Friday, September 28, 2012

Uncounted ownership: Time to stop hiding?

Cross-posted with permission from Alex Cobham

It really matters, for all sorts of things from fair taxation to the prevention of corruption, that people are unable to hide their ownership of major assets or income streams. Could the post-2015 development framework provide an opportunity to change, fundamentally, the level of international transparency about beneficial ownership?

The UK’s Deputy Prime Minister Nick Clegg has been talking about a possible ‘mansion tax’ on high-value properties. He explained to the BBC, among other things, that wealth taxes on property are much harder to avoid than taxes on financial assets which can be moved quickly around the world.

Mr Clegg is certainly right about the latter – as discussed here, the latest Tax Justice Network estimates indicate somewhere between $21 trillion and $32 trillion of hidden assets around the world, with massive implications for real levels of inequality.

I’m not sure, however, about the point on property taxes being hard to avoid. This Observer story from last year, for example, found that only 9 of 62 flats in “the world’s most expensive residential block” were registered even for council tax:
An analysis of the records by the Observer shows that 25 of the flats’ registered owners are companies in the British Virgin Islands. Other offshore tax havens used to purchase the properties include Guernsey, the Cayman Islands, Liechtenstein and Liberia.

There are two reasons relevant to tax dodging (and of course many that are not) to use companies to hold the ownership of property:
  • first, to hide the actual ownership – this is why you would use a company formed in a secrecy jurisdiction like the BVI rather than a UK one; and
  • second, to hide changes in ownership – so that individuals can sell and buy the company which owns a property, rather than property itself, since although these are equivalent actions the former allows the possibility of not paying stamp duty.
The same secrecy, of course, poses a major challenge to developing countries too – BVI companies are also involved in the ownership of Zambian copper mines, for example; and without implicating any of them, the human impacts of lost tax revenues and greater corruption can be much more direct in countries at lower income levels.

The Norwegian presidential commission on tax havens presented considerable evidence on the links between developing countries and havens, pulling out link after link that threatens development and revolving around the hiding of ownership – whether for purposes of facilitating corrupt payments, trade mispricing to dodge tax, or money laundering. In addition, the commission set out (see Appendix I) a model of how governance in a country could be broadly undermined by greater exposure to tax havens.

Because the key to havens is not in fact tax rates but secrecy, I prefer the term ‘secrecy jurisdiction’ (for reasons set out at some length in my chapter of this World Bank volume). Ultimately, it is the hiding of ownership that havens facilitate which undermines regulation and taxation around the world – not any tax competition they may engender.

A measure to address UK stamp duty avoidance in the last Budget implicitly recognised the problem that Mr Clegg’s argument faces. Instead of simply requiring the identification of the beneficial owner of a property (i.e. regardless of any intervening corporate structure), the government imposed a higher rate of stamp duty for residential properties over £2m bought by “certain non-natural persons”.

Despite the centrality of identification of beneficial ownership for international measures against everything from tax dodging to money laundering to grand corruption, the ability of even a relatively powerful government like the UK to effectively police it remains limited, and so the UK itself was reduced to working around the problem rather than challenging it. [Meanwhile, the UK itself must face the challenge of transparency in relation to the ownership of trusts, and its many satellite jurisdictions.]

What this means is that Mr Clegg’s optimism about the solidity of property reducing tax avoidance may be misplaced. The bright side, though, is this: that effective international exchange of information on beneficial ownership would deliver great benefits not only for the effectiveness of the UK’s tax system, but for a great many other countries and their citizens too.

The US has unilaterally enacted FATCA, the Foreign Account Tax Compliance Act, which demands beneficial ownership globally for “financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest”. A future with substantially lower levels of international corruption, money laundering and tax dodging relies on this type of transparency being available to all governments, not just the most powerful, and applying to bank accounts, trusts and foundations, companies and so on. FATCA for all! Or perhaps something more cooperative, like a broader version of the EU Savings Tax Directive which requires automatic information exchange among participating states.

The coming proposal is this: a requirement for some minimum, international exchange of beneficial ownership information (as once suggested by Richard Murphy), as part of the global policy package associated with the post-2015 development framework. Alongside the measures championed by the Open Government Partnership to ensure that governments are transparent and accountable to their citizens, this seems a natural complement: to ensure a higher degree of transparency and accountability to society.

A more or less continuous critique of the Millennium Development Goals has been that there is little or no accountability for international policy commitments (contained in MDG 8, on ‘global partnership’) – notwithstanding the worthy efforts of the MDG Gap Task Force. Can we envisage detailed tracking of commitments to (i) collate, and (ii) exchange automatically, data on beneficial ownership of each asset class? What’s there to hide?

The alternative would be an international convention, cutting across the multiplicity of related measures on tax, corruption, money laundering, terrrorism financing and so on, that would establish simply the responsibilities of signatories in regard of beneficial ownership transparency. Mooted by Norway in 2010, the time may have come for a group of leading nations and civil society organisations to take this forward.

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