Early-bird rates, opportunity ends June 1 - Registration for 2012 AABA/TJN Research Workshop on Tax Avoidance, Corruption and Crisis
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Why tax havens cause poverty
it’s junk economics (pdf). See the data in the linked piece.His link connects to a study, which we've blogged before, called “High Rate” Income Tax States Are Outperforming No-Tax States: Don’t Be Fooled by Junk Economics, by the Institute on Taxation and Economic Policy (ITEP,) a sister organisation to our friends at Citizens for Tax Justice. Krugman is full of praise for ITEP:
if you want to discount ITEP as a liberal source — which you shouldn’t, because they do very good, careful workand he refers to a comprehensive study by Jim Alim which says, in the abstract:
"there is moderately strong evidence that a states political orientation has consistent and measurable effects on economic growth; perhaps surprisingly, a more “conservative” political orientation is associated with lower rates of economic growth."Cue, of course, hysterical comments beneath his article.
The UK believes there are seven key advantages to exchange of information.That is a good start. Disappointingly, the list does not contain the word 'automatic.' We have noted on numerous occasions how the OECD has sought to impose its woefully inadequate "on request" system of information exchange on recalcitrant secrecy jurisdictions, calling it the internationally agreed standard - when we have demonstrated beyond doubt, on several occasions, that the far more comprehensive system of automatic information exchange is superior. Grinberg adds:
First, exchange of information allows for the right amount of tax due on the income from savings to be collected. For those countries which tax the savings income of their residents at the marginal rates which apply to income in general, a withholding tax is unlikely to be the marginal rate at which the investor should be paying tax in his state of residence.
Second, exchange of information allows savings income to be taxed in the right country - that is, the investor's state of residence rather than solely in the state of source for the investor's savings income. The "co-existence approach" [TJN: permitting E.U. states to choose to apply either withholding tax or information exchange] does not allow for this and this is why several Member States have argued for revenue sharing.
Third, exchange of information encourages compliance with the tax system. It provides a deterrent to the non-declaration or under-declaration of income. In contrast a withholding system, without exchange of information, might appear to give the impression of legitimising tax evasion since it fails to deter non-declaration. Acceptance by the EU of the "co-existence" model in Community legislation might be interpreted by taxpayers as a signal that non-declaration to the taxpayer's state of residence will be tolerated.
Fourth, exchange of information helps wider compliance with the tax systems of Member States, including tackling the serious problem of cross-border "laundering" of the proceeds of tax evasion. Exchange of information will often draw the attention of the country of residence to the existence of an asset which may have been funded from income, profits or gains which have themselves been hidden from the tax authorities. In turn, these activities could now be taxed. Withholding conveys none of these advantages.
Fifth, exchange of information is easy and efficient. It would be sufficient to draw the attention of the country of residence to the existence of the income-producing asset - the tax authorities could then seek sufficient information from the investor to work out the tax liability. In contrast, applying withholding might in some circumstances require a financial institution to perform complex calculations not needed for its own purposes. In addition, a withholding system would require additional administrative costs in order to manage tax deductions or investor certification.
Sixth, exchange of information is good for the honest investor, since it does not lead to the cash flow disadvantages associated with a cross-border withholding tax system.
Seventh, exchange of information produces equity between Member States. It precludes the likelihood of capital flight from countries providing information to countries opting for withholding under "co-existence" arrangements. Dishonest investors determined to evade tax will generally prefer to suffer a (minimum) withholding tax rather than have information passed to their country of residence, and will choose where to invest their savings accordingly. This would lead to undesirable distortion of competition, by putting financial institutions in withholding countries at a tax-driven competitive advantage.
Exchange of information for tax purposes is consistent with the trend to greater international co-operation and transparency in international financial systems, encouraged by international initiatives in both tax and non-tax fields. Even if withholding arrangements were adopted by all countries globally, this would not provide an effective solution to evasion of tax on savings income. They would not allow Member States to collect the full amount of tax due on their residents' savings income, nor to deter and detect the "laundering" of the proceeds of tax evasion through investment abroad.
Exchange of information arrangements on a wide international basis is the only way in which an effective solution to the evasion of tax on savings income can ultimately be achieved. And it is the only way that the Helsinki European Council Conclusions can be delivered. Such an approach requires EU countries (as well as important third countries) to set aside those bank secrecy laws which are standing in the way of a solution to tax evasion based on exchange of information. This has already been recognised in a number of important initiatives on the international front aimed at tackling tax evasion, harmful tax competition and international financial crime.
"Anonymous withholding arguably represents the tax administration forswearing any independent effort to collect tax that is due. Thus, it may well legitimize tax evasion not only through offshore accounts but also more broadly.(and he develops this important point further, particularly on pp 41-42l we also noted further additional points he made in our recent blog on his paper.)
A cross-border anonymous withholding system also undermines the expressive role that taxation plays within a liberal democracy. A cross-border anonymous withholding system also undermines the expressive role that taxation plays within a liberal democracy.
"Following a concerted lobby effort by the United Kingdom (directed at preserving the London-based Eurobond market), member states agreed that automatic exchange of information, rather than withholding tax, was the ultimate objective of the E.U. approach to policing the taxation of savings."This on the face of it might make sense, since that lobbying effort would have been happening at a time when the final scope of the Savings Tax Directive was unclear, and they might have worried that a withholding tax might have been applied to the super-massive Eurobond market, from which City bankers and lawyers earn vast rents. Note here that the Eurobond market is a tax-free, largely regulation-free offshore market, one of the keys to understanding the size and power of the global financial services sector and to the rebirth of the City of London from the 1950s (read all about about that in this book.) But -- surprise, surprise -- in pushing for information exchange, the UK was being more devious than it would appear! From the New York Times, in February 2000:
"Britain proposed Friday that governments exchange information to crack down on investors who evade taxes by stashing their money abroad, as an alternative to a proposed European Union withholding tax on savings income that is favored by most EU governments.For international tax wonks, the twists and turns of international tax are fascinating, and the existential crisis now facing the European Union itself adds a whole new dimension of uncertainty into all this.
But EU officials said the British offer appeared to be a ploy aimed at undermining the withholding plan, which Britain vehemently opposes as a threat to the dollars 3 trillion Eurobond market in London. Britain says the 20 percent withholding tax would drive holders of Eurobonds into other markets.
A senior official at the British Exchequer, Dawn Primorolo, proposed the information exchange at a high-level EU working group that is seeking to solve the tax conundrum before a summit meeting in Lisbon in June.
"It is difficult to regard the latest U.K. contribution as being very constructive," Jonathan Todd, a spokesman for the European Commission, said.
Officials said Britain had produced the new approach without warning or preparation at the group meeting.
. . .
In London, a spokesman for the Treasury said Britain had not altered its position on a withholding tax, adding, "We won't agree to anything that damages the City's interests.""
"ATO commissioner Michael D'Ascenzo last week warned Australian taxpayers against avoidance schemes that use New Zealand administered trusts as a way to gain tax-free income. The warning is another blow to New Zealand's financial standing, coming as news broke that the country had, along with Russia, been turfed off a European Union anti-moneylaundering "white list" because of weak regulation."Now we have Naked Capitalism, following an exploration of the Mexican Drugs Lords connection, continuing its excellent New Zealand series, with a new headline: New Zealand, Fresh From Its Service to Mexican Drug Lords, Helps Out the Russian Mafia. It takes a cue from the NZ newspaper Stuff:
"Another New Zealand shell company has been linked to an alleged fraud worth more than US$150m - this time involving Ukrainian state-owned companies.And behind all this, it seems, lurks the Russian Mafia. And it has gems such as this:
The company, Falcona Systems Ltd of Albany, Auckland, was struck off the New Zealand Company Register last October but only after it was used to gain $150m in kickbacks for Ukrainian and Latvian officials, according to East European media reports."
Two years ago another New Zealand shell company, SP Trading Ltd of the same Queen Street address, was found to have chartered a Georgian registered plane to fly embargo-busting arms from North Korea to an unknown Middle Eastern state. They were intercepted in Bangkok.Classy stuff. And then the sign of the capture of policy making by criminal financial interests:
"New Zealand companies can be created online for just $153.33 and while Commerce Minister Craig Foss has said action is being taken to tighten registrations, nothing has happened. Foss is in Japan and could not be reached for comment."We have seen this kind of behaviour from secrecy jurisdictions again and again. For pitifully small sums, jurisdictions can prostitute themselves out to the world's criminals, for a handful of dollars. It's not even very much money! An earlier Naked Capitalism headline captured the spirit: New Zealand Opportunity! Earn $$$ Working from Home, Creating Bogus Companies for Crooks!
In the struggle between developing countries’ tax systems and multinational companies, there are calls for an elite task force of international tax experts to assist the side of national tax agencies. Here is why I believe a new proposal by the OECD to create ‘Tax Collectors Without Borders’ is a good idea.We have given our cautious endorsement to the idea, too. Now read the rest of his article. It is short, and to the point.
"Perhaps the plan for an oecd SWAT team could be useful, perhaps not.Given our deep mistrust on the OECD, based on its jealous guarding of its woefully inadequate and even harmful standards on a range of issues in the international arena, which we have commented on interminably (see here, here and here, for example), it is wise to take this note of caution extremely seriously.
The country needs to have laws in place that make foreign companies actually liable for tax --- or else nothing works. The SWAT team can do nothing if taxes are not legally due. In one of the fictional cases, we have transfer-price abuses. The OECD is going to solve such abuses? How, when it cannot solve them in Germany or the U.S.? What we might get is an oecd style transfer-price audit, with a negotiated settlement at 25 cents on the dollar. Something, but not a lot.
The country needs to have an anti-interest stripping law in place. If it does, does it really need an outside SWAT team? If not, what can the SWAT team do --- appeal to transfer pricing constraint? It needs an anti-royalty-stripping rule in place. And, of course, it needs to have avoided an oecd-based tax treaty that protects against domestic anti-stripping laws. Is oecd going to be helpful in this regard?"
The IMF study estimated the flight of capital from India during 1971-97 at $ 88 billion, GFI, in its 2010 report, put the total illicit outflows from India at $213.2 billion. This sum, after adjustment for the possible returns earned on these funds (the money is not kept under a mattress), would amount to $462 billion.The Indian White Paper is here, and the GFI India report is here. But the reasons cited by the First Post for saying that GFI's numbers (which are, as GFI would admit, subject to very large margins of error) are inflated, are bogus. We explained this a while ago following an attack on GFI's numbers by the Oxford Centre for Business taxation (which in our opinion mixes serious academic research with pro-business lobbying, reflecting its funding sources and the way it was founded: see more on that here.) The Oxford study made a similar point to what the Indian finance ministry is saying: that GFI's numbers overstate the figures because they do not take account of illicit inflows back into developing countries, which they suggest should be subtracted from the outflows. But this is totally wrong. Here is the relevant section from our rebuttal of the Oxford study:
The finance ministry’s White Paper pooh-poohs the GFI claim by saying that the estimates are probably too high since they do not take into account “illicit inflows” – the black money that comes back in to earn returns.
What TJN’s colleagues have measured in terms of mispricng is capital flight out of developing countries into secrecy jurisdictions and other locations. What it does not measure is capital flight into developing countries. To illustrate: TJN’s colleagues have measured capital flight out of, say, Congo, and into Switzerland – but have not measured capital flight from Switzerland into Congo. This is not to say that there is not an issue here – there is – but this now brings us to two important points.Now in fairness to the Indian White Paper, they do make a concession to our argument. But the way they do this is rather odd:
First, it is fanciful to think that capital flight into developing countries from tax havens and elsewhere is likely to be anything like as big as capital flight out of developing countries. Even if, say, capital flight into developed countries were, say, 20% of capital flight losses out of developing countries – which seems unlikely (see Richard Murphy’s analysis of this here) - and we were to subtract one from the other, that would be no grounds at all for concluding that there has been a “drastic” overestimation.
In addition to this, how could they possibly come up with “drastically” if they have not measured this themselves – which they haven’t? The use of this -- headline soundbite – word cannot be supported.
Yet the second point is more fundamental. For the researchers have made an elementary yet crucial error. They say we should subtract losses in one direction from tax revenue losses in the other direction – when in fact we should add them.
If a country loses tax revenue from overpriced imports into developing countries and underpriced exports, it does not somehow magically recoup illicit money going in the other direction which suffers losses from, say, flows evading VAT or import duties. No, it loses revenue in that direction too."
"Illicit inflows have been excluded mainly on the grounds that since illicit flows are unrecorded, they cannot be taxed or utilised directly by the government for economic development. Further, these inflows are themselves driven by illicit activities such as smuggling to evade import duties or value-added tax (VAT) or through over-invoicing of exports. . . By not considering illicit inflows even if the reasons given are valid, it is apparent that the estimate given in GFI’s November 2010 report of a total of US$ 213.2 billion being shifted out of India from 1948 to 2008 appears to be on a higher side. (TJN's emphasis added.)"One wonders why India's Finance Ministry would stick to its claim that these numbers appear to be on the high side "even if the reasons given [for using that methodology] are valid." Very strange. And in fact, the paper then continues, by saying that GFI's estimates might, after all, be too conservative:
Moreover the GFI (and World Bank) models do not capture significant illicit outflows, such as through:
- Mispricing occurring through trade in services and intangibles as the same are not addressed in IMF Direction of Trade Statistics
- Trade mispricing that occurs within the same invoice through related or unrelated parties
- Smuggling
- Hawala-type swap transactions
And concludes that further research is therefore needed. We can certainly live with that.
Nevertheless, despite its odd parts, the report contains much that is interesting, and we will put it as a permanent item on our 'magnitudes' page.