Tax Justice Network’s offshore wealth estimates have just been validated by the OECD

As we announced last week, the OECD has published data showing that financial accounts holding more than ten trillion euros are now the subject of multilateral, automatic information exchange – a longstanding tax justice goal that the OECD had long resisted. Now James Henry – a senior adviser to Tax Justice Network, former chief economist for McKinsey and author of the Price of Offshore studies – explains how this data represents not only a major advocacy success, but also confirms the approach of those earlier estimates.

Guest blog: James Henry, senior advisor to the Tax Justice Network

Since 2012, our approach to estimating “offshore wealth” has relied on at least three independent methods to triangulate on the size of what is really the largely still hidden, untaxed “eighth continent” of private offshore wealth. A number of key points from the OECD release and recent research are worth highlighting here.

1.  The new OECD data support our estimates and our methodology.  

The OECD’s report is not only consistent with Tax Justice Network’s basic size and growth estimates. It also underscores the fact that our estimation approach is uniquely able to leverage the new data generated by reforms such as automatic exchange of information, and beneficial ownership registration — the A and B of the Tax Justice Network’s ABC of tax transparency, that it has fought hard for. This is a virtuous cycle indeed. 

The OECD data relate only to the relatively narrow class of financial accounts that are currently reportable under their Common Reporting Standard (CRS). In addition, because of the USA’s refusal to cooperate, and the piecemeal exchange process where only some bilateral relationships are ‘active’, a great volume of theoretically CRS-reportable accounts are excluded.

For the total of accounts subject to automatic information exchange now to exceed $11 trillion, even with these caveats, confirms the broad reasonableness of our $24-$36 trillion estimate (for 2014). As a side issue, it also highlights how narrow is the basis of Gabriel Zucman’s $7.6 trillion estimate for the same year. Zucman’s methodology excludes many countries, and many types of financial assets, so it is not unexpected that even the limited OECD data significantly exceed that estimate.

2. Our estimates and methods also take into account a (growing) number of other offshore asset classes. Recent improvements in their measurement have also yielded results that are consistent with our earlier estimates.

Our more diversified, open-ended approach to estimation allows us to take advantage of improved direct measures of other asset classes —  for example, offshore reserve currencies (now perhaps $2 trillion); internationally traded e-currencies ($500 billion); offshore gold, other precious metals, and gems ($1-$2 trillion); private art collections and other collectables; private “untraded” loans; private equity; minority positions in hedge funds; international real estate ($5-$10 trillion); and private jets and yachts, etc.   

3.  The Tax Justice Network’s offshore estimates show the likely scale of a thriving global haven industry.   

Our approach to measuring “flight wealth” tackles the basic question begged by all discussions of “illicit financial flows” and “capital flight”:  just what becomes of the money when it leaves the source countries? Where are the missing “stocks” that correspond to the “flows”? How much is consumed? How much is reinvested? At what yields?  Most important — who manages all this loot? 

What’s at stake here is not just numerology. Our larger estimates imply the existence of a large, lucrative, influential “global haven industry”. This industry cuts across individual havens, and is populated by the world’s largest hedge funds, banks, law firms, accounting firms, corporate registries, and a whole lot of lobbyists who are well paid to keep the whole show going across the world’s many financial secrecy jurisdictions.   Quantifying this industry’s global scale highlights the importance of tackling these “enablers” on a cross-haven basis. 

4. Our other recent offshore estimation work has turned up still more exciting findings: 

5. The “ offshore” world has shifted since we did our 2012 estimates.  

This is an important topic, from the standpoint of financial secrecy: the rise of “onshore secrecy,” real estate, and other asset classes, the precise secretive structures that financial services firms use to handle wealthy clients, and the changing role of key havens like the US and the UK. It has important implications for future measurement efforts.  But I will leave it there for now… 

Estimates are inevitably uncertain – and all the more so when those carrying out the estimated activities are determined to hide them. Our Price of Offshore estimates illustrated the scale of the global haven industry, and while they have not been without criticism, the very best rejoinder just came from the OECD in the form of published data.  

In Apple’s victory lies a defeat for women’s rights

Earlier this week the European Court of Justice (ECJ) published its ruling on Ireland’s state aid to Apple, annulling an earlier decision against the country and the tech giant. This new ruling means that the Irish Government does not need to collect the 13.1 billion Euro which Apple might have otherwise contributed to the public coffer. It is expected that the European Commission will appeal this week’s ruling.

We explain here how the Commission can and urgently must reform the tax rules for multinational companies in order curtail such ‘rogue’ tax behaviour and the type of shenanigans practiced jointly by Ireland and tech firms such as Apple. Reforms are much needed, not just on state aid, but also on establishing a unified approach to transparency and country by country reporting by multinational companies.

At its core this story is one of unfair advantage. Unfair to the small and medium businesses both in Ireland and in other countries that have not been offered a favourable tax treatment. But more so it piles hardship on the people who, in Ireland and countries world-wide where Apple generates its profitable economic activity, need their governments to maximise available resources. This is especially the case now, as people are experiencing some of the hardest of times. Governments need sustainable revenue to meet their human rights obligations and to ensure they do not discriminate against the most marginalised – most often women and girls. Governments need to to reform policies to maximise revenue through progressive taxes and ensure social protection policies are comprehensive not piecemeal.

The day before the judgement on Apple, a joint statement was released by the UN’s Special Rapporteur and the EDVAW Platform of women’s rights mechanisms on Covid-19 and the increase in violence and discrimination against women. The connection may not be immediately obvious, but it is critical to draw attention to the obscene privilege multi-national companies are shown over and above the rights of women and other marginalised people. Favouriting of private interests over public good can have dire implications for the realisation of human rights.

It is now well documented that violence and discrimination against women and girls has spiked during the COID-19 pandemic. From Ireland to India violence against women and girls has increased. A whole range of factors and systemic issues contribute to these particular horrors under the Covid-19 lockdown. One is the availability of resources to address pre-existing perceptions of the role and treatment of women and girls. Another is the political will and policy approach to a range of measures and services which are critical to the support of women and girls both in crisis and in rebuilding their lives in the longer term. The lack of availability of such services is a policy choice triggered by regressive fiscal decisions. Domestic violence services have been targeted for cuts in many countries, both from a decade of attrition and as a result of fiscal priorities developed during the pandemic.

The shortfalls in such service provisions come as a result of pandering to private interests. Failure to clamp down on rampant tax abuse, or allowing weak tax rules to persist, means inflicting harm on the public budget. The Special Rapporteur’s report [above] describes the consequences of these failures for women facing violence and discrimination: “Fewer police interventions; the closure of courts and limited access to legal assistance, to counselling and other emergency services, such as alternative housing; the closure of shelters and services for victims have aggravated the risks faced by women and girls.” All such services need sustainable tax revenue to finance them, underpinned by a progressive tax regime.

Taking Panama to task: Women’s rights trampled by financial secrecy

Just over four years have passed since a huge archive of secret documents from the Panamanian law firm Mossack Fonseca, containing wide-ranging details of fraud, tax evasion and other illegal financial schemes, were leaked to a German newspaper provoking a global scandal. The public outcry that followed embroiled political leaders, celebrities and business titans from across the world, while the Panamanian Government itself faced intense international pressure over its facilitation of shady cross-border finance.

In the years since, Panama has taken some tentative steps towards cleaning up its act, but these have been manifestly inadequate to make a meaningful difference. Moreover, the country’s continuing facilitation of financial secrecy is likely to be undermining human rights in many other jurisdictions. As demonstrated in a new Tax Justice Network submission to the UN Committee on the Elimination of Discrimination Against Women, Panama’s financial system continues to expose other countries to a significant risk from illicit financial flows. This includes abusive cross-border tax practices, which syphon away resources needed for the fulfilment of women’s rights.

The extraterritorial impacts of both corporate tax havens and financial secrecy jurisdictions have become an issue of increasing concern to human rights monitoring bodies in recent years. International human rights law makes it clear that states have a duty to cooperate to maximise the resources available for the fulfilment of human rights, and to take action to prevent behaviours by private actors within their jurisdictions that might be harmful to human rights “regardless of whether the affected persons are in their territories”.

In order for tax authorities to be able to determine who owes what in their jurisdiction, they need to know who are the real beneficial owners of companies, trusts and foundations – both those that are registered within their borders and those foreign entities with financial links to their territory. Corporations and economic elites seeking to avoid paying their fair share of tax, often by transferring their wealth out of the country where it was generated, use complex legal structures and vehicles to conceal this information.

Private foundations are one such device, and Panama hosts some 55,000 of these, making it second only to the Netherlands in fuelling the proliferation of these vehicles. Furthermore, the country only records partial registry of the ownership of these, and thereby leaves them wide open for abuse. It also hosts some 350,000 secretive ‘International Business Corporations’, making it the third largest enabler of these opaque entities in the world, after Hong Kong and the British Virgin Islands. Another popular strategy for hiding assets from regulatory authorities is bearer shares, which make it impossible to ascertain real beneficial owners. While Panama recently introduced new laws to limit these nefarious structures, they still don’t require the beneficial owners to be registered with the government.

As a result of these facts, it is likely that Panama is still providing safe harbour to stolen tax revenue, and other illicit financial flows. Tax Justice Network’s newly-launched Illicit Financial Flows Vulnerability Tracker likewise suggests the country plays a significant role in facilitating questionable resource flows to and from other countries. The tracker, which combines metrics on the volume of financial transactions with the level of secrecy among its trading partners, provides a measure of the risk of illicit flows. As illustrated in the graphics below, in 2018 Switzerland was the largest recipient of outward bank deposits from Panama. Huge flows of outward direct investment from Panama to other secrecy jurisdictions and tax havens – including Malta, Luxembourg and Hong Kong – are also apparent, again raising questions as to whether any of this torrent of revenue might in fact be due to government coffers elsewhere.

Panama: Bank deposits outward 2018
Panama: Direct investment outward 2018

What’s more, Panama’s finance-centered development strategy seems to have brought little benefit for ordinary people living in the country, much less marginalised groups such as women and indigenous communities. A recent country review by the World Bank noted stark and persistent regional inequalities, with much higher poverty rates in rural areas where indigenous communities are largely located. Indeed, the rate of extreme poverty stood at 24.8 percent in rural areas in 2016, as compared to just 2.8 percent in cities.

In indigenous towns and villages, known as camarcas, poverty stood at a staggering 70 percent with extreme poverty at 40 percent. Meanwhile, the World Bank also reports that maternal mortality among indigenous women in rural areas is four times higher than that experienced by urban populations.

As detailed in our submission, these concerns were raised by the Independent Expert on the effects of foreign debt after his mission to Panama in 2017, when he noted that persistently high levels of inequality are evident in a context where “economic policy choices seem to continue favoring wealth consolidation and growth in the hands of a very few”. The Independent Expert also emphasised that women, who account for over 60 percent of single-parent households, should be prioritised in poverty reduction efforts.

Being mindful that women are under-represented in the financial sector the world over, the picture that emerges is one in which, despite some progress in reducing overall poverty levels, women and girls have been largely excluded from Panama’s finance sector-driven growth.

The country’s appearance before the CEDAW Committee will offer an important opportunity for one of the UN’s key human rights oversight bodies to interrogate both Panama’s failure to adequately protect women’s rights within its borders and its continuing role in undermining these rights internationally through the facilitation of deleterious financial practices.

The 76th Session of the CEDAW Committee, which has been postponed due to the Coronavirus pandemic, is due to be rescheduled soon. For a more thorough analysis of the women’s rights issues at stake in Panama’s financial secrecy regime, and recommendations on what needs to change, you can download our submission to the CEDAW Committee, which was produced with the support of the Financial Transparency Coalition, here.

Photo of Panama City courtesy of Francisco Rioseco/Unsplash

A response to the European court’s bad Apple ruling

Today’s Apple decision confirms that the European Union’s rules against state aid are not up to the job of preventing EU member states operating as tax havens. Powerful tax justice reforms are needed, rather than broader application of state aid rules. Neither the EU nor any other countries will be able to raise the revenues needed to invest in health services and to fight the pandemic, if the scourge of corporate tax abuse is not challenged head-on.

Ireland, in common with the Netherlands and a number of other EU member states, have based their national business models on procuring profit shifting at the expense of their neighbours. Meanwhile the OECD’s second attempt at reforming the international corporate tax rules has lost its way, much as the first effort failed to deliver the changes needed.

Bad Apple

Firstly, what can be said about Apple? Will they be celebrating the possibility that they could get away with a multibillion euro tax bill? Or might they eventually come to regret, in the heart of a pandemic, appearing to put their own net profits ahead of the public health funding of countries where they make their money?

On the one hand, Apple is merely a symptom of a sick system, exploited ever more aggressively by too many multinational companies and their tax advisers from the big 4 accountants and international law firms. But of course Apple has also long had one of the most high-profile and egregious corporate tax behaviours, with previous analysis for a European Parliament grouping suggesting a Europe-wide tax rate of less than 1%.

Just this month, the 2019 accounts of Apple’s UK arm confirmed concerns over their approach. The results show Apple Retail UK Ltd declaring a level of profitability on its sales that is a fraction of the margin that Apple Inc makes on its worldwide operations – and paying an equally minimal amount of tax to the UK exchequer. Specifically, Apple Inc’s 2019 filings show that more than 20% of its global sales were pure profit – whereas the UK operation apparently cannot manage a 3% margin.

Globally, Apple Inc paid tax equivalent to 4%-5% of its worldwide sales in the last two years. Apple Retail UK, in contrast, managed to pay less than half of one per cent of its sales in UK tax – making it around about one tenth as good as the global operation at generating taxable profits, in one of the richest countries in the world.

Maybe Apple is just exceptionally badly managed in the UK. Or maybe the demand for iPhones just isn’t what it used to be (although little profit was apparently possible then either).

But the average person looking from outside might reasonably conclude that Apple shifts its profits away from the place it makes its money, in order not to pay a fairer level of tax in the UK. Tax that would otherwise contribute to the costs of public health and all the other elements of civilisation, the importance of which the pandemic has provided a stark reminder.

While it’s clear that we need the systemic changes to tax rules outlined above, people may also want to ask themselves whether they want to keep giving their money to a company that seems to go out of its way to give back as little as possible.

For policymakers, two immediate steps are available. Requiring public country by country reporting would ensure that Apple and all large multinationals have to show, on a comparable basis, just how badly their taxable profits are ‘misaligned’ from the locations of their real economic activity. That would allow the public to make choices about companies they buy from, and to see if policymakers are serious about making progress against tax abuse.

And as the need for revenues grows, to fight the pandemic and its economic impact, Apple seems to make a good case for a temporary pandemic profits tax, based on a country’s activity-weighted share of global profits (in order to avoid the avoidance). That would lay the basis for the necessary long-term reforms too.

EU solutions to a global problem  

The real issue goes far beyond Apple, of course. Tax Justice Network’s newly published research indicates that annual profit shifting by the largest multinational companies is of the order of $1.3 trillion a year. This scale of abuse results in direct revenue losses exceeding $300 billion a year, with the indirect costs – from countries lowering their tax rates in a needless race to the bottom – likely to bring the total to $500 billion or more, in line with previous estimates.

It is time now for the EU – and indeed other regional groupings around the world – to take effective action against corporate tax abuse, both by member states and by tax havens elsewhere. We welcome the European Commission’s commitment today to pursue progress. This should include three key elements.

First, this case highlights the critical need to reform the EU’s corporate tax rules so that each member state can effectively tax the profits arising from economic activity in their jurisdiction. A version of the long-discussed Common Consolidated Corporate Tax Base, or CCCTB, including a fully global application of unitary taxation such as the G24 countries have proposed, provides the way forward. This would follow well from a pandemic profits tax.

In addition, the Commission has expressed a willingness to take serious measures against member states that continue to act as tax havens – which would represent an important step forward from the current list of ‘non-cooperative’ jurisdictions, which excludes member states by default.

Finally, and repeating the point above: perhaps the most important immediate step the Commission could initiate today, would be to require multinational companies to publish their country by country reporting. At a stroke, this is likely to raise substantial additional revenues because this transparency has been shown to curb the most aggressive tax abuses. Moreover, it will provide the ongoing public accountability for both multinationals and EU member states (and other jurisdictions), to show that they are not procuring profit shifting at the expense of others.

At a time when the pandemic has highlighted weaknesses in public health provision, and deep inequalities in the human cost, it is crucial that countries are able to defend their corporate tax base and raise fair levels of revenue in the places where companies’ real economic activity takes place – which is of course also where the human health needs arise. Our human need for nurses and doctors, their personal protective equipment and the intensive care units and ventilators that we all rely on, cannot be shifted to tax havens – we should not allow profits to be manipulated in this way either.

Tax Justice Network Spanish language monthly podcast: ¿Cómo salir de la crisis económica y sanitaria mundial?

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Is financial secrecy always bad?

The Tax Justice Network has long been an opponent of financial secrecy. Wealthy oligarchs, criminals, and looters have increasingly been paying lawyers, accountants and bankers to set up secrecy vehicles such as trusts, foundations and shell companies to hide their ownership of all sorts of assets from the forces of law and order, from our tax authorities, and from the societies in which they live. 

This creates one rule for the wealthy and powerful (who can afford to pay those lawyers, accountants and bankers) and another set of rules for everyone else.  The result is more crime, worsening inequality, weaker accountability, greater corruption, more looting and illicit financial flows, plummeting tax revenues, and so on. The use of secrecy vehicles as “strategic corruption” undermines democratic societies and threatens national security in country after country.

The defenders of financial secrecy make a range of tired and mostly bogus arguments to justify all this: we look at and demolish their main arguments one by one, here.

However, is secrecy (or privacy, as our opponents prefer to call it) always bad? If you go to the doctor with embarrassing ailments, would it be acceptable for your doctor to nail a list of all your medical problems to their front door (or, worse, on the internet), free for anyone to view?  Of course not!  There is, as with most important things in life, a balance to be struck. The question is, where?

Looking for the contours of acceptable secrecy

The scholar Amnon Lehavi has published a paper entitled “Property and Secrecy,” laying out a useful description of the scope of privacy arguments. It touches on many topics dear to us, including trusts, beneficial ownership and listed companies.

The paper focuses significantly on what might be called internal stakeholders: for example, minority versus majority shareholders, or neighbours within a building or area. The Tax Justice Network, on the contrary, usually focuses on external stakeholders, those who are not invited to the negotiating table, especially the wider public and societies which might be damaged by the actions of individuals, entities or other secretive arrangements.

Legal ownership: having your cake and eating it

Those who oppose transparency reforms that we and our allies advocate – such as public beneficial ownership registries – often invoke rights to privacy. Alternatively they use “efficiency” arguments and speak of “liberty” with a broad ideological opposition to regulation and “red tape” which they claim are hindering business and development. Markets should regulate themselves, many (lazily) argue. We know that they just don’t.

At the same time though, these opponents of “Big Government” do demand that a big and powerful government comes to their aid when it comes to defending their private property through court systems and the passing of private interest-friendly legislation.

But how can the private property of owners be protected, if those owners are to be kept secret?  The answer, called “legal ownership”, is based on disclosing only a mask while  obscuring the real owners (called the “beneficial owners”).

Here’s a conversation that exemplifies what may happen.

Legal representative of company A: “The State confirms that this house belongs to company A, so get out!”

Person inside the house: “But who are you? Who is company A? Who is behind it?”

Legal representative of company A: “That’s (legally) none of your business!”

By owning any asset, eg a house, through an entity, trustee or nominee, it’s possible to register only the entity as the (legal) owner and thus benefit from property rights and secrecy (because the real (beneficial) owner is not disclosed). However, it is still essential that the authorities know who the beneficial owners are: for example, to know whether the person is paying the right wealth or income tax, or to find out how they afforded to buy the property, to make sure it’s not through the proceeds of corruption or part of a money laundering scheme.

In our view, transparency isn’t a favour that owners graciously agree to grant society, but the price they have to “pay” in exchange for the protection of property rights, or in exchange for creating a company or trust that enjoys limited liability (that protects the company owner from the company’s creditors).

As the figure shows, disclosing only the legal ownership, rather than full beneficial ownership, is cheating on this basic contract.  Just as we wouldn’t recognise ownership of something purchased with fake money, society shouldn’t recognise property rights or limited liability over assets whose beneficial owners are hidden.

On the bright side, things are improving. The 2020 edition of the Financial Secrecy Index shows that more than 80 countries now have beneficial ownership registration laws. Going further than just registration as we have been demanding for many years, many countries are also starting to make information from registration publicly available. This is especially true in EU countries, based on the 5th anti-money laundering directive (AMLD 5). The UK has been providing this information since 2016 and it has requested this from its Overseas Territories (although that can has been kicked way down the road) Now more countries are following, including in Latin America.

The next step however, is for beneficial ownership of other assets, including real estate, cars, yachts or planes, to also be made public. The Financial Secrecy Index also assesses countries on this under our indicator 4 “Other Wealth Ownership”. In addition, proposals on beneficial ownership of assets were also made at a workshop for a Global Asset Registry co-organised by Tax Justice Network in Paris in 2019. In relation to this, the Independent Commission for Reform of International Corporate Taxation (ICRICT) in 2019 published a scoping study of the UK asset ownership registries for real estate, gold, racehorses, bitcoins and other assets. These asset ownership registries would be relevant to measure inequality, apply wealth taxes and detect illicit financial flows.

Trusts vs Wills: the secrecy benefits that were never justified

Lehavi, whose paper we mentioned above, starts with one of our biggest secrecy concerns: trusts. His paper describes that while wills must become public, trusts can remain secret even from trust beneficiaries, let alone public authorities and  the general public. 

What is a trust?
Put simply, a trust is a three-way arrangement where a “settlor” (say a rich grandfather) gives assets (eg a bank account, or an apartment) to a “trustee” (often a lawyer) to look after on behalf of beneficiaries (for example, the grandchildren.)  This often obfuscates ownership: if the grandfather has given the assets away, but the grandchildren haven’t received them yet, and the trustee only has very limited rights over the assets, then who owns them? 

Wills are only confidential until the person who made the will dies.  This makes sense because a will has no effect until death: that person may change or destroy it at their discretion. A will also has no effect after death if there aren’t any assets remaining to transfer, perhaps because creditors took them. After the person dies, wills must become public in order to enforce their wishes, and for legitimate heirs and creditors to become aware of the new property rights.

A trust, by contrast, can affect ownership from the moment it is created. Trust assets are shielded from personal creditors, including tax authorities.  Trusts don’t always need to be registered, let alone be publicly disclosed.

We have written about trust abuses here and here, and also made the case for trust registration here. The fact that trusts enjoy immunity and secrecy benefits that aren’t available to wills or to companies can only be explained by the way financial elites and their enablers work: secretive vehicles and regimes can be created with complete disregard for current laws or consequences, to serve just a small number of powerful people.

Another paper by Adam Hofri-Winogradow, another authority on trusts, refers to this:

Given that self-settled spendthrift trusts [a kind of trust often abused by wealthy people] leave settlor-beneficiaries’ creditors, including spouses, tort victims and governments, empty handed and perpetual trusts [ditto] leave the public fisc wanting, if even the professionals who lobbied for them are not enriched by them, it is unclear what merits, if any, they have.

Still, in what may be considered “divine justice” or karma, trusts often turn against the people they are meant to benefit.

Trusts separate out different aspects of ownership: technical legal ownership of assets (giving power to buy and sell the assets, for instance), the power to control and use those assets (such as telling the directors of a company held in a trust what to do) or power to enjoy those assets (such as rights to live in a luxury apartment or castle held in a trust.)  As the box above shows, trusts can place assets in a kind of limbo where nobody at all can legally be identified as the owner. So creditors of one of the parties to a trust – for example, the rich grandfather who put assets into the trust – cannot access those assets if they need to — because they don’t own those assets any more.  Many trusts can be said to hold ‘ownerless assets,’ in a kind of legal limbo, like an impenetrable legal fortress into which only a select group of invitees may have access. In the words of Brooke Harrington, a leading author on trusts and wealth management:

‘People can get sued and lose or incur debts they can’t cover, but if their assets are in a Cook Islands trust, they can say, “Meh, I don’t feel like paying. Come and get me”’. (source: Finance Curse, p186.)

For a trust to work “effectively” as a shield against creditors or as a veil against authorities, legal ownership must be pushed to its limits. Settlors and beneficiaries need to appear so distant from the trust ownership and control, and the trustees must appear to have so much independence and discretion that there are plenty of cases where trustees are able to steal the whole wealth for themselves. The “Offshore Alert Conference” 2019 held a session entitled: “Liechtenstein’s Modern Day Grave Robbers – Stealing The Assets of Dead Clients”:

In the early 1990s, Information Technology specialist Klaus Lins claimed to have discovered evidence that a Liechtenstein fiduciary was misappropriating the assets of wealthy clients when they died, instead of distributing them to beneficiaries… More recently, the family of Israeli tycoon Israel Perry has been waging a bitter legal war against a trust company in Liechtenstein in a so-far vain attempt to gain access to the deceased’s vast fortune.

The network of tax havens, secrecy jurisdictions and especially those private enablers of the system hurt everyone: not only government and the public, but even in many cases the wealthy they are meant to protect.

Control over listed companies, section 13(d) and hedge funds

Lehavi’s paper is also illuminating on privacy and transparency arguments related to US Securities Exchange Commission (SEC) regulation 13(d) which requires the disclosure within 10 days of any person acquiring at least five per cent of the capital of a company listed on the stock exchange (because of the control it could exert through that five per cent).

We have already written (“Beneficial ownership in the investment industry”) about the shortcomings of such rules: for example, they can be evaded by investing via different entities and funds or custodian banks, for a total above five percent. While five percent may be relevant in terms of control for a listed company, it is too high a threshold in terms of money: just 0.1% of Apple is worth around US$ 1.5 billion, representing a huge potential tax evasion or money laundering risk.

What Lehavi’s paper highlights, however, relates to an “efficiency” argument made by none other than hedge funds, claiming “positive externalities” from secrecy. The paper describes the arguments presented by hedge fund lawyers:

“outside blockholders [eg hedge funds or other large shareholders not involved in the management of the company] with a significant stake have stronger incentives to invest in monitoring and engagement,” making incumbent managers more accountable and reducing agency costs and slack… secrecy is even more necessary to enable the benefits for corporate governance because a key incentive to become a blockholder lies in its “ability to purchase shares at prices that do not yet fully reflect the expected value of the blockholder’s future monitoring and engagement activities.” If an investor cannot do so, the returns on becoming an active blockholder fall and other shareholders lose the benefits of its presence. Publicly disclosing the presence of an outside blockholder too early might therefore perpetuate agency problems and managerial slack to the detriment of shareholders as a group. Secrecy therefore creates positive externalities. 

In plain English: hedge funds (who pool money from sophisticated investors, either other investment funds or high net worth individuals), are meant to add value to the corporation in which they invest (and hence the economy, and hence the world) because they have an incentive to monitor and reduce slack in the management of these corporations. But, it only makes sense to them to do this good monitoring (to the benefit of all of the human race) if they can keep their share purchases secret for 10 days, so that selling shareholders don’t raise their prices after realising that a rich buyer is in town.

This argument reminds us of trusts in the sense that their existence is defended based on potentially good outcomes that may occur, while nothing in the law guarantees that such a positive outcome will actually happen. Those who defend trusts (especially discretionary trusts with asset protection features) invoke the need to help provide for the family or help the poor. Yet, nothing in the law obliges trusts to help vulnerable people. A trust may be created to benefit only the same settlor who created the trust. In fact, some news articles show millionaires and billionaires use trusts to rip off their soon-to-be-ex-wives).

Back to the hedge funds discussion. It would be one thing if the law required hedge funds to maintain their investments unchanged for a long time, show how they improved management and how the company and all stakeholders are better off. But if nothing prevents a hedge fund from taking control only to engage in self-dealings or to stay just for the right amount of time only to sell those shares at a premium (without doing much monitoring), we cannot be so sure that it will benefit anyone but themselves. And there are good reasons to worry about the negative effects that has on economies.

However, the main reason we should question whether “secrecy” is the right way to ensure hedge funds will buy their shares at a cheap price doesn’t have to do with illicit financial flows (although, US hedge funds don’t even need to check for anti-money laundering purposes the origin of the millions and billions invested in them, unlike any local bank when you try to set up an account). The point here is about inequality. Do we really want “more secrecy” to make it cheaper for hedge funds to amass even more wealth, especially when their lack of transparency means we don’t even know who’s benefitting from them?

The power struggle: privatising the elite’s information and socialising the general public’s data

The big element missing from Lehavi’s paper involves power.

Access to information is ultimately about power. Powerful people (authorities, secret services, IT companies, credit card companies, banks, lawyers) already have access to a trove of personal information on most of us: what we own, what we owe, what we buy, where we go, what we like. As one article puts it, Google knows you better than you know yourself.

By contrast, ordinary people know little about those with wealth and power: how they got their money and assets, the taxes they pay (or not), or whether, or how they are influencing politics, or illegally obtaining government contracts. According to Oxfam, “the world’s richest 1% have more than twice as much wealth as 6.9 billion people”.  Extreme inequality in access to capital, ownership of media, procurement processes, or financing of political parties is undermining our democracies and our justice systems.

To argue that we should defend the “privacy” of the owners of capital – in the name of liberty and freedom – is a bit like advocating for a fascist political party to run for election because we believe in democracy.  

Rules on disclosure are there as protection for ordinary citizens against powerful predatory behaviour. Undoing those protections in the name of “freedom” raises the question: whose freedom do we value the most?  Giving the fox more freedom in the henhouse isn’t the best course of action.

It’s precisely because we love democracy and freedom that we should establish limits to ensure that no one has so much power (and information) that they are above the law.

In practice, privacy doesn’t mean that no one knows anything about anyone, as financial elites and their enablers claim. What it really means is that a few (may) know everything about everyone, while most know nothing about those in power or those at the top of the tree economically.

Pandemic of tax injustice in Ukraine

The Ukrainian government took the pandemic as an opportunity to further shift the tax burden from the rich to the poor, while Tax Justice Network’s new illicit financial flows tool confirms the country is vulnerable to profits shifting to tax havens and bank deposits outflows.

Guest blog from the Center for Economic Justice, a new TJN affiliate in Ukraine.

The Ukrainian economy has the largest ratio of exports to GDP in Europe, larger even than mega natural resources exporter Russia. The majority of these are commodities such as agricultural produce, steel and iron ore, and most of the exporters are private companies belonging to rich and super-rich Ukrainians. The wealthy not only control the most profitable sectors of the economy but also the mass media and political parties, and hence their influence allows them to enjoy low taxation and lax tax control of their exports. Personal income tax in Ukraine is flat,[1] withholding tax on dividends is low, and agricultural exporters enjoy a substantial reduction on corporate income tax.

To top up these tax privileges (subsidised by a population with the lowest average wage in Europe) the exporters also shift profits to low tax jurisdictions by underpricing sales to offshore intermediaries. Imagine a company, ‘Steel Co’, with subsidiaries in Ukraine, Switzerland and Germany. They make the steel in Ukraine and would like to sell it to manufacturers in Germany. If they do this directly, the entire profits of this operation are located in Ukraine, where they would pay 18% in corporate income tax. However, they can first sell it to the subsidiary in Switzerland for a low price, and then sell it from Switzerland to Germany for a high price. In this way, the majority of the profits can be shifted to offshore financial centers (such as Switzerland), where they are taxed at a much lower income tax.

As our two in-depth studies of transfer pricing demonstrated,[2] commodity exports are significantly underpriced, and as a result both the state budget and the Ukrainian economy are losing desperately needed resources. We estimated that around US $3 billion of profits are shifted offshore every year. Underpaid corporate tax alone costs the national budget about US $600 million.

Tax Justice Network’s new Illicit Financial Flows Vulnerability Tracker confirms the exposure of Ukraine’s financial flows to tax avoidance. It shows that the deposits of Ukrainian firms and individuals are located especially in Switzerland (Figure 1). 30% of the overall vulnerability is created by the US and 26% by Switzerland. It also shows that foreign investment into Ukraine takes place predominantly from offshore financial centres (Figure 2). US $8.4 billion of foreign investment comes from the Netherlands, US $6.4 billion from Cyprus, and US $2.1 billion from Switzerland.

Figure 1. Vulnerability to outward bank deposits of Ukraine, from https://tax-justice.thibi.co/#/profile/UKR
Figure 2. Inward foreign direct investment into Ukraine. Main partners

Apart from the gross injustice of tax avoidance and official under-taxing of the well-off, reduced resources render the Ukrainian state incapable of handling economic crises like the current pandemic.

Given that the Ukrainian budget is meagre[3] and that tackling the crisis requires budgetary intervention, you might expect the government to step up efforts to close tax loopholes and thereby help society address the economic downturn. But you would be entirely wrong. Contrary to the logic of fairness and efficiency, the “anti-crisis measures” implemented have provided further tax breaks for companies, none for employees[4], and negligible support to affected workers.

The key measures deployed by Ukraine to tackle the economic shock have been:

These measures place the burden of tackling the crisis firmly on workers, the poor majority of society, while tax avoiders are given further support at the public expense:

(i) the land tax had already been introduced at a special lower rate substituting the corporate tax for agribusiness. This surprising tax break for super-profitable agri-exporters had been criticised for providing them with an unfair and unnecessary advantage, and now even this lowered rate has been scrapped.

(ii) The suspension of tax checks and fines can be enjoyed only by business owners since taxes and social security contributions are automatically deducted from employees’ monthly pay.

(iii) The social security contribution break for the self-employed is surprising on many levels: some business activities remained profitable during the crisis, so why reduce their taxes? And why provide a tax break for the self-employed but not for employees? This measure is in line with the general neoliberal ideology of consecutive right-wing Ukrainian governments.

To conclude, thanks to a lack of sustained pressure on Ukraine’s political elite to reduce inequality, the current crisis has led to a further propagation of tax injustice. By their very nature tax issues are international, and so the struggle for tax justice also has to be international. The international community of activists and progressive politicians needs to step up the coordinated effort to fight for tax and economic justice both in Ukraine and around the world.

[1] Absence of progressive taxation in Ukraine means that high income earners pay the same rate of 18% as the poor, while in the majority of Western European countries the rich pay about 55% tax rate.

[2] https://www.guengl.eu/issues/publications/profit-shifting-in-ukraines-exports-of-agricultural-commodities/ , https://www.guengl.eu/issues/publications/profit-shifting-in-ukraines-iron-ore-exports/

[3] See comparisons in the agri-exports study, ibidem.

[4] There are some for the self employed, but our analysis shows this is done inefficiently and in the logic of radical free market thinking.

[5] https://covid19.gov.ua/prohramy-sotsialnoi-pidtrymky

Moving beyond poverty begins with tax justice

The former United Nations Special Rapporteur on Extreme Poverty and Human Rights Professor Philip Alston has concluded his missions to observe the state of human rights in various countries, with strong condemnation of the failures to eradicate poverty.

And he begins and concludes his final report for the Human Rights Council underlining the importance of tax justice. This speaks volumes about how far the tax justice agenda has travelled since the Tax Justice Network was founded.

Poverty is a political choice and its elimination requires: (i) reconceiving the relationship between growth and poverty elimination; (ii) tackling inequality and embracing redistribution; (iii) promoting tax justice; (iv) implementing universal social protection; (v) centering the role of government; (vi) embracing participatory governance; and (vii)
adapting international poverty measurement.”

~ Philip Alston, 2020.

Having recently handed over the reins of the Special Rapporteur role on Extreme Poverty and Human Rights to Olivier De Schutter, Alston sets out why tax justice is so pivotal to the realisation of human rights and to addressing inequalities. He echos the four Rs of tax: revenue, redistribution, re-pricing and representation. He points to the colossal sums lost to illicit financial flows (estimated between US$500-600 billion annually) and to the undermining of the realisation of rights by tax evasion and avoidance.

The report criticises the relentless rewarding of wealth over labour, and the ‘pretence’ that private sector interests can, and do, adequately fill gaps in public need. Ultimately, the dominant narrative of private sector ‘efficiency’ and of public-private partnerships has drowned out the obligation to uphold and protect rights to education and to health. Politicians have failed to deliver on the transformation that fair taxes can make, but as Philip Alston’s report highlights,

‘over time “taxation, both as a symbol of solidarity and burden-sharing, and as a reflection of deeper values, must be front and center in any set of policies to eliminate poverty.”

Alston’s country missions and reports have powerfully shone a light on political failings and the rights failures and impoverishment of citizens. He aimed some of his strongest criticism at some of the wealthiest nations (USA, UK and Northern Ireland) . Their political choices have resulted in shocking and extreme social and economic inequalities.

Not surprisingly, the various goverment responses illustrate an indifference or refusal to address policy decisions that favour private interests over social and economic equality. They range from denial and political indifference to public insults.

Professor Alston’s USA and UK reports and his later mission to Spain challenged political elites head-on to ‘look in their own back yard’ at the ‘parlous’ state of poverty and contrast that with their public rhetoric. The reports have been both a harbinger of the deep social and economic inequalities that have been magnified during the COVID-19 pandemic, a critical record of a collective failure to ‘care’ for those most in need. and a reflection of the loss of a moral compass.

The sustainable solution for the extreme poverty and hardship exacerbated by Covid 19 would be significantly alleviated by transparency. As Philip Alston says in his concluding points:

A common set of indicators for tracking income and wealth should be
prioritized in the next revision of the UN System of National Accounts. Governments should publish income, wealth, and effective tax rates of top earners, and require multinationals to publish country-by-country reporting data.”

The influence and key importance of the tax justice agenda is inescapable. Within the G77, the OECD, and here in this report, parts of the UN are recognising the centrality of tax justice. They must also recognise the need for systemic levels of transparency.

At the heart of tax justice is a progressive choice to address the horrors of extreme poverty and increasing inequalities. Governments now need to demonstrate a meaningful commitment to eradicate poverty and meet their obligations of realising human rights. In essence, it requires governments to work in unity to dismantle a failed fiscal architecture; and those same governments underpinning that unity with political leadership. Philip Alston ends his report thus:

Protestations of inadequate resources are entirely unconvincing given the determined refusal of many governments to adopt just fiscal policies, end tax evasion, and stop corruption.”

We must have an intergovernmental body to agree a series of tax and financial transparency standards – where all governments from ‘developing’ (usually plundered) countries and ‘developed’ nations can formulate sustainable revenue and redistribution standards.

Image by Milan Rout.

Exploring UK companies’ legal ownership chains to detect red flags and verify beneficial ownership information: Part 1

By Andres Knobel and Oliver Seabarron

The Tax Justice Network in cooperation with the CORPNET group at the University of Amsterdam (@UvACORPNET) and the Data Analytics and Society Centre for Doctoral Training at the University of Sheffield (@DataCDT) has mined and applied advanced analytics to Orbis data to identify patterns and red-flags on the ownership chains of UK companies. Findings include that 74 per cent of UK companies have very simple structures (a natural person directly owning the company or just one intermediary entity in between. Only 5 per cent of UK terminal companies have more than 5 layers, and only 0.5 per cent have more than 10 layers. However, two UK companies of our sample have 23 layers of intermediary entities up to a natural person shareholder. We checked the records of one of these 23-layered companies in Companies House and found that they have declared wrong information (entities as beneficial owners) and even contradictory information on the addresses and shareholders (when comparing information available on the accounts, annual returns and other registered data).

Context of beneficial ownership transparency

Beneficial ownership transparency (identifying the natural persons who ultimately own and control companies and trusts) is getting a lot of global momentum as one of the most relevant tools to tackle illicit financial flows related to money laundering, corruption and tax abuse. As our latest update of the state of play of beneficial ownership registration around the world shows, based on findings from the Financial Secrecy Index 2020, more than 80 jurisdictions have approved laws requiring beneficial ownership information to be registered with a government authority.

However, verification of registered beneficial ownership information continues to pose challenges in all countries. For this reason, we have set up a multi-stakeholder group to promote verification of beneficial ownership and organised a call to map current verification strategies around the world.

One of the first public cases of verification of beneficial ownership data was carried out by Global Witness. Based on the open data format of the UK’s beneficial ownership register held by Companies House, Global Witness was able to analyse UK beneficial owners and thus detect many red-flags, including 500 ways to write “British” in the field for nationality, cases of disqualified directors and so on. Unfortunately, UK data on legal owners is not available in structured data format for bulk downloads to run proper checks. The data also lacks enough identification details – only legal owner’s names are made publicly available.

The importance of legal ownership and the full ownership chain

Beneficial ownership is arguably more useful than legal ownership to tackle illicit financial flows. After all, the legal owner (the shareholder) may be another company, but neither companies nor trusts can go to jail for illegal activity, only a natural person can.

This doesn’t mean that the legal owners are irrelevant. On the contrary, data on the legal owners and the full ownership chain is necessary to detect abusive practices, such as circular ownership or fragmented ownership to avoid beneficial ownership reporting requirements. At the same time, information on the full ownership chain is necessary to confirm the beneficial owner’s identity. In the figure above, Mary is both the beneficial owner of company A, and the legal owner and beneficial owner of company F. Given that the beneficial owner is in principle[1] also a legal owner of the last layer, by identifying every legal owner in the ownership chain it is possible to confirm the beneficial owner’s identity. Applying logic: if Mary -> (owns) company F -> company G -> company H -> company A, then we can confirm Mary -> company A. It’s important to note here that a beneficial owner may include an individual who controls the entity through mean other than ownership. However, here we consider that the natural person shareholder, Mary, is the beneficial owner (although she could just be a nominee, unless the information is verified).

Most countries, including the UK and Denmark only publish information on the first layer (company H) and the beneficial owner (Mary) but nothing on the intermediary entities in the ownership chain.

This lack of information on the full ownership chain is not a problem in the scenario where the ownership chain of any local company includes exclusively other local companies. Where no foreign entities at all are involved in the ownership chain of a local company, all the relevant information would be available in the same register, even if it required navigating through many different records. For instance, the register’s records on company A would hold information about company H and Mary. It would be possible to search for the register’s records on companies H, G and F to confirm that Mary is indeed the beneficial owner of company A.

However, if any of the intermediary entities are foreign companies (like the example in the figure above), the UK register may have no information on the legal owners of companies H, G and F. In this case, it will be necessary to go to the registries of the country of incorporation of each intermediary entity to find the corresponding legal ownership information (in the figure’s example, it would be necessary to search the registries from the US, Luxembourg and Panama). It only takes one of these countries to fail to provide legal ownership information, to make it impossible to identify the full ownership chain. In that case, it won’t be possible to confirm the beneficial owner either.

To make matters worse, the possibility of not finding legal ownership information on an intermediary entity isn’t just a potential risk but a very real one. Our latest paper on the state of play of beneficial ownership registration shows that out of the 133 jurisdictions covered by the Financial Secrecy Index, only 37 jurisdictions have proper legal ownership registration (where bearer shares don’t pose risks). Out of these 37, only 11 jurisdictions provide information online (out of which, only 1 in open data format).

Exploring the ownership structure of local companies to detect red-flags

Apart from looking at the full ownership chain of a specific company to confirm its beneficial owner, it is possible and relevant to systematically analyse ownership chains for all local companies. As described by our paper on beneficial ownership verification, that are many steps needed to verify beneficial ownership information, including authentication (eg the beneficial owner is who they say they are), authorisation (eg the lawyer incorporating a company on behalf of the beneficial owner is authorised to do so) and validation (eg write “British” properly). However, the most complex verification process is detecting red-flags and outliers (eg a director managing thousands of companies at the same time).

To detect outliers, it is necessary to know what a typical company looks like. For example, do most companies have one, two or ten shareholders? How are shareholdings allocated among shareholders, equal distribution (50-50 split, 33-33-33 split or 99-1 split)? How many layers are present in the ownership chain?

By knowing what a regular company looks like, it would be possible to identify outliers and audit them further to detect possible wrongdoing before illegal activity takes place. For example, if someone is trying to create a company with a very odd structure, authorities may want to investigate this company to understand the reason behind the extra complexity. This detection would be enhanced even further if countries knew not only the structure of a regular company, but also the typical corporate structure used in money laundering, tax evasion or corruption cases to compare it to. This way, if authorities explored and identified typical ownership structures beforehand, it would be possible to run systematic checks upon incorporation, to verify whether the new company’s structure resembles that of a regular company or that of a company involved in illegal activities. Suspicious companies could be investigated to prevent them from incorporating, opening bank accounts and engaging in illegal activities.

Exploring UK companies’ legal ownership chains

Inspired by Global Witness’ analysis on beneficial ownership data, the research on Tenders in EU: how much goes to tax havens? and Javier Garcia-Bernardo’s work on global corporate ownership networks, the Tax Justice Network produced an analysis of UK companies’ legal ownership chains. This project was the result of interdisciplinary work carried out mostly by Oliver Seabarron (DataCDT/Tax Justice Network) as part of his PhD, under training and supervision from Javier Garcia-Bernardo (UvACORPNET/Tax Justice Network), based on the legal ownership framework and analysis proposed by Andres Knobel (Tax Justice Network).

Sourcing ownership data for analysis

Based on the explanations above, Companies House’s legal ownership data was not sufficient for the purposes of our analysis . Instead, data from Orbis was used, which has the following limitations:

It would be rather simple to analyse the ownership chain of companies, if all UK companies looked like this:

However, reality looks more like this:

To be able to analyse the data, we simplified the scope of the analysis. We took a sample that applied two conditions:

  1. Terminal companies: the analysis covered only companies that didn’t own other companies (or those that owned less than 50 per cent of another company). This prevents companies integrated within a long ownership chain to be considered as independent chains (in which case we would be double counting some companies).

Consider the ownership chain in the above figure: Mary -> (owns) F -> G -> H -> A. When we analyse A’s ownership chain, we see that there are three intermediary entities (F, G and H) up to the beneficial owner Mary. However, if we didn’t limit our analysis to terminal companies (eg company A), our analysis would also present “Mary -> F -> G->” as the (independent) ownership chain of company H, “Mary->F->” as the (independent) ownership chain of company G, and “Mary->” as the (independent) ownership chain of company F. In other words, we would be adding noise to the analysis by recording for one ownership chain (company (A) with three intermediary companies) as several more chains (company (H) with two intermediary companies; company (G) with one intermediary company; and company (F) with no intermediary companies).

  2. Shareholders with > 50 per cent ownership. To avoid circular ownership situations that would result in a never-ending loop, the sample considers only layers where the entity shareholder above owns more than 50 per cent of the capital.

Otherwise, the analysis of the figure below would result in: company E is owned by company D, which is owned by company C, which is owned by company E, which is owned by company D, which is owned by company C, which is owned by company E, which is owned by company D…

These two conditions, unavoidably, narrow the scope of our analysis to exclude more highly complicated ownership chains.

Firstly, only the chains through primary shareholders are captured, and therefore chains through any minority shareholders are not analysed.

In addition, as the following figure describes, if none of a company’s entity shareholders own more than 50 per cent (dashed arrow), it will be considered as though there are no additional layers above the company (as though the company were owned directly by natural person shareholders or beneficial owners. Another consequence is that the ownership chain may be broken into several parts:

For example, the  ownership chain on the left hand side of the figure is Mary-> company F-> company G-> company H-> company I-> company L-> company M. However, given that company I owns only 20 per cent of company L, the analysis will consider that company’s M chain includes only one layer (company L). The analysis will also consider that (intermediary) company I is a terminal company (so its ownership chain, which includes companies H, G and F will be considered as independent from companies M and L).

On the other hand, the ownership chain on the right hand side of the figure, of terminal company O (Mary-> company F-> company G-> company N-> company O) will be disregarded. This is because company N only owns 20 per cent of company O, and is not a UK company, hence not considered a terminal company.  Therefore, the analysis will determine that company O has zero layers (as though it were only owned by natural persons).

The narrowing of scope resulting from these conditions, however, is minor. A statistical check of our results found that less than 10 per cent of cases in the analysis had their chains simplified or “broken” by the two conditions, with the majority of these instances occurring in the first layer of ownership. To find out more about the robustness checks and results across different samples, look at the fact sheet here.

Findings – Part 1

The first sample analysed 327,587 UK terminal companies. Of these, 12 per cent had zero layers and 62 per cent had one between the company and the beneficial owner. This is consistent with the OECD’s Global Forum 2018 peer review report on the UK, which informed that “an analysis from the current PSC Register [beneficial ownership register] shows that approximately 80 per cent of companies are directly owned by natural persons or by companies whose immediate shareholders are natural persons and are managed by the same persons. The remaining 20 per cent are more complex structures” (page 45, [TJN-Note]).

The following figure shows the distribution of the number of layers (intermediary entities between a company and its beneficial owner), for those companies with one or more layers:

Interestingly, only 5  per cent of UK terminal companies have more than 5 layers, and only 0.5 per cent have more than 10 layers. This suggests the proposal mentioned in our paper on beneficial ownership verification to limit the length of the ownership chain to up to two or three layers (to make it easier to verify beneficial ownership information) wouldn’t affect the vast majority of UK companies because most of them already use very few layers. Coincidentally, the World Bank’s well-known The Puppet Masters’ report on grand corruption cases proposed a three-layer test for sniffing out inappropriate complexity (this may likely apply to small companies but not to listed multinationals): “One compliance officer suggested an informal ‘three-layer complexity test’ as a quick-and-dirty rule of thumb. Whenever more than three layers of legal entities or arrangements separate the end-user natural persons (substantive beneficial owners) from the immediate ownership or control of a bank account, this test should trigger a particularly steep burden of proof on the part of the potential client to show the legitimacy and necessity of such a complex organization before the bank will consider beginning a relationship.” (page 56).

As regards the outliers, there are two companies that have 23 layers up to a natural person (or where there is no more data)

Cross-checking Orbis and Companies House data

According to Orbis, one of the terminal companies with 23 layers had 15 layers of UK entities and 8 layers of entities from the Cayman Islands. We decided to check the information from that terminal that was available at Companies House.

The first observation is that it is very difficult to obtain information on legal owners from Companies House. The first and best option is to look at annual returns which are available as an image, ie non-machine-readable pdfs. However, many of the layers didn’t have updated annual returns. Second, it is possible to look at the company’s full accounts, read the notes and hope that there is some information on legal owners. Many of the layers’ accounts referred to the immediate layer above, and the controlling group, a private equity company from Canada listed on the Toronto’s stock exchange.

However, these are some of the issues we found:

Conclusion

A first analysis of Orbis data shows that corporate ownership is very complex and messy. Company registries that offer information online, for free and in open data format can help obtain necessary information to verify the beneficial owners. However, the lack of verification and enforcement on beneficial ownership data, allows companies to declare an entity, instead of a natural person, as a beneficial owner (as Global Witness had already warned). On top of this, the UK’s lack of open data format for companies’ legal ownership information, makes it very hard to track the ownership chain of companies. This problem is exacerbated by the lack of verification on legal owners, where either annual returns are not filed on time, or where the information reported by the full annual accounts contradicts the shareholder information reported by the same company. In any case, the trove of useful free online data in the UK makes it possible to obtain some information, which is much better than Cayman’s case, where each search costs USD $36, and it’s not clear what information will be obtained.

However, this problem is exacerbated when the ownership chain is long and it includes different types of legal vehicles from different countries. The terminal company that we analysed was “easy” because it included many companies from the UK. Had it included trusts or limited partnerships from the UK, or entities from many other countries, our findings would have been even more limited.

One way to reduce the risks of legal and beneficial ownership inaccuracies is to set limits on the length of the ownership chain, so that it includes few layers (ideally not more than one or two, unless the need is justified). The other complementary limit would be qualitative: to only allow intermediary entities, as long as they are incorporated in countries offering free online data on their legal and beneficial owners. In the case of the UK, both our findings and the OECD’s Global Forum peer review report demonstrate that the vast majority of UK companies (between 75 and 80 per cent) already have very simple structures, so none of them would be affected by the proposed length and quality limits.

The next part of this project will include an analysis of the country of incorporation of most layers of UK terminal companies.

Generation Equality – Calling young feminists for tax justice

The call for youth-led organisations and movements to lead the Action Coalitions for Generation Equality has been reopened by UN Women. Deadline 19 July 2020.

UN Women is part of the United Nation and is the overall convener of the Action Coalitions. The Action Coalitions cover six critical areas (see below) designed to help achieve substantive gender equality and rights for women. Tax Justice is central to achieving greater economic justice and rights.

The Generation Equality Forum is a global gathering for gender equality, convened by UN Women and co-chaired by France and Mexico.  The virtual Forum events (as they must since COVID 19) take place 25 years after the Beijing Declaration and Platform for Action (English, Spanish, French, Russian, Arabic, Chinese) – the ‘blueprint to achieve women’s empowerment and gender equality’. The Generation Equality Forum will take stock and chart a set of actions to accelerate progress for women’s rights and substantive gender equality.

What are Action Coalitions?
Action Coalitions will be vital to a strong, vibrant and results-driven constituency of partners. UN Women is the overall convener of the Generation Equality Action Coalitions, covering six critical areas:

What is required of leaders of Action Coalitions?
The criteria for all leaders of Action Coalitions is as follows:

Why should you apply?
Youth is one of the pillars for the Generation Equality Forum, and this will be a great opportunity to lead feminists and activists around the world, putting young person’s rights at the centre of all commitments. You’ll get to network with decision-makers and feminist movements, and have a chance to engage meaningfully in five year-plan actions.

Apply now

View the application form in: English, Spanish, French.

It’s got to be automatic: Trillions of dollars offshore revealed by Tax Justice Network policy success

This is a moment, in these strange times, to celebrate an ongoing success in the history of the tax justice movement. Automatic, multilateral exchange of information on financial accounts is the A of our ABC of tax transparency. It has been a campaign aim since our inception in the early 2000s, as the key to ending bank secrecy. It is the start point to unravel the enormous volume of illegitimately held global wealth.

The OECD announced this week that “nearly 100 countries carried out automatic exchange of information in 2019, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets of EUR 10 trillion” (their emphasis).  

Back in the day, the OECD was the stout defender of information exchange ‘upon request’. That polite phrase referred to a standard under which countries looking at a particular individual (no ‘fishing trips’ allowed) had to put together a small dossier to justify it, and then ask financial centres nicely for specific pieces of information. In many cases they still didn’t get it, because of some invented obstacle or other. That’s why we’ve always advocated automatic exchange: the annual, multilateral exchange of information on the financial accounts of other countries’ residents.

And how times change…

Tax Justice Network, 2005: The current state of the European Union Savings Tax Directive is far from ideal [but it] has established the principle of automatic information exchange between nations and is therefore a welcome step towards a global framework for automatic information exchange.

– Tax Us If You Can , Tax Justice Network, 2005 (p.40).

OECD, 2020: Automatic exchange of information is a game changer… The discovery of previously hidden accounts thanks to automatic exchange of information has and will lead to billions in additional tax revenues.

~ OECD Secretary-General Angel Gurría, 30 June 2020.

Estimating the hidden sums

An important tactic we used to bring attention to the issue was to publish estimates of the volume of assets involved. Just how much money, potentially ill-earned and untaxed, was floating around the world while policymakers put their fingers in their ears and shouted ‘La la la! “Upon request” is the OECD standard!’?

A study published in 2005, The Price of Offshore, drew on data published by financial industry sources and estimated the global total of assets held offshore by high net worth individuals at approximately $11.5 trillion. With tax authorities providing little or no data on the scale of declared offshore financial assets, the proportion of this which was undeclared for tax purposes was literally, then, unknowable.

Front page coverage for The Price of Offshore, Revisited

In 2012, we published an update with a substantially more rigorous methodology: The Price of Offshore, Revisited. Here, James Henry – one of our senior advisers and the widely published former chief economist for McKinsey’s – utilises four different approaches to make the most of the available data, and provide a more robust estimate than any previous: some $21 trillion to $32 trillion.

It’s important to note, both in general and for this discussion in particular, that the estimate relates to a wide range of financial assets – but also excludes many non-financial assets. There is no way of stating with precision what share of the assets are declared to home tax authorities – although the evidence is clear that automatic information exchange dramatically increases compliance. The 2014 estimates of Gabriel Zucman, Berkeley economist and ICRICT commissioner, assess a rather narrower range of financial assets and put their total at roughly $8 trillion, of which around 80% is estimated to be undeclared to tax authorities.

Petr Jansky and I survey these and a range of other estimates in our new book, Estimating Illicit Financial Flows – published with open access by Oxford University Press. No method is perfect, because of the inevitable data problems – the very success of tax evasion depends on being uncounted. In part for that reason, policymakers not keen to take action were quick to pour scorn on the suggested orders of magnitude.

A measure of progress

There have been two critical steps on the way here: the EU Saving Tax Directive, which introduced a limited form of automatic exchange among EU member states; and the Foreign Account Tax Compliance Act, FATCA, which required the financial institutions of all other countries to provide equivalent information annually, and uni-directionally, that is, only one way, to the United States. At which point, the G8 in 2013 told the OECD to get with our programme!

This allowed the OECD to bring forward a multilateral instrument based on the EU approach, which would have been impossible without US permission. And although the Obama administration u-turned on its commitment to participate within a few months, the process was inexorably underway.

Now the OECD Common Reporting Standard is in place, with a couple of years of operation under its belt, and the OECD has announced new statistics on its coverage: 84 million accounts containing 10 trillion euros ($11.2 trillion).

I’ll come to the caveats below, but some positivity first. This is outstanding! Here’s why.

First, the world is finally taking seriously the scale and threat of offshore tax evasion. The ability of governments to tax their elites, and to ensure they contribute to the societies from which they profit, is greatly improved.

Second, the numbers confirm at a stroke the orders of magnitude involved, and indeed those estimated by James Henry for the Tax Justice Network. Bearing in mind that the data refer to a much narrower set of financial assets than the Price of Offshore estimates; and that they exclude the US and many lower-income countries; there is clear confirmation here.

Now imagine if the United States participated in automatic exchange as well. The US is the largest financial centre, and takes second place on the 2020 Financial Secrecy Index behind only the highly secretive Cayman. As such, the US is now the preferred tax haven for a great deal of foreign money – the last holdout against transparency. The value of financial accounts held would likely swell to perhaps $13 trillion or $14 trillion if the US were to participate – and the share of that additional wealth undeclared to home country tax authorities is likely to be particularly high. For now, you can find Jim’s latest estimates on his site.

Third, as Jim pointed out in correspondence, the new numbers confirm an important point about the Tax Justice Network’s approach. There is a virtuous circle built in. Progress on the ABC of transparency not only supports greater accountability and improved compliance directly. It also strengthens our estimates of scale, in turn raising the pressure for further transparency and the policy measures ultimately to end the abuses.

Sunlight disinfects, and the bigger the crack, the more pressure there is to open the door all the way.

But you’re still complaining?

You bet. The OECD’s Common Reporting Standard, as with the organisation’s adoption of our proposal for country by country reporting by multinational companies (at the behest of the G20), has introduced major and quite unnecessary flaws. In both cases, these involve a systematic bias against lower-income countries and in favour of the biggest OECD members – tax is ultimately political, not technical.

What’s next?

It’s clear that the fact that the OECD did adopt the Tax Justice Network proposal for multilateral, automatic exchange of information on financial accounts, despite all the flaws that need fixed, is having dramatic impacts. Trillions of dollars of offshore assets are now in tax authorities’ scope, that would not otherwise ever have been. We need to know more about them, and we need reporting to show tax authorities are acting on failures to declare – but we can see the world has already changed.

The old arguments have fallen away. The claims that such a scale of global, offshore assets was not credible; or that this type of coordinated policy response was unthinkable; these are gone.

And further change is coming. Trillions of dollars more, especially those of lower-income countries excluded by the OECD, remain out of the scope of tax authorities. As in the corporate tax reforms, the OECD has increasingly confirmed that it cannot or will not act as an honest broker.

Globally inclusive measures are needed instead, and the high-level UN FACTI Panel must take up this challenge when it reports next year. The Panel is now actively assessing the many weaknesses in international arrangements for Automatic information exchange; for public registers of Beneficial ownership; for Country by country reporting by multinationals; and much more. In their initial evidence sessions, the Panel has heard many calls for a UN convention, to ensure fully inclusive application of the ABC and to create within the UN system a space for genuinely global negotiations of corporate tax rules.

The remaining element for the Panel would be to take up the recommendation for a UN Centre for Monitoring Taxing Rights. This is a proposal I put forward in The Uncounted, a new book published by Polity Press (and kindly listed by Martin Wolf as one of the Financial Times books for Summer 2020). The Centre would be responsible for the collation, analysis and publication of global data on cross-border tax avoidance and tax evasion, and for tracking the resulting inequalities in taxing rights between countries. While the quality of ABC and other data available would eventually make estimations unnecessary, the Centre would likely play a role initially in driving forward the quality of international estimates such as the Price of Offshore.

Lastly, one to flag. In September 2020, the Tax Justice Network and key partners will be publishing a major set of new numbers…

Image: “the money is that way” by theclyde is licensed under CC BY-NC 2.0

Edition 30 of the Tax Justice Network Arabic monthly podcast #30 الجباية ببساطة

Welcome to the 30th 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 30th edition of Taxes Simply:

Walid Ben Rhouma and Osama Diab discuss new statistics issued by the Central Agency for Public Mobilization and Statistics (CAPMAS) on the economic impact of the coronavirus on Egyptian households; the discussion focuses on the social groups most affected by the crisis and the unequal impact of the crisis.

Plus: we present a summary of tax and economic news from the Arab region and the world including: 1) A new agreement between Egypt and the IMF 2) The United States blocks a proposal to tax multinationals and 3) The fears for a Tunisian economic contraction.

الجباية ببساطة #٣٠ – الأثر غير المتكافئ لجائحة كورونا على الدخل

أهلا وسهلًا بكم في العدد الثلاثين من الجباية ببساطة. في الجزء الأول من هذا العدد يتناقش وليد بن رحومة وأسامة دياب حول إحصائيات جديدة صادرة عن الجهاز المركزي للتعبئة العامة والإحصاء المصري عن أثر فيروس كورونا الاقتصادي على الأسر المصرية، ويتمحور النقاش حول أكثر الفئات تضررًا من الأزمة والأثر غير المتكافئ للأزمة.

في القسم الثاني نتناول ملخص لبعض أخبار الضرائب والاقتصاد من المنطقة العربية والعالم، ويشمل ملخصنا للأخبار: ١) اتفاق جديد بين مصر وصندوق النقد؛ ٢) الولايات المتحدة تعطل مشروعا لفرض الضريبة على الشركات متعددة الجنسيات؛ ٣) توقعات بانكماش الاقتصاد التونسي.

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

The Tax Justice Network’s Francophone podcast: Un nouvel outil pour traquer la vulnérabilité aux flux financier Illicites, édition 17

Here’s the 17th edition of Tax Justice Network’s monthly podcast/radio show for francophone Africa produced and presented by finance journalist Idriss Linge in Cameroon. Nous sommes fiers de partager avec vous cette nouvelle émission de radio/podcast du Réseau pour la Justice Fiscale, Tax Justice Network produite en Afrique francophone par le journaliste financier Idriss Linge au Cameroun.

Pour cette 17ème édition de votre Podcast Francophone « Impôts et Justice Sociale », nous revenons sur l’outil de mesure du niveau d’exposition des pays aux Flux Financiers Illicites. Cette plateforme développée par Tax Justice Network, permet à diverses catégories d’utilisateurs, de mesurer le risque de fuite des capitaux qui existe entre les pays et leurs partenaires commerciaux. Nous revenons aussi sur les débats parlementaires au Cameroun, où un député interroge le gouvernement sur les cadeaux fiscaux faits aux entreprises du fait de la crise, alors que le pays a besoin de ressources. Nous interrogeons enfin divers acteurs de la société civile africaine sur les questions de transparence budgétaire en Afrique

Interviennent dans ce podcast:

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Beneficial ownership transparency in Africa: The state of play in 2020

Leak after leak has confirmed what African citizens have long suspected: the elite hide their actions and identities to loot state resources and reduce taxes owed. A new study published today by the Tax Justice Network Africa and Tax Justice Network examines one of the steps African countries are taken to address this issue: beneficial ownership transparency.

Earlier this year, the International Consortium of Investigative Journalists investigated Africa’s wealthiest woman, Isabel dos Santos, who is the daughter of former Angolan President José Eduardo dos Santos, for allegedly moving millions in public assets and revenue out of Angola.

Comprising over 715,000 documents, the Luanda Leaks on the surface sounds like just another story of corruption in Africa. However, the leaked documents suggest that dos Santos and her husband were only able to move the ill-gotten gains thanks to a web of at least 94 secrecy jurisdictions across the world through an “archipelago of shell companies”.

Indeed, as Claudia Gastrow writes

“‘African corruption’ is only African as regards its victims, its perpetrators are institutions and individuals from across the globe who are willing to loot without conscience as they watch their offshore accounts grow.”

Claudia Gastrow, Laundering Isabel Dos Santos, Africa is a Country

Financing Africa’s development is deeply undermined by global financial secrecy. Illicit financial flows exiting the continent dwarf overseas development assistance entering the continent, and erode the sovereignty of nations in raising revenues domestically for public expenditure and investment.

In 2015, in 30 African countries, capital flight averaged about two-thirds of gross domestic product and vastly exceeded external debt. While illicit assets abroad are private, debt is a collective liability of current and future generations of Africans.

Tackling illicit financial flows with beneficial ownership transparency

Mr Smith is the beneficial owner of Company A in this complex arrangement – (Adapted from OECD & IDB, A Beneficial Ownership Implementation Toolkit, 2019, p. 8)

African countries are taking action to domestically address financial secrecy, including requiring the beneficial owners of companies, partnerships, foundations and trusts to register. Identifying, registering and disclosing the real people (beneficial owners) who ultimately own or control legal vehicles is a key policy for promoting and protecting domestic revenue mobilisation that may otherwise be eroded by illicit cross-border financial transactions including money laundering, tax evasion and avoidance, corruption and terrorist financing.

Beneficial ownership registration was placed squarely on the African agenda to address illicit financial flows in 2015, with the launch of the African Union and United Nations Economic Commission for Africa’s report of the High Level Panel on Illicit Financial Flows from Africa. The High Level Panel was emphatic that the year-on-year haemorrhaging of government revenues was a fundamental obstacle to achieving sustained human development, the fulfilment of basic human rights and the ending of poverty.

Beneficial ownership disclosure can allow better oversight by the public and their representatives, especially when entities are involved in extracting mineral resources that are vested in the state on behalf of the people or are bidding for public contracts. For example, beneficial ownership information is vital for monitoring compliance where countries have mineral and local content laws in place that require a certain proportion of mineral rights be held by indigenous groups, or nationally-owned or majority women-owned companies be prioritised in a mining company’s procurement of goods and services.

The state of play of beneficial ownership in Africa today

A new study published today by the Tax Justice Network Africa and Tax Justice Network examines the progress being made towards beneficial ownership transparency in 17 African countries. This draws on the data from the Financial Secrecy Index 2020 and complements a global study of beneficial ownership registration.

The study finds that seven jurisdictions have introduced legislation requiring the registration of beneficial ownership information. These are Botswana, Egypt, Ghana, Kenya, Mauritius, the Seychelles and Tunisia.

Botswana joins just three other countries worldwide (Argentina, Ecuador and Saudi Arabia) that have transparent measures for companies that can be interpreted as requiring all beneficial owners with just one share to register.

Across the world, 81 of the 133 countries assessed in the Financial Secrecy Index have laws and regulations for beneficial ownership registration. Of these countries, 68 countries have partial or complete registration of beneficial owners, and in some cases, this is not only for companies, but also for partnerships, foundations and trusts.

Jurisdictions with laws and regulations for beneficial ownership registration in 2020

Effectiveness of laws is, however, limited in countries that continue to allow bearer shares and where updating information is not mandatory. No African country makes beneficial ownership information available online, for free, for all sectors, and for all legal vehicles.

The chart below shows the state of play for beneficial ownership registration of companies in Africa. For beneficial ownership registration to be effective, bearer shares must be cancelled, be made unavailable or be immobilised. All domestic companies must be required to register all of their beneficial owners in all cases, except for common exemptions for state-owned companies and listed companies. The effectiveness of beneficial ownership registration is also dependent on the information being updated along with the threshold set for registration; it should not be higher than the “more than 25% ownership” threshold. For the greatest transparency, all information should be available online, ideally for free and in open data format.

Effective registration of company beneficial ownership information

In 6 of the 17 assessed African countries, bearer shares have not been immobilised as shown in the first column of the chart below (Angola, Kenya, Liberia, Morocco, South Africa, Tanzania). The second column shows that of the 10 countries where bearer shares do not pose a risk, only Ghana, Botswana, Seychelles and Tunisia require the registration of all beneficial owners of all types of companies with a government authority, like the Registrar of Companies. The next column goes on to show that in only three jurisdictions – Ghana, Botswana and the Seychelles – does this information have to be updated. In none of the assessed countries does this information have to be online.

This year progress is expected for ending anonymous companies extracting solid minerals, oil and gas in Africa. Countries participating in the voluntary Extractive Industries Transparency Initiative are required to introduce public registries for beneficial owners of mining, oil and gas companies. Yet beneficial ownership transparency is required for all sectors.

Recommendations

The study makes practical recommendations on how countries can implement beneficial ownership registration and improve the effectiveness of disclosure. In summary:

Such domestic action is critical for African countries. Yet the main providers of financial secrecy lie outside the continent. Thus furthering the global movement towards greater public beneficial ownership disclosure is required. Making information public across all jurisdictions will provide African governmental regulatory authorities and watchdogs, financial institutions, investors, journalists and civil society groups with access to information for investigations, asset recovery, public contracting, entering mining contracts, improving tax compliance, and more.

The continent must continue to stand united in requiring those most complicit, especially former colonial powers, to make this information publicly available.

Download the report.

Carbon Taxes Can Be Progressive: Myth-busting and Mainstreaming Carbon Taxes

We recently published a two part Tax Justice Focus special on climate crisis and tax justice. This blog reproduces the article by Jacqueline Cottrell, in which she explains that while carbon taxes were once at the centre of discussions about tackling climate crisis, aggressive lobbying by fossil fuel advocates persuaded the public that they are regressive and would hit the world’s poorest hardest. In this article Cottrell calls for citizen’s assemblies to embed carbon taxes in a broader progressive agenda. Click here to download the first and second parts of our Tax Justice Focus special.

by Jacqueline Cottrell

Myth-busting

It is an old story of neoclassical economics that policymakers must be prepared to trade off positive environmental outcomes and GDP growth. Today, in the European Union at least, this myth has been overcome; policymakers now refer to green taxes as “growth-friendly” and are supportive of a European green deal. Myth-busting has been relatively successful – and for good reason. None of the huge body of scientific research conducted to examine the impacts of carbon taxation have produced any evidence that it has a negative impact on GDP growth. Instead, research has indicated that a carbon price is the most efficient and effective instrument to reduce GHG emissions, whether implemented by means of taxes or trading.

When it comes to carbon taxation and social equity, however, many myths persist. It is received wisdom that carbon taxes are unfair and inequitable and have a disproportionately negative impact on lower income groups. The reality is more complex. To understand it, we need to take a closer look at the different dimensions of inequity relevant to climate policy and carbon taxation.

Let us look first at policy outcomes. Without additional welfare spending, carbon taxes may lead to price increases that have negative impacts on lower-income households. On the other hand, carbon taxes can raise really substantial amounts of revenue. A tax of US$70/tCO2 has the potential to raise revenues worth 1-3% of GDP in most countries, or 2-4% of GDP in major developing economies such as China or India. This implies that in low- and middle-income economies, with an average tax-to-GDP ratio of just 12%, carbon taxes can raise 25% more revenue.

In most of low and middle-income countries, the revenues a carbon tax of US$70/ tCO2 could raise dwarf current spending on health, education or welfare. Carbon taxes have the potential to act as a hugely powerful engine for change, reducing inequality and establishing targeted welfare programmes and free health and education systems, as well as funding the transformative changes required to tackle and adapt to the climate emergency.

The second dimension pertains to inequity of contributions to the climate crisis. In 2015, Lucas Chancel and Thomas Piketty found that just 10 percent of the global population – amongst the world’s wealthiest – emit 45 percent of global CO2 emissions. The bottom 50 percent of emitters, almost exclusively from developing countries, are responsible for just 13 percent of global emissions. If we do not implement a carbon tax for social equity reasons, we are letting these 10 percent of polluters get away without paying for the impact of their excesses on the global climate.

Seen in these terms, and assuming that appropriate redistributive mechanisms are in place – free installation of small-scale renewable energy such as rooftop solar, solar water heating or biogas, distribution of clean energy-efficient stoves, cash transfers, or a carbon dividend as proposed by James Boyce in this issue – a high carbon tax, of which 45 percent is paid by the top 10 percent of polluters, has an air of “Robin Hood” about it. The final dimension of inequity relates to climate change outcomes: the devastating impact of the crisis will be most felt by the poor and vulnerable groups, as they will be least able to adapt or respond.

So, why have we not reached agreement on a global carbon tax? The answer to this question is way beyond the scope of this article. But at least one of the reasons is also linked to inequity: in this case, inequity of representation in policy-making. Many industries and individuals have a strong financial interest in the status quo: oil and mining companies, energy-intensive industry, wealthy consumers (let me remind you: around 10 percent of the global population responsible for 45 percent of GHG emissions), to name but a few. These groups exert a great deal of influence in global policy debate, while the voices of the world’s poor and vulnerable are hardly represented.

In contrast to big business, which spends billions lobbying governments every year, civil society is underfunded and poorly organised in comparison, and up until now, has tended not to focus on tax policy.

The joy of tax?

Some citizens are passionately interested in taxes and recognise their potential to shape our societies, looking to Scandinavian countries as an example. All Scandinavian countries have a carbon tax: Sweden has the mother of all carbon taxes, at a rate of US£127/tCO2. Nevertheless, life in Sweden is relatively normal: there are no blackouts, people still drive Volvos, dance to Abba and shop at IKEA, while Sweden leads the way in decarbonising electricity, heating and transport.

On the whole, however, interest in tax policy is limited, including carbon taxes. Josephine Public does not know much about carbon tax, and certainly does not appreciate its potential to raise revenue worth between 1-4% of GDP. Neither does Josephine know that these revenues could be redistributed in whatever way governments see fit, or that they have the potential to transform our societies and economies through redistributive mechanisms, increasing investment in health, education, jobs, low-carbon industries, and access to sustainable energy for all.

Josephine also doesn’t know the best news of all: carbon taxes are fair, as the wealthiest and the biggest polluters pay the most.

Unfortunately, in reality carbon taxes generally hit the headlines when they are perceived as being too high, unfair, or punitive. Articles in favour often cite policy wonks arguing about “externalities”, “the social cost of carbon” and “market failures”. Even if this jargon means something to tax justice campaigners and climate activists, it does not serve well as a call to arms for the typical wo/man on the street. How can we change this?

Mainstreaming

In the past, we did not take the climate crisis seriously enough. Initial responses to “global warming” were not proportionate to a threat to our continued existence on the planet.

In the Northern hemisphere, many joked about warming sounding quite promising. In the global South, governments prioritised GDP growth, calling on high-income governments to tackle climate change given their historical responsibility.

Climate scientists were rightly cautious about drawing a causal link between individual extreme weather events – hurricanes, typhoons, droughts, desertification, devastating floods – and the climate crisis, a reticence which has served as ammunition to climate deniers.

Today, our vocabulary and our understanding has changed. Where public discourse once referred to “climate change” or “global warming”, we now talk about the “climate crisis” or the “climate emergency”. The good news is that this reflects a growing shared understanding of the seriousness and immediacy of the problem.

All over the world, street protests are putting climate action centre stage: schoolchildren and students are participating in “Fridays for Future” strikes, while citizens old and young are joining the Extinction Rebellion’s calls for decarbonisation. In October 2019, 400 scientists joined protests on the streets of London, several of them contributors to IPCC reports on climate change.

Yet to go further and achieve decarbonisation, these movements need to identify and articulate specific policy demands. Policy wonks contend that the best carbon tax would be a global one – to prevent distortions between countries and keep decarbonisation as efficient as possible. The question is: How might a global carbon tax be achieved?

The Extinction Rebellion in the UK is calling for a citizen’s assembly. Taking a global approach and creating a number of citizen’s assemblies, one for each continent, or part of a continent, would take the instrument debate out of clandestine meetings between big business and policymakers and move it into the public domain, to a place where evidence is public and subject to scrutiny.

Citizen’s assemblies would put the evidence in favour of carbon taxation, alongside other instruments, before a wide audience. It would give experts the opportunity to explain why carbon taxes are a good thing, that they can be effective, fair and equitable, and that their revenues can be used to reshape the societies and economies we live in. I believe that under such circumstances, the case for a carbon tax would win out.

Mainstreaming climate policy discussions through citizen’s assemblies would create a platform for the planet’s inhabitants all to be vocal in our support of ambitious climate policy in general and carbon taxes in particular. The results could be fed into UNFCCC negotiations and drive the step change in climate policy which is both urgently necessary and sadly lacking. What a coup for the UK government at the COP26 in Glasgow if they could negotiate a global agreement to implement a series of global citizen’s assemblies in 2021?

Ultimately, we have to recognise that one way or another, we are all going to have to deal with the climate crisis. We can choose to address it now with a carbon tax, reducing GHG emissions and using revenues as an engine for enhancing social equity and transforming our economies and societies according to our democratic wishes. Alternatively, we can pass the problem on to future generations and leave them to look on, powerless, as the climate emergency transforms our societies and economies in ways that we cannot imagine. Putting this choice in the hands of global citizens now is the only equitable way forward.

* Jacqueline Cottrell is an environmental fiscal policy consultant active in the field of development cooperation for numerous international organisations. She is a Senior Associate at Green Budget Germany and a member of the international programme committee of the Global Conference on Environmental Taxation. Her publications include a study on fiscal policies to address the health impacts of the transport sector in Jakarta, Indonesia (UNEP, forthcoming), A Climate of Fairness: Environmental Taxation and Tax Justice in Developing Countries (VIDC 2018), andEnvironmental Tax Reform in Developing, Emerging and Transition Economies(German Development Institute, 2016).

Systemic racism, reparations and tax justice: the Tax Justice Network podcast, June 2020

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

Faulkner wrote: “The past is never dead. It’s not even past.”

As we discuss, the legacy of centuries of institutionalised racism is that a wealth chasm has been created between black and white communities.

We also know that the City of London in Britain built its wealth from slavery and empire. Still today, major finance sectors have extractive business models which impoverish some of the world’s poorest nations. And, financial secrecy is another form of empire.

So how can we think about combining tax justice and reparations? Keval Bharadia‘s work on a super tax on the $8 trillion a day financial markets could help show the way. And all financial institutions must have independent slavery money audits. For those financial institutions now coming forward and offering what they’re calling reparations funds, how do we ensure that these funds are large, they’re targeted to the right places, and they’re ongoing?

A transcript of the programme is available here (not 100% accurate)

Featuring:

We’re recovering from many things. We’re recovering from COVID-19, we’re recovering from 400 years of oppression, and we are also recovering from a looming economic downturn. And one thing we know for sure, and we continue to learn with every economic downturn is that States have choices. They have a choice point and that’s to cut services and continue to cut their budgets that harm families that are in need – or raise revenue, raise revenue on corporations, raise revenue on those that are most profitable and the wealthy. And that’s a racialised choice, given the country’s history and ongoing biases.”

~ Cortney Sanders, Center on Budget and Policy Priorities

There needs to be a proper negotiation on what level of reparations should be paid and to whom and who will be responsible for holding reparations in trust funds for the genuine benefit of the descendants of slaves. What must not happen is that banks and other companies use tokenistic reparation payments as an exercise in white-washing while not disclosing the full history of their involvement in slavery or in imperial plunder and pillage.”

~ John Christensen, Tax Justice Network

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

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

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

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

Tax Justice Network Portuguese podcast #14: De onde virá o dinheiro para salvar vidas?

Existem “pílulas tributárias” para uma retomada econômica mais sustentável e redistributiva.

O  episódio #14 do É da sua conta receita quatro “pílulas” que podem fortalecer o orçamento público para que governos tomem decisões justas no enfrentamento da crise, priorizando o combate à pobreza e à desigualdade, a manutenção de empregos e o resgate de pequenas e médias empresas.

Nosso colunista, jornalista da Tax Justice Network Nick Shaxson aborda a primeira “pílula tributária”, a taxação sobre lucro excedente de grandes corporações. A Comissão Independente para a Reforma do Imposto sobre Corporações Internacionais (Icrict) apresenta a “pílula” para adequar a tributação de multinacionais que operam em monopólios ou oligopólios. A terceira “pílula” é a taxação de grandes fortunas. Revisão de isenções e benefícios tributários a empresas e setores econômicos e transparência sobre esse tipo de decisão resumem os efeitos esperados pelo uso da quarta “pílula tributária”.

Participantes desta edição:

Download do podcast: https://traffic.libsyn.com/secure/edasuaconta/edasuaconta14.mp3

Leia mais:

Campanha Taxar Fortunas para Salvar Vidas

10 Medidas Tributárias Emergenciais

Imposto às grandes fortunas: propostas em todo o mundo (em espanhol)

É hora de reviver os impostos sobre lucros excedentes (em inglês)

Relatório da ICRICT “Pandemia global, recuperação econômica sustentável e tributação internacional (em inglês, espanhol e francês)

Conecte-se com a gente!

www.edasuaconta.com 

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

Inscreva-se: [email protected]

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

Seeking a tax justice podcast commentator and consultant in Arabic

The Tax Justice Network produces five monthly podcasts: the Taxcast in English,  Justicia ImPositiva in Spanish, Impôts et Justice Sociale in French, É da sua conta in Portuguese, and our Arabic podcast الجباية ببساطة

Our monthly podcasts are aimed at ordinary citizens, campaigners and practitioners, filling the gap in regional media coverage and analysis of tax, redistribution, financial secrecy and the global infrastructure of corruption, holding governments to account. The podcasts empower citizens to engage in and influence debates on these issues, and provide the solutions needed to support change. The podcasts are offered free to radio stations, as well as for downloading. They also reach key influencers: journalists, researchers, bloggers, tax and corruption experts, lawyers, policy makers, politicians and NGOs.

The Tax Justice Network is seeking a tax justice commentator and consultant for our Arabic podcast. Please find all details on the role and how to apply here. The deadline for applications is July 20th 2020. [Update: application deadline now extended to September 2nd 2020 with a new start date of September 7th 2020]

Our producer Walid Ben Rhouma has been producing and hosting the podcast for almost three years and, after a happy and fruitful relationship, our collaborating journalist and human rights expert Osama Diab is leaving our tax justice podcast family and handing on the microphone!

If you’re the right person to replace him, we’d love to meet you. You need to be an Arabic and English speaker who can continue Osama’s role of helping educate listeners in an accessible way on tax justice, helping source stories, great interviewees, compile headlines, always finding effective ways to explain to listeners about taxation, financial secrecy, tax havens, corporate tax cheating, and economic justice, communicating the global power aspects of who makes the rules, and how.

You will need to be very familiar with the Tax Justice Network’s solutions to all these problems and able to communicate them and ensure the programme is ‘on-message’. You will also appear each month on the podcast as a commentator discussing and analysing one or two agreed topics relevant to that month with Walid. You will be supported by me, Naomi Fowler – I produce the English language podcast, coordinate all our
podcasts, and will have editorial oversight.

Please find all application details here. I look forward to hearing from you. Here’s the team you’ll be a part of, broadcasting tax justice in five languages:

Track your country’s vulnerability to illicit financial flows with our new tool

Illicit financial flows are transfers of money from one country to another that are forbidden by law, rules or custom. They damage economies, societies, public finances and governance of countries around the globe. A key challenge to tackling illicit financial flows is the difficulty countries face in identifying which financial flows carry the largest risk to their economies. The Tax Justice Network is today launching the Illicit Financial Flows Vulnerability Tracker to help countries identify the trading partners and channels that pose the greatest risks to their economies.

Our previous research identified the eight main channels in which illicit financial flows take place: trade (exports and imports), banking positions (claims and liabilities), foreign direct investment (outward and inward) and portfolio investment (outward and inward).

For each of the eight different channels through which illicit financial flows operate, we calculated three measures.

  1. Vulnerability captures how financially secretive the country’s trade, investment or banking partners are. Vulnerability reports the average financial secrecy level of all partners with which the country trades or invests for a given channel, weighted by the volume of trade or investment each partner is responsible. For example, if all the inward foreign direct investment a country receives comes from the Cayman Islands, one of the world’s greatest enablers of financial secrecy, the country would have a high vulnerability measure on foreign direct investments.
  2. Intensity reports the share of national GDP that the channel makes up, helping capture the importance of the channel to the country. Intensity does not measure the secrecy involved in the channel nor the risks of illicit finanical flows the channel poses. For example, foreign direct investments may represent 10 per cent of a country’s GDP.
  3. Exposure combines a channel’s vulnerability and intensity to estimate the share of a country’s GDP exposed to illicit financial flows by the channel. Comparing the exposure levels of different channels helps countries identify the channels that most expose their economies to illicit financial flows. For example, if a country’s inward foreign direct investment channel has a vulnerability of 76 and the channel accounts for 10 per cent of the country’s GDP, the country’s exposure score in inward foreign direct investment would be 7.6 per cent. This means 7.6 per cent of the country’s GDP is exposed to illegal transfers of money.

The Tax Justice Network’s new Illicit Financial Flows Vulnerability Tracker allows users to explore illicit financial flows data with interactive tools, and understand which countries are more vulnerable to illicit financial flows, and more importantly, why: which partner countries and which channels are responsible for the vulnerability in a country’s economy.

The tracker consists of three tools: map view, country profiles and country comparison.

Tool 1: Map view

The interactive map allows users to understand which countries and regions are more vulnerable to illicit financial flows. For example, we see that the vulnerability of Brazil to outward foreign direct investment in 2017 is 67 (a very high score). This implies that Brazilian residents own many companies in places with high levels of financial secrecy, indicating high risks for illicit financial flows (and offshore tax evasion) to occur via direct investment.

Tool 2: Country profile

Clicking on a country (or clicking on “country profiles” in the top menu) takes you to the country profile page of the country you selected. Each country’s profile page provides a detailed breakdown of the 10 trading partners that are most responsible for the country’s vulnerability, intensity or exposure for a given channel. Country profile pages also allow you to see year to year changes in a country’s vulnerability, intensity or exposure levels for all eight channels. In the case of Brazil’s country profile, the webpage shows that high vulnerability to outward direct investment is caused by the top three partner countries: Cayman Islands (responsible of 27 per cent of the vulnerability), British Virgin Islands (17 per cent) and Bahamas (14 per cent)). Cayman Islands—with a secrecy score of 76, British Virgin Islands—with a secrecy score of 71and Bahamas—with a secrecy score of 75— are three of the most secretive countries in the world. The left panel allows the user to easily switch between channels, variables and years.

Tool 3: Comparison tool

Finally, the comparison tool allows you to compare countries’ vulnerabilities, intensities and exposures across different channels. For example, comparing Brazil, Chile, Argentina and Peru, we can observe that Brazil is highly vulnerable to illicit financial flows. While Peru’s vulnerability has decreased over time, Brazil’s remained constant.

The rest of this blog provides three case studies we’ve compiled on Ukraine, Ghana and India by using the Illicit Financial Flows Vulnerability Tracker.

Case study 1: Ukraine

The majority of foreign direct investment entering Ukraine comes from three countries: the Netherlands, Cyprus and Russia. Other highly secretive jurisdiction, such as Switzerland and British Virgin Islands are also among the top investors in Ukraine.

Foreign direct investment (inward flow)

Foreign direct investment exiting Ukraine is primarily destined for Russia and Cyprus.

Foreign direct investment (outward flow)

Case study 2: Ghana

Ghana gained independence from the United Kingdom in 1957. However, the influence of the former empire is still highly present. Outward bank deposits are often situated in the United Kingdom and British Crown Dependencies Jersey and the Isle of Man.

Bank deposit (outward flow, claims)

A large share of inward foreign direct investment comes the United Kingdom, and, concerningly, from highly secretive British Overseas Territories: the Cayman Islands, the British Virgin Islands and Bermuda.

Foreign direct investment (inward flow)

India: The Mauritius connection

A large fraction of India’s inward foreign portfolio investment (non-controlling investment in equity and debt securities) enters the country via Mauritius, Luxembourg and Singapore, notorious corporate tax havens known for their roles as conduits. This is not so evident for outward foreign portfolio investment, dominated by flows to the United States and the United Kingdom.

Portfolio direct investment (inward flow, liabilities)

Portfolio direct investment (outward flow, assets)

Visit the tracker

US blows up global project to tax multinational corporations. What now?

“(Other nations) had all come together” via the OECD to “screw America and that’s just not something we’re ever going to be a part of”.

~ US Trade Representative Robert Lighthizer addressing Congress, 17 June 2020, per Sydney Morning Herald.

Boom. The US has blown up ‘BEPS 2.0’, the OECD’s tax reform process with the Financial Times reporting that US Treasury Secretary Steve Mnuchin has written to four European finance ministers to say that the US was “unable to agree even on an interim basis changes to global taxation law that would affect leading US digital companies.” 

US Trade Representative Robert Lighthizer told the US Ways and Means Committee, in response to a question about the letter, that the intention was to block any further progress at the OECD. “We were making no headway and [Mnuchin] made the decision that rather than have them go off on their own, you would just say we’re no longer involved in the negotiations.”

The finance ministers of France, Italy, Spain and the UK responded to the letter – per Belgium’s Le Soir – to say that “the positions and proposals of the United States have always been respected and taken into account”. Although they couldn’t resist a little dig, noting that this included an important US proposal that had never been “fully explained“.

The Trump administration then added the now-traditional confusion, with Treasury spokesperson Monica Crowley tweeting a one-line statement that contradicted Lighthizer on both the nature of the US decision and the reason for it: “The United States has suggested a pause in the OECD talks on international taxation while governments around the world focus on responding to the COVID-19 pandemic and safely reopening their economies.” (Italics added.)

The OECD hit back with its own statement, not from the tax team but directly from the Secretary-General Angel Gurría. His threat was clear: “Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back. This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further.”

A strong response, effectively arguing the US is irresponsible to undermine talks. But in truth, the process was already in disarray, with the non-OECD members of the Inclusive Framework – that is, the lower-income countries that have typically been rule-takers as far as the OECD is concerned – openly calling out the institution’s failure to take meaningful account of their views. More than that, the OECD had already abandoned – at the behest of the US – most of the original ambition. While still paying lip service to the pledge to go ‘beyond the arm’s length principle’, the secretariat had tried to impose a US-French deal that did little of this at best.

Our research with the Independent Commission for the Reform of International Corporate Taxation (ICRICT) showed that the OECD proposal would have moved few of the profits declared in tax havens back to the countries where the real economic activity takes place; and would have primarily benefited a few OECD members, including the US, over all others. (Incidentally, we published the full model and the full dataset; sadly, the OECD has still to publish their data or any replicable model, providing only top line numbers that are hard to square with any others).

Digital services taxes? No thanks

Again, what next? The obvious outcome is that a whole slew of countries will now introduce their own digital services taxes (DSTs), to claim some revenues from these major tax-avoiding multinationals. No bad thing, you might think, and perhaps a small step to reduce tax injustice…

But: Digital services taxes are bad taxes. There, I said it. They don’t deal with profit shifting. They don’t ensure a level playing field between businesses (quite the opposite). They don’t address the global inequalities in taxing rights between countries. Digital services taxes don’t address the issue of unearned rents in the pandemic. And they don’t build towards the broader reforms of corporate tax that are now urgently needed (again, quite the opposite).

What do digital services taxes do? They may raise some – typically small – amounts of additional revenue, at a time when it is much needed. They may reduce the effective policy bias to a sector that has been particularly aggressive in its tax dodging. OK. Digital services taxes allow governments to respond to public pressure to do something about tax dodging – without actually doing very much.

The threat of countries going their own way on this added pressure for some international progress at the OECD, but that’s done now. And the threat of digital services taxes certainly did nothing to prevent good proposals like that of the G24 being ditched in favour of the limited, highly complex alternative negotiated bilaterally by the US and France (until the US today threw its toys out of the pram).

Priorities for countries

The ideas that drove the original optimism around BEPS 2.0 have not gone away. And nor, despite the pandemic, has the systemic tax abuse of multinational companies or the role of their advisers at the big four accounting firms. There is an urgent need for reform – and revenue. If countries are to take unilateral action, here are three options – all ultimately consistent with the broader reforms needed:

1. Countries should introduce excess profits taxes. These will allow states to capture a share of the large unearned profits of those companies that are benefiting from the massive state intervention of lockdowns, while all others suffer. But these must be based not on the declared local profits of multinationals, but on a fair share of their global profits. Take the global profits above, say, a 5% return; then apportion to the country a share in line with their share of the multinational’s global sales and staff. The country can then tax these exceptional, unearned, locally generated profits, at a rate of say 75%-95%.

[If all countries do this, there is no double taxation and the multinationals even get to keep a bit of their unearned profits. Not bad for a pandemic when so many are losing so much, so let’s not take any complaints too seriously.]

2. Countries can introduce formulary alternative minimum taxes. Leave the OECD’s failed rules in place for now, awaiting some global negotiation, but draw a line on the extent to which profits can be shifted. If the declared profits after transfer pricing, thin capitalisation and all the other manipulations end up being less than, say, 80% of the country’s fair share of the global profits under a unitary tax approach, the tax authority should simply draw a line there and claim that as the minimum tax base.

[Again, this approach will not lead to double taxation unless other countries are taxing far more than their share – in which case multinationals should be encouraged to address any complaints there instead.]

3. Countries could move unilaterally to a full unitary and formulary approach. There’s no reason, in fact, not to just go the whole way. There’s no need for global agreement, and no reason for this to cause double taxation unless, again, other states are taxing more than their fair share.

Whichever path countries or regional blocs like the EU choose, they should ensure that multinationals are required to publish their country by country reporting. This will confirm to the world that the country is not taxing more than its fair share; and reveal if other countries are continuing to procure profit shifting. And of course, country by country reporting shows the public which multinationals – and which tax advisers – are most aggressively flaunting their social responsibilities to pay tax fairly, like the rest of us. What’s not to like?

Where now for the OECD?

At one level, the OECD faces a simple choice. While it has said that the show must go on, there is presumably a more thoughtful process happening behind closed doors. They could opt to complete the exercise, in the hope that Trump will be replaced and a new administration willing to get on board with the outcome will be along shortly. But this would be an EU deal, with few other countries able or willing to engage fully during the pandemic, and OECD members unwilling to cede real power. And in any case, how likely is it that global corporate tax reform would head the action list of an incoming Biden administration facing a twin crisis of corruption and COVID?

Would the EU want to bother, or instead push ahead itself and finally bring in the Common Consolidated Corporate Tax Base (CCCTB) – ideally on a full unitary basis? It’s hard to see how the OECD could regain any credibility with the Inclusive Framework after putting a red line through their work programme at the behest of the US, so the only argument would have to be ‘come on back, the big bully has gone’. Tricky, although it could perhaps work a bit if the EU was willing to see a more ambitious outcome internationally – something closer to the Common Consolidated Corporate Tax Base for all. But given the EU’s difficulties in dealing with its own tax havens, no one should hold their breath.

Alternatively, the OECD could do what we asked them to do a few months ago: accept that this process is toast, and unconscionably unfair to non-OECD members, and abandon it. It should be painfully clear to all that the negotiation of international tax rules is political, not technical; and the OECD’s legitimacy, such as it is, is technical and not political. This is not the right forum.

The OECD’s future role on tax could be in providing technical support to its members in a global tax negotiation. That negotiation must be at the UN – not because it is perfect, but because that is what it is for: to provide a forum for global political negotiations. The OECD has recently inveigled its way into UN processes, seeking a role to guide some kind of ‘BEPS 3’ for lower-income countries. This too is clearly illegitimate; but hints perhaps at a technical role on the fringes of a political process.

There are many good people working at the OECD to make international tax better. But the organisation has confirmed once again, for what should be the very last time, that it is a members’ club only and cannot be trusted to run a genuinely inclusive process.

Where now for the excluded of the ‘Inclusive Framework’?

It is not coincidental, of course, that OECD members are primarily countries that have had empires and/or are ‘settler nations’ – while those in the ‘Inclusive Framework’ are primarily the colonised, the ‘settled’. If ever there was a time to leave this behind, it’s now.

Three options stand out.

1. The possibility of meaningful, regionally led reforms. A combination of the technical group and the political (the African Tax Administration Forum working with the African Union, say); or a technical group working with a regional power (CIAT, the Inter-American Center of Tax Administrations, with Argentina, perhaps).

2. The UN might finally take on its role as the global forum for the global negotiations over global taxing rights that must, eventually, come to pass. A critical decision facing the high-level UN Panel on Financial Accountability, Transparency and Integrity (FACTI), when it reports in January 2021, is whether to put its full backing to the proposal for a UN tax convention. Such an instrument is intended to deliver fully multilateral commitments to tax transparency measures, and at the same time to establish the forum for such negotiations.

OECD members have already indicated their opposition, following their longstanding blocking of a meaningful role on tax for the UN. If the OECD is a busted flush, even this could perhaps shift; but for now, the third option may be the best bet:

3. This would be process-led by the G24 or G77 groups. The idea would not be to move immediately to a formal, global negotiation. Instead, the groups could convene an open discussion among states, with strong technical support, to allow exploration of the options and likely revenue and broader economic impacts. In effect, the idea would be to convene the sort of process that the Inclusive Framework had set out in its work plan, but with genuinely open participation.

This would allow the potential for consensus to emerge over time, but also provide technical support for countries taking more immediate measures – of the sort described above, for example – in the face of the pandemic and other revenue pressures. The Tax Justice Network stands ready to assist with technical support to any such process, as undoubtedly would the wider global tax justice movement.

Image: “ஆடுகளம்” by Logeshwaran Rajendran is licensed under CC BY-NC 2.0.

The Reboot #2: how to pay for the pandemic (video)

Everyone knows the global economic system isn’t working in the interests of most of us. In our new video series the Reboot we talk about how to fix it. From lockdown because of covid19 Naomi Fowler speaks to John Christensen and Nicholas Shaxson of the Tax Justice Network.

In this second episode of the Reboot: the big question people are asking as many governments are busily ‘printing money’ to tackle the coronavirus is – how can we afford this? We talk about wealthier. economically powerful countries with strong currencies and independent central banks and why they absolutely can afford this. And then we’ll look at the situation for countries which don’t have strong currencies or powerful central banks, many of whom are already seriously indebted to the IMF, World Bank and private creditors.

Naomi Fowler is the host and producer of the Tax Justice Network’s monthly podcast The Taxcast which is available on most podcasts apps.

John Christensen is co-founder of the Tax Justice Network and is a forensic auditor and economist. His research on offshore finance has been widely published in books and academic journals, and John has taken part in many films, television documentaries and radio programmes.

Nicholas Shaxson is a journalist and writer with the Tax Justice Network. He is author of the book Poisoned Wells about the oil industry in Africa, Treasure Islands: Tax havens and the Men who Stole the World and The Finance Curse: how global finance is making us all poorer.

Covid-19: An opportunity for structural reforms to create a people-centred economic system

TJN-AFRICA STATEMENT

This statement from Tax Justice Network-Africa,
reproduced below, can be accessed in pdf format here.

The COVID-19 pandemic has exposed systemic inequalities in the current social, political and economic systems. African countries are disproportionately bearing the brunt of the impacts of the pandemic as a result of decades of privatisation and austerity measures resulting in underfunding of social sectors. The crisis has also exacerbated the weak monetary and fiscal systems, with a limited fiscal capacity to respond. African countries are now also experiencing reduced tax revenues due to reduced economic activities as a result of the loss of export earnings and commodity price collapses.

The differentiated COVID-19 impacts in Africa as in many countries in the global south are as a result of neoliberal, neo-colonial and patriarchal economic systems of oppression through decades of structural adjustment programmes of the 1980/90s. The main political mantra of the Structural Adjustment Programme was to minimise the welfare state by reducing the involvement of State in socio-economic programmes. These policies focused on unviable capital-intensive industries often in commodity sectors, instead of promoting competitive labour-intensive industries. Africa’s low average annual growth of 3.3% in 2014-19 has in turn constrained public finances, leading to underfunded social sectors including health and education systems, weak governance, rapid increases in public debt, and large infrastructure deficits. This neoliberal system continues to entrench a broken international financial architecture that enables illicit financial flows, tax evasion and avoidance by the rich and MNCs. This broken tax system allows transnational corporates to minimise their taxation by shifting their profits to offshore tax havens.

Additionally, the MNCs lobby and obtain low or zero corporate income tax rates from governments growing use of generous tax giveaways aimed at attracting foreign investments. The private sector-led growth policies have resulted in severely undermining the capacity of the State to generate domestic resources required to invest in social sectors and made African countries largely reliant on extern aid to support government programmes. Trade liberalisation has also reshaped economies and relegated developing countries to mainly producing and exporting primary commodities and importing manufactured goods and now impacted by the drop in the price of commodities in the context of a global recession.

The Covid-19 pandemic has created an opportunity to address some of the underlying principles of neo-liberal economic theory and demand structural and systemic reforms for redistributive justice including progressive taxation reforms, and where the wealthy elite and multinational companies pay their fair share. It’s about creating an opportunity to re-examine the continent’s fiscal and economic-policy priorities and creating alternatives to the current structure’s economic model that is fit for purpose and reinvigorating the role of the State.

The impacts of the global pandemic in Africa are not limited to health; it has also affected peoples’ lives socially and economically. Firstly, the pandemic has exposed weak public health systems which are understaffed and poorly resourced due to decades of underfunding and privatisation. Africa is witnessing the vulnerability of privatised and discriminatory health systems, and COVID-19 is increasing the pressures on the already unresponsive public healthcare systems. Secondly, reduced economic activities as a result of lockdown containment measures have led to a reduction in tax revenues despite the increased spending in the health sector. Fewer exports from African countries due to reduced demand and less economic activity has the probability of leading to a substantial economic recession requiring governments to inject money into the economy for survival. However, Africa’s ability to use monetary and fiscal policies to mitigate the pandemic’s economic impact is limited. African countries’ governments and central banks lack the fiscal policy space and capacity to adopt robust and often unprecedented short-run stimulus measures. Governments are constrained by monetary arrangements that prevent them from implementing national strategies. Besides, many African countries have unsustainable sovereign debt levels. Currently, the continent has a total external and domestic debt stock of $500 billion, and the median debt-to-GDP ratio had risen from 38% in 2008 to 54% in 2018. By causing a collapse in exports and terms of trade, the COVID- 19 pandemic is pushing African countries into negative per capita growth.

The effects of the coronavirus are also being felt disproportionately by the poor and the working class. The ILO estimates that more than 72% of total employment in sub-Saharan Africa is in the informal sector. Despite this sizeable informal economy of up to 90%, African countries do not have social welfare systems to cover those without jobs as a result of lockdown measures. The pandemic has led to massive layoffs and non-payment of wages, pushing many workers into unemployment, poverty and starvation. The pandemic has also revealed and deepened existing gaps in social protection systems and has also translated into an intensified care burden for women. This has resulted in increasing the underpaid and unpaid care work and reinforcing patriarchal norms because women, on average perform 76.2 per cent of total hours of unpaid care work, more than three times as much as men. Lastly, most African countries are agriculture-based, and the GDP is primarily built upon agricultural services. However, food sovereignty and security is threatened as food supply chains are disrupted.

We urge African governments to: