Monday, April 28, 2008

Oil companies and corruption

A new FT editorial asks:

Bribery and corruption are not just morally indefensible but bad for your business. That is the message Transparency International, the anti-graft campaigner, is determined business will internalise and, perforce, implement. But is it true?

Before the early 1990s, when Transparency International was set up, the answer was, often enough, "no." Bribery, it was reasoned, oils the wheels of business, allowing deals to get done. It is a measure of how far the world has come in seeing through this nonsense that the standard answer to this question today is "yes." (As an aside, TJN has had major beefs with Transparency International: our critique is available here. In essence, we want the global infrastructure of corruption - the banks, tax havens, laws, lawyers, accountants and so on that facilitate the $1-1.6 trillion annual cross-border flows of money, to be considered as part of the corruption equation. We want to overturn today's mentality, equivalent to the pre-1990s nonsense - and highlighted in a recent survey of tax havens by The Economist magazine - that tax havens oil the wheels of international business.)

In the new report focused on by the FT, Transparency International looks at 42 of the world's biggest international and national oil and gas companies operating in 21 countries, based on the transparency of their reporting, particularly on payments made to governments for resource extraction rights. The fact that ExxonMobil is the world's most profitable private oil company and yet is ranked in the worst of three categories on transparency will make uncomfortable reading for those who oppose secrecy and are contemplating the question in today's FT editorial.

Two main points spring from this. The first is that extractive industries like oil and gas constitute a special case. As a recent book explains:

Extracting oil is different from “normal” businesses like tourism or making electric razors. Nobody would destabilize or attack a country to capture its tourist revenues; this would be like using hand grenades to catch the goose that lays golden eggs. Oilfields are not like golden egg-laying geese but are instead are like the golden eggs themselves, buried underground; it may be feasible to blast them out with explosives—even if you damage them you will still get most of what you want. With oil, your profits depend less on political stability or a healthy business environment, and depend more on geology, extraction technology, and world oil prices.

Under this analysis, oil and gas companies do not mind so much about operating in an environment of appalling corruption and mismanagement, so there is less incentive for them to be transparent, and more incentive to be secretive so as to gain favour from corrupt leaders sitting on oil reserves. This promotes the kind of "bad competition" (such as the race-to-the-bottom competition between countries on tax and regulation - see more here) that drives poverty and boosts corruption around the world. This is not to say that non-oil companies are clean, just that the balance of incentives for them is generally healthier: In more "normal" industries and countries, the forces of "good competition" between companies on transparency are stronger, because a healthy business environment (of which transparency is a key part) is more important for them when they look for places to invest. All in all, the answer to the FT's question is more likely to be "no" in sectors like oil and gas than in other, more "normal" sectors.

A second key point about this report is illustrated by the case of BP in Angola. On February 6, 2001, the company's group managing director Richard Olver, in a letter to the transparency campaigners Global Witness, promised greater transparency in its reporting on its Angola operations. The response from Angolan state oil company was fast and utterly furious. BP sheepishly backed down; ExxonMobil's then CEO Lee Raymond subsequently sneered in an FT interview that BP had "got itself into trouble" for being too transparent in Angola.

The lesson from this episode is clear: because of this powerful "bad competition" between companies to pander to secretive oil-rich rulers (and others), if individual oil firms stick their necks out and are more transparent unilaterally, they risk losing out.

Because unilateral action is so difficult, global action that targets all oil companies must be the answer. The problem cannot be tackled without regulatory and other mechanisms, on a global basis. Country-by-country reporting - allowing citizens or governments to unpick company results so that they can find out what the companies are up to in their territories - must be a centrepiece of any move to clean up the world. Such recommendations have already been made by the Publish What You Pay (PWYP) coalition (their original recommendations were set up with help from TJN's Richard Murphy.)

More recently, there have been signs of movement on one key part of the equation: the arcane-sounding but vitally influential International Accounting Standards Board (IASB - click here and here for essential background, and here for a recent update.)

PWYP and others are restricting the scope of their analyses to the extractive industries like oil, gas or minerals. But why on earth stop there? Why not aim for all listed companies, and not just those from the extractive sector, but for all sectors?

The current financial crisis was caused, in large part, by a lack of transparency in international finance. Country-by-country reporting would have transformed the equation. It may have prevented the earlier Enron affair. It would transform the fight against crime around the world. It would enable developing countries to understand the tax-dodging tricks that multinational companies play, and receive the proper taxes they are owed, reducing their need for foreign aid. It would produce generally better governance, everywhere. And it would be achieved with very little cost. In short, country-by-country reporting would change the world for the better. Join us.


Wednesday, April 23, 2008

Church speaks out against corruption

The Uniting Church in Australia has just produced a remarkably good, carefully researched and far-reaching report into corruption. It deserves to be read very widely.

While the report has a significant Australian focus, it contains a multidude of good things which are relevant at a global level. Here are a few snippets.

While lecturing developing countries about corruption, wealthy countries often play a role in fostering, rewarding and benefiting from corruption in developing countries. Eliminating corruption globally will require significant effort by all countries.

Exactly right. And one of the report's co-authors, Mark Zirnsak, told Ecumenical News International that contrary to popular opinion it is not always the poor nations of the world that are the most corrupt. As he said:

Some wealthy countries actively foster corruption, reward it and seek to benefit from it. The rich are the secret and usually unnoticed players in the global corruption game, and yet they always come out as the winners.

Indeed. This is just as we have been arguing. The report looks at many other things. It contains an interesting section on the theology of corruption and good governance; it agrees with TJN's possible suggested definition of corruption, to replace Transparency International's; it looks closely at the role that tax havens, secrecy, lawyers, bankers and accountants play in the global infrastructure of corruption; it looks at the importance of tax competition in fostering this global environment. It also looks at the role of western nations in harbouring looted assets from poor countries - an especially pertinent subject in light of the recent research that has emerged in the United States on the accumulated six hundred billion-odd dollars drained from Africa.

And the report highlights an appropriate quote from the World Bank and the UN Office on Drugs and Crime (UNODC)

While the traditional focus of the international development community has been on addressing corruption and weak governance within the developing countries themselves, this approach ignores the “other side of the equation”: stolen assets are often hidden in the financial centres of developed countries; bribes to public officials from developing countries often originate from multinational corporations; and the intermediary services provided by lawyers, accountants, and company formation agents, which could be used to launder or hide the proceeds of asset theft by developing country rulers, are often located in developed country financial centres.

This quote itself shies away from the issue of tax evasion (but the report it comes from does explore the issue, rather timidly.) In any case, well said.


TJN programmes - new web page

The Tax Justice Network has just published a new section on its website, which provides an overview of some of the most important areas being pursued by TJN-international. (Some national-level TJN programmes are not included; these will be added in due course.) The basic list of programmes is below. TJN welcomes support and engagement on all of these, from a wide variety of partners.

  • The Road to Doha
  • EU Savings Tax Directive
  • Country-by-Country reporting.
  • A UN Code of Conduct on Tax Evasion
  • A TJN Code of Conduct on Taxation
  • Financial Transparency Index
  • Mapping the Faultlines
  • Plato Index
  • Tax competition
  • Source and Residence Taxation (coming soon)
  • Corruption
  • Tax and Corporate Social Responsibility
  • UK Domicile
  • Tax and state-building
The web site provides details of all the different programmes, under "Activities" on the home page. For more information, click here.


Saturday, April 19, 2008

Six hundred billion drained from Africa

New research has just emerged from the University of Massachusets, Amherst, about the astonishing scale of capital flight from Africa. As the research on 40 African countries estimates:

Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end-2004.

(At the bottom of this blog, we link this to an important but often forgotten piece of world history, using the proposals of two wise men to offer pointers for the future.)

Money that flows out of Africa as capital flight generally stays out. The total external debt of these countries in 2004 amounted to "only" $227 billion, leading to another staggering figure. As the researchers put it:

Their net external assets (accumulated flight capital minus accumulated external debt) amounted to approximately $398 billion over the 35-year period.

The same authors, Léonce Ndikumana and James Boyce, very recently presented a brief summary of their research in the latest edition of Tax Justice Focus; this is the full research document. It also updates earlier research by the authors looking at the period 1970-1996. The new report continues:

Over the past decades, African countries have been forced by external debt burdens to undertake painful economic adjustments while devoting scarce foreign exchange to debt-service payments. On the other hand, African countries have experienced massive outflows of private capital towards Western financial centers. Indeed, these private assets surpass the continent’s foreign liabilities, ironically making sub-Saharan Africa a “net creditor” to the rest of the world.

But there is one absolutely crucial difference between the assets and the liabilities:

The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.

It continues:

Some of the private assets held abroad by Africans may well be legally acquired. But the legitimacy of a significant part of these assets is questionable. This is especially the case for the wealth held by African political and economic élites in international financial centers that provide the coveted secrecy of banking operations. Recently, international pressure on Swiss banks has uncovered large sums of money belonging to former African rulers including Sani Abacha of Nigeria and Mobutu of the Congo. (former Zaïre). These may be only the tip of the iceberg of looted African national resources.

Capital flight is notoriously hard to define, but it generally means an outflow of capital that is not part of normal commercial transactions from a country where capital is relatively scarce (see this for more details). There are several reasons for capital flight, but tax evasion and a desire to grow rich secretly are among the most powerful incentives. This is a massive blight on the continent. Capital flight diverts scarce resources away from domestic investment and other productive activities; and it results in lost taxes for African governments - which are important not only from the point of view of lost revenue, but in terms of the institution-building imperative that we have already remarked upon (the Economist recently noted this point: "the well-off have less incentive to lobby for reforms at home if they are free to store their wealth overseas".) Capital flight accelerates the outflow of human capital too; it has pronounced negative effects on the distribution of wealth within countries; it compounds the debt crises. (By 2000, the report says, debt service amounted to 3.8% of GDP for sub-Saharan Africa as a whole, while they spent just 2.4% of GDP on health in that year.)

The authors rightly conclude that this research underlines the need for greater debt repatriation and forgiveness, but add:

Repatriation of illicit capital and the prevention of future illicit outflows will require a concerted effort by the international political and financial community to increase transparency and accountability in international banking practice.

This report contains many other important things, including country-by-country tables of their estimates; new econometric evidence on the links between external borrowing and capital flight ("out of every dollar of new borrowing, as much as 60 cents left the country in the form of capital flight the same year"); indications that capital flight from Africa constitutes a heavier burden than on other developing regions, even if the absolute volumes are lower; and more.

The authors also contributed to a 2005 book on capital flight which includes some fascinating history:

The neglect of capital flight in current debates is striking given the attention it received at the 1944 Bretton Woods conference, (which) is said to have laid the foundations for today's financial order and many reformers today talk of the need for a 'renewed Bretton Woods vision' The Bretton Woods architects saw the regulation of capital flight as a key pillar of the international financial order they hoped to construct.

The two principal Bretton Woods architects, Harry Dexter White and John Maynard Keynes, were principally worried about large-scale capital flight from war-devastated European countries to the US, destabilising them and turning some of them towards the Soviet bloc. They recognised the difficulties in exerting capital controls, and they addressed these with a further proposal, as the book explains:

They argued that controls on capital would be much more effective if the countries receiving that flight capital assisted in their enforcement. In their initial drafts of the Bretton Woods agreement, both Keynes and White required the governments of receiving countries to share information with the governments of countries using capital controls about foreign holdings of the latter's citizens. White went further in his draft to suggest also that receiving countries should refuse to accept capital flight altogether without the agreement of the sending country's government.

Both of these proposals were strongly opposed by the U.S. financial community which had profited from the handling of flight capital in the 1930s . . . in the face of this opposition, the final IMF Articles of Agreement contained watered-down versions of Keynes' and White's roposals. Co-operation between countries to control capital movements was now merely permitted, rather than required.

The replacement of one word with another has had nothing less than catastrophic consequences for the world's poor. As TJN's John Christensen and David Spencer argued in their recent Financial Times comment piece, referring to the fact that information on tax matters is only exchanged between countries on request:

In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included.

The UN Report by the High-Level Panel on Financing for Development of June 2001 (also known as the Zedillo Report, after Chairman Ernesto Zedillo, former President of Mexico) also called for a mechanism for multilateral sharing of tax information. The report said "developing countries would stand to benefit especially from technical assistance in tax administration and tax information sharing that permits the taxation of flight capital."

This shift alone would likely do more good for Africa than all foreign aid combined. The time has come to resuscitate the proposals of the two grand old men of global finance.


Thursday, April 17, 2008

Murphy vs. Mitchell

The Center for Freedom and Prosperity is an enormously wealthy think tank on the fringes of the ideological right in the United States. The CF&P recently issued a news release stating:

The Coalition for Tax Competition is sending a strong message to the World Bank explaining why tax competition is important and why the Bank should reject the anti-free market agenda advocated by ideological groups like the Tax Justice Network and statist bureaucracies such as the OECD.

TJN is happy to be the subject of their attention. They give us an opportunity to bring our arguments to a whole new constituency. They simply have no answer to the agenda we are setting. Theirs is a crude strategy: saying things that are manifestly false (for example, arguing that TJN espouses an anti- free market agenda) to win the argument. This is the Straw Man strategy (set up a straw man, then knock it down, and hope that it makes you look good). It is a gambit typically used by those who know they have lost the argument and consequently need to change or twist the facts. If you don't believe we are right, simply read their points, then see Richard Murphy's answer on these points here - then judge for yourself.

More dramatically, CFP has also recently been advertising a showdown between its Senior Fellow Dan Mitchell and TJN's Richard Murphy in Fort Lauderdale, Florida. The debate was entitled: Offshore Financial Centers – Are They Healthy for the Global Economy? As one of the CF&P pre-debate flyers said:

It may not be at the same level as the Lincoln-Douglas debates (though Richard Murphy and Jack Blum want taxpayers to be slaves of government). It may not get the ratings of the Ali-Frazier "Thrilla-in-Manilla" (though we are expecting a knock-out). But when Dan Mitchell (Senior Fellow, Cato Institute, USA), and Richard Hay (International Tax Principal, Stikeman Elliott, UK) square off against Richard Murphy (Research Director, Tax Justice Network, UK) and Jack Blum (Co-Author, Financial Havens, Banking Secrecy & Money Laundering, USA), sparks are sure to fly.

The debate has now happened. Richard Murphy has been blogging the event. Dan Mitchell, apparently, now "looks like he has his tail between his legs." As Richard said:

Many people at the conference told me Jack Blum and I won the debate - and that I beat Dan hands down on economics, even if they did not like what we said. It was good to have that said publicly in the concluding session of the conference by Lorna Smith, Director of the BVI International Affairs Secretariat - not an obvious ally of ours.

We think it is worth reproducing Richard's speech in full. Here it is:

Good morning. It’s great to be here. Many thanks to David for organising this debate.

It’s just such a shame it has started so badly. It’s hard to believe that Dan and I are debating the same motion. I’d remind you what we’re talking about. The motion says “OFCs (or tax havens as I’d rather call them) - are they healthy for the global economy?”

Dan has completely failed to address that issue. He’s only talked about micro issues and not the global economy. So if you’ll let me I’ll address that economic issue, and I do so not just as a chartered accountant and tax expert, but as a trained economist.

And as an economist I’ll tell you that the real problem with what Dan has said is that it makes no sense in economic theory, and it does not accord with economic reality.

But let’s get some basics on the table. Markets are good things. They’re the best mechanism we’ve got for supplying the majority of the needs and at least some of the wants of most people.
It’s also a fact that government is good thing. The evidence is unambiguous. We seem quite unable to live without it, anywhere and at any time. That means we need a mechanism to pay for it. That’s called tax.

Of course, how much government involvement and how much market participation is needed to create a good economy is open to debate. This is not that debate. The point that is indisputable is that we need both government and effective markets to create a well functioning economy.

But government and markets are very different. Market theory does not apply to governments. The reason is obvious. Market theory and practice requires that participants can and do fail, and go out of existence. But we know that when government fails in this way the consequences are painfully apparent, and catastrophic for the state and people involved.

That’s why we tolerate the existence of what is the perpetual monopoly of government. It’s the best option we have, and we all recognise it. But let’s be clear: monopolies pose problems and have to be controlled. That’s why we have created a system to do that in the case of government. That process is called democracy. It is not called competition. It’s very definitely not called tax competition.

Despite which let’s also be realistic: it’s obvious that governments do compete to attract capital. I know that. But to pretend that the major economies compete in this way because of the existence of pin-prick states called tax havens is to live in a world of make believe. It’s like saying that KPMG and Pricewaterhouse compete because of the existence of small town accountants, and what’s more that it’s the small town accountants who set the Big 4’s prices. That’s just not true.

Nor is it true that tax rates have fallen over the last twenty or thirty years except for the very rich. They have benefited from cuts, but ask absolutely any middle class person anywhere about tax right now and they’ll tell you they’re paying disproportionately more, and they’re right. That’s because the scale of government activity has not reduced. Far from it. Partly because of the demand from business for better quality public services, in the OECD as a whole in the last decade the tax to GDP ratio went up in a significant majority of countries and overall by 1.3%. That was the democratic choice people made. So, if tax havens are meant to reduce tax rates for all, and limit the scope of government universally then there’s just one thing to say based on this evidence. They’re dismal failures. And if this is the criteria for their successful contribution to a healthy global economy that Dan is using I could stop now and my case would be proven.

But the issue is more complex than that. The reality is that economic theory provides the clearest evidence that tax havens must harm the health of the global economy. You see even the most basic understanding of neo-classical market economics says that three things are needed to ensure an optimal outcome results from the operation of a market. Those things are equal access to capital, equal access to markets and the availability of perfect information to ensure the optimal allocation of economic resources to efficient activity.

And the fact is that tax havens deliberately set out to subvert all three of these requirements. They do this by exploiting the one, so called, competitive advantage they have. That advantage is not low tax rates. Indeed, the tax rates for many ordinary people who live in tax havens are not that low when compared to middle classes elsewhere and some tax havens, such as Jersey, have very robust laws to make sure that their residents cannot take advantage of the tax haven services they provide, or that are supplied by their near neighbours such as Guernsey. Jersey’s general anti-avoidance provision designed to tackle what they see as such abuse is, I’d suggest, a model of its type.

So low tax rates are not the thing that provides tax havens with their supposed competitive advantage. It’s the secrecy that they provide that gives that advantage. It’s secrecy and the fact that only some, highly selected groups of people are legally allowed to hide behind that secrecy veil to claim that they locate their activities in tax havens that gives them their advantage.

Note I say that people claim to locate their activities in tax havens. They don’t actually, of course. An absence of any economic substance is the reality of these places. I’m always amused by a friend of mine who advises a Cayman registered hedge fund. The rule is, he says simple. The advice he provides goes to London, where it’s used. It’s just the bill that goes to Cayman. That’s the tax haven world, in a nutshell.

So how is the secrecy that characterises this world used?

Well, first of all it’s used to ensure that those who can use these places, legally or illegally, have access to capital at lower rates than those who do not have that access. This lower cost of capital results from the fact that those who can hide behind the veil of tax haven secrecy accumulate their capital faster because it’s in a tax free environment.

Second this limited access to tax haven secrecy is used to deny access to markets on an equal footing. Of course this happens in the tax havens themselves: in most such places tax haven operations are ring fenced from the local economy for fear they will undermine local markets and tax revenues. The irony should not be lost on you.

More importantly though, given the inevitable and appropriate nationally based measures to tackle tax avoidance and evasion that countries must implement if they are to fulfil their democratic mandate, most ordinary people and almost all small and medium sized businesses in the world cannot use the offshore structures to access the markets that the wealthy, law breakers and multinational businesses can access at lower cost using tax haven facilities. This does put the ordinary person, the law abiding person and small business at a deliberately constructed competitive disadvantage.

Third, the secrecy that allows this to happen also undermines all the principles of open access to information that are essential to ensure that the effective decision making resulting in optimal allocation of resources in market economies takes place.

The result is obvious. Tax havens set out to undermine effective markets, and that’s the goal they succeed in achieving. In saying that I make clear that tax havens don’t extend liberty, as some would claim, they’re actually designed to grant monopoly rights to a privileged few, and that is exactly what they do.

Those few are the wealthiest of the world, the largest businesses of the world and the lawbreakers of the world. Those groups exploit that monopoly advantage as all monopolists do, to close down effective competition. The result is simple. The richest get wealthier at the expense of the middle class and the poor who have to pay the taxes to provide the services multinational business demands. Multinational business meanwhile squeeze out medium and small nationally based business that have an unfair higher cost structure than their larger rivals. The poorest nations of the world that do not have the resources to challenge the hemorrhage of illegal and mispriced money from their shores subsidise the tax take of the richest nations of the world. Throughout all this democracy is undermined, as is the rule of law.

And you might also note that tax havens were used to create most of the securitised debt that has resulted in our current global credit crunch. That’s some contribution to a healthy economy.

The economics of this then are simple, and unambiguous. Tax havens must, and do, harm economic well being for all but the minority who can use them because they do wrongly allocate economic resources and inappropriately allocate the reward of economic activity.

But it’s more than economics. If you believe monopoly is harmful and law breaking is wrong, if you believe in small enterprise and the need to foster it, if you believe in national pride and the state you live in, if you believe in democracy, and if you believe that markets can best meet our needs then you can’t believe that tax havens deliver a benefit for the world economy as a whole.

That’s the motion we were asked to discuss. I think the answer is unambiguous, tax havens harm the world economy and as such I oppose the motion.


Monday, April 07, 2008

Tax Justice Focus – THE DOHA EDITION

Tax Justice Focus, 1st Quarter 2008, Vol. 4, Number 1 – THE DOHA EDITION

From the Editors

April 7th, 2008

The Doha Edition - click here

The first quarter 2008 edition of Tax Justice Focus (TJF) is a special edition focusing on the preparations for the United Nations meeting on Finance for Development in Doha, Qatar, from November 29-December 2, 2008. It is edited by Nicholas Shaxson and John Christensen.

In the editorial, The Road to Doha, we look at six emerging trends which all favour the tax justice agenda, and argue that the next few years present the best opportunity in decades of rolling back the ideology in favour of tax havens, corruption, and abusive tax practices. Powerful vested interests will fiercely resist change, so it is urgent that civil society groups in rich and poor countries now start to get properly involved.

The U.N. Tax Committee has asked PROF. MICHAEL J. MCINTYRE to work up a draft U.N. Code of Conduct to set minimum standards for countries to co-operate on measures to combat capital flight, international tax evasion and abusive tax avoidance. In our lead article Coming Soon – a Code of Conduct on Tax Evasion? Professor McIntyre discusses the historical, political and technical issues.

In their article Capital Flight from Sub-Saharan Africa on page five, LÉONCE NDIKUMANA and JAMES BOYCE at the University of Massachusets, Amherst, describe their new research into the scale of capital flight from 40 countries in Africa. They find the accumulated stock of capital flight, including interest earnings, to be nearly three times the size of these countries’ external debt. Africa is consequently a net creditor to the world – but the assets are in private hands, while the external debts are borne by the governments, and through them the African people.

DAVID SPENCER, a New York-based attorney and a senior adviser to TJN, in his article From Monterrey to Doha: an Overview examines the importance of the 2002 International Conference on Financing for Development in Monterrey, Mexico, and the preparations for the follow-up conference in Doha this year. He outlines a series of far-reaching recommendations for the future.

In the following feature article entitled Waking the Slumbering Giants, ALEX WILKS explores why so many non-governmental organisations have been slow to engage with the tax justice agenda, and explains why this is now starting to change.

Other key articles:

* JO MARIE GRIESGRABER on page 11 describes an ambitious new project involving TJN which aims to help governments of developing countries share successful tax practices and build international mechanisms to mobilise their own resources for development. It aims to help broaden the grassroots push for international tax reform by boosting the involvement of developing-country governments, complementing what TJN and other NGOs are already pushing for.

* TOM CARDAMONE AND NICHOLAS SHAXSON then describe a new project called Mapping the Faultlines, involving Global Financial Integrity (GFI) and TJN, which aims to provide the most far-reaching and detailed investigation to date of the global infrastructure of secrecy and structures that facilitate capital flight and illicit capital flows.

* SVEN GIEGOLD, in an article starting on page 12, takes a look at the recent Liechtenstein scandal from the point of view of his native Germany. He explores how the political arguments on tax havens have developed, and draws conclusions and pointers for the future.

This edition also contains two book reviews. The first, by ATTIYA WARIS, looks at Taxation and State-Building in Developing Countries: Capacity and Consent – which shows how the very act of taxation fosters better and more accountable states. The second review, by BILL FANT, looks at Taxing Reforms, a book about consumption taxes in several countries, with particular focus on the United States.


Wednesday, April 02, 2008

Country by Country reporting: briefing paper

The Tax Justice Network has published a new briefing paper setting out the case for Country by Country reporting. No single legislative measure would do more to make multinational corporations (MNCs) more transparent, and its costs would be negligible when compared to the dividends for the citizens of rich and poor countries. As the briefing says:

Making MNC accounts more transparent would help tackle tax avoidance, and at very low cost. It would provide other benefits, such as improving democratic accountability, curbing crime and removing large and destabilising risks from the global financial markets.

Many people are turned off by economics and accounting - but that does not make them any less important. Both powerfully shape the world we live in, and each profoundly affects the distribution of wealth and power within and between nation states. Like many of the issues TJN points to, we are alarmed that civil society around the world has been so quiet on this fundamental issue for so long.

The essence of the problem with company reporting is very simple. Companies do not need to break down their accounts according to the countries where they operate - but can instead scoop up all the numbers for each country and publish them in a broader geographical segment, leading to, for example, a single profit figure for "Africa." The individual African countries' tax authorities where that multinational operates cannot unpick that "segment" (as it is known) and find out the company's local profit. Sometimes they can't even work out who really owns the companies operating in their terrritory. Country by country reporting - applied as international financial reporting standards - would simply require companies to unpick their accounts for each country where they operate.

An NGO network known as Publish What You Pay already campaigns for this, but only with respect to "extractive" (mineral-based) industries such as oil production and diamond mining. TJN wants to extend this to all companies.

One little-known organisation, the International Accounting Standards Board (IASB) is at the heart of this debate. This recent article in Britain's Guardian newspaper by Professor Prem Sikka explores this a little more, and a recent TJN blog looks at an early success by the Publish What You Pay campaign on this issue, in partnership with some very influential institutional investors. A submission to the IASB produced by TJN's Richard Murphy delves deeper into the issues, looking at whom the IASB is accountable to. As Murphy says:

This body that basically sets the accounting rules for the world bar the USA is nothing more than a private company. It’s registered in Delaware USA (which says a lot in itself). It’s financed by the big banks, corporations and accountancy firms. And they could collectively do something to use accounts to tackle a real world issue by adopting this standard.

Opponents of these changes (and there are many exceedingly powerful vested interests that will fight this) say that such a requirement will add onerous burdens on corporations. They are wrong, and they know they are wrong. As the TJN briefing explains:
Country-by-country reporting would impose little or no cost burden on MNCs because they already hold all the necessary data that we are asking to be disclosed for internal accounting purposes.

Murphy goes further in their comments under Prof. Sikka's article:

The arguments are solid. Risk is geographic. More than that though a company gets its licence to operate in any territory from the government that represents those people: it has a corporate duty to account in return. This is the essence of stewardship and accountability: concepts forgotten (deliberately) in IFRS. Instead we have companies pretending they float above all these countries. They don't. It's time to hold them to account for what they do, where they do it.

Other comments under the article hit the nail on the head. One said:

A "country" is a clearly understood segment and the IASB should have followed that. Companies always look at the risks in each country and that they know investors do the same. So it is the logical basis for accounting disclosures.

Another spoke from his own experience:

I work for one of the Big Four firms and recently qualified as a chartered accountant. During my studies we were told just to learn accounting standards and ask no questions about standard setters or even their logic. We all know that accounting standards only do what big companies want. My firm always lobbies for standards that our clients want. Prem Sikka is right that "Accountancy rules affect public welfare and they should be made by a democratic organisation that is independent of big business and accounting firms".

The potential benefits are very large. Our briefing paper ends like this:

Introducing a country-by-country reporting standard would potentially raise as much tax revenue in poor countries as has been estimated is needed to secure the Millennium Development Goals. It is impossible to place a monetary value on the benefits of country-by-country reporting. But we can say with a high degree of confidence that no other measure could yield such a range of benefits with such ease and effectiveness, and with so little administrative cost.


Tuesday, April 01, 2008

The Precarious State of Public Finances

We would like to highlight a new report published in January and entitled "The Precarious State of Public Finance: Tax evasion, capital flight and the misuse of public money in developing countries – and what can be done about it." It was written by Jens Martens of the Global Public Policy Forum/Europe and is an excellent in-depth study which contains much new information and analysis about the importance of taxation. They add that:

We aim to build a bridge between the discourse about development financing on the one hand, and tax justice, corporate taxation and corporate accountability on the other. In the project we aim to examine what measures are necessary to increase tax revenues in countries of the Global South, reduce capital flight, and ensure that public expenditures are used for the right purposes

The report rightly points out that while the focus of so many in the "development" community have focused on increasing aid flows, too little attention has been paid to the (much larger) flows in the other direction. This new paper by Raymond Baker of the Brookings Institution provides more details on the magnitudes of the flows involved, and this January 2008 report from the tax expert David Spencer (a senior adviser to TJN) look at some of the legal issues and identifies ways that the problems might be tackled. As he points out:

The solution to the capital flight problem is to override bank secrecy in tax matters and require automatic exchange of tax-relevant information in the international context. For example, if the investment by an Argentine were not protected by bank secrecy in an OECD or other tax haven financial centre, and if that financial centre would automatically provide the Argentine government with tax information about that person's investment, it would substantially diminish capital flight and the resulting tax evasion. Exchange of information between governments about capital flight was urged by John Maynard Keynes and Harry Dexter White, the principal architects of the IMF, when the Bretton Woods agreement was being drafted in 1944. But this proposal was allegedly opposed by the US financial community which had benefited from capital flight."

The new Jens Martens paper contains information such as this:

According to World Bank estimates, the share of central government revenues to GDP in low-income countries was only 13 % in 2004. In contrast, in high-income countries it was 26.0 %, and in the European Economic and Monetary Union it was even 35.7 % (see Table 2).5 The financial capabilities of Governments in many developing countries are thus not only severely limited in absolute numbers, but also in relation to the GDP – and so are their abilities of providing reasonable quality public goods and services, for example in education and health care.

It also quotes the UN Millennium project as estimating that to attain the MDGs:

In low-income countries, the proportion of public expenditures to gross national income would need to increase by 4 percentage points by the year 2015.

Martens' paper looks at corruption, tax competition, transfer mispricing, capital flight, and much more. One thing that the paper does not investigate in any great detail - and is a fast-emerging area of research - is the importance of taxation in building relationships of accountability between rulers and citizens, as described in this new book, and in this new OECD paper.

Nevertheless, The Precarious State of Public Finance is a most useful addition to the emerging literature on tax and the tax justice agenda.