Even before the Coronavirus pandemic hit, international tax abuse was pillaging government coffers all over the world of resources desperately needed to fund essential public services like health care. Now that the world is struggling to tackle both the direct health impacts of the crisis and the economic fallout that has come with it, confronting abusive international tax practices is more urgent than ever.

Every year, out sister organisation the Global Alliance for Tax Justice coordinates a worldwide campaign demanding stringent measures to confront this injustice. This year, the Global Days of Action for Tax Justice will run from 14-17 September and focus on the particularly pressing needs stemming from the Coronavirus crisis.

For all those who would like to support this important effort, the Global Alliance has made a campaign action toolkit available here. In it, you will find some ideas on actions that you can organise, contribute to, and take part in!

The Toolkit already shows the key elements for the campaign actions and activities during the Global Days of Action, but the Global Alliance will share more visuals and social media materials in the coming days. 

In the meantime, here are some easy steps that you can already take to be part of the Global Days of Action:

• Bookmark the campaign action toolkit link (or save the short URL: http://bit.ly/GDOAToolkit)
• Share the Save The Date posts on Twitter and Facebook 
• Widely circulate GATJ’s Statement on Tax Justice and COVID-19 titled, “Towards tax justice in a post-pandemic world: An integral part of the struggle against the neoliberal agenda”.
• Start popularizing the slogans in your events or in social media:
  – Tax private wealth to safeguard public health!
  – Uphold tax justice to overcome the crisis!
• Add the #TaxJustice slogan filter to your Facebook profile photo. You can get the filter here.
• Submit a video for the video project – Be a voice for people’s survival. Be a voice for tax justice. You will find the guidelines for the video recording and submission in the Toolkit. 

If you have other ideas for campaign actions, let the Global Alliance know and they will add them to the Toolkit. More importantly, if you have planned activities during the Global Days of Action, do share them with the Global Alliance so that they can show their solidarity!

Interested in participating? Contact the Global Alliance for Tax Justice:

• Joy Hernandez ([email protected]) for Asia and other general inquiries
• Caroline Othim ([email protected]) for Africa
• Marie Joubert ([email protected]) and Lays Ushirobira ([email protected]) for Latin America and the Carribean
• Dereje Alemayehu ([email protected]) for Europe and North America

Welcome to the 32nd edition of our monthly 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 and Osama Diab of the Egyptian Initiative for Personal Rights, also an investigative journalist. 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.

Taxes Simply #32  – Coronavirus and the increase in MENA billionaires’ fortunes

In the thirty-second edition of Taxes Simply Walid Ben Rhouma discusses with Osama Diab the recent data issued by Oxfam regarding the increase in billionaires’ fortunes in the Middle East and North Africa during the Corona pandemic crisis.

In the second part, we present a summary of the most important tax and economy news from the Arab region and the world including:

• No tax exemption for Egyptian government institutions on profits from sovereign debt investment
• The UK denies that it plans to drop taxes on digital giants
• Uganda summons its ambassador to Denmark over a plot to steal coronavirus aid money.

الجباية ببساطة #٣٢ – كورونا وزيادة ثروات المليارديرات في الشرق الأوسط وشمال أفريقيا

أهلًا بكم في العدد الثاني والثلاثين من الجباية ببساطة. في هذا العدد يتحاور وليد بن رحومة مع أسامة دياب بخصوص البيانات الأخيرة الصادرة عن منظمة أوكسفام بخصوص زيادة ثروات المليارديرات في منطقة الشرق الأوسط وشمال أفريقيا خلال أزمة جائحة كورونا.

أما في الجزء الثاني، نتناول ملخص لأهم أخبار الضرائب والاقتصاد من المنطقة العربية والعالم، ويشمل ملخصنا للأخبار: ١) إلغاء إعفاء بعض المؤسسات الحكومية المصرية من ضريبة أرباح الاستثمار في الديون الحكومية؛ ٢) المملكة المتحدة تنفي أنها تخطط لإسقاط الضرائب على الشركات الرقمية العملاقة؛ ٣)  أوغندا تستدعي سفيرتها في الدنمارك بسبب مؤامرة لسرقة أموال إعانات كورونا.

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

Pour cette 19^ème édition de votre podcast « Impôts et Justice Sociale », nous revenons sur la taxation de l’économie numérique au sein de la Communauté Economique des Etats de l’Afrique de l’Ouest (CEDEAO), grâce à une thèse de doctorat rédigée par Aboubakar Nacanabo. Le document se présente comme une contribution aux projets législatifs en cours dans cette sous-région. Nous allons aussi au Cameroun, où une récente étude a démontré que le pays a un gap brut de 31,5 milliards $ en dix ans sous la forme des flux financiers illicites.

Ce programme est produit en Afrique francophone par le journaliste financier Idriss Linge basé au Cameroun.

Participent à ce podcast:

• Aboubakar Nacanabo: Inspecteur des Impôts au Burkina Faso, Expert en Fiscalité Internationale
• Jean Mballa : Directeur Exécutif du CRADEC, Cameroun

Vous pouvez suivre le Podcast sur:

• Le télécharger pour l’écouter hors connexion sous le lien suivant
• Notre page facebook à l’adresse: https://www.facebook.com/impôts et justice sociale/
• Notre Twitter: www.twitter.com/ImpotsSociale  
• La publication sur Youtube et notre nouveau site web www.impotsetjusticesociale.com
• Et pour ceux qui ont l’application Stitcher et iTunes ect
• Si vous souhaitez recevoir cette production ou être média partenaires ou simplement contribuer, vous pouvez nous écrire à l’adresse Impô[email protected]

Ainda que existam medidas justas para enfrentar a crise da pandemia, que intensificou as crises econômica, social e climática, alguns governos não as colocam em prática. O que está faltando? A adequada distribuição econômica e de poder, que, “traduzida” para princípios de justiça fiscal são duas palavras que começam com a letra R: redistribuição e representatividade são abordadas no É da sua conta #16.

Redistribuição e representatividade são essenciais para a democracia plena. Sizaltina Cutaia, da Open Society Angola apresenta o contexto democrático angolano e mostra como o país luso-africano tenta implementar medidas para dar mais transparência ao sistema tributário. A reportagem de Luciano Máximo mostra o momento de derrocada da democracia no Brasil e ilustra como isso prejudica  a adoção de medidas progressistas tanto na área social quanto na fiscal. 

Os princípios internacionais de direitos humanos devem orientar a forma como governos arrecadam tributos e alocam recursos orçamentários, explica Sergio Chaparro, do CESR, que traz o exemplo dos avanços na Argentina. E o nosso colunista, Nick Shaxson, aprofunda os conceitos de redistribuição e representatividade, dois dos 4 “Rs” da justiça fiscal (receita, redistribuição, reprecificação e representatividade).

Participantes desta edição:

• Charles Alcântara, Federação Nacional do Fisco Estadual e Distrital (Fenafisco)
• Deborah Duprat, subprocuradora-geral da República aposentada 
• Ligia Giovanella, da Associação Brasileira de Saúde Coletiva (Abrasco) e Centro Brasileiro de Estudos em Saúde (Cebes).
• Nick Shaxson, Tax Justice Network
• Sergio Chaparro, Center for Economic and Social Rights  (CESR) e Iniciativa P&D
• Sizaltina Cutaia, Open Society for Southern Africa (Osisa)

Mais informações:

Iniciativa dos princípios e diretrizes dos Direitos Humanos na política fiscal – https://derechosypoliticafiscal.org/pt/

Os 4 erres da justiça fiscal, com Nicholas Shaxson, no É da Sua Conta #1

The 4 Rs of Tax Justice no blog da TJN

Branko Milanovic sobre desigualdade de renda no É da Sua Conta #3 

Conecte-se com a gente!

www.edasuaconta.com 

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

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

Updated: an earlier version of this blog incorrectly referred to the legal opinion of the Advocate General as belonging to Luxembourg rather than to the European Court of Justice.

For years, we have advocated the automatic exchange of bank account information across borders. The previous “on request” system, where a country had to make specific requests about specific taxpayers already under investigation, was only slightly better than nothing, as our 2009 report explains.  Sadly, even in 2020 amid a global boom in automatic exchanges of information (on all resident taxpayers,) major tax havens are still throwing up obstacles wherever they can.

Two recent cases in Luxembourg (known as C-245/19 and C-246/19) provide a recent example. Spain has asked Luxembourg to share information on contracts signed between some companies, as well as bank account records from one company.  The Advocate General (AG) Kokott of the Court of Justice of the European Union (ECJ) has presented a legal opinion that third parties (the companies and the bank) should be able to seek judicial review to reject the exchange of their information. More surprisingly, perhaps, she has proposed worsening two secrecy mechanisms.

The first one is about widening the concept of “fishing expeditions”. While many tax authorities face staff and budget cuts, this extract below describes all the hoops that the requesting tax authority has to jump through before they dare to request information from Luxembourg or any other country. (Of course, the opinion is based on Swiss practices:)

Different factors should therefore be taken into account in order to distinguish the information likely to be relevant from the research which is carried out irregularly in all directions… The behavior that the taxpayer has adopted in the past also matters. To this end, the Swiss federal court rightly demands concrete evidence attesting to a breach of tax obligations. This would be the case here, for example, if the taxpayer had not previously declared accounts or relationships with third parties related to him or if he had given contradictory indications in the tax procedure. Finally, the elements which the applicant tax authorities have investigated so far are also important. For example, undeclared business networks with unclear reciprocal financial flows may create a particular need for information. The same applies when the investigations carried out so far have given contradictory results which can only be clarified with the assistance of Bank A.

In the present case, the Spanish tax authorities must therefore set out, for example, elements which lead them to believe that the taxpayer has other accounts at bank A, that there are other undeclared income and which allow it to assume transfers of assets between taxpayers and companies B, C and D.

Without these concrete elements, a request for information aiming to find in a bank all the accounts of the taxpayer and all the unspecified accounts of third parties linked in one way or another to the taxpayer, is not regular with regard to of Directive 2011/16 but is an all-out search (consisting of “going fishing”). (translated from original in French)

A prohibition on “fishing expeditions” were a staple tax haven response during the heyday of the previous (near-useless) “on request” system of information exchange, which we had hoped to see the back of.

More problematic, though, is a second secrecy argument, whose implications go far beyond exchange of information. It relates to how society treats legal persons (such as companies). Societies around the world currently give legal persons rights as if they were (natural) persons: a company, for instance, may sue or be sued, own assets in its own right, enter contracts or sell goods or services, even if many of them are permitted to hide the natural persons (called “beneficial owners”) who operate behind them.

Now, the Advocate General to the European Court of Justice based on other case law suggests that legal persons should also be entitled to the rights of privacy and family life. This conclusion with huge implications seems to have been reached, without any clear reasoning:

Article 7 of the Charter contains the fundamental right of everyone to respect for his private and family life. With regard to the processing of personal data, it extends to any information which concerns a specific or determinable natural person. The protection of privacy also encompasses professional or commercial activities, including the transactions which result therefrom. This includes information relating to bank data.

As such, legal persons can also invoke section 7 of the Charter. However, the justification for an encroachment on section 7 of the Charter may obey, for legal persons, to other criteria than those applicable to natural persons…

In the present case, information relating to bank accounts and assets has been requested, which also concerns companies B, C and D. These legal persons may therefore rely on Article 7 of the Charter. (Translated from original in French)

(Here’s an official English summary of the case suggesting the same conclusion.)

As regards concerned third parties (here, several companies), the Advocate General points out that under the case-law the fundamental right to the protection of personal data (Article 8 of the Charter) relates in principle to natural persons. Legal persons may, however, in any event rely on the fundamental right to respect for private and family life (Article 7 of the Charter) where, as here, information concerning bank accounts and assets is demanded.

The argument is of course fallacious. It is fine that natural persons are entitled to privacy in their private lives (just as your doctor shouldn’t publish details of your ailments on the internet.) But to then assert that a legal person should enjoy the same privacy protections as a natural person is just that: an assertion. It does not follow at all.

A personal bank account is covered by the protection of private and family life, but not because it’s a bank account: it is because it belongs to a natural person.

Here the Advocate General isn’t saying that a natural person taxpayer would be entitled to extend their protection of private and family life to their assets and bank accounts, but that a company is entitled to the protection of private and family life because it has assets and bank accounts (and thus is entitled to seek judicial review because the case affects the protection of private and family life).

The right is for natural persons and their belongings, not for things and then extended to whoever owns them.

Societies need to start claiming back limits to the infinite freedoms of legal vehicles that enable them to enjoy secrecy, limited liability or full immunity, private property and now also the protection of family life.

Image courtesy of Kristina Flour/Unsplash

For some years now, countries have been sharing information about bank accounts held by each others’ residents, implementing “automatic exchange of bank account information” under the OECD’s Common Reporting Standard (CRS). (This is what we called for many years ago, and were scorned at the time for being naïve and utopian.)

As more countries join the system, however, lower-income developing countries are being excluded because without sophisticated information-collecting mechanisms they cannot easily reciprocate even though this is usually pointless (it’s unlikely that rich Swiss crooks will stash their loot in Nigeria, for instance). The other big problem is the United States, whose Foreign Account Tax Compliance Act (FATCA), which is similar to the CRS, is good at getting other countries to send banking information to the US, but shares very little information in return. (That is why the United States is one of the world’s biggest tax havens.)

Information is now being shared across borders, but journalists, civil society organisations and others cannot know much about automatic exchanges other than the fact that they are happening. Do we trust governments to use them wisely? No — and we especially mistrust many tax havens (in the EU, some countries didn’t even bother to open the CDs containing the information).

So we have been asking at least for statistics: we have even designed a template (see p37 of this report.) Global statistics would, among other things, show avoidance schemes and other red flags, say if rich Italians closed their accounts in Switzerland and moved them to Luxembourg, or if they are acquiring ‘golden visas’ to escape being reported altogether, or hiding behind lawyer-held accounts. This is the only way in which we can hold authorities to account for how they are using the information they are now receiving (and sending). In addition, we argue that countries should report about how they are using the received information, such as whether they were able to match it to the tax returns of local taxpayers, and whether sanctions were imposed.

However, these statistics, such as the ones recently published by Germany, don’t help developing countries that are excluded from the automatic system. That should change. But even if these countries are excluded from the direct exchanges of information, there is still plenty that can be done for developing countries. We argue that countries using the CRS must adopt the “wider-wider” or “widest” approach when collecting information from their local financial institutions (following the examples or Argentina, Australia, Estonia, and Ireland). Countries implementing the “widest” approach require local banks to collect and report to authorities information on all account holders, not only on those residents from countries participating in the automatic exchange scheme. This would cover residents from excluded lower-income countries.

Countries should then also publish statistics on what they have found. This would help lower-income developing countries, which would at least be able to know how much money in total their residents hold in each financial centre (but they still unfortunately wouldn’t be able to know who those accounts belong to because they are excluded from automatic exchanges).

In fact, Australia has already (thanks in no small measure to pressure from TJN-Australia) started publishing such statistics: they describe the accounts held at  Australian financial institutions by residents from 248 jurisdictions (of which only 100 participate in automatic exchange of information.)

Now, back to Germany.

Based on our research and proposals, Fabio de Masi (Die Linke) with support from Tax Justice Network-Germany made a parliamentary enquiry to obtain statistical information on automatic exchanges relating to Germany. They have received a reply which they shared with us, which raise a number of questions to be investigated further and addressed.

The statistics are not as comprehensive as we would like. For instance, while the CRS covers financial account information that may be held in depository banks, custodial banks, some investment entities and some insurance companies, the statistics refer to all accounts and income together, without making any distinction. Annoyingly, statistics were produced as a pdf rather than as machine-readable data, but after spending some time converting the data into an Excel document, here’s what we have found.

Preliminary observations on Germany’s exchanges under the OECD’s Common Reporting Standard (CRS)

1. Secrecy jurisdictions opposing statistics

The UK, a self-proclaimed transparency champion, has refused to let Germany publish even statistical information on the information sent by the UK relating to accounts held by German taxpayers in UK financial institutions. (The same happened with Canada, Cayman Islands, Isle of Man and South Korea.) These refusals are strange since there cannot be a privacy problem. No personal information is published: only collective statistics.

Although it is nonsense that a country may prevent another from publishing statistics that involve no personal information, in any case this refusal could only refer to information sent by those opposing countries: for instance, if the UK told Germany that there are X Germans with bank accounts in UK banks. However, the UK should have no say at all on the information reported by German banks to German authorities about British account holders in Germany. That is pure German data.

Unfortunately, Germany got it wrong and failed to publish statistics on the accounts held in German banks by residents from these opposing countries (for example, how much money Brits have in Germany). In contrast, Australia did publish statistical information on accounts held by residents of the UK, the Isle of Man, Cayman and more than 200 other jurisdictions. Germany can easily do it.

In any case, we have taken the UK’s refusal as an encouragement to submit a Parliamentary Enquiry in the UK for them to publish the data. Let’s see what comes back.

1. Voluntary secrecy affecting statistics

Another factor limiting German statistics even further is the “voluntary secrecy” chosen by some countries under the CRS. This is where a secrecy jurisdiction chooses not to receive any bank account information from foreign countries. According to the OECD’s Global Forum which assesses countries compliance with exchange of information, this option was chosen at least by Anguilla, The Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Kuwait, Marshall Islands, Nauru, Qatar, Turks and Caicos Islands and United Arab Emirates.

As we had warned, this voluntary secrecy by those countries means that German statistics report less data regarding non-residents holding German bank accounts. Germany published information about Germans’ accounts in 88 countries, but when it comes to accounts held by foreigners (non-residents) in German financial institutions, Germany published information for only 66 countries. So 22 jurisdictions are missing: all the voluntary-secrecy jurisdictions (plus Aruba, Belize, British Virgin Islands, Costa Rica, Curacao, Grenada, Ghana, Macao, Montserrat, Lebanon, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines and Vanuatu. (For aficionados of our Financial Secrecy Index, this list correlates to Indicator 18.)[1]  

The data

The data produces a number of anomalies and questions.

a) Germans’ foreign accounts in 2018 (info that Germany received from other countries)

As already reported by Business Insider and der Spiegel, in 2018 Germans held most of their overseas bank account money in tax havens: Jersey (180 billion Euro), followed by Switzerland and Luxembourg. Other than EU countries and India, two other secrecy jurisdictions stand out: in 9^th place is Guernsey (10 billion Euro) and 11^th Singapore (3 billion Euro).

If we mine the same data to calculate average account balances, another strange picture emerges.

The top 15 countries by average account balance are all typical tax havens and secrecy jurisdictions: Jersey is top, with 15 million Euro per account. But it is odd that the average account balance of German account holders is 100 times larger in Jersey than in Switzerland. Does this relate to the fact that German individuals have more personal money in Switzerland, while German entities or investment funds have more in Jersey?. We don’t know, because German statistics fail to disaggregate this, but it should prompt further investigation.

The strangest thing, however, is the average income per account. In this case, Germans reported an average of 2 million Euros of income per account in Colombia, followed by Argentina and Curacao (ca. 150,000 Euro of income per account). In Switzerland, the average was merely 50,000 Euro of income per account. Was this a mistake, or are Germans making vastly more money in Colombia from financial assets? Again, further investigation is needed. Similar outliers are found when comparing income and account balance (how much income was reported for every Euro of account balance). For Colombia, the relationship is 19,000 per cent – 190 times more income than account balance – which is ridiculous. In contrast, in Switzerland or Luxembourg the relationship was closer to 30 per cent. This, too, merits further investigation.

More questions arise when we consider the accounts in Germany held by non-residents.

b) Accounts held by non-residents in Germany in 2018 (info sent by Germany to other countries)

These show that:

Residents of Switzerland, France and Austria, and mostly of EU countries, have the highest number of accounts and account balances in German financial institutions.

However, when looking at the income from financial assets held in German financial institutions, Dutch account holders are spectacularly successful compared to the rest. 210 billion Euro, compared to incomes between 4.3 and 2.4 billion Euro for account holders from Switzerland, Austria and Luxembourg. Again, this merits further explanation.

When comparing the relationship between income and account balance, the Netherlands also stands out, with a value of 2,524 per cent (25 times more income than account balance, on average), which again makes no sense. Next are Saudi Arabia and Russia with 50 per cent each. Another thing to look at. Is it a mistake in the numbers, are Dutch account holders removing their money from the banks right before 31 December when the account balance is calculated, or is there some other explanation?

Again, when looking at the highest average account balances in German banks the list is a gallery of tax havens and secrecy jurisdictions. The only jurisdictions whose residents have more than 100,000 Euros on average are Jersey (726,000 Euro), Monaco (500,000 Euro), then Guernsey, Liechtenstein, Cook Islands, Panama, Luxembourg, San Marino, Cyprus and Malta.

Other anomalies and questions emerge from odd changes in account balances and income. For account holders from Gibraltar, the number of accounts in German financial institutions remained stable at around 800 accounts between 2017 and 2018, but the reported account balance totals went from 1 billion to 73 million Euros, and the income from 730 million to 8 million Euros! Meanwhile, accounts from Jersey residents also stayed at 400 between 2017 and 2018, while their income went from 87 million to 13 million Euro on average. Something similar happened with the Seychelles, where there were also ca. 400 accounts in 2017 and 2018, while the reported income went from 20 million to 4.7 million Euro. Were these account holders terribly unlucky between 2017 and 2018? Did they change investments while keeping their accounts open? Did they keep part of their income unreported? Again, we need to know more.

Preliminary observations on exchanges with the US under FATCA agreements

Once again, the statistics show that the USA is a gigantic tax haven. No information on German beneficial owners of US accounts is provided, because the US does not exchange information at the beneficial ownership level. (Put simply, if a German individual holds an account in a US bank using a non-German company or trust, Germany won’t get any information about it.)

In principle, however, if the US bank account is held by a foreign company, the US may at least provide some information to the country where that company is resident. The figure below illustrates what can and can’t happen.

The first case in the diagram, “Anna” and Company A, involves countries that signed a “Model 2” agreement with the US where they send information to the US but  receive nothing back from the US.  These countries include Austria, Bermuda, Chile, Hong Kong, Japan, Macao and Switzerland, among others. Here, if a German individual holds an account in a US bank through an Austrian company (Company A in the figure below), no country will receive information about that because Austria decided not to receive information from the US.

Panama is different: with a German (“Paul”) owning a Panamanian company, Panama will receive information because the account holder is a Panamanian company.  Germany will receive no information, however. Germany will receive information from the US if a German entity (Company C) or a German individual (Markus) directly hold an account in a US bank: Germany signed a Model 1A agreement so it will receive some basic information from the US.

In contrast, Germany exchanges information with all participating countries, including the US, both at the level of the account holder (entity or individual) or the beneficial owner. Here it is, in another diagram, showing the scandalous imbalance between how much, and what type of information Germany provides the US, including at the beneficial ownership level, compared to what it gets in return.

The US sends Germany information on the income received by German accounts holders but not on their account balances. In contrast, Germany shares information with the US both on the income and the account balance of US account holders (and also for US beneficial owners). This imbalance becomes abundantly clear by comparing the following two tables.

Account balance reported by Germany

(“Konten naürlicher Personen” means “accounts of natural persons”, the next column is “accounts of non-natural persons,” and the third column is “all accounts.”)

Account balance reported by the US:

As regards the publication of statistics, given that Germany collects and exchanges information at the beneficial ownership level (eg the cases of Mary and John), it could easily publish statistics disaggregating what information refers to beneficial owners (who aren’t the direct account holders). However, German statistics fail to disaggregate information at the beneficial owner both for American accounts held in Germany, as well as for bank account information sent and received within automatic exchanges with other countries under the OECD’s CRS.

Conclusion

Statistics on banking data can be very useful to get indications of illicit financial flows, and to look for avoidance schemes or potential mistakes. Statistics may not determine wrongdoing by themselves but signal many outliers that should prompt an investigation, and allow journalists and civil society groups to ask difficult and challenging questions to prevent cover-ups. If we can find all these anomalies based on totals for only three years, provided by one country, imagine all the checks and investigations that would be possible with more details.

It would be still more useful to have disaggregated information based on:

• Account holders who are natural persons or entities,
• The country of residence of the beneficial owners of the account holders which are entities.
• Disaggregated information above based on the type of financial institution that holds the account (eg depository bank or investment entity). For example, Germans had $X million in US depository institutions and $Y million in US investment entities and $Z million in US insurance companies.
• Germany should follow Australia’s example and publish information not only on those account holders who are resident in a jurisdiction participating in automatic exchange of information but also on residents of lower-income countries which are still excluded from the automatic exchange system. In other words, Germany published information on the accounts held in German financial institutions for 66 jurisdictions. Australia did the same for 248 jurisdictions, including all African, Latin American and Asian countries.

All the points above refer to statistical information on the information exchanged. However, authorities have access to the actual identity of account holders. We would thus need statistics on what authorities have done with the information, including on:

• the matching ratios (if Switzerland informed that Markus had an account in a Swiss bank, were German authorities able to match that information to a specific Markus taxpayer to make sure that he properly reported his Swiss account?) Norway, for instance reported a matching ratio of 90 per cent, while in the US it may be lower than 50 per cent). Again, highly useful to hold governments to account!
• sanctions and investigations undertaken by authorities based on taxpayers who failed to properly report their foreign accounts

[1] These countries may include also those that failed to meet confidentiality requirements and are thus unable to receive information (EU countries are still mentioned by Germany because they do have to report information under the EU Directive of Administrative Cooperation (DAC 2)). It’s not clear why Dominica isn’t mentioned in Germany’s statistics, though.

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 iTunes y tenemos un nuevo sitio web.)

En este programa con Marcelo Justo and Marta Nuñez:

• Los millonarios del mundo que exigen pagar más impuestos.
• El papel de las cortes internacionales corporativas en medio del coronavirus.
• América Latina y la Pandemia. Los casos de Chile y Venezuela.
• y el acuerdo de la Unión Europea frente al coronavirus. ¿Por qué Holanda, paraíso fiscal europeo, se opuso hasta último momento?

Invitados:

• Morris Pearl inversor Patriotic Millonaires and Millonaires for
  Humanity
  Twitter: @PatrioticMills
  Instagram: @PatrioticMillionaires
  Juan Pablo Bohoslavsky, ex relator de deuda de Naciones Unidas.
• Ricardo Martner de la Comisión Independiente para la Reforma del Impuesto Corporativo Internacional, el ICRICT
  Twitter: @icrict
  Facebook: @icrict
• Giordana García Sojo del Centro Estratégico Latinoamericano de Geeopolítica (CELAG)
  Twitter: @giordanags
  Instagram: @giordanags
• Javier García-Bernardo, Tax Justice Network
  Twitter: @javiergb_com
  javiergb.com

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Indian court case sees through the sham of discretionary trusts

In a recent ruling from India, a court found that taxpayer Renu Thikamdas Tharani had to pay taxes on several million dollars’ worth held in a bank account in Switzerland. Tharani claimed not to own the account, but to merely be a beneficiary of the discretionary trust (see box) that held the Swiss account through a Cayman company. The bank account was disclosed in the Swissleaks affair (a list of HSBC secret bank accounts leaked by Hervé Falciani). In a judgement worth reading, the bold judges not only quote Shakespeare but give a very blunt description of the reasons why someone would use a tax haven or a bank with a track record of money laundering.

Interestingly, the judges ascertain something we have claimed for a long time: secrecy caused or created by an individual shouldn’t benefit them but count against them. Also, common sense and the principle of reality has to be applied, rather than relying on whatever a taxpayer, an enabler or a tax haven have to say. For instance, when comparing the declared income of the taxpayer to the (undisclosed) amount held in the Swiss bank account, the court in this case concluded it would have taken the taxpayer 11,500 years to earn that much money.

“Discretion” and discretionary trust

A basic trust is a three-way arrangement. A settlor (for example, a rich grandfather) puts assets into a trust which is managed by a trustee (typically a lawyer) on behalf of beneficiaries (for example, the grandchildren.) A discretionary trust is where the trustee has discretion to decide who gets what, when. The beneficiaries can argue that, until they receive a distribution, they aren’t entitled to any of the trust assets, because it’s all up to the trustee. The assets have been given away by the settlor, but nobody is entitled to them yet, so they are in an “ownerless” limbo, ring-fenced from tax, from creditors, or from the rule of law.

“Discretion” is not itself bad: after all, a CEO uses his or her best judgement to manage a company, while a regular trustee manages trust assets on behalf of vulnerable people. The useful function of discretion can be achieved by other means: but no society should tolerate assets being put into this ownerless limbo, above the rule of law.

This Indian ruling deals with many issues we hold dear. First the issue of trusts and especially discretionary trusts, where a settlor puts money into a trust, and the trustee has (on paper) discretion to decide who gets a distribution from the trust money, when, and how much. (We have described the abuses of trusts here and here.) In essence, discretionary trusts should be abolished because they are as abusive as it gets (and there are other, less harmful ways of achieving the discretion function).

They allow individuals to isolate assets from their creditors and from third parties with legitimate claims (such as tax authorities, or the forces of law and order). If abolishment sounds too radical, our proposal is at least to disregard discretionary trusts and the “ownerless limbo” (see box) that they create: if the settlor put assets into a discretionary trust and so far no (discretionary) beneficiary is entitled to them, the assets should be regarded as still being the property of the settlor, for tax and other purposes (eg income, wealth, inheritance) or for any debt owed to creditors. If the law isn’t amended to address this excess, we have to depend on courts, often tax haven courts, to fix the abuses — which may rarely happen.

Before we go into the Tharani case, it is worth mentioning two previous Indian court cases dealing with discretionary trusts and tax abuses. In the first one relating to a Maharaja (ruler), the Supreme Court allowed a discretionary trust to get away with it and not pay taxes. In the next one, involving a Liechtenstein trust, the Indian court put a stop to discretionary trusts’ abuses in the way that we have proposed.

1. The Maharaja of Gonda

The Supreme Court case, Estate of HMM Vikramsinhji of Gondal, refers to a Maharaja who was the former ruler of the Gondal who created two UK discretionary trusts for the benefit of himself, his children, and (c) their wives or widows.  The settlor, who was entitled to the trust income (that is, income coming into the trust) during his life, included this trust income in his income and wealth tax returns. Upon his death, his son also included the trust income in his tax return. However, he then claimed that it was a mistake, both of him and of his dead father, to have included the income to the trust in their tax returns, because the trust was discretionary.

However, even though the trust was labelled discretionary, it’s not that any Indian could have got a distribution. The only potential beneficiaries were family members, including the son. In addition, no one had received income from the trust because in more than five years since the creation of the trust no trustee had been appointed to “exercise discretion” (so even though they may have called it a discretionary trust, it wasn’t a properly functioning one). It appears that had there been no trust, the son would have inherited the assets and would have had to pay taxes on them. So this trust, controlled by people who will benefit from its assets and income, allows those same people to escape taxes on the assets and income merely because they are held in the trust. This makes no sense to us, morally, economically or democratically.

However, the Supreme Court ended up ruling in favour of the taxpayer (the son), despite all these facts showing that this was not a properly functioning trust. The Supreme Court held that the trust was discretionary so the income belonged to the trust, so therefore neither potential beneficiary had to pay any tax:

A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.”

Courts do often make nonsensical decisions.  But not always. The next example shows a far more sensible approach.

The Ambrunova Trust from Liechtenstein

This case relates to the Liechtenstein based trust, the Ambrunova Trust and Merlyn Management SA, which had USD 24 million in a bank account. The Indian taxpayer claimed not to be a beneficiary of the trust and thus refused to pay taxes on the income to the trust. However, information obtained based on an exchange of information request revealed that the taxpayer was indeed a beneficiary. This case reveals another reality we have mentioned many times: it’s quite irrelevant whatever the trust document says, whether the trust is revocable or irrevocable, discretionary, or whether someone is mentioned as a beneficiary or not. What matters is how it operates in practice.

As described by a law firm (opposing the ruling):

The revenue submitted factual proof that the Taxpayers were beneficiaries of the Trust, based on trustee records and other records, which were obtained through a Tax Evasion Petition (TEP) filed with Lichtenstein. While the Taxpayers do not appear to have been specifically named in the trust deed itself, the revenue authorities relied upon the beneficiary allocation contained in trustee filings, to add the corpus amounts as the “undisclosed income” of the Taxpayers… Strangely enough, the Tribunal’s ruling has turned on the fact of non-disclosure, rather than the substantive question of whether the income of an offshore discretionary trust should be taxable in the hands of Indian resident beneficiaries.

Interestingly, the Indian court gave a much better decision than what the Supreme Court decided on the Maharaja case. Instead of saying that discretionary beneficiaries are isolated from the assets and income in the trust until a distribution taken place, the court in this case ruled that if a person is the only discretionary beneficiary of a trust, the assets and income held in the trust should be considered to belong to them:

It is a common knowledge that discretionary trusts are created for the benefit of particular persons and those persons need not necessarily control the affairs of the trust. Still the fact remains that they are the sole beneficiaries of the trust. Thus totality of facts clearly indicate that the deposit made in the bank account of the trust represents unaccounted income of the assessee [the taxpayer], as the same was not disclosed by the these assessees in their respective returns in India.

The Tharani case (again)

The two previous cases were followed by the brave ruling regarding taxpayer Renu Thikamdas Tharani (the “assessee,” again). As a reminder, Tharani was the beneficiary of a discretionary trust that held a Swiss bank account through a Cayman company, and the account was disclosed in Swissleaks.  The descriptions and arguments are so interesting that we limit ourselves to quoting some extracts.

This extract includes a description of Cayman Islands, which was ranked as the top worst offender in our 2020 Financial Secrecy Index:

It must be seen that underlying company of the Tharani family trust, i.e. GWU Investments Ltd is a company having address in the Cayman islands which is a tax haven and the account is maintained in HSBC, Geneva which is known for its banking secrecy laws and in recent times has faced investigation from various authorities in its role in facilitating tax evasion of its clients… We have also seen as to how the HSBC Private Bank (Suisse) SA has been indicted by several Governments worldwide and how it has even confessed to be being involved in money laundering.

One trick used by tax havens is to notify miscreants when they are being investigated, so they can quickly erase evidence. (The Financial Secrecy Index assesses this under Indicator 1).

It is an interesting coincidence, coincidence if it is, that within a short time of the information about the above account coming to the possession of the Government of India, this account was closed. Whatever assets were being held in this bank account were thus transferred back to GWU Investments Limited, a company based in Cayman Islands- a tax haven where it is almost impossible to find out about beneficial owners of a corporate entity…

It must also be a coincidence, coincidence if it could be, that the process of covering the tracks did not stop with closure of the HSBC account. It is a further coincidence that even the GWU Investments Limited, after the disclosure in respect of account, was closed as its name is struck off from the records of Registrar of Companies, Cayman Islands.

This next extract is long but fabulous, and shows that judges sometimes do use common sense. First, it describes why someone would use a secrecy jurisdiction like Cayman.

GWU Investments Ltd is a Cayman Islands entity, and it needs no special knowledge to know that, more as a rule rather than as an exception, the Cayman Island entities are owned by nominees of the beneficial owners. The operations carried out by these entities, are mainly to facilitate financial manoeuvring for the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. These offshore entities, which are routinely used to launder unaccounted monies, are a fact of life, and as much a part of the underbelly of the financial world, as many other evils. Even a layman, much less a Member of this specialized Tribunal, cannot be oblivious of these ground realities.

Indeed! Second, the ruling proposes not to believe everything a taxpayer claims, and that deploying secrecy should count against the taxpayer.

It is also inconceivable that a Rs 200 crore [around $27m at current rates] beneficiary in a trust will not know about who has settled that trust….The claim of the assessee…is to be examined in the light of real life probabilities and the very act of the assessee, in stalling the further probe, works against the assessee.
…
No reasonable person can accept the explanation of the assessee. The assessee is not a public personality like Mother Terresa that some unknown person, with complete anonymity, will settle a trust to give her US $ 4 million, and in any case, Cayman Islands is not known for philanthropists operating from there; if Cayman Islands is known for anything relevant, it is known for an atmosphere conducive to hiding unaccounted wealth and money laundering, and that does not advance the case of the assessee.

Good sense, again. As we have argued, especially in relation to complex ownership chains: secrecy should act against its creator, not in their favour. A person using complex secretive legal vehicles, bearer shares or failing to cooperate, shouldn’t get the benefit of the doubt:

This inference is all the more justified when we take into account the fact that the assessee has been non-cooperative and has declined to sign the consent waiver. One of the arguments raised by the assessee…that the assessee could not have performed the impossible act of signing consent waiver because she was not owner of the account is too naïve and frivolous to be even taken seriously.

The assessee has not submitted the trust deed or any related papers but merely referred to a somewhat tentative claim made in a letter between one Mahesh Tharani, apparently a relative of the assessee and the HSBC Private Bank (Suisse) SA- an organization with a globally established track record of hoodwinking tax authorities worldwide…Nothing is clear, nor does the assessee throw any light on the same
. . .

Something is rotten in the State of Denmark. There is a series of coincidences, right from the HSBC account being closed after the information contained in the base note coming out and to the underlying company being removed from the name of Register of Companies in Cayman Island, right from assessee living in complete denial about any knowledge about a HSBC Private Bank (Suisse) SA account in her name to her lack of information about the company which is holding US $ 4 million for her, and, despite assessee being purportedly so clean in her affairs, her thwarting any efforts of the income tax department to get at the truth by declining to sign the consent waiver form.

That’s robust, clear, and entirely sensible. One could argue that this judge has, in a few days’ work rejecting offshore trust skulduggery, built several Indian schools, or bought enough Coronavirus masks for a big chunk of India’s population.

Conclusion

Several lessons emerge.

On the one hand, the Supreme Court’s ruling shows that discretionary trusts are powerful ways for the wealthy to escape income, tax and inheritance tax.   

On the other hand, bold judges may apply common sense and restore justice by considering that:

• Tax havens are used for secrecy and thus enable financial crimes and other abuses,
• Trusts’ descriptions (“irrevocable”, or “discretionary”) aren’t to be taken seriously, and courts should look at reality. For example, if a person is the sole beneficiary, or they have control, or they secretly receive a distribution, or are mentioned somewhere, they should be regarded as the owners of the trust money and income and thus pay applicable taxes.
• If a person refuses to cooperate, sign a waiver for a bank to submit information, or claim not to know why an unknown person would give them millions of dollars, that should be used against the taxpayer, instead of them getting the benefit of the doubt.

But the big point here is that societies shouldn’t depend on bold and alert judges. Laws should change so that these abusive legal vehicles such as discretionary trusts, aren’t permitted to begin with.

Australia has become the first country to publish statistics on automatic exchange of information for all jurisdictions, especially those that cannot join the automatic exchange system. Here’s what they reveal and why it has more potential than statistics published by the Bank for International Settlements (BIS).

We’ve been advocating for automatic exchange of bank account information for years, in the hope that all countries, especially lower-income ones, would reap the benefits. Unfortunately, when the OECD published its Common Reporting Standard (CRS) for automatic exchange of bank account information, they added a very problematic feature. They require reciprocity from countries willing to receive information. This automatically excludes most lower-income developing countries as most of them are unable to collect and share information held in their financial institutions because of a lack of resources or infrastructure.

Of course, in the long run all countries should be able to collect and share information with others. Otherwise they risk becoming a tax haven or secrecy jurisdiction. However, in the short term, all countries should be able to receive information about their elite’s holdings in financial centres.

Thanks to the great work of Mark Zirnsak from Tax Justice Network-Australia, Australia passed a legal amendment back in 2016 requiring it to publish basic statistics (we’ve been asking for comprehensive statistics and have even designed a template, see page 37), but hey, this is a good start.

Unfortunately, Australia only started exchanges in 2018 and the law there requires statistics to begin from that year only. The Financial Secrecy Index assesses, under indicator 16, whether countries are publishing statistics on automatic exchange and it acknowledges Australia’s law. However, Australia didn’t get any transparency credit in the latest edition of the Index because no statistics had yet been published by the cut-off date.

However, Australia has finally published its basic statistics!

First, let’s look at the shortcomings/things for improvement (so as to end on a positive note):

• Information was published as an image, so we had to use an OCR software (Optical Character Recognition) plus manual checks to extract the numbers from the image and convert it into an Excel document to do our analysis.

• There isn’t much analysis to do because Australia has only published the total number of accounts and the total balance account as of 31 December 2018. We have no idea whether these are accounts held by entities (eg companies, trusts) or by individuals. We also don’t know how accounts evolved since people became generally aware of automatic exchange of information. For that we would need to see the values for accounts since 2013, before the Common Reporting Standard had been published, ie before anyone had any reason to rearrange their affairs in order to avoid scrutiny.

• There is no information on income or on the type of financial institutions that hold these accounts (is this money held in depository banks, or is it held in custodial banks or in investment entities?).

• We don’t know anything about the beneficial owners of the Australian accounts, for cases where account holders are entities such as companies or trusts.

Now, the positives:

• Australia has published information on absolutely all countries. In total, there’s data on the accounts held in Australian financial institutions by residents from 248 different jurisdictions, while only 100 of them participate in the Common Reporting Standard.

On the one hand, Australia will be recognised in the next edition of the Financial Secrecy Index not only under indicator 16 for their publishing statistics, but also under indicator 18 because these statistics reveal that Australia is applying the so-called ‘wider-wider approach’: information on all account holders (not only those who are resident in a participating country) was not only collected by Australian financial institutions but also reported to Australian authorities (We were only previously aware of Argentina, Estonia and Ireland applying this approach).

These statistics, covering all jurisdictions, is exactly what we were asking for. Thanks to Australia’s statistics, the 148 jurisdictions unable to join the automatic exchange system will at least find out how much reportable money their taxpayers hold in Australian financial institutions. Of these 148, those lucky enough to have an exchange of information agreement with Australia can make a request for information, or even better, Australia could share it with them spontaneously (or at least share more details than what they have published, if not the full details on each account holder). Local civil society organisations or journalists could also start investigations and push their countries to obtain information from Australia.

There are many countries that haven’t been able to join the automatic exchange system yet, according to the OECD:

Australia published information on all of them and beyond:

Findings

• In 2018, residents from 248 jurisdictions held 6.1 million accounts in Australian financial institutions with a total account balance of AUD 208 billion.

• Looking at the countries with the highest number of accounts, results look as expected, given the size and geographical closeness of countries to Australia:

• When looking at the jurisdictions with the highest account balance, some tax havens or secrecy jurisdictions start to appear:

• When looking at the highest average account balance, tax havens and secrecy jurisdictions take over:

Unfortunately, as we’ve said, we don’t know which of these accounts correspond to individuals and which to entities such as companies or trusts. It would be unlikely for so many individuals from the Cayman Islands to have that many accounts in Australia, unless these refer to individuals who acquired golden visas. If these refer to entities, Australia could publish information about the residence of the beneficial owners of those entities so that countries could become aware of their individual taxpayers’ holdings in Australia, but also the preferred jurisdiction by those beneficial owners to incorporate shell companies (to hold bank accounts). Speaking of beneficial ownership, while Australia is a great leader in publishing statistics on automatic exchange of information, it’s lagging behind on legal and beneficial ownership transparency. While more than 80 jurisdictions already have laws requiring beneficial owners of companies and other legal vehicles to register with government authorities, Australia doesn’t even ensure updated legal ownership information is registered.

What next?

1. Consistency with the Bank for International Settlements (BIS) and other macro data

While the Bank for International Settlements (BIS) has been publishing data on deposits by country of origin, this data has shortcomings for determining the possible revenue loss for a country. It includes mostly loans and deposits in depository institutions. Some Central Banks, eg in the US or Switzerland, publish similar data, with similar constraints. Meanwhile, the automatic exchange system already covers information based on the tax residence of account holders both at the legal owner and beneficial owner level. It also covers financial assets held by custodial institutions, investment entities and insurance companies. More importantly, other than information on account balance (deposits as for 31 December), the automatic exchange system also covers income related to each account. This makes it more directly relevant for taxation.

However, the Bank for International Settlements data may be relevant for cross-checks and to detect loopholes. If Australia, and other countries publishing statistics on automatic exchange, disaggregated information for the type of reporting financial institution (eg depository institutions) and the Bank for International Settlements described in its statistics what information refers exclusively to deposits (not loans) in depository institutions, we could then cross-check both reports for consistency. These statistics could reveal loopholes affecting the automatic exchange system, given that some types of accounts and some types of account holders are considered non-reportable. Even without further disaggregation of the Bank for International Settlements data, consistency analyses could be carried out once multi-year (panel) data or data for multiple countries (cross-sectional) was available both for the Common Reporting Standard and the Bank for International Settlements statistics.

• Lower-income countries joining the multilateral tax convention and the automatic exchange system

While ideally all countries should be able to join the automatic exchange system, the first step is to have an international agreement to allow exchanges. Having an applicable exchange agreement with the relevant financial centre, eg Australia, allows a country to make a request for information and to receive a spontaneous exchange, until the time in which they may join the automatic exchange system.

For example, one of the non-participating countries with the highest value held in Australian financial institutions is the Philippines, with a total of AUD 527 million in 2018. The Philippines hasn’t committed to joining the automatic exchange system yet, and while they have signed the Convention on Mutual Administrative Assistance in Tax Matters (the multilateral tax convention), they haven’t ratified it yet, so it’s not in force. Nevertheless, there is a double tax agreement between Australia and the Philippines in place, so Australia should be able to share information spontaneously, or the Philippines should be able to make a “group request”.

The “group request” does not need to identify any specific taxpayer, but it needs more details than a mere suspicion to be considered foreseeably relevant and not a fishing expedition. The OECD gives an example of what an acceptable group request would look like:

8. h) Financial service provider B is established in State B. The tax authorities of State A have discovered that B is marketing a financial product to State A residents using misleading information suggesting that the product eliminates the State A income tax liability on the income accumulated within the product. The product requires that an account be opened with B through which the investment is made. State A’s tax authorities have issued a taxpayer alert, warning all taxpayers about the product and clarifying that it does not achieve the suggested tax effect and that income generated by the product must be reported. Nevertheless, B continues to market the product on its website, and State A has evidence that it also markets the product through a network of advisors. State A has already discovered several resident taxpayers that have invested in the product, all of whom had failed to report the income generated by their investments. State A has exhausted its domestic means of obtaining information on the identity of its residents that have invested in the product. State A requests information from the competent authority of State B on all State A residents that (i) have an account with B and (ii) have invested in the financial product. In the request, State A provides the above information, including details of the financial product and the status of its investigation.

While a group request would have to be tested, it’s unlikely that the double tax agreement between Australia and the Philippines, signed in 1980, would allow group requests given that it is not explicitly allowed. If group requests were allowed, based on the OECD example, Australia might respond to the request if the Philippines could prove that investments in Australia are popular/advertised among its residents and that none (or very little) of the AUD 527 million held by residents in Australian banks has been reported to the Philippines’ tax authorities. In the absence of routine reporting, the omission of income is likely the norm. Assuming that only 10 per cent of the AUD 527 million are declared by Philippines taxpayers, and assuming a 5 per cent return on investment, it would result in an additional taxable revenue in the Philippines of AUD 23.7 million (= 5% x 90% of 527 million) per annum for Australian income alone. With the Philippines personal income tax rate of 20 per cent for passive income, that would amount to about AUD 5 million of additional revenue.

Ideally, these statistics should prompt lower income countries to sign the multilateral tax convention, make requests for information and join the automatic exchange system. In terms of priority countries, this will for now depend on the countries actually publishing statistics, but once more options are available countries could use the Tax Justice Network’s Illicit Financial Flows Vulnerability Tracker. In the case of the Philippines, Australia is ranked 8^th:

Other countries are in worse conditions than the Philippines because they are neither participants in the automatic exchanges nor do they have any relevant agreement to obtain information from Australia. One such example is Bangladesh, for which Australia represents the 5^th riskiest country in terms of vulnerability of bank deposits (based on the data from the Bank for International Settlements). Based on Australia’s statistics on automatic exchange of information, residents from Bangladesh have AUD 113 million in Australian financial institutions. Based on the same assumptions as above on return on investment and undeclared assets abroad, Bangladesh could raise an additional AUD 1.5 million of tax revenue per annum from Australia (based on a highest statutory personal income tax rate on financial investment of 30 per cent), through joining the Common Reporting Standard or otherwise obtaining the relevant tax data from Australia.

As for other regions such as Latin America and Africa, other countries that are unable to automatically obtain information from Australia, but that could still make a request for information, include the Dominican Republic, whose residents have AUD 412 million in Australian banks, and Kenya, whose residents have AUD 106 million.

Conclusion

In conclusion, this a great first step, and hopefully many lower-income countries will now start asking Australia for more details on their residents’ holdings in Australian financial institutions (or first signing relevant conventions). We need more countries to publish these statistics and with a higher level of detail so we and others can start measuring and understanding offshore holdings, and different avoidance or secrecy schemes.

Photo courtesy of: Liam Pozz/Unsplash

03 and 04 December 12:00 – 17:30 GMT (tbc)

Co-organised with Gurminder K Bhambra, University of Sussex and Julia McClure, University of Glasgow

An analysis of inequality stemming from Imperialism and an exploration of reparation pathways

Colonial histories remind us, time and again, that the poverty of what comes to be understood as the global south and the wealth of the global north are intrinsically connected. That is, the very same historical processes that generated the wealth of European countries are the ones that made other places poor. During the phases of imperialism from the sixteenth century onwards, European countries extracted revenues and resources through formal and informal channels and spent this money often on domestic welfare and infrastructure. The precise value of the ‘colonial subsidy’ to European states and their citizens is incalculable or, at least, no attempt has been made at the global level to attempt to calculate it.

During the age of European global empires, European countries imposed tax regimes both nationally and across their imperial hinterlands that have also contributed to the establishment of trends of inequality that continue through till today. This conference will bring together leading academics to present new research highlighting the linkages between empires, nation states, taxation and resource extraction, and the resulting inequalities in polities and welfare systems experienced as a consequence of this mass extraction.

The conference will also explore where society and institutions can go from here to begin to address the centuries of damage and to investigate how reparations could begin to address some of this damage. This event will explore the following themes:  

• To what extent has the European project of public expenditure on welfare been made possible by imperial extraction?
• What role has been played by promoting dependent territories as ‘tax havens’, in the more recent period of extraction, and how has this damaged those territories as well as others?
• How do tax laws, which can themselves be understood as having imperial legacies, continue to shape inequality trends?
• What sort of reparations could conceivably address the scale of damage created from imperial extraction, and how can taxes be collected and redistributed to begin to mitigate the economic damage created?

Call for papers:

This conference will focus on qualitative and quantitative research that explores the themes of empire, taxation, inequality and reparations. In addition to the range of papers already in preparation for a forthcoming volume, the organisers wish to invite original, high-quality papers for presentation in the following areas:

1. Reparations through taxation: the potential role of different types of taxation, for example on wealth or on financial transactions, to contribute to reparations
2.  ‘Plan B’:  alternative development paths for UK territories and others where a ‘tax haven’ business model was effectively imposed by the imperial power, and potential reparations for the damage done
3. Tax, race and gender: to what extent are tax systems, now and historically, designed around a largely white, male landowning class, and what are the past and present implications? Are tax systems largely ‘colourblind’ and ‘genderblind’, or is disaggregated data used to inform policies and tax administration – and how does this affect inequalities?

Please submit abstracts of up to 500 words, along with the required supporting information, using our online application form. The deadline for submissions of abstracts is 11 September. The review panel will communicate decisions by 25 September. Full papers will be due by 30 October.

Registration will open when the preliminary programme is published in October 2020. More information will be published in due course on our website. For any queries, please email [email protected].

Blog by Neeti Biyani, Centre for Budget and Governance Accountability, New Delhi

Geopolitically, India is one of the most significant countries on the planet, with a GDP of almost $3 trillion and the fifth largest economy in the world. It is surprising, then, that the tiny island nation of Mauritius – with a GDP of approximately US $14 billion and a population of just 1.3 million – is the largest foreign investor in India.

The Mauritius Leaks, an investigation by the International Consortium of Investigative Journalists in 2019 offered clues as to why this might be the case. From being an idyllic island nation, Mauritius made a concerted decision to follow in the footsteps of numerous British Crown Dependencies and transformed itself into an offshore financial centre starting in 1989. Seeking to diversify its largely agrarian economy, Mauritius positioned itself as a jurisdiction of choice for multinational corporations and investors looking to invest in developing African, Asian and Arab countries.

Through the enactment of the Mauritius Offshore Business Activity Act (1992) to govern the country’s offshore financial services sector, it paved the way for foreign companies to incorporate subsidiaries with limited public disclosure, extremely low tax rates and a high degree of secrecy and asset protection. And by creating an intricate network of bilateral investment, tax and trade treaties with mostly developing countries, Mauritius proceeded to build one of the most aggressive offshore regimes in the region.

Along with offering low taxes, the network of Investment Promotion and Protection Agreements (IPPA), commonly known as Bilateral Investment Treaties, essentially protects and allows foreign-owned holding companies to become Mauritian resident companies. This incentivises businesses and investors to invest in other regions, mainly Africa and Asia, while operating under the garb of the Mauritian flag.

Often detailing taxing rights, these treaties constrict the taxing rights of developing countries, as profits are shifted to low-tax jurisdictions such as Mauritius – thus depriving developing countries of the revenue they rightfully deserve. The IPPA network provides measures against any efforts towards expropriation and nationalisation by partner countries. Due to the very nature of IPPAs, countries often end up losing money by way of litigation, penalties and compensation if the investors are unable to recover the investment made.

Despite evidence that double taxation agreements (DTAs) cause considerable and unnecessary loss of revenue from developing countries, resource-strapped low-income countries in particular are forced into entering unfair and unjust treaties to attract FDI in the absence of any alternatives.

India and Mauritius too had such a double tax treaty for many years, which proved irresistible to multinational corporations seeking to avoid paying their fair share of taxation. In the absence of a democratic global system of governance in this domain, most countries manage their tax relationships with other nations through bilateral agreements called double tax treaties. Indeed there are now over 3,000 of these agreements, ostensibly designed to prevent companies from having to pay tax twice in two different jurisdictions, in effect around the world. The proliferation of these accords has in turn fuelled the phenomenon of ‘treaty shopping’, through which multinational companies seek to exploit loopholes and inconsistencies by creating a fake paper trail for the goods and services they provide, and thereby pay less to government coffers. All too often, they succeed in paying no tax at all. In fact, research has shown that developing countries lose billions in tax revenues due to treaty shopping strategies employed by multinational corporations.  

Until recently, the double tax agreement between India and Mauritius was notorious, with such vast revenue flows moving between the two countries that Mauritius became, on paper at least, India’s largest investor. At the same time, many Indian exporters were also invoicing their goods through shell companies in Mauritius, again to avoid tax liabilities in their home country.

For over 30 years, firms have been able to avoid paying capital gains taxes on sales using the Mauritius-India DTAA signed in 1982. Research by Centre for Budget and Governance Accountability, New Delhi has shown that between 2000 and 2017, Mauritius accounted for 34 percent of foreign direct investment into India. According to the Reserve Bank of India, in 2018, foreign direct investment from Mauritius accounted for US $13.4 billion, accounting for 36 percent of India’s total investments.

What was really happening was that investors were using Mauritius as a conduit, routing capital through shell companies in the country and then into India through a tax avoidance technique known as ‘investment round tripping’. In this context, it means that capital from India was usually routed to Mauritius, a jurisdiction with a lower corporate income tax rate. Indeed, the rate they paid could descend to zero if the money was held in special types of registered companies. Then the capital is sent back to India in the form of foreign direct investments and, thanks to the double tax treaty, an investor can claim she’ll pay tax in the conduit country (i.e. Mauritius). For the same reasons, the Mauritian route was also used by Indian companies that were investing outside of India.

In 2016, after years of negotiations, India managed to renegotiate its tax treaty with Mauritius and, by reimposing capital gains taxes on investors ‘from Mauritius’ who buy shares in Indian companies, it plugged one of the tax avoiders’ favourite loopholes. The treaty amendment went into force in April 2017 and applied half of the prevailing rate of capital gains tax until 1 April 2019, following which the full rate applied.  

However, while the treaty amendment closed the benefit of zero capital gains tax, other vehicles used for avoiding taxation, including mutual funds and exchange-traded derivatives, were not adequately addressed in the renegotiation, so alternative channels for illicit financial flows remain in place. Furthermore, although both India and Mauritius are parties to the Multilateral Instrument (MLI) created by the OECD to prevent the abuse of double tax treaties in cases where the principal purpose of a business arrangement is to save tax, Mauritius has not included its tax treaty with India in its MLI commitments.

And as shown by Tax Justice Network’s new Illicit Financial Flows Vulnerability Tracker, Mauritius was still India’s number one source and destination for both inward and outward foreign direct investment in 2018. In fact, in 2018, the inward direct investment stock from Mauritius (estimated at almost US$ 126 billion) was even higher than such investment in 2015 (estimated at around US$100 billion).

Despite a sudden and telling drop in direct investment from Mauritius to India in 2019, the corresponding figures for Singapore – the second most popular tax haven among India’s economic elite – have grown enormously in recent years. Indeed, the volume of investment from Singapore to India doubled from US $33.5 billion in 2015 to US $66 billion in 2018. The Netherlands is a close second in terms of acceleration of investment into India since the revision of the India-Mauritius treaty.

It must also be underlined that, of the top ten destinations for direct investment in India, six are either corporate tax havens or financial secrecy jurisdictions (the United States, Switzerland, Singapore, Japan, The Netherlands, and the United Kingdom – which if considered together with its spider web of jurisdictions would have ranked first on both indices). This suggests that the Indian economy is severely exposed to international tax avoidance schemes, and other illicit financial flows, that are likely to be systematically draining state coffers of resources desperately needed to tackle both the ongoing Coronavirus health emergency and the concomitant economic crisis.

In this context, it is unsurprising that India has been one of the leading voices calling for developing countries to have a more meaningful role in negotiations on the international governance of taxation. Efforts to address the dysfunctional global tax system have thus far been led by the OECD under the Base Erosion and Profit Shifting (BEPS) process. However, this process, negotiated behind closed doors by rich countries, has largely excluded the voices of developing countries. Repeated calls from developing nations for a genuinely democratic, inclusive body under the auspices of the United Nations have likewise been thwarted by richer countries. With the US having now demanded the OECD process be put on hold, it is high time for the international community to work together for a radical reform of global tax rules through a genuinely inclusive process in which all can participate on equal footing. Such a process is only possible at the United Nations.

Image of Indian banknotes courtesy of Rupixen/Unsplash

Guest blog: Richard Christel, Program Associate at Transparency and Accountability Initiative

Recently, Transparency and Accountability Initiative was asked to prepare a presentation for a Tax Justice Network organised convening bringing together civil society, private foundation, and public aid agency participants. The focus of the presentation was on civil society funding for domestic resource mobilisation (DRM) efforts. Our research confirmed the challenge of getting reliable data on current level of support, but also brought home the limited levels of funding for non-state actors on tax. Given the bleak fiscal picture for countries around the globe exacerbated by responding to the coronavirus pandemic, mobilising engagement of all stakeholders in support of equitable and accountable tax system is all the more important.

Tax reform and subsequent revenue raising will be key in the recovery effort and now more than ever, civil society must be involved in reform discussions. If you are not at the table, you are on the menu. Civil society can play an active role in working with policymakers and tax authorities to remove inequities in current tax policy and administration and raise revenues for development priorities as the TAI-commissioned report on civil society engagement in tax reform points out, “CSOs tend to play three broad roles in tax debates, often in combination: analysis of tax policy, advocacy for or against policy proposals, and awareness raising on tax rights and obligations.”

Of course, civil society can only do this if they have resources to engage effectively.

A drop in the bucket

Previous research has confirmed that civil society funding for domestic resource mobilisation is indeed low – in both terms of absolute funding and as a percentage of domestic resource mobilisation efforts.

But exactly how low is it?

To answer this question, we examined data from the OECD Creditor Reporting System (CRS) in April. We examined gross disbursement data from 2014 to 2018 from all official donors in sector code 15114 (domestic resource mobilisation). This data isn’t perfect and isn’t totally complete, as it lacks some European Commission funding, but of available datasets, it is the most complete and easiest to use.

Overall, civil society funding for domestic resource mobilisation has been on the upward trend, starting off at (2018 USD prices) $950,000 in 2014 and ending at $13.26m in 2018. Compare this figure to funding for public sector institutions, $10m and $260m in 2014 and 2018 respectively. As a percentage of all reported domestic resource mobilisation funding, civil society has received on average only 2.72 per cent of funding from 2014-2018. Of course, no one is arguing for parity in these numbers. Civil society cannot collect taxes or establish a tax administration office, nor can it issue subpoenas or conduct audits. However, given the importance and value of funding civil society efforts on domestic resource mobilisation, these are strikingly low figures.

Reporting Woes

However, this isn’t the full story.

When countries signed on to the Addis Tax Initiative (ATI), they pledged to increase funding for domestic resource mobilisation efforts. Part of this commitment is to report data on disbursements and countries do so when they report official aid statistics to the OECD and the Addis Tax Initiative. Unfortunately, we found anomalies in the data across reporting mechanisms.

One such anomaly was quality control in reporting. For example, one country government marked more than $10m in funding to the Kenya Revenue Authority as civil society funding, which appears a mislabeling. When we account for such apparent reporting glitches, this government’s civil society funding dropped from $16.49m from 2014 -2018, down to just $520,000 over the same period.

Similarly, for another donor government what was labeled as technical assistance to national and subnational government was categorized under civil society support. Upon recategorization, the civil society support drops from $3.5m to $100,000.

Indeed, original Creditor Reporting System data indicated civil society funding being $60.9m from 2014-2018. Upon closer analysis, I suggest that a more accurate figure is $36.64m, a difference of $24.26m.

Perhaps the targeted end users for these original disbursements were for civil society, however we could only analyze publicly available data.

Compounding the challenge of an accurate overview are differences between different data sources. For example, the Addis Tax Initiative’s public domestic resource mobilisation database lists the Netherlands as having two total project disbursements in 2016, while the OECD data has six. Simultaneously, the Addis Tax Initiative 2016 data source lists the Netherlands having 11 projects, of which 6 had USD amounts extended. For their part, the Addis Tax Initiative says “…the data used in the DRM Database consists of OECD DAC data adjusted for the purpose of the ATI monitoring exercise.”

However, we don’t know the basis for differences between the two datasets. There is also value in having timely data available – currently the Addis Tax Initiative database only has data from 2015-2017 available.

Given that TAI members report grants data to the Secretariat annually, we try to create an accurate sense of domestic resource mobilisation funding from our members. However, finding an exact dollar amount for civil society domestic resource mobilisation funding is difficult due to some funding being core support to grantees working a range of issues including domestic resource mobilisation and as such isn’t broken down.

The Window

Investing in domestic resource mobilisation strategies now is what will help alleviate financial pressure and increase fiscal sustainability in the long run. Care should be taken however, to avoid levying regressive taxes on an already battered populace. A well-resourced civil society can garner political capital and harness citizen anguish to push for more progressive taxation, help assure that multinational corporations and the wealthy pay their fair share, that loopholes do not favour the well-connected, and in turn bolster treasuries and limiting more financial strain on the poorest. These initiatives can strengthen public budgets and help ease, however slightly, the economic devastation that is sure to linger.

But of course, that is only if organised civil society is left standing. As the next round of the Addis Tax Initiative begins to shape up, let us support taxation and civil society with dedicated targets of support to assure equitable and accountable tax systems and sound reporting to back it up.

Welcome to the 31st edition of our monthly 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 and Osama Diab of the Egyptian Initiative for Personal Rights, also an investigative journalist. 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 the 31st edition of Taxes Simply:

Welcome to the thirty first edition of Taxes Simply. In the first part of this edition, we meet Nabil Abdo, regional policy advisor for Oxfam in the Middle East, on the structure of the Lebanese economy that led to the emergence of the severe economic crisis currently taking place in the country. In the second part, we meet with Tunisian journalist Khawla bou Karim about her investigation, “The missing million in oil taxes”, in which she reveals the disappearance of $53 million in oil taxes from the Tunisian government budget.

As for the third and final part, we cover a summary of the most important tax and economic news from the Arab region and the world, and our summary of news includes: 1) The automatic exchange of tax information covers assets worth $10 trillion; 2) The implementation of “country-by-country reporting” system may save EU countries $20 billion; 3) The IMF further reduces its forecast for the region.

الجباية ببساطة #٣١ – أزمة لبنان الطاحنة واختفاء ضرائب نفطية في تونس

أهلًا بكم في العدد الحادي والثلاثين من الجباية ببساطة. في الجزء الأول من هذا العدد نلتقي بالباحث الاقتصادي اللبناني نبيل عبدو مستشار السياسات الإقليمية لمنظمة أوكسفام في الشرق الأوسط في حوار عن هيكل الاقتصاد اللبناني الذي أدى لبزوغ الأزمة الاقتصادية الطاحنة التي تشهدها البلاد حاليًا. في الجزء الثاني، نلتقي مع الصحفية التونسية خولة بوكريم عن تحقيقها الصحفي “ضرائب المحروقات والملايين المفقودة” التي تكشف فيه عن اختفاء ضرائب نفطية بقيمة ٥٣ مليون دولار من ميزانية الحكومة التونسية.

أما في الجزء الثالث والأخير، نتناول ملخص لأهم أخبار الضرائب والاقتصاد من المنطقة العربية والعالم، ويشمل ملخصنا للأخبار: ١) التبادل التلقائي للمعلومات الضريبية يشمل أصول بقيمة ١٠ تريليون دولار؛ ٢) تطبيق منظومة “الإبلاغ عن كل دولة على حدا” (country-by-country reporting) قد يوفر ٢٠ مليار دولار على دول الاتحاد الأوروبي؛ ٣) صندوق النقد يخفض توقعاته بشأن المنطقة.

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

On 14 July the Tax Justice Network co-hosted the fourth call of the multi-stakeholder group to promote beneficial ownership verification. We took the opportunity to present updates on progress of the pilot in one African country and to hear more presentations on how to verify information (our last call included 15 brilliant presentations on strategies used by authorities, banks and researchers.)

This time, the call’s presentations covered two main topics: how to share confidential information and how to apply advanced analytics to already collected data to detect red flags.

As we described in our paper on beneficial ownership verification, one of the steps to confirm the accuracy of the data involves cross-checking information against other databases. “Is John really called John and does he actually live on that street?” Countries are already required to ensure national authorities cooperate and share information with each other (eg the tax authorities and the financial intelligence unit which deals with money laundering). Achieving this at the national level is already challenging due to the lack of standardised data or interconnection of local databases, along with the refusal of local authorities to cooperate with each other by invoking fiscal confidentiality or other secrecy laws (they tend to forget that they all play for the same team, and that many of these financial crimes are related to each other, eg tax evasion may be a predicate offense for money laundering).

Sharing confidential information with other parties

Given the current freedom of establishment where anyone may have interests in a legal vehicle from any country, domestic cooperation is not enough. Countries need to verify information on any non-resident beneficial owner: “Hi Germany, is Friedrich really called that, and does he actually live in Berlin?” Cooperation at the international level may be even more difficult because countries would likely be unable and unwilling to share personal data of their citizens/residents with any foreign country. To address this, our paper had proposed zero-knowledge proof queries, where the beneficial ownership register of say, the UK, would automatically query Germany’s databases on the details declared by Friedrich to the UK register. German databases would only answer whether there was a perfect match (confirming that Friedrich didn’t lie to the UK). In case of a mismatch, Germany wouldn’t reveal the true answer. The UK would simply reject Friedrich’s registration until he declares information that results in a perfect match with Germany’s records.

An alternative to our proposed zero-knowledge proof queries was presented on the call by Jules Anthonia from FCInet. It suggested enabling cross-border checks without the need for foreign databases to be integrated. “FCInet is a non-commercial (government developed) decentralised computer system that enables FCISs (Financial Criminal Investigation Services) from different jurisdictions to work together, while respecting each other’s local autonomy. With FCInet, FCISs can jointly connect information, without the need to surrender data or control to a central database or authority, and without unlawful intrusion on privacy. A core functionality of FCInet that allows FCISs to jointly analyse information and to identify relevant information in real time, is ma3tch. Ma3tch enables distributed analysis without the need to bring data together in one central place.”

While this technology is meant for financial intelligence units and tax authorities, it could also be used by beneficial ownership registries, as the figure shows. Ma3tch agents (Agency A) would pseudonymise local data (Philip Tattaglia, Luca Brasi and Johnny Fontane) into match filters (zK4G). The receiving register (Agency B) matches its local data (Greene Moe, Adams Kay, Brasi Luca) against the received filter in FCInet. Only hits on information that both the sending FCIS and the receiving FCIS have in common are revealed (eg Luca Brasi). Subsequently, identified hits can be validated and followed up, so that Agency B only shares information about Luca Brasi.

Similar technologies could be used to share information among private actors. Under the 5^th EU Anti-Money Laundering Directive (AMLD 5), banks are required to report discrepancies to the public beneficial ownership registers. If company A registered John as its beneficial owner in the beneficial ownership register but then, when opening a bank account, company A tells the bank that Mary is its beneficial owner, the bank should report this discrepancy.

However, banks could report discrepancies not only with the beneficial ownership register, but among themselves, for example if company A told bank 1 that John is the beneficial owner, but when declaring to bank 2, it said that Paul is the beneficial owner. The UK Financial Conduct Authority (FCA) organised a TechSprint where different banks, compliance and data companies proposed frameworks on how banks could share customer information with each other in an encrypted way so as to detect discrepancies without disclosing their customers’ personal data.

Detecting red-flags using banking information

While reporting discrepancies in beneficial ownership between different data sets is useful, it’s not enough. After all, a company could have declared John as the beneficial owner to the beneficial ownership register and to all banks, when actually John is a de facto nominee and the real beneficial owner is Mary. There would be no discrepancies, but the data would still be wrong. More sophisticated checks are also necessary, especially in looking for patterns and red flags, as described in our paper on beneficial ownership verification.

On the one hand, outliers would be revealed if countries knew what their typical corporate ownership structure looks like. As example on how to do this, we undertook research using Orbis data to explore the legal ownership chains of UK companies.

There is significant scope, however, to look to internal information to verify accuracy of external information provided. Banks have key financial information that if examined in the right way could also detect money laundering schemes and enable real beneficial owners to be identified. Based on their experience analysing the Moldova Laundromat and other major money laundering schemes, Howard Cooper, Chris Ives and Matt Weitz from Kroll described how banks could enhance their analysis to detect sophisticated financial crimes.

Rather than analysing customers and their transactions in isolation – eg “has company X done too many transactions above $10,000?” – banks should look at the full customer profile across their full customer base to identify patterns and hidden relationships. This way it will be possible to determine whether apparently unrelated bank customers are linked to one another. These checks could include analysis to detect overlap in common customer information such as addresses, telephone numbers or IP addresses (from where remote bank transactions are carried out) as well as shared people – directors, shareholders, signatories, beneficial owners, people with power of attorney or professional service providers who opened the account on behalf of the company. Even more sophisticated analysis would involve analysing fund flows to detect undeclared links between customers and the ultimate beneficiary of transactions.

For example, in one Kroll investigation into a complex fraud and money laundering network, the analysis of internet banking IP addresses (in the middle of the picture below) revealed connections across a large number of purportedly unrelated customers (at the bottom):

Another example involved looking at apparently unrelated customers (in green, blue and pink) that shared the same corporate nominee directors and shareholders, which were owned and controlled by the same trust and company service provider:

On the surface, and in know-your-customer (KYC) files and the relevant corporate registry documents, all three of the customers had different beneficial owners. However, by analysing the transactions of the customers together rather than separately, it was quickly revealed that:

• The three customers received funds from common external accounts and the onward movement of funds followed the same pattern, exposing an undeclared relationship between them.
• One customer (in purple) transferred funds to the Trust and Company Service Provider for the incorporation of another apparently unrelated customer (in blue), indicating the know-your-customer (KYC) information may not have been accurate.
• The end result of all the transactions was the transfer of funds to the account of an individual (in red) – indicating that this individual was the true ultimate beneficial owner of the companies and that the transfers were contrived for their benefit.

Looking at each transaction in isolation would not reveal any issues, it was only by examining the network of transactions did the discrepancies between the know-your-customer (KYC) data and the actual beneficiary of transactions become apparent.

Other red-flags that digitalisation makes possible to detect

By digitalising administrative procedures, countries may not only prevent corruption, because there is no paper file to be lost or changed, but they may also look for patterns and outliers to detect red flags.

Maria Jose Martelo and Eduardo Martelli, formerly at Argentina’s Federal Ministry of Modernisation explained how the digitalisation of administrative procedures in Argentina enabled two basic red-flags to be detected: one based on time and the other based on the responsible public officer.

Regarding time checks, two indicators can be constructed. The first one looks at compliance with “First in, first out” (FIFO). In principle, unless a procedure is categorised as urgent, chronological order should be respected. If John started the application to set up a company on 1 April, and Paul started another on 10 April, there should be no reason why Paul’s company should be ready first, assuming John’s application had no flaws. If this happens, it may be an indication that Paul bribed someone to get his company ready first, or that John was blackmailed by the public officer to pay a bribe, and upon his refusal, his application was put on hold (or “in a drawer” as the Argentine expression goes).

Similarly, by looking at specific procedures throughout the year, it is possible to determine the average time it takes to complete one. Applications (to set up a company, get a construction permit, etc) that are too brief compared to the average time may be an indication of corruption (eg bribe or conflict of interest). On the other hand, an application that is taking too long may be an indication of blackmail or the application being slowed down to encourage the applicant to bribe the public officer.

These time checks may be combined with an association check, to determine whether the same corporate user (or service provider) always gets the same public officer to process their application. This would be especially suspicious if that public officer also takes a record (short) time in approving the applications.

While none of these rules would confirm a case of corruption (after all, a fast public officer may simply be more efficient than the rest, or may be specialised to deal with specific types of industries or cases), at the very least such red flags should prompt an investigation to discount any collusion or corruption.

Importantly, these digitalised checks only work if absolutely all procedures are done digitally. By allowing any exception to the rule, a window for corruption is opened. Unfortunately, Argentina invoked problems with the IT platform at the beginning of the Covid-19 pandemic (after the platform exposed a scandal of overpriced contracts) to allow paper-based procedures to take place again.

Conclusion

Countries and policymakers should consider the following proposals:

• Digitalised procedures and data (eg digitalised beneficial ownership registers) allow the cross-checking of information and the detection of red flags (eg based on time analysis and association rules).
• By combining digitalised data and encryption, it is possible to share confidential information and detect discrepancies without disclosing all the personal details of shareholders, beneficial owners or relevant users. This would enable cross-checks among countries and among private holders of information.
• Banks have a trove of data that should become part of systematic anti-money laundering checks so that they report not only basic discrepancies, but also other undetected cases of wrongful beneficial ownership information. These checks could include analysis to detect overlap in common customer information such as addresses, telephone numbers or IP addresses (from where remote bank transactions are carried out) as well as shared people – directors, shareholders, signatories, beneficial owners, people with power of attorney or professional service providers who opened the account on behalf of the company. Even more sophisticated analysis would involve analysing fund flows to detect undeclared links between customers and the ultimate beneficiary of transactions. While this analysis would be done at each bank, these checks should also be done at the global level, as we proposed in our recommendations for SWIFT to include beneficial ownership information in the messaging system and to run similar advanced analytics.

Pour cette 18^ème édition de votre podcast « Impôts et Justice Sociale, nous revenons sur plusieurs actualités qui ont animé la justice fiscale et sociale dans le monde. Le programme débute sur la publication mi-juin 2020 d’un rapport concernant la transparence sur la propriété réelle en Afrique. Nous revenons ensuite sur la récente publication de l’OCDE, qui pour la première fois reconnait que la publication des données fiscales pays par pays, permet de mesurer l’ampleur des pertes fiscale pour les pays dans le monde. Le programme s’achève avec un invité, qui commente le dernier rapport Global Witness/PPLAAF sur les pratiques de corruption et de blanchiment d’argent présumés en RDC, impliquant l’homme d’affaires d’origine israélienne Dan Gertler.

Produite en Afrique francophone par le journaliste financier Idriss Linge au Cameroun.

Participent à ce podcast:

John Christensen, Fondateur et Président de Tax Justice Network

Riva Jalipa, Responsable des analyses politiques et du Plaidoyer, Tax Justice Network Africa

Gabriel Bourdon-Fattal, Responsable de projets au sein du PPLAAF

Vous pouvez suivre le Podcast sur:

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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]

Diante de uma sinfonia de crises intensificada com a pandemia do novo coronavírus, o É da sua conta #15 segue a partitura das edições anteriores e apresenta mais instrumentos que, se bem afinados, podem ajudar países a financiar uma recuperação econômica. 

Falamos de emissão monetária e de títulos da dívida, sempre em harmonia com medidas tributárias justas e progressivas, focadas na tributação dos mais ricos e das grandes corporações. 

Entenda o que é emissão monetária e os impactos na taxa de juros, na inflação e no endividamento. Saiba também como usar a dívida pública interna para financiar a solução dos problemas atuais e futuros. Enquanto países lusófonos africanos ainda sofrem com a dívida externa, lembramos como o Brasil superou o fardo de décadas de dívida externa e a dependência do FMI.

Participantes desta edição:

• Celeste Banze, Centro Integridade Pública de Moçambique
• Fábio Terra, Universidade Federal do ABC
• Guido Mantega, economista, ex-ministro da Fazenda 2006-2015
• Júlia Braga, Universidade Federal Fluminense e Associação Keynesiana Brasileira
• Nick Shaxson, Tax Justice Network

Download do podcast: https://traffic.libsyn.com/secure/edasuaconta/PP_15.mp3

Conecte-se com a gente!

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É da sua conta é o podcast mensal em português da Tax Justice Network, com produção de Daniela Stefano, Grazielle David e Luciano Máximo e coordenação de Naomi Fowler.O download do programa é gratuito e a reprodução é livre para rádios.

The UN high-level panel on Financial Accountability, Transparency and Integrity (FACTI) is moving fast. Following its launch earlier this year, the Panel has consulted widely with member states, civil society and experts from all areas of its broad mandate, the global architecture within which illicit financial flows take place.

Now FACTI has published a series of background papers laying out the key conclusions from expert assessment in each area. Below, colleagues from across the Tax Justice Network have summarised the main technical findings of each paper. We draw out the potential outline of the FACTI Panel’s final report, were they to follow the logic of this body of work.

As I said in invited remarks to the FACTI Panel’s ‘virtual global town hall‘ meeting, the problems the panel are addressing may be technically complex, but they are fundamentally political in nature:

Thank you co-chair, and panel, for the opportunity to speak. Your work is crucial, and most timely.

The Tax Justice Network was formed nearly two decades ago, and put forward then what remain the key elements to fix the global architecture for tax and financial integrity – motivated by the recognition that tax injustice does systematic damage to human rights, especially women’s rights and across a whole range of intersectional inequalities. The technical fixes include a shift to unitary taxation for multinational companies, and the universal introduction of the ABC of tax transparency: A for automatic exchange of information on financial accounts; B for beneficial ownership transparency, through public registers joined up into a Global Asset Registry; and C for public country by country reporting from multinational companies.

But while detailed, technical solutions are required, the question of whether the world chooses to implement these is fundamentally not a technical one but a political one.

For decades, the former imperial powers that dominate the OECD have set the rules for international tax and the architecture for financial transparency. The position in which we now find ourselves is the position that these rich countries have created. And that position is one in which tax abuse by multinational companies, and other forms of corruption, are not marginal activities, but are central to the global economy. All serious estimates, whether from researchers at the Tax Justice Network, UNCTAD or the International Monetary Fund, show that the costs of tax abuse are disproportionately high for lower-income countries – the very ones that are denied an effective voice at the OECD, and the right to participate fully in both rule-setting and information exchange.

And so the FACTI panel has one clear challenge: to outline the truly global governance alternative at the United Nations which can oversee effective responses to tax abuse and illicit financial flows, in the form of a new UN tax convention and rule-setting forum. Genuinely multilateral information exchange and rule setting has the potential to eliminate the grave inequalities in taxing rights between countries, to curb gross inequalities within societies, including those rooted in gender and racial injustice, and to empower the type of revenue raising for public spending that the pandemic has highlighted is crucial for all of our health.

As the review of the background papers confirms, the expert authors have identified exactly the political dynamics at play, and recommend a set of important and powerful reforms.

Summary of technical papers

The first of these, ‘Tax information production, sharing, use and publication’ underscores the importance of recent key steps towards transnational tax information cooperation. However, it criticises the established legal framework as not being universal, since it overlooks the needs of developing countries. For that reason, the paper emphasises the need to revise the existing legal frameworks and calls for public availability of certain tax information as a key policy tool.

The analysis by Professor Leyla Ates considers a number of proposals for improving existing legal frameworks of taxation. First of all, the existing international institutional framework should be improved through the creation of a global body with responsibility for collating and analysing tax data (including gender-disaggregated data) under the umbrella of the UN. Data should cover, inter alia, automatically exchanged financial account information and country by country reporting by multinational companies.

Moreover, countries should enjoy the full benefit of automatically exchanged financial accounts and public country by country reporting. To achieve this, Prof Ates argues, all jurisdictions must commit to fully inclusive and multilateral information exchange, to publish aggregate and detailed data, and to make detailed data available for analysis. To underwrite these processes, an international tax convention, led by the United Nations, is required.

In their paper on ‘The appropriateness of international tax norms to developing country contexts’, Martin Hearson, Joy Ndubai and Tovony Randriamanalina examine the extent to which six sets of international tax norms (including tax treaties, transfer pricing rules and mutual assistance agreements between states) hinder or help developing countries in enforcing their tax laws and preventing tax avoidance by multinational enterprises. The authors argue there is an institutional deficit in international tax norm setting and point out the need for an international body which can reconcile competing interests between lower-income and more powerful states.

In an attempt to address the disadvantages that developing countries currently face in global tax negotiations, the paper recommends the FACTI Panel employ a combination of short, medium and long term interventions. Among the short-term measures are that the Panel should urge governments to promote local filing legislation for country by country reporting, and adopt unilateral measures for taxing the digital economy that are better-suited to resource-constrained contexts. Medium term interventions include that the Panel should reexamine the purpose of tax treaties as a tool to maximise the gains for developing countries and explore a more radical approach; strengthen developing countries’ participation in international tax cooperation and capacity building, inter alia through investigating potential changes to the institutional design of the UN Tax Committee and the OECD’s Inclusive Framework.

Most importantly, the authors urge the Panel to pursue longer-term reforms by evaluating the replacement of the arm’s length principle with unitary taxation with formulary apportionment; investigating alternative instruments to current blacklists, peer review mechanisms and trade investigations, that better meet developing counties’ needs and available resources; and considering the call for a global tax body.

In the next paper in the series, ‘Transparency of asset and beneficial ownership information’, the Tax Justice Network’s Andres Knobel describes how financial secrecy is achieved in order to engage in illicit financial flows. To address and reveal these tax and financial crimes and abuses, beneficial ownership transparency entails identifying the natural persons who ultimately own, control or benefit from legal vehicles such as companies and trusts. This transparency provides a way to prevent abuses and to “anchor” legal vehicles to the limits and responsibilities of a natural person so that no one stays above the law. While the Financial Action Task Force (FATF) and the Global Forum on Exchange of Information for Tax Purposes allow countries to implement three different approaches to ensure availability and access to beneficial ownership information, the paper identifies the many gaps left in place, and recommends that all countries establish a centralised register of beneficial ownership for all legal vehicles.

Setting up registers does not guarantee that information will be accurate and up to date. Countries should also close the many loopholes in the legal framework (eg narrow scope of legal vehicles subject to registration, high thresholds in the beneficial ownership definition, lack of effective sanctions) and properly equip the beneficial ownership register. The paper weighs the privacy risks and economic costs, and concludes that giving online public access to beneficial ownership information will have significant benefits, by ensuring that all relevant users are able to access, use and verify the data. While most of the recommendations involve legal changes (which are economically ‘free’), the digitalisation, online disclosure and automated cross-checks or interconnection of registries may involve economic costs. Countries should see these improvements in beneficial ownership transparency for assets and legal vehicles as a strategic investment. High-income countries (especially major financial centres where most offshore legal vehicles are incorporated and where most of the cross-border wealth is located) should assist lower-income countries, because global beneficial ownership transparency is an important public good from which all stand to gain.

In their paper, ‘Anticorruption measures’, Michael Findley, Dan Nielson and Jason Sharman emphasise the need to increase efforts in law enforcement, as well as assessing risks and effectiveness of anti-corruption policies. The paper sheds light on the role of corporate service providers in international corruption and exposes the problem of misidentification of haven countries: the symbiotic relationship in which high-income havens, often OECD members, receive illicit flows from lower-income countries. The authors further note – as our Financial Secrecy Index has long demonstrated – that corruption perception rankings may capture some risks in source countries, but systematically ignore the havens that shelter the proceeds.

The authors recommend refocusing the fight on haven countries, and changing both the metrics and the policy responses in order to spotlight them. And while the authors are less convinced of the value of beneficial ownership registries, arguing for a focus on regulating, licensing and auditing corporate service providers, they concur with Andres Knobel on the crucial role of verification of beneficial ownership.

Abiola Makinwa’s paper, ‘Foreign bribery investigations and prosecutions’,shows that illicit financial flows and foreign bribery rely on difficulties in effective prosecution because of the obscure transacting environment where it takes place, which is delocalised and has no central nexus of governance. Furthermore, the monopoly of the state to initiate criminal law enforcement often translates into a reluctance to prosecute domestic companies or persons, and, paradoxically, the criminal justice system may in such circumstances provide a layer of protection to wrongdoing corporations. State actors are often among the primary beneficiaries of contracts facilitated by foreign bribery; while the primary enforcer of anti-foreign bribery laws is the state itself. Finally, information asymmetries represent a great challenge since few countries have the critical capacity to uncover and discharge the traditional burden of proof with respect to foreign bribery activities that are shrouded in secrecy and concealed with the best expertise money can buy.

The author argues that the FACTI Panel should promote non-trial resolutions (NTR), whose growth and spread has focused on crime prevention ex ante, and which outperforms traditional (ex post) criminal prosecution. Dr Makinwa proposes structurally integrating victims’ compensation into NTR regimes, while in the long-term she advocates for linking supply-side NTRs to demand-side foreign bribery prosecution, in order to develop a prosecutorial framework that leverages voluntary disclosures from supply-side NTRs to support the development of a demand-side NTR process.

Fatima Kanji and Richard Messick in their paper ‘Accelerating the return of assets’ criticise approaches to stolen state assets that have been largely centered on the malfeasance of government officials from lower-income countries, while ignoring richer countries’ centra role in hiding the proceeds. The authors note that Sustainable Development Goal target 16.4 calls for more effective recovery and return of stolen assets, whereas the United Nations Convention Against Corruption requires states to assist in locating and returning stolen resources but all too often through processes that are painstakingly slow and prohibitively expensive.

In order to streamline asset recovery procedures, Kanji and Messick argue that barriers to the exchange of information should be addressed urgently and that states themselves should be required to disclose how long they take to respond to relevant requests. They also propose a crackdown on professionals who facilitate the hiding of assets, through the deployment of anti-money laundering laws and the strengthening of penalties. Such legislation should also be used to confiscate stolen assets and ensure their prompt return to victim states.

In the final paper, ‘Peer review in financial integrity matters’, Valentina Carraro and Hortense Jongen examine the role of peer review mechanisms – the most prevalent form of monitoring in the field of international financial integrity, but characterised by serious gaps and vulnerabilities. The authors evaluate six international review mechanisms: on tax, those mandated to monitor the OECD’s Inclusive Framework on Base Erosion and Profit Shifting, and the Global Forum on Transparency and Exchange of Information for Tax Purposes; in the area of corruption, the oversight mechanisms of the UN Convention Against Corruption, the OAS Inter-American Convention Against Corruption, and the OECD’s Working Group on Bribery; and  in the field of money laundering, the monitoring of the Financial Action Task Force.

The authors identify five key institutional weaknesses that are currently limiting the effectiveness of these mechanisms: (1) the frequency with which they are conducted; (2) the lack of systematic follow-up monitoring; (3) exclusion or lack of participation by civil society and other key stakeholders; (4) power imbalances and political bias; and (5) problems arising from the existence of partially overlapping monitoring systems. They also emphasise that, at the domestic level, implementation of standards promoted through peer review mechanisms is often hindered by lack of political will and lack of technical expertise and resources.

Potential recommendations from the UN FACTI Panel report

The FACTI Panel has an important opportunity to lay out the path forward, identifying the changes in global rules and rule-making that will give the world at least a chance of curbing illicit financial flows, including the great scourge of corporate tax abuse. The central recommendations from the Panel’s background papers offer a clear roadmap, should the Panel choose to take it.

Running through all the papers is the core point that current structures are flawed politically: that power imbalances result in bad policies, with OECD members preventing effective scrutiny and accountability of their own actions (and often those of their dependent territories), thereby blocking globally effective action. The focus of current instruments and policy fora is consistently put on actions to be taken by lower-income countries and small jurisdictions, when it is high-income countries and major financial centres, along with their multinational companies and professional enablers, which are the consistent actors in all illicit financial flows.

The papers make a clear case for a UN convention, on which negotiations could begin immediately. This could address each of the three key thematic areas of the Panel’s work, providing the fully supportive context for additional, national actions and for a globally inclusive and effective response to the grave threat posed by illicit financial flows.

• Corporate tax

In 2013, the G20 countries established a consensus – since joined by many more countries at all income levels and from all regions – that the single goal of corporate tax reforms should be to reduce (or indeed eliminate) the misalignment between the location of multinationals’ real economic activity, and where their profits are declared. In successive processes (2013-15, and now 2019-ongoing), the OECD appears to have failed to make significant progress. A convention can create the basis for, and the expertise in a secretariat to support, genuinely inclusive negotiations to deliver the necessary reforms. As noted in the background papers, this is likely to include a shift to unitary approach with formulary apportionment.

• Financial transparency

The key elements identified in the Panel’s discussions and confirmed in their background papers are the ABC of tax transparency. The convention could include a comprehensive set of commitments to ensure comprehensive, multilateral, automatic exchange of financial information, including the publication of aggregate data; set the standard for beneficial ownership registers for all major asset classes, with a technical basis in open data allowing their combination into a global asset register; and the full publication of country by country reporting by multinational companies.

• Institutional effectiveness

The convention should set standards for issues of cooperation and process raised in the background papers – notably, with regard to the speed and power relations in asset recovery processes; and to non-trial resolutions in foreign bribery and other illicit flow cases. In addition, and importantly, the convention would address the key failure of current arrangements in respect of peer review of compliance with international instruments – and specifically, would establish a comprehensive and inclusive mechanism of peer review for the convention itself.

Conclusion

There is no guarantee that the FACTI Panel will follow the advice of the chosen experts – and there has already been fierce resistance to the entire process from a number of OECD member states, and of course the corporate lobby – eg the International Chamber of Commerce arguing that the “Confidentiality [of multinationals’ country by country reporting data] is critically important”.  

At the same time, many in civil society have expressed scepticism about the Panel’s willingness to take their own logic to its necessary conclusion, and to make the case for the full reforms that their analysis confirms to be urgently needed.  With the publication of this important set of background papers, the world now awaits the FACTI Panel’s findings.