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OECD should step aside and let UN tackle tax havens say Tax Justice Network and Action Aid

Financial Secrecy Index, OECD, Secrecy jurisdictions, Tax Havens, Tax Justice Network 9 Responses »

Nov 012011

Last week the OECD’s tax boss Pascal Saint-Aman’s made comments in the International Tax Review criticising the Tax Justice Network’s Financial Secrecy Index. These are the published replies from Action Aid’s Martin Hearson and TJN director John Christensen.

Martin responded to Saint-Aman’s comments about transfer pricing – in which he suggests that the OECD’s approach to transfer pricing is wrongly criticised – and John defends TJN’s Financial Secrecy Index from accusations that it was rigged to ensure that countries we wanted on top of the list “be on top of the list”.

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The OECD does not have all the answers
27 October 2011

Responding to Pascal Saint-Amans’s comments in an exclusive interview with International Tax Review, Martin Hearson, policy adviser at ActionAid, argues that the OECD does not have all the answers in the formulation of international tax standards.

In an interview with International Tax Review, Pascal Saint-Amans suggests that the OECD’s approach to transfer pricing is “disputed and sometimes contested by people who don’t really get it right”. We welcome the appointment of Pascal, who has always made an effort to reach out to civil society organisations, to the OECD’s top position at a time when tax and development is rising up the global agenda. But his comments somewhat mischaracterise an important debate.

Development NGOs such as ActionAid have invested a lot of time in engaging with tax officials from developing countries. We understand that building transfer pricing capacity is the immediate priority, especially in Africa; we also appreciate that many countries will prefer to do this on the basis of the OECD guidelines, because they are currently the pre-eminent international standards. But we also know that we are not the only ones to question the guidelines’ long-term suitability for developing countries.

First, it is important to recognise that transfer pricing, the arm’s length principle and the OECD guidelines are three different things. The OECD standards propose several ways to determine the arm’s length price (ALP), and represent one approach to transfer pricing. But the OECD does not have a monopoly on transfer pricing or the ALP – just ask the Brazilians.

It is perfectly possible to believe in transfer pricing, and indeed in the ALP, but to think that the OECD guidelines may need to be adapted to the resource-constrained context of an African revenue authority. This is one of the issues with which the UN Committee of Experts is grappling in the drafting of its practical manual on transfer pricing. I have heard strong support for this perspective from many African quarters, along with an insistence that the adoption of transfer pricing standards is a matter of national tax policy, to be made by each state itself.

Second, it is not the OECD’s role to reconcile the interests of OECD members and of developing countries. The existence of two model tax conventions – maintained separately by the UN and OECD – is an acknowledgement that these interests do not always coincide. The OECD’s report on attribution of profits to permanent establishments is frequently singled out by African revenue officials as an example of a step too far away from the taxing rights of source countries, and has been rejected in the recent update of the UN model convention for precisely this reason. My impression is that many also question whether, in the longer term, a similar balancing might not be necessary with regards to transfer pricing standards.

As should already be clear, the characterisation of the transfer pricing debate as between those who favour OECD standards and those who advocate formulary apportionment overlooks much of the current discussion. But Pascal’s advice to developing countries to “be cautious about the white man” who advocates formulary apportionment is also wide of the mark. I recently attended a meeting at the OECD on transfer pricing capacity building, at which only one person brought up the topic of formulary apportionment. It was not a white man, or indeed an NGO participant, but a woman from an African tax authority.

There is much important work to do on tax and development, and I consider the OECD secretariat an important partner which is already doing a lot of good work. For NGOs, however, the long-term objective is for developing countries to participate, on an equal footing, in the formulation of international tax standards. The first step towards this is to admit that the OECD does not have all the answers.

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OECD should step aside and let UN tackle tax havens
31 October 2011

In response to Pascal Saint-Amans’s comments in an exclusive interview with International Tax Review, John Christensen, director of the Tax Justice Network, defends the Financial Secrecy Index and argues that the OECD is unsuitable to lead global attempts to tackle offshore secrecy.

The OECD’s Pascal Saint-Amans cannot go unchallenged when he asserts, in aninterview with International Tax Review, that the Tax Justice Network created its 2011 Financial Secrecy Index (FSI) “with a mathematical formula to get countries they want on top of the list to be on top of the list”. If Saint-Amans has evidence to support this extraordinary attack on the integrity of the FSI he should provide it; if not he should withdraw his comment and apologise to those concerned, myself included since I was responsible for the overall direction of research for the 2011 FSI.

The FSI is based on 15 indicators which were applied in exactly the same way to all 73 countries assessed in the 2011 FSI. Readers wanting to explore the background to these indicators can access our explanatory notes.: They can judge for themselves whether these indicators are biased towards unspecified countries we want “to be on top of the list”.

Readers can also judge for themselves whether the mathematical formula we used in 2011 is biased towards one country or another. When we evaluated the results of the 2009 index we were told that the formula used that year did not put sufficient emphasis on the secrecy score arising from our assessment of the 15 indicators. This had the outcome of elevating larger offshore financial centres higher up the ranking relative to the more secretive jurisdictions.

This year we rectified this by adjusting the mathematical formula used for combining the secrecy scores with the scale weightings to emphasise secrecy over scale. Readers can access the detailed methodology on the FSI website. Saint-Amans implies that we have an unrevealed agenda for getting countries we “want on top of the list to be on top of the list”. I would ask him to expand on the political agenda he accuses us of pursuing. From our perspective, we designed the index in 2007 precisely to overcome the deficiencies of the OECD’s 2000 list which omitted many of the world’s largest secrecy jurisdictions, including OECD member states like Austria, Luxembourg, Switzerland, UK and USA.

Not surprisingly the 2000 OECD list was widely condemned. To compound their earlier error, in 2009 the OECD published a black/grey/white list of secrecy jurisdictions based only on their hopelessly inadequate tax information exchange agreement (TIEA) criteria. Mere commitment to cooperate was sufficient to secure removal from the black list, and simply signing up to 12 TIEAs on the OECD ‘upon request’ model was sufficient to secure a white listing. Hey presto, almost every secrecy jurisdiction is now white listed and the OECD claims victory in the battle against tax havenry.

Sadly, the OECD claims are greatly exaggerated. The effectiveness of the TIEAs cannot be assessed since the OECD has not published data on how much information is actually being exchanged. Where information does exist, it appears that very little data is being exchanged under the TIEA process. Worse, despite the claims made by Saint-Amans, banking secrecy remains operationally intact. Do not take my word for it; take this from the horse’s mouth:

“The Swiss Bankers Association (SBA) welcomes the finalisation of the tax agreement between Switzerland and the United Kingdom. Overall, the agreement is comparable to the one concluded with Germany. Firstly, the bilateral treaty gives clients of banks in Switzerland who are taxable in the United Kingdom a path to tax compliance while maintaining their financial privacy.”

Financial privacy in this context is banking code for secrecy.

Time and again, the OECD has demonstrated its unsuitability to lead global attempts to tackle offshore secrecy. It is a rich countries’ club whose members feature prominently on the 2011 FSI ranking. The policy prescriptions it promotes are either ineffective (. the ‘upon request’ TIEAs), or impossibly complex and unsuited to the needs of non-OECD countries ( the ‘arms-length’ approach to transfer pricing).

The OECD is not the appropriate organisation to carry forward global attempts to tackle offshore secrecy. Lacking both legitimacy and political will, it should stand aside and allow a suitably politically upgraded UN Committee of Experts on International Cooperation on Tax Matters to take over responsibility for carrying forward the vital agenda of ending tax havenry.

The evidence that so called tax information exchange agreements with tax havens don’t work is mounting

Information exchange, OECD, Tax Havens 23 Responses »

Oct 272011

At the April 2009 G20 summit in london the big news was the supposed end of tax havens. I know: I was there.

And it hasn’t happened. The OECD used the mandate it had been given and in the mot extraordinary act of accommodation and even promotion of tax haven abuse deemed that any tax haven that had signed 12 so called tax information exchange agreements was ‘internationally compliant and need take no further steps to sign further deals. The fact that the San Marino – Andorra style deals that have proliferated since then count, and were clearly intended to count, show just how biased in favour of promoiting tax haven secrecy the OECD is )(and if not, how utterly incompetent it it).

The flaws in these deals are explained here.

The fact that offshore lawyers know they don’t work and exploit that was recently highlighted here.

And now there’s clear evidence that first of all the number of requests countries can make as a result of those flaws are minuscule (because basically, if you do not know they answer to the question you’re raising it’s almost impossible to ask the question). As has been reported of the Netherlands:

THE HAGUE, 27/10/11 – The Netherland seldom seeks fiscal information from countries known as tax havens, it emerges from research by Het Financieele Dagblad newspaper.

In recent years, the Netherlands has taken a lot of trouble to conclude treaties for the exchange of information with tax havens such as Jersey, Guernsey, the Isle of Man, the Cayman islands and Liechtenstein. The aim is to track down both individuals and companies that use constructions ot evade tax. A total of 28 treaties have been made, of which 18 have come into effect. The others await signature.

In total, the Netherlands only made 22 requests for fiscal information between 1 June 2008 and 1 June 2011. Over half (13) were made to Jersey. Requests were also made now and then to Guernsey. But the tax service has only once requested information from the Isle of Man, with which there has been a tax information agreement (TIEA) since as long ago as 1 January 2007.

The treaty with Liechtenstein, a country which experts say still shelters quite some Dutch ‘black savers’, came into effect on 1 December 2010. The Dutch tax service has made three requests to it in six months’ time.

Of the requests made, the finance ministry can only say that seven replies have been received from Jersey and three from Guernsey. No information is being released about the content and quality of the replies.

So first of all it’s nigh on impossible to use these deals which is why so few request are made.

And when you do make a request you don’t always get a reply.

And this is what the tax havens use to claim they’re transparent.

They and the OECD who partner them in this abuse should hang their heads in shame at the tax abuse they continue to unleash on the world as a result.

The OECD really does need to tell the truth

OECD, Secrecy jurisdictions, Tax Havens 5 Responses »

Sep 122011

The OECD has put out a press release this morning saying:

Tax: Jurisdictions move towards full tax transparency

So I thought “Wow, that’s amazing.”

And then I noted it was full of reports like this one, on the British Virgin Islands:

The Virgin Islands has made progress in improving its legal and regulatory framework in order to be able to effectively exchange tax information. The availability of information on trusts and the availability of reliable accounting records is not yet ensured however. Also, the authorities do not have sufficient powers to obtain all foreseeably relevant information in order to respond to international requests. The Virgin Islands has not been assessed as ready to move to the next phase of its evaluation.

And then I realised there was no connection at all between the headline and what the OECD have actually found in most of its latest per reviews of tax havens, which show they are far from tax transparent.

My suggestion to the OECD? Keep the headline for when it’s true. Right now it isn’t.

The OECD peer review process – praise where it is due

Information exchange, Jersey, OECD, Tax avoidance, Tax evasion, Uncategorized Comments Off

Jul 112011

I, like many in the tax justice arena, was very dubious when the OECD set up the Global Forum on Transparency and Exchange of Information for Tax Purposes to undertake peer reviews of the operation of tax information exchange by participating states in the aftermath of the financial crisis and the rush to sign tax information exchange agreements (TIEAs).

TIEAs are deeply flawed and the OECD designed and promoted them.

The OECD was also remarkably cagey about this whole process: civil society was excluded from most involvement, far too many tax havens appeared to get positions of influence over it, the nature of the peer review process was not clear and there was some real doubt about whether the process might be a bit of a whitewashing exercise.

However, I was one of several speakers at the Tax Justice Network conference last week to comment that although reservations about process remain (and they do, and remain valid) the outcome of the review processes to date suggests that this is no whitewash.

The case of Jersey is an example. The fist phase report was critical of issues in Jersey’s access to data that we in civil society would have found hard to identify. Although it was noted that the deficiencies in the accounting requiremnts for many orgasiations in the island had not as yet given rise to any practical difficulties in exchanging data the review still demanded that they be remedied. That was welcome, of course.

That however was stage one, and the easy part. Having the right pieces of paper in place has been something that we’ve always said that a secrecy jurisdiction should be able to do without much problem – after all their legislatures are captured in very many case by the local financial services industry to ensure they meet its needs, and this was just another one of those needs. But, stage 2 was something else. We’ve always said that the test of these places would come when a review of actual activity was undertaken.

The OECD have delivered on this. They’ve revealed, in unambigupus terms, how little information exchange Jersey has actually done And they’ve also not avoided the fact that a perceived failure has occurred and they have levelled criticsm at Jersey for the fact that this has happended and have demanded reform.

This shatters Jersey’s reputation. Firstly it is not transparent when tiny amounts of data are made available. Second it is shown to be non-cooperative (as the UK has already officially labeled it).

And I have to say that I did not think the OECD would do such things.

So I say that although reservations still exist about this process and tax information exchange agreements themselves remain fundamentally flawed and in need of replacement with automatic information exchange the actual peer review proicess itself seems to be delivering, so credit is given where credit is due, and I offer it on this occasion, as I know others in TJN do as well.

Jersey’s peer review shows it to be very far from the transparent place it claims to be

Jersey, OECD 2 Responses »

Jul 052011

The latest draft copy of Phase 2 of Jersey’s Peer Review on Exchange of Information (EOI) by the Global Forum on Transparency and Exchange of Information for Tax Purposes has fallen into my inbox. It’s damning of Jersey. It says in its conclusion, which deal with the implementation of the standards in practice:

The highlighted provisions in some of Jersey’s EOI agreements may limit the effectiveness of information exchange.

Further, in one case to date, the interpretation applied by Jersey appears to be inconsistent with the definition of “criminal tax matters”, and is preventing the exchange of information under that TIEA.

But that’s not all. They also reiterate some of the findings from the first phase of the work which say things like:

Jersey’s domestic legislation which provides access powers to obtain information for exchange contains impediments which may significantly affect access to relevant information although to date they have not restricted access.

The claim that Jersey has always made that it is well regualted is being blown apart by this process.

As I’ve always said, it may have all the right pieces of paper in place, and that has been the focus of almost all previous reviews, but the fact is that they have to be used to be effective and there are clear signs of real problems in this process in this new phase of the review.

What is clear is that Jersey is a long way from being the transparent place it claims to be.

Jersey has failed its OECD peer review

Jersey, OECD 12 Responses »

Jun 132011

Rumour reaches me that Jersey has failed its OECD peer review.

The OECD says of the peer review process that:

The international fight against cross-border tax evasion has entered a new phase with the launch by countries participating in the Global Forum on Transparency and Exchange of Information of a peer review process covering a first group of 18 jurisdictions: Australia, Barbados, Bermuda, Botswana, Cayman Islands, Denmark, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway, Panama, Qatar, San Marino, Seychelles and Trinidad & Tobago.

The reviews are a first step in a three-year process approved in February by the Global Forum in response to the call by G20 leaders at their Pittsburgh Summit in September 2009 for improved tax transparency and exchange of information.

Note Jersey is involved.

There’s just one problem for them: I gather that Jersey has failed its second part of the peer review process. I understand that at least one country is saying Jersey is not exchanging information as expected under the OECD process.

Some of us aren’t surprised.

Some of us might say that this blows apart all the claims Jersey makes about being a transparent, cooperative state.

But then some of us know that it’s no such thing, and that’s why we’re not surprised.

Tax information exchange agreements don’t work – even the lawyers say so

Information exchange, OECD, Tax justice Comments Off

Apr 252011

As Nick Shaxson notes on his Treasure Islands blog:

The April edition of the Journal of International Taxation (not available online) has a provocatively titled article on ‘The Death of Information Exchange Agreements?’ about the G-20 / OECD project for tackling tax evasion with tax information exchange agreements (TIEAs). Bottomline, the authors share TJN’s view that TIEA’s just don’t cut the mustard, so powerful countries like the USA and EU member states use other tools:

“The major countries of the western world have clearly started to focus on other means of obtaining data because TIEAs in practice do not work.”

And as Nick notes, what’s exceptional about this support for the position TJN and I have taken for some time is that the author’s of the article all comes from international law form Baker & McKenzie.

So why are the OECD persisting with their failed policies?

If the OECD was really serious about tax avoidance it would back country-by-country reporting

OECD, Tax avoidance Comments Off

Feb 012011

The OECD has issued a press release saying:

Aggressive tax planning is a major risk to the revenue base of many countries. As shown by some recent cases and settlements, numbers are vast. Countries have developed a number of strategies to deal with aggressive tax planning. The underpinning of any such strategy is to ensure the availability of timely, targeted and comprehensive information, which traditional audits alone can no longer deliver. The availability of such information is important to allow governments to identify risk areas in a timely manner and be able to quickly decide whether and how to respond, thus providing increased certainty to taxpayers. To be effective, tax administrations are moving closer to working in real time. Several countries have therefore introduced complementary disclosure initiatives aimed at improving their capability to identify and quickly respond to aggressive tax planning.

As they then say:

This report, approved by all OECD members, shows how countries are doing this – tackling aggressive tax planning through improved transparency and disclosure. It covers a range of approaches from mandatory disclosure rules to forms of co-operative compliance.

But there’s a problem – which is that if the OECD was really serious about tax avoidance internationally by multinational corporations then it would back country-by-country reporting – and to be candid, despite having a working group on the subject it seems to me it is doing all it can to block progress on this issue.

So the words ring hollow. If Jeffrey Owens is serious he has to do three things:

1) Give civil socitety equal representation on his working group on country-by-country reporting

2) Allow civil society to take expert representation with them – a privilege only granted to business right now

3) Resource those from developing countries who want to be represneted but cannot afford to turn up through lack of funding.

Then I’ll believe the OECD is really serious about multinational corporation tax avodiance. Until then it’s all lip service.

PS There’s a curious little foot note that says:

For instance, based on its disclosure rules for tax avoidance transactions, the UK was able to cut off GBP 12 billion in avoidance opportunities.

But of course corporates deny my claim that this practice is prevalent.

Jersey claims this is tax information exchange

Information exchange, Jersey, OECD, Uncategorized 7 Responses »

Jan 182011

The following answer to a written question has been published by the States of Jersey today:

WRITTEN QUESTION TO THE CHIEF MINISTER

BY THE DEPUTY OF ST. MARY

ANSWER TO BE TABLED ON TUESDAY 18th JANUARY 2011

Question

Can the Chief Minister inform members how many Tax Information Exchange Agreements were in force at the beginning of 2005, 2006, 2007, 2008, 2009 and 2010?

Can he further tell members, for each of those years, how many requests for information have been received, from how many countries they were received, and in how many cases was the information requested found and sent to the requesting authorities, and how many staff (FTE’s) were employed in this work?

Answer

The number of Tax Information Exchange Agreements in force at the beginning of each of the following years on a cumulative basis is –

2005 – nil

2006 – nil

2007 – 1

2008 – 1

2009 – 2

2010 – 12

2011 – 15

In addition there was one Double Taxation Agreement with equivalent tax information exchange provisions in force at the beginning of 2011.

I am unable to provide members for each of the years the number of requests for information received and from how many countries they were received. Jersey has been requested by some of our treaty partners not to publish the number of requests received. Quoting figures for the earlier years would identify the number of requests received from the USA, which is one of the countries concerned. What I can say is that for the period from 1 January 2007 until the 31 December 2009 there were 12 requests and for the year 2010 there were 27 requests. Over the period as whole requests have been received from Australia, Denmark, Germany, Iceland, the Netherlands, Norway, Sweden and the USA.

Of the total of 39 requests received by the end of 2010, two were subsequently withdrawn by the requesting authority and three have given rise to issues relating to the distinction drawn in the agreements between criminal and other tax matters, and the definition of what is a criminal tax matter, which issues we are currently seeking to resolve in discussion with the countries concerned. Otherwise all requests have been responded to within the forty days set by the Jersey competent authority (the Comptroller of Income Tax). This is significantly faster than is required by the OECD Model Agreement.

All the requests to-date have been dealt with by the Comptroller of Taxes personally as a normal part of his duties, and there are no staff specifically employed in this work.

So now we know several things:

a) Until 2010 Jersey did almost no information exchange – which confirms what we always suspected;

b) The UK has not made a request for information exchange (which is extraordinary);

c) The amount of information exchanged is so pitifully small the requesting countries do noit want their tax payers to know that the system really does not work, and therefore has no compliance effect;

d) As I’ve always said, this proves how hopelessly ineffective the Organisation for Economic Cooperation and Development tax information exchange agreements are, and how badly they failed the G20 when suggetsing this programme in 2009;

e) As a result there is still no effective mechanism for information exchange in existence because the obstacles to making a request are so enormous it is almost impossible to make one. In effect a tax authority has to know all the information it is requesting before a request can be made.

The campaign for effective information exchange goes on.

My suggestion is here. And it would really work, at very low cost.