Tackling offshore internationally

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I have suggested that if we are to reform offshore we have to start at home, and have detailed a programme of reform that many governments would have to undertake. I have also suggested a programme of reform for secrecy jurisdictions. The next target for reform on my agenda of necessary change to transform the offshore world is in the international arena.

In this arena there are several essential reforms. The most important from my perspective is the introduction of country-by-country reporting – about which I have written so much I just link to my summary on the subject, here. One of the many advantages of country-by-country reporting is that it will shatter the secrecy space which the published consolidated group account of multinational corporations represent. In that secrecy space all manner of intra-group transactions can be lost from view. This opacity has to be broken at the same time as that of secrecy jurisdictions themselves if we are to really know all we must know about the operation of multinational corporations and are to hold them to account for what they do.

Second, there must be international agreement on making tax evasion a predicate offence. This means tax evasion would automatically be considered an offence that in turn gave rise to the right to prosecute for the offence of money laundering. It seems so obvious that an act of illegality involving theft of a government’s property should be a predicate offence that it is hard to see how anyone can object to this – but object they do.

Third, we quite clearly have to solve the mess surrounding the taxation of international transactions. The arm’s length pricing model for transfer pricing promoted by the OECD might have worked in the 1930s when it was first adopted but it is hopelessly out of date now. It must be replaced by a more appropriate mechanism for resolving how tax revenues might be allocated to jurisdictions. Of the alternatives available formulary apportionment is by far the most appropriate. I explain it at page 33, here.  It is not without faults, but it so happens that it produces, with much less effort ,the outcome most countries seek to achieve when negotiating transfer prices – which is a fair proportion of profit allocation based on the real underlying economic factors that drive income generation – usually being where your customers are, where your people are and where your assets are.

Fourth, we must reform the way in which international regulation works. Both the IMF and OECD monitor offshore and so far the outcomes have been profoundly disappointing. The time has now come to stop asking if a jurisdictions has the right pieces of paper in place so it might regulate (which is all that has really been tested by these authorities to date) and instead to ask whether the secrecy jurisdiction has actually regulated transactions – to which a blind eye has been turned to date. This would radically transform the assessment of offshore compliance and force real change on it, of which there has been far too little.

Finally, sanctions should be adopted for states that will not comply with reasonable requirements. These should focus on tax based penalties – and most especially the right to withhold tax on all payments into a jurisdiction that does not comply with regulations – and on all payments into a jurisdiction that helps another breach internationally required regulation. When there is a weapon in the armoury cooperation is more likely.