This one is priceless. We hope The Telegraph do not mind us reproducing it in full.
Why tax havens cause poverty
An E-Mail from Athens naked capitalism
There are many urgent issues we could discuss today, but I want to focus on two. First, partnering with developing countries on reforms in three interconnected areas – taxes, transparency, and corruption – because focusing on these three will give us the tools needed to enable more countries to fund more of their own development.
I’ve spoken about the importance of countries and international organizations like the OECD working together on taxes, transparency, and corruption many times in many places, from Pakistan to Ecuador.
Why? Because corruption, lack of transparency, and poorly functioning tax systems are major barriers to long-term growth in many developing countries. Corruption stifles entrepreneurship and it siphons funding away from critical services, hurting the people who rely on those services. Poor transparency makes it difficult if not impossible to determine how governments raise and spend their funds, and therefore, how to hold governments accountable. And weak tax systems rob states and citizens of the resources needed. Why? Either because the taxes are not levied at all, or because it’s very easy for people to avoid paying them. Nobody likes paying taxes, but the countries around this table represented know that in the absence of funding public services, it’s very difficult to achieve the kind of outcomes for prosperity, growth, opportunity that we seek.
And further, Clinton appears to back Automatic Information Exchange when she points out:
And let’s be very clear – many wealthy people in low-income countries avoid taxes by hiding their money offshore, an outflow that by some estimates comes to more than $1 trillion a year. Now, to some degree, it is logical that low-income countries would raise less revenue internally than others. After all, some of the most common sources of income in developing countries are very difficult to tax, and building strong public institutions is a challenge for any nation. But we also have to acknowledge that wealthy countries share responsibility, so that is why, for instance, the United States is making it easy for other governments to know when their citizens are keeping money in American accounts.
On the latter point, as a reminder, see here for the FACT Coalition testimony by Rebecca Wilkins of Citizens for Tax Justice, for the Internal Revenue Service (IRS) hearing on May 18 on Guidance on Reporting Interest Paid to Non-resident Aliens.
There's more, but while you can read the full text here, we would like to highlight Clinton's remark:
We all have an interest in solving these problems together, to empower governments to collect precious revenue.
Our view entirely. Thank you Secretary of State Clinton.
The time is right to make these changes. In these ways, the UK can have a huge impact on global poverty.Stop tax dodging and shine a light on the payments companies make to governments.
This year, there are urgent opportunities for the UK government to press for more corporate transparency through UK legislation, at the European Union, and at the G20 meeting in November. We want to make sure that they seize these chances and enable poor communities to free themselves from poverty by raising funds for development from their own resources.Champion innovative, effective and fair financing for development
We want to see the UK government championing a Financial Transaction Tax (Robin Hood Tax) at the G20.Good stuff. And now, help yourself to a biscuit and pass the plate along. . .
All successful revolutions are the kicking in of a rotten door – JK Galbraith. . . which we feel helps explain the recent successes of the tax justice movement.
“Billions of pounds of taxpayers’ money is being diverted from essential public service provision that could benefit society as a whole. Often those that benefit most are registered in tax havens.”The report is demanding an inquiry into private prison finances.
From the Treasure Islands site:
Naomi Rovnick of the South China Morning Post has an excellent article looking at the use by Chinese of British Virgin Islands (BVI) vehicles. It is de rigeur to be in the BVI, it seems, as one British tax lawyer says:
Our [Chinese] clients say that you haven't really arrived if you don't have at least one BVI company to your name.
Ten percent of all "foreign" investment into China comes from the BVI, in fact - and growing explosively, as this document (see table 4) shows. Why so? Well, the reporter met quite a lot of obfuscation. The lawyers didn't want to tell her; one Scottish corporate lawyer merely said 'ask the Chinese clients'. But then she extracts this telling quote from U.S. lawyer Steve Dickinson, which says it all:
"The reason for this strong link between China and the BVI is a very simple form of tax avoidance. If you take the money straight back into China you pay capital gains [or income] tax. If you leave it in the BVI, wait a while then send it back, it can be made to look to the authorities like it is a foreign investment, and you don't pay tax on that."
That's a nice, frank quote, but Mr. Dickinson might like to straighten out the difference between tax avoidance - which by definition involves getting around the law without actually breaking it, and tax evasion, which is a criminal activity. What this lawyer is talking about is Chinese interests pretending to be foreign - essentially escaping tax, illegally, through offshore deception. This is illegal. It is tax evasion.
And this process of so-called round-tripping - where you take your money offshore, dress up in financial secrecy, then return back home to illegal harvest the tax breaks available only to foreigners - is one of the key raisons d'etre of many tax havens, worldwide. No wonder the BVI hosts over 900,000 corporations. And in case anyone suggests that this is just anecdote - the article also describes, lower down, how the (Chinese) regulator made a rare admission that mainlanders, not foreign investors, were responsible for much of this inflow.
It's not just about tax, and not just about China. There's the fraud element too, as Offshore Alert recently noted:
At least 10% of Chinese companies that have gone public on stock exchanges in the United States are engaged in fraud. The deals often involve establishing offshore holding companies in the British Virgin Islands, Cayman Islands, Samoa or another offshore jurisdiction in order to conceal illegal conduct. . . . although the companies are listed on U.S. markets, their business operations are in China and their holding companies are in a third country, creating a maze of regulatory and jurisdictional conflicts.
Now all this refers to inward investment into China. So how significant are tax havens with respect to outward investment from China? Well, the US-China Economic and Security Review Commission recently estimated that:
"In 2009, Hong Kong, the Cayman Islands, and the British Virgin Islands collectively received 79 percent of China’s net, nonfinancial FDI outflows. . . this makes the ultimate destination of Chinese overseas investment especially difficult to track."
And these aren't the only tax havens Chinese investors use - Singapore is another big one - so the true offshore figure must be even higher than that.
The SCMP article has some wonderful colour concerning one particular BVI address: No. 24 De Castro Street,
"a three-storey building where chickens are pecking their way along the driveway
The address hosts a photography studio, the BVI Tourist Board, and the office of corporate services firm Mossack Fonseca, which is the postal and legal home of an array of Hong Kong and Chinese companies, including -- get this -- the company that owns Hong Kong's International Finance Centre.
This is, perhaps, the BVI equivalent of Cayman's Ugland House, or 1209 Orange Street in Wilmington, Delaware, host to over 200,000 corporations. Read about my visit to Orange Street and Ugland House in Treasure Islands - the former looked, at least from the entrance, like a slightly disheveled pizza parlour. Back to BVI, and the unreality of it all deepens when we find out that
"the island's sole judge presides over multibillion-dollar corporate legal disputes and battles over wealth stored in BVI-incorporated family trusts that lawyers say increasingly involve heirs to Hong Kong fortunes."
A sole judge? Details like this that reveal -- more than any academic study can possibly tell you - how offshore financial services industries act as gigantic artificial shams, designed to help Chinese (and other) elites get around their own laws and taxes, in order to get ordinary Chinese (and other) citizens to pay the taxes and costs, and shoulder the risks. Offshore secrecy creates elite impunity, which in turn leads to (and is a feature of) poor governance and authoritarian tendencies. (See more on this here.)
The article also mentions Treasure Islands, looking at the history of the emergence of tax havenry in the Caribbean, and offering one more choice morsel:
The use of Caribbean havens took off in Hong Kong in the lead-up to the handover.
So when the Chinese took over Hong Kong, Britain had a network of other jurisdictions ready to keep the dirty business, and the links to the City of London, ticking along just as before.
And as for the hopeless ineffectiveness of a new information-exchange agreement that China signed with the BVI in 2009 - after which BVI companies were allowed to list on the Hong Kong Stock Exchange the article provides a wonderful quote:
"Ha ha!", he scoffs. "They are probably now being told by their BVI counterparts that the owner of a BVI company is an anonymous Cayman Islands company." (Cayman companies don't have to say who their shareholders are either.)
It all confirms what I, and others I've worked with, have long been saying.
(TJN adds: recently, someone in Hong Kong sent us an email including the sentence "The vast majority of HK listed companies say in their annual reports that they have BVI incorporated structures, but they usually do not disclose what these subsidiaries hold" and asking more general questions. For those more technically-minded, a TJN senior adviser responded for some reasons why one might use a BVI company instead of a Cayman one:
(1) NON-LISTED COMPANY
If the investor is a China based person, the use of an offshore company permits "round tripping" and theoretically hides the identity of the beneficial owner from the Chinese authorities. As you know, the volume of "offshore capital" of persons from China is extremely large. The British Virgin Islands is used most frequently as a place of incorporation in such situations because incorporation in the British Virgin Islands can be done very rapidly, relatively inexpensively, and that jurisdiction is English based and does not have the stigma of "lawlessness" that Panama had.
Other jurisdictions such as the Cayman Islands could be used but the Cayman Islands is more costly and not always so efficient as the British Virgin Islands. The British Virgin Islands is really the "capital" of offshore incorporations. And corporate service providers in the British Virgin Islands have probably been very aggressive in marketing this service/product. Most of the large offshore multinational law firms have offices in the British Virgin Islands. For example, the large Cayman based law firms now have offices in the British Virgin Islands. From a tax point of view, the British Virgin Islands does not offer any tax benefits different from the tax benefits offered by other offshore jurisdictions.
(2) LISTED COMPANIESThe British Virgin Island company could be used by the Group in this situation without having possible corporate law/securities law issues/problems of using the Cayman Listed Company, and without having corporate law and/or tax issues/problems of using the Hong Kong company. For example, the Group might want to carry out other business ventures, or hold other investments, which it does not want at the Listed Company level nor at the level of the Hong Kong company.)
The Cayman Islands is normally used as the Listed Company for public offerings, or for large more complicated financings when an offshore vehicle is used, because (a) Cayman has a much more sophisticated legal/financial structure and expertise; (b ) Cayman is a financial center while the British Virgin Islands is more of an incorporation center. That is why the listed company is almost always a Cayman corporation.
The reasons for a British Virgin Island company being in the chain of ownership is not always easy to determine. One primary reason is that the Group may want an intermediate offshore holding company below the Listed Company in Cayman but above the Hong Kong company, such as the British Virgin Island corporation in the structure that you mention in your email, in order to be able to hold other assets, or engage in offshore transactions, without the use of the Listed Company and without the use of the Hong Kong company.
"any suggestion that current law disadvantages U.S. multinational firms in respect of the effective foreign tax rates they suffer, when compared with their territorial-based competitors," is "inconsistent with the data."In other words, all those claims that the U.S' current corporate income tax rates are somehow 'uncompetitive' are, at least if you look at the data, bunk. Second, he concludes that
"Stateless income privileges multinational firms over domestic ones by offering the former the prospect of capturing “tax rents” – low-risk inframarginal returns derived by moving income from high-tax foreign countries to low-tax ones"Which is as we have argued for years. And there are further conclusions:
"the paper ultimately concludes by recommending a worldwide tax consolidation solution."This is similar to recommendations recently put forward by Citizens for Tax Justice in the U.S. Kleinbard's use of the term 'consolidation' does not necessarily suggest that he favours formula allocation approaches (something that the OECD opposes, and which TJN generally favours. See more on this here.) However, he does argue that
"a powerful case can be made that a well-ordered territorial tax system necessarily implies the systematic application of formulary apportionment rules for at least some activities of a multinational group."Pocket Explanation: territorial vs. worldwide Under a 'territorial' system, countries don't tax income earned outside their borders; with a 'worldwide' system, companies are taxed on all income regardless of where in the world it is earned. (In practice, most countries have a mix of the two. The United States has a nominally worldwide system, but the fact that it often lets companies 'defer' tax by keeping it offshore makes it what Kleinbard calls a "quasi-territorial" tax system, or "an ersatz variant on territorial systems".) Tax havens generally have highly 'territorial' systems, though many supposedly 'onshore' economies do too - and territorial systems generally make it easier for companies to cut their tax bills by shifting profits offshore under these systems.
“They are using arguments like ‘competitiveness’ and ‘regulatory burden.’ What they are really afraid of is they are going to lose their tax-evading customers."This is from a story in The Hill about the lobbying efforts surrounding the U.S. Foreign Account Tax Compliance Act (FATCA), which aims to crack down on U.S. tax cheats, and which will come into force in 2013.
TJN has repeatedly written about Switzerland’s divide-and-rule strategy to undermine the European Union’sefforts to construct a properly functioning system of automatic information exchange. The Swiss Finance Ministry, together with its banks, has deployed a strategy to head off efforts to end financial secrecy, with a system that it calls the “final withholding tax”. This is designed to preserve banking secrecy while buying off the most vocal and powerful foreign governments by transferring to them the fruits of a final tax on foreign citizens’ financial account’s income (details here).
The German-language Swiss newspaper Tagesanzeiger is now reporting on spokespeople from the German and Swiss Finance Ministries, signalling their willingness soon to finalise the negotiations. Last week, German Finance Minister Schäuble caused confusion saying that this would happen by the end of 2011, while Swiss Finance Ministry spokesman Mario Tuor said it would happen within two months.
Yesterday, the foreign ministers of both countries followed suit with a PR tour, keen to portray an image of happily restored relationships, with and end to the acrimonious fall-out over the banking secrecy scandal under former German Minister of Finance Steinbrück.
Two fresh and particularly worrying details, though, now stand out.
The first involves technical matters. It seems that formerly hidden funds that have been on deposit for at least 10 years will face a mere 20% tax rate -- with a proportional discount for deposits that have been held for a shorter period. The tax rate for future interest income that has been legalised this was is said to be 26% -- far lower than the 35% withholding tax agreed in the third stage of the European Savings Tax Directive, which begins in a few weeks. (July 2011).
As we have often argued, this approach of applying a final withholding tax, instead of having proper transparency, cementing two-tier justice in two ways. First, it solidifies the flat taxation of interest income, in contrast to labour income which is taxed progressively. Second, those evading their taxes through Switzerland receive privileged treatment as compared to those who have been evading taxes, say, through the United States. Moreover, the rules for voluntary disclosure for tax evasion have only recently been tightened in Germany - and now this treaty offers routes to circumvent these changes. That’s absurd and creates all sorts of perverse incentives. The Tagesanzeiger reports:
“Interesting, too, is the question of how one should react to clients who suddenly bring their money from offshore centres to Switzerland and intend to legalize the money under the discounted rate. The rate of 20% only applies for monies that are here for 10 years; for what arrived later, accordingly the rate will be even lower.”
The withholding tax appears to create the incentive for tax dodgers to move their hidden money from other tax havens to Switzerland, leave it there for a while, then be taxed only at the preferential rate - and then get exonerated from any criminal prosecution!
They reduce the risk of their assets being discovered in other jurisdictions, as Swiss Secrecy is being preserved, being offered a safe refuge from legal consequences. Meanwhile, Switzerland's and Germany's governments are strutting around saying how cooperative they have now become bringing tax revenue back to the German people.
Apparently, such movements of funds have already happened in response to the announcement of such a withholding tax scheme and is a feature German’s bureaucrats dislike. In response, they came up with the idea of allowing a “simplified” upon request information exchange in cases of fresh black money. Now, it begs the question how this should be implemented: Will Germany deploy buses full of tax inspectors who are sniffing in UBS & Co.’s IT-systems to find out about if a German taxpayer's bank balance is fresh or old, and therefore the request can be simplified, or not? What if she or he took a few million out of the account a few years ago, and now refilled to the original sum: is that fresh money? This process is a declaration of bankruptcy of sanity and reason.
The truth is: nobody can prevent that an institutionalized exonerating withholding tax will be abused badly. The naivety is unsurpassable with which Germany appears to be willing to hand over taxation capacity to a country whose banks have an outstanding record of notoriously helping to break foreign country’s laws. Richard Murphy comments on the corresponding treaty between the UK and Switzerland: “Let’s just call it an endorsement of criminality, or a slap in the face for honest taxpayers” .
The second kind of novelty relates to the bigger strategic picture. As we have argued before, these negotiations by Switzerland are intended to weaken the common EU-position. It is likely that they played a part in the recent fallout by Italy’s Finance Minister Tremonti during the last ECOFIN-session, where he ranted against the Swiss, saying they wrote the EU-Savings Tax Proposal (some preceding history here ). The harmful impact of the negotiations with the Swiss on the European project has been confirmed indirectly by German Foreign Minister Westerwelle’s response on a question has been asked yesterday by a journalist. Again, the Tagesanzeiger notes (rough TJN translation):
“Asked about the amounts of the withholding tax, to be transferred in the future to the German tax coffers, Calmy-Rey and Westerwelle remained evasive.
Similarly, on the question about the consequences of the agreement between Switzerland and Germany on the negotiations at the EU-level, they did not want to comment: “You want to know more than I am prepared to say”, said Westerwelle answering the corresponding question of a journalist.”
Sometimes silence speaks volumes (and good on Westerwelle for being that honest!). Now, the real shocking news is to come. The same article announces a meeting of German-speaking countries next Wednesday in Vaduz, Liechtenstein. The Ministers of Finance of Germany, Liechtenstein, Austria, Luxembourg, and Switzerland will meet up there. This group includes the countries in Europe who continue to cling most tightly to banking secrecy. This very much looks like a follow-up on the shiny PR-hand-shaking-event between Westerwelle and Calmy-Rey yesterday to enthrone a new Entente. It has the taste of old Germanic banking secrecy connections revived to replace European solidarity. This does not bode a bright future, especially given Germany’s past.
Just because dirty money is driven through an inter-state laundry-“Autobahn” does not make it clean. Citizens will easily understand this.
"The OECD’s proposed Global Forum for transfer pricing, which will institutionalise the involvement of developing countries, may detract from the UN’s tax committee and the work it is doing for developing countries"As the article notes, developing countries have more allegiance to the UN because the OECD is seen as an organisation aimed at developed countries. TP Week carries this summarising sentence:
"In response to the claims the OECD is competing with the UN for time and resources, Owens said the OECD contributes extensively to the UN work on taxation."we might mischievously re-summarise the last 10 words of that sentence like this:
" . . . the OECD interferes extensively with the UN work on taxation."Which is essentially saying the same thing. But it supports what we've been saying all along.
"The OECD is comprised of 30 wealthy countries and its origins are in Europe,” said Glenn DeSouza of Baker & McKenzie in China. “As such, its views and biases tend to be representative of the wealthy economies who now see jobs migrating to China and India. The OECD bus is driven by the wealthy nations. . . . China and India are passengers.”And, as we mentioned, developing countries are finding their voice. Interesting times, indeed.
International financial centres (IFCs) will not survive unless they join forces to create a united body to articulate the benefits they provide the global economy.Well, there are plenty of bodies - like STEP or the Center for Freedom and Prosperity - that are already doing that. We wouldn't be surprised to see more of them. There is more from him:
Over the coming years, Mr Norris expects economic powers to develop preferences for certain IFCs. “I can see Brazil using Panama, India using Mauritius, China using Macau and the US using whoever they want,” he said.Well, that's already happening - and it has been a pattern for a long time. And he added:
“The UK will destroy their financial centres and then discover that they were the engines that kept things going.”Well, that's not quite our analysis, but we can see what he's getting at. First, we aren't confident - though we hope he's right - that the UK will "destroy" its financial centres. The City of London, which is fed by Britain's offshore network, is too powerful to think this could happen any time soon. On the "they were the engines that kept things going" - we don't disagree with that - although that requires us not to unpack the word "things" here. What "things" refers to is the capture of UK politics by the City of London and by the City of London Corporation; too-big-to-fail banks; what Andrew Haldane of the Bank of England called the financial "doom loop;" the Dutch Disease as applied to finance, the appalling inequality and impoverishment of lives for ordinary British people, the decline of British manufacturing and agriculture - and that sort of "thing." Yes, he's right - the British tax havens have been an engine for all this. He added
IFCs not aligned to any major power would likely disappear, he added.This is interesting. It may be true, and it underlines that points made by TJN and in Treasure Islands, that we aren't talking about a bunch of independent sovereign states here, but about the projects of elites in major powers.