Task Force on Financial Integrity and Economic Developm

Tax evasion gets just that little bit harder

Feb 162012

The Task Force on Financial Integrity and Economic Development, of which Tax Research UK is a member, has welcomed new moves to tackle tax dodging announced by the global body charged with fighting financial crime.

Under revised standards from the Financial Action Task Force (FATF), tax evasion will be an offence that can lead to a money laundering charge in the future. That means that, as I have long argued should be the case, banks will now be obliged to be on the look out for suspected tax evasion by their clients and report it if they suspect it is happening. The new FATF recommendation will provide authorities with a powerful tool to help prosecute individuals and corporations attempting to dodge financial obligations, hide ill-gotten gains or fund illegal activities.

Although they carry no legal weight by themselves, FATF recommendations are considered the basis for national and international legislation to prevent the money laundering. As such we can expect this recommendation to be reflected in new law worldwide over the next few years.

That’s the good news. The bad news is that the FATF has not tackled one of the biggest problems with the current international financial system: the difficulty of accessing information about the real persons who have ultimate control over a company. It is “anonymous companies” that are a key part of the structure that enables criminals to set up the bank accounts they use to hide their funds. This represents a failure of political will by FATF member states, leaving a significant loophole that undermines progress elsewhere. As a result the FATF has taken a step forward, but still has a long way to go.

That said; no one should doubt the direction of travel. Those campaigning for reform to prevent financial abuse can see that their campaign is winning, and will emphatically win out in the end. The next step in achieving that will happen when the FATF requires all countries to have a public register of the ultimate person with control over a company, known as the beneficial owner. This could easily be integrated into the process of forming a company in any given country, and existing companies could be required to file beneficial ownership information with their next regular certification. How far away is this? Much sooner than most people expect and for one good reason – which is that the world over governments are losing out to tax abuse as they do not have this information and their willingness to accept that is going to be tested to the limit over the next few years as tax revenue becomes one of the scarcest commodities in the world.

The demand for transparency, accountability and for everyone who owes it to pay tax will deliver reform. It’s just a matter of time.

The tax reforms needed if globalisation is to work

Economics, Task Force on Financial Integrity and Economic Developm, Tax avoidance, Uncategorized Comments Off

Jan 302012

IPPR produced a report on globalisation last week. With a forward by Lord Mandelson the report was written by Will Straw and Alex Glennie.

I admit I don’t agree with either Mandelson or Straw; they have a political perspective I don’t always share but this report has merit to it, as others have also noted since its publication. It represents a clear change of heart on Peter Mandelson’s part, and that I welcome.

The report is especially strong on the need for corporate tax reform. Having noted that profits are rising as a trend t also notes that there is a steady fall in corporate tax receipts as a proportion of profits and realises this is an issue that has to be addressed. It dismisses the alternative to corporate tax proposed by Oxford University and Mirrlees, which is a form of Value Added Tax. As the report rightly notes there is no doubt this would be regressive and so unacceptable. Instead it suggests five reforms, as follows:

First, the European Union should implement the Common Consolidated Corporate Tax Base (CCCTB). Under the current tax regime, multinationals file separate accounts for each country in which they operate; under the CCCTB, each company would compute only its EU-wide consolidated profit, on a common definition of the tax base. This profit would be allocated to member states on the basis of an apportionment formula containing factors such as shares in employment, payroll, assets and sales. Each member state would retain autonomy to tax its allocated share of profits at its own tax rate. This approach would allow countries to retain their own tax rate and pursue healthy tax competition. But within the EU, companies would have to actually move their staff and physical capital to the lower-tax regimes, rather than relying on the accounting mechanisms outlined above. In time, other jurisdictions could be encouraged to join, paving the way for an eventual global consolidated tax base.

Second, the EU and its member states should begin discussions with the International Accounting Standards Board to introduce a requirement that all multinational corporations report sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns in what is known as country-by-country reporting. Country-by-country reporting discloses the profits that companies record in each jurisdiction in which they operate and the taxes that they pay on them. This means that they can be held accountable for what they do and do not pay. The requirement would complement the CCCTB by providing simple transparency on the activities of multinational companies in jurisdictions outside the EU.

Third, other jurisdictions should be encouraged to adopt the EU Savings Taxation Directive as a means of creating an automatic exchange of taxation information. Since 2005, the directive has ensured that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. In Cannes, Indian prime minister Manmohan Singh called for the G20 to take a lead on the issue ‘in the spirit of our [2009] London Summit that [said] “the era of bank secrecy is over”’ . But the communiqué only committed to ‘consider exchanging information automatically on a voluntary basis as appropriate’. The EU should also adopt an amendment to the savings directive which would close existing loopholes and prevent tax evasion by stopping taxpayers from channelling interest payments through trusts and intermediate tax-exempted structures.

Fourth, as the Financial Action Task Force has already recommended, the beneficial ownership of companies, trusts and foundations should be on the public record. This would prevent multinational corporations from using networks of international subsidiaries to transfer profits and reduce their tax liability. This reform would also have the added benefit of making money laundering and the handling of illicit funds more difficult.

Fifth, bilateral and multilateral donors should support developing countries in building their tax collection and enforcement agencies.

Taken together, these measures will act to reduce the power of tax competition and lower the incentives on companies to execute tax arbitrage strategies.

There is much in here that is based on my work, that of the Tax Justice Network and colleagues in the Task Force on Financial Integrity and Economic Development. I welcome that.

I welcome Peter Mandelson and Will Straw seeing the merit of these ideas over those that were technically presented to them by economists as superior, but which ignored the political realities of taxation.

The tide is turning: the merit of international cooperation on tax is becoming apparent. It will help get us out of the mess we’re in: that’s now indisputable by all those except the governments of those states that promote tax evasion and those who benefit from it.

Tackling global tax evasion

Country-by-country, Economics, Task Force on Financial Integrity and Economic Developm, Tax Havens Comments Off

Jan 242012

It’s Davos week. Appropriate growth has to be on the agenda of all present. But so too does something else, and that’s tax evasion.

Tax evasion costs the world US$3.1 trillion a year in my estimation - at least 5% of world GDP. and we could stop some of it. I never pretend all of it: that’s impossible. But stopping some of it would radically restructure the economies of the world with special benefit for the poor.

In that case it’s good to see my Task Force on Financial Integrity and Economic Development colleague Nick Mathiason in the Guardian today explaining five ways to tackle global tax evasion. Please read what he has to say, here.

Incorporation with limited liability is a privilege. It should not include anonymity

Economics, Task Force on Financial Integrity and Economic Developm, Tax compliance 4 Responses »

Jan 202012

I’ve long argued for the contention in the title of this blog. I am convinced legal limited liability is a privilege - after all, if people sign a piece of paper to form a company they no longer have to accept full responsibility for their debts. That’s an extraordinary state of affairs, and a massive privilege. But I have said that, like all responsibilities, this one comes at a price. The price is to say who you are i.e. to disclose who really owns the company and who really runs it, as well as to say what you do i.e. to put true and fair accounts on public record.

For a long time this argument has been resisted, so it’s especially welcome to note the Economist saying this week:

Limited liability—a commercial venture that protects its shareholders from personal bankruptcy—is one of the greatest wealth-creating inventions of all time.

I agree. And it then follows up saying:

But limited liability is a concession—something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed.

And as they add:

In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see article). Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders—and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.

And as they continue:

It does not seem unreasonable to ask who are the main recipients of this benefit [of limited liability] (with, say, stakes above 5%). Legitimate concerns for owners’ safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an unlimited option—but that will be their risk.

That last point is well made: limited liability is a choice. As they conclude:

Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.

The Task Force on Financial Integrity and Economic Development has campaigned on this issue – as have I, Global Witness, The Tax Justice Network and others who are all members of that body. It’s great to see support for our call for reform from a paper like the Economist.

Now will the UK reform its company registry to comply?

And will offshore listen?

Despite Global Financial Crisis, Illicit Financial Outflows from Developing World Remain High

Task Force on Financial Integrity and Economic Developm, Tax evasion, Tax Havens 2 Responses »

Dec 152011

Developing countries lost US$903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008, finds a new study by Global Financial Integrity (GFI), a Washington-based research and advocacy organization and partner of Tax Research UK in the Task Force on Financial Integrity and Economic Development.

The new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2009.

“This is a breathtakingly large sum at a time when developing and developed countries alike are struggling to make ends meet,” said GFI Director Raymond Baker. “This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

While US$903 billion marks a drop from the US$1.55 trillion¹ that illicitly flowed out of the developing world in 2008, the study finds the decrease is almost entirely attributable to the global financial crisis rather than any governance improvements or economic reforms.

The study, which was co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, tracks the amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009, and it ranks the countries by magnitude of illicit outflows. According to the report, the 20 biggest victims of illicit financial flows over the decade are:

China ………………………………………$2.74 trillion
Mexico ……………………………………..$504 billion
Russia ……………………………………..$501 billion
Saudi Arabia ……………………………$380 billion
Malaysia ………………………………….$350 billion
United Arab Emirates………………$296 billion
Kuwait ……………………………………..$271 billion
Nigeria …………………………………….$182 billion
Venezuela ……………………………….$179 billion
Qatar ……………………………………….$175 billion
Poland ……………………………………..$162 billion
Indonesia …………………………………$145 billion
Philippines ………………………………$142 billion
Kazakhstan ……………………………..$131 billion
India ………………………………………..$128 billion
Chile ………………………………………. $97.5 billion
Ukraine …………………………………..$95.8 billion
Argentina ………………………………..$95.8 billion
South Africa …………………………….$85.5 billion
Turkey……………………………………..$79.1 billion

For a complete ranking of average annual illicit financial outflows by country, please refer to Table 5 of the report’s appendix.

Time for the G20 to act if markets are to have any chance of functioning properly

Economics, Task Force on Financial Integrity and Economic Developm Comments Off

Nov 022011

The Task Force on Financial Integrity and Economic Development, of which Tax Research UK is a member, issued the following statement on the G20 meeting this morning:

Three years after the near collapse of the international banking system and as it faces new instability, the governments of the Group of 20 leading economic powers (G20) must focus on the underlying, systemic causes of the current financial crisis. A first step should be the enforcement of measures to ensure financial transparency.

A free-market cannot flourish when rules of fair play are perverted by the corruption and legally-condoned tax cheating that has resulted from 30 years of de-regulation, liberalization and increasing financial secrecy provided by tax havens.

As the living standards and job prospects of billions of people suffer, the fundamental injustice of the current financial system has led to the groundswell of anger represented by the ‘Occupy’ movements around the world. Many of the ill effects currently suffered by ‘rich country’ economies have been endured by the developing world for decades.

Some progress towards fairness and repair has been made. For example, OECD initiatives such as the Global Forum have increased the amount of tax monies received by governments. This is a welcome but all too rare glimmer of progress; the G20 needs to embrace a much more progressive agenda. The Task Force on Financial Integrity and Economic Development therefore urges G20 members meeting in Cannes this week to introduce policies that would bring an end to the secrecy that enables tax cheating and corruption.

Such measures include:

- automatic international exchange of tax information, making tax evasion much more difficult;
- disclosure of beneficial ownership and control of companies and trusts, so that international financial exchanges may be properly monitored and taxed;
- strengthening and proper enforcement of anti-money-laundering laws to prevent banks accepting stolen government funds and facilitating tax evasion;
- full operational, financial, income and sales tax information of companies’ performance in every country it operates in, to ensure that taxes are being paid where they are due instead of being minimized or voided via tax havens.

It is time for the G20 to act decisively and make real change. Without firm indication this week that transparency and economic justice measures are on the table and with a clear sense that they will be implemented, the Task Force believes the G20 will be maintaining a corrosive financial system that has failed millions.

Jeffrey Sachs at Occupy Wall Street

Economics, Task Force on Financial Integrity and Economic Developm, Tax Havens, Uncategorized 4 Responses »

Oct 182011

On Saturday, Jeffrey Sachs, who spoke at the 2011 Task Force on Financial Integrity and Economic Development Conference earlier this month, made an impassioned impromptu speech at Zuccoti Park. The speech covered a range of topics, but at 8:01, he addressed tax havens:

“Its not because we think wealth is bad.
Its because we think you cheat.
Its because you don’t follow the law.
Its because you don’t pay your taxes.
And then you say we have no money in this country,
To educate our children.
We have the money.
Its your money in the Cayman Islands.
Its Your money in the Swiss bank accounts.
And if you don’t bring it home,
We’re going to bring it home.
Because this is a country of laws.
Because this is a democracy.
And we are the 99%.
We have the votes.”

Few have moved more than Sachs in realising his earlier errors on neoliberalism. In the face of the evidence he has changed his mind. Others need to do the same.

How to find €1trillion and $1 trillion, at the same time? Easy – just recruit the tax inspectors

Banking, Economics, Secrecy jurisdictions, Task Force on Financial Integrity and Economic Developm, Tax evasion, Tax Havens 3 Responses »

Oct 182011

Doug Saunders of the Globe and Mail in the USA had an article in his paper at the weekend saying:

How do you scrape together an extra trillion? That, in the end, is what the world needs to know. And the answer is right in front of us.

A trillion euros, more or less, is what needs to be put up by [Europe]’s governments, and soon, to stabilize the economies and get banks lending and companies hiring again. And, across the Atlantic, a trillion dollars is what many observers feel ought to be put into the U.S. economy, quick, to get growth and employment back on track. (Instead, hampered by Congress, Barack Obama’s jobs bill offers a pale fraction of that.) Without spending a trillion, both these huge economies could lose a lot more, fast.

The analysis is a bit simplistic, but not far out. We do have to nationalise banks in Europe. And the US badly needs a real stimulus. But as he notes:

But a thousand billion in anyone’s currency is not to be found by looking under sofa cushions. Nobody has it lying around; quite the contrary, everyone holds a lot of debt, and the sums needed to kick the world’s economies into gear could raise that debt to crisis levels.

But, as it happens, there’s a trillion to be found. It could easily be obtained without raising taxes: We just need to start applying our current taxes to all the money people actually earn. In fact, the debt crisis would end overnight if we did that in a concerted way.

That’s the answer. There’s no ifs or buts. We have to raise tax. But not any tax. Very specific taxes. As Saunders notes:

The monitoring group Global Financial Integrity estimates that people and companies are stashing away $9.4-trillion in secret offshore banks in places such as Luxembourg, Singapore and the Virgin Islands to avoid paying taxes on it. That’s $2-trillion more than all the money held in all the banks in the United States. Taxed at 11 per cent (a fraction of what’s actually owed on it), this would yield an instant trillion.

Now of course that’s a tax on the capital, not the income. But that capital is there because much of it is illicit and has never been taxed, so taxing the capital is wholly appropriate. Taxed at proper rates due at the time this cash was hidden from view, with interest and penalties applied most of this offshore money belongs to the governments of the world. So as Saunders argued:

At a time when ordinary people are being asked to bear heavier burdens and lose vital government services in order to pay for rescuing the economy, it’s unconscionable that large sums go untaxed. It’s particularly galling that most of this money is held by extremely wealthy people who are taxed, legally, at lower rates than those who struggle to feed their families. As Congress revealed this week, there are 94,000 people with earnings over $1-million a year who pay lower tax rates than their secretaries.

The Swiss Bankers’ Association has admitted half the money it holds may be illicit. Much of that is moving to Singapore right now.

We have a choice: we can save the world from its financial crisis. We can do so without punishing ordinary people. We can raise the money we need. We just have to tackle tax havens head on. We have to employ the tax inspectors to do this. We have to out in place the measures to do this. We have to tackle the political issues to do this.

If we don’t we make a choice to make the rich rich and the poor poorer. And if we don’t we acquiesce in the plan of a wealthy elite that this should be the outcome of the recession the banks created to achieve this goal.

Task Force to the G20

Corruption, Country-by-country, Development, Information exchange, Secrecy jurisdictions, Task Force on Financial Integrity and Economic Developm, Tax avoidance Comments Off

Oct 172011

The Task Force on Financial Integrity & Economic Development (of which Tax Research UK is a committee member) released the following communiqué following its 2011 annual conference, held this year in Paris, France on October 6-7, 2011:

This past week, the Task Force on Financial Integrity and Economic Development (Task Force) concluded its annual two-day conference in Paris, France, building upon its success in recent years establishing an awareness and understanding of the problem of illicit financial flows and the importance of increasing transparency in the global financial system.

The Task Force further developed its five recommendations for achieving greater transparency in the global financial system—beneficial ownership disclosure, automatic tax information exchange, trade mispricing curtailment, country-by-country reporting by multinational corporations, and better anti-money-laundering laws, into a working plan for the G20—taking into account obstacles and logistics of implementation.

Specifically, the Task Force recommends the following next steps for the G20, when it meets next month:

Support ongoing efforts to improve domestic resource mobilization for tax collection and empower anti-corruption efforts through greater transparency and accountability of Multinational Corporations (MNCs) in the Extractive Industries. Specifically, (1) support full implementation of the Cardin-Lugar provisions (Section 1504) of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2011 as well as similar legislation that is currently moving through the European Union, and encourage G20 member countries to adopt similar provisions for country-by-country reporting by MNCs in the extractive industries; (2) explore mechanisms and standards to increase transparency on MNCs contributions to governments beyond the extractives; and, (3) encourage members to commit to the Convention on Mutual Administrative Assistance in Tax Matters.
Urge the Financial Action Task Force (FATF) to include (1) establishment of tax evasion as a predicate offense for money laundering, and (2) improvement of the peer review process for member countries in the 40+9 Recommendations as a result of the Review of the Standards currently underway.
Strengthen anti-bribery provisions by implementing and enforcing laws criminalizing foreign bribery and prohibiting off-the-books accounts in accordance with the OECD Convention Against Bribery of Foreign Public Officials and UN Convention Against Corruption (UNCAC), and regularly reporting on the enforcement of these laws.
Call upon member countries to establish national registers of companies, trusts, and other legal entities with information on accounts, beneficial owners, nominee intermediaries, managers, trustees, and settlers. This information should be made available to any tax authority.

Every year, developing countries lose approximately $1.3 trillion in illicit financial outflows—the proceeds of crime, corruption, tax evasion, and trade mispricing. This loss of capital outpaces current levels of foreign aid by a ratio of 10 to 1. Curtailing these outflows is crucial to nurturing a stable and robust economic recovery in global markets, stamping out political corruption and crime, and fostering good governance in emerging economies.

The Task Force on Financial Integrity and Economic Development is a unique global coalition of civil society organizations and more than 50 governments working together to address inequalities in the financial system that penalize billions of people.