Tuesday, March 30, 2010

Offshore questions for Britain's Tony Blair

Recently TJN's senior adviser Richard Murphy was judged to have solved a mystery related to the finances if former British Prime Minister Tony Blair. Now, Britain's Telegraph newspaper has an interesting article about the former British Prime Minister, entitled Tony Blair under pressure to explain if he is avoiding UK taxes.

As the article explains:

"The source of Mr Blair’s wealth is expected to become an election issue today when he gives a speech in support of Gordon Brown. Last night, the Conservatives published a dossier that showed that some of Mr Blair’s companies, called Firerush Ventures, have received "permission" to operate in tax havens including Gibraltar and Lithuania.

There was no suggestion that Mr Blair had broken any laws but both countries have lower corporate tax rates than in Britain.

Interesting. We'll bring more, as and when it emerges.


British cross-party support for transparency measures

Responding to Christian Aid’s campaign on transparency, taxation and international development, British Conservative Party leader David Cameron has issued the following statement:

"Just as Conservatives believe that aid needs to be more effective and accountable in order for it to have the maximum possible impact on global poverty, so there is no doubt that more needs to be done to increase transparency in tax affairs.

The UK Government has a responsibility to work with other countries, including overseas territories, to ensure that information on the tax position of individuals and companies is exchanged between tax authorities. This is vital in addressing tax evasion and also money laundering.

Ultimately, an international accounting standard on country-by-country reporting may well address many of the problems currently created by a lack of transparency. We need to ensure that any such reporting regime provides the relevant information and does not deter multinationals investing in developing countries.

In the shorter term, the UK Government must continue to press for further exchange of information agreements, greater monitoring of the use of transfer pricing and the use of complex structures and greater transparency."

This is good news. UK tax justice campaigners now find themselves in a situation where, in the run-up to imminent elections, all three major parties have issued statements that broadly support TJN's call for effective tax information exchange and corporate accounting transparency in the form of a country-by-country reporting standard. Yes, we can quibble over the working of the statement, which does not specify automatic information exchange, and uses weak language ("may well address many of the problems"), but the degree of cross-party alignment is welcome. These issues are too important to be treated on a partisan basis, and all political parties, whether on the Left or the Right, need to recognise that the corrupt practices facilitated by financial secrecy are incompatible with market economies and democratic forms of government.

Well done to our colleagues at Christian Aid.


Monday, March 29, 2010

Source, residence and duplicity in the OECD's approach

TJN has written extensively about the OECD’s deeply flawed “on request” standard of information exchange between jurisdictions. It is important to point out some of the consequences of that OECD standard.

One form of tax evasion that is common in developing countries is for wealthy individuals to invest in bank deposits or other passive investments (or even active investments) in OECD financial centers or other financial centers. The income on such investments, often protected by secrecy/confidentiality laws in those financial centers, is frequently not declared by the investor to the tax authorities in the country of residence of the investor. That wealthy investor may also engage in “round-tripping” – the wealthy local investor exports capital to a secrecy jurisdiction, where the capital is disguised through offshore secrecy mechanisms, then returned to his or home country in the developing world, where it may benefit from tax holidays or other special privileges that are frequently offered to supposedly “foreign” capital.

Now this has an important role to play on the question of “source country” taxation versus “residence” country taxation. (In short, imagine an investment by a US-based multinational in Ethiopia, which earns income there. The “source” country is Ethiopia, which is the source of income; the “residence” country is the U.S., where the multinational corporation is resident.) This raises the significant question of who gets to tax the income: the source country (Ethiopia) or the residence country (the United States.) Residence-country taxation, of course, tends to favour rich nations where the multinationals tend to be based; source-country taxation would favour developing nations where much of the multinationals’ income is earned.

As TJN has noted several times in the past, the OECD has unsurprisingly pushed energetically for the primacy of residence-country taxation (which favours rich nations) and the OECD model income tax treaty reflects that. Developing countries have pushed for source-country taxation and they have tried to have the UN Model Income Tax Treaty, an alternative to the OECD's model, reflect that. As TJN members can attest at first hand, however, the OECD has, step by step, tried to undermine the UN Tax Committee on that question.

In this context, a TJN correspondent has sent us this, which contains a twist to the normal source vs. residence classification.

“On the major tax issue of cross border illicit funds flows from the South to the North, with the income thereon theoretically “returning” to the South, the OECD policy of exchange of information “upon request” undermines residence country taxation (in this case, the residence country is the country in the South where the investor/tax evader resides).

That is, by requiring the source country (basically onshore and offshore financial centers, where the investor/tax evader invests his/her/its money) only to exchange information “upon request” rather than via automatic exchange of information, the OECD in effect permits the source country (a rich country) to prevent the residence country (a poor country) from taxing that income. The result: regarding the major tax issue of capital flight from the South to the North, the OECD undermines developing countries’ ability to tax their citizens’ income, because it is to the advantage of OECD financial centers and offshore financial centers, to a large degree controlled or influenced by the OECD, to do so.

But with regard to industrial/manufacturing/intellectual property income flowing from the South to the North, the OECD insists on residence-based rather source country taxation -- because it is to the advantage of the OECD to do so. Real duplicity!

What is needed is a study about how source country taxation is essential (in tax treaties and otherwise) for developing countries. The study of the impact of income tax treaties on developing countries is a part of this more comprehensive topic of residence country versus source country taxation.

Read more about source-based and residence-based taxation here. Read more about information exchange standards here.


Tax harmonisation in East Africa: study

German Development Cooperation GTZ has a useful study entitled Tax Systems and Tax Harmonisation in the East African Community (EAC) from October 2009, which contains a large amount of useful information and data about plans to form a common market and (eventually) a currency union.

Click here for the report.


Dublin event: A Fairer Global Tax System

Sheila Killian (University of Limerick) and David McNair (Christian Aid) are the invited guest speakers this coming Thursday 1st April for the latest in the current series of development studies lectures at the Trinity College, Dublin. The lecture title is A Fairer Global Tax System: Developing World and National Perspectives.

More details, including background papers are available here (scroll down the page). We hope to see you there.


Tackling overseas corruption: a remarkable new judgement


In a remarkable and important judgement on an unsatisfactory plea agreement between the British Serious Fraud Office (SFO) and UK-based petro-chemical company Innospec (which produces potentially dangerous petrol additives), Lord Justice Thomas has ruled that the directors of the SFO “had no power to enter into the arrangements made and no such arrangements should be made again.” He stated that the SFO cannot agree penalties with an offender before bringing the facts of the case before a court because “the imposition of a sentence is a matter for the judiciary“.

Lord Justice Thomas stated that ”those who commit such serious crimes as corruption of senior foreign government officials must not be viewed or treated in any different way to other criminals. It will therefore rarely be appropriate for criminal conduct by a company to be dealt with by means of a civil recovery order“. His judgement throws into question the whole approach of the SFO to dealing with overseas corruption, which specifically offers companies the carrot of a civil settlement if they report wrongdoing to the SFO. “It would be inconsistent with the basic principles of justice for the criminality of corporations to be glossed over by a civil as opposed to a criminal sanction."

This is no trivial matter. Time and again the British state tends towards leniency for certain classes of criminals, bribe-payers, tax evaders, insider-traders, for example, which would not be extended to others. Knowing how devastating corrupt practices can be on their victims in the poorer countries makes it all the more important that companies whose bribe-paying activities are detected (as was the case with Innospec) should face the proper justice processes. Lord Justice Thomas has established a hugely important matter of principle, which as Sue Hawley of Corruption Watch points out, could lead to the unwrapping of the less than satisfactory settlement with BAE Systems:

“This is a remarkable judgement. The SFO’s negotiated settlement approach to overseas corruption has been shown to be far too lenient, utterly untransparent and potentially unconstitutional. In light of today’s ruling, the SFO will have to go back to the drawing board with how it deals with corruption. The courts have recognised how serious overseas corruption is and the need or very high penalties to sanction and deter it. The BAE settlement could potentially receive a very rough ride in the UK courts.”

More here.


Death of a loophole

We recently reported on the disclosure provision to combat tax evasion incorporated into the Hiring Incentives to Restore Employment (HIRE) Act, a new job creation bill signed by President Obama on 18th March. A contact in Miami now draws our attention to another provision in the same bill which closes off a sneaky little tax avoidance device which, according the US Government Accountability Office is losing American taxpayers billions of potential revenue through the use of so-called dividend equivalent strategies.

Under US tax laws, dividends paid by US companies to foreign shareholders should be taxed at 30 per cent. For decades, however, US banks have structured deals using derivatives that allow clients to turn their dividends into "dividend equivalents." These have the appearance of a dividend, but by being embedded into a derivative they don't generate a tax liability.

According to the New York Times, here’s how they work:

Say a hedge fund holds shares in General Electric. By entering into a swap agreement with a financial institution, the fund can simultaneously sell its G.E. shares a few days before the dividend is issued and receive a derivative tied to the value of the shares and the dividend payment.

After G.E. pays the dividend, the swap is canceled and the investor gets back the shares plus the dividend equivalent payment. The bank that did the trade typically charges a fee linked to the amount of tax savings the hedge fund reaps.

The new law eliminates the tax-free aspect to this transaction, because it treats the swap payments as dividends.

The NYT article reports that this particular wheeze was dug up by the ever-vigilant staff of anti-avoidance crusader Senator Carl Levin, the Michigan Democrat who heads the Senate Permanent Committee on Investigations. Yet again, we raise our hats in their direction.

Interestingly, the same article carries a comment by Lee Sheppard of Washington-based Tax Notes, saying that while the new provisions embedded in the HIRE act will go some way towards tackling the tax evasion culture in America, the radical route to closing down the tax evasion industry would be to make tax evasion a predicate act under anti-money laundering provisions:

“If you really wanted to stop this, you would define tax evasion as a predicate act to money laundering. Currently the money-laundering information the banks give the government is not given to the I.R.S. for civil tax enforcement.”

This is a proposal that TJN has been campaigning on for several years. For too long, a vast (and vastly overpaid) army of lawyers, bankers, accountants and other camp-followers, have been allowed to play the wilfully blind professional when it comes to advising their tax evading clients. Requiring them to raise a suspicious transaction report each and every time they have grounds to suspect that a client is evading tax, will make it far less easy for them to get away such monkey-business. We know that this matter is currently under review by the International Monetary Fund, and we say bring it on.


Saturday, March 27, 2010

Germany-Switzerland tax deal: reason for caution

From the Wall Street Journal:

"German and Swiss finance ministers agreed Friday on the structure of a new double-tax deal aimed at repairing relations damaged by a tax-evasion dispute that culminated with German officials purchasing stolen data on suspected evaders' Swiss accounts."

The deal needs to be reviewed and ratified by the German and Swiss governments. There is, predictably, devil in the detail; Reuters adds that:

"Switzerland's Finance Department said on Friday Germany had recognised in the talks that the Alpine nation would not give administrative assistance in cases of bank data bought from a third party. It added that Switzerland was able to secure several advantages for Swiss business during the negotiations."

While this deal may have some positive aspects, the negative side is that with this deal Germany seems to have set in stone its acceptance that Switzerland does not need to provide Germany with administrative assistance in dealing with tax evaders. This is quite a concession. As a correspondent to TJN via email said:

"If I understand correctly, this new bilateral agreement will contain language which would in fact limit the possibility of the German government to counter tax evasion by putting limitations on what information they would be allowed to use."

One reason for this restriction of German powers to track down its citizens evading tax is that the agreement conforms to fatally flawed OECD standards of information exchange (which we explore here.)

All this raises a broader question about some of the problems with Double Tax Agreements (whose main purpose ostensibly is to stimulate trade by ensuring that tax is not applied to the same transaction twice - but whose effects, all too often, are to create the possibility for double non-taxation.) The problem is that unacceptable provisions are given a solidity that they would not otherwise have.

As a reminder of the enduring nature of this problem, a passage from Nicholas Faith's 1982 book Safety in Numbers: the Mysterious World of Swiss Banking, telling a story about the emergence of Swiss bank secrecy, underlined by a 1934 law creating criminal penalties for violation of secrecy (the law was triggered by a gigantic tax evasion scandal in France, involving investigations by a French politician, Albertin.)

". . . requests for credit made by France to Swiss banks in Autumn 1937. There was readiness on the part of the banks to accede to these requests but the credits were made dependent on two conditions of general interest: the French import quota system had to be modified in a manner favourable to Switzerland, and an acceptable double taxation agreement was stipulated as a conditio sine qua non.

Not surprisingly, the Treaty which emerged provided specifically that Swiss laws, regulations and administrative custom and practice would be scrupulously respected by the French. In the meantime the general problem of banking secrecy raised by M. Albertin's little list had been dealt with, in a form which has achieved an importance quite out of keeping with the modest political scandal which sparked off the legislative process."

In other words, it seems that the treaty became a mechanism to solidify Swiss banking secrecy. For anyone interested in this episode, one would do well, after consulting TJN's letter in the Financial Times a year ago about the origins of Swiss banking secrecy, a study by the Lausanne academic Sebastian Guex, "The Origins of the Swiss Banking Secrecy Law."


EU adopts tax haven resolution

The European Parliament has adopted a resolution, with this language on illicit flows and tax havens:

Combating tax havens and illicit capital flows

MEPs warn that "the negative impact of tax havens may be an insurmountable hindrance to economic development in poor countries", because it undermines national tax systems and increases the cost of taxation.

Tax fraud in developing countries leads to an annual loss of tax revenue corresponding to 10 times the amount of development aid from developed countries, the report underlines.
MEPs therefore call for "a new binding, global financial agreement which forces transnational corporations, including their various subsidiaries, to automatically disclose the profits made and the taxes paid on a country-by-country basis, so as to ensure transparency about sales, profits and taxes."


Friday, March 26, 2010

African Land: An Un- or Under-Taxed Resource

25th March

Nairobi: The question of how to tax land figured highly in discussions today at TJN for Africa’s Pan-African Conference on Tax and Development. Despite the powerful case in favour of taxing land values in major cities, for example to fund the much needed railway upgrade programme in the Nairobi urban area, a wide range of political, social and technical matters stand in the way of progress. Land values consequently go un-or under-taxed. Unsurprisingly, speculation, inflation and rent-seeking activity is rife.

The major political barrier to change lies with the concentration of land assets in the hands of political elites and small land-owning classes, much of which has been acquired through corrupt means. This makes implementing a comprehensive land tax somewhat fanciful, but probably wouldn’t block the possibility of using a land value tax to fund specific infrastructure projects such as upgraded roads or railways, which would raise land values along their entire length.

On the social side, rural land tenure patterns vary enormously between huge private holdings, some carried forward from the colonial period and more recently from land purchase by foreign investors, and more traditional patterns of communal land use without formal property title. In urban areas there are sharp divides between formally owned property and squatters occupying vacant land without tenure rights. The latter seldom benefit from infrastructure investment since they are typically evicted before the investment goes ahead so that others can benefit from the rising land value. These issues need to be addressed without resort to making squatter families destitute.

In many cases it seems that the technical barriers to effective land taxation are linked to the political ones. Poorly maintained land cadastres, in some cases 20 or more years out of date, seem commonplace. This neglect might not be accidental. Ownership details and land values need updating, but the cadastral staff frequently lack appropriate technology and would benefit from additional training in land valuation, including mass valuation techniques.

Despite the barriers, the potential benefits to many African cities of adopting land value tax is too great to ignore. Linking the tax to major upgrade programmes would generate the public demand needed to overcome the political barriers mentioned earlier. A strong case can be made for allocating external funding, possibly under aid programmes, to make the necessary technical and capacity upgrades. This is an important part of shifting towards just and equitable tax systems for African countries.

The Pan-African conference has attracted over 50 participants from 17 countries. Today's discussions will be followed tomorrow by a focus on how tax havens and transfer pricing impact on the Continent's development.


Illicit financial flows: $854bn drained from Africa

Global Financial Integrity in Washington have produced a new study, entitled $854 Billion Removed from Africa by Illicit Financial Flows from 1970 to 2008. The figure is clearly compatible with a different study, using different methodologies, from the University of Massachussetts, Amherst, estimating a stock (including imputed interest earnings) of $607bn drained from Africa from 1970-2004.

The GFI news release accompanying the report reads as follows.

"$854 Billion Removed from Africa by Illicit Financial Flows from 1970 to 2008
Hundreds of billions that could have been used for poverty alleviation and economic development lost, finds new report from Global Financial Integrity

March 26, 2010
Monique Perry Danziger, 202-293-0740

WASHINGTON, DC - Africa lost $854 billion in illicit financial outflows from 1970 through 2008, according to a new report to be released today from Global Financial Integrity (GFI). Illicit Financial Flows from Africa: Hidden Resource for Development debuts new estimates for volume and patterns of illicit financial outflows from Africa, building upon GFI's ground-breaking 2009 report, Illicit Financial Flows from Developing Countries: 2002-2006, which estimated that developing countries were losing as much as $1 trillion every year in illicit outflows. The new Africa illicit flows report is expected to feature prominently at the 3rd Annual Conference of African finance ministers in Malawi, which is currently underway.

"The amount of money that has been drained out of Africa-hundreds of billions decade after decade-is far in excess of the official development assistance going into African countries," said GFI director Raymond Baker. "Staunching this devastating outflow of much-needed capital is essential to achieving economic development and poverty alleviation goals in these countries."

Examining data for a 39-year range from 1970 to 2008, key report findings include:
  • Total illicit financial outflows from Africa, conservatively estimated, were approximately $854 billion;
  • Total illicit outflows from Africa may be as high as $1.8 trillion;
  • Sub-Saharan African countries experienced the bulk of illicit financial outflows with the West and Central African region posting the largest outflow numbers;
  • The top five countries with the highest outflow measured were: Nigeria ($89.5 billion) Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion);
  • Illicit financial outflows from the entire region outpaced official development assistance going into the region at a ratio of at least 2 to 1;
  • Illicit financial outflows from Africa grew at an average rate of 11.9 percent per year.
"This report breaks new ground in the fight to end global poverty with analyses and measurements of illicit financial outflows never before undertaken," said Mr. Baker. "As long as these countries are losing massive amounts of money to illicit financial outflows, economic development and prosperity will remain elusive."

"The drivers of illicit financial outflows vary from country to country but overall transparency in the global financial system would curtail all forms of outflows by making it harder for money to disappear once it exits the country," commented Mr. Baker. "When the G20 meets in Canada this June, the problem of illicit financial flows must be at the top of the agenda."

GFI recently launched the G20 Transparency campaign to enable people around the world to take action on the problem of illicit financial flows. To sign the G20 transparency petition, which will be presented at the G20 meetings in June, go to www.G20Transparency.com or visit www.GFIP.org.

Click here to download a copy of the report.


Thursday, March 25, 2010

On the tax treatment of debt

In October 2009 we blogged on a major faultline in global capitalism: the relatively different tax treatments given to equity and debt. This issue, largely as a result of a ferocious lobbying offensive by private equity companies and others, has not been in politicians' sights - but it should.

John Plender has an excellent article on this in the Financial Times, entitled It Is Time to Stop Punishing Prudence, which says many of the same things we said (and our last article quoted him, too.) As Plender says:

"The heated debate on the taxation of bank bonuses has distracted attention from a glaring omission in current policy proposals to put the financial system to rights. This is the tax bias that exists in favour of debt at the expense of equity in the US and UK, which are the countries that matter most for global financial stability. It is a bias that potentially undermines the thrust of regulatory efforts to strengthen bank balance sheets."

Indeed. So a private equity company, for instance, has its financing supplied from a zero-tax haven, and pays no tax on the interest income there, while getting tax deductions on the cost of this interest income from the higher-tax onshore jurisdiction. It is a simple, and routine, abuse.

There seem to be two main approaches to evening out the difference in the tax treatment of these very different forms of finance. The first would be to make the notional cost of equity finance deductible against tax. The second, far better approach, would be to stop making interest payments on debt tax-deductible. This would allow governments to reduce headline rates while broadening the tax base. Plender points out some of the pitfalls of the first approach:

"The snag is that this reduces tax revenue and narrows the tax base – the assets and income available to be taxed. The switch to giving relief for equity finance is reckoned to have cost Croatia up to a third of corporate tax income. Raising headline rates of corporation tax to compensate is politically difficult."

Politicians need to wake up to this essential question. Stop this, and (among other things) a world of offshore abuse disappears.


Wednesday, March 24, 2010

Automatic Information Exchange: the way forward- UK

From ActionAid:

The government has just sent the clearest signal yet that it agrees automatic information exchange is the way forward. HMRC's commentary on the budget says that, when it uncovers British taxpayers tax dodging in tax havens, the fine they incur will be “determined by the tax transparency of the jurisdiction in which the non-compliance arises.”

It works like this:

You pay the biggest fine if you hide your money somewhere where that doesn’t exchange tax information with the UK at all; the fine is smaller if you hide it somewhere that exchanges on request; but the fine is smallest if you try to hide it somewhere that exchanges automatically with the UK.

We like automatic information exchange a lot and like to think we've had a role in pushing this issue forwards globally. Our work on information exchange has established that although the OECD claims that its fatally flawed "on-request" information exchange is the "internationally agreed standard," automatic information exchange is, in fact, the emerging standard. This latest budget move is, while timid, a small incremental step in this direction. On tax information exchange agreements, also read this important article by TJN Senior Adviser Richard Murphy in The Guardian newspaper, which begins:

"Alistair Darling (UK Chancellor, or Finance Minister) won a rousing cheer for announcing a crackdown on Lord Ashcroft’s tax haven. But we should read the small print.
. . .
What the UK is signing is a Tax Information Exchange Agreement (Tiea) with Belize. That sounds good. The reality is far from living up to the title. Tieas (as they are called, to rhyme with "tear") were first created in 2002, at the low point of the attack on tax havens, when George Bush was riding to their defence."

Read on . . .


Lucy Komisar scoops Headliner award

Congratulations to tax justice campaigner Lucy Komisar who has been awarded the National Headliner Award for the story on Ponzi-schemer Allen Stanford she took to the Miami Herald last year. It exposed how the Florida Banking Department ignored the strong advice of its own lawyer and allowed Stanford to set up an unregulated office to move money offshore.

The Herald assigned its reporters Mike Sallah and Rob Barry to work with Lucy and dig deeper into local aspects of the story. The Headliners, among the most established national journalism honors, are administered by The Press Club of Atlantic City.

Ironically the story was turned down by major print and on-line media. And once it was published, the major national media never picked it up. So much for the state of investigative reporting.

Read Lucy's story here.


Jack Straw: update on libel reform

British libel law, a sedition law for millionaires, as it's been called, is under review. Read what Jack Straw, UK Secretary of State for Justice, had to say here; and read what the Libel Reform movement had to say in response, here. Some snippets:
  • our libel laws are stacked in favour of claimants, of 154 libel proceedings in 2008 identified in the Jackson Review (of 259 taken to the High Court), 0 were won by defendants. The most expensive libel action cost £3,243,980 and the average cost for the 20 most expensive trials was £753,676.95.
  • The average cost of a libel trial in England & Wales is 140 times the European equivalent.
  • Media companies are becoming ever less likely to fight libel cases to a verdict, in 2008 61% of libel proceedings were settled by a “statement in an open court” this has risen from 21% in 2004.
  • As the recession has deepened increasingly corporations are suing each other in a ‘race to the bottom’ to bolster their public profiles, the number of libel cases involving a business suing another business tripled last year.
  • In a survey of 600 GPs, half believed that English libel law was “‘restricting open discussion of the potential risks of drug treatment”.
Time to stop this support for Britain's City of London.


Monday, March 22, 2010

What Hope for Global Tax Justice?

The prolific writing team of David McNair and Dries Lesage have a new article in the current (and first) edition of Political Insight.

The article opens:

2009 was the year when international co-operation on taxation stopped being preferable and became vital. The fi nancial crisis highlighted the woeful inability of individual nation states to regulate global capital flows, forcing the leaders of the world’s largest economies to come together under the banner of the G20, seeking global solutions to global problems.

In contrast to the widely recognised need for international co-operation, the political reality of achieving multilateralism on taxation remains fraught.

Well there's an understatement. But read on, you can access the whole article here.


US healthcare: dispatch from anti-tax la-la land

Following President Obama's victory on healthcare, Citizens for Tax Justice in Washington, D.C. (an important player who did a lot to dispel some of the nonsense that was being spouted during the process of pushing forward the bill) has published another useful analysis:

"The Institute for Research on the Economics of Taxation (IRET) is at it again. If you've ever wondered where the Wall Street Journal's editorial board gets its most half-baked ideas about taxes and economics, the IRET is your answer. Last year, they released a remarkable report concluding that repealing the estate tax would actually increase federal revenue. (See CTJ's response.)

Now the IRET claims that the Medicare tax reform included in the health care compromise before Congress would decrease GDP by 1.3 percent and actually reduce federal revenue by $5 billion a year.
. . .
Sadly for IRET, no one believes it. Even George W. Bush's Treasury concluded that the gross increase in revenue resulting from the economic impact of tax cuts is tiny and comes nowhere near the level needed to actually offset the cost of tax cuts (much less result in a net revenue gain). Economic advisers to conservative Republican presidents agree. For example, Martin Feldstein, Chairmen of Council of Economic Advisers under President Reagan, and Glenn Hubbard and Greg Mankiw, both CEA chairmen during the George W. Bush administration, all have been quoted as saying that tax cuts do not raise revenue. One would assume that they believe the reverse, that tax increases do not reduce revenue.

More from this in our 2007 article Laffer in la-la land. And the CTJ article has plenty more.


Denmark getting on side

From Denmark's latest draft development strategy, informally translated from the Danish:

"Denmark will support the development of more effective tax systems, in order to help partner countries in the long run to be able to finance public expenses to health, education, infrastructure, water and sanitation. A larger tax income creates potential for initiatives that will also benefit poor people. Funds that illegally escape tax should be captured and be included in the financing of development in the countries. Income from natural resources should be for the benefit of the entire society. Denmark will support international efforts against tax havens and illegal financial transactions."

Bit by bit, progress is breaking out.


UK: expose the non-doms

A useful comment article in the UK's Guardian newspaper, as part of the long-running Ashcroft scandal:

"There is no reason at all why the identity of each person claiming non-dom status in Britain should not be published on an open register. There is nothing inherently intimate or private about the matter, and publication of the names could not possibly lead to any increase in tax avoidance or non-co-operation. Routinely making public the identities of those who claim to be foreigners would help to police false claims – and Ashcroft for one, who set up his own Crimestoppers charity, would surely be the first to vote in favour of that."

Not specifically a core TJN position, since we haven't formulated a position on this specific point, but an interesting option to consider.


Sunday, March 21, 2010

Transfer Mis-pricing: Game Over?

The Financial Times reports that following the G-20 summit meeting in London, which led to a surge of new tax information exchange agreements being signed in the second half of that year, tax authorities are better placed to challenge the transfer pricing strategies of multinational companies:

More than 300 tax information exchange agreements – three quarters of the total number in existence – were signed last year. As well as helping tax authorities chase down individual evaders, the agreements allow tax authorities to request information from offshore financial centres on margins and other matters relevant to “transfer pricing” enquiries, which determine how multinationals split taxable profits between countries.

As a result, according to the FT:

Multinationals are increasingly shying away from using tax havens in favour of routing transactions through low tax countries that have the benefit of tax treaties. Those treaties already contain provisions giving overseas tax authorities the scope to request tax information.

Does this mean the game's over for MNCs? The OECD's Jeffrey Owens, quoted in the article, seems fairly bullish: “I think the world is in the process of changing. It will have a big impact on corporations and high net worth individuals.”

In support of the potential shift of power away from the corporations in the direction of the state, the FT cites the case of a successful use of an information exchange treaty by the Chinese tax administration:

It concerned a Chinese shoe manufacturer which it suspected of under-declaring profits because it was related to a big US customer. It discovered “important evidence” allowing it to increase its tax demand after it issued an information exchange request that allowed it to show that payments were made to an overseas bank account controlled by one of the company’s biggest shareholders.

For many years TJN has argued that transparency is crucial to tackling abusive tax practices. Information exchange is an important part of creating a transparent operating environment. But we see tax information exchange agreements as only part of the process since they perpetuate the cat and mouse process of tax authorities chasing after information that MNCs have not been required to disclose in the first place. This is why we advocate accounting standards that require basic reporting on a country-by-country basis. This is what the FT article is referring to when it notes:

Over the past year, campaign groups have succeeded in persuading the OECD to consider new guidelines on transparency after claiming that transfer pricing abuses allow companies to divert revenues from developing countries to tax havens.

But our concerns about transfer pricing abuse run deeper. While information exchange will help tackle some forms of abusive practise, the problem remains that transfer pricing is a fundamentally flawed system for determining profits and tax liabilities between the different parts of multinational company.

The OECD has produced guidelines for how transfer pricing should be carried out, but these are phenomenally complex and don't overcome the problem of how to arrive at a world market price for a product or service that is only traded within the confines of an MNC. Worse, the existing guidelines don't even begin to tackle the vexed problem of how to price the value of an intellectual property right like a brand name or logo. Oil giant Royal Dutch Shell, for example, recently packaged its shell logo into a special purpose vehicle located in the Swiss canton of Zug. Who is to say what the value of that logo is, and how much can be charged to each and subsidiary in every country where the company operates, for the use of that logo? Critics of the existing system are bang on the button when they call it "a licence to print money."

And before you dismiss this as some minor matter of little importance to the real world, just bear in mind that the OECD has recently stated that 70 per cent of cross-border trade occurs between subsidiaries of MNCs. So there's plenty of scope for mispricing to cause mayhem.

TJN thinks this issue calls for fresh thinking. We have started an enquiry into the whole issue of transfer pricing, and in due course we will report back with our recommendations. Meantime, watch this space.


Saturday, March 20, 2010

Cayman model not sustainable: former regulator

From Reuters:

"Timothy Ridley, former chairman of the Cayman Islands Monetary Authority, expressed doubts about whether the government had the political will to cut a bloated civil service to maintain the financial viability of a 'no direct taxation' model.

"What we have now is not sustainable even with savage cuts in expenditure. The sooner government and the community as a whole wake up to this fact the sooner we can address the issues in a meaningful way and develop broader and more stable revenue sources," Ridley said."

This section is, admittedly, buried at the bottom of the story. Scroll back to the top of the story, and we have folk like Antony Travers saying things can continue as before. Funny that Travers can be saying things like that, given that he seems to have been panicking about the problems, for some time.

This all sounds awfully like what seems to have been happening in Jersey. The havens are hurting - and rightly so.

We are not amused, however, to see that the "independent" commission set up by the Cayman authorities to consider the request by the British government to introduce a sustainable fiscal programme was headed by an American, James C Miller III, who just happens to be linked to the American Enterprise Institute - a right wing lobbying organisation - and was Director of the US Office of Management and Budget during the disastrous period of Ronald Reagan's presidency: not exactly the qualifications needed to put public finances on an even keel. It is entirely predictable that people such as this get appointed to these posts (the old boy's network is live and kicking in the offshore financial world). Equally predictable have been the core proposals that the Miller Commission came forward with: slash public spending and resist the introduction of direct taxes.

Same old Cayman, same old monkey business. The future does not look bright for the people of Cayman.


GFI's $10 trillion - and there's more

Further to yesterday's blog on the $10 trillion offshore figure, we'd like to stress that Global Financial Integrity's estimate, which chimes nicely (albeit using different data sets) with TJN's The Price of Offshore is as they say, just part of the equation. They cite two key reasons why this figure is likely to be too small:

"First, there is no reporting of business managed off the balance sheet. As the International Monetary Fund notes in the Offshore Financial Centers IMF Background Paper, “anecdotal evidence suggests [off-balance sheet activity] can be several times higher than on-balance sheet activity” (IMF).

Second, BIS data do not include information on assets held by mutual funds or private trusts and companies, the beneficial owners of which do not need to be reported."

Read more in the report. The growth rate is striking, as the graph shows:

"Clearly, the growth rate of offshore deposit holdings has outpaced the rise of world wealth."

Note that our Price of Offshore study relates solely to financial deposits, which we estimated at around $9 trillion, but we also added a further $2 trillion of non-financial assets, including works of art, real estate, private jets, yachts, race horses, etc, all of which would incur taxes (estate, inheritance, wealth, capital gains, etc) if taxable onshore. The new GFI figures show sustained growth since 2005 and are consistent with our data.


Friday, March 19, 2010

New report: U.S., UK, Cayman Islands Top Destinations for Private Deposits Offshore

From our friends Global Financial Integrity in Washington:

"A new report released today from Global Financial Integrity (GFI) on private, non-resident deposits in secrecy jurisdictions finds that the United States, United Kingdom, and the Cayman Islands are the most popular destinations for financial deposits by non-residents. Switzerland, Luxembourg, and Hong Kong also make the top 10 list of destinations.

"This report looks at deposits held offshore by private entities on a country-by-country basis, achieving a level of specificity previously unavailable to the public," explained GFI director Raymond Baker. "With overall deposits in secrecy jurisdictions currently approaching US$10 trillion, this report measures a sizable chunk of global wealth and helps us to better understand where individuals and corporations are putting their money."

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions analyzes data from the Bank of International Settlements and the International Monetary Fund to measure total deposits by non-residents in areas considered secrecy jurisdictions under the definition established by the Tax Justice Network.

Notable report findings include:
  • Total Current total deposits by non-residents in offshore centers and secrecy jurisdictions are just under US$10 trillion;
  • The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions, with the United States out in front with more than US$2 trillion in non-resident, privately held deposits in the most recent quarter for which data are available (June 2009);
  • Contrary to expectations of perceived favorability for deposits, Asia accounts for only 6 percent of worldwide offshore deposits, although Hong Kong is the tenth most popular secrecy jurisdiction by deposits in this report;
  • The rate of growth of offshore deposits in secrecy jurisdictions has expanded at an average of 9 percent per annum since the early 1990s, significantly outpacing the rise of world wealth in the last decade. The gap between these two growth rates may be attributed to increases in illicit financial flows from developing countries and tax evasion by residents of developed countries.
The report also contains two case studies of Switzerland and Iceland, which show measurable fluctuations in financial deposits correlated to events in which financial secrecy or overall market solvency were threatened.

"This report shows that offshore deposits are on the rise, and the quantities of money being sent into these jurisdictions are massive," said Mr. Baker. "The report also helps us to better understand where reporting may be improved to better differentiate between licit deposits and illicit deposits, which will ultimately enable better law enforcement in cases of tax evasion and other financial crimes."

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions is the second report by GFI economist Ann Hollingshead. Her earlier report, Implied Tax Revenue Loss from Trade Mispricing, was released last month. Click here to download a copy of Privately Held, Non-Resident Deposits in Secrecy Jurisdictions, click here to download a copy of Implied Tax Revenue Loss from Trade Mispricing, or contact Monique Perry Danziger at 202-293-0740 to request a copy or schedule an interview."

This essential research nicely complements TJN's work on its Financial Secrecy Index which, although using and combining very different data sets, produced similar findings in terms of the top-ranked secrecy jurisdictions. The $10 trillion figure is also in the same ball park as TJN's $11 trillion figure (again, using different data) revealed in The Price of Offshore, put together by a team of TJN researchers.


Round tripping and double dipping

This blogger has just come across a document from the World Bank Institute which, while containing nothing especially new, does contain a decent brief outline of some of the ways that tax incentives and the offshore system can interact, especially with respect to developing countries.

"The following are among the more common abuses associated with tax incentives:

Round-tripping. Round-tripping typically occurs where tax incentives are restricted to foreign investors or to investments with a prescribed minimum percentage of foreign ownership. It seems to be a common phenomenon in China, and partly accounts for the very high level of FDI in that country, as well as for the high levels of both inward and outward investment in Hong Kong. Typically, money leaves China and returns in the form of “foreign” investment from Hong Kong. Similar practices have occurred in a number of transition economies, especially in connection with the privatisation of state-owned firms, where the existing management has acquired ownership of the firm through
the vehicle of an offshore company."

This is the classic offshore pattern: local elites go offshore, disguise themselves as foreigners, and thus qualify for tax breaks. Because they're located in Cayman or Luxembourg or Mauritius (often via a host of other places), the authorities will be none the wiser. The end result: local elites shift the tax charge onto less wealthy locals (and, through secrecy, they may well be in a better position to extract rents through monopolistic practices). Here is another one the World Bank outlines:

Double dipping. Many tax incentives, especially tax holidays, are restricted to new investors. In practice, such a restriction may be ineffective and may be counter-productive. An existing investor that plans to expand its activities will simply incorporate a subsidiary to carry on the activity, and the subsidiary will qualify for a new tax holiday. A different type of abuse occurs where a business is sold towards the end of the tax holiday period to a new investor who then claims a new tax holiday. Sometimes the “new” investor is related to the seller, though the relationship is concealed (TJN: guess how).
. . .
Transfer pricing. Transfer pricing has been described as “the Achilles heel of tax holidays,”though it can be a problem with other forms of investment incentives as well.

(TJN: Transfer pricing - more on this, coming soon . . .)

Again, nothing particularly new here - this is just a reminder of some of the things that go on, for anyone who might be interested in the wealth and poverty of nations. Another reminder - for those interested in tax incentives and so on, this far more recent IMF research is worth bearing in mind.


Lloyds tax deals equal false accounting - whistleblower

The Guardian newspaper seems to have picked up on a major story that others haven't noticed:

"A former employee of Lloyds Banking Group has accused the bank of artificially inflating its profits by almost £1bn through the use of aggressive tax-avoidance schemes and exotic "Lehman- style" offshore deals which he said amounted to false accounting."

Well done that whistleblower (it's predictable, isn't it, that he lost his job last September "in a move he said was driven by the desire to silence a whistleblower." The same thing seems to have happened at Barclays, which has been accused of even more appallling acts of tax abuse.) There is so much important stuff in this story that we'd urge you to read it in full; one paragraph (among many important ones) that stands out is this:

"If the finance director wanted a new tax figure their staff worked to that figure and they delivered it too," he said. "The tail was wagging the dog in that the need to hit the bank's effective tax rate forecasts was driving the business."

In other words, in the financial services sector, accountants are simply free to make up how much tax they want to dodge, then find the way to do it. It reminds us of what John Lanchester told us about Rupert Murdoch's News Corporation in the London Review of Books:

"The company’s profits, declared in Australian dollars, were A$364,364,000 in 1987, A$464,464,000 in 1988, A$496,496,000 in 1989 and A$282,282,000 in 1990. The odds that such figures were a happy coincidence are 1,000,000,000,000 to one. That little grace note in the sums is accountant-speak for ‘Fuck you.’"

This is what accountants are doing, day in, day out: holding up two fingers (or one finger, depending on your culture) to our societies.

But it is in the financial sector where some of the most serious tax-dodging goes on: it is no wonder that research by TJN a year ago found that:

"As in the USA, the largest user of tax havens in every country surveyed was a bank."

(And yes, in Britain, the winner was Barcays.) The Government Accountability Office in the United States had earlier found a similar result, with Citigroup recording 427 offshore subsidiaries (News Corp. had 152.)

Given that corporations have so much leeway to decide how much to fleece taxpayers, it's still a wonder that corporate responsibility groups haven't picked up on the fact that taxpaying has to be front and centre of corporate responsiblity. Read more on that here.


Thursday, March 18, 2010

Halliburton, Iran, Cayman and the Hidden Treuhand

The International Relations and Security Network in Zurich has an article focusing on the work of our recent guest blogger Shelley Stark on the Hidden Treuhand business.

The new article contains some of the same analysis, but plenty of new material too. Well worth a read.


US: FATCat measures move towards automatic information exchange

ON 17th March the US Senate passed an Act (the Hiring Incentives to Restore Employment (HIRE) Act) which includes provisions relating to what is termed Foreign Account Tax Compliance (FATC). These provisions are designed as a revenue raising measure aimed at offsetting part of the costs arising from the job creation aspects of the HIRE Act. We have seen a memorandum on the FATC provisions, and can highlight some of their key aspects.

According to the memo, tackling offshore tax evasion is a central part of the provisions:

The overall purpose of the Foreign Account Tax Compliance legislation is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. The ultimate goal of the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by US taxpayers in an efficient and timely manner rather than have the New US Withholding Tax Regime imposed.

The legislation's central provision imposes a requirement on what are termed foreign financial institutions (FFI) and "other foreign persons" to identify and disclose US citizens holding accounts with them or become subject to a 30 per cent withholding tax. As the memo puts it:

Foreign financial institutions and other foreign persons affected by the legislation will have a simple choice to make as to whether they agree to the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.

Those institutions and foreign persons that would like to invest on their own behalf or on behalf of clients in the US capital markets will have to agree to comply with the legislative provisions.

Those that do not agree to comply with the legislative provisions will suffer a 30% withholding tax and thus will be unable to compete with those foreign financial institutions and foreign persons that comply with the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.

Furthermore, as the memo makes clear, the provisions extend to foreign investment vehicles that are ultimately owned by US citizens:

The FFI would be required to report information with respect to accounts for (1) Specified US Persons and (2) a US Owned Foreign Entity. A Foreign Investment Vehicle that is owned by a Specified US Person is a US Owned Foreign Entity of the level of ownership in that entity by the Specified US Person and thus is subject to reporting.

While these provisions do not take the form of an international treaty, they do represent a step towards automatic exchange of information, at least with regard to US persons with accounts outside of the United States.

One obvious weakness, however, lies with the absence of any measures to cooperate with other jurisdictions by offering a reciprocal arrangement to provide information about non-US citizens using US banks to evade tax. Indeed, as our colleague Sol Picciotto has pointed out, the summary requires the IRS to draft its proposed regulations "in a manner that will not discourage or disrupt foreign investment in US capital markets." So the leopard hasn't changed its spots.


Amartya Sen - Power and Capability; Development as Freedom

On Monday 15th March 2010 Nobel prize winner Amartya Sen gave the annual lecture at Demos. Our guest blogger, Christian Aid's David McNair, was in the audience.


As Amartya Sen took the stage to speak, his slight frame and gentle manner seemed to belie a force of intellectual rigor. A Nobel laureate for his work on economics, Sen pioneered the idea that development is ultimately about freedom. The freedom to choose one's life course and the capability to take advantage of that freedom.

Freedom has many dimensions.

 In his view, it is among the most feared of human conditions. Precisely because those in authority often fear the freedom of their citizens and the limitations it could bring to their own power. The fear leads to what Sen called "unfreedoms", or injustices, for others.

He urged the audience to take a more pragmatic approach and seek out injustices and use the power we have to challenge them. Currently, Sen said, we focused too much on just institutions to mediate a just society.

 To illustrate his point that economic and social advantage is reflected in capabilities (what one can do measured against the things that one values), Sen introduced the concept of the conversion handicap - the cost of converting income into a good living. A disabled person not only faces additional challenges in raising an income, but the cost of living is also higher. As such, the sole focus on income as an indicator of economic justice is inadequate.

Speaking about the shortcomings of GDP as an indicator of development, Sen suggested that individual characteristics such as biological makeup, circumstances, gender, talents, as well as the extent of pollution and local crime often impinge on human freedom in ways which are more significant that economic inequalities.

When asked for his opinion on bankers, Sen appeared to be single-minded. With greater economic power comes greater responsibility, he said, and the state must have a role to play in redistribution through progressive taxation.

For economists and those interested in development, Sen's words present a significant challenge. How do we develop public policies that lead to human freedom and challenge 'unfreedoms'? Here challenging economic inequality is the start, not an end in itself.

TJN adds: from his book Development as Freedom, Sen summarises:

"Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states. Despite unprecedented increases in overall opulence, the contemporary world denies elementary freedoms to vast numbers - perhaps even the majority - of people."


The Jersey disease also hits Hong Kong

Hong Kong is one of Asia's most important secrecy jurisdictions - remember the kerfuffle at the G20 summit last April when Chinese premier Hu Jintao wrangled to get Hong Kong and Macau - two favoured secrecy jurisdictions for the use of Chinese elites - snipped off the OECD blacklist.

So it is no surprise to find this, in a superb story from the Financial Times:

"A territory better known for its breathtaking harbour-front skyline and its money-making possibilities has plenty of misery to go round. In a city of 7m people with an average per capita income of nearly US$30,000, 1.23m live below the poverty line, earning less than half of a desperately low median wage. The city’s Gini coefficient, which measures income inequality, is the worst in Asia (worse even than India and mainland China) before the limited effects of the city’s half-hearted income redistribution are counted."

(See some details about Hong Kong poverty and inequality here.) Now we've written a fair bit in the past about what we sometimes call the "Jersey Disease," a phenomenon similar in nature to the "Dutch Disease" that afflicts mineral-rich nations, where one dominant sector crowds out many others, partly through a rise in the real effective exchange rate, partly through the draining of social and economic capital into the dominant sector. Mineral dependence provokes the Dutch Disease (and other ills); tax havenry provokes the Jersey Disease. The result is, all too often, soaring inequality and social tensions. Read our last blog on the subject for more on that. The FT continues:

"Hong Kong has a tradition of small government and a credo of “positive non-interventionism”. A free-market philosophy lauded as key to Hong Kong’s success as a financial centre, positive non-interventionism has little to offer if you are living in a cage. The upshot is no public pension and very small unemployment benefits or disability allowances. As yet, there is no minimum wage. Government expenditure is around 16 per cent of gross domestic product. Now you know what Sweden spends the other 34 per cent on."

A while ago we blogged about similar problems in another major Asian secrecy jurisdiction: Singapore. Read our December 2008 blog about Singapore, and note the similarities with the Hong Kong that Pilling describes.

Now this is no coincidence: in states dominated by finance and tax havenry, the dominant ethic is almost always an outright libertarian one, or at least an atmosphere tilted that way. This pervasive hatred of regulation and governments so common in the secrecy jurisdictions not only encourages the idea that it's OK to subvert other governments' tax revenues, but it also leads to these tensions at home, not to mention the other things Hong Kong suffers from, such as a surfeit of complex monopolies harming ordinary people and benefiting a tiny elite.

Time and again, in haven after haven, the pattern repeats itself. Tax havens cause poverty - we say. And this applies inside the havens, as well as in the wider world.


Wednesday, March 17, 2010

Why it took so long for TJN and partners to appear

"Only small secrets need protection. The big ones will be protected by public incredulity."
-- Marshall McLuhan

Hat tip: Jim Henry


Swiss banking demands flat taxes for the world – at rates they will set

A good article by Richard Murphy, on how Swiss bankers wants to set tax rates for nations around the world.


Tuesday, March 16, 2010

Lehman chicanery is tip of the iceberg

Good article by Prem Sikka on failures of accountancy, a major tax justice issue. The article is well worth reading, and this comment underneath is worth noting too:

"Over the years I have been involved in audits and have also been part of the teams auditing major banks. Iefore each audit we are briefed on the firm's strategy. Everyone knows that if anyone upsets the client company's directors and loses the job, they will have to look for employment elsewhere. We have to work within tight time budgets and no one wants to be stuck with an unusual or awkward items for too long.

If you did, the the partners think you have not been very efficient and the effect of that comes out through lack of promotion and/or salary increase. So everyone tries to avoid awkward looking items. I have never been been on any audit where the partners concerned have ever talked about our duties to the public. I will soon be leaving my job with one of the Big Four firms. I am amazed at why the media and the public has so much confidence in auditing."


Swiss Banking Secrecy: The End is Nigh - Get Over it!

The Swiss government continues to maintain its out-dated position on banking secrecy, but international tax lawyer Philippe Kenel, who also happens to head the Swiss Chamber of Commerce in Belgium and Luxembourg argues that this dogged unwillingness to recognise changing political realities will undermine the Swiss negotiating position. Interviewed in the Tribune de Gèneve, Kenel says:

"Switzerland's only chance lies with negotiating the end of banking secrecy while it still has some value. Judging by the speed with which banking secrecy is being eroded, acting once we have our backs up against the wall, would be tantamount to waiting to be shot down. By that stage there would be nothing we could receive in return."

Kepel also argues that the Swiss authorities should "immediately begin negotiations to move towards automatic information exchange (with the EU), pushing for a long-transition period in order to maximise the potential benefits." He goes on to suggest 2018 as a possible implementation date, arguing that a long lead-in time would allow Swiss banks and their customers ample opportunity to adapt to the changed situation. Call us impetuous, but we think that eight years is way, way too generous to both the banks and their customers: what is being proposed does not require a massive technological or administrative leap, and there is no justification for such a long delay.

Elsewhere, in SwissInfo, TJN's Markus Meinzer counters claims that automatic information exchange infringes on personal privacy: "Already with the [current system of] exchanging information on demand, information can only be transferred to public authorities that are involved in tax administration and tax justice. A citizen cannot obtain the data."

By adopting automatic information exchange as the model for its relations with the EU, Markus argues,Switzerland would contribute to combating harmful global tax competition and also strengthen the legitimacy of its criticism of the secrecy space provided by trusts and shell companies in other jurisdictions. This is an important point: the current Swiss pleadings ring hollow, suggesting to the detached observer that the Swiss have no real interest in improving the framework for international cooperation, instead pointing fingers at others to stall progress. This is unlikely to strengthen Switzerland's negotiating hand with the EU, and it sure as heck won't improve Switzerland's already tarnished international reputation.

By now even the most backwards of the cantons should have recognised that the end of banking secrecy is nigh. The only honourable way forward is to negotiate a speedy transition to fully automatic information exchange, and to join forces with governments and civil society organisations that are campaigning to put an end to other forms of secrecy, including trusts and treuhand.


Plot to destroy Wikileaks?

We recently blogged on TJN's meeting with the secrecy-busting organisation Wikileaks and on Iceland's commendable efforts to turn itself into a kind of anti-tax haven. Now we note this, on the Wikileaks site:

U.S. Intelligence planned to destroy WikiLeaks, 18 Mar 2008
This document is a classifed (SECRET/NOFORN) 32 page U.S. counterintelligence investigation into WikiLeaks.

"The possibility that current employees or moles within DoD or elsewhere in the U.S. government are providing sensitive or classified information to Wikileaks.org cannot be ruled out''. It concocts a plan to fatally marginalize the organization.

Since WikiLeaks uses "trust as a center of gravity by protecting the anonymity and identity of the insiders, leakers or whisteblowers'', the report recommends "The identification, exposure, termination of employment, criminal prosecution, legal action against current or former insiders, leakers, or whistlblowers could potentially damage or destroy this center of gravity and deter others considering similar actions from using the Wikileaks.org Web site''. [As two years have passed since the date of the report, with no WikiLeaks' source exposed, it appears that this plan was ineffective].

As an odd justificaton for the plan, the report claims that "Several foreign countries including China, Israel, North Korea, Russia, Vietnam, and Zimbabwe have denounced or blocked access to the Wikileaks.org website''. The report provides further justification by enumerating embarrassing stories broken by WikiLeaks---U.S. equipment expenditure in Iraq, probable U.S. violations of the Chemical Warfare Convention Treaty in Iraq, the battle over the Iraqi town of Fallujah and human rights violations at Guantanamo Bay."

The report, which TJN has not reviewed (but on a skim-read looks rather baffling and murky), is here.


Linking Climate Justice to Tax Justice

The Center for the Advancement of the Steady State Economy is carrying an article on its website by James Henry (TJN-USA) and Brent Blackwelder (Friends of the Earth) advocating two forms of Tobin Tax to combat the 'financial pollution' caused by (a) speculative activities on the wholesale foreign exchange markets, and (b) personal wealth held offshore and almost entirely untaxed (think of the possible headlines: "Kim Jong-Il to pay for climate change costs!")

The authors propose that these taxes would be levied as a 'climate change surcharge', linking climate justice to tax justice. Read on, and let us have your reactions.

14th March 2010

Two "Robin Hood" Taxes for the Price of One

Linking Climate Justice to Tax Justice

Co-authored by James S. Henry, economist, lawyer, and author of The Blood Bankers (Basic Books, 2005) and Dr. Brent Blackwelder, president emeritus of Friends of the Earth

The subject of taxes certainly isn’t the most riveting topic for cocktail party conversations. Most people don’t like thinking about the labyrinthine tax code or filling out convoluted forms. They certainly don’t enjoy paying taxes. But we believe that the time has come to reframe the debate on taxes and build up some popular passion and energy for a few basic adjustments to the tax code. With these simple, easy-to-implement changes, it turns out that we could move the economy in a direction that works much better for people and the planet, including a more stable climate.

We badly need to recapture the public discussion and debate on tax codes from the technical specialists and special interests, as well as the diehard anti-government reactionaries. The tax system is so critical to the functioning of any nation that as concerned citizens, it is essential for us to insist on making values like justice, fairness, and shared responsibility central to any political debate on this issue.

By framing all discussions of taxation with the jaundiced view that “politicians just want to raise your taxes,” critics have actually ended up promoting a tax system that rewards pollution and disproportionately exempts the wealthy from paying their fair share. Since more careful discussions of tax policy have become taboo, governments have ended up being deprived of revenues that are essential to provide services. Thus, the anti-government forces have created a vicious, self-perpetuating cycle: their programs to curtail revenues have often crippled government programs, helping, in turn, to reinforce the notion that government can’t get anything done.

The issue of government revenues has come to the fore as developing nations have tried to grapple with climate destabilization. Quite reasonably, they’ve been asking for assistance from the wealthy nations that, over the long haul, have undeniably been the biggest contributors to the problem, to help them pay the costs of adaptation.

The huge Copenhagen climate summit in December failed to achieve breakthrough results to reduce greenhouse gas emissions, but it did result in a pledge by the U.S. Secretary of State, Hillary Clinton, for $100 billion per year in climate adjustment assistance to poor countries by 2020. The actual amount required may turn out to be even larger, but if we start early and build up a reserve fund, we can be prepared – much like insurance. And the good news is, there is a way to obtain such large sums even in today’s difficult economic climate, while simultaneously helping to clean up and stabilize the global financial system.

The tragic earthquake in Haiti, although not caused by climate destabilization, graphically illustrates the sheer magnitude of physical and monetary magnitude of relief and adaptation measures that scientists predict may well be needed by poor nations as the earth’s climate is disrupted.

Our revenue plan involves two very modest, complementary transnational “climate change surcharges” on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients.

The first component is a variation on the well-known “Tobin tax” on foreign currency transactions, originally suggested by Keynes in the 1930s. The version of the Tobin tax that we are proposing would be even less intrusive. It would only apply to wholesale foreign exchange transactions, not to retail customers. Nor would it really be an international tax, imposed on countries by some faceless OECD bureaucracy. Each country signatory would agree to introduce legislation to adopt its own national version of a “model” tax. Each country’s own tax authorities would be responsible for collection and enforcement. Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream that we propose is an “anonymous wealth” tax. This involves levying a modest 0.5% annual “climate aid” withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — that we and other analysts have estimated now sit offshore, almost entirely untaxed, in anonymous accounts, trusts, and foundations. This tax could raise at least $25 billion to $50 billion per year.

Furthermore, the administration of all these “private banking” assets is heavily concentrated in the hands of a comparative handful of leading First World banks, including all of the key players in the wholesale currency market, as well as the leading players in the recent financial crisis, and the largest recipients of “too big to fail” assistance.

This means that the anonymous wealth tax and the transactions tax complement each other neatly. The first one addresses the huge stock of undisclosed offshore wealth and income that has fallen through the cracks, while the other addresses the ongoing speculative activity that has been fueled by the accumulation of all this restless, internationally mobile private capital. From an administrative standpoint, major international banks, the “systems operators” for this highly problematic global financial industry, are perfectly positioned to help clean up its “bads.” In that sense, we can view these two modest taxes as “financial pollution” taxes, which will help to compensate the rest of us for bearing the costs and the risks of easy tax avoidance and excessive speculation.

In sum, we believe that these two modest tax proposals constitute a bold new potential solution to the problem of paying for climate adaptation, and a way of linking “climate justice” to “tax justice.” They not only are administratively and politically feasible, but most important, they also happen to be the right things to do on ethical grounds.

Administrative feasibility. This year the G20 and the IMF have already had very serious discussions of several variations on the Tobin tax, and just this week the European Parliament passed a resolution supporting it. Nevertheless, for reasons that are unclear, the U.S. Treasury Department and White House economists have been resisting. Apparently the economists are concerned about “market efficiency,” while the Treasury is still concerned about Wall Street.

These concerns are overblown. Of course all taxes interfere with perfect markets to some extent, but no one except radical anarchists are proposing that we all return to the mythological Eden of a tax-free world. This is especially true in a world with highly imperfect markets, where facts of life like imperfect information, excess financial speculation, financial crimes, ineffective law enforcement, and pollution often justify tax policies that offset these market imperfections.

The question in any real world situation is always whether the revenue generated is worth the price of any extra inefficiencies. We believe that in the case of our two specific proposals, the revenue gains dwarfs the inefficiency, if any. For example, in the case of the .005% levy on all wholesale and interbank foreign currency transactions among major currencies and cross-currency derivatives, such a tax could be implemented at very low cost, with limited opportunities for evasion. The wholesale foreign exchange market is already completely electronic, and highly concentrated. Indeed, in 2009, for example, more than 60 percent of all trading was handled by just five global banks — Deutsche Bank, UBS, Citigroup, RBS, and Barclays. This growing market generated over $4 trillion of transactions per day, more than twice the volume in 2004.

Similarly, in the case of the withholding tax on anonymous offshore wealth, the top 50 private banks in the world have more than $8 trillion in private financial assets under management, and another $4 to $5 trillion in assets under custody. Indeed, the top 10 alone account for nearly half of this amount. So long as the taxes were implemented uniformly across anonymous customers, it would be simple for these institutions to levy .5% annual withholding taxes on these assets.

Political feasibility. In principle, the revenue plan proposed here should be by far the most politically pain-free way of fulfilling Secretary Clinton’s Copenhagen climate aid pledge. It concentrates the costs on a very tiny, privileged group that is supremely able to afford them — the world’s wealthiest 10 million people on a planet with 6.8 billion humans.

From this angle, this proposal should attract widespread support from religious congregations and other nongovernmental organizations that are concerned about equity and global development. It should also attract support from national tax authorities, law enforcement agencies, and homeland security agencies that continue to see a large share of proceeds from international tax evasion and the underground economy slip through the cracks, despite their best efforts. Of course it should also attract support from environmental groups, and from public officials who are concerned about finding ways to pay for essential government activities without going deeper into debt.

Finally, this proposal could gain traction from the public outrage over the lingering effects of the financial crisis and the taxpayer bailouts that have been received by wealthy financial institutions that were “too big to fail.”

Moral justification. The moral foundation of this proposal is the idea of combining “global climate justice” with “global tax justice.” Global climate justice reflects the polluter pays principle — the judgment that it is fundamentally fair for rich countries to pay for most of the costs of adapting to climate change, since they have been overwhelmingly responsible for greenhouse gas emissions in the first place.

The concept of “global tax justice” reflects the judgment that it is fundamentally fair for the financially wealthiest citizens and corporations in both poor and rich countries alike to pay at least some taxes on their worldwide incomes and/or wealth to support their home countries.

One key source of the trillions in private funds that we propose to tax is underreported capital flight — money that is secreted offshore and invested abroad beyond the reach of domestic tax authorities. A second major source is under-taxed corporate profits and royalties that have been parked offshore in tax havens by way of rigged transfer pricing schemes. A recent report by the charity Christian Aid estimated the annual cost of these transfer pricing schemes to developing countries, in terms of lost tax revenues, at $160 billion per year. A third source is the myriad illicit activities that constitute the global underground economy — corruption, fraud, insider trading, drug trafficking, “blood diamonds,” and innumerable other big-ticket, for-profit crimes.

The ownership of the trillions in untaxed financial wealth is incredibly concentrated. At least 30 percent of all private financial wealth, and nearly half of all offshore wealth, is owned by world’s richest 91,000 people — just 0.001% of the world’s population. The next 51 percent is owned by at most 10 million people, comprising only 0.15% of the world’s population. About a third of all this offshore wealth has been accumulated from developing countries, including many of the largest “debtors.” And almost all of it has managed to avoid any income or estate taxes, both in the countries where it has been invested and the countries where it originated.

Tax policies are at their best when they provide the right incentives, secure funding for needed public goods and services, place the burden of payment on the right parties, and make progress toward a more equitable society. The proposed “Robin Hood” taxes on anonymous wealth and foreign exchange transactions meet all these criteria, and they are easy to administer. They are precisely the kind of progressive tax changes that we should all be happy to discuss, even at a cocktail party.