Sunday, October 31, 2010

David Mitchell and the Golden Rule

British comedian David Mitchell (seen here) has entered the tax justice fray with a long comment piece in today's Observer newspaper. And if you read beyond the title - You can't blame the rich for paying as little tax as possible. I do the same - he makes some important points, though he might also be misunderstanding the basis on which 38 Degrees have pitched their campaign.

Let's start at the beginning.

Two weeks ago Channel 4's Dispatches broadcast a programme revealing the use of tax havens by leading members of Britain's coalition government, including Chancellor of the Exchequer George Osborne. You can access the programme via this link.

The Dispatches programme, coming as it did just hours before the announcement of the most swingeing cuts to British public services since the 1920s, precipitated a backlash. Online campaigning organisation 38 Degrees launched a petition calling on George Osborne to pay his fair share of taxes. You can read the text of their petition here.

But the wording of the petition irritated comedian David Mitchell:

"What a stupid, wrong-headed campaign. Along with George Osborne and "two other cabinet members", I avoid paying tax. Only saints and incompetents don't. Most people pay the minimum amount of tax they're legally required to and not a penny more. That's prudent tax avoidance not illegal tax evasion."

Using the term "prudent tax avoidance" takes the debate straight into a political and moral minefield. By definition tax avoidance involves taking actions to reduce tax payments in ways that were not explicitly granted by policy-makers. This makes such behaviour anti-democratic. Mitchell undermines his case by not exploring this more fully: had he done so he might have recognised that Britain's tax rules have stimulated a global industry of tax avoidance that has corroded the revenue base and the social tax contract of many countries.

Not that Mitchell shies away from tackling the unfairness of the existing rules:

"...what the petition should really address, is how that one rule, which applies to all of us, is so much more beneficial to him and his friends - to the rich - than to everybody else. The rules are universal but unfair. They allow the rich to avoid tax without having to evade it, and Osborne, as chancellor, is responsible."

Quite so. City of London lawyers like to joke that poor people evade taxes, while rich people avoid them. Britain's tax rules did not become regressive by chance or accident: decades of political influence-peddling have created a tax code so riddled with loopholes that paying taxes has become almost discretionary for rich people, especially those who claim non-domiciled status.

Tax rules shape the nature of the societies we live in. Fair taxes promote social well-being, protect our ecology and encourage useful enterprise. Unfair tax rules stimulate free-riding and speculation, worsen inequality and undermine our social institutions. Sadly, Britain's tax rules are largely shaped to promote the interests of a tiny elite of wealthy people and powerful corporations. Their political power is known as the Golden Rule: those who have the gold shape the rules.

George Osborne knows this. His decision this week to negotiate the continuance of Switzerland's noxious banking secrecy, see here for details, clearly demonstrates that he has every intention of protecting the interests of Britain's tax evading classes. And as for tax avoidance, there is little indication that Osborne and other members of the coalition government are prepared to do anything to seriously reduce this cancerous activity.

On balance Mitchell makes a weak case for not drawing public attention to the way that Osborne organises his tax affairs: this is clearly a matter of public interest.

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Saturday, October 30, 2010

Repeat after me: tax cuts don't pay for themselves

Here is an interesting new U.S. site we've come across, I Heart Taxes. Take a look at it. (They do a nifty line in t-shirts too.) It, in turn, pointed us towards something else we have blogged extensively about: the widely peddled notion that tax cuts somehow pay for themselves. (Our recent exchange with MP Roger Helmer was our latest in that particular series.)

Now we have the respected U.S. economist Mark Thoma weighing in:

Republicans are selling snake oil once again:
Some Republican Senate candidates have suggested that extending the Bush tax cuts — which are scheduled to expire at the end of the year — will actually be good for the country’s bottom line, as the economic growth that results will more than offset the trillions of dollars in lost revenue. “By extending tax cuts you pay down the deficit, you grow the economy by giving people more money,” said Colorado Republican Ken Buck.

Today, on Fox News Sunday, Pennsylvania’s Republican Senate nominee Pat Toomey joined this club, telling Fox’s Chris Wallace that “it’s not clear” that extending the Bush tax cuts — while also lowering the corporate tax rate — would increase the deficit...
But, of course, the Bush tax cuts did not even come close to paying for themselves. The Bush tax cuts cost us around $1.7 trillion in revenue from 2001 through 2008, in part because of weak output and job growth following the cuts (contrary to assertions about how the tax cuts would stimulate economic growth).

As for the cost of extending the tax cuts to the wealthy, the Tax Policy Center estimates that making all the Bush tax cuts permanent, as opposed to extending them only for the middle and lower classes, would cost $680 billion over the next decade.

The disappointing part is that the press still lets them get away with this.


Now read on . . .

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Friday, October 29, 2010

CTJ responds to Tax Foundation attack in US

For those with an interest in the unreasonable claims of tax lobbyists in the U.S., this latest report from Citizens for Tax Justice, in its usual wry style, neatly skewers some of those arguments that have been put forward. This is somewhat involved, so probably only for connoisseurs of U.S. tax details. Click here.

It is also worth reading their recent How to Enact (and Maintain) Tax Reform.

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Standard bank says it does not encourage tax evasion

Tineyi Mawocha, Managing Director of Standard Bank in Swaziland, is encouraging wealthy locals to put their money offshore.

"Being a user of such a service myself, I highly recommend it because you’re also able to transfer money without any tax regulations involved as you would have already complied with these in your home country.

Is that so? Would you necessarily continue to comply, once your money was offshore, and in secret? And the secrecy is definitely there, as another Standard Bank official, Richard Bray, stresses:

"He said there were many reasons why people should consider offshore financial services, including the security and confidentiality which the premier offshore jurisdictions offered. “We do not share client information with say the South African Revenue Services (SARS). However, we do not encourage tax evasion."

So these bankers are encouraging people to move their money offshore, reassuring them about security and confidentiality and the fact that they won't let the tax authorities know what their money is up to - and then saying they do not encourage tax evasion?

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Singapore among world's most corrupt nations

Singapore is the world's eighth most corrupt nation, according to our rankings. It is a haven for secrecy and one of the biggest, and fastest-rising, sinks for illicit, tax evading and criminal loot from developing and other countries around the world. Just look here to see some of the things that Singaporeans have been saying about their country, for instance.

So we are distressed to see Transparency International's Corruption Perceptions Index (CPI) ranking Singapore as the world's "cleanest" country, alongside Denmark and New Zealand. It is not the cleanest. It is one of the dirtiest.

Transparency International, to be fair, has supported the Financial Secrecy Index, which is in the process of being updated (though results won't be out any time soon.) But this CPI is showing a very false picture of what is really going on in the world.

Read more on what corruption really means, from a tax justice perspective, here and here.

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UK Rabbi takes on tax dodgers

From the Jewish chronicle:
Chief Rabbi Lord Sacks has criticised people who try to avoid paying tax in the current economic climate. Addressing the annual dinner of the Jewish Assocation of Business Ethics in London on Tuesday night, he said: "I think individuals have to say 'if I belong in this society, I have to share in the fate of this society'.

"Where everyone else is suffering, it is morally wrong to say 'I am going to take myself out of it'. Even if you can justify it, the fact is we're all in this together."
We agree, of course, as did a bunch of protesters in London this week. Well said. But now here is a shocker, from the same story.
When Mr Randall asked whether any of the 320 guests agreed with the Chief Rabbi's views on tax avoidance, only two raised their hands.
And this was a business ethics meeting? What kind of business ethics are being discussed here?

It is the role of leaders to lead, even when their followers don't get it. Leadership takes courage in the face of nay-sayers and doubters, and we are delighted to see Lord Sacks carrying out his responsibilities in full in this respect. And let's face it, we are talking about universal human values here. And the ideas at the core of a tax justice agenda are very, very simple indeed. As Lord Sacks put it:

Any business that is seen to be taking wealth out of the country and not giving back to the community will find itself morally unacceptable.

Indeed.

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Tax deal lets down developing world

Martin Hearson, Policy Adviser at ActionAid, has an important letter in the Financial Times complementing our recent blogging on the issue. We reproduce it here, in full:
Tax deal lets down developing world
Published: October 28 2010

From Mr Martin Hearson.

Sir, The tax deal between the UK and Switzerland (report, October 26) may generate some revenue for the UK, but it is also good news for corrupt politicians and tax dodgers across the developing world.

By leaving banking secrecy intact, HM Revenue & Customs has scored an own goal in the global effort to clamp down on tax evasion, slamming the door shut in the face of developing countries. Without the economic and political influence to establish similar arrangements, developing countries have been reliant on the fringe benefits of the Group of 20’s tough approach to tax havens, in particular a crackdown on the principle of secrecy.

The corollary of this week’s agreement must therefore be UK advocacy at the G20 in Seoul next month for a global tax information exchange deal that meets the needs of developing countries.

Martin Hearson,

Policy Adviser,

ActionAid,

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Thursday, October 28, 2010

Vodafone UK: more tax protest action coming

Following this, on one Vodafone store in London, we now note this, on a lot of them. P.S. we didn't organise this! It seems to be something rather, er, spontaneous. People are beginning to get annoyed about all these tax shenanigans.

Get a flavour of the strength of public feeling in the UK here. Ordinary people on the street explaining exactly what tax justice is all about.

Update: there was an Attac protest about Vodafone's tax tricks in Germany in 2004. For those who speak German, click here. Hat tip: Detlev von Larcher.

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On foreclosuregate, efficiency and tax havens

We have been reading occasional stories about the foreclosure mess in the United States.

For those who don't know about it, here is a quick summary, to start with. In the run-up to the financial crisis that erupted in 2007, banks and other financial institutions packaged up bundles of mortgages into entities which were then themselves diced up and sold on, once or more than once, to other investors, in a process known as securitisation. The chain of ownership between houseowner and the ultimate holder of the mortgage risk often involved many links, with ownership passing from hand to hand many times over. But evidence has recently been emerging that mortgage servicers had been cutting corners and not doing the proper paperwork while ownership was being handed down these chains, and the result is an almighty legal mess throwing into question the whole basis for the securitisation deals and the chain of ownership. It is throwing a huge question mark over the banks. (Here is just one story giving some examples of what has been going wrong.)

One of the most important sites following the situation is the well-regarded Naked Capitalism, which notes something in one of its latest blogs that struck us as being particularly important.

"The media has finally woken up and is reporting on a wide range and variety of bogus foreclosure actions, vitiating the industry claims that all foreclosure actions are correct. And before some readers try the argument that a few errors here and there are no big deal, try telling that to someone threatened with the loss of their home. This sort of thing was impossible in the pre-securitization era, and for good reason: the process of dealing with real property was cumbersome by design. It was fault intolerant because the consequences of error can be catastrophic to the participants. Any process that has a lot of safety features and checks is going to be inefficient. It was inevitable that a drive for efficiency at all costs would compromise the integrity of the system."

Now this Naked Capitalism paragraph reminds us of our fairly recent blogging on the parallels between tax havenry and actions that people traditionally think of as corrupt.

Exhibit A in the tax havens' defence is that they make the flow of international finance more "efficient".

As we mentioned in that previous blog, some people argue that bribery is efficient because it allows, for instance, that business to get its container through the port, or to get its permissions to start trading, or whatever. The correct response to this "efficiency" argument for bribery is that what is efficient for a single individual or entity may well not be efficient for the system as a whole. And a system plagued by bribery, or other forms of corruption, is certainly less efficient than one that is relatively free of such evils. Corruption gives an advantage to insiders, at the expense of the majority. In the process it undermines the rules, systems and institutions that promote the public good, and undermines our faith in those rules. It rots the system, in other words.

What do tax havens do? They allow people or entities to get around various obstacles to doing the business they want: cutting that tax bill, providing "light-touch" financial regulation, or whatever, and getting the deal done faster and more, er, "efficiently." But what are the obstacles that tax havens help us get around? Why, tax, financial regulation, criminal laws, transparency requirements, and all kinds of other things that are put there for very good reason: to promote the public good, and prevent insiders from abusing the public good. Tax havens (or secrecy jurisdictions as we sometimes call them) are the ultimate insiders' tool, not least because of their fondness for secrecy. At heart, they promote escape: escape from all the constraints and responsibilities of living in society. In allowing a minority of insiders to escape these things, and to free-ride off the backs of others, they undermine the rules, systems and institutions that promote the public good, and undermine our faith in those rules. In other words, they rot the system. (And Richard Murphy's latest blog on why tax havens are the enemies of free markets just reinforces the point: read it, if you haven't yet.)

And this is why the Naked Capitalism article on foreclosuregate reminded us of this very argument: because we are seeing the same underlying process at work. As a reminder of what they said about the dodgy paperwork:

This sort of thing was impossible in the pre-securitization era, and for good reason: the process of dealing with real property was cumbersome by design. It was fault intolerant.

The securitisation game tried to make the whole process more "efficient" - and in the process, corrupted the system. Again, as they note:

It was inevitable that a drive for efficiency at all costs would compromise the integrity of the system.

And, we should add, it compromised our faith in the integrity of the system. Which means it has corrupted the system.

We can't help once again reminding our readers of the words of John Maynard Keynes in 1933.

"There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations between men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation."

He was quite right. And his words, of course, can be applied perfectly to the analysis of tax havens.

For much more in-depth analysis of our corruption from TJN's perspective, click here.

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Tax Justice is the best friend free markets have

Richard Murphy has written an excellent article on the blog of the Task Force on Financial Integrity and Economic development, with the above headline.

We won't reproduce it all here - read the whole thing, because it's worth it. We will just provide the conclusion, which we'd wholeheartedly agree with.
"Why do so many, who claim to believe in free markets, support the use of tax havens? As I noted at the outset, there is only one explanation. These people are not telling the truth when they claim they believe in free markets. They do instead believe in the maintenance of privilege. They do that to sustain their monopolies. They do that to sustain their exploitation of ordinary people in developing countries. They do that to avoid their obligations to societies around the world. But this exploitation is utterly inconsistent with the potential for the creation of well-being that free markets have to offer in partnership with well funded, effective states.

It may be a surprising conclusion for some, but the Tax Justice Network may be one of the strongest supporters of the benefits of free markets that there is. And so am I. And I challenge anyone to disagree."

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Wednesday, October 27, 2010

Tax protest closes Vodafone shop in London's Oxford Street

We recently blogged a Private Eye story about Vodafone's tax games, involving the corporation not paying as much tax as it really ought to. Now we are heartened to see this happening on the streets of Britain, as it plunges into a new era of austerity. From Sky News:
Protesters have closed a Vodafone store in London's Oxford Street in a demonstration over an alleged unpaid £6bn tax bill. Vodafone has confirmed the shop will remain shut until it is safe to open it again. However, it disputes not paying a £6bn tax bill.
(it would, of course, dispute that. This is presumably the Philip Green defence: "no tax was avoided because none was due" - which seeks to paper over the fact that no tax was due because a number of legal shenanigans were engaged in, to make sure that no tax was due). Back to Sky News:
Activist Chris Coltrane, at the demonstration, tweeted: "Vodafone have dodged £6bn tax. That would have paid for almost all the welfare cuts. "We're shutting down their flagship store in protest."
It is excellent to see private citizens taking tax dodging as seriously as we do. Hat tip: Chris Jordan, ActionAid.

Update: the best story we've seen on this so far is from the New Statesman. Read it, and you get a sense of the anger out there.

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David Cay Johnston: scary new wage data

David Cay Johnston has unearthed two new, and quite surprising, wage shockers from the U.S.
The average wage in this top category increased from $91.2 million in 2008 to an astonishing $518.8 million in 2009. That’s nearly $10 million in weekly pay!

You read that right. In the Great Recession year of 2009 (officially just the first half of the year), the average pay of the very highest-income Americans was more than five times their average wages and bonuses in 2008. And even though their numbers shrank by 43 percent, this group’s total compensation was 3.2 times larger in 2009 than in 2008, accounting for 0.6 percent of all pay. These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers."
and then the second shocker:
Total wages, median wages, and average wages all declined . . . Not a single news organization reported this data when it was released October 15, searches of Google and the Nexis databases show. Nor did any blog, so the citizen journalists and professional economists did no better than the newsroom pros in reporting this basic information about our economy.
Well, we're doing our bit here, we hope. Along with Tax Prof., who posted this. The historical background?
The story the numbers tell is one of a strengthening economic base with income growing fastest at the bottom until, in 1981, we made an abrupt change in tax and economic policy. Since then the base has fared poorly while huge economic gains piled up at the very top, along with much lower tax burdens.
And, from this article, we will add this to our quotations page:
a society in which commas — it takes three to be a billionaire — count more than character

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Pay your taxes, George

UK residents can sign this new campaign document by the organisation 38 degrees, which focused on statements by the UK government that "we're all in this together" while the chancellor (finance minister) George Osborne seems to have been putting in place structures to avoid paying large amounts tax.

To sign up, please click here.

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Barclays in Ghana, Seychelles - and Botswana

We have blogged a few times about the efforts of Barclays Bank to encourage and set up offshore banking in Ghana, amid a highly corrupted region in the throes of a gigantic oil boom. The prospect for illicit leakage is tremendous.

This next offering in the Harvard International Review takes the story further. Its first line goes like this:
We are bound by our confidentially agreement with our clients,' disclosed a Barclays official based in the Seychelles. 'No other branches can access our client details.'
Barclays Bank again. The article continues:
Closer to home, Bostwana's lack foreign exchange controls has rendered the country 'the Switzerland of Africa' facilitating easy transfer and repatriation of laundered profits. The country's International Financial Services Centre (IFSC), structured after that of Dublin's, was created in 2003 to 'facilitate cross-border financial services ie: the Hoover effect, sucking up illicit flight from neighboring regions, including SA.

'We do not intend to ruin our international reputation by embracing practices which place us in the category of a tax haven', declared the IFSC, established with the intention of competing with another tax haven, Mauritius. But Botswana's IFSC allows for foreign clients to escape withholding and capital gains tax, while accessing a 15% corporate tax rate that may be circumvented using a selection of services available including the age old trick of mispricing. Though SA provides secrecy vehicles such as trusts, the proximity of the IFSC, allegedly shaped, as in Ghana, by foreign banks such as Barclays, does not bode well. The IFSC's CEO himself is an old Barclays hand.

The country's IFSC is one of only three in the world and Botswana offers one of the world's lowest tax rates. One client, Zimre Holdings Ltd, a Zimbabwean investment and insurance entity keen to engage in 'oil, gas and other energy forms in Africa, especially Angola'. The company, only recently delisted from sanctions by the EU, is almost 70% controlled by the government of Zimbabwe.
We haven't yet written too much about Botswana, though it's been on our radar screen for a little while. Seeing the name Barclays for a third time makes us see something of a pattern here. Tax havens can serve as conduits for financial flows into nearby jurisdictions. But in our experience, especially with developing countries, they are far more important as conduits for capital flowing out. Are we seeing a pattern here of the City of London seeking to muscle in on hoovering up yet more dirty money from Africa? With Ghana to hoover it up from the oil-rich west African subregion, with Botswana for South Africa, Zimbabwe and the rest of southern Africa, and the Seychelles (and Mauritius) for the continent as a whole? It does look a bit like that.

More specifically on Botswana, as the OECD Global Forum peer review mechanism recently noted:

The review of Botswana’s legal and regulatory framework reveals a number of serious deficiencies which, taken together, make it impossible for Botswana to engage in effective exchange of information in tax matters. These are:
  • Nominees – while Botswana’s rules regarding the availability of ownership information are generally adequate regarding legal ownership, there is no provision to ensure that beneficial ownership information is available where the legal owner holds an interest on behalf of another person.
  • Bank Secrecy – bank information can only be obtained where relevant to a civil or criminal proceeding taking place in Botswana.
  • Inadequate confidentiality rules – information held by Botswana’s tax authorities can be disclosed in a number of different circumstances beyond those prescribed by international standards.
  • Lack of exchange of information agreements – Botswana only has one agreement in place that appears to provide for effective exchange of information in tax matters.
And that is the OECD's assessment. The OECD's standards are, as we have repeatedly pointed out, risibly low. So Botswana's standards must be really very low indeed. This is a very new tax haven, and it should be cause for very great concern.

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Tuesday, October 26, 2010

Tax and debt: something we'd like to hear more about

The latest AABA workshop call for papers reminds us of an issue that we have been plugging for some time - the tax deductibility of debt. This is a crucially important issue which we hope will be addressed by at least some of those presenting papers. We covered the issue recently, and it has been hard to find serious people who disagree with us: most recently, TJN's director John Christensen recently found himself putting this idea to Dan Mobley of Standard Chartered Bank in an online debate, who responded:
"We are in danger of furious agreement! Abolishing tax relief on debt interest is long overdue. "
We are now pleased to see this now being pushed in The Guardian, in a piece looking at how the UK ought to be looking at combating short-termism in the business and investment world.
"If the coalition really wanted to reverse the trend towards short-term thinking, it would change the rules on the tax-deductibility of interest since the current rules encourage companies to load up with debt to reduce their tax bills.

Many of the corporate disaster stories of the past two years can be explained that way. Chief executives, citing the fear of takeover by private equity, preferred to join the leverage club and seek instant gratification and popularity in the form of special dividends and share buy-backs. The cost was the accumulation of dangerous levels of debt that impaired long-term investment after the crash of 2007-08.

It would be a (relatively) simple matter to phase out tax-deductibility in return for a bigger cut in corporation tax than the coalition currently plans. Life would become harder for the buyout brigade; the takeover game would be transformed, which is what Cable seems to wish, and chief executives would be challenged to find more imaginative uses for capital than balance-sheet gymnastics.

Cable did not once mention the tax rules as a cause of short-termism in his speech yesterday. Maybe his review will do better."
Let's hope this idea continues to get support.

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2011 Research Workshop: Call for Papers


AABA


Invitation to Participate in a Workshop on

DEBT, TAX AND HUMAN RIGHTS

Essex University, 5th and 6th July 2011

The 2011 research workshop co-organised by the Association for Accountancy & Business Affairs i and the Tax Justice Network,ii will explore connections between debt, tax justice and human rights. The themes that might be explored within this remit are wide, potentially including issues such as how debt impacts on public finances; how tax avoidance infringes human rights; why tax revenues are more sustainable as a source of public finance than debt; and how tax system design can contribute to delivery of tangible human rights.

Other related themes are likely to emerge as the workshop programme develops.

The aim of this workshop is to bring together researchers, academics, journalists, policy staff of civil society organisations, consultants and professionals, elected politicians and/or their researchers, and government or international organisation officials to explore issues on these and related themes. The purpose of the workshop is to facilitate research through open-minded debate and discussion, and to generate ideas and proposals to inform and shape the political initiatives and campaigns already under way.

There will be a small charge for attendance at the Workshop. Participants are usually expected to finance their own travel although applications from students and others with limited means for bursary support will be considered. Accommodation at Essex University will be available at modest cost.

Anyone interested in participating should provide details of the nature of their interest, affiliations and any relevant research or publications to:

John Christensen, Tax Justice Network International Secretariat, john(at)taxjustice.net

Offers of papers are especially welcome and early submission is encouraged since applicants have exceeded available spaces in recent years. Any submissions will be actively considered by the organising committee which comprises:

John Christensen (Tax Justice Network)

Jo Marie Griesgraber (New Rules for Global Finance)

Prem Sikka (Essex University)

Richard Murphy (Tax Research LLP)

Ronen Palan (Birmingham University)

Sol Picciotto (Lancaster University)


i http://www.aabaglobal.org/

ii http://www.taxjustice.net/cms/front_content.php?idcat=2


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Tax Heavens: a whistleblower's story

Tax Heavens
by Faust Kalam

Much of what we know about secrecy jurisdictions has come into the public domain thanks to the work of whistleblowers. Sometimes these people are motivated by money, but more often than not they are people of integrity who find it impossible to align their personal values with those of their employer.

This is the case with Ron Edelweiss, a Swiss banker turned whistleblower after working on the fictitious Caribbean secrecy jurisdiction of Crocodile Island. Having worked for nine years at the heart of an apparently respectable Swiss bank, Edelweiss walks out on an organisation which he regards as corrupt to its core.

Based on a true story, this book claims to provide unique and astonishing insights into the closed world of offshore banking. It also reveals a truth not widely understood: for all the fine words spoken about the importance of whistleblowers in protecting public interest, too little is done to protect them from the thugs whose interests they challenge. They can expect to be bullied, harassed, belittled and hung out to dry.

We hope to review Tax Heavens in due course.

Copies can be obtained here.

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Britain aligns with Switzerland in defence of secret wealth

We are horrified to see that Britain has surrendered to the interests of big finance and secret wealth, in a new treaty signed with Switzerland. We will blog this at greater length in due course, but for now we will simply cut and paste from Tax Research UK which notes that although we are yet to see the final details, the UK government looks like it has effectively announced an intention to sign a total tax amnesty for UK tax evaders who have used Switzerland, and has, it seems:
1) Granted Switzerland the right to set the effective higher rate of tax on investment income in the UK;
2) Granted Swiss banks an everlasting competitive advantage over UK banksbecause it will pay all higher rate tax payers to bank in Switzerland henceforth;
3) Denied the UK tax authority the right to make enquiries of their own choosing about the tax affairs of a British personthe Swiss now being granted the right to decide how many enquiries may be made and whether they are appropriate or not.
4) Granted criminal immunity to Swiss bakers who sell tax evasion – so allowing them to commit ongoing crime in the UK.
In the process the UK is:
a) Promoting tax evasion by its citizens
b) Promoting Geneva and Zurich over London
c) Abandoning its right to tax
d) Abandoning its rights to enforce its laws
e) Alienating the OECD
f) Abandoning the fights against tax havens.
It is a thorough indictment of the current UK government, which has effectively surrendered on this point.

Update: Tax Journal reports on this, quoting our blog it seems, and adding this nice touch:
"Andreas Kolb, a Partner in the Switzerland office at Eversheds, observed: ‘It is somewhat surprising that the United Kingdom is the first country with which Switzerland has signed a basic agreement on dealing with untaxed money, especially given that the UK’s Channel Islands are known the world over for the legal possibilities they offer in terms of concealing money via trusts. These constructions are often much more confidential than the famed Swiss bank secrecy.’"
The Crown Dependencies will not want to admit it, but Kolb is right, too.

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Monday, October 25, 2010

Ireland's 12.5% tax rate - read the small print

Following our blog on Google's 2.4 percent tax rate, we'd like to highlight one other aspect of this story, which the Irish Times, nicely repackaging that Bloomberg article, picked up on. People routinely talk about Ireland's 12.5% corporation tax rate as the big lure for foreign funds and corporations. But as is so often the case, it is not the headline tax rate, but the deliberate loopholes and exemptions, that matter here.
The Dublin subsidiary was credited by Google with 88 per cent of its $12.5 billion in non-US sales in 2009 – a figure that substantially dwarfs the €18.3 million that Google paid in taxes in Ireland last year.
. . .
Google Ireland reported pretax income of less than 1 per cent of sales in 2008. This was largely because it paid $5.4 billion in royalties to Google Ireland Holdings which, despite its formation in Ireland and Irish-sounding name, has an “effective centre of management” in Bermuda. The royalties take a little detour along the way to the Netherlands and an employee-free company called Google Netherlands Holdings to avoid Irish withholding taxes: this little stopover is what gives rise to the “Dutch Sandwich” nickname. The ultimate parent is Google Inc.

We are used to the idea that US companies might want to set up shop in Ireland to bask in the glow of a 12.5 per cent corporate tax rate. For some companies, however, 12.5 per cent is still too much when there are tax-free destinations such as Bermuda to stash your cash."
Just something to remember. And we are pleased to see the Irish times noting that:
While it is sunny Bermuda that is generally dubbed the “tax haven” in this international three-way, from the US perspective, both Ireland and the Netherlands are also worthy of the title.
Indeed. And on the subject of Ireland and its role in the ongoing international race of tax competition, take a look at Sheila Killian's 2007 paper exploring this issue. As she notes:
"The first round of tax competition was already harmful; the second round could bring new levels of damage, particularly to developing countries."

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Sunday, October 24, 2010

Does Costa Rica gain full benefit from its pineapple trade?

The Guardian's Felicity Lawrence recently filed an excellent article on global pineapple trade. Taking the example of Costa Rica, she outlined the low wages and union busting, the environmental harm caused by excessive use of agro-chemicals, and the injuries and health problems incurred by workers.

The article has touched several raw nerves, and much of the industry response has focussed on the "economic" benefit to Costa Rica. Employment creation is one, but this can be limited to low wage employment with little in the way of useful knowledge transfer. Local procurement of inputs is another potential area of benefit, but chemical inputs are largely imported so the links to the domestic economy are limited.

And then there's the issue of tax on profits generated. If the taxable profits are retained and taxed locally there might be a genuine benefit to Costa Rica. But that's a big if: profits generated by multinational companies are easily shifted offshore, and these leakages make it very hard for tax authorities in countries like Costa Rica to determine what taxes are due.

Christian Aid's Alex Cobham has raised the tax issue with Felicity Lawrence and she has blogged his findings here. As the following excerpt makes clear, somewhere between being exported from Costa Rica to being imported into the European markets, the price of pineapples doubles and in some instances triples:

If you look at the export prices for pineapples per kilo, you can immediately see that pineapples leave Costa Rica at an average of 40 cents per kilo. Exports from other producing countries, which all happen to be developing countries, show similar average prices. By the time shipments of pineapples come to be logged in the main importing countries for Europe of Belgium, Holland and Germany, however, the price has doubled to more to 83 cents per kilo in Belgium, and up to $1.14 in the Netherlands.

So what is happening? As Alex makes clear, shipping costs only account for a small part of the price increase:

Shipping costs probably account for up to 20 cents per kilo, but what about the rest of the difference? Belgium, the Netherlands and Germany appear in the top 10 pineapple exporting countries too, since pineapples from Central America come into their ports and are then sent on to other European countries. The price these three rich nations receive for their exports is double what countries like Costa Rica receive. Nothing much happens to the pineapples in the meantime, other than being shipped and unloaded. (These figures specifically exclude further processing such as cutting and packing for supermarkets.)

Clearly shipping, processing and packaging don't account for the massive price hike between the port of export and onward shipping within Europe:

So where's the money going between pineapples leaving Costa Rica and arriving in Europe? The most obvious answer is that the profits are being made offshore as pineapples pass through subsidiaries of transnational companies where charges can quite legally be added on paper for "services" such as use of brand names, or expertise in markerting and logistics.

We've seen something similar in the past. In November 2007 Felicity Lawrence and Ian Griffiths published an article about how bananas are traded through offshore structures to shift profits to tax havens. You can find the results of their astonishing research here. Approximately half of the retail price paid for bananas consumed in Europe is accounted from by dubious transfer pricing of intellectual property rights, including brand names, use of distribution networks, financial services, marketing services, insurance services, and so on. In every case, these services were provided by subsidiary companies registered in tax havens.

The banana case study revealed a massive faultline in globalised trade: intellectual property rights are hard to price and therefore provide perfect cover for multinational companies to shift their profits to a zero tax jurisdiction. On the basis of the available trade data, Alex has estimated the potential profits-shifting on pineapple trade from Costa Rica in 2009 at approximately US$590 million. If this is the case, the claims made about benefits to the Costa Rican economy are exaggerated.

As Felicity notes: "We'd love to hear from the industry on this..."

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Saturday, October 23, 2010

Malawi: Better taxation for better education

Tiny, land-locked Malawi is amongst the most impoverished in Africa. The people of Malawi live predominantly in rural areas and agriculture is the principal industry. Education levels are below those of regional neighbours, but free primary education has been provided since 1994 and the constitution requires that each child has a minimum of five years primary education.

The available evidence suggests that this policy is working: attendance rates have improved significantly and youth literacy rates are now well over 80 percent. This augurs well for the future, but investment in education costs money, and as this article in Nyasa Times makes clear, aid dependence in an era of austerity is unlikely to provide a sustainable funding source. Greater emphasis is therefore required on collecting taxes and adopting the right mix of tax policies:

One therefore feels there is no choice but to find solutions at home. Taxation may not be the only local solution to the country’s financial challenges; you can also rely on mining, agricultural productivity, tourism, and trade. But taxation is arguably the most predictable and sustainable solution. I can imagine that if Malawi improves tax collection by at least 30%, government will be able to address the NESP funding gap of K20 billion a year and guarantee all citizens better quality education.

Achieving a 30 percent increase in revenue collection might not happen overnight, and attention should be given to ensuring that the tax base is progressive in its overall impact, but the goal is worthwhile, and might even bring pressure to bear on the government to concentrate on meeting the needs of the people, rather than buying toys for the boys in the form of a private jet for the president.

We are, of course, delighted to see reference in the article to Tax Justice Network and our colleagues at Action Aid. Our agenda is widening and deepening.

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Friday, October 22, 2010

Liberia, flags of convenience and corporate capitalism

Flags of convenience - the Liberia shipping registry, or Panama's, or that of the Marshall Islands - are maritime versions of tax havens, allowing shipping operators to do what they would not otherwise be allowed to do at home, whether it be paying taxes properly, or evading environmental regulations or other prohibitions.

This latest article from Khadija Sharife, a South African writer exploring the role of flags of convenience in evading anti-Apartheid sanctions, is another useful contribution on this subject, and well worth reading. It covers an important, but hitherto grossly under-researched, piece of global economic history.

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Tax and malnutrition in Guatemala

Christian Aid on tax and development in Guatemela.



To see more on this broad subject, see last year's edition of Tax Justice Focus.

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Cayman News on Cayman Finance's Nemesis

Following our Mr. Angry blog responding to an attack on TJN emailed out to a number of people in London and presumably elsewhere, the Cayman News Service has picked up the story. In an article entitled UK documentary stirs up wrath of Cayman Finance, it carries links both to the TJN blog and to the original article (which now has a link,) and it does a half-decent job of trying to be balanced.

It contains a number of errors - it claimed that the programme
depend[ed] on the Tax Justice Network – Cayman Finance’s Nemesis -- as its main source of information
which is simply untrue - it merely quoted TJN director John Christensen and senior adviser Richard Murphy on several occasions, but its main sources of information were good old journalistic legwork. It also seemed to think that Murphy had written our Mr. Angry blog - which is untrue. Murphy is a senior adviser to TJN and is perfectly capable of doing his own blogging - which he does, ably and prolifically, here. (As far as this blogger is aware, Murphy has never written for the TJN blog - though we do refer to his blog from time to time.)

We like one of the comments under the article:
"Thought it constituted some fantastic free advertising for the the Cayman Islands. . .. It's not as if it could have made our reputation any worse."

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Luxembourg: ready to cooperate with automatic information exchange?

According to this article, Luxembourgian Finance Minister Luc Frieden has indicated to the European Union's Council of Finance Ministers (EcoFin) that the Grand Duchy is no longer opposed to automatic information exchange through the EU's savings tax directive (STD). If this is the case, we have cause for celebration, though we still don't know whether Austria will also fall into line and cooperate.

The EU's STD is currently under review. The review process is considering broadening the directive's scope to include a wider range of incomes (it currently only covers interest on bank deposits) plus a widening of the directive's cover beyond natural persons to include legal persons such as companies, trusts and foundations. If these steps are agreed - and we understand that countries like the U.K. are blocking in order to protect their offshore tax evasion industries - the STD will become the global gold standard which other regions should aspire to in their efforts to tackle tax evasion.

The article indicates that M Frieden expects the EU to achieve agreement on the revised directive before year-end 2010, with the revisions coming into force by 2015. This timeline is less than ambitious, and will allow wealthy tax evaders plenty of time to re-design their tax evasion strategies, but even securing agreement will be a major political success in the face of such powerful vested interests. And even with Luxembourg in the bag, the U.K. is still likely to put up strong resistance to including trusts in the STD's remit. Watch this space.

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Thursday, October 21, 2010

Google's products, not being so evil

Our latest "Don't be Evil" blog about Google's tax affairs is now followed by a take on Google from a different direction: the corporation, or at least its products, have been helping tax authorities squirrel out tax dodgers! As the Guardian reports:

Using Google Earth, the unit recently announced it had discovered some 50,000 "undeclared" swimming pools as well as tracing the owners of an estimated 2,500 state-of-the-art pleasure boats moored in marinas around the capital. Politicians with power cruisers costing as much as €1.5m, but which have never appeared on tax returns, have been outed.

So while we hate Google's tax department, we like many of its products! And, separately, we are delighted to see this, in the context of Greece's famously disastrous national finances:

"Bank accounts abroad have also been targeted as Papandreou, in an unprecedented step, has taken the fight against tax evasion beyond Greek borders. "We have opened bank accounts in Liechtenstein and plan to open others in Switzerland and the City of London," Kapeleris said. "We have discovered deposits that make the mind boggle, huge amounts that simply do not correspond to professed professional activity."

Luxury villas on far-flung islands – some belonging to Britons and other foreign nationals – that were rented without ever being declared had similarly been unearthed. "We have been in touch with tax authorities in the UK and other EU states," he said. "Some of these villas are rented for tens of thousands of euros a month."

This could get interesting.

And on the subject of villas and swimming pools that you can find on Google Earth, this is why we think land value taxation is such a good idea. It's an incredibly simple system, and with the right political will, near-impossible to avoid. Read more on this here.

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Not being evil? Google pays 2.4% tax rate

Jesse Drucker at Bloomberg is on form again. This time, it's a startler: Google 2.4% Rate Shows How $60 Billion U.S. Revenue Lost to Tax Loopholes. (Note: we just blogged Martin Sullivan explaining how Microsoft has shielded billions from U.S. taxation.)

In each case, it is this trick of transfer pricing (or mispricing) being used to shift profits around the world, in order that profits are realised in the low-tax or zero-tax jurisdictions, while the losses are shifted to the "onshore" higher tax countries, where they can be heaped on the shoulders of unsuspecting populations.

We won't repeat any of the article here, as it can quite ably speak for itself. Read it. It also has a nice little interactive graphic, exposing the disgracefully artificial profit-shifting Google has been up to (the graphic is similar to one in Drucker's similarly excellent Lexapro article recently.)

And then read our discussion of the notion of corporate responsibility - a particular issue for a company whose motto goes, or at least went, "Don't be Evil." This goes contrary to what Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP, had to say.
“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally."
Well he would say that. He makes his living, presumably, from helping companies do exactly that. And this seems like a reasonable thing to say, except for one thing: a company's obligation is not only to its shareholders. Companies get their licence to operate from the societies in which they are embedded, and whose facilities, from the educated workforces to the rule of law, they depend on. As Joel Bakan puts it in his best-selling book The Corporation:
The state is the only institution in the world that can bring a corporation to life. It alone grants corporations their essential rights, such as legal personhood and limited liability . . . Without the state, the corporation is nothing. Literally nothing.’
(See the philosophical underpinnings of this too, here.) Once you understand this, you understand that corporations are accountable not just to shareholders, but to a wider set of stakeholders. Once we understand that, then we understand how the accountancy profession's distorted world view has become corrupted in the service of narrow interests, against society.

Note also that all of these shenanigans may do wonders for Google's share price (one analyst reckons it has put $100 on Google's $600-odd share price) - but they do absolutely nothing to add value in global markets: what is given to Google is taken away from somewhere else, either in terms of higher taxes or lower spending. This is just a subsidy, via a tilted playing field, distorting markets and consequently making them less efficient.

Anyone concerned about the power of multinational corporations, either generally or in specific cases like this one, needs to pay attention to transfer pricing.

This is why we are, bit by bit, gearing up to move our transfer pricing project forward. Read more here.

Update: Google isn't always evil.

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