Monday, May 25, 2009

The Netherlands as a tax haven - a misunderstanding?

The White House press briefing announcing measures against tax avoidance and tax havens, published on 4 May 2009, originally contained the following sentence as a bullet point in the introduction:

"Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland."


The next day, after strenuous efforts and expressions of displeasure by the Royal Netherlands Embassy in Washington, this sentence was removed from the introduction of the briefing and a Dutch Finance Ministry spokesman explained the original inclusion as a misunderstanding. So, earlier this month, the Tax Justice Netherlands published a comment on the matter, noting that:

"the Dutch system of tax treaties together with other tax regulation is regularly been abused to avoid taxes in other countries. The United States underlined this by pointing at tax avoidance caused by fiscal constructions abroad. Therefore it probably was not just a matter of a misunderstanding."


Our Dutch partners SOMO have now been able to identify the source of the information in the sentence, which was not mentioned in the White House document. The data on foreign profits of US corporations are based on tax returns filed by the corporations themselves, presented in a figure in a 2007 discussion paper by K.A. Clausing and R.S. Avi-Yonah (see figure 2). Although the Netherlands may not qualify as a typical low-tax country (it has low effective tax rates only for specific types of corporate financing activities) the 2003 US tax return data show that foreign profits of US corporations in the Netherlands were almost 13% of the total. This puts the Netherlands in first place for that year, ahead of Ireland and Bermuda. So the figures themselves were not a misunderstanding, and they have been published before – only in a less politically sensitive context.

A last word from Tax Justice Netherlands:

"(The Dutch Finance Minister) underlines the active role of the Netherlands to promote transparency and information exchange, but does not seem to be willing to critically review the possibilities to abuse the Dutch set of tax treaties at the expense of other countries.

But how desirable is the current situation? What are the social consequences of the praised Dutch tax treaties? Today the Americans complain, but what other countries face tax evasion as a result of the Dutch treaties? How much do developing countries miss out on tax income as a result of smart fiscal constructions that the system does not prevent?

Tax Justice Netherlands underlines that it is good for the Netherlands to have a sound set of tax treaties, but also reiterates that the possibilities of abuse of the tax regulation needs to be point of discussion. Government, politics and not in the least multinationals need to take position and consider their social responsibility. Calling this issue a misunderstanding means avoiding the underlying problems and ignoring social responsibility."

Quite so. For more information, see SOMO's report Netherlands - A Tax haven? and follow-ups to it here.

PS - for the record - we agree with Richard Murphy who says the Netherlands is a tax haven. As he puts it:

"The Netherlands is a tax haven. . . . It is brazenly seeking to artificially reallocate profits to its domain. In the process it is seeking to subvert tax compliance."

Enough said.

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Netherlands wants more automatic information exchange

Following the OECD's false claim that its extremely narrow approach to information exchange enjoys "universal endorsement", we have yet another indication of more actors keen to push forwards with multilateral and automatic exchange of information.

The Dutch Deputy Finance Minister, Jan Kees de Jager, has said in a letter to parliament that, unofficially translated, says:

"The Netherlands would like to go a step further in the relationship with these countries, and make agreements on the automatic exchange of information. This way, tax evasion can be addressed (even) more effectively. . . . The Netherlands strives for automatic exchange of [tax] information, at the multilateral level (OECD, UN) as well as the bilateral level (at the conclusion of tax treaties and Tax Information Exchange Agreements)."

The Netherlands will be contacting Austria, Luxembourg, Switzerland, Belgium, Liechtenstein and Singapore to improve agreements about information exchange. De Jager also wrote that he intends to conclude TIEAs with Monaco, Andorra, Bermuda, Panama, the Cayman Islands and the British Virgin Islands. This is significant, and it shows that political will exists to push this superior standard of information exchange forwards.

Now look at this. A story in The Economist quotes Anthony Travers, chairman of the Cayman Islands Financial Services Association and one of the most influential voices on the island, as criticising Obama's recent budget provisions to close tax loopholes that would curb use and abuse of the Cayman Islands. Then he says something surprising:

"Better, he says, would be a “proactive” treaty, with the American authorities automatically notified of their taxpayers’ offshore accounts."


Is the Cayman Islands interested in automatic information exchange? We do not know what the detail is of what Travers is proposing, or what exactly he meant, but this comment certainly looks interesting. Either way, step by step, pressure is building for the superior standard to emerge.

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European Investment Bank and tax havens


At a time when aid programmes are increasingly being challenged as effective ways of tackling poverty, its appropriate that agencies ostensibly engaged in delivering aid are brought under the spotlight.

Step forward the European Investment Bank, the "house bank" of the European Union, which our colleagues at Counter Balance finds has been structuring major investment programmes in developing countries via offshore companies registered in tax havens. Examples include:

WAPCo. incorporated in Bermuda, sponsor of the West African Gas Pipeline from Nigeria to Ghana, financed by the EIB in the amount of EUR 75 million in December 2006.

Tenke Holding Ltd/Lundin Holding, registered in Bermuda, part-owners of the Tenke Fungurume copper/cobalt mining project in the Democratic Republic of Congo, for which the EIB agreed a preliminary commitment up to EUR 100 million in August 2007

Mopani Copper Mines plc is majority owned by Carlisa Investments Corporation, incorporated in the British Virgin Islands, that is the sponsor of the Mopani Copper Project in Zambia, loaned EUR 48 million by the EIB in February 2005.

Setting aside the moot point about whether funding extractive industry programmes is the most effective way of delivering assistance to the poorest people of the countries concerned, the EIB needs to explain why it has allowed the use of tax haven structures, and to whose benefit. We hope that this Counter Balance initiative will be followed up by sharp questions within the European Parliament.



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Sunday, May 24, 2009

French banks seek tax haven crackdown?

We recently published detailed research surveying European companies' presence in tax havens, finding that the biggest user of tax havens in every country surveyed was a bank. And we recently noted all sorts of financial dirty dealings in France, involving the banking system. Now for something completely different.

The Fédération Bancaire Française (FBF,) the French Bankers' Federation, has issued statements concerning tax havens. We can't find the links on their web site (they were sent to us by a trusted colleague), so we've pasted them (in French) below. An article from the left-leaning French daily Libération encapsulates the spirit of the statement, in its first sentence:

"Have French banks joined Attac? Look at them taking the initiative on regulating tax havens . . . you have to pinch yourself because it is so hard to believe"

From the FBF, Statement 1 starts like this:

"The fight against tax havens and non-co-operative jurisdictions has been recognised by the G20 as one of the strong priorities for reform of the international financial system. French banks totally share this objective. Wishing to contribute as effectively as possible to this common action, they have elaborated a set of propositions."


Ignoring to what extent sincerity lies behind this statement, this blogger is not aware of a group of banks ever having got together to say anything like this before. It's eye-catching, and refreshingly unusual. So far, we like it.

What are their proposals? Statement 2 contains more details:

- Proactivity in international co-operation (TJN: they put a stress on blacklists - TJN is fiercely opposed to the way that the OECD's blacklist was formulated, but accepts that the list process has served as a source of pressure - as this remarkable letter from the Cayman Islands shows)
- Extension of rules of internal control applicable in Europe (except when local rules are stricter)
- transparency on their local operations - "Each year, addressing to the supervising authority a resumé mentioning their local operations (subsidiaries, branches or representative offices) in non-co-operative countries, describing their principal activities. This will be presented to the board of directors or to the supervisory council and every new local operation in one of these countries will be submitted to a high-level authorisation procedure within the group. If a country is on a list of non-cooperative countries where it was not previously, an examination of the situation will be conducted and submitted to high-level review." (TJN: this is far from being the kind of country-by-country reporting that TJN is pushing for, though it is clearly a recognition of the importance of the principle.)
- Specific governance for less co-operative countries "The board of directors or supervisory council will decide within three months on a mechanism for restricting activities, going as far as a total cessation of them, taking into account the adequacy of oversight."
- transparency of operations with less co-operative countries.
"Regarding the least cooperative countries, having information available to the banking authorities of the country of the group headquarters about certain operations in the field that led to the classification of the country in this category, and applying to these operations a surveillance regime defined by the international community."

Statement 1 throws down the gauntlet to other European bankers, explicitly proposing that they engage on these five points. The bankers (yes, pinch yourself, this is bankers talking) also note four main principles worth looking for. We paraphrase:
  1. This is a global battle. The whole international community must mobilise to create desired rules and have them respected (TJN: we agree)
  2. This battle is on three fronts:
    - money laundering and terrorist finance (TJN: OK, but there are bigger things to focus on)
    - tax evasion (TJN: yes - this is one of the big ones)
    - a lack of regulation or supervision of instruments, markets or institutions with systemic imporance (yes - this touches on the other big one).
  3. An agreement between states on the rules which each member of the international community must respect
  4. Lists of non-cooperative countries must be formulated in a multilateral forum in a transparent manner (TJN: yes - unlike the OECD process!)
A few points things to end. First, these changes do not go nearly far enough, though they do represent progress. Second, the broad statements and tone are right. Third, the bankers correctly note that only "a strong and co-ordinated enagement on the part of states" will do in terms of pushing the agenda forward. Fourth, a note of caution. These are, after all, just words - and companies and their representative associations the world over are notorious for making superficial changes under the cover of fine words, while leaving everything else the same. It is quite possible that this is the case here. Note the interview that Les Echos carried (reproduced in Liberation) with FBF president George Pauget, noting that while information was to be presented to supervisory authorities, it would not be made available to the public. And also that there is a big - a very big - question mark over the OECD's list, which Pauget described as "practically unusable because of its scope."

Nevertheless, the fact that they have made a statement like this is significant, and it elaborates and recognises principles that are most welcome. Let's now see how this is followed up. Let's see if the OECD can't start seeing some sense in its list-making. And let's see if British or American bankers can have the courage to come out with something similar. We won't be holding our breaths for that one.

The original statements (in French):
Statement 1
22 mai 2009

LES BANQUES FRANÇAISES PROPOSENT AUX AUTRES BANQUES EUROPEENNES UN ENSEMBLE DE MESURES CONCERNANT LEURS ACTIVITES DANS LES PAYS NON-COOPERATIFS
La lutte contre les paradis fiscaux et juridictions non-coopératives a été reconnue par le G20 comme une des priorités fortes de la réforme du système financier international. Les banques françaises partagent totalement cet objectif. Soucieuses de contribuer le plus efficacement possible à cette action commune, elles ont élaboré un ensemble de propositions.

Ces propositions se fondent sur quatre constatations majeures. La première est que cette lutte est globale. Toute la communauté internationale doit se mobiliser et s'engager pour édicter les règles voulues et les faire respecter. La deuxième est que cette lutte se mène sur trois fronts : contre le blanchiment d’argent sale et le financement du terrorisme, contre la fraude fiscale, et contre l’insuffisante régulation ou supervision des instruments, marchés ou institutions d’importance systémique. La troisième est que le passage obligé de cette lutte est un accord entre Etats sur les règles que tout membre de la communauté internationale doit respecter pour que les transactions publiques ou privées avec une entité relevant de sa juridiction soient autorisées par les autres pays. La quatrième est que les listes de pays non coopératifs, c’est-à-dire ne respectant pas les règles internationales dans chacun des domaines concernés, doivent être établies dans un cadre multilatéral et de façon transparente, avec une claire indication de ce qui est licite et de ce qui ne l’est pas, et des sanctions applicables, le cas échéant.

Par conséquent, des traitements différenciés doivent être appliqués aux pays non coopératifs, selon la nature des listes sur lesquelles ils figurent. Les propositions ci-dessous reposent sur le dispositif existant d’élaboration des listes (GAFI, forum mondial de l’OCDE) et seront modifiées si ce dispositif évolue.

Si la mise en œuvre de ces propositions est d’abord de la responsabilité des pouvoirs publics, les entreprises en sont parties prenantes, et notamment celles du monde de la finance. Les banques françaises affirment leur intention ferme d’y jouer un rôle exemplaire.

Les banques françaises proposent en conséquence à l’ensemble des banques européennes de s’engager sur les cinq points suivants, auxquels elles sont d’ores et déjà prêtes à souscrire, mais qu’elles souhaitent voir mis en œuvre au niveau de l’Union européenne dans le respect des règles qui régissent les relations entre les Etats membres et des lois en vigueur dans les pays concernés.

1) Premier engagement : Proactivité dans la coopération internationale
Respecter scrupuleusement les règles et principes dégagés par la communauté internationale, offrir une coopération franche pour leur élaboration afin de leur assurer le maximum d’efficacité et contribuer dans la mesure de leurs moyens à l’élaboration de règles internationales aussi efficaces que possible, notamment en ce qui concerne les listes de pays non coopératifs établies par les autorités.

2) Deuxième engagement : extension des règles de contrôle interne applicables en Europe
Pratiquer dans l’ensemble de chaque groupe bancaire les règles et principes déontologiques applicables dans l’Union européenne, sauf si les prescriptions locales sont plus strictes.

3) Troisième engagement : Transparence sur les implantations
Adresser chaque année à l’autorité de supervision un état mentionnant les implantations (filiales, succursales ou bureaux de représentation) dans les pays non-coopératifs et décrivant les principales activités effectuées.
Cet état sera présenté au conseil d’administration ou au conseil de surveillance et toute nouvelle implantation dans l’un de ces pays sera soumise à une procédure d’autorisation à haut niveau au sein du groupe.
Si un pays est inscrit sur une liste de pays non coopératifs où il ne figurait pas préalablement, un examen de la situation sera fait et soumis à une instance de haut niveau.

4) Quatrième engagement : Gouvernance spécifique pour les pays les moins coopératifs
Dès lors qu’un pays sera inscrit sur une liste spécifique des pays les moins coopératifs, le conseil d’administration ou le conseil de surveillance se prononcera, dans les trois mois, sur un dispositif de restriction des activités, pouvant aller jusqu’à l’arrêt total de celles-ci, en tenant compte de l’adéquation du dispositif de contrôle.

5) Cinquième engagement : Transparence sur les opérations avec les pays les moins coopératifs
S’agissant des pays les moins coopératifs, tenir à disposition des autorités bancaires du pays de la société mère du groupe des informations sur certaines opérations relevant du domaine ayant conduit au classement du pays dans cette catégorie et appliquer à ces opérations le régime de surveillance particulier défini par la communauté internationale.

Statement 2
Paris, le 22 mai 2009

Pays non coopératifs : Les banques françaises prennent l’initiative en Europe Les banques françaises, réunies au sein de la Fédération Bancaire Française (FBF), viennent de proposer aux autres banques européennes un ensemble de mesures concernant leurs activités dans les pays non coopératifs (« paradis fiscaux »).

Elles répondent ainsi à la demande du Président de la République qui, lors d’une réunion à l’Elysée le 10 avril dernier, a encouragé la communauté bancaire à se montrer une force de proposition au niveau européen dans tous les domaines abordés par le G20 et particulièrement dans ses relations avec les pays non coopératifs.

Prenant l’initiative (comme elles l’avaient déjà fait en début d’année sur la rémunération des opérateurs des marchés), les banques françaises proposent aujourd’hui que l’Europe partage explicitement quelques principes et bonnes pratiques pour renforcer la lutte contre les zones d’opacité qui nuisent à la sécurité du système financier mondial.

Ces propositions sont les suivantes :
- proactivité dans la coopération internationale,
- extension des règles de contrôle interne applicables en Europe,
- transparence sur les implantations,
- gouvernance spécifique pour les pays les moins coopératifs,
- transparence sur les opérations avec les pays les moins coopératifs.

Elles reposent donc d’une part sur l’application rigoureuse d’un principe de transparence (sur les implantations, sur les opérations avec les pays les moins coopératifs) et d’autre part sur des règles de gouvernance particulières et renforcées (extension des règles de contrôle interne applicables en Europe, vigilance accrue des organes de décision des groupes, pouvant aller jusqu’à la fermeture d’activités).

Seul un engagement fort et coordonné des Etats, responsables exclusifs de l’élaboration des règles internationales (notamment des listes de pays non coopératifs, dites listes « grise » ou « noire ») et de leur mise en œuvre au niveau des lois nationales, permettra aux efforts des professionnels européens de la finance d’être réellement et pleinement efficaces.

Contacts :

Colette Cova – tél : 01 48 00 50 07 - e-mail : ccova@fbf.fr
Kenza Benqeddi – tél : 01 48 00 50 70 – e-mail : kbenqeddi@fbf.fr

www.fbf.fr

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Global Witness testifies in US Congress

While our bloggers were away, the path-breaking non-governmental organisation Global Witness has been busy testifying to the U.S. House of Representatives’ Financial Services Committee. As their press release says:

"Some of the world’s major banks, including Barclays and Citibank, have been facilitating corruption and undermining development in some of the worst-governed countries in the world."


And their testimony notes, by way of background:

"For a decade and a half, our investigations into conflict diamonds, illegal logging and corruption in oil, gas and mining have been the catalyst for international initiatives and policies to promote transparency and ensure that natural resources do not fuel conflict. Our work has been a key driving factor behind the Kimberley Process, to control the trade in conflict diamonds, and the Extractive Industries Transparency Initiative, to encourage disclosure of payments made by extractive companies and received by governments.

But with all of these investigations into various natural resource trades, there was a missing link: the route for the money behind these corrupt or conflict-fuelling transactions. So we started to look into it. And in each of these cases of corruption, there was inevitably a bank involved."


Their testimony goes into some detail:

"Overall, our research has shown that the key factors that are allowing banks to do business with corrupt regimes, and thus to help perpetuate poverty, are also precisely those which have allowed banks to destabilize the U.S. and other major economies. These are, on the part of the banks, a failure of the culture of due diligence, and on the part of the regulators, a failure of inconsistent national-level regulations to get to grips with global flows of money."

More specifically, they give examples:

"Banks are required to identify whether their customers are PEPs and, if so, to conduct enhanced due diligence on them. Based on our investigations, Global Witness has concluded that one of the reasons this bank did not do this is because it is not subject to meaningful regulatory standards that require it to conduct sufficient due diligence to avoid its processing the proceeds of corruption. The existing standards are not meaningful, because in practice, a bank faces little threat of sanctions should it take the proceeds of corruption – a very different outcome than if it took terrorist funds. So Bank of East Asia ran Mr Sassou Nguesso’s name through the terrorist lists to check that he was not a terrorist, but did not, apparently, even check Google, let alone one of the specific PEP databases, to see if its customer was a family member of the head of state as well as being a senior official of a corrupt oil-producing country. Instead, the bank went on to arrange for payment, out of an account of a company that it knew to trade in Congolese oil products, of the personal credit card bills of the president’s son."

Now we think this is a fantastic piece of work by Global Witness, but perhaps we'd have added a little more detail to their testimony. They focus heavily on the kinds of dirty money that relates to corruption. That is one (smaller) form of dirty money that harms developing (and other) countries. That is fine, and respects their mandate - though we would have added more emphasis than they do on tax, for it is simply not possible to tackle the proceeds-of-corruption angle while ignoring tax. As Raymond Baker put it so well in his book

“Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand . . . These are two rails on the same tracks through the international financial system.”


One of his main points was that if you're not serious about tackling tax and the structures deliberately set up for tax evasion, you'll not have a chance of tackling the kind of shocking things that Global Witness digs up.

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Winners Of New ‘Alternative Tax Awards’ Revealed

(TJN's bloggers have been travelling - apologies for late delivery of news items)

Christian Aid today (Thursday 21 May) announces the winners of its new Alternative Tax Awards. Categories include Tax Haven Enthusiast of the Year, Low Tax Rate Achievement and Most Surprising Use of Tax Havens.

Christian Aid has created the Alternative Tax Awards to draw attention to the devastating effect corporate tax dodging has on poor countries. ‘We calculate that multinational corporations and other companies trading internationally dodge at least $160 billion in taxes in the developing world every year,’ says Christian Aid’s tax campaign manager, Judith Cavanagh.

‘This is one-and-a-half times the total annual amount of aid that poor countries receive and is desperately needed to fund public services such as hospitals and schools. We estimate that if the money was used according to current spending patterns, then the lives of some 350,000 children under five would be saved each year.

‘Much of the money that goes missing ends up in tax havens. The accounting rules must be reformed to prevent this happening. Tax dodging costs lives.’

Christian Aid will hold its Alternative Tax Awards ceremony outside the Hilton Hotel on Park Lane at 7.45pm this evening. The winners – detailed below - are invited to collect their trophies from us.

Greatest Potential for Tax Reform: The joint winners are the Big Four accountancy firms - PriceWaterhouse Coopers, KPMG, Ernst & Young and Deloitte & Touche - together with the International Accounting Standards Board. These five organisations have between them the power to change the rules to help developing countries obtain the money that is rightfully theirs.

Most Surprising Use of Tax Havens:
The joint winners of this award are CDC Group plc and its sole owner, the UK Government’s Department for International Development (DFID). CDC has 72 subsidiaries, of which 40 are in tax havens including Bermuda, Mauritius and the Netherlands Antilles, the company told MPs in December 2008.

DFID argues that if CDC did not use tax havens, then investors in the funds used by CDC would be taxed twice. Christian Aid nonetheless finds it astonishing that the government department set up to tackle international poverty allows its own company to exploit tax havens as a means of avoiding tax in developing countries.

Low Tax Rate Achievement Award
P&O cruises’ owner Carnival deserves a special mention for its outstanding, dedicated and entirely legal use of tax avoidance. Between 2002 and 2008 inclusive, Carnival plc paid tax of just $61.7 million on total profits of $4.3bn. This is an effective tax paid tax rate, over the seven years, of approximately 1.4 per cent.

Tax Haven Enthusiast of the Year:
The winner of this award is Barclays plc. The financial services company is extremely keen on tax havens – with subsidiaries in some 315 of them. Again, this is entirely legal.

Most Overhyped Reform of the International Tax System:
Bilateral Tax Information Exchange Treaties (TIEAs) are the clear winner of this award. The Organisation for Economic Co-Operation and Development says TIEAs are an important weapon against tax dodging. They are voluntary instruments, however, which offer little or nothing to developing countries.


Join Christian Aid’s call for the Big Four accountancy firms to support country-by-country reporting here.

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FT forum: Does aid work?

From the Financial Times:

“The notion that aid can alleviate systemic poverty, and has done so, is a myth. Millions in Africa are poorer today because of aid; misery and poverty have not ended but have increased.” Thus writes Dambisa Moyo, a brilliant former Goldman Sachs economist, of Zambian origin.

Thus notes the FT at the top of a discussion forum entitled "Is Aid Working?"

TJN thinks there can be a role for aid, but our mandate is focused towards tax, and we believe that to the extent that discussions about aid have displaced and obscured those on tax, this is harmful. The importance of tax is summed up in the words of Kenya's Revenue Commissioner in 2007: "Pay Your Taxes, and Set Your country Free." At the time of blogging, the FT's forum had attracted 24 comments. So far, no substantial comment on tax. Please join in and add yours.

(While you're at it, the FT arena has also been discussing tax, and notably the need to patch up ballooning deficits with higher taxes, here. Here is one part of their conclusion:

"Governments must choose taxes that spur economic efficiency, not expand those that are a drag on it. The former are easy to find, as the FT online debate on taxes showed with its suggestions of a carbon tax and (for the UK) a land value tax."

TJN supports both these taxes, though only (of course) as part of broad and comprehensive tax systems.

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CTJ on US healthcare reform options

Citizens for Tax Justice in the US have produced a detailed analysis of options for paying for healthcare reform.

"After propping up major corporations and their CEOs and shareholders, Congress might find it
reasonable to make the following deal. Main Street is paying to make Wall Street healthy. Wall
Street, when it is healthy, will return the favor."

Their proposal, in very brief form, goes like this:

Selected Options to Raise Over $100 Billion in 2012 to Fund Health Care Reform

Reduce Tax Incentives to Invest Offshore, $ 12.4 billion

Eliminate Other Tax Subsidies for Wall Street, $ 15.0 billion

Reduce Tax Subsidy for Capital Gains and Dividends (28% Top Rate), $ 34.7 billion

Expand the Medicare Tax for the Rich, $ 44.7 billion

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Exchange of information: the Yossarian approach

From Paul Sagar's Bad Conscience blog:

"I recently had direct experience of trying to break this circular logic when I met some representatives of a prominent Offshore Financial Centre, which I would certainly class as a secrecy jurisdiction. I asked them to prove that they weren’t committed to banking secrecy by detailing how many pieces of information they had exchanged with other nations. I asked when their company accounts would be open to audit by being placed on public register. I wanted to know when the Tax Information Exchange Agreements (TIEAs) they claimed to have signed were actually coming into force.

I didn’t get answers to any of those questions. What I did get was a catch-all reply that went: “Hey, we’re fully committed to stopping crime – if you know of any criminals, we’ll help you catch them!”

This is the closest thing secrecy jurisdictions have to a trump card. It’s their claim to the moral high-ground. Unfortunately, it doesn’t stand up to a moment’s consideration. The problem with criminals who operate their finances via offshore is that usually the criminality cannot be proved until authorities have access to their accounts. Yet the offshore centres in which the criminals stuff their stolen wealth will refuse to release any accounts until their client is proved to have engaged in criminality. See the problem? You can’t prove criminality until you have the accounts, but can’t get the accounts until you have proved criminality. Yossarian would recognise the predicament only too well."


Quite. And we like the Woody Guthrie quote at the top too.

"Yes, as through this world I've wandered I've seen lots of funny men; Some will rob you with a six-gun, And some with a fountain pen."

(or perhaps with a spread sheet.)

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Wednesday, May 20, 2009

Collateral damage: Latin America and the financial crisis

Letter from Montevideo
John Christensen, 20th May 2009

This week Uruguay hosts a timely and fascinating regional forum aimed at sharing views on how Latin American governments should adapt their fiscal policies in this time of crisis. Jointly supported by the Economic Commission for Latin America and the Caribbean (ECLAC) and the German Agency for Technical Cooperation (GTZ) the forum has brought together top economists and policy makers.

As recently as mid-year 2008 there were those who argued that the countries of the South had succeeded in 'de-coupling' themselves from the financial crisis in the USA and Europe. The traumatic events of Autumn 2008 put paid to such notions. Despite successes in strengthening their public finances, restructuring and lowering debt burdens, and regulating their banking systems in ways that put the USA and UK to shame, many countries in the region are seeing tax revenues plummet as commodity exports fall, remittances from the USA shrink, and inwards investment flows dry up. The spectre of rising unemployment haunts the region.

Whilst governments in the North have taken measures to stimulate growth, for example, by cutting taxes and pumping new money into the banking system, there is less room for manouevre in the South, partly because of the high public debt levels and also because of the existing high level of dependence on mineral royalties and indirect tax revenues. Public revenues, already relatively low compared to OECD countries, are likely to fall. After almost a decade of rising revenues, will governments react by cutting back on some of the more progressive programmes for long-term poverty alleviation, for example programmes to support secondary education for children from low income households? Or are there other possibilities for protecting public expenditure programmes without incurring unsustainable debt levels?

Tax systems in the Latin American region are too frequently regressive in their overall impact. In many countries pre-tax market income inequality is actually lower than post-tax disposable income inequality. Too many government transfer payments schemes benefit the upper middle classes: people with pensions, those in tertiary education, and the big energy users. This situation is compounded by very low collection rates for direct taxes on property, personal income and corporate profits. Unnecessary and harmful tax exemptions secured by politically powerful elites play a part in this under-collection, but most people seem to agree that tax evasion has been endemic throughout the region for decades and lies at the root of public financing problems in most countries.

In this respect, the current crisis offers room for political manouevre that would have been previously unthinkable. Progressive governments throughout the region should push for regional and multilateral tax information exchange based on the European Union's automatic exchange principle. They should also be pushing for enhanced corporate accounting transparency to combat transfer mispricing and other tax evasion techniques. TJN's accounting standard for country-by-country reporting is designed for this purpose. And, given that much of the region's tax evasion problems stem from tax havens in the Caribbean area (not to mention that Uruguay narrowly avoided inclusion on the OECD's blacklist published last month) now is the moment for regional leaders to push G-20 president Gordon Brown to take strong action to tidy up the British tax havens in the Caribbean and support their transition to non-tax haven economies.

Tackling endemic under-collection of direct taxes offers Latin American governments the opportunity they need to protect their public finances and sustain their anti-poverty programmes. The depth of the current crisis provides political space to take action against the entrenched interests that have blocked reform in the past. Latin American leaders should send a clear message to the G-20 leaders that they want rapid progress towards multilateral information exchange and tough action against havens that don't cooperate. This was the basis of my comments to the Forum yesterday afternoon, the message was well received.

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Tuesday, May 19, 2009

Challenging times for Christians in Jersey

There is something rotten in the higher strands of the Christian community in Jersey. Last Autumn this blogger commented about the behaviour of the Dean of Jersey. Before posting the blog I discussed our concerns with Mr Keys who, instead of engaging in discussion, lost his temper, swore and put the phone down. He subsequently called back, apologised and, in the spirit of reconciliation, agreed to meet me next I came to Jersey.

Mr Keys did not keep his word. When we organised a public meeting in Jersey this March, I took care to invite Mr Keys. Like most of the other members of the island's government we invited, Mr Keys was conspicuous by his absence. Moral leadership? I think not.

Meanwhile on the Catholic side of Jersey's Christian community, my friends talk of deep divisions, ostracism, and a refusal to address tax justice concerns. This despite the clear messages issued by the Vatican in advance of last year's UN conference on Finance for Development in Doha.

The latest episode to catch the eyes of tax justice campaigners in Jersey is an article by Iain MacFirbhisigh - a church deacon - in the Jersey Evening Post. Written in the context of Christian Aid Week, the article reflects the constant propaganda and humbug which the cheerleaders of tax havens chose to frame their arguments:

Christian Aid week is fast approaching. This is yet another opportunity for us as a community to exercise Christian Stewardship. It may be very special this year because many of us are being challenged by the alliance of Christian Aid with the Tax Justice Network. It may be that the initial reaction to withdraw from this work is justified - why should we support an organisation that appears critical of our society?

Let's place this in context. TJN and its affiliated members campaign against the harm caused by tax havens. Christian Aid has estimated that tax evasion by multinational companies using tax havens costs developing countries a massive US$160 billion a year. This is a massive sum. The G-20 leaders recognise the importance of this matter.

We do not campaign against Jersey's society, indeed a significant minority in Jersey aligns with us on this issue. Iain MacFirbhisigh - and Mr Robert Keys, plus all the other opinion formers in Jersey - have had ample opportunity to discuss our concerns: but they refuse to even meet us, let alone counter our detailed analysis with well reasoned papers of their own. Instead, they threaten to withdraw funding from organisations working on tax justice issues and impugn our motives for trying to tackle the problems raised by tax havens.

But Iain steps in deeper:

Well there are two things. Firstly, an opportunity has presented itself for the situation in this Island to be examined critically and many of those who have incorrectly expressed disapproval of our activities are now realising that far from being a community of "tax dodgers" we are in fact a community of offshore financial experts who seek to be a part of the solution rather than the problem.

Much of our activity is geared towards greater equity and transparency and nowhere is this more recognised and appreciated than in many of the third world countries who are in most want.

Where do we begin to dissect this nonsense? Presumably the reference to critical examination refers to the OECD list published last month. We have already commented on the shortcomings of this listing process, but let's be clear: the OECD did not say that the jurisdictions listed on the "white" list were in the OK, just that they were ahead of the game in signing up to (largely ineffective) tax information exchange agreements.

In what ways are offshore financial experts part of the solution to tax evasion and avoidance by multinational companies which use tax havens to shift their profits out of the countries where the profits originate? We just don't get it. Step forth Iain MacFirbhisigh and explain in writing what you mean by this sentence. Answer this. Exactly how does the existence of an offshore financial centre in Saint Helier benefit public interest in developed and developing countries: what value is being created in these centres and by what mechanisms does any value created by offshore centres get distributed to poor people in either developing or developed countries.

And now we come to the issue of transparency. We recently blogged about the meaningless claims from tax havens about their transparency. Let's put it this way: would Mr MacFirbhisigh please give us the name, address and telephone number of the Registrar of Trusts in Saint Helier? Just that, nothing else. Anyone who knows anything about the tax evasion industry knows that trusts are a principal building block of offshore tax evasion structures. Until such time as details of trusts (settlors, beneficiaries, trustees, deeds of settlement, the whole shebang) are available for information exchange purposes, all talk of being transparent is mere hot air. (Clue: for those not familiar with British tax havens, there is no Registrar of Trusts in Jersey, nor in London come to that. Trusts are the ultimate weapon in the secrecy arsenal).

These are turbulent times. The probity and competence of the business community has been challenged by the financial crisis. Political elites are also being challenged on the probity of their actions. Church leaders have a legitimate part to play in this discourse, but we hope they are not simply being shills for an industry that has played a major part in fomenting chaos and inequality. Iain MacFirbhisigh should accept our challenge and answer the questions we have put to him. We will be happy to publish his reply.

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Saturday, May 16, 2009

Cayman doesn't make the cut

This from Cayman News Service, following our blog about the OECD considering whether to strike them off their grey list.

"Cayman has not made the OECD’s White List following a key meeting yesterday. The introduction of the government’s Unilateral Tax Exchange Mechanism which was hoped would ensure removal from the grey list doesn't appear to have found favour with the international organization’s Technical Committee. The decision has been greeted with dismay throughout the financial industry and particularly in the light of assurances received. CIFSA said it reaffirmed its advice to government that multiple bilateral or multilateral tax information exchange treaties be signed without delay."

This is the right decision from the OECD. Cayman, after all, offers this. And for all the criticism we've aimed at the OECD over its appalling "on-request" standard of information exchange (which is fully justified) we should also give the OECD credit for apparently terrifying the Cayman authorities with their failure to make the grade on their list.

Let's also just remember how much falsehood issues forth from Cayman's large spin industry, day in, day out. Try this recent one from their spin doctor in chief, Anthony Travers:

"none of the financial recklessness that has brought about much of the current global crisis occurred in or involved the Cayman Islands."


Really, Mr. Travers. Demonstrating this is false is as easy as shooting a fish in a barrel. There is the Bear Stearns fiasco, with Cayman at its heart. Why, just today, yet another piece of news emerges about Cayman's role in the midst of the giant global mess.

Two men have been arrested in connection with the collapse of the Mayfair hedge fund Weavering Capital, which went into administration in March with its leading fund owing investors more than $600m (£395m).
. . .
In a statement, the SFO said the investigation centred on a series of suspicious transactions with a related firm in the British Virgin Islands that had inflated the apparent value of the Macro Fixed Income Fund.
. . .
Weavering went into administration on 19 March after Macro, which was based in the Cayman Islands and presented as a low-risk investment, ran into trouble."

And let's not forget Enron, LTCM, Parmalat, BCCI, and so many more - these are among the biggest global scandals of all time. And each time, the same story emerges from the Cayman authorities: we are a transparent, well regulated jurisdiction. The trouble is, some people, both in Cayman and outside it, believe this stuff. We are delighted to see that the OECD has seen through the spin, at least in Cayman's case. Now it should apply those same standards to a number of other jurisdictions - starting with Delaware, Jersey and the City of London.

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Friday, May 15, 2009

Blogging hiatus

Two of TJN's main bloggers are away for much of the next week - so please forgive us if the traffic is less frequent than ususal.

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No taxation without celebration

This from MarketWatch, not known for these kinds of views on taxes:

"Northern Europeans are the happiest people on the planet, according to a new survey. The Organization for Economic Cooperation and Development says people in Denmark, Finland and the Netherlands are the most content with their lives. The three ranked first, second and third, respectively, in the OECD's rankings of "life satisfaction," or happiness.

There are myriad reasons, of course, for happiness: health, welfare, prosperity, leisure time, strong family, social connections and so on. But there is another common denominator among this group of happy people: taxes. Northern Europeans pay some of the highest taxes in the world."

We can't find the OECD link, though we haven't looked that far. Combine this survey with this, and that gives food for thought.

Declaration: we don't advocate high (or low) tax - just the tax levels voters want. But we firmly oppose the kinds of knee-jerk anti-tax approaches that have become so popular in recent decades.

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Cayman's unilateral mechanism

We have been aware for some time that Cayman has a "unilateral mechanism" for information exchange, that is neither "on-request", "automatic", or "spontaneous" (see our draft briefing paper for more details, which we'll be updating before too long.) We haven't yet described unilateral exchange in detail yet. One summary puts it like this:

"The unilateral mechanism is part of Cayman’s 2008 Tax Information Authority Law, by which local authorities gain assent of nominated countries to exchange tax information without requiring formal government negotiations."

Following our two blogs yesterday on the OECD and on Cayman's internal letter, the following has just been sent to us by a contact in the Cayman Islands. It is a news release issued by the Portfolio of Finance and Economics (we can't find a link for it, unfortunately).

"The Cayman Islands announced progress this week in both areas of its implementation of international standards in tax information exchange. The Cayman Islands unilateral mechanism1 was cleared to go forward by the Harmful Tax Practices Sub-committee for review by the Committee on Fiscal Affairs2 of the Organisation for Economic Cooperation and Development (OECD). The Committee on Fiscal Affairs will review the unilateral mechanism next month."

The unilateral mechanism is interesting. We hope to be discussing it with Cayman officials soon, to understand it better. We aren't passing judgement at this stage, until we know more, though there is no doubt that multilateral, automatic and comprehensive exchange of information is the way to go. But it's worth keeping an eye out for this unilateral mechanism; we'll return to this.

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Task Force on Financial Integrity & Economic Development

Its website has just gone live. As it notes:

"The Task Force on Financial Integrity and Economic Development is a unique global coalition of civil society organizations and more than 50 governments working together to address inequalities in the financial system that penalize billions of people. Launched by Global Financial Integrity in January 2009, the Task Force advocates for greatly improved transparency and accountability in the global financial system.

The Task Force advocates five priorities – curtailment of mispricing in trade imports and exports; country-by-country accounting of sales, profits, and taxes paid by multinational corporations; confirmation of beneficial ownership in all banking and securities accounts; automatic cross-border exchange of tax information; and harmonization of predicate offenses under anti-money laundering laws – each one focusing on transparency."


TJN is one of the members of the co-ordinating committee.

Take a look at its blog too.

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Thursday, May 14, 2009

India seeks offshore tax information

From TaxAnalysts' Worldwide Tax Daily:

"CBDT Chair S.S.N. Moorthy acknowledged that notices have been sent to individuals whose names were on a list provided by Germany, including some prominent businessmen and industrialists. "Whatever action can be taken under law will follow," he said."


Interesting - this relates at least in part to Liechtenstein's LGT bank, which was irritated to find that Germany's intelligence agencies had got access to confidential records. The report, which cites TJN estimates of quantities stored offshore, continues:

"The government, in an affidavit responding to a public interest petition filed by noted jurist Ram Jethmalani and four others, told the Supreme Court that it has the names of Indians with accounts at LGT Bank."

There is a catch, however:

"Tax professionals and income tax officers believe there will be roadblocks hindering access to those LGT accounts. For example, they cite the statute of limitations, which bars the income tax department from initiating proceedings on cases that date back further than six years."

Let's hope the statute of limitations (the Berlusconi defence) doesn't get in the way of proper prosecutions. Note this, too, from Credit Suisse.

India’s government needs to follow through on pledges to bring back cash stashed overseas to help fund an $85 billion economic stimulus plan and bolster markets, Credit Suisse Group AG and Credit Agricole SA say.

“India has to claw back every cent it can get,” Joseph Tan, chief economist for Asia in Singapore at Credit Suisse, the second-biggest Swiss bank, said in an interview. The prospect of “revenue is the impetus for this crackdown on tax evasion and tax havens,” he said."


Interesting messenger seemingly favouring a crackdown on tax havens: a major Swiss bank!

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OECD to look at Cayman

Following our publication of the startling Cayman letter, we note that Cayman Net News is reporting that

"The Cayman Islands is on the agenda at today’s (Thursday, 14 May) closing session of an Organisation of Economic Cooperation and Development (OECD) committee meeting, which will decide whether to allow Cayman off the international financial-services “grey list”.

The OECD might like to consider a number of things related to Cayman's efforts. One is this section in its Confidential Relationships Preservation Law, otherwise known as its secrecy law.

As a major commercial operator in Cayman notes:

"Section 5 of the CRPL prescribes criminal penalties on anyone who divulges (or threatens, offers or attempts to divulge) or wilfully obtains (or attempts to obtain) any confidential information with respect to business of a professional nature, which arises in, or is brought into, the Cayman Islands. The penalty for committing an offence under the CRPL is up to two years' imprisonment and a fine of CI$5,000.00."

Now most of this, perhaps, isn't such a surprise: Cayman doesn't like giving up its many dark secrets (though it does provide tiny 'gateways' through this law that foreign governments and lawmakers can occasionally fight their way through). But one part of section ("or attempts to obtain") will shock many people. You can go to prison in Cayman not only for divulging information, but also merely for asking for it! (And we have checked with people who know that this is a correct interpretation.)

Is this the kind of thing that will get Cayman on an OECD white list? We very sincerely hope not. But we also note that the Cayman government has launched an

"all-out lobbying effort, but remains tense. “We are all on standby because we want to know. It’s very political, but we have done everything one could possibly do,” said Director of Public Relations for the Portfolio of Finance and Economics Ted Bravakis.

We have called all the OECD member states that are going to be there, talked to Germany, Ireland and Japan, all those who have supported us in the past, even the US, although this is not so high on their radar. The UK has said they would step up to the plate for us. We have made a concentrated effort to pull in whomever we can,” he said. “We have exhausted every possible angle to help ensure a positive result.”

So the UK, it seems, is backing them in their quest to have their shocking secrecy provisions, among many other very unpleasant things, legitimised. What a surprise. Let's hope the OECD makes the courageous decision.

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Letter from the Cayman Isles

An internal letter has come into our possession, from the Cayman Islands. It suggests that the OECD's list has caused considerable alarm there. It was originally reported in Cayman news wires, but not in full. We now reproduce the startling letter in full, transcribed from the original hard copy.

BY HAND

The Honourable Leader Of Government Business, Mr. Kurt Tibbets JP
23 April 2009
The Government Administration Building
Elgin Avenue
Grand Cayman


Dear Sir

I write with a degree of urgency following the meeting of the Executive of the Cayman Islands Financial Services Association at which transactional deal flow to the Cayman Islands was evaluated in the light of the inclusion of the Cayman Islands in the current OECD "Grey List". There was unanimous concern expressed at the immediate and negative responses being received on a daily basis from clients and hard evidence of determinations having been made by institutional clients now not to use the Cayman Islands, rather to favour "White List" competitor jurisdictions.

We bring this to your attention because we are afeared that if all immediately available steps are not taken to remedy the current position accelerating and irreversible damage will be done to the Cayman Islands financial industry. Once relationships are established by institutional clients in alternative jurisdictions we doubt that Cayman will be able to compete effectively for future business from that institution thereafter. It is a regrettable but unquestionable fact that legislative improvements based on Cayman model legislation have rendered such jurisdictions highly competitive. The overall concern is heightened because this occurs at a time when there are fewer institutional clients and, as a consequence of the global recession, statistics for Q1 indicate that overall transactional flow may be down by as much as fifty percent in any event. This will unquestionably soon have dramatic repercussions in terms of local employment statistics.

CIFSA is fully understanding of and remains fully supportive of CIG's effort to secure immediate recognition of the unilateral mechanism. But given that there now exist grounds to conclude that the viability of the entire financial industry is at stake, as an exercise in risk management, we consider it essential that CIG immediately undertake two specific further steps.

1) To implement immediately four additional bilateral treaties either a) by delivering signed forms of Treaty in the OECD model form forthwith to any four jurisdictions currentl designated in the unilateral mechanism or b) delivering signed treaties without a counterparty designated in the model form to the OECD. For the record in the current circumstances CIFSA now places no value whatsoever on whatever may have been considered to be the negotiated treaty benefits available in consideration for the execution of those treaties. At best the value of these benefits are intangibles. The daily damage now being sustained by the Cayman financial industry is verifiable.

2) We recommend two amendments to the Confidential Relationships Preservation Law. We recognize that the House is not in session but suggest an announcement of legislative intent would have similar public relations effect. Firstly we would recommend that the criminal law sanctions be repealed leaving the structure of the law in place (so as to cause no disruption to cross references in transactional documents.) Secondly we suggest an amendment to section 3(2) that specifically states that the CRPL is subject to requests for tax and criminal information that are made pursuant any bilateral tax treaty, the unilateral mechanism or any mutual legal assistance treaty.

We are fully sympathetic to the current difficulties that arise consequent upon the election process and CIFSA would wish to remain constrained from comment during a sensitive period. But we are concerned that the current constititional hiatus should not be alowed to contribute to any delay in resolution with the result that incremental damage is inflicted on the financial industry. Furthermore the real time commercial exigencies are such that pressure from clients is rendering the current position of professional advisers in the financial industry untenable. Whilst the intention is to express every confidence in the CIG position typical client reaction varies from extreme scepticism to non acceptance of assurances and adverse conclusions as to the outcome are being drawn. As the representative of the private sector we feel an obligation to bring the current position to your immediate attention since we now doubt that the Cayman Islands financnai lindustry can withstand a lengthy review process by the OECD without sustaining irreparable harm. We would be happy to discuss in conference and would respectfully request a meeting this week.

Subject thereto we would be pleased to provide technical drafting assistance to help resolve the sitution.

Respectfully yours

Anthony Travers
Chairman
Cayman Islands Financial Services Association

Cc: HE The Governor
Honourable Members of Cabinet.

Update: see more on Cayman and confidentiality here.

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Tina was wrong: globalisation without tax havens

The Friedrich Ebbert Stiftung has published another in its occasional papers on globalisation. Re-defining the Global Economy (paper No.42, 2009) comprises views on how a globalised economy could be shaped to produce alternative outcomes with a stronger bias in favour of social justice and democracy (and non-militarism).

Not surprisingly, there is a huge focus on financial markets, regulatory capture, tax avoidance and tax havens. These issues have become mainstream in ways that seemed inconceivable even two years ago. Former World Bank chief economic adviser Joseph Stiglitz sets the scene in his introductory section:

We will not be able to restore confidence in our financial markets unless we change their behaviour through regulation. Regulation must be comprehensive. Regulatory institutions too have to be reformed: too often, the regulatory process has been captured by those who were supposed to be regulated.

Regulatory capture has become a major problem, and small island tax havens pose a particular problem because their political arrangements are just so weak: an issue which Mark Hampton and our own John Christensen were writing about over a decade ago.

Stiglitz continues:

The voice of those injured as a result of inadequate regulation – pensioners who lose their life savings, homeowners who lose their homes, workers who lose their jobs – has to be paramount.

Who can disagree with this? Well apparently the British Chancellor of the Exchequer and the cast of boardroom retreads he summonsed to write the appalling report on the future of financial services in the UK, blogged here. Under the leadership of a former chairman of one of the largest failures in all history, Citigroup, this study singularly fails to take account of the views of any of these stakeholders: no pensioner representatives, no homeowner associations, no trade unions. The fox remains in charge of the hen-coop.

Such regulation could encourage real innovation, not the kind focusing on regulatory, accounting and tax arbitrage that has marked . . financial markets in recent years, or the derivatives that were supposed to manage risk but instead created it.

Here we get to the nub of the issue. In their constant quest to increase profits by circumventing or degrading regulation, taxation and accounting standards, the "innovators" of the past few decades have created a system which undermines genuine wealth creation and enterprise. It also destroys the environment, creates grotesque social inequality, rewards failure and confuses liberty for licence.

We detect alarming trends in the current discourse. Radio and television journalists, apparently bored with covering the financial market crisis, have moved on to other issues. Meantime the silken-tongued public relations teams of the financial services industry are re-emerging from the shadows to re-assert the need for light touch regulation. One such spokesman, a professor from the London Business School, talking on BBC's Radio 4 Today programme this morning, was warning that any attempt to strengthen regulation of the derivatives markets would drive the business elsewhere, presumably to wholly unregulated centres in the Channel Islands or Caribbean. This is the counsel of despair. What is needed is better regulation. Tougher regulation. And no gaps which allow operators to shift to dodgy places with captive regulators.

Re-defining the Global Economy gives an interesting overview of how a set of different voices, including those from developing countries and representing workers and consumers, would set about restructuring globalisation in the public interest. It is an important antidote to those voices of the past who continue to insist that THERE IS NO ALTERNATIVE (TINA) to unbridled laissez faire capitalism.

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And tomorrow children, we'll set up a Panamanian tax shelter

For those who think that setting up an offshore tax shelter is a complex and covert process, Jessica, a sophomore college student and intern at Global Trade Watch, called up a Panamanian company formation agent to show just how farcically easy it is for tax dodgers to get underway. Watch it now.

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Wednesday, May 13, 2009

Foreign Policy: Africa's missing billions

Khadija Sharife, whom we've just taken on to help us with some research, has an article in the prestigious Foreign Policy magazine in the US. This is most welcome, not least because they have been resistant to tackling this issue for some time.

Take a look!

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Avi Yonah on US tax cheating

Guest blogger: Prof. Sol Picciotto, TJN Senior Adviser

Reuven Avi-Yonah, who is probably the leading US tax academic, has an article in the current issue of Tax Notes International called “Obama's International Tax Plan a Major Step Forward.”

It's a little surprising he is so optimistic, because the Obama proposals (presumably originating from Larry Summers) aim to strengthen residence taxation of multinational enterprises (MNEs), while Avi-Yonah favours source taxation. (Source taxation means that tax is levied where the profits arise, the “source” of the profits; residence taxation means that tax is levied where the MNE has its residence, usually the parent company’s headquarters. It's not a question of either-or, however: as Avi-Yonah puts it, "effective source taxation requires residence taxation, and effective residence taxation requires source taxation." See more in this briefing paper – as it happens, prepared by Avi-Yonah for TJN.)

Avi-Yonah argues that source taxation has been undermined by low-tax jurisdictions - evidenced by data that in 2003 about a third of the profits of U.S. MNEs were in Ireland, Bermuda and the Netherlands; and of the top 10 locations of such profits 7 had effective tax rates below 10%. He points out that the Obama proposal is less radical than the proposal made in 2000 when Summers was Treasury Secretary, presumably because of feared MNE opposition, though they are anyway opposing this one too.

MNEs can avoid attempts to strengthen residence taxation by moving their corporate headquarters to a lower-tax jurisdiction, as many have done and are threatening to do. He says US MNEs can be prevented from moving their corporate headquarters by rules to prevent this enacted in 2004, but suggests that the provisions in the Stop the Tax Haven Abuse Act on 'managed and controlled' companies should be enacted to try to stop companies claiming to set up headquarters in low-tax countries such as Ireland or the Netherlands, as well as accummulating their worldwide profits there (which the anti-deferral rules would block).

But he says he still favours source taxation and so sees this should be as just a first step in protecting the US tax base from erosion.

He also supports the moves on the Qualified Intermediary (QI) procedures for the same reasons, as strengthening taxation of US citizens. A qualified intermediary is an institution, typically a bank, that makes payments such as interest to non-residents. The US rules allow a QI to keep the identity of the payee secret if it certifies that they are both non-resident and non-US citizens. This allows such banks to manage the investments of various tax cheats and purchase, say, portfolio-interest bonds on their behalf. The QI rules allowed banks to help foreign tax cheats, so long as they weren’t evading US taxes. Unfortunately, as the UBS case has shown, many of them also helped US tax cheats, by advising them how to use companies or trusts in havens to own the assets. See more on pages 3-4 here explaining what can go wrong.

As a next step aimed directly against havens his Avi-Yonah’s proposal is that rich countries could:

"eliminate the tax havens' harmful activities overnight by, for example, imposing a refundable withholding tax (for example, at 35 percent) on all payments to noncooperating tax havens, or more broadly, to all nontreaty countries, and insisting on effective automatic exchange of information with treaty countries. The withholding tax would be refunded on a showing that the income was reported to the residence country. This idea is similar to, but much broader than, the refundable withholding tax proposal in the Obama plan."


He added:

"The financial services industry would no doubt lobby hard against such a step on the grounds that it would induce investors to shift funds to other OECD member countries. However, the EU and Japan have both committed themselves to taxing their residents on foreign-source interest income. The EU savings directive, in particular, requires all EU members to cooperate in the exchange of information or impose a withholding tax on interest paid to EU residents. Both the EU and Japan would like to extend this treatment to income from the United States. Thus, this would seem an appropriate moment to cooperate with other OECD member countries by imposing a withholding tax on payments to tax havens that cannot be induced to cooperate in exchanging information, without triggering a flow of capital out of the OECD."


We think this is an optimistic view of the Obama plan, which on the face of it is a unilateral move by the US to protect its tax base. However, Avi-Yonah is well-informed, and has good contacts with the Obama administration, so let's hope he is right.

TJN’s Action Plan "End the Offshore Secrecy System" supports a stronger multilateral approach, including unitary taxation of MNEs. Since Avi-Yonah was co-author of a paper in June 2007 advocating exactly this, presumably he agrees.

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Carl Levin on automatic exchange of information

We have been banging on about automatic exchange of information for some time. We've just spotted this from US Senator Carl Levin, from last week:

"The Administration may want to consider finalizing a regulation proposed by the Clinton Administration years ago. That regulation would allow the United States to engage in automatic information exchanges of account information with countries on a reciprocal basis for tax enforcement purposes. Right now, the only automatic tax information exchanges we engage in are with Canada. A lot more countries may be willing to participate. The resulting account data could produce new information identifying U.S. tax dodgers."

Now let's hope this makes progress. OECD, take note. There is, as we've said, far from universal endorsement of your feeble exchange-on-request model as you seem to think.

"A lot more countries may be willing to participate," Levin said. Hands up, anyone? Germany? France? Britain? The European Union? South Africa? Brazil? India? The Isle of Man? Let's get this ball rolling.

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Fox conducts new review of henhouse safety

Nobel prize winning economist Paul Krugman is on form again in the New York Times, reminding us of scary problems still out there:

"It’s my sense that the prospects for fundamental financial reform are fading. Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.

Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind."


We've used this analogy before: why is the fox always appointed to look after henhouse security?

Britain has a particular knack for doing this. HM Treasury has released a study entitled UK international financial services – the future: A report from UK based financial services leaders to the Government.

It is a remarkable piece of propaganda, short on analysis, essentially backing the case for to expanding London's role as a financial centre. Yes, you read that right: notwithstanding the devastation the City has demonstrably inflicted on the world they want more:

"The Government and the industry should collaborate in order to maintain and expand the UK’s central role as a finance portal for the rest of Europe and the world. . . "

Be afraid, very afraid, when the kids take control of the tuck shop keys.

Who headed the report team? Step forward Sir Winfried Bischoff - former chairman of now busted Citigroup. Who are the members of the Professional Services Global Competitiveness Group, which produced the report? Take a look at page five - bankers and accountants, almost the lot of them, with the occasional politician or civil servant thrown in. John Christensen, TJN's director, said:

"This is an exercise in pure propaganda - there is almost no real analysis here. Time and time again the people at the root of the problem are put in place to solve the problem – and they have this blinkered attitude – There is an extraordinary failure to consult outside their group."

Check out their chart on page 31, which takes a somewhat dubious look at Britain's so-called strengths and weaknesses (click on the chart to enlarge it).

Britain is rated poorly on "competitive costs" - which presumably means the cost of housing, transport and general living and so on. This is fair enough, but why is Britain, and particularly London, so expensive. It's because of the financial services industry! It has stoked demand hugely, especially in the housing market, requiring huge numbers of people to resort to debt driven puchases which few can afford. The City's prominent role as a global capital market (with huge tax concessions to non-resident depositors) has attracted massive inflows of essentially portfolio capital, keeping sterling over-valued in comparison to major European economies and 'crowding-out' the potential for investing in non-finance activity, especially in the South-East region. Success? We think not, especially now that we have handed over a record level of peace-time national debt to the next generation, entirely because of the incompetence and greed of those talented and upstanding folk in the City of London.

Britain's private finance initiative, massively boosting the financial services industry, has further served to make Britain a more expensive place to do business. And a more unequal society.

Britain is described as "expat friendly." What that means is that Britain provides a highly abusive tax regime for "non-domicilied" residents, an abomination in the British tax system that has invited any number of dubious criminals to live in London, pumping up local house prices. The report fails to raise the urgent questions about this rule, unlike Martin Wolf.

And where does tax figure in their analysis? You guessed it: on the negative side of the balance sheet - represented as a challenge. Which it is for those who make their living from avoiding it. Because at the end of the day, what London and its satellite tax havens on the Crown Dependencies and British Overseas Territories is really, really good at, is avoiding tax. This is where the so-called comparative advantage lies. Not in the competitiveness of lawyers or bankers fee rates, or the excellence of their ability to understand risk and investment management (the crisis has put paid to all that nonsense). Nor in safe-guarding people's savings and pensions - the latter being in a state of total crisis. No, the City's real specialism lies in tax avoidance. Britain used to provide butlers to the world's wealthiest. Now it provides tax avoidance schemes. Is this progress?

Britain has "accounting transparency"!!? As readers of TJN's, or Richard Murphy's, or Prem Sikka's published work will know, this is a gross misrepresentation. Both in the private and public spheres, accounting deficencies cause materially important information to be withheld from investors, voters, and all other stakeholders. Just try finding out about the costs of private finance initiative projects. Or tax avoidance schemes implemented by major British corporations.
Unbelievably, the report claims that the financial services industry in Britain is not too big - and what comparison do they use to support their case? Singapore and Hong Kong! Two of the biggest, dirtiest tax havens in the world, which are even more captive to financial capitalism. Perhaps if they had taken a balanced approach they would have made more useful comparisons with countries like Germany, Australia or Sweden, which have succeeded in keeping a more diversified industrial base.

The report makes a lot of the growth of international trade flows since 2000, in the context of globalisation - yet they don't appear to recognise that a large part of this growth comes in the form of trade in goods and services within multinational corporations – it shows up as cross-border trade – but an awful lot of that is being driven by tax avoidance and tax arbitrage issues. Do the report's authors even know this.?

The ascendancy of self-interest over public interest in the political sphere is live and kicking. And the City remains firmly in control of Whitehall. This report is a scandal in the commissioning, in its failed ideological position, and in its brazen promotion of special interests. Shame on everyone involved, including and especially the Chancellor of the Exchequer.

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Swiss tax competition in full swing

Tax competition isn't only a problem between countries; it can be a problem within countries. Switzerland is no exception: its cantons indulge in a race to the bottom with each other as they steadily lower standards and taxes to attract the wealthy away from each other. A new story in Le Temps newspaper, entitled Obwald, Pirate Fiscal, looks at a recent example.

Obwald has just 33,000 inhabitants - fewer even than the Cayman Islands - and it is at the geometric centre of Switzerland, and it has already been under fire for trying to introduce a regressive tax system (that is: the richer you are, the less you pay.) A federal tribunal vetoed that one, but it was replaced by a flat tax, which is still noxious. As Le Temps put it:

"The canton is envisaging creating building zones of high standing, reserved for particularly affluent contributors."

As we have noted, huge numbers of Swiss are uncomfortable with the whole tax haven thing. A former mayor of Zurich, Elmar Ledergerber, describes this as a scandal and the "undermining of our liberal and social state." Moritz Leuenberger, a federal adviser, has likened this to apartheid. Le Temps said:

"Obwald is accused of endangering 'equality of rights' under the constitution by virtue of its zones of selective living."

And so tax competition rumbles on, steadily shifting the tax charge away from the richer sections of the global population and heaping it onto the shoulders of those less fortunate.

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Tuesday, May 12, 2009

A willing taxpayer in The Office

The British comedian Ricky Gervais has made a fortune from The Office, the smash hit comedy he created. In an interview in the Financial Times, this emerges:

"Then come the cackles as he sums it up: “He tried to be humble and coy but his true colours were shown at the end when he said ‘I’m richer than Simon Cowell’.”

Those familiar with The Office will smirk at Gervais' use of the third person in this sentence. But it's this other thing that this son of a dinner lady and a labourer says, which interests us the most.

"Tax exiles are “unsavoury”, he says. He welcomes the educational and health benefits his family enjoyed: “I like paying tax. If it wasn’t for the welfare state I wouldn’t be where I am today.”

Well said. He joins Katie Melua and Graham Norton, and doubtless a number of other celebrities whom we haven't picked up on. Good on 'em.

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Isle of Man considers automatic exchange of information

The Isle of Man, one of Britain's Crown Dependencies, is considering whether to adopt automatic exchange of information, a move that TJN would greatly welcome, if it is done right. As IOM Today reports:

"A Treasury working party has been set up to look at whether automatic exchange of tax information should be introduced."


and, as background:

"The Isle of Man has so far signed 14 tax information exchange agreements, more than any other offshore jurisdiction and a tally that secured its place on the Organisation for Economic Co-operation and Development a whitelist of co-operative countries. But currently such tax information is shared only on request.
. . .
At the moment non-residents can choose to exchange tax information or pay a withholding tax of 20 per cent on their savings interest, which is remitted back to their home country."


And, we are pleased to note:

"Now there are clear signs that the international agenda is moving towards automatic exchange, said Treasury Minister Allan Bell. . . . . . Automatic exchange was on the agenda when Mr Bell met with UK counterpart, Financial Secretary to the Treasury Stephen Timms, recently."

All of this is important progress. Anyone for Jersey? Guernsey? The Cayman Islands?

And don't forget that, even for developing countries, automatic exchange of information can work.

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