Tax Research UK

The Isle of Man Today web site carries the following back handed compliment today, the following being an edited (shortened) version of the story:

We have also written a story about a letter from a group who thinks the Isle of Man should ditch zero-10 company tax.

The group of 12 people – including a high profile charity worker – says that we’d be better off in the long run and have a better reputation if we re-introduced company taxes.

You might remember that a few weeks ago (August 10, to be precise) we ran a story based on a survey of corporate service providers and other finance sector interests. They predicted doom and gloom – ultimately lots of job losses and a big cut in tax take – if the Island lost zero-10.

We’re delighted we’ve got a response today.

Unfortunately, the group of 12 people who’ve written to us aren’t establishing themselves as a formal pressure group. That’s a shame because they could have help to fill an argument vacuum on this topic and widen the debate. We sometimes find it hard to find someone to put counter-arguments in political stories because there are few pressure groups and little in the way of formal party politics – which thrive on confrontation – in the Isle of Man.

But at least there’s someone here in the Isle of Man – and not just Richard Murphy, the UK blogger – making the argument.

Well, I’m delighted too. I don’t want to be the one-man political opposition in the Isle of Man and never set out to be so.

But I also note how very hard it is for their to be effective political opposition in places like the Isle of Man and the other Crown Dependencies. Any pretence that there is freedom of speech in such places is just that – a pretence. These islands are effectively occupied  by the financial services industry and they use their power – the very real power to make or break people’s chance to make a living – to ensure that opposition to their activities is silenced – or belittled to the fringes.

This is not accident. This is the ultimate expression of the neo-liberal contempt for government – that overlaps with that of anarcho-capitalism, as I noted here. That same contempt for government and the rule of law that it upholds is indeed inherent in the whole definition of secrecy jurisdictions: Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction. They do in addition create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

The Isle of Man Today web site and the weekly Isle of Man Examiner newspaper can welcome twelve brave individuals standing up against their government – as I do too – but the reality is that if that paper really believes in freedom of speech, politics and proper government it would challenge the whole structure of secrecy on which the Isle of Man’s business model is predicated. But it doesn’t. As such it is complicit with the occupying force within the island that holds it in fear and to ransom.

That’s why a few of us – not just me by a long way – from outside the Isle of Man and other secrecy jurisdictions have had to challenge what happens in these dark corners of corruption that set out to undermine democracy, society as we know it, accountability and the rule of law and which are, in consequence the very enemy of society itself. We’ll know we’re winning when there is real democracy in these places. Maybe the twelve who have written are a start – and I wish them well without knowing who they are – but we have a long way to go. Until we get there they can rely on much external support – and not just from me.

Richard Murphy Guernsey, Isle of Man, Jersey, Secrecy jurisdictions

Tim Bush does, in effect ask the above question in his paper on the failings of the IFRS with regard to UK and Irish banking and says:

The Queen asked of the banking crisis “why had no one spotted it coming?” The reason, I submit, is quite simply due to the above. A shared model that had worked in the UK and Ireland since 1879,
was replaced by another shared one that produced false profits, overstated capital, misleading creditors, misleading shareholders, the Bank of England, FSA and others.

Although IFRS had been rolled out across the EU, the UK and Ireland implemented it so extensively that the impact was different. It has been a “double dose” to the extent of being a deadly dose, by removing what had underpinned banking solvency for over 120 years. In engineering terms it was like a signalman sending a train down the wrong track. The UK had the first failing bank, Northern Rock, which only the month earlier appeared to have so much capital it applied to reduce it. IFRS merely reports the train crash rather than prevents it.

The banking crisis was systemic in the UK and Ireland, including the building society sector, despite having different currencies, different interest rates and different banking regulators. The common factor was a banking system underpinned by a Company Law Accounting Standards system since 1879, then being replaced by a new one from 2005, with one with severe faults with solvency left out. IFRS implementation cost hundreds of millions in some banks, but the real cost has been many, many multiples of that.

The root of the error is that the ASB is tasked with setting accounting standards for the purpose of the Act (which includes supporting banking solvency) and not merely “financial reporting standards” for the purpose of the EU capital market Transparency Directive from which IFRS came. A crucial difference and a fatal error. Parliament did not change the required output standard of audited accounts of banks (i.e. repealing Sections 830-837), but the ASB’s method of implementing IFRS changed the method of delivery to a sub-standard level.

The essence of Tim’s argument is a simple one and it is that UK company law has since 1879 been committed to ensuring companies are solvent. The current law is to be found in sections 830 to 837 Companies Act 2006 – and auditors have an absolute duty to understand and report on it. Tim argues that under IFRS this obligation was ignored – and worse still, the UK Accounting Standards Board facilitated that process by thinking that compliance with a flawed approach in IFRS was more important than compliance with UK company law. This is, of course, the ultimate arrogance of self regulation.

The issue of greatest importance was the recognition of provisions for bad debts. Under the UK’s accounting standards – and company law in the UK until International Financial Reporting Standards came along – prudence was required. So bad debts were anticipated and provided when reasonable doubt arose. Under IFRS this was outlawed – bad debts were only allowed to be recognised when they had gone bad. So concern was not enough. A disaster had to happen before provision was made – hence Tim’s claim that “IFRS merely reports the train crash rather than prevents it” because capital is knowingly overstated in the meantime – and reported, quite incorrectly as being true and fair.

No wonder banks fell over one after the other.

All of them helped by that other imprudence of IFRS – that a company’s debt can be revalued to market worth – meaning banks could and did take profit on its own gearing before the crash.

And who is responsible for this? The UK accounting profession – without a shadow of a doubt.

Richard Murphy Accounting, Banking

There’s a long article in the Telegraph this morning under the above title.

The article refers to the work of UK chartered accountant Tim Bush who has massive concerns about the credibility, and even legality of International Financial Reporting Standards. bevasue I have spent many hours working with Tim on this issue I rake the liberty of reproducing the article in full:

An influential watchdog has written to the Department of Business listing a catalogue of staggering regulatory errors that allegedly contributed to the collapse of several banks in 2008 – and still threatens the system today.

While reviewing the proposed expansion of the International Financial Reporting Standards for accounting, Tim Bush, a member of the “Urgent Issues Task Force” that scrutinises the work of the Accounting Standards Board (ASB), claims to have uncovered “fatal” and “dangerous” flaws in the system.

The City veteran has argued that applied to banks, the standards “produced false profits and overstated capital” which have “misled creditors, misled shareholders, the Bank of England, FSA and others”.

In a devastating assessment, Mr Bush alleges the regulations, and specifically the way they have been implemented in the UK and Ireland, have led to “mistakes [being made] of such severity that it is difficult to overstate”.

His letter, written on August 19 and sent to the BIS as well as the ASB and other accounting bodies, claims:

* The ASB has “not fully understood” the IFRS accounting standards and implemented them in a way that even contravenes the Companies Act. As a result, UK and Irish banks have wrongly relied on a different – and flawed – financial reporting system from the rest of Europe.

* The application distorted bank’s company accounts, giving “false assurances”, and hampered the directors and regulators from seeing the build-up of leverage and other risks.

* The system is still “causing direct business risk” in the banks and will do the same if applied to other companies too.

* The dangers are set to spread to small and medium-sized businesses under proposals to roll-out the accounting system further.

According to Mr Bush, who was formerly a fund manager at Hermes, the root of the “fatal flaw” lies in the adoption of the new IFRS accounting system to work alongside the Companies Act, whose rules had applied to financial reporting in Britain since 1879.

Although the IFRS system was introduced in the wake of the Enron scandal to combat accounting fraud, it has been widely criticised by accounting experts across Europe.

Mr Bush has argued that the standards preclude the principle of “prudence”, or the likelihood of money being repaid, disguising, for instance, a bad loan until it actually fails. But Mr Bush has claimed that while European banks applied the standard at group level, Britain’s ASB said that all bank units and subsidiaries should use the same measures, too.

The standards also applied to the Republic of Ireland, where the ASB is one of the last remaining British bodies to have any jurisdiction.

In his letter, Mr Bush wrote: “Although IFRS had been rolled out across the EU, the UK and Ireland implemented it so extensively that the impact was different. It has been a ‘double dose’ to the extent of being a deadly dose, by removing what had underpinned banking solvency for over 120 years.”

He said the system produced figures that hid instability in banks, so that directors and regulators of the banks could look at the audited figures and conclude that banks were not just solvent but had excess cash.

As for banks in the lead-up to the financial crisis: “They did not have the capital that they presented, and they were not going concerns. The true situation was that business models were loss-making and actually consuming capital.”

Mr Bush wrote: “In engineering terms it was like a signalman sending a train down the wrong track. The UK had the first failing bank, Northern Rock, which only the month earlier appeared to have so much capital it applied to reduce it. IFRS merely reports the train crash rather than prevents it.”

He said the system is still flawed and urged the Government to scrap plans to extend the standards. “In my view, the direction that the ASB took, and is still taking, is… causing direct business risk.”

He added: “The proposed further roll-out of full IFRS and the IFRS for SMEs has the same fundamental flaws as what has gone so badly wrong in the banks, a level of apparent compliance that undershoots what the law requires. It is difficult in the extreme to envisage Parliament knowingly assenting to a model of company accounts that dilutes the responsibilities of auditors at the same time as offering less for directors, creditors and the wider public interest.”

The ASB could not be reached for comment.

I’ve read Tim’s letter – and his submissions to the forthcoming House of Lords review of auditing and the banking crisis and think they’re a wholly appropriate analysis of the situation – and the misunderstandings on the part of regulators and auditors as to what their duties were and are.

And if Tim is right – and I think he is – the case against bank auditors is compelling, and cannot be avoided by claiming they relied on IFSR alone. UK company law has priority – and I think they ignored it.

Richard Murphy Accounting, Banking, IASB

The FT has reported:

Organised criminals in the UK are becoming increasingly involved in financial frauds including insider share dealing that they see as lucrative and low risk, investigators have warned.

The trend – for 15 years a concern of US securities market regulators – is only now being explored in Britain where authorities are facing criticism for failing to co-ordinate on tackling financial crime.

Paul Evans, Soca’s (Serious Organised Crime Agency) director of intervention, said those people targeted by his agency – which covers areas such as drugs, people trafficking and extortion – appeared to be moving into financial crimes, where it was rare for severe sentences to be handed down. “I thought City fraud was in a sealed jar,” he said. “[But] I think the water in which our criminals swim is pretty common to all kinds of criminal behaviours.”

Mr Evans said he and others had noticed a “surprising level of correlation” between reports of suspicious financial transactions made to the FSA and to his organisation. That had led law enforcement agencies to sharpen their focus on financial sector intermediaries, such as bankers and lawyers, whom they saw as the “facilitators” of links between the two worlds.

“There are people with Janus personalities,” he said. “They face the public and they look compliant. But they face the criminals and they look useful.”

Apologies to the FT for the long quotation – but this is an issue in the public interest.

Financial crime has always been the subject of a soft touch in the UK – quite inappropriately. This is undoubtedly a facet of our class system: ‘nice’ people commit financial crime, “people like us” – as the judges might say.

But there’s more to it than that. The fact that a relative blind eye is turned to the issue mirrors the blind eye turned to offshore, where all of this will be recorded. I stress the word all, because I believe all of it will be recorded offshore.

The offshore secrecy world provides the perfect mechanisms to disguise such crime: complete anonymity, de facto or actual banking secrecy, no information required anywhere on public record, no requirement to file accounts or tax returns with public authorities, and the ready available of those Janus personalities referred to by Soca. I’ve called them the suppliers of corruption services in the past.  But call them bankers, lawyers and accountants if you like. The reality is that without these people these crimes would not be possible. But these crimes happen. Therefore these people are engaged in them. And almost all who do so will be offshore. In places like Jersey, Guernsey and the Isle of Man.

Howls of protest might follow.

But this is the reality of insider dealing crime.

Richard Murphy Accounting, Corruption, Secrecy jurisdictions

According to Isle of Man Today the island is in deep trouble:

AN end to the current zero-10 corporate tax regime could devastate the largest sectors of the Manx economy according to a survey carried out of business professionals in the Island.

Jobs and business would leave the Island and go to rival jurisdictions if the Isle of Man introduced corporate tax.

As it explains:

The Island cut corporate tax to zero in 2006 for most industries to lure more business here. The Channel Islands followed suit.

But the European Union, which initially did not complain about the Manx tax arrangements, began to sit up and notice.

Some members believe the rates are predatory and are taking money away from them. The EU Code of Conduct Group is now looking at the issue.

I readily confess to having a hand in that. I have long argued (this paper is from 2005) that the Isle of Man’s arrangements are  not EU compliant. I have not changed my mind since then. Just as I did not on the Isle of Man’s VAT subsidy, where my work was the precursor for change.

The IoM Today article is fascinating. They, for example, say:

If the EU comes out against the Isle of Man, the Island’s complicated constitutional relationship with the UK could, in a worst-case scenario, mean that the UK could legislate over the head of Tynwald for the Isle of Man. It has not done that since Westminster banned Radio Caroline from broadcasting from a ship off Ramsey Bay by extending the Marine Broadcasting Offences Act to the Isle of Man in 1967.
Such a move, in itself, would damage the Manx economy and put back years of progress in which the Isle of Man has gained more independence from the UK.

Which is a welcome acknowledgement that all that the Isle of Man does is with the consent of the UK. All; those who claim otherwise, please note.

But the article also provides impact of by how much the island has been captured by the financial services industry:

About 36 per cent of the Island’s national income comes from the finance sector. A further 20 per cent is in professional and scientific services (for example, accountancy and law). Those sectors would face the brunt of the changes. The CSP (Corporate Service Provider) sector currently employs about 1,900 people. But the impact would go much further. Since 60 per cent of the Island’s banks’ corporate deposits come from CSPs, they will be affected too. More jobs would certainly disappear from them.

This, as I have pointed out and John  Christensen and Mark Hampton have pointed out, is the problem of being a secrecy jurisdiction without a Plan B. The scale of the problem is indicated by the findings of the surveys:

Bankers, lawyers, accountants and investment managers were asked in the survey referred to (run by the Isle of Man Association of Corporate Services Providers  and the Society for Trusts and Estate Practitioners, who it should be said, are far from objective observers) what would happen to their firms if corporate tax were introduced. The survey revealed:

• 53 per cent expected that their companies would shrink;
• 32 per cent said their companies would move elsewhere;
• 26 per cent said there would be no changes;
• 16 per cent said they would close their Isle of Man operations.

In addition, 70 per cent believed the Isle of Man’s status as an international finance centre would be adversely affected and 82 per cent said international business would move elsewhere.

The bankers, lawyers, accountants and investment managers surveyed said that revenue would drop by 18 per cent if a tax rate of just 2 per cent were introduced. It would mean that 17 per cent of jobs in the sector would go.

If tax were 20 per cent, they predicted revenue would shrink by 47 per cent. Then 39 per cent of jobs in the sector would disappear.
The jobs most at risk would be administration and support staff. There would be knock-on effects on all sorts of industries, in particular the legal profession who currently rely on international business.

And they predicated wider ramifications:

As people and money left the Island, the value of property would fall.
There would be fewer people travelling to and from the Island, so services would be cut and costs might rise.
Meanwhile, because the tax take would also fall, sustaining leisure facilities would be harder to do.

In all likelihood some of this is true.

But the question then becomes – so what? Why should the EU and the UK tolerate the abuse the Isle of Man facilitates by being a secrecy jurisdiction when the UK alone is facing the loss of millions of jobs as a result of a collapse in tax revenue – some of it, no doubt, the result of activity in the Isle of Man? In May 2009 I estimated that the Isle of Man cost the UK £1.5 billion a year in lost revenues. That would be enough, in itself, to prevent most of the job losses and service cuts that have been learned of at the Ministry of Justice in the UK in the last day. In straightforward terms of utility alone it is clear UK jobs in staffing prisons, providing justice and keeping probation officers at work have much more value than a loss of 1,900 staff engaged to avoid and evade tax in the Isle of Man. So the Isle of Man can expect no sympathy at all for its cause from the UK – and it is the UK that has to argue its case at the EU.

But what happens when zero ten does, inevitably, go? What next for the Isle of Man? I’ve offered Jersey Plan B and they do not want it. I’ll offer it to the Isle of Man again. And if they reject it, then I fear the mess will be as big as they predict. And yes, I do suspect that will mean that first the Isle of Man government will fail financially, second it will ask the UK to bail it out and if it will not the EU will and third it will lose much or all of its supposed independence as a result. What other options are there if it will not save itself?

And of course those options have a cost to the UK. I accept that. But they’re less than the option of saving the Isle of Man’s tax abuse, by a long way. So if that’s the option put on the table the outcome is, I suggest, inevitable.

The Isle of Man should be preparing the lifeboats. It’s going to need them.

Richard Murphy Isle of Man, Secrecy jurisdictions

The UK government has proposed increasing the standard rate of Value Added Tax (VAT) from 17.5% to 20% from 4 January 2011.

They are not alone in proposing increases in VAT or equivalent taxes to address deficits in government budgets. The States of Jersey currently has a proposal to do much the same thing – increasing their rate of Goods and Services Tax (which is a VAT in all but name) from 3% to 5%. These rises will be contagious.

In this case though there is a curious link between the two proposals. A paper issued by the House of Commons library[i] on this issue and commentary in Jersey on the same issue[ii] both rely on work by the Institute for Fiscal Studies to support their claim that any increase in VAT is only mildly regressive at most, or might actually be progressive – as the IFS have claimed[iii].

A new Tax Briefing from Tax Research UK examines that Institute for Fiscal Studies claim and finds it is a statement of political dogma, but not of fact.

As the Tax Research briefing argues, a regressive tax is almost universally agreed to be one where the proportion of an individual’s income expended on that tax falls as they progress up the income scale[i]. VAT is a regressive tax. This is shown, quite dramatically, in the graph below which is based on UK official data[ii] :

By chance the VAT and total direct tax burdens on the bottom 20% of households ranked by their income is the same. Direct taxes then rise steadily as a proportion of income as incomes rise and both VAT and all indirect taxes combined do the exact opposite, falling as a proportion of income as income rises. So marked is the trend that the overall progressive effect of income tax is not enough to counter the fact that the poorest households suffer such a high rate of overall indirect tax that they end up with the highest average tax rates in the economy as a whole.

The message from this data is unambiguous: the poorest 20% of households in the UK have both the highest overall tax burden of any quintile and the highest VAT burden. That VAT burden at 12.1% of their income is more than double that paid by the top quintile, where the VAT burden is 5.9% of income. VAT is, therefore, regressive.

The IFS dispute this. They produce the following data in evidence:

They say of this:

It shows that the percentage of net income paid as VAT varies relatively little across most of the income distribution, with the biggest exception being that the bottom decile group does pay a higher fraction of its net income on VAT than do other income groups.

And they then use this claim to justify the fact that in their opinion VAT paid is not regressive with regard to income.

The slight problem for them is that this overlooks the very obvious fact that it is. Replotting their data and excluding the bottom decile as they would like the following graph can be drawn:

The linear regression shows a clear downward trend that makes very clear VAT is regressive.

Surprisingly the IFS ignore this obvious fact and go on to claim:

However, looking at a snapshot of the patterns of spending, VAT paid and income in the population at any given moment is misleading, because incomes are volatile and spending can be smoothed through borrowing and saving. Consider a student or a retiree: their current income is likely to be quite low but their lifetime earnings could be relatively high. The student may borrow to fund spending, whilst the retiree may be running down savings. Similarly, many people in the lowest income decile will be temporarily not in paid work and able to maintain relatively high spending in the short period they are out of the labour market. Because their spending is higher than their current income, these people will be paying a high fraction of their current income in VAT. Similarly, those with high current incomes tend to have high saving, and so appear to escape the tax, but they will face it when they come to spend the accumulated savings. Because of this ‘consumption smoothing’, expenditure is probably a better measure of living standards (and households’ perceptions of the level of spending they can sustain).

And they then claim that comparing VAT with spending shows that VAT is progressive:

However, this requires that a number of further conditions hold. First, the poor must have savings, and as I show, they don’t. Second, they must have access to borrowing, and as I show, they don’t (except for doorstep lenders). Third, the consumption patterns of the rich must be the same as the poor, and they’re not. In fact, the consumption patterns of the rich (for school frees, private health, leisure travel, second homes and financial services products) are all VAT free, unlike the consumption patterns of the poorest. In addition, the IFS has to abuse all known notions of measure for progressivity to reach this conclusion.

The result is that far from the IFS claim being justified, it is vey obviously wrong, and very poor quality research. As a matter of fact VAT is regressive.

The IFS claim is, however, consistent with persistent IFS recommendations that VAT be increased (to replace corporation tax, for example, and on food and children’s clothing to pay for “desirable tax reductions”) all of which, together with their recommendations that Inheritance Tax be abolished and tax on interest income be abolished suggest a systematic bias towards making recommendations that favour redistribution of taxes from those who work for a living or who are the poorest in our country towards those with wealth and who enjoy income from capital.

None of which makes it easy to see how the IFS can sustain the claim that [i] it:

maintain a rigorous, scientific approach to research, while offering scope for timely, independent, well-informed contributions to public debate.

The full paper is available here.

[i] http://www.ifs.org.uk/centres/esrcIndex

[i] It is, for example, defined as such in the Oxford Dictionary of Economics.

[ii] [ii] http://www.statistics.gov.uk/downloads/theme_social/Taxes-Benefits-2007-2008/Taxes_benefits_0708.pdf

[i] http://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snbt-05620.pdf

[ii] http://www.gov.je/SiteCollectionDocuments/Tax%20and%20your%20money/ID%20FSR%20GREEN%20PAPER%2020100621%20MM.pdf

[iii] http://www.ifs.org.uk/budgets/gb2009/09chap10.pdf

Richard Murphy Economics, Ethics, VAT

The law firm of Appleby provides offshore legal, fiduciary and administration services. Appleby and its Group Managing Partner, Peter Bubenzer in Bermuda, issued in June 2010 an article entitled“OFCS [Offshore Financial Centers] in the Crosshairs — But Not Alone in Their Struggle to Survive.” Since Appleby operates from many offshore financial centers: Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, Seychelles and Switzerland, the article merits a reply. Our full reply, prepared by a senior adviser to TJN, can be downloaded here. What follows is a summary.

First, the Appleby article states that “One of the issues raised in more recent onshore discussions has been the absence of tax in the major OFCs. Of course this is not true, as most have, for their small size, relatively sophisticated infrastructures, which are funded by taxes or fees,” such as for example, in Bermuda custom duties and payroll taxes. However, the real issue is that OFCs permit foreign persons to use those financial centers free of tax: free of income taxes and all other taxes. The fact that purely local activities within the OFC might be subject to customs duties and payroll taxes, is really not relevant to the role of OFCs.

Second, the Appleby article states that “The sovereign right of countries to determine their tax system seems to be overlooked in many discussions on OFCs’ own tax structures.” True, countries have the sovereign right to determine their own tax systems. But those tax systems should not encourage nor facilitate residents of other jurisdictions to evade taxes in their country of residence and violate the tax system of their country of resident.

Third, Appleby refers to “tax competition” and argues that“[tax competition] is still alive and well in the onshore world (examples are the differential tax rates among the various States of the United States of America or the different tax rate that people across the European Union).” However, the states in the United States and the countries in the EU provide different tax rates for activities within their respective jurisdictions. The offshore financial centers provide tax free benefits primarily to non-residents and foreign corporations who/which have no real economic activity within the respective jurisdictions, and which in many cases are not permitted to do business locally. Offshore financial centers, all of which are “financial secrecy jurisdictions,” do not merely provide tax competition. Because of the confidentiality those jurisdictions provide, they facilitate and encourage tax evasion/tax fraud.

Fourth, the Appleby article states that “Many OFCs have now been added to the OECD “White List,” each having entered into a considerable number of TIEAs [Tax Information Exchange Agreements] or DTTs [Double Tax Treaties].” However, the OECD requires that a jurisdiction enter into only twelve (12) such agreements in order to be on the White List. Twelve such agreements is hardly “a considerable number.” Further, some low tax/zero tax jurisdictions have entered into such agreements with (1) other low tax/zero tax jurisdictions, or (2) jurisdictions which have hardly any economic activity or personal wealth (such as the Faroe Islands and Greenland, and those insignificant agreements count for OECD purposes, toward the minimum of twelve. Read more here

Fifth, the Appleby article, in discussing automatic exchange of information, states “At present, the only automatic TIEAs that I am aware of consist of arrangements between the USA and Canada, and those partial arrangements that exist under the Savings Directive implemented in the European Union.” This clearly is a misstatement. The Tax Justice Network prepared a memorandum in December 2009, entitled “Memorandum on Automatic Exchange of Information and the United Nations Tax Committee” which indicated that at least some information is exchanged automatically:

(a) Between Mexico and the United States
(b) Between Mexico and Canada
(c) Between Australia and New Zealand
(d) Between the Nordic countries (Denmark, Faroe Islands. Finland, Iceland, Norway, Sweden), according to their Convention on Mutual Assistance in the Tax Matters
(e) By Australia, Canada, Denmark, Finland, France, Japan, Korea, New Zealand, Norway, Sweden, United Kingdom, pursuant to income tax treaties (See the March 2000 OECD report,Improving Access to Bank Information for Tax Purposes, page 40.)

TJN believes that in the ten years since that report was issued, at least several other countries are exchanging information automatically pursuant to applicable income tax treaties or in other agreements administrative assistance.

Further the United States enacted in March 2010 the Foreign Account Tax Compliance Act (“FATCA”). When FATCA enters into effect, it will in effect require all foreign financial institutions and other foreign entities which invest in the United States their own funds or their clients’ funds, to provide automatically to the U.S. Government information about U.S. persons with financial accounts at those foreign financial institutions or other foreign entities.

Sixth, the Appleby article states “It should be noted that the major OFCs do not receive financial and or grants from onshore governments or global monetary institutions.” Presumably the author was not referring to major OFCs like London, Luxembourg, Zurich and such-like which rank among the top ten secrecy jurisdictions on TJN’s 2009 Financial Secrecy Index. But for the record we would note that the Cayman Islands, which continues to resist British government requests that it adopts a more sustainable tax regime, including direct and land taxes, has its considerable external debt guaranteed by the U.K. taxpayer, see here.

Seventh, the Appleby article states that the “global economic crisis did not have its origin in the offshore world.” However offshore financial centers contributed to the global financial crisis: special purpose entities and special purpose vehicles in tax free offshore financial centers were treated “off balance sheet” by major financial institutions, and much of the shadow banking activity that underlies the build-up of unknown systemic risks was driven by opportunities to use complex offshore structures for tax and regulatory arbitrage.

Eighth, the Appleby article does admit that the offshore/world has facilitated “crude tax evasion, such as hiding assets by non-declaration or under-reporting to onshore tax authorities.”

Ninth, Appleby states “OFCs view themselves as responsible financial centers providing a base for companies and individuals seeking, with proper advice and disclosure onshsore, to structure their affairs as tax efficiently as the applicable onshore and offshore laws allow. The majority of offshore work in the major OFCs consists of providing services to companies and individuals who are operating in full compliance with their own tax laws, and these OFCs would not want it any other way.”

When a company is organized in an offshore financial center (or other financial secrecy jurisdiction), the local government authorities generally do not know whether the owners of that company “are operating in full compliance” with the laws of the jurisdiction of residence of those owners. Normally the Appleby office in the offshore financial center (or other secrecy jurisdiction) would act only as registered agent of the locally organized company, and therefore that Appleby office would not really know of the activities and the assets of that company.

Also, TJN researched in 2005 the amount of assets held by individuals in jurisdictions outside their country of residence and not declared by them in the country of residence (TJN, “The Price of Offshore”). Tax justice Network’s conservative estimate: US$11.5 trillion, which results in an annual loss of tax revenue for governments of about US$255 billion. TJN believes that the US$11.5 trillion figure has increased substantially since then, resulting from additional undeclared income on such undeclared assets, and substantial additional capital flight.

Tenth, Appleby states that “it has been suggested that the offshore world must move to the automatic exchange of tax information rather than the present treaty-based request system, with its checks and balances too protect the legitimate rights of taxpayers that exist in all civilized countries. In the context of the worldwide system of automatically exchange tax information, where there is a global standard applicable to all, it must be right to expect such rules to apply to OFCs. In the absence of an equal application of such requirement onshore and offshore, requiring it solely for the OFCs would clearly be unfair and discriminatory.”That statement merits two comments: First the “request system,” that is, exchange of information/upon request which is the official OECD promoted policy, is not effective exchange of information. Under the “request system,” in order for a government (“Requesting Government”) to make a valid request for information of another government (“Requested Government”), the Requesting Government in effect must already know substantially all of the information being requested. That is why the number of effected requests has been minimal. An attorney for several offshore financial centers, including some jurisdictions where the Appleby Group has offices, noted that “Bermuda [where Appleby was originally, and still is, headquartered] has had such arrangements [exchange of information upon request] with the US for twenty years, and over that time [Bermuda] has effected less than fifty exchanges [of information]. (Richard Hay, “Beyond a Level Playing Field: Free (R) Trade in Financial Services.”) Offshore financial centers and onshore financial centers support exchange of information upon request because such method is not effective exchange of information.

Eleventh, Appleby states that “A number of these [offshore financial centers] jurisdictions, for example the Cayman Islands, have been subject to an examination (by the General Accounting Office of the USA [GAO]) as to their co-operation in the effective use of their agreements and were declared to be fully co-operative.”

The report of the U.S. Government Accounting Office, GAO, cited in the Appleby statement indicates (pages 5 and 37) that the United States has used only “a small number of times” the Tax Information Exchange Agreement (ITEA) between the United States and Cayman since it went into effect in 2004, to exchange information related to civil and criminal tax investigations.

Twelfth, Appleby states “…..as noted in Transparency Internationals published lists, the world’s worst offender according to its assessment of global transparency was the state of Delaware in the USA.” Two Comments: Tax Justice Network, not Transparency International, prepared the Financial Secrecy Index published in December 2009, referred to in the Appleby statement. Also as noted in the FSI, many jurisdictions suffer from the lack of financial transparency and TJN readily acknowledges that secrecy is endemic, but not all countries make it their business to actively attract deposits and other financial assets of non-residents whose primary goal is tax evasion.

For the record, nine out of the twelve Appleby offices are located in jurisdictions which are in the top twenty financial secrecy jurisdictions according to TJN’s Financial Secrecy Index.

In summary, the Appleby statement is not “digestible.”

NB: cross posted from Tax Justice Network with permission

Richard Murphy Secrecy jurisdictions