86 » Tax Research UK

Time for Europe to take tax justice seriously

86, Tax justice Comments Off

Nov 012010

John Christensen, the director of the Tax Justice Network, has a piece with the above title in the latest edition of New Europe, just published. It’s worth reproducing in full:

European governments and citizens should be doubly alarmed by last week’s Bloomberg news story that Google Inc. has been paying tax at a rate of just 2.4%. Not only do taxpayers in Europe and elsewhere face higher tax bills or poorer public services because Google won’t pay its taxes, but also the tax structures Google has used to cut its tax bill, from the so-called "Double Irish" to the "Dutch Sandwich", are being facilitated by European tax havens. Google’s game is called Transfer Pricing. By artificially adjusting the prices that its subsidiaries sell to each other, it can shift its costs into ‘onshore’ high-tax countries and its profits into tax havens, where it can run almost employee-free offices and pay next to no tax. This cuts tax revenues in the United States and in the European and other countries where Google does its real business.

Despite the efforts of deficit-plagued governments to tackle such abuses, multinationals are winning these battles. In 2000, Microsoft booked less than 20% of its profits outside the United States; that figure is now 60%, though Microsoft’s share of real sales and employment only grew from 30% to 40% during that time. Microsoft has cut its tax rate sharply as a result.

All this distorts markets and is anti-competitive. It favours large multinationals over their smaller national competitors and boosts the strength of those like Google or Microsoft with already elevated market power. It helps banks grow too big to fail. It does nothing to improve these corporations? real productivity.

The Tax Justice Network (TJN), a global civil society coalition, seeks to tackle abuses like this, to expose the systemic faultlines in the international financial architecture, and to propose policy answers. Tax havens (or secrecy jurisdictions as they are often known) are central to TJN’s concerns.

Europe can lead

National tax authorities, rooted in their home jurisdictions, cannot properly assess the devious tax strategies of global multinationals, legal and illegal. International co-operation must be part of the answer. So a co-operative Europe is naturally a potential world leader.

Europe already leads in some areas. Its Savings Tax Directive (STD), under which member states automatically share tax-related information, is an excellent idea which should be expanded far beyond Europe’s borders. Europe’s own tax havens, notably (but not only) Luxembourg and the United Kingdom, have lobbied hard behind the scenes to insert loopholes into the current STD, and it is fairly ineffective. Work is being done to tighten it, and Europe needs political courage to confront the vested interests.

Europe could also lead on curbing transfer pricing abuse. Current international tax rules treat multinationals as if they were a collection of unrelated entities, with each part taxed by the jurisdiction where it is resident. This OECD-led system makes no sense, because multinationals are integrated global operations.

A better alternative, Unitary Taxation, would involve taxing multinationals based on what they do in the real world, rather than on the artificial offshore constructions its tax advisers can cook up. Under unitary taxation a multinational is considered as a whole, and its profits are allocated to different jurisdictions under a formula based on wages, turnover or capital value in each place. Jurisdictions can set whatever tax rate they want, but if a company runs a one-person booking office out of Bermuda, say, then only a tiny portion of its profits will be allocated there and subjected to its zero-tax rate. Some U.S. states already operate this system successfully; a European project called the Common Consolidated Corporate Tax Base (CCCTB) currently being considered would be a step towards this system. It must be driven forward in the face of howls of protests from tax havens, multinational corporations and the powerful accountancy and law firms that support them.

Europe should also lead on rules for corporate reporting. Multinationals are currently not required to break down their profits and other important data by country, but can instead report them by region or even for the world as a whole. Neither the citizens of the countries where they operate, nor their tax authorities, can unpick this published data to find out what these corporations are really doing on their territories. A new proposal for so-called Country by Country reporting, under which results would be broken down for each jurisdiction, is starting to get a worldwide civil society coalition behind it. Europe can lead the world in pushing this forwards.

Europe is a tax haven victim and a perpetrator, but with political courage, it can fight the vested interests on behalf of all Europe’s citizens. TJN also wants Europe to lead a global struggle against the abuses, to benefit the citizens of the poorest countries. Given that up to a trillion dollars in illicit financial flows are estimated to leak out of developing countries each year, this could be far more effective than foreign aid.

Tax Justice is the best friend free markets have

86, Economics, Secrecy jurisdictions, Tax Havens, Tax justice 4 Responses »

Oct 252010

I am fascinated by the recent attack on my work and that of John Christensen and the Tax Justice Network by Cayman Finance.

It is not new of course, many tax havens / secrecy jurisdictions have made such attacks before. And no doubt they will do is again. But in making such a tax they show their real colours: they show that they are the real enemies of free and fair markets, and we are their strongest supporters. Why else would they be so annoyed?

If you believe in free markets you believe in tax justice

Let me be clear about what I am saying . If you believe that markets can or should continue to deliver well-being then you can’t believe in the continued existence of tax haven abuse. And you have to side with those of us who oppose tax havens. I say that because that is the only sustainable free market position there is.

Let me put it another way: if you really believe in free markets you have to be on the side of the Tax Justice Network. If you aren’t on their side then you’re opposing the operation of effective markets. That’s it – in a nutshell.

Now I am aware that there will be those who will reject this argument , especially on the right of the political spectrum. But if they do they show themselves for what they are – as supporters of privilege, not as supporters of markets.

Secrecy is the enemy of free markets

Let me explain. Markets, if they are to allocate resources as effectively as possible according to economic theory need three things to exist. The first is information. Unless those who participate in markets know what is happening in that market; unless they know the prices that others are offering; unless they know what their competitors are doing in other words they do not have the information they need to compete to greatest effect. And if they do not compete effectively they misallocate resources, or they misprice. In either case they undermine the market’s ability to deliver product at low cost, which is a precondition of it maximising well-being. This failure will be exacerbated by some market participants failing for lack of that information, which they here then imposes an additional cost on society as they will not have failed for reason of their own making: they will have failed because they did not have the information they needed to compete on a level playing field.

Tax havens go out of their way to hide information from view. It is not for nothing we call them secrecy jurisdictions, which we define as 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 and that 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.

By doing this tax havens/ secrecy jurisdictions seek to undermine markets. In the process they provide favour for some at considerable cost to others. So, for example, they favour large companies who find it much easier to access such locations, and they favour companies with greater resources who can overcome the barriers to entry that effective operation from a secrecy jurisdiction demands and they favour older companies as a result over new market entrants. Those new entrants will almost invariably have greater need for information than their larger competitors because their capital base will be smaller in proportion to their activity. Their larger competitors will, however, have the advantage of supplying asymmetric information to the market. As a consequence those larger competitors will exploit the vulnerability of newer, smaller market entrants, exacerbating their weaknesses, and will do so not because they have inherent competitive advantage but because they can and do create a market distortion in their favour by operating, at least in part, through tax havens.

The cost of this behaviour is significant. Smaller, newer companies, have greatest likelihood of delivering innovation, new jobs and in many cases well being for society. They are less likely to do so as a consequence of the operations of larger companies based in tax havens. This means market effectiveness is undermined . Worse, it means tax havens/secrecy jurisdictions support monopolies: monopolies that exploit asymmetry of information to exclude competition, to charge excessive prices and which as a result extort for their own benefit from those who should be protected from such abuse.

Free markets require effective states

But that’s only the first thing tax havens / secrecy jurisdictions do to undermine the effective operation of markets. All markets require regulation. Without the rule of law to uphold private property rights there could be no markets. Without regulation to ensure a level playing field there would be no markets, for that regulation ensures that those who supply honestly are protected individually and collectively from those who do not. And only government has been capable, since time immemorial, of providing that regulation. And only government, of course, can ultimately regulate money. So there has to be an effective state to ensure that effective markets exist: effective markets cannot exist without such states. And yet tax havens / secrecy jurisdictions set out to undermine the effectiveness of states by denying them tax revenues. So tax havens are responsible for directly attacking another of the key underpinnings of effective markets by seeking to destroy the revenue streams that governments need to ensure that regulation that markets need is in place.

It is precisely for this reason that those who support strong, effective and fully functioning markets must also support tax compliance. Tax compliance is 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. Tax compliance is utterly inconsistent with the use of tax havens / secrecy jurisdictions because, as I note below, there is no economic substance to what takes place in those locations. Tax havens/secrecy jurisdictions promote tax avoidance at best and tax evasion at worst. The Tax Justice Network promotes tax compliance because that promotes a level playing field and it ensures that the resources that are needed for the effective operation of markets are available to the governments who deliver the marketplace to all participants who want to engage in commercial activity on the basis of equal access – a fundamental requirement of fair competition. All those who believe in free markets should, therefore, be supporting the Tax Justice Network position.

“Make believe” undermines markets

And then there’s the last issue I’ll mention in a short article – which is the fact that secrecy jurisdictions deliberately seek to undermine good governance , reduce accountability and in the process encourage irresponsibility. This is not just because of the asymmetrical information they provide, or the assault on tax revenues that they facilitate: it is something much more invidious than that. Tax havens / secrecy jurisdictions undermine these things because of the fiction that they create.

The reality is that almost nothing ever really happens in the so-called offshore world of the tax haven/secrecy jurisdiction. These places do not create wealth. They do not undertake trades. Physical goods and services do not pass through them and are not supplied from them. These places are mere booking agencies where entries are recorded in the ledger of a company that is little more than a tiny piece of computer hard disk and a brass plaque on the wall. Anyone who believes that the substance of the transactions recorded in these places is real has to suspend their disbelief: the claim to any such reality is very obviously false. If nothing is really taking place in a tax haven/secrecy jurisdiction then to believe the claim that there is either requires the claimant to be a liar or it requires that they suppress their critical faculties for the appraisal of the substance of transactions. It so happens that I’m not claiming that most who advocate such belief (for I stress, this is a belief system, not a reality) are liars. I am instead suggesting that they are not in possession of their critical faculties.

This loss of critical faculty is however a cause for fundamental concern. Once you have suspended your disbelief on such a scale then your ability to appraise the realities with which you are faced is seriously impaired. At that point the prospect that the person who can suspend their disbelief to this extent can also be responsible for good governance, ethical conduct, transparent accountability or the proper stewardship of assets is remote in the extreme. I simply do not believe that the world of ‚Äòmake-believe’ that the use of tax havens / secrecy jurisdictions requires is compatible simultaneously with the appropriate mindset required for sound financial management when complying with the standards of probity that society expects of those to whom it entrusts its assets. In that case tax havens/secrecy jurisdictions undermine the essential quality of trust that must exist if capital markets are to function properly. As such, tax havens/secrecy jurisdictions do not facilitate the smooth flow of capital, they fundamentally undermine the availability of capital and the prospect that it will flow appropriately.

Again, the conclusion is clear. The position that the Tax Justice Network and hold on tax havens / secrecy jurisdictions is the only tenable position that a person who believes in free markets can support. We make clear that nothing happens in these places for the glaringly obvious reason that this is the truth. Anything else is a pretence. And that pretence cannot underpin effective markets, it does instead undermine them.

Tax havens don’t support free markets – they support oppression

In that case why do so many, who claim to believe in free markets support the use of tax havens? As I noted at the outset, there is only one explanation. These people are not telling the truth when they claim they believe in free markets. They do instead believe in the maintenance of privilege. They do that to sustain their monopolies. They do that to sustain their exploitation of ordinary people in developing countries. They do that to avoid their obligations to societies around the world. But this exploitation is utterly inconsistent with the potential for the creation of well-being that free markets have to offer in partnership with well funded, effective states.

It may be a surprising conclusion for some, but the Tax Justice Network may be one of the strongest supporters of the benefits of free markets that there is. And so am I. And I challenge anyone to disagree.

Tories and secrecy jurisdictions – what a surprising mix!

86, Conservatives, Secrecy jurisdictions, Tax Havens 17 Responses »

Oct 172010

The Mail on Sunday reports:

Channel 4 was last night embroiled in an explosive row with the Government over an investigation into the financial affairs of Cabinet Ministers.

The documentary makes allegations about millionaire Ministers including Chancellor George Osborne, Transport Secretary Philip Hammond and International Development Secretary Andrew Mitchell.

Last night, all three men strongly denied any implication that they had acted improperly by deploying tax-avoiding measures, with Mr Hammond warning that his ‚Äòlawyers will be watching’ the programme tomorrow.

And the Foreign Office entered the row after learning that the report would claim that it had granted special financial treatment to the Cayman Islands – an infamous tax haven – thus indirectly benefiting companies run by Tory Party donors.

The programme is on Channel 4 at 8pm on Monday 18 October.

The producer tells me I appear six times. John Christensen also appears several times. But in case Mr Hammond’s lawyer’s are reading – the Mail story was the first occasion that I knew that he was in the programme.

So I look forward to learning more.

And yet more French spirit!

86, Development, Ethics, Secrecy jurisdictions, Tax Havens Comments Off

Oct 142010

The French Catholic newspaper La Croix has published a remarkable graph showing how far sentiments have changed recently, as to the causes of hunger and poverty in developing countries.

In September 2010 they asked 985 people aged 18 and over to ask for their opinions about various issues with respect to poverty. Click the graph to enlarge it (and click on the article to see more results).

For those who don’t read French, two things here stand out. First is the chart in the top right, reporting the answers when people were asked what the most effective measures for fighting poverty in the world. A quarter of them (in blue) said that increasing foreign aid should be the highest priority. But here is the stunner: a full 70 percent said that fighting against tax evasion and tax havens was the answer.

The second surprise was the pair of pie charts at the bottom, representing shifting attitudes towards the effectiveness of measures taken by the G20 and OECD against tax havens, amid claims by the likes of President Sarkozy that "tax havens, bank secrecy, are finished."

In 2009, 30 percent thought the measures had been very effective of mostly effective, while 62 percent thought they had been rather or very ineffective. A year later, and only seven percent think they have been very or mostly effective, and 84 percent think they have been very or rather ineffective. Which puts the majority of the French population in line with TJN.

Remember, this is not a survey of people who are already committed to the fight against tax havens. This was a survey representative of the French population at large. With extreme congratulations due to our French colleagues in the non-governmental organisations who have worked tirelessly to raise awareness of this issue.

NB Also republished from Tax Justice Network with permission

Tax Justice Focus – the Swiss edition

86, Switzerland, Tax justice Comments Off

Oct 062010

The new edition of the TJN publication ‚ÄòTax Justice Focus’ has just been published. This edition is dedicated to Switzerland and is available here .

The edition explores the changing face of tax haven Switzerland. Historically one of the world’s most important secrecy jurisdictions, Switzerland – along with its financial services sector – has recently been buffeted by a series of scandals and pressures. These range from a giant tax evasion probe in the United States targeting the Swiss bank UBS, to massive damage to the banks from the latest financial crisis, to renewed anger about tax evasion and avoidance facilitated by Switzerland, as governments around the world – especially in Europe – seek to secure fiscal revenues amid an economic downturn.

Guest editor Bruno Gurtner and his selected contributors explore the ways in which Switzerland has responded to the pressures, and find that while the country has taken some welcome steps towards transparency, there remains a very, very long way to go – and those limited positive changes that have taken place have generally seen developing countries left out of the picture.

Recommended.

TJN Latin America

86 Comments Off

Oct 052010

TJN Latin America has a new web site.

It’s in Spanish, of course.

It’s importance is that it marks the continuing spread of TJN in developing and intermediate countries. Congratulations to all involved.

Must reads at Tax Justice Network

86 Comments Off

Oct 022010

Tax Justice Network has been producing piles of good blogs this week.

I recommend its review of the new OECD peer review reports. As TJN notes:

The linchpin of effective information exchange, of course — the number of pieces of information actually exchanged — is notably absent in this report (to get an idea of the appalling ratio see table 1, page 12 and table 2, page 15 of our recent briefing paper on automatic information exchange).

Will this kind of relevant information be contained in the second phase report? Until we see numbers of the pieces of information requested and exchanged, sorted according to the origin of the requests, and also as shares of total business activity with the respective jurisdiction, these assessments will look more like exercises in Ignoring The Elephant.

No surprise there then.

The link to a video on the US tax cuts for the wealthy is great. Pity I can’t seem to embed it here, but watch it all the same. It’s an attack on anarcho-capitalism, again.

Then there’s a piece that asks:

How and why did Britain come to be such a dominant player in tax havenry? Did it arise from government policy, or was it driven more by private sector players striving to shake off the shackles of regulation imposed by Bretton Woods? And how did the various Whitehall departments react to the emergence of this tax haven empire during the crucial period of the 1960s and 70s as it suddenly mushroomed in scale?

In 2009 a TJN research team visited the Bank of England and national archives to explore files released under the 30 year rule. What we discovered was an astonishing inter-departmental battle of ideas, with Inland Revenue on one side fighting to prevent rupturing revenues, and the Bank of England and Ministry for Overseas Development on the other, both supporting tax havenry. The research team, consisting of Paul Sagar, John Christensen and Nicholas Shaxson, has written up its initial findings in a paper which it gave at a conference at Loughborough University this week.

The paper’s abstract is shown below. You can download the presentation we used at Loughborough here.

This is a key issue – which the UK likes to ignore. And TJN is tackling it.

Which highlights the importance of the work it does.

Tax Justice Network – putting tax competition in its place

86, Economics, Tax justice 10 Responses »

Oct 012010

The Conservative Party in the UK is the home of some quite bizarre thinking – like belief in the Laffer curve. In the last week an MEP – Roger Helmer – accused Tax Justice Network’s John Christensen of not understanding Laffer. As he said:

You describe tax competition between nations as "A Race to the Bottom". No. It’s a race to growth and properity. Here in the EU, MEPs love to talk about "Harmful Tax Competition". But there is no harmful tax competition. All tax competition is good. All attempts at tax harmonisation are cartels operated by governments against the interests of citizens and tax-payers.

Well, that’s anarcho-capitalism for you – but as John has convincingly argued in reply, it’s also plain wrong.