Tuesday, May 31, 2011

Priceless

"Alex" is wonderful satire, in The UK's The Telegraph, on current topics in the world of international finance.

This one is priceless. We hope The Telegraph do not mind us reproducing it in full.


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Links May 31

India to quantify black money, exhaustive study underway AML-CFT
May 29 - Amid mounting pressure to unearth black money, the government has commissioned an in-depth study to quantify unaccounted income and wealth stashed within and outside the country in 16 months. The study will also suggest ways to detect and prevent unaccounted money, bringing it into the tax net. Hat tip Markus Meinzer.

Review Petroleum and Mining Contracts GhanaWeb

May 30 - Reporting on the "communiqué adopted at a Strategic Planning Session of the Tax Justice Network Ghana held last week in Kumasi. The session, which was attended by representatives of civil society organizations and their partners, was coordinated by the Integrated Social Development Centre (ISODEC)."

Press Release: Tackling illicit capital flows begins with the recognition that it is against national interest
UN Economic Commission for Africa
May 18 - Reporting from the Tax and Development Conference held in Addis Ababa - "Dereje Alemayehu, Christian Aid Country Manager for East Africa and Chair of the Tax Justice Network-Africa said that the extent of tax leakages is absolutely alarming and dangerous, not just for Africa but for most developing countries."

Namibia looking for mineral windfall tax International Business Times

May 17 - Namibia is looking to introduce a minerals windfall tax to enable the state to benefit more from the country's vast mineral resources. The move is the latest by Namibia, home to some of the world's largest uranium reserves, to increase its share of the money made by mining companies.

Transfer pricing ‘deprives’ the poor Business Day

May 6 - Transfer pricing is an increasingly high-risk area in Africa and it is vital that the tax authorities co-operate and share best practice, says Logan Wort, executive secretary of the African Tax Administration Forum (Ataf), speaking at the Deloitte Africa Tax Summit held in Johannesburg earlier this month. See also: Africa's tax systems face challenges Business Day.

Bid to block European Investment Bank loans to newly-floated Glencore Daily Mail

May 25 - Further news on the Glencore story we have been blogging - as the company was floated on the London Stock Exchange, a group of 50 MEPs were submitting an open letter to the European Investment Bank:" ‘Considering the problems regarding transparency and good governance in most of these countries, investments in the mining sector [are] a hazardous venture,’ they point out"
- the European Investment Bank granted Glencore a development loan of 48 million euros in 2005.

See also:
Zambia: Who profits from copper? France5
(In French)
May 31 - MEP Eva Joly is cited as denouncing the Glencore scandal, observing that within a few decades we will view this type of scenario with the same eyes as we saw colonization and slavery.

Argentina: Tax Reform Needed: Its Guidelines IADE (In Spanish)
May 26 - Jorge Gaggero presents an outline of reform aimed at addressing crucial issues of challenge of fiscal policy: the macroeconomic, the public goods and redistributing income, and competitiveness. Hat tip Markus Meinzer.


Switzerland: The double role of public prosecutor Damiel Zapelli LeTemps (In French)
May 30 - David LeLoup reports on how the Swiss public prosecutor is a director of two active Panamian shell companies.
How can one be both a party to an opaque company registered in a tax haven, and magistrate in charge of tracking fraud and money laundering?

An E-Mail from Athens naked capitalism
May 30 - "Wow, this is what debt slavery looks like on a national level. The Financial Times reports that a new austerity package is about to be foisted on Greece. It amounts to asset stripping and a serious curtailment of national sovereignty." Hat tip The Cynical Tendency.

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Crying Wolf: Why oil companies should be taxed on windfalls

Oil companies, like banks, are prone to threatening behaviour, especially when it comes to taxing their gargantuan profits. Even when oil prices peak at over $100 per barrel, with production costs at only a tiny fraction of that price, they howl with anger at any attempt to tax what are undoubtedly windfall profits. When UK Chancellor of the Exchequer George Osborne proposed a Fair Fuel Stabiliser which cuts in once oil prices top $75 per barrel (with revenues offset against lower duty rates on retail petrol and diesel sales), Malcolm Webb of the Oil and Gas UK lobby group threatened that 15,000 jobs were being put at risk, and over £12 billion of investment was potentially in doubt because of loss of investor confidence.

Webb's comments are nonsensical, especially at a time when oil and gas production has seldom been so profitable. Any notion that investor confidence is in the slightest way disturbed needs to be put in context, which is what a new report by Greenpeace and Platform sets out to do.

First, despite the volatility of global commodity markets, prices remain historically high and are unlikely to fall below $75 in the foreseeable future: demand remains high and increasing; supply is constrained and the conflicts in the Middle East and North Africa continue to cast uncertainty over production in those regions.

Second, peak oil is imminent and western oil companies are forced to compete with powerful players from Asia and Latin America. This means that any talk about withdrawing investment from the North Sea region is just that, talk. Threats to reduce investment in upstream production look even less convincing when considered in the context of a 2009 oil industry survey which placed the UK at the top as the preferred country to invest in.

Third, claims made by oil and gas producers about uncompetitive tax regimes need to be taken with a double pinch of salt. In the North Sea province, wells drilled since 1993 are taxed at 62 percent on the UK side and 78 percent on the Norwegian side. Both sides share similar geologies. These rates are by no means high by international standards: the Venezuelan government imposes a rate of 95 percent when oil prices exceed $100 per barrel.

Oil and gas are natural resources. Production costs vary considerably from one field to the next, sometimes being less that $5 per barrel, in other cases exceeding $35 per barrel. In other words, production costs bear little or no relation to the prices achieved on the world markets (hovering around $100 pb at time of writing).

Oil companies boast about record profits as if this was somehow due to the innate wisdom and entrepreneurial flare of their directors. Earlier this year, announcing annual profits of $18.6 billion, Shell's chief executive Peter Voser bragged that: "There is more to come from Shell." The fact that profits had doubled over the preceding 12 months had little to do with Voser's business acumen and much to do with the imbalance between global supply and demand. Governments are absolutely within their rights to extract some of the excess unearned income from the oil and gas producers for recycling within the economy. They can, and should, see down the oil company bullies.

Read the report by Greenpeace and Platform here.

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Friday, May 27, 2011

G8 Communiqué - weasel words and little initiative

With the global recovery wobbling on many fronts and dissent spilling out onto the streets of cities across the Middle East and Europe, the G8 has been deliberating in Deauville, France, and has issued a communiqué that can only be summarised as weak, weak, weak.

On the one hand they try to talk things up: "The global recovery is gaining strength and is becoming more self-sustained", while having to accept the reality check that: "downside risks remain, and internal and external imbalances are still a concern." This is an understatement. Debt burdens cripple governments, companies and households. Consumer demand is at best sluggish and corporate investment weak. This is no time to be cutting government expenditure, but that's exactly what G8 offers up.

And the news is no better on regulation, governance and accountability. In respect of the latter we are not encouraged by paragraph 62 under the relevant section:

Para 62: We will improve transparency of our aid information. In particular, we will make further efforts on publishing information on allocations, expenditure and results. Information will be provided in accessible formats that deliver on the needs of partner countries and citizens. In this respect, it is important that partner countries also improve transparency. We recognise that individual countries will proceed at their own pace but we will lead by example through increasing transparency in this area and work with others in advance of the Fourth High Level Forum in Korea in November 2011. We will continue to support transparency in other areas including through the full implementation of the Extractive Industry Transparency Initiative (EITI), which we all support, We call on all countries, notably resource-rich countries, and extractive companies to join or support this initiative. We also welcome the complementary efforts to increase revenue transparency, and commit to setting in place transparency laws and regulations or to promoting voluntary standards that require or encourage oil, gas, and mining companies to disclose the payments they make to governments.

Of course transparency on aid information is important, but the increasing trend to funnel aid through private financial intermediaries is a step in the wrong direction, and muddies the waters around the role of aid and who benefits from it. The statement about the EITI and revenue transparency is, well, weak, and the mention of voluntary standards provides a cop-out for countries and companies happy with the status quo.

And while it holds no surprises, paragraph 63 isn't something to get excited about:

Para 63: We will continue to work with the OECD and in other fora to foster accountability processes and call on all donors to engage in similar exercises.

Yes, yes. But we've heard this before, and its hard to get excited about the OECD processes which are just so minimal and ineffective. For example, attempts last year to introduce the concept of country-by-country reporting into the OECD guidelines for multinational enterprises just fell by the wayside, and the Global Forum peer review process (yes, we know its more of a G20 process rather than G8) just doesn't cut the mustard.

They could try harder, but they won't. This is why civil society needs to take the initiative here and simply drive forwards with its own proposals. G8 politicians just haven't got what it takes.


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Mauritius yields to Indian pressure on information exchange

The Economic Times of India has reported that for the first time ever the Mauritian government has shared tax information with the Indian Tax Department.

India, which is in the process of renegotiating its existing double taxation avoidance agreement with Mauritius to include exchange of information clauses, is increasingly concerned about the volume of inwards investment routed through Mauritius, a secrecy jurisdiction which TJN awarded an opacity score of 96 percent in 2009 on the basis of its weak anti-money laundering arrangements, strong banking secrecy and poor commitment to international cooperation.

Opacity contributes to making Mauritius a useful centre for 'round-tripping' Indian capital shifted offshore and disguised behind offshore companies to be returned to India in the guise of foreign direct investment. The Economic Times reports that Mauritius accounted for about 42 per cent or USD 54.22 billion of the total USD 130 billion worth of foreign direct investment (FDI) in the country since April 2000. FDI receives tax and regulatory breaks that are typically not available to domestic investors, and holding capital offshore enables India's wealthy to evade tax on stunning scale.

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Treasure Islands praised by Cayman supremo

Congratulations to best-selling author of Treasure Islands, TJN's very own Nick Shaxson, on being honoured by a Cayman Islands literature prize. Announcing the award, the Chair of the Cayman Islands Stock Exchange, Tony Travers - who features in the book - described Treasure Islands as a “sublimely entertaining account of bad guys, tax wrongdoers and hidden treasure". Having now apparently read the book, Mr Travers has joined the chorus of reviewers who sing its praises, saying: “It’s a rattling good light read, hugely entertaining and, my goodness, very, very, humorous.”

As recently as January 2011, when the book was launched, Travers described Nick Shaxson as an "imbecile". Has he had some kind of Damescene conversion? Or was he trying to be humorous? If the latter, he hasn't done the Cayman tax dodging industry any favours: first rule of public relations is do nothing that might draw attention to your opponent's arguments.

Own goal, Tony.

Postscript: Nick Shaxson is currently on vacation but will doubtlessly be in touch to nominate his prefered charity to receive the prize.

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Thursday, May 26, 2011

U.S. Secretary of State Clinton gets it on tax and development

In her address to the OECD Session on Development and Gender, Secretary of State Clinton made some very welcome remarks:

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.

Clinton then observes:

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.

Now, we have stated vehemently - see here, here and here - that the UN Tax Committee is the right forum for reform of global tax dodging, particularly with regard to developing nations. So we would like to see the implementation of Clinton's statement "countries and international organizations like the OECD working together" to be the cooperation of the OECD with the UN and with developing countries instead of their constant fig-leafism.

Clinton continues:

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.


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Links May 26

Cat-and-mouse dance in tax evasion struggle Swissinfo
May 20 - On a story we have been blogging - see here. Switzerland’s bid to rid itself of the tax haven mantle has resulted in a delicate game of strategy with the European Union and individual EU member states. At stake is Swiss banking secrecy, Switzerland’s sovereignty as a bilateral EU partner, countless billions of assets parked in Swiss banks and the multiple millions this wealth should be contributing to the tax coffers of other countries.


U.S.: Stimulus Contactors Who Cheat on Their Taxes: What Happened? U.S. Permanent Subcommittee on Investigations

May 24 - More than $24 billion in stimulus funds went to contractors and grantees who owed the government hundreds of millions of dollars in tax debts, according to a new report from the Government Accountability Office (GAO). GAO identified 3,700 contractors and grantees who received stimulus funds, despite collectively owing the government $757 million in back taxes.

MEPs call for moratorium on public financing of mining projects Eurodad

May 24 - In an open letter addressed to the EU president, the EU presidency and the European commission, 50 MEPs from 4 different political parties call for “a moratorium on EU public financing for mining projects until adequate standards and regulations are in place.” See also: European Parliament makes clear it wants full country-by-country reporting Tax Research UK

In a first, Mauritius gives details of black money The Times of India

May 26 - Yielding under "pressure", Mauritius has for the first time provided bank details of a person being investigated by the Income Tax Department (ITD) for tax evasion and money laundering. The Central Board of Direct Taxes (CBDT) is in favour of re-negotiation of the tax treaty with Mauritius so that India could have access to banking details besides tax-related information.

Armenia: Sarkisian Warns Big Business Over Tax Evasion, Unfair Competition
azatutyun.am
May 26 - President Serzh Sarkisian warned Armenia’s leading entrepreneurs on Thursday against evading taxes and obstructing competition. He said, “It is unacceptable when an entrepreneur spends a lot of time thinking about and developing mechanisms for avoiding taxes or abuses his dominant positions in markets in order to make excessive profits”.

HSBC and Goldman Sachs held $335m of Libyan state oil money Global Witness
May 26 - Global Witness has been leaked a draft presentation that appears to show the investment position for the Libyan Investment Authority (LIA) as of 30 June 2010, which stood at $53 billion. The information shows the diversity of Libyan assets held by major financial institutions. “It is completely absurd that banks like HSBC and Goldman Sachs can hide behind customer confidentiality in a case like this."

Tough Swiss Regs Induce UBS to Consider Glass Steagall Lite Partition, So Risky Ops May Become US Problem naked capitalism

May 26 - Switzerland recognizes that it cannot credibly backstop banks whose assets are more than eight times the country’s GDP. UBS apparently plans to partition the bank in a Glass-Steagall lite split, leaving the traditional banking operations in Switzerland and putting the investment bank in a separate legal entity outside Switzerland. The Wall Street Journal questions whether this will work.
Hat tip The Cynical Tendency.

Conviction of Lawyers in Tax Shelter Case Seen as Deterrent New York Law Journal

May 26 - The conviction of four people in the Jenkens & Gilchrist/BDO Seidman tax shelter fraud case on Tuesday continues a long run of aggressive enforcement by prosecutors in New York against lawyers and other promoters of transactions that lack economic substance and are meant solely to generate paper losses. "The government has sent a very strong message in this area and it has been heard."

Offshore Tax Crackdown Scorecard: UBS, Credit Suisse, HSBC Bloomberg

May 23 - The U.S. extended its crackdown on offshore tax evasion last week, charging a further tax cheat with failing to report his offshore account at HSBC Holdings Plc (HSBA) to U.S. authorities. The article provides a handy scorecard on U.S. cases.

Calvin Johnson's Shelf Project on corporate compensatory options A taxing matter

May 18 -
Compensatory stock options were touted as a way to align managers' interests with shareholders' interests. It turns out that they give managers even more reason to juice up the value of the stock in "timely" fashion, in order to give themselves more pay at shareholders' expense. Johnson suggests ending a special tax exemption for performance-based stock options.

America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S

Report of Jan 2011 - This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980- 2008.

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IMF: time for change

While European countries get more deeply mired in the mess caused by the financial crisis, leading countries from outside Europe and North America are clearly signalling that they do not want yet another European to replace Dominique Strauss-Kahn at the International Monetary Fund.

Senior officials from Brazil, Russia, India, China and South Africa have just released the following statement, which we support on the grounds that the IMF has, for far too long, pushed fiscal programmes that are profoundly harmful to the social and economic sustainability of the countries where they operate. Radical change is needed at the IMF, and we don't see it coming from the leading European candidate, Mme Lagarde.

Press Release No. 11/195

We, as Executive Directors representing Brazil, Russia, India, China and South Africa in the International Monetary Fund (IMF), have the following common understanding concerning the selection of the next Managing Director of the International Monetary Fund:

1) The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.

2) The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

3) Accordingly, several international agreements have called for a truly transparent, merit-based and competitive process for the selection of the Managing Director of the IMF and other senior positions in the Bretton Woods institutions. This requires abandoning the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe. We are concerned with public statements made recently by high-level European officials to the effect that the position of Managing Director should continue to be occupied by a European.

4) These statements contradict public announcements made in 2007, at the time of the selection of Mr. Strauss-Kahn, when Mr. Jean-Claude Junker, president of the Euro group, declared that “the next managing director will certainly not be a European” and that “in the Euro group and among EU finance ministers, everyone is aware that Strauss-Kahn will probably be the last European to become director of the IMF in the foreseeable future”.

5) We believe that, if the Fund is to have credibility and legitimacy, its Managing Director should be selected after broad consultation with the membership. It should result in the most competent person being appointed as Managing Director, regardless of his or her nationality. We also believe that adequate representation of emerging market and developing members in the Fund’s management is critical to its legitimacy and effectiveness.

6) The next Managing Director of the Fund should not only be a strongly qualified person, with solid technical background and political acumen, but also a person that is committed to continuing the process of change and reform of the institution so as to adapt it to the new realities of the world economy.

Aleksei Mozhin, Executive Director (Russia)

Arvind Virmani, Executive Director (India)

Jianxiong He, Executive Director (China)

Moeketsi Majoro, Executive Director representing South Africa

Paulo Nogueira Batista Jr., Executive Director (Brazil)

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Tea Time For Change

Enjoy tea but don't like the anti-tax Tea Party?

Here's an antidote.















Our friends at Action Aid, Christian Aid, Oxfam and other UK-based non-governmental organisations, are organising an opportunity to sit down with Members of Parliament on Thursday 9th June.

And tax justice is high on the agenda of things to discuss, as the following blurb makes clear:

What are we asking for?

Across the globe billions of people live in poverty. Over 1 billion people cannot access clean water and more than 2.5 billion lack basic sanitation. It shouldn’t be this way.

Aid is essential, but by itself, aid will not end poverty. If poor countries are to prosper we also need changes to the rules of the game. We need multinational companies to open up the books on what they pay in poor countries, and to stop avoiding payments through tax havens. We need innovative ways of funding development like financial transaction taxes (the Robin Hood Tax).

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. . .

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Tuesday, May 24, 2011

Quote of the day

Another in an occasional series:
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.

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Tax dodging jail owners

More from the Department of You-Couldn't-Make-It-Up:

Britain's Daily Mirror is reporting that the owners of private jails are shifting their profits to offshore tax havens to dodge tax. Quoting a Prison Officer's Association report, the Mirror notes:
“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.

It is almost as crazy as the deal to let a tax-avoiding Bermuda company run the offices of . . . . Britain's tax authorities.

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Monday, May 23, 2011

Taxing multinational banks

The nature of international banking means that tax authorities have particular problems when trying to tax banks. Banks provide a range of intangible services and products to their international clients. Client lists are shared across their organisations and banks move in response to client demands. Banks operate an integrated trading model which allows responsibility for the "book" to move from a branch in one jurisdiction to the next as markets close and open in different time zones. The opportunities for profits shifting are endless, and its therefore not surprising that banks are the biggest users of tax havens.

The May 2011 edition of the Journal of International Taxation (sadly not available online) carries an important article on taxing multinational banks by Kerrie Sadiq of the Taxation Law and Policy Research Institute at Monash University, Australia. Sadiq argues that the exclusive characteristics of multinational banks create a situation whereby the prevailing system of taxing business, based on using transfer pricing rules to assign income to the source country where the income producing activities were based in practice, fails to take account of the way in which banks operate in practice:

"The current source and transfer price regime attempts to assign a geographical source to income by looking at the location of the income producing activities. Because of the legal principles that have developed, however, the geographical source to which the income is allocated may not be the location of the income producing activities. For example, parts of the multinational bank will often be allocated along functional lines, such as certain jurisdictions having the responsibility for trading when the market is open."

This reflects the reality of globalised financial markets. And rather than trying to tweak the unworkable transfer pricing regime which attempts to allocate income on the basis of wholly artificial legal forms, which unsurprisingly involve complex structures spanning multiplicities of subsidiaries located in tax havens, Sadiq proposes a shift to unitary taxation which divides the profits of the entire global entity and apportions them according to an economically justifiable formula.

Despite significant implementation and enforcement hurdles, Sadiq argues, formulary apportionment would allow a more equitable distribution of taxing rights between the relevant jurisdictions while also allowing the banks to shape their commercial operations in ways that are tax neutral (i.e. commercial decisions are driven by genuine economic factors rather than possibilities for tax arbitrage).

Unitary taxation offers a number of distinct advantages over the current system. It would go a long way towards overcoming the impossibility of applying the hopeless Arm's Length Principle to transfer pricing within banks (as Sadiq notes: "Placing a value on the use of (a) client list for transfer pricing purposes is difficult given that it is firm specific and, therefore, has no arm's length value"). It would also eliminate the possibility of double taxation of income, since the tax base to be divvied up between jurisdictions cannot exceed 100 percent of taxable profits. Above all, Sadiq argues, the unitary taxation model "provides greater alignment with the unique features of (multinational) banks."

This is a hugely important topic; absolutely central to TJN's goal of achieving inter-nation equity of taxation. The current article in the Journal of International Taxation is a two-parter. The second part will follow in a later edition and will pick up on the practical implications of adopting a unitary tax based on formulary apportionment as the best available system for taxing multinational banks. We will return to the subject once that article has been published, but meantime recommend you lay your hands on part one (published in the May 2011 edition).

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On hissy fits and taxing the rich

Do tax hikes cause high income earners to work less? For some, it's an article of faith that increasing taxes on rich people will yield less revenue because they'll have collective hissy fits and find ways to refuse to pay, legally or not. This was the background to George W. Bush's tax cuts programme -- though there's little evidence to suggest it achieved its objectives.

For true devotees of tax cuts for the rich, a large literature on what academics like to call the elasticity of taxable income (ETI) provides some empirical evidence backing the idea that rich people are more sensitive to tax than other members of society are.

That isn't an argument for feeding them endless tax breaks, in the vague hope this might incentivise them to get out of bed in the morning. TJN is not the first to challenge the widely held view that the best way to incentivise poor people is to pay them less, while the best way to incentivise rich people is to pay them more . . . We share J. Paul Getty's view that "Money is like manure. You have to spread it around or it smells."

Kevin Drum explores this issue in his latest blog on the Mother Jones site, and concludes that while higher taxes might indeed upset a few (but not all) billionaires and millionaires, "the rest of the economy would do just fine." He cites the work of economists Emmanuel Saez, Joel Slemrod, and Seth Giertz, who reviewed the ETI literature in 2010 and concluded:

"....While there is compelling U.S. evidence of strong behavioral responses to taxation at the upper end of the distribution around the main tax reform episodes since 1980, in all cases those responses [are related to] timing and avoidance. In contrast, there is no compelling evidence to date of real economic responses to tax rates....If behavioral responses to taxation are large in the current tax system, the best policy response would not be to lower tax rates, but instead broaden the tax base and eliminate avoidance opportunities to lower the size of behavioral responses."

Well we won't be arguing with that conclusion. Read Drum's blog here.

Hat tip: James McLaren

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Why do so many Chinese companies use the BVI?

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 COMPANIES
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.

The 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.)

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Sunday, May 22, 2011

U.S. tax expert recommends worldwide tax system

Update: this has now been updated, with better links and, in particular, the addition of the crucial words in bold here: "Kleinbard's use of the term 'consolidation' does not necessarily suggest that he favours formula allocation approaches."

Professor Ed Kleinbard of the University of Southern California, a high-profile tax commentator, has looked at the issue of territorial versus worldwide taxation - an issue we blogged recently after a top U.S. Republican called for the U.S. to become more like a tax haven and adopt a "territorial" tax system (see our pocket explanation of the two different systems at the bottom of this blog).

To cut to the chase, Kleinbard in two papers (part 1 here and Part 2 here) looks at the huge volumes of "stateless income" (which is, by and large, offshore income subject to zero or very low tax rates - and there is about US$1 trillion of it out there for U.S. firms alone) and considers what the implications are for the U.S. tax system. He notes that "the pervasive presence of stateless income tax planning changes everything" and concludes a couple of things. First, that:
"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:
  • a systematic bias towards offshore rather than domestic investment and in favor of investment in high-tax foreign countries (TJN: because it's far easier for them to do their transfer mispricing out of other countries than out of the U.S., which for all its faults has a sophisticated revenue service.)
  • the erosion of the U.S. domestic tax base through debt-financed tax arbitrage (TJN: which we've blogged often before)
  • Many instances of deadweight loss ( TJN: as a result of all the distortions and expensive tax gymnastics required for "manning the various dials and gauges of the tax planning mechanisms" - so much for the so-called 'efficiency' of offshore that their defenders keep banging on about),
  • the lock-out phenomenon, where U.S. firms accumulate vast earnings outside the U.S. - more than they profitably can redeploy, to the great frustration of their shareholders, who would prefer that the cash be distributed to them ("shareholders are tantalized by glimpses of enormous cash hoards just out of their reach.")
It also looks at the failure of critical assumptions that the defenders of territorial tax systems make, and finally:
"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.

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Quote of the week

From Rebecca Wilkins of Citizens for Tax Justice:
“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.

There is something rather unsavoury about a process whereby the U.S. puts in place measures to crack down on widespread (criminal) tax evasion, then finding that the Australian Bankers' Association; Barclays Capital of the UK; Private Client Investment Managers & Stockbrokers of London; the Investment Funds Institute of Canada; and various other foreign bodies taking an "aggressive" stance in lobbying to influence the law.

We have blogged about FATCA often (and see our memorandum on it); it's a form of one-way automatic information exchange which appears to have some real teeth.

Wilkins' full testimony to Treasury and IRS officials is here, along with a little CTJ context, entitled "America Should Not Be a Tax Haven."

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Friday, May 20, 2011

Germany is building a gateway for criminal money

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.


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Thursday, May 19, 2011

Links May 19

Cheat Street: How U.S. Banks Help Foreigners Dodge Their Taxes CBS
May 18 - 'Jack Blum, a former U.S. Senate investigator and an authority on offshore tax shelters' - and Chair of TJN-USA - 'says U.S. bankers “sell tax evasion to citizens of Central America, the Caribbean, all over Latin America.” The U.S. government hasn’t put a stop to it, Blum says, because bankers and politicians don’t want to stop the flow of foreign cash into the United States.'

See also:
Bankers, consumer groups clash over IRS plan to crack down on foreign tax cheats iwatch
May 19 - "Imagine a coming wave of human and financial disasters: Kidnappings in Latin America. Bank failures in Florida. Millions of jobs lost across the United States. What could cause such chaos? According to American bankers and their allies ... the Internal Revenue Service plan that would require U.S. banks to report interest paid to foreign nationals with deposits." As Rebecca Wilkins of our friends at Citizens for Tax Justice observes: "U.S. banks are using scare tactics to prop up a regime of financial secrecy that allows tax evaders and money launderers to thrive."

BAE pays $79m fine to settle civil case with US government The Telegraph
May 17 - Fine imposed on BAE on being charged with conspiracy to defraud the US - The Department of Justice claimed that BAE transferred more than £10m and $9m to Swiss bank accounts controlled by an agent with a high probability that a payment would go to a Saudi Arabian official in a position of influence. Such a settlement approach has been show to be far too lenient - for example see here.

How a Nigerian oil company Made N3.1 Billion Profit, Dodging Taxes Sahara Reporters

May 15 - Reporting on a story we blogged earlier here
. "Tax avoidance among CDC’s [the UK's Commonwealth Development Corporation] companies is unsurprising since the fund has modelled itself as a private equity investor, a structure in which tax dodging has always been an intrinsic part. But that doesn’t make the British development fund’s indulgence in the shady business any less damaging for poor countries like Nigeria."

India: Tax Department Vows Crackdown on Black Money Wall Street Journal

May 19 - 'Retired Supreme Court Justice P.V. Reddi, the chairman of India’s law commission, said that to effectively clamp down on black money, authorities “need to instill a fear of detection” in taxpayers. But for this to work, a culture shift has to happen among law enforcement authorities, too.'

What happens to Glencore if Jersey fails the EU Code of Conduct? Tax Research UK
May 18 - Richard Murphy considers that Jersey will fail the EU Code of Conduct tests for acceptability on business taxation later this year. As he also noted recently, Glencore, the world’s largest trader in commodities, has launched itself onto the world’s stock exchanges through a Jersey company. We've blogged and linked previously on the Glencore story, as here.


Jersey shifts the burden of tax from tax abusers to ordinary people Tax Research UK

May 19 - Richard Murphy reports on how "The tax burden is shifted from the tax abusers who use the island to avoid their obligations elsewhere in the world onto the ordinary people who live there."

Is the IRS’s ‘Wealth Squad’ Working? Wall Street Journal

May 16 - "The IRS has garnered a lot of headlines with its crackdown on the wealthy. The Global High Wealth Industry Group, formed in 2009 and also known as “The Wealth Squad,” has a team of agents specially trained in the dark arts of tax evasion by the rich. ... But at least it is working right? We don’t know."

US offshore accounting may leave investors in dark Reuters
May 19 - "U.S. regulators want some companies to tell investors how much of their cash they hold in other countries to clarify how much money a company has when it needs it. ... But investors may not know that if the company repatriates the money, it may have to pay a big tax bill ... A company might not be as liquid as it initially appears."

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OECD may detract from UN work

For those many millions of people with a subscription to Transfer Pricing Week, it's currently carrying a useful article following our blog entitled "Developing countries are finding their voice". It quotes Martin Hearson of ActionAid as saying
"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.

Now there certainly is a case for co-ordination among international organisations on issues such as this - having lots of different systems is potentially a recipe for arbitrage by corporations. What we object to is the fact that the OECD remains firmly in the driver's seat, pushing policies that, as we've demonstrated, are to the detriment of developing countries. And it quotes:
"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.

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Tax havens need unified voice, TIEAs unconstitutional - Norris

Bermuda's Royal Gazette is carrying some forthright views from Professor Gilbert Norris, a speaker at a conference by the Society of Trust and Estate Practitioners (STEP,) an influential lobby group for tax havens and offshore secrecy. A number of separate things are worth nothing:
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:

Mr Norris said that the tax information exchange agreements (TIEAs) that Bermuda and other IFCs had been signing at a rapid rate at the behest of the Organisation for Economic Cooperation and Development (OECD) were unconstitutional.

“If you are a common law jurisdiction, then you have constitutional confidentiality that can’t be lightly disapplied,” Mr Norris said. TIEAs trampled on fundamental confidentiality rights including legal and professional privilege and privacy, he added. “I believe that organisations like the OECD, the IRS and EU are not only behaving inappropriately, but also illegally,” Mr Norris told delegates."


That isn't our analysis. Our analysis is that the TIEAs are, at best, almost useless - and possibly worse than useless, because they have allowed a number of jurisdictions to claim they are 'clean' while allowing secrecy business as usual. More here. Norris goes on:
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.

Which is why it's so hard to tackle.

Which is why public mobilisation is now essential.

We're working on it.

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Wednesday, May 18, 2011

Links May 18

As IRS crusades against Americans hiding money offshore, Latin American tax cheats flock to U.S. banks iwatch
May 18 - "Teams of private bankers working for powerful banks court wealthy people from distant shores with this sales pitch: Move your cash to our country. We will keep it safe and secret. That was the modus operandi of UBS, the Swiss banking giant that was forced to admit holding billions of dollars in covert accounts for Americans trying to avoid U.S. taxes. It is also a tactic used by big American banks to solicit deposits from wealthy citizens in Third World countries." Hat tip Jim Henry.

Capitalists Who Make vs. Capitalists Who Take Dylan Ratigan
May 16 -
What’s the difference between productive wealth and destructive wealth? What if Gross Domestic Product made a fundamental distinction between the two — between making money by producing real value for others, versus just making money by exploiting others?

Hong Kong's rich-poor divide still the world's worst as gulf widens monsters and critics

May 11 - Hong Kong - Hong Kong's rich-poor divide has widened, cementing the city's global top spot for wealth disparity.

France Mulls New Tax on Top Earners tax-news.com

May 11 -
Pierre Méhaignerie, President of the French National Assembly Social Affairs Committee, has recently revealed that he has been given the go-ahead from President Nicolas Sarkozy to submit a parliamentary initiative imposing an exceptional contribution on top earners in France.

Tax Reform: Trusts will no longer escape French taxes BourseReflex (In French)
May 11 - In France,
trusts that until now have allowed their beneficiaries to avoid paying taxes in France, will be taxed in accordance with reforms that come into effect on 1 January 2012. The article reports how Tax Information Exchange Agreements (TIEA's) will help reveal assets hidden in trusts - although as we've frequently pointed out these TIEAS have very limited effect. See here for the way forward.

NYTimes on the new shadow insurance system Treasure Islands

May 13 - Best-selling "Treasure Islands" explains how small U.S. states such as Delaware were serving essentially as offshore centres within the U.S., offering secrecy and lax regulation of various kinds, and offering themselves as ‘captive states’ willing to write their laws in pretty much whatever ways private interests (from elsewhere) wanted, while no consultation with anyone outside the tiny rarefied circle of insiders. A new and excellent New York Times story, about the captive insurance industry, fits the Treasure Islands framework so closely as to be almost spooky.

Treasure Islands: An Offshore Awakening truthout
Treasure Islands: An Offshore Awakening

Treasure Islands: An Offshore Awakening
May 15 - If you have not yet read Treasure Islands, check out this excerpt from the prologue of the book.

Channel Islands retailers 'involved in postal scam' The Telegraph

May11 - Channel Islands online retailers are potentially denying the UK government millions of pounds of tax with an alleged postal scam that compounds a VAT loophole already being exploited offshore.

U.S. tax burden at lowest level since '58 USA Today

May 6 - The total tax burden — for all federal, state and local taxes — dropped to 23.6% of income in the first quarter, according to Bureau of Economic Analysis data. By contrast, individuals spent roughly 27% of income on taxes in the 1970s, 1980s and the 1990s — a rate that would mean $500 billion of extra taxes annually today, one-third of the estimated $1.5 trillion federal deficit this year.

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