Friday, June 29, 2012

Links Jun 29

Tax havens; Heaven for the rich, hell for the poor TJN Latin America and Caribbean
Jun 27 - Great video explaining tax havens. (In Spanish).

Tax justice must be on the agenda for the post-2015 development goals New Statesman

Jun 17 - ActionAid's Mike Lewis writes: "As the 2015 deadline approaches for achieving the "Millennium Development Goals" - the global benchmarks for tackling poverty - questions are growing louder about how far we’ve come, and what we do next."

Bangladesh: Call to withdraw VAT that hurts poor The New Nation

Jun 28 - "Activists of 20 civil society organizations and rights groups have demanded the government to increase the contribution of direct tax in the budget making corresponding reduction in VAT to protect the poor and the low income groups from disproportionate tax burden."

See also:

Rights activists criticise VAT as regressive tax Daily Sun
Jun 28 - "In Bangladesh, indirect tax such as VAT accounts for 70 percent of the revenue earning compared to 25 percent direct tax whereas contribution of direct tax which ensures social justice is almost 70 percent even in Europe and America."

TCI business community fights back at VAT Cayman News Service

Jun 26 - The UK government’s proposal to implement VAT in the Turks and Caicos Islands has met with opposition: “This new VAT tax is not driven by a "grass roots" initiative, but is a politically driven tax imposed upon us by distant bureaucrats based in Europe without effective due process and regard to our specific economy and its future development."

The mystery of Zambia's mining millions Christian Aid Blog
Jun 14 - Reporting on a visit to Zambia, Charlote Marshall notes: "The overwhelming message was that the companies taking wealth out of their country were not giving anything back."

Tax evasion fight starts to bare its fangs Reuters Africa

Jun 28 - "Some of the money Africa loses through artful officials diverting cash into offshore tax havens could be recovered after a push by the world's richest countries to share tax data. The initiative, unveiled quietly in a report last week by the OECD, embraces the notion that countries should automatically share data on taxable income and assets."

Greek, Romanian Companies Move To Bulgarian Tax Haven Bloomberg

Jun 28 - "Greek and Romanian companies that registered in Bulgaria rose last year as executives sought to take advantage of low taxes and a stable currency in the neighboring Balkan country." Hat tip: Offshore Watch.

Spain: Expats on Hacienda tax hit list IFA online

Jun 29 - "A number of clients have reported receiving letters about their offshore bank accounts. It is the first time we have seen the Hacienda [Spain tax authority] using information supplied by a tax haven to pursue tax on undeclared income."

Why the global political class lies in fear of the LIBOR scandal The Slog
Jun 28 - On the developing story of banks colluding to distort markets by manipulating LIBOR (London InterBank Offered Rate), a fundamental mechanism of international money flows. Not tax justice precisely, but connects with activities by the financial elite to distort markets for the benefit of a privileged few.

See also:
Don't blame Barclays alone New Statesman

Jun 27 - Richard Murphy comments on "banks rigging prices and manipulating markets to mitigate their risk at cost to others."

Might of Fonterra may monopolise market Stuff

Jun 27 - Another story of the ripple effect of murky financial dealings - "Last November, the High Court in London ruled on an extraordinary case involving a wealthy Russian businessman, a Russian state-owned bank, a dairy company and various tax haven entities .."

The Price of Inequality: Interview With Joseph E. Stiglitz Rolling Stone

Jun 24 - On the new book The Price of Inequality.

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Offshore: the smoke-filled room, where gentleman arrange the world's affairs over cognac and cigars.

One of the themes that TJN keeps returning to is that tax havens, despite their name, aren't just about tax. They are, essentially, about escape: they are escape routes from the rules responsibilities of mainstream societies elsewhere. The entire proposition of these places is, by its very 'offshore' nature, profoundly anti-democratic, and we think that the term 'secrecy jurisdiction' can sometimes be a more appropriate term than 'tax haven'. Others prefer to use the term 'offshore,' which reflects this 'elsewhere' aspect.

The Guardian, in its ongoing Channel Islands series, has an editorial today about the Channel Islands, which it dubs "the Loophole Islands", with a short summary of a piece it just wrote, which describes one more escape route that people don't traditionally associate with tax havens.
"The fact that Guernsey has opted out of European standards on what claims can be made about vitamins and minerals means that it has effectively become the supplement capital of the continent, bustling with firms that for years have made unsubstantiated health claims for their wares. The number one market for these 21st-century super supplements is the UK."
Why are financiers and other sharp operators so very fond of places like Jersey? It's because of this 'elsewhere' concept: they are places where they can reap the benefits of (in this case British) society, while shaking off the responsibilities: the lines of accountability have been cut. A new blog from the Treasure Islands site, copied more or less wholesale (with permission), gives the idea quite clearly.

Yesterday I had coffee with a financial expert in Zurich, who is in the process of setting up a new financial product. The expert said to me:

"I have had laws changed to accomodate this proposition."

Me: "Where have these laws been changed.?"

"Offshore."

This reminded me straight away of a short section in a chapter of Treasure Islands.

" ‘Someone comes up with a new idea, but onshore regulation blocks it,’ said Robert Kirkby, technical director for Jersey Finance, echoing what Delaware’s insiders had boasted of. ‘You can lobby onshore, but there are lots of stakeholders, you have to get past them all, and it takes a long time. In Jersey, you can bash this thing through fast. We got the leading edge years ago. We can change our company laws and our regulations so much faster than you can in, say, the UK, France or Germany.’ "

It all sounds so 'efficient,' doesn't it? The analogy is of grit in the machine, with tax havens as the oil that makes the machine run more smoothly. But hang on a second. What, exactly, is that 'grit'? That grit is a small matter called 'stakeholders.' It is tax, it is financial regulation, it is disclosure rules, and so on.

All of those things are put in place for good reason. Adapting something I wrote elsewhere a little while ago:

"Jersey's secrecy, or its tax or financial loopholes, are designed to attract money not from locals, but from foreigners. ‘Elsewhere:’ hence the term ‘offshore.’ Offshore lawmakers are always separated from those affected by the laws they write, so there is never proper democratic consultation when these laws are written. This is not only deliberate – it is the whole point. These are laws by insiders, for insiders, without democratic accountability: they are private law-making machines. Offshore is, almost by definition, a smoke-filled room. The implications for the last financial crisis, and for the next ones, should be quite clear.

It's a point I can't stress strongly enough.

P.S. the rest of my conversation over coffee, just a few metres away from the grand old UBS headquarters (though my coffee companion was not from UBS), was fascinating too.

Offshore: the smoke-filled room, where gentleman arrange the world's affairs over cognac and cigars.

And the same Treasure Islands blogger had an article in yesterday's Guardian, unpicking Jersey's threats to declare independence if people put too much pressure on them.

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Thursday, June 28, 2012

The Guardian: Special report on the Channel Islands

The Guardian newspaper is running a special series on the Channel Islands. There are already a number of stories available, here, with plenty more to come.

This will be added to our permanent A-Z archive.

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Wednesday, June 27, 2012

Helsinki Transfer Pricing Conference: the presentations

The TJN Transfer Pricing conference organised in Helsinki last week, in partnership with Finland's KEPA and the Foreign Affairs ministry of Finland, was a resounding success. In essence, there was quite widespread agreement that the OECD's dominant so-called "Arm's Length" approach to transfer pricing -- which may have worked acceptably half a century ago when the global economy was a very different place -- is catastrophically broken today, and that real workable alternatives are available and already being put into practice.
The conference outcomes are summarised by John Christensen here, and we are delighteded to provide the conference presentations, below. These are already also placed in our permanent archive of transfer pricing materials, here; (scroll down to the news and updates section.)
  • Opening remarks by Finland Minister Heidi Hautala
  • The Indian Transfer Pricing System - Anita Kapur, Director-General of Income Tax
  • Transfer Pricing: Alternative Methods of Taxation of Multinationals, Finland Minister for Foreign Affairs, Mr. Erkki Tuomioja. See also his closing remarks, here.
  • The South African Transfer Pricing System, Gerdi van der Westhuysen, South African Revenue Service (SARS)
  • Transfer Pricing in Latin America, Isaac Gonzalo Arias Esteban, International Cooperation and Taxation Director Inter American Center of Tax Administrations
  • Rethinking the Source of the Arm's Length Transfer Pricing Problem, Ilan Benshalom, Hebrew University Faculty of Law.
  • Formulary Apportionment— Myths and Prospects, Reuven Avi-Yonah & Ilan Benshalom
  • International Transfer Pricing Abuse: Sizing the Problem, James Henry
  • Transfer Pricing: Alternative Approaches / Sub Saharan Africa, Joseph H. Guttentag, International Senior Lawyers' project
  • Bananas: the case of Ecuador, Juan Carlos Campuzano S. Servicio de Rentas Internas, Ecuador
  • Transfer Pricing in Nigeria, Julius Bamidele, Director (Oil and Gas), FIRS, Nigeria
  • Taxation of Multinational Financial Institutions Using Formulary Apportionment to Reflect Economic Reality, Kerrie Sadiq
  • Transfer Pricing - the Brazilian case - Marcos Aurélio Pereira Valadao (with additional text here.)
  • Meeting the Challenges of Transfer Pricing, Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing, Fin. Transactions, OECD, more text here.
  • SAB Miller: what happened next. Martin Hearson, ActionAid. Original report here.
  • Combined Reporting with Formulary Apportionment: The Transfer Pricing System of the US States, Michael J. McIntyre Professor of Law, TJN Senior Adviser, Wayne State University
  • Future of Taxing Multinational Corporations: Transfer pricing issues in Central America, Ricardo Barrientos
  • Country-by-country reporting and transfer mispricing, Richard Murphy, Tax Research
  • The Common Consolidated Corporate Tax Base (CCCTB) in Europe, Prof. Sol Picciotto, TJN Senior Adviser
  • Brazilian Transfer Pricing – A Practical Approach Could this be a Model for Developing Countries? Tatiana Falcao, IBFD
  • The Role of Finland in promoting international tax co-operation. Tuire Santamäki-Vuori, State Secretary, Ministry of Finance
  • Indian Transfer Pricing System, Vikram Vijayaraghavan, SAPR Associates, Chennai
  • China’s transfer pricing system, Zhang Ying, State Administration of Taxation of People’s Republic of China
For David Spencer's long introductory piece ahead of the conference, summarising criticisms of dominant OECD methods, click here.
There are a couple of additional papers, which are available here, we will update this blog by listing them in full in due course.

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European Commission: new report on tax havens, tax abuse

A new report from the European Commission has just been published. It contains many things of interest, such as this clear statement of some of the harm that tax havens can cause:
"Tax havens, also sometimes referred to as 'non-cooperative jurisdictions' are commonly understood to be jurisdictions which are able to finance their public services with no or nominal income taxes and offer themselves as places to be used by non-residents to escape taxation in their country of residence. The OECD has identified three typical 'confirming' features of a tax haven: (i) lack of effective exchange of information, (ii) lack of transparency, and (iii) no requirement for substantial activities. In addition they often offer preferential tax treatment to non-residents in order to attract investment from other countries. Tax havens therefore compete unfairly and make it difficult for 'non' tax havens to collect a fair amount of taxation from their residents."
(An accompanying press release is here, with a FAQ sheet here) And it adds that estimates of the size of the shadow economy in the EU of nearly one fifth of GDP, gives a clear indication of the extent of the problem, with the FAQ sheet adding that

"Some studies estimate the level of tax evasion and avoidance in Europe to be around €1 trillion."
(That would be a TJN study that they are referring to.) The document also reinforces the size of the potential issues.
"Well-known and marketed financial centres with strong banking secrecy laws continue to dominate the international cross-border deposits market. Cayman Islands and Switzerland alone, with a total of USD 1352 billion deposits by non-banks represent almost 20% of all worldwide deposits by non-banks."
(Although of course by no means all of that is tax-evading money.) One of the recommendations is to push forwards amendments to the EU transparency arrangement known as the EU Savings Tax Directive, which we've written about extensively elsewhere; including how Switzerland is leading the charge to sabotage those amendments, with the complicity of the United Kingdom and other countries.
"The Council should swiftly give a mandate to the Commission and provide support to it in negotiating amendments to the existing EU savings agreements with Switzerland, Andorra, Monaco, Liechtenstein and San Marino."
Indeed, but the political obstacles, with tax havens inside the EU such as Luxembourg and Austria on the side of secrecy, are enormous. And there are other interesting prospects for international co-operation in their sights:
"Recent developments at international level as regards the US Foreign Account Tax Compliance Act (FATCA) open new perspectives for strengthening automatic information exchange between Member States and third countries thus improving transparency at a global level."
And there is, of course, plenty more in there.

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Why UK's domicile rule damages British football

The satirical UK magazine Private Eye, which provides some of the UK's best tax reporting, makes a powerful yet simple argument, about how one of the UK's prime tax haven offerings - the special tax exemptions given to so-called 'non-domiciled' residents - has made UK national football less competitive, and helps (along with the curse of penalty shoot-outs and other phenomena) account for the perpetually dismal performance of the UK's national football teams in international competitions.

The argument is very simple indeed, and unarguable. "Non-domiciled" foreign players must pay far less tax than native British players do, and this effectively makes British players uncompetitive in the bidding competitions for talent. As the Eye puts it:
"It's far cheaper to buy a decent striker than develop a home-grown one.

This is in large part down to state-sponsored tax dodging in the form of the non-domicile concession for which foreign players qualify. The large chunk of their fees that are designated for “image rights”, plus earnings for playing abroad, can all be kept untaxed offshore, giving overseas players a major advantage over their home-grown rivals. The same net wage for Julio Geordio costs far less than that of Roy of the Rovers."
If British teams wants to win international competitions, then the domicile rule has to go.

(UK players do, to be fair, try to get around their home tax rules. But evidence is accumulating that many of the strategies they use may not just be immoral and legally dubious - but frequently dangerous to the players too.)

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Summary report on the transfer pricing seminar held in Helsinki on 13-14 June 2012


 Transfer Pricing: Alternative Methods of Taxation of Multinationals
Seminar held at the Parliament of Finland, Helsinki, June 13-14, 2012

Rapporteur’s Summary
Emanuel Rasche

      Preceding remarks
This report on the seminar Transfer Pricing: Alternative Methods of Taxation of Multinationals”, hosted by the Ministry of Foreign Affairs of Finland, Tax Justice Network and KEPA, provides a broad overview of the matters discussed and restricts itself to exploring overall lines of reasoning discussed during the seminar and indicating how to proceed in its aftermath. It does not provide a detailed statement of the technical discussions within the course of the seminar.  For the sake of brevity, the summary is selective in choosing what matters to report on, and readers are advised to consult the powerpoint presentations and papers provided by speakers at the seminar, available here.

       Day 1
In his opening remark TJN’s director, John Christensen, stressed the overall objective of the seminar to highlight persistent and systemic problems arising from attempts to tax multinational companies (MNCs) under the transfer pricing guidelines promoted by the Organization for Economic Cooperation and Development (OECD).  MNCs continue to shift their profits to tax havens, while accounting for the costs of production and services in countries with moderate and high tax rates. Christensen specified that the aim of the seminar was to discuss the problems arising from, and alternatives to, the current guidelines, and noted that the seminar brought together a wide range of expertise, including theoretical thinkers as well as practitioners from across the world.  
In his welcoming remarks, Finnish Minister of Foreign Affairs, Erkki Tuomioja expressed the commitment of the Finish government to tackling tax avoidance, promoting more cooperation of jurisdictions by mechanisms such as Automatic Information Exchange, and its efforts to promote adoption of a Financial Transaction Tax. He noted the differing views with respect to the current transfer pricing regime and expressed that the Finnish Government did not expect a unanimous consensus from the conference, but expected the seminar to provide a space for constructive dialogue on this important subject. He also stressed the willingness of his Ministry to further cooperate with TJN and related civil society organisations.
Heidi Hautala, the Finnish Minister for International Development, noted that discussion on international development is steadily moving beyond aid to making tax a major point of interest. The Minister stressed the common problems of developing and developed countries in this respect, in dealing with the extractive industries for instance, and she acknowledged the willingness of the Finnish Government to support governments of developing countries that seek to achieve more transparency and democratic control of land and resources.
Tatiana Falcao outlined the Brazilian transfer pricing system as a possible alternative to the OECD guidelines. She stressed the workability of the Brazilian approach, which relies on a fixed mathematical formula based on the MNCs own data. The system could reduce the excessive administrative burden that developing countries incur when trying to apply the OECD’s guidelines. The Brazilian system also provides juridical certainty for government and taxpayers.  Tatiana emphasised how the Brazilian system gives priority to tackling tax avoidance, particularly in situations involving the use by MNCs of tax havens, which she referred to as “Privileged Tax Regimes”, even if they are not directly linked to Brazilian entities.
In the following contributions by practitioners from various countries, a pattern of problems with the current transfer pricing regime became unmistakably clear.  Presentations by Zhang Ying from the State Tax Administration of China, Anita Kapur from the Ministry of Finance in India, Julius Bamidele from the Nigerian Federal Inland Revenue Service, and Gertrude van der Westhuysen from the South African Revenue Service, drew attention to the problems arising from attempts to apply the OECD’s arm’s length method of transfer pricing in situations where accurate and timely pricing comparables from non-related parties cannot be obtained or do not exist. The general lack of suitable comparables and databases to successfully apply the arm’s length method was also stressed by Indian tax practitioner Vikram Vijayaraghaven, who posed the simple question: Comparables: Whither Art Thou?
Another topic that recurred throughout conference was the growing challenge posed by intangible trading within MNCs. In cases of intangible trading it is evident that suitable comparables are typically entirely missing, enabling huge profits shifting from source countries to tax havens.
            Chennai-based Vijayaraghaven expressed concerns about protracted litigation processes arising from transfer pricing controversies in India. He concluded that the transfer pricing regime requires “a sea change” and proposed sector wide safe harbours and formulary apportionment as possible solutions.
            James Henry, Senior Adviser to TJN, provided empirical insights into the “Quantification of Transfer Pricing Issues”. He noted that estimates of the harm caused by transfer mispricing range between US$100-150 billion annually. He requested that priority be given to further empirical research to disaggregate the data provided by corporations to better understand their value chains. He also proposed undertaking country specific studies.
            In his contribution on “Tax-Administration in Sub-Saharan Countries”, Joseph Guttentag, former senior adviser to the OECD’s Committee on Fiscal Affairs, stated that the OECD’s arm’s length method could be applied successfully by developing country governments and rejected the idea that other mechanisms, such as unitary taxation with formulary apportionment could function on a global level. He did, however, propose a long list of measures that could be adopted by Sub-Saharan-Countries to improve the use of the OECD’s arm’s length method. Most importantly he stressed the need for more transparency and the disclosure of information by MNCs. He further suggested making use of hybrid methods, such as the Profit Split Method, which is de facto based on a formulary approach, to overcome the difficulties confronting Sub-Saharan-Countries.
              Case studies presented by Martin Hearson and Felicity Lawrence illustrated how MNCs create complex legal structures to shift profits to tax havens. Despite their elaborate codes of conduct on social responsibility, paying tax is not widely seen as a sustainability criterion under existing MNC codes of conduct. It became clear that tax compliance by MNCs requires constant monitoring by civil society.
            In their session, JuanCarlos Campuzano, from the Tax Administration of Ecuador, Ricardo Barrientos, from the Central American Institute of Fiscal Affairs and Gonzalo Arias, from the Inter American Centre of Tax Administration, raised the need for a practical approach to tackling transfer mispricing in South American Countries. They stressed that developing countries suffer from a lack of expertise and sufficient funds to make the arm’s length method practicable in their countries. They also noted the problem of “revolving doors” involving skilled staff leaving tax authorities for the private sector, while former employees of the private sector enter the revenue authorities of governments: conflicts of interest almost inevitably arise.
            David McNair concluded that the sheer complexity of the arm’s length method, combined with the absence of timely and reliable comparator data, poses huge obstacles for developing countries with limited technical resources to investigate transfer pricing abuses.  The situation cries out for simplification.

      Day 2
Opening the seminar’s second day, Marlies de Ruiter, Head of the Tax Treaty, Transfer Pricing and Financial Transaction Division of the OECD’s Centre for Tax Policy and Administration, reported on OECD efforts to overcome the current problems and dissatisfaction with its guidelines from various sides. She explained that the arm’s length method was initially designed to establish a market-based level playing field between MNCs and local companies.  Discussants noted, however, that the trend towards highly integrated MNC business models in recent decades has led to a situation in which competition between MNCs and their locally based competitors is distorted by the former’s ability to use subsidiaries based in tax havens for profit shifting purposes. De Ruiter acknowledged that the treatment of intangibles poses significant problems when trying to apply the arm’s length method and outline the OECD’s efforts to build expertise, especially in developing countries to cope with these challenges. De Ruiter also referred to attempts by the OECD to simplify its guidelines.
            TJN’s Richard Murphy explained that Country-by-Country Reporting was a concept that required disclosure of financial accountancy for every single jurisdiction where a MNC operates.  He argued that the public has a right to have access to this information due to the considerable privilege offered to MNCs in form of limited liability. If the countries in which MNCs operate are required to bear the risk of their failure, then the public similarly has a right to receive full information and account for tax payments. Furthermore, disclosure of this information would provide reliable and timely pricing information for use in collating data for pricing comparables.  Murphy argued that such information might partially overcome the weakness of the arm’s length method, which is significantly restricted by the absence of comparables.
            Mike McIntyre from Wayne State University (another senior adviser to TJN) outlined the US system of taxing MNCs, which focuses on taxing the economic substance of their activities in the different states where they operate. The US requirement for “Combined Reporting”, McIntyre’s preferred term, treats MNCs as a single “unitary business” (hence the term “unitary taxation”) which must file financial records covering all the states in which it operates. The combined income of the MNC is taxable according to an agreed formula, for instance based on payroll, property and sales, which allocates a share of the taxable profits to each state in which the MNC is present. McIntyre rebutted suggestions that this approach is hard to apply in practice, and noted that there is no need for agreement on one particular formula: varied formulae can be applied as appropriate to different sectors of an economy.
        Michael Durst highlighted the central fallacy of the arm’s length method, namely that subsidiaries of MNCs can be treated as though they are non-related parties. This assumption ignores the economies that arise from the integration of a wide range of activities within an MNC structure. He noted that a formulary system, based on taxing real economic activity, should yield a reasonably clear measure of a company’s taxable income. While there is no “ideal system”, the theoretical flawsinherent to the arm’s length method makes it less preferable to unitary taxation using formulary apportionment.
            Reuven Avi-Yonah proposed how improvements could be made to the arm’s length method. He stressed that financial transactions and the use of debt within MNCs must be reconsidered to make income shifting between related entities more difficult. He stressed that the price for capital can be determined with arm’s length tools under the current approach but the form of capital investment was beyond its scope. He proposed “re-characterising” related transactions within MNCs as long-term subordinated debt. Under this re-characterization, MNC affiliates would be seen as paying high interest rates on a regular basis and income shifting manipulation could therefore be reduced using the existing arm’s length method.
            Both Avi-Yonah and Ilan Benshalom suggested that a way forward from the currently unworkable system might involve a “hybrid system”, applying the arm’s length method where relevant comparables are available and formulary arrangements where they are lacking, especially in respect of intangible trade. Both argued that formulary apportionment processes are often misunderstood and problems with applying these processes are frequently exaggerated. Their key argument was that there is no “all-or-nothing paradigm”: formulary apportionment can be used selectively to overcome the obvious weaknesses of the arm’s length method.
            Kerrie Sadiq deepened this line of pragmatic reasoning by exploring possibilities to tax multinational banks according to formulary arrangements. She noted mounting awareness of the problems related to taxing Multinational Financial Institutions (MNFIs) under the OECD’s guidelines, and suggested that MNFIs can be regarded as a unique subset of MNCs due to the specific services they supply and their “integrated trading model”.  Sadiq argued that formulary arrangements would yield a substance-over-form approach, which would take account of MNFIs real economic activities within specific jurisdictions and disregard their extensive use of complex legal structures to shift profits to tax haven subsidiaries. Moreover taxing MNFIs on the basis of real economic activity reflects internalisation theory, which states that companies become multinational precisely because of the benefits they can achieve by internalising costs; benefits which are not taken account of in the arm’s length method. Sadiq suggested that a formulary approach to taxing MNFIs would lead to enhanced certainty, improved tax compliance, reduced complexity, and a reduction in the potential for double taxation and double non-taxation. For these reasons she proposed that applying formulary apportionment on a sectoral basis to MNFIs might provide a useful test for its wider application.
            Sol Picciotto reported on Europe’s Common Consolidated Corporate TaxBase (CCCTB), which attempts to establish a single set of rules for companies operating within the European Union. The CCCTB exemplifies the EU’s approach to tackling transfer mispricing by moving towards a formulary approach and, Picciotto suggested, could serve as role model for other regions.
            In the final session, chaired by Christensen, Nicholas Shaxson remarked that a principal objective for the future was to bridge the gulf between experts and people on the street by adopting a simplified language that could convey the basic issues to ordinary persons. There is also a need to build effective communications between practitioners and theoretical experts. Shaxson also stressed the need for more empirical data on profit shifting and case studies to illustrate how it is done.
            One contributor stressed that the current situation requires “sticking to problems and bringing proposals forward rather than sticking to labels”, while another contributor remarked that TJN should select a specific position and lobby for it. These apparently contradictory remarks highlight two strands of reasoning that were notable throughout the seminar: on the one hand the “all or nothing solutions” tending towards either the arm’s length method or unitary taxation based on formulary apportionment, and the more pragmatic proponents with a “problem-focus” tending towards hybrid solutions on the other hand.

Emanuel Rasche
Helsinki, June 2012

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Tuesday, June 26, 2012

Tax haven Jersey in the spotlight

 Paradis Fiscal: Jersey denies being a tax haven, but these French activists aren't taken in.

The Guardian has published two major articles on the British tax haven of Jersey.  The first article explores the island's role as primarily a centre for complex tax avoidance, something which the spokespeople of Jersey Finance are always anxious to deny, though experts with the island's finance sector are less cagey in private:

"Only in private will a small number of Channel Islands politicians and businessmen betray any trace of personal misgivings about the manner in which the local finance industry trades on complex tax structures to help big business and super-rich individuals cut their tax bills.
"When a horse falls from heaven you don't check its teeth, do you?" said one government figure, who asked not to be named. "And the finance industry is like that here."
Another lawyer who works in Jersey's trust industry, looking after assets of overseas millionaires, explains over a beer that local rules mean he must know the commercial rationale for the structures he administers. "The answer is generally always tax. Tax and inheritance planning." He too spoke only in confidence."

You can read the entire article here.

The second article concerns political reactions in Jersey to the mounting international pressure to close down tax havens.  Disappointed at the lack of support from the Tory-led British government (the Tories have long supported tax havenry, but are more concerned now about protecting the City of London than protecting the VAT scams of the fulfillment industry), senior politicians in Jersey are now openly calling for independence from the UK.  Read more here.


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Links Jun 26

G20 Communiqué Hits Some Priorities, Misses Others Task Force Blog
Jun 21 - Nick Mathiason explains G20 Mexico outcomes.

EU exec sets steps to tax 2.4 trillion euro shadow economy Reuters

Jun 26 - "The European Union is losing around 1 trillion euros a year in tax evasion at a time when governments are struggling to improve public finances, the European Commission will say on Tuesday as it proposes steps to deal with tax fraud."

How Swiss bank accounts are killing off Africa’s lions The East African
Jun 23 -  A story highlighting the ripple effect and interconnections of financial abuse and poverty.

Caymans reeled in ¥15 trillion from Japanese investors in 2011 The Japan Times

Jun 26 - "Setting up a subsidiary in the Cayman Islands itself is not illegal, but Yukio Noguchi, adviser to Waseda University's comprehensive finance research organization, said, "(Japanese) businesses should keep in mind that they have a responsibility to repatriate profits to the Japanese economy ultimately" by way of tax payments and other means."

Manifesto for Tax Justice: action for our time Tax Research UK

Jun 25 -  See Richard Murphy's updated manifesto.

Aggressive tax schemes aren’t just ‘immoral.’ They can be dangerous too Treasure Islands

Jun 25 - On the risk of losing heavily when caught tax dodging.

Booming Iceland: it zigged where others zagged Treasure Islands

Jun 26 - On how Iceland, following its massive collapse, is seeing an unconventional recovery.

Analysis: Rio +20 – Epic Failure The Bureau of Investigative Journalism
Jun 22 - Note comment by Barbara Stocking, chief executive of Oxfam, that the parallel People's Summit "was a vision of a future we want with the people at its centre, and a rejection of business as usual…the failure of Rio+20 will feed growing public insecurity and anger. [We want] to turn that anger into an irresistible demand for change.”

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US corporate profits hit all time high, wages an all time low. There's an answer

From Business Insider, a dramatic headline:
Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low
And just look at those graphs. For a sector awash in corporate profits, and in an era when austerity has been repeatedly shown to be the wrong answer, there is a simple solution, Here. This looks at the counterpart of super-high corporate profits - large corporate cash piles, sitting idle, and notes that:
"Corporate taxes transfer money away from a sector (corporations) that lets it sit idle, into the hands of a sector (government) that puts it straight to work – educating children, building roads and so on. Corporation taxes and appropriate spending are exactly what Britain [and many other countries need] right now."
So the current focus on rabid corporate tax-cutting, as practiced by the UK and various other countries, is just silly.

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Do low taxes promote growth? - part 2

Recently we pointed to dramatic empirical evidence showing that tax-cutting doesn't appear to be the route to economic growth. The graphs provided showed cross-country comparisons supporting the thesis.

Now Bloomberg is reporting on a study by the Institute for Taxation and Economic Policy (ITEP) asking a similar (but slightly different) question with respect to U.S. states. The conclusion:
The BGOV Barometer shows the nine states with the highest personal income taxes on residents outperformed or kept pace on average with the nine that don’t tax their residents’ incomes
. . .
Per-capita economic output increased an average 10.1 percent in the nine “high-rate” states (while) the average growth rate for the nine no-tax states was 8.7 percent.
. . .
Median household income declined an average 0.7 percent among the nine “high-rate” states, compared with a 3.5 percent drop in the nine states without such a levy. The study found no difference in the average unemployment rate between the two groups of states.
This is a slightly different result from the cross-country comparison we blogged earlier, where the metric was tax as a share of GDP, and the result was a rather neutral one: that if you are a high-tax country you are likely to grow just as fast as if you are a low-tax one (though we pointed out that if you adjust for inequality, then you will get a result that is more like the ITEP study.)

The FT's Martin Wolf noted in our earlier blog:
"The spread in the average tax ratio is quite large, at 26 per cent of GDP, from Japan to Denmark. It is even quite surprising that such a spread seems to have no effect on economic performance."
Now Bloomberg adds a few quotes, such as this one, which chime with Wolf's:
“Being low-tax doesn’t generate economic competitiveness or long-term economic viability,” said Ralph Martire, executive director at the nonpartisan Center for Tax and Budget Accountability in Chicago.
and another fairly obvious point:
“States that have higher overall taxes have better capacity to weather economic downturns,” Martire said. “Then they can maintain their spending on the salary of workers, who then go out and spend their paychecks on the local economy.”
And there is an important proviso - one which we routinely try to insert in studies such as these:
The study doesn’t prove that high income taxes will stimulate growth, ITEP’s Davis said. Rather, it shows “there’s no evidence” that cutting income taxes will boost growth.
Exactly. And we will finish with Wolf's words, from our last blog:
"The conclusion to be drawn is that a tax burden within the range of 30 per cent to 55 per cent of GDP) tells one nothing about a country’s economic performance. It is far more a reflection of different social preferences about the role of the state."

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Ethical Consumer Reports on the Great Olympic Tax Swindle

London Olympics: A Tax Haven Within a Tax Haven

Ethical Consumer magazine reports that for a few short weeks in July and August, Stratford, in east London, will become a tax haven.  Millions upon millions of profits made by multinational companies with monopoly rights to exploit the 2012 Olympics will flow direct into the pockets of shareholders and CEOs without a penny being refunded to the British taxpayers who paid for the event.  How did this happen? Well, according to Ethical Consumer this has become normal practice:
"The sad fact is that enacting tax avoidance legislation has now become a criteria for hosting international competitions such as the Olympics. Big name athletes such as Usain Bolt (along with the organisers) have applied pressure to potential host nations to ensure that winnings (and profits) are not taxed."
If this sounds familiar, it's because we witnessed exactly the same rip-off around the 2010 World Cup.  As we reported in May 2010, FIFA managed to strong-arm the South African government into creating a tax-free bubble around the entire World Cup event, which meant that the financial benefits of the World Cup flowed out to the corporate sponsors, with little or no lasting benefit to the South African economy.  Granting tax haven status to major sporting events appears to have become the norm, reflecting the power that big sport is able to exert over politicians.  As Ethical Consumer notes:
"Without these tax sweeteners the IOC would simply take their corporate circus elsewhere and so begins a race to the bottom in a bidding process that echoes the offshore system. New tax rules ushered in as part of the winning Team GB bid include ‘a temporary exemption from UK Corporation Tax and UK Income Tax for certain non-resident companies’."
Companies like Visa, with a monopoly on payments for the 2012 Olympics, and McDonalds, which will be operating its largest outlet in the world at the Olympic village, stand to make a tax-free fortune.  According to the ever accommodating British tax authority, Her Majesty's Revenue and Customs:
“For the purpose of this exemption a London 2012 Partner is an organisation (known as a Commercial Delivery Partner) that is supplying services to LOCOG in return for the right to market and advertise themselves or their products for commercial purposes by reference to their association with the Games. It includes a company connected with the Commercial Delivery Partner.”
Winning athletes will also be exempt from tax on their earnings.
All of which is music to the ears of the International Olympic Committee (IOC) which, like FIFA, is Swiss-based and therefore enjoys low taxes on its worldwide profits in addition to the tax-free bubble it managed to negotiate for itself around the 2012 event.
But the real winners of the 2012 Olympics are the corporate sponsors.  While the mega-event is unlikely to provide a lasting legacy in the form of a healthier and fitter society, or a useful boost to the UK economy, 'commercial delivery partners' will be making tax-free killings.  Trebles all round in the director's enclosure.
You can read the full Ethical Consumer report here.




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Monday, June 25, 2012

TJN's June Taxcast

In June's Taxcast: celebrity tax avoidance, Greece's missing billions, what should have been on the G20 agenda and trade mispricing.
 http://traffic.libsyn.com/taxcast/June_Taxcast.mp3

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Links Jun 25

Companies abroad are required to report on tax Norway Finance Department (In Norwegian)
Jun 21 - Press release - Norway will implement country-by-country reporting, by 1 January 2014, even if implementation by the European Union occurs later. 

The secret world of oil and mining Zambia Daily Mail
Jun 25 - Comment on investigation by Publish What You Pay Norway - "It was, therefore, enlightening for me to read that 10 of the world’s most powerful oil, gas and mining companies own a staggering 6,038 subsidiaries with over a third located in ‘secrecy jurisdictions’. They do not want us to know what is happening." See also earlier report by Nick Mathiason for The Bureau of Investigative Journalism.

Newsletter from TJN-Latin America and Caribbean (In Spanish)
May/June 2012 edition - Includes editorial on tax reforms in Latin America, article on advances and challenges for a financial transaction tax, and news of the European parliament taking stronger measures to combat tax evasion and illicit financial flows.

French Ministry of Economy and Finance relaunches its fight against tax havens Le Figaro (In French)

Jun 22 - The draft supplementary budget this summer will include disincentives for companies to locate in tax havens.

French MPs examine Swiss banking secrecy WRS

Jun 22 - Members of the French Investigatory Committee for Capital Flight go to Switzerland, gathering information about Swiss banking secrecy. Reportedly, "not a friendly visit."

Nervous Investors Fill Swiss Safes With Cash, Gold Reuters

Jun 25 - "The interest in real assets and in safe-deposit boxes may also be linked to offshore clients of Swiss banks, looking to find a way to circumvent pending deals with Germany, Austria and Britain that would tax their secret accounts."

Equatorial Guinea President Obiang Meets With NGO’s Tax Force Blog
Jun 20 - On the filing by the U.S. Department of Justice of a lawsuit regarding the alleged corrupt practices of Teodoro Nguema Obiang, son of the President of Equatorial Guinea. 

Channel Islands Respond To UK Tax Avoidance Debate Tax-News
Jun 22 - Geoff Cook, the Chief Executive Officer of Jersey Finance, the promotional agency for the island's financial services industry, stated: "In our view, conflation between illegal tax evasion and legal tax avoidance, or tax planning, is unhelpful in moving any wider debate forward." Er, is he missing a point? ...

See also:
UK Treasury Minister describes aggressive tax avoidance as 'morally repugnant' Guardian
Jun 24 - Chief secretary to the Treasury points out: "These sorts of schemes which save wealthy people potentially many tens of millions of pounds in tax, they are paid for by everybody else." 

See also:
Public shaming is the way to tackle tax cheats Financial Times
Jun 22 - "The state can play a role ... the prime minister would do far better simply to make it clear that in future no individual with a serious question mark hanging over their tax affairs can expect access to government, or to receivehonours."

UK wants high standards Cayman News Service

Jun 25 - On a new white paper on the Overseas Territories published by the Foreign and Commonwealth Office - it says that people living in the territories have a right “to expect the same high standards of governance as in the UK". Restricting "good governance" to the public adminisrations of these territories is kind of missing the point: the governance impacts of the secrecy industry are felt elsewhere.

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Friday, June 22, 2012

Links Jun 22

U.S.: IRS Pledges to Improve Whistleblower Program TaxProf
Jun 21 - Following an article in Bloomberg (linked recently), the IRS says it "will review its tax whistle-blower program to improve its backlog and working practices, after the program came under fire from politicians and lawyers."

Parliamentarians call for financial transparency Eurodad
Jun 21 - "Members of parliament from Africa, the Caribbean and the Pacific (ACP) and Members of the European Parliament supported key Eurodad demands on tax when they adopted a resolution on the social and environmental impact of mining in developing countries at the Joint Parliamentary Assembly (ACP-EU JPA), in Denmark end May."


Kenya: Executives Set to Pay for Tax Evasion allAfrica 
Jun 21 - "Directors and senior management will now be personally liable for tax offences committed by the firms they work for and will be compelled to pay any dues to Kenya Revenue Authority if such offences are proven."

Swiss and US move forward on tax compliance swissinfo
Jun 21 - Update on Switzerland and FATCA. "The Swiss Bankers Association said it welcomed the move, particularly the fact that banks would be able to hand over data directly to the US authorities and not via the government as in the solution proposed with five European states."

Swiss haven chagrined as commodities traders look East Reuters
Jun 22 - On how: "Singapore is also beating Switzerland at its own game - on taxes."

UK government set to shelve plan to publish ministers' tax returns Guardian
Jun 21- More news on emerging tax dodging scandals of public figures - the government may now be "preparing to abandon plans for David Cameron and senior ministers to disclose their tax returns." (See earlier blog on this story). Interesting to compare with the culture and practice in Finland on public disclosure of taxes paid.

Debate: Nick Shaxson vs. Mr. Angry of the Cayman Islands Treasure Islands
Jun 22 - An intriguing exchange between Nick and Anthony Travers OBE, currently chairman of the Cayman Islands stock exchange, who has been "leading a one-man protest movement against Treasure Islands for quite some time. Some illuminating points emerge.

UK Lord costs £14k+ pcm Cayman Islands News
Jun 22 - Records released following an FOI request show the Cayman Islands public purse is being charged a significant amount by Lord Blelncathra, for playing a role promoting the Cayman financial services industry. See earlier report by The Bureau of Investigative Journalism here.

Who is bailing who out of the leaky boat? The Racoon Arms
Jun 20 - Wrenching story of global interconnections in corruption and inequality. Hat tip: The Cynical Tendency.

Doomsday Prophet Found Guilty Of Tax Evasion Huffington Post
Jun 21 - Er, no comment.

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Another expert criticises OECD transfer pricing rules, says they create 'secret body of law'

We have assembled quite a roster of high-level experts who are prepared to go on the record exposing the gaping intellectual and practical holes in the OECD's dominant guidelines for taxing multinational corporations. At a TJN seminar in Helsinki last week, quite a few of these experts came together to look at this and to discuss alternatives. And for all those who are prepared to go on the record, there must be many who share our views but for professional and other reasons won't speak out.

Now we have a new high-level expert, who wasn't at our seminar and whom we haven't quoted before, lending his voice: François Vincent, formerly Revenue Canada’s principal legal adviser on transfer pricing matters and now with KPMG as Leader, Global Transfer Pricing Dispute Resolution Services. The OECD Guidelines, he writes, appear not to be science at all:
"Taxpayers, by definition, need to be able to determine the tax payable in order to be able to account for that tax. Conversely, tax authorities need to be able to determined tax payable in order to properly administer their tax system. The needs of both parties are thus convergent. The need for certainty within the context of a tax treaty was organized by the [Canadian] Federal Court of Appeal….. Unfortunately, it is the standard set by the arm’s length principle that creates a systematic impreciseness in its application [our emphasis added, as below].

The main cause may be that, at its root, the arm’s length principle is supposed to match the transactions or dealings entered into either between non-arm’s length entities or between a branch and the rest of an enterprise with similar transactions that would have been entered into between arm’s length entities.

In reality, in all but a few cases, this is simply not possible because the MNE’s transactions / dealings cannot be matched with those of arm’s length parties. Therefore, taxpayers, their advisors and tax authorities are left trying to reconstruct, from largely dissimilar transactions or entities, what arm’s length parties would have done under similar circumstances. This exercise or reconstruction is, in the words of the OECD, “not an exact science”. Given the wide range of results and positions observes, one might remark that it does not appear to be a science at all."

(Extracted from: Francois Vincent, “Transfer Pricing in Canada;” 2011 Edition, Carswell, Toronto (2011)).
This reminds us of comments made at our Helsinki event by Vikam Vijayraghaven, a Chennai-based tax practitioner, who said transfer pricing was as complex as modelling the weather, adding that

"Transfer pricing is not art, it's not science . . . it's magic."
Vincent also says that the OECD’s transfer pricing rules have resulted in a secret body of law:

"One of the greatest current concerns is that transfer pricing has moved many tax jurisdictions worldwide to a state of taxation by negotiation rather than taxation by legislation. This, in turn, gives rise to lack of certainty for taxpayers and the raises the specter of a secret body of law (the compendium of the aggregate of competent authority and arbitration decisions)"
Vincent further emphasises the uncertainty of the OECD’s transfer pricing rules too:
These days it seems that, even though we are virtually inundated with guidance from world tax authorities in respect of how to apply the arm’s length principle, we are no closer to certainty. At the time of getting ready to prepare their tax returns, taxpayers are still scratching their heads as to whether the chosen transfer pricing methodology or method of attribution of profits to PEs will be acceptable to tax authorities……While it is laudable for tax authorities wish to protect their base from unreasonable stripping of profit in favour of low or zero tax jurisdictions, the current state of the application of the arm’s length principle in the vast majority of situations is remarkably imprecise and inherently gives rise to suggestions that either the taxpayers or the tax authorities are abusing the fuzziness of the rules.
Although Vincent says the views expressed above represent the “author’s personal point of view,” his message is highly important, given his professional experiences and associations.

He suggests the systematic application of a global profit-split method, by application of a profit allocation formula. TJN will have more to report about that alternative, quite soon: we discussed it extensively at our Helsinki seminar last week.

Footnote: The OECD admitted that its methods are not an "exact science" in this text:|

However, because transfer pricing is not an exact science, there will also be many occasions when the application of the most appropriate method or methods produces a range of figures all of which are relatively equally reliable. In these cases, differences in the figures that comprise the range may be caused by the fact that in general the application of the arm’s length principle only produces an approximation of conditions that would have been established between independent enterprises. It is also possible that the different points in a range represent the fact that independent enterprises engaged in comparable transactions under comparable circumstances may not establish exactly the same price for the transaction.
With thanks to David Spencer.

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