The human right to care and tax justice

On International Human Rights Day today, we support and highlight the call for the human right to care and the pivotal role of tax justice in realising this right. 

The Covid-19 pandemic, the climate crisis, debt burden and the fiscal austerity of recent decades have brought untold burdens and hardships on those who need care and those who care.  We have come to see how care and caring is so poorly valued; either worthy of low pay or no pay at all.  

The pandemic has brought about a laser-like focus on care and understanding the implications of care and of it being predominantly the domain of women and girls. In social and health care settings, in informal settings or in the home, women are on the front line as providers of care. According to a IMF/UN study, women account for 70 percent of the health and social care workforce responding to the pandemic.

Caring should be valued with decent pay and decent work conditions. It should not be a target of financial extraction or commodification. Caring for others, whether it is family or part of a formal role, should not mean that other fundamental rights, such as health, education and livelihood are foregone.  

Needing care or providing care must be accompanied by the right to dignity afforded by professionalised services, social protection and adequate living conditions. The impact of constrained public budgets and countries’ indebtedness leaves those who need care or who care, predominantly women, facing additional hardships without adequate public services and social protection.

Governments need to reclaim their primary role as providers of care, as regulators, and as professional standards setters. They often counter this by saying they have hard fiscal choices to make, but in doing so they neglect their role to guarantee economic and social rights.   

Governments across the world are failing to maximise available resources. Last month, the 2021 edition of the State of Tax Justice revealed the critical importance of maximising resources for the advancement of human rights and substantive gender equality. The report found that countries are losing a total of $483 billion in tax a year to global tax abuse committed by multinational corporations and wealthy individuals – enough to fully vaccinate the global population against Covid-19 more than three times over. It is far from credible for governments to claim that the right to care with dignity is not affordable.

On International Human Rights Day we are sharing a set of resources in support of the Manifesto of Care. Prepared by Public Services International and its allies including the Center for Economic and Social Rights, Global Initiative for Economic, Social and Cultural Rights, the Global Alliance for Tax Justice and Tax Justice Network, these materials advocate and explain the human right to care.

The Care Manifesto: Rebuilding the Social Organisation of Care (Public Services International) sets out 5 Rs of care:

RECOGNISE the Human Right to Care; REWARD and remunerate care work; REDUCE the burden of unpaid care work on women; REDISTRIBUTE care work within households, among all workers, eliminating the sexual division of labour and between households and State; RECLAIM the public nature of care services.

The report:  The Social Organisation of Care (Public Services International)

The blog: The Human Right to Care (Veronica Montufar, PSI)

Video: Recognize Care

Video: Reclaim Care

Video: Reward Care

HC-One: Death, Deception, Dividends

December 2021 Spanish language podcast, Justicia ImPositiva: Los papeles de Pandora, el fraude fiscal, los bancos y la pandemia

Welcome to our Spanish language podcast and radio programme Justicia ImPositiva with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita.

En este programa:

INVITADOS:

Los papeles de Pandora, el fraude fiscal, los bancos y la pandemia #66

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: https://traffic.libsyn.com/secure/j-impositiva/JI_dic_21.mp3

Subscribase a nuestro RSS feed: http://j_impositiva.libsyn.com/rss

O envien un correo electronico a Naomi [@] taxjustice.net para ser
incorporado a nuestra lista de suscriptores.

Sigannos por twitter en http://www.twitter.com/J_ImPositiva

Estamos tambien en facebook: https://www.facebook.com/Justicia-ImPositiva-1464800660510982/

Tax Justice Network proposal to FATF’s consultation on beneficial ownership for legal persons

The Financial Action Task Force (FATF) in charge of the Recommendations on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) has opened a consultation on the reform of Recommendation 24 on beneficial ownership for legal persons.

We have sent written submissions and participated at calls on Recommendation 24 and recently Recommendation 25 (on beneficial ownership for trusts and other legal arrangements). Now, the FATF is inviting feedback on their proposed amendments to the text of Recommendation 24.

You may find our proposed amendments below. If you have any comments or feedback, please write to [email protected]

In essence, here’s a summary of our proposals:

1)      Application to all legal vehicles (eg trusts), not just to legal persons.

All changes to Recommendation 24 (asking for beneficial ownership registration, public access, etc) should also apply to trusts (which are currently covered and subject to less transparency under Recommendation 25). The main argument in favour of this equal treatment is two-fold. First, trusts are a type of complex legal vehicle subject to many types of abuses (and widely mentioned in the latest Pandora Papers leak) so they should be subject to even more transparency (or at least as much as) legal persons, not less. Second, private foundations share the same control structure and goals as trusts, and given that they are considered legal persons, they are already subject to Recommendation 24, so there’s no reason why trusts should be considered special or different.

2)      Mandatory beneficial ownership registries (without alternative mechanisms)

While a multi-pronged approach using many sources of information is welcome, a central beneficial ownership register should become mandatory for all countries, without allowing for “alternative mechanisms”. As of April 2020, mora than 80 jurisdictions already had laws requiring beneficial ownership information to be registered with a government authority. As of November 2021, that number is closer to 90 with new relevant countries such as the United States. Given that countries are already allowed to use any government authority, eg the commercial register, the tax administration, the financial intelligence unit, the central bank or a new beneficial ownership register, there is no need to water-down this requirement by allowing “alternative mechanisms”.

As for the cost of the registry approach, countries with low resources should consider that requiring beneficial ownership registration need not involve any new cost. The cheapest option is to add a field on beneficial ownership to the forms that must already be registered by local entities and taxpayers (eg incorporation form with the commercial register or a tax return with the tax administration).

3)      Central registries

While countries should be allowed to have as many local registries as they need (eg for federal purposes) all information should be centralised in a digital platform. This central platform should contain information on beneficial ownership and for all types of legal vehicles, and ideally also legal ownership information to avoid consistency problems. This way, it will be possible to know all the legal vehicles related to a beneficial owner, no matter in which district or province this vehicle was incorporated. Likewise, by having information on all legal vehicles as well as legal and beneficial ownership in the same place, it will be possible to ensure consistency, to prevent cases where the beneficial ownership register describes that company A is owned by company B which in turn is owned by John, but the shareholder register states that company A is owned by trust X.

4)      Verification independent from risk approach

Verification is a crucial element to ensure that beneficial ownership registries will be useful. While obliged entities (eg banks) and the general public (civil society organisations, investigative journalists) should be encouraged to report discrepancies or indicate on other red-flags, this should essentially be a responsibility of countries, not something that they should be able to outsource. In fact, the whole purpose of now reforming Recommendation 24 to require beneficial ownership registries is because the old approach (relying on banks as the source for beneficial ownership information) was proved insufficient. In other words, if banks were proven not to be effective as the only source for beneficial ownership information, it’s not possible to expect the verification can be effective, if only banks are required to do it. It should be governments’ role to ensure that registered beneficial ownership information is trustworthy.

In addition, reporting discrepancies should be one measure, but certainly not the only one. A criminal could have lied both to the registry and to the bank. In this case, there will be no discrepancy, but information will still be inaccurate. Verification should involve cross-checks, data validation and red-flagging.

With regard to applying verification based on a risk-based approach, one analogy may be relevant. Just as all passengers must go through airport security, all legal entities should be subject to verification mechanisms. Otherwise, verification would fail to identify the “unknown unknowns” as well as needing to catch up with an ever changing and sophisticated criminals. For instance, the UK had to widen the scope of beneficial ownership registration. First, for companies and limited liability partnerships (LLPs). Then, to Scottish limited partnerships after finding out that they were involved in major money laundering schemes. Now, there’s evidence that limited partnerships from England and Wales and Northern Ireland are increasingly being misused, so the UK should be required to subject them to beneficial ownership registration too. It would have been easier to cover all partnerships from the beginning.

A risk-based approach should be applied but only to determine which entities should be subject to enhanced verification procedures (eg filing additional documentation as part of registration, in-person meetings, etc). The risk-based approach should also involve publishing statistics on the typical structures of legal entities (number of layers, nationality of layers, type of entity of each layer, number of legal owners and beneficial owners and their nationalities and residencies) to determine outliers. Structures considered too complex compared to the “statistically” normal one, should also be subject to enhanced verification procedures.

5)      Beneficial ownership registration for foreign legal vehicles with link to a country

Contrary to general practice, beneficial ownership registration should be required not just for locally incorporated legal vehicles (as is currently the case in most countries), but especially for any foreign legal vehicle which has a link to the country. These foreign legal vehicles may be creating illicit financial flows risks in the country (eg holding real estate or bank accounts as part of a money laundering scheme) and there may be no information about them in the beneficial ownership register. For this reason, links that would trigger beneficial ownership registration should be as comprehensive as possible:

(i)                  holding registrable or valuable assets (eg real estate, cars, ships, aircrafts, art work, etc),

(ii)                having relations with an obliged entity (holding bank accounts, engaging with a lawyer, notary or accountant),

(iii)               having operations in the country (eg providing or acquiring goods or services, including free services such as social media, streaming or other digital services),

(iv)               having income or being considered tax resident or subject to tax, or

(v)                 having a local participant who is resident in the country, participating either as a legal owner, beneficial owner, director, trust party, etc.

6)      Beneficial ownership definition and thresholds

The beneficial ownership definition should be based on the FATF Glossary, rather than on the customer due diligence rules of Recommendation 10. In essence, this means that a beneficial owner should be any natural person who meets at least one prong: ownership, control or benefit (rather than applying a cascading test where a person with “control via other means” is only considered a beneficial owner (second step) when no one is identified as having a “controlling ownership” (first step)).

Thresholds should not be applied to the beneficial ownership definition for legal persons (just as it happens with legal ownership of companies and with beneficial ownership for trusts, where absolutely all shareholders and all parties to the trust must be identified, without any threshold). This means that any natural person who directly or indirectly holds one share, vote, interest or right to economic benefit in an entity should be registered as a beneficial owner. In addition,  there cannot be cases where an entity doesn’t have a beneficial owner (so a senior manager would never be identified as a beneficial owner). Many countries apply a beneficial ownership definition without thresholds, including Argentina, Botswana and Ecuador.

Although the “25 per cent” threshold is too easy to bypass by having an entity with more than four shareholders, in reality any threshold can be circumvented. For instance, a recent Al Jazeera investigation revealed an enabler hiding the beneficial owner of a football club by incorporating an investment fund where the investors/shareholders were 21 companies (so that all companies would have a shareholding below 5 per cent, which was the threshold to report ownership to the financial regulator). An investigation by Kroll into the Moldova Laundromat revealed the same strategy to acquire a bank, by holding interests of up to 4.99 per cent, to be below the 5 per cent threshold.

7)      Prohibition of bearer shares and warrants

Bearer shares should be prohibited. In a globalised and digital world, giving ownership to whoever holds a paper-share creates no benefit to society, but absolute secrecy. There is no reason why they should remain in existence, even if registered or immobilised. All pre-existing bearer shares should be converted into registered shares. In case of no-compliance, pre-existing bearer shares should be cancelled, losing all rights, without any chance to reinstate rights or obtain compensation (unlike the Swiss case).

Until full prohibition is established, countries which allow immobilisation should require a government authority (instead of a private party like a lawyer or bank) to immobilise the bearer shares.

Bearer warrants should also be prohibited, and financial instrument (eg call options, convertible debt, etc) should either be prohibited or disclosed as a beneficial owner (eg if John has convertible debt or a call option to acquire shares, he should be considered -and registered- a beneficial owner).

8)      Prohibition of nominee shareholders and directors

Nominee shareholders, aka fake shareholders, and nominee directors should be prohibited. In a world with perfect beneficial ownership transparency, nominee shareholders would become obsolete because everybody would know who the nominator (beneficial owner) is. The prevalence of nominee shareholders means that current beneficial ownership transparency hasn’t reached an acceptable level. Nominee shareholders should thus be prohibited to remove an additional obstacle to transparency.

Given that de facto nominees may still be employed despite the prohibition, countries should establish, in addition to civil and criminal penalties, that registered information has “constitutive effect” (meaning that rights start to exist upon registration) so that the nominee would be entitled to all the economic and political rights over an entity. The nominator (real beneficial owner) would have no rights at all. This would work as an incentive not to register incorrect or inaccurate information.

Nominee directors should also be prohibited because they are an abuse of law (if the law considers necessary to have a number of directors, it makes no sense to appoint a person who only rubber-stamps decisions or forwards correspondence). To enforce this prohibition countries should disregard any indemnity provision in favour of directors and consider that directors should be held responsible for the entities they manage or direct, without being able to claim that they were merely nominees.

9)      Public access

Public access to legal and beneficial ownership information should become the norm. Public access is available in EU countries, other European countries (eg the UK, Ukraine and the Western Balkans), as well as in countries in Africa (eg Ghana), Latin America (eg Ecuador) and Southeast Asia (eg Indonesia).

Given that legal vehicles give excessive benefits to their owners (eg limited liability, asset protection, possibility to hold assets and operate through the legal vehicle, etc), beneficial ownership transparency should be considered the minimum “consideration” (price) in exchange for creating legal vehicles and enjoy their benefits. Individuals who prefer not to have their names in public beneficial ownership registries should refrain from creating or owning legal vehicles, and should rather operate under their own name.

Public access is the best way to save resources for everyone. Those who need the information (local and foreign competent authorities, local and foreign obliged entities, etc) would have access to it without constraints. Those who hold the information would not need to spend time and resources to respond to requests for beneficial ownership information. Verification will be enhanced by increasing scrutiny by obliged entities, civil society organisations and investigative journalists.

Although some of the details may be restricted and available only to competent authorities, publicly accessible information should enable the determination of who a beneficial owner is (eg to determine if John Smith owning company A is the same John Smith owning company B) and the nature of such beneficial ownership (eg John is the beneficial owner because he has 100% of the votes).

Here are our proposed amendments to the Recommendation’s text (in italics and underlined is what the FATF is proposing to amend, and in bold is what we are proposing):

Recommendation 24. Transparency and beneficial ownership of legal persons vehicles, including legal persons and arrangements

Countries should assess the risks of take measures to prevent the misuse of legal persons for money laundering or terrorist financing, and take measures to prevent their misuse. Countries should ensure that there is adequate, accurate and timely up to date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently in a timely fashion by competent authorities through either a government register that holds of beneficial ownership information or an alternative mechanism. In particular, cCountries  that have legal persons that are able to should not permit legal persons to issue new bearer shares or bearer share warrants, and take measures to abolish prevent the misuse of existing bearer shares and bearer share warrants. Countries, or which allow nominee shareholders or nominee directors, should prohibit take effective measures to ensure that nominee shareholders and directors they are not misused for money laundering or terrorist financing. Countries should consider measures to facilitate public access to beneficial ownership and control information by financial institutions and DNFBPs undertaking the requirements set out in Recommendations 10 and 22 as well as by foreign authorities and other stakeholders (eg civil society organisations and investigative journalists).

Interpretive Note to Recommendation 24 (Transparency and Beneficial Ownership Of Legal Persons Vehicles, including legal persons and arrangements)

1.         Competent authorities should be able to obtain, or have access in a timely fashion to, adequate, accurate and current information on the beneficial ownership and control of companies and other legal persons (beneficial ownership information[1]) that are created[2] in the country, as well as those that have any present ML/TF risks and have sufficient links[3] with their country (if they are not created in the country). Countries may choose the mechanisms they rely on to achieve this objective, although they should also comply with the minimum requirements set out below. It is also very likely that cCountries will need toshould utilise a combination of mechanisms to achieve the objective.

2.         As part of the process described in paragraph 1 of ensuring that there is adequate transparency regarding legal persons, countries should have mechanisms that:

a)             identify and describe the different types, forms and basic features of legal persons in the country, publish statistics on the typical ownership and control structure of local legal persons, considering at least (i) number of layers, (ii) type of legal vehicle in each layer (eg company, trust, partnership, etc), (iii)nationality of layers, (iv) number of legal owners and beneficial owners and (v) their nationality and residence.

b)             identify and describe the processes for: (i) the creation of those legal persons; and (ii) the obtaining and recording of basic and beneficial ownership information;

c)              make the above information publicly available; and

d)             assess the money laundering and terrorist financing risks associated with different types of legal persons created in the country, and take appropriate steps to manage and mitigate the risks that they identify.

e)             assess the money laundering and terrorist financing risks associated with different types of foreign-created legal persons to which their country is exposed, and take appropriate steps to manage and mitigate the risks that they identify[4].

A. BASIC INFORMATION

3.         In order to determine who the beneficial owners of a company[5] are, competent authorities will require certain basic information about the company, which, at a minimum, would include information about the legal ownership and control structure of the company. This would include information about the status and powers of the company, its shareholders and its directors and the full ownership chain and control structure up to each beneficial owner.

4.         All legal persons (and arrangements) companies created in a country should be registered in a company registry[6] to have legal validity[7]. Whichever combination of mechanisms is used to obtain and record beneficial ownership information (see section B), there is a set of basic information on a company that needs to be obtained and recorded by the company[8] as a necessary prerequisite. The minimum basic information to be obtained and recorded by a company should be:

a)             company name, proof of incorporation, legal form and status, the address of the registered office, basic regulating powers (e.g. memorandum & articles of association), a list of directors, legal entity identifier (LEI) and unique identifier such as a tax identification number or equivalent (where this exists); and

b)             a register of its legal owners (shareholders or members or partners, or in the case of private foundations, all the parties including founder, member of foundation council, protectors, beneficiaries and any other individual with effective control over the private foundation), containing the names of the legal owners shareholders and members and number of interests shares held by each legal owner shareholder and categories of interests shares (including the nature of the associated voting rights).

5.         The company registry[9] should record all the basic information set out in paragraph 4(a) above.

6.         The company should maintain the basic information set out in paragraph 4(b) within the country, either at its registered office or at another location notified to the company registry. However, if the company or company registry holds beneficial ownership information within the country, then the register of shareholders need not be in the country, provided that the company can provide this information promptly on request.

B. BENEFICIAL OWNERSHIP INFORMATION

7.        Countries should follow a multi-pronged approach in order to ensure that the beneficial ownership of a company can be determined in a timely manner by a competent authority. Countries should decide, on the basis of risk, context and materiality, what form of registry or alternative mechanisms they will use to enable efficient access to information by competent authorities, and should document their decision. This should include the following:

a)      Countries should require companies to obtain and hold adequate, accurate and up-to-date information on the company’s own beneficial ownership and the full ownership chain and control structure up to each beneficial owner; to cooperate with competent authorities to the fullest extent possible in determining the beneficial owner, including making the information available to competent authorities in a timely manner; and to cooperate with financial institutions/DNFBPs to provide adequate, accurate and up-to-date information on the company’s beneficial ownership information.

b) (i)   Countries should require adequate, accurate and up-to-date information on the beneficial ownership of legal persons to be held by a public authority or body (for example a tax authority, FIU, companies registry, or beneficial ownership registry). If information need not be is not held by a single body, the country should implement a digital platform to centralise legal and beneficial ownership information (including the full ownership chain and control structure) of all legal persons only[10].

b) (ii) Countries may decide to use an alternative mechanism instead of (b)(i) if it also provides authorities with efficient access to adequate, accurate and up-to-date BO information. For these purposes reliance on basic information or existing information alone is insufficient, but there must be some specific mechanism that provides efficient access to the information.

c)      There should be no exemptions from beneficial ownership registration, unless the exact same information that is required to be registered is already available by another government authority, eg the stock exchange, central securities depository, etc. In such cases, the beneficial ownership register should contain a link or a duplication of the beneficial ownership information which is already available with the other government authority (eg the stock exchange).

Countries should use any additional supplementary measures that are necessary to ensure the beneficial ownership of a company can be determined; including for example information held by regulators or stock exchanges; or obtained by financial institutions and/or DNFBPs in accordance with Recommendations 10 and 22[11].

10.       All the persons, authorities and entities mentioned above, and the company itself (or its administrators, liquidators or other persons involved in the dissolution of the company), should maintain the information and records referred to for at least five years after the date on which the company is dissolved or otherwise ceases to exist, or five years after the date on which the company ceases to be a customer of the professional intermediary or the financial institution.

TIMELY ACCESS TO ADEQUATE, ACCURATE, AND UP-TO-DATE INFORMATION

11.       Countries should have mechanisms that ensure that basic information and beneficial ownership information (as well as the full ownership chain and control structure), including information provided to the company registry and any available information referred to in paragraphs 7, is adequate, accurate and up-to-date. Countries should require that is accurate and is kept as current and up-to-date as possible, and the information should be updated within a reasonable period following any change.

Adequate information is information that is sufficient to identify and determine the risk[12] of the natural person(s) who are the beneficial owner(s), and the means and mechanisms through which they exercise beneficial ownership or control. 

Accurate information is information which has been verified to confirm its accuracy by verifying the identity and status of the beneficial owner using reliable, independent source documents, data or information.  The extent of Enhanced verification measures may vary according to the specific level of risk.

Countries should consider complementary measures as necessary to support the accuracy of beneficial ownership information, e.g. discrepancy reporting, automated cross-checks against other databases, pre-filled forms, data validation mechanisms and requiring information to be verified by a liable obliged entity with physical presence in the country.

Up-to-date information is information which is as current and up-to-date as possible, and is updated within a reasonable period (e.g. within one month) following any change. Registered information should be considered to have “constitutive effect” where rights (to dividends, votes, etc) only exist for a legal or beneficial owner since registration.

12.       Competent authorities, and in particular law enforcement authorities, should have all the powers necessary to be able to obtain timely access to the basic and beneficial ownership information held by the relevant parties, including rapid and efficient access to information held or obtained by a public authority or body or other competent authority on basic and beneficial ownership information, and/or on the financial institutions or DNFBPs which hold this information. In addition, countries should ensure public authorities have timely access to basic and beneficial ownership information on legal persons in the course of public procurement.

13.       Countries should require their company registry to provide and/or facilitate timely access by financial institutions, DNFBPs and other countries’ competent authorities to the public information they hold, and, at a minimum, to the basic information referred to in paragraph 4 (a) above. Countries should also establish consider facilitating timely access by financial institutions and DNFBPs to information referred to in paragraph 4(b) above and to beneficial ownership information held pursuant to paragraph 7 above, as well as public access to these information legal and beneficial ownership information (which should include at least the full name, identifier, date and nature of beneficial ownership). Public access should be online, for free and in open data format.

D. OBSTACLES TO TRANSPARENCY

14.      Countries should take measures to prevent and mitigate the risk of the misuse of bearer shares and bearer share warrants, for example by prohibiting the issuance of new bearer shares and bearer share warrants[13]; and, abolishing for any existing bearer shares and bearer share warrants, by applying one or more of the following mechanisms within a reasonable timeframe[14]:

(a) prohibiting them

(a) converting them into a registered form; or

(b) immobilising them by requiring them to be held with a regulated financial institution or professional intermediary, with timely access to the information by the competent authorities; and [Immobilisiation, if it is to be kept, should only be allowed by a government authority, eg the Central Bank or Central Securities Depository.]

(c) During the period before (a) or (b) is completed, requiring holders of bearer instruments to notify the company, and the company to record their identity before any rights associated therewith can be exercised.

15.       Countries should take measures to prevent and mitigate the risk of the misuse of prohibit nominee shareholding and nominee directors. Examples to enforce this prohibition include:, for example by applying one or more of the following mechanisms[15]:

(a) applying the “constitutive effect” where registered legal owners or beneficial owners, even if proven to be de facto nominees, are to be considered the real owners of interests and rights to dividends or distributions, where the real (hidden) owner loses all rights over those interests, in addition to the civil, administrative and criminal consequences that apply against the nominee and nominator for violating the prohibition of nominee shareholdings requiring nominee shareholders and directors to disclose their nominee status and the identity of their nominator to the company and to any relevant registry, financial institution, or DNFBP which holds the company’s basic or beneficial ownership information, and for this information to be included in the relevant register as part of basic information; or

(b) considering nominee directors to be fully liable for the legal person’s actions, disregarding any indemnity provision or defence based on being a mere nominee requiring nominee shareholders and directors to be licensed[16], for their nominee status and the identity of their nominator to be recorded in company registries, and for them to maintain information identifying their nominator and the natural person on whose behalf the nominee is ultimately acting[17], and make this information available to the competent authorities upon request[18].

E. OTHER LEGAL PERSONS

16.       In relation to foundations, Anstalt, Waqf[19], limited partnerships and limited liability partnerships, countries should take similar measures and impose similar requirements, as those required for companies (including beneficial ownership registration), taking into account their different forms and structures.

17.       As regards other types of legal persons, countries should take into account the different forms and structures of those other legal persons, and the levels of money laundering and terrorist financing risks associated with each type of legal person, with a view to achieving appropriate levels of transparency. At a minimum, countries should ensure that similar types of basic information should be recorded and kept accurate and current by such legal persons, and that such information is accessible in a timely way by competent authorities. Countries should review the money laundering and terrorist financing risks associated with such other legal persons, and, based on the level of risk, determine the measures that should be taken to ensure that competent authorities have timely access to adequate, accurate and current beneficial ownership information for such legal persons.

E.  LIABILITY AND SANCTIONS

1.                 18.                 There should be a clearly stated responsibility to comply with the requirements in this Interpretive Note, as well as liability and effective, proportionate and dissuasive sanctions, as appropriate for any legal or natural person that fails to properly comply with the requirements. In addition to civil and criminal sanctions, the consequences for failing to register accurate or updated information must include:

a) for non-compliant legal persons: removal from the register and loss of legal existence (being prevented from owning assets or engaging in any transaction),

b)        for non-compliant beneficial owners: loss of all rights (dividends, voting rights and their interest in the legal person),

c)         for non-compliant legal owners who fail to identify their beneficial owners: loss of all rights (dividends, voting rights and their interest in the legal person),

G. INTERNATIONAL COOPERATION

19.       Countries should rapidly, constructively and effectively provide the widest possible range of international cooperation in relation to basic and beneficial ownership information held by public authority or body, on the basis set out in Recommendations 37 and 40. This should include (a) facilitating access by foreign competent authorities to basic information held by company registries; (b) exchanging information on shareholders; and (c) using their powers, in accordance with their domestic law, to obtain beneficial ownership information on behalf of foreign counterparts. Countries should monitor the quality of assistance they receive from other countries in response to requests for basic and beneficial ownership information or requests for assistance in locating beneficial owners residing abroad. Consistent with Recommendations 37 and 40, countries should not place unduly restrictive conditions on the exchange of information or assistance e.g., refuse a request on the grounds that it involves a fiscal, including tax, matters, bank secrecy, etc. Information held or obtained for the purpose of identifying beneficial ownership should be kept in a readily accessible manner in order to facilitate rapid, constructive and effective international cooperation. Countries should designate and make publicly known the agency(ies) responsible for responding to all international requests for BO information.

[1] Beneficial ownership information for legal persons is the information referred to in the Glossary and should cover all natural persons that have either ownership, control or benefit from a legal person, without applying thresholds. interpretive note to Recommendation 10, paragraph 5(b)(i). Controlling shareholders as referred to in, paragraph 5(b)(i) of the interpretive note to Recommendation 10 may be based on a threshold, e.g. any persons owning more than a certain percentage of the company (determined based on the jurisdiction’s assessment of risk, with a maximum of 25%).

[2] References to creating a legal person, include incorporation of companies or any other mechanism that is used. 

[3] Links should include at least: (i) holding registrable or valuable assets (eg real estate, cars, ships, aircrafts, art work, etc), (ii) having relations with an obliged entity (holding bank accounts, engaging with a lawyer, notary or accountant), (iii) having operations in the country (eg providing or acquiring goods or services, including free services such as social media, streaming or other digital services), (iv) having income or being considered tax resident or subject to tax, or (v) having a local participant who is resident in the country, participating either as a legal owner, beneficial owner, director, trust party, etc.

Countries may determine what is considered a sufficient link on the basis of risk. Examples of sufficiency tests may include, but are not limited to, when a company, on a non-occasional basis, owns a bank account, employs staff, owns real estate, invests in the stock market, owns a commercial/business insurance, or is a tax resident in the country.

[4] This could be done through national and/or supranational measures. These could include disregarding the legal effects of unregistered local or foreign entities, as well as prohibiting nationals and obliged entities from engaging with those unregistered local or foreign entities. requiring beneficial ownership information on some types of foreign-created legal persons to be held as set out under paragraph 7. [BO registration for linked foreign entities should be mandatory]

[5] Recommendation 24 applies to all forms of legal persons. The requirements are described primarily with reference to companies, but similar requirements should be applied to other types of legal person, taking into account their different forms and structures – as set out in Section E.

[6] “Company registry” refers to a register in the country of companies incorporated or licensed in that country and normally maintained by or for the incorporating authority. It does not refer to information held by or for the company itself.

[7] Unregistered legal persons and arrangements should be able to enjoy limited liability, hold assets under their name, enter into transactions with any party or engage with obliged entities.

[8] The information can be recorded by the company itself or by a third person under the company’s responsibility. 

[9] Or another public body in the case of a tax identification number.

[10] A body could record beneficial ownership information alongside other information (e.g. basic ownership and incorporation information, tax information), or the source of information could take the form of multiple registries (e.g. for provinces or districts, for sectors, or for specific types of legal person such as NPOs), or of a private body entrusted with this task by the public authority.

[11]   Countries should be able to determine in a timely manner whether a company has or controls an account with a financial institution within the country.

[12] Examples of information aimed at identifying the natural person(s) who are the beneficial owner(s) include the full name, nationality(ies), the full date and place of birth, residential address, national identification number and document type, and the tax identification number or equivalent in the country of residence. Additional details to determine the risk should include: other residencies and nationalities, PEP status, date since becoming a beneficial owner, value or nature of the transaction that allowed them to become a beneficial owner (eg acquiring 10% of the shares for a value of X).

[13] Or any other similar instruments without traceability such as financial instruments (eg call options, futures, etc).

[14] This requirement does not apply to bearer shares or bearer share warrants of a company listed on a stock exchange and subject to disclosure requirements (either by stock exchange rules or through law or enforceable means) which impose requirements to ensure adequate transparency of beneficial ownership.

[15] Countries may instead choose to prohibit the use of nominee shareholders or nominee directors. If so, the prohibition should be enforced.  

[16] A country need not impose a separate licensing or registration system with respect to natural or legal persons already licensed or registered as financial institutions or DNFBPs (as defined by the FATF Recommendations) within that country, which, under such license or registration, are permitted to perform nominee activities and which are already subject to the full range of applicable obligations under the FATF Recommendations.

[17]  Identifying the beneficial owner in situations where a nominee holds a controlling interest or otherwise exercises effective control requires establishing the identity of the natural person on whose behalf the nominee is ultimately, directly or indirectly, acting.

[18] For intermediaries involved in such nominee activities, reference should be made to R.22 and R.28 in fulfilling the relevant requirements.

[19] Except in countries where Waqf are legal arrangements under R.25.

The pitfalls of over-reliance on economics research in corporate tax policy

In rare cases when academic research attracts political attention, the results can be dramatic. An illuminating example of such an impact is an episode where a single review article became the chief justification for a drastic corporate tax rate cut with a direct budgetary impact of around 900 million euros. A close reading of the aforementioned article reveals caveats that undermined the anticipated policy goals of the reform. These caveats were not reflected upon in the public debate. The episode highlights the perils of relying on one branch of economics as a chief source of evidence in the design of tax policies.

The case study introduced below draws from our peer-reviewed article titled Conceptualizing Epistemic Power: The Changing Relationship Between Economic Policy Paradigms and Academic Disciplines, published at the Accounting, Economics and Law journal. It continues the debate instigated in a 2016 blog post that Nicholas Shaxson published in this blog under title Corporate tax cuts: why the old analyses don’t stack up any more (did they ever?), which drew from another blog post by Rasmus Corlin Christensen. At the heart of this discussion is a long-standing dilemma: can the negative budgetary impact of tax cuts be offset by an increase in economic activity? The case study also raises an important follow-up question: what forms of research are required to answer this question in different national settings?

Finland and the global financial crisis

Finding answers to these questions requires going back to early 2011. Finland had just adopted an unusually broad six-party government, with parties from left, right and the center of the political spectrum. The governmental program reflected the 1990s-style tax policy consensus, characterized by conceding to the gradual race to the bottom in corporate tax rates. The governmental program envisioned lowering the corporate tax rate by one percentage point to 25%. This promise was fulfilled (and even exceeded) in 2012, with a new tax rate of 24.5%.

If the story had ended there, it might just have been a typical example of the race to the bottom in corporate taxation. However, the government soon decided that the economic crisis necessitated further action. This paved the way to the drastic reform of 2014, which reduced the corporate tax rate from 24.5 to 20%. There was an urge to do something “big” to send a signal to the markets and to bolster Finland’s ‘competitive advantage’.

The case for the cut

The decision was politically contentious for a six-party government with deep ideological rifts. In the words of an insider, the tax cut “was an undesirable expense for the political left, and the smaller the cost, the easier it was to settle on the reform”. The static downward impact on tax revenues was estimated at around 900 million euros.

The preparatory stage of the reform was unusual in its reliance on the international economics literature, and in sidelining the  lawyer-dominated Tax Department of the Ministry of Finance (MoF). These two factors facilitated the entrance of the anticipated – and highly contested – dynamic effects of the tax cut in the political debate. In other words, the negative budgetary effect was expected to be mitigated through the resulting increase in employment and investment. To assess this impact, an idea emerged of conducting impact estimates on the behavioral effects of the tax cuts that would broaden the corporate tax base. The MoF tasked a state-funded economic research institute to conduct such study.

In an unprecedented move, the government projected that broadening the tax base would help to cover more than half (50–62%) of the annual revenue loss. The estimates relied on studies of tax elasticity of corporate tax reforms in the international economics literature. These impact estimates in turn relied on a dynamic, applied general equilibrium model, based upon a number of contentious assumptions. Impact estimates failed to specify a timeframe for the emergence of such dynamic effects. The chosen approach was highly controversial even within the MoF. High-ranking civil servants found meaningful short-term impact unlikely.

Several preparatory memos of the tax cut referred to a 2008 review article written by Ruud de Mooij and Sjef Ederveen, which happens to be the same piece of analysis discussed in the aforementioned blog posts by Shaxson and Christensen. The crux of the matter relates to the question of tax elasticity, which refers to the ways in which tax base reacts to the changes in tax rate. Advocates of tax cuts often argue that tax rate cuts tend to create or attract new economic activity. This is a questionable idea for the reasons we will discuss in detail below.

The power of a paper

After reviewing 427 studies, de Mooij and Ederveen suggested that when governments cut corporate taxation, the ensuing broadening of the tax base carries potential to offset part of the revenue loss. In the Finnish debate, this was interpreted to mean that a 4.5 percentage point drop in corporate tax rate would result in a self-financing rate of 62% through broadening the tax base. The article identified five sub-components for this effect: changes in the (1) the corporate legal forms; (2) the profit-shifting patterns of multinationals; (3) debt-capital ratios; (4) size of the existing foreign direct investment, and, (5) the amount of inward investments. The relative size of these components was estimated through a literature review.

Two-thirds of the dynamic effects were seen to result from the shifts of transboundary “hot money”, or, from changes in the legal form of existing economic activity. These effects are prone to react to corresponding changes in other jurisdictions. Moreover, the long-term effects of hot money on economic growth and employment are often meagre, as the governmental assessments also noted. Even the relationship between profit-shifting patterns and corporate tax rate is much more complex than anticipated. Profit-shifting is influenced by a variety of factors such as tax treaties and the capacities of tax authorities. Many commentators found the international estimates unreliable and questioned whether they could be meaningfully applied in the Finnish context. Yet, the contents of these sub-components were only vaguely debated in public, even though they involved highly controversial assumptions. Finally, as Christensen and Shaxson mention in their blog posts, the rapid changes that have upended global tax governance in the 2000s have also made earlier, historical statistical analyses of tax elasticity outdated.

It should also be noted that the de Mooij and Ederveen article saw the level of corporate tax rate as key variable in determining economic activity, which has been seen to reflect the contested idea of the Laffer curve. The article infers predictions on investment activity based on a pre-determined set of causal mechanisms that impact the cost of capital. However, empirical literature suggests that investment decisions are influenced by a myriad of reasons beyond tax rates, such as productive possibilities, market size, resources and the political and macroeconomic conditions. The type of investment most responsive to the level of corporate taxation seems to be highly mobile portfolio investment.

These uncertainties notwithstanding, this single article occupied a central role in governmental discussions on the budget framework. The article was important not only at the preparatory level, but also within the government. An expert with close knowledge of the negotiation process explains that the article was in:

“briefcases when the decision was made, it was reviewed and browsed during the process. […] If I need to name one study that was on the desks at the time, this was it”.

A cautionary tale

Resonating with the concerns we highlighted above, a lawyer whom we interviewed speculated that “perhaps there is a growing need to give policy proposals a seemingly scientific form to lend them credibility”. Hence, politicians “sometimes refrain from advancing reforms that might generate positive results according to practical knowledge of the issues at hand”. Politicians tend to favor quantitative assessments, even when they are highly uncertain.

The remarks of the interviewee quoted above are spot on. If the forms of knowledge production that guide decision-making favor abstract and formalist forms of economics research, important aspects may get sidelined. While econometric calculations can be useful in different stages of governmental preparatory work, they need to be balanced by a clear-headed understanding on the factors that drive corporations and investors and the underlying legal and accounting-level mechanisms. A sensitivity to national and historically specific contexts is of utmost importance when interpreting research.

Overall, this dramatic example of the international race to the bottom should serve as a warning sign for other countries. If it happens in a country that prides itself with endorsing evidence-based policy-making, other countries are likely vulnerable to similar turns in the narrowing understanding of evidence in policy-making.

In the international debate on corporate taxation, the OECD’s proposed introduction of a global minimum tax and a small sales-based apportionment mechanism is beset by controversy over the likely distribution of any benefits. In that context, the OECD has raised eyebrows by refusing to publish country-level estimates of the revenue impact – while multiple independent studies including from the International Monetary Fund suggest that many countries stand to lose out.

Meanwhile, the leading business lobby group has written to the OECD to demand greater involvement in the remaining process; and researchers at Oxford University have shown that the outstanding decisions in that process will effectively determine whether or not the minimum tax has a meaningful impact when introduced. The quality and transparency of evidence matters greatly.

Written with contribution by Jussi Jaakkola and Leevi Saari.

Tax Justice Network Portuguese podcast: UM RETRATO ASSOMBROSO DO ABUSO FISCAL #31

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business) produced by Grazielle David, Daniela Stefano and Luciano Máximo. All our podcasts are unique productions in five different languages – English, Spanish, Arabic, French, Portuguese. They’re all available here. Here’s the latest episode:

Enquanto países de baixa renda, como Angola, têm apenas 6% da população vacinada contra a covid-19, só com os US$ 483 bilhões do abuso fiscal de multinacionais e super-ricos em 2021 daria para vacinar o planeta inteiro mais de três vezes com duas doses. Ao não contribuírem com os impostos que deveriam, grandes corporações e pessoas super-ricas são responsáveis pelo agravamento das desigualdades no mundo.

Estudo elaborado pela Tax Justice Network, em parceria com a Global Alliance for Tax Justice e a Public Service International, revela “O Estado da Justiça Fiscal 2021”. Os principais achados deste relatório estão no episódio #31 do É da sua conta.

Participam dessa edição:

Roteiro/transcrição – É da sua conta #31

UM RETRATO ASSOMBROSO DO ABUSO FISCAL #31

O abuso fiscal tem tudo a ver com criação e manutenção de desigualdades nos planos internacional e doméstico e entre indivíduos ricos e indivíduos pobres. No plano doméstico ele acaba fazendo com que o imposto pago por pessoas ricas e corporações grandes seja muito inferior àquilo que é pago por pessoas mais pobres ou empresas menores. Isso fortalece e mantém a desigualdade dentro dos países.”

Florência Lorenzo, pesquisadora da Tax Justice Network.

Basicamente as multinacionais operam como empresas globais, mas as autoridades fiscais apenas tributam as subsidiárias em cada jurisdição. E isso dá a elas muita liberdade para realocar lucros para jurisdições de baixa tributação.”

Sol Piccioto, professor emérito da Universidade de Lancaster, na Inglaterra.

Temos realmente de lidar com a tributação e a regulamentação adequada das multinacionais para que elas não tenham essas vantagens injustas.”

Nick Shaxson, jornalista da Tax Justice Network.

Os membros do clube de países ricos decidem os padrões da fiscalização internacional, mas ao mesmo tempo são os responsáveis ou os culpados pela continuidade da evasão fiscal.”

Lucas Millán, pesquisador da Tax Justice Network.

O Reino Unido e outros países têm que melhorar sua regulação para fechar as lacunas que permitem esse abuso fiscal.”

Shanna Lima, pesquisadora da Tax Justice Network.

[Com abusos fiscais e recursos não declarados em paraísos fiscais] Os ricos sonegam imposto no país onde moram e alguém tem que pagar a conta desse cidadão. Sobra para os mais pobres.”

Clair Hickman, diretora do Instituto de Justiça Fiscal.

Na nossa visão, o ideal seria que qualquer financiamento público voltado pra área da saúde tenha condições específicas de que quando aquele conhecimento se traduzir em um produto, ele tem que ser acessível, não pode ficar sujeito a uma definição de preço sem nenhum tipo de critério. Isso não aconteceu agora na pandemia.”

Felipe Carvalho, coordenador no Brasil da campanha da Médico Sem Fronteiras

Os paraísos fiscais, onde as grandes corporações não são tributadas, implicam em redução de orçamento público para financiar direitos, para acabar com a fome.”

Valeria Torres Burity, secretária-geral da Fian Brasil

Temos uma crise em nossos países em torno da educação, da terra, da proteção social a quem está vulnerável e lutando. Esse tipo de coisa não pode ser resolvida pelo setor privado, precisa do governo, precisa do Estado para fazer sua parte.”

Irene Ovonji Odida, ActionAid e membro do Facti Panel da ONU

Mais informações:

O Estado Atual da Justiça Fiscal 2021

Pfizer, BioNTech e Moderna obtendo US$ 1.000 de lucro a cada segundo, enquanto países mais pobres do mundo permanecem não vacinados

É da sua conta é o podcast mensal em português da Tax Justice Network. Coordenação: Naomi Fowler. Produção e apresentação: Daniela Stefano, Grazielle David. Dublagem: Luiz Sobrinho e Camila Saraiva. Redes Sociais: Luciano Máximo. Download gratuito. Reprodução livre para rádios.

The Tax Justice Network’s French podcast: Avec 17,1 milliards $ de pertes fiscales, l’Afrique a manqué l’opportunité de vacciner 82% de ses 1,2 milliards d’habitants: Edition Spéciale

Welcome to our monthly podcast in French, Impôts et Justice Sociale with Idriss Linge of the Tax Justice Network. All our podcasts are unique productions in five different languages every month in English, Spanish, Arabic, French, Portuguese. They’re all available here and on most podcast apps. Here’s our latest episode:

Pour cette 34ème édition de votre podcast qui est consacrée au Rapport sur l’Etat de la Justice Fiscale dans le Monde publié conjointement par Tax Justice Network, Public Service International et Global Alliance for Tax Justice, nous revenons sur les chiffres et les grilles de lecture qu’on peut avoir sur la situation en Afrique. Il s’agit notamment de l’implication pour les femmes, des opportunités en termes de création d’emplois pour les jeunes. Nous avons aussi écouté les avis de l’homme de la rue.

Interviennent dans ce programme:

Avec 17,1 milliards $ de pertes fiscales, l’Afrique a manqué l’opportunité de vacciner 82% de ses 1,2 milliards d’habitants: Edition Spéciale

Vous pouvez suivre le Podcast sur:

[Image: “Broadcast Tower” by Steven Beger Photography (Beger.com Productions) is licensed under CC BY-SA 2.0]

Tax Haven Ireland: the Tax Justice Network podcast, November 2021

Welcome to the latest episode of the Tax Justice Network’s monthly podcast, the Taxcast. You can subscribe either by emailing naomi [at] taxjustice.net or find us on your podcast app. In this episode:

Featuring:

Tax Haven Ireland

We want to bring the true nature of Irish capitalism and the true nature of the Irish establishment into the light – effectively, the failure of Irish capitalism. At the centre of the whole thing was an enormous tax haven and it just became more and more clear to us, especially when we started to look at the official statistics, that there was an enormous story to be told. We need to expose what is an awful system in terms of human development.”

~ Brian O Boyle, Tax Haven Ireland author

It’s a fool’s game, I mean this is a model of development that’s promoted across the world, you know, set up an export processing zone, set up a financial services centre. But as every country’s doing that, there’s a sort of race to the bottom where you have to offer some even more tax incentives, more deregulation. And ultimately it’s a loser’s game.”

~ Kieran Allen, Tax Haven Ireland author

One of the things we hear quite often is sort of this framing of UN versus OECD, which I always find quite strange in terms of framing because the UN tax body and convention isn’t about stopping limited membership bodies from the work that they’re doing, it is simply about establishing a principled process of global negotiations on tax that is inclusive, transparent, and centred around commitments to human rights and gender equality.”

~ Pooja Rangaprasad, Director, Policy and Advocacy, Financing for Development, Society for International Development

In some ways you can read it [the State of Tax Justice report 2021] as a counsel of despair. You know, we find this year that the member countries of the OECD, the richest and most powerful countries in the world are responsible for more than three quarters of the tax losses imposed globally. And this is the body that the G20 has mandated to find the solution to the international tax problems we face. But we shouldn’t feel disheartened. We brought forward with the global movement for tax justice a set of policy proposals. One of them is to move away from the OECD and towards an intergovernmental body to set tax rules in a genuinely inclusive way under the auspices of the United Nations. It kicked the doors open to the idea. I hope the G77 feel the very strong support of the movement.”

~ Alex Cobham, Tax Justice Network

Further Reading:

[Image credit “Colors on the River Liffy” by Let Ideas Compete is licensed under CC BY-NC-ND 2.0]

‘Power concedes nothing without a demand:’ the OECD, the G77 and a UN framework convention on tax proposal

With the OECD tax reforms having lost most of their original ambition, and the remaining benefits captured almost entirely by a few larger OECD members, attention is switching to the search for alternatives. In October, the G77 – by far the largest of all the ‘G’ country groups – once again tabled at the UN its proposal for an intergovernmental tax body under UN auspices.

This idea, also long supported by the global tax justice movement, would not, of course, guarantee progress. It would however see tax negotiations take place in a globally inclusive setting, and with much greater transparency. Importantly too, it would move decisions away from the OECD which – despite the secretariat’s undoubted desire for progress – is inevitably led by its major members. And as we’ve made clear so often, the OECD’s founding members are demonstrably responsible for the clear majority of global tax abuse. Its own members also lose the greatest amounts in absolute terms, but lower-income countries lose much larger shares of their current tax revenues – with terrible implications for human rights.

It is beyond foolish to expect the OECD to be able to bring forward proposals to curb that tax abuse, or to distribute any benefits in a way that reduce the global inequalities in taxing rights faced by non-members.

But it would be equally foolish to just hope that the OECD or its major members might cede their dominance. As the US social reformer Frederick Douglass famously said, ‘Power concedes nothing without a demand.’ The G77 has now made that demand. The immediate response has been rejection. The rich countries demanded immediately that the proposal for an intergovernmental body be dropped from the text, and so it has been – for now. More extreme, these same countries refused to support the paragraph of the revised text which merely ‘noted’ the FACTI Panel – a crucial initiative whose final report lays out the necessary changes in the global architecture, including, naturally an intergovernmental tax body – and requests that the UN Secretary-General provides a report on illicit financial flows.

Frederick Douglass went on to say: ‘Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them.’

There seems to be a desire from the UK, effectively the largest single actor in illicit financial flows, and some other rich countries, to test exactly that boundary with regard to international tax abuse.

But the momentum is building. A key element is the growing attention to the potential specifics of an intergovernmental tax body, and we are honoured to republish here the work of Professor Sol Picciotto, coordinator of the BEPS Monitoring Group and a senior adviser to the Tax Justice Network, and Abdul Muheet Chowdhary, Senior Programme Officer at the South Centre Tax Initiative.

Their proposal for a UN framework convention on tax as the basis to establish an intergovernmental forum is a major contribution to the debate. Read their blog and report Streamlining the Architecture of International Tax through a UN Framework Convention on Tax Cooperation here.

[Image credit: “The Mountain Tops” by Jocey K is licensed under CC BY-SA 2.0]

Losses to OECD tax havens could vaccinate global population three times over, study reveals

Poorer countries hit hardest by global tax abuse at the hands of rich countries

Countries are losing a total of $483 billion in tax a year to global tax abuse committed by multinational corporations and wealthy individuals – enough to fully vaccinate the global population against Covid-19 more than three times over.1 The 2021 edition of the State of Tax Justice documents how a small club of rich countries with de facto control over global tax rules is responsible for the majority of tax losses suffered by the rest of the world, with lower income countries hit the hardest by global tax abuse. The findings are further galvanising calls to move rule-making on international tax from the OECD to the UN.

The State of Tax Justice 2021 – published by the Tax Justice Network, the Global Alliance for Tax Justice and the global union federation Public Services International – reports that of the $483 billion in tax that countries lose a year, $312 billion is lost to cross-border corporate tax abuse by multinational corporations and $171 billion is lost to offshore tax evasion by wealthy individuals.

The $483 billion loss consists of only direct tax losses: that is, tax losses that can be observed from analysing data self-reported by multinational corporations and from banking data collected by governments.2 Uncounted in this estimate are the indirect losses: the chain-reaction losses that arise from tax abuses accelerating the race to the bottom and driving tax rates down globally. The IMF estimates that indirect losses from global tax abuse by multinational corporations are at least three times larger than direct losses.3 No equivalent estimate exists for the indirect losses of offshore tax evasion.

Tax Justice Network data scientist Miroslav Palanský said, “The $483 billion lost to tax havens a year is the tip of the iceberg. It’s what we can see above the surface thanks to some recent progress on tax transparency, but we know there’s a lot more tax abuse below the surface costing magnitudes more in tax losses.”

“The $483 billion lost to tax havens a year is the tip of the iceberg.”

OECD countries, not palm-fringed islands, enable most of global tax abuse

Over 99 per cent of global tax losses countries suffer result from multinational corporations and wealthy individuals utilising abusive tax regulations and loopholes in higher income countries.

The lion’s share of blame among higher income countries falls on members of the OECD (Organisation for Economic Cooperation and Development), a small club of rich countries and the world’s leading rule-maker on international tax. Despite commitments by OECD members on curbing global tax abuse, OECD members were found to be responsible for facilitating 78 per cent of the tax losses countries suffer a year. OECD members facilitate the handing over of $378 billion a year from public purses around the world to the wealthiest multinational corporations and individuals.

The worst culprit among OECD members is the UK, which is responsible for over a third (39 per cent) of the world’s tax loss. The UK is by far the world’s greatest enabler of global tax abuse, which it facilitates through a network made up of British Overseas Territories like the Cayman Islands, Crown Dependencies like Jersey and the City of London. Known as the UK spider’s web4, the UK government has full powers to impose or veto law-making in these territories and dependencies and key government positions in these jurisdictions are appointed by the Queen.

The UK spider’s web, together with OECD members Netherlands, Luxembourg and Switzerland are responsible for over half of the tax losses the world suffers (55 per cent), which is why the countries are often collectively referred to as the “axis of tax avoidance”. The axis of tax avoidance cost the world over $268 billion in tax losses a year, equivalent to more than 18 times the amount of money expected to have been spent globally on facemasks in 2020 and 2021.5

The huge role the axis of tax avoidance plays in facilitating global tax abuse means that many OECD members are also among the heaviest losers, in absolute terms. France, for example, cost other countries over $4.6 billion in tax losses a year, but lost over $41 billion a year itself. Even in countries responsible for the most extreme levels of abuse, few citizens enjoy any benefits as almost all the tax losses their governments enable are pocketed by wealthy multinational corporations and individuals. Citizens of these countries typically face higher inequalities, a greater threat of corruption of their political systems and the documented consequences of the “finance curse” phenomenon.6 Reigning in OECD members’ tax havenry would generate major benefits to people living in both OECD and non-OECD member countries.

Despite the huge tax loss suffering imposed by these countries, no OECD member nor any axis of tax avoidance country appears on the EU tax haven blacklist.7 The handful of mostly small island nations blacklisted by the EU are responsible for 1.1 per cent of global tax abuse.

Rich countries’ vaccine pledges mask plunder of poorer countries taxes

Global tax abuse enabled by rich countries is hitting poorer countries the hardest. While higher income countries lose more tax in absolute terms, $443 billion a year, their tax losses represent a smaller share of their revenues - 9.7 per cent of their collective public health budgets. Lower income countries in comparison lose less tax in absolute terms, $39.7 billion a year, but their losses account for a much higher share of their current tax revenues and spending.

Collectively, lower income countries lose the equivalent of nearly half (48 per cent) of their public health budgets – and unlike OECD members, they have little or no say on the international rules that continue to allow these abuses.

The $483 billion lost to tax havens a year is enough to cover the cost of purchasing and delivering two Covid-19 vaccine doses for the global population three times over.8 This is equivalent to vaccinating 1000 people against Covid-19 every second. The taxes that lower income countries lose to tax havens in a year would be enough to vaccinate 60 per cent of their populations, bridging the gap in vaccination rates between lower income and higher income countries. With their vaccination rates far lower, global tax abuse deals a double blow to lower income countries by robbing them of the funding to protect their populations against Covid-19 and, consequentially, exposing them to an even greater human and economic toll.

Analysis for the State of Tax Justice 2021 reveals that for every $1 OECD countries pledged to the COVAX programme, a worldwide initiative established to address vaccine inequity, they cost the rest of the world $43 in lost tax by facilitating global tax abuse. Altogether, OECD countries pledged $8.7 billion to the COVAX programme but cost the world $378 billion in lost tax.9 If OECD countries had not pledged any money to COVAX but simply stopped facilitating global tax abuse instead, countries around the world could have collected enough tax revenue to vaccinate the global population against the Covid-19 virus 2.9 times over.

Dr Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice said:

“The richest countries, much like their colonial forebearers, have appointed themselves as the only ones capable of governing on international tax, draped themselves in the robes of saviours and set loose the wealthy and powerful to bleed the poorest countries dry. To tackle global inequality, we must tackle the inequality in power over global tax rules. Rules on where and how multinational corporations and the superrich pay tax must be set at the UN in the daylight of democracy, not by a small club of rich countries behind closed doors.”

Urgency grows for UN to step in

Calls for shifting the responsibility of setting tax rules away from the OECD to the UN gained unprecedented traction this year when the High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI) called for a comprehensive overhaul of the global architecture. The FACTI Panel’s key recommendations draw closely on the work of the tax justice movement, and include the establishment of a UN tax convention, a Centre for Monitoring Taxing Rights at the UN to raise national accountability for illicit financial flows and tax abuse suffered by others, and a globally inclusive, intergovernmental UN forum for the urgent negotiation of further changes to the international tax rules.10

The proposal follows years of criticism11 levied against the OECD for its failure to deliver meaningful change in its long-awaited tax reform proposals, and the hypocrisy of its members inflicting huge tax losses on others. The OECD’s latest global tax deal, which includes a global minimum tax rate, similarly came under fire this year for acquiescing to tax haven members like Ireland.12 The tax deal is expected to recover only a sliver of tax revenues lost to tax havens and will redistribute most recovered taxes to rich OECD members instead of the countries where the taxes should have originally been paid.

Alex Cobham, chief executive at the Tax Justice Network said:

“Another year of the pandemic, and another half trillion dollars snatched by the wealthiest multinational corporations and individuals from public purses around the world. Tax can be our most powerful tool for tackling inequality, but instead it’s been made entirely optional for the superrich. We must reprogramme the global tax system to protect people’s wellbeing and livelihoods over the desires of the wealthiest, or the cruel inequalities exposed by the pandemic will be locked in for good. The State of Tax Justice tells us exactly which countries are responsible for the tax abuse we all suffer. It’s time they were held accountable.”

Taxes on wealth and excess profit

In addition to calling for a UN role on global tax, the State of Tax Justice also recommends the introduction of an excess profit tax and wealth tax. The report calls on governments to:

Rosa Pavanelli, general secretary at Public Services International, said:

“Many corporate and political leaders applaud our frontline workers in public; yet in private, they undermine frontline services by continuing to perpetuate tax abuse on a repulsive scale. Ending tax dodging would pay for 1000 people to be fully vaccinated every single second; we could fully vaccinate the world's 135 million health and care workers in just a day and a half. The only way out of this crisis is to end vaccine inequality, and that requires both waiving patents and cracking down on corporate tax dodging, which pulls money away from our frontline health services and into their offshore bank accounts."

-ENDs-

Read report
Country profiles
Launch event

Contact details:

Featured image credit: "COVID-19 emergency response activities, Madartek, Basabo, Dhaka" by UN Women Asia & the Pacific/Fahad Abdullah Kaizer is licensed under CC BY-NC-ND 2.0

Notes to Editor:

  1. For the purposes of demonstrating the impact of tax abuse on vaccine affordability and equity, we estimate that cost of acquiring and delivering full vaccination dosage falls within the range of $9.70 to $17.20 per person. This range is based on the People’s Vaccine Alliance data on the accepted cost per dose of the Pfizer, Oxford/AstraZeneca and Johnson & Johnson vaccines, which range from $3 to $10, and the WHO’s estimates on the delivery and infrastructure cost of administrating full dosage, which is $3.70 per person. At a range of $9.70 to $17.20, the $483 billion annually underpaid by multinational corporations and wealthy individuals is enough to fully vaccinate the global population between three and six times over. The State of Tax Justice 2021 uses the highest price range, $17.20, in its calculation of vaccinations lost per country and globally. For more information, see Chapter 1 in the State of Tax Justice 2021 report.
  2. Estimates of global tax abuse by multinational corporations is based on country by country reporting data collected by governments and published by the OECD. Country by country reporting is and international accounting standard designed to expose and deter profit shifting, a practice that involves multinational corporations moving profits from the countries where they were generated to tax havens, where corporate tax rates are low to non-existent, in order to underreport how much profit they made outside of tax havens and consequently pay less corporate tax.

    Country by country reporting was first proposed by the Tax Justice Network in 2003. Although initially resisted by the OECD the reporting method was eventually backed by the G20 group of countries in 2013, with the OECD producing a standard for use from 2015. After numerous delays, the OECD finally published partial data in July 2020. However, while the Tax Justice Network’s proposal called for multinational corporations to publicly disclose their country by country reports, the OECD required multinationals only to privately submit their reports to OECD countries’ tax authorities. Reports collected from multinational corporations were then aggregated and anonymised by OECD countries before the data was shared with the OECD body and published. As a result, while the Tax Justice Network’s analysis of the data published by the OECD shows that multinational corporations are paying $312 billion less in corporate tax than they should, it is not possible to identify which multinational corporations are responsible.

    Estimates on offshore tax evasion by individuals are based on banking data collected by governments.
  3. The International Monetary Fund estimates that, at a global level, indirect losses from global corporate tax abuse are at least three times larger than direct losses. If we were to adjust the State of Tax Justice 2021’s estimate of direct tax losses accordingly, we would see overall losses well beyond $1 trillion. While this extrapolation could be considered at a global level, it is not possible to multiply countries’ individual direct losses by the IMF’s global factor since the complex nature of global tax havenry and the varied movement of profit between jurisdictions imply greater levels of indirect losses for some countries and lower levels for others.
  4. Extensive research has documented the ways in which the UK’s network of jurisdictions operates as a web of tax havens facilitating corporate and private tax abuse, at the centre of which sits the City of London. The UK spider’s web consists of the following British Overseas Territories and Crown Dependencies: Cayman Islands, British Virgin Islands, Guernsey, Jersey, Gibraltar, Bermuda, Isle of Man, Anguilla, Turks and Caicos Islands and Montserrat. For more information about the UK spider’s web, please see Michael Oswald’s documentary “The Spider’s Web: Britain’s Second Empire”, produced by Tax Justice Network founder John Christensen. The documentary is available on YouTube in English, Spanish, French, German and Italian and has been viewed nearly 5 million times.
  5. The Global Face Mask Market size was estimated at USD 6,867.82 million in 2020, and expected to reach USD 7,808.64 million in 2021.
  6. The finance curse identifies a paradox at the heart of financial sectors: “too much finance” can make a country poorer. More information is available here.
  7. The EU blacklist, last updated on 5 October 2021, is composed of: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. Collectively, the jurisdictions facilitated 0.51 per cent of global tax abuse, costing the world $2.47 billion in lost tax a year.
  8. See note 1
  9. A breakdown of COVAX donors is available here.
  10. More information on the UN FACTI panel is available here.
  11. See The Nation article.
  12. See Tax Justice Network op-ed here.

About the Tax Justice Network

The Tax Justice Network believes our tax and financial systems are our most powerful tools for creating a just society that gives equal weight to the needs of everyone. But under pressure from corporate giants and the super-rich, our governments have programmed these systems to prioritise the wealthiest over everybody else, wiring financial secrecy and tax havens into the core of our global economy. This fuels inequality, fosters corruption and undermines democracy. We work to repair these injustices by inspiring and equipping people and governments to reprogramme their tax and financial systems.

About Public Services International

Public Services International is a Global Union Federation of more than 700 trade unions representing 30 million workers in 154 countries. We bring their voices to the UN, ILO, WHO and other regional and global organisations. We defend trade union and workers’ rights and fight for universal access to quality public services.

About the Global Alliance for Tax Justice

The Global Alliance for Tax Justice is a global coalition of the tax justice movement, campaigning for progressive and redistributive taxation systems at the national level, and for a transparent, inclusive and representative global tax governance at the international level.

Created in 2013, GATJ comprises regional tax justice networks in Asia (Tax & Fiscal Justice Asia), Africa (Tax Justice Network Africa), Latin America (Red de Justicia Fiscal de América Latina y el Caribe), Europe (Tax Justice-Europe) and North America (Canadians for Tax Fairness & FACT Coalition), collectively representing hundreds of organisations. 

November 2021 Spanish language podcast, Justicia ImPositiva: Breve historia de los paraísos fiscales #65

Welcome to our Spanish language podcast and radio programme Justicia ImPositiva with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita.

En este programa con Marcelo Justo and Marta Nuñez:

Breve historia de los paraísos fiscales desde Francis Drake hasta los Papeles de Panama, los Papeles de Pandora y el nuevo acuerdo del G20 para que las multinacionales paguen impuestos. ¿Están las cosas cambiando? ¿Comienzo del fin de una larga historia? Con Nicholas Shaxson de Tax Justice Network, autor de “Las islas del Tesoro” y “The Finance Curse”.

Breve historia de los paraísos fiscales #65

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: https://traffic.libsyn.com/secure/j-impositiva/JI_nov_21_brevehistoria.mp3

Subscribase a nuestro RSS feed: http://j_impositiva.libsyn.com/rss

O envien un correo electronico a Naomi [@] taxjustice.net para ser
incorporado a nuestra lista de suscriptores.

Sigannos por twitter en http://www.twitter.com/J_ImPositiva

Estamos tambien en facebook: https://www.facebook.com/Justicia-ImPositiva-1464800660510982/

[Cover image: “The City from the Golden Hind” by It’s No Game is licensed under CC BY 2.0]

Imposing Standards: Lessons from tax history about the ‘global tax deal’

The OECD’s triumphal announcement of the Inclusive Framework tax reforms last month was followed in close succession by the larger G77 group of countries tabling a proposal in United Nations negotiations for a genuinely inclusive intergovernmental tax body under UN auspices. Martin Hearson is a research fellow at the ICTD who has studied the power dynamics in international tax negotiations, and we’re delighted to cross-post his assessment.

G20 leaders are celebrating a new agreement to strengthen the taxation of tech firms and create a global minimum tax, reached by 136 jurisdictions and brokered at the OECD. Numerous lower-income countries have expressed frustration that their influence was marginal and their demands rejected, but many have nonetheless signed up.

Historical legacies

These negotiations reflect today’s political landscape, but resemble a century of international tax negotiations that have disadvantaged lower-income countries. As the organization representing African tax authorities has argued, the continent is “beset by serious issues such as . . . tax treaties with no appropriate tax allocation rights.” There are over a thousand bilateral treaties curtailing lower-income countries’ ability to tax foreign multinationals. In my book, Imposing Standards: The North-South Dimension to Global Tax Politics, I explain how this came about.

First, policymakers based their decisions on political priorities, oversimplifications and misapprehensions. In Zambia at the turn of the 1970s, a changing cast of politically-appointed Revenue Commissioners raced around Europe negotiating tax agreements in the hope that this would bring more investment. A government adviser told me: “a tax treaty…was seen at the time in the minds of policymakers as opening the door to the possibility of foreign investment… There wasn’t a very good awareness of the revenue consequences.”

Half a century later, as one African negotiator said, “African countries have been brainwashed into thinking that they need [tax] treaties, but they don’t.” This should lead us to question the new global deal: will developing countries be better off if they sign up?

The politics of expertise

Too little knowledge can be a dangerous thing, but tax knowledge embodies interests, typically those of capital-rich countries. Whether acquired through formal technical assistance and training or in the process of negotiating itself, the knowledge on offer to lower-income countries is imbued with ideas about the ‘acceptable’ way to tax multinationals.

In the 1970s, British officials wrote that the country’s expanding network of bilateral tax treaties was above all a means to “impose acceptable standards…in countries…where such standards would otherwise be absent.” When Vietnam opened to foreign investment in the 1990s, capital-exporting countries took advantage of officials’ lack of experience to lock the country into treaties based on OECD standards.

Lower-income countries must be capable of critically analysing international tax standards, as well as underlying premises about what it is ‘acceptable’. It will become increasingly difficult to defend ‘unilateral’ taxes on tech firms once the G20/OECD deal is in place, even if replacing them with international standards leaves a country worse off.

These dynamics mean that, while business power has played no small part in creating today’s international tax regime, it is most effective on the technical plane. In 1970s Britain, the Inland Revenue was pressured by other parts of government to sign tax treaties with countries that refused to accept OECD standards. The Inland Revenue’s opposition – endorsed, surprisingly, by senior tax officials in British businesses – was because “it is of little use to try to ‘educate’ developing countries…about acceptable international fiscal standards if, when it comes to the crunch, we are prepared to sacrifice principle in order to secure an agreement.”

The power balance between political actors and technicians is shaped by the institutions of government. While the British technocrats prevailed in this cross-government struggle, in lower-income countries they often lose. For example, in Zambia during the 2000s, political priorities produced treaties with tax havens such as Mauritius, while leaving problematic older treaties untouched. This situation has improved in recent years as technocratic and political priorities aligned.

A final point concerns historical disadvantage. Few tax negotiations begin from a blank slate: instead, incremental changes are layered on top of each other, anchored by the authoritative status of the OECD-dominated status quo. When lower-income countries gain a seat at the global table, they must advocate for changes to that status quo, a harder task than defending it. This dynamic has persisted since the earliest negotiations in the 1920s. At national level, great negotiating skill is frequently undermined by the precedent of poorly negotiated past treaties.

How can countries overcome these barriers?

First, by expanding the pool of expertise so that critical perspectives gain momentum, and the existing monopoly on authoritative forms of tax knowledge is broken. In Imposing Standards, I cite Cambodia as an example of a country that invested in technical capacity before negotiating, developing a position and model that matched its own priorities.

Second, through technocrats and their political principals working together, so that lower-income countries’ negotiating positions combine the best expertise with political backing. Nigeria’s firm stance against the global tax deal is a good example of this.

Third, stronger democratic oversight of international tax negotiations will, if anything, strengthen negotiators’ hands. A high court challenge in Kenya, for example, means that the government will now ratify tax treaties with public consultation and parliamentary scrutiny.

Many representatives from lower-income countries seem disenchanted with recent negotiations at the OECD, with some countries deciding to go their own way. At the same time, the new members of the UN Tax Committee recently agreed an ambitious plan of work for the next four years. Perhaps this will herald a turning of the tide against the tax standards that for so long powerful states have imposed on others?

Image credit: G20, under CC-BY 3.0 license, https://www.g20.org/wp-content/uploads/2021/10/g20-summit-trevi-def-_edited.jpg.

Rethinking Limited Liability: Beneficial Ownership Transparency to Reform the Liability System, working paper

I am sharing a working paper which I, Andres Knobel have written, for which I welcome feedback, please send to [email protected]. Here’s a summary below, and you can read the full paper here.

Rethinking Limited Liability: Beneficial Ownership Transparency to Reform the Liability System

Limited liability refers to the right to cap a legal or natural person’s losses up to their investment in a legal vehicle, shielding the rest of their personal wealth from the entity’s debts. Limited liability is two-sided: i) the personal creditors of a shareholder in a limited liability company have no direct right over the company’s assets (they can seize the shareholder’s shares, but they can’t reach into the company to seize its equipment etc.), while ii) the creditors of the company cannot access the shareholder’s personal assets. Limited liability is usually obtained simply by creating or incorporating a legal vehicle as a separate entity. It may also be achieved where the law recognises a distinct pool of assets without separate legal personality. This could be, for example, a trust where the law distinguishes the trustee’s personal assets from the assets held by the trustee in relation to the trust.

The main problem of limited liability, from a justice perspective, is that it caps investors’ losses but not their gains, transferring the risk and costs of any endeavour to the rest of society, but not sharing any of the profits.

In addition, limited liability is one of the benefits automatically obtained by legal vehicles when they are incorporated (eg companies) or created (eg trusts) without requiring that legal vehicle to offer society anything in return. Vehiclesenjoying limited liability do not even offer transparency about who is benefitting from the vehicle, unless their country of incorporation has a public beneficial ownership registry. In other words, while limited liability was presented in theory as an incentive for investors to undertake risks which would create employment and economic growth, nothing in the law requires this social benefit to take place. An individual could set up a company to hold their assets (eg house, car, yacht) and such a company would enjoy limited liability even though it creates no benefit for society.

Finally, limited liability is an argument used to justify the need for complexity within corporate structures. When corporate groups create complex structures involving many layers of entities, they can not only create secrecy (because it becomes harder to identify who is ultimately owning or controlling the group), but they also add layers of limited liability to isolate risks from the rest of the group, protecting the corporate group but affecting society at large.

This brief explains why the current system of limited liability is unfair, and it proposes ways to rethink limited liability to make it more aligned with goals of financial justice and equality. This brief proposes that if an entity’s assets are not enough to pay for its debts, then the entity’s owners should need to respond, at least partially, with their personal wealth.

To enforce this new system, more transparency would be required to ensure the identity of each owner (shareholder or investor) in an entity is easily accessible. Beneficial ownership transparency deals precisely with the identification of the natural persons who ultimately and effectively own, control, or benefit from legal companies and other legal vehicles. Therefore, beneficial ownership transparency is an essential tool to have a fairer liability system.

In addition to knowing the identity of each owner, it is necessary to ensure that they won’t be able to protect their personal wealth by transferring it to yet another entity. This proposal to prevent individuals from escaping liability by shielding their assets should not just apply to owners of entities, but to any individual who is liable to a creditor (eg because they ran over someone with a car).

Conclusion and proposals:

Although limited liability is invoked as a tool to promote economic growth, this paper explains that limited liability has evolved such that it is automatically awarded upon the creation of a legal vehicle, often in situations where it was never meant to apply (eg between a parent and its subsidiary). In addition, this paper describes the unfairness of a system which caps losses but not gains, by transferring the losses to the rest of society. From a financial justice perspective, the system of liability should be completely reformed. For reforms to be effective, however, it is necessary to hold the beneficial owner liable and to prevent them from shielding their assets through the creation of trusts or private interest foundations.

Although the issue of reforming limited liability deserves much more research and development, this brief explains why the current situation is unfair and proposes alternatives which would improve the situation.

In summary, this paper proposes to consider and further develop measures to:

  1. End limited liability between a subsidiary and its parent.
  2. End limited liability for investors who are especially wealthy and have considerable information and control over an entity  (especially large investment funds).
  3. For natural person small ultimate investors, alternatives to limited liability should at least be considered. Alternatives include pro rata liability, or bringing all of the benefits received to the liability pool including dividends and capital gains (rather than just the original investment).
  4. Liability should be held by the beneficial owner (to prevent the ultimate investor from escaping liability or being unidentified, including by recourse of a complex ownership chain to hold the shareholdings).
  5. To prevent the beneficial owner from shielding assets from creditors (to escape liability), asset protection trusts or private interest foundations should be disregarded by considering that the settlor or founder is still the owner of the trust/foundation assets until they have been distributed to the beneficiaries.
  6. If all of the above proposals are considered too radical, then limited liability should, at the very least, apply only to “active” entities that engage in business, hire employees, and undertake risks (thus creating some benefit for society at large). It should not apply to “passive” or holding entities which merely hold assets but do not engage in any type of risk or value creation

Decision tree on the application of non-limited liability:

You can read the full paper here.

[Cover photo by pixpoetry on Unsplash]

Cigarette Tax Scorecard shows modest progress globally

The second edition of the Tobacconomics Cigarette Tax Scorecard is out today and shows that governments have made insufficient progress in addressing the world’s leading cause of preventable death, despite established evidence that the most effective tool—tobacco taxation—would reduce smoking and increase tax revenues. By using new data from the WHO Report on the Global Tobacco Epidemic, 2021, the 2nd edition of the Scorecard assesses countries’ cigarette tax policies with respect to consistency with the widely accepted best practices of cigarette taxation. The Scorecard is based on four key components: cigarette price, change in affordability, tax structure, and tax share of retail price.

The global average cigarette tax score has barely risen over the past several years from 1.93 (out of 5.00) in 2014 to 2.28 in 2020. Overall scores have improved in 81 countries, stayed the same in 24 countries, and worsened in 48 countries. Only 75 of the 160 countries for which data are available score 2.50 or higher out of a maximum of five points. In this edition of the Scorecard, New Zealand and Ecuador scored the highest with scores of 4.63, followed by United Kingdom and Canada, with scores of 4.38 and 4.25, respectively.

From 2018 to 2020, cigarette prices increased globally—except most notably in low-income countries—where the tobacco industry seeks to expand its market. There, average prices decreased by $Intl PPP 0.28. Lowering these prices makes cigarettes more affordable and accessible to low-income populations, especially young people.

During the same period, while average cigarette prices rose in the Americas and Western Pacific regions, the average tax share of retail price decreased. Thus, revenues that could have been gained by governments through tax increases were captured by the tobacco industry. These regional gains in revenues allow the industry to lower prices in many low-income countries and maintain stable global profits while expanding their markets—even in the midst of the COVID-19 pandemic. Our research shows that despite this economic shock, multinational tobacco companies are now continuing on a business-as-usual trajectory with stable, even growing, profits.

Tobacconomics Cigarette Tax Scorecard 2nd edition infographic

Why Cigarette Tax Revenues Matter

Apart from the fact that tobacco excise taxes affect the bottom-line profits of the tobacco industry more than any other policy, tobacco taxes generate revenues to help governments address the significant public health and economic burdens caused by tobacco-related illness and premature deaths.

However, as the Scorecard shows, most countries’ tax levels are inadequate. Country-level estimates of the economic burden from tobacco illustrate its scale. Recent research by Nayab et al. from Pakistan shows that the economic cost of tobacco-related diseases and deaths in 2019 amounted to Rs 615.07 billion (US$ 3.85 billion), which was five times the tax revenue collected from the tobacco industry (Rs 120 billion) in the same year. Moreover, when health care is publicly funded, the costs of treatment for diseases related to the consumption of harmful products are borne by public budgets and ultimately, others in society. A recent study from Indonesia by Dartanto et al. estimates the direct health care costs from tobacco-related illness to the Social Security Agency for Health and the national health insurance program to be between 0.1% and 0.2% of Indonesia’s GDP.

Given the importance of these taxes to reduce smoking and generate revenues to address its economic and public health burdens, implementing smart tax structures and sufficiently high rates is vitally important. To find out more, check out the Scorecard at www.tobacconomics.org.

Written with contribution from Jeff Drope who leads the Think Tanks project on the Tobacconomics team at the University of Illinois Chicago.

Tax Justice Network Arabic podcast #47: السودان: حلول عسكرية لأزمات إقتصادية و إجتماعية

Welcome to the 47th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. It’s produced and presented by Walid Ben Rhouma and is available on most podcast apps. Any radio station is welcome to broadcast it for free and websites are also welcome to share it. You can follow the programme on Facebook, on Twitter and on our website.

 السودان: حلول عسكرية لأزمات إقتصادية و إجتماعية  

في الحلقة #47 من البودكاست العربي “الجباية ببساطة” تطرقنا لأزمة السودان من خلال استضافة الباحث في الاقتصاد السياسي عمر سمير والذي أكد على الوضع الإقتصادي والإجتماعي المتردي الذي تعيشه البلاد منذ سنوات بتسجيل نسب تضخم قياسية وأرقام بطالة مرتفعة مع إنهيار لقيمة العملة المحلية. في أخبارنا المتفرقة، قمنا بجولة في المنطقة العربية والعالم. من لبنان إلى ألمانيا مرورا بمصر والسعودية

 السودان: حلول عسكرية لأزمات إقتصادية و إجتماعية  

تابعونا على صفحتنا على الفايسبوك وتويتر https://www.facebook.com/ TaxesSimply Tweets by taxes_simply

The Tax Justice Network’s French podcast: Conférence Panafricaine sur les FFI : La Société Civile invite à la prudence sur l’Accord Fiscal de l’OCDE #33

Welcome to our monthly podcast in French, Impôts et Justice Sociale with Idriss Linge of the Tax Justice Network. All our podcasts are unique productions in five different languages every month in English, Spanish, Arabic, French, Portuguese. They’re all available here and on most podcast apps. Here’s our latest episode:

Pour cette 33ème édition de votre podcast en français sur la justice fiscale et sociale produit par Tax Justice Network , nous revenons sur la Conférence Panafricaine sur les Flux Financier Illicites (PAC 2021), dont une part des activités s’est déroulée à Yaoundé au Cameroun. Informés des outils d’analyse et de la position de The Tax Justice Network de nombreux acteurs de la société civile et même des parlementaires ont reconnu la nécessité de mener une réflexion supplémentaire, sur l’Accord Fiscal international récemment validé par le G20, le groupe des vingt pays les plus riches du monde, plus l’Union Européenne  

Interviennent dans ce podcast: 

Conférence Panafricaine sur les FFI : La Société Civile invite à la prudence sur l’Accord Fiscal de l’OCDE #33

Vous pouvez suivre le Podcast sur:

[Image: “Broadcast Tower” by Steven Beger Photography (Beger.com Productions) is licensed under CC BY-SA 2.0]

Tax Justice Network Portuguese podcast #30 Pandora Papers provam a podridão do sistema financeiro

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business) produced by Grazielle David, Daniela Stefano and Luciano Máximo. All our podcasts are unique productions in five different languages – English, Spanish, Arabic, French, Portuguese. They’re all available here. Here’s the latest episode:

Pandora Papers provam a podridão do sistema financeiro #30

O episódio #30 do É da sua conta mostra o papel dos Pandora Papers como prova da degradação do sistema financeiro no mundo todo.

Além disso, Andrés Arauz, ex-candidado à presidência do Equador e ativista por justiça econômica, fala da perseguição que vem sendo vítima após exigir que uma lei de seu país seja cumprida e investigue o presidente Guillermo Lasso por ter empresas offshore. E a repórter Ethel Rudnitzki, que participou da cobertura dos Pandora Papers pela Agência Pública, fala sobre a importância para a democracia de vazamentos de informações sobre onde está o dinheiro dos super-ricos para a democracia.

Ouça no É da sua conta #30:

“É muito importante que saibam que a riqueza das pessoas não está só no próprio país e que isso não está sendo tributado.”

~ Ethel Rudnitzki, repórter da Agência Pública

“É preciso buscar a forma legal de usar os tribunais americanos para denunciar os bancos nos Estados Unidos, porque as contas estão em Manhattan, e a lavagem de dinheiro acontece em Manhattan.”

~ Hernan Arbízú, denunciador, economista, ex-banqueiro

“As multinacionais, quando planejam seu pagamento tributário, criam estruturas para contabilizar os lucros em jurisdições de baixa carga tributária, ou seja, em offshores. E assim evitam pagar impostos.”

~ Uallace Moreira, professor de economia da Universidade Federal da Bahia (UFBA)

“Servidores públicos não deveriam ter recursos offshore em paraísos fiscais, pois  sabemos que são pilares de opacidade, de falta de transparência, onde se escondem as possíveis transações obscuras relacionadas com corrupção, má gestão, conflito de interesses, ocultação do patrimônio.”

~ Andres Arauz, economista, ex-candidato à presidência do Equador

“A legislação brasileira não favorece as pessoas que mandam dinheiro para paraísos fiscais. Então, como elas fazem para não pagar o imposto sobre esses rendimentos? Elas criam mecanismos para fugir da tributação ou para se aproveitar de brechas legais.”

~ Clair Hickman, diretora do Instituto de Justiça Fiscal (IJF) e auditora fiscal aposentada da Receita Federal

Participam desta edição:

Pandora Papers provam a podridão do sistema financeiro #30

Conecte-se com a gente!
 
www.edasuaconta.com

Twitter

Facebook

Plataformas de áudio: Spotify, iTunes, Stitcher, Deezer

Inscreva-se: [email protected]
 
Download do podcast em MP3 https://traffic.libsyn.com/secure/edasuaconta/edasuaconta_30.mp3

É da sua conta é o podcast mensal em português da Tax Justice Network. Produção: Daniela Stefano, Grazielle David e Luciano Máximo. Dublagem: Vanessa Martina Silva Coordenação: Naomi Fowler.

Download gratuito. Reprodução livre para rádios.

Rethinking economies: the Tax Justice Network podcast, October 2021

Welcome to the latest episode of the Tax Justice Network’s monthly podcast, the Taxcast. You can subscribe either by emailing naomi [at] taxjustice.net or find us on your podcast app.

Featuring:

Transcript available here. (Some is automated and may not be 100% accurate)

Rethinking economies #115

This is a global ecological crisis, and it has to do with the way the global economy works. And this requires mobilisation on the scale of the anti-colonial movement.”

~ Jason Hickel

The cutting of resources for the tax authorities and forces of law and order is a major problem and if there’s one thing above all that needs doing and that’s to start giving the tax authorities and international criminal authorities proper resources to start chasing this stuff“

~ Nick Shaxson

There are many reasons why Nigeria refused to endorse and sign the OECD deal [15% minimum corporate tax rate] Countries like Nigeria already have a company income tax rate of 30%…you have countries like Ireland, Switzerland and other countries who are already close to that 15%, so it doesn’t look like it’s going to be any significant change for them. So for countries like Nigeria, there isn’t real incentive to sign up to this deal as it doesn’t offer much for them.”

~ Mustapha Ndajiwo

The debate around how to structure the political economy for renewable energy markets hasn’t even reached its infancy. There’s very little progress towards that kind of really progressive thinking that’s needed if we’re going to make the energy markets actually work for ordinary people. Denmark, Germany and other countries are signalling how this could be done so differently.”

~ John Christensen

Further reading:

Image: “hope” by @polsifter is licensed under CC BY 2.0

Indonesia launches investigation following ‘Macao Money Machine’ report

The Government of Indonesia has launched an investigation on pricing and customs reporting practices of a pulp mill owned by one of Indonesia’s wealthiest moguls. The investigation follows the launch of the Macao Money Machine report published by Indonesia’s Tax Justice Forum and other civil society groups including Tax Justice Network.

The report documents pricing practices of two pulp mills with common beneficial ownership exporting to China between 2007 and 2018. The pulp exports from Indonesia were sold at below-market prices to affiliated companies in Macao and Singapore apparently by mis-labeling the product as a lesser-grade of pulp that commands substantially lower market prices. The affiliated companies in Macao and Singapore then sold the same pulp at significantly higher prices that reflected the market values of the actual product, and thereby realizing a lot of the profit outside the grasp of Indonesia’s tax authorities.

Across a dozen years between 2007 and 2018, these pricing practices resulted in potential tax losses exceeding $150 million from an estimated $668 million in understated revenue.

The Macao Money Machine case, documented with transaction-level data and audited financial reports from publicly-held companies, is one of only a handful of specific examples that Indonesia can point to in a broader transfer pricing problem in the natural resources sector that it said is responsible for $15.6 billion in losses in 2016 alone. One of the other prominent cases involves an oil palm producer owned by the same tycoon who owns the pulp mills, and which became Indonesia’s largest case of tax evasion.

Fortunately, Indonesia’s financial governance reform efforts, led by Finance Minister Sri Mulyani, a former Deputy Director of the World Bank, have included policies that address the ‘ABC of tax transparency’:  automatic, multilateral exchange of tax information with numerous countries; beneficial ownership disclosure requirements; and, critically, the requirement of country-by-country reporting by multinational companies.

Implementation challenges abound for this ambitious tax transparency reform policy. Information exchange relationships need to be operationalized. There’s been limited compliance with the beneficial ownership disclosure requirements: less than 20% of corporations (PT) have made a declaration and those that have are yet to face a credible verification mechanism. And the country-by-country reporting requirements are not made public.

But the fact that the Government of Indonesia is working through these implementation challenges sets the country on a promising trajectory. The Macao Money Machine case represents an opportunity for the Government to take action in a way that nets substantial government revenue, showing both that the tools work and that they can generate government benefits to ease a strained fiscal situation.

Indonesian civil society groups are urging the government to follow through with its investigation into one of the pulp mills, PT Toba Pulp Lestari, and to open an investigation into the larger of two pulp mills, PT Riau Andalan Pulp & Paper, for which pricing practices were documented between 2016 and 2018.

October 2021 Spanish language podcast, Justicia ImPositiva: Los Pandora Papers, el Bitcoin en El Salvador y crisis de la inmobiliaria en China #64

Welcome to our Spanish language podcast and radio programme Justicia ImPositiva with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita.

En este programa con Marcelo Justo and Marta Nuñez:

INVITADOS:

Los Pandora Papers, el Bitcoin en El Salvador y crisis de la inmobiliaria en China #64

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: https://traffic.libsyn.com/secure/j-impositiva/JI_oct_21.mp3

Subscribase a nuestro RSS feed: http://j_impositiva.libsyn.com/rss

O envien un correo electronico a Naomi [@] taxjustice.net para ser
incorporado a nuestra lista de suscriptores.

Sigannos por twitter en http://www.twitter.com/J_ImPositiva

Estamos tambien en facebook: https://www.facebook.com/Justicia-ImPositiva-1464800660510982/

Pandora Papers and (South Dakota) trusts: Why do criminals and the rich like them so much?

The Pandora Papers is full of stories involving trusts, particularly South Dakota trusts. This short blog explains why trusts are so problematic and what we can do about it.

What is a trust?

Depending on the country, a trust may be considered an entity (similar to a company), a contract, an arrangement or just a relationship. Although lawyers and academics love to point to the nooks and crannies that set these classifications apart from each other, none of these distinctions are that important for understanding why trusts are so problematic from a transparency and justice perspective.

In essence, trusts involve a legal structure where a person (called the settlor) transfers assets to a trustee, who will hold the (trusted) assets under their name and manage them according to the settlor’s directions in favour of the beneficiaries appointed by the settlor. Why would anyone do this instead of giving the assets directly to the beneficiaries? The idea of trusts, which originated in England in the Middle Ages, is that for some reason the beneficiaries cannot or shouldn’t hold the assets yet, so it’s better for someone else, a trusted person, to manage and hold the assets on their behalf until they are ready to receive them. Based on this basic structure, trust enthusiasts commonly give the example of a responsible parent who sets up a trust to ensure that a trustee will take care of their vulnerable children after the parent (settlor) dies. This is a very noble goal, but there’s more to it.

Why are trusts problematic?

As explained in our paper “Trusts: Weapons of Mass Injustice?”, although trusts can indeed be used to protect beneficiaries who are sick and vulnerable, nothing in the law actually requires this. Instead of helping those in need, the trust beneficiary could turn out to be a person convicted of sexual abuse against a minor or a person convicted of murder. In addition, depending on the country where the trust was created, all these different parties (the settlor, the trustee and the beneficiary) do not necessarily need to be different people. Rather, they could just refer to the same person, or alternatively may be under the control of the same person.

Trusts are especially problematic for two reasons. First, their secrecy. Second, their capability to shield assets from the rest of society (tax authorities, victims of sexual abuse or murder or fraud, etc).

  1. Secrecy

Unlike companies and other legal persons which need to incorporate and register with the commercial registry in order to exist, trusts usually require no such registration. For this reason, there’s no way of knowing how many trusts exist in the world, let alone how many assets they hold or who the people are that are behind them. While some countries require some trusts to register (eg the EU) and individuals may have reporting obligations to tax authorities if they are subject to tax, not all types of trusts are covered. Even for those which are covered, enforcement is very problematic given that no one may know that the trust exists in the first place. In many cases, the only way the public becomes aware of them is through leaks such as the Panama or Pandora Papers, or via media coverage of divorce cases of multimillionaires.

Even countries that require (some) trusts to register tend to allow trusts to enjoy more secrecy, compared to companies and other legal persons. For instance, while the EU 5th anti-money laundering directive requires public access to companies’ beneficial ownership information (the natural persons who ultimately own or control the companies), in the case of trusts access is limited only to those with a ‘legitimate interest.’

In addition to not requiring all trusts to register, countries may fail to obtain information about all the relevant people involved in a trust. While companies tend to have very simple structures encompassing just shareholders with the same voting rights, trusts involve many parties. The three parties in a classic trust setting (the settlor, trustee and beneficiary) can involve many more: a legal (nominee) settlor, an economic settlor (the real owner of the assets to be transferred), the trustee, a protector or enforcer, a beneficiary who may be determined, discretionary or anyone belonging to a defined “class”. Trusts can now just have “purposes” (eg to concentrate family wealth) instead of beneficiaries. What’s more, many of these parties may themselves be legal persons (eg a corporate trustee, a corporate protector) making it even harder to determine who is behind the trust and who is in control of it.

Trusts are therefore often used to integrate more complexity into the ownership structure of a company or asset (eg a house) in order to create more secrecy around its real owners. Institutions like the World Bank, the Financial Action Task Force (FATF) and the Egmont Group suggest that the involvement of trusts in major corruption or money laundering scandals may be underestimated because trusts are so complex that authorities don’t bother to take action against them (assuming they even know about them).

The StAR (World Bank/UNODC)’s “The Puppet Masters” reports (p. 45-46):

Investigators interviewed as part of this study argued that the grand corruption investigations in our database failed to capture the true extent to which trusts are used. Trusts, they said, prove such a hurdle to investigation, prosecution (or civil judgment), and asset recovery that they are seldom prioritized in corruption investigations. Investigators and prosecutors tend not to bring charges against trusts, because of the difficulty in proving their role in the crime… As a result, even if trusts holding illicit assets may well have been used in a given case, they may not actually be mentioned in formal charges and court documents, and consequently their misuse goes underreported.

The FATF/Egmont Group’s “Concealment of Beneficial Ownership” says (p. 34):

The interaction of the trust with other legal persons adds an additional layer of complexity and helps frustrate efforts to discover beneficial ownership… It is also possible that the use of legal arrangements may increase the difficulty of investigating and identifying the beneficial owner, thereby explaining their relatively low prevalence in the case study sample.

  1. Asset protection

Apart from hiding assets and owners’ identities, trusts can shield assets from everyone else even in cases where there is full transparency on the trust’s existence, the identities of their parties and the value of their assets. Unlike companies which merely grant “limited” liability, trusts may achieve full immunity thanks to what we call the “ownerless limbo”. On paper, it appears as if trust assets aren’t owned by anyone. The settlor would say: “I’m no longer the owner, I gave the assets to the trust/trustee”. The trustee would say: “I’m not the real owner, I merely hold and administer the assets in favour of the beneficiaries, but I cannot do as I want with assets nor are they a part of my personal wealth”. Finally, beneficiaries would say: “We don’t own the assets yet, they must first be distributed to us after X time”.

One of the special types of asset protection trusts are discretionary trusts, which suggest (on paper!) that the trustee has full discretion to distribute assets to beneficiaries, determining who will receive what, when, how much and even “if”. In other words, discretionary trusts allow beneficiaries to say “I’m so distant from owning the trust assets, because it’s not that I don’t own them yet, but I may never own them at all, unless the trustee uses their discretion to distribute anything to me”. This argument is used, and sometimes even endorsed by the OECD (p. 19) to justify not requiring the disclosure of “discretionary beneficiaries” – because they may end up not receiving anything at all.

Of course, reality may be very distant from what it says on paper, and all settlors and beneficiaries may be enjoying the assets (eg using the mansion, the yacht and the private jet). It’s only when someone else tries to get access to an asset that they are all able to hide behind the trust paper claiming no one actually owns it. Asset protection trusts are so effective, that they have shielded assets against the US tax administration (the IRS), and unfortunately even against victims of sexual abuse and murder.

Why South Dakota?

South Dakota has been actively promoting itself as the ideal jurisdiction of choice both for US Americans (so that they don’t go to set up trusts in some remote island) as well as for foreigners, eg actively promoting trusts to Latin American elites.

Many may prefer South Dakota over a small tropical island because it is in the US. Although the US ranks as the 2nd worst offender in the Tax Justice Network’s Financial Secrecy Index, most countries don’t consider the US to be a “tax haven”, affording a higher degree of perceived reputation to US trusts.

Although South Dakota is widely mentioned in the Pandora Papers, it would be naïve to consider that it is the only risky jurisdiction with regards to trusts. As described here, many jurisdictions such as the Cayman Islands (its STAR trust), the BVI (its Vista Trust), Belize, Cook Islands, Nevis as well as other US States (Nevada, Alaska) have been offering very abusive trust provisions. Apart from the lack of transparency (given that trusts are usually not required to be registered in most places, let alone give public access to that information), many of these jurisdictions offer legal frameworks that ensure or allow for, among others:

Finally, the strategy of these trust jurisdictions is that victims and defrauded creditors would have to file lawsuits in many of these offshore jurisdictions or to spend a lot of time obtaining sufficient details about trusts that are often changing (the trust could in many cases migrate to other jurisdictions, change trustees, etc.). This would discourage even starting investigation or legal action where a trust is involved.

What can we do about it?

Countries should:

  1. Establish public online registries of the beneficial owners of trusts (eg. Denmark), covering any trust created according to local laws as well as any foreign trust with local assets or local parties (the settlor, trustee, etc)
  2. Neutralise the “ownerless limbo” by considering that trust assets are always owned by the settlor, until trust assets were distributed to beneficiaries (who would then become their owners). In other words, if a settlor has creditors and claims to have no money to pay the debt, creditors should be able to get hold of the trust assets as part of the payment.
  3. Establish lists of jurisdictions with abusive trust regimes (eg based on their secrecy and asset protection provisions) and prohibit residents from being connected to trusts from these jurisdictions, or disregard by considering invalid any of those trusts operating in the local territory or holding assets.

Pandora Papers: law firms must disclose clients’ names (like they’ve started doing in the US of all places)

This blog post contextualises the new Pandora Papers leak. It explains the need for public beneficial ownership registries, it opposes the latest opinion by the EU Data Protection Supervisor on the matter, and it shows how to use recent US case law to get the names of enabler’s clients, regardless of professional secrecy. It ends with a proposal suggesting that, just as banks are required to report their account holders to authorities and intermediaries are required to disclose schemes to hide beneficial owners, lawyers and corporate service providers should start reporting the identities of the clients for whom they set up offshore structures to authorities on an annual basis.

The Pandora Papers are yet another leak that exemplify the urgent need for public beneficial ownership registries around the world. Public beneficial ownership registries are official registries or databases (eg a commercial register) which collect information on the natural persons who ultimately own, control, or benefit from any legal vehicle (eg company, trust, etc). Having a record of the natural person (or beneficial owner) behind every legal entity serves to prevent the kind of financial secrecy that enables illicit activity. When public access to beneficial ownership information is not available, the public (and in some cases, the authorities) rely on leaks to access this information. In fact, as we’ve argued in a previous blog post, public access to beneficial ownership information would make leaks obsolete. Everyone would have access to beneficial ownership data without needing to depend on whistleblowers and journalists.

Undermining transparency: the EU Data Protection Supervisor

In an act of apparent hostility toward beneficial ownership transparency, which started gaining public support after the Panama Papers and the Paradise Papers, the EU Data Protection Supervisor issued Opinion 12/2021 on 22 September 2021 in which they expressed opposition to the growing movement for public access to beneficial ownership information as enshrined in the EU 5th Anti-Money Laundering Directive (AMLD 5). (This non-binding opinion is about the “AML legislative package” adopted by the EU Commission on 20 July 2021, which among other items, reiterates the call for public access to beneficial ownership information as established in AMLD 5).

The EU Data Protection Supervisor (EDPS) concluded the following:

As we have described in the UN High-Level FACTI Panel background paper on beneficial ownership transparency, disclosing information on beneficial owners is critical for tackling many types of illicit financial flows. Although money laundering and terrorist financing are important issues, so are tax abuse, corruption, unjustified enrichment, bid rigging, conflicts of interest, etc. In fact, the trend now is towards using data such as automatic exchange of banking information under the OECD’s Common Reporting Standard both for tax and money laundering cases (eg Punta del Este Declaration, page 6), rather than restricting access for just one purpose.

The worst part of Opinion 12/2021, however, is that, despite acknowledging the role of civil society organisations and the media in the fight against illicit financial flows and the fact that more EU countries are establishing public online registries of beneficial ownership, the Opinion still discourages public access until another study is done to assess proportionality and other issues. Creating a commission to discuss an issue and adding as many people as possible is a commonly-known disingenuous tactic for preventing further action.

In light of this opposition to public access to beneficial ownership information, it’s worth remembering, as explained here, that no one is obliged to create companies or other structures. If individuals do not wish for their identities to be disclosed or leaked from service providers, they could operate in the economy or hold assets under their own name. Agreeing to beneficial ownership transparency should be the least of the conditions under which individuals are permitted to set up legal vehicles which operate in the economy on their behalf, own assets, etc.

This transparency requirement is especially relevant if the individuals involved will also benefit from limited liability. What’s more, most companies have very simple structures (eg 85 per cent of UK companies are directly owned by individuals or by a company which in turn is directly owned by an individual). This means that in most cases, the shareholder (legal owner) and the beneficial owner are one and the same. In addition, most countries give public access to legal ownership information (after all, many commercial registries are called “public mercantile registries”) because this was considered necessary for trade. In other words, information on the individuals who own a business was made publicly available so that investors could know who they are dealing with.

Therefore, given that for most companies the beneficial owner and the legal owner coincide, beneficial ownership information has technically been publicly available in regular mercantile registries that disclose shareholder information. Beneficial ownership registries become relevant only when individuals set up complex ownership structures, including the integration of foreign entities (mostly from secrecy jurisdictions) into the ownership structure. These complex ownership structures make it impossible to determine the beneficial owner by looking at the local commercial register alone. An attempt to restrict public access to beneficial ownership information distorts the level playing field in local economies to benefit offshore investors/vehicles.

Moreover, contrary to this opinion which undermines the case for public access, it’s worth remembering that the Panama Papers, Paradise Papers – and most likely as will the Pandora Papers — have proven time and again the same fact: it’s not that “NGOs and the investigative journalism de facto contribute to drawing attention” to money laundering, but rather that they are indispensable to addressing illicit financial flows within our current framework. Sadly, media articles are sometimes the only real sanction that wrongdoers face and the only source of information on the users of secrecy jurisdictions.

Many authorities have had access to beneficial ownership information in (confidential) registries for years. They have also had access to data held by local financial institutions. The UK even has access to the beneficial ownership registries of some of the most problematic secrecy jurisdictions including the Cayman Islands and the British Virgin Islands (both ranked among the worst offenders by the Financial Secrecy Index), because they happen to be UK dependencies. Yet, this data is rarely used proactively. Investigations by government authorities mostly happen after a leak and many times as a result of  the leak. These government actions in the aftermath of leaks may be because some governments (especially in lower income countries) didn’t have access to the data prior to the leak. In other cases, however, it may be that authorities only felt pressured to take action after the leaks became public.

Access to beneficial ownership information by the media and NGOs is so important because, other than some politicians resigning, the consequences of these leaks from law enforcement do not result in bankers, lawyers, or other enabler – let alone politicians – going to jail en masse. In other words, it’s not that Civil Society Organisations (who help the media understand and contextualise data) and investigative journalists simply help law enforcement by providing the information they need to administer consequences. It’s that their work alone may be the only type of “enforcement” that takes place (reputational risk as a result of negative press). Politicians and elites may be more discouraged from using secrecy jurisdiction because of leaks than for the fear of law enforcement.

Just as the Panama Papers led to the EU 5th Anti-Money Laundering Directive, which required public access to beneficial ownership information, the Pandora Papers demonstrate the need for beneficial ownership information to be publicly accessible in all countries, starting with major secrecy jurisdictions and financial centres. This would enable these “NGOs and investigative journalists”, as well as authorities from all over the world, to conduct investigations year round rather than depending on leaks.

What is being done and what is missing

As our paper the State of Play of Beneficial Ownership describes, by April 2020 more than 80 jurisdictions had approved laws requiring beneficial ownership data to be disclosed to a government authority. Public access, albeit still limited, is now growing in Europe (not just in the EU, but also in British dependencies, Eastern Europe, and especially in the Western Balkans). To continue moving in the right direction, however, authorities need to invest more in developing verification mechanisms and closing loopholes. Beneficial ownership will not be useful if there are pathways for certain types of legal vehicles to avoid registration (eg most laws do not cover listed companies and investment funds) and if there are too many exceptions, as is the case in the US. Moreover, establishing beneficial ownership registries just for legal persons but not for trusts misses the point, given that trusts are weapons of mass injustice and have been documented again in Pandora Papers to be vehicles of choice for illicit financial activities.            

Apart from major loopholes to the scope, a big impairment to data accessibility is based on limited triggers. In other words, the parameteres for when beneficial ownership data must be registered and whose data must be registered are not inclusive enough. As explained in this brief (see page 18, proposal 4), most countries require only local legal vehicles (eg companies) to register their beneficial owners, but don’t demand this from foreign entities that may be operating in their territories or whose beneficial owners may be local residents. In other words, even a super advanced beneficial ownership register like Denmark’s would have no data on what was revealed by the Pandora Papers. The Danish register would know about Danish companies, but not about offshore companies set up by Danish residents in secrecy jurisdictions.

Until public beneficial ownership registries are available all around the world, each country should require beneficial ownership registration not just from locally incorporated legal vehicles, but also from any foreign legal vehicle with operations or assets in their territory, and from any legal vehicle that has a local participant, be it a beneficial owner, shareholder, director, etc. In other words, Denmark’s beneficial ownership register should collect beneficial ownership information on any Danish legal vehicle, as it does. But it should also collect information on any foreign legal vehicle with assets or operations in Denmark and any foreign legal vehicle in which a Danish resident participates as either a shareholder, director, beneficial owner, settlor, etc. (There are some disclosure regimes, either asset returns for public officials or asset and income returns for tax authorities, which already target offshore holdings, so expanding triggers of beneficial ownership registration is not that different to what already exists).

However, even though a country with such comprehensive scope and trigger criteria would in theory have all the relevant information (because the law would require it), the accuracy of the registered information as well as the enforcement of its registration is a completely different issue. For this reason, countries should undertake additional measures:

  1. Country of residence as a structured data to be searched for or exchanged

While many countries have established public online beneficial ownership registries, search mechanisms may be limited. A user may need to know the exact name of an entity, or may only do a (free) search by an entity’s name or ID. Some countries also allow users to search for information by the beneficial owner’s name or ID. What is needed, however, is the capacity to search by country(ies) of residence. This way, a countries could search for information on all their residents across every country’s public beneficial ownership registry, rather than trying to search for every individual taxpayer to see if they are mentioned as a beneficial owner. Countries without public access to information should engage in automatic or spontaneous exchanges of this information with the country of residence of the beneficial owner.

  1. Using offshore banking data to reveal offshore strategies

As proposed by our latest blog post on the leak from a bank in the Isle of Man, offshore banking data – especially what must be exchanged under the OECD’s Common Reporting Standard for automatic exchange of financial account information – could be a game changer for authorities. Data on offshore accounts, in addition to disclosing undeclared monies, could be used to reveal offshore secrecy strategies by determining the preferred secrecy jurisdiction used (or abused) by local taxpayers. Exchanged banking information could also reveal the types of structures typically chosen (a company, a trust, an Anstalt, etc) by residents of a particular country. For instance, based on a very small sample, the blog post described that 70 per cent of British beneficial owners used discretionary trusts from Cyprus to hold their bank accounts in the Isle of Man. A systematic analysis by authorities of the information received through automatic exchanges could reveal patterns that allow authorities to focus resources on obtaining data or establishing countermeasures in the secrecy jurisdictions favoured by their taxpayers.

  1. Obtain client information en masse directly from enablers

One of the conclusions of the Pandora Papers is that despite the many leaks, enablers such as lawyers and trust and company service providers (TCSPs) keep helping criminals and high net worth individuals hide behind secretive structures to engage in illicit financial flows including tax abuse and corruption. The Financial Action Task Force (FATF) in Recommendation 22 requires Designated Non-Financial Businesses and Professions (DNFBP) such as lawyers, notaries, and accountants to conduct customer due diligence and be subject to anti-money laundering rule. However, not all countries require this from their service providers. Even for those that try to require it, lawyers are especially prone to resistance, often invoking professional secrecy based on attorney-client privilege, which can be abused to engage in illicit financial flows in general, as well as to avoid automatic exchange of banking information.

On the bright side, however, a recent US case law (Taylor Lohmeyer Law Firm PLLC v. United States of America, Civil Action No. SA-18-1161-XR, 15 May 2019) that we blogged about gave access to the US tax authority, the IRS, to the identities of clients of a law firm that had engaged in creating offshore structures to enable abuse of US taxes. Importantly, the decision was also upheld by the US Court of Appeals in 2020. Here are some interesting remarks:

It’s ok to ask for client information from a law firm engaging in creating offshore structures to hide the beneficial owner:

“The clients of [the Firm] are of interest to the [IRS] because of the [Firm’s] services directed at concealing its clients’ beneficial ownership of offshore assets”.

It’s also ok for the purpose of identifying unknown clients who have also obtained the services:

“The IRS is pursuing an investigation to develop information about other unknown clients of [the Firm] who may have failed to comply with the internal revenue laws by availing themselves of similar services to those that [the Firm] provided to Taxpayer-1”

This is the data that the IRS asked for:

“Documents “reflecting any U.S. clients at whose request or on whose behalf [the Firm] ha[s] acquired or formed any foreign entity, opened or maintained any foreign financial account, or assisted in the conduct of any foreign financial transaction”; “[a]ll books, papers, records, or other data . . . concerning the provision of services to U.S. clients relating to setting up offshore financial accounts”; and “[a]ll books, papers, records, or other data . . . concerning the provision of services to U.S. clients relating to the acquisition, establishment or maintenance of offshore entities or structures of entities.”

Given that the identity of the disclosed client would not necessarily incriminate them, attorney-client privilege does not apply:

“This broad request, seeking relevant information about any U.S. client who engaged in any one of a number of the Firm’s services, is not the same as the Government’s knowing whether any Does engaged in allegedly fraudulent conduct, or the content of any specific legal advice the Firm gave particular Does, and then requesting their identities.”

Based on the success of this US case, all countries should not only follow and try similar lawsuits, but they should also establish by law that, just as banks and financial institutions are required to report the identities of their accounts holders and beneficial owners, law firms and corporate service providers in general should annually report the identities of all their clients for whom they set up (or help set up) legal vehicles. These regulations should focus especially on service providers who set up offshore structures (entities incorporated in a country different from the residence of the beneficial owner). In relation to this, the OECD already called on countries to obtain more beneficial ownership information by publishing Model Mandatory Disclosure Rules on Schemes to Hide the Beneficial Owner. Based on this framework, authorities trying to catch wrongdoers should be asking not just for the scheme details but also for the identities of those clients who may have used these schemes.

Establishing such a requirement by law may also undermine any attempt to invoke professional secrecy to oppose disclosing clients. Another US case, United States v. BDO Seidman, dealt with this subject matter. This case was based on US tax regulations requiring organisers of tax shelters to register tax shelters with the tax administration. The regulations also required organisers and sellers of such shelters to keep lists of their investors. (For background information on such rules, see indicator 13 in the Corporate Tax Haven Index which monitors such disclosure rules.) In the United States v. BDO Seidman case, the US tax administration (the IRS) requested the identities of the clients because “the IRS received information suggesting that BDO [the tax advice firm] was promoting potentially abusive tax shelters without complying with the registration and listing requirements for organizers and sellers of tax shelters”.

Although the clients (the “Does”) opposed the disclosure of their identities based on professional secrecy, the US Court of Appeals concluded:

“The Does have not established that a confidential communication will be disclosed if their identities are revealed… Disclosure of the identities of the Does will disclose to the IRS that the Does participated in one of the 20 types of tax shelters… It is less than clear, however, as to what motive, or other confidential communication of tax advice, can be inferred from that information alone”

This case shows why it is important to have a regulation requiring the disclosure of at least the schemes:

“At the time that the Does communicated their interest in participating in tax shelters that BDO organized or sold, the Does should have known that BDO was obligated to disclose the identity of clients engaging in such financial transactions. Because the Does cannot credibly argue that they expected that their participation in such transactions would not be disclosed, they cannot now establish that the documents responsive to the summonses, which do not contain any tax advice, reveal  confidential communication.”

Conclusion

As explained here, no one is obliged to create companies or other structures. If individuals do not wish for their identities to be disclosed or leaked from service providers, they could operate in the economy or hold assets under their own name. Beneficial ownership transparency should be the least of the conditions under which individuals are permitted to set up legal vehicles which operate in the economy on their behalf, own assets, etc. This transparency requirement is especially relevant if these individuals will also benefit from limited liability. After three major leaks, it’s high time for countries to speed up the establishment of public beneficial ownership registries. In the meantime, they must start using existing exchanges of information to obtain and verify data. These leaks, however, also prove that more is needed. Not only should schemes to hide beneficial owners be disclosed to authorities by intermediaries as proposed by the OECD and the EU, but the identities of the clients potentially using these schemes should also be part of corporate service providers’ annual reporting to authorities.

Tax Justice Network Arabic podcast #46: ضريبة تثير جدلا لدى صانعي المحتوى الرقمي في مصر

Welcome to the 46th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. It’s produced and presented by Walid Ben Rhouma and is available on most podcast apps. Any radio station is welcome to broadcast it for free and websites are also welcome to share it. You can follow the programme on Facebook, on Twitter and on our website.

ضريبة تثير جدلا لدى صانعي المحتوى الرقمي في مصر

فرض ضريبة على مداخيل الانفلونسرز وصانعي محتوى السوشيال ميديا على يوتيوب وفايسيوك وانستاغرام وتيكتوك هو موضوع الحلقة #46 من بودكاست “الجباية ببساطة” في حوار مع الباحث في مجال الحقوق الاقتصادية والاجتماعية، إلهامي مرغني، حول الجدل الواسع الذي أثارته مصلحة الضرائب المصرية والتي تقدر مداخيل سنوية لهذا النشاط تفوق 500 ألف جنيه مصري للفرد.

كيف سيطبق هذا القرار؟ بأي آليات؟ وماهي تبعاته المتوقعة؟ أسئلة تجدون الإجابة عنها في البودكاست العربي “الجباية ببساطة “.

ضريبة تثير جدلا لدى صانعي المحتوى الرقمي في مصر

For this month’s episode #46 of Taxes Simply الجباية ببساطة  we begin with the latest news relating to fiscal justice issues globally and in the Arab region. We then interview Elhamy Al Merghany, an Egyptian researcher and consultant on economic and social issues. Walid and Elhamy discuss the recent decision by the Egyptian government to impose taxes on social media content creators, also knows as “youtubers” or “vloggers”. Elhamy provides an analysis of the decision, the rationale behind it and how just it is when assessing fair taxation at large.

تابعونا على صفحتنا على الفايسبوك وتويتر https://www.facebook.com/ TaxesSimply Tweets by taxes_simply