Tax Justice Network » Tax Research UK

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.

A Bloomberg editorial says it’s time for Swiss banking secrecy to go

Switzerland, Tax evasion, Tax Justice Network 1 Response »

Oct 252011

A Bloomberg editorial today says:

Switzerland’s bank secrecy laws and anonymous numbered accounts have a long and shameful history: They have been used to help criminals conceal illicit gains, to deny Holocaust survivors their stolen inheritances and to help the world’s wealthy hide taxable income.

So it’s a welcome sign that 11 firms may be on the verge of agreeing to pay billions of dollars in penalties and reveal the names of Americans who used Swiss bank accounts to evade U.S. taxes, according to a Bloomberg News article yesterday.

As they note:

U.S. prosecutors held out the threat of criminal indictments, which is tantamount to a death sentence for a bank.

And the add, importantly:

Finance Minister Eveline Widmer-Schlumpf said that the country wants to reach an agreement with the U.S. so that Switzerland isn’t confronted “with the same issue time and again.” If that’s the case, Switzerland shouldn’t assume the U.S. will accept deals like those reached earlier this year with the U.K. and Germany, allowing the identities of customers with untaxed assets to remain secret.

There’s good reason for that: as they say:

Unfortunately, Switzerland has cooperated only grudgingly in meeting international banking standards, agreeing to do so in 2009 under threat of sanctions and being named as a tax haven by the Organization for Economic Cooperation and Development. Even so, the country this month was ranked at the top of a financial secrecy index developed by the London-based Tax Justice Network.

Switzerland should do itself a favor and abandon the financial opacity that has made it the world’s No. 1 destination for offshore wealth. It has no place in a globalized world where money can be electronically whisked from one place to another, except as a cloak for financial wrongdoing.

This is one of the biggest financial news networks iin the world and it is arguing the UK is wrong, Switzerland is wrong and the Tax Justice Network is right to take its position.

Times are changing, at least a bit.

EU to come down very hard on the UK – Swiss tax deal

EU STD, Europe, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network 2 Responses »

Oct 252011

Europolitics has reported today:

The European Commission is planning to attack the tax agreements concluded by Switzerland with Germany and the United Kingdom, on 25 October in Strasbourg. It finds that Berlin and London have encroached upon the Union’s powers by negotiating bilateral arrangements with Berne that interfere with savings taxation rules.

Taxation Commissioner Algirdas Semeta will answer that evening an oral question by British Liberal Sharon Bowles, on behalf of the EP Committee on Economic and Monetary Affairs (ECON), which she chairs.

MEPs question the compatibility of these Rubik agreements, set to enter into force in 2013, with EU rules on taxatin of savings income, which provides for a 35% withholding tax at the source (not in full discharge of liability) on interest earned on savings. More generally, they wonder whether states have the power to negotiate such bilateral tax agreements and whether the Rubik system may present an “obstacle” to revision of the EU savings taxation directive and of the EU’s agreements in this area with Switzerland, Liechtenstein, Andorra, San Marino and Monaco. Will not Rubik agreements “have the effect of halting the move towards an automatic exchange of information for tax purposes,” they ask.

The question answers itself. Luxembourg and Austria have already seized the pretext of Berne’s arrangements with London and Berlin to hold up the savings taxation issue in the EU.

Keen on being treated equally with Switzerland, in order to prevent any capital flight, they refuse to be obliged to switch from the system of withholding at the source to the automatic exchange of information between tax administrations, and to abolish their banking secrecy in the process.

In the context, Commissioner Semeta plans to take a very hard line, on 25 October, and to denounce an abuse of power by Germany and the United Kingdom – except no doubt for the amnesty operation, which the Commission does not have the competence to prevent.

And as they note this is in the context of:

The global network Tax Justice will publish, on 25 October, a study that pillories London and Berne. Its conclusions will doubtless be identical to those of a tax specialist based in Zurich, who is consulted regularly by the Commission and prefers to remain anonymous.

So not only are the UK incompetent in their dealings with Switzerland, they’re also incompetent in their dealings with Brussels who have rumbled exactly what Osborne and Hartnett are doing – which is to undermine any effective challenge to tax havens.

It’s good news that the EU is fighting back. So they should. The promotion of tax haven abuse is unacceptable anywhere - including in London.

The US demands tax justice for its Swiss tax evaders: the UK settles for 30 pieces of silver

Corruption, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network Comments Off

Oct 252011

The UK has signed a tax haven deal with Switzerland it won’t even come near to raising the money claimed for it, whilst perpetuating bank secrecy. So says the Tax Justice Network this morning, and rightly so.

In the meantime the USA has taken a different approach. As Bloomberg report:

Swiss banks will probably settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, according to two people familiar with the matter.

U.S. and Swiss officials are concluding negotiations on a civil settlement amid U.S. criminal probes of 11 financial institutions, including Credit Suisse Group AG (CSGN), suspected of helping American clients hide money from the Internal Revenue Service, according to five people with knowledge of the talks who declined to speak publicly because they are confidential.

Switzerland, the biggest haven for offshore wealth, wants an end to new U.S. probes while preserving its decades-old tradition of bank secrecy, the people said. The U.S. seeks data on Americans who have dodged U.S. taxes and a pledge by Swiss banks to stop helping such clients, according to the people. The Swiss reached accords this year with Germany and the U.K. on untaxed assets.

“The Swiss would like to get out of this by paying money, and they’ve done that with other countries,” said tax attorney H. David Rosenbloom of Caplin & Drysdale Chartered in Washington, who isn’t involved in the talks. “For the U.S., it’s not primarily a money question. It’s a matter of making sure the laws apply fairly among taxpayers.”

And that’s it in a nutshell. The UK has done a tawdry deal with Switzerland that lets it continue to operate as a tax haven and demands no names of those active, habitual and large scale criminals who have used it to evade tax.

The US demands justice and puts cash second.

Who has the priorities right? Clearly the US has. And what’s more, I have no doubt it will also raise a great deal more money, even in relative terms, as a result.

But then, Hartnett, HMRC and Osborne all support tax havens. No other explanation for their behaviour is possible.

Press coverage for the Tax Justice Network report on the flaws in the UK – Swiss tax deal

Corruption, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network 12 Responses »

Oct 252011

The serious press has picked up and covered the Tax Justice Network’s new report on the flaws in the UK – Swiss tax deal.

The following are some highlights:

Swiss-U.K. Tax Agreement May Be ‘Revenue-Negative,’ Group Says

Bloomberg - Leigh Baldwin - ‎7 hours ago‎

Switzerland’s decision to impose withholding duties on untaxed British funds may generate only a “fraction” of anticipated revenue, the Tax Justice Network said.

Swiss tax deal could end up costing UK

The Guardian (blog) - ‎7 hours ago‎

The UK’s tax agreement with Switzerland will not bring in as much revenue as expected, critics say. Britain’s controversial tax deal with the Swiss government will raise considerably less than claimed

‘Fatal flaws’ in UK-Swiss tax deal attacked

Financial Times - Vanessa Houlder - ‎11 hours ago‎

Campaigners are stepping up their attack on a newly signed tax deal struck with Switzerland, which they say is subject to a series of “fatal flaws” that will give evaders a cost-free means of maintaining their anonymity.

Revealed: Loopholes in Swiss tax deal mean £7bn windfall could be lost

Bureau of Investigative Journalism - Nick Mathiason - ‎7 hours ago‎

An agreement between the UK and Swiss governments, which beleaguered permanent secretary for tax Dave Hartnett has stated will raise between £4bn – £7bn, is so fundamentally flawed it could actually lose the UK tax revenue.

The loopholes which destroy HMRC’s claim that Swiss tax deal will see a £4-7bn Treasury windfall

Corruption, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network 8 Responses »

Oct 252011

The following press release was issued by the Tax Justice Network this morning, and I’m proud to be associated with it:

UK/Swiss tax deal could see UK lose money
10 loopholes identified that mean this agreement won’t deliver
TJN urges immediate cancellation of agreement

An agreement between the UK and Swiss governments, which permanent secretary for tax Dave Hartnett has stated will raise between £4bn – £7bn, is so fundamentally flawed it could actually lose the UK tax revenue.

A forensic analysis of the agreement by the Tax Justice Network reveals a series of fatal flaws in the two-week old tax deal. Though the analysis focuses on the UK, it is of great relevance to Germany, which recently signed a near-identical deal with Switzerland under similar false promises, as well as for other countries considering signing similar bilateral deals.

The UK-Swiss deal, signed on 6 October, is supposedly designed to capture assets held by wealthy UK residents who have evaded taxes by secreting their fortunes in Swiss banks.

But the 10 loopholes identified by TJN – and we believe there are more loopholes than that – means there is virtually no chance the agreement will raise anywhere near the £4-7bn suggested by Dave Hartnett.

The loopholes provide numerous ways for accountants, lawyers and bankers to help their UK clients escape the new rules.

Loopholes include:

Provisions which allow UK wealthy individuals who hold their assets in so-called discretionary trusts, foundations and similar structures to evade the new rules. These structures are extremely popular with wealthy tax evaders and make it impossible to identify who currently owns the assets. Accountants and lawyers who set these structures up are poised to do a roaring trade.
Wealthy UK individuals can side-step the rules by creating trading, manufacturing or commercial operations as these fall outside the scope of the new deal.
Branches of Swiss banks in other countries are not included in the provisions so UK Swiss banks account holders can simply move their assets to a foreign branch of a Swiss bank to escape the agreement’s scope.
While the new deal includes interest, dividends and capital gains on ‘bankable assets’, it crucially does not extend to:
- Wages;
- Royalties;
- Income on property;
- Directors’ fees; and
- Loans
This allows advisers to UK residents to siphon out benefits through these routes, untaxed.

The deal does not come into force until May 2013 allowing 17 months for advisers to make alternative arrangements and move assets to escape the deal.

These loopholes and more besides (see accompanying in-depth report) leads the Tax Justice Network to challenge claims by HM Revenue and Customs (HMRC) that this agreement will see a £4-£7bn inflow of tax receipts into the UK.

TJN regards this as a major over-estimation which misleads the British public. In fact, as we argue in our report, there is a real likelihood the serious loopholes, flaws and knock-on effects will actually reduce the already pitiful tax take from UK individuals keeping their assets in Swiss banks in the medium and long-term.

TJN fears this deal will also undermine ongoing efforts to improve transparency and tackle tax evasion through the European Union Savings Tax Directive. An initiative that Switzerland – along with Austria, Luxembourg and Jersey – are doing everything in their power to scupper.

John Christensen, director of the Tax Justice Network, said:
“It’s hard to see how the British public will benefit in any way from this flawed agreement. Worse, it will reverse years of progress made by the EU towards tackling tax evasion through automatic information exchange. It is impossible to see how the HMRC can describe this deal as being in Britain’s interests.”

Nicholas Shaxson, author of Treasure Islands - tax havens and the men who stole the world, said:
“There is a very strong likelihood that that this deal which guarantees tax haven secrecy, will spread like a cancer through the global financial system. This is because many countries are now considering similar agreements. They are either tax havens that want to copy Switzerland, or victims of tax evasion that want to copy the UK. This deal has to be killed.”

Dr David McNair, Economic Adviser at Christian Aid, said:
“This stunning analysis from the Tax Justice Network shows that the UK’s deal with the global headquarters of bank secrecy is likely to undermine the UK’s tax revenues as well as those across the developing world. It’s no wonder Swiss bankers and their clients are delighted. But everyday people in the UK and developing countries will lose out. It is imperative that the UK now takes strong action on financial secrecy at the G20 in Cannes.”

Contacts:

Nick Shaxson +41 79 477 1070

John Christensen +44 797 986 8302

Richard Murphy +44 777 552 1797

Notes for Editors

1) The Swiss-UK tax deal retains the principle of Swiss banking secrecy. In return, tax evading UK citizens will pay a charge of 19% – 34% of the absolute value of their account. In addition, they will pay taxes on subsequent income of between 27% and 48% annually. Switzerland will pay the UK 500 million Swiss Francs (about £350 million) of this up front.

2) Estimates of the amount of UK taxpayer assets in Switzerland range between £40bn and £125bn. In 2010, the UK received £16.9m in tax from Switzerland under a withholding tax arrangement in the context of the EU Savings Tax Directive. That Directive is also full of loopholes, which are being patched up.

3) Historical revenues from the EU Savings Tax Directive are the only realistic benchmark against which estimates can be made for the UK-Swiss deal. Our calculations show that the absolute maximum revenue for this deal is £1 billion from the capital charge – but almost certainly it will be far lower than that. Future income will most likely be lower than under the current EU Savings Tax Directive. Britain’s only certain revenue from this deal is the CHF 500 million (£350 million) up-front payment.

4) Some loopholes stem from the fact that this is a bilateral deal, unlike the EU’s multilateral arrangements. Any countries considering similar deals should be aware that it is impossible to close these loopholes without a multilateral approach.

5) The analysis of the UK-Swiss Tax Agreement was conducted by Nicholas Shaxson, author of Treasure Islands – Tax Havens and the Men who Stole the World, in consultation with several people inside and outside TJN.

The full report is here.

Call for Papers for a Workshop on Tax Avoidance, Corruption and Crisis

Tax avoidance, Tax Havens, Tax Justice Network, Uncategorized Comments Off

Oct 242011

Call for Papers for a Workshop on

TAX AVOIDANCE, CORRUPTION AND CRISIS

Essex University, July 2012

The 2012 research workshop co-organised by the Association for Accountancy & Business Affairs and the Tax Justice Network will explore connections between tax avoidance, corruption and crisis. The themes that might be explored within this remit are wide, potentially including issues such as how tax avoidance harms progressive tax systems, distorts markets and infringes human rights; the role of financial professionals in promoting financial and legal secrecy; and how secrecy jurisdictions have contributed to economic, financial, political and social crises around the world.

Other related themes are likely to emerge as the workshop programme develops.

The aim of this workshop is to bring together researchers, academics, journalists, policy staff of civil society organisations, consultants and professionals, elected politicians and/or their researchers, and government or international organisation officials to explore issues on these and related themes. The purpose of the workshop is to facilitate research through open-minded debate and discussion, and to generate ideas and proposals to inform and shape the political initiatives and campaigns already under way.

There will be a small charge for attendance at the Workshop. Participants are usually expected to finance their own travel although applications from students and others with limited means for bursary support will be considered. Accommodation at Essex University will be available at modest cost.

Anyone interested in participating should provide details of the nature of their interest, affiliations and any relevant research or publications to:
John Christensen, Tax Justice Network International Secretariat, john@taxjustice.net

Offers of papers are especially welcome and early submission is encouraged since applicants have exceeded available spaces in recent years. Any submissions will be actively considered by the organising committee which comprises:

John Christensen (Tax Justice Network)

Jo Marie Griesgraber (New Rules for Global Finance)

Prem Sikka (Essex University)

Richard Murphy (Tax Research LLP)

Ronen Palan (Birmingham University)

Sol Picciotto (Lancaster University)

Offshore lawyers admit that tax haven claims of transparency are bunkum – as some of us have argued for a long time

Cayman, Information exchange, Jersey, Lawyers, Secrecy jurisdictions, Tax avoidance, Tax evasion, Tax Havens, Tax Justice Network, Uncategorized 7 Responses »

Oct 182011

Cayman News Service has blown the lid on one of the biggest lies of recent years about tax havens / secrecy jurisdiction. It’s been claimed since 2009 that tax information exchange agreements – promoted by the Organisation for Economic Cooperation and Development as the way to tackle tax haven abuse – mean that tax havens are now ‘open and transparent places’. Those most inclined to say so are minsters of the UK and the representatives of the offshore finance industry in places like Jersey.

But as Cayman News Service reports from a conference on the issue of confidentiality, obviously so secret that they omitted to mention where it was held:

A panel of trust experts from Cayman, Guernsey, the UK, Switzerland and the Bahamas examined whether the right to privacy for trust clients could continue in light of the push by international bodies to live under regimes of disclosure during an industry conference last week where the issue of confidentiality was the top talking point for delegates. Despite the tax information agreements signed by offshore centres in recent years however, there were still ways that trust professionals could protect beneficiaries and confidentiality because of the hoops tax authorities needed to go through to extract information, the conference heard.

The central paradox for trustees, according to Shan Warnock-Smith QC, was how to reconcile the principles of confidentiality and disclosure, which were both expected to be observed by trust professionals. Warnock-Smith QC mediated a panel at Mourant Ozannes first conference of its kind last week where she described the issue as a balancing exercise.

Panelist Robert Shepherd from MourantOzannes in Guernsey said onshore governments’ requirement for money had resulted in the UK tax collectors beefing up their staff recruiting 2,200 more tax inspectors. He said that the onshore governments have tried two ways to get at funds – by getting offshore institutions to disclose more and alternatively by circumventing offshore jurisdictions by getting investors onshore to tell them what they know. Tax Information Exchange Agreements (TIEAs) had been created by onshore governments to try and force offshore institutions to provide more information which would then bring in more money for them, Shepherd believed.

On the face of them TIEAs appeared “fearsome” with one tax authority forcing another to disclose information on foreign nationals, Shepherd noted, but actually there was a good deal that trust professionals could do to protect beneficiaries and honour obligations of confidentiality, citing a number of hoops that tax authorities needed to go through to extract information. For example, the onshore authority must initially identify the tax payer in question about whom they require the information and equally they must have exhausted all local powers to gain information first.

As I and the Tax Justice Network have argued many times, this does in effect mean that the prospect of making a enquiry from a trust is in most cases non-existent – as these lawyers well know. This was confirmed at the meeting:

Julien Martel, from Butterfield in the Bahamas said that the issue about TIEAs was a “storm in a tea cup”and the issue did not come up frequently in conversation. He went on to say that the issue of confidentiality in the light of increasing burden of disclosure was actually a global issue and not just a question for international financial centres, which were in fact better positioned to deal with the conflict because of their flexibility.

Flexibility should be read in its true light here – it’s a weasel word, often meaning the ability of these places to move client funds out of a jurisdiction before an enquiry can develop, thwarting it before it really gets under way. And the reality is:

Confidentiality was an issue for clients but it was not stopping business, he added.

But this comment was also telling:

Alan Milgate, from Rawlinson & Hunter in Cayman said that in certain cases trustees wanted to disclose specific information to beneficiaries and that it was the duty of the trustee to try and establish the costs and benefits for disclosing the information. Some beneficiaries were better able to process information than others, he said, and added that deciding how much information to give out to beneficiaries was sometimes a difficult exercise, because not giving information bred suspicion. Effort needed to be put into explaining and planning the structure of a trust up front, he said.

As this reveals, these lawyers don’t even tell their clients what they’re really up to. Which is really convenient when the client’s money is under the lawyer’s control, and fuelling the bafflement I have always had about why anyone would trust an offshore lawyer with their money.

But perhaps most telling was this, which blows apartt the bunkum put out by the OECD, states like Jersey and Cayman and ministers like David Gauke in the UK who constantly claim that tax avoidance in tax havens is under control because of the existence of tax information exchange agreements:

Ziva Robertson from Withers said that there was a big difference between the political will to be seen to be creating TIEAs and the actual economic effect of their implementation.

To put it another way they don’t work. It doesn’t take a lawyer to work that out. And why don’t they work? Because:

She also said the situation could sometimes be exacerbated by instances of privacy laws which explicitly prevented a trustee from providing the beneficiary with information. Trusts were becoming increasingly complex and often spanned a number of jurisdictions, with confidentiality meaning different things in different jurisdictions and meaning different things in times of war and in times of peace, she observed

In other words, the pinstripe brigade of offshore lawyers, accountants and bankers make sure that there is a self perpetuating income stream for themselves at expense to their clients and the governments of the world. At least they’re honest enough to admit it. Which is why I’ve taken the liberty of quoting at length.

The argument is over: tax information exchange agreements don’t work. Everyone knows it. The time for automatic information exchange has arrived.

UK the top secrecy jurisdiction

Financial Secrecy Index, Secrecy jurisdictions, Tax Havens, Tax Justice Network, Uncategorized 10 Responses »

Oct 182011

Tax Journal has just published a lengthy article on the Tax Justice Network’s Financial Secrecy Index which opens with the following sentence:

The United Kingdom would ‘easily’ take Switzerland’s place at number one in the Financial Secrecy Index if the ‘British network of secrecy jurisdictions’ were considered.

This is absolutely correct. The City of London is intimately connected to offshore satellites in Bermuda, British Virgin Islands, Cayman and Jersey (all of which fall in the top ten of the FSI), and if all the Crown Dependencies (CDs) and British Overseas Territories (BOTs) were combined with the UK as a single entity, there is no doubt that the UK would top the list. As Tax Journal notes:

Ten secrecy jurisdictions on [the TJN’s list of 73 jurisdictions] are either British Crown Dependencies (such as Jersey) or British Overseas Territories (such as the Cayman Islands or Bermuda) while many others are members of the British Commonwealth.

These jurisdictions generally share British common law [and] deep financial penetration by British financial interests, typically use British-styled offshore structures such as trusts, usually have English as a first or second language, and mostly have their final court of appeal in London.

Here is the full list of CDs and BOTs with their [secrecy scores] and global scale weights

Guernsey [65] 0.00298
Isle of Man [65] 0.00060
Jersey [78] 0.00374
Anguilla [79] 0.00000
Bermuda [85] 0.00066
BVI [81] 0.00150
Cayman [77] 0.04622
Gibraltar [78] 0.00005
Montserrat [86] 0.00000
Turks & Caicos [90] 0.00003

Look first at the secrecy scores. They range between 65 (Guernsey and Isle of Man) to 90 (Turks & Caicos). While the average secrecy score comes out at a very poor 78, the appalling scores for Bermuda, Montserrat and Turks & Caicos demonstrate that when it comes to hiding away the truly nasty stuff, British bankers and lawyers are spoilt for choice in terms of what they can offer their dodgy clients.

Now let’s turn to the issue of scale. London is already a giant in the offshore financial services market. The IMF data we used for the 2011 Financial Secrecy Index showed London as having 20 percent of global market share. Now add the estimated combined market shares of the CDs/BOTs and the aggregated figure rises to around 33 percent. One third of the global market in offshore financial services – and that doesn’t include British Commonwealth countries which also feed cross border financial flows through to London.

Now at this stage we have a dilemma: should the Tax Justice Network take the UK secrecy score (45), or should it work on the basis that London can use its offshore satellites to do the monkey business (viz Bermuda: secrecy score 85) while maintaining the pretence of being reasonably transparent and cooperative? If the former, London’s position on the overall ranking scarcely shifts, but if the latter, which reflects reality, then London screams ahead of the pack to number one position.

TJN’s general position when assessing secrecy scores is to assess on the basis of the lowest common denominator position. If British lawyers and bankers can use jurisdictions like Bermuda, Cayman, Jersey and Montserrat (average secrecy score = 81) to hide their dirty business from UK investigators, then that’s exactly what they’ll do. And experience shows this to be what happens.

Meantime, successive British governments connive with the City of London in arguing that these are independent statelets with internal autonomy when it comes to setting tax rates. This argument is at best disingenuous, at worst outright mendacious. When it comes to creating secrecy mechanisms, through trusts and company laws, for example, or through cooperation in international international tax information exchange processes, the British government has complete control. As TJN director, John Christensen, notes in the Tax Journal article:

“‘No law is passed in Jersey without the approval of the Privy Council,’ he told Tax Journal, adding that key Jersey officials are appointed by the British monarch.”

So TJN now needs to consider its position on how to treat what we call the British Empire of Tax Havens. Does it continue as present and rank them separately; or should we aggregate them into a single spider’s web of interlinked financial services serving the political and economic agenda of the City of London? If you have a view on this, please drop us a line at info at taxjustice.net

And finally, the sharp-eyed among you will have noted that the common feature of the stamps illustrating this blog is Her Majesty, the Queen of England. Not long ago, HM Queen asked why no economists had seen the 2007/8 financial crisis before it hit. Of course, some of us had foreseen it, but more pertinently, some of us had also seen how secrecy jurisdictions have contributed to increased inequality, fiscal crisis, financial market instability, corruption, and a whole host of other plagues and miseries. And with due respect to Her Majesty, too many of these places carry her head on their postage stamps. We strongly recommend that she asks Santa Claus for a copy of Treasure Islands: Tax Havens and the Men Who Stole the World in her Xmas stocking this year.

NB: adapted from TJN blog with permission