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

Rank	Jurisdiction	Secrecy score	Vulnerability score	Direct Investment Outward (derived) (billions) (USD)	Share of Direct Investment Outward (derived)
1	Panama	72	17.16%	15.1	14.62%
2	United States	63	12.47%	12.5	12.14%
3	Brazil	52	10.64%	13.0	12.61%
4	Peru	57	10.5%	11.6	11.28%
5	British Virgin Islands	71	9.93%	8.8	8.53%
6	Argentina	55	7.65%	8.8	8.52%
7	Colombia	56	5.59%	6.2	6.06%
8	Cayman Islands	76	4.74%	3.9	3.81%
9	Luxembourg	55	3.42%	3.9	3.78%
10	Uruguay	57	2.98%	3.3	3.20%

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)

Rank	Jurisdiction	Secrecy score	Vulnerability score	Value of Banking Claims (derived) (billions) (USD	Share of Banking Claims (derived)	Activated AEOI Relationship?
1	United States	63	58.68%	9.5	59.39%	N
2	Panama	72	28.81%	4.1	25.52%	Y
3	Switzerland	74	3.22%	0.4	2.77%	Y
4	United Kingdom	46	2.76%	0.6	3.80%	Y
5	Spain	44	2.21%	0.5	3.20%	Y
6	France	50	1.35%	0.3	1.72%	Y
7	Australia	50	0.94%	0.2	1.20%	Y
8	Germany	52	0.59%	0.1	0.73%	Y
9	Luxembourg	55	0.33%	0.06	0.38%	Y
10	Austria	56	0.28%	0.05	0.32%	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:

This month Naomi Fowler speaks to activist and writer Ben Phillips about how past struggles for justice were won and how we can win them again. We discuss valuable lessons he learned from living and working around the world which he writes about in his book How To Fight Inequality and why that fight needs you.
Plus: Why is the Chinese economy so successful? Naomi discusses with John Christensen the rise of China and, unless they chuck shareholder capitalism, the continuing demise of the US and the UK.
Transcript is available here (some has been transcribed using automation so may have small inaccuracies)

Featuring:

Ben Phillips, activist and writer of How To Fight Inequality and why that fight needs you.
John Christensen, Tax Justice Network
Hosted and produced by Naomi Fowler of the Tax Justice Network.

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!

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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 5^th 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:

La economía mundial del 2021 ¿Qué pasará con la pandemia y con América Latina?

La necesidad de un sistema tributario internacional equitativo para el desarrollo económico y la justicia social

Y el hashtag impuesto a la riqueza ya la nueva campaña en América Latina para que los ricos paguen más impuestos.

Invitados:

Oscar Ugarteche, profesor de la Universidad Nacional Autonoma de Mexico, la UNAM y autor de Historia Critica del FMI
Daniel Titleman, director de planificación económica de la CEPAL
Matti Kohonen, de Christian Aid
Jorge Coronado, de la Red Latinoamericana por Justicia Económica y Social – Latindadd

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:

Economist Francis Karugu
Economist, lawyer and senior Tax Justice Network advisor Jim Henry
Economist Keval Bharadia
John Christensen, Tax Justice Network
Produced and presented by the Tax Justice Network’s Naomi Fowler

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.

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:

As mais importantes revelações do relatório “Estado da Justiça Fiscal Internacional 2020”
Por quê falamos abuso fiscal e não elisão e evasão fiscal.
Como o abuso fiscal prejudica políticas sociais e acirra as desigualdades no Brasil e, principalmente, em países de baixa renda.
Estratégias para acabar com o abuso fiscal.
Ganhadores do livro Donos do Mercado.

Participantes desta edição:

Alex Cobham, Tax Justice Network
Gabriel Casnati, ISP
Lays Ushirobira, Global Alliance for Tax Justice
Matti Kohonen, Christian Aid
Nick Shaxson, Tax Justice Network

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 Organisatio n, 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.

The Corporate Tax Haven Index: a Joint Research Centre audit

We are pleased to publish a guest blog written by Erhart Szilárd of the European Commission’s Joint Research Centre, presenting their findings of the statistical audit of our Corporate Tax Haven Index 2019. The Tax Justice Network’s first engagement with the centre dates back to 2016, when we began engaging on the evaluation of the Financial Secrecy Index with their world-leading team on composite indices (results published in the Financial Secrecy Index 2018 methodology, pages 163-194). We are proud of this standing relationship because it helps ensure that the index work we do is robust and of internationally leading quality.

The statistical side of the tax equation: The Joint Research Centre Audit of the Corporate Tax Haven Index

By Szilárd Erhart, European Commission’s Joint Research Centre

Indexes are getting increasingly important for policy design, implementation and assessment in today’s information age. Multifaceted issues like tax evasion are difficult, if not impossible at all, to measure by a sole indicator. Information aggregated in an index can, however, effectively synthesise complex and large dataset and distil messages into user-friendly and easy-to-understand measures.

Still, we have to admit that the index development process is challenging at every stage from the conceptualisation to the measurement and communication. To support index developers in improving the reliability and transparency of their indices, the European Commission’s Competence Centre on Composite Indicators and Scoreboards (COIN) at the Joint Research Centre (JRC) in Italy, carries out statistical audits of indexes upon request of international organisations and other European Commission services. To date, over 100 indexes, in a variety of policy domains, have received tailored recommendations from our research team at the JRC.

In 2019, the Tax Justice Network reached out to JRC colleagues and requested the statistical assessment and audit of the Corporate Tax Haven Index, similar to a 2018 JRC audit of the Financial Secrecy Index. The Tax Justice Network team wanted to cross-check the methodology, the background calculations and conceptualisation of the Corporate Tax Haven Index. The JRC’s statistical assessment of the Corporate Tax Haven Index was undertaken between Dec 2019 and June 2020.

After mutually beneficial discussions in 2020, with suggestions for improvements in terms of data characteristics, structure and methods used, the JRC published the statistical audit of the Corporate Tax Haven Index. The audit focused on the statistical coherence of the structure of indicators and the impact of key modelling assumptions on the Corporate Tax Haven Index.

The Corporate Tax Haven Index methodology was found by the JRC to be coherent and thoroughly considered by experts of tax evasion. The audit showed some of the differences in scoring of Corporate Tax Haven Index indicators, their correlation with other indicators and discussed how all these can influence the final Corporate Tax Haven Index scores and rankings. The JRC suggested to weigh up the possibility of using a geometric average for the aggregation of indicators, as it may better reflect the non-compensatory nature of tax avoidance. In general, the Corporate Tax Haven Index was found to be robust, top ten ranked countries of the Corporate Tax Haven Index are in the top of other lists of tax havens in recent studies, applying different empirical methods for the identification. As recommended by the JRC team in its Financial Secrecy Index audit, it would be worthwhile to publish confidence intervals alongside the ranking.

Table 1: Top-ranked countries in corporate tax haven rankings

The development of the Corporate Tax Haven Index, like the construction of any composite indicator, involves assumptions and subjective decisions. The JRC tested the impact of varying some of these assumptions within a range of plausible alternatives in an uncertainty analysis. Here, the objective was to attempt to quantify the uncertainty in the ranks of the Corporate Tax Haven Index, which can demonstrate the extent to which countries can be differentiated by their scores. Although many assumptions made in the development of the Corporate Tax Haven Index could be examined, three particular assumptions were examined in this uncertainty analysis

1. Corporate Tax Haven Index Indicator set [Full set] vs. [Reduced set]

2. Aggregation method [Arithmetic mean] vs. [Geometric mean]

3. Weights [Randomly varied +/-25% from equal weights]

These were chosen as plausible alternative pathways in the construction of the Corporate Tax Haven Index, which can be relatively easily investigated.

The uncertainty in the Corporate Tax Haven Index rankings, given the assumptions tested, was found mostly quite modest. Country ranks could be stated to within around 13 places of precision (Figure 1), although some countries are especially sensitive to the assumptions made. This information should be also used to guide the kind of conclusions that can be drawn from the index. For example, differences of two or three places between countries cannot be taken as “significant”, whereas differences of 10 places upwards can show a meaningful difference. One can also observe that the confidence intervals are generally wider for mid-ranking countries, and narrower for top and bottom-ranking countries.

Figure 1: Simulated rankings (median values and confidence intervals)*

We expect the Corporate Tax Haven Index and its background dataset to energise tax evasion experts, to provide them with a useful benchmark and to help re-colour the black economy with colours from white to green.

Contact: [email protected]

About JRC: The Joint Research Centre (JRC) is the European Commission’s science and knowledge service. The JRC provides European Union and national authorities with solid facts and independent support to help tackle the big challenges facing our societies today. The JRC creates, manages and makes sense of knowledge, delivering the best scientific evidence and innovative tools for the policies that matter to citizens, businesses and governments. Twitter: @EU_ScienceHub

[Image: “Index Cards’ ‘DNA'” by ayalan is licensed under CC BY-NC-ND 2.0]

The Tax Justice Network December 2020 Spanish language podcast, Justicia ImPositiva: Las cuentas fiscales del mundo

Welcome to this month’s latest podcast and radio programme in Spanish with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! Escuche por su app de podcast favorita. [The image “i bleed america latina” by leonelponce is licensed under CC BY 2.0]

En este programa:

Las cuentas fiscales del mundo. Todo en el informe anual de la Tax Justice Network El Estado de la Justicia Fiscal: 2020: La justicia fiscal en tiempos de la Covid-19

¿Qué hacer ante este panorama de abuso tributario en el mundo y en América Latina?

Guatemala y la justicia tributaria: manifestaciones multitudinarias contra un presupuesto de la desigualdad.

El abuso tributario en tiempos de coronavirus – golpea mucho más a las mujeres que a los hombres

Invitados:

Alex Cobham Director de Tax Justice Network

Juan Valerdi, profesor de la Universidad de la Plata y ex aseseor del Banco central de Argentina

Javier Estrada Tobar, periodista guatemalteco y especialista en narrativas sociales

Verónica Serafini Latindadd y ONG Decidamos Paraguay

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: https://traffic.libsyn.com/secure/j-impositiva/JI_Dic_2020_.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 tax havens support fossil fuel companies

We’ve been reading an excellent new Reuters report entitled How oil majors shift billions in profits to island tax havens. As it summarises:

“Shell and other oil majors are avoiding hundreds of millions of dollars in taxes in countries where they drill by shifting profits to thinly staffed insurance and finance affiliates based in tax havens, according to a Reuters review of corporate filings and rating agency reports. Shell, BP Plc, Chevron and Total use subsidiaries in the Bahamas, Switzerland, Bermuda, the UK Channel Islands and Ireland.”

Companies claim they do not “engage in artificial tax arrangements.”

One of the most interesting aspects of this report concerns “captive insurance”, which are subsidiaries of the fossil fuel companies, parked in tax havens: their core role seems to be more about escaping tax, than about insuring things. The Reuters story contains an excellent short explainer about how captive insurance works.

Normally, an insurance company hopes to take in more in insurance premiums (which are income) than it has to pay out in insurance claims (which are costs), and if income is greater than cost then it makes a profit.

Captive insurance throws a well-aimed tax haven spanner into this, as the story notes:

“The big oil firms’ captive insurers are far more profitable than a typical insurance company. That’s because the amount they pay in claims accounts for a far lower proportion of the money collected in premiums – all from other affiliates of the oil giants – than is the case at other insurers, Industry data shows. That means the captive insurance units absorb part of the revenue made by the oil majors’ subsidiaries elsewhere – often in high-tax countries where they extract oil and gas – and shift it to operations located in low-tax or no-tax jurisdictions.”

For tax justice connoisseurs, it’s another form of transfer pricing to shift profits into tax havens. But what is astonishing is how brazen this all is. Here’s an example from BP:

“In 2014, Jupiter had an operating ratio – which includes pay-outs and other costs as a share of premiums – of just 1.3%. That compares to more than 90% for most U.S. insurers.”

That is a shocking comparison. All of this boosts fossil-fuel profits, increases inequality, undermines tax systems and faith in democracy. Captive insurance companies also pose financial stability risks (e.g. see p20 here). That’s because tax havens don’t just help big multinationals escape tax: they are generally libertarian zones of regulatory laxity where things like capital and reserve requirements fall away, there is little or no transparency, and little or no direct supervision. (In fact, your correspondent spoke to a senior insurance company official a few years ago who said their giant global company came close to collapsing during the last global financial crisis, largely because of huge risks that had piled up in an offshore subsidiary.)

How do we tackle this? Well, in two main ways.

First, completely re-engineer the international tax system, along lines we have long endorsed, such as country by country reporting, or unitary taxation with formula apportionment. Fortunately, this is now starting to happen. If done properly, these moves could cut captive insurance and many other shenanigans right out of the global tax system, and raise hundreds of billions in tax.

Second, join our two-day online conference to discuss how to pay for the climate transition. It starts in a couple of hours! It is free to all and you can register here to attend.

Download the programme here. If you can’t make it, our recent edition of our newsletter Tax Justice Focus covered these issues in detail.

How to fight inequality: a chat with Ben Phillips

Inequality is out of control in pretty much every country in the world. The Tax Justice Network and many others have laid out a range of policy prescriptions for change, and now even the world’s most powerful institutions, from the IMF to the World Economic Forum, agree with us.

But inequality just keeps getting worse!

Why aren’t our policy prescriptions being put into practice? How can we actually fight inequality?

In this article, two authors finally fix the world. Ben Phillips is a historian and the author of How to Fight Inequality, which has just been released. Nick Shaxson is the author of the books Poisoned Wells, Treasure Islands, and The Finance Curse, and a staff writer for the Tax Justice Network.

Nick asked to interview Ben. But Ben asked in reply if instead he could interview Nick. So they interviewed each other. Here’s an abridged record of their conversation (it’s also posted on Inequality.org).

You can also listen to a fascinating and inspiring conversation with Ben on our monthly podcast the Taxcast:

The Taxcast: How We Win, #108

So, how do we actually fight inequality?

Nick: When I give a presentation about tax havens or about finance, I get this one question all the time, which I struggle with. People say I ‘agree, but what can I do now?’ With an emphasis on the ‘I.” Your book, How to Fight Inequality, has been most useful to me, in this respect, and more broadly. It has really influenced how I think about all this.

You root this question of ‘how to fight inequality’ in history. You start by setting out how winning the intellectual argument doesn’t get leaders to shift, that it’s not a debate, it’s a fight.

Ben: I studied history. Whenever someone says how can X or Y happen? – I always ask well, ‘how did it happen before? If we want to reduce inequality, how did people do it before?

There’s an irony that some of the very academic policy wonk types who see themselves as utterly driven by the evidence, still believe that merely presenting evidence will lead decision-makers to pursue transformational change decision-makers, when . . . there’s no historical evidence for that!

Nick: That’s what you call in your book ‘the Evidence-Based Paradox’?

Ben: Yes. I remember sitting in a room full of economists exchanging formulas with Greek letters. Then I raised my hand, ‘just wondering, everyone here seems to see it as their role that they will present the facts that will explain to leaders how inequality is harmful, and what policy mix would reduce it, is that right?’ I was told ‘yes.’

So I said OK, can anyone tell me about when and where doing that brought a noteworthy reduction in inequality? They went very quiet. Then they started laughing. There had been no historical example of that unspoken assumption ever delivering.

As Jay Naidoo, who founded the trade union coalition in South Africa that helped bring down apartheid, once told me: ‘It was not about how brilliant our argument was. No one cedes power because of a great Powerpoint. What matters is the balance of power between your side, the people’s side, in the confrontation and negotiations with the other side, the side of the elite.’

Nick: Your book is a guidebook for people power. How do we, the people, get control of the wheel? What are the top three lessons from history?

Ben: First, overcome deference. When I looked back, all of the people who eventually won against inequality were told at first to stop causing trouble. Right now, when critics bemoan Black Lives Matter, they say ‘why can’t they be more like Martin Luther King?’ Well, who in a 1966 Gallup Opinion poll show was viewed unfavourably by 63% of Americans? It was Martin Luther King. Because by 2011 Dr King was viewed unfavourably by only 4% of Americans, people often read the recent consensus back into history and assume that he was always broadly accepted, and learn therefore a completely false lesson, that change comes from people and movements who never offend anyone; whereas the true lesson of Dr King and of other change-makers is that fighting inequality requires us to disrupt, to confront power and to take on prevailing norms.

Nick: So, be happy being a trouble-maker. And the second and third lessons?

Ben: Second, build collective power together. The march, the demo, the great speech, are the most visible acts but are not the main work. It was never the famous leaders that delivered. Even Nelson Mandela – they were really expressions of, or things enabled by, wider groups of thousands of leaders.

The main work is patiently organising. Gather together people in your neighbourhood, your workplace, or your faith community. Then bond and bind your groups with other groups. Revd William Barber calls these fusion coalitions – because ordinary people are only powerful together, in coalitions of coalitions.

Third, create a story. Get above technical policy debates and have more profound conversations about who we are and what we stand for. Presenting data and formulating policy was always a necessary condition, but so insufficient that it’s not even in the top 3 lessons of how change happens.

Sometimes progressives say “we are the scientists, the experts, we don’t do myths and stories.” Well then, you’ll lose.

As the great union organiser Joe Hill noted, ‘a pamphlet, no matter how good, is never read more than once, but a song is learned by heart and repeated over and over.’ In Britain in the mid twentieth century, the phrase ‘Welfare State’ came from the Archbishop of Canterbury. In Mexico recently, a big step forward in rights for domestic workers was enabled by the success of the movie Roma which set out no policy propositions, but changed the narrative.

Nick: And then, when you do these three, you win?

Ben: And then you can win. That beautiful chant ‘the people united will never be defeated’ is, sadly, not correct. But what is correct is that the people divided will always be defeated. Resistance doesn’t always work, but acceptance always doesn’t work. Inequality is a contestation over power. It asks us, in the words of the great civil rights song “Which side are you on?”

Now I want to ask you about your work Nick because you do just that, you pick a side.

Your writing is in the great journalistic tradition of the exposé, bringing to light abuses of power and cover-ups, but it does so on economics. That makes you unusual. A lot of crusading journalism now goes no deeper than uncovering one politician who did something embarrassing; meanwhile, on the other hand, so many mainstream books on finance manage to be abstract, dull and elitist. Your work, in contrast, lays bare massive looting.

How did you end up writing about what’s happened to finance, and more specifically, how did you end up writing about it in the way that you do?

Nick: I cut my teeth in a news agency, Reuters. They pride themselves on impartiality. Crudely, you went to one side, got some quotes, went to the other side, got quotes from them, tried to steer some sort of middle ground. The end result was sort of like ‘well this person says this, another person says that, here’s some analysis, and it’s complicated, the end’.

Then I was plunged into Angola, an oil rich country with vast money flows happening, a few people who were very rich, very absent and very distant, and most in abject poverty. The news reporting was all about the war but almost nobody was touching the economic side and how that related to the politics, even though everyone knew there was some awful connection. I began to see how money sloshing downwards through a political system shaped that system in its own image.

It was so clear that this was a story of people doing bad things, of bad systems and bad structures. Neutrality was a trap. I moved from an impartial ‘it’s all complicated’ approach to being clear about good and bad and explaining carefully why.

The dirty secrets of what has gone wrong with finance are not only hidden in vaults – they are also hidden in acronyms or strange phrases, ‘Double Irish’ is one, a linguistic masking that is maybe even more insidious than any physical masking. I work to peel away both of these maskings, and say, plainly, ‘this looks like looting.’

Ben: A lot of people portray corruption as an African phenomenon. But your work calls out leading western institutions, which until recently were fairly well-regarded brands.

Nick: It was a long process of pulling on threads, finding unexpected connections, then keeping pulling, and finding more. Then, in middle of doing that – I was just about to publish Poisoned Wells, my book about oil in Africa – I got a call from the former economic adviser to British tax haven island of Jersey. He wanted to tell me about tax havens. We met up in London and he detailed the corruption, the vested interests, and I saw it was the same story as Angola. My career, which I had assumed was going to go down the oil-in-Africa route, made a sudden pivot.

I had started in Africa, followed the leads, and ended up back at home in my own country. I laid it out in my tax haven book, Treasure Islands.

Ben: Desmond Tutu said when you keep seeing people drowning in a river, sure, go and rescue them, but also go upstream and stop the guy pushing them in. From Angola, you have gone further and further upstream, right?

Nick: From Angola I could already dimly see offshore, because so much of the wealth was disappearing there. Then especially with the help of that Jersey official – he’s called John Christensen, and he co-founded the Tax Justice Network – I got to understand the global system of offshore, how it worked. It was much bigger than what I had expected – and Britain and the United States, sat right at its heart.

Ben: You went from writing about the oil curse to writing about the finance curse. What does the finance curse do?

Nick: Tax havens transmit harms outwards, to other countries, but countries with oversized financial centers transmit harms inwards to their own people. Instead of providing services that support the creation of wealth, they focus increasingly on the more profitable business of extracting wealth. Democracy gets undermined, inequality gets worse, and economic growth slows. The answer? Shrink finance, for prosperity.

Ben: Your books includes no-holds-barred revelations of collusion between financial and political elites. How do those whom you have exposed respond. Have they sued?

Nick: I always worried that someone with infinitely deep pockets would destroy my life in the libel courts. But they haven’t sued, except with minor exceptions. They chose a cannier tactic. They didn’t engage with the revelations at all. On a BBC radio programme, I was up against someone from the financial sector to talk about the finance curse. I was worried, would they come out swinging, find some awful mistake in the book? Instead, and I was unprepared for this, her reaction was, ‘yes, well there are some problems in finance, it’s not always so great, but we are trying really hard and things are getting better.’ And that was it. Opposing that is like fighting against mush.

OK so my son, who is 13 years old, has come into the room. So to conclude, can you explain to him, why we need to fight inequality, and how?.

Ben: Hi. Great to meet you.

My daughter, she’s not much older than you, she goes on climate marches where we live now, in Italy. There was a big one planned for a school day, and schools were warning kids that going on the march would have them recorded absent from school without authorisation, a mark against their name. But then it became clear that this march was going to be huge: thousands and thousands and thousands of kids would join, across the country. So the minister for schools said there were just too many kids to all be marked down like this, so he instructed that going to the march would count the same as going to school. Then, after the march, he agreed to change the school curriculum to properly include climate.

Each of those kids who won those victories weren’t powerful on their own, but together they were.

When we look back at history, we see that when the worst unfairnesses got tackled, it was only possible because people came together.

People standing up together is what stopped governments insisting that different races had to live apart; it is what stopped governments telling women they could not vote; it is what stopped company bosses telling little kids to work down mines or up chimneys. The lesson from history is this: if you want to make your school, your town, your country, fairer, you can – but not alone. You will find that lots of people care the same as you. It’ll still be really hard. But the only time we’ve ever made steps forward like that was when we’ve pushed, together.

Find out more about How to Fight Inequality by Ben Phillips here

Find out more about The Finance Curse by Nick Shaxson here

Online Conference: How to Pay for the Climate Transition

* *Update: see the full conference, and separate presentations, here.

This week the Tax Justice Network is holding a virtual conference on the subject of How to Pay for the Climate Transition. The conference opens on Thursday 10^th December at 14h00 GMT with a keynote speech from climate justice activist Suzanne Dhaliwal, founder of UK Tar Sands Network, who will discuss why decolonising climate justice and rebalancing existing power structures must be embedded in progressive agendas.

The second day of the conference will open at 14h00 GMT on Friday 11^th December with a keynote speech by Sven Giegold MEP. Sven, who is also a founder of the Tax Justice Network, will discuss the European Green New Deal, exploring whether it is in fact Green, New, or even a Deal.

The conference is free to all and you can register here to attend. Download the programme here.

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The most consequential outcome of Joe Biden’s election success will be in the area of mitigating the climate crisis. A progressive US engagement on this issue will determine whether the threat of damaging and irreversible change is averted, and who might benefit from the trillions of dollars that will be poured by governments in the coming decade into making the transition away from the era of fossil fuels. This question of cui bono, who benefits, is a key topic of our online conference..

According to the International Energy Agency, global investment in the energy sector must reach US$3.5 trillion annually if we are to limit temperature rises to 2.0 degrees centigrade. The International Monetary Fund argues that a programme on the scale required to deliver this outcome requires a combination of front-loaded green investments, massive investment into research and development, and a sustained political commitment to raising the price of fossil fuels. In an interesting sign of changing times, the IMF’s October World Economic Outlook, pushes back against the mantra that we face hard political choices between the economy and the environment (see chapter three here). In brief, we are entering an era when transiting away from fossil fuels is necessary, possible, and, if properly designed, can address many of the other crises facing humanity and the planet we inhabit.

In a blog published earlier this year Tax Justice Network staff writer Nicholas Shaxson commented:

Many people think that the fight to protect the world’s climate is separate from the struggles to tackle inequality, oligarchy, or racial and gender injustices. For example, climate activists may favour carbon taxes even if such taxes may hit the poor hard and have regressive economic effects, while campaigners for economic justice may oppose carbon taxes for the same reason. This is a dangerous delusion: the two struggles are inseparable, and each will fail without the other.”

So this is a moment for progressives across the spectrum to engage with the question of how to finance the climate transition in ways that ensure the benefits of the multiple trillions of dollars of public investment in the coming years accrue to society as a whole and are not hijacked by bankers and private equity funds who see ample opportunity for financialising the future energy market.

Over the two days of our conference we will explore these issues, considering both the economic and political challenges confronting progressives.

The day one programme provides some of the answers to the question of how to finance the climate transition in ways that don’t hand the benefits over to private banks and financiers. First, we need to lay to rest the neoliberal consensus that governments should relinquish the funding role to the private sector: Germany’s best known economist, Peter Bofinger, will argue that governments can and must borrow and press for central bank interventions to finance the transition. In the mid-afternoon panel session Laura Merrill, Jacqueline Cottrell and Rose Bridger will consider the billions of subsidy paid annually to the fossil fuel sectors, and to key fossil fuel guzzlers like the aviation and maritime industries. What could be done if these sums were freed up to fund a just transition away from burning hydrocarbons? And in the final session of day one, TJN Senior Adviser James Henry will interview Jim Boyce on how a carbon dividend can transform carbon taxation to make it socially progressive.

The second day of the conference, starting at 14h00 GMT on Friday 11^th December, will consider some the political changes needed to shape a just transition. Economist Daniela Gabor outlines the stark choice that needs to be made between what she calls the Wall Street Climate Consensus, involving deep financialisation by private sector players who reap huge rewards while passing the risks to the general public, or on the other hand state-green industrial policies and monetary policies, with large penalties imposed on polluting industries. She is joined on her panel by Chien-Yi Lu who argues that neoliberalism has deliberately frustrated democracy by replacing our political power to promote progressive ideas with narrow calculations based on individual economic calculations. In the following session Taxcast producer Naomi Fowler will interview Gail Bradbrook, a founder of Extinction Rebellion, about the extremism of the fossil fuel sector and its supporters.

The conference concludes with a panel discussion involving Molly Scott Cato, Sven Giegold and others.

The conference programme is available here.

Tax-Justice-Network-Climate-Conference-Programme-Dec20 Download

Click here to register for the conference.

The UK’s #ImperialInequalities: Past, present and future

History faces forwards as well as backwards. Yesterday with our friends at Tax Justice UK we published new work with the Foreign Policy Centre outlining how the UK could embrace a new role in taking forward an agenda to undo the worst harms of its global ‘tax haven’ network, while supporting its dependent territories to find alternative development paths. We’re also in the middle of hosting a two-day online conference on ‘Imperial inequalities: states, empires, taxation and reparations‘, bringing together cutting edge research and policy analysis.

For the UK, the looming exit from the European Union has surfaced public and political sentiments about reclaiming an imagined golden past of benevolent, imperial leadership; while the prominence of the Black Lives Matter protests, and the continuing rights abuses inflicted on the Windrush generation and their descendants, has made it harder for those who would ignore at least some of the structurally racist legacies of the empire.

This time last year, at the debate on the Queen’s Speech on, the newly elected Prime Minister Boris Johnson announced his plans for Brexit and beyond:

“This is not a programme for one year or one Parliament; it is a blueprint for the future of Britain. […] I do not think it vainglorious or implausible to say that a new golden age for this United Kingdom is now within reach. […] As we engage full tilt now in this mission of change, I am filled with invincible confidence in the ability of this nation, our United Kingdom of Great Britain and Northern Ireland, to renew itself in this generation as we have done so many times in the past.”

The UK’s ‘tax haven’ network

Such a renewal requires, perhaps, a clarity about the present situation. Our recently launched State of Tax Justice 2020 provides a categorical assessment of one aspect in particular. In the first truly comprehensive evaluation of the scale and pattern of tax revenue losses around the world due to cross-border corporate tax abuse and offshore tax evasion by wealthy individuals, we find that the UK itself is responsible for around 10 per cent of all global losses inflicted on other countries. When we include the UK’s Crown Dependencies and Overseas Territories – including Cayman, the most damaging of all – this UK network is responsible for more than a third of all global losses, roughly $160 billion a year.

While the State of Tax Justice 2020 has received greater global media coverage in its first two weeks than any other tax justice analysis, ever, the UK coverage has been relatively muted. It is strange, in some ways, to contrast this with the great soul-searching over the government’s decision to cut UK aid spending at a time of rising global hardship.

The UK network is built upon financial secrecy – obscuring both the illicit shifting of multinational companies’ profits, and the anonymous ownership of assets and incomes streams, untaxed. As I will present in my paper today in one of the later sessions of the conference, this is what emerged from the period of formal Empire. Dr Vanessa Ogle’s research, which she presented in yesterday’s keynote, has shown how the first global period of illicit financial flows – as opposed to brute force extraction – was characterised by imperial actors seeking to take their ill-gotten gains out of colonies approaching independence, but without bringing them back into the tax net of the parent country. Our own Nick Shaxson has documented in his book Treasure Islands how the UK government eventually agreed to encourage smaller dependent territories down the path of offshore finance, in order to reduce demands on UK aid and to support the preeminent position in global finance of the City of London.

While British policymakers worried about potential for ‘financial wizards’ in the territories to undermine British tax revenues, they showed no concern for any other country’s revenues. Nor did they worry about the inequalities and broader damage that might be imposed on the dependent territories, due to the political, economic and social threats – now better understood as the ‘finance curse’ – of a disproportionately large financial sector.

The UK as a transparency leader?

But the UK has sometimes provided important international leadership in the area of financial transparency. In the wake of the global financial crisis, in 2009, it was Prime Minister Gordon Brown who ensured that – for the first time ever – the G20 group of countries would work on the basis of a ‘tax haven’ list that reflected an objectively verifiable criterion, on jurisdictions’ participation in the exchange of financial information. That laid the grounds for the subsequent development of a multilateral instrument for automatic exchange, which in turn has brought trillions of dollars in offshore financial accounts into the sight of tax authorities.

Brown’s successor David Cameron moved from the ‘A’ of automatic exchange to the ‘B’ of beneficial ownership transparency, and at the G8 in 2013 led the way in establishing a public register of the ultimate owners of UK companies, and in promoting this around the world. And on the ‘C’ of our ABC of transparency, Cameron’s Chancellor, George Osborne, accepted an opposition amendment to allow the Treasury to require that multinational companies publish their country by country reporting, to lay bare profit shifting, and although he refused to enact it without multilateral agreement, he did go to the EU to lobby his fellow finance ministers to this end.

The current UK government, however, appears to have set a course for financial opacity – in each area of the ABC. Some countries are now publishing bilateral, aggregate data on their automatic exchange of financial information, which allows accountability for tax authorities as well as individual financial centres; the UK refuses. Some countries, including the member states of the EU, are now publishing beneficial ownership registers for trusts and foundations; the UK, as a leading trust jurisdiction, does not. Most countries agreed to provide aggregate country by country reporting data for the OECD to publish jointly – the UK U-turned on this commitment.

Away from tax, there are growing questions about the UK government’s refusal to publish details of many billions of pounds in public procurement during the pandemic, which has been shown to include multiple contracts at prices well in excess of market rates, and in many cases involving people with connections to the governing Conservative party, or to individual ministers or officials. As the National Audit Office concluded in its ‘Investigation into government procurement during the COVID-19 pandemic’ published on 18 November 2020:

“[We] found specific examples where there is insufficient documentation on key decisions, or how risks such as perceived or actual conflicts of interest have been identified or managed. In addition, a number of contracts were awarded retrospectively, or have not been published in a timely manner. This has diminished public transparency, and the lack of adequate documentation means we cannot give assurance that government has adequately mitigated the increased risks arising… [T]here are standards that the public sector will always need to apply if it is to maintain public trust.”

Recommendations for renewal…

While the idea of ‘a new golden age’ might be contested, the potential for renewal is clear. The later sessions of our conference consider policy around reparations for slavery and empire, issues in respect of which UK policymakers can expect to hear increasing demands for action. But right now, it seems the government is looking to establish a UK profile in the world which is not defined by that which it is not (an EU member, or an imperial power; or, now perhaps, a leading aid donor).

Looking ahead to 2021, there are two obvious opportunities: the UK’s hosting of the COP-26 climate talks, and of the G7 group of major economic powers. Leaving climate questions for our climate justice conference next week, the G7 offers the UK government a platform to establish a position on global economic or financial questions.

Given the critical analysis above, it might be tempting to seek to avoid any discussion of tax or transparency. But these are areas where the UK has been able to position itself well before, and which play to the significant leverage that the UK has, given the scale of its network. In fact, this is one of a diminishing number of areas where the UK retains disproportionate international influence.

In the article with Robert Palmer of Tax Justice UK, and our own Andres Knobel, and published by the Foreign Policy Centre, we make recommendations of two types – the immediate priorities for the UK to take forward, for itself and the wider network; and the critical need finally to support the members of that network to be able to pursue alternative development paths:

The UK should leverage its chairing of the 2021 G7 and its preeminent position in international finance by taking leadership on financial transparency, with commitments to:
- publish aggregate data on the automatic exchange of financial information to curb further the threat of bank secrecy;
- extend, improve and connect public registers of beneficial ownership to eliminate anonymous ownership of assets; and
- put into practice the existing legislation to require public country by country reporting from multinational companies, to curtail profit shifting.
The UK should ensure the rollout of all these measures across its network, by working with the Overseas Territories and Crown Dependencies – including through substantial financial support to repair the damage of the UK’s having promoted their offshore financial secrecy role over decades, and to assist the transition to alternative economic development paths.

The UK owes a debt – to these territories, for the road it pushed them down and the damage that has done them; and to the wider world, for the compound costs over decades of the tax abuse and corruption facilitated. Taking a lead on these core aspects of tax and financial transparency, and working to support the network’s shift, would allow the UK to ‘stop the clock’ on this debt – as the basis, perhaps, for a genuine renewal.

…and revenue

Perhaps more compellingly for politicians with immediate pressures, the steps outlined would also help to address the pressure for tax revenues at home.

The UK is one of the biggest losers to cross-border tax abuse, suffering an estimated $40 billion in revenue leakage due to the combination of profit shifting and undisclosed offshore assets. That works out to more than 5% of pre-pandemic tax revenues, and over 18% of the sorely stretched budget for public health – or the annual salaries of an extra 840,000 nurses.

It is clear that the UK, like most others, must take steps to address their revenue position over the coming years. A progressive approach would include the above transparency measures and further steps, to address the scale of the abuse of current taxes; and then the introduction of additional measures, as we called for globally in the State of Tax Justice 2020, with our partners in the Global Alliance for Tax Justice and the global union federation, Public Services International:

Excess profits taxes on the large multinational corporations whose profits have soared during the pandemic while local businesses were forced into lockdown
Wealth taxes, recognising the explosion in the asset values of the wealthiest since the pandemic began, even as unemployment has soared to record levels in many countries, to ensure that those with the broadest shoulders contribute as they should at this critical time.
UN tax convention: A global tax system that loses – conservatively – $427 billion a year isn’t a broken system, it’s a system programmed to fail. As the UN FACTI panel is now exploring, a tax convention could deliver multilateral commitment to the ABC of transparency; a centre for monitoring taxing rights by using the data that results, to explore international patterns of revenue losses; and an intergovernmental forum to set global tax rules, finally, in a broadly transparent, inclusive and accountable UN setting.

Women need real social protection that goes beyond the aspirational

In June 2021 the UN Special Rapporteur on extreme poverty and human rights, Olivier De Schutter, is scheduled to present his report on the establishment of a Global Fund for Social Protection to the 47th session of the UN Human Rights Council. It is timely, as he begins to gather evidence and prepare his report, to highlight this excellent research by Veronica Serafini on the pivotal role played by progressive tax regimes in establishing strong social protection for women.

We are grateful to Patricia Miranda and @latindadd for giving us the opportunity to share this blog in full.

New report “Tax Justice for the social protection of women” addresses gender gaps and inequalities in the coverage of these systems in Latin America.

In Latin America, on average, women earn 20 per cent less than men doing the same jobs. In addition, a good part of the female population in the region is dedicated to carrying out care work, without receiving any compensation for this essential work for the preservation of our societies. Most of them suffer from the limited and deficient coverage of the weak social protection systems provided by our governments.

According to Verónica Serafini, feminist economist and author of the new report “Tax Justice for the social protection of women”, to overcome this problem, one of the key pillars is to have “more tax revenues to finance gender equality in the social protection.” The report points out that there are many groups of women that will never be covered by the traditional protection system, and thus it is necessary to formalise the labour market and collect more taxes so that the State can provide protection against the adversities and vulnerabilities they face throughout their lives. “They are not sitting around waiting, they are performing jobs, both paid and unpaid, that are useful to the society. Despite this, they do not have economic autonomy in their youth nor during their adulthood and old age. They are less covered by the retirement and care systems. Many women depend on someone else throughout their whole lives.”

According to the data provided in the report, edited by the Latin American Network on Debt and Development (Latindadd), a significant share of women in Latin America and the Caribbean work without receiving a salary or do not work in the formal market, implying that they cannot contribute to the pension system. “In the case of households headed by women, 30% of the total in the region, women are single parents. In contrast, households headed by men generally have two adults who provide care, income and food. This does not happen in households headed by women; they are more complex and more vulnerable than the traditional ones”.

Serafini Geoghegan also noted that the new report presents data that helps to explain the current dissatisfaction the region is experiencing. This new report reveals the relationship that exists between taxation issues and those problems faced by women, “which is often difficult to identify. A tax system that does not work well affects women in every way, such as a social protection system with low coverage, poor quality, lack of care policies and actions against violence”, Serafini highlighted.

Worrying numbers

The report “Tax Justice for the social protection of women” highlights among many findings that while 71.9 per cent of men aged 15 years or more are active in employment, only 48.3 per cent of women participate in the labour market. In contrast, the study shows that 17.8 per cent of women in the region are exclusively dedicated to domestic chores, compared to only 0.9 per cent of men dedicated to this type of work. The existing gap in paid and unpaid work and, therefore, in the distribution of income and social protection coverage is evident.

Another point to consider when analyzing the weak structure of our social protection systems is what happens with the expansion of social security, concentrated mainly in urban sectors and in the richest quintiles of the population. Only in Brazil, Chile, Costa Rica and Uruguay, does more than half of the employed population has coverage. When looking at the case of the poorest quintiles of the population the situation is dire: less than 10 per cent of the population has coverage.

It is important to consider the need for a gender approach in social protection systems and income generation. In the region, 28.9 per cent of women over 15 years of age do not have their own income, compared to 12.5 per cent of men. However, there are cases where this gap is even deeper, such as in Guatemala, where 51 per cent of women have no source of income. In Costa Rica, Ecuador and El Salvador this figure is around 35 per cent.

Is a model change necessary?

According to the author of the new report “Tax Justice for the social protection of women” there are two main obstacles to overcome in order to achieve a social protection system with a gender perspective. “The first is the re-design of social protection systems; they are conceived from an androcentric approach: a male head of the family, who works under a dependency relationship and whose coverage will include his entire family.”

The second aspect that Serafini highlights as key to improving the coverage of these systems in our region is financing. “We can change everything to try and cover everyone, but without financing it will not be possible. If there are no resources, because there is low tax pressure, because there is tax avoidance and tax evasion and regressive tax systems prevail, it will not be solved either. On the one hand, there is the design of the social protection system that incorporates the gender perspective and, on the other hand, a tax system that guarantees the right to social protection for women”, she highlighted.

Read the report in Spanish.

Read the report in English.

Details about the UN Special Rapporteur’s forthcoming report on a Global Standard for Social Protection can be found here.

New book provides practical solutions to make tax work to reduce poverty

We’re delighted to announce a new book: Tax Justice and Global Inequality: Practical Solutions to Protect Developing Country Tax Revenues, edited by Krishen Mehta, Erika Dayle Siu and Esther Shubert, published by Zed Books and featuring contributions from many leading thinkers in the field. The following post, by Erika Dayle Siu and Krishen Mehta (who is also a board member of the Tax Justice Network), introduces the key issues and contributors.

In Myanmar, 50 out of every 1,000 children that are born die before the age of 5; in Norway the equivalent number is 2. In Equatorial Guinea 342 women die in childbirth for every 100,000 births; in France, the equivalent number is 8. In Japan, 100% of the primary school age children are enrolled in school; in West and Central Africa, more than 25% of the children are not enrolled in any school at all.

There are many reasons for the current situation, and there is no doubt that poor management, lack of transparency in governance, and the role of local elites contribute to the problem. But the existence of limited resources to meet their needs is foundational. Corruption, and the resultant competition for limited resources, is a natural outcome of the lack of resources.

What are some of the future consequences of such extreme poverty?

There is the risk that a large number of the lower income countries in the Global South, particularly in Africa, Latin America, and parts of Asia could face greater instability in the years to come as a result of these tax losses. This has implications not only for these countries and regions, but also for countries beyond, including in the Global North.

If the refugee migration from some of these countries thus far has already had negative implications for the Global North, then what will happen if the situation becomes much worse economically in the Global South in the years to come? Clearly, the shortfall of tax revenues will make it very difficult for these countries to invest for the future and provide hope for their citizens, especially the younger generations. If this situation is left unchecked, it could have major spillover effects on the Global North that could make the current refugee and migration crisis seem modest in comparison.

What then is the answer to the current situation?

Based on various estimates, it is believed that the resources needed to address the scourge of extreme poverty globally have risen since the pandemic, to around US$ 100 billion a year; although recent estimates by the Tax Justice Network indicate that as much as US$ 427 billion a year is lost due to aggressive corporate tax avoidance and evasion by wealthy individuals. That means that if the current faults in the global tax rules did not exist, the challenge of extreme poverty could very well be remedied several times over.

Estimates of the number of people living in extreme poverty since the beginning of the Covid-19 pandemic have surged upward by an additional 120 million people. This means that there are now likely to be over 766 million people, or close to 10 percent of the global population living on less than $1.90 per day. Alleviating such extreme poverty would require about US$ 100 billion – but recent estimates by the Tax Justice Network indicate that as much as US$ 427 billion a year is lost due to aggressive corporate tax avoidance and evasion by wealthy individuals. That means that if the current faults in the global tax rules did not exist, the challenge of extreme poverty could very well be remedied four times over in one year.

The need for resources also extends to emerging economies seeking to promote public health and a healthy and productive workforce, especially as they grapple with fiscal imbalances caused by the pandemic. An analysis in 2019 estimated that over 50 million premature deaths could be prevented if countries increased excise taxes to raise prices of tobacco, alcohol, and sugary beverages by 50 percent over the next 50 years. These reforms would yield over US$ 20 trillion in revenue.

Contributions of this new book

These are just a few of the many opportunities to mobilize a considerable amount of resources for sustainable development and poverty reduction. The essays in a new book, titled: Tax Justice and Global Inequality: Practical Solutions to Protect Developing Country Tax Revenues, edited by Krishen Mehta, Esther Shubert, and Erika Dayle Siu offer practical tax policy solutions at the domestic and international levels and provide alternatives to current taxation rules that are not working to support developing country priorities.

This book brings together a group of authors who present solutions from varied perspectives, concerned not only about revenue raising, but also the environment, public health, fair trade agreements, and human rights.

Alexandra Readhead presents what resource-rich countries can do to make the extraction of their natural resources a win for both sides.
Tovony Randriamanalina then deals with the current transfer pricing system, and how it can be made to work more effectively for developing countries.
Annet Ogutto explores how international tax competition can lead to harmful tax practices and what can be done about it.
Mustapha Ndajiwo then delves into the challenges faced by developing countries in the expanding area of taxing the digitalised economy, and more equitable approaches to taxation in this space.
Victoria Lee examines the use of bilateral investment treaties and free trade agreements, and how the interests of developing countries can be better protected.
Kerrie Sadiq takes us into an application of formulary apportionment as a possible solution to address multinational entity debt financing schemes.
Jorg Alt and Charles Chilufa present an idea whose time has come – that of joint tax audits in the current environment of information exchange and country-by-country reporting to ensure that multinational corporations are paying their fair share of taxes in each jurisdiction.
Lauri Finer presents an example of tax avoidance in development finance, and how both countries involved can ensure development objectives in such an environment.
Erika Siu, Estelle Dauchy, Evan Blecher and Frank Chaloupka explore how taxation can address the production and consumption of harmful goods, such as tobacco, alcohol and sugary drinks to achieve better outcomes for health.
Tatiana Falcao discusses environmental taxation and a multilateral carbon treaty as a pathway for the protection of our common future.
Nikki Reisch examines the close linkage between fiscal policy, inequality, and human rights, under the challenging paradigm of ‘taxing for justice’.
Monica Iyer describes a more just international tax order that gives content to Article 28 of the Universal Declaration of Human Rights through the lens of the global tax system.

In many countries, discussions about tax reform are often dominated by the views of economists and financial experts, and the reform process is often not subject to full democratic debate. As a result, technical considerations of efficiency and ease of administration often overshadow discussions of economic, social, and environmental equity. It is this trend that we seek to counter in creating a system that is just as well as efficient. The essays in this volume represent an effort toward that goal.

Tax Justice Network Portuguese podcast #19: Carrefour e Pão de Açúcar: abusos em nome do lucro

É da sua conta #19: Carrefour e Pão de Açúcar: abusos em nome do lucro

Carrefour e Pão de Açúcar cometem diversos abusos – tributários, trabalhistas, com fornecedores e clientes – tudo para lucrar ainda mais, revela o livro “Donos do mercado”, dos jornalistas João Peres de Victor Matioli. Os abusos tributários e comerciais das duas maiores redes de supermercados que operam no Brasil estão no episódio #19 do É da Sua Conta. Ouça:

João Peres e Victor Matioli, autores de Donos do Mercado, contam como investigaram os dois hipermercados e trouxeram à luz as más práticas das empresas.
Carrefour e Pão de Açúcar exploram seus fornecedores, sobretudo os de pequeno porte, para maximizar seus resultados financeiros.
Envio de lucros a paraísos fiscais, organogramas complexos e não pagamento de multas relacionadas a impostos: manobras usadas por Carrefour e Pão de Açúcar para evitar o pagamento de tributos no Brasil
As medidas fiscais que podem acabar com estes crimes se colocadas em prática.
Como a financeirização atua no setorde alimentação
Você pode ganhar um livro “Donos do mercado”. Ouça o podcast e saiba como participar do sorteio!

Participantes desta edição:

Clair Hickman, Instituto de Justiça Fiscal
GustavoFerroni, Oxfam Brasil
João Peres, O Joio e o Trigo
Júlio Cesar Benedito, Sitío A Boa Terra
Nick Shaxson, Tax Justice Network
Victor Matioli, O Joio e o Trigo

Mais informações:

Estudo do Instituto de Justiça Fiscal sobre evasão dos lucros no setor de mineração brasileiro para paraísos fiscais
Artigo Tenebrosas Transações, de Clair Hickman e João Carlos Loebens sobre envio de lucros a paraísos fiscais via preço de transferências.
Estudo “Hora de Mudar” da Oxfam
Princípios orientadores da ONU: Empresas e Direitos Humanos

Este episódio é dedicado a João Alberto Silveira Freitas e a todas as pessoas vítimas de crimes raciais.

Conecte-se com a gente!

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.

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

Imperial inequalities: states, empires, taxation & reparations: online conference

Online conference: 3 and 4 December 2020 – Register here

Co-organised with Gurminder K Bhambra, University of Sussex and Julia McClure, University of Glasgow, also based on a forthcoming book Imperial Inequalities: Taxation and Welfare across European Empires

In previous centuries European countries exercised the ‘aggressive extension’ of their authority. Their political interests extracted value and hardwired systems, culture and law to ‘lock’ colonised countries into debt and fiscal dependency. More recent decades, during ‘decolonisation’, saw the perfecting of this imperialist authority leaving a legacy of fiscal indenture.

Today defenders of imperialist systems – multinational companies and wealthy individuals – continue to exploit their powerful advantage leaving states impoverished and often democratically weak.

This conference will highlight the genesis of inequalities within countries and between countries. And in examining this, legacy contributors will explore directions for reparation and reprogramming global tax law and policy.

Questions we’ll be exploring:

To what extent has the European project of public expenditure on welfare been made possible by imperial extraction?
What role has taxation and welfare played in creating imperial inequalities? Do these challenge any pre-established theories about pathways to global inequality?
What role has been played by promoting dependent territories as ‘tax havens’, in the more recent period of extraction, and how has this damaged those territories as well as others?
How do tax laws, which can themselves be understood as having imperial legacies, continue to shape inequality trends?
What sort of reparations could conceivably address the scale of damage created from imperial extraction, and how can taxes be collected and redistributed to begin to mitigate the economic damage created?
How can we move reparations policy up the international political agenda and gain political momentum to move reparations forward?

Risks associated with Foreign Direct Investment

Geopolitical Implications

Offshore tax evasion and automatic exchange of information

Policy recommendations

1. Enhance data availability

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

3. Embed illicit financial flows risk analyses across administrative departments

The statistical side of the tax equation: The Joint Research Centre Audit of the Corporate Tax Haven Index

So, how do we actually fight inequality?

The UK’s ‘tax haven’ network

The UK as a transparency leader?

Recommendations for renewal…

…and revenue

Worrying numbers

Is a model change necessary?

What are some of the future consequences of such extreme poverty?

What then is the answer to the current situation?

Contributions of this new book

Thank you!