havens, reviewed here.)

Sharman has written for TJN before but is not a TJN member and this is not a TJN study; we are still trying to find the study itself. Le Temps said this:

"With a small budget, and using classified ads that proliferate on the Internet or in the press, this professor of the Center for Governance and Public Policy at Griffith University (Australia) made bids to set up shell companies in 22 countries -- some labeled as tax havens; others are very respectable members of the OECD."

What, pray, did he find?

"His conclusion is doubly embarrassing for members of the G20 currently leading the hunt for tax evasion. First, it is easy to transfer money anonymously, despite all the rules of conduct and the conventions. Second, and more surprisingly, countries where the misuse of rules is easiest are not the exotic islands, Switzerland or Liechtenstein - but the United States and Great Britain."

This does not surprise us, and we've said this kind of thing many times before, but it has colossal implications. How did he find this out?

"He began by identifying on the internet players that offer to set up front companies, and solicited 45 bids. In 17 cases, these service providers kindly provided the requested shell without bothering to check on the actual identity of the client. And it was not expensive: $800 to $3000. Interestingly, only four of these providers were located in tax havens (TJN: we presume they mean "classic" tax havens of the popular imagination), while 13 were located in OECD countries claiming to keep to the rules of verification: seven in Great Britain, four in the United States, one in Spain, and one in Canada."


The next step was to open an anonymous bank account. Here, the task proved more difficult: the process resulted in only five cases. Five out of 45? At first glance the system seems pretty tight. Jason Sharman did not believe it: he only had Google and 20,000 dollars available, "which is nothing compared to the capacity of criminal organizations," he adds.

The five successful attempts to open an anonymous account took place in Wyoming (where the laws have since changed), Nevada (a scanned driver's license was the only proof of identity requested), twice in Great Britain (via the Seychelles, Montenegro, St. Vincent and the Grenadines) and once in Liechtenstein (in a joint arrangement through Somalia). Copies of passports were sometimes required, but not certified by notary.

The Economist picked up on this study, and added:

"At issue is not banking secrecy as the Swiss once knew it, where discreet men in plush offices promised to take the names of their clients to the grave. This is a more insidious form of secrecy, in which authorities and bankers do not bother to ask for names, something long outlawed in offshore tax centres such as Jersey and Switzerland but which has persisted in America. For shady clients, this is a far better proposition: what their bankers do not know, they can never be forced to reveal. And their method is disarmingly simple. Instead of opening bank accounts in their own names, fraudsters and money launderers form anonymous companies, with which they can then open bank accounts and move assets."

And they added, regarding the United States:

"For foreigners, America is a particularly attractive place to stash cash, because it does not tax the interest income they earn. Thus with both anonymity and no taxation, America offers them all the elements of a tax haven."


and about Britain:

"in 45 minutes on the internet he formed a company without providing identification, was issued with bearer shares (which have been almost universally outlawed because they confer completely anonymous ownership) as well as nominee directors and a secretary. All was achieved at a cost of £515.95 ($753)."

Sharman's conclusion?

"The United States, Great Britain and other OECD states have chosen not to comply with the international standards which they have been largely responsible for putting in place."

Though it does not surprise us, it shocks us.

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Links - March 27

** Also see our searchable archive of past story summaries; and Offshore Watch. **

The club of incorruptibles.
March 23 (Le Monde) - They belong to the same brotherhood, that of men and women with no other purpose than to clean up the world democracies in tracking corruption in every corner. They are members of a private network created by the former judge Eva Joly, with the active support of Norway. They are not numerous, about twenty, and meet discreetly twice a year. In February, they met in Zambia.

Toxic Assets Were Hidden Assets
March 25 (WS Journal) - Hernando de Soto, author of "The Mystery of Capital" writes in an opinion for the Wall Street Journal that toxic assets are a symptom of the debased global financial architecture, a problem that must be tackled from the root in order to reign derivatives in. This must be done using six longstanding procedures to guarantee value such as recording assets and transactions, and prioritizing production over finance.

Stockbrokers 'hid AIB deals behind secret tax havens'
March 25 (Independent) Dubbed the 'Irish-style Watergate' AIB's stockbroking arm used black-listed tax havens to circumvent rules preventing it from buying and selling the bank's shares, the bank's former auditor told a Dail committee yesterday.

A seven day plan pre the G20
March 25 (Tax Research UK) Co-founder of Tax Justice Network Richard Murphy, blogging from the House of Commons, outlines a seven point plan toward reforming the global financial architecture in response to a challenge by Michael Meacher MP in a classic 'what would you do if you were Gordon Brown for a day..(or week).

Obama’s bank plan could rob the taxpayer
March 25 (Financial Times) Jeffrey Sachs, Director of the Earth Institute at Columbia University, comments on the Geithner-Summers plan saying, 'under the plan the loan is precisely designed to be a one-way bet, for the purpose of overpricing the toxic asset in order to bail out the bank’s shareholders at hidden cost to the taxpayers.'

Tax: Sarkozy ready to resign from his post as co-prince of Andorra
March 24 (AFP) PARIS (AFP) 'President Nicolas Sarkozy has threatened Wednesday to UMP members to resign from his post as co-prince of Andorra if the G20 does not progress on the issue of tax havens.'

Tough rules needed to shut financial market casino - UN
March 19 (Reuters) Tough international rules are needed to regulate currency, commodities and other financial markets and "close down the big casino" to prevent more economic crises, a U.N. agency said on Thursday.

Volcker panel to study tax reform, report to Obama
March 25 (Reuters) 'A panel led by former Federal Reserve Chairman Paul Volcker will study options for U.S. tax reform and report back to President Barack Obama by December 4, the White House budget director said on Wednesday.'

Early Day Motion
March 24 (UK Parliament) - That this House condemns Barclays Bank for indulging in alleged tax avoidance schemes which may have reduced the Treasury's tax revenues by over £1 billion; and urges the Government not to provide any loans, guarantees and financial support to Barclays and suspend its deposit-taking licence until it cleans up its affairs and withdraws from manufacturing, marketing, sale and implementation of all tax avoidance schemes.

Early Day Motion
March 24 (UK Parliament) - That this House congratulates Wikileak for publishing documents relating to alleged tax avoidance schemes used by Barclays Bank; and urges the Government to place copies of those documents on the HM Treasury website.


AIG's Bonus Unit Now in IRS's Sights
March 24 (WS Journal) 'Some of the same banks that got government-funded payouts to settle contracts with American International Group Inc. also turned to the insurer for help cutting their income taxes in the U.S. and Europe, according to court records and people familiar with the business.'

Bancos devem dar mais informação aos clientes - Silva Lopes
25 Mar (Lusa) – Former Portuguese Finance Minister calls for more international financial transparency at TJN event involving John Christensen in Coimbra, Portugal. Translation here.

A vault unlocked
March 23 (Financial Times) 'Bern’s acceptance of international standards on tax transparency, potentially lifting the veil on billions of francs in foreign assets never declared by their owners, came in an international chain reaction by countries whose bank secrecy rules long appeared impregnable.'

Almost half of all Malaysians guilty of tax evasion:
March 23 (Earth Times) 'At least 900,000 Malaysians are guilty of not paying their taxes'
There were an estimated 2 million people with taxable earnings in the country, but only 1.1 million are currently paying. Companies fared even worse, with only 104,000 corporations paying taxes on their profits, out of the 500,000 firms registered.

Co-op credit societies may be used for money laundering
March 23 (The Economic Times) India: 'With banks closing most loopholes for money laundering, co-operative credit societies may turn out to be the weak link in the system.'

France and Jersey in deal to fight tax fraud
March 23 (Reuters) 'France and Jersey have signed an agreement to combat tax fraud by exchanging information, the French government said on Monday.

Andorra, Taxed by the Financial Crisis
March 24 (Le Monde) No one would criticise Obama for ognoring Andorra, 'yet despite its Lilliputian size, these entities will hold for a few hours of the major discussions of this world at the G20 summit held in London on 2 April.'

On Tax Havens
March 24 (Le Monde) 'At the heart of St. Helier prosperous one of the most formidable network of financial institutions on the planet. This island of 186 km2 and 90 000 people raised a short distance from Cherbourg has 47 branches of international banks and several hundred fund managers, accounting firms and law firms.'

London and New York are also tax havens
March 24 (Le Monde) Marc Roche of the Le Monde interviews John Christensen, Director of the Tax Justice Network.

Switzerland: Moralising small steps
March 24 (Le Monde) Switzerland and the fate of foreign funds is as stake as the question of tax evasion, fraud and capital flight is questioned by the international community.

Swiss banks ban top executive travel
March 26 (TJN) - Switzerland’s private banks have started to ban their top executives from travelling abroad, even to neighbouring France and Germany, because of fears they will be detained as part of a global crackdown on bank secrecy.

Offshore account holders offered tax deal
March 26 (FT) - Thousands of British investors with up to £3bn stashed in secret Liechtenstein bank accounts will be asked to come forward voluntarily under a deal to be negotiated next week that could be the first of many worldwide.

Barclays tax documents: how Matthew Oakeshott told their lordships what we couldn't
March 27 (Guardian) - Yesterday in the Lords, Matthew Oakeshott, the Lib Dem Treasury spokesman, used parliamentary privilege to tell his fellow peers about what newspapers could not: Documents leaked to the Liberal Democrats.

House Committee Schedules Hearing On Banking Secrecy
March 26 (Tax-News) - Congressman Richard Neal has announced that a House of Representatives committee will hold a hearing on issues involving 'banking secrecy practices and wealthy American taxpayers.' It will focus on the apparent limitations of the Qualified Intermediary (QI) program.

An imbalanced summit
March 25 (Asia Times) - By Oscar Ugarteche - A group of seven highly indebted rich countries (HIRC) of the world have organized a meeting of 20 nations in London next month to discuss the future of the world's finances. They have called to the table some creditor developing countries, such as Brazil, Argentina, Mexico, some Arab countries, China and India, but have left aside all the world's other surplus countries, creditors to the US and Europe.

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Thursday, March 26, 2009

Obama: latest on tax havens

In yesterday's Op-Ed he wrote:

"We must crack down on offshore tax havens and money laundering.
. . .
Instead of patchwork efforts that enable a race to the bottom, we must provide the clear incentives for good behavior that foster a race to the top."


Good to hear it.

This is what the UK's Gordon Brown had to say.

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TJN: official G20 blogger

Richard Murphy is a senior adviser to TJN. See this press release, and note his involvement:

Bloggers to Make History at G20 Summit
Posted: 24/03/09

A coalition of NGOs - the G20Voice – and the UK government are breaking with convention and, for the first time, allow 50 bloggers to report live and direct from the G20 summit, on 2 April 2009 in London.

This unprecedented event, backed by the Government, gives the bloggers and their audience the chance to engage with and influence world leaders on issues including development, climate change and women’s rights. The bloggers were nominated by the public, with more than 700 nominations received in 12 days.

The organisations behind G20Voice are OxfamGB, Comic Relief, Save the Children, ONE and Blue State Digital. G20Voice is a collaborative effort demonstrating the breadth of commitment to ending world poverty and inequality.

The 50 include a broad range of influential, knowledgeable and popular bloggers from the G20 countries and the developing world. These include:

Sokari Ekine – a pioneering Nigerian blogger
Jotman – an undercover blogger exposing injustice in Thailand and Burma
Daudi Were – a leading organiser of African bloggers
Dr Kumi Naidoo – head of GCAP and contributor to Huffington Post
Cheryl Conte from Jack and Jill Politics - representing the US “Black bourgeoisie”
Enda Surya Nasution – the father of Indonesian blogging
Rowan Davies – representing the 200,000 members of Mumsnet
Rui Chenggang – China's leading economics broadcaster and blogger with 13,000,000 viewers every evening on CCTV
Richard Murphy – the leading expert on Tax Havens.

They will be joined by thousands of bloggers online at www.g20voice.org with audio and video livestreaming, and also via skype broadcasts from inside the summit.

There is a full programme of events for the 50 invited bloggers. The event begins on 1 April with the official launch, including a series of briefings and round table discussions. On the day of the summit bloggers will have access to briefings from senior figures and world leaders. Members of the delegations have been invited to speak with the bloggers to discuss the developments in the main summit chamber.

Journalists are invited to come to the blogging tent to meet and talk with bloggers throughout the day.

Karina Brisby, G20Voice project founder and Digital Campaigns Manager, Oxfam GB said: "The G20Voice project was inspired by the articulate, engaging and often outraged posts, tweets, podcasts and videocasts from bloggers all over the world about the current economic crisis and how that affects the issues they are passionate about such as poverty and climate change.

"We are seeing a huge increase in the number of people around the world using digital tools to inform themselves and then contribute to debates about the issues that affect their lives. G20Voice recognises the importance of bloggers and gives them a unique opportunity to report back to their audiences direct from the G20 Summit itself."

Adrian Lovett, Director of Campaigns at Save the Children said: “G20Voice will tear back the curtain as leaders draw up their blueprint for global recovery. Thanks to G20Voice at this summit the world will be watching. Bloggers will witness the summit from the inside - and the world will know whether leaders are building a future fit for the world's children, or one that rewards only the rich. Gordon Brown has set the bar for the London G20 summit next month by promising that the UK will meet its aid commitments despite the economic downturn. He must ensure other G20 countries do the same. If action to prevent children dying isn't taken now we could see this financial crisis claim the lives of a generation of children.”

Oliver Buston, Europe Director of the Africa campaign group ONE said: “At ONE we’ve always been focused on empowering individuals to raise their voices against extreme poverty. This group of citizen-journalists includes some of the most articulate voices on this issue, and it’s exciting to be a part of bringing them to this international stage. The world’s poorest people are being hit hardest by a global crisis not of their making – the bloggers will have a chance to ask tough questions of world leaders, and demand solutions that will benefit everyone, not just the wealthy few. “

How to Find G20Voice Online

web: www.g20voice.org

twitter: @G20Voice


flickr: http://www.flickr.com/g20voice

youtube: http://www.youtube.com/G20voice

moblog: http://moblog.net/voice

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TJN Germany - spreading its wings

Today at 2pm, and led by TJN-Germany, 17 German civil society organizations handed over a call for a determined clampdown on tax havens to the German Secretary of Finance, Nicolette Kressl. Click here to read it. The advances already achieved against tax havens - not least because of pressure applied by the German government on secrecy jurisdictions such as Liechtenstein and Switzerland - are welcome, but far from sufficient. Major developmental NGOs and trade unions are among the signatories.

There are more good things happening in Germany. TJN-Germany is launching a blog in German that will go live on Monday, 1 April, 2009 right before the G20-summit. The link is here.

TJN-Germany also plans to build up a German TJN-website soon, though some technical details remain to be sorted out at this stage.

Macht euch bereit. Und viel Spaß.

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TJN in the FT: Swiss bank secrecy

We have this letter in the FT today, responding to an earlier long FT piece

Swiss secrecy laws had nothing to do with the Nazis

March 26 2009

From Mr Bruno Gurtner.

Sir, Your correspondent writes, in his article about Swiss bank secrecy (“A vault unlocked”, March 24), that Swiss secrecy laws “date back to 1934, when they were enacted partly to protect German Jews and trade unionists from the Nazis”. This is a big myth. The argument about it being set up to protect Jewish money first appeared in the November 1966 Bulletin of the Schweizerische Kreditanstalt (today Credit Suisse). The main reason bank secrecy was strengthened in 1934 was a scandal two years earlier, when the Basler Handelsbank was caught in flagrante facilitating tax evasion by members of French high society, among them two bishops, several generals, and the owners of Le Figaro and Le Matin newspapers. Before that, there was professional secrecy (such as exists between doctors and their patients), and violation was a civil offence, not a criminal one as it is today. Swiss bank secrecy has always been an effective way to attract foreign money.

Many Swiss people are delighted that our country is going to stop blocking the exchange of information with other jurisdictions and will now follow Organisation for Economic Co-operation and Development standards. For Switzerland this is a huge step. Other important steps must follow, to tackle other loopholes in the offshore world, such as those provided by British trusts and by other damaging facilities offered in Britain’s Crown Dependencies.

Bruno Gurtner,
Chair of the Global Board,
Tax Justice Network,
Bern, Switzerland

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UNCTAD blames deregulation, seeks code of conduct

The UN Conference on Trade and Development (UNCTAD) has issued a report ahead of next month's G20 summit saying what is by now well known: a sustained process of financial deregulation -- within countries and between countries -- led to an expanding cycle of optimism and risk-taking that is at the root of the current global crisis.

The 64-page report mentions the word "tax" only four times, but it does mention one especially interesting idea:

"To avoid the fight for market shares through manipulation of the exchange rate, wage rates, taxes or subsidies and to prevent financial markets from driving the competitive positions of nations into the wrong direction, a new code of conduct is needed regarding the overall competitiveness of nations. Such a code of conduct would have to balance the advantages of one country against the disadvantages of other directly or indirectly affected countries."

Now that makes sense. On the tax field, one is already being prepared for the UN. Read more here.

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Britain's disgrace, again

Last July we wrote an article about Britain's libel laws, which are an international disgrace. It quoted a commentator as saying:

"The libel laws of England and Wales are tilted so heavily against the defendant and involve such monumental costs that they amount, in effect, to censorship by private interests: a sedition law for the exclusive use of millionaires."

Quite, as some of know all too well. There's now a new article that reveals:

"A recent study by the Centre for Socio-Legal Studies at Oxford University revealed the astonishing fact that the cost of libel litigation in England and Wales is 140 times the average elsewhere in Europe."

British tax and secrecy laws and its special international arrangements protect the world's crooks and dictators perhaps more than any country's; Britain's libel laws have exactly the same effect. As the Guardian continues:

"Some of the most important investigations into corruption and human rights abuse are conducted by non-governmental organisations such as Human Rights Watch and Global Witness, whose work is constantly threatened by libel action."


There is a glimmer of light:

"there is currently a rare momentum for change, with a select committee inquiry and a number of consultations scheduled or under way"

We hope this leads to a clean-up of these dirty policies, though the article isn't that optimistic. Nevertheless, we are also heartened to hear that:

"English PEN and Index on Censorship have been conducting their own inquiry into the impact of libel this year, talking to editors, lawyers, journalists, publishers, bloggers and NGOs. Such is the concern that media competitors and interest groups who are traditionally suspicious of each other have been prepared to sit down at the same table. There is a strong argument that "no win no fee" is incompatible with the right to freedom of speech under article 10 of the convention on human rights. The Mirror is making this case in the European court of human rights."

The Guardian's Alan Rusbridger, writing about the Tesco case, had more wise words to say here.

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Tuesday, March 24, 2009

Breaking the Curse: TJN4Africa

Please be aware that tomorrow TJN for Africa, in partnership with other organisations, will be launching a report entitled "Breaking the Curse: How Transparent Taxation and Fair Taxes can turn Africa's Mineral Wealth into Development."

The invitation for the launch in Nairobi is pasted below.

Launching the Breaking the Curse Report

Action Aid International-Africa Region and the Tax Justice Network for Africa (TJN-A) would like to invite you or a representative of your organisation/agency to the launch of a groundbreaking report titled, Breaking the Curse: How Transparent Taxation and Fair Taxes Can Turn Africa’s Mineral Wealth into Development.

The report was commissioned and supported by leading International Development and Pan Africa Organisations - ActionAid, Christian Aid, Tax Justice Network for Africa, Third World Network Africa and Southern Africa Resource Watch. The report focuses on the lack of transparency in mining contracts as well as the revenue that national governments forego owing to imprudent excessive mining tax concessions. The report also reflects on unscrupulous schemes by multinational companies to avoid and evade tax.

The study found some very disturbing common features across the seven countries – Ghana, Malawi, Democratic Republic of Congo, Sierra Leone, Tanzania, Zambia and South Africa where the research were conducted. It demonstrates that African governments are foregoing millions of dollars in tax revenue from the mining industry.

The report further demonstrates that overly generous tax concessions are usually granted discretionarily in secret mining contract negotiations. In instances, where the government takes all reasonable steps to make the mining contracts equitable and transparent multi-national corporations engage in hideous schemes of tax avoidance and illegal tax evasion . A major contributing factor to this hemorrhaging of the African continent in this critical sector has been the lack of transparency and oversight of the financial remittances from mining companies to government institutions and the inability/lack of capacity in government regulatory institutions to audit the very complex multinational mining companies’ accounts/transactions.

Almost every African country faces critical challenges relating to contracts in the extractive sector (mining, fisheries, forestries, etc). The objective of this launch is to create an opportunity for interaction between and amongst with policy markers, parliamentarians, civil society practitioners, academics and citizens to critically engage the findings and recommendations of this report.

It is further hoped that these interactions will bring out practical suggestions for taking the recommendations forward in Kenya and beyond. The research report and inputs from subject experts will provide the background for deliberation and discussion at launch

The launch will take place on 25th March 2009 at Nairobi Safari Club, Nairobi, Kenya.

Time: 10h00 – 12h00

We hope you will accept our invitation and join us as a valuable participant as we take this opportunity to share the findings of the study on breaking the curse: how transparent taxation and fair taxes can turn Africa’s mineral wealth into Development.

Kindly confirm your availability soon by emailing Wole Olaleye: wole.olaleye@actionaid.org or call on: 020 425 0000/445 1041/3

Sincerely

Brian Kagoro
Pan Africa Policy Manager
ActionAid -Africa Region
Nairobi, Kenya

Alvin Mosioma
Coordinator
Tax Justice Network for Africa
Nairobi, Kenya

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UN commission of experts on financial crisis - recommendations

The high-level UN commission of experts on reforming the international monetary and financial system, chaired by the Nobel prize-winning economist Joseph Stiglitz, has now issued its preliminary recommendations. We are highly encouraged by what we see, and we note that recommendations we submitted to the Commission are substantially reflected in this draft.

Take this, for example, from point 40.

"The collapse in confidence in the financial system is widely recognized as central in the economic crisis; restoration of confidence will be central in the recovery. But it will be hard to restore confidence without changing the incentives and constraints facing the financial sector. It is imperative that the regulatory reforms be real and substantive, and go beyond the financial sector to address underlying problems in corporate governance and competition policy, and in
tax structures, giving preferential treatment to capital gains, that may provide incentives for excessive leverage."

This is just as we have been arguing (the italics are the UN's, not ours). Well said - and the rest of point 40 is worth reading too. Now look at the next section of the report:

"Well regulated economies have to be protected from competition from economies with inadequate or inappropriate regulatory systems. The problems of regulatory arbitrage and tax evasion are closely linked. Tax havens and financial centers in both developed and developing countries that fail to meet basic standards of transparency, information exchange and regulation should be given strong incentives to reform their practices, e.g. by restricting transactions between financial institutions in those jurisdictions and those in more highly regulated countries. Institutional arrangements for improving harmonisation and transparency should be strengthened, including the United Nations Committee of Experts on International Cooperation in Tax Matters as proposed in Paragraph 16 of the Doha Declaration. Also other international arrangements and conventions such as United Nations Convention against Corruption should also be strengthened."

We like it. Point 56 is also worth noting (this time, the italics are ours):

"Financial institutions have been allowed to grow to be too big to fail, imposing enormous risk on the global economy. And while there has been innovation, too much of the innovation was aimed at regulatory, tax, and accounting arbitrage, and too little at meeting the real needs of ordinary citizens. Too little was done to help developing countries and ordinary homeowners manage the risks which they face, with consequences that have been repeatedly apparent. Financial regulation must be designed so as to enhance meaningful innovation that improves risk management and capital allocation."


Point 67, looking at better global regulatory governance, notes that

"Movement towards this goal might be enhanced by taking steps to lay the groundwork for a Global Financial Regulatory Authority and a Global Competition Authority.

Interesting. A Global Tax Authority is something that has been suggested in the past, although nobody seems to be pushing this hard at the moment. And, referring to what the Financial Stability Forum and the Basel Committee have agreed (a College of Supervisors to coordinate supervision of major international banks,) the Stiglitz report makes clear that this is only seen as a temporary step:

"A potential, but partial, remedy to this difficulty is the proposal for a College of Supervisors to oversee systemically relevant global financial institutions. This could provide a basis for a more comprehensive Global Authority."

Then points 78 and 79 provide for an intriguing possiblity. First, point 78 provides the context:

The international community needs to explore a variety of mechanisms of innovative finance, including regular emissions of a new global reserves (SDRs), revenues generated from the auction of global natural resources (such as ocean fishing rights and pollution emission permits), and international taxes (such as a carbon tax, which would simultaneously help address problems of global warming, or a financial services tax, which would simultaneously help stabilize international financial markets."

And then point 79, adds this crucial set of ideas:

"The effective implementation of national systems of taxation form a crucial part of domestic development finance. Measures must be taken to preserve national autonomy in the selection of the sources and methods of government financing while ensuring that national differences do not create incentives to evade responsibility of contributors to the support of government policies. An efficient method of achieving this result would be the acceptance by all countries of an amendment of Article 26 of the United Nations Model Double Taxation Convention between Developed and Developing Countries to make the exchange of information automatic."

Here the UN is suggesting automatic exchange of information, just as we've been discussing. Fascinating. Times are changing.

There are some things we don't see in there. Proposals for a proper multilateral framework for tax cooperation, and reference to the proposed UN Code of Conduct on taxation are absent; these are just some of the ideas we'd have liked to see proposed here.

The report will be presented and discussed in an interactive thematic session on 25-27 March 2009 at the UN in New York. It would be interesting to conduct a gap analysis between this set of recommendations, and the final outcomes, to find out what has been cut out, and why. And, of course, who was responsible for cutting them out. Very little, we hope. But past experience has made us rather cynical.

(For those interested in looking at the issue of tax havens and the financial crisis in depth, look at this recent article by Nicola Liebert of TJN-Germany and Axel Troost of the German Bundestag; see also this special TJN web section dedicated to these issues. There is also now a German translation of our paper Ending the Offshore Secrecy system here.)

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OECD: some nuts and bolts

Recently we wrote a highly critical blog looking at what we see as the OECD’s feeble standards and criticising it for effectively setting itself up to fail: allowing the creation of a blacklist that singles out small island states and significantly absolves the large tax haven culprits like London, Switzerland, Luxembourg, Austria, Belgium: the OECD’s own. As happened in the last war on tax havens, which started just over 10 years ago, we suspect that this will lead to justifiable claims of unfairness and hypocrisy, and a widespread loss of support for the process.

Well, not everyone agrees with all of it. One opinion is that it may not have been the OECD Secretariat, so much as certain member states and groupings of states, that have led to the unfair black list/grey list outcome we described. Possibly so. Some also argue that by setting up a potential blacklist (there's still nothing published, though we now believe the list we mentioned to be substantially accurate), the OECD forced an extraordinary pace of change on jurisdictions which would never otherwise have happened. Several previously uncooperative jurisdictions — Andorra, Austria, Belgium Hong Kong, Liechtenstein, Luxembourg, Monaco, Singapore and Switzerland — have recently indicated that in effect they will adopt the OECD’s program of exchange of information upon request. This evidences that the momentum for transparency and for the override of bank secrecy and confidentiality in tax matters is growing. These are, one might argue, legitimate points. TJN would like to think it has played an important role in helping foster the political climate underpinning these changes.

For those who wish to know more about the technical aspects of what is involved with the OECD, here are some key opinions and technical details, provided by a correspondent close to TJN.
  • While we remain implacably critical of OECD standards as being hopelessly weak, especially when compared to the standards adopted by the European Union, the OECD does deserve credit at least for establishing the principle that a government’s obligation to exchange tax information should override its bank secrecy and confidentiality laws. (For tax geeks: this principle is embodied in the revised Article 26 of the OECD Model Income Tax Treaty and in Article 5 of the OECD Model Tax Information Exchange Agreement (TIEA). The UN Tax Committee has revised Article 26 of the UN Model Income Tax Treaty to adopt that same principle. We explain what these terms – TIEAs etc. - mean in a short section at the end of this blog.)

  • However, and as we’ve said before, the OECD’s program only requires those secrecy jurisdictions to exchange information on request. That is, the OECD member country must know enough information about the tax evader’s assets or accounts in the tax haven before it can request and then obtain more information. Clearly, exchange of information upon request is not effective exchange of information.

  • There are several other problems with the OECD’s approach of exchange of information on request. One is that the OECD program is implemented by bilateral agreements, and it will take many years for those jurisdictions to negotiate these agreements. Although there are 30 OECD member countries and 35 jurisdictions classified as tax havens, these tax havens have only negotiated about sixty five bilateral TIEAs since the OECD programme began in 1998. Another is that some of those tax havens/secrecy jurisdictions have indicated that they will apply special procedural requirements and or limitations upon exchange of information.

    For example, Singapore’s recent statement saying it has signed up to the OECD’s model also suggests that it will add some procedural safeguards to the procedure, to prevent `fishing expeditions' (that is, one country’s tax authorities making general requests to a tax haven about the taxable income of its citizens), and to protect confidentiality. Stipulations like this "Singapore will implement the Standard through our DTAs to assist on bona-fide requests for information rather than information fishing" are likely to create major additional obstacles to effective information exchange and further eviscerate the obligation of the secrecy jurisdictions to exchange information.

  • Even worse, the OECD programme is limited to bilateral agreements between OECD member countries and the secrecy jurisdictions. The OECD has not applied pressure on them to exchange tax information with non-OECD, developing countries. Why not?

  • The only effective procedure exchanging information is the automatic exchange of information, on a multilateral basis. The OECD does not do this. The EU Savings Tax Directive has adopted automatic exchange of information with regard to interest income, and is trying to expand such automatic exchange of information to other types of income, despite resistance from some member states. The EU is also trying to expand the Directive so that it applies to other countries; TJN strongly supports this too.

    This is not the only example. The United States automatically exchanges information about Canadian individuals’ bank interest income with the Canadian Government; and Mexico, as we recently noted, is now asking for the same thing. These are bilateral arrangements, however, which as we’ve indicated are inferior to the EU’s multilateral approach.
Explanatory section: TIEAs, income treaties and double tax agreements.

Income tax treaties and double taxation agreements (DTAs) are the same thing. They are comprehensive, in that they cover all types of income (either specifically or in general terms), and they specify what rates are applicable, and which of the two governments can tax which income and at what rates. They also cover procedural and administrative matters. Income tax treaties normally have a clause about exchange of information.

A Tax Information Exchange Agreement (TIEA) merely specifies the rules and procedures for exchanging tax information. However, in this respect the TIEA is more detailed than the exchange of information clause in income tax treaties. The TIEA details the procedural rules for how such information is exchanged.

(Separately, TJN's Nicola Liebert has prepared a comment for the Finance Committee of the German parliament on tax havens and explaining why OECD standards are not good enough. Click here - unfortunately it is only in German; no English translation is available.)

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Trillions down the drain: tax havens and shadow banks

This is the title of a first-rate article published by a German political magazine looking at tax havens and the economic crisis. It is written by Nicola Liebert, an active member of TJN-Germany, and Axel Troost, a member of the German Bundestag (parliament) who is also a TJN member. The article can be downloaded in German here, but we now have an English translation, which we provide here.

An early paragraph gives a flavour, quoting the Deputy Managing Director of the Bank for International Settlements as saying that the emergence of a "shadow banking system" had simply not been noticed, then adding:

"This paper argues that one key reason why the development of a shadow banking system had not been registered by even the most senior supervisors, let alone regulated, is that this system is almost exclusively based in tax havens."

It then goes on to outline why this has been so. It focuses especially, but not exclusively, on German financial institutions, looking, for example, at how German banks such as IKB, Sachsen LB, Hypo Real Estate (HRE), HSH Nordbank and Bayern LB shifted assets abroad, offshore, and off their balance sheets, often to jurisdictions like Dublin or Delaware that most people don't realise are tax havens, but also to the more "classic" tax havens like Cayman or Jersey. This complements and expands on research for TJN by Jim Stewart, Senior Lecturer in Finance at Trinity College, Dublin, who described problems with Dublin's International Financial Services Centre (IFSC) in a recent edition of our newsletter, Tax Justice Focus.

Liebert and Troost note, for example, about an HRE subsidiary called Depfa:

"in a letter to the Finance Committee of the German Bundestag written on 16 October 2008, Jochen Sanio, the President of the German Federal Financial Supervisory Authority (BaFin), emphasised that it was exclusively incumbent upon the Irish supervisory authority to monitor Depfa’s liquidity and solvency, which was why the German auditors had definitely not been required to examine the liquidity position of HRE’s Irish subsidiary."

And then compare this to what Jim Stewart wrote:

"Yet despite the location of managed funds and substantial operations in Ireland, the Irish regulator does not feature in any media analysis or discussions relating to the insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considers his remit is to ‘Irish banks’ – that is, banks that have their headquarters located in Ireland."


The long article continues; it looks at hedge funds, at the off balance sheet activities of Fortis bank and its hundreds of offshore subsidiaries; at the Icelandic bank Kaupthing and its activities in Bermuda, and it briefly examines Dublin, Jersey and Delaware to illustrate typical features of "regulatory havens." It also provides fascinating snippets, such as this comment from the Managing Director of the Cayman Islands Monetary Authority, Cindy Scotland, which illustrates not only attitudes in tax havens, but also the high legal hurdles that must be overcome to enact exchange of information under OECD guidelines:

"In the last few years, exactly two inquiries have come from Germany. So there does not appear to be any great need for transparency."

The article contains many more points and looks at approaches to tackling the problems; it is fitting to end this blog on this quote:

"The strategy currently being pursued by the world’s governments resembles that of health authorities that react to the outbreak of a pandemic solely by treating the people who are carrying the infectious disease – the banks – with expensive medicines without asking where they picked up the infection. No one is stopping their patients from setting off straight away for the same destination again, and no one is bothering with action to fight the sickness at its epicentre."

If you haven't already read the article, click here (English; Deutsch)

(Separately, Liebert has prepared a comment for the Finance Committee of the German parliament on tax havens and explaining why OECD standards are not enough. Click here - unfortunately it is only in German; no English translation is available.)

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Monday, March 23, 2009

Letter to the Financial Crisis Advisory Group

Tax Justice Network has submitted the following letter to the Financial Crisis Advisory Group of the International Accounting Standards Board. It is crucially important that this Group understands the importance of a reform of reporting standards for multinational companies in order to transform their operational transparency, and that the wider world understands how important this is:

Financial Crisis Advisory Group
International Accounting Standards Board
1st Floor, 30 Cannon Street
London EC4M 6XH

24 March 2009

Dear Sir

Financial Crisis Advisory Group - Input from Constituents

We note your request for comment from constituents published on 10 March 2009 and comment as follows:

1. From our perspective general-purpose financial reporting as currently promoted by the IASB has not helped identify issues of concern during the current financial crisis. In particular, the current structure of consolidated financial statements which means that more than 60% of world trade is hidden from view as it is undertaken on an intra-group basis has been particularly harmful. As a consequence of this approach to accounting we have not known:· In which countries multinational corporations (MNC) operate;· What an MNC is called in each location in which it operates;· What an MNC’s financial performance is in every country in which it operates, identifying both third party and intra-group trade as well as labour costs and head count;· How much tax (and other benefits) it pays to government locally as a consequence.
The absence of this data has created considerable opacity within the world financial markets which we believe led to the crisis of confidence within the world's banks and their reluctance to lend to many commercial organisations currently requesting facilities.

2. In our opinion this issue is of considerably greater importance than the absence of ‘through the cycle’ provisioning when assessing the impact of deficiencies in general-purpose financial statements on the world financial crisis. This is because the absence of country by country information of the type noted above is a fundamental failure in the reporting process but the absence of ‘through the cycle provisioning’ represents the omission of an indication of the subjective opinion of the management.

3. We share the opinion of some FCAG members who have indicated that they believe issues surrounding off balance sheet accounting and securitisation are more important than issues surrounding fair value accounting. We have no doubt that the opacity created by off balance sheet accounting, and the opacity of the tax haven structures used for securitisation that were in the main omitted from declaration were in combination a significant factor in creating the fundamental failure of confidence within the world's financial system that occurred in the financial markets in August 2007. We believe that off balance sheet accounting and the use of all artificial entities associated with such mechanisms should be banned.

Our present concern is that the focus of the International Accounting Standards Board is too narrow when considering responses to the current international financial crisis. This is because we believe that the Board is not properly fulfilling its mandate by considering that present andpotential capital providers are the primary user group for general purpose financial reporting. The international accounting standard is required to promote global accounting standards in the public interest and in our opinion it must, if it is to fulfil this requirement promote standards for general purpose financial reporting that meet the needs of both ‘participants in the world’s capital markets and other users’ as the International Accounting Standards Committeeconstitution states it should (our emphasis added).We have argued that this can be best done by requiring an MNC to provide users with segment data on a country-by-country basis disclosing, as a minimum, that information noted in paragraph (1) above.In saying this we do not dispute the value of consolidated financial reports to the users of general purpose financial statements. They need that data to form one objective view of the trading of the group in which they have invested, or might invest. We do however want to place on record our concern about the limitations inherent within consolidated financial statements and in particular that they do not:
  1. Disclose the extent of intra-group trading within the reporting entity;

  2. Allocate the trading of the entity to geographic domains, and as such prevent risk assessment on this basis being undertaken;

  3. Show the sustainability of the profit allocations to enterprises within the entity, or the sustainability of the tax charge because its location of payment is unknown;

  4. Show vital information required by those trading locally with the entity. This means that suppliers, employees and customers located in a particular country do not have the information they need about trading with local group members, much of which is also not available to them locally because few countries require this information to be readily available to such persons although the International Accounting Standards Board has clearly recognised its obligations to these groups.
For these reasons we strongly suggest that another view of the trading of an MNC is required and suggest this would be best achieved by requiring that the data in consolidated financial statements be reconciled to reporting published on a country-by-country basis.

If this were to be done confidence would be restored in general purpose financial statements, risk in financial markets would be reduced with a consequent lowering in the cost of capital, the now widely recognised problems that tax havens create could be properly assessed and appropriate data to ensure that corporations can demonstrate their commitment to making payment of their taxes in the right place and at the right time would be on public record, all of which is crucial if the vital relationship of trust between the public and MNCs is to be restored.For all these reasons we commend this course of action to you.

Yours faithfully

JE Christensen
Director

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Besieged Brown and the tax havens

A new article entitled "Brown plans global scrutiny of tax havens" suggests that UK Prime Minister Gordon Brown is taking the tax haven issue seriously. This is slightly at odds with a blog we did last month casting doubt upon the UK's commitment to the issue. Since then, we've received some encouraging signs. The article says:

"Despite a rearguard action by tax havens, the prime minister intends next week's G20 summit to discuss plans for a multilateral exchange of information on "offshore" accounts."

We like the word "multilateral" very much, very much indeed (an alternative, bilateral deals, means that many billions of people, notably from developing countries, will fall through the cracks.) The article added:

"Brown would like the Paris-based OECD to work out a detailed blueprint for reform over the coming months if, as expected, the London talks on 2 April back action to combat capital flight and improve transparency."

Ah. The OECD. Well, change is possible, but we have recently taken a very dim view of what seems to be happening at the OECD at the moment.

And now the question of automatic exchange of information (which we love), versus exchange of information on request (which we loathe:)

"Campaigners said the initiative was welcome but said much would depend on what tax havens would be forced to reveal. Under the current OECD plans, exchange of information is not automatic but relies on those making inquiries knowing full details of accounts and account holders. . . . Richard Murphy of the Tax Justice Network, said: "A multilateral system is the way forward but to be fully effective it would have to be automatic."


But of course caution is the watchword.

"Government sources said the UK was taking reform of tax havens step by step, fearful that pressing too hard at this stage would damage the growing international consensus for reform. They said Downing Street had been "besieged" in recent days as tax havens reacted strongly to signs that they will be the prime targets of proposals to toughen up international regulation."

In short, we are giving UK Prime Minister Gordon Brown a little more benefit of doubt than we were before, but we are most conscious of the powerful political forces arrayed against him. Brown is certainly in political difficulties over this, and the opposition Conservative party which currently has a significantly better than average chance of winning at the next election (which must be held by June 3 next year) is, notwithstanding Brown's appalling record on tax havens, the traditional party that supports the offshore system.

So we'll look forward to concrete steps - and we'd like to see is a clear roadmap for implementation - but won't hold our breath for too much yet.

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Where on earth are you? Big companies in tax havens

Update June 2009: Swiss companies in tax havens

The Tax Justice Network, with the help of Alternatives Économiques in France and SOMO in the Netherlands, has just produced a new report with information that has never been published before. The executive summary starts like this:

"This report builds on a finding in the United States that 83 per cent of the largest US companies have tax haven / secrecy jurisdiction subsidiaries.

The report surveyed 97 of the largest quoted companies in the UK, the Netherlands and France. Of those companies all but one had tax haven subsidiaries. 99 per cent of the European quoted companies surveyed operate in tax havens. As in the USA, the largest user of tax havens in every country surveyed was a bank."

This gives the briefest summary. The rest of the executive summary says:

"As in the USA, the largest user of tax havens in every country surveyed was a bank. In the USA the largest user was Citigroup, in the UK it was Barclays plc, in France it was BNP Paribas and in the Netherlands ING. ING was also the largest single user of tax havens, with more than 2600 tax haven subsidiaries, putting it comfortably ahead of every other company in the survey. However, this may reflect a different pattern of recognising a subsidiary on its part from that used elsewhere.

The most popular tax haven in the world is Hong Kong. Hong Kong is followed by the Cayman Islands, then Singapore, Switzerland, Luxembourg, Bermuda, the British Virgin Islands, Jersey, Mauritius, the Bahamas, Guernsey, the Isle of Man, Panama, Costa Rica and the Netherlands Antilles in that order.

There are strong regional variations in the use of tax havens. US corporations use the Cayman Islands more than other locations, but also show a bias towards Bermuda, the British Virgin Islands, the US Virgin Islands and Barbados.

U.K. corporations are the biggest users of the UK Crown Dependencies as tax havens. French corporations have a bias towards using Switzerland and Luxembourg and it is only Dutch corporations that break this general rule. They seem to use more Far East tax havens such as Hong Kong and Malaysia, which significantly increases the apparent popularity of these locations in the survey results.

Undertaking this survey has not been without difficulty, particularly in the case of U.K. corporations. The 33 companies surveyed in the UK were selected on the basis of being those for which reliable data was available.

This, in itself, is indication of the enormous secrecy that surrounds the trading of these major corporations, many of which have turnovers bigger than nation states. Even though we have been able to locate some of the tax haven / secrecy jurisdiction companies that these multinational groups have created we know nothing about the following:
  • What these companies do in these places;
  • How much trade they undertake in these places;
  • How many people they employ in tax havens / secrecy jurisdictions;
  • How much profit they record in tax havens;
  • How much tax they do, or do not pay as a consequence;
  • The value of assets hidden from mainstream financial regulators as a consequence of their operating outside the normal regulatory environment by being located in tax havens.
All this information would be available on public record had the companies surveyed been required to present their global financial results on a ‘country by country’ basis[2].

Country by country reporting would require that a multinational corporation published the name of each country in which it operates, without exception, the names of all its companies trading in each country in which it operates without exception, and a profit and loss account and limited balance sheet data for each such country in its annual financial report.

This report argues that only through the introduction of country by country reporting will it be possible to assess whether multinational corporations and banks are properly regulated, pay their taxes, and do not abuse the countries in which they operate.

This last point is especially important. Christian Aid has estimated that developing countries lose at least $160 billion a year in lost tax revenues from the abuse of transfer pricing and accounting rules by major multinational corporations. This abuse would have been highlighted, or eliminated, if the corporations in question had been required to account on a country by country basis with enormous benefit arising to the developing world in consequence.

This report does not suggest that anything illegal has been happening. But our findings suggest that current legal practice has to change substantially for the benefit of the ordinary people of this world, wherever they reside."

Richard Murphy, who directed the research for TJN, pointed out:

No one could have published that ordered list of tax havens before now.

We could not have said with certainty that banks are the biggest users before now.

We could not have published the data on we do on regional significance of tax havens before now.

Each of these findings is important.

But the most important finding is by far the simplest: tax havens are an integral part of the business system. 99% of all European companies surveyed had a tax haven subsidiary. Most had many.

They are also a cancer that is helping destroy it from within, as John Kay suggested in the Financial Times this morning.

This survey has shown just how far we are from understanding how our markets work, how money flows, and why businesses are structured as they are. We cannot deliver optimal results in that case.

That last point is crucial.

This study directed by Richard Murphy follows our earlier blog describing the research by the French publication Alternatives Économiques, which was an integral part of the study. Markus Meinzer was centrally involved in the research too. Many thanks to all.


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Links - March 23

** Also see our searchable archive of past story summaries; and Offshore Watch. **

Where on earth are you? Big companies in tax havens
March 23 (TJN) _ A new TJN report, producing information and analysis that has never been seen before, surveyed 97 of the largest quoted companies in the UK, the Netherlands and France. Of those companies all but one had tax haven subsidiaries. 99 per cent of the European quoted companies surveyed operate in tax havens. As in the USA, the largest user of tax havens in every country surveyed was a bank.

Where on earth are you?
March 21 (Tax Research) - This report builds on a finding in the United States that 83 per cent of the largest US companies have tax haven / secrecy jurisdiction subsidiaries. The report surveyed 97 of the largest quoted companies in the UK, the Netherlands and France. All but one had tax haven subsidiaries. 99 per cent of the European quoted companies surveyed operate in tax havens. As in the USA, the largest user of tax havens in every country surveyed was a bank. This is the first time we have had this information.

Tax havens exist because of the hypocrisy of larger states
March 21 (FT) - Excellent article by John Kay, despite the ominous headline. Havens exist only because larger states allow them to exist, and larger states allow them to exist because the customers of havens are the rich and powerful. In the 1860s, the typical client of a haven was a patron of Blanc’s casino: in the years after 2000, the typical client of a haven was a hedge fund registered in Grand Cayman.

The Big Takeover
April 2 edition (Rolling Stone) Wonderfully written long article about AIG and the financial crisis, comparing it to Enron. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

Barroso sees US-Europe ‘convergence’
March 20 (FT) - The US and the European Union are finding common ground in their efforts to strengthen global financial market regulation. José Manuel Barroso predicted that, if the push for tighter regulation ran into obstacles, they might come from big emerging countries such as China rather than the US or UK.

Macho poker bets, summary sackings and an 'electric chair'
March 20 (Guardian) - High stakes poker games, a "cow eating club", brutal sackings and a team-building exercise in which an executive was strapped into a mock electric chair.

Watchdog fears market ‘Ponzimonium’
March 20 (FT) - US federal regulators have warned of a “rampant Ponzimonium” as they disclosed they are investigating “hundreds” of possible scams in the aftermath of the $50bn fraud allegedly perpetrated by Bernard Madoff.

RBS faces probe over 'threats' to directors
March 22 (Guardian) _ The scandal engulfing the Royal Bank of Scotland reaches new heights today with serious allegations from a senior Labour politician that at least three of its former non-executive directors may have been intimidated and threatened with the sack for asking searching questions about its financial affairs.

Peripheral care should be the central concern
March 22 (FT) - Europe and the US guaranteed that no other important financial institution would be allowed to fail. Many poor countries could not offer similar guarantees. So capital fled from the periphery to the centre. The flight was abetted by national financial authorities at the centre who encouraged banks to repatriate their capital. When history is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade.

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