Tuesday, November 30, 2010

John Le Carré on laundering, havens and intelligence

The novelist John le Carré, a former British intelligence operative, has given a rare interview to Democracy Now (hat tip: Sarah Knott), plugging his new book Our Kind of Traitor and ruminating on a wide range of things - including several issues close to TJN's heart. One, of course, is money laundering:
"Now, this isn’t fiction. That part of it isn’t fiction. Money laundering is simply everywhere. On the grand scale, it’s endemic to banking . . . .money laundering is not some distant fantasy. It’s actually how you handle the profits of extortion, tax evasion, criminal conspiracy and huge quantities of drug money, how you get that into the white sector.

The thing is, it is very undemocratic, because if you or I go to one of these banks along here somewhere with a few thousand dollars in a briefcase, if I’m a Brit and do it, I have to give a really thorough explanation. Bank manager may call in the police. I have to produce my passport. If I want to open an account, I have to produce a utilities bill and all of that. But, if Mr. Orloff comes to a bank here and says, "I am from Russia. I have millions and millions of dollars, please. And here is a letter from a reputable lawyer in Moscow. And here is evidence that I run hotels, casinos, whatnot," bank manager says, "What are you doing for lunch?" And we’re away. So, the bigger the sum, the easier the crime."
Indeed. Tax havenry is about the most profoundly, absolutely, undemocratic business there is, and as our recent FIFA blog explains, it breeds a suffocating arrogance, derived from a feeling of untouchability that enables the roughest, most aggressive vested interests to face down entire societies and free ride on their citizens' backs:
"When there’s a great humanitarian need, somehow or another, it’s the conservative voice, the orthodox voice, the chauvinistic or the patriotic voice, that outshouts other people’s decent thinking processes."
Le Carré also speaks from his personal experiences as a spy in the late 1950s and early 1960s, and of his having watched the evolution of intelligence agencies (which infest the secrecy jurisdictions, or tax havens as many people know them) from bodies dedicated to protecting society, into ones that have, at least at times, become prone to supporting societal abuse. This is surely no accident: as our recent blogging has highlighted, the secrecy jurisdictions are conduits for vast tides of global money. Information follows the money, so the secret intelligence services naturally gravitate towards where it flows: in the secrecy jurisdictions. As these agencies have embedded themselves in these unaccountable, anti-democratic offshore zones, their operatives have inevitably imbibed the same unaccountable offshore world view, contemptuous of the notion of society and democracy. As Friedrich Nietzche famously put it: "If you gaze long into an abyss, the abyss will also gaze into you." Le Carré describes how things have changed:
"I suppose that if I could generalize about my work in intelligence in those days, for better or worse, we counted ourselves an elite with a very considerable responsibility: to speak truth to power, like good journalists, that whatever we came upon, however offensive it was to those in power, we told it straight.
. . .
I have the feeling that the power of the counterterror market is expanding and creating a wider—an ever-widening circle of those who are initiated, indoctrinated, part of the security structure, whether directly or indirectly, and those who are not. . . . it makes it possible for a senior MP to take a neophyte aside and say, "If you’d seen the papers that I’ve seen, you would know which lobby to go into when the vote comes up." And this suggestion that there are those in the know and those not in the know, and that those not in the know are second-class citizens, is extremely dangerous to society."
And this is all tied up with the tax thing, too, of course:
"In our country, we’re up against the fact that huge corporations are effective here, control the super markets, whatever they do, and they pay virtually no tax. We’re back to how they launder their money, or, if it’s a more polite way of saying it, how they apply sophisticated taxation arrangements so that they don’t pay tax."
And, more specifically, he said something that is of particular relevance to the issue of transfer pricing:
"In The Constant Gardener, in particular, it was quite extraordinary to go to Basel, to get among the young pharmaceutical executives in a private way, promise them that I would never tell—divulge their names, and listen to them pouring out their rage against the work they were doing, at the people who were making them do it. But they were still taking the penny, and they were still doing what they were doing. They were still contributing to the invention of diseases. They were fiddling with compounds, turn them into new patents, when they actually had no greater effect than the previous patent. They were joining the lie that every new compound put on the market cost six or eight hundred million dollars, which is pretty good nonsense when you think that many of the main health life-saving drugs that go on the market have been developed, for instance, in your own federal laboratories and then sold by some strange method to the pharmaceutical company, so they didn’t do the hard work themselves very often.
Patents are among the most powerful corporate tax avoidance tools that exist. The patent is shifted to a subsidiary in a secrecy jurisdiction - which then charges the "onshore" subsidiary high royalties, which can then be deducted against tax - while the subsidiary's profits are in a zero-tax haven. Le Carré's words put all this in an even more cynical light.


Schtop! tax dodging


Irish site value tax is a land value tax

We've had an answer from Ireland of a question we asked recently: is the Site Value Tax introduced in the new Irish budget a land value tax?

The answer is that it is. Good news. Read more here.

(And the commenter notes that "we called it SVT rather than LVT so as not to rouse the wrath of the farmers' groups.") Seems like a good idea. . . .


Richard Brooks: more on African tax losses

Richard Brooks, the lead investigator on ActionAid's excellent recent investigation into the tax affairs of brewer SABMiller, has a very fine piece in The Guardian, reflecting on what he has discovered.

We urge you to read the article in full, for it contains many important points. One that we'd like to draw out now, however, is this, concerning double tax agreements:
"Ghana recently signed one such agreement with Switzerland as a very expensive price for Swiss agreement to divulge details of money stashed by wealthy Ghanaians in Swiss bank accounts."
Now, having read that, take a look at this, on India:
"Switzerland managed to wrest various important concessions in the revised DTA -- above all, a most-favoured-nation clause regarding the fiscal treatment of interest, dividends, licences, etc. for Swiss investments in India.These are, of course, far less welcome."
The details are here. There is clearly a pattern: a Swiss strategy to screw more concessions out of developing countries on tax treaties - in exchange for miniscule progress on information exchange. More generally, Brooks explains:

"The rules of the international tax game are set by the developed economies' club, the Organisation for Economic Co-operation and Development, and are forced on developing countries through "double taxation agreements" they must sign if they are to have any hope of attracting foreign investment. These treaties largely transfer the rights to tax the royalties and fees from the country where they are paid to the one where they're received even when, as with Switzerland and the Netherlands, that country has no interest in taxing them."

It is just this sort of power relationship that we are now trying to address.


Offshore FIFA: making governments crawl on their bellies and beg

BBC Panorama carried a superb investigation last night on British television of the corruption at the heart of the Féderation Internationale de Football Association (FIFA,) which you can see here if you are in the right area (or, if you can't, you can read the BBC story, which tells part of the tale).

We watched the programme, and would like to draw attention to some points from the TV programme that aren't in the text story. For there is a serious tax and offshore angle.

The Panorama investigation discovered a truly vast web of bribery - 175 payments totalling a truly gargantuan $100m. One angle concerns companies named Sicuretta and Sanud, based in Liechtenstein, about which it was very hard to get information because of offshore secrecy. The fact that FIFA is based in Zurich, Switzerland, helps deepen the secrecy. It gives the lie to appalling deals that Britain and Germany made with Switzerland recently, which let the Swiss get away with preserving their harmful secrecy practices, and focusing only on squeezing some taxes out of the illicit accounts. Tax matters, but this programme showed that secrecy is about far, far more than tax.

But there is much, much more in the programme that we need to pay attention to. Fifa has a set of eight "guarantees" that it forces on supplicant governments begging to be allowed to host the next World Cup - and Fifa insists the guarantees are kept secret. Visa rules are thrown out of the window. Workers’ rights are suspended. New laws may be needed to protect Fifa’s official sponsors.

And then there is the tax.

A while ago we blogged the story about FIFA's so-called African "tax bubble" whereby FIFA forced a poor African country to forego all its football tax revenues in order to funnel yet more money into FIFA's gilded Zürich headquarters. That story was enough to make any right-thinking person retch; Panorama interviewed some right-thinking Dutch observers who tend to agree with us. Professor Han Kogels of Erasmus University, Rotterdam, had this to say.
"They want to create their own tax haven. A fully exempt situation. That is, FIFA and its FIFA subsidiaries that are fully exempt from any tax whatsoever levied at every level – state level, municipal level. All sorts of taxes: consumption taxes, income taxes – you name it – it’s all exempt."
There are also tax breaks for FIFA’s official sponsors. The Dutch government calculated that if they win the bid, FIFA’s tax demands could amount to 300m Euros. Even for a developed country, that is hard to swallow. And why should anyone swallow this? Renske Leijten, a Dutch MP, put this in a wider context:
"As a government yo make laws for everybody and every situation. You are not going to make laws for just one situation – and that situation is the world cup. You do not make laws to protect organisation."
Well said that woman. Who do these FIFA people think they are? They are not gods - yet they behave as if they were. Two other commentators highlighted the sheer arrogance of this offshore organisation. When Panorama showed the leaked list of guarantees to Lord Corbett, a former member of parliament, the response from Corbett, who was visibly trembling with anger as he spoke:
“It is just indifensible”. That is the word for it. It is indefensible. And it is an insult to taxpayers in this county. Sign up here or your bid will likely be regarded as deficient. They have the audacity to seek to instruct the parliament that they will dance to the FIFA tune."
David Mellor, a former chairman of the football task force who knows what it is to bid for a World Cup, described what it is like:

"Logic has to be suspended. Normal standards of integrity and honesty have to be suspended. We have to go in on our knees to accept FIFA dictats: to crawl on our bellies to beg them to give us the World Cup."
Far better, he said, for England not to bid and instead insist on reform of FIFA, to make it transparent and accountable.
"Far more important than anything else in world football is to get a FIFA that is clean and fit for purpose. It astonishes me that FIFA continues the way that it does."
FIFA's arrogance comes from two main areas. The first is that it is a monopoly supplier of World Cups. With monopoly comes something that economists call rents: the unearned income of those who, as Adam Smith remarked, "love to reap where they never sowed." And economists agree almost universally that there is one very good recipe for what to do with rents: tax them at very high rates. And yet FIFA is a non-profit organisation, based in the tax haven of Switzerland. This is all wrong.

Fifa's arrogance also comes from another direction: its offshore status. The offshore sector tends to be a very hard nut: it is, as Simon Johnson recently described it,
"this part of the economy cannot be taxed"
And from this "you can't touch us" arrogance of offshore, flows all manner of abuse.

Time for this scandal to be addressed, head on.

Protests are now breaking out over tax avoidance in the UK. Although FIFA is based in Switzerland, its officials do visit the UK on a regular basis, and its presence is felt all over the place.

Time for the protesters to pay FIFA some serious attention. And take a look at this too.


On the need for improved deferred tax accounting

The Marks & Spencer story raises another issue: deferred tax. This is an item or items appearing in company accounts, but often only in slippery and elusive ways. Wikipedia says:
"Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes."
The name itself suggests, misleadingly, that this is tax to be paid some time in the future. In reality, deferred tax is frequently deferred forever: it becomes tax that is never paid. And there is usually very little disclosure about what really happens inside this strange category. A lot of deferred tax - trillions of dollars worldwide, most probably -- is sitting in tax havens right now. So it's something worth getting to grips with.

We will now draw out some key points from the Tax Research blog. First of all, it notes that companies are not required to make full disclosure of their deferred tax: neither what the reasons for it are, nor the country in which the deferred tax liability has arisen, nor whether the company will ever pay it.

"Given that deferred tax balances are frequently material on a company’s balance sheet it is extraordinary that so little information is disclosed with regard to these liabilities, particularly as many may be fictional."

Crucially, this allows companies to claim they are paying taxes close to the headline rate of tax - while in reality they are paying far less than this, and deferring the rest. This explains why in the Marks & Spencer story (we stress that M&S is far from unusual in this respect) the company can claim in its accounts that it has paying almost exactly the headline 28-30% tax rate, while in reality paying less than 19%. Click to enlarge the graph.

Tax Research thinks this whole set-up looks very ugly indeed:
"It is hard to escape the conclusion that the International Financial Reporting Standard requiring the provision of all deferred tax liabilities, whether or not there was any real possibility of the tax being paid, was little more than a deliberate public relations exercise designed to disguise tax avoidance. The deferral of tax is very often the aim of tax avoidance, complete cancellation of liability being much rarer. In this regard, it must be remembered that the International Accounting Standards Board is effectively controlled by the Big 4 firms of accountants and some of their largest clients; it is not, despite official sounding title, and government or international agency accountable to any international authority."
The solution, he says, is as follows:
1. All deferred tax liabilities should be disclosed by the country in which they arise;

2. All deferred tax provisions must be fully explained, with no “other” categories allowed;

3. The date of estimated settlement of liability should be declared for all deferred tax liabilities, and the date of realisation should be disclosed for all deferred tax assets. If settlement or realisation cannot be predicted within the coming ten years then the liability or asset in question should be considered contingent;

4. All tax reconciliations should be to the current tax liability, with an additional note explaining the composition difference between that current tax liability and the full tax charge including deferred tax;

5. All deferred tax movements, whether they be adjustments, or charges made through the Statement of Realised Gains and Losses, must be fully explained in the financial statements.
There are other deferred tax issues in addition to these, but addressing these issues would have significant impact on the way in which disclosure was made and address the problems noted in interpreting the accounts of Marks & Spencer.

The whole, occasionally slightly wonkish, post is here - and well worth reading.


More on Philip Green protests

Following yesterday's blog, The Guardian has a longer piece today about Sir Philip Green, a tax avoider and UK retail billionaire who has a high-profile job with the British government advising on public austerity savings. It has a great comment from a spokesman for the grassroots protest group UK Uncut, who says:

"Philip Green is a tax avoider, and yet is regarded by David Cameron as an appropriate man to advise the government on austerity," said UK Uncut's spokesman, 26-year-old Daniel Garvin. "His missing millions need
to be reclaimed and invested into public services not into his wife's bank account."

Bit by bit, the tax justice agenda is gathering momentum.

On the subject of UK retailers, Tax Research has now updated its "Knickers to tax" work on Marks & Spencer, which we blogged recently. It responds to those who have criticised the research, and produces a list of questions for the critics to answer.


How to make trade work for low income countries

Britain's Department for Business, Innovation and Skills issued a white paper on trade recently which asked what are the key constraints and challenges in the way of Low Income Countries (LICs) benefiting from trade? Tax Research has made a submission, focusing on transparency. It can be accessed here.


Monday, November 29, 2010

Flashmob blockades Top Shop

From Indymedia (hat tip: Tax Research)

"Philip Green, national thief, pay your tax or we won't leave!" and "Philip Green's taxation could pay for Education" are two of the chants causing Top Shop in Oxford Street to try turning up the music to drown out the protests in Oxford Streets TopShop flagship store.

One Top Shop employee begged flashmobbers to trash the store, explaining that even though Top Shop's profits have risen by 19%, employees are to receive a measly £5 bonus."

Philip Green argues that he hasn't avoided his tax. In making that argument, he is using the, er, Philip Green defence.

The Tax Justice agenda is spreading.


How SAB Miller escapes tax in developing countries

Update Nov 30: see Richard Brooks in the Guardian.

If you read one story today, read this one in the Guardian, and the associated ActionAid report. As The Guardian summarises it:

"The world's second-largest beer company, SABMiller, is avoiding millions of pounds of tax in India and the African countries where it makes and sells beer by routing profits through a web of tax-haven subsidiaries, according to a report published by ActionAid today."

ActionAid estimates it may have reduced its African corporation tax bill by as much as a fifth last year, depriving poorer countries of up to £20m (US$31m) in tax.

Look, first, at what is a minor detail, at least in the grander scheme of things:

"Marta Luttgrodt sells beer from her small stall in the shadow of Accra Brewery, SABMiller's Ghanaian subsidiary in the capital city. . . . Luttgrodt sells beer from the factory for 90p a bottle and manages to make £220 profit a month. She pays fixed fees of £11 per month to the Accra authorities and a further £9 per quarter to the Ghana Revenue Authority."

And compare that to the income tax that the income taxes paid in Ghana: zero.

“The most shocking part of this story is not the huge amounts of tax avoided, but the fact that one woman selling beer outside SABMiller’s brewery in Ghana paid more income tax last year than the multi-million pound brewery.”

Astonishing, isn't it? SABMiller has been using transfer pricing techniques to avoid tax in Ghana entirely, not to mention its avoidance in many other countries. As Luttgrot says;

"I don't believe it," she said when told this. "We small businesses are suffering from the authorities – if we don't pay, they come back with a padlock."

An SAB spokesman said there were sound commercial reasons for structuring its business through tax havens, adding that "we dispute that we have avoided paying any tax." Once you read the detail of ActionAid's report, it becomes clear that the spokesman's last sentence comes from the Philip Green school of tax avoidance. It all depends on what you mean by the word "avoid." ActionAid's report, drawing on the expertise of top UK tax expert Richard Brooks, shows SABMiller's tax avoidance games in forensic detail.

Tax avoidance, of course, is not illegal. But it is wrong.

The report outlines several ways in which tax is avoided, via transfer pricing schemes:
  • Dutch detour: The company holds its brands in the Netherlands. In one case, it's brands such as Castle, Stone and Chibuku: venerable African beers, for sale to Africans in Africa. The Ghana subsidiary will pay royalties to these subsidiaries, where they pay minimal corporation taxes (and the same royalty payments can then be deducted against tax in Africa.)
  • Swiss sidestep: SABMiller’s African and Indian subsidiaries pay ‘management service fees’ to sister companies in European tax havens, mostly Switzerland, where effective tax rates are much lower. The head of the Ghana Revenue Authority told ActionAid that “management fees is an area that we know is being used widely [to avoid tax] . . . it’s difficult to verify the reasonableness of the management fee”.
  • Mauritius manoeuvre: A Mauritius subsidiary sees its trading profits taxed at 3% compared to 25% on its trading partner in Ghana.
  • Thin capitalisation: another transfer pricing scheme, where the African subsidiary borrows from the Mauritius subsidary, deducting its interest payments from the final tax bill, while the Mauritius subsidiary's lending profits (derived from those same interest payments) are taxed minimally.
We should say a couple of things in SABMiller's defence. First, as ActionAid put it:
"SABMiller isn’t a lone bad apple. Its tax avoidance practices are far from unusual, conforming to the model followed by multinational companies the world over."
Indeed. This is a scourge that is going on all over the world as corporations, in a quest to maximise profits for shareholders (usually wealthy ones) at the expense of the wider societies in which they are embedded, seek to free-ride on the services paid for by others: the education, infrastructure, rule of law and many other things that enable them to make their profits. South Africa's former Finance Minister Trevor Manuel called it "a serious cancer eating into the fiscal base of many countries."

Next, SABMiller said:

"We follow all transfer pricing regulations within the countries in which we operate and the principles of the OECD guidelines."

We don't doubt it. As we've noted, nobody is accusing them of breaking the law. But the fact is that they have been using tax havens to drain desperately needed fiscal revenues from developing countries. They say they have worked within the rules. We would say that the rules are unfit for purpose. This particularly applies to things such as thin capitalisation - where the capital takes the form of intellectual property rights, the barn door is not just open, but the horse is living in a pampered stable in the Alps. This just demonstrates the ludicrousness of the transfer pricing rules, which do not work. The OECD, which created this framework and lobby to protect it - has a responsibility to change them. As Hearson notes:

"Tax authorities in developing countries are fighting hard to stop tax dodging but the reality is they are locked in a David and Goliath-style battle with multinational companies. International standards governing the taxation of big business are stacked against them."

They are indeed - and read more about it on our transfer pricing page.

But there is something else. The Guardian reports this:

"SABMiller said its companies "pay a significant level of tax", adding that in the year ended 31 March 2010, the group reported $2.93bn (£1.88bn) in pre-tax profit . "During the same period our total tax contribution remitted to governments – including corporate tax, excise tax, VAT and employee taxes – was just under $7bn, seven times that paid to shareholders," the company said. "This amount is split between developed countries (23%) and developing countries (77%)."

This looks impressive, but it needs serious unpacking. This appears to be from a concept apparently designed by PriceWaterhouseCoopers called the "total tax contribution" whereby a firm rakes in every single tax it can conceivably claim to be associated with its business, and claims it for itself.

So it will claim, for example, Value Added Tax paid on its businesses, and employee taxes. But of course much of the VAT is paid by consumers, not by PWC. Similarly, the employee taxes are paid by the employees. They are not taxes borne by the company. It is a very clever idea, and we will be seeing a lot more of this Total Tax Contribution, now that people are beginning to wake up to the issue of tax avoidance.

Bob McIntyre of Citizens for Tax Justice does an excellent job of looking at this Total Tax Contribution framework in The American Prospect. As he summarises it:

"PwC is trying to get corporations to pretend their tax bills are bigger than they really are, by counting not just their actual taxes, but also taxes they don't pay, such as those paid by their customers, workers, suppliers, and so forth."

He looks at how ExxonMobil used this formula to claim to have paid $99 billion in taxes on just $36 billion in profits. He also cites TJN's Richard Murphy, who notes:

"This is bilge -- to put it nicely."

(Murphy has more to say on the Total Tax Contribution framework here, here and here. This is one of the problems with tax, more generally. International tax is so complicated that when investigators publish excellent research on corporate tax avoidance schemes, it is relatively easy (as with the recent Vodafone story) for corporations and their supporters to publish their own re-interpretation of the same information, sowing confusion in the public mind. While it always makes sense to look at the other side of any argument, we should remember that corporations have an awful lot of leeway in presenting the facts in ways that present themselves in the best possible light.

ActionAid has done some excellent and important work here. If you want to act, click here.


Friday, November 26, 2010

Some forensic detail about Offshore Ireland

Courtesy of Naked Capitalism, we've been pointed to this apparently well-informed, and evidently angry blogger:
The same banker told me this. She was aware of instances, and so was everyone else, of banks, German banks, who used to fly their people from Germany to Ireland in order to do deals that were not allowed in Germany.
That is absolutely, quintessentially, offshore business. More specifically:
"German banks set up subsidiaries in Ireland. These subsidiaries were often registered as completely Irish companies. Back in Germany the German regulator (BaFin) had strict and enforced rules. Very good rules for the most part. Far, far better than Britain or Ireland. But these good rules, properly enforced meant German banks could not do many of the most lucrative and in hind sight reckless kinds of deals.

So the German banks would do the figures and work it all out in Frankfurt, then send a banker over to Ireland, get them to sit at 'their' desk in Ireland, in the Irish bank, and do the deal there. The legal registration of the deal and the 'oversight' were all Irish. This is known in the financial world as jurisdictional arbitrage. You and I would call it cheating if we were feeling charitable and lying if we weren't.

The Banker flies back to Germany, where the German bank hasn't done any deal, and therefore has done nothing wrong. The deal was properly overseen and approved by the appropriate Irish financial authorities and the profits would be banked at a very happy Irish bank. If any management of the 'deal' was required an Irish company would be hired, there are many, and an Irish manager often living not far from Cork, would 'manage' the money in and out. I have spoken to such people. Usually I can hear the sweat coming off them as they ask how I got their number and where did I get my information."
This goes right back to Professor Jim Stewart's writings for TJN, who looks at the whole thing in overview. Even if now a little old, that research remains highly pertinent amidst today's mess. As for the precise numbers:
"I can't tell you the figures because only the Irish Stock exchange has the otherwise completely confidential paper work and I have serious doubts (from what I have been told in the last week by an insider with first hand knowledge) that the Irish regulator and stock exchange have much of a clue themselves."
Offshore business again. Rake in the fees - and who gives a damn about who is affected by this nonsense? Our blogger returns to the key question at the core of his post:
So let's return to our question? Whose fault?
And his answer?

"The losses never were, and should not ever be, yours and mine. We, the people, who were told nothing, were not asked nor consulted, whose laws were either ignored, set aside or re-written, we should not be expected to pay for those losses now.

They are bankers losses. It is NOT a question of Irish or German. It is question of wealthy bankers from all countries not just Germany (almost every nation, Germany, America, Russia, France Britain, we did dirty work in Ireland) and their corrupt Irish helpers versus the people. It is not a question of should the Irish people or the German people pay. Neither people should. It should be the bankers who made the losses who should take them."

We will drink to that, and Paul Krugman would seem to agree. This stuff should be bringing people out into the streets.


IMF: Developing a Taxpayer Compliance Program

We haven't read this report yet, but it may be of interest.


M&S: Knickers to tax

Tax Research has a most useful new report out about the British High Street chain Marks & Spencer. This is an example of how companies can claim to be paying very high rates of tax - while actually paying far less. It concerns the issue of deferred tax, which is very much a tax haven issue.

The short version is here.


British banks to buy tax-dodging permission

From Britain's Daily Mail (hat tip: Offshore Watch:)
Britain's leading banks are in talks with the Treasury about contributing £1.5billion to community projects to avoid being hit with new taxes. The cash will be used to create a ‘Big Society Bank’ which will make money available to charities, social enterprises and voluntary groups. As part of a far-reaching deal with the Government, Britain’s biggest banks are also discussing plans to slash pay-outs in the next round of City bonuses. . . .the reputation-building initiative has been nicknamed ‘Project Merlin’.
And in exchange for this?
In exchange for making cash available for community projects and slashing bonuses, ministers may agree not to impose any bonus or transaction taxes on the industry on top of a £2.5billion-a-year levy announced earlier this year.
This seems like a win-win for banks, and a lose-lose for the rest of us. Apart from the promise to "slash pay-outs" which would be a good thing if (repeat if) this is genuine, and not an elaborate trick, this seems to be a way for the British government to use public spending in a way that it serves to rehabilitate the justly appalling reputation of City of London banks. This is an extraordinary display of cynicism. As Lord Oakeshott, spokesman for the coalition Liberal Democrat party puts it:

"If the banks think that Government policy can be bought for £1.5billion, they have got another think coming.
We fear, unfortunately, that in Britain exactly that can happen: government policy is indeed for sale.


Simon Johnson on Ireland's ghost economy

For those who have already read our blog on secrecy jurisdictions, contagion and Greece, please note that we have just updated it.

On a similar subject, we are intrigued to receive this by the acclaimed Simon Johnson (hat tip: Tax Research). First, on a question of measurement:
"Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product, or G.N.P.; in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.

That’s a higher number than you see in many news reports, in part because officials are still focused on gross domestic product, a misleading statistic in the Irish case, as Peter Boone and I have been arguing in this space for some time."
And he notes something else, which we've also blogged before:
"At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P."
Some bits of the economy, then, can't be taxed - because it's so hard to break the offshore part of the economy - and that means the rest of the economy is even smaller in relation to the mountains of debt that afflict Ireland than most people think. The offshore system helped cause the problem (by puffing up the financial centre) - and it helped disguise the problem (by puffing up G.D.P. artificially) and now it won't pay for the problem (which should be measured against the smaller GNP, rather than GDP.) It kind of makes you sick, really.


The European Investment Bank and tax havens

The NGO grouping Counter Balance has just issued a new report entitled Flying in the face of development: How European Investment Bank loans enable tax havens.

It notes particularly the role of Mauritius (again!) in this game:
Mauritius offers a zero tax regime to foreign investors, provides opacity, and the tax agreements it has signed with African countries contribute to depress tax revenues in these countries. A Norwegian government report on tax havens and development published in June 2009 finds that; “Mauritius offers a location to foreign investors for a nominal fee to the government and for very low taxes protected through tax treaties. This is an example of a harmful structure, whereby Mauritius offers investors the opportunity to establish an additional domicile which allows the investor to exploit a virtually zero tax regime. In reality, the source country is robbed of tax on capital income through this type of structure, while the tax-related outcome for the investor is very favourable”.
And Mauritius is murky from a very different angle too:
"According to the IMF’s annual portfolio investment survey, portfolio investments in Mauritius as of 31 December 2007 totalled USD 155 billion. This is much higher than the figure of just over USD 13 billion from the Bank of Mauritius. The difference, according to the Norwegian report on tax havens and development, can probably be explained by the fact that the Mauritius central bank figures do not embrace all the assets in foreign companies, due to the lack of accounting requirements."
Read on.


Tax havens at the core of the Greek crisis

(Updates: some forensic details about offshore Ireland; Simon Johnson on Ireland's ghost economy.)

Sometimes a picture speaks more clearly than words can. Now, courtesy of something that FT Alphaville has just pointed out, we bring you this (click to enlarge):

Look at all those jurisdictions inside the black circle. Secrecy jurisdictions. The accompanying text in the relevant IMF report, from where this graph comes, says:
"An illustration of Greece‘s interconnections in cross-border funding flows reveals why funding strains in Greece in the first half of 2010, despite being by itself small, might have translated into pressures on other Euro Area peripherals. Recall that banking exposures to Greece were relatively small in the context of banks‘ balance sheets; yet, concerns about the strength of balance sheets and the ability of other Euro Area peripheral countries with fiscal and financial vulnerabilities to finance themselves increased as the Greek situation worsened. Using the funds‘ data, Figure 10 presents four clusters (i.e., countries that together form more of a closed system), centered around a set of core connections that are closely linked to Greece: (i) a red cluster of countries with access to funds domiciled in Luxembourg; (ii) a black cluster with access to funds domiciled in the offshore centers of British Virgin Islands, Jersey, Cayman, Guernsey, and the Isle of Man; (iii) a blue cluster with Ireland at the core; and (iv) a green cluster of the U.S. with several key European and other countries. Greece is interconnected with each of the central nodes of these clusters. This close interconnection across other core countries suggests why asset re- allocations and flows might have been large systemically, with potentially significant impact on countries such as Ireland."
Contagion: it was the tax havens wot dunnit. Or at least played a major role. (And you can be sure that the "United States" will have heavily featured Delaware, a tax haven inside the U.S. that has been the securitisation jurisdiction of choice; the "United Kingdom" means the City of London, that state within a state that is arguably the world's most important offshore jurisdiction.)

Half a century ago, the global financial architecture was, as a result of lessons learned from the Great Depression, heavily fragmented and flows of capital across borders were quite tightly constrained by capital controls. The quarter century after the Second World War (well, from 1948ish) was known as the "golden age" of capitalism: an era of broad-based, stable growth, with few financial crises. The rise of tax havens and the interrelated phenomenon of the offshore Euromarkets coincided with the end of the golden age and the disruption of these happy trends. From the 1970s onwards, incomes for ordinary folk have stagnated while those at the top have soared. Tax havens, or secrecy jurisdictions, played a major role in this.

One of the key aspects was that the offshore finance, by making flows of international finance more "efficient" (in January TJN will be producing a lot of material showing just how inefficient this all was), also had the effect of making the world's economies more interconnected. Unregulated capital could now flow, unhindered, to tax havens and mass there, protected from outside interference, and from these protected platforms they could mount large-scale and co-ordinated speculative attacks against currencies, for example, often with terribly destabilising effects. The countries that joined in this game and liberalised their economies seem to have been the most troubled, while those that financed themselves from local markets tended to do better. The result of this "efficient" interconnected financial economy was an explosion in the number of financial crises.

The IMF report illustrates exactly that. Onshore economies are massively interconnected with each other, via tax havens, and, as the IMF notes:
"The vast majority of global finance is intermediated by a handful of large, complex financial institutions (LCFIs), which transact on a few payments and settlements systems and operate out of a small set of countries that serve as global common lenders and borrowers. . . . pervasive interconnections can result in a rapid transmission of adverse shocks across the global financial system . . . The transmission of shocks and the spillover of policies and financial conditions occur largely through these core economies."
The paper looks at both banks and "non-banks" - the strange creatures that roam that largely offshore zoo that is known as the Shadow Banking System. The non-bank sector, as the IMF explains, is very offshore-like:
"The nonbank entities [exhibit behaviour that] has been fueled in part by the desire to avoid regulations"
Now the offshore system and the shadow banking system are different, albeit overlapping things. As we noted recently, shadow banks are those institutions that escaped from the social contract. They did it, very substantially, by using offshore jurisdictions. And we should focus not just on the jurisdictions, but on the private players:
"By virtue of their global reach, these LCFIs can reap diversification benefits. At the same time, they are also "super spreaders" of crisis and losses in stressful times; during the recent global crisis, 18 institutions accounted for more than half of the $1.8 trillion losses reported by the world‘s banks and insurance companies."
The non-bank fund industry, it notes, increased in size from $11.7 trillion to 26.8 trillion from 2002 to 2009. Phew. Offshore played a central part in puffing all this candy floss money up so fast: without regulations, money grows much faster. And then there is this:
"The rise of offshore financial centers gives the impression of a seemingly dispersed or decentralized global financial architecture with many centers. But the analysis of holdings and cross- border exposures in the funds data reveals a core group of centers or nodes, such as the United States, United Kingdom, Luxembourg, and France, around which the offshore centers are clusters and to which they channel funds sourced globally.
Several things need pointing out here. First, the way this is phrased suggest that the IMF doesn't undestand what an offshore centre is. It seems to think Luxembourg is onshore - which it is most definitely not. We think Luxembourg is the world's second biggest secrecy jurisdiction, after the United States. This reminds us of a confusion we noted at the Bank for International Settlements:

"The most common SPE jurisdictions for European securitisations are Ireland, Luxembourg, Jersey, and the UK. . . . The most common jurisdictions for US securitisations are the Cayman Islands and the state of Delaware. The onshore (Delaware) versus offshore (Cayman) decision will generally be driven by factors outlined in the previous section."

Again, the BIS is wrong. Every one of these jurisdictions is offshore. As regards Luxembourg, look at this picture:

Luxembourg is massive. And then we have another picture. But first, an explanation:

Figure 9 illustrates clusters of offshore centers that together pass-through funds (i.e., receive and distribute funds to the rest of the world). Guernsey and Liechtenstein are distributors of funds to the core nodes, whereas the Bahamas and Bermuda are more collectors of funds for the clusters of off-shore centers."

These are the conduits: the vectors of financial contagion. Even though Greece and Ireland are pretty small countries, they are jeopardising all of our futures, partly because of the leverage at the heart of these structures - leverage that offshore finance has also helped to foster, it has to be said.

And the scale of this thing is vast. As the IMF also says:
"A core set of countries and financial systems are at the center of global finance. These nodes intermediate close to two-thirds of claims on the rest of the world."
But Professor Ronen Palan of the University of Birmingham notes something absolutely crucial about all this:
"Why do we really need this level of 'interconnectdness' ? There does not seem a logical reason for so much money to flow back and forth through so many jurisdictions. The IMF does not ask why it takes place.
And there's more . . . but we will get to that shortly.


Thursday, November 25, 2010

Deficit Hawks, Tax Chickens

We just liked this headline. From the New York Times economix blog:
"I’m not sure who invented the term “deficit hawk,” but it seems an odd name for a creature too chicken to raise taxes."
Nicely put. And it's a nice article too.

Putting the same point, but in a different way, we have Professor Calvin H. Johnson of the University of Texas saying:

"The (deficit) commission got distracted from its mission. It wants to hand out sweets by cutting revenues and providing tax incentives. This is not the time, how- ever, to be reducing the tax revenue from corporations.

Somebody else should hand out the sweets. The job of the commission is to make us take cod liver oil."

Also worth reading (hat tip: Taxprof). With gems such as:

We should be spending $4 million a year right now to pay for 20 top-flight professionals to go on search- and-destroy missions for tax shelters. . . The Shelf Project, which I am a part of, has proposed 50 different ways to raise $1 trillion a year. Each project can be used independently when Congress is ready to raise revenue. All the proposals would make the tax system fairer and more efficient.

The proposal is here. With an interesting table attached.

And on U.S. tax changes, this fiery piece from Michael Hudson is, as always, worth reading.


Some points about TJN in Jersey

There seems to be some debate in Jersey from the Jersey Democratic Alliance, about TJN, and about the island's so-called zero-ten tax regime. It makes interesting reading.


Irish budget: interesting detail on site value tax

From the Reuters summary of the Irish budget, we note an interesting detail:

Measures will broaden the tax base, abolish or curtail a range of tax exemptions and relieves, and introducing a new site value tax.

On the surface, this looks like a land value tax. This follows a release at the beginning of the month from an Irish group called the Smart Taxes Network, calling for a site value tax: "a proposed annual charge on the value of residentially zoned land" and it stresses that this is not a property tax. As they say:

"The tax collects much of the increase in land values caused by services and infrastructure provided by national and local government, so that increased tax revenues will gradually repay public expenditure."

That does look like a land value tax. However, this was just what was called for a few weeks ago, though we don't have confirmation that this is what they mean in the budget itself. Some property surveyors seem to think otherwise: they are calling it a property tax. Interested if anyone can provide more info. Read more on land value taxes here.


European MEPs call for Ireland to stop free-riding

A new press release has emerged:
Fiscal rescue and EU tax policy: Cross-political MEPs call for minimum common corporate tax rate of 25% as necessary for EU solidarity

A cross-political alliance in the European Parliament has called for the introduction of a minimum European common corporate tax rate of 25%. MEPs from the Greens/EFA, ALDE, S&D and EPP groups (1) issued the declaration in the context of the ongoing Eurozone solvency crisis and the rescue measures being proposed for Ireland. Commenting on the declaration, Greens/EFA economic and finance spokesperson and co-signatory Sven Giegold said:

"Introducing a minimum common corporate tax rate in Europe is the only way to limit tax competition and the damaging effects this has had on the European economy and European solidarity. Today's declaration is a welcome development, which represents the first time that such a broad political alliance in the European Parliament has thrown its weight behind a clearly defined common corporate tax rate.

"Tax competition within the EU and the Eurozone enables cross-border businesses to avoid over €100 billion in tax payments, notably by repatriating profits to jurisdictions with lower corporate tax rates. This not only undermines the spirit of the common market, it is grossly unfair and diminishes revenues in other member states. It is particularly odious that financial institutions, which have unfairly profited from this tax competition and thereby avoided their responsibilities to their national exchequers, should now be bailed out by the same public coffers.

"Ireland will clearly need support in the painful reconstruction of its economy following the crisis. However, it is not acceptable that this support should be used to rebuild an economy based on tax dumping."
The release also contains a common declaration, at the bottom. Click here.

This is clearly influenced by the Irish situation, where Europeans have been trying to find ways to prevent Ireland free-riding on the citizens of Europe (and other jurisdictions) by poaching their tax revenues. Unfortunately, we note that in the Irish budget, the corporation tax rate of 12.5% has been preserved. As Reuters notes:

"The Government remains committed to the 12.5 percent corporation tax rate: it will not be increased under any circumstances."

The latest MEP resolution has no binding force, but it is important that it reflects the profound unfairness of the system. An editorial in the Belfast Telegraph, from neighbouring Northern Ireland, notes:

"other EU countries, as well as the UK, feel that it gives the Republic an unfair advantage as an economic investment destination. Nowhere is that advantage more keenly felt than here. Mr Robinson is not seeking to kick the Republic when it is down, but rather pointing out that it still retains a tax incentive which disadvantages the province."


But we should note something else. The media has been focused on the headline 12.5% rate. And, by and large, they have ignored the devious exemptions that Ireland has been offering. Remember the recent Bloomberg story about Google's 2.4% tax rate? That is a lot lower than Ireland's 12.5% tax rate. As Bloomberg notes, Google:
licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings. . . That licensee in turn owns Google Ireland Limited . . . The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.

Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.
(Read the story for further details, including a detour via the Netherlands.) This is not about the 12.5% rate. It is about Ireland skimming of a bit of cash from devious transfer pricing schemes to help big private companies get out of paying tax.

A last word from one of the world's top experts in international tax.
“The system is broken and I think it needs to be scrapped,” said [Reuven] Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.”
It's just this kind of thing that the European parliamentarians are trying to stop.


Book review on tax havens book

An overview of Palan, Chavagneux, and Murphy's book Tax Havens: How Globalization Really works.
"We are increasingly coming to recognise their function as centres of a gigantic parallel offshore shadow economy, whose secrecy and opacity lie at the heart of the financial upheavals that afflicted East Asia and the West in the last decade."
For those who don't have the book yet, take a look.


Wednesday, November 24, 2010

Some polite tax queries about England's future queen

The British journalist Andrew Gilligan has been asking some questions in the Telegraph Newspaper about Kate Middleton, the extremely popular fiancée of Prince William.

We think the response from the family company to Gilligan's queries puts them on a bit of a sticky wicket.

"Party Pieces is a private business and you will therefore understand that we will not be responding to the various questions you have asked."

We ought to be told a little more about this.


The EU Code of Conduct Group

Quite a lot has been going on with respect to the rather secretive EU Code of Conduct Group, which looks to see if the tax legislation of places like the British Crown Dependencies are complying with EU rules. We haven't blogged it because TJN's Senior Adviser Richard Murphy has been ably doing this, with the help of some inside information, it seems. It looks like some interesting developments are in the pipeline.

For those who want to get up to speed on this, click on his latest blog - and follow the links back. Among other things, Guernsey has been forced to say:
"the expectation is that the Crown Dependencies will be required to introduce revised corporate tax regimes."
It's a topic that could have major implications for Britain's tax havens.


Top EU official backs better information exchange

Take a look at these remarks made last week by Algirdas Šemeta, EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud, in a presentation entitled The Importance of Information Exchange in Tax Matters. (hat tip: Markus Meinzer)

We will highlight a couple of things he said (and note that he was speaking in an official capacity, it seems.) Like Tremonti, he gives short shrift to those who think a witholding tax regime alone is good enough. Proper information exchange, he says, is the thing to aim for.
"Automatic exchange of information permits tax authorities to obtain information on their own tax residents in cases where they might not otherwise be aware of such cross-border investments.

It is much more interesting for a tax authority to receive comprehensive information about the assets owned by its residents abroad than to receive only a withholding tax on the income produced by such assets. Such a withholding tax may generate some revenue, but it does not allow Member States to assess the overall tax base of their residents. As a consequence, the progressivity of some tax scheme cannot properly be applied. This leads to less revenue and the unequal treatment of taxpayers."
And as for the OECD's forms of information exchange - they just aren't good enough. So much for the OECD's claim that theirs are the universally accepted international standard.
Undoubtedly, the OECD standards of transparency and exchange of information have paved the way for international consensus on the importance of effective exchange of information for collecting taxes. But as you may know, the OECD standards, which prevent States from invoking bank secrecy to refuse access to information, concerns exchange of information on request. This approach only works if the State that needs the information already has indications that a tax resident may have financial interests in another State.
Quite so. Well said. It's the OECD's Catch-22 approach. And then, back to the UK's and Germany's deeply flawed deals:
In this context, a distinction must be made between our closest neighbours and other international partners. Our European neighbours are closely associated to all our policies, through the EFTA and EEA agreements and, particularly in the case of Switzerland, also through a series of bilateral EU agreements. As a result, our respective markets are closely integrated and cross-border trade and investment are intense.

It is therefore only logical that we have higher expectations for these countries, and that we expect them to cooperate more closely with the EU on the exchange of information. In this context, it is not sufficient that individual EU Member States conclude bilateral agreements with third countries which provide for the OECD standards of transparency and exchange of information.
He is quite right. Fantastic to see influential people speaking truth to power.


Who is Guilio Tremonti really?

We just noted how Giulio Tremonti, Italy's finance minister, has said some things that TJN would agree with, as TJN Senior Adviser Richard Murphy notes too. However, we are beginning to wonder if there might be more to this than meets the eye.

Murphy:Is there something we need to be told?


Power to the people: tax is the way

Some more for our quotations page:
An adviser to the President of Sierra Leone told me that in the past, officials who had not even completed a school education were negotiating contracts worth billions of dollars with the best lawyers in the world.
David McNair, Christian Aid, April 2010
Mozambique is losing a lot of money in tax to international operations. There is no adequate legislation governing transfer pricing...when there is a request for transfer pricing placed with the tax authorities, nobody knows how to deal with the request
Unnamed official from a Big Four accountancy firm, via David McNair, Christian Aid, April 2010

The head of tax policy at a large multinational recently told me that companies are now allocating more profit and paying more tax to the most aggressive tax authorities to avoid expensive and difficult legal disputes over transfer pricing. As a result, fewer profits are allocated to developing countries.
David McNair, Christian Aid, April 2010

If poverty is a lack of social, economic and political power, then addressing poverty is putting that power back in the hands of the people. Tax is the way it can be done.
David McNair, Christian Aid, April 2010
The presentation is worth reading in its entirety.


Italy finance minister opposes UK-German style deals

We have been highly critical of tax deals recently reached between the UK and Germany, on the one hand, and Switzerland, on the other hand. We are not alone, it seems: Italian Finance Minister Giulio Tremonti has also been taking a rather jaundiced view. From Swissinfo:
"Tremonti has been vociferous in his criticism of deals which avoid the automatic exchange of information about bank clients.
He reiterated his position forcefully in Brussels on Wednesday, telling journalists he did not believe the bilateral agreements that Switzerland is about to negotiate with Germany and Britain were compatible with either the spirit or the content of the EU directive on the taxation of savings."
Tax-news provided more details about what Tremonti said (hat tip: Tax Research).
"He has now said that the agreements being negotiated with Switzerland compromise, and are “plainly against the spirit of”, the existing EU regulations. He said that Italy could not agree to the EU Directive being “violated” by bilateral agreements. He pointed out that he is awaiting a reply within Ecofin on their unacceptability, and that “without a reply, there could not be unanimity”.
Swissinfo, which tends to view bank secrecy rather fondly (though not entirely uncritically) says Tremonti is taking a "hardline" position. No, he isn't. He is taking an entirely reasonable position.


Tuesday, November 23, 2010

PWC and World Bank highlight falling corporate tax rates

PriceWaterhouseCoopers, a global accountancy and tax advisory business, in conjunction with the World Bank, has published a new report which highlights - amongst other things - that corporate tax rates have fallen in over 90 countries since 2006. And for good measure they claim that this will contribute to economic growth. You can read the report here.

Meanwhile, indirect taxes which impact on poorer households most continue to rise, and public service provision - including pensions - are being cut across most countries. Further nails in the coffin of economic justice.


Tax and the financial crisis - new paper

We have written extensively already on the many and profoundly important ways in which secrecy jurisdictions (or tax havens, if you will) are implicated in the long genesis and gestation of the financial crisis that erupted in 2007. As far as we are aware, nobody has directly challenged what we have written -- though there are several who have made lazy, sweeping exonerations of tax havens -- and as a result we presume that what we have said is quite right. (Please do have a go at challenging our specific points, if you feel the need to disagree. Try any of these articles here.)

We now have another paper to add to our collection (hat tip: David McNair, Christian Aid.) Entitled Tax and the Crisis, it is by Michael Keen, Alexander Klemm and Victoria Perry of the IMF's Fiscal Affairs department, and it follows on from an earlier IMF paper on a similar subject. The latest paper, like the last, isn't only about tax havens - though they are an important component of the problem.

The new paper's abstract reads as follows:
Did taxation play any role in precipitating the financial crisis? Are there lessons to be drawn for future tax reform priorities? This paper reviews the main channels by which tax effects might have been felt and which may require forceful attention. These include in particular the large tax biases favouring debt finance and, in some countries, investment in housing. The complexities of national tax codes, and the international interaction between them, have, moreover, encouraged the use of complicated financial instruments and international tax planning, reducing transparency. Tax distortions did not cause the crisis – in the sense that there are no obvious tax changes likely to have triggered it – but they may well have contributed by leading to higher leverage and more complexity than would otherwise have been the case. Most of these distortions have long been a source of concern, but dealing with them may be more important than previously supposed.
Once again, the paper is here.


So you've had a threatening letter?

The field of tax avoidance and evasion, and tax havens, is littered with pitfalls. It's a hugely complex topic - and the people who use them most are often those who are the most aggressive and unpleasant when it comes to taking cases to the libel courts. The worst libel law in the world is English libel laws, which, as one commentator rightly put it:
"are tilted so heavily against the defendant and involve such monumental costs that they amount, in effect, to censorship by private interests: a sedition law for the exclusive use of millionaires."
In other words, the perfect protection for tax haven London.

This is why it is refreshing to see a group putting together a document to help bloggers and others deal with the pitfalls, and understand the terrain of sophisticated censorship in which they find themselves. You can download the guide here.


Offshore Crime, Inc.

This one looks very interesting. We don't have time to parse it right now, but we will. Just as a taster:
"He draws a line from a dot on the sheet representing the Seychelles Islands off the coast of Africa to other forms representing Cyprus and Nigeria. Then a line to a Kiss company in Bulgaria and finally to the key location – the US state of Delaware.

“What you need is a triangulation,” Kiss says in his patient, teaching tone. He turns the sheet to the reporter and added: "This is the mechanism I propose to you." He calls it tax optimization.

When reporters showed the sheet to authorities later they called it something else: fraud."
Enjoy. There is a whole lot more where that came from.


India: don't sign with Liechtenstein

Prince Alois of Liechtenstein wants to play hardball with India. As Tehelka magazine reports:
The acting head of the Principality of Liechtenstein, Prince Alois, has announced that an Indian request on sharing of information on stash money will be considered only after the double taxation avoidance treaty and other tax-related deals have been concluded.

After a recent meeting with Finance Minister Pranab Mukherjee, Prince Alois said the agreements were still at an exploratory stage, thereby hinting that it would be a long time before India recovers the mounds of black money — unofficially pegged at around $1.4 trillion.
This is very, very dirty business - criminal tax evasion, probably drugs money, and all sorts of other nefarious business - that Prince Alois is protecting here. We can't vouch for the $1.4 trillion figure - Global Financial Integrity's US$462 billion figure is bad enough. Next, Alois says something we would roundly oppose:
"We would like a double taxation agreement, rather than a treaty just for a tax information exchange. We are, after all, more than just a little island offering offshore financial services. So we think a double taxation treaty would help trade, besides complementing the FTA, thus enhancing business on both sides by reducing yet another trade barrier,” the prince said."
Nobody should be signing Double Tax Agreements with countries like Liechtenstein. It is essential to understand what is at stake here.

Broadly speaking, countries sign two kinds of agreements with each other, as our recent briefing paper on this explains. First, there are Tax Information Exchange Agreements, which concentrate only on the issue of transparency and, well, information exchange. These are the agreements that people need to sign with tax havens, or secrecy jurisdictions.

The second kind are Double Tax Agreements (DTAs,) which is what Alois is talking about. These are much broader frameworks -- and they often include an information-sharing component - for deciding which country gets to tax which bit of income from a cross-border investment.

The aim, you see, is to avoid "double taxation" - that is, that both jurisdictions don't tax the same income. That would, we agree, be unfair. But what we don't like - and this is what so often happens when you avoid double taxation is that you get this other thing - double non-taxation.

With a "normal" country, it is possible to sign an agreement whereby the income does get taxed in one or other jurisdiction. When you sign a DTA with a tax haven, however, what happens is that an agreement is reached to cut back on the taxing rights of the nation that hosts the foreign investment (the "source" jurisdiction, in the parlance - in this case, it would be India) - but the income would again not get taxed in the "residence" jurisdiction that is the source of the investment - in this case, Liechtenstein (though note that Liechtenstein isn't the real residence location here: it is merely a conduit for investors who are resident from elsewhere, who would put a subsidiary in Liechtenstein in order to get the treaty benefit - the knocking out of the tax charge in India.) Sorry, there's no easy way around the gory details: international tax is complex.

So Liechtenstein is looking to turn itself into a conduit for investment into India, raking off some fees as the billions flow through, and helping wealthy capital owners (often wealthy Indians, round-tripping their capital back home after dressing it up in offshore secrecy) to shake off the tax charge, leaving poorer Indians to pay it for them.

So India should not sign a DTA with Liechtenstein. A tax information exchange agreement (TIEA) should be quite enough. But they don't even want to do that. This is not the first time an Alpine secrecy jurisdiction has sought to push India around. Read more on Switzerland's bully tactics in the first article of our latest edition of Tax Justice Focus.

One bright point is that India seems to be getting increasingly reluctant to be pushed around by the tax abusers. As the Hindustan Times notes:

"Finance minister Pranab Mukherjee on Friday told delegates at the Hindustan Times Leadership Summit that India has written to 78 countries to amend existing tax treaties, insisting on their adding on Article 26 of the Model Tax Convention of the Organisation for Economic Cooperation and Development (OECD).

"We are regenotiating the double taxation avoidance agreements (DTAAs) with 78 countries," Mukherjee said."

This is, unfortunately, only under the OECD's woefully inadequate "on request" standard of information exchange. But it is a little better than the (even worse) previous agreements, in most cases. Let's hope that India just treats this as a step on the road to much stronger forms of international financial transparency.

For more general details, see our September 2010 briefing paper on information exchange between Northern and Southern countries, available on our Information Exchange page.