2009 June » Tax Research UK

Critics Say Tax Haven Crackdown Falls Short

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Jun 242009

Critics Say Tax Haven Crackdown Falls Short – Forbes.com.

[T]here are also an increasing number of experts who argue the OECD’s process, the main vehicle to enact change so far, falls considerably short of a serious attack on the global financial system’s many black holes.

“The OECD program is incredibly ineffective,” says John Christensen, a British economist who is the director of the Tax Justice Network’s International Secretariat, a lobbying group, supported by charities like Oxfam and Christian Aid, that is agitating to close tax loopholes and reform bank and trust “secrecy” rules around the globe.

The core problem? The OECD’s prescribed information exchanges are based on a “by request” process that involves submitting a country’s evidence of a citizen’s tax evasion to the tax haven where the evader is suspected of keeping his bank accounts.

“The evidence request requirements are very high. You have to have a smoking gun. And then there is tremendous discretion within the tax haven’s courts as to whether they will comply,” says Christensen.

In amongst all the OECD hype this morning this is the reality.

Why didn’t you ask Oxford?

Tax avoidance, Tax evasion, Tax Havens 4 Responses »

Jun 232009

I have been blogging rather a lot about the new Oxford paper on tax avoidance and tax evasion in developing countries today, but issues keep jumping out at me.

Take this one:

TJN (2009) claims that 60% of all global trade is routed through tax havens. The origin of this number is unclear, though.

If they’d just picked up the phone or sent an email (it’s not hard to do) the answer could have been given. For the record, it’s here, the OECD Observer for January 2002, written by a member of OECD staff:

Once you take on board the fact that more than 60% of world trade takes place within multinational enterprises, the importance of transfer pricing becomes clear.

So why be so impolite; after all the source quoted is not an academic paper – it is a web page – and a link to an OECD related story implying its source was provided? In addition in other documents where we have used this data we have noted the source – some of which they also include in their bibliography.

One can’t help thinking that a certain lack of effort was expended in trying to find some things out when preparing this piece of work and that demeaning asides were adopted as an alternative.

Why was that, I wonder?

Defending the Price of Offshore

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Jun 232009

I was the main author of a Tax Justice Network report published in 2005 called The Price of Offshore. In it we argued that $11.5trn dollars of private assets of high net worth individuals are held offshore and that the resulting tax loss was $255bn a year. Those numbers have since acquired a life of their own, being quoted, often, around the world in everything from US Senate reports onwards.

This paper has been criticised in the Oxford University report on tax evasion and tax avoidance, to which I have already referred today. They say of it:

A widely cited estimate of the revenue losses due to offshore holdings of financial assets has been published by the Tax Justice Network (TJN, 2005). TJN starts with estimates of global wealth in financial assets published by Banks and Consultancy Firms (a report by Merril Lynch and Cap Gemini for 1998 and a report by Boston Consulting Group from 2003). This is combined with estimates of the share of financial assets held offshore by the Bank for International Settlement (which refers to US asset holdings, though). By combining these numbers, TJN (2005) claims that offshore holdings of financial assets are approximately US-$ 9.5 trillion. This is augmented by US-$ 2 trillion of non-financial wealth held offshore like e.g. real estate (no source is given for this number). On this basis, TJN (2005) estimates that globally approximately US-$ 11.5 trillion of assets are held offshore. Assuming an average return on these assets of 7.5 percent implies that these offshore assets yield a return of US-$ 860 billion. Moreover, the TJN assumes that these assets are taxable at 30% and thus calculates a revenue loss of US-$ 255 billion per year (in 2005).

They go on to say:

Clearly, these are rough back-of-the envelope calculations based on ad hoc assumptions on taxable rates of return and the distribution of asset holdings which, again, cannot be verified.

So much for academic objectivity.

But let’s ignore that, let’s consider the facts. First, because they failed to ask and failed to read the paper properly they got the data sources wrong. The 1998 and 2004 World Wealth Reports were used, not just the 1998 ones. And the BIS data used was not restricted to the USA.

Second, we did not combine these sources: we used them because they triangulated. That’s a perfectly acceptable statistical technique.

Third, this is not ‚Äòad-hoc’ data. It’s data from major market sources. You might call it the firm level data which elsewhere the Oxford team are so keen on, and no doubt it was prepared at considerable cost from micro sources, again of the type they seem so keen on. So what was the problem with our data?

Fourth, we based the estimate of the ‚Äòadditional’ non-financial assets or illiquid assets included in trusts on experience and information from informed persons. Actually, we’ve since been told by Colin Powell, the Chair of Jersey Finance (amongst many other things) that we seriously underestimated this. I happen to believe that such sources, when treated with care are perfectly acceptable.

Fifth, the rate of return was based on a survey of risk based portfolio returns at the time. Which for an offshore investor seemed a reasonable basis for calculating expected returns.

The tax rate was based on weighted data from the KPMG corporate tax rate survey and (rather bizarrely) data from the Forbes Tax Misery index on the highest marginal income tax rates in all the countries where we expected the owners of these funds to be really resident, with it seeming likely that the countries surveyed would be the main sources.

And we then allowed for tax withholding on part of returns and for part of the holdings to be declared. The Oxford paper ignores this and argues in the paper that this could be a weakness in the methodology. It is not: we allowed for it.

So is this a back of the envelope calculation? Clearly not. Not unless you dismiss all work by Cap Gemini, Boston Consulting, Merrill Lynch, the BIS, Forbes and others as ‚Äòback of an envelope’. Not unless you say that tax rate data cannot be used at face value. Not unless you say triangulation has no relevance. Not unless you assume it is not possible to calculate expected average returns, or that those that are published bear no relationship to real returns.

Of course you can assume all those things because the data used does not come from the usual sources an economist uses. That’s true. But then, tax havens don’t publish much data, at all. So what else were we to do?

The fact is we used verifiable sources and explicit (not ad hoc) assumptions to create a best estimate of a recognised phenomena (and surely the existence of offshore funds is not denied by the Oxford team?) to then publish a best estimate based on that work.

What is so different in that process form the work of the average economist, who uses inherently unreliable data (like published accounts) to which gross simplifying assumptions are applied to make them manipulable (for example, with regard to exchange rates, or that they are all prepared on the same accounting basis or that the tax charge on the face of the profit and loss account represents the liability due) to which a regression analysis is then applied to which arbitrary weighting of percentage significance is then attributed which is then used to provide an estimated result?

In both cases the result is an estimate. But why is ours a ‚Äòback of the envelope’ job and the alternative not? An answer is needed, because it is not apparent that a good one is available – and the Oxford paper certainly does not provide it, especially when the opportunity to question me about the work was foregone and it does not seem that the paper was read with any particular care.

All of which lends support to my opinion that the Oxford report is seriously flawed.

The tax gap cannot be calculated from micro-based data

Country-by-country, Development, Tax avoidance, Tax evasion 6 Responses »

Jun 232009

The Oxford University report on tax evasion and tax avoidance, to which I have already referred, makes a number of quite extraordinary claims.

One is that:

In general, micro approaches based on information from tax audits of randomly selected taxpayers are most likely to deliver reliable tax gap estimates. In contrast, methods to quantify the domestic tax gap based on macro indicators are less reliable and informative.

It uses this assumption to support its argument that the methods used by all nine of the significant papers to which the paper refers are flawed, precisely because they use a macro approach, despite the fact that it notes:

However, data to implement micro methods is seldom available for developing countries.

You might reasonably conclude from this that the authors are saying this work cannot be done, but in practice I seriously question their opinion that estimates of the tax gap must be based on micro approaches.

The authors assume that micro approaches work because, they claim:

methods which rely on tax audit information collected by the national tax authorities‚Ä¶.deliver relatively reliable tax gap estimates [and secondly] allow .. calculat[ion of the] individual components of the tax gap according to tax payer groups (e.g. corporations versus individuals, different income classes and sectors of activities) and the type of income which is evaded (e.g. income earned from international and national transactions). The latter provides important and valuable guidance for reforms of the tax administration and the tax system in a developing country.

This claim cannot be supported. It makes the enormous, and wholly unreasonable assumption that tax audit information collected by national tax authorities includes data on tax not declared. But it does not, of course. It may include some data on the tax collected by those who submit tax returns which subsequent audit proves to be defective, giving rise to additional tax liability. But that does give an estimate at all of the taxable income not declared on which a tax liability is therefore evaded by those who simply are not known to the national tax authorities.

How many such people are there? Who knows. But let’s take the UK as a start point for consideration. Using ONS data there were believed to be 61.4 million people in the UK last year. 14.7 million were 19 or under and so unlikely to be tax payers. That leaves 46.7 million adults who could pay tax. But according to HM Revenue & Customs about 31 million actually did.

Of course some are on non taxable benefits. And some are maintained dependents. But are we really sure that there are 15.7 million such people?

I’m not sure. I don’t know how anyone can be. I think it’s entirely possible that there are 2 or 3 million unregistered people who should be taxpayers in the UK population. And not one of them would be picked up by tax audit information. That basically deals with data that is available, not data that is not available.

What is clear is that this means that the Oxford approach is to estimate the tax that the existing systems with the existing data might collect. But that’s not what people like the Tax Justice Network, Christian Aid, Oxfam and Global Financial Integrity (and we’re the big players in this field) have sought to collect. We want to show the capacity for collection if only data were available and systems improved in consequence. Of course we accept that not all such tax would be collected: we’re equally pragmatic. If just one third of the tax lost to transfer mispricing according to Christian Aid – a total of $160 billion – was collected then sufficient resources would have been recovered to pay for the Millennium Development Goals.

And then there’s the small problem that the paper is meant to be reviewing the loss of revenue in developing countries. It seems a small oversight on the part of the authors not to have noticed that the tax administrations in such places are often stretched beyond capacity and still have almost no chance at present of collecting a tiny proportion of the tax due. Alternatively, the loss arises from international flows on which they have no means of collecting data at all right now, meaning that in effect the data to undertake the necessary surveys they suggest necessary to identify the extent of the tax gap would only be available when the tax gap had been closed sufficiently to provide the resources to collect the necessary information to assess the scale of the problem which had then been solved.

Those of us working in this area have not chosen to use alternative, macro based data of the type we have used as a first option: in many cases we have done so out of necessity. But if we’re to tackle this issue that’s what we’ve had to do. To criticise us for using the only available data and the only available methods does seem extraordinary. What would the Oxford team have us do? Deny there is a problem, when it is very obviously true that there is one, or just have us ignore it because we cannot fit our data into their preferred models? In either case this seems like economists seeming to assume the world should fit their preferred models, not seeking to model the world as it is.

Those of us who have done this work have modelled the world as it is. And we’re not going to apologise for doing so. We’ve proven there is a problem. We’ve shown that more data derived from greater transparency would solve this at a macro-level, with greatest opportunity for therefore dragging most taxpayers into the tax system unlike the compliant only model Oxford proposes, and we’re going to defend the answers we come up with as a result until someone can show there is a better method of actually doing this work, rather than objecting to it.

And Oxford have not delivered that solution.

The Oxford study on tax abuse in developing countries

Development, Tax avoidance, Tax evasion 4 Responses »

Jun 232009

The FT noted yesterday that:

A ‚Ä¶ study, by the Oxford University Centre for Business Taxation, says tax losses frommultinationals shifting profits that are down to faulty transfer pricing have been "overestimated drastically". It also criticises estimates of tax evasion by rich individuals in developing countries, which some reports have put as high as $124bn (£75bn) a year.

It says: "Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data."

It also questions the view that tax evasion is the main reason for money being shifted out of developing countries, saying political instability and concerns about property rights may be more important. But the study supports the call by campaigners and aid charities for transparency, and says evasion and profit shifting are likely to be problems.

This report was commissioned by the Department for International Development from Clemens Fuest and Nadine Riedel, both based at the Oxford University Centre for Business Taxation and both previously at the University of Munich.

The paper says what the FT reports in the first two paragraphs noted; the last is a generous interpretation of what they say: I can’t find the last sentence reflected in the report.

I do, I fully admit have massive problems with this document. I think it fundamentally flawed. There are a number of reasons, all of them serious, and I’ll be exploring them for a while I expect, such is the significance of this ill-timed attack on the work many in the NGO community are now doing. But let’s start with some obvious ones.

The first is that of the eleven authors whose work is reviewed by the Oxford team nine are personally known to me. Only one was given any opportunity to discuss his work, and that because he asked to do so. I find that very strange. This was not a purely academic review: this was a review of data on a real problem. In that case, why did the researchers not seek to establish the credibility of their own findings by discussing them with us before publishing their report?

Second why, when suggesting future research have they suggested methods for which I can reasonably state that there is no known data available – a weakness which required all of us to use methods of estimation which they dismiss in the report, but which were designed to make optimal use of the best alternative available data?

Third, it seems that they have assumed that absence of the conventional evidence that an academic economist might seek to use is evidence of absence of a problem in this area. This is clearly wrong. It just suggests we need more data which has to be created by more transparency.

Fourth, to suggest that this problem cannot be proven to exist because it does not fit within the modelling capacity of conventional economics does not suggest there is nothing wrong with the world: it suggests that the modelling techniques of economists must be developed in ways we have sought to pioneer.

I hope you’re already beginning to get a feel for my concerns. It would be disastrous if it was concluded on the basis of this deeply flawed report that there was no problem relating to illicit capital flows or transfer mispricing out of developing countries: our work conclusively shows there is, although we entirely accept that estimates of its scale can be refined. But that is the need, and we must not wait until the problem is solved which is the realistic pre-condition of securing the data the Oxford report suggests is required to take their own research forward.

I would hope no one will take this report seriously as a result of these flaws, but equally know the cache attached to Oxford. This is why I’ll be addressing more specific issues today and over time.

Tackling the Taxpayer’s Alliance

Tax Payers Alliance 1 Response »

Jun 232009

I have had a great email from a person who reads this blog, who said:

i mentioned to you that I am concerned that the BBC frequently uses interviews with representatives of The Tax Payers Alliance without indicating whose views they represent. I am in favour of putting forward various viewpoints but I like to have some idea of who is funding organisations and what their purpose might be. When I see or hear such an interview, I often ring the BBC asking if they could indicate who funds The Tax Payers Alliance and who they represent. Listeners comments are logged and passed to the programme makers/editors. The number to ring is 03700 100 2222.

Alternatively (I have not done this) I understand it is possible to leave a message on the BBC message board which can be found at http://www.bbc.co.uk/messageboards/newguide/messageboards_a-z.shtml.

Give it a go! Let’s challenge them time and time again.

There is no doubt that the Taxpayer’s Alliance does not represent taxpayers – so why does the BBC give them airspace?

‘Pension’ is a nice word for re-organising property rights

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Jun 232009

A commentator on this blog has written:

I am glad to see someone else has woken up to the real challenge of the next decades – how will a reducing work-force supply the needs of an increasing non-working population? It’s not just a UK problem, but a worldwide one.

Let’s be blunt: most people think of a pension as their retirement income paid for from a pool of funds. That’s the appearance, i agree. But the substance is something quite different.

Pensions are a mechanism for transferring property rights: between generations and from the owners of capital to the suppliers of labour.

That’s it. let’s not beat about the bush: however we wrap it up this is what they do.

Now, how do we want to do that? That’s the question we need to answer, and aren’t.

We’re not angry enough, yet

Economics, Ethics, Politics Comments Off

Jun 232009

Polly Toynbee has written about banker’s pay in the Guardian this morning, saying in conclusion:

Wherever you go in meetings or gatherings, people are incandescently angry with the establishment. But they have nowhere to turn, no one to rally them against untouched City power or a complacent parliament. Labour, once the natural home for anti-establishment anger, is now defender of everything people want to rebel against. At the time of the crash, Brown and Darling had a choice to become the representatives of that voice but they ducked the radical moment. Instead they are defenders of the status quo, halfhearted in political and electoral reform, timid apologists for the City. What more will it take to make politics respond to popular anger?

She’s right. She was when she said this too:

The New Labour "project" was designed by Mandelson, Brown and Blair to abolish the politics of class, scorning the "politics of envy". The project has ended in abolishing the credibility and meaning of Labour itself.

As is the Guardian editorial which says:

This is a moment when everything should be changing, and yet everything seems to be staying the same. The potential stirred up by the fall of big finance and rotten politics has not led to anything fresh. Banks owned by the taxpayer are pouring out champagne in their Wimbledon marquees and justifying huge salaries on the grounds they have always used – seeking shareholder value. Only now the public is the shareholder and must pay the bills. Even the All England Lawn Tennis Club, with its new sliding roof over Centre Court, has proved to be less hidebound by tradition than the Treasury. There is an absence of shame; the establishment does not think it did anything wrong.

But it did: it did something very wrong. But as yet this is not hurting as it might.

Being candid the Tories will probably win the next election. I hate the idea. My comfort is that they are going to hate winning even more. Being in power after 2010 is going to be a torrid experience. The chance of cutting as the Tories say they will and surviving the next election is very, very low. And I accept there will need to be serious reviews of government spending – even though I challenge the Tory reasoning for this, and their likely choices of target. I hate to say it, but only then will the anger be apparent. It is not as yet. But the left most certainly need to be prepared for it, starting now.

And I think there is a chance that will be the case.

But whether Labour will deliver it is hard to say.

Taxman defends debt retrieval priorities

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Jun 232009

Taxman defends debt retrieval priorities – Accountancy Age.

The Revenue says it is not chasing debts of less than £10,000.

Which is blatrantly absurd – for a loot of self employed people that is more than their tax bill for the year.

Why? Because as the PCS union rightly say that the 18,000 staff shed by HMRC since 2004 as part of an efficiency programme has meant the department has ‚Äònot been able to focus on debts of less than £10,000’. Thed additional 7,000 staff cuts planned over the next two years can only further hinder debt collection.

So the tax gap gets bigger, and the burden of tax rates will ahve to rise at a time when the governemtn needs every penny it can get.

There is not one iota of sense in this strategy: it is the madness of the corporate model applied to a revenue collecting government department coupled to the inherent belief that tax is a bad thing and so the less of it that HMRC recover the better.

This has to change.

But the policy has also to be appropriately applied: in the alst few days I have seen a threat of legal action from HM Revenue & Customs to recover £3.31. What is worse – it was abundantly clear that this significant debt had already been paid.