Links - June 19

The G8 summit - Reasons to be cheerful The Economist
"After the Lough Erne summit, the NGOs have a bit more wind in their sails, and those who hold or move black money have another reason to believe that life for them will only get harder." See TJN comment here.

The beginning of the end of corporate secrecy? G8 strikes a blow against corruption – but still more to do Global Witness

Governments to share tax records ICIJ

U.S.: Senator Levin statement on G8 declaration on offshore tax abuse and corporate transparency

EU directive places Cayman funds at a competitive disadvantage CayCompass
On European demands that the funds and the fund manager have to be based in the same country. The majority of Cayman-based alternative investment funds, such as private equity or hedge funds, are managed from the US.

South Korea: Gov't to get tougher on offshore tax evasion Yonhap News Agency

Singapore to Virgin Islands: India begins global black money crackdown First Post

ICIJ probe: List of Indians in tax havens Indian Express
See also: With 184 addresses, Mumbai leads the nation in haul Business Standard and India approaches tax havens on black money expose Kashmir Times

EU tax chief urges Swiss to end bank secrecy Reuters

Swiss Parliament Pushes Back on U.S. Banks Deal The Wall Street Journal

The "African laundry" of BNP goes back to Geneva Huffington Post (In French)

Australia’s Tax Office Has ‘Declared War’ On Dodgy High-Profile Lawyers and Accountants Business Insider

Italy: Economy minister vows to continue war on tax dodgers adn kronos

Multinationals face OECD pressure over their tax evasion and avoidance Irish Examiner

U.S. Companies Lobbying Furiously To Save Corporate Tax Loopholes: Study Huffington Post

How tax havens stole your money CNN

Picardo challenges Spain on tax evasion Gibralter Chronicle
Yet more on the theme of We are not a tax haven

The Dolce And Gabbana Verdict Is Nigh Vogue

Tax avoiders as space invaders: new infographic

A fine infographic, for those of us old to have enjoyed the original video games. With a serious message attached. Courtesy of Real Business Rescue.

G8 and tax havens: a helpful beginning, but only a beginning

We haven't commented yet very much on the G8 outcomes - partly because most of us are travelling, partly because hordes of others are commenting, and partly because we wanted to sit back a bit and comment once we've had a bit of time to digest all the kerfuffle.

We think there's been some useful progress, most importantly on matters of principle and in terms of a serious shift in political will in our direction. A few years ago only a few crackpots (such as us) would have been calling for such things as:

• G8 countries said they should make multinational corporations disclose the taxes they pay on a country-by-country basis. (FT.) Country by country reporting is now officially endorsed, at the highest level.
• Tax authorities should automatically share information to fight evasion. (FT.)
• Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily. (statement)

These have all been core TJN campaign issues for some years now - and it's delightful to see world leaders now talking about this, and at least pushing for some action, even in such vague terms. All of this is several decades overdue, and the shift in the zeitgeist is hugely welcome. We are also pleased that the UK has exerted some leadership on this issue, as far as it goes. From The Guardian, on the corporate taxation side of it:

"The decision to try and lead the charge will provide a rare moment of unity at home – nowadays, everyone from UK Uncut to the crustiest of Tory backbenchers is keen to see companies stump up what they owe."

In an email to TJN, ActionAid said this:

"Twelve months ago, the idea of the G8 summit being dominated by tax dodging in developing countries would have been absurd. It simply wasn’t on the agenda."

And so we have seen big progress. But of course there are many big negatives out there. As the FT notes:

"The written statement is not short of what governments and companies “should” do. . . . But critics are not convinced. It lacks a clear promise on whether G8 members will follow through on these obligations and by when."

Or, as Professor Prem Sikka put it:

"The G8 summit in Lough Erne was preceded by much hype and promises about action on tax avoidance and corporate secrecy, but it has delivered little. The leaders' communiqué commits governments to nothing more than vague promises.
. . .
the G8 has made no mention of any time scale for implementation. Neither does the communiqué say anything about how this information exchange is to be co-ordinated or enforced."

And of course there are the pesky questions of detail. Such as:

How will places such as the Cayman Islands comply with this protocol when they do not levy income or corporate taxes, and thus do not have the infrastructure for collecting data about taxes or tax avoidance vehicles? And note that while there are indications of some willingness to "consider measures to facilitate access to company beneficial ownership information," there appears to be no intention to let the public know the details about ownership of companies, or beneficial ownership information with respect to trusts. No sign at all of any willingness to even consider the issue of secrecy-shrouded 'ownerless assets' - believed to add up to many trillions of dollars' worth, around the world.

And, from The Guardian:

"It looks very unlikely that any country will deliver on this promise – and even the UK is saying it will only be consulting on how to implement it and that's not good enough. If that's all that happens, tax evasion will continue at a cost to billions of people the world over – especially in developing countries."

So, all in all, lots and lots of hot air, very little in terms of specific progress - but some important progress on broad global targets that we should all be aiming for. That is worth a lot, despite the other disappointments. Sikka summarises well:

"The kindest thing that one could say about the G8 communiqué is that as a result of public anger, issues such as tax avoidance and corporate secrecy are on the political agenda. However, the summit has not delivered."

We could have made our blog headline far more negative - but today's blogger is in a good mood. And in any case, we're preparing ourselves for yet more disappointment from the OECD.

More commentary on all this, a bit later.

Taxcast: the Big Four accountants

Reminding readers of a taxcast special feature, looking at the neglected role of the Big Four accountancy firms (aka the 'pin-stripe mafia') in corporate tax avoidance. A Taxcast special from the Tax Justice Network produced by @Naomi_Fowler and featuring Professor Prem Sikka.



Watch it on youtube here.

"They have penetrated the state. They have captured the state. [TJN: more on what 'capture' means, here.] That has resulted in the real corruption of public politics and policy making.

The tax returns and related correspondence of all corporations should be publicly available, and the working papers of accountancy firms who are peddling tax avoidance schemes should be automatically available to the tax authorities."

- Prof. Prem Sikka

See also these, just from this week alone:

Deloitte gets one-year New York ban - BBC

Who really runs this place? Study into how the Big Four influences government - Spinwatch.


For the full monthly Taxcasts with news and expert analysis go to www.tackletaxhavens.com/taxcast or look for us on iTunes.

There is nothing "efficient" about letting others pay more tax

TJN's director John Christensen has a short letter in the Financial Times today, entitled There's nothing "efficient" about letting others pay more tax. It rather speaks for itself, and we hope the FT doesn't mind our reproducing it here in full.

Sir, I welcome your analysis of the private equity industry’s tax arrangements (“Private equity leads the way in tax efficiency”, June 18) and I would strongly support calls by UK lawmakers and others to curb these market-distorting indulgences provided to some of our wealthiest citizens.

But your authors and headline writers must banish the term “tax efficiency”. This is an abuse of language. Efficient for whom?

If private equity groups pay less tax, others must pay more, or we must have more potholes and fewer schools, or more government borrowing. Economic inequality, which is politically and economically destabilising, will rise. As you mention, private equity groups typically achieve their tax savings through borrowing, and the Bank of England recently warned in its latest quarterly bulletin that this poses “a risk to the stability of the financial system”.

What on earth is efficient about any of this? Language is tremendously important, and the sooner we can eradicate this poisonous term “tax efficiency”, the better off we will all be.

The article on the private equity industry, linked in the letter, is also well worth reading. Shocking, in fact - at least for those that still have the capacity to be shocked about the private equity industry.

Links Jun 18

G8 Declaration
See also: OECD urges G8 to clamp down on tax evasion BBC

G8 action plan principles to prevent the misuse of companies and legal arrangements

India: Need for public registration of all shell companies Money Life

Kofi Annan urges G8 to make company ownership, revenue flows completely transparent Ghana Business News

G8: Africa's loss to tax avoidance is double aid income The Telegraph

Swiss Parliament vote stalls US tax settlement swissinfo

The OECD is moving in the right direction Tax Research UK

US Congress Hears About BEPS Tax-News

Kenyans Mobilise Against Taxing the Poor Inter Press Service

How sanctions monitors’ work is compromised Financial Times (Subscription)
Former United Nations sanctions monitors are deeply concerned that the undisclosed control or ownership of corporate and legal vehicles severely impairs the work of sanctions monitors and poses a clear threat to regional peace and security.

EU tax havens under pressure as leaks go public EU Observer

U.S.: Go Read This New Research on Corporate Taxes, Lobbyists and Our New Fiscal Reality Citizens for Tax Justice

Apple's Worldwide Developer Conference Americans for Tax Fairness
Groups ACCE, Jobs with Justice, and Americans for Tax Fairness project #taxdodger and #badapple onto Apple logo during WWDC party on Thursday night

Can a New Banker Clean Up the Vatican's Money Mess? Bloomberg Businessweek

Can Bitcoin make peace with Washington? Washington Post

My Journey Into the Tax Justice Movement Huffington Post
By IF spokesperson and Chair of TJN-A Dereje Alemayehu

CNN: a single tax dodge deprived India of enough revenue to feed every Indian primary schoolchild for a year

CNN is running an excellent article entitled How tax havens stole your money. It's worth reading in full, and the photo at the top is interesting. But we thought we would highlight this particular snippet, drawn from an ActionAid report last year:

"In one case a single - entirely legal - transaction through UK-linked tax havens would have provided $2.2 billion in tax if it had not taken place offshore, according to the Indian government. This is almost enough money to provide every Indian primary school child with a subsidised midday meal for an entire year."

That is one single case. Compare this single item alone to Britain's global aid budget, and you get an outrage. Add up all of these transactions, for all of the countries that are victims, and you get one of the great scandals of our age.

The UK's tax haven network - in pictures

From Al Jazeera, we're pasting one section of a large infographic showing the UK's tax havens.

Click on the original link to see the full infographic, in high definition.

For more details on this, see the Aljazeera in-depth report on this, as well as this fascinating recent report on the UK's Overseas Territories.

Who really runs this place? Study into how the Big Four influences government

We have often written about the close relationships between the Big Four accountancy firms and governments around the world. Now Spinwatch in the UK has produced a fascinating case study (hat tip: Naomi Fowler).  As Tamsin Cave, author of the report, notes:

"To see them as separate from our government is a mistake."

The report shows, among other things:

• One of the Big 4, Ernst & Young, lobbies for tax breaks for its clients – a service that it describes as a ‘low risk alternative’ to tax avoidance – while at the same time advising the Treasury on reform of the tax system;
• At least 50 employees of the Big 4 have been on loan to the government in the past three years;
• They successfully lobbied the British government to oppose new EU rules designed to improve audit standards and challenge the monopoly of the Big 4;
• They are profiting from changes to government policy, changes that are made by government departments that they are contracted to;
• Lobbying by the Big 4 accountancy giants – either on their own behalf or for clients – is unlikely to be included in the forthcoming register of lobbyists.
• Collectively, these four earn £500 million per year directly from government contracts - but this isn't the only benefit they get. Far from it.

One more example of political and economic 'capture', the essence of the Finance Curse.

Links Jun 17

ICIJ Releases Offshore Leaks Database Revealing Names Behind Secret Companies, Trusts
Crackng open the impenetrable world of offshore tax havens, users can search  through more than 100,000 secret companies, trusts and funds created in offshore locales such as the British Virgin Islands, Cayman Islands, Cook Islands and Singapore. See the video here.
See also: How We Built The Offshore Leaks Database

Multinationals pay little tax in Africa, forum told Irish Times
See also: Give us access to information on tax havens and tax avoiders, African leaders tell David Cameron ahead of G8 Summit The Independent

India approaches tax havens on global black money expose Economic Times

Breakthrough commitment from UK to roll back corporate secrecy; the G8 and offshore havens should follow suit Global Witness

Without curbing corporate power the G8 have no chance of combating tax avoidance The Conversation
Prem Sikka notes, "One of the recurring themes in social sciences is the “capture” of the state by economic elites."

Tax havens agree to Cameron clampdown Guardian
"Prime minister claims success from talks ahead of G8 summit, but campaigners give only qualified support to new measures". See also: G8 deal on tax havens a long way off Guardian "Western leaders are unlikely to deliver anything comprehensive now – but the fact they are discussing the issue is progress" and The G8 could act radically to stop tax avoidance. Don't bet on it Guardian

New EU anti-corruption standards increase demands for greater transparency to combat tax dodging Eurodad

Swiss leaders call for data exchange standards swissinfo
See also: Switzerland open to the automatic exchange of information - a little ... TJN Germany Blog (In German)

US continues hunt for tax dodgers in Swiss banks swissinfo

New Report: Corporate Pirates of the Caribbean Institute for Policy Studies
See also: It’s Time Corporations Flew Old Glory Instead Of The Jolly Roger Financial Transparency Coalition Blog, and
'Fix The Debt' Companies Would Reap Up to $173 Billion From New Territorial Tax System, Report Finds Huffington Post

U.S: House Hearing on Tax Havens: Possible "Purple" Issue? Institute for Policy Studies

David Ricardo, “competitive” banking and the Finance Curse Treasure Islands

Dolce and Gabbana tax evasion verdict expected on Wednesday Telegraph

Corporate taxation: are the OECD technocrats serious?

Guest blog by Prof. Sol Picciotto:

Pascal St-Amans, head of the OECD’s Centre for Tax Policy and Administration, has been travelling the world reporting on the progress of the OECD’s Base Erosion and Profit Shifting (BEPS) project. This is an OECD initiative responding to justified outrage around the world about the international tax system, which is unfit for the modern age and allows multinational corporations to take the benefits from societies in which they operate, then skip paying their share. The OECD, a club of rich countries which has dominated the design of the international tax system, bears the greatest responsibility for the current mess. Recently U.S. tax expert Lee Sheppard, for instance, described the OECD-designed tax treaty system as `a load of nonsense . . . to make life comfortable for multinationals’.

Last Tuesday 11th June St Amans was in London, giving evidence to the House of Lords Committee on Economic Affairs, which is considering whether a new approach is needed to corporate taxation. Thursday 13th he was in Washington, speaking to the tax-writing committee of the US Congress, the House Ways & Means Committee.

There’s a lot riding on the BEPS project. Politicians are under enormous pressure from their citizens, fed up with facing austerity, while hearing the many media revelations of avoidance of billions of dollars of taxes by the world’s largest and until now most respected companies: Amazon, Google, Ikea, Starbucks, Vodafone. So the G20 leaders ordered the OECD to come up with effective measures. The OECD’s interim response in February looked serious. It promised to think `outside the box’, and seek `holistic and comprehensive solutions’. TJN, along with 57 allies, greeted this with cautious optimism, and we subsequently gave detailed responses to questions sent to us by the OECD.

Now the OECD is working on the report which is supposed to lay out its proposed Action Plan for reform of the international tax system. This was due to be published later this month, but we now understand that it may not be ready until mid-July. Well, Rome was not built in a day, and we can understand if they are finding it hard with a few weeks’ work to agree on how to turn the juggernaut of the OECD consensus on tax onto a new course.

Pascal of course, like his colleagues, is a technocrat. This is not meant pejoratively - they are experts, specialists on the international tax system. They have an important job: to advise governments, and to produce reports which can help ensure that there is a well-informed public sphere for debate and decision-making on complex issues.  

But Pascal seems to have stepped outside this role. In his oral evidence to the House of Lords committee, he was asked about Unitary Taxation as a possible approach to taxation of transnational corporations (TNCs). His response was very negative, indeed dismissive. He argued that this `would require that all jurisdictions across the world - and we have 190-plus states, plus jurisdictions which are tax-sovereign - to agree on criteria and trust each other enough to rely on the information on the consolidated accounts which will be held in the headquarters of the group. I just don't see this happening any time soon.’

St Amans knows very well that is mistaken, and for several reasons. Agreement from every jurisdiction in the world is simply not necessary. The more co-operation, the better, of course: but there are several possible full, partial and even unilateral versions of unitary tax, and routes for a transition to such a system. International tax is a process of coordination, not a straight-jacket.

St Amans also knows that many international tax experts strongly believe that the only way effectively to reform the system of TNC taxation is precisely to move towards treating TNCs as what they are, unitary firms – rather than the current system that treats them as loose collections of separate entities all trading with each other as if in a competitive market.

For example, Prof. Ed Kleinbard, who also gave evidence at the same House Committee session as St. Amans, proposed that the US should adopt – on a unilateral basis – a worldwide approach to assessment of TNC profits, with a credit for foreign taxes paid.  

Others have made proposals for a transition towards a unitary taxation approach by extending current transfer pricing rules, especially the profit-split method (see my paper Towards Unitary Taxation for an explanation of this, Box 3.) This was put forward five years ago in a paper by Reuven Avi-Yonah, Kim Clausing and Michael Durst, who are also now part of a team of researchers working on the implications of unitary taxation for the International Centre on Tax and Development.  

St. Amans should know better, not least because the response to BEPS by TJN and its allies clearly put forward proposals for a transitional strategy. We hope that he and his colleagues are taking it seriously, despite his casual remarks to their Lordships.
What we are now looking for from the OECD is a serious report that lays out the possible options, so that a genuine public debate can take place. It is not the role of technocrats to foreclose that debate. They should accept that the proposals for moving towards a unitary approach for TNC taxation deserve a hearing. We believe, indeed, that many OECD experts – even Pascal – accept that a unitary approach is conceptually the best one. In that case, it is not for them to say what is or is not politically feasible. So why is he opposing it? 

Ways can be found to move towards a unitary approach in a gradual and pragmatic way. It clearly cannot be done overnight, but should be put on the table as an option now. Interim measures are also desirable and possible, which can and should be designed to move the system towards a unitary approach. But to dismiss such ideas as politically not feasible would be a breach of the responsibility that technocrats owe to the public.

Tax wars: EU playing catch-up with US

Guest Blog by Markus Meinzer - reposted from the EUobserver Blog, with kind permission.

Last week, while showcasing draft EU laws on tax transparency, commissioner Algirdas Semeta told media in Brussels he is building "the most comprehensive information exchange system in the world."

He added: "The EU system will become even broader than the US system."

It is an astonishing claim.

The wide-reaching impact of the new US regime - the Foreign Account Tax Compliance Act (Fatca), which came into force on 1 January - has been demonstrated by a storm of angry reactions in worldwide financial centres.

Some of Semeta's proposals, notably his amendments to the EU Savings Tax Directive (EUSTD), do broaden the scope of information to be shared inside Europe and do go beyond Fatca.

But other elements of the US law are missing from the EU package.

Meanwhile, even if the European Commission now has the legal instruments to create a Fatca-plus system, there is no guarantee they will ever be used.

Semeta's laws must first be unanimously agreed by EU countries.

So long as Austria and Luxembourg, two EU financial centres, are allowed to delay and frustrate the EUSTD amendments, the entire project will remain what it has been for the past five years: a lovely idea on paper, nothing more.

Despite reports to the contrary, the last meeting of EU finance ministers in May did not mark a change of heart in this respect.

Austria and Luxembourg did not abandon their old tactic of saying "we will happily join if and when Switzerland joins as well."

Instead, EU countries agreed to make progress by the end of the year, a deadline which falls after elections in Austria and Germany.

Judging from the two countries' track record on tax transparency, it does not bode well.

In contrast, Fatca is already reality.

By directly targeting global financial institutions and by using US market power as leverage, Washington has taken a beautiful shortcut through potentially endless and fruitless diplomatic talks.

The EU also has to shape up on the geographical scope of its system.

Back in 2010, it was fashionable in the EU and in the Paris-based economic club, the OECD, to speak of coherence on tax and development policy. But in 2013 developing countries have been left out of the equation on EU automatic information exchange (AIE).

The new EUSTD - if it is ever adopted - does contain interesting extra-territorial clauses (see below).

But its reporting obligations and, importantly, the countries which are to benefit from the new information streams, are limited to EU member states and associated jurisdictions.

If the new EUSTD comes into force, it will create a system, albeit internally sound, of enriching EU countries' treasuries at the expense of everybody else, including some of the most vulnerable people on the planet.

At the same time, it will risk undermining the potential for a truly multilateral AIE regime.

It is true that Fatca's primary aim is also to enrich the US' Inland Revenue Service.

But Fatca is to be applied globally, wherever a financial institution offers significant cross-border bank services.

The US, under a series of bilateral treaties, currently offers limited reciprocity. But it has promised additional legislation to expand information sharing.

The OECD is currently drafting a multilateral AIE system based on Fatca.

It has the political support of 17 European nations as well as several BRICs (Brazil, Russia, India, China) and could form the nucleus of a regime that would benefit more than just Western exchequers.

Devil in the detail

In terms of technical nitty gritty, the Fatca model is attractive because it obliges banks to follow strict protocols on searching their whole database for reportable accounts.

Financial details of all high risk legal entities, including trusts, must be scrutinised for signs of reportable tax residents and bank staff who manage clients' accounts must be named.

If you add Washington's willingness to prosecute and jail people, no matter where they are, for helping to evade US taxes, Fatca is a peerless deterrent against tax fraud.

There is one glitch, however.

On high risk entities, the account holder has to file a form with US authorities.

The first draft of the paperwork has been published - if you tick the box saying the entity has no US owners, you get off the hook.

Anybody who is familiar with so called "discretionary legal structures" (typically, trusts and foundations) knows they are both widely used by the super-rich in Anglo-Saxon countries and that, by definition, they do not have identifiable owners.

The Fatca loophole might well see the bulk of global wealth - which, at the top holding level, resides in trusts and foundations - escape the net.

In other words, the US, or other Fatca-model adopters, could claim they are being tough on tax, while in fact protecting trust secrecy.

This is what happened in the Global Forum, a tax transparency club created 13 years ago, which now has 110 member countries.

It is also what happened with the EU's extant Savings Tax Directive eight years ago.

Semeta's ace

And so, Mr Semeta has a trump card.

The new EUSTD is the first law in history to pierce this secrecy.

Under the new EU system, people who run trusts, discretionary foundations or shell companies must declare the identities of settlors (individuals who donate money to create them) and beneficiaries even if the ultimate owner stays hidden.

This is "even broader" than Fatca, which targets a wide range of financial intermediaries, but not shell firms or trustees.

Before we get too excited, it is difficult to imagine how Semeta's reporting obligation can be enforced in current conditions, however.

In order to make it work, EU countries and their protectorates must also create reliable registries of all parties of discretionary structures.

The move is envisaged under a separate EU bill, its fourth revision of the EU anti-money-laundering directive.

But in order to make a global impact, EU leaders must seize the opportunity provided by Monday's (17 June) G8 summit in Lough Erne, Northern Ireland.

For his part, British Prime Minister David Cameron is making the right noises.

He told The Guardian newspaper on Saturday that: "The way to sweep away the secrecy and get to the bottom of tax avoidance and tax evasion and cracking down on corruption is to have a register of beneficial ownerships so the tax authorities can see who owns beneficially every company."

EU as tax haven

Semeta's role should be to unlock his new regime for adoption by non-EU nations.

If his new savings tax law stays limited to the EU27 jurisdictions, it might, effectively, turn Europe into a tax haven for the rest of the world.

It might harm the momentum for a single multilateral platform for automatic information exchange.

Semeta should also demand that Germany leans on Austria and Luxembourg to sign the amended EUSTD way before December.

At the least, he must make sure that EU countries create central and public registries.

If he delivers, then he can declare in Brussels the EU is leading the world in the multi-trillion-dollar war on tax crime.

New report into the UK's Overseas Territories and developing countries

Christian Aid and the IF campaign have a very important and topical new report available, entitled Invested interests: the UK's Overseas Territories' hidden role in developing countries.

Tortola, British Virgin Islands

It is becoming increasingly recognised that huge amounts of investment in and out of developing countries is being routed via tax havens. Former UN Secretary-General Kofi Annan has remarked, accurately:

"When foreign investors make extensive use of offshore companies, shell companies and tax havens, they weaken disclosure standards and undermine the efforts of reformers in Africa to promote transparency. Such practices also facilitate tax evasion and, in some countries, corruption, draining Africa of resources that should be deployed against poverty and vulnerability’."

Many of the world's most important tax havens - between a third and a half, depending on how it is measured - are British Crown Dependencies or Overseas Territories, partly independent from Britain, but also closely linked to the UK via a web of constitutional links.
The crucial part to know here is that Britain has complete power to disallow the offshore secrecy (and other) legislation that these places put in place. In a very important section entitled The UK's role, it notes:

"In the most recent White Paper on the BOT [British Overseas Territories] it was confirmed that ‘[As] a matter of constitutional law the UK Parliament has unlimited power to legislate for the territories’.

The UK has hitherto chosen not to intervene, in almost every case - but there are isolated cases, not related to offshore secrecy, where the UK has forced the islands' hands.
So it is wonderful that influential organisations are now starting, for the first time (spurred in part by long-running work by TJN and by books such as Treasure Islands) to take a long hard look at Britain's role in development. The new report notes that it:

"attempts, for the first time, to quantify the role that tax havens to which the UK is constitutionally linked play in facilitating the flow of FDI into developing countries, dwarfing that of the BRICS nations."

Anything like this is, as we have noted in our own research, an exercise in night vision, so precision is hard to get. But this is a very useful piece of new research.  And it's topical too, as the report's author Joseph Stead notes:

"The UK as G8 chair has never been in a stronger position to end the grave injustices caused by tax havens – if the UK  succeeds in putting its own house in order first. The Prime Minister must do everything he can to get UK havens agreed on a tax deal before he arrives in Northern Ireland, so he can push the G8 to end the tax scandal."

Quite so.
There is an absolute ton of useful information in here. We will merely scratch the surface, and highlight a few fascinating details, such as this one:

Three of 14 British Overseas Territories, in particular the British Virgin Islands (BVI), Cayman Islands and Bermuda emerge as among the biggest global sources of FDI. Together with the Crown Dependencies of Jersey, Guernsey and the Isle of Man, they were in 2011 the largest provider of FDI to the developing world

. . . and this remarkable fact is backed up by an equally remarkable table:

We've seen isolated information on this before -- such as in this French report, for instance -- which was surprising enough, but we've never seen the data collated like this.

In short, tax havens are conduits for a large share of foreign direct investment around the world - but the share is much bigger when just developing countries are considered. Nearly half the investment from the highly secretive British Virgin Islands, for instance, goes to developing countries, and outward FDI from the BVI was equivalent to over 860 times (NB, that's not 860 percent, but 860 times!) the BVI's GDP. (By comparison, the UK has a ratio of around 1:1 and the US around 0.2:1.) That is astonishing.

The report outlines a number of reasons why the tax havens may be so important, ranging from a desire for a more secure legal environment to the more nefarious round-tripping, tax dodging and corruption. Secrecy automatically facilitates and promotes these.

The report notes that the IMF and others have been woefully lax in collecting data on this; the report's authors had to go to individual countries to find out the totals. Shame on them. The OECD, it says, has the overwhelming role in designing international the corporate tax system - but this is highly problematic given that while the OECD is a club of rich countries, it is the poorer countries that are disproportionately the victims of this. Much more transparency is obviously needed too.

An extremely useful overall contribution to the literature.

Do corporate taxes destroy growth? Here's some new evidence.

Many politicians and accountants and lobbyists and, occasionally, economists, assert that high taxes discourage savings and investment and kill growth.

But is this actually true? What does the evidence say?

It's fair to say that the evidence shows that high taxes don't kill growth. For instance, high-tax countries grow just as fast (or slowly) as low-tax ones in the long run - though it should be noted that the low-tax ones seem to suffer the penalties of higher inequality and greater risk of economic crisis, with no consequent growth benefit. See, for example, this post looking at evidence compiled by the Financial Times, which concluded:

"There is no relation between the share of government revenue and the rate of growth of real output per head. . . It is even quite surprising that such a spread [of the average tax ratio, from 29 percent of GDP in Japan to 55 percent in Sweden] seems to have no effect on economic performance."

Or take our blog in April looking at evidence from Prof. Chris William Sanchirico of Penn Law School and the Wharton School, which concluded that:  

"it would not be unreasonable to conclude, based on the best available theory and data, that the growth argument has no real basis."

Or see this, showing that higher-taxed U.S. states tended to outperform or match lower-taxed states and are better able to weather downturns; or this, on tax 'competition' between states, or this, showing that cutting top tax rates doesn't generate economic growth - although it does increase income inequality.

Now, via Citizens for Tax Justice in the United States, a graph from a report by the Economic Policy Institute authored by Thomas Hungerford (who also wrote a high profile official Congressional Research Service report showing income tax cuts create more inequality than jobs.) It looks at whether high corporate taxes hurt growth, and it speaks for itself:

(Click to enlarge.) This looked at statutory tax rates, then examined growth in the subsequent year. The graph slopes upwards, suggesting that high tax rates might even promote growth - although he notes that this is not statistically significant; another figure comparing growth with effective marginal tax rate on earnings from investment slopes (even more slightly) downwards and is also statistically insignificant. He concludes:

"There appears to be no relationship between capital income taxes and economic growth."

The result, it says, applies both to the statutory corporate tax rate, as well as to the effective rate. This study looks at the United States, whereas the FT study cited above looks at a range of countries. Together, these and others studies suggest strongly that while corporate taxes may be useful for tackling inequality and other ills, they aren't useful tools for promoting growth.

Which is hardly a surprise, if you think about it. Corporate taxes don't go up in smoke: they are a transfer from one sector to another, and they pay for some of the essential ingredients of growth such as the rule of law, or educated and healthy workforces. And see what candid corporate bosses really think about corporate taxes, here.

But the story doesn't end there. The new EPI study also asks what the corporate income tax is for. It cites three reasons:

• It raises a lot of money ($242.3 billion for the U.S. in fiscal 2012, 10 percent of total federal revenues - down from about 30 percent in the high-growth 1950s.) 
• It makes the tax system more progressive (that is, poorer people pay less as a share of their income.) The study notes that most studies find that the corporate tax burden falls overwhelmingly (75-82 percent) on capital, rather than on workers or others.
• It serves as a backstop to the individual income tax - if it were not there, or if rates are far lower than top-rate income taxes, then wealthy rich people will simply turn their income into corporate income, so as to pay the lower rate. (And indeed as corporate taxes

(A bunch of other reasons why we should tax corporations is here. With further reasons here.)
Although this study focuses heavily on the United States, its implications, and those of the other studies we cite, are wide-ranging.

In country after country around the world, the corporation is under attack, both from lobbyists who argue based on flawed evidence that it's a good idea to cut taxes on corporations, and from the disastrous race-to-the bottom on corporate tax rates and corporate tax loopholes - which not only harms the world as a whole, but harms each player in the race who participates.

Read more about all that, here.

Tanzania examines its tax exemptions

From the Financial Times:

"The government in Dar es Salaam has set itself the goal of reducing the tax incentives it offered to companies to below 1 per cent of its national output. It is a big call, given in the past two years it doubled to 4.3 per cent of gross domestic product, or $1.1bn."

Should countries like Tanzania be giving tax exemptions? Well, the Tanzania Revenue Authority doesn't seem to think so. Still, from the FT article:

“Most countries including Tanzania [have] had little to show in exchange for the incentives offered,” the Tanzania Revenue Authority said in a presentation this year and it argued that tax exemptions do not top the list of reasons why companies invest in the country.

“When you look at the top 10 reasons given by investors as enabling factors you find they mention things like rule of law, human resources capacity, infrastructure and so many other issues that are all more influential and significant than just tax incentives,” says Alvin Mosioma, director of Tax Justice Network-Africa, who is pushing for the removal of tax exemptions for Tanzania’s gold mining sector.

It seems particularly silly to provide special incentives in the natural resources sector. Those resources are in the ground, and if investors want to extract them, they will be prepared to pay high tax rates. Some established oil producing countries levy effective marginal tax rates of 90 percent and more - and still find that the investors are scrambling to get a piece of the lucrative action. A post-tax return is, after all, still worth fighting for, even if a lot of tax has been paid.

The article also reports on some very interesting statements and work by Zitto Kabwe, Tanzania's dynamic shadow finance minister who chairs Tanzania’s parliamentary public accounts committee. We've written about him recently.

Offshore race to bottom fosters shadow insurance industry, "may need bailout"

Posted from the Treasure Islands blog:

From the New York Times:

"Investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators."

That is offshore business, and the race to the bottom - yet again. In fact, I wrote about this very issue - with a particular focus on Vermont (and Bermuda) a couple of years ago. This shabby story involves both U.S. states such as Missouri, Delaware, Iowa, South Carolina, Nebraska, and Vermont - and offshore tax havens such as the Cayman Islands.

So what exactly is this all about?

Well, essentially, insurers are using lax state and tax haven laws to cook their books, allowing them to appear safer than they really are, in a scam that lines executives' pockets but could lead to another taxpayer bailout. Insurers are supposed to set aside reserves against possible future claims, and to have adequate collateral  - but if they reinsure this business through special captives formed in lax jurisdictions, they can make those reserve and collateral requirements largely fall away.

"Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance”

These tens of billions of dollars that Lawsky uncovered affect policies worth trillions of dollars and are, as Lawsky's official report entitled Shining a Light on Shadow Insurance puts it,

"likely to be just the tip of the iceberg nationwide. There are almost certainly tens, if not hundreds, of billions of dollars of additional shadow insurance on the books of insurance companies across the country."

And worldwide, we should add. Where is the European equivalent of this report? This is a gigantic problem. As the report continues:

"Insurance companies use shadow insurance to shift blocks of insurance policy claims to special entities — often in states outside where the companies are based, or else offshore (e.g., the Cayman Islands) — in order to take advantage of looser reserve and regulatory requirements."

What a surprise. A race to the bottom, secrecy, lax financial regulation - and tax havens. The NYT adds:

"The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents."

Bloomberg describes the arrogance of the insurance companies, via an email from Metlife:

"The contracts are a “cost-effective way of addressing overly conservative reserving requirements."

In other words, we don't like the democratically mandated constraints that enable us to double up on risks to pay executive compensation - so we'll go offshore to get around the rules!

And here's another real surprise, from the NYT:

"Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends."

This ugly story will ring true with any reader of Treasure Islands. Lawsky's report adds, ominously:

"Shadow insurance also could potentially put the stability of the broader financial system at greater risk. Indeed, in a number of ways, shadow insurance is reminiscent of certain practices used in the run up to the financial crisis, such as issuing securities backed by subprime mortgages through structured investment vehicles (“SIVs”) and writing credit default swaps on higher-risk mortgage-backed securities (“MBS”). Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices at numerous financial institutions. Ultimately, these risky practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multi-trillion dollar taxpayer bailout.

Similarly, shadow insurance could leave insurance companies on the hook for losses at their more weakly capitalized shell companies."

One more for the Economic Crisis + Offshore permanent webpage.

The Fair Tax Mark – launched today in the UK

From the Financial Times, reporting on a project co-funded by TJN:

"Campaigners have ratcheted up pressure on big companies by ranking retailers according to their corporation tax payments and “transparency”, in the latest effort to make corporate tax a reputational issue.

The Fair Tax Campaign, a spin-off from the Tax Justice Network pressure group, issued a report on Thursday that awarded marks according to a company’s tax disclosures, whether they paid an “acceptable” rate of tax on profits and whether they used havens."

From the Tax Research blog of Richard Murphy, who has been co-working on this for six months:

Over the last six months I’ve been working with Meesha Nehru on the Fair Tax Mark, which we launched this morning. It’s got its own website here.

The first Fair Tax Mark report ranks 25 UK retailers on their tax and transparency – the latter being more important than the rate paid. As the ranking shows, one company – Greggs – got full marks whilst Majestic Wines came close. Others missed the mark by a long way, so it’s important to note what we rank on, which, as the Mirror notes this morning, is three separate measures:

• Do companies publish enough information so we can tell how much activity they have in the UK, what profit they make here and how much tax they pay in this country?

• Does the company pay an acceptable rate of tax on its profits, and does it look likely that a fair part of that profit is declared in the UK?

• Does the company use tax havens, indicating whether or not it is likely to be involved in tax avoidance.

There are five points available for each measure and firms getting 12 or more out of 15 are awarded a Fair Tax Mark.

As we found, there are widely varying results:

• 9 of the 25 companies scored 0 for their country-by-country reporting – meaning we could not get sufficient data on their UK activities to assess whether they paid fair tax.

• 6 companies scored 0 for their tax rate – meaning they paid low rates of tax on average over six years and we could not tell whether they paid it on appropriate UK profits.

• Only two companies scored 0 for tax haven use – meaning they did not provide enough information to tell whether they used them or not.

• Only 3 companies scored a maximum 5 points on tax haven usage – meaning they did not use tax havens (Greggs, Majestic Wine and Asos – the online fashion retailer).

What was also interesting was interpreting the results:

• As the size of a company increased its Fair Tax Mark fell, on average

• As companies got bigger their use of tax havens increased, on average

• As companies got bigger their tax rates fell on average, suggesting that bigger companies are working the tax system to their advantage

• Country-by-country reporting data got worse as companies got bigger.

As my colleague, Meesha Nehru, told the press:

People are increasingly expecting companies to pay the tax that society demands of them or to at least explain why not.

They’re not paying, and they’re not explaining and neither are acceptable – and that’s the message of this report and the Fair Tax Campaign which believes that fair tax is at the heart of a good society.

We haven’t got that society right now, and that’s why people want Fair Taxes back.

This Mark is intended to help people assess who is, and is not, telling us what we need to know to assess whether there’s a fair tax system in place – and that, we think, is an important step in taking this debate forward.

Jersey: "90% of our business is discretionary trusts"

We've just come across a remarkable statistic from a Jersey trust practitioner. Here it is, via the Expat Channel. Our emphasis added.

"Despite the different types of trusts that have developed over the last half a century, the most enduring remains the discretionary trust. “Something like 90% of Jersey trusts we draft are fully discretionary ones as they give the maximum flexibility,” explains Giles Corbin, Partner with Jersey-based law firm Mourant."

We had heard even higher numbers than this 90 percent figure cited before in the general context of offshore trusts, but never seen anyone in the industry say as much in public.

The discretionary trust has particular potential for abuse. If you're not up to speed on trusts, take a look at our short primer In Trusts we Trust.   As our analysis of the Swiss-UK tax deal explains, the discretionary trust is a way to put assets into a legal limbo so that they are, in effect, 'ownerless' and can escape all those pesky transparency requirements to identify beneficial owners. We explained it like this:

The innnovation in a discretionary trust is that the beneficiaries are not fixed. Instead the question of who is to benefit from the assets is left to the 'discretion' of the trustees. So you might have several potential beneficiaries - some could even be children who have not been born yet - and at least for now, nobody is entitled to the assets or their benefits untl the trustee uses his or her 'discretion' (another highly slippery concept, especially when wielded by an offshore trustee) and shells out to that particular person at some point in the future. Behind these arrangements, undisclosed to anyone but the trustees, there will be a set of instructions about how to manage the assets, sometimes called a 'letter of wishes' or 'bylaws' that only the person who established the structure, and their trustee, will know about.

So until the payout happens - which may be decades in the future - you cannot know that any given individual is entitled to that benefit: so you cannot say who the beneficiary is. There actually isn't one: it's all up in the air since the trustee's discretion has not yet been fully exercised."

That Expat Channel article sums it all up:

"Alan Binnington, Private Client Director for RBC Trust Company says that a prime reason for the popularity of discretionary trusts’ is that once the assets have been transferred to the trustees the settlor ceases to own them, which may have advantages from a taxation point of view or for asset protection purposes. This transference of ownership also means that assets can be passed to future generations without the complication of having to obtain grants of probate."

It sounds great - until you unpack terms such as "may have advantages from a taxation point of view, or for asset protection purposes."  Protection from whom? Well, in many cases it is the tax or criminal authorities. Not only that, but Jersey foundations are designed to achieve basically the same trick.

This is a jurisdiction that likes to say how clean it is. Not on this evidence.

It will be very interesting to see if all the efforts to tackle tax evasion at the G8 look seriously at these slippery structures.

In case the link changes, here's the original.

New study of top 50 Euro companies: Deutsche Bank's 768 tax haven subsidiaries, Barclays 345, RBS 320

The French non-governmental organisation CCFD-Terre Solidaire and the revue-projet.com today launched a new study looking at the 50 biggest European companies, updating figures from earlier research in 2010.

Entitled Aux paradis des impôts perdus, it is an important report - only in French at the moment, unfortunately - whose main findings are:

• On average, the 50 biggest European companies have 117 entities in secrecy jurisdictions, or 29% of their foreign subsidiaries. The total amount of offshore subsidiaries is 5848.
• Only 60% of the companies publish a free and available online full list of entities consolidated in their financial accounts.
• The winners are Deutsche Bank (768), Barclays (345), Royal Bank of Scotland (320), Allianz (290) and Metro (228)
• There are twice as many subsidiaries in the Cayman Islands as in India
• The report provides a world map of favourite tax havens, indicating the main gainers and losers among them in the last 3 years.

As usual, the biggest tax haven users are the banks. See also here.

Links Jun 12

EU vote marks birth of global transparency standard – G8 to pick up the challenge Global Witness
Landmark legislation a major defeat for Big Oil and boosts UK’s G8 push for extractive industries transparency. The law is a major victory for Global Witness and the Publish What You Pay coalition after more than a decade of campaigning for this measure.

G8 deal on tax can feed millions This is Money

David Cameron may be forced to water down key G8 aim over public disclosure of shell companies to stop tax evasion The Independent

Obama Urged to Back Plan to List Owners of Shell Firms NY Times

Canada: Tell Harper: Don't be a Spoiler on G8 Action to Stop Tax Havens Canadians for Tax Fairness
See also: The Problem With Tax Havens - Canada Should Embrace Global Movement towards Tax Transparency Huffington Post

Activists Press G8 Leaders on Beneficial Ownership The Wall Street Journal
See also reports in El País and Clarín

To combat tax avoidance, tough talk is not enough The Guardian

Swiss Committee Recommends Rejection of U.S. Tax Bill  Bloomberg

The high-security, high-concept vault where Deutsche Bank will store $9 billion of gold Quartz
"The irony of the Singapore FreePort is that it was designed by Swiss architects and security experts but competes directly with Switzerland for off-shore accounts."

North Korean Regime Could Have Wealth in Tax Havens DailyPressdotcom

How digital currencies democratize tax evasion Quartz
See also: Bitcoin among virtual currencies targeted in US crackdown on tax evasion The Telegraph

Jersey: Battling the tax haven label BBC

The Netherlands is not a tax haven, says minister DutchNews.nl

Delaware state turns defensive as tax debate steps up Financial Times (subscription)

Domestic Russian tax haven idea on back burner RT

Vodafone Defends International Tax Practices Tax-News

Transfer Pricing Assessment Shocks Danish Company Tax-News

Tax reduction jargon explained Financial Times (Subscription)

Multinational Profits: Here, There, or Nowhere? Huffington Post

Camp Announces Hearing on Tax Reform: Tax Havens, Base Erosion and Profit-Shifting U.S. House of Representatives, Committee on Ways and Means
Hearing to take place June 13

Secret files reveal more Canadians using offshore tax havens CBC
See also: Revenue Canada rejected secret tax haven files CBC

How the Big Internet, Software, and Computer Companies Are Ripping off America's Young People for Ill-Gotten Profit Truth-Out

Obama Axes Bank-Harrassing Gary Gensler at CFTC, Plans to Install Lightweight Ex-Goldmanite naked capitalism

G8: It's Time For Action On Money Laundering Transparency International

Does big business flee if taxes get too high?

It's often said that you shouldn't raise taxes because big business will flee if you do. Well, Eric Schmidt of Google - yes, him of the aggressive corporate tax avoidance, and possibly beyond even that - doesn't seem to agree:

"Google will continue to invest in the UK no matter what you guys do because the UK is just too important for us."

Another one for our quotations page. Which also contains the opinion of another well known U.S. corporate boss, Paul O'Neill (ex chairman of Alcoa and former US Treasury Secretary:)

"I never made an investment decision based on the tax code. . . If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements."

Or try this one, from Warren Buffett:

"I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain."

Which is all fairly obvious, really. If there's a decent post-tax return to be had, the investors will come, whether or not the effective tax rate is 2 percent or 20 percent.

Yet the politicians in Britain, as in many other countries, continue to run terrified from these companies' threats to run away if they dare to stop their relentless programmes of tax cutting and loophole-creating.

Read more about all this here.