THE GREAT REVENUE ROBBERY - New Canadian book
New book,The Great Revenue Robbery, calls for fair tax system
Why tax havens cause poverty
"On the basis of our sample of MNCs operating in India, we find that MNCs with tax haven connections:These conclusions provide useful empirical confirmation of what many people already know: tax havens help multinational corporations dodge taxes in developing countries, undermining development. Christian Aid continue:
• report 1.5 per cent less profits
• pay 17.4 per cent less in taxes per unit of asset
• pay 30.3 per cent less in taxes per unit of profit
• have 11.4 per cent higher debt ratios than MNCs with no connection to tax havens."
"Our findings strongly suggest that MNCs with connections to tax havens engage in profit shifting more intensively than those MNCs with no tax haven links. This confirms the notion that when corporations have tax haven links they face higher incentives (because of the low tax rates in tax havens) and opportunities (because of the secrecy provisions tax havens offer) to shift income than corporations that do not have any tax haven links.And their solution? Among other things, unitary taxation with profit apportionment.
Profit shifting by MNCs can significantly reduce the tax revenues raised by governments. In countries where taxes raised as a percentage of GDP are very low, the revenue foregone can seriously undermine efforts to tackle poverty and invest in human development."
"For over thirty years, Sarawak has been governed by Chief Minister Abdul Taib Mahmud, who controls all land classification, forestry and plantation licenses in the state. Under his tenure, Sarawak has experienced some of the most intense rates of logging seen anywhere in the world. The state now has less than five per cent of its forests left in a pristine condition, unaffected by logging or plantations and continues to export more tropical logs than South America and Africa combined.
The film reveals for the first time the instruments used by the ruling Taib family and its lawyers to skirt Malaysia’s laws and taxes. It shows how they cream off huge profits at the expense of indigenous people, and hide their dirty money in Singapore."
"In order for MNCs to be taxed according to their real nature, two measures should be introduced:We should add that combined reporting, broken down on a country-by-country basis, is at heart a transparency issue. In and of itself it does not force countries into any particular tax policies, and It merely provides them with the information that they need to help tax multinationals. Combined reporting is a central component of the more far-reaching unitary taxation, which our new report also explores in depth, and which was the subject of a recent paper on the topic by Professor Sol Picciotto, who has done much work on this.
These two measures could be the basis of a tax system that would consider the total profits made by a MNC, rather than the profits made by any of its parts. It would then allocate these profits to the different countries in which the MNC conducts its real business, according to transparent criteria. Each country would be free to decide what tax rates to apply to their corresponding tax base.
- MNCs should be required to submit a worldwide combined report, including consolidated accounts, to the tax authorities of each country in which they operate.
- MNCs should be required to provide a country-by- country breakdown of their employees, physical assets, sales, profits and taxes actually due and paid.
These measures should be complemented by others in order to foster financial transparency, such as the public disclosure of the beneficial owner of companies, foundations and trusts, and the adoption of automatic information exchange as the new global standard."
"This is a truly historic moment. Issues that have been off the agenda for nearly a century are now finally on the agenda. The OECD can either make history and push forward with thoroughgoing reforms, or it can pander to corporate lobbying and come up with a damp squib. The next 12 months will be crucial for establishing whether or not the OECD is up to the job of establishing a new and more just global economic order, where multinational corporations can no longer free-ride on the backs of the rest of us, channeling wealth upwards into the hands of a privileged few."Access the full report here or on Christian Aid's website here. This is an important document, which we will add to our home page. For further reading on combined reporting, see The Use of Combined Reporting by Nation States, by Prof. Michael McIntyre, and a presentation by McIntyre looking at how combined reporting functions in the hands of U.S. states. Read more on this blog entitled Render Unto Caesar, from the Center for Global Development. As it notes:
No less a radical firebrand than the Financial Times notes that corporate tax has become ‘a largely voluntary gesture’, which it thinks ‘scandalous’. The problem is particularly acute for developing countries.Our new No Shifty Business report contains further reading material.
"Each of the BRICs have big problems with tax dodging, which saps billions from national treasuries and—in the case of Russia, India, and China—suggests the newly rich are failing to share the wealth with the poor.Now read on. It's a great article.
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The clearest sign that BRICs are leaking tax revenues is that each country’s biggest source of outside investment is a tax haven. China counts the tiny Caribbean bolthole of the British Virgin Islands as its biggest source of foreign investment (not including the Chinese territory of Hong Kong). India has Mauritius, Russia has Cyprus, and Brazil has the Netherlands."
"Because of these men, corporations like Amazon, Google etc. pay almost no tax. With their 700 000 staff they skilfully create tax tricks. It is high time to drag them out of their loopholes."How apt. Absolutely right. The Big Four accountancy firms help multinational corporations (and other wealthy players) escape huge tax bills, shifting the burden of tax onto the shoulders of others: smaller more local businesses, individuals, the victims of public sector cutbacks, and so on. The ability of multinationals to harvest these tax subsidies helps them out-compete their smaller, more locally-based rivals, killing them in markets and driving them out of business. The result is greater market concentration, greater oligopolistic pricing power for the multinationals, greater influence for the tax havens that facilitate all this (thus providing cover for all manner of nefarious activity,) greater economic inequality around the world, and more. All this goes by the name (in the Anglo-Saxon world) of 'tax efficiency' - when these outcomes are all profoundly inefficient.
"A lack of transparency and strict secrecy are part of the business model of the Big 4. As with the banks, nobody dares to break the wall of silence."It is fantastic to see Stern taking this approach. Spot on. Among other things, the authors read and understood our research about the propensity of big 4 firms to locate in jurisdictions which provide a more secretive legal environment. In tiny Cyprus, for instance, PWC alone employs over 1000 staff.
"Michael Sell profoundly knows the big tax firms. He can assess the danger arising from the Big Four like few others. "With 32 I was employee of a big-four firm. There, I asked myself: do I want to help foreign firms save taxes in Germany all my life? I then changed to the federal tax administration." He begun to model and expand the central tax office on the example of the federal criminal investigations office - though he does not accept this comparison."A US senate report reveals what happens in sales pitches for new tax avoidance schemes: the clients do not receive computer files. Nothing is noted on paper. The sellers write everything on boards, which they wipe off afterwards."
"Whatever gloss you put on it, it’s basically about money-laundering."Quite so.
"The troika has potentially vaporised the Cypriot-based financial services sector and undermined its status as a tax haven, a deliberate act which aimed to police the wilder shores of capital flow in and out of Europe. . . .The financial services sector may now prove dead in the water and the tax haven status of Cyprus has been swiftly and comprehensively compromised. If you have money to hide, you are not going to park it in Cyprus any more.Or, in the words of a Russian cited in the FT (in an article that deserves a blog all to itself),
“The Cypriots killed their country in one day.”The Cyprus Mail article is fascinating, for although the authors clearly it describes something that we at TJN have long described and will explore in far greater depth, in a forthcoming long paper: the capture of, and capitulation by, an entire nation state, to the offshore financial services industry. And this is the big point that the world's media has largely missed, and which is perhaps the most fundamental of all. As the same article notes:
"The interest of the Cypriot political elite has, in large part, been tied to the financial services sector since the early 1990s with lawyers, accountants and others massively over represented in public life and wielding inordinate power . . . the broader interests of the Cypriot economy have become, to a significant degree, dependent upon this economic regime."Take this interesting article about Cyprus, for instance, which noted that the EU had held back on taking action against Cyprus banks because of imminent elections, which EU officials hoped would oust the current President, the Communist Dimitris Christofias, who was "considered too close to the Russian investors." The opposition leader, Nikos Anastasiades, is duly elected, and the article notes that "Anastasiades is a successful investment lawyer, who has several Russian billionaires in his portfolio" and the finance minister Michalis Serris "was also a member of the board of the second bank of Cyprus, the Popular Bank (Laika Bank in Greek.)" And those are just the most obvious examples.
"Cyprus is a remarkably un-reflexive society so this issue appeared to have been ignored by every single journalist, academic and political actor on the island. A consensus emerged here that if the goods were being delivered there was nothing to be gained by reflecting on how those resources were secured."Or, as that same Russian businessman cited in the FT put it:
"They are saying we laundered all the money, but they lived on that money for 10 years and forgot about it.”Back to Officer and Taki:
The crisis has caught up with us and I have grown inured to international media attention since stories are spreading across the media but with no connection to the context described above. Gave a 45 min interview to [a U.S. newspaper] a couple of days ago which was reduced to two lines on their front page on Saturday. The outsider cannot grasp the context and the Cypriot insider is not in a position to join the dots because they have never been given the conceptual framework or the motivation to do so."TJN has been told by Cypriot journalists that they had (until the recent crisis) quite literally been afraid to report deeply on the offshore sector, for fear of reprisals. Anyone who has read The Life Offshore chapter in Treasure Islands will instinctively understand what is happening here. Officer and Taki continue:
"Why we can talk about 'state capture' by the financial services industry is how a nominally left-wing party such as AKEL has never once raised any substantive issues about how the economy had become absolutely dependent upon the tax haven model and Cyprus a conduit for the flow of foreign finance capital between jurisdictions. Political consensus emerged around this model because it appeared to deliver the goods and common resistance was forged to any attempt by international organisations - World Bank, IMF, FAFT, EU....the list goes on - to impose an effective regulatory regime which would undermine this particular cash cow."Officer and Taki clearly have great sympathy with the ordinary citizens of Cyprus, as do we: the EU's response, they say, is
"a cruel and unusual punishment visited upon ordinary Cypriot citizens who have never been informed of the perpetual risks which have accompanied the tax haven strategy of economic development vigorously promoted by the political elite since the 1980s."Now Cyprus - and ordinary Cypriots - have a huge, existential problem. When an island gets captured by an offshore financial services industry - and we've seen this again and again - it tends to kill off substantial parts of alternative sectors. Among other things, it can create "Dutch Disease" effects where local price levels rise in response to the inflows of money, either via the exchange rate or via inflation, and the resulting higher-cost environment then makes it harder for various other sectors to compete in international markets. They consequently wither. More importantly, though, the salaries in this sector are far higher than in any other, and this leaches the best and most highly skilled people out of other sectors (private and public) and thus further worsens their prospects. In the face of all these adverse trends, policy makers then lose interest in 'difficult' problems such as creating a viable agriculture or manufacturing or tourist industry and instead let the easy money roll in in pursuit of secrecy and lax criminal enforcement, no questions asked. Dissenters are bought out or threatened.This makes the problem worse still. It also tends to criminalise originally law-abiding people who come into contact with this sector, who find that they are required to turn a blind eye to foreign tax evasion and other criminality if they want to prosper.
"The index indicators through which measurement occurs are incomplete because they concentrate on the formal legal framework rather then the actual practice of lawyers, accountants and others which deviate from the legal norm established.(We don't disagree with this criticism of our index, other than to say we consider that deviation from the rules that we measure, is exceedingly hard to measure. We would argue that our index is made up of two components: a secrecy score, and a weighting for size, and deliberate non-compliance ends up being captured, indirectly and very roughly, in the scale weighting, which reflects the size of flows that are attracted by the non-compliance.)
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The usual vested interests from the President to the financial services industry have been repeating the mantra that 'there is no dirty money in Cyprus' and deflecting attention from implementation issues to the comprehensive legal framework in place - this is the same issue. Small island jurisdictions obscure from view the informal practices which circumvent the law.
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This is the competitive advantage they then use to attract foreign capital to Cyprus."
"Moneyval in 2005 noted that Cyprus also hosts 14,000 offshore firms, 12,000 of which have no physical presence on the island. . . . It [Moneyval] operates by sending a questionnaire to the Cypriot government, which evaluates itself on compliance with international anti-money laundering standards.That sounds good. But what did they actually find?
It then sends six or so experts who spend three to eight days talking to people in Cypriot government institutions, such as the central bank, Cysec (its main financial regulator) and Mokas (the Cypriot attorney general's anti-money laundering division).
Its last report, in 2011, was described by an independent expert, Tommy Helsby, from the US-based audit firm Kroll, as full of "glowing words."
"Despite the size of Cyprus' financial sector, it said that since 2005 authorities convicted just two people and issued nine orders to freeze accounts in cases focused on money laundering. It noted that "sanctions imposed in practice have been mainly in the form of warning letters." It also said Cyprus lacks the IT and human resources to implement laws."This EU Observer article is worth reading in full: it's a shocker. Just for instance, in light of the Magnitsky case:
The plot involved the theft of three Russian firms, which were owned by two Cypriot companies, which in turn belonged to a UK-based investment firm called Hermitage Capital.Officer and Taki continue:
The directors of the Cypriot firms in June 2008 sent a complaint and two affidavits, seen by EUobserver, to the Cypriot authorities asking for help. The authorities never replied.
When EUobserver phoned the Cypriot attorney general in January to ask why, he said he is too busy to explain. . . . the Cypriot attorney general did not open a money laundering case until six months after he got the information and now appears keen for it go away."
"Small, close knit societies like Cyprus thrive on a lack of transparency and inadequate regulatory regimes in dealing with their own population. This is the competitive advantage they then use to attract foreign capital."
"According to the revelations, Bank of Cyprus, Cyprus Popular Bank (Laiki) and Hellenic Bank -- which were earlier this week acquired by Greece's Piraeus Bank -- has forgiven companies, MPs and local authority officials millions of euros in loans over the past five years."That would constitute outright bribery, as a direct route to state capture.
"While the government is only too happy to put the populist boot into the tax affairs of Jimmy Carr or Starbucks, it is rather cagier about the curious twists of policy that allow swaths of the corporate tax code to be written by companies with help from the very accountants who design avoidance schemes.It's a really positive review. Our quote of the day in bold. Right on the money.
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Britain, far from ruling the waves, may be condemned increasingly just to waive the rules. At the end one is left with a slight whiff of nostalgia – for the days when governments could crack the whip over even the biggest companies."
"People are always writing about bankers leaving. In the end, not so many tend to move and I think that will also be the case this time."Quite so, and the same applies to tax. We've seen the threats again and again, but the number of bankers who actually do rip their children out of their schools in a fit of pique at not getting quite as much as their peers, and relocating to soulless places like Monaco, is always at least an order of magnitude smaller than the number who threaten to do so.
"before long it had proved the most effective single piece of anti tax avoidance measure on record."He should know: he is a former UK tax inspector; OK officials estimated that it enabled the UK to collect an additional £12.5 billion in just a few years.
"A City tax lawyer has backed calls for an extension of the UK’s disclosure of tax avoidance schemes (DOTAS) regime to include ‘abusive’ cross-border transactions affecting vulnerable tax jurisdictions.How would this work?
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Action Aid, Oxfam, Save the Children and Christian Aid proposed that DOTAS should incorporate an additional hallmark covering indicators of possible ‘abusive tax behaviour’ outside the UK. UK-resident taxpayers and UK-based tax advisers would be required to disclose to HMRC transactions and arrangements displaying the additional hallmark."
"David Quentin, a consultant at the law firm Farrer & Co, provided technical tax advice to the charities. ‘Where international mechanisms allow, HMRC will pass on the information to the tax authority in the developing country concerned,’ they wrote."A simple, yet powerful idea. Developing countries could, of course, consider introducing DOTAS-like legislation themselves too.
"Last week the Labour peer and shadow spokesperson for international development, Lord Collins of Highbury, asked whether the government would consider ‘new measures to force British companies to disclose any tax avoidance schemes that could be detrimental to poorer countries, and to support them in taking corrective action’."The responses (as reported in the Tax Journal) were negative, but it's likely that the legal implications of this, and the possibilities, have yet to be prodded and pushed and explored.
As the Senate begins its debate on the budget resolution, 100 national, state and local organizations have announced their support for closing offshore tax loopholes as a way of achieving the growth needed to create jobs and responsibly protect fiscal and program priorities. The priorities of these groups provide a stark contrast to proposals by large multi- national corporations that seek to retain and even extend offshore tax loopholes that cost the U.S.Treasury $90 billion per year.Read the rest of the release here. These are important proposals.