Friday, March 30, 2012

Corporate Taxation - The Next Race to the Bottom

By guest bloggers James S. Henry and Nicole Tichon

with research assistance by David Lighton


Suddenly, without warning, we appear to be in the midst of a global tax race to the bottom in corporate income taxation, with no end in sight.

One month ago, President Obama announced a new plan to reduce the “book” or nominal US corporate income tax rate from 35 percent to 28 percent.

Two weeks later, this was followed by the UK’s announcement that it would slash its top corporate rate to 22 percent by 2015, with the explicit objective of “maintaining the lowest corporate rate in the G-8.” Other EU countries are also reportedly thinking about responding in kind.

Just this Sunday, on April Fool’s Day, Japan will lower its own nominal corporate tax rate to 36.8% from 39.5%. And in three years the rate will drop another 2.3 percentage points to 34.5%.

The fact that all this new tax cutting is coming to a head on April Fool’s Day is entirely appropriate.

Only the world’s most foolish politicians, acting under the spell of election-year politics and the torrents of anti-tax propaganda spewed out by corporate lobbyists, could possibly believe that this “tax race” is anything but a costly, unproductive zero-sum game.

If it is allowed to continue, the tax race will undermine what little is left of progressive taxation all over the globe as well as our slow economic recovery. On the one hand, it threatens to throw more and more of the costs of essential government services onto the backs of the middle class and the poor, slash their services even deeper, and cost them jobs, even as they are still struggling to recover from the “1%-made” financial crisis.

On the other hand, the tax race threatens to force governments around the world to go even deeper into debt.

Either way, this serves no one’s interests but those of the world’s most self-serving multinationals and their armies of well-heeled lobbyists and anti-tax “think tanks.”

This new wave of corporate tax cutting is especially disturbing, because it defies abundant evidence that such additional cutting is not only unnecessary, but counterproductive.

For example, a comprehensive study from Citizens for Tax Justice and the Institute on Taxation and Economic Policy that analyzed 280 of America’s most profitable companies found that 78 of them paid no federal income tax in at least one of the last three years. It’s worth mentioning that the 280 companies also received a total of $223 billion in tax breaks. In fact, the report unearthed thirty companies that enjoyed a negative income tax rate over the three year period, while banking profits totaling $160 billion. Anyone who paid even one penny in taxes, paid more than the likes of Exxon Mobil, General Electric, Fed Ex, and Wells Fargo. In other words, the joke is on us.

The Congressional Budget Office, an independent, non-partisan agency, has reported that the average corporate tax rate on domestic profits - meaning the share of profits that companies actually pay in taxes — is at 12.1%. This is less than half of the statutory rate of 35%, which will be held up as the raison d’etre for American corporations’ inability to compete and continually referred to as the highest rate in the world. In fact, the corporate tax rate is at the lowest level since the early 1970s.

Contrary to what will be heard on the campaign trail today, the U.S. collects less corporate taxes as a share of GDP than all but one of the 26 Organization for Economic Cooperation and Development (OECD) countries for which data are available. The contribution of corporate tax revenue to the federal government decreased from 30 percent in the mid-1950s to 6.6 percent in 2009.

But these aren’t the statistics that will make headlines today.

The reality is that the tax rate could be 45% or 5% - the number doesn’t really matter to most profitable multinational corporations. It is especially inconsequential to 83 of the top 100 publicly traded companies who use offshore subsidiaries in low- or no- tax jurisdictions. The problem is not the rate of taxation, the problem is the loopholes, preferences and deductions that allow large corporations to both claim that their competitiveness suffers due to high taxes, while not actually pay much of a tax bill.

The corporations that benefit from the current system of taxation would like us to remain fools. These companies like to appear to the public and to shareholders as oppressed martyrs, starved of cash due to the U.S. system of taxation, while at the same time more than doubling their profits over the last ten years. Those who favor corporate tax breaks argue that it is tax cuts that are key to growth, even though practical knowledge or even having lived through the first decade of the 21st Century would dictate otherwise. It’s like the corporation that cried tax. Most recently, we saw Apple issue its first dividends due to “massive cash reserves” while at the same time lobbying for a tax holiday for the money it maintains offshore.

The constant drumbeat that tax breaks for businesses will spur growth and create jobs has rung hollow. The Des Moines Register’s Iowa Caucus poll revealed that 87% of those surveyed said that corporate tax loopholes should be closed so that every U.S. business pays some taxes. In addition, “90% of small business owners say big corporations use loopholes to avoid taxes that small businesses have to pay—and 92% say big corporations’ use of such loopholes is a problem,” according to a recent survey of small business owners (the majority of whom were Republican). Small businesses are both important job creators and trotted out as adversely affected by tax reform. In reality, small businesses are adversely affected by trying to compete with large multi-national corporations that use offshore subsidiaries in low- and no-tax jurisdictions to reduce their overall tax rate.

Finally, of course, there are many reasons why businesses choose to locate in the U.S. that have nothing to do with tax levels. They benefit from the size and depth of our markets, our consumer base, our schools, our roads, our hard-working labor force and the fact that skilled labor still dreams of living here, the professionalism and integrity of our judicial system, and the national security provided by our armed forces.

Most of all, they benefit from the fact that we have always been a constitutional democracy with a healthy middle class.

If we continue the April Fool’s game of racing to cut taxes for corporations and the economic elite, these more fundamental non-tax advantages will soon disappear. And no amount of tax cutting will ever bring them back.

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Links Mar 30

Some news via ATAF's Kodi Katika Afrika, hat tip: Sandra Kidwingira:

Tax muscle-flexing Financial News
Mar 22 - "An important policy shift is taking place, of which business, especially multinationals, should take heed: not only are tax administrations becoming more aggressive, they are becoming more effective."

Revenue Authority Clamps Down On Tax Cheats GhanaWeb
Mar 19 - "Information filtering in from the Domestic Tax Revenue Division of the Ghana Revenue Authority (GRA) indicates that through the Authority’s Tax Identification Number System (TIN) it will begin to clamp down on some businesses and individuals evading taxes in the country."

Africa: Effective Taxation Critical to Nation Building allAfrica

Mar 12 - Analysis and discussion on how "taxes are an integral component of institution-building, growth, and democracy", and "the importance of building the capacity of tax collecting institutions, as part of a larger social contract between government and citizens".

Transfer pricing: A rule worth scrutiny The East African

Mar 10 - "Kenya is fast becoming a hub for the management of company operations in the East African region. As KRA seeks to improve tax efficiency and thereby increase its tax collections, multinational enterprises, in particular, need to be concerned with the transfer price applied on the supply of goods and services between associated enterprises."

Foreign investors complain at India tax provisions Reuters
Mar 28 - "Foreign brokerages are complaining at recent Indian provisions to tax indirect investments and combat tax evasion, saying they are couched in ambiguous language and could also be used to target overseas market investors, risking a sell-off in markets."

Taxes of Rs 181 crore realised in HSBC bank Geneva cases Economic Times

Mar 30 - "The Income Tax department has realised taxes of about Rs 181 crore with respect to the cash deposits of Indians who had unreported accounts in HSBC bank Geneva."

Philippines collects 9 pct more tax than expected in Feb TrustLaw

Mar 29 - "Manila has been trying to fight tax evasion and corruption in the collection process, rather than raising taxes."

U.S. Tax-Evasion Probes Said to Slow as Prosecutors Transfer Bloomberg
Mar 27 - "The U.S. Justice Department has lost almost 30 percent of its tax prosecutors in the past month, slowing a U.S. crackdown on offshore banks that enabled tax evasion, according to four people familiar with the matter."

Credit Suisse Asks U.S. Clients on Tax, Aargauer says Bloomberg
Mar 24 - "Credit Suisse asked U.S. clients to confirm they filed their 2010 United States tax return, Aargauer Zeitung said, citing unnamed employees and an Switzerland-based client with both U.S. and Swiss citizenship. The lender also asked U.S. clients to disclose the name of their tax consultants."

The question of tax evasion Times of Malta
Mar 30 - "There could be a middle-of-the-road solution, which is raising the social stigma of tax evasion, such that there can no longer be any pride to be had in outsmarting the system. Fundamentally, we need to stop thinking that tax evasion is a tricky question – it is not as without taxation our society cannot survive."

Italy recovers €12.7bn from tax evasion Irish Times
Mar 29 - "Italy recovered €12.7 billion from tax evasion in 2011, up 15.5 per cent from the amount it retrieved in 2010 after stepped up surveillance and collection efforts ...The struggle against tax evaders has taken high prominence in recent months Hat tip: Offshore Watch.

The UK may have signed a dodgy deal with the Swiss but the Germans are seeing sense Tax Research UK
Mar 30 - Richard Murphy comments on the story TJN blogged yesterday.

UK: HM Revenue & Customs sends its tax inspectors back to college The Telegraph
Mar 29 - "After being accused of making “sweetheart” deals with big companies and losing a tax evasion trial against Tottenham Hotspur manager Harry Redknapp in February, HMRC is to link up with Manchester Metropolitan University to retrain its taxmen."

The United States, UK, hooked on offshore Treasure Islands
Mar 29 - Nick Shaxson on an IMF Working Paper from 2010: Bilateral Financial Linkages and Global Imbalances: a View on The Eve of the Financial Crisis - "There is no general agreement on what constitutes ‘offshore’ but the IMF and others tend to take an overly restrictive view."

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German opposition blocks Swiss tax deal

Following yesterday's blog, we are happy to report that German opposition party leaders have continued to oppose the signing of a "Rubik" tax deal with Switzerland. We hope that we and our allies (particularly at Campact) had an influence on this, and we know that many of the faltering German länder (states) received phone calls and forwarded them to their state governors talking in Berlin, though we do not know exactly what happened at the end of the day. From Germany's Suddeutsche Zeitung:
"Despite some minor concessions from Switzerland, most of the SPD and the Greens continue to reject the proposed treaty between Germany and its neighbour. Representatives of both parties said that . . . the deal is too generous."
Swiss DRS Radio quoted an SPD party leader, Sigmar Gabriel, as saying
'the SPD-led states, and the SPD as a whole, believe that far too many loopholes exist, and that there is a very big equity gap with ordinary taxpayers."
Big loopholes indeed.

The conditions reportedly demanded include raising the minimum rate on the capital charge from the current 21-22 percent to 25 percent, and in addition, the SPD has rightly insisted that information exchange provisions should be at least as good as those afforded to the United States, which used its political muscle and law enforcement to ensure a far stronger deal with Switzerland.

These are major hurdles to overcome. However, there remains a real danger that Germany might approve such a deal. This is a welcome development - but we need to keep the pressure up.

Other stories: Focus and Wall Street-online.

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Thursday, March 29, 2012

TJN named in movers and shakers list

The publication Transfer Pricing Week, a reference for many in the field of transfer pricing, has cited TJN and our colleagues at ActionAid among the top five leading forces in the field of transfer pricing, an area of central importance when it comes to taxing multinational corporations. The OECD and the accountancy firm PWC were, unsurprisingly, at the top. ActionAid, with its excellent and influential report on SABMiller in Africa, came third.

Read the report here. Read all about transfer pricing here.

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Germany: urgent phone action on Swiss tax deal

From the German campaigning group Campact, very loosely translated and with our own interpretations added:

A moment of danger has arrived for transparency in Europe. Several German states governed by the SPD and the Green party are threatening to reverse their previous opposition to a scandalous tax amnesty agreement with Switzerland, which provides impunity (and numerous escape loopholes) for wealthy criminal tax evaders. We have written about often this before. If this agreement goes ahead, it will have the political effect of undermining many years of work to build transparency in Europe through the Savings Tax Directive and its forthcoming amendments.


The state governors will meet tonight to discuss whether or not to approve the deal, and the governors of Berlin, Hamburg, North Rhine-Westphalia, Rhineland-Palatinate and Baden-Wuerttemberg have been giving worrying signals that they might capitulate on this deal. They have been promised large tax revenues from the Swiss deal - and those recalcitrant states have recently been offered a higher proportion of the total revenues, as bait to tempt them into accepting this squalid deal. (We have demonstrated beyond doubt that revenues from the deal will be only a fraction of what has been publicly promised, however.) Only two or three countries need to agree in order for the pro-Swiss Finance Minister Wolfgang Schäuble to get a majority in the Bundesrat to push this Swiss secrecy steamroller forwards.

So today we want to mobilize all forces once again. Please get involved: Call right now at the Treasury or the State in one of the countries and ask the end for the tax treaties.

Further details about how to get involved, in German, here and here.

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Wednesday, March 28, 2012

Links Mar 28

Switzerland: Regulator demands more tax transparency swissinfo
Mar 27 - "The Swiss financial regulator has broken ranks with the financial community by calling for a greater exchange of tax and regulatory information with other countries."

See also:
Switzerland’s Finma Sees No ‘Tragedy’ in Offshore Wealth Decline Bloomberg Businessweek

Mar 27 - "Wealth managers in Switzerland face “great challenges” that may topple the country as the world’s biggest offshore center, the Swiss financial supervisory authority said."

UBS threatens legal action over book claims swissinfo
Mar 28 - "A newly released book has raised the hackles of UBS by claiming that the bank systematically helped French clients evade taxes."

Switzerland near German, U.S. offshore account deals Reuters
Mar 28 - "Switzerland is nearing deals with Germany and the United States over hidden offshore accounts, including paying U.S. officials 5 billion Swiss francs ($5.5 billion) to settle allegations of aiding tax evasion..."

Switzerland Snubs Tax Deal With Austria Tax-News
Mar 28 - "The Swiss government has no firm plans to conclude a bilateral tax agreement with Austria to resolve the longstanding issue of undeclared bank accounts held by Austrian nationals in the Confederation’s banks despite claims to the contrary by the Austrian government."

Netherlands To Extend Tax Treaty Network In South America Tax-News
Mar 28 - "Commenting on the planned visit, Frans Weekers explained that the country’s extensive network of tax treaties makes the Netherlands a popular country for companies and foreign investors." See recent TJN blog Dutch National Bank lists the Netherlands with tax havens.

India: Drive against blackmoney, tax evasion is an ongoing process: Government Economic Times
Mar 28 - "The proposed strategy aims at systematic and conscious reshaping of the country's national integrity system. The draft Strategy recommends a set of action to be taken by the Government and a set of actions by the political entities, judiciary, media, citizens, private sector and civil society organisations."

Vodafone controversy: India not a tax haven, says Pranab DNA India

Mar 27 - "In a strong message to the critics of the retrospective amendment to the tax laws, Finance Minister Pranab Mukherjee on Tuesday asserted India is not a tax haven."

Africa: The Challenges of Curbing Illicit Financial Flows From the Continent allAfrica
Mar 27 - Analysis: "On 18 February 2012, the United Nations Economic Commission for Africa (UNECA) established a High Level Panel to examine what it referred to as 'the debilitating problem of illicit financial outflows from Africa'." See the Communiqué here.

French judges seek E. Guinea president son's arrest Agence France Press

Mar 27 - Unfolding events on a major corruption story. See here for a recent Global Witness press release.

Son-in-law of Spanish King 'stole millions of euros of public money' The Independent

Mar 20 - "For months now, gory financial details from the case – the alleged tax dodges of more than half a million euros via a NGO for children with terminal illnesses, the apparent charging of €700,000 (£580,000) for a 13-page financial report on a football club stadium and the use of offshore companies in Belize and the UK – have found their way out of Spain's leaky judiciary system and into front-page newspaper reports."

UK: Why legal professional privilege should be extended to clients of chartered accountants Tax Journal

Mar 15 - "Developments such as the Legal Services Act have hastened the need for legal professional privilege to be extended to clients of tax advisers who are chartered accountants." Hat tip: Alex Marriage.

Five of the best tax havens in the world AOL
Mar 27 - The article observes "The super rich can avoid huge tax bills by taking up residency in a "tax haven" such as Monaco or Jersey", and takes a look at "five of their favourites."

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Guest blog on rifts between the OECD and United Nations on international tax

Guest blog by David Spencer, TJN Senior Adviser.

This is adapted from an article with a different headline first published by the International Enforcement Law Reporter, Volume 28, Issue 5, May, 2012 and is reprinted with permission

ECOSOC, the Economic and Social Council of the United Nations, held a Meeting in New York on March 15 on International Cooperation in Tax 
Matters and Institutional Arrangement to Promote Cooperation. The main issue to consider was the status of the Committee of Experts on International Cooperation in Tax Matters, commonly referred to as the “UN Tax Committee,” and in particular whether this Committee should be upgraded to an intergovernmental entity. The G77 group of developing countries and China, representing 131 UN member countries, want the UN Tax Committee to be upgraded from a mere Committee to a more powerful intergovernmental commission, with additional resources from the UN budget. The OECD and the EU adamantly oppose that.

The current mandate of the UN Tax Committee is to: 

• Keep reviewing and updating the United Nations Model Double Taxation Convention between Developed and Developing Countries (“UN Model Income Tax Treaty”);
• Provide a framework for dialogue, to enhance and promote international tax cooperation among national tax authorities;
• Consider how new and emerging issues could affect international cooperation in tax matters and develop assessments, commentaries and appropriate recommendations;
• Make recommendations on building capacity and providing technical assistance to developing countries and countries with economies in transition; and
• Give special attention to developing countries and countries with economies in transition in dealing with all the above issues.
The UN Tax Committee’s main task has been to update the UN Model Income Tax Treaty. The Treaty generally follows the OECD Model Tax Convention on Income and on Capital (“OECD Model Income Tax Treaty”), but the UN Treaty grants more taxing rights to “source countries” -- that is, countries where the income has its source, generally developing countries, as opposed to ‘residence countries’ where the multinational corporations are resident (which usually means wealthy countries; see our briefing paper on Source- and Residence- taxation for more details.) The OECD Model Income Tax Treaty grants more taxing rights to the “residence countries.”

The UN Tax Committee also has a major project to develop a Transfer Pricing Manual for developing countries (see our Transfer Pricing page for background).

The UN Tax Committee has 25 members: tax experts nominated by twenty-five countries and chosen by the UN Secretary General. Twelve (12/25 or 48 percent) were nominated by and are from OECD countries, and thirteen (13/25 or 52 percent) are from non-OECD countries. This composition does not reflect UN membership: the 34 OECD members represent only about 18 percent of the 193 member countries of the United Nations, while the remaining 159 represent 82 percent.

ECOSOC had in 2010 requested the U.N. Secretary General to submit a report by March 2011 “examining the strengthening of institutional arrangements to promote international cooperation in tax matters, including the UN Tax Committee.”

The Secretary General issued his report on February 28, 2011. It concluded:
75. There currently exists no single entity with the global legitimacy, resources and expertise to serve as a single coordinating body for international tax cooperation. The possibility of establishing such single norm-setting body has found little support in practice. In the absence of such an entity, organizations active in this area must work together with a view to meeting common tax and development goals in the most efficient, responsive and participatory ways.

76. While each country is responsible for its own tax system, the U.N. universal membership and legitimacy can be a catalyst for increased international cooperation in tax matters to the benefit of developed and developing countries alike. Since the great majority of U.N. member countries are not members of either OECD or the G-20, the U.N. has a key role to play, working with these and other relevant fora such as the Bretton Woods institutions and regional associations of tax administrations, towards ensuring the active participation of developing countries especially the least-developed ones, in relevant activities.

77. ECOSOC may wish to consider three options analyzed [below] or any other modalities for the strengthening of institutional arrangements within the U.N. to promote international cooperation in tax matters, including [the UN Tax Committee]. Ensuring that the U.N. plays its proper role in international tax cooperation in terms of its institutional capacity would be a significant contribution by ECOSOC to enhancing domestic resource mobilization for development. It would respond to a real opportunity, and an urgent need, for greater international cooperation in tax matters for the benefit of both developed and developing countries in their common pursuit of achieving the MDGs [Millennium Development Goals] by 2015.
The 2011 Report suggested three options. First, strengthening the existing arrangements within the United Nations while retaining the current format of the UN Tax Committee; second, converting the UN Tax Committee into an intergovernmental Commission as a subsidiary body of ECOSOC; and third, creating an intergovernmental Commission and retaining the current UN Tax Committee as a subsidiary body of the Commission.

ECOSOC met in New York on April 26th, 2011, to consider these options. In general, the G-77 and China favored [and continue to favor] a universal, intergovernmental commission. The EU countries, the OECD including the United States opposed and continue to oppose that adamantly. In view of the divergent positions, negotiations continued, but unsuccessfully.

In February this year, the UN Secretary General issued a second report further detailing the arguments for strengthening the UN Tax Committee. It concluded:
71. The universal membership in the United Nations, as well as its history and expertise in the area of international taxation, make it well-placed to continue, through the Committee of Experts on International Cooperation Tax Matters [the UN Tax Committee] to make a distinctive, practical and enduring contribution to improving international tax cooperation, which is increasingly understood as a key path to sustainable development. The distinct and unique role of the Committee is well accepted. Likewise, the existing working methods of the Committee are appreciated by the international community as a generally efficient way of meeting its mandate to the greatest extent possible, from within current resources. While there is inevitably room for the improvement of its methods, there is a widespread agreement among the Committee members and more broadly that additional resources are urgently needed to support its work and to enable it to meet its mandate. These increased resources are necessary, inter alia, to strengthen the Secretariat’s capacity to support the work of the Committee and its subcommittees and to ensure that the subcommittees are sufficiently balanced, representative and able to meet their specific mandates to the satisfaction of the Committee and the United Nation Member States.

72. While each country is responsible for its own tax system, the United Nations, thanks to its universal membership and its legitimacy, can be a catalyst for increased international cooperation in tax matters for the benefit of developed and developing countries alike. Since the great majority of United Nations Member States are not members of either OECD or the Group of 20, it is the role of the United Nations to ensure the active participation of developing countries including the least developed countries, in international tax cooperation activities, which will ultimately be of benefit to them. Only if this level playing field is achieved, can enhanced tax cooperation be truly respected as global. At present, there appears to be a moment in time when the proper application of resources could bring that goal within reach.

73. To that end, the United Nations tax work should be focused on providing leadership role in areas where there are gaps, including in term of the voice and participations of developing countries, which the Organization is uniquely placed to address. Such a leadership role would best be achieved by working cooperatively with others, recognizing their distinct roles and the relationship between those roles and that of the United Nations.
At the March 15, 2012 meeting in New York of ECOSOC, the differences between the OECD/EU countries and the rest of the world remained severe. In adamantly opposing the upgrading of the UN Tax Committee, the OECD/EU countries are in effect trying to concentrate and monopolise the debate on international tax matters within the OECD Global Forums (see our paper on the OECD Global Forum here). The Group of 77 and China argue that only the United Nations has the universality and legitimacy to serve as a forum for the consideration of international tax matters. Reaching a consensus on this issue seems difficult.

Also significant at the March 15, 2012 meeting of ECOSOC was a statement by the Ambassador from India that the UN Tax Committee’s Transfer Pricing Manual for Developing Countries should not be based entirely on the OECD’s Transfer Pricing Guidelines which represents the interests of only the 34 countries members of the OECD. The Indian language was quite strong: for example:
"It is inconceivable as to how a standard developed by Government of only 34 countries can be accepted by Government of other countries as 'standard' of sharing of revenue on international transactions between source and resident country, particularly when it only takes care of the interest of developed countries and has seriously restricted the taxing powers of source country."
The members of the UN Tax Committee from China and Brazil had also generally supported the position of the Indian Government on this issue.

END

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The rich get even richer: astonishing US stats

From the New York Times, citing work by the the French economists Thomas Piketty and Emmanuel Saez:
In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers.
Meanwhile, down at the other end:
The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.
And things have been getting worse, fast:
In the Clinton era expansion, 45 percent of the total income gains went to the top 1 percent; in the Bush recovery, the figure was 65 percent; now it is 93 percent.
David Cay Johnston, who's also analysed the figures, adds:
The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966. . . . At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.
Goodness goodness gracious. Remember (well, you may not) what happened after the Great Depression? You had a huge political realignment, the New Deal, high top tax rates, highly progressive taxation, widespread capital and exchange controls to keep the financial sector in its box. And for a quarter century or so after the Second World War, amid all these interventionist things, we had the Golden Age of capitalism: high and broad-based growth, and falling inequality around the world.

This crisis, though, we've seen the banks saved, and no political realignment to speak of. A little bit of wrist-slapping (and higher capital requirements) for the banks, but otherwise relatively little action. The concentrations of wealth, this time around, remain mighty, and there is no sign of anything around that will shrink them.

See supporting evidence here.

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Tuesday, March 27, 2012

Links Mar 27

TJN Latin America and Caribbean - Monthly Newsletter
February edition - includes articles written by network members and partners, significant news, calendar of events, campaigns and other information of interest.

Argentina: Tax evasion, capital flight and money laundering El Ruido de las Nueces (In Spanish)
Mar 23 - Jorge Gaggero explains how to confront these challenges, in the context of Argentina's historical currency fluctuation issues and curbing financial abuses through attention to foreign currency dealings.

Increased tax revenue is key to economic development in Latin America CEPAL
(In Spanish)
Jan 25 - "Latin American countries have made ​​great strides in the last two decades in increasing tax revenues." An important set of statistics.

Audio: Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent Task Force Blog
Mar 19 - On the launch of the book, Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, at the Brookings Institute in Washington D.C.

German-Swiss Tax Deal Nearing Agreement Nasdaq
Mar 25 - "The German-Swiss tax agreement is close to being finalized, weekly Magazine Wirtschaftswoche reports, saying it obtained information that the Swiss government is willing to accept proposed reworks." See most recent TJN blog post on Rubik here.

Coutts fined 8.75 million pounds for money laundering failures Reuters
Mar 26 - "Coutts, best known as banker to The Queen, was fined 8.75 million pounds for "significant and widespread" failings in its money laundering controls, its second penalty for financial trangressions in four months."

See also:
Global Witness welcomes £8.75m fine against Coutt’s for corruption failings Global Witness

Mar 26 - Press release: "Global Witness welcomes news that the British regulator, the Financial Services Authority (FSA), has fined Coutts bank for failing to do enough to prevent corrupt funds from flowing through its accounts."

See also:
Coutts in the dock... but once again the taxpayer will pay price for City folly The Independent

Mar 27 - Coutts is owned by Royal Bank of Scotland, which, from the crisis bailout, is now "owned" by the UK taxpayer. This commentary observes: "As for the fine, it will ultimately be paid by Royal Bank's shareholders, which means the taxpayer. It will go towards the FSA's supervisory budget, which has been fattened by £25m in fines against RBS over the last two years. That money will do a lot to help keep fees down for other City firms that are a bit better managed ..."

See also:
RBC buys Coutts units from Royal Bank of Scotland Reuters

Mar 20 - "Royal Bank of Canada will buy some overseas divisions of the Coutts private banking business from Royal Bank of Scotland, giving RBC access to high net worth individuals in fast-growing emerging markets."

UK: Say no to tax avoidance for public service providers The Independent

Mar 24 - "If the Chancellor was serious about filling the gaping black hole in the country’s finances he’d have used the budget to stop the billions – yes billions of pounds that are gushing out of the economy every year via lawful offshore tax havens. Research by Ethical Consumer has made a valuable contribution to the growing campaign for tax justice ..."

UK: Budget 2012: The only two certainties in life are death and tax avoidance Guardian

Mar 25 - Interesting commentary on how tax cuts did not lead to less avoidance.

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Monday, March 26, 2012

Links Mar 26

Written Evidence: Tax in Developing Countries: Increasing Resources for Development UK Parliament
Links to written submissions to the UK government's International Development Committee.

Report on Round-Table on Fiscal Policy, Growth and Inequality, LatinDADD

Final version of the report on the roundtable on “Fiscal policy, growth and inequality” on September 7 and 8, in Lima, Peru, organised by Latindadd, in collaboration with the Central American Institute for Fiscal Studies (ICEFI), Poder Ciudadano, Christian Aid, Tax Justice Network and the Hemispheric Working Group on Trade - Finance Linkages. Hat tip: María José Romero.

India: Taxman's GAAR spooks mkt: Mauritius invsts under threat? Moneycontrol
Mar 26 - "This has been made very clear by the government as a general principle that India will not allow the use of tax havens - where this is used as a tax saving route or tax evasion route."

See also:
Mauritius tax haven over, foreign investment could be hurt: Experts NDTV Profit
Mar 26 - "The government has decided to follow ‘substance over form".

Canadians have $100M stashed in Liechtenstein CTV News
Mar 26 - "Tax evaders from around the world have been investigated, fined and jailed for trying to hide their wealth in Liechtenstein, but a senator says Canadians suspected of using bank accounts there to dodge the taxman are getting off easy ..."

G20 Update - Monthly Newsletter Heinrich Boell Foundation
February edition: "Highlights plans for the upcoming Mexican Summit, the trade union movement’s G20 agenda, an analysis of the G20’s “financial inclusion” initiative, provocative questions about the G20’s development agenda and questions about the G20’s readiness to tackle the causes of the global food crisis"

"Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times IMF
Mar 1 - Includes assessing:"the wider scope for VAT reform in meeting fiscal consolidation needs, developing and beginning to apply a methodology for finding additional VAT revenue in ways less distortionary and fairer than further raising the standard rate."

New Facebook page for New Rules for Global Finance
New Facebook page launched for New Rules - this will be an public forum to debate and discuss issues pertinent to global finance and economics.

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TJN's March Taxcast

In March’s Taxcast: Apple i-tax dodging, reclaiming Arab Spring country assets, the rich country club of the OECD and the ABCs of setting up letterbox companies. It’s child’s play!
http://traffic.libsyn.com/taxcast/March_Taxcast.mp3

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Could a new consensus emerge on corporate taxes?

Recently TJN writers were on the LSE blog explaining the economic folly of corporate tax cuts. For example:
"British corporations are awash with cash: according to Deloitte, non-financial companies held £731.4 billion in the third quarter of 2011, the highest ever. . . The U.S. is in a similar situation to the U.K., with corporates there sitting on an estimated US$1.7 trillion cash pile."
And the conclusion is that cutting corporate taxes is the equivalent of pushing on a string. But they are worse than that, because they are actually harmful. Corporate tax cuts take money from a sector that is investing (that is, government) and giving it to a sector that is letting it sit idle. Three weeks after we wrote that, the FT's influential Lex column stated, in response to the UK's budget:
"Four years after the financial crisis, companies globally are awash with cash: $1.7tn among US companies, €2tn in the eurozone, and £750bn in the UK. A really competitive tax regime would encourage companies to invest their cash, not just to grow it."
Rather a similar point, perhaps you'll agree. And we have Martin Wolf taking this point further on the same day:
"Vastly more dubious are the cuts in corporation tax, to be lowered to 24 per cent, with the aim of cutting it to 20 per cent. Zero-sum competition among governments to attract mobile headquarters cannot make sense. Nor is there any reason to suppose the fiscal and economic benefits will be large. Meanwhile, the reduction in corporate tax will encourage retentions over distributions, while doing nothing to raise investment. A far more sensible proposal would be to increase investment incentives and maintain – or even raise – headline rates."
We could not agree more. We can't claim credit for his saying this - he's said things a bit like this before, though perhaps not as strongly, and others have too - such as Joseph Stiglitz:
"[It is a myth] that lowering [the] corporate income tax rate across the board will stimulate investment in the United States. No evidence of that. … If you want to encourage investment, what you do is lower taxes on firms that invest and you raise taxes on firms that don't invest. You can restructure the taxes to provide incentives to invest."
Well, indeed. This isn't a new argument, but this does look a little bit like a consensus of the sensible emerging. There seems to be no real argument here - corporate tax cuts are a really, really foolish idea right now: exactly the wrong way to go. The UK, for instance, seems to be run by a ship of fools, with the deluded at the helm.

Read this, or this, or this, for more details on the corporate tax cut arguments.

What needs to happen now is that this message on corporate tax needs to spread far and wide. Journalists who interview corporate tax-cutting politicians need to put it to them, and persist in this line of questioning - then watch them wriggle.

Opposition parties can make huge mileage with this one. Why have they been so silent on this no-brainer?

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Tax justice: ripples spreading in Europe

Adapted from the Treasure Islands blog:
Last week there was an event in Brussels entitled Tax and financial havens: a threat to the EU's internal market, organised by the European Economic and Social Committee - an official advisory body to the EU institutions. In a report on the event, I am delighted to see this:

"In his opening speech at the conference on tax havens, the president of the EESC section on internal market Bryan Cassidy plainly pointed at Switzerland, Luxembourg and the UK as onshore fiscal havens within Europe. He underlined how "money laundering and tax havens are closely connected". And he praised the work of a former Reuters journalist Nicholas Shaxson, whose book on tax havens Treasure Islands is now on the desk of many decision-makers in Brussels. In his well-documented book, Shaxson argues that the UK and the United States are the biggest fiscal havens in the world.

The exotic islands and alpine resorts, usually indicated as shelters against taxmen, are mere subsidiaries of Wall Street and the City of London in carrying illicit activities, Shaxson says. Phrases such as "tax efficiency" and "transfer pricing", enabled by a vast network of double-taxation agreements, make it possible for international individuals and global corporations to reduce their tax payments to nil through both legal tax avoidance and illegal tax evasion - Shaxson explains.

Global action seems to be following on the heels of these accusations."

Well, I don't want to claim too much credit for all this global action (or, in many cases, non-action). The main impetus for action is the financial crisis which has led to fiscal deficits and a drive to re-examine old orthodoxies. I think Treasure Islands certainly came along at a good time in this respect. Various others, such as the Tax Justice Network, and closely connected others such as the Uncut movements, Richard Murphy, and various non-governmental organisations around the world, have played major parts too. The report went further:

"The most radical voices against creative finance and accounting are getting louder, and more ears are ready to listen to them. "Fiscal havens are the central feature of the globalised economy; they are the core feature of contemporary capitalism and contributed to shape the current financial crisis," said John Christensen, economic adviser to Jersey's fiscal haven between 1987 and 1998 - and later founder of the Tax Justice Network or TJN."

The forces pushing against us are truly monstrous, and we lose far more battles than we win. But we are certainly having an impact, on a shoestring budget (take a look at p4 of this document to see just how little we are working with), and we are achieving one of our core aims, which is to help the world to wake up to the offshore trap that it has fallen into.


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Friday, March 23, 2012

Links Mar 23

Tax Justice Network's Taxcast Tackle Tax Havens
In March’s Taxcast: Apple i-tax dodging, reclaiming Arab Spring country assets, the rich country club of the OECD and the ABCs of setting up letterbox companies.

The world's biggest tax havens - the US and the UK? Public Service Europe
Mar 22 -"European Union institutions are stepping up their efforts against tax havens, shifting their attention from remote islands or alpine mini-states to actual EU member states - such as the United Kingdom..."

Tax Evasion Possibly Biggest Drain of Money From Africa Voice of America
Mar 22 - Article cites research by Global Financial Integrity (GFI).

Philippines: Senate defers approval of changes to anti-money laundering law Philippine Daily Inquirer

Mar 21 - Interesting perspective on tax evasion being a predicate crime for money laundering, and in the context of Financial Action Task Force (FATF) requirements.

U.S.: Audit rates of millionaires nearly double CNN Money
Mar 23 - "The IRS said its recent offshore tax evasion initiatives have contributed to the jump in audits of millionaires, since many offshore tax evaders are high-income earners. This year, the agency is offering taxpayers a reduction in penalties and no jail time for a limited window of time if they fess up to having offshore accounts."

Peru to Boost tax Take Tax-News
Mar 22 - "Peru's Finance Minister Luis Miguel Castilla has announced that Peruvian authorities are to target non-compliant taxpayers, aiming to boost the tax take by 2.5% of gross domestic product (GDP) within a four-year period."

Italy Boasts New Weapon In War On Evasion Tax-News
Mar 22 - "It will look at whether a taxpayer’s declaration of taxable income is coherent with his or her overall spending capacity ... The new system will be able to trace individuals' expenditure in more than 100 different categories to find disparities between spending and declared incomes.."

Australia: Tax Office does number on tax evaders PSnews
Mar 20 - The Australian Taxation Office (ATO) has released its 2011 prosecution figures for tax and superannuation offences ...'People deliberately committing tax evasion are often caught by the sharing of information between Government Departments and other third parties'”.

The erosion of India's consensus-building Business Standard
Mar 20 - "The Organisation for Economic Co-operation and Development’s effort to make the transfer of funds from one national jurisdiction to another more transparent has been strenuously and deviously resisted by several developed countries. Specious claims are made by financial institutions that receive funds from dubious sources that cross-country tax arbitrage is not a crime in their countries. Tax havens also claim that if tax avoidance or theft is alleged by countries from where capital flight has taken place, it is for the accusing country to provide the required evidence."

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Thursday, March 22, 2012

Links Mar 22

Offshore financial centres and international development: An NGO perspective Cayman Financial Review
Jan 18 - Article by David McNair, an important piece to be published in offshore financial centre media - "This article gives an NGO perspective on the role of offshore financial centres in global development and why it is in the self interest of OFCs to share information".

See also:
The future of offshore financial centres: Survival traits in a new era Cayman Financial Review
Jan 18 - Interesting to contrast with David McNair's article linked above - the article points out: "It is certainly true that international politics and the economic interests of OECD countries plays a key role in the continuing pressures that IFCs face" - but does not address the issue of the impact of offshore on developing countries.

Revised British tax deal re-opens battle front swissinfo
Mar 21 - "A modified tax deal between Switzerland and Britain has revived Swiss hopes that it could provide a platform to save banking secrecy ... The success of the Rubik treaty is of vital importance to the Swiss financial sector. If the British scheme can be passed and implemented by the start of next year, other countries such as Greece could soon start negotiating for their own deals." The report cites TJN's commentary.

The Biggest Story in Banking, Thanks to IRS Forbes

Mar 21 - On the U.S. Government "breaking down the walls of Swiss banking secrecy."

Jurisdiction Profile: The Austrian Banking Model, A Well-Kept Secret To Many WealthBriefing
Feb 27 - TJN asserts that a global, multilateral approach is required to address abuses of bank secrecy and to achieve tax justice. This article provides an example of why that is the case: "The Swiss banking model is constantly under attack from abroad, but it is not often mentioned that almost identical secrecy laws are found in the neighbouring Alpine state of Austria..."

Philippines: Technical Assistance Report on Road Map for a Pro-Growth and Equitable Tax System IMF
Mar 19 - "The mission‘s work was based on the following key objectives besides the revenue goal: Improving the Philippines‘ competiveness in doing business under the ASEAN Economic Community (AEC) framework; Simplifying the tax system; Improving the equity of the tax system; and Improving the effectiveness of the tax system. Hat tip: Francis Weyzig.

EU transparency proposal threatened by imaginary laws Eurodad

Mar 21 - "One of the clearest flaws in the European Commission’s (EC) proposal to increase corporate and government accountability has been ignored. Namely, the EC has included an exemption meaning companies would not have to disclose payments in countries where criminal law prohibits such disclosure..."

Time to talk about the Finance Curse Treasure Islands
Mar 22 - Nick Shaxson comments, on a Reuters article on this issue. The term “Finance Curse” is the result of years of discussions with Nick, and John Christensen and others. It is similar to (but different from) the Resource Curse, Nick's previous field of expertise.



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Loopholes for Sale: Campaign Contributions by Corporate Tax Dodgers

New from U.S. PIRG and Citizens for Tax Justice
A new report from U.S. PIRG and Citizens for Tax Justice (CTJ) finds that thirty unusually aggressive tax dodging corporations have made campaign contributions to 524 sitting members of Congress (98 percent of all members), and disproportionately to the leadership of both parties and to key committee members. The report, Loopholes for Sale: Campaign Contributions by Corporate Tax Dodgers, examines campaign contributions made by a total of 280 profitable Fortune 500 companies in the 2006, 2008, 2010 election cycles and so far in the 2012 election cycle.

Read the report.

The report focuses on campaign contributions by 30 companies – dubbed the “Dirty Thirty” – that a previous U.S. PIRG/CTJ study found collectively received $10.6 billion in tax rebates from 2008 through 2010 while spending millions to lobby Congress.

Altogether, these companies spent $41 million on campaign contributions during the four most recent election cycles, with members of Congress receiving $58,000 on average.

The top five Congressional recipients of contributions since 2005 from the 30 no-tax companies were:

House Minority Whip Steny Hoyer (D-MD) - $379,850
Speaker of the House John Boehner (R-OH) - $336,500
House Majority Leader Eric Cantor (R-VA) – $320,900
Senator Roy Blunt (R-MO and former House Minority Whip 2003-08) – $220,500
Senate Minority Leader Mitch McConnell (R-KY) - $177,001


The top five corporate contributors since 2005 are:

Honeywell - $6,469,277
Boeing - $4,049,250
General Electric - $3,390,850
Verizon - $3,201,550
FedEx - $2,595,900

Read the report.


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Wednesday, March 21, 2012

Links Mar 21

Fair Shares? BBC World Service
Mar 9 - Interview with Savior Mwambwa of the Centre for Trade Policy and Development in Zambia. "It has always been one of the great ironies of international development that some of the poorest countries on earth have the greatest riches. Many African, Asian and South American nations have vast reserves of natural resources. So why don't they get more of the profits from exploiting them? ... the key problem is tax avoidance by international companies."

A network that advocates for tax justice El País (In Spanish)
Mar 21 - A major article featuring TJN, and issues of tax and inequality with a focus on Latin America.

Argentina: Lafuente of fortune, the unresolved debate over the inheritance tax Cronista
(In Spanish)
Mar 16 - On the debate about whether inheritance tax should be imposed within Argentina, and the argument that this would help reduce inequality. Hat tip: Jorger Gaggero.

What is the key to longevity in countries with higher life expectancy infobae
(In Spanish)
Mar 19 - Note that the countries listed with highest life expectancy in the world are secrecy jurisdictions - the question is why? Hat tip: Jorge Gaggero.

Analysis: Swiss banks still draw rich despite secrecy blows Reuters
Mar 20 - Note the Swiss Private Banking trend: " ...the country has managed to compensate by attracting clients among the new wealthy in booming emerging markets like Latin America and the Middle East and Africa."

India: Income-Tax sleuths to be posted in offshore havens to track evaders The Economic Times
Mar 20 - "Tax officers will be posted in offshore havens and various countries to spot suspicious transactions by Indian residents who use these jurisdictions to escape tax and launder money." Hat tip: Offshore Watch.

U.S.: Loopholes for Sale: Campaign Contributions by Corporate Tax Dodgers Citizens for Tax Justice
Mar 21 - "Citizens for Tax Justice and U.S. PIRG’s new report Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes."

U.S.: IRS forms "SWAT team" for tax dodger crackdown Reuters
Mar 21 - "The U.S. Internal Revenue Service is staffing up with high-powered talent to crack down on companies shifting profits from country to country to lower their tax bills, a strategy the agency has targeted before with only limited success."

Apple says $60 billion will remain overseas until US tax law changes The Hill
Mar 19 - "Apple made an aggressive pitch for a corporate tax holiday Monday, stressing that it plans to keep more than $60 billion parked offshore until Congress makes it easier for companies to bring those profits home." Hat tip: Holly Sklar. See recent Apple-related blog from Nick Shaxson here.

UK: Closing Stamp Duty loophole should just be the start Red Brick

Mar 20 - Interesting commentary on addressing inequality. Hat tip: Carol Wilcox, Labour Land Campaign.

See also"
94,000 properties. How many prosecutions for the crimes they hide? Tax Research UK

Mar 21 - Richard Murphy comments on "According to some reports The Land Registry has calculated that in the past 12 years a total of 94,760 properties have effectively been placed offshore and beyond the reach of the taxman...."

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TJN Statement on Transfer Pricing

David Spencer, a New York attorney and senior adviser to the Tax Justice Network, has prepared the following statement about transfer pricing, which he presented at the meeting on Transfer Pricing sponsored by the UN Financing for Development Office at the UN in New York on March 14th, and which we mentioned in our blog about India's strong statements about the OECD's dominance of transfer pricing issues.

Statement by the Tax Justice Network

I. The Tax Justice Network Suggests an Objective Analysis of Transfer Pricing Issues.

The Tax Justice Network calls for objective analysis of Transfer Pricing issues, especially in the context of the needs of developing countries.

The Tax Justice Network (“TJN”) does not agree with the OECD about several transfer pricing issues, including for example the following:

First, the OECD continues to assert that the arm’s-length principle developed decades ago is still “sound in theory.” TJN believes that the OECD’s theory of the arm’s-length principle no longer applies to multinational enterprises which are highly integrated, and that comparables in many if not most cases can not be found.

Second, the OECD is asserting orthodoxy, as evidenced by (a) its deletion of Article 7(4) of the OECD Model Income Tax Treaty, (b) the OECD’s continued opposition to the Brazilian transfer pricing method, and (c) the OECD’s continued insistence on imposing the OECD’s Transfer Pricing Guidelines on developing countries. As U.N. Assistant Secretary General Jomo K. Sundaram pointed out quite clearly in his presentation at the meeting on transfer pricing here at the UN in June 2011, the OECD Guidelines have been developed by a small group of countries, which are rich.

Third, the OECD Transfer Pricing Guidelines are so complex that even the tax administrations of many developed countries can not adequately administer those rules. Therefore, how can developing countries, especially the least developed countries, be expected to administer adequately those rules?

Fourth, in effect the OECD continues to assert that there are only two options: (1) the OECD’s arm’s-length principle, or (2) global formulary apportionment which the OECD rejects. TJN believes that the arm’s-length principle is broader than the OECD’s Transfer Pricing Guidelines, and also that there is a spectrum of transfer pricing methods, including for example, combinations of (a) an arm’s-length principle when comparables can easily be determined and (b) formulary apportionment concepts in other situations.

Therefore, Tax Justice Network calls for an objective analysis of modifications of the OECD’s Transfer Pricing Guidelines and an alternatives to the OECD’s Transfer Pricing Guidelines.

II. Comments by Experts about Transfer Pricing Rules

Some distinguished experts have commented about transfer pricing rules:

(1) Vito Tanzi:

Vito Tanzi, Formerly Director of the IMF’s Fiscal Affairs Department has written:
“Through the manipulation of transfer prices, the multinational enterprises can shift profits to subsidiaries in jurisdictions with low taxes. These actions reduce the total liabilities of the multinational enterprises and cause some reallocation of tax money among the countries involved, with some countries losing revenue and others gaining from these actions. In the views of various tax administrators, this has become a significant problem and has led to an erosion of tax revenue. The technical characteristics of many modern products (airplanes, automobiles, electronics, and intangibles) make the control of transfer prices particularly difficult. Tax jurisdictions are allocating increasing administrative resources to what may be a futile attempt, over the long run, to deal with this [transfer mispricing] problem…. For corporate income, formula-based taxation may eventually replace account-based taxation as a method for dealing with the problem of transfer prices, as mentioned earlier.”
(Vito Tanzi, “Is There a Need for a World Tax Organization,” in The Economics of Globalization, 1998)

(2) Martin Sullivan:

Martin Sullivan, the economist, has stated that
“The problem with the arm’s-length method is that it does not work well in theory or in practice.”
(“Combining Arm’s-length and Formulary Principles,” Tax Notes, January 25, 2010).

(3) Stephen Shay:

Stephen E. Shay, then Deputy Assistant Secretary (International Tax Affairs), U.S. Department of the Treasury, testified before the U.S. House Committee on Ways and Means (July 12, 2010). Shay stated, in summary:
“Chairman Levin, Ranking Member Camp and members of the Committee, thank you for the opportunity to testify on the important topic of transfer pricing. I will focus my testimony today on [US] Treasury’s analysis of the available data relating to the issue of whether profits are being shifted abroad out of the United States for tax purposes through the mechanism of related party transactions or, as the mechanism is more commonly known in the tax policy community, through transfer pricing. We conclude, based on our analysis of available data, that there is evidence of substantial income shifting through transfer pricing.”
(4) David Rosenbloom:

H. David Rosenbloom, formerly International Tax Counsel at the U.S. Treasury Department, and now a partner in Caplan and Drysdale and Director of the International Tax Program at New York University Law School, has been quoted as follows:
“H. David Rosenbloom called the arm’s-length system as it operates today fundamentally unworkable. Nevertheless, citing treaty obligations and problems of international continuation – he had to admit we are stuck wit it. But he does not believe there must be a dichotomy between the arm’s-length and formulary methods. He suggested a midway position whereby the IRS would presume a formulary assignment of profits but taxpayers would be allowed to rebut the presumption with reference to arm’s-length principles. Rosenbloom pointed out that this could be a variant of the Brazilian system, adopted in 1997, that relies heavily on formulary methods and fixed-markup safe harbors. Brazil’s approach is not compliant with the OECD’s arm’s-length standard.”
(Martin A. Sullivan, “Combining Arm’s-Length and Formulary Principles,” Tax Notes, January 25, 2010, page 314).

Clearly, the message from these experts is that the OECD Transfer Pricing Guidelines should be closely scrutinized.

III. What has the OECD Done about the Shifting of Profits to Low Tax / No tax Jurisdictions?

The OECD in its 1998 seminal Report, “Harmful Tax Competition: An Emerging Global Issue,” mentions (page 61) the relationship of transfer pricing issues and low-tax and no-tax jurisdictions. Of course, one essential element of transfer mispricing is the efforts of multinational enterprises to shift profits to low tax or no tax jurisdictions. That 1998 OECD report states:
166. Measures that constitute harmful tax competition often result in significant income being attributed to a foreign entity which performs few, if any, real activities. The application of transfer pricing rules, which typically start from an analysis of true functions performed by each part of a group of associated enterprises, does, in that respect, constitute a useful counteracting measure.

167. It may be appropriate, however, that the [OECD Fiscal Affairs] Committee develop procedural rules that would address the specific circumstances of tax havens and regimes that constitute harmful tax practices. Rules effecting a reversal of onus of proof in certain cases …. would fall in that category. One action that could be taken in that respect would be for the [OECD Fiscal Affairs] Committee to supplement [the OECD Transfer Pricing Guidelines] with more guidance on the application of the [OECD] Guidelines in relation to tax havens and regimes constituting harmful tax competition.
I cannot find in the OECD’s Transfer Pricing Guidelines modified in July 2010 any such focus by the OECD.

The Brazilian transfer pricing system which the OECD rejects, does focus on transactions with entities in a specified list of (a) tax havens and (b) jurisdictions with “privileged fiscal regimes”, whether those transactions are with related or unrelated parties.

IV. Country-by-Country Reporting to Help Solve the Information Deficiency Problem


The draft Transfer Pricing Manual being prepared by the Subcommittee on Transfer Pricing of the UN Tax Committee refers in numerous places to the information deficiency problem. That is, the problem faced by developing countries in getting sufficient information, including comparables, about the activities of multinational corporations.

Tax Justice Network, and other civil society groups strongly support country-by-country reporting, including for example, section 1504 of the Dodd-Frank Act (although limited in scope), and also the relevant provision of the proposed U.S. Stop Tax Haven Abuse Act.

We believe that country-by-country reporting will substantially improve compliance with applicable tax law, especially in developing countries, and that such benefit for developing countries will far outweigh the very marginal increase in the compliance cost for multinational corporations.

TJN calls for country-by-country reporting whether countries adopt the OECD’s Transfer Pricing Guidelines, or a modified arm’s-length principle, formulary apportionment, or a mixed system.

And the G-20 at Cannes referred specifically to improving the transparency of multinationals through country-by-country reporting.

V. Vested Interests

A significant source of support for the OECD Transfer Pricing Guidelines and its Arm’s Length Principle comes from people who have a significant vested interest in the continued use of those Guidelines and the Arm’s Length Principle: auditing firms and law firms and economic consulting firms which derive substantial income from advising and consulting about those Guidelines. The more complex those rules are and the more difficult to administer those rules, the more money those firms make. And employees of governments and international organizations who have developed expertise in the OECD Guidelines and whose careers depend to some significant degree on the OECD Guidelines also have a vested interest in the continuance of the OECD Guidelines. To quote Martin Sullivan, a distinguished economist: “There is the small but influential army of private-sector pricing consultants, many of them former [U.S.] Treasury officials and U.S. Internal Revenue Service Officials, who have built careers around the arm’s length method.”

Michael Durst formerly a U.S. Treasury Department official responsible for the Advanced Pricing Agreements about transfer pricing issues, has emphasized that transfer pricing rules based on the arm’s-length principle are inherently unenforceable. Indeed, he implies that the arm’s length method exists because it is unenforceable, and that is why business lobbyists have supported it so energetically.

VI. Modifications of the OECD’s Guidelines

The OECD’s Transfer Pricing Guidelines state explicitly that “the use of safe harbors is not recommended” (Chapter IV, section E, paragraph 4.122). However, the OECD has recently woken up and is now willing to consider safe harbors. That evidences that the OECD’s Transfer Pricing Guidelines are not cast in stone and can be substantially improved.

Similarly, TJN expects more critical, objective analysis by the OECD and certainly by others, of the OECD’s Transfer Pricing Guidelines in general. The Tax Justice Network is organizing a Seminar on June 13th -14th, 2012 about proposed modifications of, and alternatives to, the OECD Transfer Pricing Guidelines.

David Spencer
Senior Adviser
Tax Justice Network

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No obvious link between capital gains tax cuts and growth - research

The Tax Policy Center in the United States has posted an article with the following graph.


For all the shrieking about how capital gains taxes stifle growth, there is the small matter of the evidence on the ground. As the authors explain:
"If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth . . . the correlation is 0.12, the wrong sign and not statistically different from zero. I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth. There is never a statistically significant relationship."
Now correlation (or non-correlation) isn't causation, as the authors readily admit. But those who argue that tax cuts spur growth need to work very hard indeed to prove their case, in the face of this evidence. The evidence, as it happens, points (very weakly) in the other direction.

In this light, one might like to consider our recent arguments about corporate tax rate cuts too, explaining why corporate tax-cutting is quack medicine.

Finally, we like these authors' summary of their findings:
"Low capital gains tax rates do accomplish one thing: they create lots of work for lawyers, accountants, and financial geniuses because there is a huge reward to making ordinary income (taxed at rates up to 35%) look like capital gains (top rate of 15%). The tax shelters that these geniuses invent are economically inefficient, and the geniuses themselves might do productive work were the tax shelter racket not so profitable. And the revenue lost to the capital gains tax loophole adds to the deficit, which also hurts the economy.

Thus, it’s no surprise that there’s no obvious relationship between capital gains tax rates and economic growth. Indeed, the low rates on gains might do more harm than good."
Most likely, the Wall Street Journal will now publish a front page article pointing to this research, with the headline "Tax Cuts: Why We Were Wrong."

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Tuesday, March 20, 2012

European Commission queries UK - Swiss deal

Yesterday we criticised a new protocol signed between Switzerland and the UK, amending the so-called "Rubik" agreement of October last year which the European Commission had objected to. Yesterday the Swiss government said that with the new protocol,
"The concerns of the EU Commission regarding compatibility with EU law have been removed."
and Vanessa Houlder in the Financial Times declared that
"Officials signed a protocol in Brussels that will modify the deal so it is compatible with existing EU laws on evasion."
We asked the European Commission whether this was true or not. And the reply came back from spokeswoman Emer Traynor:
The Swiss press release is its own interpretation of the situation - it's not for the Swiss government to profess the Commission's position.
. . .
For the moment we don't have a reaction, because we were only informed about the revised agreement being signed at midday today. So we'll have to see the exact wording first.
. . .
We'd hope though that it would reflect the good discussions that the Commission has had with UK over the past months, from which we believe there was a common understanding on what needs to be changed in these agreements to make them compatible with EU law. Commissioner Semeta was extremely clear in his letter to Member States on 5 March as on the parameters that Member States must respect in such bilateral agreements with CH. He remains firm on that."
European Commission President José Manuel Durão Barroso said:
On the tax question I want to tell you one thing - the Commission will never accept a bilateral agreement by a member state with a third party like Switzerland if it does not fully respect community law. So we will look at these agreements and we will make sure that community law is fully respected.
In short, the Financial Times might have got the story right, and it might not. It does have some additional detail about inheritance taxes, which is interesting, and which we'll look at when we have more details.

Still, even if Rubik is compatible with EU law, then there will be little point in anyone signing up to it. Even the original version was useless, and although we haven't seen a statement from UK Revenue and Customs - they don't seem to have even issued a press release yet - it seems clear from what has been said that the gaping, fatal loopholes that suffuse the whole deal, leaving it like a Swiss cheese, have not been filled - except, perhaps, with cunning little tax-advising mice.

What we can say for sure is that Dave Hartnett, the head of the UK Revenue and Customs authority was being economical with the truth when he said:
“What was already a highly effective weapon to tackle offshore evasion has been further strengthened."
Highly effective? We have publicly and privately asked HMRC, along with the UK accountancy profession, the Swiss Bankers' Association and the Swiss tax authorities, to explain why our analysis revealing the disastrous, hole-riddled uselessness of the whole thing is wrong. We are still waiting for someone to come up with a serious objection to what we said.

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