Friday, July 31, 2009

Tax specialists - in indecent haste?

We linked to this FT story a couple of days ago but now feel it's worth dwelling on. It notes that the IMF, worried about the economic crisis, has concluded that

"financial innovation has been driven primarily by the search for new ways to allocate risk, but also by tax avoidance”


And the article notes:

Amid the wreckage of the financial crisis, there are few areas of banking less tipped for a comeback than the baroque world of tax-driven structured finance. . . (one opportunity lies in) the breathtaking scale of bank losses – coupled with many countries’ strict rules on how they can be used, particularly after mergers. That prompts a need for heavy structuring of losses and, with it, a need to get the tax specialists back on their feet. With indecent haste, some might say.

Oh dear. And look how bad it has been:

"In 2006, the UK Revenue identified a share-dealing scheme that had the potential to wipe out a year’s corporation tax liabilities for the entire banking sector. In 2007 the US identified a significant threat from “foreign tax credit generators” which it viewed as “particularly abusive” because they are designed to generate credits in any amounts the taxpayers desire."

And yet it should also be noted that

"the complexity of this issue means that regulators are at an early stage of thinking about it."

Well, governments are not alone in not finding it easy, figuring out what the banks are up to. Lots of people in the banks don't understand what the banks are up to either. The article is rather gloomy about finding solutions. But we note, in this context, something in a hard copy of the Guardian from July 24th - though we can't, strangely, find the link:

"Bank bosses who allow their firms to devise schemes to help customers avoid paying tax could face sanctions from the Financial Services Authority.

This was raised at the regulator's annual public meeting. A new voluntary bank code of conduct is out for consultation, the article notes. An official at the meeting, Nigel Harper,

"was particularly referring to the structured finance operations of banks, which often specialise in tax planning, when asked whether individuals employed by banks not signing up to the code would still be considered "fit and proper" under the FSA's rules.

Lord Turner, the FSA chairman, said

"The whole overlap betweeen tax and regulatory arbitrage and the fit and proper test is one we are still thinking about."

Voluntary codes are nowhere near enough, though they can at times have a place, as long as they don't whitewash and legitimise the illegitimate. At least brains are, at long last, starting to whir on this crucial subject.

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Thursday, July 30, 2009

Tax evaders confess

From the Wall St. Journal:

"Wealthy taxpayers have inundated the Internal Revenue Service in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts.

The volume has been so great that Wednesday, the IRS issued a streamlined, three-page form for taxpayers seeking entry into its temporary voluntary-disclosure program. "Last week we had 400 [applicants] -- four times as many as in all of last year," said IRS spokesman Frank Keith, who declined to provide more detailed figures."

It's good to see stirrings of guilt, but if we compare these hundreds to the 52,000 people fingered in the UBS case alone, we can't help but feel that we still have a very long way to go.

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We're humans, we do big tasks

A very short and excellent video from Christian Aid. Note the importance of tax.


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TJN's congressional briefing and a bowl of jello

Recently we blogged a forthcoming Congressional Briefing by Jack Blum and Sarah Lewis of TJN-USA, alongside Raymond Baker of Global Financial Integrity and Bob McIntyre of Citizens for Tax Justice. We now have the document from the Congressional Briefing entitled Tax Evasion and Incorporation Transparency: Show U.S. The Money.

Like the Congressional Research Service briefing which complements it and which we blogged two days ago, the latest document contains a wealth of good material that helps counter the awesome quantities of spin that have been issuing recently from the well-resourced machinery of offshore, notably from Jersey, London, Switzerland and the Cayman Islands.

This blogger was talking to a wire journalist yesterday, who expressed a belief that the recent U.S. activism against UBS somehow marked, if not the death knell of offshore, a body blow. We at TJN are aware that while the new spirit of activism on the part of some governments is most welcome and useful, we haven't got very far yet beyond the pinprick stage. As Lewis, a highly experienced former private banker notes:

"Private banking is like a rock sunk into a bowl of jello: you press on one part, and you see an expansion in another direction. As UBS pulls back from taking on US clients, it is expanding its marketing push in Latin America and other regions, in developing nations in particular. As are other private banking operations. The scrutiny on UBS as a larger global institution can even provide a market advantage for the under-the-radar niche players.
. . .
The status quo nature of the business is maintained, even with obstacles placed in the way. The devious workaround is part of the private banking mindset."

Her short talk makes fascinating reading, very different from what you might normally read on this subject, either from TJN or from its many adversaries. Take a look, too, at Robert McIntyre's presentation on page six, highlighting the simple scams that heap taxes that corporations ought to pay onto the shoulders of ordinary Americans. Scroll down to page 25, where the section on Myths and Facts about Offshore Tax Abuses describes in common-sense unravels some of the nonsense that lies behind the anti-tax campaigners of the offshore system.

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Links - July 30

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

A pact to get banks to abide by the spirit of tax legislation
July 29 (FT) - The scale and complexity of some projects regularly appals tax authorities. In 2006, the UK Revenue identified a share-dealing scheme that had the potential to wipe out a year’s corporation tax liabilities for the entire banking sector. In 2007 the US identified a significant threat from “foreign tax credit generators” which it viewed as “particularly abusive” because they are designed to generate credits in any amounts the taxpayers desire.

Deal far from done in UBS tax evasion case
Jul 29 (AP) - Attorneys say no settlement is imminent in the U.S. attempt to force Swiss bank UBS AG to disclose names of thousands of suspected tax dodgers.

Illuminating outline
July 29 (FT) - The model of capitalism practised in Sweden, Norway, Denmark and Finland is seen by some as one of the few winners of the current economic and financial crisis.academics from across the region who wrote a book called The Nordic Model. They argue that an openness to globalisation combined with strong social protection and egalitarianism defines the region’s capitalism.

We've forgotten the force which really drives political change
July 29 (Independent) When you are just one person sitting on a warming planet – when you see economies collapsing, wars raging, and reasons for fear on every corner – how should you react? What can you do? The current cluster of crises has stirred mood-responses that you can hear in every bar and coffee shop.

Conservatives leader dashes hopes of tax cuts
July 29 (Accountancy Age) David Cameron has signaled tax cuts are an unlikely priority under a Tory party government, and said if elected, public spending would be cut and taxes may even rise.The Conservatives leader made the remarks on the BBC’s Andrew Marr Show yesterday, according to tax-news.com

UBS Client Case Implicates Swiss Bankers, Official
July 28 (NY Times) An American client of UBS pleaded guilty on Tuesday to using Swiss bank accounts to hide more than $8 million (4.8 million pounds) from U.S. tax authorities and said a Swiss government official received $45,000 to help cover up the fraud.

Tax take from City firms falls by half
July 28 (Guardian) The tax contribution from City firms has plunged by half over the past two years, following multibillion-pound losses suffered by banks in the credit crunch.

U.K. Launches Tax Amnesty for Offshore Accounts
July 28 (WSJ) The U.K. government, struggling to keep up revenue streams as public finances deteriorate, Tuesday offered an amnesty to U.K. citizens with unpaid taxes linked to offshore accounts.

Offshore Disclosure Initiative Launch
July 28 (HM Revenue & Customs) (HMRC) has confirmed the details of a new disclosure initiative that will allow people with unpaid taxes linked to offshore accounts or assets to settle their tax liabilities at a favourable penalty rate.

The 2009 IMF-World Bank Annual Meetings
July 28 (IMF) The 2009 IMF - World Bank Annual Meetings will be held on October 6 and 7, 2009 in Istanbul, Turkey.

US Government Seeks Compromise
July 28 (Tax Analysts) The U.S. government is seeking a compromise with UBS and Swiss authorities in which it would accept a fraction of the names currently sought under a John Doe summons, according to Swiss media.

German Economics Institute Recommends Wealth Tax
July 27 (Tax-News) According to a recent study conducted by the ‘Deutsche Institut für Wirtschaftsforschung’, the largest economics research institute in Germany, increasing tax on wealth could generate as much as EUR25bn annually for the State. The report recommends significantly increasing property tax, and reviving the wealth tax in Germany.

Criticism Grows over Banking Data Deal
July 27 (Spiegel) The EU is about to enter talks with the US on giving it access to banking data in its fight against terrorism. German politicians from across the political spectrum are up in arms, and members of the European Parliament say they will try to scupper any deal that violates data privacy.

Tax Transparency Is Set To Increase
July 24 (Forbes) The emphasis on tax transparency at the April G20 meeting in London has not dissipated; rather, it has strengthened. Governments increasingly seem determined to implement serious change. Agendas have broadened from a strict focus on tax haven secrecy to measures in the area of corporate profit-shifting.

On Tea and Taxes
July 23 (Financial Task Force) One evening in November 1773, colonists disguised as Mohawk Indians threw 342 chests of tea into the Boston Harbor. Later dubbed the Boston Tea Party, the protest was in dissent of what colonists believed to be unfair taxation by the interfering British Empire. This sentiment reverberated throughout the colonies, escalating until the colonists were freed from their oppressors many years later. Little did they know, but there are easier ways to use tea to avoid taxes.

Marijuana Gets a Stamp of Approval
July 22 (NY Times) Perhaps only in the sometimes hazy world of medical marijuana could higher taxes be considered good news. But sure enough, supporters of medical marijuana were pleasantly pleased Wednesday after Oakland voters overwhelmingly approved a huge tax increase — 15 times the former rate — on sales at the city’s handful of permitted medical marijuana dispensaries.

Tory banking regulation tastes stale
July 22 (Guardian) After the announcement of the Conservative party's plans for financial reforms (pdf), the fat cats must be licking their plates of cream. With support from taxpayers, banks have been given protection from bankruptcy – and there is no shortage of bonuses for those at the top either.

ATO lifts lid on tax havens in US
July 22 (The Australian) DETAILS of tax scams by Australian organisations involving US entities have been revealed in a submission sent to US authorities.

Fraud reporting
July 21 (Economist) The rise in financial crime in America. OVER 730,000 counts of suspected financial wrongoing were recorded in America last year, according to recent data from the Treasury Department's Financial Crimes Enforcement Network. Institutions such as banks, insurers and casinos are required by law to report suspicious activities to federal authorities under 20 categories.

Stanford case spreads its tentacles
July 21 (FT) The indictment of Sir Allen Stanford on charges ranging from wire fraud to bribery has provided an illuminating glimpse into how cross-border white-collar crimes are investigated and prosecuted, experts say.

Graft Inquiry in Namibia Finds Clues in China
July 21 (NY Times) To the likely consternation of diplomats in both Beijing and faraway Windhoek, a newly minted initiative by Namibia’s government to root out official corruption has snared an early catch: three people who, Namibian prosecutors charge, helped win a lucrative contract for a Chinese company recently headed by the son of Hu Jintao, China’s president.

Tax Returns Filed by the Rich on the Rise
July 21 (Hindu Business Online) More of the rich are now beginning to file income-tax returns. There has been a sharp rise in the number of assessees who filed return of income between Rs 1 crore and Rs 5 crore a year during the last three financial years.

Brooks: Tax Sparing
July 21 (TaxProf Blog) Kim Brooks (McGill) has posted Tax Sparing: A Needed Incentive for Foreign Investment in Low Income Countries or an Unnecessary Revenue Sacrifice, 34 Queen's L.J. ___ (2009), on SSRN. Here is the abtstract:

Pay of Top Earners Erodes Social Security
July 21 (WSJ) The nation's wealth gap is widening amid an uproar about lofty pay packages in the financial world.

IRS Gets Tougher on Offshore Tax Evaders
July 20 (WSJ) The Internal Revenue Service has stepped up scrutiny of offshore accounts and foreign income, an enforcement campaign that could sweep up tens of thousands of taxpayers.The push to recover some of the billions of dollars lost each year to offshore tax evasion goes beyond the government's high-profile effort to force Swiss bank UBS AG to release the names of 52,000 American account holders in order to nab tax evaders.



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Tuesday, July 28, 2009

Secrecy havens: new US congressional report (+ French news)

The U.S. Congressional Research Service (CRS) has issued a detailed new report looking at secrecy jurisdictions (also sometimes known as tax havens).

The report, which references our work in several places, is packed with data and useful material. For example, looking at methods of corporate tax avoidance, it mentions:
  • Allocation Allocation of Debt and Earnings Stripping (p8, "borrow more in
    the high-tax jurisdiction and less in the low-tax one." - note also our latest blog)
  • Transfer pricing (p9, "By lowering the price of goods and services sold by parents
    and affiliates in high-tax jurisdictions and raising the price of purchases, income can be shifted")
  • Contract Manufacturing (see p10)
  • Check-the-Box, Hybrid Entities, and Hybrid Instruments ("where an entity
    can be recognized as a corporation by one jurisdiction but not by another - see explanation on p10)
  • Cross Crediting and Sourcing Rules for Foreign Tax Credits (p11, "the use of excess foreign taxes paid in one jurisdiction or on one type of income to offset U.S. tax that would be due on other income. . . . Studies suggest that between cross crediting and deferral, U.S. multinationals typically pay virtually no U.S. tax on foreign source income.")
  • Deferral (U.S. multinationals are not taxed on income earned by foreign subsidiaries until it is repatriated to the U.S. parent as dividends; see more on p7)
That's for corporations. For individuals, the report highlights as examples
  • Tax Provisions Affecting the Treatment of Income by Individuals (p19, related to "U.S. rules that do not impose withholding taxes on many sources of income."
  • Limited Information Reporting Between Jurisdictions (p20) noting in blunt language how worthless TIEAs can be, with an interesting example from the British Virgin Islands.
  • U.S. Collection of Information on U.S. Income and Qualified Intermediariesidentify the true beneficiaries of interest and exempt dividends.") (p20, "Under the QI program the United States itself does not require U.S. financial institutions to
On p13-14 the report provides a striking comparison of U.S. corporate profits as a share of GDP, with France, Germany and Japan all in the 0.2-0.3% range, and Bermuda, the British Virgin Islands and the Cayman Islands all in the 350-450% range.

There is also a long section on magnitudes of the problem on pp 15-19 for corporations, with some additional discussion for individuals. Anecdotally, it includes this:

"The Tax Justice Network has estimated a worldwide revenue loss for all countries of $255 billion from individual tax evasion, basically using a 7.5% return and a 30% tax rate.75 These assumptions would be consistent with a $33 billion loss for the United States using the $1.5 trillion figure."

The report then considers policy options for addressing the problems. As they say in the preamble:

"Outcomes would likely be better if there is international cooperation."

Indeed. The options for tackling include:
  • Repeal Deferral (p22, " to institute true worldwide taxation of foreign source income") as well as Targeted or Partial Elimination of Deferral (p23)
  • Allocation of Deductions and Credits with Respect to Deferred Income/Restrictions on Cross Crediting (p24, "allocate deductions and credits, so as to deny those benefits until income is repatriated."
  • Formula Apportionment. A big one - linked with our new transfer pricing project (p24, "income would be
    allocated to different jurisdictions based on their shares of some combination of sales, assets, and
    employment. . . .Studies have estimated a significant increase in taxes from adopting formula apportionment.")
  • Eliminate Check the Box, Hybrid Entities, and Hybrid Instruments; Foreign Tax Credit Splitting From Income (p25, "rules to require that legal entities be characterized in a consistent manner.")
  • Tighten Earnings Stripping Rules (p26, "dropping the debt to asset share test.")
  • Foreign Tax Credits: Source Royalties as Domestic Income for Purposes of the Foreign Tax Credit Limit, Or Create Separate Basket; Eliminate Title Passage Rule; Restrict Credits for Taxes Producing an Economic Benefit (p26, "sourcing royalties as domestic income for purposes of the credit or putting them into a separate foreign tax credit basket."
  • (Other) Transfer pricing moves as proposed by Mike McIntyre (p27, "making transfer pricing penalties nearly automatic for taxpayers who have not kept contemporaneous records; . . . some type of formula apportionment plan as a default for transfer pricing for non-complying taxpayers.")
  • Codify Economic Substance Doctrine (p27, "Firms that enter into tax savings arrangements that are found not to have economic substance can have their tax benefits disallowed by the courts."
  • Prevent Dividend Repatriation Through Reorganizations (p27),
  • Individual reporting (p27-, mostly through better information sharing and enforcement; shifting from a residence- to a source- basis for passive income)
  • Multilateral Information Sharing or Withholding via International Cooperation - including floating the possibility of joining the EU Savings Tax Directive ("The Tax Justice Network has proposed that the United Nations develop a global tax cooperation standard, set up a panel to determine compliant states, and deny recognition to non-compliant jurisdictions. They have also suggested that the IMF and Word Bank country assessments address tax compliance" which is accurate but doesn't include all our proposals.)
  • Expanding Bilateral Information Exchange p28
  • Unilateral Approaches: Withholding/Refund Approach; Increased Information Reporting Requirements p29
  • Incentives/Sanctions for Tax Havens p29
  • Revise the and Strengthen the Qualified Intermediary (QI)Program p30 several options have been proposed; some feature TJN's own Jack Blum.
  • Placing the Burden of Proof on the Taxpayer p31
  • Treat Shell Corporations as U.S. Firms p31
  • Impose Restrictions on Foreign Trusts (click here for a primer on trusts) p31
  • Treat Dividend Equivalents as Dividends p31
  • Extend the Statute of Limitations p31
  • Greater Resources for the Internal Revenue Service to Focus on Offshore p32
  • Make Civil Cases Public as a Deterrent p32
  • Revise Rules for FBAR (Foreign Bank Account Report) p32
  • Joe Doe Summons p32
  • Strengthening of Penalties p32
  • Address Tax Shelters; Codify Economic Substance Doctrine p33
  • Regulate the Rules Used by States to Permit Incorporation p33
What a lot of very good ideas. The Obama administration has made a start on some of these; see pp 33-40 for an overview of those. And, if that isn't enough, this AP story yesterday, entitled Bill Would Shut Out Countries With Lax Bank Rules, provides this:

"The senior House Democrat in charge of overhauling the nation's banking regulations warned Monday that foreign banks would be denied access to the U.S. system if they become an ''escape hatch'' for risky investments."

So there is some progress, at least, in the United States. There is progress too, it seems, in France: the finance minister, Eric Woerth, has outlined new measures in the 2010 budget. Article in French, rough English translation here:

"At a hearing before the Committee on Finance of the National Assembly, Mr. Woerth spoke of a "heavier taxes on passive income to non-cooperative jurisdictions". The rate of withholding tax on dividends, interest and fees would be increased to 50% if the beneficiary is resident or established in a non-cooperative "

(and take a look at Christian Chavagneux' own list of measures one might take against the secrecy jurisdictions.)

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Non-dom's bluff called

Last week Lord Swraj Paul of Marylebone, a non-domiciled UK resident who has been funding Britiain's Labour party, threatened to stop bankrolling the party because of because of a government-backed bill that forbids party funding from people who do not pay tax on all income from abroad. (What right does someone not domiciled in the UK have to interfere in Britain's democratic processes?)

The bill was designed, among other things, to deal, partly, with this interesting little tale.

Now we are delighted to report that, for once, the tax bullies have not got their way.

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Well done, The Guardian

The Guardian newspaper patted itself on the back yesterday for its expensive campaigning efforts on corporate tax. They are quite right to congratulate themselves. The newspaper

"spent three months investigating many more avoidance schemes across the whole of British corporate life. The resultant "tax gap" series cost more than £90,000 in specialist legal advice and professional consultancy."

It hasn't been easy:

"One of its first exposures, of offshore tax avoidance schemes by the supermarket giant Tesco, led to bruising litigation."

Read more here. And they noted:

"A central feature was Richard Brooks's daily blog. This, along with a dedicated confidential email, enabled readers to post their own comments, and those with specialist knowledge to supply their own tip-offs. The consequences were dramatic. With new information that came in, the Guardian was able to spotlight hitherto unknown avoidance schemes by the big banks, particularly those in the process of being helped by state funds."

Follow issues in the Guardian's dedicated Tax Avoidance section. The issues are so important that we wish other well-resourced publications around the world would put the same effort into this. Bit by bit, we see momentum building. We have a very long way still to go.

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Regulatory arbitrage and the fool at the poker table

Eliot Spitzer, the former governor and Attorney-General of New York, came crashing down in flames after a scandal over prostitutes. Yet that doesn't invalidate what he has to say. Now take a look at this video of him on MSNBC, and what he had to say about it (scroll down to see it; his comments start at about 5:30).

"The Federal Reserve has benefited for decades from the notion that it is quasi-autonomous, it’s supposed to be independent. Let me tell you a dirty secret: The Fed has done an absolutely disastrous job since [former Fed Chairman] Paul Volcker left.

and

“The reality is the Fed has blown it. Time and time again, they blew it. Bubble after bubble, they failed to understand what they were doing to the economy."

and

“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy."


and

“The most poignant example for me is the AIG bailout, where they gave tens of billions of dollars that went right through — conduit payments — to the investment banks that are now solvent. We [taxpayers] didn’t get stock in those banks, they didn’t ask what was going on — this begs and cries out for hard, tough examination."

(hat tip: Raw Story)

AIG is an interesting case. As this 2008 report notes, AIG's previous annual report had noted cheerfully that all the credit default swaps AIG was involved in were:

"for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”.

As everyone now knows, it was regulatory arbitrage that AIG was really selling - on a gigantic scale.

As Vanity Fair asked in a long and readable article about AIG:

"How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table?"

So where was the focus of all this regulatory arbitrage? AIG F.P. And where is that based? The City of London, the world's biggest regulatory wasteland.

"Ground zero for AIG's spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have put as much as half a trillion dollars at risk." (link)

More on this in due course.

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Debt, equity and corporate welfare

Recently we blogged on the scandal of tax relief on corporate debt payments -- both the IMF waking up to the problem, and Richard Murphy's astute observations on this issue, in his blog "Rebuilding the bias to equity."

Now we have Prem Sikka writing on the same issue. This is such an important article that we hope we will be forgiven for reproducing nearly all of it. The effects of this system are momentous. Read it all to see why this matters so much.

"The further degradation of education, transport, healthcare or pensions will not help hard-pushed citizens, or businesses that rely on public spend. As always, there are alternatives. Let us cut the welfare programme enjoyed by corporations – for example, the tax relief on borrowings. This would also help to address excessive leverage, one of the causes of the banking crisis as well.

The current financial crisis shows that banks have been addicted to debt. They had very high-leverage ratios, ie borrowings in the form of debt were very high compared to the long-term funds provided by shareholders. The significance of high leverage was demonstrated by the demise of Lehman Brothers, which had a leverage ratio of 30 to 1. An expert told a US House of Representatives committee that "with this leverage, a mere 3.3% drop in the value of assets wipes out the entire value of equity and makes the company insolvent". Elsewhere major banks had leverage ratios in the range of 11:1 to 83:1 that inevitably contributed to their problems.

Companies borrow for a variety of reasons. One reason is that it enables them to give higher returns to shareholders, something that also boosts executive remuneration, which is often linked to profits. A key point is that the payment of interest qualifies for tax relief. Companies can offset the interest cost against their taxable profits. With corporation tax at 28% this reduces the real cost of borrowing, ie with tax relief the £100 cost of borrowing effectively becomes £72. Not surprisingly, a debt-fuelled shadow economy consisting of hedge funds and private economy has sprung up where a small change in interest rates can magnify profits many times over.

The perils of high leverage are recognised by the government, by the Conservative party and the Financial Services Authority. Eliminating the tax relief on corporate debt is the obvious solution to reducing the corporate addiction to debt, but no one advocates it.

The neocons have never tired of telling us that tax reliefs distort markets and should be abolished. Based on this logic, in 1988 the Conservative government began to dismantle the tax relief available to individuals on mortgage interest payments, and it was finally abolished in 2000 by the Labour administration. In general, an individual cannot receive tax relief on interest payments whether the debt is for buying a house, car, fridge, cooker or anything else. In contrast, the tax concessions to corporations have been maintained regardless of whether the debt is for buying productive assets, or speculating in markets, paying exorbitant dividends, setting up operations in tax havens, or even champagne parties for friends. Though the exact figures are hard to calculate this gives companies enormous financial advantage and encourages them to finance their activities through debt rather than long-term equity.

Elimination of the tax relief on corporate interest payment would not prevent companies from using debt finance. Instead, it would add an element of neutrality into their choice of capital structure since payments of dividends to providers of equity do not qualify for tax relief. The ending of the taxpayer subsidy would also force companies to maintain more moderate levels of leverage. The measure would increase tax revenues that can be used to fund pensions, healthcare, education, public transport, reduce public borrowings and even tax cuts for normal people, and provide a much needed stimulus to the economy.

Corporate barons used to subsidies and welfare programmes will not like parity with the tax regime faced by normal people. They would oppose the withdrawal of their tax perks by citing dire consequences. Some weeks ago, George Osborne indicated that he might consider scrapping tax relief on debt interest. It drew protests and the Conservatives "swiftly abandoned" the idea. Instead, cuts in public expenditure and tax rises for normal people have been mooted as the official policy even though this will increase unemployment and reduce the spending power of normal people.

Cutting and slashing public investment and social rights should not be the first option. There should be a public debate about ending corporate welfare programmes. Not only the tax relief on corporate interest payments, but also the subsidies enjoyed by agribusiness, railway, armament, energy and other businesses."

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Monday, July 27, 2009

Jersey creates foundations

As if we hadn't identified enough dirt on Jersey, now they come up with this. Foundations.

As a complement to trusts - which we have explained in detail here (a description of foundations will follow, in due course) -- this seriously muddies the murk on what Private Eye had dubbed The Septic Isle.

And -- guess what -- Jersey still haven't responded to our open challenge (click here, scroll down.) Why could that be?

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Friday, July 24, 2009

Fair-Trade Promises Hide the Reality of Tax Losses

Something sweet seems to be happening in otherwise bitter cocoa markets, as the Guardian tells us: Cadbury’s is going fair-trade; Mars is teaming up with the Rainforest Alliance; and Nestlé supports initiatives by two trade bodies: World Cocoa Foundation and the International Cocoa Initiative. So is cocoa all sweet now?

A short look at cocoanomics tells us that more could be gained by cancelling tax breaks in cocoa manufacturing and looking at trade mispricing at point of exit from West Africa, or entry into Europe and the USA.

Why is cocoa so sensitive? A part of this answer comes from the regions where it’s grown, over 70% comes from West Africa. A recent Global Wittness report 'Hot Chocolate' looks into the rebel financing, not so different from the infamous ‘blood diamonds’. Indeed, since the civil war started cocoa prices have doubled.

The International Labour Organisation (ILO) has for a long time drawn the attention to the use of child labour in cocoa farms, estimated at 200,000 children working in farms. This report led to the establishment of the International Cocoa Protocol, implemented by voluntary codes of conduct at trade bodies like the Association of Swiss Chocolate Manufacturers.

The real problem underpinning cocoa growers is poverty. In Ivory Coast, it’s estimated that only 35% of the world market price is retained by the farmers – some US$ 950 per tonne. In Ghana, the producer price is fixed by the government at GH¢ 1632 (US$ 1090) per tonne, so a typical household producing 3-10 bags (62.5 kg each bag) of cocoa in Ghana will make between US$ 200 - 700 in annual incomes from cocoa.

Fair-trade’s first benefit is that it helps producer villages with a transfer of an additional US$ 150 per tonne, establishing floor prices if prices plummet, and organising farmers in co-operatives and producer associations for better representation and retaining more value-added.

Cadburys buying an additional 10,000 tonnes of fair-trade cocoa (tripling existing fair-trade production in Ghana), means an additional US$ 1.5 million in revenues to village development projects. However fair-trade alone won’t have the capacity alone to lift the farmers from poverty – state funded schools, hospitals and other public services are needed to be paid by government spending.

The monetary benefits are dwarfed by transfer mispricing. A recent study by Christian Aid titled ‘False Profits’ estimated that trade mispricing from cocoa producing regions to West Africa accounted an average total annual loss of US$ 135 million for cocoa and cocoa preparations. The figure is based on deviations from the average world market price, as produce arrives in ports in Europe and the USA.

This is a problem much wider than what is addressed currently by fair-trade initiatives, as it tackles the producer price, but not lost tax revenues at further stages of production. As fair-trade moves mainstream, it will increasingly use conventional commodity trade channels, and the tax issues become ever more relevant. Tax audits should in the future make an integral part of fair-trade monitoring and evaluation excercises -- and guidelines following our country-by-country reporting proposal should be used for this measure.

A separate issue, not illegal but still questionnable, are the extensive tax holidays given to cocoa manufacturing plants in key producing countries. For instance, in Ghana most processing companies establish themselves in Export Processing Zones (EPZ)s or benefit from specific agro-industrial tax exemptions.

In the past two years, both Cargill and Barry Calebout have established large (60,000 and upwards tons of produce) facilities in Ghana, both in the Tema Free Zone. In the free zones, the tax holiday is 10-years, and a 8% rate is applied thereafter. Meanwhile, Archer Daniels Midland will be establishing a facility in Kumasi, benefitting from a 5-year tax holiday on agro-processing industries outside of Accra and Tema. After the initial holiday a 10% rate is applied instead of the statutory 25%. The issue with EPZs is that it’s hard to estimate the costs and benefits of such incentives, questionned by a recent IMF paper.

This is because the current development model is focused on increasing exports, and growth – instead of stronger public finances. This distorts the development priorities, as growth and especially exports per se don't yet tell of the level of development if hefty exemptions and rampant tax evasion is taking place.

What do investors say about Ghana? A UN Millennium Cities Initiative (MCI) report on Kumasi quotes one investor:
"Kumasi’s natural endowment is phenomenal and can provide basic raw materials for many industries. In addition, at present, Ghana provides one of the best investment environments in Africa, with long tax holidays, duty-free entitlements, immigration quotas, and a good chance to do profitable business. Among the areas investors can explore are agriculture, medicinal plants, timber, mining for gold and industrial diamonds, etc.”
Giannetto Caraceni, General Manager, Modern Wood Technology Co. Ltd (p.2)

The free-for-all tax environment is detrimental to development. If this is what the UN Earth Institute promotes as a development model, then count us out!

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Thursday, July 23, 2009

Channel Islands - 1.8 voluntary information transfers per year

The fabulously irreverent but hard-hitting British political-satirical magazine Private Eye has just put in a most important Freedom of Information request to find out just how much information is being exchanged through woefully inadequate "on request" systems of information exchange between jurisdictions.

We hope the Eye doesn't mind us quoting from their subscription-only magazine:

Such deals are as useful as the proverbial chocolate teapot. In the last three years the three tax havens (Jersey, Guernsey and the Isle of Man) have between them handed over information on a taxpayer voluntarily on a total of 17 occasions. Given the hundreds of thousands of people and companies using the havens, that is not a great haul.

A back-of-the-envelope calculation puts this at 1.8 transfers of information per haven per year. Britain's revenue and customs authorities, in addition, made 141 requests - that is, 16 times a year from each haven - but we don't know the results.

Private Eye correctly notes how the secrecy jurisdictions like Jersey are using the OECD's appalling system of allowing anyone who signs 12 TIEAs to be put on their "white list."

The havens can't believe their luck . . . Those who use tax havens haven't been slow to exploit the respectability the G20 initiative gives them.


Read on. More details are provided here. We can't link to the Eye story, as it is subscription-only, unfortunately - so instead we encourage anyone with an interest in our issues with a British perspective to take out a subscription.

Oh, and one last thing. Our challenge to the Jersey authorities for a televised public debate still stands. Unfortunately, all we can hear at the moment is a distant, but distinct, cacophony of clucking.

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Illicit flows: we finally reveal the official data

Quite recently, as part of our series shooting the Oxford report down in a spectacular ball of fire, we posted a picture at the bottom of one of our blogs.

This book - it's a rather nicely bound, 100-page document, was put together by the Brussels-based non-governmental organisation Eurodad. Click on it to enlarge - and look at the title.

Global Development Finance: Illicit Flows Report, 2009

This book is designed to collect together all the available official estimates of illicit flows around the world: from the IMF, the World Bank, and so on. In our last blog, we said we'd reveal what is in the book in due course.

Well, the time has come to reveal what these august international institutions have produced on this staggeringly important subject. Here it is

(cue drumroll . . . ).


Get it? (If you don't get it - then go out and see if you can find the estimates produced by the IMF, World Bank and so on.)

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Interviews: tax evasion hurts the poor

If you're a French speaker or reader, you might be interested to see this interview that Switzerland's Le Temps newspaper has with TJN's director, John Christensen. It outlines the scale of the problems developing countries face from the offshore problem, and more besides.

Le Temps also carries a story about how the United States serves as a tax haven for Mexico, quoting David Spencer in New York (very rough translation here.)

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Australia: America is a secrecy jurisdiction

We have long pointed to the fact that the United States is, to a very significant degree, a secrecy jurisdiction, not least through dirty practices offered in places such as Delaware. It isn't something that people like to mention in polite company.

Now we're very heartened to see the Australian tax office has written an open submission to the US Senate Committee on Homeland Security and Governmental Affairs, which includes the following strongly-worded:

"In our opinion, entities established in some states of the USA, for example some US incorporated companies, have some of these same attributes as entities established in secrecy havens."


This is timely, in light of a briefing by TJN-USA and its colleagues and partners, Global Financial Integrity and Citizens for Tax Justice, on the Hill in Washington DC tomorrow, including on the all-important Incorporation Transparency and Law Enforcement Act which will engage on the issue of the United States being a secrecy jurisdiction.

The Australians also helpfully include a description of some of the crimes that have been encouraged and facilitated by American secrecy. The overview is here, and the detailed case studies are here.

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More abuse in Jersey

Update: now Jersey has foundations

Our attention has been drawn to an interview given by Andy Thewlis - Rector of the Parish of Saint John in Jersey. Mr Thewlis was until recently the Chair of Christian Aid in Jersey. He resigned earlier this year in protest at Christian Aid's engagement on tax justice issues. Interviewed in the Jersey Evening Post on 17th July he said as follows:

Jersey was and remains a well regulated international financial centre. To suggest that Jersey is otherwise does not measure up to scrutiny. The ongoing relationship of Christian Aid UK with the Tax Justice Network and Attac Jersey is, I believe, seriously misguided.

Priests in Jersey seem to have a rather close relationship with the local financial services industry, even to the extent of quitting organisations which raise legitimate questions about the tax evasion industry, the appalling state of financial regulation - not just in Jersey but right the way across the world - and ignoring invitations to engage in open debate rather than (let's be blunt) abusing their positions of power.

Mr Thewlis, like his colleagues Iain McFirbhisigh and Bob Key, did not bother to attend the public event we organised in Saint Helier in March. He has not been in contact with Tax Justice Network or Attac Jersey. He has not seen fit to address any of our concerns about Jersey, see below. A global crisis is building up: the catastrophic global failure to regulate the banking and financial services industry, and we stress that this is a global failure of truly incredible proportions, will be causing social and economic stress to hundreds of millions of poor people.

Faith communities have a part to play in trying to see a way through this extraordinary mess. But the established church in Jersey sees its role as that of a shill for the bankers. In addition to showing their ignorance of the issues we confront, they demonstrate, time and again, that they are unfit to exert any kind of moral leadership.

The litany of abuses perpetrated by Jersey is astonishing. Here is just a short selection.

First, read through this document on trusts - Jersey hosts £3-400 billion of assets held through these things, according to Colin Powell of the Jersey Financial Services Commission. Jersey trusts enable stronger and more devious forms of secrecy than are available in Switzerland. The document quotes one Jersey trust provider as saying:

"A trust is not a public document and does not need to be registered with the Jersey authorities. Furthermore, neither the settlor nor the beneficiaries will be the registered owner of any trust assets. As a result, a trust arrangement can be regarded as highly confidential."

Well-regulated? This is shameful business. On trusts, note this:

"In 2006 the States of Jersey degraded the island's trust law to allow the creation of "sham" trusts. These can serve no legitimate purpose, and therefore we must conclude that the purpose of this law was to encourage tax evasion to circumvent the European Union's Savings Tax Directive."


The trusts document also quotes an official Jersey website, on the islands' hopeless information-sharing arrangements:

"A high threshold therefore exists before the Jersey authorities will accede to a request under a TIEA. For example in the past year, there have been just four requests from the US under the terms of the TIEA. There is no automatic exchange of information under any circumstances and no ‘fishing expeditions’ for information. Strict confidentiality provisions in the agreement preclude any information being passed to third parties without the express written consent of the requested country."


There is more secrecy right there.

We also pointed, in a submission to the US Senate Finance Committee Hearing on tax evasion, to further abusive Jersey mechanisms:
  • there is no or only nominal taxation on relevant income of non-residents;
  • there is a lack of transparency of the tax and regulatory regimes, there is no public access to information about beneficial ownership of companies, no financial reporting requirement is imposed on tax exempt companies, there is no register of trusts and no information is collected about trusts;
  • there is no requirement that the activities of non-resident companies have any economic substance in the island, i.e. the island is essentially a ‘booking centre’.
  • Jersey allows for corporate and nominee company directors. This adds to secrecy.
  • Jersey allows for nominee owners of private companies. This adds to secrecy.
As if that weren't enough, we have more.

Jersey allows for the redomiciliation of companies. This adds an additional layer of secrecy and complexity since a company registered in Jersey can leave at a moment's notice and re-appear in another jurisdiction where it will be safe from prosecutors. Or, a company from another tax haven can appear under a different name and continue its operations in Jersey.

Since early 2008, Jersey has allowed for the creation of unregulated hedge funds. Yes, you read that correctly: unregulated hedge funds. More here.

In the 1990s Jersey-based law firms -- especially Mourants and Ogiers -- created specialist divisions concentrating on the writing of the legal instruments used for securitisation of, amongst other things, the collateralised debt obligations that helped trigger the current economic crisis. These law firms have become world leaders in the creation of these toxic products.

Oh, and we haven't yet mentioned this.

"At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions. Rapid growth of bank deposits and mutual funds shares in the first half of 2007 easily pushes the total above $500 billion."

And there is no better and more thorough source than that.

Do you really feel, Mr. Andy Thewlis, that you are able to defend your claim - that Jersey is well-regulated? How about defending this in a public debate in Jersey, with TV cameras in attendance? Bring any Jersey official you want to support your case.

We have challenged Jersey officials on this before. They have never accepted our challenge. The reason? They are scared (terrified might be a better word) of us because they know, deep down, who is right.

Any time, any place.

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More tax incentive folly

We recently remarked on the IMF's extremely belated finding (where have they been?) that tax incentives and lower corporation taxes offered by developing countries as enticements to foreign investors don't seem to promote growth. If you haven't seen it it's worth taking a look.

Now here's another issue to consider. This is a paper from McGill University, looking at international tax issues. We haven't read the paper yet, but this caught our eye from the abstract:

"Where no tax, or reduced tax, is paid to the foreign jurisdiction because of a tax incentive, the result is that the investor pays the same amount of tax they would have paid in the absence of the tax incentive, but simply pays a larger proportion of it to the resident (high income) state.

In other words, the tax incentive offered by the low income country has operated as a revenue transfer from the treasury of the low income state to the treasury of the high income state."

That's so often what happens: tax revenue is simply shifted from the poor country to the rich one. But it's often, and probably usually, worse than that -- because often a tax haven will get into the middle of this calculation. So a British company could invest in, say, Guatemala, via Bermuda. Guatemala will still lose all the tax revenue from its misguided incentive, without getting the hoped-for benefits, but Britain isn't going to benefit so much from it either - or at least not all of it. Instead, the company will be able to park its profits in Bermuda, cutting its British tax bill.

What we have in this case is an outward transfer of wealth from a poor country, which is then divided up between the treasury of a rich country and the profits of a multinational corporation - with any number of highly-paid pinstripe intermediaries - accountants, lawyers, bankers, and so on -- invited to the trough.

The net result is - we see an eroded wealth transfer from Guatemala to Britain, with Guatemala losing out fully, but Britain failing even to get the benefit.

Why are the big accountancy firms so silent on all this?

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Another day, another regulatory race

John Gapper is writing sensible stuff in the Financial Times this morning. On efforts to beef up regulation in the U.S. and the U.K., he says:

"Given the scale of the crisis we have just endured, and appear to have survived, this is pathetic. If I were a banker, I would be laughing discreetly at the bumbling and misdirected efforts of governments to change my behaviour."

He is exercised about Britain's offshore-steeped Conservative Party, which seems to have backed down from the kind of sensible reform that would see "casino" investment banking separated from "utility" real banking: the stuff that gives me a trustworthy place to park my savings, and reinvests it into real businesses. Many, many, people see this as a very sensible reform - though massive vested interests oppose it. Why have the Conservatives backed down? In two words, regulatory competition.

"His explanation for floating the idea and then dropping it in the Tory “white paper” on financial regulatory reform was that “while there are some value arguments for this approach if implemented at an international level, it would not be feasible or desirable for the UK to impose an absolute separation unilaterally”.

This leaves us precisely where we started . . . the UK and the US fear to clamp down on large banks in case they move from New York to London (or vice-versa) or locate themselves offshore."


It never stops, does it? If you live by the sword -- trying to outdo others in a race to the bottom - you just have to keep dancing, faster and faster. This is not a sustainable development strategy.

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TJN - USA in House briefing on US legislation

Tax Evasion and Incorporation Transparency: Show U.S. the Money"

What: Breakfast Briefing on New Legislation Dealing with Tax Evasion and Incorporation Transparency
When: July 24th 9:00-10:00am
Where: Rayburn House Office Building, B-354, (U.S. House of Representatives)

With presentations by:

Raymond Baker, Director, Global Financial Integrity
Jack Blum Esq., Washington Lawyer, Chair of Tax Justice Network USA
Bob McIntyre, Director, Citizens for Tax Justice
Sarah Lewis, Executive Director, Tax Justice Network USA

Topics to be covered include:
  • The Stop Tax Haven Abuse Act
  • The Incorporation Transparency and Law Enforcement Act
  • The UBS Case and the Future of Bank Secrecy
  • Raising Crucial Revenue by Cracking Down on Tax Evaders and Limiting Tax Avoidance
Please R.S.V.P. to Monique Danziger at Global Financial Integrity 202-293-0740, mdanziger at gfip.org or Sarah Lewis at TJN-USA: sarah.lewis (at) taxjusticenetworkusa.org

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Wednesday, July 22, 2009

In trusts we trust

The Swiss tend to be outraged when they are criticised for their fabled bank secrecy. They correctly argue in response that Anglo Saxon common law countries, which are so often the origin of the finger-pointing, routinely achieve even stronger and more devious forms of secrecy through trusts. TJN has always been extremely concerned about trusts, especially offshore trusts. Trillions of dollars’ worth of assets are likely to be held through trusts worldwide – three to four hundred billion through Jersey-admnistered trusts alone – so this is an issue of global importance.

This long blog offers a simplified primer on trusts, to help foster better understanding of how trusts are used to create secrecy, to evade or avoid tax, and to get around rules, laws and regulations. It is illustrated mostly with reference to the United Kingdom, the original home of the trust concept, and to Jersey, a secrecy jurisdiction that has made it onto the OECD’s “white list”. It is simply descriptive: it is neither intended to be comprehensive and exhaustive, nor does it offer solutions for tackling abuse (something we intend to tackle in due course.)


1.1 Introduction

Most people take it for granted that when they own an asset – a bank deposit, say, or a painting – it is a simple matter: they own it, and that is that. In fact, however, ownership is a more complex concept involving a bundle of different rights: these include the legal title to the asset; the right to an income stream from an asset; the right to control the asset and direct how it is used; and other things. Usually these rights are bundled together into one, and you don’t notice the difference. Yet these rights can and frequently are unbundled. For example, if you buy a house on a mortgage, you are the legal owner, but the bank or building society has rights to foreclose and take over the property if you default on the payments.

Trusts are ways to unbundle different the aspects of ownership into separate parts. This can be done for valid and legitimate reasons, or for abusive ones.

A trust typically involves three main parties. One party (“the settlor” or grantor or donor) -- typically a wealthy person, hands over control of an asset to a trusted second party (“the trustee”), perhaps a lawyer, who in turn controls the property on behalf of a third party (“the beneficiary”) who might be the settlor’s child, for example. The trustees are the legal owners of the asset (“the trust property”) but they are not the beneficial owners, and apart from fees the trustees should receive no benefits from the assets. Trustees are bound by a “deed of settlement” (or trust deed) in which the settlor lays out instructions about how the assets of a trust can be used; the trustee is bound by law to follow these instructions. Trusts are generally meant to incorporate this split of roles, responsibilities and entitlements (although as described below there are trusts, sometimes known as purpose trusts, for which there is no intended beneficiary.)

(Contrasting the trust with the limited liability company may help illustrate this further. The owners of a limited liability company control it as beneficial owners: they have full control of the company through the company’s bodies – on behalf of themselves.)

Many varieties of trusts exist. The U.S. Internal Revenue Service (IRS) provides a glossary here and the UK Revenue and Customs provides a clear outline of some of the main forms of trusts here.

The historical origins of the trust mechanism help illustrate what is happening. They were first used, the legend goes, in the early Medieval period in Europe when knights (in effect, the settlors) headed off to the Crusades and left their property and land in the hands of trusted stewards (trustees), who would look after them on behalf of third parties – typically their wives and families (the beneficiaries) – under a set of clear instructions (the deed of settlement.)

In more recent times trusts became used typically for inheritance tax purposes: people with assets (settlors) created trusts to pass assets to their children (beneficiaries) and these assets were managed on the beneficiaries’ behalf by trustees. For example: a settlor might say to a trustee: “here is a million dollars. You take it off my hands, and you are instructed to invest it; then when my oldest child is twenty-one you pay him a half of the current value; pay the remainder to my youngest when she is twenty-one.” The trustee should in theory be fully independent of the settlor. Again, although the trustee has legal title to an asset (so, for example, he or she can sell them – though the proceeds must go to the beneficiaries), the trustee is not the beneficial owner - so, for example, if a trustee becomes insolvent, creditors have no claim on it.

A body of law grew up around these arrangements so that they have become enforceable, and an industry has grown up around these laws, often to provide services to facilitate them, and trust facilities have become replicated in many jurisdictions around the world.


1.2 Q: Why does the settlor have to give away assets as part of a tax avoidance or evasion strategy? Doesn’t that drastic step more than defeat the original objective?

It can be hard to understand why a settlor would want to give away their assets. To lose the whole asset seems like an oversize price to pay if the aim is, say, to cut the tax bill on the income from that asset.

A first answer to this question is that the British upper classes, quite comfortable with sending their children away to be cared for by trusted strangers in boarding schools, also seem to be perfectly happy separating themselves from their money, to be managed by trusted strangers. This apparently light-hearted answer conveys an important point, however, that there is a significant cultural element here: people in Anglo-Saxon traditions have tended have grown to be more comfortable with trusts than are people from other jurisdictions.

A second, more serious answer is that while the settlor has, in theory, given the assets away to a trustee, who has legal title to them, the settlor can still exert a measure of control over the assets. Offshore jurisdictions in particular allow very wide powers to settlors – which mean they can still pretend to have been separated from the assets, while in reality they exert a large measure of ongoing control and can, to all intents or purposes, be considered to be the real beneficiary. This can become a game of smoke and mirrors. Several examples of how this is done are given below.


1.3 Q: How is secrecy obtained through trusts?

This happens in several layers. The first two described below are specific to trusts; the others are techniques commonly used with trusts but which are common with other structures, such as companies, too.

In a first layer, trusts create a legal barrier between the trustee, on the one hand, and the settlors or beneficiaries, on the other – and in the process this creates the potential for an information barrier in the same place as the legal barrier. Even if you can find out who a trustee is, the trustee may be bound by a confidentiality arrangement not to reveal who the settlors or beneficiaries are. Often, and especially in a secrecy jurisdiction, the trustee will be an anonymous trust company that specialises in being a trustee for many thousands of trusts, and there will be no obvious clue to suggest who the settlors or beneficiaries might be.

A second layer of secrecy is typically provided for in onshore and offshore legislation, which may stipulate – as in the case of the Cayman Islands or Jersey – that trusts do not need to be registered. (A trust is just a legal instrument; it does not have its own legal identity which might require registration.) If there is no register of trusts, you may not know what you are looking for. For example, a Jersey trust provider, Appleby, said this:

A trust is not a public document and does not need to be registered with the Jersey authorities. Furthermore, neither the settlor nor the beneficiaries will be the registered owner of any trust assets. As a result, a trust arrangement can be regarded as highly confidential.

A third layer of secrecy may involve several layers. This might split the trustee, the settlor and the beneficiary between three different jurisdictions, with the assets themselves parked in a fourth jurisdiction (or many jurisdictions.) Not only that, but a trust might be layered upon another trust or another structure, itself split between two or three further jurisdictions. For example a trust’s assets may be shares in a company controlled by nominee directors in a jurisdiction where it is impossible to find out who the company directors are or what the company does. That company’s assets may also turn out to be deposits held in a bank account in a country with strong bank secrecy laws. This layering process can, and frequently does, go on for several more steps, making it fiendishly hard for the forces of law and order to work out what the trust is really about – if they can identify it in the first place.

A fourth layer of secrecy, which does not only apply to trusts, involves the international protocols by which information is exchanged. Some countries simply refuse to exchange meaningful information with others, although this is becoming less common as a result of international pressure. Nevertheless, many generally agreed protocols such as the OECD’s standards of “exchange of information only on request” (as opposed to automatic, multilateral exchange of information) are pitifully weak, making it exceedingly hard to find out information even if you know what you are looking for (and frequently it is hard to know where to start looking in any case.) See more in our briefing paper on information exchange, here. One such protocol is the Tax Information Exchange Agreements (TIEAs). An official Jersey website says, for example:

A high threshold therefore exists before the Jersey authorities will accede to a request under a TIEA. For example in the past year, there have been just four requests from the US under the terms of the TIEA. There is no automatic exchange of information under any circumstances and no ‘fishing expeditions’ for information. Strict confidentiality provisions in the agreement preclude any information being passed to third parties without the express written consent of the requested country.

Not only that, but trusts constitute major loopholes in international treaties and arrangements. A good example is the European Savings Tax Directive which applies to income on bank deposits, but not to income from trusts. This may be amended.

A fifth layer of secrecy involves the many other offshore tricks that assist secrecy, though these are generally not exclusive to trusts and will not be discussed in detail here. These might include, for example, “flight clauses” that require trustees and company administrators to transfer assets to a different jurisdiction at the first hint of investigation.

In a slightly different context, when somebody dies trusts are often used in place of wills, as a way of keeping financial affairs secret; wills must be filed in a probate court to be executed, meaning that they become public documents. Trusts can stay secret.


1.4 Q: where are trust assets actually located?

This is important. If a trust is administered in one jurisduction, the underlying assets may be located anywhere. If a newspaper somehow finds out about this trust, it may say “a trust in Jersey” – but in fact although the trustees are in Jersey, the underlying asset will typically be held in London. In fact, Jersey serves as a conduit and a satellite of the City of London, sweeping up assets from around the world and parking them in London – even if the trust is supposedly located in Jersey.


1.5 Q: How are trusts taxed?

Trust tax law is a complex area, and the principles vary according to the jurisdiction, so this blog only gives some basic notions.

In the UK, for example, trust tax is paid by the trustees (the legal owners of the trust property) out of trust funds. However, a trust beneficiary may also have to pay tax separately on the income they receive from a trust. (Sometimes inheritance or other taxes may also be paid upon the transfer of some property into trusts.) Yet trustees in Jersey, by contrast, do not pay Jersey income tax on certain common types of income, at least if the settlor and beneficiaries are resident elsewhere.

Adding to the complexity, trusts may or may not produce income. For example, an antique painting held in trust constitutes capital, but it will not produce any direct income, whereas $100,000 sitting in a bank will produce bank interest. The income, and the capital, may go to different beneficiaries, and different taxes may apply on the different elements: income tax, capital gains tax and so on – each of which may be taxed at different rates. The UK, for example, currently has an income tax rate and an inheritance tax rate of up to 40%, and 18% on capital gains. Jersey, by contrast, does not have capital gains tax or inheritance tax, and it has zero tax on certain common types of income. UK Revenue and Customs give some basic principles here.


1.6 Q: How are trusts used to avoid and evade tax, in theory?

In summary, two main themes are involved.

First, because a trust creates a distinction between the legal owner, the trustee, and the beneficiary, this complicates the issue of how to tax the trust. This creates many avenues for both avoidance and evasion.

Second, because trusts create the potential for great secrecy, tax authorities cannot easily find the assets to tax them. This typically creates possibilities for tax evasion. Often the two themes: the legal distinction, and the secrecy, apply simultaneously.

In theory, once a settlor passes the assets into a trust, he or she no longer owns it, so cannot be taxed on its income. So a settlor should not be a beneficiary too. If a settlor could say in the deed of settlement: “make all the assets available to me whenever I want them” then the tax authorities could judge them still to be the real owner of the asset – and tax them on the income. If the ownership were not really split, what would the point of a trust be? The property would be owned absolutely by one person, for own benefit.

However, as explained above, if the settlor is able to pretend to let go of the assets in order to escape a tax bill, while not having let go of them in reality, then he or she may be able to enjoy the income or other benefits of the asset without paying tax. The question of whether or not the settlor has really become separated from the assets can be a legal grey area, raising difficult questions over whether this is avoidance or evasion.

The U.S. IRS notes this, in a primer on trusts:

Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. Although these schemes give the appearance of separating responsibility and control from the benefits of ownership, as would be the case with legitimate trusts, the taxpayer in fact controls them.

Games of smoke and mirrors can also be played between the trustee and the beneficiary. The discretionary trust is an example, below.


1.7 Q: How are trusts used for tax avoidance and evasion, in practice?

A wide variety of other mechanisms are used to cut tax bills. Just a few examples are given below; new ones are being invented or modified all the time.

One of the central mechanisms, as explained above, is for the settlor to enjoy benefits from an assets while pretending to have become entirely separated from them. (One might call this the “settlor’s pretence.”) Secrecy is often a counterpart of such schemes.

Some of the world’s finest legal minds spend their time dreaming up schemes using these kinds of principles – generally, the more complex (“sophisticated”) they are, the harder it is for tax authorities or crime-fighters to penetrate.


1.7.1 Permissive or "flexible" laws giving special powers to the settlor

Laws in secrecy jurisdictions in particular are set up with the intention of helping create the “settlor’s pretence.” As one Jersey commercial website puts it:

Jersey trusts are created and governed pursuant to the Trusts (Jersey) Law 1984, as amended. The 1984 Law is essentially a permissive law which provides, in effect, that the terms of the particular trust determine the duties and obligations of the trustee thereof.

Note the word “permissive” and the suggestion of how the flexibility of offshore arrangements can create trust products tailor-made for tax evasion. The U.S. Congressional Research Service describes another way of achieving the settlor's pretence:

"Trusts may involve a trust protector who is an intermediary between the grantor (settlor) and the trustees, but whose purpose may actually be to carry out the desires of the grantor."


The Cayman Islands’ Star trusts are even more stark versions of the settlor's pretence. While Star trusts are used for many purposes, another commercial operator describes this possibility:

The settlor has the power to make the trust's investment decisions and the trustee is under no obligation to ensure the investments are in the interests of the beneficiaries.

Other examples include:

1.7.2 Replacing the trustees

A trustee might, for example, appear to be independent from the settlor when the trust is set up, but then be replaced later by a more pliable trustee, or even by the settlor himself, in disguise, perhaps through another complex offshore secrecy arrangement involving trusts elsewhere.


1.7.3 Sham trusts

Jersey’s sham trust is another example of the “settlor’s pretence.” Jersey Finance says this of its new laws introduced in 2006

Among the amendments is the introduction of settlor-reserved powers. . . the powers that may be reserved by the settlor will include the power to appoint and remove trustees, to amend or revoke the terms of the trust and to appoint or remove an investment manager or investment adviser

Richard Murphy analyses what this means:

Jersey will now allow the creation of what can only be called ‘sham trusts’, although they’re calling them trusts with ‘reserved powers for the settlor’. What are those reserved powers? Well, the settlor can tell the trustee what to do, which means the trustee only has a nominee role. And the settlor can claim the property back (see “revocable trusts,” above.) . . . In other words, the settlor continues to have complete beneficial ownership of the asset and there is in fact no trust in existence at all, just a sham that suggests that there is. . . . This is a completely bogus transaction. I have no doubt that Jersey knew the new laws would facilitate tax evasion. Indeed, it is hard to see what other purpose they could have.”

Belize, a 2008 US Senate report notes, offers something even more blatant:

"In Belize you can be the grantor, the trustee, and the beneficiary, and have the trust considered valid."

1.7.4 Revocable trusts

A more specific way to achieve the settlor’s pretence is through a revocable trust (that is, the settlor could decide to revoke the trust and get their property back whenever they wanted.) In such a case, it is hard to see how the settlor has really let go of the asset if they can always get it back: trusts should in theory be irrevocable for the settlor to get the tax benefit. However, it can be hard for tax authorities to find this out or fight legal battles in support of a tax claim. Laws passed by Jersey in April 2006, for example, said that every single Jersey trust can now be revoked.

Read more here.


1.7.5 Private Trust Companies

Another way to give the settlor more control is to appoint a Private Trust Company (PTC) as the trustee, then have the settlor (or perhaps a family member) be a director of the PTC, giving the settlor a significant degree of control. As one offshore promoter puts it:

If you’re familiar with the concept of an offshore trust but always had issue with handing over control of your assets to a third party you are not alone. Many people fear that the establishment of a trust really leaves them in too tenuous a position regarding the protection and management of their own assets…which is why private offshore trust companies came into being. They give the settlor far greater asset control.

In the Cayman Islands, for example, it is extremely hard to find out who a company’s directors are, so it can be hard to work out that the settlor has this measure of control.

Similarly, Jersey Finance says this:

A PTC (Private Trust Company) can be established in Jersey on a fast track basis within 24 hours and other than providing the name of the PTC to the JFSC, there are no other regulatory hurdles to surmount. For the reasons set out above, PTCs have become increasingly popular with high net worth individuals . . . . PTCs are also typically used to act as the trustee of family charitable or philanthropic trusts or where the assets to be held in trust are regarded as being of the sort which carry greater risk for a trustee than usual.

In other words, you only need to provide the name of the PTC to the authorities, but not the underlying information. Note the section in bold text, and ask what this “risk” means. This is most likely to mean the risk of getting caught engaging in malfeasance?


1.7.6 Discretionary Trusts

A discretionary trust is one where the trustees can pay out income or capital to one or more of a group of beneficiaries, entirely at the trustees’ discretion. This is not about the settlor’s pretence. The beneficiaries have no right to demand income from a discretionary trust. Discretionary trusts can, for example, protect trust assets against the bankruptcy of a beneficiary: since a beneficiary has no claim to any specific part of the trust fund, none of it can be claimed by creditors in the event of the beneficiary’s bankruptcy.

Yet from tax authorities’ points of view these kinds of trusts have another crucial feature: because no single beneficiary can be said to have title to any trust assets prior to a distribution, there is no obvious taxable asset for tax authorities to be able to get a handle on. This makes it a powerful weapon in the tax-dodgers’ arsenal.

Illustrating how difficult it is for tax authorities to tackle these trusts, the Society of Trust and Estate Planners (STEP) has said of efforts by the European Union to update its EU Savings Tax Directive to include discretionary trusts:

It would appear difficult to draft practicable trust-related amendments to the Savings Directive of the kind referred to in the Working Document which would be "litigation-Proof"

The EU is likely to take a contrary view.


1.7.7 Other mechanisms for promoting tax evasion


1.7.7.1 Secrecy

The simplest is tax evasion through subterfuge: assets generating income and capital gains are parked in secrecy jurisdiction where the owner’s tax authorities are simply unaware of what is going on. This may be the commonest form of tax loss, though it is impossible to measure with any precision, and it is of course not only a problem for trusts.


1.7.7.2 Bogus expenses

Bogus expenses might be charged against income at one layer. After these expenses are deducted, the remaining income is distributed to another trust, and the process is repeated until, in many cases, the income falls to zero. Tax is eliminated from the trust income by distributing all that income to the beneficiary; and tax on the beneficiary is eliminated through the claiming of bogus expenses to set off against tax. This scenario is a criminal matter.


1.7.7.3 Complexity and jurisdiction shopping

If the trustee, the beneficiary, and the trust assets are located in the right combination of jurisdictions, tax can often be avoided altogether without technically breaking the law. This is not always a simple matter: a German resident, for example, should generally expect to pay tax on their income and capital gains, wherever in the world they are realised. But some countries create categories such as the non-domiciled residents: usually wealthy individuals who are absolved of the need to pay tax on their worldwide income. This creates opportunities to cut the tax bills through jurisdiction shopping, again without technically breaking the law, though this end need not be achieved through trusts.

A tax bill on a trustee can be made to fall upon a beneficiary, if so intended, perhaps because of where the trustee and beneficiary are located. So a trustee may distribute all the trust income to beneficiaries, then legally deduct these distributions from its taxable income, reducing its taxable income, and its taxes, to zero. If the trust is offshore, the tax rate on trust income may well be zero in any case. For example, the trustees of a Jersey trust are not liable to income tax on the income from trust assets where none of the beneficiaries is Jersey resident.

Complexity is a classic support for secrecy. For example, you might have a trust whose trustees are a Jersey law firm (but which is not registered), whose trust assets consist of shares in a company in Luxembourg which has nominee directors. The company might have a bank account in Liechtenstein, but the bank account might be managed by a Geneva private banker, which invests the funds in Hong Kong. Many structures are more complex than this – and a secrecy wall must be penetrated at every step.

As one former trustee put it:

“You will not get any disclosure of who's behind them. There will be no register anywhere of who is the real owner, or who is the beneficiary. You will never find them for tax purposes – these are far more secretive than bank accounts under bank secrecy.”

The IRS of the United States provides another example here. Other abusive schemes can be seen here.

In the promotional literature, the euphemisms for ‘complex’ or ‘complexity’ being used to create secrecy are words like ‘sophisticated’ and ‘sophistication.’ These words should generally be taken as a red flag.


Q. What else can trusts be used for, apart from tax evasion?

Trusts can be used in a number of legitimate ways. For example, they can be used for the genuine charitable transfer of assets; or to hold assets for minors and those unable to handle their financial affairs.

However, take a look at this list of other possible uses of a trust, from the Jersey Association of Trust Companies (JATCO)

• Preservation of family property and protection against political risk
• Tax planning
• Avoidance of inheritance laws or probate formalities
• Employee benefit trusts and employee share option schemes
• Charitable trusts
• Purpose trusts
• Trading trusts
• Unit trusts
• Avoidance of exchange controls
• Ownership of special purpose vehicles

It is useful to unpack this list to understand its meaning. Note how many of these bullet point items refer to undermining the laws of other jurisdictions – that is, helping the wealthy (who can afford the fees) escape their responsibilities to the societies upon which they and their wealth depend.

Note: “Avoidance of inheritance laws.”

Is it right that a tax haven should get to decide whether wealthy individuals should be provided with facilities that enable them to escape the laws that normally affect the rest of us?

Exactly the same could be said of “avoidance of exchange controls.” Whatever one thinks of exchange controls, if, say, a democratic developing country’s government decides it wants to impose certain types of controls to try and counteract massive capital flight by the wealthiest sections of society– is it right that tax havens should provide trust facilities to undermine that?

“Preservation of family property and protection against political risk.” This is a complex area. “Preservation of family property” may well mean, in practice, “protection from the tax authorities” or “protection from creditors.” The latter often protects the proceeds of ‘take the money and run’ illegal activity that is a common feature of the international criminal underworld. “Protection against political risk” is typically a euphemistic term for “protection” against one’s own government and particularly its tax authorities and/or other law enforcement bodies.

A trust provider in Jersey is more explicit:

a trust can provide for the transmission of wealth in a manner which may not be allowed, and to persons who may not be entitled, in some countries.”

In a similar light, another company boasts of “enhanced protection of Jersey trusts from adverse foreign court judgments.”

Jersey Finance adds this:

The validity of a trust governed by Jersey law will not be affected by any rights conferred on anyone under a foreign law.”

In other words, ‘we will help you get around the laws of the place where you live.’

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Trusts and Special Purpose Vehicles

As the JATCO list above notes: one purpose of trusts can be “Ownership of special purpose vehicles (SPV)” These kinds of bodies have been a central feature of the latest global economic crisis. Why are trusts often used for these arrangements?

What trusts do, as we’ve noted, is to split ownership. If a company puts its assets into a trust, for example, it can be treated as if it is so that it is no longer the beneficial owner of the assets, then it can be arranged so that the assets are no longer bound by the regulatory or tax requirements of the jurisdiction where it is incorporated. A trust arrangement might help a bank, say, shift assets off its balance sheet. As one analysis put it, “the company (then) belongs to no-one.”

SPVs are not only set up for tax reasons but for other specific purposes (which is why they are called “special purpose” vehicles – they may be used to ring-fence one part of a business, perhaps to prevent it from “contaminating” (through, say, uncontrolled losses) another part of the business, or vice versa. A company may want to, say, invite investors into a particular project, but protect them from risks inherent in the parent company itself. The trusts involved are often known as “purpose trusts” – which are neither charitable nor for obvious beneficiaries, but for a special purpose.

Quite often, charitable trusts are involved. A famous example was in the case of the failed British bank Northern Rock, which was discovered to have a charity for children with Down’s Syndrome – with the charity unlikely ever to receive a penny from the arrangement, and even unaware that it was the beneficiary. The charity said:

“We are investigating why our charity appears to have been named as a beneficiary of a Trust without our consent.”

Why did Northern Rock do this? Because trusts need beneficiaries – although because of the way it was set up there was no real need to pay any money to beneficiaries: all the important business was between settlors and trustees. As one commercial analysis put it

“A trust must have an identifiable beneficiary to exist and, for that reason, nearly all trusts include a long stop charity as a beneficiary in case all of the named beneficiaries should die. To use a trust for commercial purposes it is therefore necessary to employ a charitable trust whose real purpose is commercial.”

While trusts have sometimes been used as special purpose vehicles themselves, often the SPV is an “orphan” company whose equity share capital is held by the trustees of a general charitable or purpose trust.

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Q: What other mechanisms are used, apart from trusts?

Other common mechanisms are anstalts (establishments, used in Liechtenstein) and stiftungs (foundations) and various other types of corporate entity. These are outside the scope of this primer.


Q: What countermeasures are taken?

Tax authorities in foreign countries routinely seek out, and take countermeasures against, abusive trust arrangements. Tax authorities try to determine the economic substance of a transaction, rather than take a purely legalistic view, and they can and do overrule what a taxpayer thought was a bullet-proof asset “protection” mechanism.

The U.S. IRS, for example, would take a very dim view of a US taxpayer using a Jersey sham trust, and would not let the settlor get away with it, if discovered. Yet to do this the IRS must first find out that this is going on – the secrecy involved makes this hard, and Jersey will not volunteer this information.

If the well-resourced IRS has enough trouble keeping track of these criminal or questionable arrangements, how much hope is there for countries with less well resourced or skilled tax authorities?

Cautionary note: Confusingly, there are companies out there that call themselves "trust companies" or "trust services companies" which in reality are not directly related to the concept of the trust. One of these companies describes its services here.

*Endnote Please add any comments, clarifications and queries underneath this blog (or contact TJN staff directly).

Update: this was complemented in November 2010 by this article by François Valérian of Transparency International, about how trusts and other structures are used to move dirty money into the licit financial system.

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