A week in tax justice: Jan 13

Tax Justice: the week that was.

Are we finally making progress on tax havens?

Last week saw a number of stories and reports looking at how governments dealt with tax avoidance in 2013. The results are a mixed bag.

The EU Observer reports that the offshore data leaks story from the International Consortium of Investigative Journalists gave a boost to governments wanting to clamp down on illicit financial flows.  Among many other embarrassments the ICIJ revealed that French Prime Minister François Hollande’s campaign treasurer held shares in offshore businesses and that the CEO of Austria’s Raiffeisen Bank held secret offshore accounts in the Caribbean.

There were advances with the UK asking some its dependencies to sign up to a tax transparency initiative and Switzerland removing some banking secrecy. But Austria and Luxembourg dug their heels in and refused to sign up to an automatic exchange of information project in the EU.

Further fallout from the ICIJ was the sharp decline in company registrations in the British Virgin Islands in 2013.

But a nagging question remains: despite these changes, is the world’s stock of dodgy money simply finding new hiding places? Bahamian media, for instance, is reporting an influx of private wealth from Switzerland as the wealthy fret about the (minimal) reforms to bank secrecy there. And it’s not just the Bahamas.

The Financial Times reports that while the UK made some progress on shutting down a loophole where employees are paid through trusts, progress on massive tax avoidance perpetrated by US tech companies such as Apple, Google and Microsoft has been limited – despite intense public scrutiny of their financial activities.

The easy way to stop tax avoidance: stop taxing. 

Last week a debate flared up in the US on whether corporate income tax should be abolished. Proponents of the idea such as academic Laurence Kotlikoff even — astonishingly — try to dress up their arguments in terms of social justice.

At the Tax Justice Network we prefer facts, and proper research. As pointed out on our blog studies from the US Department of Treasury show that 83% of corporate tax is paid by the owners of capital. This makes corporation tax an extremely progressive tax.  Even more importantly, abolishing corporate income tax would open opportunities for increased tax avoidance as high income earners channel their income into companies rather than be paid as individuals.  Something we note they are rather adept at. And how many minimum wage workers do you know who chose to be paid though their Caribbean shell company?

And as we and Richard Murphy note, the impact on developing countries of such a proposal could be truly appalling.

China deals blow to UK’s bid to become offshore banking centre 

Last Autumn the UK Chancellor of the Exchequer George Osborne returned from his tour of China to announce with pride that the UK had signed a deal which he hoped would lead to London becoming the offshore banking centre for the Chinese economy.

But this week it began to dawn on some people that China may have very different ideas of offshore from the unbridled and potentially disruptive flows of capital favored by the financial elite in London.

The Telegraph reports this week that Yi Gang, director of the State Administration of Foreign Exchange has ordered a report into the implementation of a Tobin Tax for the Yuan. The UK’s Conservative-led government, encouraged by the City of London, have fought tooth and nail to stop similar proposals from the EU, who argue if implemented it will diminish the UK’s attractiveness as a financial hub.

But China’s policy makers are more concerned about the disruptive impact of an opening up of the economy to vast capital movements at a time when it is already struggling to control illicit and other destabilising financial flows.   Something our City friends very often seem to gloss over – since economy-destroying financial products have proved to be a nice little earner for London traders in the past.

Offshore overcooking Australia’s housing market? 

Illicit flows of capital from China show up in a number of unexpected places, such as inflation in property markets.   The problems of illicit financial flows into the London property market are well documented. Today 70% of new homes in London are bought by “foreign investors”, frequently through offshore vehicles which are designed to hide assets.

Londoners have started to complain that parts of the city have become ghost towns. And of course the vast amount of dodgy money flowing into the system pushes prices beyond reach for people buying a home for the simple purpose of having somewhere to live.

Now it seems Australia may be feeling the impact from similar flows of speculative cash from offshore.  Reports this week in the Australian Media quoted rises in house prices of 10% in 2013.

This sharp rise has partially been attributed to Chinese investors who are seeking somewhere to put their money as Beijing clamped down on their shadow banking industry last year.

A case of yuan thing after another.