Tax Research UK

Earlier this week a team from Oxford University challenged the work I and others have done in seeking to estimate the tax loss to developing countries as a result of transfer mis-pricing and related issues. One issue in particular stood out:

A key shortcoming of many existing studies based on mispricing is that they only take into account overpriced imports into developing countries and underpriced exports of these countries. But the mispricing approach also identifies underpriced imports into developing countries and overpriced exports. Both shift income into developing countries. Estimates of tax revenue calculations have to take into account income shifting in both directions. If only one direction is taken into account, the results are highly misleading. In this case, tax revenue losses due to mispricing are overestimated drastically.

I have said they have got their analysis wrong, but had the chance to explore this yesterday when i was at a conference with a major figure in finance from a poor developing country (Chatham House rules prevent me from saying which). I asked if he had witnessed under pricing into his country and over pricing out and he confirmed he had. But then said that the over pricing out was to claim export subsidies in excess of any additional tax paid and the import under-pricing was to avoid import duties in excess of any additional tax paid. In other words, in both cases there was tax cost and not benefit to the developing country – quite contrary to the assumption made by the Oxford team.

I am afraid their wholly unsupported assumptions used to criticise our work are not just unsupported, they are wrong. All mis-pricing into and out of developing countries is designed to harm their tax receipts.

Richard Murphy Development, Economics, Tax Havens, Tax avoidance, Tax evasion

Stephen Timms was speaking at an OECD / NGO forum in Paris this morning.

He confirmed the UK’s support for country-by-country reporting.

And he confirmed that the UK has asked the OECD to undertake a technical study of it.

Country-by-country reporting continues to make progress.

Richard Murphy Country-by-country, Development

As I note yesterday, the FT has noted that:

A … study, by the Oxford University Centre for Business Taxation, says tax losses from multinationals shifting profits that are down to faulty transfer pricing have been “overestimated drastically”.

It’s clear that the FT knew of this before the report was published so either the Oxford University authors or DfID drew this to their attention. It was a message someone wanted to get across. So I went to find support for their claim.

This is to be found in this text:

A key shortcoming of many existing studies based on mispricing is that they only take into account overpriced imports into developing countries and underpriced exports of these countries. But the mispricing approach also identifies underpriced imports into developing countries and overpriced exports. Both shift income into developing countries. Estimates of tax revenue calculations have to take into account income shifting in both directions. If only one direction is taken into account, the results are highly misleading. In this case, tax revenue losses due to mispricing are overestimated drastically.

This may be true: I leave it to the authors of these reports to comment. But that’s not the point. It is possible to say that this omission leads to the risk that the net estimates are overstated, if the claim made by the Oxford authors is true: that I agree. But is it possible to say, as they do, with apparent objective certainty, that the “tax revenue losses due to mispricing are overestimated drastically”?

For that to be a plausible conclusion without having done research on the mass of data used to reach the conclusions my friends and colleagues have come to in the work they have done there would have to be a body of evidence suggesting that:

1. There is prima facie evidence that people want to shift money into developing countries through illicit financial flows based on transfer mispricing;
2. That there is evidence of them actually doing this;
3. That there is documented evidence of profits being overstated in these places as a consequence.

Anyone familiar with the literature on illicit financial flows knows there is no such prima facie evidence: I have seen none at all. I have never heard of people redirecting financial flows and profits to such places. I have never seen a tax agreement that considers the possibility. I have never heard of capital flight of any sort into such places. There is little evidence of profits being reported in developing countries. I have of course heard of remittances through informal channels: that we know of, but these are not corporate transfer mispricing.

So you have to ask, why should we expect anyone to test a hypothesis when there is no evidence that the phenomena exists? And secondly, how can anyone come to a categorical conclusion that such flows are so substantial and significant  that they nullify the evidence of massive flows in the opposite direction when no evidence is put forward by them to support that hypothesis? Given that is the case I have to ask whether the Oxford paper qualifies as objective academic observation.

And there is another issue that the claim ignores, which is the fact that even if there was transfer pricing abuse into developing countries this would not in any way reduce the abuse that has been found that imposes such substantial cost on them. The transfers in would not match the transfers out.  They would (if they occurred, which I doubt) be on different commodities and be by different companies because no one is going to do dual transfer pricing abuse in and out to arrive at a net correct position. So in fact the gains would be entirely unrelated to the losses, could not be netted off and would be a massive transfer pricing loss to developed countries; somthing we contend occurs but which has as its destination the, for multinational corporations, more attractive destination of a tax haven / secrecy jurisdiction. As such the inherent logic of netting off in the Oxford paper is fundamentally flawed whichever hypothesis is right. The reaklity is that the loss calcualtions stand up to scrutiny, it is the critique that fails.

In that case doesn’t it follow that the claim it makes that “tax revenue losses are overestimated drastically” is actually just “wildly exaggerated” or simply “plain wrong“?

Whichever is true one thing is certain: the Oxford paper is unambiguously flawed, without foundation and lacks any element of objective credibility when such extraordinary and categoric claims can be made in the absence of presentation of any evidence to support them.

Richard Murphy Development, Tax Havens, Tax avoidance, Tax evasion

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

One is that:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And Oxford have not delivered that solution.

Richard Murphy Country-by-country, Development, Tax avoidance, Tax evasion

The FT noted yesterday that:

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

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

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

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

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

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

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

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

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

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

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

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

Richard Murphy Development, Tax avoidance, Tax evasion

The FT has reported:

Stephen Timms, financial secretary to the UK Treasury, will push this week for a move towards “country-by-country” financial reporting for multinationals.

The move comes as finance ministers meet in Berlin on Tuesday to review the international crackdown on tax havens.

The Treasury, keen to expand the campaign to include aggressive avoidance as well as evasion, believes that the additional reporting requirement for multinationals would bring more transparency into their negotiations with developing countries on transfer pricing. This determines the allocation of taxable profits between parts of a multinational.

The idea is largely opposed by business, in part because of the extra compliance burden. Some development experts also question the approach, given the more fundamental problems facing some developing nations’ tax administrations.

A critique of existing research on the country-by-country reporting issue will be published on Tuesday by Britain’s Department for International Development.

Which I admit I find rather odd: as creator of the concept they never sought my opinion, but knew where I was. I wonder how objective it is in that case? Or could the omission be explained by that it was written by my old friends at Oxford:

The study, by the Oxford University Centre for Business Taxation, says tax losses from profit shifting by multinationals due to faulty transfer pricing have been “overestimated drastically”. It also criticises estimates of tax evasion by rich individuals in developing countries, which some reports have put as high as $124bn (€89bn, £75bn) a year.

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

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

I’m inclined to note that ‘they would say that’ of our estimates, but it doesn’t really worry me: the fact is this: if the estimate is wrong but the problem is real now please fund the research to replace that done by us with tiny resources but who have none-the-less dragged this issue onto the international agenda. I suspect this critique got more funding than we have ever enjoyed in combination.

So let’s now work to really tackle the issues. And accept that country-by-country reporting is one of the solutions.

Richard Murphy Country-by-country, Development