2011 July » Tax Research UK

Report: IFIs and tax policy in developing countries

Jul 142011

Actionaid and Eurodad have co-written an important new report looking at how international financial institutions such as the IMF have been advising developing countries on tax, and how things might be improved.

The paper looks at what has been meant by the Tax ‘Consensus’ – a concept which has been used by several authors to describe a consistent template of interlinked policy prescriptions that the International Financial Institutions have applied in their technical assistance and policy advice on tax policy in developing countries.

Tax reforms under this Consensus became an increasingly important part of the Structural Adjustment Programmes promoted by the World Bank and the IMF in developing countries from the late 1980’s. Key underlying principles of the tax consensus have been neutrality and simplicity; that taxes should not be used to redistribute wealth because this would distort market signals, and that the number of taxes, tax rates and exemptions should be reduced. Key policies have been to promote trade liberalisation and alongside it to recoup the lost revenue from trade taxes through introducing VAT. In addition there has been strong emphasis on administration.

So developing countries have been urged to reduce trade tariffs, introduce VAT, improve tax administration and remove exemptions. The latest paper also looks at the different ways the IFIs have used to influence tax policy, and then looks at the impacts of these policies.

Until early 2011 neither the IMF nor the World Bank had published an official account of their approach to tax policy in developing countries. This is astonishing, especially given that, as an earlier Actionaid report notes, if all developing countries were able to raise just 15% of their national income as tax revenue – a commonly accepted minimum figure – they could realise at least an additional US$198 billion in revenues – almost double the sums spent on foreign aid.

But things started to change in 2011 with the publication of a new and important paper by the IMF’s Fiscal Affairs Department (which the Tax Justice Network commented on here, in a blog entitled “Is the IMF starting to get it on tax and development?“). While the IMF paper didn’t contain many huge surprises, it did give credence to the issue of fairness in tax systems. Which is absolutely crucial.

It also recognised the challenge developing countries face in dealing with transfer pricing techniques used by multinationals and recognised that country by country reporting is a means to improve tax transparency that merits further investigation. These are all core concerns of TJN.

Although Eurodad/Actionaid new paper recognises a progressive shift in IMF thinking, one area of remaining concern is the IMF’s continued preference for regressive impacts of consumption taxes to be remedied through government spending – even though it admits that the IMF has failed to adequately address this in the past.

There are also ongoing problems with the design of the Doing Business indicator on tax, and despite IMF technical assistance on tax policy and administration growing in scale there is still next to no transparency on the actual content of the advice delivered in this context.

All in all, an important contribution to the literature.

Hat tip to Tax Justice Network

Right now UK government debt may be just about the best bet in town – so let’s exploit the fact

Economics, Uncategorized 16 Responses »

Jul 142011

I had a twitter exchange with Adam Lent, with whom I worked at the TUC, last evening.

Adam is, it seems, firmly in the ‘we’ve got to worry about the bond markets’ camp of economic commentators, seemingly believing that just around every corner there is a bond vigilante waiting the perfect moment to strike the UK economy down. In fairness, he is far from alone: this logic underpins the whole of the Conservative party’s economic policy, although in their case it’s not at all clear that they aren’t closely related to such vigilantes, if they were to exist.

The last point is, though, the important one. As Paul Krugman points out, often, there is absolutely no evidence that there are such things as bond vigilantes, at least until such occasion that politicians give them the opportunity to strike. German politicians have given bond vigilantes the opportunity to strike at Greece and Portugal; Irish politicians created the opportunity all for themselves. Republicans in the USA are certainly going about creating market turmoil in a way that only they seem capable of, seemingly willingly wishing to destroy the credibility of US debt in pursuit of petty smallmindedness. But the UK? Come on, let’s get real.

The UK is far removed from risk of bond vigilante action that to make the fear of something that is such a remote possibility the basis for economic policy is simply absurd. Our average debt in the UK is 14 years old. Our debt ratios are very low compared with most countries. You don’t believe me? Then look at this chart of debt to GDP ratios for EU countries using Eurostat data, (hat tip to RWER):

We’re doing fine right now, as someone once sang, and historically our debt is so much lower than throughout most of our history that we are in an extraordinarily strong position, and not the opposite.

What is more, the demand for our gilts is high, and rising partly precisely because we have an ageing population, many of whom will want to buy UK government gilts as the basis of their annuities as they come to retirement ( which is why we actually need more of them, and so can afford to borrow). In addition, we have also proven beyond a shadow of a doubt that the government is capable of using quantitative easing to create significant amounts of cash if need be without having any impact whatsoever on the real interest rate or long-term inflation in domestic markets ( all that we are now suffering being the result of government tax policy or commodity prices that are beyond our control, even when adjusting for exchange rates).

In other words, our financial position is at least relatively strong. That is especially true precisely because the euro is in a mess, the dollar is heading for a mess, and like it or not if people want somewhere to put their money then UK gilts look one of the best places to be right now. We do really have an attractive proposition to sell.

In that circumstance an astute government would see the current situation as a position of strength and not look at the markets and think that they represent a threat. They don’t. There is a wall of money in the markets that needs somewhere to invest: somewhere where the currency has reasonable backing, there is limited risk of Euro contagion, somewhere where right wing zealots intent on destroying well-being are being held reasonably at bay, where if only a little stimulus were provided to the economy the prospects for growth might exist. Look around the world and, believe it or not, amongst the major nations that leaves the UK as one of the safest bets on the planet.

In the circumstances, the Office for Budget Responsibility report suggesting that the UK has a problem because its debt might rise to 100% of GDP over the next 50 years because of the need for increased healthcare, pension provision, the social services as a result of an ageing population seems to me to be a simple recognition of the fact that we have an entirely manageable position, which we can afford to finance, and which requires absolutely no panic reaction of any sort whatsoever, let alone the demand for cuts that appear to be emanating from right-wing newspapers and others who live in fear of the market.

What those who react in this way ignore is the fact that we have choice available to us in the UK. Partly that’s the result of the democratic process (now reinvigorated?). As populations age they will vote for higher proportions of tax to be paid to cover the pensions, health care and the other services they need. The current resistance to making such provision will disappear as demands become apparent and the younger generations realise that this is the only cost-effective way of making provision for their parents. Change is, in other words, possible expecially when the alternative will be seeing the old living in abject poverty. I don’t think people will accept that.

More than that though, as is becoming readily apparent, markets are failing in very many ways. I believe very strongly in the importance of a mixed economy, but I also believe that this is utterly dependent upon the existence of firm regulation, sound ethics, accountability, transparency, and the payment of tax by all who participate in those markets so that a level playing field is created between honest, dishonest and just incompetent participants so that all do genuinely play their part in the maintenance of a good society. We do not have that at the moment. We have a society corrupted by bankers. We have a society corrupted by the media. We have a society corrupted by endemic tax evasion in the small-business sector as is evidenced by my research in this area, and we have an enormous tax gap that the government refuses to tackle since it believes that it is better to leave cash in the pockets of crooks and cheats instead of providing healthcare, education, social services and opportunities that the young.

We have the choice of correcting this. In fact we may have no choice but do so: unless we are to see our markets collapse under the weight of corruption we will have to tackle these issues. The cancer that is currently eating its way into the core of our capitalist system has to be eliminated. Then we can also create the basis of prosperity to provide the services that we need.

But to assume in that case that the status quo will continue is absurd. To assume that we cannot take on these issues is also absurd. As absurd as assuming that there is a bond vigilantes around the corner.

It’s time to take courage from the facts – not cower in the shadow of myths. I do, of course, call the result a Courageous State.

Family policy is economic policy – and right now that’s completely anti-family

Conservatives 1 Response »

Jul 142011

From Zoe Williams in the Guardian this morning – drawing attention to the fact that the Tories did not just get Murdoch wrong:

You can’t cut a family’s benefits then pay a Sure Start centre “by results” to run parenting classes about how stress and debt are bad for your family dynamic. Well you can, but it’s an insult and a waste of money. You can’t introduce a universal cap that means couples claiming housing benefit will be forced to live separately, while simultaneously emphasising the importance of parental stability. You can’t make speeches about “removing the pressures on childhood” … when one of those pressures is “being hungry”. You can’t have a benefits policy that chases parents out of work and then penalises them for being unemployed without accepting that that is also a family policy.

In short, family policy is indivisible from economic policy

And right now economic policy is fundamentally anti-family.

It’s destroying work.

It’s destroying incomes.

It’s destryoing hope.

It’s devaluing education.

It’s denying access.

It’s cutting away at some of the most basic of needs as ranked on Maslow’s hierarchy.

That’s Tory reality.

That’s why their disaster on Murdoch – which will be ongoing as Cameron’s lack of judgment is trawled through the press over coming months and years – is important. It will show that he and the Tories can’t be trusted and that an alternative is needed. Soon.

If we’re to eliminate fear of and from the media then we have to reform libel too

Corruption 1 Response »

Jul 142011

As many have, rightly, pointed out the reason for Murdoch’s extraordinary power has been the fear he’s been able to create. The effect has been pernicious. Reform to shatter that power, and remove that fear, is essential. I take my hat off to those organisations like 38 Degrees and Avaaz who have helped start that process through their mass, online, campaigns.

But there is another aspect of fear that has to be removed from the media if we are to have an effective Fourth Estate in this country. Our libel laws are also pernicious. They stop us holding people to account. They stop us telling the truth about those who hold power, and who abuse it. They stop us telling the truth because the price of defending that truth is too high.

Yes, we must transform the press, and not just the News International part of it. I look forward to the Mail, at least, being held to account as well. But that is only the starting point. Unless we reform our libel laws our freedoms will remain shackled, and that is simply unacceptable if we are to create the necessary freedom to prevent corruption and abuse in this country.

It’s time to hire KPMG to tell you how to…hire KPMG

Accounting, Auditing, KPMG Comments Off

Jul 142011

Accountancy Age reports:

Almost half of local authorities admitted they are unprepared to appoint auditors, just as the government is preparing to hand over this responsibility following the planned closure of the Audit Commission.

A survey by KMPG showed that, for 44% of chief executives, directors of finance and chairs of audit committees, the issue is “not yet on the radar”, and no one on their team had any experience of audit procurement.

So, KPMG undertakes a survey to show that local authorities need to hire their services to help them buy audit services from….well, KPMG.

Gravy train, anyone?

Just as George ordered, of course.

Bursting the myths about tax havens

Uncategorized 5 Responses »

Jul 132011

Available here

Tax havens: new PCS report sets out the problems, and the solutions

Tax Havens 2 Responses »

Jul 132011

PCS launched its new tax haven report last night in the House of Commons. I declare an interest here, I wrote it.

I talk about what I said at the launch last night on my Forbes blog today.

But the most important thing about the report is that it is solution focused. I’ve never been interested in simply, discussing problems to which I have no solutions. I want reform and the report suggests no less than 18 of these, split into groups as follows:

International reforms

The UK should now demand Tax Information Exchange Agreements with all identified secrecy jurisdictions so that they are forced to raise their standards of information exchange;
Improved standards of information exchange should be developed, including multilateral agreements between countries so that complex enquiries can be raised simultaneously in all countries involved;
Automatic information exchange should be put in place so that each country has to report to the country where a person really lives any source of income arising which they might have that is located outside their normal country of residence. As a result, for example, all tax haven bank accounts would have to be notified to the countries where their owners live. Nothing could be more effective in stopping tax evasion by individuals.

UK domestic law

The UK’s domicile rule, that helps make this country a tax haven, should be abolished;
The UK’s tax residence laws should be reformed to make it harder for people to leave the UK and claim tax haven residence;
Introduce general anti-avoidance principles into UK tax law to tackle artificial use of tax haven structures;
UK law should require significantly better disclosure from UK companies and trusts so that we set the international standard for transparency by which others can then be judged;
H M Revenue & Customs should promote a Code of Conduct for all involved in tax management that requires tax compliance, which this report defines as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. There should be greater scrutiny for those who refuse to participate, including professional advisers;

Investing in tackling abuse

Increased resources to be made available to HM Revenue & Customs to tackle tax haven / secrecy jurisdiction abuse as well as tax avoidance and evasion in general;

Reform in the UK’s tax havens

The UK must demand an increase in the level of corporate transparency in the UK’s Crown Dependencies and Overseas Territories to match that now found in the UK;
The UK must create a Registers of Trusts, equivalent to the current Register of Companies, and demand that its related territories do the same since trusts are still commonly used for tax avoidance;

European reform

The UK must support reform of the EU Savings Tax Directive so that all affected jurisdictions must offer automatic information exchange in full and this must be extended to companies and trusts and not just be applied to individuals;
The UK must promote geographic extension of the European Union Savings Tax Directive to as many countries as possible, including those outside the European Union;
The UK should support the introduction of a Common Consolidated Corporate Tax Base within Europe to tackle the problem of transfer pricing and tax avoidance between member states and should demand its extension beyond the European Union to ensure that tax haven abuse is eliminated by the use of this form of tax computation;

Accounting reform

The UK must actively demand that the European Union, the International Accounting Standards Board, the Organisation for Economic Cooperation and Development and stock exchanges must all require that multinational corporations prepare their accounts on a ‘country-by-country’ basis so we would know how much profit and tax was paid in each country in which they have operations. This would tackle the biggest single cause of corporate tax avoidance through what is called transfer pricing, would highlight the tax haven activities of companies, and would provide data on comparative labour conditions worldwide;

Financial services regulation

Credit card companies should be held to account for the use of their cards from offshore jurisdictions and be required to provide information on the beneficial ownership of those cards on demand, irrespective of their place of issue;
The tax profession should clarify their approach to tax haven activity and make clear the limits to professional good conduct in such places;
Secrecy jurisdiction banks and financial services institutions should be regulated from major financial centres such as London if that is where their parent company headquarters are located.

This is an ambitious package of reform. PCS is proposing it because it believes that the cost of inaction is now much higher than the cost of action. This report suggests that whilst the current economic crisis did, inevitably, have its causes in the major world economies, those secrecy jurisdictions that played an extensive role in repackaging sub-prime debt (Cayman and Jersey being of significance in this respect amongst British jurisdictions) played a major part in creating the climate of mistrust that precipitated the global financial failure which is now imposing an enormous burden on ordinary people throughout the world. This cost cannot be ignored, nor can the risk that it might recur be taken. That’s why we need reform, now.

The government’s accounts are blatantly wrong and must be qualified

Accounting, Auditing, Economics, Uncategorized 40 Responses »

Jul 132011

The UK government has for the first time ever issued a set of consolidated accounts covering its activities today. They are, admittedly in draft, but they are also blatantly wrong, and so seriously misstated that any auditor must be duty-bound to qualify them as being a completely unfair view of the state of the government’s finances.

The reason for saying this is simple: it is an absolute rule of accounting that revenue must be recognised as it falls due and any sum not collected must be treated as a bad debt. However, the revenue included in these accounts is the net sum of cash collected relating to the year 2010/11. As such the accounts are stated net of losses to tax evasion, which the Revenue themselves admit might be £35 billion a year, and may be as high as £70 billion a year in my estimate, and they are also stated net of tax avoidance. The Revenue have admitted they have £25 billion worth of tax avoidance subject to dispute at present, and I believe that this is the sum lost annually for this reason.

As a result I contend that the top line of these accounts is understated by at least £95 billion, meaning they are grossly and materially misstated in accounting terms or, in layperson’s terms, they are just a straightforward lie about the true financial state of the government.

Unless and until the UK government can accept the fact that it fails to collect a very large part of the tax owing to it then we have no hope of economic competence being restored at heart of government. Basic recognition of this truth is the first step towards achieving that goal, and these accounts suggest that the government remains in denial on this fundamental issue that could transform the well-being of the UK government, help slash the deficit to a point where it would be of no great consequence, restore social justice in this country by giving preference to honest people over cheats, and at the same time uphold the rule of law and the democratic will of Parliament.

Right now, the government chooses to do none of those things. It prefers to leave money in the pockets of cheats instead of using it to pay for pensions, provide education and ensure the health service is secure for the future. Worse still, by stating its accounts in this way it denies that there is even a problem to address.

The government should be ashamed of these accounts and ashamed of their cowardice with regard to tax collection and I sincerely hope that the auditor of these accounts has the courage to say that they do not represent a true fair view of the government’s activities, because that is very obviously true. If they do they will be doing us all a great service: this government may demand greater transparency and accountability but unless it adopts that maxim for itself then there is no hope of it being achieved elsewhere. So far they are a long way from coming up to scratch.

The Telegraph on the UK ending the VAT subsidy to the Isle of Man

Isle of Man 18 Responses »

Jul 132011

There’s excellent coverage in the Telegraph on this issue this morning.

I admit I am quoted extensively saying:

“I know this is a massive problem for the Isle of Man, but it has been a long time coming and I don’t apologise for it.

“Why should the UK taxpayer subsidise the Isle of Man so that it can operate a tax haven and offer a standard rate of income tax of 10 per cent, a top rate of 18 per cent and a cap on total tax paid?

“It does not need a zero per cent corporation tax. It could charge capital gains tax. It could charge inheritance tax. All of these are choices: bad choices.

“Today’s ruling means they will now have to collect tax, change their tax regime and attract real business and tourism.

“It also raises another question: how long can these crown dependencies last? Jersey, Guernsey and the Isle of Man all have holes in their budget, their tax regimes aren’t viable and very soon they will have to apply to the UK or EU for inclusion.”

I note Anne Craine, the Minister responsible for this issue in Douglas said:

“There will be those who say that [the Manx] government has not fought hard enough, that we should have refused to accept any revision of the Revenue Sharing Arrangement, or that more robust political lobbying in the UK could have improved our position.

“To those I would say, the Isle of Man government has negotiated robustly in a much harsher economic and financial world than most people on the island have experienced. The world has changed; we have to get real.

I agree.

Now accept that I’ve been right all along and begin to adopt a post-tax haven plan for the Isle of Man.