Making a killing from care

Foreign investors who own UK care homes are charging exorbitant fees while shifting millions of pounds into tax havens. That is the finding of a new report by the Center for International Corporate Tax Accountability and Research (CICTAR) which shows the Canadian government pension fund PSP Investments, which controls more than 60 UK care homes, is shifting profits offshore and declaring losses in the UK while demanding £200 a day in fees from thousands of residents.

Darkness at Sunrise: UK Care Homes Shifting Profits Offshore focuses on two companies controlled by the PSP; Gracewell Healthcare and Signature Senior Lifestyle, both of which are run by management company Sunrise Senior Living. The report presents a concrete example of what is likely to be a much broader pattern of predatory corporate behavior in a sector that is dominated by private equity firms with a track record of aggressive tax planning.

The study comes at a timely and troubling moment, as the Coronavirus pandemic has thrown decades of underfunding of the sector into stark relief. Financialisation of the UK care industry has enabled private equity firms to extract many millions of pounds from the economy while prejudicing the wellbeing of residents and undermining the labour rights of workers.

For example, US real estate company Welltower – which is a minority partner in the homes examined – made an estimated £64 million from them in 2019. What’s more, the firm owns some 120 UK care homes in total. As explained by the report’s author Jason Ward: “Profits reported to shareholders reveal what is usually kept hidden – complex corporate structures using tax havens artificially create losses to avoid UK tax.”

In Canada, meanwhile, PSP Investments owns the second largest care home operator, Revera, which is now facing scrutiny over Covid-19 deaths and growing calls for public ownership.

The pernicious impacts of financialisation, and in particular of private equity firms, in the UK care sector has also been examined in episode 96 of the Taxcast, and Nick Shaxon’s book The Finance Curse.

Submission to New York State Assembly: the case for Financial Transactions Taxes

Update, March 7: In new Zogby poll, majority of New Yorkers support the change. See TJN release here

A version of this document is being submitted today to the New York State Assembly, in support of its Stock Transfer Tax.

The time for financial transactions taxes has returned

By James S. Henry, John Christensen, David Hillman and Nicholas Shaxson

New battles with global finance are brewing, as a range of countries, states and coalitions now push to enact new financial transactions taxes (FTTs,) an old, honourable, effective and progressive kind of tax that is fast regaining popularity around the world as governments scramble to pay for the costs of the Covid pandemic.  Powerful new initiatives in the United States and the European Union show rising momentum for new FTTs.

An FTT does what it says on the tin. States apply a tiny tax rate (for example, 0.1 percent) on the value of financial transactions such as the sale of shares or derivatives. Well designed FTTs have three main benefits: first, they raise significant tax revenue, delivering a welcome transfer of wealth from rich to poor; second, perhaps more importantly, they curb excessive and harmful high frequency financial speculation (which makes up around half of all US stock market trading now) while leaving normal trading and investment intact; third, they boost transparency, giving tax authorities better oversight of financial activities.

A push in New York, and the United States

In New York state, Assemblyman Rep. Phil Steck has sponsored a disarmingly simple three-page bill that would raise some $10-20 billion a year from Wall Street and plough the money into the pandemic response and the local economy, creating jobs with a fair, efficient and progressive tax. 

The form of FTT in play is the Stock Transfer Tax, a tax on share dealing that has been on the books in New York state since a Republican governor introduced it in 1905 – and still is.  The tax was progressive and highly effective, raising around $80 billion (in 2020 dollars) until 1979 when the New York Mayor and state governor caved into Wall Street pressure and phased in a 100 percent annual “rebate”, which unfortunately also remains in effect. So the tax is in effect levied – then kicked straight back to Wall Street.  According to detailed calculations by co-author James Henry, who is helping Steck organise the fight, New York state has lost $344.2 billion in lost STT revenues since 1979 when they started phasing in the rebate (figure is in 2020 dollars: original data sources are here and here.)

“The whole public sector has been starved,” said Steck.

His bill is clear and simple: it removes the rebate. If enacted, it would levy a tax of five cents on every share trade valued over $20 – so for the median Nasdaq share traded, worth $48, this would amount to an insignificant 0.1 percent tax. It behaves like a progressive sales tax,  vastly lower than the eight percent tax New York residents pay on retail items.

The STT would be painless and easy to implement – and, of course, would prove immensely popular. Steck’s bill currently has 54 sponsors in the New York assembly – and it only needs 60-65 to get accepted. (Senator James B. Sanders, Chair of the New York State Banking Committee, is sponsoring the same bill in the state Senate.) It has widespread support, ranging from the biggest trade unions, to conservatives worried about budget deficits.  We are close to a nifty victory that can be replicated all over the planet. This has got legs. 

A similar Wall Street Tax Act, a new federal FTT proposal, is supported by a good majority of voters, though its chances at a federal level are currently slim, and even lower if this doesn’t pass in New York. Various other FTT proposals have been introduced recently in the US alone.  

The Wall Street pushback

Predictably, Wall Street is shrieking, and wielding the same kinds of spurious arguments and empty threats they always make when faced with taxes and regulations.  For instance, the Securities Industry & Financial Markets Association (SIFMA,) in partnership with the Institute of International Bankers and several others, just organised a letter to Governor Cuomo opposing the STT, and the president of the New York Stock exchange followed this up by a thundering opinion article in the Wall Street Journal. These lobbyists wheeled out the usual arguments: that the tax threatens jobs; that it is a ‘tax on working families’; and of course the old “competitiveness” shibboleth: that all the banks will run away if they have to pay the tax. They cited various horror stories of countries like Sweden that had imposed an FTT, and apparently ended up regretting it.

They coo that the state should instead fill its current $15 billion pandemic-year’s fiscal deficit with other, complex mostly pro-Wall Street proposals that gouge the poor – such as budget cuts, raising fees on auto registration, or legalising casino gambling or marijuana. None have the clout and simplicity of simply repealing the costly rebate.

These tired old arguments remain as invalid as they have always been – as we will demonstrate below. Parts of our counterargument may shock some people.

A new push in the European Union

In the European Union, a new FTT push has just begun under the leadership of Portugal, which holds the rotating presidency. Although negotiations have been long and hard, Portugal has provided invaluable technical expertise on the FTT file over the years, putting it in a good position – with sufficient determination and strong civil society support – to deliver a historic FTT agreement in the coming months.

An EU document leaked to the Agence Europe highlights the FTT’s potential, and urges European countries to build on “an FTT that has already been successfully introduced and secured with minimal distortions to the financial markets” in France and Italy, and to “start testing at the European level, as early as possible, the approaches developed and already tested” – possibly including not just shares but equity derivatives. And, once introduced, it urges exploring “the options of developing this tax in the future”.

This gradual, phased approach may feel slow for those demanding a far more ambitious FTT, encompassing bonds and derivatives, but may be pitched correctly for now, so as to get the FTT over the line at a time when European leaders know their populations, angry and hurting, demand measures like this.

In many countries, financial transactions taxes have been enormously successful, as explained below. In no country has the tax inflicted any significant damage on the economy: the opposite, in fact. And they are immensely popular. In Britain, for instance, over a million people signed the “Robin Hood Tax” petition for a far broader FTT covering derivatives and other instruments.

The scope for such a tax to curb risky finance is immense. Globally the volume of outstanding derivatives contracts alone is now estimated to be equivalent to $640 trillion dollars – nearly 10 years of annual world economic output – and the sheer excess volume of financial transactions is a threat to global, national and local financial stability. This has to be reined in – and economists from John Maynard Keynes to James Tobin to Joseph Stiglitz have advocated the FTT as a great way to do it, “throwing sand in the wheels” of excessive and risky speculative global finance.

Busting the Wall Street myths

The threats and arguments from Wall Street and the European banking sector are versions of the same threats and spurious arguments we have seen, time and again, around the world, whenever anyone wants to tax financial capital. They are as wrong now as they always are – and it is worth taking the threats apart, point by point.

Claim 1: that this is a ‘tax on working families’ The idea here is that financial institutions will simply pass the cost of the tax onto end investors – such as pension funds.

The exact opposite is true, for several reasons. First, we must distinguish between investors holding shares for the long-term – like pension funds – and high-frequency traders. The former has legitimate needs, while the latter provides no useful service to the economy: their business is to use super-fast computers to flip shares milliseconds ahead of their competitors, to gain a trading edge over their counterparties, which include pension funds. This is pure wealth extraction from others. The 0.1 percent average STT hardly touches the ‘good’ investors, because it is levied only once per trade – while it would hammer the HFT predators (which are effectively levying a private tax on all share owners every time they use their supercomputers to trade against them.)

Second, our further calculations suggest that the cost of the FTT to the $103bn New York State Teachers retirement pension fund, for example, would be just over $20m a year. That may seem like a lot, but compare it to the shocking $330 million in annual management, advisory and legal fees the fund paid to Wall Street (see p94 here), just on the $54 billion of their assets that are externally managed. Add internal administrative costs for the internally managed assets, much of which also flow ultimately to Wall Street, and the total rises to $401 million. Put another way, the STT would cost the fund 1.8 basis points, while the fees cost it 60 basis points.  Adding in the New York State and Local Retirement System pension fund, including police and civil service, we calculate a total of $1.33 billion in overall fees and administrative expenses.

These fees are splashed out to 37 different investment advisers (p96 here), and the assets are fire-hosed out into 414 different Wall Street funds (pp 97-100), many of which extract hidden fees not recorded above. That is a lobbyists’ gravy train – and a vastly bigger tax on working families than any STT could ever be. It is also an example of “pension fund capture” – which may help explain why it has been so hard to get many employee pension funds on board with such an employee-friendly tax.

What is more, a STT encourages pension funds to invest as they should: for the long term, rather than speculating with pensioners’ money.  Meanwhile, those clever Wall Street investment managers have overseen a $2.5bn decline in those pension fund assets since 2018, while stock markets have soared.

This general principle also applies to any taxes that effectively target the owners of capital (as opposed to targeting workers or employees, say). Such taxes disproportionately strike capital-intensive, low-employment (and often predatory) activities, while hardly touching the patient productive investors employing locals. That is largely because taxes that apply to firms employing large numbers of people are usually a tiny proportion of overall outgoings (whereas things that those taxes help pay for, such as infrastructure or an educated workforce, loom far larger.) Meanwhile, taxes on capital loom far larger in capital-intensive industries employing few people, such as hedge funds. What is more, it is easy to design safeguards to minimise impacts on healthy investing.

Also, over 80 percent of quoted U.S. shares are ultimately owned by the wealthiest 10 percent of Americans, so any residual direct costs on share owners (like pension funds) are shouldered overwhelmingly by richer folk in any case. When the racial or gender dimensions are considered, the picture is even starker. And for the FTT, the wealth impact is even more concentrated than this, because the main beneficiaries of strategies by hedge funds that engage in HFT – the ones targeted by the STT – are billionaires and other high net worth individuals.

Claim 2: Other countries that imposed an FTT regretted it. Sweden is routinely cited here, when an FTT imposed in 1984 led to a reduction in Swedish trading volumes.

The exact opposite is true. Sweden did lose some trading volumes after the FTT was implemented – but this was because of its design flaws. As the IMF reported in 2011, the FTT was only imposed on trades via Swedish brokers, so “it was easily avoided by using non-Swedish brokers.”

By contrast, Britain’s Stamp Duty on securities, a narrow FTT on share transfers is extremely hard to avoid.[1] It raised around £3.5 billion (US$ 4.9 billion) in 2020, equivalent to the salaries of 110,000 nurses, for instance, or seven times the operating budget of Oxford University.  This tax, which was introduced in 1694 (that is not a misprint) has not prevented London from being one of the world’s two biggest financial centres, alongside New York.  If extended to cover other forms of financial trading, the UK’s FTT could raise multiples of these sums.

The latest EU document notes that in Italy’s and France’s case “the introduction of an FTT did not have a significant impact on market liquidity . . . nor did it have a significant effect on financial volatility” and added that it has “not led to a significant shift towards non-taxable investment vehicles as a strategy for tax avoidance.” And in all these countries, the revenues, added transparency and reduced risky speculation delivered large benefits.

Claim 3: That the financial sector is the goose that lays golden eggs, the “engine” of the economy, thatitshowers tax revenues and jobs on the rest, so we should nurture and protect it.

Another complete myth. A financial sector provides some ‘utility’ benefits to any economy, but parts of it also impose severe costs. Two images illustrate this.

The blue section in the image on the left is the ‘utility’ part of finance, providing useful services to the economy: lending to small businesses, providing ATM machines, etc. The red part is the harmful stuff: the hedge fund predation, the high-frequency trading / extraction, and so on. The image on the right, from the IMF, shows there is an optimal size for a financial sector: expansion beyond this tends to harm economic growth in the state that hosts it. The U.S. and U.K. passed this point some time in the 1980s, and both suffer a heavy “finance curse”. Oversized finance is not a golden goose, but a cuckoo in the nest, crowding out and harming other parts of the economy. The conclusion is, “shrink finance, for our prosperity.” Shrink the red part, and keep the blue part.  How can we do this? One good way is via an FTT, which kills harmful high frequency trading, but leaves the utility functions unscathed.

Claim 4: that the tax imposes a ‘burden’ on the country or state. 

This claim resonates quite widely in the United States, where anti-tax and anti-government ideologies run deep, but it is nonsense. A tax is not a cost to an economy but a transfer within it. An FTT transfers wealth downwards, from wealthy shareholders and owners, many of which are from overseas or out of state, to the local public purse, which deploys resources to fund economy-growing initiatives such as local public infrastructure, courts, or health and education. Studies have suggested that FTTs boost economic growth and net job creation, and reduce the likelihood of financial crises.

An FTT provides additional public benefits, like a tax on tobacco or on gambling, by reducing harmful financial trading and financial risks, as discussed above.

Claim 5: that “all the money will run away” – that our country or state will become “uncompetitive” and the bankers will de-camp or do their trades elsewhere.

They always say that. (Why woudn’t they? Talk is cheap.) When New York’s STT was enacted in 1905, the New York Times thundered that all the money would flee to other stock exchanges like Philadelphia’s or Chicago’s, and New York would be like those “medieval cities, which fell out of the course of modern commerce.”  Three months later, the NYT retracted the opinion, admitting it had been a great success.  And now consider that immense gravy train of Wall Street fees extracted from New York’s pension funds described above: why on earth would Wall Street run away from that? In fact, of the many US pension fund assets invested overseas, the top destination is the United Kingdom – which has the highest FTT of any major country. 

In fact, FTTs of different kinds are happily in place in Belgium, China, Colombia, Cyprus, Egypt, Finland, France, Hong Kong, India, Ireland, Italy, Kenya, Malaysia, Malta, Pakistan, Peru, Philippines, Singapore, South Africa, South Korea, Spain, Switzerland, Taiwan, Tanzania, Thailand, Trinidad & Tobago, Turkey, United Kingdom and Venezuela – and those are just the ones we know about. Denmark and Poland are considering them.

As a detailed IMF study put it, FTTs “do not automatically drive out financial activity to an unacceptable extent,” they are “certainly feasible” even unilaterally, and “would likely be quite progressive.”

Many of of those FTTs were brought in since the last global financial crisis – and precisely none of the FTTs trashed their local financial centres. It is also almost certain, though we haven’t checked every case (here’s some Kenyan FTT lobbying, for instance), that financial interests threatened armageddon ahead of the introduction of every one of them, often brandishing Sweden as if it supported their arguments.

Don’t believe the hype. These ‘competitiveness’ stories are a hoax.

In short, since the first FTT was pioneered in the Netherlands in the 1630s, such measures have always been passed in response to fiscal crises. Pretty much every country and state across the globe faces a fiscal crisis now. The time to get these taxes into the books is today.

Further reading

James S. Henry is an investigative economist and lawyer, Global Justice Fellow at Yale, Board member of Amnesty Internatinoal US, and Senior Advisor to the Tax Justice Network.

John Christensen is an economist and former head of the government economic services of the British Channel Island of Jersey. He chairs the Board of the global Tax Justice Network.

David Hillman campaigned to Ban Landmines and Drop the Debt before helping found the Robin Hood Tax (RHT) campaign to tax the finance sector better, sparking RHT campaigns across Europe and in the US.

Nicholas Shaxson is a financial journalist and author of Treasure Islands, a book about tax havens, and The Finance Curse, about the perils of oversized financial sectors. He also writes for the Tax Justice Network.

[1] As the IMF explains: “the U.K. stamp duty is a tax on the registration of shares in U.K. registered companies. Investors purchasing shares in U.K. companies anywhere in the world must pay stamp duty in order to ensure their legal claim on the shares.” Austrian economist Stephan Schulmeister has produced a more detailed analysis of the Swedish experience, which he contrasts with a much more effectively designed transaction tax in the United Kingdom: the full report can be accessed here.

Call for papers: Human rights and the 4 “Rs” of tax justice – Tax Justice Network annual conference

Each year, over $427 billion in tax is lost to the most egregious forms of international corporate and individual tax abuse. This costs countries around the world the equivalent of nearly 34 million nurses’ annual salaries every year – or one nurse’s annual salary every second. But while the expansion of research into credible measurement of these tax losses has helped to drive forward international policy responses, these responses are often disconnected from the human costs that result. This reflects a failure to properly consider “the 4 Rs of taxation”.

Without tax justice, states cannot raise the revenues to meet their obligations to provide the maximum available resources to promote human rights. Without effective taxation, states cannot deliver the level of redistribution necessary to combat gross inequalities. Without a functioning tax system, states cannot achieve the repricing of public “bads” such as carbon emissions, to ensure sustainable development. And last but far from least, without fair and transparent taxation, we do not see the development of effective political representation necessary to ensure accountable governments based on a healthy social contract.

In 2021, the UN’s High Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) has thrown down the gauntlet. The Panel’s final report calls for a fundamental overhaul of the global architecture around tax and financial transparency, in order to address global inequalities in taxing rights between countries. Such an overhaul is crucial to ensuring that all states can deliver the 4 Rs.

The tax justice movement has in recent years worked ever more closely with human rights organisations to confront tax injustices and the resulting human rights failures, including the critical failures of women’s rights. Existing international legal instruments such as the Convention on the Elimination of Discrimination Against Women and the International Covenant on Economic, Social and Cultural Rights have been utilised to enforce accountability, while domestic mass mobilisation campaigns have sought to raise public awareness and demands for action.

Co-organised by the Association for Accountancy & Business Affairs (AABA),  City University of London (CityPERC), the Tax Justice Network and the Tax and Gender Working group of the Global Alliance for Tax Justice (GATJ),this virtual conference is the latest in an annual series dating back to 2003. The events bring together researchers, academics, journalists, civil society organisations, consultants and professionals, along with elected politicians and their researchers, and officials from national governments and international organisations. The purpose is to facilitate research, open-minded debate and discussion, and to generate ideas and proposals to inform and shape political initiatives and mobilisation.

Call for papers, and proposals for panels

The organisers wish to invite original, high quality papers for presentation, in the broad field of human rights and the 4 Rs of tax justice. We particularly welcome papers that focus on the following themes:

In addition, we welcome proposals for interactive panels, conversations or other sessions of a non-standard format, addressing an alternative particular theme. Please note that we will not consider men-only sessions, and that we are committed to broader diversity including with respect to race and class.

Please submit abstracts and/or panel proposals of up to 500 words, along with details of the authors and proposed speakers by 12 March 2021. The review panel will communicate decisions by 26 March 2021, and final papers will be required by 28 May 2021. Proposals should be submitted via the form below. For any queries, please contact Helena Rose at [email protected] or Liz Nelson at [email protected].

Financial support may be available for speakers where remote connectivity would otherwise present obstacles to participation. Please indicate with your submission if you would require support to be able to attend.

Registration

Registration will open when the preliminary programme is published, in April 2021. For more information contact: [email protected].

The Tax Justice Network February 2021 Spanish language podcast, Justicia ImPositiva: Nueva ley, nueva constitución, nuevo mundo #56

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

En este programa:

Invitados:

Nueva ley, nueva constitución, nuevo mundo #56

MÁS INFORMACIÓN:

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

Some things never change: the use of Swiss banks by crooks

While many aspects of our lives and economies have faced uncertainty and instability during the Covid-19 pandemic, some areas seem to have resisted turmoil or even thrived from it. Unfortunately, Swiss banking secrecy and its abuse by corrupt officials and dictators is one of those areas, and it appears to be alive and kicking harder than ever.

As reported by Swissinfo:

Swiss officials have discovered CHF9 billion ($10billion) in embezzled Venezuelan public funds spread across hundreds of bank accounts. One in eight Swiss banks is caught up in this latest scandal, which some experts say shows up the failure of the anti-money-laundering mechanism put in place by Switzerland.

Not an isolated case

This absolutely doesn’t surprise us. The new revelations about embezzled Venezuelan public funds are far from being the only cases of corrupt officials with money in Swiss banks. Another Swissinfo article entitled “Switzerland has ‘impressive results’ for return of dictator funds” listed a recount of Switzerland’s other crook clients. This does make us wonder if it is so “impressive” to have that many dictators hide their ill-gotten money in Switzerland to begin with:

CHF4.5 million placed in a Geneva bank by a former cabinet minister of deposed Haitian dictator Jean-Claude “Baby Doc” Duvalier… CHF321 million siphoned off by the family of Nigeria’s former dictator Sani Abacha… 570 million in the case of Egypt [Mubarak], $60 million in the case of Tunisia [Ben Ali] and about $70 million regarding Ukraine.

Yet another Swiss publication entitled “No dirty money. The Swiss Experience in Returning Illicit Assets” included other cases of government officials’ money held in Switzerland (part of which was then returned), including US$5.5 million from Mobutu (Democratic Republic of Congo), CHF 3.9 million held by Mali’s Moussa Traoré, US$93 million from Peru’s Vladimiro Montesinos, US$684 million from the Philippines’ Ferdinand Marcos, CFH 120 million held by Syria’s Bashar Al-Assad, and US$64 million related to Angolan officials and embezzlement from the sale of Angolan oil.

What neither of these articles mentions is of course, Switzerland’s role in profiting from Nazi gold (which according to the Eizenstat Report by the US Special Envoy of the Department of State, included gold taken from victims of concentration camps). The Swiss Bergier Commission and news articles, eg on Estelle Sapir, described the reluctance of Swiss banks to return the money to Holocaust survivors, until they were forced to do it by external pressure.

Is Switzerland considered a tax haven by everyone?

Based on these cases, and the prevalence of secrecy until today, it’s no wonder that Switzerland has been ranked among the top worst offenders for years on the Tax Justice Network’s Financial Secrecy Index, a global ranking of countries most complicit in helping wealthy individuals hide money from the rule of law, and the Corporate Tax Haven Index, a global ranking of countries most complicit in helping multinational corporations abuse corporate tax.

Switzerland
  • Corporate Tax Haven Index Ranking: 5
  • Financial Secrecy Index Ranking: 2
  • Tax Loss Each Year To Tax Havens: $ 4,669,696,002
  • Tax Loss Inflicted On Other Countries: $ 17,621,174,737
See country profile ↘

Nonetheless, some folks appear to prefer turning a blind eye. Just last year, the OECD’s Global Forum rated Switzerland as “largely compliant” on issues relating to availability, access and exchange of ownership information on entities and bank accounts, among others. If this sounds at odds with the current news story of Venezuelan money laundering in Swiss banks, hold your breath because there’s more. Switzerland held onto its old “largely compliant” rating, even though the 2020 criteria was expanded to also cover availability and access to beneficial ownership information↪NOTEA beneficial owner is the real person, made of flesh and blood, who ultimately owns, controls or receives profits from a company or legal vehicle, even when the company legally belongs, on paper, to another person or entity, like an accountant or a shell company. Identifying and registering beneficial owners is vital to making sure the wealthiest are held to the same level of transparency and accountability as everybody else. Learn more here., something that even Global Forum acknowledged not to be guaranteed in Switzerland:

It cannot be ascertained that beneficial ownership information will be available in all cases… In addition, the AML [Anti-Money Laundering] legal framework contains some deficiencies with respect to the identification, verification or updating of the beneficial owners of legal entities and arrangements that may result in the AML obliged professionals not always maintaining beneficial ownership information in line with the standard. Similarly, the obligations for companies and their shareholders to identify some beneficial owners do not allow the full identification of all beneficial owners according to the standard.

In contrast, more than 80 jurisdictions already had a law by April 2020 requiring the disclosure of beneficial ownership data to government authorities. Even the United States approved a law requiring beneficial ownership registration in January this year (although some the law has some loopholes that should be fixed).

Switzerland secrecy problems don’t stop there. One of the biggest obstacles to transparency are bearer shares, a type of certificate that gives ownership of shares whoever physically holds the certificate. Most countries have prohibited bearer shares or have at least immobilised them. According to the Global Forum report, based on recent laws, Switzerland will allow non-compliant holders of bearer shares (who fail to convert the bearer shares on time) to reinstate their rights up to October 2024 (more than three years from now). In addition, non-compliant holders of bearer shares will have until 2034 (almost 13 years!) to claim economic compensation for the loss of their bearer shares.

As for banking secrecy, although Switzerland is now engaging in the OECD’s Common Reporting Standard (CRS) for “automatic” exchange of banking information, it originally showed strong resistance, and then managed to include obstacles to prevent others from obtaining information. First, as described here (see box 4), Switzerland tried to prevent automatic exchanges altogether, offering instead their alternative, known as Rubik agreements. Under these agreements, Switzerland would collect the owed taxes and give it to each corresponding country, instead of disclosing the identity of those with secret accounts in Switzerland. Those countries that signed the Rubik agreements, such as the UK, failed miserably to obtain the expected tax revenues.

When automatic exchange of information↪NOTEAutomatic exchange of information is a data sharing practice that prevents corporations and individuals from abusing bank accounts they hold abroad to hide the true value of their wealth and pay less tax than they should at home. Under automatic exchange of information, a country takes the information it has on the financial activity of individuals and businesses who are operating within its borders but are resident in, aka permanently living in or headquartered in, another country and shares that information with that country. Learn more here.  was finally endorsed, Switzerland managed to get its hands on the design of the OECD standard to protect Swiss financial interests. As described here and here, the Swiss requests for full reciprocity from developing countries and the initial allowance for Switzerland and other tax havens to cherry-pick countries to exchange information with, resulted in many countries being excluded from the system, or failing to receive information from Switzerland until later in the future (giving enough time for tax abusers to rearrange their affairs).

By 2020, there were also concerns with Switzerland’s compliance with the old (but surviving) standard of exchanges of information “on request” (when a foreign authority makes a specific request for detailed banking information). The Global Forum report wrote that, despite some recent changes, it appears that Switzerland will not respond to a foreign request of banking information if it’s based on “stolen data” (eg a leak) and if the requesting authority “actively sought out” the information outside of an administrative assistance procedure.

There are also concerns with the delays to respond to information requests (sometimes more than two years) and with the excessive information that Switzerland shares with the investigated person about the foreign authority’s request for information about the person’s financial affairs

The 2016 Report noted that the persons entitled to notification have a right to see the EOI [exchange of information] file, including the request letter, subject to exceptions. The legal framework has not changed and the recommendation to ensure that it does not exceed the confidentiality requirements as provided for under the international standard remains… In addition, the publication of the notification in the federal gazette specifically relates to administrative assistance, and in the case of group requests, provides information about the requesting authority, the date of the letter and the legal basis. Switzerland is recommended to ensure that it only discloses the minimum information necessary for the notification.

Conclusion

Unfortunately, corruption and money laundering cases keep popping up be it the Moldova Laundromat, Danske Bank or now the Venezuelan case. Embarrassingly, these cases keep using the same secrecy strategies, the same enablers (banks, lawyers, accountants, etc) and the same tax havens. Yet these tax havens continue to earn “largely complaint” ratings from the body supposedly best placed to tackle tax havens. We keep assessing countries in our indexes, proposing how to verify beneficial ownership information and how to use SWIFT data to detect money laundering. What else is needed to get governments to react?

Tax Justice Luxembourg responds to #OpenLux

Our good friends at the Collectif Tax Justice Lëtzebuerg (Luxembourg), which launched in 2016, have responded to the #OpenLux revelations. Here is their English translation of the original French press release, #OpenLux : Lumière sur la face cachée du Luxembourg.

Press release from the Collectif Tax Justice Lëtzebuerg (CTJL)

#OpenLux: Casting Light on Luxembourg’s Dark Side

The Collectif Tax Justice Lëtzebuerg (CTJL) has taken note of the #OpenLux investigation, published on this day by many national and international media outlets. These revelations are the result of a collaborative investigation carried out by Le Monde, with the participation of many journalists and investigative media, including WOXX, over the past year.

Despite some real and concrete advances in terms of transparency and openness in Luxembourg in recent years, such as the establishment of a Registry of Beneficial Ownership (RBE), which also made this investigation possible in the first place, these efforts remain insufficient. We regret that the country and its leaders have not managed to break with its past as a secrecy jurisdiction (or “tax haven”, even if this term is not precise enough), despite the assurances offered by the Prime Minister during his last address on the State of the Nation. The continued existence of many companies without any real economic substance bolsters fears that the financialisation of the Luxembourg economy will continue, at the risk of the country’s productive and creative economies.

The global COVID-19 pandemic underlines in several ways how interdependent humanity is and how much collective solutions are needed to overcome not only the disease but also the deep socio-economic injustices and inequalities that have facilitated the spread of COVID-19 in the first place. The adverse ecological impact of Luxembourg’s financial centre because of investments into polluting industry by investment funds is also worrying, as highlighted in a recent report by Greenpeace Luxembourg.

The Luxembourg government, which reacted quickly to the survey by setting up an information page (www.openlux.lu), needs to show real political will to combat tax evasion by multinationals and high net-worth individuals. It is not enough to hide behind excuses such as the application of the – alas insufficient – standards of the OECD or the European Union (as highlighted in particular by the adoption of the European Parliament Resolution of 21 January 2021 on the reform of the European Union’s list of tax havens). Advertising campaigns such as “Luxembourg – Let’s Make It Happen” cannot replace building a real culture of openness and good governance in the public interest.

In order to seize the opportunity offered by these latest publications, the CTJL believes that the Luxembourg authorities should:

Press release by the Collectif Tax Justice Lëtzebuerg (CTJL), 8 February 2021

Tax Justice Network Arabic podcast, edition 38: الجباية ببساطة #٣٨ – عندما يتقاضى المعلم دون الأجر الأدنى في الأردن

Welcome to the 38th 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 for listeners to download. Any radio station is welcome to broadcast it for free and websites are also welcome to share it. You can join the programme on Facebook and on Twitter.

الجباية ببساطة #٣٨ – عندما يتقاضى المعلم دون الأجر الأدنى في الأردن
مرحبا بكم في هذا العدد الجديد من الجباية ببساطة. في هذه الحلقة نعود على أهم الأحداث الإقتصادية والضريبية في المنطقة العربية و العالم في سنة لم تكن كباقي السنوات. من طلاق بريطانيا والإتحاد الأوروبي إلي سقوط عملات السودان وسوريا وتركيا مرورا بالإنكماش الإقتصادي غير المسبوق في كل أنحاء العالم جرّاء قرارات الإغلاق، زيادة على إنخفاض أسعار النفط لضعف الطلب.
في الجزء الثاني من البرنامج نحاور مدير مركز الفينيق للدراسات الإقتصادية بعَمان، أحمد عوض، حول الوضع الإقتصادي في الأردن في ظل جائحة كورونا وتداعياته الاجتماعية، مع عودة على إحتجاجات المعلمين وأسبابها.

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

The Tax Justice Network’s Francophone podcast: Malgré la Covid-19, les injustices sociales et fiscales ont persisté, #24

Pour la 24ème édition de votre podcast en français Impôts et Justice Sociale sur la justice fiscale et sociale en Afrique et dans le monde proposée par Tax Justice Network avec Idriss Linge, le premier de l’année 2021, nous revenons sur un fait marquant de l’année 2020, celui de la persistance des injustices fiscales et sociales. Au nom de la Covid-19, les pays du monde ont engagé 14 000 milliards $. Mais selon des données du Fonds Monétaire International (FMI) seulement 5,2% de ces ressources ont été affectés à la lutte contre la pandémie. Le reste est allé gonfler la richesse des personnes les plus riches.

Au Cameroun, la loi organise la redistribution par l’Etat des revenus collectés dans le secteur des mines et des carrières. Mais une étude publiée par la branche camerounaise de Publish What You Pays révèle que le processus connait des problèmes et prive de millions de populations de ressources nécessaires pour leur développement.

Sont intervenants dans ce podcast :

Vous pouvez suivre le Podcast sur:

Tax Justice Network partnership with Federal Inland Revenue Service of Nigeria explores new audit tool

The Tax Justice Network is engaged in a pioneering joint research and data analysis project to support Nigeria’s Federal Inland Revenue Service (FIRS) audit of Multinational Companies.

Like most countries, Nigeria has a plethora of international companies doing business there, and an under-resourced tax authority, so it only gets to audit a fraction of the international economic activity passing through. A tool to help prioritise audits could therefore be invaluable.

Under an agreement with the FIRS, signed in December 2019, the Tax Justice Network has developed a detailed risk assessment tool based on international data that can help Nigeria’s tax authority (and, hopefully, others in future) prioritise and target their audits of multinational companies. On January 11-13 we partnered with FIRS in a joint three day event, entitled “Workshop on effective audit of multinational corporations for domestic revenue mobilisation in Nigeria.” The workshop was attended by about 50 staff from different areas of the FIRS, including the International Tax Department in charge of transfer pricing audit, the Treaties Unit and the Exchange of Information Unit. Beyond the specific audit project, another aim of the workshop was to create and enhance synergies between these units.

Speaking at the workshop, FIRS‘ Executive Chairman Muhammad Nami said that “many rich Multinational Corporations do not pay the right taxes due from them, let alone pay their taxes voluntarily.” Nigeria is now paying greater attention to tax audits, he said, adding that “we have created more than 35 additional Tax Audit Units and deployed experienced and capable staff to take charge of these offices.”

Tax havens, of course, constitute a major risk factor for the Nigerian tax authorities, and international data provided by official bodies in this area is hardly better than worthless. A slide we showed at the workshop illustrates this.

Nobody believes that American Samoa or Vanuatu, or Guatemala for that matter, are the top jurisdictions of concern for Nigeria, or for any other country. The world’s top tax havens are nearly all European or at least OECD countries, and these powerful groupings naturally exclude their own from blacklists. They are political. By contrast our rankings – the Financial Secrecy Index and the Corporate Tax Haven Index – are based on careful analysis of hard data, rather than on political considerations.

Essentially, both of our indexes involves combining two metrics for each jurisdiction: a “haven/secrecy score”, each based on 20 specific indicators, which tells us how risky the country’s legislation is in terms of enabling abuses; and a ‘scale weight’ telling us the size of financial flows through these jurisdictions. These scores are then mathematically combined to produce the final ranking.

However, our models have gone a step further, from the global, macro level analyses, to the bilateral macro level analyses: in our Illicit Financial Flows Tracker tool, we provide risk profiles of individual country’s economic cross-border activity based on their illicit financial flows risks in foreign direct investment, in their banking deposits abroad, etc. These risk profiles provide important pointers where to focus audit activity, and where to prioritise resourcing and how to target policies for information exchange better.

Yet, the next level is to take this analysis to the “micro” level. So instead of merely saying “Cayman‘s investment in my country provides risks”, the tax authority can scrutinize its taxpayers for related transactions and specific flows via Cayman, based on declarations and disclosure. Through our model, the tax authority can systematically calculate the risks for illicit activity of individual taxpayers based on each taxpayer’s entire cross-border transactions with all secrecy jurisdictions (not only with Cayman) to flag and rank those taxpayers incurring most geographic risks. The result is a ranking of taxpayers causing most of a country’s vulnerability in their cross-border economic transactions – and thus allowing the country prioritise its audits.  

The analysis rests significantly on a core formula: Exposure = Vulnerability x Intensity. This slide illustrates the top-level view of this.

Data will be mined from certain components of transfer pricing documentation submitted as part of annual tax returns, with appropriate confidentiality and anonymisation safeguards in place. The key risk dimension driving the model is geographical risk, looking at where the connected companies and individuals (eg shareholders, intra-group trade with related companies, directors) are incorporated and/or tax resident; and at the related volume of costs or income from high secrecy jurisdictions.

In this way, tax authorities will be able to examine the risks of different corporate structures in a speedy manner and to process large volumes of corporate tax data fast, teasing out those corporate groups whose finances are most exposed to geographic risks. The model thus allows them to understand the flows better, and prioritise their audits accordingly. Similar kinds of exercises can be carried out looking at wealthy individuals, instead of corporate structures, using the data categories from our Financial Secrecy Index.

This model now needs to be subjected to the hard knocks of the real world, and refined accordingly. We will be delighted to receive feedback and are expecting that once road-tested in Nigeria, it can be useful to a range of other countries in Africa and beyond. 

We’re proud to partner with Nigeria in countering illicit financial flows by sharing knowledge, capacity building and pioneering new methods and tools.

Tax Justice Network Portuguese podcast #21: Taxar super-ricos JÁ!

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business). All our podcasts are unique productions in five different languages – English, Spanish, Arabic, French, Portuguese. They’re all available here.

Estima-se que pelo menos 26 bilhões de dólares anuais podem ser arrecadados na América Latina com impostos sobre grandes riquezas, o que é urgente para superar as maiores crises já enfrentadas pela nossa geração. Além de contribuir com o financiamento de ações contra essas crises, o imposto sobre riqueza é essencial para auxiliar a reduzir desigualdades. O É da sua conta #21 te convida a conhecer e participar das campanhas pela tributação de grandes riquezas.

E começa mostrando que é possível: mais de cem super-ricos defendem a tributação sobre suas grandes riquezas e participam da campanha global Milionários pela Humanidade. Especialistas latinoamericanos explicam como funcionam os impostos sobre riqueza que já existem na Colômbia e na Argentina.Também contam  a experiência dos países que ativaram esse tributo para enfrentar a pandemia: Bolívia, de forma permanente e Argentina, de forma extraordinária.

E você ainda ouve as iniciativas de países que seguem tentando aprovar leis de imposto sobre riqueza na região, como Chile e Brasil. 

No que depender dos ouvintes do É da sua conta taxar grandes fortunas é urgente e necessário. Destacamos a opinão de alguns deles ao longo do episódio.

Ouça no podcast:

Participantes desta edição:

Mais informações:

Transcrição do podcast

Conecte-se com a gente!

Plataformas de áudio: Spotify,iTunes,Stitcher, Deezer

Inscreva-se: [email protected]

Download do podcast em MP3

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

Download gratuito. Reprodução livre para rádios.

New study and tool for assessing risks of illicit financial flows in Latin America

This blog is an expanded version of a blog published originally on CIATblog, with kind permission.

Today, the Tax Justice Network publishes its new study on “Vulnerability and exposure to illicit financial flows risk in Latin America.” It is the most comprehensive and systematic analysis of illicit financial flows risks in Latin America to date, and provides the basis for granular policy decisions. Illicit financial flows (IFFs) are transfers of money from one country to another that are forbidden by law, rules or custom. They encompass flows from both illegal origin capital (classic money laundering, arms, drugs, human trafficking, corruption) and legal origin capital (tax evasion and avoidance).

Illicit financial flows affect the economies, societies, public finances and governance of Latin American countries – as they do in all other countries. Latin American and Caribbean countries account for a significant share of trade-based illicit financial flows, and are estimated to lose US $43bn annually to global cross-border tax abuse. The urgent need to tackle illicit financial flows is clear. Despite global agreement in target 16.4 of the UN Sustainable Development Goals, however, the international architecture remains entirely insufficient to support progress  – although the UN FACTI panel’s final report, due in February, will identify key gaps and make recommendations for immediate action.

At the national level, a particular challenge in countering illicit financial flows lies in prioritising among the many channels; and within each channel, identifying the economic partner jurisdictions responsible for the vulnerability. We address this research gap by elaborating on an approach pioneered in the report published by the High-Level Panel on Illicit Financial Flows from Africa (“Mbeki Panel”), which can be used to generate proxies for illicit financial flows risk by combining bilateral data on trade, investment, and banking stocks and flows, with measures of financial secrecy in partner jurisdictions. This approach rests on the observation that illicit financial flows are hidden; thus, the likelihood of an illicit component increases with the level of secrecy of any given transaction. Trade with companies in Cayman Islands will be more risky than trade with companies in Ecuador. The analysis also points to geopolitical implications, and below we explore questions of OECD responsibility for threats faced in the region.

Chart 1 below illustrates the vulnerability in the eight economic channels for the 19 countries in Latin America under review, where zero represents no vulnerability or secrecy in the economic channel, and 100 implies highest vulnerability, or economic flows with an entirely secretive counterparty. The dotted lines represent the global average of vulnerability, so it can be seen that Chile, for example, faces roughly the average risk in most channels, while Mexico is more vulnerable in most.

Chart 1: Latin American jurisdictions’ vulnerability to illicit financial flows in different channels, 2018. Dotted lines represents the global average.

Risks associated with Foreign Direct Investment

The study discusses how the data-driven vulnerability profiles for individual Latin American countries relate to, and can be used to help identify, real cases of tax avoidance, evasion, money laundering and corruption. For instance, the risks stemming from inward FDI for tax avoidance by multinational companies can be illustrated with the case of Coca-Cola in Brazil. According to a media investigation published in 2018, Coca-Cola Brazil was involved in a tax avoidance scheme. At the core of the allegations is an investment from two companies registered in the U.S. state of Delaware, a corporate tax haven and secrecy jurisdiction, into a subsidiary in Brazil. Chart 2 shows the vulnerability of Brazil’s inward foreign direct investment 2018.

Chart 2: Vulnerability of Brazil’s inward foreign direct investment stock in 2018. Source: IFF vulnerability tracker.

The Netherlands is responsible for 31 per cent of all Brazilian vulnerability in inward foreign direct investment (Chart 2). Brazil and the Netherlands have a tax treaty which can be exploited by multinational corporations. Due to its position as a corporate tax haven and a secretive jurisdiction, Brazilian authorities should pay special attention to Dutch inward investment and analyse the costs, risks, and benefits of the tax treaty between the two countries to consider cancellation of the treaty. Brazil also receives high inward direct investment from other corporate tax havens: are Luxembourg (#6 on Corporate Tax Haven Index 2019), Switzerland (#5), and the British Virgin Islands (#1), and the US (#25), as illustrated in the case of the Brazilian Coca-Cola subsidiary.

In outward direct investment, there is also the risk that domestic companies and individuals make false statements about the relationship, owners, and accounts of their foreign businesses or activities in tax returns. This may be done for round-tripping purposes. That is, to nominally invest abroad with the ultimate destination being the domestic economy, to exploit tax treaties or other provisions only available to foreign investors, or to pay kickbacks for securing contracts abroad. For instance, in 2019, Joaquín Guzmán Loera (a.k.a. “El Chapo”) was found guilty by a District Court in Brooklyn, United States, of drug trafficking and money laundering. According to the United States Drug Enforcement Administration (DEA), one of the methods used by El Chapo for laundering billions of U.S. dollars of drug proceeds consisted of using U.S. based insurance companies and controlling numerous shell companies. These shell companies and U.S. based insurance companies, into which El Chapo invested, would be recorded as (derived) outward FDI from Mexico.

Chile offers a striking example of highly concentrated illicit financial flows risks in derived outward foreign direct investment positions in Latin America. Panama dominates (over 17 per cent) all Chile’s vulnerability in outward FDI with over US$15bn of investment. While some of these investments may consist of genuine, tangible real investment interests of Chilean based companies, the magnitudes involved and the secrecy levels found in Panama suggest a significant risk that some of it is there for opacity’s sake. The British Virgin Islands (71) and Cayman Islands (76) are other high secrecy jurisdictions in Chile’s vulnerability in outward foreign direct investment.

Chart 3: Vulnerability of Chile’s outward direct investment (derived) stock in 2018

RankJurisdictionSecrecy scoreVulnerability scoreDirect Investment Outward (derived) (billions) (USD)Share of Direct Investment Outward (derived)
1Panama7217.16%15.114.62%
2United States6312.47%12.512.14%
3Brazil5210.64%13.012.61%
4Peru5710.5%11.611.28%
5British Virgin Islands719.93%8.88.53%
6Argentina557.65%8.88.52%
7Colombia565.59%6.26.06%
8Cayman Islands764.74%3.93.81%
9Luxembourg553.42%3.93.78%
10Uruguay572.98%3.33.20%

Overall vulnerability of investment outward (derived): 61

While this macro-level analysis signals red flags for the Chilean tax administration, which might consider investigating the outward foreign direct investment stock into some of the highly secretive and more notorious corporate tax havens itself, the next level would consist in applying the same analysis to micro-level outward foreign direct investment and intra-group trade transactions. By applying this vulnerability analysis to transaction level data, administrations can sift through large volumes of data and implement a high level advanced analytics risk mining of their datasets. This model could be applied for example to controlled transactions in transfer pricing returns filed by multinational companies, to customs declaration forms, to suspicious transaction reports, or to SWIFT money transfers, etc. By focusing limited audit capacity on transactions with the highest composite secrecy risks and with the greatest financial values cloaked in secrecy, both the revenue yield and the compliance impact of audits could be greatly enhanced. The Tax Justice Network currently partners with tax administrations to pioneer and evaluate the effects of this approach, and is working towards expanding this approach.

Geopolitical Implications

Another important finding of the study concerns the responsibility of OECD member states and their dependencies in the vulnerability (not only) of foreign direct investment in Latin America (see chart 4). In 2018, 91 per cent of Latin America’s vulnerability risk in direct (inward) foreign investment stemmed from OECD countries and their dependencies.  The implied political economy of international tax governance points to the need for vigilance in the current “BEPS 2.0” process negotiations around reform of the taxation of multinational companies under the inclusive framework of the OECD. More ambitious proposals for comprehensive reforms, such as those made by the Intergovernmental Group of Twenty-Four (G24) and by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), have been sidelined, as has become evident in the blueprints published in October 2020 by the OECD. Latin American countries should carefully evaluate their political representation at the OECD and the inclusive framework, and assess the potential for an enhanced role through a UN tax body and convention, not least through the FACTI panel.

Chart 4: Vulnerability in direct investment (inward and outward (derived)) 2018 – Top suppliers of secrecy risks faced by Latin America, by OECD membership and dependencies

Offshore tax evasion and automatic exchange of information

An even higher concentration of risks in OECD member states can be found in the outward banking deposits of Latin America. The case of Colombia – one of the Latin American countries which is most actively engaged in the automatic exchange of information system – illustrates the importance of risks stemming from banking relationships. As chart 5 illustrates (last column), the United States remains by far the biggest obstacle to a level playing field for countering banking secrecy by not participating in the Common Reporting Standard (CRS).

Chart 5: Vulnerability of Colombia’s banking claims (derived) in 2018, and AEOI: Automatic Exchange of Information (Y = indicating activated relationship under the Common Reporting Standard; N = absence thereof)

RankJurisdictionSecrecy scoreVulnerability scoreValue of Banking Claims (derived) (billions) (USDShare of Banking Claims (derived)Activated AEOI Relationship?
1United States6358.68%9.559.39%N
2Panama7228.81%4.125.52%Y
3Switzerland743.22%0.42.77%Y
4United Kingdom462.76%0.63.80%Y
5Spain442.21%0.53.20%Y
6France501.35%0.31.72%Y
7Australia500.94%0.21.20%Y
8Germany520.59%0.10.73%Y
9Luxembourg550.33%0.060.38%Y
10Austria560.28%0.050.32%Y

Overall vulnerability of derived banking claims: 61

Latin American countries already participating in the exchange system (i.e. Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Uruguay) might consider working towards a joint position for tweaking the parameters of the system to their needs. For example, requiring public statistics could be an effective means to increase compliance of reporting obligations in major OECD controlled financial centres. In addition, the artificial legal constraints the OECD places on the use of data for criminal corruption and money laundering investigations could be revisited. The Punta del Este declaration, “a call to strengthen action against tax evasion and corruption”, signed by participating ministers from Latin America in 2018, could provide a useful starting point for international political coordination towards more efficient and ambitious data usage. Furthermore, options to achieve fully reciprocal information exchanges, including with the United States, should be explored, including a continent-wide withholding tax on non-participating financial institutions.

All data underlying the report is available freely in the Tax Justice Network’s Illicit Financial Flows Vulnerability Tracker. In February 2021 the website will be updated, providing increased granularity (e.g. vulnerability through agricultural exports) and a user-friendly data explorer.

Policy recommendations

The report offers three broad policy recommendations to counter IFFs more effectively. In each of the chapters, more granular policy recommendations are provided.

1. Enhance data availability

Broadening the availability of statistical data on bilateral economic relationships is a first step for enabling both in depth and comprehensive analyses and meaningful regulation of economic actors engaged in cross-border transactions. In the process of collecting statistical data according to IMF standards, governments would need to build registration and monitoring capacity that likely helps improve overall economic governance.

2. Consider Latin American coordination on countering illicit financial flows risks

The bulk of illicit financial flows risks at the moment is imported into Latin America from outside the region. This finding could help foster joint negotiation positions among Latin American countries when engaging in multilateral negotiations around trade, investment or tax matters. Despite the lack of political organisation at the regional level, which makes coordination and joint action more difficult to achieve, Latin American countries might consider crafting alternative minimum standards for trade, investment, and financial services in order to safeguard against illicit financial flows emanating from secrecy jurisdictions and corporate tax havens controlled by European and OECD countries. Furthermore, Latin American countries should carefully evaluate their political representation at the OECD and the associated Inclusive Framework, and assess the potential for an enhanced role through a UN tax body and convention.

3. Embed illicit financial flows risk analyses across administrative departments

A holistic approach to countering illicit financial flows requires capacity to identify and target the areas of the highest risks for illicit financial flows. Illicit financial flows risk profiles can assist governments to prioritise the allocation of resources across administration departments and arms of government, including tax authorities and customs, the central bank, audit institutions, financial supervisors, anti-corruption offices, financial intelligence units and the judiciary. Within these departments, the illicit financial flows risk profiles would support the targeting of audits and investigations at an operational level as well as the negotiation of bilateral and multilateral treaties on information exchange at a policymaking level. Whether on tax, data, trade or corruption related matters, capacity building strategies at a continental level should include illicit financial flows risk analysis.

Read report

How we win: the Tax Justice Network podcast, January 2021

New year, new logo: our monthly podcast the Taxcast is entering its tenth year on the air and to celebrate we’ve got a new logo!

In this episode of the Tax Justice Network’s monthly podcast, the Taxcast:

Featuring:

Download this link to listen on your mobile device

If we on our side have every fact and every policy and the other side has all of the stories, the passion, the emotion, the excitement, then we’ll lose”

~Ben Phillips, author of How To Fight Inequality and why that fight needs you.

From where I’m sitting, this is the end of the line for Thatcherism and for shareholder capitalism, it’s made a tiny number of people, bankers and private equity people and mergers and acquisition specialists spectacularly rich in the past 40 years, but overall the development strategy has failed the vast majority of people in the United States and in Britain and in other countries that went down this route.”

~ John Christensen, Tax Justice Network

Want more Taxcasts? The full playlist is here. Or here.

Want to subscribe? Subscribe via email by contacting the Taxcast producer on naomi [at] taxjustice.net OR subscribe to the Taxcast RSS feed here OR subscribe to our youtube channel, Tax Justice TV OR find us on Acast, Spotify, iTunes or Stitcher etc. Please leave us feedback and encourage others to listen!

Join us on facebook and get our blogs into your feed.

Follow Naomi Fowler John Christensen, The Taxcast and the Tax Justice Network on Twitter.

The US beneficial ownership law has its weaknesses, but it’s a seismic shift

In January 2021 the US finally joined the more than 80 jurisdictions that, as of April 2020, had a law requiring beneficial ownership information to be registered with a government authority. As described in our recent blog, this is a major victory for US activists, with particular recognition to the leading role the Fact Coalition has played, which has been working tirelessly for beneficial ownership transparency in the US.

While the new legislation is an incredible achievement that sets the world’s largest economy on the right track, it does not yet go far enough to reduce the US’s ranking of second place on the Financial Secrecy Index if it were to be reassessed today. (Currently jurisdictions are assessed every two years). Due to the limited scope of the Corporate Transparency Act and numerous exceptions in its application, we cannot yet conclude that the US is practicing effective beneficial ownership registration. Nevertheless, the law does mark a seismic shift for this super-sized economy towards tax transparency and for the imminent global reforms of the highly influential global anti-money laundering (AML) standards of the Financial Action Task Force (FATF) towards acknowledging the essential importance of the principle of central registration of ownership data at government agencies – the potential of which could be monumental further down the line.

Ironically, the US has been the cause for many countries in the world to become more transparent, either because of US domestic laws (eg the Foreign Account Tax Compliance Act, FATCA) which resulted in many countries having to change their laws in order to start exchanging bank account information automatically both with the US and with each other, or through international organisations such as the OECD or the Financial Action Task Force (FATF) where the US exerts a high degree of influence. However, when it comes to achieving change within the US, the situation is entirely different.

The US is ranked as the world’s second greatest enabler of global financial secrecy on our Financial Secrecy Index in 2020, overtaking Switzerland and coming in just after the Cayman Islands. While countries in the index on average reduced their contribution to global financial secrecy by 7 per cent, the US bucked the trend by increasing its supply of financial secrecy to the world by 15 per cent.

Given the progress other countries have been making on beneficial ownership registration, we would have expected the US to make up for lost time. For example, the EU 5th anti-money laundering directive (AMLD 5) already requires EU countries to provide public access to beneficial ownership information, and some countries like the UK have been offering free access to beneficial ownership information in open data for years. Instead, the new US law considers beneficial ownership information to be confidential. The information will have to be filed with the notoriously under-resourced financial intelligence unit (FinCen).

At the Tax Justice Network, our preference is for countries to use commercial registers for holding beneficial ownership information for three reasons. First, given that commercial registries usually hold legal ownership information, if they also register beneficial ownership, all information would be in one place, facilitating easier checks and preventing contradictory information. Second, it improves enforcement; a commercial register usually confers the status of a legal person upon fulfilling certain criteria, so entities have an incentive to comply and those not compliant with beneficial ownership requirements would be flagged directly as such on the commercial register, avoiding delays or friction between one body alerting the other and making sure non-compliant entities can be prevented from operating, holding assets or incorporating other legal vehicles.  Third, it is more likely that a commercial register will give public access to information, compared to other authorities such as the tax administration, the central bank or the financial intelligence unit which are usually subject to different confidentiality and secrecy laws.

While it may have been too much to ask for the US to provide public access to its beneficial ownership register like EU countries are already required to do, we did not expect the new beneficial ownership registration law to have so many loopholes.

The Corporate Transparency Act only requires “reporting companies” to disclose the identities of their beneficial owners.  The law defines “reporting companies” as follows:

‘‘(A) means a corporation, limited liability company, or other similar entity that is—‘‘(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or ‘‘(ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe”

While the definition of “reporting companies” covers a “corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office”, it is not clear if “other similar entities” would include other types of legal vehicles available in the US: trusts, private foundations and partnerships with limited liability.

On top of this, some reporting companies can still get out of disclosing information. While the above extract of “Paragraph A” in the bill describes what is within the scope of beneficial ownership registration in only four and a half lines, the next paragraph, “Paragraph B”, spanning across almost three pages, describes the 24 scenarios where companies are not required to file beneficial ownership information.

Any legislation with these many exceptions should be a cause for concern. It certainly makes enforcement harder and the design of circumvention strategies easier. In many cases, the reasoning for the exclusion may be that these types of companies already file information or are supervised by another authority. However, this means that for these companies, filing beneficial ownership information should not be that big of a deal, and it would ensure that all beneficial ownership information is centralised in one place.

The 24 exceptions do not refer only to companies listed on the stock exchange and investment funds, which are unfortunately often excluded from many countries’ beneficial ownership frameworks (for more information on why companies listed on the stock exchange and investment funds should not be exempted from beneficial ownership registration, see our recent brief). The exceptions extend to banks, brokers, public utility companies, public accounting firms, and even companies above a certain number of employees and sales:

‘‘(xxi) any entity that— ‘‘(I) employs more than 20 employees on a full-time basis in the United States; ‘‘(II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of— ‘‘(aa) other entities owned by the entity; and H. R. 6395—1223 ‘‘(bb) other entities through which the entity operates; and ‘‘(III) has an operating presence at a physical office within the United States.“

Even dormant companies, instead of being de-registered to prevent them from operating in any country, benefit from an exemption from registering.

Leaving the exclusions from the scope aside, the other problem with the new US legislation has to do with the way beneficial ownership is defined. According to the new law:

“The term ‘beneficial owner’— ‘‘(A) means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise— ‘‘(i) exercises substantial control over the entity; or ‘‘(ii) owns or controls not less than 25 percent of the ownership interests of the entity.“

While many countries adopt the (too high) threshold of 25 per cent, the US could have opted for lower thresholds. For example, the US could have followed the examples of Argentina, Botswana, Ecuador or Saudi Arabia which impose no threshold at all. In other words, no matter how minimal the ownership, beneficial owners will be identified. The US could also have added control scenarios, such as a percentage of voting rights (or at least one vote), the right to appoint or remove the board of directors, and so on. The high US threshold means that even companies that do not qualify for exemption and are required to disclose may still evade identifying their beneficial owners if these individuals own less than 25 per cent of a company’s shares (and are not considered to exercise “substantial control” either).

Lastly, the beneficial ownership definition does not specify in cases where a reporting company is owned by a trust, which party from that trust should be identified as a beneficial owner. The US could follow the lead of the Financial Action Task Force and the EU’s 5th Anti Money Laundering Directive in such cases, which would require every party to the trust – the settlor, trustee, protector, beneficiaries and any other individual with control over the trust – to be registered as a beneficial owner.

Given the new US administration under Biden, we are optimistic that through regulation some of these issues may be resolved. In any case, kudos to our US friends who have achieved what was long considered impossible. We should now all feel strengthened to achieve even more ambitious progress together.

[Image: “Show me the money…” by opensourceway is licensed under CC BY-SA 2.0]

Argentina keeps pushing to be at the vanguard of transparency. Now they need to make more information public

In the last months of 2020, Argentina issued two new resolutions requiring the filing of relevant information to the tax administration: beneficial ownership information on trusts (General Resolution 4879) and information on tax schemes (General Resolution 4838). These resolutions help put Argentina at the vanguard of availability of information with government authorities, joining many EU countries. However, unlike EU countries, Argentina is yet to make information publicly available.

Trusts’ beneficial ownership information

As described by our papers (here and here) trusts are especially problematic legal vehicles, creating a high degree of secrecy based on the fact that, unlike companies, they need not be incorporated or registered in order to become legally valid. In addition, trusts have very complex control structures, involving many potential parties such as a (legal or nominee) settlor, an economic settlor, trustees, protectors, beneficiaries, classes of beneficiaries, purposes, etc. Moreover, even if all trust parties are disclosed, trusts have managed to keep shielding their assets against tax authorities and other legitimate creditors, including victims of murder and sexual abuse.

A few months ago, we blogged about Argentina’s beneficial ownership registration based on the tax administration (AFIP) General Resolution 4967 of April 2020. (This regulation was then amended by General Resolution 4878. An updated and consolidated version of Resolution 4697 is available here). While we commended this improvement, we noted that it covered only legal persons but failed to extend the beneficial ownership obligations to trusts. Argentina’s General Resolution 3312 from 2012 was already pretty advanced, requiring many types of trusts and their parties to be disclosed to the tax administration. However, it referred only to legal ownership information.

However, the new General Resolution 4879 of October 2020 extended the Resolution 3312’s requirements to cover also beneficial ownership information for domestic and foreign law trusts. Importantly, the full ownership chain has to be disclosed whenever the party to the trust is a foreign legal vehicle. Additionally, all beneficial owners of those legal vehicles which are parties to the trust have to be identified as beneficial owners of the trust regardless of any threshold. In other words, if trust A has company 1 as its trustee. John has 1 share and Mary has the remaining 999 shares in company 1, both John and Mary will have to be identified as the beneficial owners of company 1 and of trust A.

Positively, all beneficial ownership information will be held by a single authority, the tax administration, facilitating cross-checks. On the negative side, information will not be made public. Additionally, it’s not clear how much coordination there is with local commercial registries to ensure that all incorporated entities file their beneficial ownership information with the tax administration.

Reporting of Tax Schemes

Tax abuse by multinationals and individuals continues to be a major problem, affecting state revenues and the guarantee of basic human rights. As our State of Tax Justice 2020 report described “Countries are losing a total of over $427 billion in tax each year to international corporate tax abuse and private tax evasion.”

In the case of Argentina, the Tax Justice Network’s Illicit Financial Flows Tracker (IFF Tracker) shows how much money is lost to tax abuse by multinationals and individuals:

In an attempt to tackle tax abuse, and in accordance with the OECD’s Action 12 of the Base Erosion Profit Shifting (BEPS), Argentina has issued General Resolution 4838 requiring taxpayers and tax advisers to report their tax avoidance schemes. 

By doing this, Argentina joins the 27 EU Member States who are already requiring that taxpayers or tax advisers report tax schemes under the amendment to the Directive on Administrative Cooperation, known as DAC 6. As described by indicator 13 of the Financial Secrecy Index published in 2020, there were 31 jurisdictions which required tax advisers to report tax schemes. Apart from the EU, countries include Canada, Mexico, South Africa and the United States. Countries such as Canada, Israel, South Africa, the US and the UK also require taxpayers to report tax schemes. The US even requires them to report uncertain tax positions. Indicator 13 describes the reasoning that justifies the reporting of schemes:

There are several reasons to support the imposition of mandatory reporting of tax avoidance schemes. First, the reporting requirements help tax administrations to identify areas of uncertainty in the tax law that may need clarification or legislative improvements, regulatory guidance, or further research. Second, providing the tax administration with early information about tax avoidance schemes allows it to assess the risks schemes pose before the tax assessment is made and to focus audits more efficiently. This is significant mainly because, in many jurisdictions, tax administrations do not have sufficient capacity to fully audit a large number of the tax files. Thus, flagging certain files that carry a greater risk of tax avoidance is likely to increase the efficiency of tax administrations and their ability to increase tax revenues. Third,  requiring mandatory reporting of tax schemes is likely to deter taxpayers from using these tax schemes because they know there are higher chances that files will be flagged, exposed and assessed accordingly. Fourth, such mandatory reporting may reduce the supply of these schemes by altering the economics of tax avoidance of their providers because a) they will be more exposed to claims of promoting aggressive tax schemes, increasing the risk of reputational damage, and b) their profits and rate of return on the promotion of these schemes is likely to be reduced because schemes are closed down more quickly. This is all the more true if contingency fees are part of contracts…

The difficulty in imposing mandatory reporting rules for tax avoidance schemes is the potential for ambiguity of whether the scheme is considered a tax avoidance scheme within the mandatory disclosure rules. In order to mitigate against this risk, the reporting obligation should not apply only to the taxpayer who uses the tax scheme or only to the promoter (tax advisers) of the scheme, but rather to both. This kind of double obligation is imposed in the United States. If both are obliged to report independently on the marketed/used tax avoidance schemes, the chances that tax administration will be able to detect hidden dubious schemes are significantly higher. Precisely because there are numerous and regular conflicts between the tax administration and taxpayers/advisers on the interpretation of tax laws, it should be expected that many tax schemes will be designed in grey areas which certain promoters might chose to interpret as not being subject to the remit of the reporting obligation. Third party reporting obligations increase the detection risk of these dubious schemes and thereby incentivises the reporting of a broader set of schemes”

Unfortunately, unlike DAC 6, Argentina’s Resolution 4838 failed to include more schemes. For instance, in relation to the automatic exchange of bank account information under the OECD’s Common Reporting Standard, countries are expected to adopt the OECD Mandatory Disclosure Rules which require the filing of schemes used to circumvent reporting under the automatic exchange of information system or to hide the beneficial owner behind opaque structures.

The other problem with Argentina’s Resolution, as with the EU’s DAC 6, is the issue of professional secrecy, where tax advisers and intermediaries may refuse to disclose information based on confidentiality rules.

We have blogged about the problem of professional secrecy, which goes beyond tax schemes and covers risks to money laundering, as described by the Financial Action Task Force. On a positive note, there are some cases of improvement as we blogged here, including a recent US case law granting the US tax administration access to a law firms’ list of clients who were potentially using the law firm’s advice to engage in tax evasion.

In conclusion, Argentina’s recent regulations keep pushing the country towards more transparency, although Argentina should not forget the importance of giving public access to information, especially on beneficial ownership. However, Argentina as well as the rest of the world will need to keep fighting against the  damage of professional secrecy. Although confidentiality makes sense in some cases (eg to prevent a doctor from disclosing medical records, or the right to a fair trial), it should certainly not be used by the most powerful multinationals and high net worth individuals in order to keep engaging in abusive practices that erode state revenues, hurting the vast majority of people who are not part of the 0.1 per cent.

The Tax Justice Network January 2021 Spanish language podcast, Justicia ImPositiva: impuesto a la riqueza

Welcome to our Spanish language podcast and radio programme with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. New year – new logo! We hope you like it! ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita. ¡Nuevo año, nuevo logo! Esperamos que les guste a todos.

En este programa:

Invitados:

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: https://traffic.libsyn.com/secure/j-impositiva/JI_enero21.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/

How a mini movement overturned secret US shell companies

Swiss bankers, and many other tax haven operatives, have always complained that they are unfairly victimised by international anger over their financial secrecy practices. “What about Delaware,” they routinely asked, “how come they can get away with it?”

And, at least in this respect, they had a point, even though it was merely a cheap exercise in what-aboutism. But, as of January 1, no longer:

“An historic anti-corruption measure ending anonymous companies in the United States became law on Friday, capping a more than decade-long campaign by transparency advocates, after both Chambers of Congress voted to override the president’s veto of the annual defense bill.”

This is a major victory. As we have long pointed out, the United States has long been one of the world’s biggest, if not the biggest, tax havens: our latest Financial Secrecy Index ranks them as Number 2 worst offender.

The U.S. has provided secrecy on two main levels. First, at a federal level, where the US doesn’t share too much financial information with foreign governments whose residents or taxpayers stash assets in the U.S. Second, at a state level, where individual U.S. states have made it easy to set up impenetrable shell companies where it’s impossible for the forces of law, order and taxation to find out who owns a company’s assets. It has famously been easier to set up a secret shell company in the U.S. than it has been to obtain a library card. Some U.S. states, most famously Delaware, South Dakota, and Wyoming, have specialised in setting up cheap, sleazy company formation businesses which have stooped to catering to and abetting human traffickers, mafia organisations, North Korean despots and peddlers of nuclear materials.

Most positive of all, perhaps, is the amazing coalition that grew up in the US to oppose shell company secrecy, and the power that came with joining forces. This was a classic “fusion coalition“, led by the indefatigable Financial Accountability and Corporate Transparency (FACT) Coalition, which was originally set up under the leadership of Nicole Tichon, who was also Executive Director of our affiliate Tax Justice Network USA. FACT brought together a range of unlikely bedfellows, as they outline:

hundreds of national security experts, police and prosecutors, banks and credit unions, CEOs, the real estate sector, large businesses, small business owners, faith groups, anti-human trafficking groups, human rights organizations, global development NGOs, anti-corruption advocates, labor unions, and conservative and liberal think tanks.

The victory, and the long list of supporters that helped deliver it, highlights how “our” issues with tax havens can find support from across the political spectrum, and in this respect it mirrors our successes elsewhere in pushing for global reforms. For a look at the history of this movement, this is a good place to start.

This is an incomplete victory, of course. For one thing, the Corporate Transparency Act requires corporations and limited liability companies (LLCs) to tell law enforcement and others with legally mandated anti-money laundering responsibilities (such as financial institutions) information on the real, natural person (or “beneficial owner”) who owns and controls an entity at the point of formation, and update this information when there is a change — but this information is not required to be made publicly available (as is now partly required, for example, by the European Union). In addition, the U.S. is still a laggard when it comes to sharing information with other jurisdictions. We have argued that in many cases authorities should move beyond forcing legal entities and arrangements to disclose information to the relevant authorities, and to make certain information public.

But this is not to take away the significance of this hard-fought and well-earned victory.

Data havens: how to tackle the new digital race to the bottom

Britain’s Times Newspaper is carrying a story entitled Errors in The Crown may prompt tighter rules for streaming services. The issue at hand, apparently, is that the Netflix series The Crown isn’t sticking closely enough to historical facts, and showing the Royal Family in a poor light. 

Quelle horreur!

But what’s of interest to us here at the Tax Justice Network is that this is the latest sign of a race to the bottom among jurisdictions when it comes to investigation and enforcement of abuses. As the article states:

“Streaming platforms such as Netflix and Amazon Prime Video are covered by a weaker EU-wide regime, known as the audio visual media services directive. Netflix is registered with the Commissariaat voor de Media, a little-known Dutch regulator, which as of last year had not investigated a single complaint from a British viewer about the streaming service.”

We don’t care much whether or not The Crown, a drama, sticks to historical facts. But we do care that complaints get taken seriously. 

The Netherlands is at No. 4 in our Corporate Tax Haven Index — meaning, in effect, that it is the world’s fourth most damaging tax haven. And as we shall see, it is no coincidence that a damaging tax haven should also be super-lax on regulating audio-visual services like Netflix. A privacy expert told TJN, via an email on this subject:

“Being a tax or data haven is wanting to profit from allowing others to behave questionably and promising to turn a blind eye.”

Internet services are another case in point. Giant monopolising platforms like Facebook or Google fall under Europe’s General Data Protection Regulation (GDPR). Lax regulation of data sharing has contributed to all manner of abuses, from climate crimes to fake news to genocide. 

We noted this privacy-related race to the bottom between European countries last year, in a major post on the links between tax havens and monopolies. 

The specific problem here involves what is called, in EU jargon, the “Lead Supervisory Authority” for the internet giants, which is the jurisdiction where the Facebooks of this world decide to put their European HQs for tax and regulatory purposes — this will be the country that co-ordinates investigations into abuses across Europe. Obviously — obviously — this approach of letting large global platforms go jurisdiction-shopping to find the friendliest data supervisor and enforcer is likely to lead to a race to the bottom, as jurisdictions try to outdo each other in laxity, to capture the giants’ business. 

A report from Access Now, a group that protects people’s digital rights, provides new evidence on lax supervision of online content — and highlights jurisdictions whose identities will surprise nobody who is familiar with corporate tax havens. 

“Ireland and Luxembourg, which are the main authorities dealing with the cases involving Amazon, Facebook, WhatsApp, Twitter, PayPal, Instagram, Microsoft, Google, and others, have issued zero fines against the tech giants to date. In the meantime, in 2018 and 2019, the Irish authoritiy received a total of 11,328 complaints.”

In fact, Ireland has now just imposed a fine (against Twitter) for failing to notify regulators after a data breach. This may sound like progress — but it isn’t. Under the GDPR Ireland could have fined Twitter two percent of its $3.5bn global annual revenue, or around US$70 million (nearly €60m) according to our calculations. In the event, the Irish regulator took two years to levy the fine and came up with . . . $450,000. Ian Brown, an authority on internet regulation, described the fine as “an embarrassment… the Irish data protection commissioner is notoriously lax.” And, as one article on the fine put it:

“The Irish regulator originally wanted to fine Twitter even less than this, but through the dispute-resolution process, it was told to increase the amount.”

Brown told TJN that the Irish data regulator:

“just do not remotely have the resources they need to employ enough staff — including highly expert staff who understand the technology — or the political will to really make use of their enforcement powers.”

Ireland is, alongside its data haven role, another of the world’s largest — and sleaziest — corporate income tax havens, bowing down to rootless global capital by offering tax loopholes such as those that allowed Apple to set up companies that existed, in effect, nowhere. This game has undercut other countries’s tax systems and has not even benefited the broad population of Ireland. Luxembourg, at number 6 on the CTHI, also engages heavily in the data haven game, particularly through its hosting of Amazon.

Access Now summarises the problem:

Large tech companies have nearly endless financial resources in comparison to the restrictive budget allocated to Data Protection Authorities. In the case of Ireland, the revenue of some of these companies is even higher than the Gross Domestic Product of the country.

There is more bad news — alongside some potentially good news.

On the worrying side, Britain, which hitherto has successfully levied some meaningful fines against large companies for GDPR abuses, now faces Brexit, its departure from the European Union. A recent article by Carissa Veliz in The Guardian quotes the UK’s digital secretary as saying that:

“Data and data use are seen as opportunities to be embraced, rather than threats against which to be guarded.”

That is indeed worrying. And the article continues:

“The UK could develop into a data haven, in the way some countries are tax havens. A data haven would be a country involved in “data washing”, being willing to host data acquired in unlawful ways (eg without proper consent or safeguards) that is then recycled into apparently respectable products.

(Data washing) would involve the UK allowing companies and governments the world over to do their dirty data work under its protection in exchange for money. [This] could turn into a privacy catastrophe.”

This is a realistic fear: there are powerful interests in the UK pushing for the UK, once out of the EU, to engage in tax-cutting and deregulation to attract capital, and data havenry.  (That’s another can of worms.)

But now, for some potentially very good news.

There is a straightforward solution to this, at least to the race-to-the-bottom element of it. And that is to do away with the “lead supervisory authority” system that allows giant companies to shop for the friendliest supervisor. Instead, supervision and enforcement should be centralised at a European level. 

The European Commission has just published its proposals for a Digital Markets Act (and Digital Services Act,) a broad, sweeping set of proposed legislation to deal with the digital economy in there.  And we find, in the DMA proposals, this:

The Commission examined different policy options . . . All options envisaged implementation, supervision and enforcement at the EU level by the Commission as the competent regulatory body. Given the pan-European reach of the targeted companies, a decentralised enforcement model does not seem to be a conceivable alternative, including in light of the risk of regulatory fragmentation
. . . 
the functioning of the internal market will be improved through clear behavioural rules that give all stakeholders legal clarity and through an EU-wide intervention framework allowing to address effectively harmful practices in a timely and effective manner. [our emphasis]

This, potentially, is huge — and worthy of support: these are still just proposals, which need to pass through the EU sausage machine before they harden into law, perhaps a year or two hence. 

The tax justice movement must now join forces with digital rights groups and others, to protect this crucial aspect of regulation in the digital age. This is the kind of cross-silo movement-building of “fusion coalitions” which, history suggests, can be the most effective of all.

Big Tobacco, big tax abuse

We recently covered the global Cigarette Tax Scorecard, published by Tobacconomics, which assesses the extent to which countries’ tax policies are up to the job of curbing the public health costs of tobacco. Now we look at a new report on the tax behaviour of the tobacco companies. The University of Bath’s Tobacco Control Research Group, which tweets at @BathTR, is a world leader in critical analysis of the harms done by tobacco. We’re delighted to post this blog by the group’s Dr J Robert Branston and Andy Rowell, on a major new study conducted with The Investigative Desk, into the international tax abuse practices of the big tobacco companies. The full report is available to download, as is the Tax Justice Network’s earlier study on this subject, Ashes to Ashes.

Guest blog by Dr J Robert Branston and Andy Rowell

There are often stories in the media about large tech companies not paying much corporation tax despite their business generating massive earnings.  Companies such as Facebook and Google are often cited as examples of companies who use clever corporate structures to avoid paying tax at the levels their revenues might imply.  It is therefore very welcome that HM Revenue & Customs, the UK tax and customs authority, has recently moved to crackdown on such schemes. As part of this push to hold companies account, they would do well to start by looking at the tobacco industry.

It is widely known that tobacco companies are immensely profitable, but a lot less is known about how the industry structures their commercial activities to pay far less tax than they should on these profits. The Investigative Desk, working with the University of Bath, have been starting to figure out what they are doing.

The analysis of group annual reports and accounts for the period 2010-2019, including of a number of crucial subsidiaries, shows that all of ‘Tobacco’s Big Four’ transnational companies – British American Tobacco, Imperial Brands, Japan Tobacco, and Philip Morris International – have ‘aggressive tax planning’ strategies, in spite of their own codes of conduct suggesting otherwise.

It is clear that all four make extensive use of the entire range of common corporate tax abuse methods. This includes shifting dividends through low tax countries, utilising notional interest payments on inter-subsidiary loans, making royalty payments to other subsidiaries, and offsetting profits in one subsidiary against losses elsewhere, all of which reduce profits on paper and hence their tax bills.

Six European countries play a key role in the elaborate corporate tax abuse strategies of Tobacco’s Big Four because of the tax rules in each of the countries: Belgium, Ireland, Luxemburg, the Netherlands, the UK, and Switzerland. For instance, on average, Tobacco’s Big Four shift around €7.5 billion of worldwide profits through the Netherlands annually. While in the UK, the local subsidiaries of Imperial Brands (IB) and British American Tobacco (BAT) – groups based and headquartered in the UK – were able to lower their UK corporate tax burden by £2.5 billion between 2010 and 2019. As a result, BAT paid close to zero corporation tax over this period. IB’s annual reports are so untransparent that their actual UK tax burden is virtually impossible to determine.

One telling illustration of the lengths the industry goes to avoid paying tax on their profits is from BAT’s operations in South Korea. All BAT cigarettes produced by local subsidiary BAT Korea Manufacturing Ltd (South Korea) are sold – on paper – to Rothmans Far East BV, a BAT subsidiary in the Netherlands. They are then immediately re-sold to a different BAT subsidiary back in Korea, BAT Korea Ltd, at a much higher price. This way, on average each year, €98 million in Korean profits are shifted to the Netherlands where the tax regime is more favourable.  

All countries, most especially the six mentioned above, need to crack down on these corporate tax abuse measures. A number of countries are already trying to do just that, with the industry engaged in tax disputes in at least 11 countries over the last ten years, with claims ranging from €45 million to €1.2 billion. So far, in the majority of cases, the courts’ decisions have been in favour of the companies. This shows that changes to tax laws are desperately needed so that tobacco companies can’t circumvent their tax obligations with the use of complex loopholes.   

Since the tobacco industry profits enormously from a product that kills at least half of its long-term users, tobacco companies need to pay their fair share in line with the spirit, as well as the letter, of the law.  With many governments facing huge COVID-19 related expenses, the time has never been better to hold the industry to account in this way.

—

The TCRG is supported by Bloomberg Philanthropies, which had no influence on the research for the report, or blog.

Taxing Wall Street: the Tax Justice Network December 2020 podcast

In this episode of the Tax Justice Network’s monthly podcast, the Taxcast:

This month we take a look at the transformative power of financial transactions taxes. There’s a chance that New York, home to two of the world’s largest stock exchanges, could be about to set an important precedent. We go to Kenya to look at its experience with a financial transactions tax. And we see how much further the tax could go.

Plus: we discuss three major waves of change in 2020: the black lives matter protests, Trump’s departure from the Whitehouse and the end of the Brexiteers dream. (Subscribe to the Taxcast via email by contacting the Taxcast producer on naomi [at] taxjustice.net)

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

Featuring:

Want to download and listen on the go? Download onto your phone or hand held device by clicking here.

“It’s interesting that you know, now the gospel is spreading from Africa to the more developed world that have been overtaken by the likes of Kenya and Tanzania and South Africa in implementing a robin hood tax.”

~ Economist Francis Karugu

A Financial Transactions Tax is “a brilliant, easily collected tax. It doesn’t cause any pain to investors. I mean there are damn few alternatives. Do you want us to really just fire all the state workers shutting down schools and laying off teachers, you know, how do you get Wall Street to pay its fair share here?!”

~ Economist, lawyer and senior Tax Justice Network advisor Jim Henry

The value of global capital flowing through financial markets is actually 28 trillion pounds per day. if we just charge a 0.05% tax rate, we’re looking at 14 billion pounds per day to fund reparations and systems change.”

~ Economist Keval Bharadia

The Brexiteer project was to break the European Union’s resolve, to break the whole project of trying to create an international rules-based trading order, in other words, to create a kind of globalisation where there were no rules, no frameworks for cooperation. And that project has failed.“

~ John Christensen, Tax Justice Network

Further Reading:

Congress passes defense bill with big ramifications for AML, whistleblowers

You can read Keval Bharadia’s paper “Recalibrating financial transaction tax policy narratives” here. You can look at his slides on Recalibrating financial transactions tax policy narratives for reparations here.

You can read about the efforts towards a financial transactions tax in New York here.

The Tax Justice Network’s Financial secrecy Index is available here

Africa’s battle against financial secrecy is here.

You can listen to the Tax Justice Network’s Rachel Etter-Phoya speaking on Africa and the Financial Secrecy Index here:

Want more Taxcasts? The full playlist is here. Or here.

Want to subscribe? Subscribe via email by contacting the Taxcast producer on naomi [at] taxjustice.net OR subscribe to the Taxcast RSS feed here OR subscribe to our youtube channel, Tax Justice TV OR find us on Acast, Spotify, iTunes or Stitcher etc. Please leave us feedback and encourage others to listen!

Join us on facebook and get our blogs into your feed.

Follow Naomi Fowler John Christensen, The Taxcast and the Tax Justice Network on Twitter.

Researcher vacancies at the Tax Justice Network: Latin America and Francophone Africa

Towards the end of a challenging, yet also dramatically impactful year, we are excited to announce the recruitment of two researcher roles in the Financial Secrecy and Governance workstream. In the past years, at the Tax Justice Network we have made substantial progress in demonstrating how tax avoidance and evasion globally are sufficiently large and certain to constitute a first-order economic distortion, especially in lower-income countries. In line with this, we have been widening our perspectives on and in the planet, by shifting our attention and centre of gravity beyond the UK and other OECD countries. With the current recruitment of two researchers focused on Latin America and francophone Africa we are very pleased to further support this shift in the next years.

The researchers are going to work in the technical engine rooms of our two leading indices that underpin and monitor the global progress towards a more equal and just world. By researching in the laborious cycles of both the Financial Secrecy Index and the Corporate Tax Haven Index, the researchers will be able to develop an in-depth and cutting edge understanding of leading policies for countering cross-border illicit financial flows, ranging from money laundering by organised crime to tax avoidance by multinational corporations. Yet the pauses in between the nitty-gritty research will offer the researchers to partner with others in- and outside the Tax Justice Network to transform empirical data into studies, reports and peer reviewed academic articles for publication and presentation.

We look forward to recruiting these new roles and invite you, dear reader, to consider applying or distributing this link to any suitable candidates.

Please click on the links below to view for further information on each of the roles and details on how to apply.

Researcher, Latin America
Researcher, Francophone Africa

Tax Justice Network Portuguese podcast #20: O Estado da Justiça Fiscal 2020

Welcome to our monthly podcast in Portuguese, É da sua conta (it’s your business). All our podcasts (unique productions in five different languages – English, Spanish, Arabic, French, Portuguese) are available here.

#20 Mundo perde US$ 427 bi com abuso fiscal internacional em 2020

O mundo perde pelo menos US$ 427 bilhões por conta de abusos fiscais cometidos por corporações multinacionais e super-ricos em 2020.

Esse dinheiro, que poderia combater as crises social e econômica da pandemia de covid-19 ou ainda a crise climática, é desviado da justa contribuição com impostos e enviado a paraísos fiscais.

Ouça no podcast:

Participantes desta edição:

Conecte-se com a gente!

www.edasuaconta.com 

O download do programa é gratuito e a reprodução é livre para rádios.

Twitter

Facebook

Plataformas de áudio: Spotify, Stitcher, Castbox, Deezer, iTunes.

Inscreva-se: [email protected]

É da sua conta é o podcast mensal em português da Tax Justice Network, com produção de Daniela Stefano, Grazielle David e Luciano Máximo e coordenação de Naomi Fowler.

Tobacconomics: Measuring the value of cigarette taxes

Tobacconomics Scorecard Shines a Light on the Untapped Potential of Cigarette Taxes.

We are delighted to publish this guest blog by Erika D Siu, Project Deputy Director, Visiting Senior Research Specialist, Institute for Health Research and Policy, The University of Illinois. It illustrates the justice of, and the need for, re-pricing to limit public “bads” such as tobacco consumption and carbon emissions.

Tobacconomics — a group of researchers at the University of Illinois Chicago recently released the first edition of the international Cigarette Tax Scorecard  assessing the performance of cigarette tax policies in over 170 countries. Using data from the World Health Organisation, the Scorecard assessment is based on four key components: cigarette price (using purchasing power parity dollars to compare price across countries), changes in the affordability of cigarettes over time, the share of taxes in retail cigarette prices, and the structure of cigarette taxes. Each of the four components is scored using a five-point index, with the total score reflecting an average of the four component scores.

The results show that globally, the overall performance of cigarette tax policies is quite low—especially given the magnitude of the economic and health losses related to tobacco use. Out of a maximum of five points, the global average score is only 2.07.

The Scorecard also reveals that low-income countries in particular stand to reap the most health and economic benefits by raising their tobacco taxes as they have very low tax shares of retail price. The higher the tax share, the more the government gains in revenue vis-a-vis the tobacco industry, which in most countries is dominated by transnational tobacco companies.

Evidence from around the world shows that higher taxes lead to higher prices and that these higher prices decrease overall tobacco use, lead current users to quit, prevent young people from initiating tobacco use, and reduce the negative health and economic consequences of tobacco use.

Tobacco tax increases have the greatest impact in reducing tobacco use among vulnerable populations, including young people and low-income populations. Tobacco use among young people is more sensitive to price increases than tobacco use among adults, which is particularly important given that nearly all tobacco users start during adolescence or as young adults.

Similarly, low-income tobacco users are more responsive to tax and price increases than higher income groups in addition to being more susceptible to the damaging health impacts of tobacco use because they often lack access to health care and services and/or are more likely to have other serious health problems. Faced with higher taxes and prices, these users are more likely to quit or reduce their tobacco use.

At the same time, increasing tobacco taxes generates new government revenues. Despite the reductions in tobacco use that follow tax increases, country experiences across the globe show that significant tobacco tax increases lead to increases in tobacco tax revenues. This happens because the reductions in tobacco use are less than the increase in price, given the addictive nature of the nicotine in tobacco products. The increases in government revenue can be used to fund public health and other sustainable development priorities. The WHO estimates, for example, that a cigarette tax increase of US$ 1 per pack would have raised between US$ 178-219 billion in 2018.

The simultaneous global health and economic crises caused by the COVID-19 pandemic have had devasting impacts on government budgets. Increasing tobacco taxes provides a logical first step for governments to raise revenue for economic recovery while promoting public health. Tobacco use—a slow-moving pandemic in itself—results in more than 8 million deaths and costs economies around US$ 1.4 trillion each year, with the burden falling heaviest on low- and middle-income countries. The Scorecard results show considerable untapped potential for cigarette tax increases to curb these costs and raise much needed revenue.

See also Tax Justice Network’s earlier report Ashes to Ashes.