Tuesday, January 31, 2012

Links Jan 31

Bank client emails in the hands of US swissinfo
Jan 31 - The recent developments being reported here are very significant. The perpetuation of Swiss banking secrecy (and secrecy offered by other jurisdictions), has relied on an assumption of impenetrability which is now being eroded.

See also:
Sensitive Swiss bank data handed to US swissinfo

Jan 31 - "The Swiss finance ministry has confirmed that encrypted data relating to Swiss banks’ clients in the United States has been transmitted to the US tax authorities ... Full access to the information, with names of client advisors, will only be provided on a case-by-case basis or when a tax agreement is in place between the two countries, the ministry said."

See also:
Swiss banks hand over encrypted data in U.S. tax row Reuters

Jan 31 - "Switzerland has handed U.S. authorities encrypted data on bank employees who served American clients suspected of dodging taxes, and will only provide the key to decipher them once a tax row is settled, the finance minister said."

See also:
Secrecy hampers money laundering fight swissinfo

Jan 30 - "The Swiss Money Laundering Reporting Office (MROS) is obliged by law to hold back information from its foreign counterparts. The government has now come under international pressure to change this situation..."

And for another view of Swiss banking:
Clean Money Please swissinfo

Oct 2010 - See this video on an alternative bank that "sets high standards for sustainable and ethical business". A director of the bank, formerly with UBS, says: "It's also up to the client to check how precisely a bank defines its sustainable policy, to make sure it's not just a marketing tool." The piece observes how names of clients with loans and their purpose are published, that is, no secrecy.

Offshore Accounts: Insider’s Summary of FATCA and its Potential Future Social Science Research Network

Jan - An article written by one of the architects of FATCA. Note:"The long-term success of FATCA may depend upon whether the US can convince other countries to adopt a similar system, or better yet, join with the US in developing a multilateral FATCA system."

Argentina: Jorge Gaggero, "Tax reform requires great political conviction, strong reformist spirit and ability to develop broad social consensus." Interview with renowned economist of the Phoenix Plan. Initiativa

Jan 27 - "Before you ask, 'What reforms do we need?', we must ask 'why?'. First, to redress levels of inequality in our society, then to give resources to strategic stability and sustainability. Therefore the costs are to be financed with the resources collected." Hat tip: Bruno Gurtner. See also recent piublication by Jorge Gaggero with José Nun on Inequality and Taxes.

U.S. Introducing the `Pay A Fair Share Act’ Washington Post

Jan 31 - "[Sen.] Whitehouse clarified that the proposal — the first concrete legislative vehicle for implementing the “Buffett Rule” — will not tamper with existing tax rates. Instead, under the proposal, those making more than $1 million a year would be required to calculate their overall tax rate, taking into account all their income and the full sum of what they pay in taxes. If that amount adds up to less than 30 percent, they would be required to make up the difference."

Amazon, fast-growing bully Treasure Islands

Jan 31 - Nick Shaxson observes: "again and again throughout history, we find that the most aggressive players in the field of anti-competitive behaviour always seem to be the ones that work hardest to reduce their tax bills through offshore shenanigans."

Lord Ashcroft: BBC on new tax haven scandal Treasure Islands

Jan 30 - On a BBC Panorama programme, "featuring the Turks and Caicos Islands, that financially unclean British Overseas Territory which was taken over by the British government a couple of years ago when the corruption spilled just too far out of control, it is a good in-depth investigation into an episode that raises uncomfortable questions about British parliamentary democracy." Nick Shaxson speaks in the programme.

European Soccer Ruling Body Asks U.K. to Probe Funding of Porto Transfer Bloomberg
Jan 31 - "European soccer ruling body UEFA is asking U.K. authorities to investigate two so-called letterbox companies that helped Porto (FCP) fund a player transfer ... 'We are urging state authorities to look into it,' UEFA Secretary General Gianni Infantino said. 'Because we are a private company, an association, we cannot go to a company when it is a letter box saying ‘please tell us who you are and what you’re doing.’ They will tell us: ‘Who are you to ask me?’”


TJN's Taxcast is launched

The TJN's new podcast service is 'live' and ready for download and posting anywhere and everywhere! We'd be grateful for your help is spreading this link as far and wise as possible - your website(s), local radio stations, blogs, on-line newspapers etc.

Here's a short summary of the round-up of events at the end of this month of January:

In our inaugural TaxCast, we discuss the implications of the Vodafone vs India landmark tax case, compare Bill Gates and Mitt Romney's attitudes to taxation and visit the Occupy camp outside St Paul's Cathedral in London.

The TAXCAST is now available for download here. Feel free to post this link anywhere you like.

Update: For latest Taxcasts, see here.


Monday, January 30, 2012

Links Jan 30

Petition of 84,000 signatures presented to the German Finance Minister protesting against the Swiss/German tax deal Tax Justice Network Germany blog:
Jan 26 - On the petition protesting the Swiss/German tax deal, organised by a civil society alliance including Tax Justice Network, . See here for a rough Google translation, and here for blog post for reporting on the petition in the Financial Times Germany.

Swiss min: Must tackle problem of tax dodgers-paper Reuters

Jan 28 - Swiss Economy Minister Johann Schneider-Amman is reported as saying: "The problem of untaxed wealth in Switzerland is a serious problem that we need to resolve. Not only with the USA but also with the Europeans - Banking secrecy wasn't invented to create an opportunity for doing business with untaxed money ... We must find a way of dealing with legacy wealth."

U.S.: Top Dem Offshoring Expert Smells Something Fishy In Romney’s Tax Code TPM
Jan 26 - Sen. Carl Levin observes: "There is no such thing as an ordinary Swiss bank account."

Secrecy key to offshore accounts linked to Hot Lotto case The Gazette

Jan 29 - A story with with bizarre twists - "The trust that held the ticket for a jackpot worth $7.5 million after taxes abandoned its claim this week after the Iowa Lottery refused to pay out without knowing who bought the ticket and who was behind the trust. Lottery officials said the would-be winner was a corporation in Belize ... 'known as one of those countries that won’t give information to the United States about its account holders.' "

U.S.: Senate Dems should force GOP to hold vote on Buffett Rule Washington Post

Jan 27 - "Picture this scenario. The Senate holds a high-profile vote on a proposal focused directly on implementing the Buffett Rule, one that would bring the current tax rate for millionaires paying lower rates on investments up to 30 percent. This, at at exactly the moment when the GOP is picking a nominee who is worth $250 million and is personally benefitting to an enormous degree from the current rate — one that’s lower than many middle class taxpayers pay ..."

See also:
CTJ Calculates Buffett Rule Would Raise $50 Billion in One Year and Affect Only the Richest 0.08 Percent of Taxpayers Citizens for Tax Justice

Jan 27 - "Citizens for Tax Justice has calculated that President Obama's "Buffett Rule" would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers -- that's just eight percent of the richest one percent of taxpayers... "

See also:
But The Top 0.1 Percent Isn’t Diverse The New York Times

Jan 15 - "Basically, the top 0.1 percent is the corporate suits, with a few token sports and film stars thrown in."

Knowledge lies at the heart of western capitalism Financial Times
Jan 29 - Herbando de Soto notes a lot of useful points, including: "To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation." - but he makes no mention at all of offshore!

Canadians for Tax Fairness: Tax Justice Newsletter
Jan 2012 edition:

Included in this issue:

World Bank Reports, Hat tip: Bruno Gurtner:

Coordinating Tax Reforms in the Poorest Countries: Can Lost Tariffs Be Recouped? by Swarnim Wagle

"A revenue-neutral switch from trade taxes to domestic consumption taxes is fraught with implementation challenges in countries with a large informal sector."

Tax Morale and Compliance: Review of Evidence and Case Studies for Europe by Benno Torgler

"The overall findings show the importance of accountability, democratic governance, efficient, and transparent legal structures and therefore trust within the society to enforce tax compliance and tax morale."

Tax Morale, Eastern Europe and European Enlargement by Benno Torgler

This study tries to remedy the current lack of tax compliance research analyzing tax morale in 10 Eastern European countries that joined the European Union in 2004 or 2007. ... The author observes that events and processes at the country level are crucial to understanding tax morale. Factors such as perceived government quality and trust in the justice system and the government are positively correlated with tax morale in 2008."


IPPR proposes tax reforms to make globalisation work for the 99 percent

The London-based Institute for Public Policy research produced a report on globalisation last week. Written by Will Straw and Alex Glennie, the report is especially strong on the need for corporate tax reform. Having noted that profits are rising as a trend it also notes there is a steady fall in corporate tax receipts as a proportion of profits and realises this is an issue that has to be addressed. It dismisses the alternative to corporate tax proposed by Oxford University and Mirrlees, which is a form of Value Added Tax. As the report rightly notes there is no doubt this would be regressive and hence unacceptable. Instead it suggests five reforms, as follows:

First, the European Union should implement the Common Consolidated Corporate Tax Base (CCCTB). Under the current tax regime, multinationals file separate accounts for each country in which they operate; under the CCCTB, each company would compute only its EU-wide consolidated profit, on a common definition of the tax base. This profit would be allocated to member states on the basis of an apportionment formula containing factors such as shares in employment, payroll, assets and sales. Each member state would retain autonomy to tax its allocated share of profits at its own tax rate. This approach would allow countries to retain their own tax rate and pursue healthy tax competition. But within the EU, companies would have to actually move their staff and physical capital to the lower-tax regimes, rather than relying on the accounting mechanisms outlined above. In time, other jurisdictions could be encouraged to join, paving the way for an eventual global consolidated tax base.

Second, the EU and its member states should begin discussions with the International Accounting Standards Board to introduce a requirement that all multinational corporations report sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns in what is known as country-by-country reporting. Country-by-country reporting discloses the profits that companies record in each jurisdiction in which they operate and the taxes that they pay on them. This means that they can be held accountable for what they do and do not pay. The requirement would complement the CCCTB by providing simple transparency on the activities of multinational companies in jurisdictions outside the EU.

Third, other jurisdictions should be encouraged to adopt the EU Savings Taxation Directive as a means of creating an automatic exchange of taxation information. Since 2005, the directive has ensured that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. In Cannes, Indian prime minister Manmohan Singh called for the G20 to take a lead on the issue ‘in the spirit of our [2009] London Summit that [said] “the era of bank secrecy is over”’ . But the communiqué only committed to ‘consider exchanging information automatically on a voluntary basis as appropriate’. The EU should also adopt an amendment to the savings directive which would close existing loopholes and prevent tax evasion by stopping taxpayers from channelling interest payments through trusts and intermediate tax-exempted structures.

Fourth, as the Financial Action Task Force has already recommended, the beneficial ownership of companies, trusts and foundations should be on the public record. This would prevent multinational corporations from using networks of international subsidiaries to transfer profits and reduce their tax liability. This reform would also have the added benefit of making money laundering and the handling of illicit funds more difficult.

Fifth, bilateral and multilateral donors should support developing countries in building their tax collection and enforcement agencies.

Taken together, these measures will act to reduce the power of tax competition and lower the incentives on companies to execute tax arbitrage strategies.

The tide is turning: the merit of international cooperation on tax is becoming apparent. It will help get us out of the mess we’re in: that’s now indisputable by all those except the governments of those states that promote tax evasion and those who benefit from it.

(This is a shortened version of a blog posted by Richard Murphy at Tax Research. We blog with his approval).


Mexico Hemorrhages US$872 Billion to Crime, Corruption, Tax Evasion from 1970-2010

Illicit Financial Outflows Average Over 5% of GDP, Driven by Underground Economy, Spiked in Wake of NAFTA

Study Recommends Policies Be Implemented to Address Trade Mispricing, Money Laundering, Tax Evasion

January 29, 2012 at 13:01 CST / 14:01 EST / 19:01 GMT

MEXICO CITY / WASHINGTON, DC – Crime, corruption and tax evasion cost the Mexican economy US$872 billion between 1970 and 2010 according to a new report from Global Financial Integrity (GFI), a Washington, DC-based research and advocacy organization. The illicit financial outflows, which averaged a massive 5.2% of GDP, grew significantly over the 41-year period studied from just US$1 billion in 1970 to US$68.5 billion in 2010.

“This is a devastatingly large amount of money for any developing country to lose,” said Raymond W. Baker, director of GFI. “$872 billion is gone, which could have been used to develop the Mexican economy, to invest in education, to build roads, or to fight the drug cartels. The negative ramifications are huge for everyday Mexicans.”

The study, which was authored by Dr. Dev Kar, GFI lead economist, saw illicit outflows explode from an annual average of US$3.0 billion in the 1970s, to US$10.4 billion in the 1980s, to US$17.4 billion in the 1990s, and US$49.6 billion in the decade ending 2009.

Underground Economy

Moreover, illicit outflows were found to drive the domestic underground economy, which includes—among other things—drug smuggling, arms trafficking and human trafficking. Thus, illegal capital flight was found to contribute to a deterioration in governance. Likewise, growth in the underground economy was also shown to drive illicit flows, creating “a snowballing effect whereby both the underground economy and illicit flows continue to grow at an increasing rate unless policy measures and institutions intervene,” according to Dr. Kar, who worked as a senior economist at the International Monetary Fund before joining GFI.

Trade Mispricing and NAFTA

The report concluded that policymakers should focus on measures to curtail trade mispricing, a form of trade based money-laundering, which skyrocketed in the years after NAFTA came into effect and which was shown to account for 73.7% of total illicit financial outflows over the 41-year time period.

The study recommends three policy measures to reduce trade mispricing:

· Require the utilization of computer software to detect export and import prices that are clearly out of line with international norms; (49)

· Require that the parties conducting a sale of goods or services in a cross-border transaction sign a statement in the commercial invoice certifying that no trade mispricing has taken place in an attempt to avoid duties or taxes and that the transaction is priced using the OECD arms-length principle; (51) and

· Undertake additional measures to curb abusive transfer pricing. (51)

Further Policy Recommendations

In addition to recommending policies to curtail trade mispricing, the report recommends four additional policy actions to reduce illegal capital flight from Mexico:

· Expand double tax avoidance agreements with other jurisdictions; (53)

· Require automatic cross-border exchange of tax information with other jurisdictions on personal and business accounts; (54)

· Maintain macroeconomic stability, which includes maintaining low budget deficits, low external debt levels, and low and stable inflation rates; (56) and

· Take steps to reign in the role of offshore financial centers (OFCs) and banks. (59)

Destination of Illicit Outflows

While the report cannot specifically breakdown into which jurisdictions illicit outflows from Mexico are deposited, the study does indicate that a majority of Mexican capital outflows, which include both licit and illicit capital, end up in U.S. banks. The large spike in illicit outflows following the implementation of NAFTA would imply that much of those outflows were indeed headed for the United States. This suggests that U.S. policymakers have a significant role to play in curtailing the flow of illicit money out of their southern neighbor.

In addition to the U.S., tax havens in the Caribbean and Europe were the second and third largest recipients of Mexican capital outflows.

Drug Cartels and National Security Risk

A large portion of drug cartel activity is conducted in cash, and none of those cash transactions are detected in GFI’s data, which is one of the reasons why the organization believes its figures to be extremely conservative. That said, drug cartels like many criminal enterprises also utilize legitimate commercial transactions to launder their profits. In fact, the Los Angeles Times reported last month that Mexican drug cartels were utilizing trade-based money laundering techniques to move their money across the U.S.-Mexico border. Those kinds of business transactions would show up in the organizations data, however it cannot be determined exactly how much of the trade mispricing in GFI’s report is attributable to the activities of drug cartels.

As such, the organization believes that this has serious implications for national security.

“The ease with which money can be laundered across the U.S.-Mexico border via trade mispricing poses a major national security risk to both the United States and Mexico,” said Mr. Baker. “Drug traffickers, like kleptocrats, terrorists and tax dodgers, all gain from anonymous shell companies, tax haven secrecy, and nefarious trade mispricing tactics. Taking steps to address these issues would curtail a number of societal ills.”


Notes to Editors:

· Download an embargoed full copy of the report in English here and in Spanish here.

· Press briefings will be held in Mexico City and in Washington, DC on Monday January 30, 2012. The Mexico City press briefing will take place at the Hilton Mexico City Reforma Hotel on Monday, January 30, 2012 at 11am CST. To RSVP for the Mexico City press briefing, contact Clark Gascoigne at cgascoigne@gfintegrity.org. The Washington, DC briefing event will take place at 1319 18th Street NW, Suite 200, Washington, DC at 10am EST on Monday January 30, 2012. To RSVP for the Washington, DC launch event, contact EJ Fagan at efagan@gfintegrity.org.



Mexico City/Washington, DC:

Clark Gascoigne
+1 202 293 0740 x222

Washington, DC:

EJ Fagan
+1 202 293 0740 x227

En español:

Mexico City:

Emilene Martínez
+52 1 55 6010 0835


The Vodafone India decision – and what we can learn from it

Following our earlier blog, a useful article from Tax Research, here.


Quote of the day - state capture

From the UK parliament:
Our newspapers, reflecting the reality that most-with some honourable exceptions-are owned and run by non-UK taxpaying moguls who live all over the place but not the UK, probably do not want to run too many stories about UK tax dodgers. They prefer benefit fraud, as in the Daily Mail. That is a much more attractive story
This is from a much longer and widely ranging discussion of tax avoidance led by Lord Dykes, which is well worth reading in full: stuffed with other quotable quotes.


Friday, January 27, 2012

Links Jan 27

Pariah regimes play cat and mouse with financial watchdogs Reuters
Jan 27 - " 'Our current arrangements for the creation of trusts and the setting up of companies anonymously have created an environment which is permitting kleptocrats to move their loot around (and commit) tax evasion on a monstrous scale,' said Anthea Lawson, head of the Banks and Corruption Campaign at Global Witness" - " 'It is so easy for extended families or powerful people with tame lawyers to set up fronts which make it immensely difficult to find (them) out,' said John Christensen" - TJN Director.

US tax scandal brings down Wegelin swissinfo
Jan 27 - "Wegelin is the first standalone Swiss bank to sell its operations in Switzerland as a result of US efforts to catch clients who used Swiss banks to evade the taxman ... Banks being probed by US authorities are worried that clients, even in their non-US operations, will pull their money out because of the investigations."

Switzerland, U.S. Aim to Conclude Tax Talks by End of 2012 Bloomberg
Jan 26 - “ 'We’ve said that at the end of 2012 we want to end these negotiations,' Swiss Finance Minister Eveline Widmer-Schlumpf told reporters today in Davos after a meeting with her U.S. counterpart Timothy Geithner ...'Our aim, and he agreed, is to find a solution where we won’t be confronted with a question about the past every year. '” See TJN comment on the U.S. position here.

US Treasury Aims To Lower FATCA Burdens Tax-News
Jan 27 - "The Treasury and the IRS believe that their efforts “to implement FATCA and to resolve the challenges it poses can and should serve as precursors to a more comprehensive multilateral approach to information exchange. For that reason, we believe that FATCA – if implemented appropriately – can serve as a catalyst for further advances in the global effort to improve transparency and combat tax evasion.”

India joins multilateral forum to curb tax evasion Economic Times
Jan 27 - "'By signing the convention, India and the other 31 signatories encourage more countries to join, sending a strong signal that countries are acting together to ensure that individuals and multinational enterprises pay the right amount of tax, at the right time and in the right place,' the finance ministry said." See TJN comment on India and the multilateral convention here.

Greece: The adventures of of Nikos Kassimatis Global Post

Jan 26 - On "The man who owes $1.23 billion to the Greek government".

Hollande Pledges to Rein In France's Banks Wall Street Journal

Jan 26 - On a statement by François Hollande, the opposition Socialist presidential candidate and opinion-poll leader. "To bring the financial sector back under control, Mr. Hollande also said he would forbid banks from doing business in tax havens and raise taxes on their profits."

Russia Reviews Eurobond Tax Rules as Claims Raise Concerns Bloomberg
Jan 6 - "Coupon payments made to foreign debt holders through offshore special purpose vehicles, known as SPVs, are taxable under the current law, although the rules haven’t often been enforced ... 'All we are saying is there’s a law,' Shatalov [Deputy Finance Minister] said ... 'Maybe it’s not good, maybe it’s bad, maybe somebody doesn’t like it, but it should be obeyed.' Read Treasure Islands for an explanation of Eurobonds and their role in the offshore financial system.

See also:
Russia: the taxman targets eurobonds Financial Times

Jan 26 - "This is seen as part of a government assault on offshore tax havens".

A taxing, troubling situation in Ukraine KyivPost
Jan 26 - Ukraine has one of the most onerous and complex tax systems in the world, yet many of the nation's richest people avoid taxes through offshore havens."

U.S.:The President's Speech: Right about Stopping Offshore Tax Dodgers, Wrong about Cutting Taxes for Other Corporations Citizens for Tax Justice
Jan 26 - "During his State of the Union address, President Obama said that 'no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.' ... However, his proposed solutions, which the administration fleshed out with a fact sheet on Wednesday, fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals"

UK: FSA in crackdown on offshore advice role in listed firms FT Adviser

Jan 26 - "The Financial Services Authority has proposed changes to the requirements for companies to be listed in the UK, including a tightening of the rules around listings for companies managed offshore."

Swiss ink tax deal with Ireland The Local

Jan 27 - "With regard to tracking cases of tax evasion, the agreement “contains provisions on the exchange of information in accordance with the international standards applicable at present,” the Swiss finance department said. The standards referred to are those established by the OECD (Organization for Economic Co-operation and Development)." Read on the flawed OECD standards here.

At Davos, Debating Capitalism’s Future New York Times

Jan 27 - Op-Ed by Ed Miliband, leader of the UK's Labour Party. "Tax authorities need to know about income and wealth hidden behind front companies, trusts and other complex financial products. If these rules cannot be changed by international agreement, progressive governments should go ahead and do it themselves."


Thursday, January 26, 2012

Links Jan 26

India: Black money: India signs multilateral agreement Economic Times
Jan 26 - "Taking another step towards combating blackmoney, India has signed a multi-lateral agreement with economic powers like France and Germany to check both tax evasion and avoidance. See TJN comment on India and the multilateral convention here.

India: Tax information exchange pact signed with Macau The Hindu Business Line

Jan 25 - "India will soon be able to get banking information from Macau for tax administration purposes. A tax information exchange agreement to this effect was recently signed with Macau ... one of the most well-known offshore financial centres and tax havens."

Sweden: Swedfund sets investment conditions Financial News
Jan 26 - "Sweden’s development finance institution, Swedfund, will make commitments to private equity only on condition that funds are domiciled in their home market, according to its new chief executive. The comments come after the firm ceased making third-party fund commitments three years ago following concerns about the tax treatment of funds offshore."

France: This money which corrupts Libération (In French)
Jan 25 - "Finally, there will be no effective fight against dirty money without suspension of any financial relationship with non-cooperative offshore centres ... the new mayor of Seoul and Bogota have been designated to embody the general interest because they have been tireless advocates in the fight against corruption. In India, Brazil and Mexico, civil society is working to restore public credibility. France can, too, lead by example as a force within Europe."

Liechtenstein Has ‘Long Way’ to Shed Tax Image, Bank Chief Says Bloomberg BusinessWeek

Jan 25 - “The world has changed very quickly and massively in the last few years,” Tribelhorn [Liechtenstein Bankers Association Director] said in an interview in Berlin. “For the customer as well as the financial intermediary, undeclared assets have no future.” The article also cites TJN's view on the UK and German Swiss deals.

Austria: Idea to name and shame tax fraudsters met with scepticism Austrian Independent
Jan 26 - The Association of Austrian Taxpayers has spoken out against the creation of a list of tax dodgers ... AK President Herbert Tumpel refused to disclose whether he backed the appeal by fellow AK members but said finance ministry officials should make the names of the Austrian tax dodgers found on a data disc provided by a banker based in Liechtenstein."

Gibralter not by any measure a ‘tax haven’ Picardo tells Miliband Gibralter Chronicle
Jan 26 - "Following Mr Milliband’s [UK Labour Party Leader] recent remarks about 'Tax Havens', the Chief Minister and Mr Licudi briefed Mr Miliband on ... the work of the finance centre as a fully compliant EU financial services hub that operates entirely in keeping with EU directives and regulations, fully compliant with OECD rules also and therefore not by any measure a 'Tax Haven'”. See here for a TJN view on such claims.

U.S.: Business Leaders Agree With President: End Millionaire Tax Breaks and Stop Rewarding Companies That Move Jobs and Profits Abroad Business for Shared Prosperity
Jan 25 - “It’s wrong for millionaires to pay less than middle-class Americans and wrong for multinational corporations to pay less than small businesses,” said Scott Klinger, tax policy director of Business for Shared Prosperity. ... If we want an economy with 21st Century infrastructure, jobs, education, research and economic development, we have to pay for it.”

U.S.: Wealthy tax cheats
Asheville's Citizen-Times
Jan 25 - Tax systems that heavily tax the rich are asking for trouble — or so the politicians who cater to the 1 percent incessantly argue. The higher the tax rate on high incomes, their argument goes, the greater the incentive the rich have to waste time and energy figuring out ways to pay less ... these cuts should have boosted tax compliance.Instead, tax evasion actually increased, rising to $385 billion in 2006 from $290 billion five years earlier, according to a new IRS study."

U.S. poised to soften offshore tax crackdown Global and Mail
Jan 25 - U.S. Treasury Department officials are looking at relieving some of the “administrative burden” of the Foreign Account Tax Compliance Act. Hat tip: Offshore Watch.

The World's Next Top (Economic) Model Huffington Post
Jan 24 - On the World Economic Forum in Davos, Sharan Burrow, General Secretary, International Trade Union Confederation observes: "Fair and progressive taxation - it is time to repair the balance sheets of governments through a fair contribution from those that can afford to pay: through making corporations pay their fair share". Hat tip: Liz Nelson.

Exclusive: Senate investigating HSBC for money laundering Reuters
Jan 25 - "HSBC Holdings PLC is under investigation by a Senate panel in a money-laundering inquiry, the latest step in a long-running U.S. effort to halt shadowy money flows through global banks."

Besieged bankers look for signs of hope at Davos Reuters

Jan 26 - "Each one of us is made for goodness, even bankers," Desmond Tutu told the Davos meeting."


Occupy London comment article in FT, seeks tax justice

Occupy London - those protesters who have been sneered at and smeared as being a bunch marginalised, bearded, out of touch anti-capitalists - have a full comment article in the capitalists' newspaper of choice, the Financial Times. That, in itself, is a very fine thing.

And we are delighted to see them wading in in an area that is very dear to our hearts, tax justice.
First, tax avoidance is endemic in the UK. Companies use complicated structures to hide their earnings from HM Revenue & Customs. Individuals stash money abroad while enjoying all the benefits of living in this country. Tax havens are used by 98 of the FTSE 100 companies, according to Action Aid. Sir Philip Green was reported to have avoided about £285m in tax and still he became a government adviser. In calling for Jersey, Guernsey and the Isle of Man to disclose those with financial affairs on the islands, Ed Miliband, the Labour party leader, is moving towards our position.

Adopting a system of “formulary apportionment” could stop corporations avoiding tax. It would create a tax base for UK companies aligned with a level of activity that actually occurs in this country rather than relative tax advantages."
Spot on (read more about that here.) And crucially important.

It goes right to the heart of two things that are very much a focus of the Occupy movement more generally: the corruption of capitalism, and inequality. More on this later (time has run out for today's blogger.)

Now read on.


IMF: race to the bottom on tax in developing world

From the IMF:
"This paper assembles a new dataset on corporate income tax regimes in 50 emerging and developing economies over 1996-2007 and analyzes their impact on corporate tax revenues and domestic and foreign investment. It computes effective tax rates to take account of complicated special regimes, such as partial tax holidays, temporarily reduced rates and increased investment allowances. There is evidence of a partial race to the bottom: countries have been under pressure to lower tax rates in order to lure and boost investment.

In the case of standard tax systems (i.e. tax rules applying under normal circumstances), the effective tax rate reductions have not been larger than those witnessed in advanced economies, and revenues have held up well over the sample period. However, a race to the bottom is evident among special regimes, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero. Regression analysis reveals higher tax rates adversely affect domestic investment and FDI, but do raise revenues in the short-run."
Note that amid the 'race to the bottom' on tax, even if revenues hold up, the structure of tax systems will inevitably become more regressive than they would otherwise have been - since tax rates on flighty mobile forms of capital (the forms that benefit the wealthiest sections of society) will tend to fall, while taxes on less mobile forms of capital will often rise to compensate.

Read more about this broad area here. In particular, see this post How tax competition harms developing countries, looking at earlier IMF research on this subject.

Still, this has just come out and we haven't had a chance to read it properly yet. More on this soon.


Wednesday, January 25, 2012

Links Jan 25

Kenya: Treasury Eyes Tax Reforms to Net Higher Revenues allAfrica.com
Jan 24 - "The Treasury will seal loopholes in tax collections as it seeks to hold government expenditure flat in the transitional budget to be unveiled late next month ... the government expects to net at least Sh100 billion by scrapping a number of exemption schemes and zero-rated goods that it currently extends to attract investment, boost exports and lower cost of essential goods."

Korea, Bermuda to exchange tax info The Korea Herald

Jan 24 - "Korea signed a bilateral agreement Monday with Bermuda on the exchange of tax information ... it is expected to provide the two nations with significant opportunities for mutual direct investment." Some bilateral agreements do sometimes include terms other than tax concerns - and read here why bilateral agreements are ineffective.

Debt-ridden Italy's tax fraud crackdown yields 50 billion euros The Economic Times
Jan 23 - "Heavily indebted Italy uncovered more than 50 billion euros ($65 billion) in undeclared revenues last year after cracking down on tax cheats ... Prime Minister Mario Monti came to power in November calling for a radical change to defend "honest taxpayers".

Italian cardinal brands tax evasion a sin Guardian
Jan 24 - "It has long been regarded as more of a national sport than a misdemeanour. And it has long benefited from the seemingly boundless indulgence of the Italian Roman Catholic church. But now the head of the Italian bishops' conference, Cardinal Angelo Bagnasco, has unambiguously declared that "evading taxes is a sin". He called for "serious, effective and relentless" action against tax dodgers."

Cyprus: Probe launched against Tax Council chief Cyprus Mail
Jan 25 - "The chairman of the Tax Council is himself facing charges of tax evasion ... the Attorney-general has given the green light for the prosecution of the chairman, following an investigation by the Inland Revenue Department."

Austria: SPÖ suggests 'list of tax evasion shame' Austrian Independent
Jan 25 - "Social Democratic (SPÖ) General Secretary Günther Kräuter has said the possible publication of a 'list of disgrace' to increase the pressure on tax dodgers has his party's unequivocal support ... Austria should follow the example of Greece in creating and publishing a list of names of people who evaded taxes in the past years."

USA: Mitt Romney's Bermuda (tax) holiday Politico
Jan 20 - From Dietlind Lerner and E.J. Fagan of the Task Force on Financial Integrity and Economic Development:"As international financial crises threaten governments in Europe and Africa, and Occupy Wall Street protests continue in cities around the country, the measure of a future president should not be that he took advantage of a great business deal. Rather should be that, if elected, he could be trusted to put an end to this entire process of legally sanctioned tax avoidance which is so harmful to our country."

UK: Properties Hidden In Tax Havens Property Mentor
Jan 14 - Helping property owners "to escape the cost of 5% stamp duties and inheritance tax (charged at 40%), in Central London alone £100bn worth of property is believed to be stored in offshore vehicles". The post notes that the trend is spreading.

UK: Harry Redknapp payment to offshore Monaco account 'disguised as loan' Guardian
Jan 24 - High profile football (soccer) manager faces allegations of cheating the public revenue by avoiding tax, having "feigned almost complete ignorance of its existence ... despite the fact he had flown to Monaco personally to open the account in 2002, and had named it Rosie 47 after his pet bulldog and the year of his birth."


Guest blog: VAT loophole abuse, for beginners

For years UK tax havens such as Jersey have been making hay from an egregious tax loohole called Low Value Consignment Relief (LVCR.) In short, this loophole has enabled UK goods under the value of £18 to be sent in a circular route via the Channel Islands so that they can re-enter the UK from outside the EU free of VAT. It is an absolutely classic example of the way that tax havens can out-compete 'onshore' businesses on a factor that has nothing whatsoever to do with productive efficiency, and everything to do with sucking wealth away from taxpayers. UK Conservative peer Lord Ralph Lucas branded the LVCR loop as "a smuggling exercise... akin to baccy for the parson, brandy for the squire."

Richard Allen, a former businessman who lost his 'onshore' business as a result of this loophole has fought almost single-handedly against this offshore loophole. Richard has written us a short blog illustrating the problem.
Guest blog: LVCR abuse for beginners

There are five market stalls in front of the Houses of Parliament selling CDs. The first four stalls show clear individual prices for their CDs with a note that says “Our price includes VAT of 20% which goes to the UK Government.” The fifth stall shows the prices for the CDs that are displayed along with a note saying “Our price is always up to 20% cheaper than the prices on the other stalls”

A customer goes to the stall selling the cheaper CDs and decides to buy a CD. He pays the attendant who at this point replies “Let me just get this delivered for you with no extra charge”. The attendant puts the CD in a bag, gets into a nearby car with the bag and the CD and then drives to Portsmouth where he gets on a ferry to the Channel Islands. He arrives in Jersey gets off the ferry then hangs around for an hour or so before getting back on the Ferry to Portsmouth. When he arrives he orders a cab to the Houses of Parliament where he then gives the CD to waiting customer with receipt showing NO VAT APPLICABLE.

One year later.....

There are now only two stalls left. A huge crowd of people is gathered around the stall with the discounted prices. The other stall is empty with a sign on it that says “Prices include VAT of 20% which goes to the UK Government.” The nearby Evening Standard news board has the headlines “UK Unemployment up – UK taxes to be increased to account for shortfall”

The attendant for the discounted stall is so busy with orders he now has a lorry to take CDs on the same round trip. Nearby he has parked his brand new Ferrari with the number plate N0 VAT.

Endnote: The loophole has since been modified. As a direct result of the complaints, the UK has removed LVCR from CI mail order items completely as of 1st April 2012 and lowered threshold to £15 from all destinations into the UK.

Further reading on LVCR:
  • A history of the VAT loophole - LVCR site
  • Businessman's fight to stop tax loophole taken up by Lords - Telegraph


Tax justice is storming the United States

At the top of the Financial Times website right now, an article headlined Obama puts tax at heart of election:
"Barack Obama laid down the battle lines for the presidential election Tuesday night as he promised a “fairer” tax regime on the day Mitt Romney, the leading Republican contender, revealed that he paid federal income taxes at an effective rate of just 13.9 per cent in 2010.
. . .
“You can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense,” he said."
If you've missed the Mitt Romney story, take a look here; Obama's address is here.

Take a look, if you haven't already, at the video pushing tax justice for the Institute for Policy Studies in Washington. Take a look at our new and invigorating TJN-USA. Take a look, when you can, at the new video We're not Broke. Take a look at the new Tackle Tax Havens project. Take a look at the surging profile of the veteran and excellent Citizens for Tax Justice, also in Washington, D.C. Take a look at the Boston Herald, in an article that pits TJN director John Christensen against Ayn Rand:
This type of aggressive tax avoidance is only available to a few elite who consider themselves above others, said John Christensen, an economist and director of London-based Tax Justice Network.
See Bill Gates of Microsoft fame, following the likes of Warren Buffett, saying he doesn't pay enough tax. "It's just justice." Take a look at Elizabeth Warren on the Daily Show, quoting research by our friends at Citizens for Tax Justice. See this article Business Leaders Agree With President: End Millionaire Tax Breaks. Now take a look at this interview with none other than David Stockman, Ronald Reagan's director of the Office of Management and Budget, tearing apart the business strategy of Mitt Romney's private equity industry. Most remarkable is that he spent years in the private equity industry himself.
"Romney was disingenous when said got grad education in company creation, job creation, growing economy as an LBO [leveraged buyout] artist. LBOS are just financial speculation – I was in the business for the same period of time. I won’t pretend that I learned anything during that tells me how to improve the U.S. economy or how to create jobs.

What I learned was how to strip-mine the cash out of a company to pay the debt. What I learned was how to powder up the pig to sell it in the quickest IPO. I made some very large gains in some cases; I had some bankruptcies in others. The point is: LBOs are not about growing an economy."
And read more about private equity, from an incontrovertible tax justice angle, here.


Not Broke, Just Twisted; USA Under Attack By Tax Havens

For those who missed this video last time round, its worth seeing again in the context of President Obama's State of the Nation speech. Addressing the Union yesterday, Obama put tax justice firmly onto the agenda which will shape this year's presidential elections.


Tuesday, January 24, 2012

TJN adviser talks Romney, Cayman on Democracy Now

TJN Senior Adviser Jack Blum talks on Democracy Now about the offshore escapades of US Republican candidate and private equity mogul Mitt Romney. Latest news: his tax returns reveal a Swiss bank account, albeit one that he's already closed, along with accounts in Cayman (which we recently blogged and in Bermuda.)

Blum also appears in "We’re Not Broke," a documentary that premiered at the Sundance Film Festival. The film examines widespread corporate tax evasion in the United States and the increasing role of offshore tax havens.

For more on Romney's private equity background, see our recent blog looking at the private equity industry.


Links Jan 24

Singapore, a preferred tax haven The Hindu Business Line
Jan 24 -
For India, Mauritius is falling somewhat out of favour following a number of scandals, and Singapore is picking up the slack. See recent TJN Blog on Tax Gateways to India .

USA: State Tax Hikes On Wealthy Proposed By California, Maryland Governors Huff Post Business

Jan 20 - "It's early, but there does seem to be a bit of an uptick in governors proposing tax increases on the rich," said Jon Schure, director of state fiscal strategies at the Center on Budget and Policy Priorities, a Washington think tank. "The public is more receptive to that idea now."

OECD: Using Tax Policy to Reduce Income Inequality, Boost Economic Growth TaxProf
Jan 24 - See the Chapter from the forthcoming Economic Policy Reforms 2012 - Going for Growth: Reducing Income Inequality While Boosting Economic Growth: Can It Be Done?. The answer is: Yes.

Why the OECD’s approach to transfer pricing is a joke Task Force Blog
Jan 17 - About a year ago TJN published two articles summarising longer papers in Tax Notes by Michael Durst, former head of the U.S. Internal Revenue Service (IRS) Advance Pricing program and a world authority on the subject. This blog is a reminder of those two important articles.

Occupy schedules 'flashmob' outside Park City bank Park Record
Jan 24 - People aligned with the Occupy Wall Street movement are planning a protest outside a Wells Fargo branch. The action is scheduled the day after the first showing of the documentary "We're Not Broke," at the Sundance Film Festival. TJN has participated in the making of the movie, and will be represented at Sundance by Jack Blum, VP of TJN-USA.

Greece publishes tax dodger list to name and shame Reuters
Jan 23 - "A famous singer and a retired basketball star were on a list of 4,000 top tax dodgers released by the Greek government as part of a name-and-shame policy to get evaders to pay up. Tax evasion is endemic in Greece and its international lenders, the EU and the IMF, have insisted Athens improve tax collection if they are to continue bankrolling the debt-laden country."

Dangerous Liaisons - Canada's shift towards becoming a tax haven The Dominion
Jan 23 - On how - "By radically integrating its own politics and financial institutions with those of tax shelter states, Canada has transformed itself, without ambiguity, into a tax haven."

Switzerland eyes tax deals, US talks 'not so easy' Reuters

Jan 12 - "Switzerland's long tradition of banking secrecy has allowed rich foreigners to park savings out of sight of their own tax authorities for decades and, for many foreigners, made Swiss bank accounts a byword for dodging taxes. But foreign governments, led by the United States, are forcing tax havens to reveal their secrets, emboldened by efforts to root out suspected terrorist funding and by a need to boost revenues depleted by the global economic crisis."

Switzerland: Banking lobby celebrates centenary swissinfo
Jan 23 - "The [Swiss Bankers] association - founded in Basel in 1912 to represent the interests of the banking industry – is proud of its record ... For years the association has had to devote a lot of energy to conflicts with tax authorities in France and the United States, although this has mainly occurred behind the scenes."

The 10 Cs of an efficient tax system Tax Research UK
Jan 24 - Richard Murphy explains how "An efficient taxation system has nine attributes with one over-riding characteristic to which they all contribute."


Five steps to end global tax evasion

Nick Mathiason* has the following article on the Guardian's Comment is Free page. With Nick's approval the article is copied in full below:

"'The World Economic Forum helped to set the tone this month when it issued a chilling dystopian vision of mass youth unemployment, wholly inadequate elderly care provision and widening global inequality.'

World leaders are failing us in the face of crisis. A new age of financial transparency could help claw back $3.1tn of unpaid tax.

Rarely have politicians and business leaders met at Davos against such a gloomy backdrop. The World Economic Forum (WEF) helped to set the tone this month when it issued a chilling dystopian vision of mass youth unemployment, wholly inadequate elderly care provision and widening global inequality. WEF's global risks 2012 report suggested fresh economic turmoil and social upheaval could wipe out gains produced by globalisation. Nationalism, populism and protectionism threatened to take root, it warned.

The world is calling for a bold vision of economic justice to counter dislocation and austerity. But since the global economic crisis reasserted its icy grip after a brief Keynesian impasse, world leaders have failed to deliver one. The inability to articulate a narrative beyond a long, hard march out of economic malaise ultimately caused by politicians' and regulators' failure to adequately supervise the financial system is resulting in a widespread disillusionment with mainstream politics that threatens to undermine faith in democracy.

World leaders need to respond quickly, and business must play its role. A good place to start is talking up the idea that there are mechanisms beyond severe budget cuts to eliminate sovereign debt. There is money in the global financial system that, if accessed and used wisely, could go a long way to mop up deficits and reinvigorate the global economy.

That treasure trove is the $3.1tn of tax, equivalent to 5.1% of global GDP, which according to international campaign group Tax Justice Network is illegally evaded in 145 countries, covering 98.2% of the world's population. In December, Washington-based thinktank Global Financial Integrity confirmed the reality of vast sums of cash flowing freely through an unregulated financial system last month. Developing countries, it said, lost $903bn in illicit outflows during 2009 – a year when economic activity was severely constrained.

The majority of these flows are washed through tax havens. These secrecy jurisdictions act as cover from international tax authorities. Disturbingly, the obstacles placed by the global financial system that would allow individual countries to track down and repatriate this cash are prohibitively burdensome. This is why a new age of financial transparency and accountability is required. Five key reforms would lay the foundations for this:

1. The rapid introduction of multilateral automatic tax information exchange between tax agencies in every single jurisdiction. This would ensure money illegally held offshore was easily identified and accounted for.

2. The introduction of new levels of financial transparency requiring the public disclosure of the ultimate human beneficiaries of companies, trusts and foundations. This is needed to prevent the further subversion of countries' tax bases whether by high net worth individuals, businesses, corrupt politicians, criminals or terrorists. It is also required to restore faith in the rule of law and the democratic process as the current non-disclosure of beneficial ownership is corruption's best friend.

3. The global introduction of country-by-country reporting so that every company has to publicly state financial details relating to its turnover, profits, costs, employees and taxes in every jurisdiction it operates in where its revenues exceed $5m. It is astounding that in the 21st century, it is impossible for citizens in many resource-rich nations to establish whether their country has got a fair deal from its oil, gas or minerals.

4. Concerted international action needs to be taken to ensure the hundreds of billions of dollars lost to exchequers by companies artificially inflating their costs and deflating profits through intra-company transactions – known as transfer mispricing – is identified, contained and reduced.

5. The harmonisation and codification of money-laundering laws to a restrictive level. Even the City of London shows brazen disregard for rules to stop money laundering, according to a report last June by the UK's Financial Services Authority.

Together, these reforms would show that world leaders were acting in their citizens' best interests, and would go a long way to averting WEF's dystopian nightmare."

* Nick Mathiason is business correspondent at the Bureau of Investigative Journalism and also works with the Task Force on Financial Integrity and Economic Development. He was previously Business Correspondent at the Guardian and Observer newspapers for 10 years.


Monday, January 23, 2012

Links Jan 23

Africa losing Billions in Tax Evasion Eurodad
Jan 23 - See the video: Africa losing Billions in Tax Evasion’ based on a report by Eurodad members Forum SydBringing the billions back: how Africa and Europe can end illicit capital flight” talking about transfer mispricing, with Attiya Waris, TJN vice-chair.

New report on tax havens: the case of Luxembourg and impacts on development Eurodad

Jan 7 - "Eurodad member ASTM and other Luxembourg groups within the Cercle de Coopération au Développement have released a new report on the role of Luxemburg as a tax haven and its development implications ... The full report (only in German) and the summary report (in English and French) can be downloaded here"

France: Surprise plan of Finance Ministry to combat tax evasion Les Echos (In French)
Jan 22 - "New measures against tax evasion will be included in the supplementary budget in February. Bercy will confiscate approximately 5% of assets hidden in foreign accounts and greatly increase the penalties for criminal offenses in a tax haven." Welcome developments - and we ask why the UK doesn't get serious on offshore accounts, maybe it's something to do with this.

City of London Corporation: tax havens a ‘core asset’ for the City Treasure Islands
Jan 22 - Nick Shaxson on a communiqué from the government of the Isle of Man ..."Indeed, just exactly as I have always been saying. Tax havens as gigantic, secrecy-suffused offshore conduits to the City of London."

How the bosses paid less tax than their cleaners Daily Mail
Jan 21 - "Multi-million-pound payouts became common in private equity during the boom years. But they are not taxed as income because they represent a rise in the capital value of the fund and are taxed as capital gains. Hat tip: Offshore Watch

Romney’s spox says Cayman isn’t a tax haven. If she believes it, I have a bridge to sell her Treasure Islands
Jan 20 - "They all deny it, because the term ‘tax haven’ conjures up all sorts of really bad images. And rightly so. Read Treasure Islands, and you’ll be left in no doubt as to just how bad it all is."

See also:
Romney’s in deep trouble in Cayman – and he’s not alone Tax Research UK

Jan 23 - Richard Murphy observes: "With the Primary race set to drag on long into the Spring, this renewed scrutiny of his tax affairs is the last thing Romney needs; with Romney’s team even denying the Cayman Islands are a tax haven and more scrutiny of how the murky offshore world works, tax could become a recurring problem for Team Romney."

See also:
More on Mitt Romney's Tax Returns TaxProf

Jan 20 - Nice reference source with a set of links on the Mitt Romney tax dodging shennanigans and implications.

Honey, they shrunk the IRS Reuters
Jan 17 - David Cay Johnston comments: "Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS."

More About Corporate Taxes And The .01 Percent New York Times

Jan 20 - "When people raise questions about big tax cuts for corporations, we’re told not to worry, because corporate taxes mainly fall on labor, not on stockholders. When people raise questions about low taxes on the very rich, we’re told not to worry because once you include all the taxes corporations have paid on their behalf as stockholders, their taxes aren’t really that low." - Having your cake and eating it.

How Citizen’s United and Anonymous Corporations Distort U.S. Politics Task Force Blog
Jan 19 - On the beneficial ownership issue - "Any U.S. voter can go to OpenSecrets.org and see the names of donors to campaigns, political action committees and parties.The protection that disclosure provides breaks down, however, when anonymous, or shell, corporations enter the picture.

For more on beneficial ownership issues, see:
Land Registration etc. (Scotland) Bill and Beneficial Ownership
Land Matters
Jan 12 - Interesting commentary on land registration, transparency, accountability and the collection of taxes. Hat tip Carol Wilcox.

One way to claw back HS2 cost Financial Times
Jan 12 - Letter from Carol Wilcox, Labour Land Campaign, observing "All good public infrastructure investment increases local land values", noting how costs of public infrastructure can be covered, and even exceeded, if the self-funding of public infrastructure by public collection of land rent is in place. See editorial by Carol Wilcox in the Taxing Natural Rents Edition of Tax Justice Focus here.


Swiss 'Rubik' deals are dead in the water

Swiss Info is reporting that the uncertainty surrounding the dodgy and loophole-ridden "Rubik" bilateral deals that Switzerland has negotiated with Germany and Britain, providing immunity to criminal tax evaders in exchange for some secret tax payments, are unravelling under pressure from the EU:
"The tax deals which Switzerland reached last year with Britain and Germany could yet fail in the face of opposition in Europe and in the countries concerned."
This is exactly what we have argued all along (as well as arguing that these deals are not only immoral, and almost useless in terms of raising revenue - they will get thrown out by the EU.) We heard by word of mouth that a top Swiss banker said in the last few days that the deals would die anyway and should be scrapped.)

There's opposition, too, from amongst the Swiss political parties, with some on the Right concerned about the gradual erosion of banking secrecy, while those on the Left see a move towards enhanced information exchange (i.e. automatic information exchange on the EU model) as an inevitability.

As Swiss Info reports:
"It is now by no means certain that the two tax agreements will pass the hurdles of the Swiss parliament either.

The rightwing People’s Party says the negative aspects of the Rubik system outweigh the positive ones. And parties on the left of the political spectrum are in any case relatively sympathetic to EU demands for automatic exchange of information.

Some economists and tax experts have cast doubt on the effectiveness of Rubik. Sergio Rossi, a professor of economics at Fribourg University told Swiss radio and television that it was based on a philosophy that could have worked in the last century, when foreign capital “sat in Switzerland and did not move for decades".

But he sees things moving now in the direction of the automatic exchange of information".

The Swissinfo story isn't quite right, however: this particular story is not, at heart, about exchange of information but about withholding taxes. At the core of the EU objections is that, as we remarked recently:
"that the EU already has legislation regarding withholding taxes on interest. As EU legislation has primacy over bilateral agreements, no EU member State can enter into agreements that impinge on the EU savings tax.
. . .
The withholding taxes levied under the EUSD are merely advance payments against what would ultimately be owed by the taxpayer. Therefore Rubik cannot be regarded as a full and final settlement. The tax evader client can still be liable to penalties, etc. This defeats the one and only purpose of Rubik. Rubik is crippled."
In other words, the key selling point of Rubik is that it enables tax-evading criminals to get off the hook (while paying taxes and back taxes) - but the EU will ensure that even if they do pay those taxes, they are still on the hook. Switzerland has been trying to play some weird little gymnastics behind the scenes to try and get around the EU's objections - by excluding bank interest from the bilateral deals (story only available in German, here, with rough web translation here) - but these typically Alpine subterfuges don't appear to address the core problem here. The whole game is a nonsense.

TJN's position is unambiguous: these deals are weak, immoral, and even silly - and they undermine international attempts to tackle tax evasion. Both Germany and Britain should swallow their pride, withdraw from the deals, and put their diplomatic effort into pushing through the EU's enhanced Savings Tax Directive - suitably extended to Switzerland.


Sunday, January 22, 2012

New Yorker, FT: the real problem with private equity

Following our blog about US presidential candidate Mitt Romney, an excellent short article in The New Yorker explaining that the principal problem with private equity firms is not their effect on stripping jobs:
The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets
And it goes on to explain concisely what the problem is. In essence, it's debt, as we've explained before. Buy a firm, load it with debt, and that leverage increases your returns.
"The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust."
And it gets worse.
"In the past decade, though, that calculus changed. Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.”
And from 2003 to 2007 private equity funds took over $70bn out of their companies. The New Yorker adds:
These dividends created no economic value—they just redistributed money from the company to the private-equity investors.
Indeed. And it goes on to explain how private equity firms can increasingly profit even if the companies they run go under—an outcome made much likelier by all that extra borrowing. It gives the example of a U.S. company that was bought and eventually went bankrupt, dumping its debts on society and wiping out its workers' pensions obligations - while making a 23 percent profit for the private equity firm (more examples of this, in an in-depth article in the New York Times here). A letter in the Financial Times from Professor Louis Brennan of Trinity College Dublin has more on this:
Private equity “works” not because of accountability but because of the ease with which implicit and explicit contracts may be broken – pension commitments, employee contracts, supplier contracts, and intellectual property stripped out and repackaged.

Private equity “works” not because of greater accountability but because of a reduced accountability that enables a minority to benefit at the expense of a majority. It is not even a zero-sum game but a game that involves both value shifting and value destruction.
(And see some Harvard research on this here.) here we get into an often overlooked aspect of tax havens. Tax havens create laws deliberately to help investors do this, under a veil of secrecy. No wonder Mitt Romney and his former company Bain Capital chose the Cayman Islands to locate their activities.

And all this is destabilising. Take a look, now, at Marty Sullivan's article on Romney, Bain, private equity and taxes, in the highbrow U.S. publication Taxanalysts.
"Bain profited from a dangerous flaw in our corporate tax that subsidizes destabilizing financial structures.
. . .
the tax incentive for leverage goes to the heart of the deal and can cause serious economic damage.
. . .
higher levels of debt threaten macroeconomic stability by leaving the economy more vulnerable to small contractions in business activity."
Now back to the New Yorker:
"That’s not exactly how capitalism is supposed to work."
You don't say. This is a classic example of the corruption of capitalism - which we believe is right at the core of what the Occupy protesters are angry about. Oh, and then there's the very closely related question of tax justice, and another example of this corruption:
"As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole."
Ugh, ugh, and thrice ugh. And, to round the New Yorker article off:
"If private-equity firms are as good at remaking companies as they claim, they don’t need tax loopholes to make money."
Absolutely spot on. All you really need know about the private equity industry, in a single page.