Tax Research UK

On 17 February the editor of Taxation magazine, Mike Truman, wrote an article under the title ‘Lack of Evidence’, the summary of which said:

The claim that poor countries lose $160 billion in tax from ‘transfer mispricing’ has been repeated endlessly. MIKE TRUMAN finds it hard to justify

KEY POINTS

• Two Christian Aid reports claim $160 billion tax lost.
• Raymond Baker’s 7% claim does not relate to TNCs.
• Problems of methodology in Simon Pak’s study.
• Real shortfall is homegrown tax evasion.

Raymond Baker of Global Financial Integrity, Alex Cobham of Christian Aid and I wrote a response, published this week. It is entitled ‘Lack of Will’.

That response is behind a paywall and so is not on public record, even though the critical article is.

There is also apparently an on-line debate going on about the issue – which none of us can read or contribute to as it is also behind a paywall. So much for debate. In the circumstances I think it entirely appropriate to republish our response, below. I leave it to others to work out the ethics of publishing criticism on open pages and denying response and debate a similar airing.

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Lack of will

Transfer pricing abuse is a massive global problem, argue

Richard Murphy , Alex Cobham and Raymond Baker.

Mike Truman, in his comment article ‘Lack of evidence’, Taxation, 17 February 2010, page 6, questioned work we have, in various and different ways, undertaken to estimate the loss arising to developing countries from transfer pricing abuse – or transfer mispricing as we prefer to call it.

We think Mike is saying three things. The first is that Raymond Baker’s work on this issue, published in his 2005 book Capitalism’s Achilles Heel, used an inappropriate interview-based methodology to establish a potential rate of transfer mispricing, which he anyway contends is now out of date.

Second, he challenges Christian Aid’s May 2008 report on transfer mispricing ‘Death and taxes: the true toll of tax dodging’, which suggested that the loss to developing countries from transfer mispricing might be as much as $160 billion a year because that reports relies in part on Baker’s work.

Finally, Mike questions the findings of Christian Aid’s second report on the subject (published in March 2009), ‘False profits: robbing the poor to keep the rich tax free’, which relies on the statistical analysis of world trade data using a methodology developed by Professor Simon Pak of Penn State University.

Based on his analysis, Mike concludes:

· transfer mispricing is not the issue we claim it is;

· country-by-country reporting as proposed as one solution to this problem is not therefore as important as we claim it might be; and KEY POINTS

· Illegal flows out of developing countries could be up to $1 trillion annually.

Despite our high regard for Mike, we have to disagree with him on all counts, although in the space available cannot address all the issues he raises.

Methodology

First let us deal with methodology. Raymond Baker in his book only examined mispricing in arm’s length transactions, i.e. between unrelated entities. Having done so, and based on personal experience, he concluded that while it was highly likely that the rate of mispricing was higher in related party transactions, he would only use the figure his interviews had established to be likely between unrelated entities. Three things should be noted as a result: first this is likely to be a conservative estimate. Second, research based on semi-structured interviews is considered entirely suitable as a basis for research in all social science disciplines, including taxation. Third, while now relatively old research, subsequent work has corroborated the findings .

That subsequent research includes new work published by Global Financial Integrity (GFI), a project Baker now directs. Its study of illicit financial flows, published in 2008, defined illegal flight capital as funds intended to disappear from record in their country of origin, with the earnings on the stock of illegal flight capital outside of a country not normally returning to that country of origin.

The report recognised a number of mechanisms that that can be used for this purpose, of which transfer mispricing was just one. As it noted, since this activity is illicit, available data with which to assess its scale is oft en incomplete or inaccurate: the work accepted that risk, as do all other studies in this area. That said, GFI used several methodologies and databases to estimate both the legal and illegal components of flight capital, including the Hot Money, Dooley, and World Bank residual methods, IMF Direction of Trade Statistics, and the International Price Profiling System. All are widely used, recognised and considered by those bodies that have given their name to some of them as the best available methodologies.

Based on this work, GFI estimated that illicit financial flows out of developing countries are some $850 billion to $1 trillion a year. We believe this estimate is conservative. It does not, for example, include transfer mispricing within the same invoice, which cannot be picked up in mispricing models based on IMF Direction of Trade Statistics.

Such mispricing is entirely possible within multinational corporations which do not need to rely on reinvoicing. Nor does it provide any estimate of the loss due to transfer mispricing on services or intangibles, which are perhaps more open to abuse given the difficulty in identifying comparables to establish an accurate arm’s length price.

The IMF Direction of Trade Statistics on which the estimate of transfer mispricing is primarily based measures the difference in exports out of one country and imports into another country for all pairs of reporting countries. After subtracting the cost of freight and insurance, the only way to get a difference in export and import prices (other than mis-entering the data which might itself be indicative of mispricing) is to reinvoice, for example through tax haven locations. It is this reinvoicing that the GFI data records meaning that mispricing within the same invoices would have to be added to these figures to get a more accurate analysis of total mispricing.

Transfer pricing abuse

The GFI report in 2008 estimated that at least half of all illicit financial flows out of developing countries involved transfer mispricing. In February 2010 a further GFI report, ‘The implied tax revenue loss from trade mispricing’ sought to quantify the tax loss arising from these illicit flows and concluded that the average tax revenue loss in developing countries was between US$98 billion and US$106 billion annually over the years 2002 to 2006. This figure represents an average loss of about 4.4% of the entire developing worlds’ total tax revenue.

The methodology used is one some commentators will challenge: it assumes that the identified flows of transfer mispriced funds would have been taxed at the marginal corporate tax rate of the location they fl owed from. This ‘tax gap’ methodology, developed by Richard Murphy, has been challenged by some as misleading since its opponents argue that it ignores the availability of reliefs and allowances that might have reduced the effective tax rate below the nominal tax rate.

We do not agree for two reasons. First, if those reliefs had been available in respect of these profits, it would have been rational to have used them. We assume we are dealing with rational entities. They were not used, so presumably they were not available, meaning that tax would have been paid.

Second, to assume that the allowances and reliefs that multinational corporations enjoy in developing (or other) countries are independent of their considerable economic power in such places when negotiating inward investment, or are even independent of other illicit financial flows such as those resulting from bribery, is untenable. Numerous reports, including some by the authors of this article, for Christian Aid, Global Witness and others attest to this fact. As such we suggest that the methodology records a potentially recoverable loss, and that is its purpose.

Bilateral trade

Simon Pak’s approach to this issue is different from Raymond Baker’s. Christian Aid notes the OECD estimate that at least 60% of world trade now takes place within multinational corporations rather than between arm’s length bodies. For the years 2005-2007, Simon Pak analyses data on all bilateral trade on commodities with the US and European Union to determine the extent of losses arising on this intra-group trade. The US and EU provided the data for this purpose.

The data is the most granulated available: so detailed that HMRC would not provide it directly for the UK because identification of individual trades was possible in too many cases. 83.7 million EU trades were analysed by Pak in 2007, for example. Only data where price estimates per unit supplied could be calculated was used. By definition services are excluded, and given that the majority of transfer mispricing is now likely to be in this area this will result in any estimate we offer significantly underestimating total losses from this activity.

An important assumption in the price filter analysis method Pak uses on the resulting data is that the estimated inter-quartile price range per unit of product traded is an arm’s length price range. This assumption is suggested by some to be arbitrary. However, the assumption is considered reasonable as the US Internal Revenue Service transfer pricing regulation, Internal Revenue Code 482, specifies that an inter-quartile range is an acceptable arm’s length transaction range. We believe that provides credibility to the approach used but we accept that the point is debatable, but then everything in statistical analysis is. This does not invalidate statistical analysis as the basis of much, if not most, academic tax analysis and in turn a great deal of tax policy worldwide.

Lost tax revenue on capital flows as a result of trade mispricing is then calculated on a country-by-country basis by multiplying the capital flow by corporate marginal tax rate for each country in question: this approach accords with that used by Baker/GFI, noted above and acceptable for the same reasons.

Losses underestimated

This approach is reflected in the second Christian Aid report noted above, but not the first. As that second report notes, the approach seeks to use Pak’s methodology to estimate how many imports to the EU and US from non-EU countries are underpriced, and how many exports from the EU and US are overpriced to facilitate illicit capital transfer from non-EU countries. In doing so it is likely to underestimate the losses, partly because services are not considered and partly since the techniques used will underestimate mispricing because over and under pricing is aggregated by the methodology. There is also the risk that averagely priced transactions may be mispriced. This possibility is not detected.

In contrast, it is accepted (and noted in the relevant report) that there is an opposite risk with regard to products with highly volatile prices, e.g. oil. There, averaging over an annual period,

as the method does, might produce errors. Across the whole spectrum of trade this is assumed to be a counter-balancing error, but it does also explicitly recognise that the issue raised by Mike Truman in his article is a matter of concern, but not one considered likely to be material.

The result of the work is an estimate of lost tax revenue from all non-EU countries to the EU and the US between 2005 and 2007 of £190.8 billion or about £63.6 billion a year ($127 billion a year at 2007 exchange rates). Given that this implied lost revenue is based on EU and US trade, and assuming that trade between developing countries and the rest of the world is characterised by a similar level of mispricing, Christian Aid extrapolated this figure to find it consistent with their earlier estimate of $160 billion globally.

All of the estimates reviewed fall in the range $100 billion to $160 billion a year. As yet unpublished research by Richard Murphy for the World Bank undertaken in 2009 shows it is plausible for transfer mispricing of this scale to take place within multinational corporations.

Consistent estimates

Our point now is to suggest that we are presenting broadly consistent estimates within a range. We are not claiming spurious accuracy. As other studies have shown, e.g. that of Clemens & Fuest for the Department for International Development in June 2009, no one outside the small circle of NGO researchers noted here has even sought to do this work. Many have sought to criticise it. We accept it is open to improvement. We also accept, as should any researcher, that the flaws in available data make the results offered estimates. We would however stress, that if the data is fl awed it is likely to be because of trade mispricing, not its absence.

We would also add that the direction of this flow should be noted: overall additional funds arrive in the EU and USA. They may be taxed there, usually at lower rates than would have been paid in developing countries. Many will come through locations such as Switzerland and Hong Kong and in case study after case study we have seen this to be true. This lets us immediately dismiss the main thrust of Bill Dodwell’s assessment of our work as implausible: we do not know of tax authorities which take transfer pricing cases to argue down their revenues. This is what would be required if Dodwell’s assessment assertion was to be correct.

That said, Christian Aid does also show a transfer of capital from the US and Japan to Europe. Given the use made by corporations from both locations of European holding companies to act as worldwide sales agents, nothing surprises us about this. Indeed, work by Martin Sullivan for Tax Notes in the US has long documented this trend, noting in 2004 that American companies were able to shift $149 billion of profits to 18 tax haven countries in 2002, up 68% from $88 billion in 1999. This strongly suggests that this direction of flow is correct, the strength of the transfer pricing regimes of those countries notwithstanding.

All this being noted, the important thing is to ask what does potential transfer mispricing of this scale from developing countries imply? First, the losses are, even if the lower end of the estimate range is considered, more than twice the sum required to pay for the United Nation’s Millennium Development Goals.

In other words, we believe that reducing (but not eliminating) transfer pricing abuse could eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability and help develop a global partnership for development. If that is the case, the argument for inaction has to be very strong indeed.

Any action does, however, have to recognise the reality of taxation in developing countries. It is essential to bring the poor into the tax base, as it is likely to result in stronger engagement in political processes, and strengthen accountability between state and citizen.

However, in the short term, income taxation will have limited revenue impact given the weak economic base. Taxing a small elite of individuals, civil servants, major corporations, international trade and natural resources when present is likely to have a much greater revenue impact. To be effective the largest available flows must be taxed.

Stricter tax reporting

We suggest three things to ensure that these flows are taxed as effectively as possible. The first is that, and here we agree with Mike, significant technical support to tax authorities in developing countries is needed – as well as cash to ensure their best staff are not continually poached by the biggest firms of accountants.

Second, we argue for country-by-country reporting by multinational corporations. Mike is entirely wrong to say this cannot help. HMRC now publicly concede that country-by-country reporting by multinational corporations would increase tax yield in the UK. We do not however argue it is the solution to transfer mispricing: it is not. What it does is provide the data that can show whether pursuing a case is likely to be worthwhile. When resources are scarce, as they are in developing countries, this is vital. The tiny experience of transfer pricing litigation in Africa to date suggests that the simple absence of data on differing profit rates by location within multinational groups – data we think was deliberately withheld by those multinational corporations to assist their cases – is a major inhibitor to any chance of success on this issue. Country-by-country reporting would help provide this data.

Country-by-country reporting does much more: it is now seen as a key component in effectively tackling corruption in the extractive industries, for example. It is, therefore, a key component in tackling the very issue Mike says is an impediment to progress. It also provides enormous value to shareholders concerning the timing and location of tax liabilities that their company faces. To dismiss country-by-country reporting because it cannot solve transfer mispricing by itself is absurd.

Lastly we promote massive increases in the range and scope of information exchange agreements available to developing countries so they can secure the data they need to address issues on transfer mispricing, which also impacts revenues from royalties, sales taxes, export levies and more besides. Developing countries are almost entirely excluded from the tax treaty network. They start with a massive asymmetric information disadvantage as a consequence, which makes their current task almost insurmountable. This economic externality has to be removed if they are to have any chance of building successful states.

In these circumstances to suggest the problems faced are the result of home-grown tax evasion misses the largest part of the picture. Nothing but abuse by those unscrupulous businesses can explain the data differences we have consistently found. We can argue about the scale of the abuse but not its existence. Even then, suppose we had overstated the scale of this issue twofold and only half the problem could be effectively tackled using the mechanisms we promote. That would still eradicate extreme poverty and hunger, achieve universal primary education, reduce child mortality and improve maternal health while leaving some over to tackle AIDS and other major diseases.

Can anyone give a good reason why the tax profession would not want to do that when all the evidence suggests that tax compliance by multinational corporations – where tax compliance means seeking to pay the right amount of tax (but no more) in the right place at the right time, where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes – could achieve these aims?

We don’t know of any.

Richard Murphy Country-by-country, Development, Secrecy jurisdictions, Tax Havens, Transfer Pricing, Transparency

Does the ownership of Leeds United matter? It does if you value fans | David Conn | Sport | guardian.co.uk .

David Conn is right:

Knowing who owns your football club is not a cure for all the world’s ills nor is it even a route to sane and well-run football clubs.

The core reason why it is so important, a very basic requirement in a club’s relationship with fans, is that a football club is a social institution first, which has to run along business lines to be successful. Its aim is to flourish on and off the field and to embody the loyalty of supporters for life. To own it purely as a business venture, particularly if the shares are held offshore in structures which suggest the owners want to avoid paying UK tax when they sell, goes against the historic culture of the game.

But the International Accounting Standards Board and the prevailing financial culture does not accept this. As the IASB says:

The primary objective of those standards is to produce financial information that is useful for decision making by present and potential investors, lenders, and other capital providers

And yet as David Conn argues, this is just not true. And it’s not just not true for football clubs. It’s also true for all public companies and any private company with any engagement with the public - its stakeholders. In other words it’s true that for all companies we need to know who owns them - because all can engage with the public, whether they do so or not - and we can’t risk them not disclosing because they say they don’t trade  - and as such we need disclosure of ownership for all companies, worldwide. That does not mean that we want to know the next company or trust up the line that owns them either - we want to know the real warm bodies that do so.

And we need this information now.

Richard Murphy Transparency

There are many reasons to get angry about the financial crisis. One is that the people and countries with least responsibility are paying the highest price – as is also true of climate change. Another reason is that the G20 group of leading countries has already broken a key promise to the poorest. But European policymakers can play a crucial role in ensuring that the policy response to the crisis also addresses the fundamental obstacles to independent, sustainable development.

The crisis that began with banks and other financial institutions in the richest countries has spread through their economies and spilled into developing countries, undermining their sources of finance and extracting a direct human cost already. First, trade earnings have fallen sharply – with the World Bank estimating that low-income countries’ merchandise exports would have dropped by almost 15% in 2009, increasing their trade deficit from 6.3% to 9.2% of their GDP. Second, net private capital flows have fallen around 70% across all developing countries from around $1.2 trillion in 2007 to an estimated $363 billion in 2009 – a drop equivalent to around 5% of GDP. Third, remittances were estimated to have fallen in 2009 by 7.3%.

Of course the richest countries are also suffering economically. The difference is that shocks in many developing countries will have much harsher and potentially permanent impacts. An estimated 120 million extra people will be living on less than $2 a day by 2010. The ILO estimates that global unemployment will rise to 219-241 million people, the highest on record, with disproportionately damaging effects on women. The World Bank conservatively estimates that the crisis will cause an additional 30-50 thousand infant deaths in sub-Saharan Africa alone – to say nothing of the permanent effects on a generation that a peak in malnutrition is likely to have.
Don’t let these numbers make you angry, though - the real outrage is the underlying levels. More than a billion people going hungry every day, according to the FAO. It’s not the 11% growth that should shock us. A few more tens of thousands of unnecessary child deaths? It’s the eight or nine million a year that should shock us; should make us incandescent with rage.

This is why Christian Aid has long recognised that development efforts cannot only treat the symptoms of poverty, but must address the fundamental causes. You can learn more about this, and join our drive for Poverty Over at http://povertyover.christianaid.org.uk.

This is also why the crisis presents such a staggering opportunity for change that would benefit the world. The same lack of financial transparency that underpins the crisis also plays a major role in denying development, by facilitating the estimated one trillion dollars annually of illicit capital flows from developing countries due to corruption, money-laundering and above all tax evasion and avoidance. If international policymakers take the right measures, they can not only reduce the chances and likely severity of the next crisis, they can also kick away a major structural cause of poverty.

The crisis is the inevitable result of a classic financial liberalisation boom. As the experience of developing countries makes abundantly and painfully clear, every significant liberalisation of international financial flows has been followed by an economic boom, and then a subsequent bust. The boom periods involve rapid expansion of credit and are typically characterised by growth in consumption, bubbles in asset prices but little productive investment. The busts see a sharp contraction of credit, and – depending on the extent of countercyclical monetary and fiscal policy – often very sharp increases in unemployment and poverty.

The liberalisation that prompted the boom in this case is somewhat hidden from view, rather than being a clear policy decision. Effectively, financial integration among rich countries ran far ahead of the capacity of national regulators to maintain domestic credit restraint. By using structured investment vehicles in opaque and little-regulated jurisdictions, and other ways to exploit regulatory arbitrage, banks and other financial institutions were able to side step the key limits on their risk-taking.

Banks’ capital is regulated so that they cannot over-extend themselves and behave too riskily. The Basle Capital Accord mandates a safe level not exceeding $12.50 of (risk-adjusted) assets for each one dollar of equity or original capital. To take just one example, our partners the Tax Justice Network have shown that the Irish holding company of US investment bank Bear Stearns had almost $120 of assets for each dollar of underlying capital. Bear Stearns was subsequently bought out by JP Morgan, to avoid bankruptcy and at the behest of the Fed, for a price of around $10 a share – compared to a 52-week high of $133.20. Neither the US nor Irish regulators were apparently able to take a global view of the company’s risk, on-balance sheet or otherwise.

In this way competition among jurisdictions to provide ever-more attractive ‘light’ regulation, while other regulators failed to intervene, allowed banks and other financial institutions to avoid the key limits to their expanding credit. At the same time, financial market instruments of growing complexity were used to distribute the ultimate risks underpinning that credit expansion. Only when confidence eventually turned was it revealed that the ‘new paradigm’ had been a shell game, with systemic risks ramped up rather than miraculously dispersed.

‘Secrecy jurisdictions’, the preferred term to tax havens - as it is not the low tax that havens levy that is the problem, but the secrecy they offer which allows abuses and corruption to thrive, are not only the small islands of popular imagination. In fact, a great deal of the global total of opacity in financial flows can be attributed to larger centres – not least the US and the UK, which both feature in the top 5 of the new Financial Secrecy Index that Christian Aid and the Tax Justice Network have just published.

The index, which can be found at http://www.financialsecrecyindex.com/, measures the opacity of each jurisdiction, and weights this by their share of the market in providing financial services to non-residents. The top twenty includes eight European countries: Luxembourg (2), Switzerland (3), UK (5), Ireland (6), Belgium (9), Austria (12), Netherlands (15) and Portugal (Madeira) (17).

For developing countries, the same mechanism and the same jurisdictions that contributed to the boom have caused even greater damage than the crisis itself: international financial integration without coordinated regulation. For the crisis, the key area of flaunted regulation was that of capital reserves to constrain credit expansion and risk. For developing countries, the major impacts are around tax evasion, tax avoidance and other corrupt or illicit flows.

Global Financial Integrity, based in Washington DC and headed by Raymond Baker, have produced the most comprehensive and respected study of illicit flows. The findings are that one trillion dollars of illicit capital flow out of developing countries every year. Raymond Baker previously estimated the corporate tax evasion component to account for around two thirds of this, and consistent with that is Christian Aid’s own estimate that the mispricing of trade in commodities (by multinational companies and others) results in a tax loss to developing countries of around $160 billion each year – more than one and a half times the total received in aid. We estimate that these funds, if spent according to current patterns, would save the lives of almost 1,000 children under five every day.

Tax revenues are lost by the abuse of trade prices to shift profits out of developing countries and into secrecy jurisdictions. One resource-rich sub-Saharan African country, for example, sends more than half of its exports - on paper at least - to Switzerland. When uncovered, the illicit funds of corrupt politicians are also typically found in secrecy jurisdictions – whether London or Geneva. Tax administrations and anti-corruption authorities in developing countries typically have neither the capacity nor the legal agreements to be able to access the necessary information to see if individuals or companies are cheating the state of much needed funds.

But the damage goes well beyond the revenues lost. Academic research has shown that the share of tax in funding governments’ expenditures is a key determinant of their responsiveness to citizens – taxation drives political representation, strengthening governance and combating corruption. What this means is that a lack of transparency in financial markets and international trade are not only costing developing countries the funds that are rightfully theirs, they are also undermining the extent to which states use those resources for the benefit of their citizens.

Christian Aid has two key demands, which would go a long way to breaking down the international obstacles to effective taxation for development. One concerns the secrecy jurisdictions, and this is to replace the largely ineffective bilateral Tax Information Exchange Agreements (TIEAs) with a multilateral agreement including secrecy jurisdictions and developing countries. Like the EU Savings Tax Directive, but unlike TIEAs, this would need to include an element of automatic information exchange. At present, TIEAs allow exchange ‘on request’ and the burden of proof is so high that even powerful requesting jurisdictions like the USA are only able to meet it infrequently. Small, low-income countries would have little chance, even if they were able to negotiate TIEAs – which shows little sign of happening.

The second key proposal is for an international accounting standard to require multinational companies to report some basic data on their economic activity, including profits made and tax paid, on a country-by-country basis. Unlike the current system of global consolidated reporting only, country-by-country reporting would allow tax authorities a system to ‘red flag’ the highest risks of abuse – where, for example, a company carries out 20% of its business there but only declares 2% of its profits, while the reverse proportions apply in a secrecy jurisdiction.

The G20 is considering both proposals, not least because of the lead that the UK government has taken, but so far the grouping has not kept its promise to present proposals by the end of 2009 to ensure that developing countries benefit from the new cooperative environment for tax information exchange.

The interests of rich and poor countries and people alike are, for once, unified in the need for greater international financial transparency. European policymakers can provide the critical momentum to ensure that the new context takes account of developing countries and truly delivers a silver lining to the crisis. The alternative is a return to business as usual – and no-one can afford that.

Alex Cobham is Chief Policy Adviser at Christian Aid

This article was originally published in Europe’s World. Reproduced with permission

Richard Murphy Secrecy jurisdictions, Transparency

Chile Passes Tax Law to Improve Transparency « Task Force on Financial Integrity and Economic Development.

The Task Force on Financial Integrity and Economic Development, of which Tax Research LLP is a member, welcomes the news that Task Force Partnership Panel member Chile has enacted legislation enhancing access to bank information for the purposes of improved compliance with OECD standards on tax information exchange and increased transparency in financial transactions.

Previously, legal restrictions prevented Chilean tax authorities from obtaining and exchanging certain types of tax information in non-criminal tax cases. The new law, which is currently in effect and applicable as of January 1, 2010, will enable Chile to better comply with its current 20 bilateral tax treaties which provide for information exchange in tax evasion investigations.

Raymond Baker of the Task Force said:

As a member of the Task Force on Financial Integrity and Economic Development, Chile has demonstrated a commitment to increasing transparency and accountability in the global financial system. We welcome the news that they have taken this key step towards cooperation and participation in the global movement for better tax information exchange and regulation and oversight of financial institutions.

Visit www.financialtaskforce.org for more information about the Task force including the Task Force publication “Economic Transparency: Curtailing the Shadow Financial System” and a list of the full Task Force membership.

Richard Murphy Transparency

I have been asked to do a video on transfer pricing.

Actually, I did, a couple of years or so ago (I can tell from the glasses). So rather than repeat the operation, here it is, with apologies to the several thousand who seem to have watched it in the meantime:

Richard Murphy Tax planning, Transfer Pricing, Transparency

I have been reading more of the evidence submitted to the Senate Committee on Homeland Security and Governmental Affairs hearing on Business Formation and Financial Crime.

That of the American Bar Association is shocking. They say (and I have edited their submission by eliminating but not changing text):

The ABA supports all reasonable and necessary domestic and international efforts to combat money laundering, tax evasion, and terrorist financing activity. 

The ABA, however, opposes the proposed regulatory approach set forth in S. 569 and any other legislation that would unnecessarily regulate state incorporation practices and impose government-mandated suspicious activity reporting (“SAR”) on the legal profession.  The ABA’s opposition is grounded in three fundamental aspects of the proposed legislation.  

First, S. 569 [the bill] would essentially federalize state incorporation practices, meaning that states would be required to obtain,  keep current, and make available to law enforcement authorities “beneficial ownership” information on corporations and limited liability companies.  In our view, the imposition of a federal regulatory regime focused on beneficial ownership information is not workable, would be extremely costly, would impose onerous burdens on state authorities and legitimate businesses, would run counter to formation practices of major countries (including Canada, Mexico, Japan, and China), and will not achieve the laudable goal of assisting federal law enforcement authorities with pursuing and prosecuting criminal activity. 

For instance, obligating state agencies to collect beneficial ownership information would involve significant and expensive hardware and software changes, including the creation of a parallel record keeping system consisting of public and non-public  information.  These impediments, coupled with an unwieldy definition of beneficial ownership and the bill’s focus on only a limited number of entities, would sow confusion into the formation process that would not enhance law enforcement’s goals.

Second, S. 569 would create a new class  of “financial institutions,” known as formation agents, that would be subject to enhanced anti-money laundering (“AML”) requirements.  Because lawyers assist clients in forming corporations and limited liability companies, the designation of formation agents as financial institutions subject to additional AML requirements threatens to sweep in U.S. lawyers and treat them as the functional equivalents of banks.

Third, S. 569 could potentially impose SAR requirements on the legal profession, meaning that lawyers would have to report to governmental authorities a suspicion that their clients are engaging in money laundering or terrorist financing activity.

Let’s summarise this:

a) We want law enforcement but not if it costs anything or might work

b) We want an exclusive crave out for ourselves that provides competitive advantage

c) We wish that competitive advantage to be based on turning a blind eye to criminality.

Yes: I know about client confidentiality. But crime is always a crime and whilst lawyers must be able to defend their clients it is an unfortunate fact that lawyers have also been found,time and again, to be assisting tax abuse in the US. Those lawyers should not be able to use the right of criminal defence lawyers to avoid their obligations when they incorporate legal entities. That seems to me an abuse of the right of the lawyer.

I find these arguments quite shocking. This is a profession that appears to want to allow anonymity so it might profit from it, even if that use might be criminal. That is utterly ethically unacceptable. No wonder lawyers are held in such low regard.

Richard Murphy Lawyers, Transparency, USA

As I have noted, there was a US Senate hearing today on a bill designed to require the identification of the beneficial ownership of US corporate entities in front of the Senate Committee on Homeland Security and Governmental Affairs. The US Treasury testimony was given by Assistant Secretary for Terrorist Financing David S. Cohen. His testimony is here.

The core of it is this:

At the outset, it is important to recognize a number of key considerations that have informed our thinking:

First, the ability of criminal and other illicit actors to form corporations in the United States without disclosing their true identity presents a serious vulnerability.  It creates a pathway for criminal actors to gain access to the international financial system, and creates significant obstacles in our ability to investigate financial crime.  As I will explain, there is ample evidence that criminal organizations and others who threaten our national security exploit this vulnerability.

Second, information on the true beneficial ownership of a legal entity – at the time a business is formed, as ownership changes during its lifespan, and when it seeks to open accounts at financial institutions – is critical to stopping the exploitation of legal entities by criminal actors.

Third, the challenge of enhancing access to the beneficial ownership information of legal entities is complex and requires a global solution.  While we work within the Administration and with Congress to address this issue domestically, Treasury is also working with our foreign counterparts to improve global understanding and capability to address this challenge worldwide.

Fourth, in seeking to make beneficial ownership information available in ways that effectively address the misuse of legal entities, we are keenly aware of the need to preserve an efficient and straightforward entity formation process in the United States, and not to create unnecessary impediments to accessing the financial system for the vast majority of new and existing businesses that pose no threat whatsoever.

Finally, because we are starting from a situation in which beneficial ownership information is not required at the time of company formation, we believe that even incremental progress in this area is likely to yield substantial positive results.

I think their are two things to say in response. First, anyone who thinks the Tax Justice Network was wrong to name the USA / Delaware as the leading location for opacity in the world financial system should now be silenced.

Second, his points two to five justify all that we have said in the Financial Secrecy Index and at secrecyjurisdictions.com.

Times are changing. And I am quite convinced that beneficial ownership data on public record will become the public norm, eventually.

Richard Murphy Financial Secrecy Index, Tax evasion, Transparency, USA

A new tax haven created by the West African state of Ghana could attract tax dodgers and drug traders seeking to launder money unless safeguards are introduced, warns a report launched today.

The report, Taxation and Development in Ghana, co-funded by Christian Aid Ghana, says the potential detrimental effects of the International Financial Services Centre (IFSC) could be felt across the region. The centre has been set up with the help of Barclays bank.

‘The risk of illicit funds finding their way into the offshore financial centre is particularly acute given the extensive cocaine trade in the country and the massive flows from oil that are expected in the near future’, says the report. Large oilfields were recently discovered off Ghana’s coast.

If the Ghanaian government is committed to the IFSC becoming fully operational,   the report argues that it should first produce and disseminate credible, well-researched evidence about the potential benefits and risks for Ghana. In addition, officials working in the Central Bank, Registrar General and tax agencies should be extremely well versed in the relevant laws and should work closely together to minimise the risks.

Furthermore, the Government should introduce special methods to monitor inflows of funds from regional oil producing states, potentially in conjunction with the Extractive Industries Transparency Initiative, because such funds are of notoriously questionable origin.

The report goes on to warn that unless Ghana co-operates in the global fight against financial crime, it is at risk of being added to the tax haven blacklist set up recently by the Organisation for Co-Operation and Development.^[i]

Other sections of the report are devoted to Ghana’s sources of tax revenue and the need to increase them in order to reduce the country’s dependence on foreign aid.

The report estimates that Ghana currently loses around 50 per cent of the corporate tax revenues it is due each year (that is, it loses some £109 million /125 million Euros) to tax dodging by multinational companies. A major part of the problem, it says, is that most tax officials lack a thorough understanding of companies’ complex tax avoidance schemes.

Mining companies are highlighted as a particular problem, in that they impose major environmental costs but contribute very little to Ghana’s tax revenues, despite their large profits in recent years. For instance, the report states that between 2002 and 2006, mining firms as a group paid a maximum of 2 per cent of their turnover in corporation tax, and a minimum of 0.5 per cent.

The report blames the low contribution of mining on a combination of tax evasion by some firms and their expatriate employees and on the failure of tax officials to properly enforce existing law, some of which they say is too complex.

Another problem highlighted by the report is the failure of Ghana’s tax collection agencies publicly to disclose (and even, perhaps, to evaluate) the effects of the generous tax incentives the country offers foreign investors.

Asked recently about the haven’s potential for abuse, Barclays Bank said: ‘Barclays has been operating in Ghana for more than 90 years. During this time, we have earned a reputation for partnering with Ghana’s government to extend access to banking services, build a culture of saving amongst the Ghanaian population and promote the development of the Ghanaian economy.

‘The creation of the IFSC is another landmark achievement in developing Ghana’s financial services sector and Barclays is proud to have been able to partner with the Ghanaian government in this initiative. We adhere to the highest and most stringent levels of international regulation, rules and industry guidance for the financial services sector.’

The report is being launched today (Monday 14 September) at the offices of the British Council in Accra, to mark the start of Ghana’s Tax Week, organised by the country’s Chartered Taxation Institute. The study was commissioned by Christian Aid Ghana from Tax Justice Network Africa.

The report is available at: http://www.christianaid.org.uk/images/taxation-and-development-in-ghana.pdf

Richard Murphy 86, Development, Transparency

FT.com / Companies / Pharmaceuticals - Pfizer agrees to plead guilty in painkiller case.

Richard Murphy Corruption, Transparency

The US Attorney’s Office in California has released details of a case involving a man from Malibu named John McCarthy.

McCarthy used the services of UBS to evade tax. You can read the whole agreement he has reached with the US authorities here, but the key bits are as follows:

So what do we have?

First, active involvement of UBS in what they knew to be tax evasion.

Second, active involvement of a Swiss lawyer in what he or she knew to be tax evasion.

And third repeated money laundering offences in Switzerland, Hong Kong, Cayman, Liechtenstein and the BVI (no surprises there, mind you).

This is not just a matter of a bank not identifying an offence: this is evidence of a bank being an active party in criminal behaviour.

So let’s ask questions:

1) Why is UBS allowed to trade anywhere in the world?

2) Why aren’t those bankers and lawyers who set this up being extradited for trial in the US, where they committed offences?

3) Will Switzerland cooperate in prosecution of the people?

4) How come no regulator anywhere spotted this? Is it because they have all the right pieces of paper in place but turn a blind eye to what is going on?

5) Why do we still allow secrecy jurisdictions to peddle their abusive structures when it is so obvious that this is what they are all about?

I know there will be a host of reactions form within secrecy jurisdictions saying ‘ just a bad apple’ etc., but that is absolute rubbish. For seven years I’ve been part of the Tax Justice Network, saying this is exactly what happens in these places – and with the active cooperation of  bankers, lawyers and accountants. We’ve been proven right so often surely the time for action is now?

So let’s start with Automatic Information Exchange (AIE): UBS knew the real owner of these accounts. If they had been required, as I have proposed, to tell the US that McCarthy had structures in each of the places in which they maintained accounts for him of which they had recorded him as beneficial owner then this abuse would not have been possible.

Which is precisely why the OECD should be moving in this direction at its forum in September. If you really want to stop abuse AIE is the only way to go. And it is possible.

Richard Murphy Banking, Cayman, Corruption, Transparency