Monday, May 31, 2010

Pre-empting the bank lobbying

Banks are exaggerating the economic effects of the regulations they are likely to face in the coming years, the economist running an international impact study told the Financial Times.

In a pre-emptive blast before the banks launch their own lobbying effort on June 10, Stephen Cecchetti, chief economic adviser to the Bank for International Settlements, said the banks’ “doomsday scenarios” were based on their assuming “the maximum impact of the maximum change with the minimum behavioural change”

They are assuming they’re not adjusting their business at all to the regulatory reforms and that the result for the economy will be the worst possible,” said Mr Cecchetti.

The Bank for International Settlements, an extremely conservative body which has been far, far too lenient to bankers in the past, does not make comments like this lightly. You have been warned.


Taxmen vs. miners: FT gets taxing rents right

The Financial Times is running an editorial looking at Australia's recent decision to tax its "super profits tax" on minerals producers. Predictably, the miners have squealed that this will make the country "uncompetitive." Not so - for mining profits are not like manufacturing profts: they are rents. We just published an excellent edition of Tax Justice Focus - the Natural Rents edition - which looks at this very issue (though it focused mainly on land rents, with relatively little discussion of natural resources rents.)

The latest editorial, which follows another important article on this broad theme, makes a number of essential points:

Natural resource profits are not like other types of income. Because of supply constraints, resource extraction follows the economics of treasure-hunting: once out of the ground, a treasure’s value bears no relation to the cost it took to dig it up. That potentially huge extra value should belong to the nation in which it is found. Governments are right to tax resource extraction more than other activities.

We agree. Australia already levies a 40 percent “petroleum rent tax” on oil and gas profits, then taxes the remaining profits at 30 percent. Now it wants to do the same in mining, and use the extra revenues to finance cuts in corporation taxes in other non-"rent" sectors.

The FT adds:

"the fact is that companies must invest where the ore is."

Quite so. This is how it is with mineral rents: you can raise tax rates and you won't drive the investment away - because, once again, that is where the ore is.

The next step, then, would be to help developing countries realise this - and capture more of the value of their minerals for themselves, rather than handing these free rents over to wealthy multinational corporations. More on this in due course.


Guest blogger: Reclaiming tax freedom day

Apologies for our relative lack of blogs recently: TJN's main bloggers were away for most of last week. This guest blog by Martin Hearson of ActionAid, focused on the United Kingdom, is only being blogged after the event. Still, it's a most worthwhile article:

Congratulations everyone! May 30 was ‘Tax Freedom Day’. Free-market think tank the Adam Smith Institute says this is the day on which we stop working for the government, and start working for ourselves.

But why the long face? Surely we should make the day a bank holiday, celebrated with street parties, gifts and a special episode of Doctor Who. A collective slap on the back for all the ‘hard-working taxpayers’ feted by politicians. Instead, from the ‘jobs tax’ controversy to this week’s dispute over capital gains tax, “tough on tax, tough on the causes of tax” is the prevailing political wisdom.

We wouldn’t have become the great nation that we are without taxes, which are “what we pay for civilized society,” as the quote emblazoned on the front of the Internal Revenue Service building in Washington, DC says. Too right. We should be celebrating the civilisation of our society, rather than bemoaning it.

The NHS, free education, roads, sewers and refuse collection - these things don’t come cheap, but together we stumped up the cash and paid for them. And aren’t they great? Sure, not everything is perfect, but then the very existence of these things that we take for granted puts us in such a privileged position compared to the world’s poorest people.

So why is it that they’re the ones congratulating themselves? In a couple of weeks Rwanda will celebrate its National Taxpayers' Day, which last year was marked by a rally in a packed football stadium, at which President Paul Kagame presented awards to the country’s “most compliant and exemplary taxpayers”.

Kenya goes one better, with a whole Taxpayers’ Week. The most recent was opened with a display of traditional dancing, which reportedly whipped the audience into such a frenzy that even “the unveiling of the new generation security-printed Logbook...was met with jubilation from the enthusiastic stakeholders.” Yes, really.

In many African countries, tax is a matter of national pride. The slogan of Kenya’s first Taxpayers’ week in 2004 was “Kulipa Ushuru ni kulinda Uhuru” (“pay your taxes and set your country free”). There’s even a Facebook group to promote it. “Taxation is key to increasing our legitimacy and ability to make our own decisions,” the head of Rwanda’s Revenue Authority, Mary Baine, explained to one of my colleagues recently.

This is all part of a conscious effort by African governments to build ‘tax morale’. By highlighting the biggest and richest taxpayers, they give the rest of the population more confidence that the system is fair. That in turn encourages people to be honest about their own tax affairs, and gives the government a mandate to gradually expand the tax base. Making taxes visible strengthens the social contract between people and the state, all the more important in developing countries where under-resourced public services reduce government’s visibility in people’s daily lives.

So why is tax such a dirty word in Britain, where every day we benefit from hundreds of the government activities it funds? Why do the ASI’s Tax Freedom Day and the anti-tax agenda of the Taxpayers’ Alliance touch such a public nerve? Much of it comes from the general malaise about politics in general, but I think there’s something else.

The plethora of high profile stories about tax dodging millionaires and corporations makes us feel like something’s not quite fair. These people seem to think tax avoidance is an entitlement, all be it one that only they can afford to take up. ‘Why should I pay my taxes when all those non doms don’t bother?’ is what people ask.

So here’s my three-part proposal. First, let’s get serious about tax havens: we need a new global information sharing agreement that lifts the veil of secrecy once and for all, and British multinationals should be forced to publish the taxes they’ve paid on a country-by-country basis. Second, follow the example of our Nordic cousins and publish everyone’s tax returns online. Then the Queen can bestow honours upon our biggest taxpayers.

Third, let’s stop moaning and enjoy Tax Freedom Day for what it should be, a celebration of the freedoms that arise precisely because we pay our taxes.


Sunday, May 30, 2010

$how Me the Money: GFI's Baker in the news

There's a longish article in the Harvard Business School's Alumni Bulletin focusing on Raymond Baker of Global Financial Integrity, and the issue of corruption. Three points are worth drawing out.

First, a reminder: a point that we've noted several times before:

"While Baker tracks bribery closely, he sees it as part of a bigger problem: the global financial system’s shadow structure. According to GFI research, the proceeds of bribery represent only 3 percent of the $2 trillion annual cross-border flow of illicit money — illicit meaning “illegally earned, transferred, or utilized.” The organized crime component is about 30 to 35 percent. A whopping 60 to 65 percent is due to the private sector’s illegal and intentional manipulation of taxes and commercial transactions. How can this be? Because the global system lacks transparency, Baker explains, it becomes a vast enabler not only of corruption and criminality but also of commercial illegality. This shadow structure facilitates the hiding of money, be it from a murderous “godfather,” a corrupt official, or a tax-evading, transaction-manipulating executive; the system’s mechanisms are available to and exploited by all three actors. “The richest countries are the biggest promoters of lawlessness in international trade and finance,” Baker writes in his 2005 book, Capitalism’s Achilles Heel. “In a process that parades as agreeable enterprise…illegal money streams through mechanisms designed by western countries to bring hundreds of billions annually into western coffers.”

Second, the article turns to Transparency International's definition of corruption as "the abuse of entrusted power for private gain" - a definition that we've objected to in the past.

Third, we'd like to correct another misperception. The article continues:

"Recently, due to its opacity and ease of incorporation (of dummy as well as legitimate companies), Britain’s independent Tax Justice Network placed the state of Delaware at the top of its Financial Secrecy Index, Time magazine reported in February. The magazine added that 'the U.S. just might be the world’s biggest washing machine for dirty money.' "

This does not accurately reflect our index. The jurisdiction at the top of our Financial Secrecy Index is the United States, not Delaware. Our index combines a qualitative secrecy score (where Delaware was used as a benchmark) with a quantitative weighting (which used data for the whole United States) and the overall ranking reflects the country, not the state.


IASB and CbC reporting: new discussions

The International Accounting Standards Board circulated a paper on the future of accounting in the Extractive Industries (that is, industries that produce oil or other minerals) in April.

Richard Murphy has written a detailed response here. It would be useful to marshal as many submissions as possible on this crucial issue. Please follow this link for more details. He will be blogging a lot on country-by-country (CbC) reporting; his blog has a dedicated CbC link is here. (If you forget the location of the relevant links, you can always find them on our permanent A-Z archive, which can be found in the right hand column of our website.)

Complementing this is a most useful recent briefing sheet: Who are the users of accounts?

And there is another briefing sheet, outlining the Benefits of Country-by-Country Reporting.

See also the 11 steps to financial transparency.


Wednesday, May 26, 2010

Taxing people who collect rents "in their sleep"

Yesterday we published Tax Justice Focus on the theme of taxing natural rents. Edited by Carol Wilcox, this edition explores how a land value tax (LVT) on land rental values can raise significant public revenues without causing economic distortions. By coincidence, a commentator on Martin Wolf's Financial Times blog yesterday picked up on the same theme. We hope this commentator won't mind if we re-publish his comment in full below, since we particulalry agree with the view that matters of fundamental interest to classical economists have been submerged (suppressed?) for many decades.

Rent is the elephant in the room. You described in an FT column not so long ago the compelling case to tax rental income. Personally, this is not a choice, but a moral necessity, since rent naturally belongs to everyone, and yet is collected by private rentiers "in their sleep" (as JS Mill observed). But at present there are reasons of economic expediency to begin this as a means of avoiding sovereign and, frankly, social collapse. The failure to tax rent is at the root of economic crisis, not to mention the awful misery that continues in the "good times" largely unnoticed.

While rent is at its heart, as I will argue below, the proximate cause of this last episode is our byzantine and utterly dysfunctional monetary / banking system. The paradox of banks lending assets they do not own has receive much criticism over the ages. It evolved into this form because without taxing rent, society has been unable to establish a risk-free asset class (short of hoarding goods) that is suitable for savers. If, instead, rent were taxed and distributed socially, savers could purchase future rent receivables from those seeking liquid purchasing power to finance capital or big ticket acquisitions (like housing wealth); this would go a long way towards preserving savers' future real purchasing power, secured under social contract, and discovering the real rate of interest as negotiated according to supply of and demand for real surpluses.

Besides having to tax everything else in sight, one consequence of the state's failure to tax rent is a deficit in risk-free assets available. In its place, savers have placed a premium on liquid assets (especially money) as a defence against real volatility. To meet savings demand far in excess of the basic transactional requirement for liquidity, the financial system has been permitted to evolve in such a way that it can simply supply money on demand: as we know, bank liabilities are designed to circulate as money, with the state all but guaranteeing the face value of these claims. Increasing the quantity of money either increases prices, distorting production, or reduces the velocity of money, which creates the potential for major volatility in prices and market dislocation. In any event, the sovereign's last recourse is to pump out new base money, with all the feared consequences.

There are further reasons (besides suppressing a natural risk-free rental asset) why failing to tax rent causes such an outcome: (1) Privatised rent becomes the key collateral for banks to lend on; indeed, acquiring collateral has become the key reason for borrowing, which introduces extra volatility in the price of collateral. It also means capital finance (surplus labour) is (mis)allocated via haphazard and chaotic transactions unrelated to the rate of interest; the result is that productivity has not received the full capital boost on offer from real surpluses, with much simply squandered. (2) The reliance on debt creates a systemic imbalance: the purpose of markets is to signal demand and supply by changes in prices, and yet one half of this -falling prices- is toxic to the financial system. This is because falling prices, when feared as signs of secular deflation, raise the real burden of debt to debtors (if not to society as a whole). The banking system (and thence the state) is exposed to debtor stress in the form of incurring massive nominal losses, which forces the sovereign to debase its currency, creating inflation, moral hazard etc. One reason falling prices can quickly become deflation is that, unless liquidity is suitably taxed, falling prices encourage consumption to be deferred, depressing demand below its 'really-desired' level in anticipation of better terms in the future. Such a response is highly correlated; moreover, it runs the additional risk of inducing a contraction in production, further damaging livelihoods and sovereign health (see under Tax Liquidity of Fall into Its Trap).

These are a handful of arguments, all premised on the unalienable rights of freedom and justice. Landownership tramples on both, but its costs are not only borne by the dispossessed - the entire economic system is forever paying for this original sin. I accept that moving towards full socialisation of rent is not straightforward, but the debate is rarely heard, with flimsy counter-arguments successfully quashing debate before it even enters mainstream thinking. I accept that calling for a tax on what people mistakenly regard as natural rights to the land -the acquisition of which may have come at significant personal cost- may be instinctively opposed by many; but then again so was chattel slavery in times of yore. Moreover, why should other hardworking people have to make sacrifices out of their hard-earned income to subsidise what landowners earn "in their sleep"? Finally, once people realise that they would all earn a stake in rent collected, it should eventually find democratic support. The fact that the evils of rentier society and merits of land taxes are so far off the political agenda, even in the midst of a fiscal crisis that encourages learned scholars like Simon Schama to fear apocalpyse and the Great and the Good to consider taxing finance outright, suggests to me that significant and concerted academic and political capital has been spent, over the years, suppressing an idea that originated from the great classical economists.


Tuesday, May 25, 2010

Tax Justice Focus - Taxing Natural Rents

Buskers on the London Underground understand rental value. Earnings from a pitch at a busy station near the city centre will be far higher than out in the suburbs. The higher earnings have nothing to do with the music: they reflect the rental value of the site. And rental value can be a significant source of public revenue.

The latest edition of Tax Justice Focus explores the issue of taxing natural rents. Economists define land, alongside labour and capital, as a factor of production. Unlike labour and capital, however, it is in fixed supply and has no cost of production. Being scarce, land is in great demand, but in many cases it is used inefficiently and its potential as a source of significant amounts of public revenue goes unrecognised. In this edition, guest editor Carol Wilcox and her selected contributors argue the case for adopting Land Value Tax as a just and efficient fiscal tool.

In the lead article Nic Tideman presents LVT as a tool for development. Poor countries have generally low land values so LVT is not commonly considered as a useful instrument for raising government revenues. Nic describes the mechanism whereby LVT can trigger a virtuous circle of increasing land values and revenues.

Henry Law discusses how LVT might be introduced. One of the main objections to LVT seems to be that it is impracticable, particularly that the valuation process is problematic. As can be seen below LVT has already been successfully implemented and land value assessment is becoming a simpler task with the development of improved software and other tools.

Molly Scott Cato then presents LVT as a green tax. Ever since value slipped its attachment to the natural world—around when fractional reserve banking was invented in the 17th century—money has become increasingly important, and the planet and its resources less so. To find solutions to the financial crisis and the environmental crisis, she argues, we must get our feet back on the ground.

Finally, Joshua Vincent describes the LVT experience in Pennsylvania and presents some interesting data. The split-rate taxes levied in Pennsylvania are probably the best documented applications of LVT in practice. In fact only a small portion of rent is collected in this way, which some say is insufficient to show the effects.

This edition also covers news of the recently issued Nairobi Declaration on Tax and Development, plus details of a forthcoming conference on the Political Economy of Taxation at Loughborough University, UK, in September 2010, a review of an IMF paper looking at the role of tax distortions and tax havens in the build-up of debt in financial systems around the world, and finally an invitation to support a documentary drama film.

You can download Tax Justice Focus volume 6, number 1, here.



Monday, May 24, 2010

African Economic Outlook 2010: a mixture of hope and failure

By guest blogger Martin Hearson of Action Aid

The African Economic Outlook is an annual publication from the OECD, African Development Bank and United Nations, a bunch of organisation which do not always agree with tax justice campaigners, or indeed with each other! This year’s publication is extremely welcome, because it focuses on domestic revenue mobilisation – raising taxes in Africa – a subject rather dear to our hearts.

“The global crisis has brought poverty reduction to a halt.”

The report begins by exposing the impact of the financial crisis on Africa’s economic development. “Although in the three years before the 2009 global recession Africa had achieved an average annual growth of around 6%,” it says, “in 2009 the growth rate was slashed by 3.5 percentage points to 2.5.” By my reckoning, that means the crisis cost Africa $41 billion in 2009.

Although it predicts that growth in Africa will bounce back, there are stark warnings that “strong and immediate action” is needed “for both climate change mitigation and adaptation,” and that progress towards meeting the Millennium Development Goals is ‘sluggish’.

The report then moves on to its thematic section.

Public Resource Mobilisation and Aid: what’s good?

Although African governments raise 11 times more money from taxation than they receive in overseas aid, much of the tax revenues are concentrated in countries benefiting from oil or other natural resources. Aid income still exceeds taxation in a quarter of African countries, and in half of them it constitutes over a third of government revenue (see chart).

“Many African countries are still heavily dependent on aid,” argues the report. “In the past, donors have devoted little attention to public resource mobilisation. But if a larger share of aid were targeted at this goal, countries would become less dependent on aid in the long run, to the benefit of recipients and donors.”

A fantastic table shows how one dollar (or shilling, or rand, for that matter) spent on tax administration yields anything between 15 and 100 times as much in public revenue.

The report is strong in its analysis of how tax policy and administration could be improved, the need to diversify tax bases, and taking a tough line on the tax concessions offered to multinational companies. It’s worth reproducing in full the summary recommendations:

• Tax reform will bring long term results only if it is visibly linked to a growth strategy.

• Improving tax collection must be accompanied by a general discussion about governance, transparency and the eventual use of increased public resources by the government.

• Proper sequencing of policy reforms is essential. Administrative bottlenecks are such that in the short-run, deepening the current tax base is the only effective policy option. In particular, countries should consider retrenching tax preferences and negotiating fairer and more transparent concessions with multinational enterprises.

• However, developing administrative capacity today is a prerequisite to opening policy options for more progressive tax policies in the medium run.

• In the long run, African countries need to improve the balance between different taxes. Urban property taxes could yield a much higher return if decentralised, as local governments usually have a more direct access to the relevant information.

• Trade liberalisation needs to be purposively sequenced with domestic tax reform. The policy response to declining trade-related tax revenues has to be designed in the context of a broader reform agenda.

• Donors can do more to build capacity in support of public resource mobilisation in Africa. They also need to deliver on their pledges of policy coherence by putting pressure on their own conglomerates to strike decent deals with African nations.

What’s less satisfying?

Did you spot the glaring omission in the summary recommendations? The report contains a discussion of the impact of tax havens in the context of multinational companies, which begins like this:

MNEs may take advantage of the different tax regimes, including tax havens to maximise after-tax profits. One way in which multinational enterprises may try to benefit from their international presence is misuse of transfer pricing, e.g. by artificially shifting taxable profits from high tax jurisdictions to low tax jurisdictions. This happens when firms under- or over-invoice for goods, services, intangibles or financial transactions between entities situated in different tax jurisdictions.

Yet, having identified the use of tax havens for tax avoidance and evasion as a problem, it doesn’t propose any solid international policy solutions. This despite the fact that initiatives such as country-by-country reporting and tax information exchange are being developed by the OECD, one of the authors of the report.

And there is a deeper concern. Perhaps by mistake, the general section of the report devotes several pages to reproducing two indices that rank countries on various aspects of economic freedom – the World Bank’s Doing Business rankings, and the Heritage Foundation’s Index of Economic Freedom. Both these indices quite explicitly award better scores to countries with lower corporate tax rates, an extremely blunt and – in the case of developing countries – potentially damaging analysis of taxation policy. There should be no place for such a one-size-fits-all approach in a report as sophisticated as this. We hope that next year’s AEO will be a little more critical of these types of index.


Former French Senator proud to be a tax dodger

Libération, the French daily, reports that former French Senator Paul Dubrule has shifted his fortune offshore to Switzerland to avoid French tax. Dubrule, who was Senator for Seine-et-Marne from 1999 to 2004, and a member of the centre-right UMP party, is reported to have boasted to Swiss business magazine 'Bilan' that shifting his fortune, which derives from his stake in the multinational hotel chain Accor, offshore saves him around SwF3.3 million a year.

Not surprisingly, the citizens of the land of liberté, égalité et fraternité aren't impressed. Read down through the comments below the article and you'll note that some think he deserves to lose his citizenship.

While naming and shaming politicians who fiddle their expenses has stirred up hornet's nests in countries like Britain, not so much attention is paid to politicians who fiddle their taxes, though the public reaction to revelations about the non-domicile tax status of Lord Ashcroft, who bankrolled the recent Conservative party election campaign in the UK, indicates huge public disquiet about the issue.

Since tax fiddles typically involve much larger sums than dodgy expenses claims, we must ask ourselves why the media don't pay more attention to the matter.


Friday, May 21, 2010

Ireland's growth - miracle or mirage?

We just blogged the fact that Jersey's national statistics are something of a chimera: much of the national income recorded in Jersey is simply profits booked by banks and other multinationals, and doesn't put food on the table of ordinary Jerseyfolk.

Now we see a former IMF chief economist, Simon Johnson, and a researcher, Peter Boone, saying the same thing about Ireland (which, we are heartened to see, they correctly identify as a tax haven.) As their article on the New York Times site notes:

"The Celtic Tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills.
. . .
The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base."

A better cross-country comparison would examine Ireland’s financial condition ignoring these artificial profit transfers. This is easy to do, he notes: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are nearly identical, but in Ireland they are not.

"When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected — by our calculation — to be 97 percent, and 109 percent at the end of 2011.

These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt."

Tax havenry impoverishes other nations, elsewhere. It also seems to impoverish your own country -- or at least most citizens.


Deepwater Horizon: Grassley letter to BP

Following our blogs about BP's damaged oil rig being offshore in more ways than one, we are intrigued to see this letter sent by Senator Grassley to the chair of BP.

It contains the following questions:
  • "The Deepwater Horizon rig is operating under the flag of the Marshall Islands. I would like to understand if this shelters BP from rigorous oversight."
  • Please explain the benefits/drawbacks of having an oil rig off the coast of theUnited States flying under the flag of a foreign country. Specifically, how does this affect safety inspections, taxes, and royalty payments?
  • Please provide a list of all BP oil rigs operating in the Gulf of Mexico and flyingunder the flag of a foreign country. Please provide the name of the oil rig, its distance from the United States coast, and the name of the country under which the rig operates.
And these two:
  • Please provide an accounting of all tax breaks and/or subsidies that BP received from the Federal Government for the Deepwater Horizon rig in the Gulf of Mexico. The time span of this request covers January 2005 to the present.
  • Please provide an accounting of royalty relief that BP has received for offshore oil drilling in the Gulf of Mexico. The time span of this request covers January2005 to the present.
Transocean, which owns the rig, received a similar letter.

Interesting . . .

(Hat tip: ataxingmatter )


Christian Aid Tax Superhero Award

Christian Aid’s Tax Superhero Award for 2010 goes to Eva Joly, a French MEP and life-long campaigner against corruption.

Joly has led calls in the EU for greater tax transparency and helped persuade EU policymakers that tax justice is intrinsic to fighting poverty. For this we salute her.

Christian Aid estimates that poor countries lose around $160 billion each year through tax dodging by unscrupulous companies trading internationally. Tackling this problem could save the lives of 350,000 children a year – a challenge of superhero proportions.

Watch our Tax Superhero Award ceremony outside the Royal Exchange in the City of London on 20 May - the same day as the accountancy profession’s own taxation awards take place in the Park Lane Hilton.

Other nominees

Ricky Gervais, British comedian and film-maker who is quoted as saying, 'There's something unsavoury about tax exiles. I love paying tax. It helps justify how much I earn.'

Graham Norton, Irish comedian and television presenter who is quoted as saying: 'I pay a lot of tax. By most people's standards I am rich so I should pay my tax because I can afford it.'

Katie Melua, a Georgian-British singer who has said: 'I pay nearly half of what comes to me in taxes, but I know I’m paying to live in a country with lots of amazing qualities. I have seen what it is like living in a country where people don’t pay tax and have poor services in terms of health and education.'

John Christensen, auditor, economist and co-founder of the Tax Justice Network. He has worked in several of the world’s poorer countries and was also employed as an offshore trust officer and economic advisor in Jersey, Channel Islands (a tax haven).

Denis Robert, an investigative reporter who co-wrote a book about Clearstream Banking which accused it of being an international platform for money laundering and tax evasion.

Phil Hodkinson, a trustee of Christian Aid and non-executive director of HM Revenue & Customs, BT Group plc, Travelex Holdings Ltd and Resolution Ltd.

Rhidian Brook, a Welsh novelist, broadcaster, and regular contributor to BBC Radio 4's Thought for the Day. He gave a personal reflection on the ethics of paying taxes on a recent Thought for the Day.

The Press release also highlights further nominees

- TJN's senior Adviser Richard Murphy,

- The singer Billy Bragg

- The organisation Blood:Water Mission, which works on HIV/AIDS and water.

(TJN might also have considered the author J.K. Rowling for this year's award.)

Take action

Why not join the ranks of our tax superheroes? Email the Big Four accountancy companies and ask them to back a new accountancy standard which would help prevent tax dodging.


Thursday, May 20, 2010

Jersey: food parcels despite record national income

Tax haven Jersey boasts one of the highest national incomes per person in the world. Adjusted for purchasing power parity (which takes account of differing costs of living) gross national income per person in Jersey in 2008 was US$66,000, which doesn't place the island top of the league (Liechtenstein takes first place, followed by oil-rich Qatar, then Luxembourg) but near enough.

Which makes it all the more shocking that Jersey's welfare benefits rank amongst the lowest in Europe and according to today's Jersey Evening Post jobless migrants on the island are forced to rely on food parcels to survive.

But dig into the national income statistics and you realise the figures are something of a chimera. A large proportion of the £3.5 billion of gross national income recorded in Jersey in 2008 consisted of profits booked by banks and other multinational businesses. Those profits will be taxable in Jersey - currently at 10 percent - but otherwise have no links to the island. The majority of their shareholders live elsewhere and ultimately those profits will flow out in dividend payments.

So claims that Jersey ranks amongst the richest places in the world must be treated with scepticism. While there are plenty of extremely wealthy people on the island, and employees in the financial services sector are generally well paid, approximately one-third of the economically active population are employed in low skill / low pay occupations, and face one of the highest costs on living in the world. Unemployed people and those on state pensions are also squeezed by exorbitant prices and low incomes. The situation is even worse for migrant workers, who have no entitlement to welfare benefits: hence the food parcels.

Tax havens: trickle down in action!


The International Tax Competitiveness Act - new U.S. billl

An anti-tax haven bill introduced yesterday in the US House of Representatives by Lloyd Doggett. It looks like a positive move. We can't find the link, so here's the summary:

The International Tax Competitiveness Act will help stop many of the schemes large multinational corporations use to siphon much-needed tax revenue and jobs out of the United States and help restore a level playing field for small businesses and other U.S. businesses that play by the rules.

Prevent U.S.-Run Corporations from Avoiding U.S. Taxes by Filing a Piece of Paper Abroad and Pretending to be Foreign

Problem: The United States taxes a domestic corporation on a worldwide basis. In contrast, a foreign corporation is only subject to U.S. tax on income with a sufficient nexus to the United States. Under present law, a U.S. corporation that files a piece of paper overseas can be treated as a foreign corporation, even if all its executives are located here and all business decisions are made here.

Solution: This bill would tighten the corporate residency rules so that a corporation would be considered domestic if substantially all of the executive officers and senior management who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily in the United States.

Stop the Transfer of Intellectual Property to Low-Tax Jurisdictions

Problem: Current tax rules are ineffective in adequately taxing income in certain situations involving the development of Intellectual Property (IP) that is undertaken, paid for, and expensed for tax purposes in the United States and then subsequently transferred overseas to avoid U.S. taxes.

Solution: Addressing the problem of income shifting from IP migration offshore that was identified in President Obama’s Budget, this provision taxes currently the offshore income associated with the U.S.-origin intangibles. Thus, corporations will no longer be able to avoid current U.S. taxes through certain offshore royalties and contract manufacturing schemes, and will have less incentive to locate American manufacturing jobs overseas in no or low tax jurisdictions.

Repeal the 80/20 Company Rules.

Problem: Usually, dividends or interest paid by a U.S. company to foreign shareholders is subject to tax. A limited exception allows certain U.S. companies that have over 80% of their active operations overseas to avoid this tax because their operations are primarily foreign. Foreign corporations can manipulate these rules to shift income from their U.S. operations offshore without being subject to tax.

Solution: The provision repeals the 80/20 company rules. This provision is based on a proposal in the President’s 2011 Budget, and was included as an offset in the Small Business and Infrastructure Job Creation Bill.

Repeal the “Boot-Within-Gain-Limitation” for Dividends Received in Certain Reorganizations.

Problem: The boot-within-gain rule allows companies to avoid taxation on certain dividends when received as part of a reorganization. These rules may permit a domestic corporation that is a party to the reorganization to avoid U.S. income tax on the repatriation of earnings from a foreign subsidiary, or permit a foreign corporation to avoid withholding tax on the distribution of earnings from a U.S corporation.

Solution: Based on a proposal in the Administration’s 2011 Budget, the International Tax Competitiveness Act would close this loophole by repealing the boot-within-gain rule, so that these dividends made in connection with a reorganization are subject to either income or withholding tax.


Financial lobbying: attacking public interest

American research advocacy group Public Citizen reports that since the height of the public bailout of the collapsing financial system in the US, the numbers of corporate lobbyists seeking to neutralise or water down rules governing derivatives have overwhelmed organisations promoting public interest.

According to Public Citizen, corporate lobbyists working on these issues have outnumbered pro-reform organisations by more than 11-to-1. Their clients include major banks, financial trade associations and the U.S. Chamber of Commerce.

At stake here are attempts to bring derivative trading more out into the open by requiring trades to be cleared through open exchanges or clearing houses. The traders don't like this degree of exposure, nor do they relish losing federal deposit insurance on their activities:

The Senate Wall Street reform bill includes relatively aggressive derivatives regulation approved by the Agriculture Committee. The current draft would push most derivatives trading onto open exchanges or clearinghouses, and would deny federal deposit insurance to derivatives traders. This latter requirement would force commercial banks to spin their derivatives trading operations off into independent companies, although they would be able to remain under the same holding company. Wall Street is lobbying furiously to eliminate or undermine these provisions.

Of course, the disparity of access to political influence is not restricted to Washington. Financial lobbyists in Brussels and London outnumber public interest reformers by similar ratios, and (like Washington) European political parties are highly dependent on banks, hedge funds and other financial institutions for their funding: not to mention the endless "special advisers" seconded to high-level politicians by the Big-4 accounting firms.

TJN encounters a similar disparity in its work on tax havens and tax reform. In terms of financial and personnel resources we are comprehensively outnumbered by lobbies representing the interests of a tiny elite. We would also add that the overwhelming volume of press coverage on these issues falls down on the side of the vested interests: o tempora o mores!

You can download the Public Citizen report here.


Escape derivatives reform - via ICE and the Cayman Islands

The American Interest is carrying an important article by the investigative journalist Lucy Komisar, a good friend of TJN and a former co-chair of TJN-USA, which starts:

"The U.S. Senate is debating a major financial reform bill in which the credit default swap, a kind of derivative, plays a significant part. An amendment to that bill, proposed by Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), would ban banks from proprietary trading. There are a lot of high-rolling bankers who do not want that amendment to pass, because it will mess up their plans to repatriate foreign profits into the United States, untaxed, by trading in derivatives on their own accounts. The clearinghouse ICE Trust U.S. forms a central part of these plans."

What is ICE Trust U.S., and who owns it? ICE Trust U.S. was created in anticipation of tougher U.S. laws that will force the trading of derivatives into clearinghouses, in which prices are made public and the losses of one member are shared with others. As Komisar explains:

"ICE US Holding Co., which was established in 2008 as the parent of ICE Trust U.S., is located in the Cayman Islands. Yet none of the owners of ICE US Holding Co. are based in the Caymans. International Exchange, Inc., which owns 50 percent of ICE US Holding, is headquartered in Atlanta, Georgia. Among the other owners of the Caymans company are Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch and Morgan Stanley, which are headquartered in New York. Bank of America, which now owns Merrill Lynch, is based in Charlotte, North Carolina. Deutsche Bank (Frankfurt), and UBS and Credit Suisse (Zurich) are also part owners."


Wednesday, May 19, 2010

Taxing financial markets: high-level seminar in Madrid

The pressure for fundamental reform of financial markets is mounting. Despite the horrendous damage caused by their foolish activities, bankers and hedge fund managers remain incapable of acting responsibly, and market interventions are now inevitable. But what kind of interventions?

A forthcoming seminar on 28th May in Madrid, organised by the IDEAS Foundation, brings together a collection of top economists and financial architecture experts, including Joseph Stiglitz, Stephany Griffiths-Jones, Jeffrey Sachs, Y Venugopal Reddy, and Stephan Schulmeister, to discuss the objectives of financial transactions taxes and the merits of the various alternative taxes available to policy makers.

Step by step this agenda is moving forwards.

More information here.


Revenue Transparency: because God doesn't like secrets

The Huffington Post is carrying an interesting editorial by Peg Chamberlain, President of the National Council of Churches of Christ, an ecumenical consortium of Christian denominations in the United States.

In the Gospel of John, Jesus states that those who do what is right do so in the light, while wrong-doers shroud their deeds in secrecy and darkness.
. . .
That is why so many in the faith community are strongly supporting an amendment to the financial reform bill that would require greater transparency for these companies.

TJN is open to all faiths, and to all non-believers, and all fence-sitters, we are firmly aligned with the thinking outlined above.

The Energy Security Through Transparency (ESTT) Amendment to the U.S. Financial Service Reform Bill, sponsored by Senators Cardin, Lugar, Schumer and Wicker, would require extraction companies to report what they pay to foreign governments. The bill would make the U.S. an implementing country for the Extractive Industries Transparency Initiative (EITI) and companies listed on U.S. stock exchanges would disclose in their regular SEC filings their extractive payments to foreign governments for oil, gas and mining which builds on the EITI requirement that all extractive companies operating in an EITI implementing country must report their payments to the government.

"Why is this important? Because oil, gas, and mining revenues are critically important economic sectors in about 60 developing and transitioning countries. Paradoxically, these "resource-rich" countries are also home to more than two-thirds of the world's poorest people and have been home to horrific acts of violence committed by those seeking to exploit those resources. Corruption and greed born of secrecy has led to the exploitation and oppression of thousands of people."


Tuesday, May 18, 2010

Northern Ireland - budding tax haven?

TJN Senior Adviser Richard Murphy has an article on the prospects for Northern Irish tax havenry in The Guardian today. He notes, in comparison to tax haven Ireland:

"As the Republic has now resoundingly proven, building an economy on the basis of corporate tax rate competition does not work. That policy has virtually bankrupted the Republic. Why on earth would anyone want to replicate it?"

This follows our recent comments about Scotland's prospects for doing something similarly abusive.


Oil spill rig offshore in more ways than one - Part II

We already noted how the Transocean rig that caused the latest oil spill flies a flag of convenience. Now the Associated Press has picked up on the fact that it is also, thanks to a recent (ish) corporate inversion, headquartered in the notorious Swiss canton of Zug.

Why? Well, tax seems key:

"The canton levies no tax on earnings generated abroad, and holding companies that receive their income in the form of a dividend from an offshore subsidiary are freed from paying Swiss federal tax as well."


"Only a dozen of Transocean's 18,000 employees work in Zug."

When will these abuses end?


Dark Side of Transfer Pricing: new AABA paper

Prem Sikka at the University of Essex, and Hugh Willmott at the University of Cardiff, have produced a new publication entitled The Dark Side of Transfer Pricing, which we will be adding to our Transfer Pricing page. As Ernst & Young put it:

"transfer pricing continues to be, and will remain, the most important international tax issue facing MNEs (multinational enterprises.)"

This is so significant that it is not just about corporate profits: the paper cites one analysis as saying

"transfer pricing may be playing an important role in aggregate national accounting, potentially reducing the reported value of exports and the current account (and thus GDP)"

A few days ago, Bloomberg cited a study that estimates

"$60 billion in annual U.S. tax revenue [is] lost to thousands of companies’ income shifting, according to a study published in December in the National Tax Journal by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon."

Stuffed with egregious examples, the paper makes a useful introduction to, and overview of, the issues. The paper concludes:

"We would suggest that research into politics of transfer pricing presents considerable opportunities for illuminating capital flight, tax avoidance, complexities of globalization and the deepening crisis of the state. Such a research agenda would place transfer pricing in broader social, political and organizational contexts and show how with the support of professionals (e.g. accountants, lawyers) accounting techniques are mobilized to allocate and retain wealth."

TJN will be pleased to contribute to this agenda.


FATCA: new automatic info exchange tool

The OECD has sought to persuade governments that its “on request” standard of information exchange – which is woefully inadequate, and an embarrassment for the OECD – is the “internationally agreed standard” for information exchange.

TJN, along with any expert in international tax who has a decent conscience, believes that there is a far better way to exchange information between jurisdictions, which is called Automatic Exchange of Information. We recently demonstrated, thanks to the expertise of Senior Adviser David Spencer, that Automatic Exchange of Information is, in fact, far more widespread than the OECD seems prepared to admit. It is, in fact, the emerging international standard, and it has proved workable in a number of areas.

Now we present another important piece of evidence about the ubiquity of Automatic Exchange of Information. This is the Foreign Account Tax Compliance Act (FATCA) which was enacted into U.S. law in March 2010 (with effective date of January 1, 2013.)

In effect, FATCA requires automatic exchange of information about U.S. persons with foreign financial accounts. It achieves this by subjecting each foreign financial institution (and other foreign entities) which invest their own funds or their clients’ funds in the U.S. to a 30 percent U.S. withholding tax on U.S.-sourced income – unless the foreign institution agrees to tell the U.S. Government information about foreign financial accounts of U.S. Persons.

FATCA builds on the existing (but deeply flawed) Qualified Intermediary (QI) Program, to create a stronger, though still flawed, piece of legislation.

This raises three main issues:
  • FATCA is a form of automatic exchange of information (not between jurisdictions, but between foreign financial institutions and the U.S. government.)

  • Although FATCA is an improvement on existing legislation, it still leaves the U.S. with double standards in its existing tax policy, by seeking to provide the U.S. authorities with information about its citizens, while still allowing the U.S. to provide de facto bank secrecy to foreigners who invest in the U.S.

  • While flawed, FATCA is nevertheless a step forwards, by making it harder for U.S. citizens to cheat on their U.S. taxes. Will other foreign governments follow the U.S. lead? It is potentially a powerful tool in tackling foreign tax evasion.
A bit of further background helps explain further.

The Qualified Intermediary (QI) Program
The QI Program was set up in 2001 to enable the U.S. government to collect tax owed to it by U.S. citizens, while preserving the U.S. as a secrecy jurisdiction for foreigners – thus continuing to thumb its nose at foreign jurisdictions, often in developing countries, who are trying to tax the income of their citizens. In short, it required foreign financial institutions to tell the U.S. authorities the identity of U.S. persons with funds invested in the U.S., but not to tell the U.S. authorities the identities of foreigners investing in the U.S. This is classic tax haven behaviour – and it is one of the main reasons why the United States was identified in first place as in TJN’s Financial Secrecy Index. Thousands of foreign financial institutions became so-called “Qualified Intermediaries.”

The devious line of thinking that led to the QI program went like this.

The U.S. wants to ferret out U.S. tax cheats. Yet the U.S. does not want to pass on information about foreign tax cheats to their home governments: if it did, then foreign tax evaders would take their money out of the U.S. and put it in another jurisdiction that would keep their information secret; among other things, this transparency would exacerbate U.S. balance of payments deficits. This is how secrecy jurisdictions work.

Yet if the U.S. had tried to ferret out information about U.S. tax cheats simply by getting foreign financial institutions to report on all income originating in the U.S., then it would have received a lot of information about potential U.S. tax cheats and foreign tax cheats. But the U.S. would not be able simply to take the information about U.S. citizens and then simply discard or ignore the information about foreigners. This is because the U.S. has a range of tax treaties and tax information exchange agreements (TIEAs) with other jurisdictions, which would formally require the U.S. to pass this information on to other foreign governments who are trying to identify tax their citizens’ overseas income. It would be obliged to be transparent.

What the U.S. did, instead, was to get someone else – the financial institutions -- to screen the information first, and then provide the U.S. with only the information about U.S. citizens. This way, the U.S. never receives any information about the identities of foreign tax evaders (and the financial institution is under no treaty obligation to inform the foreign government either). So the U.S. has no information available to submit under its treaties with foreign governments.

Problem solved. Foreign tax evaders will still invest in the U.S., knowing that their money will be protected by U.S. secrecy.

In fact, the original intent of the QI program was even more cynical, it seems. As a former U.S. tax official who was involved in the genesis of the QI program told TJN in a telephone interview in December 2009:

“It’s not clear to me that the QI program is well adapted to the objective of ferreting out Americans – that is not how it started at all. The program was not aimed at identifying Americans. The program was aimed at protecting the identity of foreigners while allowing them to invest in the US,” he said. “Making sure that Americans weren’t in the picture was part of it, but the real focus was on this competitive aspect abroad.”

In other words, it was the Tax Haven USA aspect that was the main objective of the QI program. The objective of ferreting out U.S. tax cheats was secondary.

How FATCA expands the scope of the QI program.
FATCA does not displace QI but builds on it. It preserves the essential Tax Haven USA approach – preventing the US having to provide information to foreign governments about their own fatcats using the USA as a secrecy jurisdiction. What it does is to beef up the ability of the U.S. to find out about its own tax cheats, by expanding the scope of QI.

QI is a voluntary program – foreign financial institutions agree to be bound by its rules, and pass on information. However, many of the foreign financial institutions that hold U.S. accounts are outside the reach of U.S. law, because they have decided not to become Qualified Intermediaries.

FATCA tackles this by expanding the scope of the requirements. Specifically, it expands:

- the type of U.S. Persons about whom automatic exchange of information is required;
- the type of foreign financial institution which must provide information automatically to the U.S. Government
- the type of income about which automatic exchange of information with the U.S. Government is required.

A PWC analysis suggests that the scope of FATCA is broad. As it says:

“FATCA requirements could extend to every type of foreign investment entity used in an alternative fund structure, including foreign master trading entities, offshore feeder fund vehicles, foreign private equity investment funds, SPVs and securitization vehicles, if they invest in securities generating U.S. source income.”

This detailed TJN Briefing Paper provides more specific details about the provisions of FATCA. Our Information Exchange page provides a range of links on this broad subject.


Monday, May 17, 2010

Bank Watch: on greed, threats and media nonsense

Last Autumn households up and down Britain held their breath in anticipation: the then Chancellor of the UK Exchequer, Alistair Darling, had proposed an increase in the top rate of income tax from 40 to 50 percent, and top City of London bankers were threatening to leave the country in droves. Their destination: Switzerland.

Sadly, this didn't come to pass. The new rate was agreed and is unlikely to be reversed by the new Tory administration. But the bankers have failed to live up to their promises to leave. And here's why: a new study covered in today's edition of Swisster newsletter reveals that the after tax earnings of overpaid bankers in London vastly outstrip those of their overpaid counterparts in Zurich and Geneva:

London bankers’ net earnings continue to outstrip those in Zurich or Geneva, says a study. The difference in salaries means the monthly pay check is, for the most part, still higher in London, even after a new 50 percent tax left by the outgoing Labour administration. The survey’s findings discredit the notion of a mass exodus of financiers from the City to escape the new tax.

This comes as no surprise to those of us who have long understood that London operates on a vastly larger scale than either of the main Swiss financial centres, making it less than likely that Britain's financial "talent" - their term, not ours - either could or would actually want to find employment there.

What this study reveals, however, is that Britain's financial press, which has a shockingly poor record for independent and critical analysis of the endless nonsense pumped out by financial PR companies in London, has yet again been used as a vehicle for political threats against any measures that might curtail the greed and sheer uselessness of the UK's overblown financial services sector.


Sunday, May 16, 2010

Michael Hudson: Bankers versus democracy

Last week's trillion dollar bail-out of the Greek economy is another step towards the triumph of financial capital over democratic politics. A mere two years after the largest financial crisis since the 1870s, and with only rather superficial responses so far (for example, the countermeasures against tax havens are nothing short of pathetic), the madmen who created this mess now stand to make a financial killing, as will foreign bondholders, buyers of credit default swaps, speculators in Euro-swaps, and other hedge funds. The losers will be taxpayers, in this instance in Greece (if the deal remains intact, which is in question). This means, largely, middle and lower income households -- since the wealthy elites and a huge proportion of the Greek professional and business classes have turned tax evasion into a national sport. (and note our recent Greek blog pointing out a huge blind spot in the economics profession's understanding of what went wrong.

But the Greek story is just the start of a new chapter in over a century of struggle by democrats to wrest control of the economy away from landed and financial elites whose interests were (and are) in direct conflict with those of the public at large and real entrepreneurs. The great political successes of the 20th century were largely driven by struggles to restrain and reduce the overbearing powers of land-owners, usurers and other rent-seeking classes. Progressive taxation, capital controls and market regulation were the tools of choice for most democrats. As American economist Michael Hudson notes in his excellent new article The People v. the Bankers:

Classical political economy was a reform program to tax away the "free lunch" of land rents, monopoly rents and financial interest extraction. John Maynard Keynes celebrated this program in his gentle term, "euthanasia of the rentiers."

For 30 years after 1945 it appeared that this struggle was going against the rentier classes. During the period known by the French as 'les trentes glorieuses', progressive taxation in most OECD countries transferred wealth away from landed elites and financiers, without detriment to economic growth and political stability (quite the contrary, in fact: it was the period of fastest growth in modern history, around the world). Despite massive indebtedness carried forward from World War Two, most European governments were able to create public health, education and pension programmes of astonishing ambition.

The landed and financial elites were never going to give up without a struggle. They funded numerous think-tanks and 'independent' academics to undermine the social contract and denigrate state intervention. Covertly they created offshore tax havens to hide their wealth and circumvent regulatory authorities. As Naomi Klein explains in The Shock Doctrine, her compelling account of the rise of disaster capitalism, they used every trick in the book to brutally regain their political and economic dominance.

Until the energy market crisis in the mid-1970s, political conditions mitigated against direct attacks on the post-war consensus of the mixed market economy. The OPEC-led price rises changed that situation dramatically, providing the crisis that right-wingers could exploit to seize real political power, first in Chile (under Augusto Pinochet), then Britain - under Mrs Thatcher - and then the United States under Reagan. They also gained the upper hand at the World Bank and International Monetary Fund, using these institutions to impose programmes of tax cuts on wealth, privatisation of publicly-owned assets, and the financial market liberalisation programmes which culminated in ever-deepening systemic crisis.

One of the central elements of the rise of Wall Street capitalism was the use of secrecy jurisdictions, and especially the London-focused Eurodollar market, to escape New Deal regulations and grow in its own unregulated space.

The Washington Consensus, which has dominated political economic thinking since the 1980s, dramatically reversed the democratic gains of the previous 30 years. Political and economic power shifted from elected politicians to unelected and unaccountable central bankers and IMF staffers. The tax reforms of the earlier period, which largely succeeded in taxing land and economic rents from unearned price gains on real estate, stocks, and bonds, were reversed. Financial services were largely deregulated. Whereas the post-1945 period yielded political stability and economic growth, the subsequent ascendancy of 'neo-liberalism' has yielded catastrophic financial market instability, rising inequality, collapsing public services, and subordination of public interest to the financial sector. As Hudson puts it:

Instead of the economy's most important sector - finance - being subject to electoral politics, central banks (the designated lobbyists for commercial and investment bankers) have been made independent of political checks and balances. . . Right-wingers in Europe and the United States (such as Fed Chairman Ben Bernanke) call this the "hallmark of democracy." It actually is the stamp of oligarchy, stripping away control over the economy's credit allocation - and hence, forward planning - while giving high finance a stranglehold over public spending programs.

The stakes here are enormous. What is at issue in Greece, Portugal, Spain, Britain, the US, - in fact, pretty much everywhere - is whether states will act to protect public interest against unregulated predatory financial interests and tax evaders, or whether states will concede their power to creditors, thereby abandoning capital investment programmes, public social spending and rising living standards for the majority.

The fight-back by Greek militants shows that financial interests have not totally won their battle for control over democratic states. Elsewhere, according to Hudson, people have lost confidence in their ability to control democratic institutions to shape their own destinies:

America’s Tea Partiers and anti-tax rebels have given up the fight to reform governments. Squeezed by debt from which they see no escape, they demand lower taxes – and are willing to see the highest brackets become the major beneficiaries in an even more regressive tax shift. Faced with the corruption of Congress by lobbyists acting on behalf of the vested interests, they reject government itself and seek safety in local gated communities. They see Congress and parliaments throughout the world losing autonomy to the IMF, the EU and other Washington Consensus organizations seeking to impose austerity and shift the tax burden onto labor and industry, off property and off predatory finance.

This is the grand narrative within which TJN's battle against tax havens must be located. Tax havens have played a major part in freeing banks, hedge funds, private equity firms, and wealthy elites generally from the regulatory controls and progressive tax systems that previously constrained them until the mid-1970s. Having mustered their forces, they used tax havens to roll back progressive tax regimes, promote regional tax wars (or, to use the more traditional but less appropriate term, tax competition), and undermine the ability of democratic states to fund their programmes.

Any attempt to reverse the steady drift towards regressive tax systems and further debt squeeze on governments must begin with comprehensive measures to restrict the use of tax havens. Until such time as this is done, progressive governments will inevitably be held hostage by predatory financiers. It is therefore time to recognise tax havens for what they are: a threat to democracy.

Michael Hudson's article, The People v. the Bankers, is here.

PS Its heartening to see that senior bankers, very few of whom have shown genuine remorse for the appalling mess they created, are now being directly targetted by American activists. This is long overdue: their continued greed, arrogance and sheer incompetence makes them legitimate targets for protest.


Saturday, May 15, 2010

BP rig was offshore in more ways than one

(Update 1: Transocean in Zug.)
(Update 2: Grassley letter)

As BP struggles to contain both the damage and the costs of the tragic accident in the Gulf of Mexico, it emerges that Deepwater Horizon, the semi-submersible rig now shipwrecked as a result of the catastrophic blowout, was registered in the Marshall Islands, a major flag of convenience for ship owners and operators (offshore oil, registered, offshore: a doubly offshore.)

Flag of convenience jurisdictions have been a part of the globalised market place since the 1930s. Operators love them since they provide lax shipping regulation combined with low tax and cheap labour. In an essay titled 'Sovereignty for Sale' American historian Rodney Carlisle noted:

An officer of the first shipping company to transfer a U.S.-flagged ship to Panamanian registry explained the appeal: "The chief advantage of Panamanian registry is that the owner is relived of the continual . . . boiler and hull inspections and the regulations as to crew's quarters and subsistence," pointing out that as long as the ships pay the registry fee and yearly (low) tax, "we are under absolutely no restrictions."

Not surprisingly, offshore oil rig operators share this passion for cutting costs, and since oil rigs are classified as ships for this purpose, they are major users of flags of convenience. Indeed in this article Andrew Leonard claims that oil companies have been prime movers in the creation of flags of convenience in places like Panama, Liberia, and the Marshall Islands, aided and abetted by U.S. diplomats and lawyers.

The rig will also, it has to be said, be covered by U.S. safety regulations (though those were poorly enforced). But drilling rigs are contracted out by the oil service companies (like Transocean) that own them, on short-term jobs, often just for a few months. This rig was leased to BP until 2013 but that gave BP leeway to move it around the world: it is not clear what environmental standards would have been applied had this rig been drilling off Angola, for example, another major BP focus. Imagine if the U.S. government had said "we don't let any rig come into our territorial waters unless it is registered in a reputable jurisdiction." The U.S. could then "export" higher environmental standards around the world.

What would be the loss? Shareholders would lose a bit from not being able to cut costs by cutting corners on environmental standards - and they would undoubtedly scream that they the investment climate has become unattractive - but anyone who understands the oil industry will know this is bluff. The equation is simple: the oil is there, and the investors will come. (As we mentioned recently, oil extraction is a "rentier" business, where you can extract a lot, such as tax or tighter environmental standards, without killing investment."

Sadly for the many victims of shipping and offshore oil disasters, lax regulation carries a price which is not always borne by the ship operators and owners. On this occasion, President Obama is insisting that BP - the licence holder for the oil field in question - carries full responsibility for the entire clean-up cost of the disaster. He is right to do so. But now is also the time to ask searching questions about whether the constant aggressive cost-cutting by shipping companies and oil-rig operators serves any interest other than those of greedy shareholders and executives.


Friday, May 14, 2010

Companies Dodge $60 Billion in U.S. Taxes

Jesse Drucker has two important stories out about transfer pricing - a subject TJN is increasingly working on (see our transfer pricing page currently under construction, here.) The first article says:

"In February, the administration said it would target some of the techniques companies use to shift profits offshore -- part of a package intended to raise $12 billion a year over the coming decade.

That’s only about a fifth of the $60 billion in annual U.S. tax revenue lost to thousands of companies’ income shifting, according to a study published in December in the National Tax Journal by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon."

Due to time pressures, we can't do this important article justice - but Richard Murphy has done a good job here. The second article is here. Both are valuable contributions to this important topic.

A Senior Vice President for Oracle illustrates the attitude of the tax abusers:

"Can someone please explain to me how following the tax laws of the United States became a reportable issue for Bloomberg News?” Glueck wrote. "

In other words, since something is strictly legal (we assume), then it must be OK. Try telling that to the victims of Apartheid or slavery.


Illicit flows 2002-6: where they went

In December 2008 Global Financial Integrity (GFI) published estimates of the scale of illicit financial flows out of developing countries, which reckoned that $850 billion -$1.0 trillion in illicit flows was disappearing from developing countries in 2002-2006. Some economists have sought to criticise such estimates, which are higher than many traditional estimates. However, the report's author Dev Kar, a former Senior Economist at the IMF, has shown convincingly why they are wrong.

Now all these outflows have a corresponding inflow somewhere else. For years, while everyone focused on foreign aid (and, occasionally, on "capital flight") almost nobody asked the question: where is all this money going. Well, GFI, along with TJN, are the leading organisations asking this question. GFI has now produced an important new report, estimating where all the money is going.

It is an important. Before reading it, however, we should note that GFI's estimate of "offshore" is very much narrower than TJN's - GFI uses traditional estimates from the IMF and Bank for International Settlements, whereas we consider a far wider range of jurisdictions - which include rich world financial centres such as the City of London (and before too long we will be revealing remarkable and unexpected new material on why the City is offshore.)

Here are the headlines from the latest GFI report:

"Our work demonstrates that developed countries are the largest absorbers of cash coming out of developing countries. Developed country banks absorb between 56 percent and 76 percent of such flows, considerably more than offshore financial centers. Thus, the problem of absorption of illicit financial flows is one that rests primarily with Europe and North America, rather more so than with tax havens and secrecy jurisdictions."

The policy implication is clear. While developing countries need to implement policies to curtail illicit financial flows, efforts to alleviate poverty and contribute to sustainable growth will be thwarted as long as developed countries permit their banks and cooperating offshore financial centers to facilitate the absorption of illicit funds. "

A most important contribution to the literature. The full report is here.