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 IndexIndicator 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.
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
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]
“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.
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
* *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 10th 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 11th 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 11th 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.
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.
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.
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.
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.
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!
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?
A lot of people will be visiting our website today to read about the State of Tax Justice 2020 report that we’ve just launched globally. But the regular visitors among you will have noticed a second major launch today from the Tax Justice Network: our new website and branding.
What happened to the map?
The Tax Justice Network launched in 2003 after three Jersey islanders – Jean Anderson, Pat Lucas and Frank Norman – contacted former Jersey senior economic advisor and our founder-to-be John Christensen, asking him to help them save their island from the tax haven it had become. If you’re unfamiliar with the story of how a small group of school teachers and nuns baked and sold enough cakes to get the Tax Justice Network on to its feet and spark a global tax justice movement, the video below about the fire-starting trio and the annual award we named after them is well worth a watch.
With the launch of the Tax Justice Network came a logo that has served as the face of the organisation for nearly two decades. At the time, not many people knew about tax havens and their devastating impact on inequality around the world. The Tax Justice Network’s logo, just like the rest of our work at the time needed to draw attention to the globe-spanning nature and urgency of the problem.
Fast forward 17 years, and after numerous offshore scandals, tax havens are regularly featured in the news and tackling them is high on national and global agendas. Polling conducted this year in seven leading countries shows overwhelming public support for policymakers to crack down on companies using tax havens.
With the launch of the State of Tax Justice 2020 today, the debates about whether tax havenry is something that happens at the heart of the global economy, not its palm-fringed peripheries; and about whether global tax abuse is large enough to constitute a first-order economic problem; are over. The world’s biggest tax havens are OECD member countries: the UK (with its network of Overseas Territories and Crown Dependencies), the Netherlands and Luxembourg. Countries are losing over $427 billion to global tax abuse ever year. Losing a nurse’s yearly salary every second to a tax haven is very much a problem, especially during a pandemic.
The numbers are in. It’s time to act.
The way forward
The Tax Justice Network’s rebrand is characterised by a key pivot from drawing attention to the problem to pointing the way forward to the solution. While the Tax Justice Network has been proposing and successfully ushering in radical and imaginative polices solutions since 2003, we wanted our new branding itself to inspire people to reimagine the role tax plays in their life, and to reimagine a world where tax justice is realised.
The first step was to rethink the colours we use. Our red, black and grey colour scheme was good at communicating the gravity and urgency of the issue, which is why you’ll often find variations of this scheme used by NGOs. But what if we wanted more from our colour scheme?
After some brainstorming, we realised: what better colour to communicate both the possibility of a new world and the prosperity to be gained by all in a just society than a bright and warm yellow? The colour of both the sun and the simplest symbol for tax, a gold coin.
The second step was to find a design that could visualise what we want to say. In the end, the simplest symbol proved the best: an arrow pointing the way.
Putting it all together, we’re delighted to finally share with your our new Tax Justice Network logo.
Reprogramming our tax systems
A number of the Tax Justice Network’s policy proposals are global standards today. The data published by the OECD this summer which made our State of Tax Justice 2020 report possible was collected under country by country reporting, based on our original proposals and the draft international accounting standard published by Richard Murphy in 2003. Nonetheless, there’s still a long way to go to achieving tax justice.
For decades, our governments have been using tax policy as a tool to indulge the desires of the wealthiest and most powerful multinational corporations and individuals, instead of protecting people’s wellbeing. As a result, our societies are characterised by gross inequalities that deny us the opportunities to make a good life possible for everyone. This has dealt an ever heavier blow to women, people of colour and disabled people who already face systematically poorer prospects. Yet despite tax rates being cut down to the lowest levels of the modern period, multinational corporations and wealthy individuals are still short-changing people out of $427 billion in tax every year.
We must reprogramme our global tax system to prioritise people’s health and livelihoods over the desires of those bent on not paying tax. That means using tax policy as tool for making sure everybody has access to the opportunities that make a good life possible.
And so, to better equip people and governments around the world with the information and resources they need to reprogramme their tax systems, we’ve completely revamped our website to make it easier for visitors to find the content they need and to learn about the tax justice issues that impact them.
The new website we’ve launched today incorporates feedback we’ve received over the years from our website visitors, supporters and global network about what they want to get out of our website. Alongside a cleaner interface for more comfortable reading and a more intuitive organising of content, our new website packs a number of clever features we think you’ll find useful – like our country profiles. We’ll be launching more features in the coming weeks, including the ability to filter content and research by topics and region.
Our new report, rebrand and website launched today marks a new chapter for the Tax Justice Network. For those of you who have been with us on this journey for some time now, we thank you for your support and look forward to taking on the work ahead together. And for those of you joining us today for the first time, a big welcome from the Tax Justice Network team – there’s plenty of room for you in the fight for tax justice. We’re just getting started.
The equivalent of one nurse’s annual salary is lost to a tax haven every second
Countries are losing a total of over $427 billion in tax each year to international corporate tax abuse and private tax evasion, costing countries altogether the equivalent of nearly 34 million nurses’ annual salaries every year – or one nurse’s annual salary every second.1 As pandemic-fatigued countries around the world struggle to cope with second and third waves of coronavirus, a ground-breaking study published today reveals for the first time how much public funding each country loses to global tax abuse and identifies the countries most responsible for others’ losses. In a series of joint national and regional launch events around the world, economists, unions and campaigners are urging governments to immediately enact long-delayed tax reform measures in order to clamp down on global tax abuse and reverse the inequalities and hardships exacerbated by tax losses.2
The inaugural edition of the State of Tax Justice – an annual report by the Tax Justice Network on the state of global tax abuse and governments’ efforts to tackle it, published today together with global union federation Public Services International and the Global Alliance for Tax Justice – is the first study to measure thoroughly how much every country loses to both corporate tax abuse and private tax evasion, marking a giant leap forward in tax transparency.
While previous studies on the scale of global corporate tax abuse have had to contest with the fog of financial secrecy surrounding multinational corporations’ tax affairs, the State of Tax Justice analyses data that was self-reported by multinational corporations to tax authorities and recently published by the OECD, allowing the report authors to directly measure tax losses arising from observable corporate tax abuse. The data, referred to as country by country reporting data3, is a transparency measure first proposed by the Tax Justice Network in 2003. After nearly two decades of campaigning, the data was made available to the public by the OECD in July 2020 – although only after multinational corporations’ data was aggregated and anonymised.4
Of the $427 billion in tax lost each year globally to tax havens, the State of Tax Justice 2020 reports that $245 billion is directly lost to corporate tax abuse by multinational corporations and $182 billion to private tax evasion.5 Multinational corporations paid billions less in tax than they should have by shifting $1.38 trillion worth of profit out of the countries where they were generated and into tax havens, where corporate tax rates are extremely low or non-existent. Private tax evaders paid less tax than they should have by storing a total of over $10 trillion in financial assets offshore.
Poorer countries are hit harder by global tax abuse
While higher income countries lose more tax to global tax abuse, the State of Tax Justice 2020 shows that tax losses bear much greater consequences in lower income countries.6 Higher income countries altogether lose over $382 billion every year whereas lower income countries lose $45 billion. However, lower income countries’ tax losses are equivalent to nearly 52 per cent of their combined public health budgets, whereas higher income countries’ tax losses are equivalent to 8 per cent of their combined public health budgets. Similarly, lower income countries lose the equivalent of 5.8 per cent of the total tax revenue they typically collect a year to global tax abuse whereas higher income countries on average lose 2.5 per cent.
The same pattern of global inequality is also strongly visible when comparing regions in the global north and south. North America and Europe lose over $95 billion in tax and over $184 billion respectively, while Latin America and Africa lose over $43 billion and over $27 billion respectively. However, North America and Europe’s tax losses are equivalent to 5.7 per cent and 12.6 per cent of the regions’ public health budgets respectively, while Latin America and Africa’s tax losses are equivalent to 20.4 per cent and 52.5 per cent of the regions’ public health budgets respectively.
Rich countries are responsible for almost all global tax losses
Assessing which countries are most responsible for global tax abuse, the State of Tax Justice 2020 provides the strongest evidence to date that the greatest enablers of global tax abuse are the rich countries at the heart of the global economy and their dependencies – not the countries that appear on the EU’s highly politicised tax haven blacklist or the small palm-fringed islands of popular belief. Higher income countries are responsible for 98 per cent of countries’ tax losses, costing countries around the world over $419 billion in lost tax every year while lower income countries are responsible for just 2 per cent, costing countries over $8 billion in lost tax every year.
The five jurisdictions most responsible for countries’ tax losses are British Territory Cayman (responsible for 16.5 per cent of global tax losses, equal to over $70 billion), the UK (10 per cent; over $42 billion), the Netherlands (8.5 per cent; over $36 billion), Luxembourg (6.5 per cent; over $27 billion) and the US (5.53 per cent; over $23 billion).
G20 countries meeting tomorrow responsible for over a quarter or global tax losses
G20 member countries meeting this weekend for the Leaders’ Summit 2020 are collectively responsible for 26.7 per cent of global tax losses, costing countries over $114 billion in lost tax every year. The G20 countries themselves also lose over $290 billion each year.
In 2013, the G20 mandated the OECD to require collection of the country by country reporting data analysed by the State of Tax Justice 2020 – a measure the OECD had long resisted until then. In 2020, the OECD’s consultation on country by country reporting highlighted two major demands from investors, civil society and leading experts: that the technical standard be replaced with the far more robust Global Reporting Initiative standard, and – crucially – that the data be made public.7
The Tax Justice Network is calling on the G20 heads of state summit this weekend to require the publication of individual multinationals’ country by country reporting, so that corporate tax abusers and the jurisdictions that facilitate them can be identified and held to account.
Alex Cobham, chief executive of the Tax Justice Network, said:
“A global tax system that loses over $427 billion a year is not a broken system, it’s a system programmed to fail. Under pressure from corporate giants and tax haven powers like the Netherlands and the UK’s network, our governments have programmed the global tax system to prioritise the desires of the wealthiest corporations and individuals over the needs of everybody else. The pandemic has exposed the grave cost of turning tax policy into a tool for indulging tax abusers instead of for protecting people’s wellbeing.
“Now more than ever we must reprogramme our global tax system to prioritise people’s health and livelihoods over the desires of those bent on not paying tax. We’re calling on governments to introduce an excess profit tax on large multinational corporations that have been short-changing countries for years, targeting those whose profits have soared during the pandemic while local businesses have been forced into lockdown. For the digital tech giants who claim to have our best interests at heart while having abused their way out of billions in tax, this can be their redemption tax. A wealth tax alongside this would ensure that those with the broadest shoulders contribute as they should at this critical time.”
Rosa Pavanelli, general secretary at Public Services International, said:
“The reason frontline health workers face missing PPE and brutal understaffing is because our governments spent decades pursuing austerity and privatisation while enabling corporate tax abuse. For many workers, seeing these same politicians now “clapping” for them is an insult. Growing public anger must be channelled into real action: making corporations and the mega rich finally pay their fair share to build back better public services.
“When tax departments are downsized and wages cut, corporations and billionaires find it even easier to swindle money away from our public services and into their offshore bank accounts. This is of course no accident; many politicians have wilfully sent the guards home. The only way to fund the long-term recovery is by making sure our tax authorities have the power and support they need to stop corporations and the mega rich from not paying their fair share. The wealth exists to keep our societies functioning, our vulnerable alive and our businesses afloat: we just need to stop it flowing offshore.
“Let’s be clear. The reason corporations and the mega rich abuse billions in taxes isn’t because they’re innovative. They do it because they know politicians will let them get away with it. Now that we’ve seen the brutal results, our leaders must stop the billions flowing out of public services and into offshore accounts, or risk fuelling cynicism and distrust in government.”
Dr Dereje Alemayehu, executive coordinator at the Global Alliance for Tax Justice, said:
“The State of Tax Justice 2020 captures global inequality in soberingly stark numbers. Lower income countries lose more than half what they spend on public health every year to tax havens – that’s enough to cover the annual salaries of nearly 18 million nurses every year. The OECD’s failure to deliver meaningful reforms8 to global tax rules in recent years, despite the repeated declaration of good will, makes it clear that the task was impossible for a club of rich countries. With today’s data showing that OECD countries are collectively responsible for nearly half of all global tax losses, the task was also clearly an inappropriate one for a club heavily mixed up in global tax havenry.
“We must establish a UN tax convention to usher in global tax reforms. Only by moving the process for setting global tax standards to the UN can we make sure that international tax governance is transparent and democratic and our global tax system genuinelyfair and equitable, respecting the taxing rights of developing countries.”
Country cases of tax losses
Tax abuse in Vietnam causes as much economic loss as Typhoon Molave Typhoon Molave, described by Vietnamese Deputy Prime Minister Trinh Dinh Dung as “one of the two most powerful storms Vietnam has had in the past 20 years,” destroyed more than 700 houses and left 80 people dead and missing in October 2020. The Vietnamese government estimates Typhoon Molave to have caused $430 million in economic damage.9 Vietnam loses nearly as much tax, over $420 million (97 per cent of $430 billion), every year to global tax abuse.
South Africa’s tax losses could lift over 3 million people out of poverty Nearly half of South Africa’s adult population lives in poverty, with more women (52 per cent) in poverty, than men (46 per cent).10 The latest upper-bound poverty line published by the South African government in 2019 is ZAR 1,227 per month (almost $85 per month).11 If the $3.39 billion in tax that South Africa loses every year to tax abuse was instead given as direct cash transfers of $85 per month to people living in poverty, over 3 million people could be lifted out of poverty.
Greece’s tax losses equal to over a quarter of scheduled debt repayments Greece’s annual loss of nearly $1.36 billion in tax (€1.15 billion) to tax abuse is equivalent to over a quarter (27 per cent) of Greece’s scheduled debt repayments for 2020, which total €4.19 billion.12 Among the multiple debtors Greece owes, the country is specifically scheduled to repay €443.7m to Eurozone countries in 2020. Greece’s annual tax losses are over double this amount.
Responsibility for global tax losses
The UK spider’s web is responsible for over a third of global tax losses The jurisdiction that causes countries the most global tax losses is British Overseas Territory Cayman, which is responsible for other countries losing over $70 billion in tax every year. However, Cayman is just one jurisdiction that falls under UK’s network of Overseas Territories and Crown Dependencies, where the UK has full powers to impose or veto lawmaking and where power to appoint key government officials rests with the British Crown. Infamously referred to as the UK spider’s web13, extensive research has documented the ways in which this network of jurisdictions operates as a web of tax havens facilitating corporate and private tax abuse, at the centre of which sits the City of London.
The State of Tax Justice 2020 finds that the UK spider’s web is responsible for 37.4 per cent of all tax losses suffered by countries around the world, costing countries over $160 billion in lost tax every year.
The “axis of tax avoidance” is responsible for over half of the world’s tax losses The Corporate Tax Haven Index 2019 had previously estimated that the UK, together with its network of Overseas Territories and Crown Dependencies, Luxembourg, Switzerland and the Netherlands are together responsible for half of the world’s risk of corporate tax abuse, coining the label “axis of tax avoidance” for the group.14 The Tax Justice Network revealed in April 2020 that the axis of tax avoidance costs the EU over $27 billion in lost tax every year solely from US multinational corporations operating in the EU.15
The State of Tax Justice Network confirms today that the axis of tax avoidance is collectively responsible for over 47.6 per cent of global tax loss incurred from corporate tax abuse. When including tax losses to private tax evasion, the axis of tax avoidance is responsible for 55 per cent of all tax losses suffered by countries around the world, costing countries nearly $237 billion in lost tax every year.
EU blacklisted jurisdictions cause less than 2% of global tax losses, EU member states cause 36% Analysis of the jurisdictions on the EU tax haven blacklist found the cohort to be collectively responsible for just 1.72 per cent of global tax losses, costing countries over $7 billion in lost tax a year.16 In comparison, EU member states are responsible for 36 per cent of global tax losses, costing countries over $154 billion in lost tax every year.
The Tax Justice Network has long criticised17 the EU’s blacklist for ignoring major tax havens while focusing on jurisdictions that are secretive but play an insignificant role in the global economy. The State of Tax Justice 2020 reveals that two jurisdictions blacklisted by the EU, Palau and Trinidad and Tobago, while non-cooperative with international tax regulations, did not create any observable tax losses for other countries.
On the other hand, British Territory Cayman which was briefly blacklisted for the first time in February 202018 but removed from the list in October 2020 after it was deemed compliant with international tax rules, is responsible for the biggest share of countries’ tax losses (16.5 per cent of global tax losses, equal to over $70 billion a year). The Tax Justice Network argues that Cayman being deemed to be compliant with international tax rules despite being the world’s greatest enabler of global tax abuse is evidence that current international tax rules are not fit for purpose.
Three actions governments must take
The Tax Justice Network, Public Services International and the Global Alliance for Tax Justice, along with supporting NGOs, campaigners and experts around the world, are together calling on governments to take three actions to tackle global tax abuse:
Introduce an excess profit tax on multinational corporations making excess profits during the pandemic, such as global digital companies, in order to cut through profit shifting abuses. Multinational corporations’ excess profit would be identified at the global level, not the national level, to prevent corporations from underreporting their profits by shifting them into tax havens, and taxed using a unitary tax method.19
Introduction of a wealth tax to fund the Covid-19 response and address the long term inequalities the pandemic has exacerbated, with punitive rates for opaquely owned offshore assets and a commitment between governments to eliminate this opacity. The pandemic has already seen an explosion in the asset values of the wealthy, even as unemployment has soared to record levels in many countries.
Establish a UN tax convention to ensure a global and genuinely representative forum to set consistent, multilateral standards for corporate taxation, for the necessary tax cooperation between governments, and to deliver comprehensive, multilateral tax transparency.
The research will be presented at virtual event taking place from 1:00pm to 2:30 pm GMT on Friday 20 November 2020. The event will features speakers from around the world. Registration is available here.
Notes to Editor
The tax losses of countries around the world are equivalent to nearly 34 million nurses’ annual salaries every year. Instead of a blanketly applying one country’s average annual nurse salary to the world, the global number of equivalent nurses’ salaries lost is arrived at by first calculating how much each country’s tax losses is equivalent to in local average annual nurse salaries in the country. Each country’s equivalent in nurses’ annual salaries is then summed to produce a global total the reflects nurses’ annual salaries around the world. Countries’ average annual nurse salaries are sourced from OECD data. For non-OECD countries, we use the average salary in the country, as reported by the International Labor Organization. Missing values in the OECD and ILO databases were calculated using the relation between the country’s average salary and GDP per capita found in other countries.
A global virtual event launching the State of Tax Justice 2020 will take place at 1pm GMT on Friday 20 November 2020.
Country by country reporting is designed to expose and deter profit shifting, a practice that involves multinational corporations moving profits from the countries where they were generated to tax havens, where corporate tax rates are low to non-existent, in order to underreport how much profit they made outside of tax havens and consequently pay less corporate tax. By requiring multinational corporations to publish how much profit they made and how much cost they incurred in each country in which they operate, public country by country reporting makes it impossible for corporations to shift profit into tax havens for the purpose of warping tax obligations elsewhere without being detected. This also exposes the cost of corporate tax havens’ aggressive tax policies to other countries.
An international accounting standard for public country by country reporting was first proposed by the Tax Justice Network in 2003. Although initially resisted by the OECD the reporting method was eventually backed by the G20 group of countries in 2013, with the OECD producing a standard for use from 2015. After numerous delays, the OECD finally published partial data in July 2020. However, while the Tax Justice Network’s proposal called for multinational corporations to publicly disclose their country by country reports, the OECD required multinationals only to privately submit their reports to OECD countries’ tax authorities. Reports collected from multinational corporations were then aggregated and anonymised by OECD countries before the data was shared with the OECD body and published. As a result, while the Tax Justice Network’s analysis of the data published by the OECD shows that multinational corporations are paying $245 billion less in corporate tax than they should, it is not possible to identify which multinational corporations are responsible.
For countries that did not make country by country reporting data available, the State of Tax Justice uses information about the activity of multinational corporations within the non-reporting country from the data made available by other reporting countries. The more data coverage a country has – ie, the more countries whose country by country reporting cover a given, other country – the greater the accuracy of the estimates for the latter. Hence the importance of the transparency measure. As more countries get on board with country by country reporting in the coming years, the sharper the estimates will become.
Countries’ annual tax loss estimates are calculated using data from the latest year available as of time of writing. Corporate tax abuse estimates are based on analysing the latest country by country reporting data from the OECD, which are for 2016. Private tax evasion estimates are based on analysing data on bank deposits from the Bank for International Settlements from 2018. These estimates are representative of the tax losses countries incur on an annual basis.
The World Bank classifies countries on the basis of gross national income per capita as either low, lower middle, upper middle or high income. Roughly half the world’s population lives in the two lower income groups, and roughly half in the higher income groups. Accordingly, when referring to “higher income” countries in this press release and report, we refer to high income and upper middle income countries grouped together, and when referring to “lower income” countries, we refer to lower middle income and low income countries grouped together.
The OECD’s blueprint for reforms published in October 2020 has been widely criticised by Joseph Stiglitz, Eva Joly, Jayati Ghosh and other leading economists and tax experts for failing to deliver meaningful reform. The Tax Justice Network criticised the OECD’s proposal for being a “tax haven lite” plan.
Approximately half (49.2 per cent) of the adult population in South Africa were living below the upper-bound poverty line in 2015. According to the government survey, there were 35.1 million adults (aged 18 years and older) under the upper-bound poverty line. Adult females experienced higher levels of poverty when compared to their male counterparts.
The South African government measures poverty by three threshold points. The upper-bound poverty line, the lower-bound poverty line and the food poverty line. The latest values for the poverty lines, among which upper-bound poverty line is the highest, were published by the South African government in 2019.
For a list of Greece’s scheduled debt repayments, see here.
Most of the UK’s Overseas Territories and Crown Dependencies ranked high on the Tax Justice Network’s Corporate Tax Haven Index in 2019, a ranking of how complicit countries’ legal and financial systems are in enabling global corporate tax abuse (see note 13 below). The Corporate Tax Haven Index previously estimated the UK and its network of Overseas Territories and Crown Dependencies to be collectively responsible for a third of the world’s risks for global corporate tax abuse.
While the index measured risks for corporate tax abuse, it could not directly measure corporate tax losses arising from those risks due to the difficulty in measuring corporate tax abuse prior to the publishing of country by country reporting data by the OECD this past summer.
The State of Tax Justice 2020 confirms that the UK spider’s web is responsible for 28.5 per cent of the tax losses countries incur from corporate tax abuse, in line with the index’s 2019 estimate. When including tax losses to private tax evasion, the UK spider’s web is responsible for 37.4 per cent of all tax losses suffered by countries around the world, costing countries over $160 billion in lost tax every year.
For more information about the UK spider’s web, please see Michael Oswald’s documentary “The Spider’s Web: Britain’s Second Empire”, produced by Tax Justice Network founder John Christensen. The documentary is available on YouTube in English, Spanish, French, German and Italian and has been viewed nearly 4 million times.
The Corporate Tax Haven Index ranks countries by their complicity in global corporate tax havenry. The index scores each country’s legal, tax and financial system based on the degree to which it enables corporate tax abuse. Each country’s corporate tax haven score is then combined with the scale of corporate activity in the country to determine the share of global corporate activity put at risk of tax avoidance by the country. The greater the share of global corporate activity put at risk of corporate tax abuse by the country’s tax and financial system, the higher the country ranks on the index. The following 10 jurisdictions ranked highest on the latest edition of the Corporate Tax Haven Index published in 2019: 1. British Virgin Islands (British territory), 2. Bermuda (British territory), 3. Cayman Islands (British territory), 4. Netherlands, 5. Switzerland, 6. Luxembourg, 7. Jersey (British dependency), 8. Singapore, 9. Bahamas, 10. Hong Kong. For more information on the index and the axis of tax avoidance, see here.
Analysis by the Tax Justice Network of country by country reporting data published in early 2020 by the US ahead of the OECD’s publishing of country by country data found that the axis of tax avoidance cost EU member states over $27 billion in lost corporate tax a year solely from US multinational corporations operating in the EU.
Of the 12 jurisdictions on the EU tax haven blacklist, data was only available for 8 jurisdictions for the State of Tax Justice 2020 to analyse: Barbados, Fiji, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, Seychelles. Due to the very small sizes of the economies of the four jurisdictions for which data is not available (American Samoa, Anguilla, Guam, US Virgin Islands), the absence of the jurisdictions from the analysis of the EU blacklist is not expected to have any material impact on the analysis.
Analysis by the Tax Justice Network in 2018 found that the EU tax haven blacklist blocks just 1 per cent of financial secrecy services threatening EU economies.
Analysis of the EU’s decision to blacklist British Overseas Territory Cayman in February 2020 is available here.
Under the excess profit tax, each country where the multinational corporation operates would have the right to tax a share of the corporation’s global excess profits according to the country’s local corporate tax rates. The size of the share of excess profits that is apportioned to a country to tax would be based on the share of the multinational corporation’s workforce and sales based in the country. Meaning, countries where multinational corporations hire employees, run factories and offices, and sell goods and service – ie, where they genuinely do business – will have the right to tax a bigger share of the corporation’s excess profit at local corporate tax rates than countries where the corporation only exists as rented mailboxes for profit shifting purposes. This method of taxing global profit is known as unitary tax.
Tax losses by regions and income groups:
Region or group
Total tax loss
Tax loss to corporate abuse
Tax loss to private abuse
Equivalent health budget
Equivalent nurses’ salaries
World
$427,782,662,532
$244,903,619,563
$182,875,735,367
9.22%
33,913,688 nurses
Higher income
$382,744,587,716
$202,166,248,454
$180,575,939,262
8.41%
16,289,176 nurses
Lower income
$45,021,135,653
$42,737,371,109
$2,282,856,942
52.36%
17,623,965 nurses
Africa
$25,775,160,683
$23,242,133,255
$2,532,717,666
52.46%
10,130,883 nurses
Asia
$73,372,803,475
$46,190,152,354
$27,182,053,281
6.48%
11,371,221 nurses
Caribbean/ American Isl.
$1,429,594,178
$642,376,849
$784,817,330
12.41%
182,632 nurses
Europe
$184,087,359,433
$79,529,965,976
$104,557,393,457
12.58%
4,636,180 nurses
Latin America
$43,111,038,773
$40,123,746,097
$2,987,292,676
20.41%
6,225,731 nurses
Northern America
$95,099,311,659
$52,551,805,288
$42,547,506,371
5.70%
1,252,972 nurses
Oceania
$4,907,394,330
$2,623,439,745
$2,283,954,586
4.79%
114,069 nurses
Tax losses inflicted on others by regions and income groups:
Region
Total inflicted tax loss
Inflicted tax loss due to corporate abuse
Inflicted tax loss due to private abuse
Share of global tax loss responsible for
Higher income
$419,574,170,899
$237,340,746,418
$182,233,424,481
98.08%
Lower income
$8,209,131,410
$7,567,170,747
$641,960,663
1.92%
Africa
$4,739,131,071
$3,582,718,497
$1,156,412,575
1.11%
Asia
$76,216,744,183
$67,520,067,437
$8,696,676,746
17.82%
Caribbean/ American Isl.
$115,808,151,640
$58,123,586,045
$57,684,565,595
27.07%
Europe
$187,962,465,805
$99,803,107,457
$88,159,358,348
43.94%
Latin America
$5,536,878,049
$3,447,622,190
$2,089,255,859
1.29%
Northern America
$31,497,411,993
$7,557,038,524
$23,940,373,469
7.36%
Oceania
$6,022,862,769
$4,873,777,015
$1,149,085,754
1.41%
Top 15 countries most responsible for global tax losses:
Country
Tax loss inflicted on other countries
Tax loss inflicted by enabling corporate tax abuse
Tax loss inflicted by enabling private tax evasion
Share of global tax loss responsible for
Cayman Islands
$70,441,676,611
$22,819,899,267
$47,621,777,344
16.47%
United Kingdom
$42,464,646,560
$13,671,390,701
$28,793,255,859
9.93%
Netherlands
$36,371,503,832
$26,593,707,934
$9,777,795,898
8.50%
Luxembourg
$27,607,634,145
$9,283,427,114
$18,324,207,031
6.45%
United States
$23,635,935,547
$0
$23,635,935,547
5.53%
Hong Kong
$21,047,358,012
$16,331,010,356
$4,716,347,656
4.92%
China
$20,045,803,268
$20,045,803,268
$0
4.69%
British Virgin Islands
$16,295,774,429
$10,405,615,250
$5,890,159,180
3.81%
Ireland
$15,830,940,779
$6,068,846,053
$9,762,094,727
3.70%
Singapore
$14,633,842,974
$12,221,060,747
$2,412,782,227
3.42%
Bermuda
$13,843,144,682
$10,860,143,218
$2,983,001,465
3.24%
Switzerland
$12,844,985,635
$10,953,644,082
$1,891,341,553
3.00%
Puerto Rico
$9,177,305,410
$9,177,305,410
N/A
2.15%
Jersey
$7,911,160,368
$4,465,999,479
$3,445,160,889
1.85%
About the Tax Justice Network
The Tax Justice Network believes a fair world, where everyone has the opportunities to lead a meaningful and fulfilling life, can only be built on a fair code of tax, where we each pitch in our fair share for the society we all want. Our tax systems, gripped by powerful corporations, have been programmed to prioritise the desires of the wealthiest corporations and individuals over the needs of everybody else. The Tax Justice Network is fighting to repair this injustice. Every day, we equip people and governments everywhere with the information and tools they need to reprogramme their tax systems to work for everyone.
About Public Services International
Public Services International is a Global Union Federation of more than 700 trade unions representing 30 million workers in 154 countries. We bring their voices to the UN, ILO, WHO and other regional and global organisations. We defend trade union and workers’ rights and fight for universal access to quality public services.
About the Global Alliance for Tax Justice
The Global Alliance for Tax Justice is a growing movement of civil society organisations and activists, united in campaigning for greater transparency, democratic oversight and redistribution of wealth in national and global tax systems. We comprise the five regional tax justice networks of Africa, Latin America, Asia, North America and Europe, which collectively represent hundreds of organisations.
Produced and hosted by Naomi Fowler of the Tax Justice Network
This is what I can’t tolerate anymore, the lies by these people that all day long are talking about free speech and the fight against corruption. This cannot continue. Every story we are looking at now today in the Arab world will have a connection to one of those safe havens, and God knows how can you find the real owners if every jurisdiction says, sorry, we can’t give out any data, helping people that should be exposed. You know, your country and US and all these offshores are providing all the secrecy and the ability to shield the beneficial ownerships and the structures of these companies.”
~ Rana Sabbagh, OCCRP, the Organised Crime and Corruption Reporting Project and founder of the Arab Reporters for Investigative Journalism
It is not okay anymore in 2020 to own a business, to own a ship that you have deliberately hidden the ownership of through hugely complicated structures to either avoid tax or minimise your tax liability or reduce your safety standards.”
~ Thom Townsend, Open Ownership
Joe Biden and his team must address the colossal power of the corporate world, which after decades of mergers and acquisitions has become super concentrated into the hands of monopoly corporations in virtually all sectors…it ranks alongside all the other huge priorities facing the incoming administration, including climate crisis and tackling inequality and restoring trust in democracy.”
~ John Christensen, Tax Justice Network
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Further Reading:
A Hidden Tycoon, African Explosives, and a Loan from a Notorious Bank: Questionable Connections Surround Beirut Explosion Shipment, OCCRP coverage
Beirut blast: a night of horror, captured by its victims
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Despite numerous data challenges, economists have established that the multinational corporations’ reported profits are not well aligned with their economic activity across countries. However, uncertainties remain about the extent and patterns of this misalignment. In our recently published research article with Petr Janský, we analyse data on German-based multinational corporations and their foreign affiliates collected by the Deutsche Bundesbank. We find that the world’s tax havens attract a considerably higher share of German multinational corporations’ profit than economic activity, while in Eastern European countries, most developing countries and some big European countries reported profits are much lower than economic activity would suggest.
How do we measure corporate profit misalignment?
The term ‘misaligned profit’ describes the share of profits reported in a country that is not in line with the share of economic activity reported in the respective country. We compute each country’s share in the total profits of the sample and compare it to each country’s share in total economic activity measured in terms of number of employees, tangible and intangible assets, and turnover. We also use a measure of activity (‘CCCTB’) which is weighted one-third tangible and intangible assets, one third turnover and one-third number of employees. This is similar to the formula proposed by the European Commission for the Common Consolidated Corporate Tax Base (CCCTB). However, due to data limitations our CCCTB measure does not exactly correspond to the European Commission’s proposal. For example, we cannot split the factor ‘employees’ between remuneration costs and number of employees and we cannot distinguish between tangible and intangible assets in our data.
If actual profits are higher than what would be estimated based on the share of economic activity, this gives rise to ‘excess’ profit. If actual profits are lower than what would be estimated based on economic activity, this gives rise to ‘missing profit’. In order to measure the overall scale of misalignment, we compute how much profit is in the ‘wrong’ place by adding up the “excess profit” of jurisdictions where there is no concomitant economic activity.
For our analysis, we use data collected by the Deutsche Bundesbank, which include confidential data on foreign direct investments from the Microdatabase Direct Investment (MiDi) and a combination of confidential and publicly available balance sheet data from the JANIS database. Our main sample includes on average 1236 German parent companies per year with 5047 foreign affiliates in 178 jurisdictions for the years 1999-2016. About 60 per cent of observations stem from the manufacturing sector, and about 30 per centfrom the service industries.
How large is the misalignment of reported profits and economic activity in total and by country?
Figure 1 depicts the share of global profits that would need to be reported in other jurisdictions in order to be aligned with economic activity on average for the years 1999-2004, 2005-2010, and 2011-2016.
We find that the scale of misalignment varies depending on the factor that we use to proxy economic activity. Global profit misalignment has risen when measured in terms of assets and turnover but not in terms of employees. When we look at the yellow column which combines of all three factors, we see no clear trend of the scale of misalignment. It has rather remained stable over time at about 10 to 13 per cent of total reported profits.
When we look at the distribution of misalignment across countries, our results are broadly in line with the literature: High-tax countries and most developing countries are missing-profit countries, while the world’s tax havens attract a considerably higher share of profits than economic activity. The Netherlands are the most notable example with about 80 per cent of reported profits being misaligned with economic activity, closely followed by the other tax havens which had to be grouped together due to the confidentiality requirements. Interestingly, the remaining EU tax havens are still more important for German MNCs than the rest of the world’s tax havens. The other excess-profit countries are mostly resource-rich countries from the Middle East, Australia and Argentina. The classification of China as an excess-profit country is puzzling. It might be explained by the exceptional combination of low cost of labour and capital combined with increasingly high value-added activities which we cannot control for in our approach. Another surprising result is the classification of all Eastern European countries as missing-profit countries despite their very low corporate tax rates.
Our results do not allow for a clear classification of Germany as an excess or missing-profit country. This is because the relative weight of misalignment is relatively low (only 2 per cent of total gross profits according to figure 2) and outcomes are not consistent over time, differ by activity factor and by the tax rate measure we use in order to compute the pre-tax profits. This is surprising as many studies find that multinational corporations shift profits out of Germany which would be consistent with Germany being a missing-profit country. However, note that we explicitly analyse a sample of German parent companies which does not include the German-based affiliates of foreign mutlinationals. Our results might thus be in line with a headquarter bias in profit shifting, in the sense that parent companies rather shift profits in between affiliates in order to minimize their global tax payments but do not necessarily shift profits out of headquarters or do so to a lesser extent. This would be in line with the results by other researchers who find that European multinational corporations are reluctant to shift profits away from their headquarters.
Our data suffers from several limitations. There is a lack of data on pre-tax profits and compensation of employees of foreign affiliates. As mentioned before, we are not able to distinguish between tangible and intangible assets which probably leads to an underestimation of misalignment. Further, our sample might not be representative of the whole population of German-based MNCs. Still, we think that – in the absence of representative data on MNCs and in particular on domestic MNCs – researchers can combine information from different pieces of data as a second best.
Conclusion
We analyse a sample of German-based parent companies and their foreign affiliates and find that about 10 to 13 per cent of reported profits are misaligned with economic activity. The distribution of „missing“ and „excess“ profits follows typical patterns: We find greater profits than activity reported in tax havens, and less profits than activity in developing countries, big high-tax countries and in all Eastern European countries despite their very low tax rates. Our results do not provide an indication of excessive profit shifing from German-based parent companies to their foreign affiliates but would be consistent with significant profit shifting activities between affiliates. This might indicate that foreign affiliates are more relevant in multinationals‘ strategies of tax minimisation. Due to our descriptive approach, we are not able to attribute the observed extent of misalignment to particular reasons. Profit shifting is only one of several possible explanations. Still, the outstanding role of the world’s tax havens in our sample points in this direction and thus requires further explanation.
The Transnational Institute has just published a report setting out ten proposals to mobilise resources to cover the cost of the global COVID-19 pandemic and to pay for the transition away from the fossil fuel economy. As the report points out in its conclusion, the multiple crises facing both the global North and the global South have shifted the Overton window of what is economically feasible. And as the report also makes clear, the means for building back better are readily available provided governments are prepared to take bold measures to, for example, tax wealth and corporate profits, reform fossil fuel subsidies, tax carbon, cancel debt, and achieve the UN sustainable development goals.
On the expenditure side the report identifies six priority areas of what might, in the words of economist Jayati Ghosh, shape “a global multicoloured new deal: red, green and purple.” These expenditures are summarised as follows:
To resource these expenditures TNI identifies ten proposals, most if not all of which will be familiar to readers of this blog, including a global wealth tax; a tax on income from wealth held through offshore structures; an excess profits tax; reforming corporate income tax; a financial transactions tax; removing fossil fuel subsidies, and so on. As the diagram below suggests, the potential revenues from these proposals are more than sufficient to pay for the expenditures identified above:
The core message of this report is that the gravity of the multiple crises facing humanity requires entirely new economic, political and cultural models that place care for humans, and for planetary life, above the pursuit of profit. If we are to meet the challenge of building back better, the resources to achieve this better future are to hand – “so long as the rich and powerful are made to pay”.
This new paper describes why beneficial ownership regulations shouldn’t exempt companies listed on a stock exchange. Securities’ disclosure regulations are not adequate for identifying beneficial owners. In addition, definitions are subject to loopholes that affect identifying all relevant end-investors.
As assessed by the Tax Justice Network’s Financial Secrecy Index and summarised by our paper on the 2020 State of Play of Beneficial Ownership Registration, more than 81 jurisdictions have approved laws requiring beneficial ownership to be registered with a government authority. However, many legal frameworks (including the EU Anti-Money Laundering Directive) exempt listed companies from the scope of beneficial ownership registration, based on what we consider to be a wrong interpretation of the Financial Action Task Force recommendations.
The exemption benefitting listed companies is usually based on the fact that some other regulator, eg the securities or financial regulator or the stock exchange, is supposed to already have that information. However, this brief looks at securities regulations available in some countries, eg the US and the UK, showing that securities regulation doesn’t necessarily cover beneficial ownership information.
In the case of the US, the Securities Exchange Commission (SEC) has form 13D which is even called “beneficial ownership report”. However, it doesn’t necessarily refer to a natural person (which is the key element of the beneficial ownership concept according to the Financial Action Task Force and the OECD’s Global Forum).
Other countries, eg Ecuador, India and the Philippines do cover natural persons when requiring listed companies to identify their beneficial owners. Nevertheless, thresholds are too high to be able to identify all relevant investors.
This brief explains why we need a comprehensive approach to beneficial ownership registration to ensure that all legal vehicles, including those involved in passive investments, are subject to proper transparency. The brief also proposes measures to address the challenges, including our previous paper on the secrecy that surrounds listed companies and investment funds.
The United States has long relied on informal agreements with private sector institutions to assert its interests in the global financial system. If we are to fight kleptocracy, we need to make this privately run plumbing more accountable to international institutions, argues Edoardo Saravallein this blog reproduced from a recent edition of Tax Justice Focus.
Getting a Grip on Global Financial Infrastructure
Edoardo Saravalle
When President Trump defied the international community and left the Iran nuclear deal in 2018, he had an unlikely partner: the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The Belgian SWIFT provides the payments-messaging services that, in the words of Federal Reserve Chairman Ben Bernanke, are ‘part of almost every international money transfer.’[1] So when SWIFT decided to ban certain Iranian banks from its services—over the protests of European governments—it packed a major punch to Tehran’s economy.
Today, privately-controlled financial nodes like SWIFT are regular partners of U.S. foreign policy. This may soon change. As Washington focuses more on transnational economic threats like kleptocracy and tax evasion, infrastructure providers may consider their economic self-interest before eagerly cooperating. Public-private partnerships are a shaky foundation for U.S. foreign policy, and the United States should not let private actors control the plumbing of the international economy. Instead, it should seek global cooperation to create a better system.
SWIFT is just one of the services that make up the international economy’s plumbing. To make metals trading easier, there is the London Metal Exchange (LME) that enables futures trading and licenses warehouses around the world. To ensure the smooth payment and tracking of securities, there are Clearstream and Euroclear. To make investing in emerging markets easier, J.P. Morgan created the Emerging Market Bond Index which brings together securities across a wide swath of countries. And the London Inter-bank Offering Rate (LIBOR), a changing interest rate based on a survey of bank employees, is calculated to ensure adjustable interest rates that mirror market conditions.
These ‘infrastructures’ started as ways to make commerce easier, then became central to the functioning of global finance, and now are key components of U.S. power. The SWIFT threat is one of the strongest weapons in the U.S. economic arsenal. Even major players like Russia and China have come to fear a cut-off. But SWIFT is not alone. The LME magnified the effect of U.S. sanctions against Russian aluminum producer Rusal by suspending the company from its exchanges. Clearstream has blocked Iranian and Russian assets, and J.P. Morgan zeroed out Venezuela in its bond index, restricting capital flows to the country.
While these infrastructures do promote U.S. foreign policy, they further a limited vision of it: one where Washington enforces norms and goals against specific countries. But U.S. foreign policy is changing. During his campaign, Vice President Biden has promised a ‘foreign policy for the middle class,’[2] one that unites foreign and domestic goals, that combines economic and security goals, and that targets tax havens and corruption as ‘drivers of inequality.’[3] This would mean taking on a world where 8 percent of global household wealth hides in tax havens.
International financial infrastructures should be great partners in tackling these transnational problems. What better way to monitor and check international flows of money between shady jurisdictions than networks like SWIFT or ClearStream that make these flows possible? The NGO Tax Justice Network has called for ‘SWIFT statistics for all’ to track financial flows and tax evasion, and Georgetown Professor Stefan Eich has argued SWIFT contains an ‘an untapped utopian promise’ of ‘global monetary and financial regulation’ due to the fact that all financial transactions need to flow through it.[4]
However, past cracks in U.S. cooperation with infrastructures suggest that leveraging these privately-controlled choke points might not be so easy. First, these nodes did not help Washington out of altruism. It took years of fines and enforcement by the United States to ensure cooperation. Clearstream paid $152 million in fines over allegations that it held $2.8 billion in securities for the Central Bank of Iran. The board of SWIFT is made up of representatives for the world’s largest financial institutions, so it faced two layers of threats: enforcement against the board-member banks and against the company itself. This danger presented itself in 2018, when Iran hawks outlined the option of sanctioning member banks if SWIFT did not ban the Iranian banks.
Even more pressure will be necessary in the future. Faced with these legal costs and compliance headaches, the infrastructures limited their risk by cutting off Iran. The countries that enable tax evasion, though, are far more plugged into the global financial system. It will be harder for enforcement actions to convince infrastructures to cut off or pressure these countries or banks. Prosecutors’ nerve may fail before taking on major European jurisdictions, and U.S. policymakers may choose transatlantic conciliation over more friction regarding tax enforcement. Plus, it will be harder to count on the self-interest of the private sector: their financial interests will be far more at stake with tax havens compared to Iran.
Furthermore, successful coercion by the U.S. might not ensure consistent cooperation from these infrastructures. In the past, they have gone along with U.S. requests while also furthering other competing agendas. British banking giant HSBC has frozen the account of a Hong Kong pro-democracy activist and has come under fire, along with British bank Standard Chartered, for backing the region’s controversial national security law. These banks have acted even as U.S. sanctions forced financial services firms to cut ties with pro-mainland Hong Kong government figures.
In one extreme case these infrastructures enabled non-state actors to assert themselves over sovereign governments. Bond servicing infrastructures enabled hedge funds to enforce their will over the government of Argentina. Facing a court order, Buenos Aires discovered that it could not pay all other bondholders through the traditional payment infrastructures as long as it refused to pay the hedge funds.
Privately-controlled infrastructures’ cooperation with competing agendas could harm U.S. anti-kleptocracy and anti-evasion goals. Countries that currently benefit from tax evasion and the unfair financial architecture of the global economy, whether by offering exceedingly low tax rates or allowing owners of ill-gotten wealth to shield their identities, would fight these U.S. measures and try to sway the infrastructure providers. In the past, countries have protested, refused to cooperate, and (often rightly so) complained about U.S. hypocrisy. In 2014, the United Kingdom opposed Russia sanctions that would have harmed its financial sector and spearheaded efforts to build a relationship with Chinese finance. Still, in most of these cases, U.S. threats have convinced recalcitrant countries.
A transnational anti-evasion and anti-kleptocracy campaign would run into a new problem as well. The success of such an effort would depend on its ability to sway the private sector—giving added influence to the same entities it is trying to coerce. While a SWIFT board member or a securities processor is agnostic about Iran policy, as long as it does not have economic interests in play, it will have strong thoughts about continuing to serve the world’s wealthiest citizens—and in keeping its own tax rate low. This will make it more appealing for these infrastructures to form coalitions with like-minded countries bent on protecting their privileges in today’s unfair global financial system.
Finally, these privately-run infrastructures can be outright corrupt, so even if they were to cooperate they would be unsteady partners. The LIBOR scandal makes this danger clearest. The LIBOR is a number that is central to the functioning of global credit markets. Lenders adjust the rates they offer borrowers based on LIBOR. According to the New York Federal Reserve Board, there are about $1.3 trillion in consumer loans and $5.2 trillion in corporate loans and bonds based on LIBOR.[5] The number, soon to be shelved in light of its legal problems, shifts daily based on surveys of bankers. Following a major investigation, the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission found that traders were cooperating to game these surveys. They would adjust their responses in order to make money on their positions. In the process, they shaped the cost of borrowing for borrowers all over the world. The LIBOR case highlights the underlying peculiarity of the infrastructures: though they are faceless and globally influential, they are usually made up of just a few players who can tilt the playing field. The incentive to tilt the field toward the private sector would be even more pronounced in this new foreign policy context.
Washington should not fight kleptocracy and tax evasion on such an unstable foundation. It should not rely on private partners that require constant coercion, that work with countries and private interests with competing agendas, and that allow corruption. Instead, Washington should ensure supranational control of these infrastructures so that they respond to the goals and wishes of the international community.
Turning the infrastructures of global finance into international organizations will have its costs. Today, sanctions often allow Washington to gets what it wants quickly and unilaterally, avoiding the diplomatic headaches that come with multi-lateral decision making. And indeed, making bond-servicing or payment processing plumbing the joint responsibility of international governments might entail more of the gridlock and international squabbling associated with the United Nations and other international organizations.
Still, this would be a far-sighted plan for the United States. States should not delegate key nodes of the global economy to private actors with their own agendas, particularly as they undermine states’ goals. As the undercutting of pro-democracy activists in Hong Kong suggests, private organizations can be untrustworthy partners. As the power-politics of the global financial system evolve, the United States might lose its uncontested influence as infrastructures hedge their bets by appeasing other countries. International control would therefore bring realpolitik as well as moral benefits.
As long as states are in charge, Washington will have a seat at the table. From this seat, it will be able to carry out a far-reaching and innovative foreign policy aimed at righting an unfair financial system. Internationally-controlled financial infrastructures will ensure that it is public goals, not private interests, that set the agenda.
Edoardo Saravalle is a former researcher at the Center for a New American Security. This article was first published in The American Interest on September 4, 2020.
[1] ‘Highlights: Bernanke’s Q&A testimony to House panel’, Reuters, February 29, 2012
[2] Joseph Biden, ‘Why America Must Lead Again’, Foreign Affairs, March/April 2020
[3] Jake Sullivan, ‘What Donald Trump and Dick Cheney Got Wrong About America’, The Atlantic, January/February 2019
[4] Stefan Eich, ‘SWIFT: A Modest Proposal’, The Nation, October 17, 2018
[5] ‘Second Report: The Alternative Reference Rates Committee’, Federal Reserve Bank of New York, March, 2018
The FinCen files leak disclosed information on “suspicious transaction reports” filed by banks between 2000 and 2017 to the US Financial Intelligence Unit (“FinCen”) in charge of monitoring anti-money laundering.
Although a lot could be said about this leak, there are many outrageous highlights: the leak refers to transactions of $2 trillion (twelve zeros: $2,000,000,000,000). Some banks kept on processing transactions on an account despite several red flags. And the worst part is it appears that both banks and regulators consider that to comply with the law and prevent risky transactions it’s enough just to file suspicious transaction reports, regardless of their quality or timing. That’s like saying that a company is complying with regulations on beneficial ownership registration even if they registered “Mickey Mouse” as the beneficial owner.
But no one is surprised. As described by anti-corruption campaigner Anthea Lawson:
If banks are sometimes complying, and many times only formally “complying” (by filing low-quality or outdated suspicious transaction reports), but money laundering schemes keep popping up (Azerbaijani Laundromat, Moldova Laundromat, Danske Bank, etc.), it’s quite clear that money laundering isn’t being prevented (and even when it’s discovered, it’s very hard to recover any of the money). It’s clear that the system is part of the problem. David Lewis, the Executive Secretary of the main international body in charge of anti-money laundering regulation, the Financial Action Task Force (FATF), confirms this. As reported by the International Consortium of Investigative Journalists (ICIJ):
Although most countries now have dedicated laws and regulations to combat money laundering, Lewis said: “they are rarely being used effectively, or to the extent that we would expect….
‘I would sum up the results as ‘everyone is doing badly, but some are doing less badly than others,’ Lewis said…
Lewis said many countries had only shown a last-minute commitment to tackling money laundering because they faced an upcoming FATF evaluation. “You see a sudden uptick in money laundering investigations and activity as they prepare to compensate for [past inaction], or to tell a good story to the assessors,” he explained.
As Lewis suggests, part of the problem may be on enforcing current laws.
However, ensuring governments properly resource authorities tackling financial crimes, given countries’ lack of interest or their need to face with multiple challenges, including urgent matters (eg Covid-19), is a long shot. The question is how serious governments really are about tackling corruption and money laundering, as the Hudson Institute and Kleptocracy Initiative’s Nate Sibley tweeted:
Before dunking on FinCEN, remember the tiny agency tasked—effectively—with policing the integrity of the global financial system has an annual budget of just $120 million. That’s less than the US government accidentally sends in benefits to dead federal employees each year.”
This blog post has some ideas on what we think should happen to improve the system without merely hoping that current laws will one day be enforced. Of course, part of the problem would be solved if banks and other enablers directly involved with customers and their money were to do a proper job. This would require going beyond asking customers for information and just believing everything they say. After all, a lawyer from Cyprus may (legally) be the beneficial owner of an entity that opened a bank account, but that doesn’t explain the source of the funds, let alone why millions of dollars are being channelled through that account. Banks are already required to apply enhanced due diligence and other measures if they have suspicions, so this is a matter of enforcement.
This blog post proposes new objective measures that would help different players obtain information while discouraging illegal schemes. To put this in perspective, a regulation could say “check that the customer isn’t lying”. While this is a matter of effort and enforcement, our proposed measures neither contradict nor modify that main goal, but try to impose new provisions – for example – “ask for a copy of their ID” which may be easier to enforce or at least to monitor, than the rather general goal of ‘detecting lies’.
First, countries should apply these things, which we’ve been calling for for years:
A: Availability of relevant ownership data
Beneficial ownership of account holders: Banks should not be allowed to open accounts, hold them or do any transaction if they haven’t determined the beneficial owner of the account holder (beyond doubt). Ideally, determining the beneficial owner of an account should go beyond asking for corporate information proving that ‘John’ is the beneficial owner because he is the shareholder of Company A, which opened the bank account. Banks should try to determine whether John is really benefitting, controlling and able to justify the source of funds and the movement of money through that account.
SWIFT messages with beneficial ownership data. The SWIFT messaging standard used to communicate international bank transfers among banks should be upgraded to require data on the beneficial owner of the sender and recipient account to be included in the SWIFT message, to enable the sending bank, the recipient and any intermediary (eg correspondent bank) to run proper customer due diligence checks. We have written more on this in this blog post. Alternatively, until SWIFT upgrades its standard to add beneficial ownership data, correspondent banks should require beneficial ownership data from any sending and recipient bank before they allow a transaction to take place.
Just as the US obliged SWIFT to hand in information for anti-terrorism purposes, the US and the EU should now require SWIFT to upgrade the standard to include beneficial ownership data. As discussed in point 9 below, the US and the EU could also require all local banks which are members of SWIFT to request that SWIFT upgrades the standard in this way.
3. Public beneficial ownership registries: Governments should make beneficial ownership information publicly available in open data format for all types of legal vehicles, including trusts, so that banks all over the world may cross-check the beneficial ownership information declared by their customers.
5. Involvement of banks in verifying registered beneficial ownership data: Banks (and enablers in general) should report discrepancies between the information declared by their customers and the information contained in beneficial ownership registries, as already required under the EU Anti-Money Laundering Directive.
6. Banks detecting discrepancies amongst each other: In addition to banks reporting discrepancies to the beneficial ownership register, they should be able to exchange customer information in a confidential way so they can detect cases where the same customer has given inconsistent information to two different banks. The UK’s financial intelligence unit (FCA) has been working on pilots for this purpose. If mismatches are detected and persist beyond mere simple errors, authorities should automatically be required to investigate.
7. Beneficial ownership registries as sources of compliant customers: Beneficial ownership registries should warn users about any legal vehicle (eg company, trust) with redflags, for example if a vehicle failed to register or update information, if its information doesn’t match other government databases, or if discrepancies have been reported. Banks shouldn’t be allowed to operate (open an account or do a transaction) with any entity marked with a redflag warning on the beneficial ownership register. We described how this could work in the Annex of our paper on beneficial ownership verification.
C: The specific role of bank
8. Systematic analysis to detect money laundering: As presented by Howard Cooper and Chris Ives from Kroll, banks should do much more than just ask information from each customer and analyse transactions on an isolated basis. Instead, they should analyse their full customer base to detect cases of connections between apparently unrelated customers. For instance, customers who share the same legal owners, beneficial owners, director, power of attorney, addresses, IP address, or whose transactions are highly related (either because they mirror each other or because transactions only take place among the same accounts). This has been described further here.
9. SWIFT as a source or centralisation of global anti-money laundering detection: While banks should do more systematic analyses of their customer base and transactions (see point above), this will only detect transactions involving each particular bank. However, money laundering schemes may involve many banks from many countries. For this reason, we have proposed that SWIFT, which already provides money-laundering services to some banks, should help detect or red-flag global money laundering schemes. Alternatively, if SWIFT is unable or unwilling to do this, governments should oblige SWIFT to hand over raw data for the Central Banks or financial intelligence units to conduct those checks, just as SWIFT provides transaction data to the US for the detection and prevention of terrorism.
If SWIFT refuses to do this claiming that it can only implement changes based on what its member banks require, the solution may be for each government to demand any local bank (that is a member of SWIFT) to require SWIFT to implement this centralisation and monitoring work (as well as to update the SWIFT system to include beneficial ownership data, as mentioned in point 2 above).
A first partial solution would be for banks to report all of their transactions on a daily basis to a government authority, eg the Central Bank or the Financial Intelligence Unit, so that analyses can be run at the national level. This wouldn’t be as good as centralising and analysing information at the global level, but it would be a very good start. For instance, banks in Australia must report the equivalent of SWIFT data for every international bank transfer to a central authority.
Now some new ideas we haven’t discussed before:
10. Checking the ownership chain up to the beneficial owner. Banks should refrain from opening accounts unless they can directly check the ownership of every entity integrating the ownership chain of the customer, in the corresponding commercial register. For instance, if the customer is Company A from the UK, owned by Company B from Delaware and allegedly owned by John, a bank should be able to obtain legal ownership information from the registries available in the UK and the US to confirm that John is the beneficial owner. If any of the country links fails to provide this information, the bank shouldn’t open the bank account, regardless of the information self-reported by the customer. This would put pressure on jurisdictions to establish public registries of legal ownership and beneficial ownership.
11. Banks exchanging information on suspicious cases and patterns. As explained in point 6, the UK is working on a system for banks to confidentially exchange information with each other to detect discrepancies (without disclosing the actual details of their customer). By the same token, banks should be able to confidentially exchange with each other (without access to the actual personal details), or through a central database held by the financial intelligence unit, information about trends, patterns as well as cases of closure or rejection of accounts, or the filing of a suspicious transaction report.
For instance, if bank A wanted to make a bank transfer for customer X, they would have to check this central database to make sure that no bank has closed or reported a transaction for that same customer. The lack of a warning or the presence of a warning shouldn’t be binding, but the presence of a red-flag reported by another bank (without knowing which one), should alert the bank to the need to potentially do enhanced due diligence. If the red flag warning indicated why the account is flagged, eg “suspicions on the source of funds”, the bank would then know what to look into.
A bank would still be able to go along with the transaction, but if in the end it is revealed that the transaction was involved in a money laundering case, the bank should be subject to heavier sanctions, given that they disregarded the warnings by other banks. This would prevent risky customers from finding more ‘flexible’ banks to open their accounts with.
At the very least banks should be able to share these (anonymous) customer risks within members of the same banking group, even if located abroad. Given that these measures also create risks (eg banks relying solely on third-party risk assessments, de-risking which excludes certain people), these measures should be monitored to prevent negative consequences, and could be reserved for extremely high-risk situations, where the money laundering risk is almost certain (eg similar to an in fraganti illegal activity).
12. Hierarchical approval for moving forward with any customer that triggered a suspicious transaction report. Any risk situation, eg establishing a relationship with a customer rejected or flagged by another bank (based on point 11), or moving forward with a bank transfer that triggered the filing of a suspicious transaction report should require the justification and signature of a responsible hierarchical authority. In other words, if a situation, customer or request of a transaction triggered the filing of a suspicious transaction report, a bank should only be allowed to move forward if a hierarchical authority puts on the record a written justification and authorisation to move forward. This could be used in the future to prove reckless actions by banks and their employees, in case of a money laundering investigation.
13. Track or prevent transactions. An alternative or addition to the two points above would be that the recipient bank of any transaction that was alerted or that triggered a suspicious transaction report should monitor that account for, say, 30 days. During that time, any subsequent bank receiving funds from that account should be subject to the same tracking and monitoring requirement. If the customer then intended to do a transaction that prevented further tracking (eg a bank in a different country, the withdrawal of money in cash or its conversion into crypto-currencies), such transaction should be delayed until the original bank (or the financial intelligence unit) confirms that the subsequent transactions do not involve any money laundering risk.
The way to enforce this would be the following: the bank that filed the suspicious transaction report, and all other banks involved (the recipient bank and any subsequent bank that receives funds from the recipient account) would have to report all the transactions related to those accounts for say, 30 days to the Financial Intelligence Unit. At the very least, this extra monitoring may discourage banks from accepting those customers or allowing the transaction. The alternative, not to file a suspicious transaction report, may be a breach of the law (that’s why banks currently file suspicious transaction reports, sometimes excessively).
D: Suspicious transactions reports
14. Report suspicious transactions in real time. Any suspicious transaction report filed later than 24 hours or 48 hours should be subject to sanctions. Given that money may be transferred and withdrawn in minutes, suspicious transactions reports should occur in real-time, ideally before the transaction takes place. Reports about transactions that are weeks or months old are useful sources of information, but have no practical use in preventing illegal transfers or recovering money.
This requirement for real-time checks may result in financial transactions taking more time than they currently do (to allow for proper checks and approvals, many of which would be automated). However, people may have to adapt to this. (We never get tired of reminding people about the case of airports. Decades ago, taking a flight was much faster with much fewer security checks on the luggage and personal belonging of passengers. Now, people have got used to not having any liquids in their carry-ons, so it’s a matter of adaptation).
15. Preventing “over-reporting” as a way to compensate the low quality reporting. The current system where banks are penalised for failing to file a suspicious transaction report to the financial intelligence unit, or where no one actually monitors or sanctions the quality of the reports, only creates an incentive to file them excessively and with low-quality. For this reason, in addition to giving feedback on the quality of the suspicious transaction reports, and statistics of the filings by other banks, the financial intelligence unit should sanction poor quality, excessive filings.
16. Sanctioning the lack of actions by banks. While banks are required to file suspicious transactions reports, they should be sanctioned in cases where they have many red-flags on one account, and nevertheless, decide to allow the transaction. In other words, in addition to sanctioning the under-reporting of banks, there should be clear criteria to prevent particularly suspicious transfers from taking place (eg a customer that triggered more than two suspicious transaction reports, a transaction worth much more than the source of funds declared by the customer, etc). To avoid excessive bureaucracy, the system could work by shifting the burden of proof. While the presence of these factors should be an indication that the bank should not perform the transfer, if the bank is convinced and may prove that the transaction is safe, it could decide to go ahead. If proven wrong, the sanctions should be heftier. This should be accompanied by point 12, where a hierarchical authority must give written justification and authorisation for going ahead with the red flagged transactions.
E: Coordination and transparency
17. Disclosure of anti-money laundering breaches. Based on the “naming and shaming” measures, countries should publish details, including the name of the bank and the case description, of any failures to implement preventive measures (eg under-filing or over-filing suspicious transaction reports, transferring money without beneficial ownership data, etc). This will also help each bank determine which other institutions represent a higher risk. In addition, countries should publish information on the fines, prosecutions, investigations or other sanctions (including the firing of directors or other staff) to monitor enforcement of these preventive measures.
18. Regional coordination. To monitor enforcement of the measures and transparency requirements, and to have a global overview and analysis of money laundering schemes, regional or multi-national authorities should be established. For instance, Joshua Kirschenbaum [N2][AK3][AK4] has been calling for the EU to establish a European money-laundering supervisor.
Finally, it may be the case that heftier sanctions should be imposed in general, including personal liability for bank directors or losing of licenses to operate in certain countries.
If you have any comments on our proposals or if you have additional ideas, please write to [email protected]
* This blog post received very useful feedback and ideas from Markus Meinzer, Maira Martini, Agustin Carrara and others who prefer to remain anoymous.
It is tempting for reformers to adopt the language of national security in pursuit of policies that would help protect the interests of popular constituencies. But we should be wary that we don’t operate in a register that is far more congenial to our opponents. In this guest blog, reproduced from this recent edition of our flagship publication, Tax Justice Focus, Grace Blakeley draws the outlines of the trap, and suggests how we might best avoid it.
The Elephant Trap: The Language of National Security and the Politics of Liberation
Grace Blakeley
Discussing the wildfires that were ravaging the West Coast of America, Joe Biden recently called Donald Trump a ’climate arsonist’ as he called climate breakdown a threat to America’s national security. In a bid to display his patriotism, Biden has frequently drawn on the theme of national security – an issue generally reserved for those on the right; he recently tweeted that every day Trump is in office is ‘another day our enemies are emboldened and the American people are at risk.’
Confident in their understanding of the mantras of median voter theory, many politicians believe that in borrowing the right’s language, they can weaken its hegemony. From Prime Minister Tony Blair’s famous slogan ’tough on crime, tough on the causes of crime’, to later Labour leader Ed Miliband’s mugs emblazoned with ’controls on migration’, British politicians are just as likely to fall into this trap.
In fact, rather than weakening the appeal of right-wing politics, such narratives tend to strengthen it. Language is not neutral – by using certain frames, politicians bring to mind particular stories and narratives that shape voters’ emotions and behaviour.[1]
‘National security’ and ’law and order’ bring to mind a bundle of other concepts like war, terrorism and crime that catalyse feelings of fear and anger in many voters. And voters who are primed for emotions like fear and anger are more likely to vote for right-wing parties that promise authoritarian policies, delivered by a strong-man candidate who can defend the dominant voting group from the threat posed by ‘outsiders’ .[2]
Progressive candidates tend to do best when they are able to build mass support for social transformation based on a vision of society in which everyone has their basic needs met. Anat Shenker Osario’s research has shown that voters are more likely to opt for progressive candidates and policies when politicians use language that unifies people based on an understanding of their common wants and needs – their common humanity – than when politicians attempt to negate the frames of the right. In fact, Shenker-Osario’s research has shown that in attempting to negate the right’s frames, progressives actually reinforce the power of those frames.[3]
But frames aren’t enough on their own; to be used effectively, they have to be woven into a compelling story. Stories, Lakoff reminds us, have a particular structure (beginning, middle and end) and an easily-identifiable cast of characters (hero, villain, victim).[4] More often than not, those on the left only tell half a story: they identify a problem without saying who caused it – they give us a story with no characters, and leave themselves vulnerable to counter-narratives that shift the blame onto convenient scapegoats.[5] Progressive politicians who centre issues like inequality, poverty and climate breakdown without pointing out that these issues have been caused by a wealthy elite that grows rich on the hard work of others will often find themselves outmanoeuvred by right-wingers who concede that society has become too unequal, but instead blame benefits claimants and migrants.
This is not to say that any use of the words ‘security’ or ‘order’ by left wing candidates will fail to generate the desired response. But if we are to avoid the linguistic traps laid by the right these terms need to be reframed. Progressives, if they do use such language, must try to recontextualise terms like ‘security’ and ‘disorder’ by placing them within a wider narrative that shifts blame for in-security and dis-order away from working people and towards the ruling class. The former leader of the opposition Jeremy Corbyn, for example, used the term ‘national security’ in a speech after the Manchester bombings in which he condemned the UK’s foreign policy because it made the British people less safe. But he did so while providing a clear story as to why this was the case – complete with the war-mongering British ruling class as its central villain – and, crucially, while offering an alternative vision of the future based on our collective capacity to organise in order to hold this villain to account.
But when Biden talks about climate breakdown in terms of the threat it poses to national security, without placing this in the context of a coherent and compelling narrative that explains why, he is simply encouraging voters to feel fear at the prospect of wildfires, food shortages and extreme weather events. And unless he develops a coherent strategy to direct blame for these events towards those most responsible for them – fossil fuel executives, the bankers that fund them and the political class that subsidises them – voters will simply find another group to blame for their feelings of fear.
The fear catalysed by constant discussion of climate breakdown, without either a positive plan for dealing with it or a clear group to blame for it will create a space that the right will fill with more xenophobia, nationalism and division. It is easy to imagine future right-wing administrations responding to the national security threat posed by climate breakdown by shutting down borders, further restricting other states’ access to green technologies and – perhaps most terrifying of all – waging wars with other states over scarce resources. The British military has already begun to prepare for the resource conflicts it anticipates resulting from a 4 degrees Celsius rise in global temperatures that it now considers inevitable.[6]
The same lessons apply to questions of tax justice and inequality. As other contributors to this collection have noted, there is a convincing case to be made that systematic tax avoidance and evasion and inequality are both threats to our collective security. The FinCEN files have recently revealed how some of the world’s biggest banks – many headquartered in the UK – have allowed criminals to move their money around the world (BBC, 2020).[7] Occasionally, investigations reveal that the UK’s financial system is actively undermining the aims of UK foreign policy: UK banks have been fined for undermining sanctions on Iran and Russia, and for laundering money for Mexican drug cartels.[8]
Similarly, high levels of inequality undermine many other stated policy aims of successive UK governments. In recent years, a decades-long trend of falling violent crime rates has been reversed. There are numerous explanations for this reversal – including rising poverty and cuts to funding for youth services – but the single biggest predictor of violent crime over time and across countries is the level of inequality.[9]
Inequality and tax avoidance undoubtedly make our societies less safe, just as climate breakdown does. But the language we use to describe these trends is very important. By repurposing right-wing tropes to describe the problems we care about, we may subconsciously increase the power of reactionary, authoritarian politicians. Saying ‘inequality is a threat to our national security’ is likely to make voters feel scared, or angry at those who pose the perceived threat – both of which are emotions that are systematically correlated with higher support for right-wing populist parties.
Progressives need to develop their own language and their own stories to describe the problems our world faces. Shenker-Osario has undertaken in-depth research with volunteers in multiple different countries, and the same finding has consistently emerged: campaign messaging that engages the base and alienates the opposition is the most persuasive to undecided voters. Having the 15% of people who passionately agree with you – along with the 15% of people who passionately oppose you – repeat your message over and over makes that message infinitely more powerful. Trump, Johnson and others know this, and use this messaging strategy very effectively. But the left is falling into their trap by repeating right-wing frames like ‘national security’ and ‘law and order’; even when negating these frames, we increase their appeal in the general population.
Rather than feeding into narratives based on fear, it is critical for the left to paint a positive vision of the world we could build, if we are able to work together to defeat the vested interests that stand in the way. If we want to overcome climate breakdown, inequality and all the multiple other social problems that our world currently faces, we must clearly identify those problems, ascribe blame to those most responsible for causing them, and paint a clear vision as to how we can work together to overcome them. The Green New Deal, which aims to create jobs and reduce inequality while facilitating decarbonisation, is clearly an incredibly powerful frame that can be used to do just this. Rather than attempting to scare people into voting for the left – a strategy that can only ever help those on the right – we need to encourage them to believe that the world can be different. In other words, we need a politics based on the language of hope.
You can access the Tax Justice Focus edition on National Security here
Grace Blakeley is an author whose books include Stolen: How to Save the World from Financialisation and The Corona Crash: How the Pandemic will Change Capitalism. Grace is a staff writer at Tribune magazine, where she hosts thepodcast A World to Win.
[2] Rico, G, Guinjoan, M and Anduiza, E, ‘The Emotional Underpinnings of Populism: How Anger and Fear Affect Populist Attitudes’, Swiss Political Science Review 23(4): 444–461, 2017; Pavlos Vasilopoulos, George E. Marcus, Nicholas Valentino and Martial Foucault, ‘Fear, Anger, and Voting for the Far Right: Evidence From the November 13, 2015 Paris Terror Attacks’, Political Psychology, 40(4), 2019.
[3] Shenker Osario, A, Messaging this Moment: A handbook for progressive communciators, 2017
[4] Lakoff, G, Thinking Points, 2006; Lakoff, G, ‘Metaphor and War: The Metaphor System Used to Justify War in the Gulf’, Peace Research 2, pp. 25-32, 1991
Welcome to the 35th edition of our Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. Taxes Simply الجباية ببساطة is produced and presented by Walid Ben Rhouma. The programme is available for listeners to download and it’s also available for free to any radio stations who’d like to broadcast it or websites who’d like to share it. You can also join the programme on Facebook and on Twitter.
الجباية ببساطة #٣٥ – آل سعود في قائمة العائلات الأغنى في العالم وتحسّن لمصر في مؤشر العدالة الضريبية أهلا بكم في العدد الخامس والثلاثين من الجباية ببساطة، . في هذا العدد سلطنا الضوء على قائمة العائلات الأغنى في العالم والتي جاءت عائلة آل سعود في مراتبها الخمس الأولى. دائما في أخبارنا المتفرقة، تحدثنا عن عجز الموازنة في المملكة العربية السعودية في ظل تراجع ايرادات النفط و تنامي العجز التجاري التركي وتأثيره على مستوى سعر صرف الليرة التركية. في الجزء الثاني من الحلقة، حاور وليد بن رحومة الباحث الإقتصادي عمر غنام حول مؤشر العدالة الضريبية لسنة 2020 والذي سيصدر قريبا
Pour la 21ème édition de votre podcast en français sur la justice fiscale et sociale en Afrique et dans le monde proposée par Tax Justice Network avec Idriss Linge, nous revenons sur la récente sortie de l’ICRICT (la Commission Indépendante pour la Réforme de la fiscalité internationale des entreprises), qui souhaite voir l’Organisation pour la Coopération et le Développement Economique (OCDE), accélérer les réformes qu’elle a entreprises pour la réforme de la fiscalité internationale des grands groupes mondiaux. Nous revenons aussi sur la critique par un réseau d’ONG internationale, notamment Eurodad, qui estime insuffisante, l’Initiative actuelle de suspension du remboursement des dettes par les pays pauvres.
Et pour ceux qui ont l’application Stitcher et iTunes ect
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Attempts to tackle corruption have tended to work with a narrow, legalistic definition of the phenomenon, which leaves much that should concern us either out of focus or altogether invisible. In this guest blog, cross-posted from our recent edition of Tax Justice Focus on national security, Camila Vergara draws on a long-neglected strand in the history of political thought to provide an account of corruption that is equal to needs of democratic reformers.
Camila Vergara
Corruption seems to be everywhere, despite multiple laws, rules, guidelines, and institutions aimed at increasing government transparency and punishing undue influence. This is because corruption is seen as an individual crime rather than a systemic tendency. We need to move away from the ‘bad apples’ approach, in which corruption exists only because there are corrupt people in office, and look at the structure in which these corrupt elites are embedded. What I call systemic corruption refers to the inner functioning of the state order, independent of who occupies the places of power in it. Since democracy is a political regime in which an electoral majority is supposed to rule, it makes sense to think that ‘good’ democratic government would benefit (or at least not hurt) the interests of the majority. When the social wealth that is collectively created is consistently and increasingly accumulated by a small minority against the material interests of the majority, then it means that the rules of the game and how they are being used and abused are benefiting the powerful few instead of the many. This trend of oligarchization of power within a general respect for the rule of law provides convincing evidence for the systemic corruption of representative democracy—even if we are still unable to measure it properly.
According to Transparency International’s Corruption Perceptions Index, two thirds of countries suffer from ‘endemic corruption,’ a kind of ‘systemic grand corruption that violates human rights, prevents sustainable development and fuels social exclusion.’ But while Transparency International claims corruption is enabling the violation of human rights across the globe, it also acknowledges that corruption cannot be properly measured given the diversity of legal systems (what is considered corrupt in one country is not necessarily illegal in another) and the disparities in the enforcement of norms on the ground. Consequently, the index relies on individuals’ perception of corruption to track long-term variations—even if individual perceptions cannot be disentangled from the existing local culture of corruption. This methodological deficiency makes evident that the actual levels of corruption are much worse than those currently being recorded.
The current approach to measuring corruption does not consider an independent standard to judge the law itself, and thus makes it difficult to push back against the introduction, normalization, and legalization of vehicles for corruption. The regulation of lobbying, for example, demonstrates that having paid peddlers for special interests can become perfectly legal—even if it clearly strengthens the undue influence of the superrich and their corporations in politics. Given the complex relation between corruption and the law, conceiving and measuring corruption by focusing only on the agents of corruption and their exchanges, is not only ineffective for combating individual acts of corruption —tax havens and shelters make quid pro quo corruption extremely difficult to trace and thus prosecute— but they also leave us unable to track systemic corruption, the degree to which the rules of the game are designed to benefit disproportionally and systematically those at the very top of the wealth distribution to the detriment of the majority of citizens.
We have tended to rationalize and downplay the oligarchization of power in society by using indexes that miss important aspects of the process. For example, the Gini Index underestimates inequality at its most politically significant point, among the superrich, since they tend to stash their wealth in offshore accounts, where it disappears from view. Much like the Corruption Perceptions Index, which is unable to accurately measure corruption, the Gini Index is unable to capture the real degree of inequality because of the massive amounts of wealth that oligarchs from all around the world have been shielding from taxation and scrutiny for decades.
While for most of the 20th century systemic corruption waxed and waned, and its increase meant national oligarchs and their corporations were able to temporally control parts of government and obtain favourable policies, laws, and verdicts with impunity, today the oligarchic class, as well as part of its wealth, is transnational—corporate profits being constantly shifted around, following liability-reduction strategies. Therefore, the threat of oligarchic power is today not only against democratic governance but also compromises national security since there is no easy way to know if the oligarchs indirectly funding parties, politicians, lawmakers, and judges are domestic or foreign. How can the state protect the population from external threats that are operating within existing legality? ‘Following the money’ to unveil a corruption scheme or a terrorist network is extremely difficult given that oligarchs have access to a global league of corporate lawyers, who are experts in protecting assets from taxation and burdensome regulations, and in hiding identities behind legal code.
Tax havens and the legal provisions shielding assets from taxation and scrutiny are both a symptom of systemic corruption and an accelerator of the oligarchic takeover of the political power structures. The establishment of legal loopholes beneficial to the superrich has historically been the result of the pressure exerted by already powerful corporate interests. The first tax havens were created in the late 19th century in the states of Delaware and New Jersey, where incorporation rules were relaxed to attract non-resident companies. Paired with the hegemonic laissez faire ideology of the turn of the century, lower corporate tax rates allowed for the already rich and powerful to accumulate wealth to an unprecedented degree in the United States. Part of the tax-free profits of corporations was then used to influence government to further mould regulations according to their interests, fuelling corruption. The Tillman Act of 1907 came to prohibit corporations from directly financing political campaigns, but lacked enforcement mechanisms and allowed for loopholes. Today Delaware gives tax shelter to about half of all publicly-traded U.S. corporations, among them Apple and Wal-Mart, and corporate donors are legally allowed to bypass campaign finance prohibitions and pour millions of dollars into Political Action Committees (PACs), which they then donate to political candidates.
Across the ocean, England also innovated early to favor the wealthy. In a 1929 court case[1] non-resident corporations —British companies with no actual business in England— were freed from taxation. This judicial verdict effectively allowed for a tax-free exploitation of the colonies by British companies incorporated in Jersey, Bermuda, or the Cayman Islands. This privileged non-resident status was then extended to financial operations when in 1957 the Bank of England declared non-resident transactions off limits to regulation and taxation.
The tax evasion by the superrich that originated in the first half of the 20th century reached a turning point in 1983 when U.S. courts allowed the first multinational to move to a tax haven to avoid paying taxes. This judicial authorization of profit shifting strategies meant that the windfall of corporate profits resulting from the deregulation plan of the Reagan administration were moved abroad. This not only decreased state revenue and social spending but also increased inequality and the rate of wealth accumulation at the very top. According to the Gini Index, inequality in the U.S. has increased sharply in the last four decades and today has the highest rate of the G-7 countries. This jump in inequality in the U.S. is of course much worse, considering that the superrich stash away a big chunk of their wealth offshore, which is not included in the measurements. According to recent estimates, around 40% of multinational profits are shifted to the more than 90 financial secrecy jurisdictions around the world, which now hold as much as $36 trillion dollars of untaxed and anonymous private wealth.[2] How can any State make sure that part of this untraceable money does not end up being used against the interests and safety of their populations?
The progressive takeover of political power by an oligarchic class that shapes policy, law, and judicial adjudication for their own benefit, from behind the scenes, is an intensifying threat to national security. Since it is currently legal for corporations to exploit loopholes and wrap their assets in legal secrecy to avoid scrutiny, domestic terrorist cells funded with corporate offshore money could remain undetected until it is too late. A regulatory framework that is ill-equipped for taxing the superrich and for keeping tabs on their money, cannot fare much better when trying to discover if this untaxed, untraceable money is being used by foreign powers planning to attack the State. The privileges of the superrich—which allow them to bypass the rules meant to curtail their economic power and undue influence—have left states powerless to effectively curtail corruption and protect their populations against foreign attacks. National security cannot be realistically assured if states keep allowing corporations to profit without limits and to shift their profits to avoid taxation, regulations, and oversight.
Camila Vergara is a critical theorist, historian, and journalist from Chile writing on the relation between inequality, corruption, and domination. She is a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia University Law School, and author of Systemic Corruption. Constitutional Ideas for an Anti-Oligarchic Republic (Princeton University Press 2020).
[1] Egyptian Delta Land and Investment Co. Ltd. v. Todd
[2] James S. Henry, “Taxing Tax Havens. How to Respond to the Panama Papers” Foreign Affairs, April 12, 2016.
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