Cyprus and the looting of Ukraine

There is an excellent article in the Kyiv post on Cyprus and the looting of Ukraine, here. Alongside this comes another story from the Financial Times, entitled IMF approves $15bn loan to Ukraine.

We don't, unfortunately, currently have time to do this justice, but you can put these two stories together and . . . go figure.

(Hat tip: Lucy Komisar.)

Offshore City of London puffed up shadow banking

The IMF has produced a curious new working paper with the exciting title of The (sizable) Role of Rehypothecation in the Shadow Banking System, with a particular look at the role that the United Kingdom has played in this vast, dangerous unregulated market.

Please forgive the slightly wonkish nature of this, but rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker (the investment banks or securities firms that provide lending and a bunch of other services to hedge funds) to be used again as collateral by that prime broker for its own funding. Rehypothecation is a form of expanding the off-balance sheet part of the financial system, by letting prime brokers use collateral that isn't really theirs to use, allowing further expansion of their balance sheets and injecting greater riskiness into the financial system as a whole. Off balance sheet financing was an essential ingredient in the conditions that brought the world to the edge of financial calamity recently.

Now all sorts of angles are interesting in this area. Two things they say are worth pointing out from the outset.

"there has been very little research in this area."

and, as a result of the studies by the authors Manmohan Singh (no, not the Indian Prime Minister but an IMF senior economist) and James Aitken:

"we show that the shadow banking system was at least 50 percent bigger than documented so far."

In other words, this matters a lot, and nobody has noticed.

But it's another angle we want to concentrate on here. It is this:

"In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets while in the United States rehypothecation is capped."

US banks have been receiving funding far beyond what prudential regulation suggests is safe, because although the United States put strong curbs on this practice, banks simply evaded them by going to the United Kingdom, which has a track record of allowing foreign banks to do what they would not have been allowed to do at home. The United Kingdom has been puffing up the size of the shadow banking system. And the IMF paper adds:

"Furthermore, there are no policy initiatives to remove or reduce the asymmetry between United Kingdom and the United States on the use of customer collateral."

The aim of this post is simply to add to the overwhelming weight of evidence that has accumulated that the City of London (pictured - the small red splodge in the middle of the pink London map), an offshore island within the United Kingdom, is in several respects the world's most important tax haven. We have already presented reams of evidence on this (see here, for instance, or here or here or here, for starters) and more evidence will be presented in the coming months - some of it which will be quite astonishing to people even in Britain.

TJN doesn't have a hard and fast definition of a secrecy jurisdiction or tax haven, but loosely we take these places to be jurisdictions that seek to attract business from elsewhere by providing opportunities to undermine or undercut the rules, laws and regulations of other jurisdictions. This is exactly what has been happening in this case. The United States instituted laws against the kind of opaque off-balance sheet abuse - so the banks went to the City of London to do it. As the IMF put it:

"the United Kingdom provides a platform for higher leveraging (and deleveraging) not available in the United States"

We now have a web page dedicated to highlighting the many and varied links between secrecy jurisdictions (or tax havens) and the latest financial crisis. We will be adding this post to it.

Wolf explores la-la-land

In November 2007 we wrote a brief blog entitled "Laffer in la-la land" which pointed to a New Statesman article exploring the insanity (and political cunning) of an ideology built around the mythical Laffer Curve, which seems to suggest that you can cut taxes to make revenues rise. It has become an article of faith in the Republican Party in the U.S. (and sits alongside another theory that you should cut taxes to "starve the beast" - which is based on the notion that if you cut taxes, revenues will fall, not rise. Few people notice the contradiction between the two.)

Well, Martin Wolf is exploring this same issue in the Financial Times, and he reaches similar conclusions. Worth reading - though beware: it is depressing.

US transfer pricing hearings: statements

For the record, and for adding to our Transfer Pricing Page, we are providing a set of links to the recent U.S. hearings on transfer pricing on July 22.

We would like to highight two presentations in particular. The first is by Martin A. Sullivan of TaxAnalysts. It highlights how just five jurisdictions - Bermuda, the Caymans, Singapore, Switzerland and Ireland - account for almost a quarter of foreign profits of non-financial U.S. multinationals, shows how the problem has been getting worse, not better - citing an annual revenue loss $28 billion over and above the revenue loss if transfer pricing rules were as effective as they were in 1999 - and that number represents a conservative estimate. It takes an example from the pharmaceutical industry, and then looks at arguments about tax losses from transfer pricing in the form of neutrality, efficiency, and subsidies. It then outlines proposed policy responses -
1. Do Not Rely on Revised IRS Regulations ("Over the decades hard-working and highly skilled IRS and the Treasury Department officials assigned to transfer pricing have had to contend with intense political pressure, unfavorable court decisions, and—most of all—a fundamentally flawed framework that gives primacy to the arm’s length standard. These factors have made it impossible to write regulations that can stem the tide of inappropriate transfer pricing.")
2. Reduce the Corporate Tax Rate
3. Elevate the Status of Formulary Methods (see our Transfer pricing page for more on this.)
4. Strengthen Controlled Foreign Corporation (CFC) Rules as Proposed by the Obama Administration
5. A Minimum Tax on Foreign Profits. Sullivan proposes a minimum 10 percent rate.

Reuven Avi-Yonah, Professor University of Michigan School of Law, Ann Arbor. He looks at how the debate surrounding the US international tax rules has revolved around the extent to which the US should tax the foreign source income of US-based multinationals (MNEs) - the "worldwide" versus "territorial" systems of taxation. He examines formulary apportionment and addresses the arguments of its critics. (For more details on formulary apportionment, see our Transfer Pricing page.

See also other testimony:

James R. Hines Jr. Professor University of Michigan School of Law, Ann Arbor, focusing on problems with analysing the data, and criticising the forumlary apportionment method.

Stephen E. Shay (Deputy Assistant Secretary (International Tax Affairs) U.S. Treasury Department describing evidence of major income-shifting through transfer pricing.

Tom Barthold, Chief of Staff, Joint Committee on Taxation

R. William Morgan, Managing Director Horst Frisch Incorporated

Businesses against tax havens - new US group

In the United States, small businesses are mobilising against tax havens, as we recently indicated. Take a look at this resource.

"We, the undersigned business owners, executives and investors, call on the President and Congress to end tax dodging and support a level playing field for business by enacting strong legislation to stop tax haven abuses. Offshore tax havens reward tax evaders, rob public coffers of needed revenue and offload taxes to responsible businesses and households."

Good progress. It's hardly a surprise - small businesses lose out to offshore abuse by bigger competitors routinely. And they figure the biggest users of secrecy jurisdictions, with a list derived from a recent GAO study.

"Citigroup: 427 tax haven subsidiaries ~ Morgan Stanley: 273 ~ Bank of America: 115 ~ Wachovia: 59 ~ Lehman Brothers: 57 ~ JP Morgan Chase: 50 ~ Goldman Sachs: 29 ~ Merrill Lynch: 21 ~ American International Group (AIG): 18 ~ Countrywide Financial: 7 ~ News Corp: 152 . . . and onwards."

See the NY Times report on this here and a Bloomberg story here.

Who pays corporation taxes?

We have blogged periodically on what is sometimes known as the incidence brigade - those sly lobbyists who argue that when you tax corporations, the taxes are ultimately paid by someone else - so why not abolish the corporation tax and just tax those other people?

Well, there's another article worth adding to the occasional series (look up "incidence" on our A-Z archive for more). After slogging through a lot of rather dry material, you get the meat at the end:

"Given that even economists cannot agree on who actually bears the burden of the corporate income tax, why not abolish the tax altogether and instead tax human beings directly? The arguments against such a move are twofold.

First, even bringing in only 12 percent or so of total federal taxes, the corporate income tax represents the third-largest source of federal revenue and could not easily be replaced with an alternative source, especially in these times of fiscal pressures.

Second, if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad."

Indeed. Also see this CBO paper whose abstract states that, if you explore the ramifications just inside nation states, "capital bears the majority of the corporate tax burden" and if you explore on a global level, "capital bears the full burden of the worldwide average corporate tax."

Pakistan, taxes and insurgency

We have long discussed the relationship between taxes, accountability and governance. This New York Times story from Islamabad, while not breaking any new ground particularly, serves as a useful reminder of how badly developing countries suffer from tax collection problems.

Much of Pakistan’s capital city looks like a rich Los Angeles suburb. Shiny sport utility vehicles purr down gated driveways. Elegant multistory homes are tended by servants. Laundry is never hung out to dry.But behind the opulence lurks a troubling fact. Very few of these households pay income tax. That is mostly because the politicians who make the rules are also the country’s richest citizens
. . .
in Pakistan, the lack of a workable tax system feeds something more menacing: a festering inequality in Pakistani society, where the wealth of its most powerful members is never redistributed or put to use for public good. That is creating conditions that have helped spread an insurgency that is tormenting the country and complicating American policy in the region.

Read on here, and take a look at some of the broader issues here.

Tax Research on tackling offshore

The Tax Research blog is rolling out a series of posts on tackling offshore. This TJN blog will provide future updates to create a longer list. The first three posts are below, with very brief summaries:

Setting the scene
1. Starting reform at home
2. Reform in secrecy jurisdictions.
3. Tackle issues in the international arena.
4. Philosophy needs to change.
5. Help developing countries get the information they need.

Tackling offshore begins at home
Three goals:
1. The first is to make sure there is information on public record to ensure that the users of limited liability entities, trusts and other related entities are accountable for what they do.
2. I’d want governments held to account.
3. TIEAs and DTAs to be offered to whomsoever wants them, subject only to human rights limitations.

Tackling offshore requires effective information exchange from secrecy jurisdictions
Not Tax Information Exchange Agreements, which do not and cannot work, but real information exchange. It points to a 2009 report here. On the subject of information exchange, note our fairly recently created information exchange page, with regular updates, here.

Tackling offshore internationally
1. Country-by-country reporting is an essential part of this - see a summary here.
2. Tax evasion must be made a predicate offence for things like money-laundering.
3. Unitary taxation with formulary apportionment is essential to tackle the giant problem of transfer pricing abuse (see TJN's web section on all this here.)
4. Monitor regulation properly, rather than simply check whether the right boxes are ticked.
5. Sanctions against nation states that do not comply. These should be tax-focused sanctions.

Tackling offshore – by changing the philosophy of opacity
Two principal concerns: we have forgotten why we allowed the incorporation of companies, and we have forgotten why it was we allowed trusts to come into existence.

Tackling offshore – with a bias to developing countries
1. These countries must be supplied with the direct aid they need to create viable tax systems.
2. These countries must be specifically encouraged to recover information from secrecy jurisdictions on the structures maintained by their citizens in those places, and be provided with all the technical assistance required to ensure that this data van be handled and used.
3. These countries must be allowed to develop tax systems that suit their particular needs.

For the details on all these proposals, click on the links.

Oil, spills and U.S. taxes

Two useful new reports from Citizens for Tax Justice in the U.S.

"What Oil and Gas Companies Extract — from the American Public"

In the wake of the disastrous oil spill in the Gulf of Mexico, the public and the media have turned their attention to some of the subsidies provided through the tax code to BP, the corporation that leased the ill-fated Deepwater Horizon drilling platform.1 The truth is that oil and gas companies have for years received a bonanza of unjustified tax breaks that serve only to boost profits for their shareholders.

and

Offshore Drilling and Taxes

The public and the media have turned their attention to some of the subsidies provided through the tax code to BP, the corporation that leased the ill-fated Deepwater Horizon drilling platform. This report describes the biggest tax subsidies enjoyed by oil and gas companies and explains that these subsidies do nothing to encourage energy independence or cleaner energy.

US small businesses to campaign against tax havens

From U.S. Senator Carl Levin:

July 19, 2010
WASHINGTON - Sen. Carl Levin will join business leaders, investors, and owners tomorrow in announcing a new campaign, Business and Investors Against Tax Haven Abuse. The details will be announced in a 2:30 pm conference call.
The Business and Investors Against Tax Haven Abuse campaign represents the first time in recent years that business people who believe tax havens are bad for business are mobilizing publicly to end the abuse. The group will also release a report exposing the marked increase in the use of tax havens to avoid taxes over the last two decades. The practice costs U.S. taxpayers up to $123 billion per year. Business and Investors Against Tax Haven Abuse is launching a drive to gather signatures on a petition calling on the President and Congress to enact legislation to stop tax haven abuse. The petition drive will launch with more than 400 initial signers from the business community.

Contact: Tara Andringa 202-228-3685

Money landering and Mexican murders: missing the point

This Bloomberg story, which is a few days old, is quite something. Here is a taster:

"Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product."

And here is one of those rare insiders who saw what was happening, and, it seems, did the right thing. He has an important point to make.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

Very well said.

On tax cuts raising revenue - again

The old canard about tax cuts actually raising revenue has been raising its head again in the U.S. For those interested in this kind of nonsense, you can see CTJ exploding the myths here, and an array of knowledgeable people asserting that the argument is nonsense here.

US Senate passes "game changing" reporting requirements for extractive industries

The following press release from our colleagues at Global Financial Integrity welcomes new reporting requirements imposed on the energy and mining sectors. Elsewhere, however, TJN's Jim Henry argues that the Dodd-Frank bill does nothing to strengthen transparency on Wall Street, more here.

July 15, 2010

New Legislation Will Increase Transparency in Extractive Industries, Help Fight Corruption in Developing Countries

New reporting requirements a "game changer" in extractive industries sector

WASHINGTON, DC - A provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in the Senate today, will require energy and mining companies registered with the Securities and Exchange Commission (SEC) to report payments to foreign governments for the extraction of oil, gas, and minerals on a country-by-country basis.

"Oil, gas, and mining revenues are critically important economic sectors in about 60 developing countries which, despite abundant natural resources, rank among the lowest in the world on poverty, economic growth, and governance assessments."

"With this information the citizens of these countries will be able to demand accountability for government corruption and ensure that a fair price is paid for their natural resources." This is a game changer for many of the countries suffering from the so-called "resource curse," stated Global Financial Integrity Director Raymond Baker.

The new reporting requirements will apply to petro giants such as Exxon Mobile, BP Corporation, Chevron, Conoco Philips, Royal Dutch Shell, and Hess. Taken together, the oil and gas companies expected to fall under the new regulation accounted for approximately $2.2 trillion in sales and $200 billion in profits last year.

"This is also good for business," said Mr. Baker. "The more informed an investor is on the business practices of a company operating in high-risk areas, the more equipped they are to assess the risks and strengths of their investment choices. Given the fact that nearly all internationally competitive oil, gas, and mining companies are registered with the SEC this new legislation will have a global impact on investment decisions."

Similar reporting requirements were passed last month for petroleum and mineral companies listed with the Hong Kong stock exchange (HKEx). Under the HKEx reporting requirements, oil and mineral companies applying to be listed on the HKEx must disclose significantly more details about their operations on their applications, including material taxes, royalties, and other payments made to governments on a country by country basis.

###

Global Financial Integrity (GFI) promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money. In putting forward solutions, facilitating strategic partnerships, and conducting groundbreaking research, GFI is leading the way in efforts to curtail illicit financial flows and enhance global development and security.

For additional information please visit www.gfip.org.

TJN Submission to the International Accounting Standards Board on the Extractive Industries

In April 2010 the International Accounting Standards Board (IASB) issued a discussion paper on accounting standards for the extractive industries. This discussion paper is highly relevant to our call, in combination with our partners at Publish What You Pay, for an international reporting standard for country-by-country reporting by multinational companies.

We think that such a standard will improve the transparency of corporate reporting, making it far easier to identify transfer mispricing to secrecy jurisdictions, and generally improving on the quality of corporate governance.

TJN's International Secretariat has submitted the following letter to the IASB (you can download the letter and its annexe here), and we encourage other civil society organisations to make similar submissions to the IASB before their deadline at the end of this month.

+++++++

15th July 2010


International Accounting Standards Board
Extractive Industries Project
30 Cannon Street
London EC4M 6XH

Comments submitted by the Tax Justice Network International Secretariat on the IASB Discussion Paper on the Extractive Industries issued 6th April 2010


The following submission is made on behalf of the International Secretariat of the Tax Justice Network.

The Secretariat provides expert advisory and professional services to civil society organisations around the world. We also represent the Tax Justice Network at events organised by international bodies such as the Organisation for Economic Cooperation and Development, the World Bank, the International Monetary Fund, the United Nations, as well as regional groupings such as the European Union.

The primary purposes of our work include the strengthening of international cooperation on tax matters, promoting pro-poor tax policies, and combating corruption through increased reporting transparency.

These goals will be considerably advanced by the adoption of an international reporting standard requiring publication on a country-by-country basis of the tax revenues paid by companies engaged in the extractive industries to the governments that host their activities. We call for the adoption of such a standard without exception across the entire sector.

In making this call for a country-by-country reporting standard, we would draw particular attention to the following matters, which we address in no particular order of priority. We also draw your attention to our answers to questions arising from this consultation, which are attached as an annexe to this letter.

First, in view of the importance of this issue, especially to the public finances of developing countries, we call on the International Accounting Standards Board to carry this work forward to the drafting of an international financial reporting standard that fully commits to country-by-country reporting. We hope that an exposure draft of such a standard will be produced for consultation purposes within a reasonable time period.

Second, we have been advised that according to the International Accounting Standards Board financial statements are produced to serve only the interests of providers of capital to a business. Capital takes different forms, including social and human capital, and since the extractive industries are by definition involved in the exploitation of the mineral resources of many countries around the world, and the citizens of those countries are both providers of capital and have an interest in the value of the extracted minerals, we argue that they and their heirs have a right to know what return is being paid to their governments for and on their own behalves. For this reason the needs of the general public, especially the publics of developing countries, for country-by-country reporting data should be given highest priority by the International Accounting Standards Board.

Third, a requirement for country-by-country reporting will enhance governance of the extractive sector, improving asset performance and raising rates of return to capital. This could yield tangible benefits that should be included in any assessment of a country-by-country reporting standard.

Our fourth point relates to companies being able to opt out of country-by-country reporting on the grounds that such a requirement might be prejudicial to commercial interests. A voluntary opt-out facility of this type would undermine the credibility of the reporting standard as a whole, causing damage to the reputation of the International Accounting Standards Board and providing companies that do not abide by national tax laws with the opportunity to disguise their tax evasion.

Fifth, while we do take the position that paying taxes is a litmus test of a company’s commitment to corporate social responsibility, we would argue that reporting of accounting data on a country-by-country basis is required for the assessment of investment risk. Such data is not normally provided in a company’s corporate social responsibility reports, which anyway are voluntary rather than mandatory and vary enormously from company to company in terms of the information provided.

Our sixth point relates to the issue of materiality. We strongly urge that the disclosure requirement for a country-by-country reporting standard should not provide companies with an opportunity to use their discretion on whether or not to report on the basis of quantitative scale of activity in a particular country. While a particular mine or oil & gas production facility might be small relative to the scale of a major multinational company, its output is likely to be large relative to the economy of a small state or microstate. We therefore call for disclosure to be subject to qualitative rather than quantitative criteria when assessing its materiality. This is especially relevant to an extractive company with operations in many countries, which could potentially lead to a situation in which the majority of its operations are deemed to be small relative to its global scale and therefore not subject to reporting requirements.

Seventh, from our experience of working in many countries in Latin America, Africa, Asia, and the former Soviet Union, we know that the extractive industries in particular are vulnerable to corrupt practices. A mandatory requirement to report on a country-by-country basis would vastly strengthen the operational transparency of subsidiaries located in countries prone to corrupt practices.

Finally. Tax Justice Network International Secretariat supports the notion of tax compliance. Tax compliance involves paying the correct amount of tax, at the right time and in the country / jurisdiction where the economic activity that generates a taxable profit actually occurs. Tax compliance is compatible with commitments to corporate social responsibility, but more importantly it reduces the exposure of providers of capital to potential risks.

We will be happy to elaborate further on any of the points made above.

We confirm that these comments and the attached annexe may be published on your website.

Yours faithfully

John Christensen
Director
For and on behalf of the Tax Justice Network International Secretariat

Desperately Seeking Plan B: what are the development options for small island tax havens

The University of Kent Business School has just published this Working Paper on development prospects for small island tax havens. Co-authored by Mark Hampton and John Christensen, the paper explores how recent changes, including the emergence of strong civil society coalitions engaged in combating tax evasion and offshore secrecy, confronts small island tax havens with difficult decisions about their future.

The paper argues that the 2007/8 financial crisis has changed the nature of the external pressures on tax havens, especially since major political power blocs face unprecedented fiscal pressures which force them to confront their massive tax losses from tax evasion. Unlike the situation at the start of 2000, when the small islands were easily able to mobilise political support to resist the OECD's harmful tax competition initiative, the situation in 2010 requires them to seriously address the need for alternatives to the tax evasion industry:

"Unlike the multilateral initiative in the 1990s against tax havens, spearheaded by the OECD, which fizzled out when the US Bush Administration withdrew its support in 2001, the current initiatives are being driven by three power blocs, the Group of 20 countries, the EU and the US, all of which are confronted by the deepest recessions experienced since the 1930s. Domestic budgetary pressures within these economies have played an important part in swinging the pendulum away from tax havens. In this context, preparing development strategies that reduce dependence on rent incomes from what the OECD terms ‘the tax industry’ should be regarded as a priority for small islands."

But identifying a realistic Plan B will not be straightforward. Many small island tax havens have allowed their offshore finance sectors to crowd-out other industries, and their options are constrained by what economists term 'path dependency'. As the authors argued in an earlier paper in 2002:, many small island tax havens “have become locked into their relationships with the offshore finance industry by their dependence upon the earnings potential of predominantly imported skills and expertise, and their lack of skills and knowledge in alternative sectors. This means that any attempts at diversification into other sectors would be constrained by the need for wholesale re-skilling and the acquisition of new knowledge bases.”

The authors, both Jerseymen, cite that island as an example of how political short-sightedness and arrogance has locked Jersey's economy into a situation where its future prospects are almost entirely dependent upon decisions taken outside the island. This particularly applies to its ill-judged zero-ten corporate tax policy, which face scrutiny by the European Union's Code of Conduct Group on Business Taxation on the grounds that it harms the tax sovereignty of other countries:

"For many decades Jersey’s key politicians have assumed that the EU could not extend its powers to include Crown Dependencies and that the UK government would intervene to protect their autonomy on tax matters. This is clearly no longer the case: the powers of the EU Code of Conduct Group on Business Taxation extend to the Crown Dependencies and the Group has required their respective governments to remove “harmful tax practices” such as the ‘ring-fencing’ of tax exempt status to non-resident companies.

Despite clear evidence that their existing tax regimes constituted harmful tax practices as defined by the EU, Jersey officials are largely dismissive of efforts to strengthen international cooperation. For example, the Chief Executive Office of Jersey Finance, Geoffrey Cook (2009), commented that: “An unlikely alliance of tax hobbyists, left wing newspapers, trades unions, and development agencies has catalysed around calls for greater concentration of the means of wealth creation in the hands of governments, and implicitly greater taxation of business and wealthy individuals through the outlawing of wealth structuring and planning, together with restrictions on cross border capital flows. They hope that their own constituencies will be beneficiaries of this new ‘contract’, with the authors; the tax hobbyists, gaining fame and funding, and their supporters feeling validated in their enduring distrust of the wealthy and their advisers.

Despite having been warned in 2006 by a number of experts, including one of the authors of this paper, that proposed amendments to their corporate tax regime (the so-called Zero-Ten tax policy) would be rejected by the Code of Conduct Group, in 2007 the States of Jersey adopted measures that were indeed deemed unacceptable in 2009."

The paper's conclusions do not make for happy reading for small island tax havens. Their options for diversification are restricted by past decisions, and attempts to diversify face major structural barriers, including the high cost bases of their local economies and the lack of local skills base outside the finance sector:

"Some tax haven islands, including Jersey, are already facing unprecedented budgetary pressures. But they have limited scope for reducing their dependence on offshore financial services. With approximately one quarter of its economically active population directly employed in the OFC, and the majority of the remaining workforce employed in secondary sectors like construction, distributive trades and catering, there is virtually no alternative skills base on which new industries can draw. This path dependence has been reinforced by the extraordinary high costs of land and labour, which have crowded-out pre-existing industries. Taking measures to diversify the local economy will therefore require politically unpalatable steps to significantly reduce the domestic cost base."

You can download the Working Paper here, and as usual we would welcome your feedback.

Letter from Mr Angry of the Cayman Islands

TJN's Jim Henry recently had an article published in Forbes Magazine, which we blogged here.

The article has generated the usual reply along the lines of "we are not a tax haven or secrecy jurisdiction" from Mr Angry of the Cayman Islands. We publish the full letter below, but we note that, yet again, the author trots out the usual nonsense about FATF and IMF assessments, which are totally irrelevant to concerns about tax evasion.

We don't suppose that many people outside the weird and whacky world of tax havens will attach any credibility to Mr Travers' claims, but just to refresh your memories, here is our 2009 assessment of the Cayman Islands, which has not been challenged.

July 13, 2010

Letters Editor
Forbes Magazine
60 Fifth Avenue
New York, New York 10011


To the Editor:

The opinion piece by James Henry (“Tax Offshore Wealth Sitting in First World Banks” 07/19/10) contains serious misinformation. The Cayman Islands are neither a “tax haven” nor a secrecy jurisdiction. The Cayman Islands have full tax transparency with The United States and with 27 members of the European Union. The U.S. Department of Justice has had full authority to make enquiry in relation to any file in the Cayman Islands since 1990 in relation to any criminal matter. The anti-money laundering legislation of the Cayman Islands has been evaluated by the International Monetary Fund and by the Financial Action Task Force and the GAO and is found to be superior to that of the United States and most EU jurisdictions.

The financial services sector in the Cayman Islands is transparent and is enormously important to the economic growth of the United States. Cayman financial services institutions pool funds from the international capital markets and direct those funds into investment opportunities in G20 jurisdictions. The impact of those investments in growing the American economy cannot be overstated.

Mischaracterizations of the sort suggested by Mr Henry which fly in the face of the facts create credibility issues for his organization.

sincerely,

Anthony Travers

Chairman
Cayman Finance

No Mr Redwood, you cannot avoid tax on a tax exempt savings account

Yesterday, the UK parliament debated corporate tax avoidance. You can find the Hansard account of the debate here (scroll down to John McDonnell's opening remarks at 4.40pm).

We are thrilled to see TJN's work quoted in this context, especially our work on the tax gap and the country-by-country reporting standard for multinational companies.

However, we would like to set John Redwood MP (Conservative member for Wokingham) right on the following question:

If a constituent of the hon. Gentleman’s had a deposit in a savings product that was paying interest, on which they were paying tax, and they switched that into a tax-free national savings product, would that be tax avoidance or sensible investment?

No Mr Redwood. Tax-free national savings products such as Individual Savings Accounts (ISAs) are exempt from tax. By definition you cannot avoid tax on income that is exempt from tax. Tax avoidance involves taking deliberate steps to not pay tax which would otherwise be due.

So the answer to your question, Mr Redwood, is that if the constituent switched to a tax-free national savings product, her sensible investment would be exempt from tax.

Why did neo-classical economists ignore resources?

We recently published an edition of Tax Justice Focus on the subject of land value taxation. Now Martin Wolf, the Financial Times economic commentator, has opened a fascinating online discussion on this very subject [we recommend you read Martin's comment and then read the largely well-informed discussion that follows it].

Martin kicks-off his discussion with an important observation about the study of economics:

"Something strange happened to economics about a century ago. In moving from classical to neo-classical economics — the dominant academic school today — economists expunged land — or natural resources. Neo-classical value theory — based on marginalism and subjective valuation — still makes a great deal of sense. Expunging natural resources from the way economists think about the world does not."

For this blogger, who took agricultural economics for his degree, economics was the study of resource use, and land was one of the three factors of production, alongside labour and capital. Not surprisingly, agricultural economists typically understand the relevance of land value taxation, whereas those schooled in neo-classical orthodoxies generally treat natural resources as capital. This tendency to lump land and capital together as a single factor of production is based on a rather questionable assumption: namely, that despite rising consumption and population growth, sustained technological change will overcome long-term tendencies to depletion of such as hydrocarbon fuels, phosphate fertilisers, uranium, not to mention the increased scarcity of fresh water and fertile agricultural land.

The assumptions of the twentieth century cannot be carried forward into the twenty first. As Martin Wolf notes, resource scarcity is an increasingly pressing issue:

"It shows up in concerns over pollution (including global warming), in the discussion of “peak oil” and so forth. The idea that diminishing returns will become a more significant factor in the next century than in the past two seems to me to be compelling, now that modern economic growth has spread across the globe. So we need to return to economic models that incorporate resources, as a matter of course."

It is time for economists -- and others -- to pay more attention to the enormous potential that land offers for raising public revenue in ways that do not inhibit innovation, or drive up the cost of labour. As Henry Law points out in an article in Tax Justice Focus:

Using land rent as public revenue has many advantages. It cannot be evaded or avoided. Parasitic speculation in the price of land titles becomes pointless, since land holding carries a liability to pay a charge proportionate to its actual present value. It inhibits corruption of the banking system through the trading of land titles, with consequential damage to the economy through boom-bust cycles.

From an economist's perspective, land value taxation has everything going for it. From the political perspective, however, resistance from powerful interests remains a bulwark against progress, as we have recently witnessed with the campaign by mining companies against the proposed profits super-tax in Australia.

Martin Wolf concludes as follows: "Thus, for both economic and political reasons, we should put natural resources into the heart of economics, thereby remedying a neoclassical mistake."

We wholeheartedly agree.

Extractive industries mining the American public

We have commented in the past about unnecessary corporate subsidies. This new report from our friends at Citizens for Tax Justice describes the biggest tax subsidies enjoyed by oil and gas companies and explains that these subsidies do nothing to encourage energy independence or cleaner energy.

Oil and gas industry insiders and lobbyists often argue that the tax breaks they enjoy encourage them to locate and extract more oil and gas, which allows them to increase supply and thus keep energy prices down below the level they would otherwise reach.

But among the largest five oil companies, less than 10 percent of profit goes to exploration for new oil fields. In fact, in the top five oil companies, managers direct most of their excess cash to dividends and stock repurchases, both of which drive up the companies' share prices and the executives’ stock option values.

To the extent that tax loopholes targeting the oil and gas industry boost their profits, there is no evidence that the additional profits lead the companies to explore for more oil so that they can increase the supply.

Nor does the current tax treatment of oil and gas companies encourage them to develop alternative energy. These companies always claim to be interested in alternative energy, but they actually invest very little in it. Reviews of oil company press releases, SEC filings and published articles suggest that alternative energy investments approximate less than of 5 percent of profits for the top five firms. For example, Shell Oil announced in 2009 that it was reducing alternative investment because conventional operations provided higher returns.

It’s obvious why these companies devote so little to alternative energy. Any substitute for oil would result in a reduced value for the industry's reserves, refineries, pipelines and the like. These companies cannot be relied upon to make these investments, at least not without public policies that change their incentives.

Read the full report here

The Appleby Message: Not Digestible

The law firm of Appleby provides offshore legal, fiduciary and administration services. Appleby and its Group Managing Partner, Peter Bubenzer in Bermuda, issued in June 2010 an article entitled “OFCS [Offshore Financial Centers] in the Crosshairs --- But Not Alone in Their Struggle to Survive.” Since Appleby operates from many offshore financial centers: Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, Seychelles and Switzerland, the article merits a reply. Our full reply, prepared by a senior adviser to TJN, can be downloaded here. What follows is a summary.

First, the Appleby article states that “One of the issues raised in more recent onshore discussions has been the absence of tax in the major OFCs. Of course this is not true, as most have, for their small size, relatively sophisticated infrastructures, which are funded by taxes or fees,” such as for example, in Bermuda custom duties and payroll taxes. However, the real issue is that OFCs permit foreign persons to use those financial centers free of tax: free of income taxes and all other taxes. The fact that purely local activities within the OFC might be subject to customs duties and payroll taxes, is really not relevant to the role of OFCs.

Second, the Appleby article states that “The sovereign right of countries to determine their tax system seems to be overlooked in many discussions on OFCs’ own tax structures.” True, countries have the sovereign right to determine their own tax systems. But those tax systems should not encourage nor facilitate residents of other jurisdictions to evade taxes in their country of residence and violate the tax system of their country of resident.

Third, Appleby refers to “tax competition” and argues that “[tax competition] is still alive and well in the onshore world (examples are the differential tax rates among the various States of the United States of America or the different tax rate that people across the European Union).” However, the states in the United States and the countries in the EU provide different tax rates for activities within their respective jurisdictions. The offshore financial centers provide tax free benefits primarily to non-residents and foreign corporations who/which have no real economic activity within the respective jurisdictions, and which in many cases are not permitted to do business locally. Offshore financial centers, all of which are “financial secrecy jurisdictions,” do not merely provide tax competition. Because of the confidentiality those jurisdictions provide, they facilitate and encourage tax evasion/tax fraud.

Fourth, the Appleby article states that “Many OFCs have now been added to the OECD “White List,” each having entered into a considerable number of TIEAs [Tax Information Exchange Agreements] or DTTs [Double Tax Treaties].” However, the OECD requires that a jurisdiction enter into only twelve (12) such agreements in order to be on the White List. Twelve such agreements is hardly “a considerable number.” Further, some low tax/zero tax jurisdictions have entered into such agreements with (1) other low tax/zero tax jurisdictions, or (2) jurisdictions which have hardly any economic activity or personal wealth (such as the Faroe Islands and Greenland, and those insignificant agreements count for OECD purposes, toward the minimum of twelve. Read more here

Fifth, the Appleby article, in discussing automatic exchange of information, states “At present, the only automatic TIEAs that I am aware of consist of arrangements between the USA and Canada, and those partial arrangements that exist under the Savings Directive implemented in the European Union.” This clearly is a misstatement. The Tax Justice Network prepared a memorandum in December 2009, entitled “Memorandum on Automatic Exchange of Information and the United Nations Tax Committee” which indicated that at least some information is exchanged automatically:
(a) Between Mexico and the United States
(b) Between Mexico and Canada
(c) Between Australia and New Zealand
(d) Between the Nordic countries (Denmark, Faroe Islands. Finland, Iceland, Norway, Sweden), according to their Convention on Mutual Assistance in the Tax Matters
(e) By Australia, Canada, Denmark, Finland, France, Japan, Korea, New Zealand, Norway, Sweden, United Kingdom, pursuant to income tax treaties (See the March 2000 OECD report, Improving Access to Bank Information for Tax Purposes, page 40.)

TJN believes that in the ten years since that report was issued, at least several other countries are exchanging information automatically pursuant to applicable income tax treaties or in other agreements administrative assistance.

Further the United States enacted in March 2010 the Foreign Account Tax Compliance Act (“FATCA”). When FATCA enters into effect, it will in effect require all foreign financial institutions and other foreign entities which invest in the United States their own funds or their clients’ funds, to provide automatically to the U.S. Government information about U.S. persons with financial accounts at those foreign financial institutions or other foreign entities.

Sixth, the Appleby article states “It should be noted that the major OFCs do not receive financial and or grants from onshore governments or global monetary institutions.” Presumably the author was not referring to major OFCs like London, Luxembourg, Zurich and such-like which rank among the top ten secrecy jurisdictions on TJN’s 2009 Financial Secrecy Index. But for the record we would note that the Cayman Islands, which continues to resist British government requests that it adopts a more sustainable tax regime, including direct and land taxes, has its considerable external debt guaranteed by the U.K. taxpayer, see here.

Seventh, the Appleby article states that the “global economic crisis did not have its origin in the offshore world.” However OFCs contributed to the global financial crisis: special purpose entities and special purpose vehicles in tax free offshore financial centers were treated “off balance sheet” by major financial institutions, and much of the shadow banking activity that underlies the build-up of unknown systemic risks was driven by opportunities to use complex offshore structures for tax and regulatory arbitrage.

Eighth, the Appleby article does admit that the offshore/world has facilitated “crude tax evasion, such as hiding assets by non-declaration or under-reporting to onshore tax authorities.”

Ninth, Appleby states “OFCs view themselves as responsible financial centers providing a base for companies and individuals seeking, with proper advice and disclosure onshsore, to structure their affairs as tax efficiently as the applicable onshore and offshore laws allow. The majority of offshore work in the major OFCs consists of providing services to companies and individuals who are operating in full compliance with their own tax laws, and these OFCs would not want it any other way.”

When a company is organized in an offshore financial center (or other financial secrecy jurisdiction), the local government authorities generally do not know whether the owners of that company “are operating in full compliance” with the laws of the jurisdiction of residence of those owners. Normally the Appleby office in the offshore financial center (or other secrecy jurisdiction) would act only as registered agent of the locally organized company, and therefore that Appleby office would not really know of the activities and the assets of that company.

Also, TJN researched in 2005 the amount of assets held by individuals in jurisdictions outside their country of residence and not declared by them in the country of residence (TJN, “The Price of Offshore”). Tax justice Network’s conservative estimate: US$11.5 trillion, which results in an annual loss of tax revenue for governments of about US$255 billion. TJN believes that the US$11.5 trillion figure has increased substantially since then, resulting from additional undeclared income on such undeclared assets, and substantial additional capital flight.

Tenth, Appleby states that “it has been suggested that the offshore world must move to the automatic exchange of tax information rather than the present treaty-based request system, with its checks and balances too protect the legitimate rights of taxpayers that exist in all civilized countries. In the context of the worldwide system of automatically exchange tax information, where there is a global standard applicable to all, it must be right to expect such rules to apply to OFCs. In the absence of an equal application of such requirement onshore and offshore, requiring it solely for the OFCs would clearly be unfair and discriminatory.” That statement merits two comments: First the “request system,” that is, exchange of information/upon request which is the official OECD promoted policy, is not effective exchange of information. Under the “request system,” in order for a government (“Requesting Government”) to make a valid request for information of another government (“Requested Government”), the Requesting Government in effect must already know substantially all of the information being requested. That is why the number of effected requests has been minimal. An attorney for several offshore financial centers, including some jurisdictions where the Appleby Group has offices, noted that “Bermuda [where Appleby was originally, and still is, headquartered] has had such arrangements [exchange of information upon request] with the US for twenty years, and over that time [Bermuda] has effected less than fifty exchanges [of information]. (Richard Hay, “Beyond a Level Playing Field: Free (R) Trade in Financial Services.”) Offshore financial centers and onshore financial centers support exchange of information upon request because such method is not effective exchange of information.

Eleventh, Appleby states that “A number of these [offshore financial centers] jurisdictions, for example the Cayman Islands, have been subject to an examination (by the General Accounting Office of the USA [GAO]) as to their co-operation in the effective use of their agreements and were declared to be fully co-operative.”

The report of the U.S. Government Accounting Office, GAO, cited in the Appleby statement indicates (pages 5 and 37) that the United States has used only “a small number of times” the Tax Information Exchange Agreement (ITEA) between the United States and Cayman since it went into effect in 2004, to exchange information related to civil and criminal tax investigations.

Twelfth, Appleby states “…..as noted in Transparency Internationals published lists, the world’s worst offender according to its assessment of global transparency was the state of Delaware in the USA.” Two Comments: Tax Justice Network, not Transparency International, prepared the Financial Secrecy Index published in December 2009, referred to in the Appleby statement. Also as noted in the FSI, many jurisdictions suffer from the lack of financial transparency and TJN readily acknowledges that secrecy is endemic, but not all countries make it their business to actively attract deposits and other financial assets of non-residents whose primary goal is tax evasion.

For the record, nine out of the twelve Appleby offices are located in jurisdictions which are in the top twenty financial secrecy jurisdictions according to TJN’s Financial Secrecy Index.

In summary, the Appleby statement is not “digestible.”

What could possibly go wrong for Ghana?

Following Ghana's recent World Cup defeat at the hands (literally) of Uruguay's Suárez, Khadija Sharife has just posted a blog in with the London Review of Books on how Ghanaian people are vulnerable to cheating on a far larger scale, albeit not so visible on television sets around the world.

Ghana is entering into its era of oil and gas production. Before end-2010 the Jubilee oil field, one of Africa’s biggest offshore finds since the start of this century, could turn Ghana into the continent’s fifth largest oil-producing nation, bringing in upwards of $800 million a year. Happy days.

But drill a little deeper, and you find the first signs of resource curse are readily discernible. As Sharife reports, ownership of the Kwame Nkrumah MV 21, the Floating Production Storage and Offloading facility used in the Ghanaian production programme, is obscured through offshore special purpose vehicles in the Netherlands, a country widely used as a conduit for shifting profits offshore. The scene is set for billions of oil and gas wealth to disappear offshore.

Quite separately, but not unrelated to the large sums of mineral wealth sloshing around Western Africa, Barclays Bank in Ghana is steaming ahead with marketing offshore services provided by its Offshore Banking Unit:

The Barclays Offshore Banking Unit, the first of its kind in Ghana and indeed Africa south of the Sahara continues to offer world class banking service to non-resident private clients and corporates.

Combine oil wealth and offshore banking, add a spoonful of state negligence (the Bank of Ghana has already stated the International Financial Services Centre in Accra "should operate with a minimum of regulation"), leave to simmer for a few years while G-20 countries prevaricate and bicker about strengthening judicial cooperation and removing obstacles to market transparency -- and what could possibly go wrong?

Read Khadija's posting on the London Review of Books blog here.

Flip this house: offshore and private equity

Recently we published an article in Tax Justice Focus highlighting an IMF report that explained one of the ways that offshore has contributed to the latest financial and economic crisis, as a result of offshore tax tricks such as those used by private equity firms to leverage up with debt, take tax deductions onshore and realise profits offshore.

Well, our attention has just been drawn to two excellent articles in the New York Times which look at the gory details of two such deals, one by Gretchen Morgenson about a Greek mobile phone company, and another by Julie Cresswell about the Simmons Mattress Company. Both were excellent, dynamic companies -- and they were driven to the ground by abusive owners.

Read on. Just look at the cynicism of all this. If this kind of stuff is legal, it's a wonder why it is.

Austerity is not the only option: tax land

Michael Hudson has a useful article in the Financial Times, looking at Eastern Europe and outlining some alternative policies to those prompted by the recent terror of deficits. Most countries, he says, feel they have only two options: austerity, or currency devaluation.

"Taxes in most post-Soviet eastern European economies, along with countries such as Greece, are regressive. They add to the price of labour and industry while under-taxing property. Latvia is an extreme example: its flat taxes fall almost entirely on employment, meaning workers take home less than half of what employers pay.

The good news is that these high taxes on labour leave open the option of shifting taxes on to other areas, in particular land. Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards. Raising taxes on property, meanwhile, would leave less value to be capitalised into bank loans, thus guarding against future indebtedness."

Well, indeed. Low taxes on land are an important part of the reason for property bubbles, because untaxed land value was paid to banks, which, in turn, lent it out to bid up prices all the more.

This is an issue of tremendous importance for countries around the world. Landed elites will resist such proposals, but these taxes can be extremely efficient and welfare-enhancing measures. We explored it in detail in our latest edition of Tax Justice Focus.

India dislikes OECD info exchange standard

Recently we blogged our rather harsh response to the OECD's claim that its deeply flawed information exchange standard is "universally endorsed." As if any more evidence were needed in support of our argument, see this in India's Economic Times.

India will pitch for deeper tax information exchange agreements at the G-20 to make such pacts more effective in facilitating the flow of crucial data on tax evasion.

New Delhi is expected to present a detailed paper on the issue at the forthcoming Seoul meeting, urging that domestic laws of countries must support such agreements for effective information exchange. “These agreements should ensure that there is actual flow of information and benefits for countries entering them (agreements) in checking evasion,” said a finance ministry official privy to the discussions.

The proposal for a multilateral information exchange comes even as India has initiated talks with Switzerland for revising its tax treaty to include tax information exchange agreements, or TIEA, to get details on likely tax evaders. India also wants improvement in the quality of information that is shared under TIEAs to make such agreements more meaningful. The current TIEA rules allow exchange of information only on specific queries in respect of an ongoing tax investigation. Fishing or general queries are not allowed."

Quite. As we have said, our proposals are on the way to becoming the emerging international standard. For more background, click here. See ActionAid's blog post on this here.

How oil makes its own laws

Following our earlier blogs on links between the disaster in the Gulf of Mexico and offshore secrecy, Le Monde diplomatique has published an article on shipping registries and flags of convenience. Authored by South African based investigative journalist Khadija Sherife, the article explores the ease with which offshore entities can be created in the Marshall Islands (ranked in 2009 as the fastest growing maritime registry in the world), and shockingly confirms the extent to which the oil industry (much like the banking industry and hedge funds) have been able to capture law-making and regulatory processes even in powerful democracies like the United States.

Read the article here. Also see the recent New York Times round up of the issues.

Save Us From These Bankers, Fast

Global Geo-Politics Net is carrying an important article by David Cronin highlighting the desperate need for a civil society campaign to counter the might of financial lobbying by banks and hedge funds. Besieged by legions of well-funded financial lobbyists (reinforced by columns of financial journalists acting as mouthpieces for the City of London and other offshore financial centres), politicians are fighting an uneven battle to protect public interest from endless lobbying to water-down regulation and protect tax privileges -- and there are virtually no organised campaigns to oppose this relentless pursuit of self-interest.

A cross-party alliance of European parliamentarians has issued a call for the creation of an international civil society campaigning organisation to work on systemic financial market problems in the same way that Amnesty International has worked on human rights issues and Greenpeace on environmental issues. Citing Tax Justice Network's research into how hedge fund activity has been driven by the constant search for innovative ways to avoid taxes, the article explains how the pressure placed on politicians by financial lobbyists threatens to de-rail attempts to regulate against a repeat of the crisis:

"According to the MEPs, the pressure they have been placed under by the financial industry is so intense that it represents a threat to democracy, especially as public interest groups have generally lacked the means or the expertise to mount a robust counter- offensive to the banks’ efforts. "

A major part of the problem lies with the lack of independence of thought within the mainstream political processes. The majority of mainstream political parties, whether in government or opposition, have long since fallen to laissez faire economics. All too often their policy making apparatus - the think-tanks and advisory teams that feed through new ideas - are similarly captured by economic ideas that have failed to protect public interest. In far too many cases these "independent" bodies are funded by vested interests and staffed by secondees from banks and accounting firms: the very people who caused the crisis in the first place. And to make matters even worse, there is a plethora of "independent" academics whose academic chairs are funded by banks and such-like, and who act as hired guns for the vested interests.

An example from BBC's Today programme illustrates the extent of this capture of political processes. In a short news item about a new report on the affordability of public pensions in the UK, BBC journalists cited two "independent" think-tanks as the source of this "independent" report: who were they? The Institute of Economic Affairs and the Institute of Directors. Objective and politically detached? Both are political lobbyists representing City of London interests.

Completely unrepentant about their role in precipitating the worst financial crisis since the 1870s, and determined to preserve the de-regulated model which has successfully transferred huge volumes of wealth upwards from ordinary people to the super-rich class who operate from offshore secrecy jurisdictions, financial lobbyists are working over-time to bamboozle politicians and re-write laws to suit their purposes:

"MEPs had to wade through 1,600 suggested amendments to the law on that occasion. Although only MEPs themselves can sign amendments, it is common practice for industry lobbyists to act as "ghost-writers". More than half of the amendments in this case were written by the financial services industry, according to Parliament insiders.

The hedge fund industry — financial speculators largely based in the City of London — has literally been seeking to write the rules it should play by itself. In April, the Parliament’s main committee for economic affairs voted on its response to the proposed law. MEPs had to wade through 1,600 suggested amendments to the law on that occasion. Although only MEPs themselves can sign amendments, it is common practice for industry lobbyists to act as "ghost-writers". More than half of the amendments in this case were written by the financial services industry, according to Parliament insiders."

The world stands on the edge of a precipice. The impetus for reform that followed in the wake of the financial crisis has been slowed by the relentless pressure from financial lobbyists. The burden of paying for the crisis has been almost entirely shouldered by ordinary people. Public and private debt burdens remain high, but earnings for the majority are stagnant or falling (director's pay being a major exception). The situation will undoubtedly deteriorate as the impact of European austerity packages hits the people in Europe and in other regions that trade with Europe. Unless measures are taken to re-regulate financial services, and especially the crucibles of toxic innovations that caused the crisis in the first place, we are headed for another, even more disastrous crisis in the not-too-distant future. The call from European politicians for civil society action should not go unanswered. TJN, for one, is keen to participate.

Why tax isn't theft

Recently, in the lead article an edition of our newsletter Tax Justice Focus, the philosopher Martin O'Neill explained clearly why tax is not theft.

"It seems completely natural to appeal to property rights when arguing about rules of taxation," he wrote. But in truth, property rights are the result of a general system of legal and political rules, which include the rules of taxation.

So even though it may seem natural to argue in this way, it involves a deep confusion. For, if actually-existing property rights are constructed by the legal rules of property, including the rules of taxation, then one is making an error of reasoning in appealing to property rights in order to justify specific kinds of changes in, say, taxation rules.

The article is excellent, and well worth reading. Now Richard Murphy at Tax Research has followed this up with a short briefing paper, which complements this and is also well worth reading.

G20 Leaders Kick the Ball Forward

Given the huge role that the G-20 countries have taken upon themselves, and the strong language they adopted in 2009 on tackling the cancer of tax havens, we want to draw your attention to the following comment piece by Aldo Caliari of the Center of Concern:

G20 Leaders Kick the Ball Forward

The Group of 20 (G20) held its Summit in Toronto on June 26-27. Coming as the first Summit after the G20 decided, in Pittsburgh, that the G20 would become their “premier forum for international economic cooperation,” expectation levels were high.

Yet, the best summary of the meeting is perhaps to say, in a metaphor that fits these Soccer World Cup times, that the G20 chose to kick the ball forward.

A look at the Summit Declaration reveals, almost in systematic fashion, a repetition of language agreed in Pittsburgh and a remarkable number of references to the (G20) Seoul Summit, scheduled for November, as the place where they are supposed to be resolved.

Fiscal consolidation versus expansion of demand

The issue that reportedly topped the agenda was the choice between fiscal retrenchment and expansion of demand that many countries face in the aftermath of the crisis.

One of the instances often invoked to exemplify the G20 leadership are the coordinated actions for fiscal and monetary stimulus undertaken to stem the 2008-09 crisis. But the recent problems in the Eurozone countries, which have prompted many countries in the region to announce tough austerity plans, imposed a sense that the day to decide on “exit strategies” had come sooner than expected, and coordinated decisions had to be made.

The debate showed, however, very divergent views on the urgency of unwinding stimuli. Some countries were adamant that fiscal consolidation should take place while others –especially emerging market countries— held the view that fiscal retrenchment would only make matters worse. The final communiqué papers over the disagreement with a call to “put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances.”

Bank capital requirements

The language on bank capital requirements also repeated the Pittsburgh pledge of adopting Basel II in all major centers by 2011 with new standards being phased in “with the aim” of implementation by 2012. The “Basel II” is, in fact, what analysts have already begun calling Basel III, as it would include new proposals on strengthening the quality and quantity of bank capital, liquidity requirements, and potentially also a leverage ratio as supplementary to capital measured as a ratio of risk-weighted assets in the current Basel framework.

The fact that the target was end-2010 hides the difficulties that have emerged in the process of reaching such consensus on capital standards. The Eurozone crisis has placed stronger constraints on European banks, who were set to be more strongly challenged in adapting capital structures to the new requirements.

The Summit also gave a positive welcome to the “strong financial regulatory reform bill in the United States.” If only. Without denial the passage of a reform bill is a very positive achievement that could not have been taken for granted at any point since the crisis—in fact, even further concessions are being granted to make its passage possible as this article is written.

But, just like the G20 in Toronto, the bill also did a lot of forward-kicking. Provisions to ban risky investments with depositors’ funds by federally insured banks, got downgraded to provisions that allow banks to keep owning hedge and private equity units and to also make investments with their capital to hedge banks’ risks or facilitate clients’ needs, up to a three percent of capital. The phase-in time for such measures is seven years. Provisions to bring derivatives to exchange platforms with central clearinghouses are also not to affect existing contracts, which are “grandfathered” in the legislation. Most importantly, there are around 200 measures that leave implementation to regulators. For such measures, the regulatory action will depend on the regulator and financial firms’ lobbyists will undoubtedly seek to ensure that is the most lax possible outcome.

Systemically important financial institutions

Limited action was also seen with regards to “too big to fail” institutions and their potential cost to taxpayers. The Financial Stability Board delivered a report on reducing moral hazard risks posed by “systemically important” financial institutions. The declaration from the Summit however limited itself to welcome the report and call for more work on concrete policy recommendations that should happen before the Seoul Summit.

The Communique also referred to the magical deadline of end 2010 for continued work on “robust, agreed-upon institution –specific recovery and rapid resolution plans for major cross-border institutions.” But it is unlikely that these plans now could, in terms of mechanisms and tools to utilize, go beyond what US legislation has established, especially since so many of the targeted institutions are based in the US.

Since the crisis, the U.S. largest 25 institutions went from 56 % of total bank assets to 59 %. Against this backdrop, the coming legislation does not leave much room for comfort. In a recent survey of economists carried by the Wall Street Journal, by a margin of 37-7 respondents agreed that the legislation rather than solving the “too big to fail” problem, institutionalizes it.

Financial transaction taxes

Efforts launched in Pittsburgh to ensure the financial sector pays a “fair and substantial contribution towards… the burdens associated with government interventions” were also stalled. The promising process launched last year had seen disagreements between those countries—especially the host, Canada—that did not want to see any type of taxes on the financial sector and those that, like European countries, promoted more than one such measure at the same time—e.g. a bank levy on the balance sheet of the firms and a tax on financial transactions.

The language in the communiqué recognizes that to that end “there is a range of policy approaches,” ruling out any consistent support or encouragement to the introduction of any particular one.

A much-debated and awaited report the G20 had commissioned to the IMF, and one of whose highlights was to assert the feasibility of financial transaction taxes, was merely thanked in the Declaration. It had been rumored before the Summit that the report would not even be made public.

Trade and investment

The G20 Leaders extended until 2013 their commitment to refrain from raising barriers or impose new barriers to investment or trade in goods and services. The World Trade Organization, UNCTAD and the OECD were asked to continue monitoring the situation quarterly. Their latest report, however, released just before the Toronto meeting, showed a continuation of the post-crisis pattern whereby countries implement trade restrictions. While the report found a lower number of new restrictions in this particular period, it also expressed concern about the accumulation and non-removal of previous ones.

A Development Working Group

One outcome to watch out of the Toronto Summit was the creation—reportedly an initiative spearheaded by Germany and South Korea-- of a Development Working Group. The Working Group is to be chaired by South Korea and South Africa and has a mandate to produce “a development agenda and multi-year action plans to be adopted at the Seoul Summit.”

In the same weekend of the G20, the Group of 8 was denounced worldwide for dropping its commitment to double aid to Africa by 2010. As loyal G8-watchers will remember, that promise formulated in 2005 was the substance that made headlines back then. With this troubled legacy, it is inevitable that the G20 initiative carries a heavy burden of proof about its worth.

Framework for Balanced Growth

Action was also expected on the “Framework for Strong, Sustainable and Balanced Growth” that the G20 launched in Pittsburgh. At the core of this initiative was the effort to redistribute surpluses and deficits in the current accounts of major economies, which in turn demanded changes to unsustainable growth models prevailing before the crisis hit.

Indeed, the immediate impacts of the 2008-09 crisis on world trade and consumption was a reduction in global imbalances. The incipient recovery this year not only has seen imbalanced patterns pick up again, but the devaluation of the Euro threatens to add large surpluses in the Eurozone –hitherto, as a whole, not a big accumulator of either deficits or surpluses— to those that will have to be balanced with deficits elsewhere.

The G20 exercise is proving so far no more fruitful than previous attempts in the context of the IMF –e.g. the multilateral consultations on surveillance, launched in 2006—to address the problem.

Conclusion

Perhaps, with two G20 Summits a year, expecting both of them to be eventful is holding the bar too high. On the other hand, the failure to make any significant progress in Toronto certainly raises the stakes for outcomes at Seoul.

G20 Summitry is still in its infancy and only time can tell how much G20 Summits can get done. But it is inevitable that G20 Summitry will have to improve its capacity to deliver results if it wants to generate any credibility as a forum. Much more if this is credibility as a “premier forum for international economic cooperation.”

After all, nobody is interested in watching a soccer game where no goals are expected to be scored.

Tax justice: the tide is turning

Many thanks to Action Aid's Chris Jordan for the following comment on how the tide of political opinion is changing in the direction of tax justice for developing countries:

MPs talk tax justice

2 July 2010

Yesterday saw the first big debate of the new Parliament on global poverty.

Reading through what was said, I was amazed at how MPs from all sides just couldn’t shut up about the need for tax justice!

Before we began our merry mission hardly anyone was talking about the importance of tax revenues for poor countries to break free from dependency on aid … but now they’re all at it! Our efforts to put tax justice on the map during the general election are definitely reaping rewards - so a hearty slap on the back one and all!

Here’s who said what…

Douglas Alexander (Lab)
The Secretary of State rightly talked about the importance of measures “beyond aid”, but where is the crucial strategy on issues such as taxation and development, highlighted, even in recent weeks, by the excellent work of charities such as Christian Aid and ActionAid? For example, how can we take forward steps on multilateral and automatic exchange of tax information or measures on country-by-country reporting?

Ann McKechin (Lab)
I hope … the Minister can provide an assurance that the Government support multilateral, automatic exchange of tax information between tax jurisdictions, so that we can better tackle the pernicious impact of tax havens, and a new international accounting standard that requires corporations to report on profits that they have made in every country where they operate. Those two measures will not cost the UK taxpayer a penny, but they could make a real and substantial difference to millions of the world’s poorest. I am sure that they would pass the Secretary of State’s value-for-money test.

Chris White (Con)
That work can be done enough through encouraging a fiscal and administrative reform. Countries can, thus, be helped to adopt tax systems that are fairer, easier to implement, less vulnerable to corruption and less distorting to economic activity, in order to help to develop transparency.

Anas Sarwar (Lab)
Perhaps most importantly, we need to prevent tax avoidance in developing countries by helping to build and strengthen their tax administration and collection systems. More effective tax collection is vital because not only does it provide a sustainable stream of finance for developing countries but it promotes stronger governance through an accountable state-citizen relationship. The increased stability that it brings significantly enhances the prospects of economic growth.

Katy Clark (Lab)
We need to consider other ways of providing further funding for aid. However, I ask the Government to consider not just aid, but some of the suggestions from the various non-governmental organisations campaigning on this issue, particularly the suggestions for a Tobin tax and international forms of taxation, the funding from which could be earmarked for, and directed towards, trying to do something to bridge the huge gap in the world between rich and poor, both within and between countries.

Jeremy Lefroy (Con)
Give them firm property rights, fair taxation, access to affordable finance that will not take the shirt off their back if things go wrong, and a good basic infrastructure, and they will create the jobs that are so desperately needed. They will also create the tax revenues that will pay for the health, education and other services on which they depend, as well as the stability without which no real development is possible.