In this episode of the Tax Justice Network’s monthly podcast, the Taxcast, we go on a reparational justice journey and speak to the Council for World Mission about their Legacies of Slavery project.
Plus: austerity’s out, public investment is now in?! We discuss the IMF’s hypocritical turn around – now poorer countries need apologies and restitution…
Hosted and produced by Naomi Fowler of the Tax Justice Network
The transcript is available HERE (some is automated and may not be 100% accurate)
In the reparations movement, they talk about a process of kind of if it’s for us, but not with us, it’s not authentic. So I think that that has to be really remembered in this, it has to be a structured process within the context of international African social movements for reparations.
It’s really important to think who is asking different bodies to do this work? On whose mandate and who are these constituencies that this work seeks to report for, seeks to action change for? The principle of consultation and participation has to be present.“
~ Priya Lukka, economist and reparations specialist
For me, [reparational justice] is about acknowledging the past and the history of exploitation that our capitalist systems are particularly mired in. But it’s also about reaching towards the vision and goals of what our shared human life can be like, especially when we bring economic justice and the potential of our economies to bear to the full.“
~ Rev Dr Peter Cruchley, Council for World Mission
The pandemic is forcing a long overdue rethink of economics. And this rethink has reached the very highest level of economic policy-making. When the International Monetary Fund issues policy advice to governments that they need to foster a strong recovery from the pandemic, even if this takes the level of public debt to record over 100% of global domestic product by the year end 2020, we have clearly entered new territory.“
~ John Christensen, Tax Justice Network
There’s never been a more obvious time to talk about reparational justice. For so many decades the IMF and World Bank have been advising poorer nations struggling economically to sell their most valuable assets, open up their markets, supposedly to investment, which turns out to be extraction. They’ve told them to cut back on their public services. But now that wealthy governments are sort of like rabbits caught in the COVID headlights, the IMF and the World Bank have done a total turnaround. And they’re calling on governments to increase public investment to aid an economic recovery and create jobs!”
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Quando impostos se destinam a taxar poderosos a elite econômico-financeira do mundonos faz acreditar que são verdadeiros fantasmas. Mas o episódio #18 do É da sua conta desmistifica a tributação sobre transações financeiras e mostra como esse imposto pode, com um desenho adequado, reduzir desigualdades ao taxar mais quem tem mais dinheiro e o setor financeiro.
O podcast explora as vantagens desse imposto como um meio para governos regularem melhor o fluxo de capital no mundo e arrecadarem de forma mais justa , transparente e diminuindo a “maldição” da financeirização. Ouça o podcast e descubra como o imposto vem sendo proposto em Nova York e União Europeia e colocado em prática no Quênia.
Yes, we can build an open and transparent tax system that works fairly for everyone. Do you know how multinationals shift their profits to dodge their taxes and how we can stop them? Our beautifully illustrated new videos tell you how, narrated in five different languages by our tax justice podcast teams. They explain how governments can put a stop to transfer pricing and profit shifting, end the race to the bottom between nations on tax, and restore the link between where business activity happens and where tax gets paid. You can read all about Unitary Taxation here.
You can listen to our unique monthly podcasts on tax justice, corruption and economic transformation in the public interest in English, Spanish, Arabic, French and Portuguese.
Click below to watch and share the video in your preferred language:
English Winning the Fight for Tax Justice: how do we make multinationals pay?
French Gagner la bataille pour la justice fiscale – comment faire payer les multinationales?
Spanish Ganar la lucha por la justicia fiscal: ¿cómo hacemos que las multinacionales paguen?
Portuguese Vencendo a batalha pela justiça social: como fazer as multinacionais pagarem?
Arabic الفوز في المعركة من أجل العدالة الضريبية – كيف نجب
Every year, corporate tax avoidance costs countries around the world an estimated US$ 500 billion or more. One reason for these losses is that companies are able to hide their financial affairs: from tax authorities, and from the public. More transparency will improve tax collection, and help pay for many public goods such as hospitals.
Since the 1970s, civil society groups have been pushing for a powerful transparency tool called Public Country by Country Reporting (CbCR) – which aims to get multinationals to report (and publish) details of their financial and tax affairs, broken down for every country where they do business. Until recently, these calls were opposed by powerful corporate lobbyists and fell on deaf ears: companies could scoop up their financial and tax results from several countries into one global or set of regional figures, which could not be unpicked to find out what is happening in each country.
Following sustained pressure from the tax justice movement, however, world leaders have started to give way. Little by little, governments and global institutions are mandating this form of corporate tax transparency – though still only up to a point.
For instance, European banks have had to publish their key financial data since 2015 — but this information is often difficult to find, complex, and presented in incompatible forms. A new report published a few hours ago by Transparency International, entitled Murky Havens and Phantom Profits: The Tax Affairs of EU and UK Banks, provides welcome clarity, showing both the improvements in transparency and the distance still to go. As others have noted: the data here is still not good enough.
Right now, a more focused, time-limited opportunity for reform has also opened up in the EU. A new report, also today, from Campact and Corporate Europe Observatory, notes that Germany’s Economy Minister Peter Altmaier is currently standing in the way of a proposal to mandate better transparency in Europe – and you can help break the deadlock. The report contains a petition, also supported by our German sister organisation, Netzwerk Steuergerechtigkeit:
Click here to find out who to send it to, and how. Please don’t delay. This window of opportunity will not be open for long.
If the EU can take the step to make the right kind of CbCR data public, then most of the remaining political objections to CbCR will be swept aside, including for lower-income countries. This is the moment, and we must seize it.
We recently published a special edition of Tax Justice Focus on national security, guest edited by Jack Blum, Charles Davidson and Ben Judah. You can read their editorial here. In the following article, Yakov Feygin from the Berggruen Institute, argues that the United States could and should use its central position in the global monetary system to tackle the related phenomena of tax avoidance and corruption.
The Financial Infrastructure of Corruption
Yakov Feygin
National security practitioners have become increasingly aware of the threat of ‘Kleptocratic regimes’ and ‘strategic corruption’ to the internal politics of liberal-democratic polities. In the classical version of this narrative, authoritarian regimes exploit global financial and business networks to penetrate the internal politics of democratic societies and secure their domestic rule by exploiting the self-interest of particular business groups.[1] Some have even suggested that foreign ‘dark money’ might enter the democratic process by supporting particular candidates.[2] The common thread that unites these views is that dark money is seen as a foreign policy problem and thus related to either extra-systemic actors or foreign competitors that exploit legitimate systems.
Viewing this issue as only the result of ‘corruption’ or as an aspect of power politics alone is flawed. The dangers highlighted above are not the result of aberrations in an otherwise functioning system that can be patched by some legal reforms. Rather they are a feature of how the international financial system has evolved to serve the world’s most powerful, whether they are kleptocrats in the developing world or reputable fortune 500 companies. The global financial infrastructure, as it has evolved in the post-war period, requires vast pools of offshore dollar accounts, so-called Eurodollars. This credit money, ‘issued at the book maker’s pen’ forms the basis for global payments and currency exchange.[3] Within these money pools, often held in tax havens with opaque ownership law, it is impossible to distinguish kleptocratic activity ‘threats’ from ‘legitimate tax optimization’ by multinational corporations and high net worth individuals. Moreover, without these wholesale money market ‘deposits,’ the global monetary system would find itself short of liquidity as even formal bank institutions are deeplyintertwined with offshore finance.[4]
Instead of viewing these activities as national security threats created by the exploitation of a legitimate financing system by illegitimate actors, any attempt to curtail these activities must be done in the context of a radical reform of the global monetary order. This is not simply an academic distinction. If one sees kleptocracy as simply a form of corruption, the solutions presented are traditional anti-corruption measures focused on transparency and the strengthening of civil society. However, if we accept a systemic perspective that incorporates the centrality of offshore cash pools to the ‘dollar system,’ then we must take a broader perspective that calls for wholesale monetary reform and the mobilization of U.S. monetary power, specifically to move toward a ‘systemic’ reform of global capitalism itself.
The formal definition of a ‘Eurodollar’ is a dollar deposit in a non-American domiciled banking institution. As such, Eurodollars are pure credit instruments. They have no formal backing at the United States Federal Reserve. That means that unlike onshore credit money, Eurodollars have no explicit guarantee for their par value. As such, Eurodollars are secured via a set of inter-bank funding agreements benchmarked by the London Interbank Overnight Rate (LIBOR). Eurodollar deposits emerge when non-American domiciled firms book a dollar inflow in non-American domiciled banks. These banks then ultimately lend these deposits to other financial institutions that require immediate dollar funding and expect a dollar-denominated inflow at some future period. The creation of a Eurodollar deposit is represented in Figure 1 through a set of stylized balance sheets.
Figure 1: An Anatomy of a Eurodollar Placement [Marcia Stigum and Anthony Crescenzi, Stigum’s Money Market, 4E, 4th Edition (New York: McGraw-Hill Education, 2007), 217.]
As we can see, Eurodollars are initially funded through an interbank transaction with a U.S. domiciled bank and its foreign branch. From the point of view of the onshore money system, no actual dollars have left the United States. However, credit has now been issued that can ultimately be multiplied many times over to create a system of dollar funding.
Moreover, the term Eurodollar is often used not only to describe the specific type of money market instrument described above, but also the larger global market for wholesale dollar funding. This market and its instruments—Money Market Fund Shares, Repurchase Agreements (Repos), and asset-backed commercial paper—form the backbone of the global ‘shadow banking system.’ One can think of shadow banking as the expansion of the category of banking beyond registered bank holding companies. There is a robust academic debate as to what counts for deposits within this system, but a general consensus is that the key to the shadow banking system’s operation are large institutional cash pools, often held in offshore banking jurisdictions.[5] These pools of Eurodollar deposits – essentially credit entries – require cash inflows to validate holdings. As such, an army of money managers has arisento attempt to find returns for these large, global pools of cash.[6]
The Eurodollar system is thus ‘hybrid,’ insofar as dollar denomination depends on a state action—the U.S.-issued dollar—but is intermediated by and created through private credit. This is not an accidental arrangement but a set of political choices.[7] A popular legend holds that the offshore dollar market was created when the USSR, fearful of seizure, wanted to hold its dollar deposits outside of American banks. More realistically, the Eurodollar market seems to have arisen through intercorporate ‘swaps’ of currency liabilities designed to get around Bretton Woods-era capital controls. These swaps evolved into markets and eventually became the source of funding for offshore issued ‘Eurobonds.’[8] In the 1970s, as the Bretton Woods system began to collapse, regulators began to give up on efforts to coordinate to control this system and financial globalization was born.[9] More importantly, a whole industry of consultants, often with the encouragement of major governments, sprang up to offer newly decolonized states—often with common law systems—roadmaps to becoming offshore financial centers.[10]
The existence of shadow banking and wholesale Eurodollar financing makes it increasingly difficult to draw specific borders between national, and global financial systems and between legitimate transactions and kleptocratic activities and ‘strategic corruption.’ Disclosures of offshore structures such as the Panama Papers reveal a mix of both obviously political corruption and ‘normal’ corporate tax optimization. An anatomy of several transactions demonstrates just how similar and indistinguishable both activities are.
Take the ‘double Irish’ tax structure favored by pharmaceutical and technology companies. Company A in California develops a piece of software. It sells the patent for this software to a wholly-owned subsidiary in the Cayman Islands for one dollar. That subsidiary then revalues the patent to 100 dollars and pays no taxes on that re-evaluation. Next, the Cayman company ‘sells’ right to the patent to an Irish subsidiary of Company A, which markets and sells the software in Europe. The Irish company thus pays low taxes on European sales and renumerates its American parent through licensing fees, paid in dollars, to the Caymans subsidiary. Note that at this point, the Irish subsidiary has entered the Eurodollar market to transform its Euro receipts into dollar deposits and has then transferred those deposits to a bank in the Cayman Islands. This bank can now engage in Eurodollar funding with its dollar deposit. Meanwhile, the Cayman company can lend to the parent firm at a zero-interest rate to bring profits home or can purchase the parent firm’s assets. Taxes have been minimized with no violation of the law.[11]
Now, let us examine a ‘kleptocratic transaction’ that uses a similar set of channels. A politically exposed person (PEP) in Country A wishes to benefit from a privatization scheme of a state-owned company. To do this, the PEP sets up a company in Cyprus which has a tax treaty with Country A. The individual then swaps shares in the worthless Cyprus company owned by him and the valuable firm in Country A. Thus, the Country A firm’s profits are now captured, and it is effectively privatized. The firm in Cyprus then sells its shares, in dollars, to another firm owned by the PEP in the Cayman Islands, thereby eliminating any tax liability and creating a dollar deposit in the Cayman Islands. Again, these chains of firms have entered Eurodollar markets to both convert cash flows from Country A to dollars, and to then deposit these receipts. The PEP can now use his dollar deposit to purchase property in London or to make investments in an American PR campaign. Again, a dollar deposit is now created within the Caymans and, with the likely exception of laws in Country A being broken, nothing illegal has happened.
The parallels between ‘tax optimization’ and ‘corruption’ are so strong that the illegality of the latter is only present because in the United States, we have made tax optimization legal and acceptable de jure. Moreover, both of these schemes have created Eurodollar deposits that can then be lent and borrowed in the global dollar system to fund trade, investments, and capital goods that are completely unrelated to these transactions. The incentives for not tampering with this existing system are thus quite high.
The offshore financial system was created in the wake of the collapse of the Bretton Woods System as a means to avoid high-cost political decisions while allowing an increasingly globalized financial system to serve the needs of a global elite. While this elite was largely in line with the interest of the United States, the national security establishment has paid little attention to the misery that the offshore world has caused due to lost tax revenue, illegal privatization of public assets, and financial instability. Now, however, that these structures are not only used by multinational corporations but also by state-related actors that might threaten American sovereignty, the national security and foreign policy establishment has woken up.
The tools it has offered us to combat these problems are a mix of relatively effective measures to boost transparency and some half measures that at best will try to restrict access to the offshore world to legitimate actors. Indeed, beneficial ownership legislation, now being championed by many in Washington, will not only help American officials push foreign counterparts to adapt their own transparency legislation but give us better ideas about the American side of many transactions. However, there is an open question about whether this legislation alone will allow the United States to effectively deal with the holes of global sovereignty caused by the offshore world. Efforts to empower civil society in corrupt states are noble but will not address the root causes of what makes kleptocracy so simple: the easy movement of capital through offshore networks.
Most importantly, these policies do not take into account the fact that such transactions are critical to global dollar funding. If the United States is really serious about fighting offshore finance and kleptocracy, it has to put in some deep thought into what the outlines of a global financial system that replaces it would look like. At the original Bretton Woods Conference, John Maynard Keynes proposed a global clearinghouse system denominated in an international currency called Bancor. States would not actually use Bancor but would settle accounts in it.[12] States with persistent surpluses of Bancor would be charged a negative interest rate to encourage them to lend to states that needed funding. Capital controls would help contain private international finances.
It would be exceptionally hard for a New Bretton Woods to happen. However, we can simulate some of its features unilaterally and eliminate incentives for other countries to serve as nodes in the offshore system. A major reason that a country like the United Kingdom might want to be a tax shelter is to attract foreign exchange to its country and thus have sources of financing for development, as well as to sustain the value of its own currency relative to a global funding currency like the dollar. The United States has a tool to sustain the purchasing power of the UK’s currency: the central bank swap line. Swap lines came into public consciousness during the 2008 financial crisis, when the Fed allowed major central banks to exchange their local currencies for dollars to backstop Eurodollar deposits. During the COVID-19 crisis, larger swap interventions prevented a general, global economic collapse. The United States should consider giving countries with strong macroprudential policies, open trade practices, and, most importantly for this piece, transparent financial systems pre-approved access to Federal Reserve swap lines.
This would, of course, mean crowding out opportunities for private finance to intermediate global monetary transactions. However, if the United States is really serious about fighting global corruption, and treating it as a national security threat, the problem has to be cut out at its root. The centrality of private offshore banking and Eurodollar creation to global funding must be eliminated to counter global corruption, not only abroad but at home.
The United States, as the issuer of the world’s dominant currency, has a responsibility to sustain this ‘global public good’ in a manner that limits the ability of rentiers and oligarchs to exploit this public good. Without recapturing the role of global intermediation from private actors, we will never solve the problem of kleptocracy. A national security strategy that addresses these new threats must realize that the enemy is not a set of particular corrupt individuals, but the structure of global capitalism itself.
Yakov Feygin is Associate Director of the Future of Capitalism Program at the Berggruen Institute. This piece was first published in The American Intereston September 21, 2020.
[1] Ben Freeman, ‘America’s laws have always left it vulnerable to foreign influence’, Washington Post, October 19, 2019.
[2] Joseph Biden and Michael Carpenter, ‘Foreign dark money is threatening American democracy’, Politico, November 27, 2018
[3] Milton Friedman, ‘The Euro-Dollar Market: Some First Principles’, Federal Reserve Bank of St. Louis, September, 1971
[4] Iňaki Aldasoro, Wenqian and Esti Kemp, ‘Cross-border links between banks and non-bank financial institutions, BIS Quaterly Review, September 2020; Marco Cipriani and Julia Gouny, ‘The Eurodollar Market in the United States’, Liberty Street Economics, Federal Reserve Bank of New York, May 27, 2015
[5] Steffen Murau and Tobia Pforr, ‘Private Debt as Shadow Money: Conceptual Criteria, Empirical Evaluation and Implication for Financial Stability’, Private Debt Project, May, 2020
[6] Zoltan Poszar, ‘Shadow Banking: The Money View’, Office of Financial Research Working Paper, July 2, 2014; Daniela Gabor, ‘Critical macro-finance: A theoretical lens’, Finance and Society, 2020
[8] Perry Mehrling, The New Lombard Street, Princeton University Press, 2010
[9] Benjamin Braun, Arie Krampf, Steffen Murau, ‘Financial globalization as positive integration: monetary technocrats and the Eurodollar market in the 1970s’, Review of International Political Economy, March 22, 2020
[10] Vanessa Ogle, ‘Archipelago Capitalism: Tax Havens, Offshore Money, and the State’, The American Historical Review, December 2017
[11] Edward Helmore, ‘Google says it will no longer use “Double Irish, Dutch sandwich” tax loophole’, Guardian, January 1, 2020
[12] Luca Fantacci, ‘Why not bancor? Keynes’s currency as a solution to global imbalances’, unpublished draft, January 19, 2012
Image: NeoNazi_02″ by Chad Johnson is licensed under CC BY-NC-ND 2.0
This week we published a special edition of Tax Justice Focus on national security, guest edited by Jack Blum, Charles Davidson and Ben Judah. You can read their editorial here. In the coming days we will publish the five articles from this special edition, starting here with an article by TJN writer Nicholas Shaxson on the multiple ways in which tax havenry has undermined international and national security, worsening inequality and contributing to the rise of political extremism.
Tax havens harm our well-being and security
Nicholas Shaxson
Our beleaguered societies should learn a trick from the Weebles, an egg-shaped children’s toy popular in the 1970s which always righted itself after you pushed it over. As the advertising jingle put it: “Weebles Wobble But They Don’t Fall Down.” The secret was the weight in the toy’s base.
In this they reflected western societies at that time. A postwar order characterised by strong workplace protections, generous welfare provision funded by steeply progressive taxes, and effective curbs on concentrated corporate power meant that productivity gains were shared more or less equitably. Meanwhile, tight financial regulation curbed the ability of powerful financial interests to overrun the authority of democratic governments. This postwar order secured high levels of public support for liberal democracy. Since the advent of financial deregulation, however, power and wealth has become highly concentrated at the top end of the pyramid, and justifications for inequality have trickled down.
Not surprisingly, support for liberal democracy has frayed.[1]
As power and wealth concentrations have become ever more top-heavy, social cohesion and democracy have become pushovers. Illiberal and anti-democratic actors, domestic and foreign, are on the offensive, corrupting our institutions, our media and our political processes. Inequality on its own is toxic enough: historically it has overturned empires, dictatorships, theocracies and democracies, and at times led to war. As inequality spreads, the likelihood of bloodshed rises.
But the issues and mechanisms that the tax justice movement focuses on – tax havens, shell companies, offshore trusts, corporate tax cheat structures – are especially corrosive. The threats to our collective security lie on many levels, each more insidious and pernicious than the others.
First, most obviously, tax havens reward rich people at the expense of poorer people, worsening inequality and deepening schisms.
Second, tax havens corrupt markets, allowing tax cheats to free-ride on public services, and rewarding large corporations at the expense of small and medium enterprises, worsening the problems of monopoly and concentrated corporate power.
Third, many of these tools are about hiding. This has destabilising effects, inflicting damage on our cultural, political and economic institutions. Tax havens are hothouses for organised crime, helping criminals and oligarchs to penetrate the heart of many governments. Major revelations, from the 2016 Panama Papers to Tom Burgis’ new book Kleptopia, have exposed how British tax havens helped Russian oligarchs amass secret wealth (and power,) and how their fortunes merged with those of the post-Soviet organised criminal underworld such as Semyon Mogilevich, whose core talent has been “to slink [criminal] money around the world incognito.” Worse, tax haven secrecy enables bribes and illegal political donations to flow undetected, making it increasingly difficult to trust the integrity of everyone from the Prime Minister and the President down.
All this undermines citizens’ faith in state institutions that are supposed to protect public interest. By allowing individuals and businesses to operate outside the law, tax havens offend against the principle of civic equality: one rule for them, one rule for us corrodes the social fabric on which so much depends. Equally dangerous, with the reputations of both London and New York tarnished by being labelled as laundromats for kleptocrats and organised crime, the soft power diplomatic advantages that the UK and USA previously enjoyed from being able to project moral authority across the world have been washed away by the sea of scandals.
Britain’s tax haven network helped accelerate the slide of nuclear-armed Russia into gangsterism, posing severe security threats to Britain itself. Citizens around the world, from Saudi Arabia to Russia to Venezuela, have seen for themselves how their national treasuries have been looted, and the proceeds stashed by élites in western tax havens. This looting has fomented public distrust and rage.
Undoubtedly tax havens hurt the countries suffering the plundered outflows, but they also pose grave threats to the economies receiving the inflows. Western countries playing the tax haven game have created a hydra, a monster which has turned around to bite them.
Illicit financial flows pose a range of political threats to the inflow countries. It diverts political leaders and civil servants away from the public interest, towards secret, more nefarious personal ends. It throws a lengthening shadow over academic institutions, think tanks, commentators, celebrities, influencers and media. An OECD report described how tax havens allow political parties to set up secret branches disguised as think tanks or foundations, “sometimes referred to as ‘offshore islands’ of political parties.” Tax haven funds combined with offshore-based media moguls prepared the way for Britain’s Brexit campaigners, leading to the destabilisation of relations with key political and military allies.
Tax havens are corrupting our leaders, our institutions and our democracies, generating yet more rage among the citizenry. When the last global financial crisis hit, western leaders largely didn’t change their economic policies in response to democratic pressure for change: instead, they subverted democracy to keep the same élites in power, and doubled down. The Covid crisis may worsen matters.
Decades of deregulation have left financial markets awash with illicit money seeking pliant host countries. Tax havens prosper by relaxing laws, rules, taxes and law enforcement, creating a criminogenic environment in the name of financial freedom. In the accelerating “global race” to attract hot money, countries ‘compete’ by offering yet more tax cuts, more regulatory loopholes, and outright subsidies to global elites and powerful corporations.
A bigger problem, though, is the devil’s bargain at the heart of this global race-to-the-bottom. Oligarchs, despots, organised crime, and other owners of rootless financial capital are so heavily invested in London and New York that their threats to disinvest and switch their wealth to Zurich or Singapore or Panama, have real potency. The misguided quest to attract the world’s hot money puts tremendous, unaccountable, direct power into the hands of malign actors, domestic and foreign. If this isn’t a threat to our democracy and collective security, it is hard to know what is.
Criminality isn’t the only problem confronting ‘inflow’ countries. Lax banking regulation brought us the global financial crash, and will deliver more crashes. Large inflows of financial capital into London and Wall Street generate a ‘brain drain’ into offshore-focused finance, damaging other economic sectors. Those same inflows push up local prices and the exchange rate, rendering it harder for manufacturers and producers to compete against imported goods, while also making housing unaffordable for young people. These problems, and the collective internal security risks they foment, are the essence of the finance curse.
The agencies tasked with protecting our collective national security, many steeped in countering terrorists radicalised by the plundering of their own countries in the Middle East and Africa, now need to recognise the scale of the threat to democracy and social stability emanating from kleptocrats, oligarchs, and organised crime. And they need to understand how this threat is structurally bound up with an army of professional enablers in accountancy, finance and law and an increasingly dysfunctional domestic economy.
Yet there is great hope here. That sea of rent-seeking and criminal capital isn’t the route to prosperity for western democracies: it’s a trap. We can simply step out of the race-to-the-bottom. Tax and regulate economic actors properly, and the predators will leave. The finance curse tells us that western tax havens, will be better off for it. And, as a further bonus, we will reduce the looting of poorer countries by their élites, curbing the rage. Like the Weebles of the 1970s, tackling tax havens would help us bounce back up again.
Image: NeoNazi_02″ by Chad Johnson is licensed under CC BY-NC-ND 2.0
The long recession precipitated by the 2008 financial crisis fed political failures across the world, increasing inequality and polarising societies to the point of social breakdown. As far-right movements threaten to take liberal democracies back to the 1930s, it is becoming increasingly clear that the offshore system, where wealth continues to accumulate in staggering quantities, is a source of serious and intensifying threats to international and national security. In this edition of Tax Justice Focus our guest editors Jack Blum, Charles Davidson and Ben Judah explore these threats and how we best tackle them. The following blog reproduces their editorial.
Editorial:Offshore, National Security And Britain’s Role
The British public is used to being warned of systemic threats: terrorism, weapons of mass destruction, Russian espionage, even climate change have been front and centre of the national debate over the preceding decades. However, the British public is much less used to a sustained presentation of the acute risks posed to national security by ungoverned spaces in the financial sector that is supposed to be the country’s competitive advantage. This special issue of the Tax Justice Focus aims to fill this void in the public’s understanding of these threats from the murky world of offshore finance.
Corruption, quite simply, is not small beer. Illicit finance, the proceeds of crime and corruption, is today a central feature of the world economy. The International Monetary Fund has estimated that money laundering accounts for between 2% to 5% of the world’s GDP. The ease with which criminal and corrupt money can move through multiple jurisdictions is the result of decades of failed regulation on both sides of the Atlantic, which has created a nexus of anonymous shell companies, secrecy jurisdictions and tax havens that come together to form the world of offshore finance.
Ilicit finance is emphatically not something that happens ’over there.’ Some estimates put the share of the UK’s GDP derived from money laundering as high as 15%.[1] London is both one of the critical nodes of the world financial system and a gateway to the offshore world: with countless financial and legal service providers ready to shuttle their clients’ wealth to secrecy jurisdictions under British sovereignty like the British Virgin Islands or the Cayman Islands which have become hubs of illegal activity. All this has helped London become a favoured location for oligarchs, whose needs and wants have become a staple of the professional services sector. Since David Cameron’s premiership, there has been growing concern in both London and Washington over growing Kremlin influence in the UK, suspicious murders and the connections of British politicians current and former to foreign autocrats. It has become a widely held view on both sides of the Atlantic and on both sides of the political divide that the UK has failed to tackle both the threat of money laundering and the political and security threats that come with it.
The following essays explore why failure has taken place and what can be done to remedy it. The first lens we use is structural. How does one situate the scale of illicit finance in an understanding of global financial flows? In our first essay Yakov Feygin, the Associate Director on the Future of Capitalism at the Berggruen Institute, takes a bird’s eye view of the system, exploring the relationship between the fundamental structures of global finance, the role of the dollar and the place of offshore finance as an enabler of corruption and authoritarianism. This is the international system in which Britain, the City of London and UK’s global territories find themselves.
What are the consequences for democracies existing in such an environment? In our second essay Camila Vergara, a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia Law School, investigates the rise of transnational oligarchic power and the struggle to protect domestic national security when the offshore system both facilitates oligarchic power within democratic societies and offers them enormous room for manoeuvre for malign influence. Vergara offers a framework to understand Britain’s backdrop of news stories concerning current and former politicians’ links to kleptocrats and authoritarian powers.
These are clearly threats to democracy: but what frame should progressives use when highlighting these dangers? In our third essay, Grace Blakeley, a staff writer at Tribune magazine and author most recently of The Corona Crash: How The Pandemic Will Change Capitalism, critiques the concept of national security from a left perspective and suggests a new way of conceptualizing these threats more in tune with progressive language. Blakeley sets out how progressives concerned by the rise of kleptocracy can reach new audiences.
In our fourth essay, moving onto solutions, Nicholas Shaxson, author most recently of The Finance Curse: How Global Finance Is Making Us All Poorer, argues that if we are to look to the US, EU and UK to use their hegemonic power to dismantle this system, they need to overturn the power of their own financial sectors. The way to do that is to harness national self-interest in each place, by showing how oversized financial centres harm the countries that host them. This harm is found in many spheres: economic, political, democratic, cultural — and in the domain of national security. And in our final essay Edoardo Saravalle, formerly of the Centre for New American Security and the Senate Banking Committee, makes the case for the United States promoting the transformation of privately controlled financial nodes like SWIFT into internationally controlled financial infrastructures to ensure that public goals, not private interests, set the agenda. Both essays set out what could be real foreign policy goals for a government determined to reshape global finance for the better.
As the editors of this series, we want to take this opportunity to contribute one final component to this discussion: the question of law enforcement. The sheer scale of illicit financial flows in the global system shows that the existing regime of international agreements and cooperating bodies has been largely toothless. The Financial Action Task Force (FATF) has been in existence since 1989 and has had powers to issue a blacklist and a greylist since 2000. The United Nations Convention Against Corruption (UNCAC) is now in force in all but a handful of countries. But despite this the ability to stem these financial flows — illustrated simply by the vast sums moving within and between national jurisdictions — remains lamentable and lacklustre. There is not so much a lack of tools as a lack of willingness to use them.
In Britain and the United States the understaffing of the bodies charged with defending the financial system is a threat in and of itself. For example, in Washington the key Financial Crimes Enforcement Network (FinCEN) has only around 300 staff and a budget of just $118m a year. Despite the vital role FinCEN plays its annual funding amounts to roughly the purchase cost of one F-35 jet. In the UK, the National Crime Agency, which deals with the full range of serious and organised crime, has less than 5000 staff and only around 1250 of them are investigators. Companies House, the body charged with registration of corporate entities in the UK employs less than 1000 staff despite over 4m companies being incorporated in Britain, with a further 500,000 new registrations every year.
Britain has a unique role to play in making finance safe for democracy. It is responsible not only for the City of London, which still competes with Wall Street as the capital of global finance, but also for Crown Dependencies and Overseas Territories such as the Isle of Man and the British Virgin Islands, which provide invaluable niche services to both licit and illicit actors. Should the UK choose to embrace a leadership role by enforcing the rules already on its books and staffing up adequately to meet the risk of financial insecurity it could achieve significant impact in cleaning up and closing down the loopholes of the offshore system. However, that same centrality to global finance also gives Britain a unique ability to be a bad actor. This is why it is in the interests of all the democracies that post-Brexit Britain brings meaningful transparency to both the metropolitan centre and the offshore periphery. A lively and robust debate in Britain about the security and democratic threats, not just lost tax revenue, posed by the offshore world is the first line of defence against such an eventuality. We hope this special issue of the Tax Justice Focus can help start it.
You can download the full version this edition of Tax Justice Focushere.
Jack Blum is a leading legal authority on money laundering who has helped investigate many major white collar crimes including the Bank of Credit and Commerce International (BCCI) collapse and the Lockheed overseas bribes scandal. Charles Davidson is editor and publisher of The Offshore Initiative (www.offshore-initiative.com) and was Executive Director of the Kleptocracy Initiative at Hudson Institute between 2014 and 2018. Ben Judah is the author of This Is London and Fragile Empire.
[1] Ali Alkaabi, Adrian Mccullagh, George Mohay, Nicholas Chantler, ‘A Comparative Analysis of the Extent of Money Laundering in Australia, UAE, UK and the USA,’ SSRN Electronic Journal, January, 2010.
Welcome to this month’s 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! Estamos en iTunesy tenemos un sitio web.Envien un correo electronico a Naomi [@] taxjustice.net para ser incorporado/a a nuestra lista de suscriptores.
En este programa con Marcelo Justo and Marta Nuñez:
Los principales bancos del mundo y el lavado de dinero del crimen organizado.
La OCDE confirma los datos de Tax Justice Network sobre la evasión y elusión fiscal de las multinacionales.
Los obstáculos políticos y mediáticos a un cambio de reglas fiscales en América Latina.
Y en tiempos de coronavirus, los avances que ha hecho la región en la lucha contra los paraísos fiscales.
Guest blog by Jesper Bertelsen, Danish Business Authority
The concept of a well-functioning beneficial owner register sounds achievable and easy, at a first glance. Simply put, legal entities check who their beneficial owners are, and enter this information into a system, in turn making it publicly available (at least for countries with public registers).
For the vast majority of legal entities in Denmark, and indeed the world, that task is straightforward. Law abiding legal entities simply register their beneficial owners because they are not interested in concealing their ownership. And, albeit with some formal errors and misinterpretations of the rules, this approach is well-functioning, and the published data about beneficial owners is mostly correct.
However, the purpose of a beneficial owner register is not fulfilled if it only caters to those entities that have the intention to play by the rules. Entities attempting to conceal their beneficial ownership, are indeed the most relevant entities to the governing authorities and financial intelligence units. The challenge for financial intelligence units and beneficial owner registers worldwide is to determine which entities are registering false information about their beneficial owners in order to conceal their ownership.
Therefore, the information that is entered into any beneficial owner register must be verified in order to ensure that the reported information is correct. To that extent, there are limitations on how far and in what quantities beneficial owner information can be verified, at least automatically.
How the Danish register verifies beneficial owner information
The Danish beneficial owner register is operated by the Danish Business Authority, which also operates the Central Corporate Registry. The Danish beneficial owner register is integrated into the Central Corporate Registry, meaning that all corporate information is available on the same webpage.
When a Danish person, registered with a Danish social security number (CPR-number), is registered as a director, board member, beneficial owner, legal owner or founder, the system automatically runs a series of checks. The system automatically retrieves the person’s address from the National Register. The system can also detect if the person is deceased or if the person has not registered an address, if the person is missing, and if the person is under the age of 18. All these parameters can be altered, so the effect of a person matching with one of these criteria can be altered.
For example, if a person is under the age of 18, this person cannot be registered as a part of an entity’s management. So, when a person tries to enter into the system that a minor is the director of a company, the system rejects the entry and the entry cannot even be reported. But, if a minor is registered as a beneficial owner, these system permits this to be submitted. But once the case is submitted, it can be decided whether these cases can be registered immediately or ifa manual review is needed first. These rules can be altered, or more rules can be added, if needed.
Foreign beneficial owners
When a beneficial owner is not a national, several issues arrise. First, the bulk of structured data that is present for Danish citizens disappears. We can no longer automatically verify if the beneficial owner is deceased or resides at the registered address.
The following information has to be submitted, when a foreign beneficial owner is registered:
Full name
Address
Citizenship
Passport number or identity card number
Picture of a valid passport or identity card
Details about the Beneficial Ownership
The validity of the submitted information depends (more than for Danish nationals) on the advisers and service providers who provide the information. It should be noted that in any case providing false information to the register is a criminal offence, which entails that the persons submitting the information can be held liable for supplying false beneficial owner information.
In order to verify the identity of foreign beneficial owners, the Danish Business Authority has introduced a series of checks that apply to foreign beneficial owners. First of all, the address is verified, by an international database, to ensure that the address exists. This does not ensure that the beneficial owner resides at the given address, but it does ensure that the address exist. Next, the Danish Business Authority sends the beneficial owner a letter to inform the person of their registration. If this letter is sent back to the Danish Business Authority, because the beneficial owner does not reside at the address or if the address turns out to be incorrect, the Danish Business Authority contacts the person that registered the beneficial owner and asks for a correct address and supporting documentation. Thus ensuring that the address is correct.
Next, the beneficial owner has to submit a picture of their passport or European identity card. The Danish Business Authority has developed a system that resembles those used in airports to scan the passport or identity card in order to ensure that the correct information is entered into the system. It also ensures, in some areas, that the passport has not been falsified.
Automatically verifying beneficial owner data is just the first stage in ensuring that the register displays the correct beneficial owners.It is well known that entities that have the goal of concealing their beneficial ownership often register an incorrect person as the beneficial owner. If the entity can provide a valid passport and all the necessary details about the individual, even the best verification system cannot detect whether this person is indeed the entity’s beneficial owner or a decoy.
Therefore, the Danish Business Authority also conducts manual checks to verify the information, and the Danish Business Authority can dissolve companies and entities that cannot properly provide the necessary documentation. This effort is well underway, and 17 entities have already been dissolved using this approach.
It is important to note that in order to make these cross-checks work in practice, a number of boxes must be checked. First of all, the Corporate Registry has to be fully digital, as well as the system used to file information with the Registry. Second, the other authorities that provide the data needed must also be digitalized, and have structured data as well, in order to make these checks work in real life. The Danish Business Authority has invested in a very modern IT-infrastructure that makes it possible for the beneficial owner register to conduct these checks.
The possibilities for cross-checking and verifying beneficial owner information are immense and can always be improved. The Danish Business Authority aspires to be in the forefront of the development of beneficial owner registers and look to other registers around the world to seek inspiration. We are closely monitoring the research and the increasing development in the sector.
Every country needs a financial centre, but as it grows beyond a certain optimal size (where it is carrying out the functions it is supposed to do) it starts to harm the country that hosts it. That is the finance curse, and many countries including the United States and United Kingdom passed that point decades ago. Shrinking the financial centres in these countries (in the right way) would make their citizens better off.
The finance curse is a compex phenomenon — see this explainer — but one of the commonest objections to it goes like this: “if oversized finance is so harmful, how come Switzerland and Luxembourg and Bermuda are so rich?”
At first glance, this question seems to be reinforced by an extensive new World Bank report, with the thrilling title “Purchasing Power Parities and the Size of World Economies.”
It noted that Luxembourg, a tax haven, had the world’s highest Gross Domestic Product (GDP) per capita, at $112,000 (on a Purchasing Power Parity basis, which is the most normally used measure of GDP,) with Ireland and Switzerland at a still-impressive $78,000 and $67,000 respectably. These tax haven scores are comfortably above those of other European countries: Denmark ($55,000), Finland ($47,000) France (45,000;) Germany (53,000;) Netherlands ($55,000;) Norway ($63,000,) Sweden ($53,000) and the United Kingdom ($46,000.)
Perhaps the headline from that comparison is that Luxembourg’s GDP per capita is twice that of Germany.
Case closed? Not so fast.
The Financial Times is also looking at this report, under a headline “Why the world’s richest countries are not all rich.” And it explains what most economists know: GDP is a pretty poor measure of the prosperity of a country’s citizens. In this case, that’s because GDP includes corporate profits — and when you’re a tax haven, those profits hardly touch the sides. They are measured in the data, but hardly contribute at all to citizens’ wellbeing (and as the finance curse explains, they often detract from it.)
This table from the World Bank report highlights the problem:
The light blue bar shows GDP per capita, making the tax havens look great; the smaller dark bars show AIC (Actual Individual Consumption per capita) where Switzerland, Luxembourg and Ireland look rather pedestrian. The finance curse disappears. (Bermuda’s AIC is pretty high – but we’ve been looking at Bermuda recently and its tiny population — the section that hasn’t already fled economic distress — is severely divided with a large share suffering severe hardship, and the main winners being white expatriates.)
Luxembourg’s Actual Income Per Capita is $38,000, somewhat higher than Germany’s $34,000, but not crazily so. Switzerland’s is $35,000, while Ireland’s is $27,000. The other rich countries — Denmark, Finland, France, Netherlands, Norway, Sweden, the United Kingdom — all have AICs from $31-36,000.
Not only that, but there is a range of other reasons, nothing to do with tax havenry, which boost ehe genuine incomes per capita of the havens. Over two thirds of the economically active population of Luxembourg, for instance, are foreigners, many commuting in on an daily basis: so other countries pay for these people’s education and retirement, and Luxembourg takes the cream of their productive working lives. Ireland — well, Ireland’s “Celtic Tiger” economy is not only not what it seems (once you change GDP into more appropriate measures like Gross National Income) but the widely peddled story that corporate tax cuts made Ireland a myth is a hoax. The ingredients of success were elsewhere entirely (look at this, if you don’t believe us.)
What is more, countries dominated by large offshore financial sectors tend to have economic policy captured by financial interests, which tends to create regressive policy (tax cuts for the rich, anyone?) which worsen inequality: neither GDP nor AIC per capita capture these nuances.
In short, debasing your economy, relaxing tax laws and financial regulations to attract the world’s hot money, is no recipe for national prosperity.
Don’t believe the hype. Don’t fall for the finance curse.
Dans cette vingtième édition de votre podcast Impôts et Justice Sociale, nous revenons sur la transparence des contrats en Afrique centrale. La branche locale de l’ONG Publiez ce que Vous Payez a produit un rapport à cet effet, et son responsable a accepté de discuter des résultats avec nous. Aussi, le mois de septembre a consacré une fois de plus la campagne « faire Payer les gros pollueurs ». Le Centre Africain de Plaidoyer, une ONG basé à Yaoundé au Cameroun, a accepté de discuter avec nous à cet effet. Enfin, la Commission des Nations Unies pour le Commerce et le Développement (CNUCED) a publié son rapport sur le développement de l’Afrique qui révèle que le continent a perdu 89 milliards $ en moyenne chaque année, entre 2013 et 2015. Un des contributeurs au document a accepté de répondre à nos questions.
Ont participé à ce podcast:
Eric Bisil, Coordonateur pour l’Afrique Centrale et Madagascar de l’ONG Publish What You Pays
Komi Tsowou, Economiste, Division de l’Afrique, des pays les moins avancés et des programmes spéciaux Conférence des Nations Unies sur le commerce et le développement
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Si vous souhaitez recevoir cette production ou être média partenaires ou simplement contribuer, vous pouvez nous écrire à l’adresse Impô[email protected]
Cancel Public Debt, Build Just Tax Systems and End Financial Support for Fossil Fuels in Response to Multiple Crises.
In solidarity with our fellow activists and advocates in the Asian People’s Movement on Debt and Development (APMDD) we post here their press release regarding the open letter they have delivered to the UN General Assembly.
October 1, 2020
As world leaders wind up the historic 75th session of the United Nations General Assembly today, people’s movements across Asia and global civil society organizations called on governments to tackle debt, tax avoidance and evasion, and public financing of fossil fuels in response to the present multiple crises.
In an open letter to the UN General Assembly, the Asian People’s Movement on Debt and Development (APMDD) and 51 member organizations raised “three urgent calls” to help peoples and communities in Asia to survive the multiple challenges of coronavirus, economic recession, and accelerating climate change:
First, unconditional cancellation of public debt for all countries in need starting immediately with a cancelation of a minimum of four years of debt service.
Second, an end to public financing of fossil fuels and adequate, additional, public and non-debt creating Climate Finance.
Third, tax and fiscal justice to correct economic and gender inequalities and generate sufficient public revenue for social services spending.
According to Lidy Nacpil, coordinator of APMDD, the open letter seeks to raise the voices of communities from Asia, a region that is home to more than two-thirds of humanity that is now facing unprecedented suffering brought about by the multiple crises. “We want to convey these concerns with the expectation that the United Nations will hear and act on these concerns decisively,” said Nacpil.
Immediate cancellation of public debt
The open letter calls for decisive steps to comprehensively address unsustainable and illegitimate debt nationally and internationally, including a UN mechanism that is transparent, fair and not dominated by lenders, as well as international fiscal measures that are not in the form of loans, noting that the “debt relief” being offered is dwarfed by the volume of COVID19 loans being extended to countries in need.
“With the volume of COVID19 loans being extended to countries, we are concerned that it is creating greater public debt. The response to this pandemic should be reducing the debt burden. Precisely it is the decades of debt payments and debt-related austerity measures that have rendered the public health care systems of developing countries too weak to deal with the pandemic,” said Nacpil.
End public financing of fossil fuels
The open letter likewise calls for “just transition to clean, renewable and democratic energy systems that give primacy to the needs of people and communities,” noting that people of Asia are under various conditions of vulnerability and face a wide range of climate hazards.
“We echo the statement of UN Secretary-General António Guterres in the beginning of this pandemic that we need to turn the recovery into a real opportunity to devise a blueprint for a healthier planet to ensure a more resilient future. An immediate step that must be taken is to halt the use of public funds to support fossil fuel build out,” said Nacpil.
The open letter states: “The delivery of adequate, additional, public and non-debt creating Climate Finance for mitigation, adaptation and loss and damage is as urgent as public financing of measures to fight COVID19, economic assistance for those whose jobs, livelihoods and well being are most affected, and programs for building more just, equitable, resilient and sustainable economies that are the foundations towards solving the multiple crises.”
Tax and fiscal justice, domestic resource mobilization
Lastly, the open letter states that the multiple crises also underscore the urgency of making taxes more progressive in order to generate sufficient public revenue for social services spending, as well as end gender bias, the preferential treatment for multinational corporations and elites, tax avoidance and evasion, and illicit financial flows from the South to the North.
It states further: “We demand more decisive action from governments at a national level and as an international community most especially at this time when we can ill-afford the continuation of undermining public revenues. Furthermore, tax justice and addressing illicit financial flows have positive impacts on governments’ propensity for relying on heavy public borrowing. At the same time, we emphasize that tax justice must be accompanied by government budgets and spending programs that give primacy to the immediate needs of people and communities in the face of the multiple crises, providing essential services, fulfilling human rights and social justice, and addressing inequality.
“Developing countries are in need of more tax revenues now. There must be a halt to the unmitigated plunder of natural resources and the massive net outflow of wealth from the South to the North. We say enough to the domination of our economies by multinational corporations. We say no more to unfair trade relations, the exploitation of our workers as cheap labor domestically and overseas, and the payment of interests on unsustainable and illegitimate debt,” said Nacpil.
Hosted and produced by Naomi Fowler of the Tax Justice Network
You know, we can afford to do all of the things that we need to do to make the world safer, more sustainable, more equal – the money is there. And the question is who is in charge of that money, or what rules have we placed on that money? And currently the rule that we’ve placed is shareholder value and profit maximisation, and money will only ever be used in that way, unless we manage to find ways to repurpose it.”
~ Michelle Meagher, competition lawyer and author
I’ve spent my whole career looking at dirty money flows and the offshore financial world. And I’ve been hearing these pathetic excuses about yeah, that’s in the past, but everything’s changed. I’ve been hearing that for 40 years. Yes, change has happened, but they’re so superficial and compliance is so weak and the regulatory regulations have been undermined to such an extent that the whole thing is nothing more than a fig leaf, an exercise in window dressing. And as far as most banks are concerned, and I’ve heard this from compliance officers working with the biggest banks in London, they just say the whole thing is a charade.“
~ John Christensen of the Tax Justice Network on the #FinCen files
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Google, Facebook, Amazon e muitas outras empresas da economia digital são muito lucrativas e, ao mesmo tempo, pagam menos impostos que uma loja perto da sua casa, proporcionalmente. É que governos de todo o mundo têm dificuldades para tributar a propaganda nas redes sociais ou serviços de streaming de áudio ou vídeo, por exemplo. Focado na produção e comercialização de bens, mercadorias e serviços “físicos”, os sistemas tributários internacional e nacionais precisam urgentemente se modernizar e chegar a um formato mais justo e que inclua as corporações da economia digital. Esse é o tema do É da sua conta #17.
Embarque com a gente num tour pelo sul global para saber como e em quais países da África e da América Latina as empresas da economia digital já pagam impostos. Nossa última parada é o Brasil. Ouça também como está o debate sobre tributação digital em espaços de governança internacional, como a Organização para a Cooperação e Desenvolvimento Econômico (OCDE) e as Nações Unidas (ONU). Especialistas e entidades apresentam as propostas que já existem para que a economia digital seja tributada de maneira justa.
Viajam conosco neste episódio representantes da Oxfam, do Centro Africano de Tributação e Governança (ACTG), do Centro Interamericano de Administrações Tributárias (CIAT), da Escola de Direito da Fundação Getúlio Vargas (FGVLaw)), Instituto de Justiça Fiscal (IJF) e Aliança Global por Justiça Fiscal (GA4TJ). Embarque com a gente nessa viagem e ouça o podcast!
Welcome to the 33rd and 34th 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.
In this 33rd episode (34th episode details below) we explore the wealth of the Governor of the Central Bank of Lebanon, Riad Salameh. We also look at the tragedy of the Beirut port explosion and the investigation by OCCRP and partners:
In the first segment we deal with the most important tax and economy news from the Arab region and the world, including:
How will Algeria compensate for falling energy revenues?
How long will the global economy continue to shrink according to World Bank projections?
How much does the International Monetary Fund estimate is the size of the cost of corruption and poor governance in terms of infrastructure expenditures?
In the second part we ask what led to the tragic Beirut port explosion in Lebanon? We speak with with Rana Al-Sabbagh, Senior Editor for the Middle East and North Africa at OCCRP, and Riad Kobeissi, an investigative journalist.
الجباية ببساطة #٣٣ – ثروة محافظ البنك المركزي اللبناني رياض سلامة
أهلا بكم في العدد الثالث والثلاثين من الجباية ببساطة. في الجزء الأول نتناول أهم أخبار الضرائب والإقتصاد من المنطقة العربية والعالم، ويتضمن الملخص :
كيف ستعوض الجزائر هبوط ايرادات الطاقة؟
كم مدة سيتواصل إنكماش الإقتصاد العالمي حسب توقعات البنك الدولي؟ وكم يقدر صندوق النقد الدولي حجم الفساد وسوء الحوكمة في نفقات البنية التحتية في العالم ؟
في الجزء الثاني نعود لنفتح الملف اللبناني من خلال حوار مع رانا الصباغ، كبير محرري الشرق الاوسط وشمال أفريقيا في منظمة OCCRP و رياض قبيسي، صحفي إستقصائي، نناقش مهعهما نتائج البحث حول ثروة محافظ البنك المركزي اللبناني ومدى ارتباطه بخروج أموال من لبنان عبر شركات لمقربين منه وهل من ترابط بين هذه الملفات وما أفضت عنه الأبحاث في تفجير مرفأ بيروت.
In the thirty-fourth issue of Taxes Simply الجباية ببساطة we highlight the flaws and suspicions around Covid-19 deals in Tunisia with investigative journalist Khawla Boukrim of e Daraj website.
In the second part of the programme, we stay in Tunisia, where the Assembly of the Representatives of the People is discussing a draft law aimed at combating tax evasion. We discuss this with the President of the Tunisian Financial Circle, Abdelkader Bouderiqa.
الجباية ببساطة #٣٤ – شبهات في صفقات كوفيد١٩ وقانون لإدماج القطاع الموازي في تونس
أهلا بكم في العدد الرابع والثلاثين من الجباية ببساطة. في هذا العدد نسلط الضوء على إخلالات وشبهات طالت صفقات كوفيد ١٩ في تونس من خلال حوار مع الصحفية الإستقصائية خولة بوكريم صاحبة التحقيق المنشور بموقع درج. في الجزء الثاني من البرنامج نبقى في تونس حيث يناقش مجلس نواب الشعب مشروع قانون يهدف لإدماج القطاع الموازي ومقاومة التهرب الضريبي. نحاور في هذا رئيس حلقة الماليين التونسيين، عبد القادر بودريقة لمزيد الوضوح حول القانون.
Some of these people in those crisp white shirts in their sharp suits are feeding off the tragedy of people dying all over the world
~ Martin Woods, a former suspicious transactions investigator for Wachovia, quoted by BuzzFeed.
Alex Cobham, chief executive at Tax Justice Network, said:
“The FinCENFiles leak exposes two major flaws in the global regime to combat illicit financial flows – the process by which financial secrecy jurisdictions are able to facilitate and promote corruption and tax abuse in other countries. We commend the ICIJ and their global media partners in bringing these critical issues to public attention.
“First, the leaks show that the biggest financial market in the world has comprehensively failed to play its role in regulating cross-border flows of suspicious money. The size of the US financial sector and the dominance of the dollar in world trade means that US regulators hear of suspicions relating to illicit financial flows all over the world – but typically lack the capacity or the motivation to explore further, or even to notify other authorities of the threats they face. The USA ranks as the second most dangerous secrecy jurisdiction on our 2020 Financial Secrecy Index, largely for this reason – while demanding with menaces that others improve their transparency and cooperation, the United States typically refuses to provideany such cooperation to others.
“This in turn points to the second major flaw exposed by the work of the ICIJ: that the global system to combat illicit financial flows operates not on the basis of effectiveness, but of power dynamics among countries that are deeply unhelpful to progress. Just as a handful of large economies have prevented the OECD from taking serious action against the tax abuses of multinational companies, which impact lower-income countries most intensely, so too the balance of power around correspondent banking has produced deeply unequal outcomes.
“This leak lays bare deep failures in the US approach to correspondent banking – failures that allow all sorts of clearly high risk financial institutions in the USA and other secrecy jurisdictions to continue providing services to anonymous legal entities, sometimes with clear evidence of criminality. But at the same time, the crackdown on correspondent banking in supposed ‘high risk’ countries (typically lower-income countries) has thrown up obstacles to all sorts of legitimate business – from small- and medium-sized businesses in a smaller country like Barbados struggling to access financial services crucial to participating in international trade, to entire countries such as Somalia facing an almost complete cutoff as banks ‘derisk’ to meet biased international standards.
“The Tax Justice Network hopes that the FinCENFiles can be the catalyst needed to address these gaping flaws in the regulation of corrupt finance and tax abuse – both the failure of US regulators to meet their international responsibilities as the world’s dominant financial market, and the failure of international institutions including the Financial Action Task Force to provide a fair and effective approach to correspondent banking standards.
“Lastly, as will be revealed over the coming days, many of the world’s major financial institutions have comprehensively failed to meet their own responsibilities, in the name of turning a profit – however dirty. Swift and robust action is needed, including potential criminal charges, or banks will simply continue to treat the prospects of being caught and fined as a simple cost of business.”
The UN75 Global Governance Forum brought together “thousands of leaders worldwide from governments, global civil society, and the technology, business, and philanthropic communities to foster new kinds of innovative partnerships with the United Nations system to better address global peace and security, sustainable development, human rights, and humanitarian action, and climate governance challenges.” I was honoured to present the first ‘partnership initiative’, led by Friedrich-Ebert-Stiftung (New York), on “Good Global Citizens: A Dialogue on Wealth and Responsible Tax Conduct for a Fair Post-Covid Global Economy”.
Our initiative aims to explore “a global campaign to tackle two critical drivers of inequality, hidden wealth and tax evasion and avoidance, as a necessary step to lay the groundwork for a more fair economic system that delivers for people at all income-levels of society.” The participating organisations reflect the broad interest of investors, businesses, the global labour movement, academia, civil society and other experts, and included: Bridging Ventures, Epworth Investment Management, Fair Tax Mark, UN DESA, Friedrich-Ebert-Stiftung, ICRICT, International Monetary Fund, Jawaharlal Nehru University – Centre for Economic Studies and Planning of Social Sciences, Oxfam, Pennon Group PLC, UN Principles for Responsible Investment, Public Services International, Tax Justice Network, Transparency and Accountability International, and UNCTAD.
Here’s the speaking note from my two and half minute slot (also available to view, with bonus virtual background – from about 32 minutes in):
The context for our partnership initiative is this: profit shifting by multinationals exceeds one trillion dollars each year, while the stock of assets held anonymously offshore is estimated at between ten and thirty trillion dollars. These are first-order problems in the global economy. Questions of the responsibilities of both businesses and the state have risen in the public consciousness in recent years, and norms regarding tax abuse and a lack of transparency are shifting, sharply so for younger generations. Advances in data technology allow transparency measures that could make a powerful difference.
In particular, our initiative explored two solutions that would boost public finances, tackle illicit financial flows, combat wealth inequality and enable a fairer playing field for business competition.
Global Corporate Standards for Responsible Tax Conduct
To tackle the corporate tax abuse that causes global revenue losses of $500bn each year, businesses should do the following:
Embrace public country by country reporting – companies should begin voluntarily to publish this data on their economic activity, profits declared and tax paid in each country, according to either the OECD standard or ideally the Global Reporting Initiative standard (both of which reflect the original proposal from the Tax Justice Network). Major multinationals including Vodafone and Shell have already committed to publish this data, and just last week the multinational Philips announced it would adopt the GRI standard also.
Publish a binding Policy undertaking not to use tax havens artificially, owned by a named board director.
Disclose their beneficial owners and persons of significant control
Pursue independent assurance from outside of the big accountancy firms.
Global Asset Registry
A global asset registry (GAR) would link the existing data provided by recent tax transparency measures, including on the beneficial ownership of companies, trusts and foundations, and provide missing wealth data, which would allow wealth inequality to be measured and understood, facilitate well-informed public and policymaker discussions and support appropriate taxation. A registry would also prove a vital tool against illicit financial flows, by ending impunity for hiding and using the proceeds of crime.
The Independent Commission for the Reform of International Corporate Taxation (ICRICT) launched a UK pilot study in 2019, and this could be replicated across different countries or at regional level based on feasibility or relevance: financial centres holding cross-border wealth, countries that are more capable of establishing some type of an asset register because they have the financial and technological capacity, or countries that are actively considering the introduction of a wealth tax, such as Argentina, Colombia, Peru or South Africa.
Next steps
The participants in our initiative, including investors, labour unions, civil society and other experts, have committed to continue meeting in exploration and pursuit of these aims, and to engage policymakers around the world on this agenda. We also look forward to the findings of the UN FACTI panel, whose interim report will be published next week, and which is likely to move forward important aspects of this agenda for global policymakers.
South African telecoms giant MTN appears to have avoided paying any capital gains tax in Uganda on the lucrative sale of its investment in mobile phone masts in the country.
MTN’s latest financial statements show a profit of 1.3 billion South African Rand – almost $80 million — from the sale of its interests in Uganda. Taxed at the standard 30 percent rate, this could have yielded $25 million for the hard-pressed country.
According to the newspaper, MTN had a 49 percent shareholding in a Dutch joint venture company which ultimately owns the towers, and it sold its stake in this Dutch company instead of selling the towers themselves.
Ghana could miss out on as much as GH¢400 million in capital gains tax following the sale earlier this year of MTN’s investment in a mobile phone tower business in the country. Ghana may not be able to tax the sale because it took place offshore. MTN sold its shares in a company in the tax haven of the Netherlands, which owns the towers.
MTN’s latest financial results, published last month, say that its profit of 4.8 billion South African rand (GH¢1.6 billion) from the sale is “non-taxable”.
Here, we’re talking bigger sums: nearly $300 million in profits, which equates to over $70m in lost taxes for Ghana. But it looks like just the same trick, with the deep complicity of the Dutch government. The Netherlands is currently ranked fourth most toxic in our global ranking of corporate tax havens, the Corporate Tax Haven Index.
And this trick, known as ‘offshore indirect transfer,’ is of course a much wider problem. The World Bank and International Monetary Fund have warned that this trick is “a concern in many developing countries, magnified by the revenue challenges that governments around the world face as a consequence of the COVID-19 crisis.”
Economically, there is no real difference between a direct sale and an indirect sale like this. But in tax terms, MTN seems to believe that it has got away with making profits in Uganda and Ghana, without paying its tax there. Instead, it wants to free-ride off the tax payments made by ordinary hardworking people in both countries. And they have been working hard:
But is MTN right that it has escaped tax? It has declined to respond to requests for explanation of its tax position by the Uganda Observer and Finance Uncovered (an investigative organisation that spun out from TJN’s journalist training programme), and the Observer article adds:
a source with knowledge of the issue said MTN Uganda requested a private ruling on the tax treatment of the transaction. “They are waiting for the URA to pronounce itself on the matter. They would not have asked for the ruling if they were confident that the transaction was not taxable,” the source said.
Similarly, Ghanaian Business News reports:
a senior source at the Ghana Revenue Authority (GRA) told Ghana Business News that despite what MTN says, the profit may in fact be taxable in Ghana. “We consider every sale as taxable,” the source said, adding that the GRA would study the transaction “to ensure that revenue is not lost to the state.”
We wish Ghana and Uganda luck and support in their struggles against this predatory situation.
And for the Netherlands, time to consider whether facilitating this abuse is what they wish to be known for.
Regulating complex ownership chains – A common goal for tackling beneficial ownership transparency and tax avoidance?
The Tax Justice Network, together with City University London, the Independent Commission for the Reform of International Corporate Taxation (ICRICT), Transparency International and the Financial Transparency Coalition are co-hosting a closed brainstorming round-table on 6 October, from 2 to 4 pm London time to discuss the risks of complex ownership chains and how to address them.
Participation is by invitation only, but if you think you have good ideas to answer the questions below, please write to [email protected] and we will consider your participation based on the number of attendees, and the relevance and diversity of expertise and opinions.
This roundtable invites experts to start thinking and finding answers to questions at two different levels: the ideal long term scenario and measures that could be taken faster.
A. The ideal scenario for the long-term:
Do complex corporate structures (many layers and many different types of legal vehicles) offer any benefit to society that cannot be ensured in any other way? Do these benefits outnumber the secrecy risks?
What is the bare minimum legal structure needed to engage in a specific business or endeavor and what does it depend on? For example, to ensure limited liability an individual would need to set up at least one company. Are there similar legitimate “benefits” or “results” that can only exist when two or more legal vehicles interact with each other? For example, an entity may be required to establish a subsidiary or branch in a foreign country to sell goods or services or to acquire assets in that country, but is there a legal requirement or business purpose that can only be met by establishing more than one subsidiary/branch in that country?
Would complex groups (especially those where the complexity is the result of organic growth of acquiring other firms) choose to simplify their structure if the simplification process was free, or even then would they prefer to stay “complex”? In other words, do complex groups stay complex because it’s too costly to simplify or do they obtain a benefit from being complex?
Does the complexity depend on “legitimate” factors, eg presence in different countries, goal to sell business units, number of employees or income? Should there be different regulations for listed or unlisted companies, active or passive entities (those engaging in business vs those merely holding assets) or by economic sector; or is there a one-size-fits-all approach?
Would regulating corporate complexity (especially vertical length) address only transparency risks, or also tax abuse risks? Does tax abuse depend more on horizontal expansion (having many subsidiaries engaging in different activities, at least on paper), but not necessarily on long vertical chains?
B: Partial measures to implement in the short-term:
What limits on the ownership chain would be easier and better to implement: limits on the length (number of layers) or quality (only allow entities that had to disclose their legal and beneficial owners)?
Should regulations: (i) prohibit complex structures (eg more than 3 layers), (ii) discourage complexity by adding more requirements for complex structures (eg higher regulation, more bureaucracy, additional verification steps, etc), or (iii) should regulations simply require a commercial justification (to be challenged if not convincing), by shifting the burden of proof on the company, as a way to obtain an understanding by authorities on the complexity of the legal vehicles operating in their countries?
How could authorities identify and analyse the ownership structures of the legal vehicles operating in their territories? Should complexity and the length of the ownership chain be considered in absolute terms (eg longest number of layers within a group), or in relation to firms of the same size or sector, or in relation to the total number of subsidiaries within the group?
For regulatory purposes, what other factors would be relevant to assess (and eventually regulate or limit), in addition to the number of vertical/horizontal layers: nationality of legal vehicles integrating the ownership chain, nationality of beneficial owners, shareholding structure (eg 50-50% vs 99-1%)?
How could ownership chains be assessed or limited given that corporate groups may hold interests in other groups as portfolio investment? Should this be limited, eg by requiring that any portfolio investment be held directly by the ultimate parent or by a special subsidiary called “portfolio investments in other non-related companies”? or should the regulation on length of the ownership chain affect only shareholders that own more than 10% (or any threshold)? In other words, the limit on the vertical chain would only apply to what would be considered the core ownership of a company or group, but not to minority investors. Or would this be too difficult to implement in practice or would this create loopholes that could be exploited? If imposing such a limit involved the divestment by corporate groups from their holdings in other groups, would that be beneficial because it would de-concentrate the economy? Or it would be damaging because it would lose financing opportunities?
Background
Individuals may set up a wide variety type of legal vehicles to operate in the economy: companies, partnerships, trusts, foundations, anstalts, cooperatives, etc. They may use them to provide goods or services, concentrate wealth, hold assets, protect vulnerable people, invest money, fund charitable causes, etc. They may also abuse those legal vehicles for illicit financial flows.
A legal vehicle in itself may present both secrecy and tax abuse risks. On the one hand, a company that doesn’t have to disclose its legal and beneficial owners, that uses nominee directors and shareholders, or that has issued bearer shares would create secrecy risks. On the other hand, a “hybrid” entity that exploits different tax rules, eg being considered tax transparent in country A but not in country B, or that manages not to be tax resident in any country at all, would create tax abuse risks.
Both risks may be exacerbated by its complex ownership chain: by either (i) adding many more layers between the entity and its beneficial owners, or at least up to the ultimate parent entity; (ii) employing exotic and secretive types of legal vehicles (eg discretionary trusts, anstalts, etc), or (iii) having many entities or subsidiaries engaging in different activities, at least on paper (treasury, finance, research and development, production, etc.)
In most – if not all – countries, individuals are free to set up any type of legal vehicle using as many layers as they please. For example, even the World Bank/UNODC StAR famous 2011 paper “The Puppet Masters” described the following structure proposed by a member of the Society of Trusts and Estate Practitioners (STEP) in Barbados as “an example of a complex structure that is nonetheless perfectly legitimate”:
This structure, as any one, is likely legal. But is it legitimate? Is it really the case that “investing assets for different family members guided by specific instructions” can only be achieved by using these complex structures that create obvious secrecy risks? (Consider that this was proposed in 2010, way before any country had a beneficial ownership register for trusts).
The more layers up to a beneficial owner, the harder it will be to confirm who that beneficial owner is. Even if the beneficial owner is known at a specific time “today John is the beneficial owner of company A because he owns company D, which owns company C, which owns company B, which owns company A”, it is almost impossible to verify that the information is still updated, unless there is real time information about all changes affecting any of companies in the ownership chain (in the example, on companies B, C and D). The risk of long ownership chains is very real. One research into procurement companies in the Czech Republic found that some of the awarded contracts were given to companies with 20 layers of entities up to the beneficial owner. Likewise, the Tax Justice Network analysis of UK companies’ ownership structures revealed that one company had up to 23 layers up to a natural person. When that company’s information registered at Companies House was checked, it was revealed that they had registered contradictory as well as wrong information (eg informing a company as a beneficial owner).
Complexity doesn’t involve only transparency. The liability and asset shielding available to the different types of legal vehicles and their foreign presence may affect enforcing the law or a judgement despite knowing who the beneficial owner is. So far in the highest-stake divorce case in the UK, the former wife of Russian oligarch Farkhad Akhmedov’s (one of Putin’s allies) has unsuccessfully tried to collect her awarded £453 millions after the husband’s assets were moved into newly created trusts and anstalts.
Likewise, many (or most) multinationals are suspected of engaging in tax abuse to exploit different tax rules and other arbitration situations to minimise their tax liability against, at least, the spirit of the law. For example, one the tax schemes involved in the LuxLeaks scandal showed three different layers of companies in one jurisdiction, eg company “LuxCo 1”, owning “LuxCo 2”, owning “LuxCo 3” which in turn owned “LuxCo 4”.
It is not clear whether that structure is used to exploit some tax treaty or other tax arbitrage or if it is completely unrelated to tax but aimed at other goals. However, given that some well-known tax schemes, eg the double Irish-Dutch sandwich involved many different legal vehicles within a multinational, it can be assumed that tax abuse strategies depend on having some complex structure involving more than one legal vehicle (although it is not clear if tax abuse depends on vertical or horizontal ownership structures or both).
In other words, while a high number of (vertical) layers would make it harder to verify the beneficial owner (for transparency purposes), it is not clear whether many vertical layers or other complexity strategies (eg having a high number of entities to perform different functions) would also be needed to exploit tax arbitrage situations.
Proposals to address complexity
One proposal that the Tax Justice Network has been exploring is to establish length and quality limits on the ownership chain. For example, not more than one or two layers of entities, unless the entity provides a justification. Alternative or complementary quality limits may involve allowing foreign entities to integrate the ownership chain of a local entity, as long as these foreign entities are registered in a country with beneficial ownership transparency and that they are prohibited from issuing bearer shares or using nominee shareholders and directors.
Imposing any type of limit on the ownership chain or complexity, vertical or horizontal expansion of a corporate structure would certainly face strong opposition. As already expressed, individuals (and corporate groups) enjoy absolute freedom on how to establish their legal structures. Countries may also fear that any regulation on the ownership chain may impose barriers that would discourage investment and economic growth. In response to that one can be reminded that no right is absolute, and the private sector has been subject to many regulations that potentially affect investment, their profits and economic growth: labour laws reducing working hours, giving holidays and health care to their workers, environmental regulations, anti-corruption regulation, etc.
Banks and other financial institutions also had to engage in very expensive procedures to prevent money laundering or to collect tax information for automatic exchange purposes which meant that they had to lose money and clients. Economic and financial goals shouldn’t be the only relevant factors to consider, and are clearly not the most relevant ones.
Determining what constitutes “complexity” may be a challenge in itself. For instance, the Puppet Masters report also suggested that
a complex corporate vehicle structure “passes the smell test” only when there are (a) legitimate business reasons to justify the form of the structure and (b) significant arguments against using less complex options that might have been available. (page 55)
It also describes more concrete rules implemented by compliance officers:
One compliance officer suggested an informal “three-layer complexity test” as a quick-and-dirty rule of thumb. Whenever more than three layers of legal entities or arrangements separate the end-user natural persons (substantive beneficial owners) from the immediate ownership or control of a bank account, this test should trigger a particularly steep burden of proof on the part of the potential client to show the legitimacy and necessity of such a complex organization before the bank will consider beginning a relationship. (page 56)
Or an even more demanding and objective test:
One Indian bank refuses to do business with a Liechtenstein Anstalt, regardless of the circumstances, because they do not understand “what it is, why someone would use it, or what business it has in India.” (page 100)
Similar to the last two criteria, the goal of this roundtable is not to discuss what is currently legal (as expressed above, a 23-layered ownership chain is legal), but what should be considered legal or acceptable.
Welcome to this month’s 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! (Ahora también estamos en iTunesy tenemos un nuevo sitio web.)
En este programa con Marcelo Justo and Marta Nuñez:
El impacto de la renegociación de la deuda argentina en las negociaciones del mundo en desarrollo
Mientras aumenta la deuda de América Latina
Cómo cambiar las reglas fiscales para salir de la crisis
Y la Pandemia en América Latina. El caso de Paraguay: coronavirus, corrupción y desigualdad.
On 26 August, together with the Inter-American Center of Tax Administrations (CIAT), we hosted a webinar in Spanish for Latin American authorities involved in beneficial ownership transparency. The Spanish webinar was based on the first and second set of presentations on beneficial ownership verification held in English by the multi-stakeholder group to promote beneficial ownership verification.
Participation in the webinar included the Financial Action Task Force of Latin America (GAFILAT), the Organization of American States (OAS), the Inter-American Development Bank, the Open Government Partnership (OGP) and the Extractive Industries Transparency Initiative (EITI). From civil society organisations, participation included many members of the Financial Transparency Coalition including Fundacion SES, Latindadd, Global Financial Integrity and the Pan African Lawyers Union (PALU).
The 262 officials who attended the virtual webinar joined in from Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay. Some officials from Spain also attended.
When looking at the type of authorities represented in the webinar, participation included 125 officials from tax administrations, 73 from financial intelligence units, 25 from bank and financial regulators, 13 from commercial registries and 26 from other authorities (eg strategic planning, secretary of the Presidency, etc).
Presentations included a summary of past events and webinars related to beneficial ownership (including the Buenos Aires event that has been promoting public beneficial ownership since 2015); loopholes in the legal framework that may prevent beneficial ownership verification; cases of verification and exchange of confidential information performed by authorities, particularly in Uruguay, Denmark and Slovakia as well as by European financial intelligence units; and verification strategies implemented by journalists, academia and private companies.
The webinar was also part of a strategic goal of bringing together authorities from tax administrations and the financial intelligence unit given how relevant beneficial ownership transparency is for both fields. Unfortunately, authorities from these two fields often work in silos and miss out on opportunities to cooperate and exchange information with each other, despite the obvious synergies between tax and anti-money laundering.
Cooperation among these authorities is also relevant for asset ownership information as addressed by the Global Asset Register and by automatic exchange of bank account information. The OECD’s automatic exchange framework (the Common Reporting Standard and the treaties and conventions that underpin it) prevent tax authorities from sharing bank account information for non-tax purposes (such as anti-money laundering and the fight against corruption). This (counter-productive) secrecy also affects the publication of statistics, as faced (and partially misunderstood) by Germany. However, there is a light at the end of the tunnel, and Latin America is leading the way with the Punta del Este Declaration which calls precisely on more cooperation between tax and anti-money laundering authorities, including in relation to exchange of information. (In relation to this, the Financial Secrecy Index “rewards” countries that signed the Punta del Este Declaration under indicator 18 on automatic exchange of information).
We hope this will be the start of more cooperation between tax and anti-money laundering authorities as well as an increase and improvement in beneficial ownership transparency in the region.
Last night, the United Nations published a document with a ground-breaking tax justice recommendation for the global meeting of ministers of finance which takes place this Tuesday 8 September. But just a few hours later, the document was replaced with another, claiming to be the ‘advance unformatted version’. This document was identical in most respects, except for a lack of formatting – and the elimination of the recommendation in question.
While the opposition remains strong – and we had been told to expect fierce pushback on this specific text – the episode confirms the direction of travel in international tax. Faith in the OECD’s ability to reflect the concerns of non-members has hit rock bottom, for sound reasons, and new UN instruments are increasingly likely to follow. This post explains the context, then details the U-turn, before drawing out some implications – for the ministers of finance meeting, for the UN FACTI panel, and for the OECD.
Tax justice gaining ground in the pandemic
The context for this U-turn is the steady advance of tax justice concerns globally, as the pandemic lays bare the critical importance of well-funded public services, and the brutal cost of unmitigated structural inequalities.
Throughout the last few months, two UN processes have been running somewhat in parallel. Predating the pandemic, the UN FACTI Panel (the High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda, convened by Nigeria and Norway) has been running since January and is working on an assessment of the gaps in the global financial architecture. Later this month, its interim report will set out a range of proposals, to be discussed before the final report in January 2021.
As we explored earlier, the FACTI panel’s background papers identify some critical issues, and propose a number of tax justice policy responses. However, the panel is facing sustained pressure from various high-income countries not to recommend UN action, and instead to continue to rely on the OECD and related mechanisms – despite the systematic findings of more intense tax losses for lower-income countries.
The more recent, and immediate process is the Initiative on Financing for Development in the Era of COVID-19 and Beyond. The initiative, convened by Canada and Jamaica, has run over the last few months with six discussion groups (full disclosure: I’ve been honoured to be an invited expert for the process, including for the group addressing illicit financial flows).
In the FfD COVID initiative, as in the FACTI panel, the dynamic has been a clear one: non-OECD countries tending to highlight the structural flaws that result in their disproportionate losses, and being inclined towards UN solutions; while OECD countries favour retaining decision-making power at the OECD.
This is not a new division, of course. But what is new is the depth of engagement on the issues, and the commitment of non-OECD countries to insist on meaningful progress. At the same time, there may perhaps be less unity among OECD members, a number of which have been among the countries to suffer most heavily from the pandemic, and see the politics shift most strongly around funding public services and addressing inequalities.
The pivotal proposal in this context of shifting division has been that of a UN tax convention.
UN Tax Convention
The idea for a UN Tax Convention has been advanced by the tax justice movement, notably the Tax Justice Network and our sister organisation the Global Alliance for Tax Justice. Over the last few years in particular, the idea has gained ground as a mechanism to ensure progress on including all countries in the full benefits of our ‘ABC’ of tax transparency (Automatic exchange of financial account information; public registers of Beneficial ownership for companies, trusts and foundations; and public, Country-by-country reporting from multinational companies); and creating a globally inclusive and representative forum to discuss and eventually to set future international tax rules and norms.
As the Civil Society FfD Group (including Women’s Working Group on FfD) put it in their input to the process, priorities must include:
UN Tax Convention to comprehensively address tax havens, tax abuse by multinational corporations and other illicit financial flows through a truly universal, intergovernmental process at the UN. Unless the failures of the international tax system are urgently addressed, countries around the world will continue to lose billions of dollars due to illicit financial flows. This will increase the already unsustainable debt levels and undermine governments’ abilities to respond to the crisis;
…
It is time to back a truly universal, intergovernmental process at the UN to comprehensively address tax havens, tax abuse by multinational corporations and other illicit financial flows that obstruct redistribution and drain resources that are crucial to challenging inequalities, particularly gender inequality.
Taxing income, wealth and trade should be seen to support the internationally agreed human rights frameworks, as without taxation we cannot mobilise the maximum available revenues. Tax abuse and tax avoidance also needs to be considered under the extraterritorial obligations of states towards other states not to hamper the enjoyment of human rights via blocking financing through abusive tax laws, rules and allowing companies and wealthy individuals to abuse tax systems.
That U-turn in full…
Back to the issue at hand: last night, the key documents from the whole process were published. These were parts 1 and 2 of the ‘Menu of Options for the Consideration of Ministers of Finance’ – in other words, the officially approved summary of all the work from each of the six discussion groups, the country positions and expert inputs, signed off as recommendations for the world’s ministers of finance to consider when they meet in just four days’ time.
The central aim throughout the process had been to boil down the many suggestions received from countries, UN bodies and civil society – hundreds, overall – to a small enough number that ministers of finance could reasonably make an evaluation, and draw some conclusions for the national challenges each faces. In many cases, suggestions were excluded, or at best merely noted. But in some few cases, there were explicit recommendations.
And so there was much rejoicing among those of a tax justice view when last night’s report included, in the executive summary no less, the following emphatic position:
A UN tax convention is also recommended, inter alia to mobilize the maximum available revenues, address tax abuse and avoidance and ensure the necessary fiscal and policy space for an effective recovery.
UN, 2020, Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Ministers of Finance, Part I (p.7).
And that rejoicing was followed today by much gnashing of teeth as the document was replaced by another, apparently identical – except for bar the total removal of the quoted recommendation. Here’s the single result of a pdf comparison tool.
Thanks to Riley Zecca for running the comparison. Screenshot: DiffChecker.
Here’s the comparison of text – not often you see an organisation deliberately replace a nicely formatted version (here, on the right), with the basic unformatted one. And all to cover a U-turn…
Some implications
It’s tempting simply to be depressed by this episode, confirming as it does the view that behind closed doors, internal UN processes can be all too easily bent to the will of a few powerful OECD member states. Some would argue this is a reason not to seek a UN forum for international tax issues if the same countries will dominate as they do at the UN.
But there’s already a difference: here, we know which countries opposed this measure, because unlike most OECD negotiations, formal UN processes are public. And here, the results were published – even if only briefly. So even this bad example of UN performance confirms its relative appeal, if what we hope for is a broadly transparent process, with some degree of accountability. (The underlying problem of power imbalances between imperial, post-imperial powers and others cannot be solved by choice of forum – but the costs of those inequalities can be mitigated to a degree.)
For Tuesday’s ministers of finance meeting, this episode sends a clear signal – the opposition will not tolerate the beginning of negotiations over a UN tax convention. And yet such a blatant display of that blocking power may have the opposite result. The G77 group of countries had drafted a resolution last year to start negotiations, but ultimately withdrew it to save consensus on other points. This meeting now offers a straightforward opportunity to raise it again, in the knowledge that there has been broad backing within the process already. I’ll be sure to mention it, at least, in the unlikely event I’m called on to speak… And media interest may just have been piqued by the UN’s strange reversal.
For the UN FACTI panel, the position could not be clearer. All of the discussions and background research confirms the need for a UN tax convention, alongside other major reforms. The interim report due out later this month should identify the gap, and in doing so lay the ground for discussions with UN member states that could form the basis for a specific recommendation for the possible content of a UN tax convention, when the final report comes out early next year.
Lastly, we might ask where this leaves the OECD. On the one hand, the tide is clearly turning against having the “rich countries’ club” set the terms for international tax and transparency. The systematic exclusion of lower-income countries, and the failure to address tax havenry of OECD members and their dependent territories, have built to a significant loss of confidence. The pressure for effective action due to the pandemic merely accentuates the disappointment.
And yet the OECD is also being given a clear direction. Pressure is growing for countries to introduce wealth taxes – but too many countries have no access to the data, generated under the OECD Common Reporting Standard, on their tax residents’ financial accounts offshore. The OECD could lead a transparency initiative here, with – for once – disproportionate benefits for non-members.
Pressure is growing, too, for international corporate tax to reflect the location of companies’ real economic activity – sales and employment – rather than their contrived profit shifting. While the OECD has had to quash the G24 countries’ proposal in spite of the Inclusive Framework’s support, in order to accommodate a US-France deal, the OECD could still reclaim some face by moving quickly to set its standard for companies’ country by country reporting to be public data.
Given that the most intense losses from corporate tax abuse, like those from offshore evasion, fall on lower-income non-OECD members, this too would disproportionately benefit the latter.
The OECD could remain set on keeping its members happy, but in the longer term this can only succeed if the OECD retains the right to set rules for all – and that is now, rightly, in serious question. A failure to respond will see growing unilateral and UN action, so that even OECD members will come to focus their attention elsewhere.
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