Why many Berlin real estate owners remain secret despite new transparency laws

Cayman Islands, a place of registration for several Berlin companies indirectly owning German real estate. Photo: Michael Klein

Guest blog by Christoph Trautvetter,  Netzwerk Steuergerechtigkeit

For anyone who cares about beneficial ownership transparency the spotlight should be on the EU – where public beneficial ownership registers became mandatory in 2020 – and Germany, which is struggling with the issue of anonymous real estate ownership in the face of a looming review by the Financial Action Task Force and a public alarmed by rising prices, which have exploded, in part due to an influx of anonymous international investment.

Just in time for the EU directive – but later than the UK, Denmark or Luxembourg – Germany made its beneficial ownership register public at the beginning of 2020 and has become one of the first countries worldwide to oblige foreign real estate buyers to register in the local beneficial ownership register.

A new study by the Rosa Luxemburg Foundation traces the ownership of more than 400 companies owning real estate in Berlin through public and commercial registers worldwide – including the German and other European beneficial ownership registers – concluding that nearly a third remain anonymous and transparency remains an illusion. It takes 15 examples and shows how implementation and enforcement of beneficial ownership transparency has failed in Germany (and other European registers) and why the EU definition of beneficial ownership remains fundamentally flawed.

When the German parliament debated the implementation of the EU’s 5th anti money-laundering directive most politicians, experts and the public agreed it should go ahead. The national risk analysis and the financial intelligence unit had identified real estate as a major risk area for money laundering and the Finance Ministry’s Secretary of State asked parliamentarians for additional ideas, in particular in the area of real estate. A prosecutor from Berlin pointedly reminded the parliamentarians that anyone who buys a house in Berlin using a company from any secrecy jurisdiction stays beyond the reach of law because prosecutors have no way of determining the real owners. And last but not least, due to soaring purchase prices and rents, many tenants are no longer willing to accept anonymous investors and dirty money. The press took notice. Everyone wants to know: Who owns our cities?

Besides opening the beneficial ownership register to the public (as foreseen in the EU directive), parliament passed one amendment that obliges any company from outside the EU wanting to buy real estate in Germany to register, and another allowing – or obliging – notaries and real estate agents to increase scrutiny of real estate transactions.

But despite all these efforts the study by the Rosa Luxembourg Foundation shows that answering the question of who owns Berlin remains impossible for two reasons:[1]

  1. The German beneficial ownership register was badly designed and is not effectively enforced.
  2. The concept and definition of beneficial ownership in the EU and FATF guidelines is seriously flawed.
Anonymous companies owning Berlin real estate135 of 433
Missing entry in the transparency register despite compulsory registration83 of 111
No beneficial owner according to current definition (25%)82 of 135

Under these circumstances the new rule forcing foreign companies to register in the beneficial ownership register is purely symbolic and easily circumvented. Out of 433 companies owning real estate in Berlin that were analyzed for the study 135 remained anonymous. Of 111 relevant cases – i.e. where the beneficial owner was not already known through the German company registers – there was no entry in 83 cases and a real beneficial owner in only 7. In at least 82 out of the 135 cases the real owners remained anonymous, using joint stock companies and investment funds to ensure they didn’t surpass the 25% threshold to register as a beneficial owner.

Germany vs. EU – the state of play of beneficial ownership registers

Even though beneficial ownership registries have been obligatory in the EU since 2017 and their publication was due at the beginning of 2020, only six countries (UK, Denmark, Luxembourg, Latvia, Slovenia, Bulgaria) made their register freely accessible by then. Seventeen countries either don’t even have a beneficial ownership register (such as the Netherlands and Cyprus) or haven’t made it public (such as France and Spain).[2] Germany created the register in 2017 and made it public by 2020 but there are two big issues that hamper its usefulness:

First, Germany is one of only four countries (with Malta, Sweden, Norway) that don’t make the register mandatory. On top of that, instead of integrating the beneficial ownership register with existing ones (like Denmark, the UK or Malta) Germany (like Austria or Luxembourg) opted to create a separate register that is badly integrated. In theory, companies that already register their beneficial owners in Germany are spared additional bureaucracy. In practice this doesn’t work. As limited companies already have to publish all shareholders in the company register, typical real estate owners – Germans owning real estate through German companies – are fully transparent. But there are also many foreign companies that hold shares of German real estate companies and whose beneficial owners consequently can’t be found in the German registers. Nearly all of these German companies failed to register in the German beneficial ownership register and, because of the poor integration of the two registers, the oversight body is unable to efficiently identify companies with foreign shareholders that should register in the beneficial ownership register.

Second, a significant share of Berlin real estate is owned by joint stock companies, investment funds or companies claiming to have no beneficial owner above the 25% threshold set by the EU definition. As German joint stock companies, they have to disclose anyone owning more than 3% of their shares and record ownership in the internal, non-public shareholder register – but they often record and know only the name of the wealth manager or the bank administering their shares, rather than the beneficial owner. Many of the investment funds are structured as a combination of Cayman Island partnerships and Luxembourg SCSp – which means they don’t register their investors in any of the existing registers. Likewise the Seychelles LLC owning German real estate via Luxembourg can easily claim to have no beneficial owners under the existing criteria without much chance for verification – especially considering the absence of proper registration, the missing international cooperation and the existence of vehicles such as protected cell companies in many of these secrecy jurisdictions.

The cases analyzed in the study show the potentials and limits of beneficial ownership registers in various ways. One particularly instructive case revolves around a traditional book shop in Oranienstraße (Kreuzberg) fighting against eviction by an anonymous owner that might well turn out to be the heirs of the Tetra Pak fortune – mostly philanthropists with a reputation to lose.[3] While the owners use an SCSp to avoid registering the shareholders in the normal corporate register, the beneficial ownership register contains the names of three lawyers working for Liechtenstein’s biggest multi-family office.

But the beneficial ownership register doesn’t contain the name of the trust or vehicle they are representing nor of the final beneficiaries (which would remain unknown anyway because Liechtenstein hasn’t adopted a beneficial ownership register yet).

Extract from the Luxembourg beneficial ownership register

In contrast the Danish beneficial ownership register (concerning an unrelated company) lists the same three lawyers as representatives of the Ingleby trust connected to the Tetra Pak heirs. Because of this ambiguity the owners of the bookshop in Kreuzberg continue to wait for the confirmation of who is trying to evict them and whom to appeal to.

Extract from the Danish beneficial ownership register

The examples and results of the study show – creating a new and parallel register and trying to avoid double-entries by exemptions for beneficial owners already registered in traditional registers was a very bad idea. To fulfill the FATF requirement of effective beneficial ownership transparency Germany will have to ensure proper integration and consistency of the registers or learn from its neighbors and change the approach. The German case is also a perfect case example to demonstrate that without public scrutiny completely dysfunctional registers can proliferate for years – something that is hopefully going to change now that the register is public. And finally the study shows that through the EU and worldwide a lot of work remains to make existing beneficial ownership register work and to eliminate the limitation that allow the proliferation of anonymous ownership.

[1] In addition, German land registers are accessible only after proof of a legitimate interest. That’s why – instead of doing a full analysis or a random sample – the study was based on owners identified through a crowd-based collection of ownership data from tenants, journalists and local politicians.

[2] For a good overview see https://www.globalwitness.org/en/campaigns/corruption-and-money-laundering/anonymous-company-owners/5amld-patchy-progress/ . More detailed country profiles can be found at: https://www.pwc.nl/nl/assets/documents/the-ubo-register-update-december-2019.pdf

[3] https://www.neues-deutschland.de/artikel/1135512.verdraengung-kartonmilliarden-gegen-buecher.html (in German)

N.B. The Tax Justice Network apologises for the use of an image of a palm tree in this article to represent tax havenry. The palm tree trope is widely used across media to associate international tax abuse largely or exclusively with small tropical islands whose populations are predominantly non-white and/or Black-majority. Evidence shows that the vast majority of international tax abuse is driven by rich OECD countries like the UK, US, Switzerland, Luxembourg and the Netherlands – yet it is small island nations that are often targeted by international policymakers while rich OECD countries are afforded exemptions. This colonial and structurally racist situation is bolstered by the use of the palm tree/island trope in media coverage of tax abuse. While the Tax Justice Network took the internal decision years ago to ban the use of the palm tree trope in our publications, we have kept our past uses of the trope up in order to be transparent about our past actions, rather than erase them, and to reaffirm our commitment to reject the trope going forward.

COVID-19: India’s self-employed women, rights and a sustainable response

Acknowledgement:  The Tax Justice Network is grateful for the information provided by India’s Self Employed Women’s Association (SEWA).

The COVID 19 pandemic has ‘flipped’ our understanding of many things which we took for granted pre-lockdown. One of these is the role of the state. 

States have needed to act to protect our health, our incomes, our industries. This has restricted freedoms and invested powers in institutions that we might not have thought sanctionable only a few months ago. While the picture and level of intervention varies from country to country, questions about the obligations and responsibilities of the state and commitments made by the state under inter-governmental and in international law are important – including with respect to the role of tax and financial transparency in relation to human rights obligations.

The many reports of death, hardship and distress mean that governments will need to think carefully about how they can, and should, meet social and economic rights. Part of these political debates will need to include how resources are distributed and what policies are needed for their redistribution to protect the vulnerable and most marginalised from further inequalities and discrimination.

The impact of COVID-19 on informal women workers is especially hard.  Many of us will remain ignorant of how women’s lives are torn apart by the COVID-19 pandemic. Knowing begs the question: what should be our response? How best to alleviate hardships born by women working in the informal economy; the most marginalised in societies? What should our governments, our intergovernmental institutions, do to mitigate the extreme impact of insecurities – food, income, housing, water, sanitation which have been triggered and exacerbated by the pandemic?

India’s Self Employed Women’s Association (SEWA) have documented, and continue to document the extreme hardships of women working in the informal economy.  According to SEWA, 93 per cent of India’s workforce is in the informal economy. In the short term, the state and international financial institutions need to step in to shield informal women workers from the shocks of crisis. 

Establishing progressive tax systems and developing robust global financial transparency is key to anticipating the effects of social and economic crisis, and to protecting the rights of gender and race. Doing so, for signatory states such as India, also opens both the possibility of “leaving no one behind” as Agenda 2030 (the Sustainable Development Goals) intends, and to meet obligations set out by human rights instruments including the Convention on the Elimination of all Forms of Discrimination Against Women (CEDAW) and the International Covenant on Economic, Social, and Cultural Rights (ICESCR).

The right response?

The COVID-19 crisis exposes long term political, social and economic ‘rights’ failures. The plight of many millions of informal workers is an injustice and a rights failure – and a failure to repay the social and economic value that is extracted from women’s informal labour in agriculture, food production, caring, and domestic work.

In India one response to COVID-19 has come in the form of a World Bank loan. Immediate relief is critical as the International Labour Organisation (ILO) has underlined, but this is also a time to underline the need to act for systemic and sustainable change.

21-day curfew – devastation for women

While the COVID-19 pandemic has already led to the loss of jobs and incomes for millions of workers around the world, for millions of poor women agricultural workers and small farmers in India, the 21-day curfew announced on March 22nd has been devastating. Living on the edge of poverty and hunger even before the disease, people now face a ban on movement and transport which has crippled the harvesting, distribution and sale of fresh produce and winter crops. The economic threat for many women and their families is grave.

Failing to recognise the reality – Banks’ loan moratorium

The winter harvest includes crops such as wheat, barley, mustard, canola, sesame, peas, etc. and fresh produce. Many women small farmers had finalised the trade of their produce. They were hoping to pay off their agricultural loans using the income from the sale of their harvests. However, due to the lockdown traders could not pay the farmers. While the Reserve Bank of India announced that all lending institutions should institute a 3-month moratorium on loan repayments, it did not waive the interest on the loans; thus, poor women farmers will have to pay a higher interest. Additionally, as many small farmers borrow from local moneylenders the moratorium does not include them, leaving many women workers without the income to pay back their loans. The government’s deferral of payments on credit card dues[1] will, similarly, yield little or no benefit to poor women in the informal economy.

More than 10,000 small and marginal farmers and vegetable growers from Gujarat as well as farmers in the states of Kerala, West Bengal, Rajasthan, and Punjab could not take their fresh produce such as tomatoes and cabbage to the market. The income they generate from the sale of fresh produce has dropped to almost half. For example, tomatoes should sell for Rs.5 per kg but the women are only receiving Rs.1 to Rs.3 per kg.

Many small farmers had harvested their cotton and wheat and had stocked it in their homes waiting for traders to pick-up the harvest. But due to the COVID-19 crisis, migrant workers are moving back to their homes in villages. However, the homes are full of harvested crops and there is no room for returning family members who are migrants.

Prime Minister Modi made the drastic decision about the 21-day curfew without any considerations for the daily lives of millions of poor women and men and their families. For women and men who live on the margin of daily wages and daily purchase of food, the restrictions on movement mean they are closer to hunger and death even before getting sick with the Covid-19 virus.

Eye catching vs sustainable

In the short-term, social and economic crises require a rapid response. So far the eye-catching responses and “beacons of better” are few and far between. Viet Nam, South Korea and New Zealand appear to have minimized the impact of the COVID-19 virus, for now at least. Denmark and Poland have caught the public mood and imagination on corporate greed with plans to exclude tax haven registered companies from public bailouts (although we have argued that a somewhat broader approach will be needed to ensure benefits).

Responses to COVID-19 in many OECD countries are operating upon the foundations of “austerity” policies, a deliberate shrinking of the state through ideologically led social and economic policy. Not surprisingly, the most aggressive countries in this aspect have found themselves floundering – either reversing economic stance quickly but finding the underlying structures unprepared (by policy), as in the UK for example, or continuing to struggle with the intellectual dissonance between ideological stance and evident need, as in the USA. Most importantly, many of the most marginalised groups suffer and are left behind to fend for themselves. Short-term actions are needed, but based on a progressive systemic, long term approach.

In India, the Tax Justice Network’s Financial Secrecy Index 2020 has documented the progress made in recent years, in terms of addressing financial secrecy. This has included important revisions (2016) to the damaging double tax treaty arrangement with Mauritius. But there remain ongoing problems including “unnamed” ownership. 

The transparency of India’s financial architecture is at best partial. Enactment of a Prevention of Money Laundering Act and the establishment of an Financial Intelligence Unit made for an early engagement in, and signature to, the OECD’s Multilateral Competent Authority Agreement (MCAA) for Automatic Exchange of Information (AEOI) in 2015. All this has helped to tighten up on “unnamed” money – money laundering and tax dodging. The 53 active Automatic Information Exchange Agreements India has in place will help to curb illicit finance flows and tax dodging, but more could be done.

Building foundations

Most countries are “guilty” of systemic tax and financial transparency failures. If addressed, such failures could create opportunities to strengthen rights protection and build formidable social and economic foundations.

A progressive tax regime, as the tax justice movement has long argued, is critical to halt the tide of so called profit shifting by multinational corporations and cement the possibility of taxing rights, in particular, in developing countries. As well as being recognised by experts around the globe as an essential element for clamping down on huge tax dodging it is a critical part of a financial transparency policy platform needed to address inequalities and human rights failures.

Governments need to match their domestic actions to the strength of their voice on the international stage. While India continues to take progressive positions in international fora such as the G24 – by advocating for more taxing rights for developing countries and pushing for unitary tax approaches – the same cannot be said for its national positions and political bent which has favoured bailouts while leaving the most vulnerable to suffer.  

US appeals court confirms firm must disclose to IRS names of clients behind offshore bank accounts and foreign entities

On 24 April 2020 the US Court of Appeals for the fifth circuit ruled that a US law firm must disclose to the US tax authority (the Internal Revenue Service) the names of requested clients in connection to an investigation. Specifically, the Internal Revenue Service (IRS) had asked for documents identifying any US clients at whose request or on whose behalf the law firm had acquired or formed any foreign entity, opened or maintained any foreign financial account, or assisted in the conduct of any foreign financial transaction, including records or other data relating to setting up offshore financial accounts and the acquisition, establishment or maintenance of offshore entities or structures of entities.

The issue at stake was whether attorney-client privilege would allow the law firm to reject the summon. It didn’t.

The law firm, however, wasn’t picked at random. The ruling describes that the investigation arose because during the audit of a US taxpayer, it was revealed that the taxpayer hired the law firm for tax planning. This was accomplished by establishing foreign accounts and entities, and executing subsequent transactions relating to said foreign accounts and entities. Specifically, from 1995 to 2009, the taxpayer engaged the law firm to form eight offshore entities in the Isle of Man and in the British Virgin Islands and established at least five offshore accounts, so the taxpayer could assign income to them and, thus, avoid US income tax on the earnings.

The case is interesting, but it reflects that enablers’ secrecy tools won’t be easy to dismantle. This ruling doesn’t suggest at all that the IRS can send fishing expeditions to any law firm to find tax abusers. Instead, it appears that the fact that there was a possibility – but not certainty – that these (unknown) US clients had violated tax regulations is what allowed the IRS to overcome attorney-client privilege.

Lawsuits require judges to interpret and apply the law to one particular case. But we should take a step back and ask ourselves whether the law itself makes sense, or if it needs to be reconsidered.

As we have recently written in an earlier blog on this case, attorney-client privilege is just the tip of the iceberg in facilitating illicit financial flows. Attorney-client privilege is abused not just for tax abuse purposes, but for money laundering as well, as warned by the Financial Action Task Force.

To sum up, this ruling is a step forward in the right direction. It goes along other transparency initiatives addressing enablers’ secrecy such as the obligation to disclose aggressive tax planning arrangements and other schemes used to circumvent automatic exchange of information or to hide the beneficial owner behind opaque structures. However, there is still much further to go.

A Feminist Response to COVID-19

Today we are delighted to support the launch of a new and critically important website: ‘a volunteer online data repository of information on feminist principles and actions, as well as policy responses to the COVID crisis.’

After the 64th UN Commission on the Status of Women in March 2020 was cancelled, feminists came together within days to share, support and to continue strategic work that couldn’t wait. They worked ‘across global movements centered on human rights, sustainable development, and economic and social justice’ to launch this vital resource. As Emilia Reyes and Bridget Burns explain in introducing it, “Working at the intersections of multiple forms of crisis is not a new task for feminist advocates”.

The new website provides a set of principles to outline a feminist response to COVID 19, which involves a ‘paradigm shift’ – a different financial model – that relies ‘on adequate and equitable financing.’

You’ll also find on the Feminist Covid Response website:

  1. Response Tracker. This marks policies or laws, temporary measures, or observed responses by country and by theme (for example, education).
  2. Online Dialogues. This is a repository of online dialogues and webinars that have been held to discuss the intersections of gender, feminism, care, women’s rights and COVID-19.
  3. Resources. This section contains a collection of feminist statements and analyses, mutual aid resources and organising tools.

This is an important opportunity to map the impact of COVID 19 and to ensure feminist solutions prevent a return to ‘business as usual’ once the crisis is perceived to be ‘over’, so please contribute with your own resources on tax justice, your experiences and your responses to COVID 19. This video below from the Womens Budget Group in the UK demonstrates how different elements of gender inequality are connected, and how unpaid care lies at the centre of this spiral. The experience of the pandemic is highlighting how deeply unequal women and girls are worldwide and we must now ensure these brutal lessons result in good policy.

We congratulate and are grateful to the twenty five volunteers from across the world who have worked so hard to publish this website. Please share widely, social media hashtags are #FeministResponse #COVID19

Principles (English): https://www.feministcovidresponse.com/static/media/principles-en.a6f9f4a2.pdf

Principles (Spanish): https://www.feministcovidresponse.com/static/media/principles-es.a419eb55.pdf

Principles (French): https://www.feministcovidresponse.com/static/media/principles-fr.a437b8f3.pdf

Edition 15 of the Tax Justice Network’s Francophone podcast: édition 15 de podcast Francophone: L’aide hypocrite du G20 à l’Afrique face au Coronavirus

Here’s the 15th edition of Tax Justice Network’s monthly podcast/radio show for francophone Africa 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.

IMPOTS ET JUSTICE SOCIALE #15 : L’aide hypocrite du G20 à l’Afrique face au Coronavirus

Dans cette quinzième édition de votre podcast « Impôts et Justice Sociale » nous revenons sur le Coronavirus, et les actions en faveur de la justice sociale au profit de l’Afrique et des Africains. De nombreux gouvernement ont pris des mesures pour limiter les conséquences économiques sur les personnes actives. Mais ces mesures reposent sur de faibles moyens et ne parviennent pas à toucher tout le monde.

Aussi, les pays riches du G20, dont plusieurs sont des paradis fiscaux ou des experts des stratégies agressives pour obtenir des avantages fiscaux avantageux, ont annoncé de grandes mesures d’aide à l’Afrique, mais il n’en est rien, Au contraire, le continent noir risque de payer plus cher cette suspension du service de la dette.

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Edition 28 of the Tax Justice Network Arabic monthly podcast #28 الجباية ببساطة

Welcome to the twenty-eighth 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 post it. You can also join the programme on Facebook and on Twitter.

In the 28th edition of Taxes Simply: can the accumulated wealth in tax havens be taxed in order to mitigate the economic and health crisis that the world is facing?

In the second part of the programme, we present our summary of the most important tax and economic news from around the world, including:

الجباية ببساطة #٢٨ – فيروس الكورونا والملاذات الضريبية

أهلا بكم في العدد الثامن والعشرين من الجباية ببساطة. نتناول في هذا العدد مشكلة الملاذات الضريبية، وهل يمكن إخضاع الثروات المتراكمة هناك للضريبة من أجل التخفيف من حدة  الأزمة الاقتصادية والصحية التي يعيشها العالم حاليا. في الجزء الثاني من البرنامج نعرض كالعادة ملخص لأهم أخبار الضرائب والاقتصاد من حول العالم، ويشمل ملخص الأخبار: ١) الدنمارك لن تدعم الشركات المسجلة في ملاذات ضريبية؛ ٢) هولندا تعطل التضامن الأوروبي في مواجهة كورونا مرتين؛ ٣) صندوق النقد الدولي يحث الكويت على زيادة الضرائب وخفض الاعتماد على النفط؛ ٤) عقود مايو/آيار  للنفط الأمريكي تصل سعرها إلى سالب في ظل نقص الطلب على الوقود الأحفوري.

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

Tax Justice Network Portuguese podcast #12: Uma nova economia pós-coronavírus

Quais são os rumos para a sociedade global, vencida a pandemia? Como não repetir erros de outras crises e apostar em novos paradigmas? Estas reflexões são feitas por uma diversidade de economistas: Laura Carvalho, Pedro Rossi, Áurea Mouzinho, Marco Antonio Rocha, Inocência Mapisse, Thomaz Jensen, Marilane Teixeira, Guilherme Mello e também pelo nosso colunista, o jornalista Nick Shaxson.

Nossos entrevistados contemplam que após a pandemia é possível o ressurgimento de Estados mais fortes, focados em investimentos públicos em saúde e proteção social; uma economia baseada em cuidados, no papel das mulheres e no consumo consciente; um mercado de trabalho mais inclusivo e a reinvenção de movimentos de trabalhadores; e, sobretudo, a ascendência da solidariedade e do coletivo como alicerces de uma sociedade global mais ambientalmente sustentável. E o dinheiro para financiar a nova economia pode vir com a aplicação de medidas como um maior controle dos fluxos financeiros de paraísos fiscais e um sistema tributário mais progressivo. 

E uma novidade: completamos um ano de podcast e o presente para todos os ouvintes é um site novo. Em www.edasuaconta.com você tem acesso a todos os episódios do podcast e a todas as plataformas digitais de áudio. Confira! 

Participantes desta edição:

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.

Conecte-se com a gente!

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A “world fit for money laundering” must end in the post Covid-19 era

We’re sharing here the details of explosive new research on “the untold history of how prominent civil servants in the UK tailored US-devised anti-money laundering policies in ways that suited the needs of Britain’s financial services industry.” This new research was carried out by our senior adviser Dr Mary Alice Young, Organised Crime, Bristol Law School, University of the West of England, and by Dr Michael Woodiwiss, American History, University of the West of England; and we’re honoured to publish Dr Young’s description of their research here. She can be contacted to discuss this research further on [email protected] or on Skype: drmaryaliceyoung 

How UK civil servants tailored US anti-money laundering policies to suit Britain’s financial services industry…

Amid the global crisis emanating from the spread of Covid-19, those of us who advocate for tax justice have seen our objectives sharpened as the already huge gulf between the living standards of the “poor” and the “rich” seemingly widens every day. The fight for tax equality concomitant with the wider notion of equality in terms of access to public services (including healthcare) for everyone has never been more pressing. As already noted by the Tax Justice Network and its contributors, the coronavirus pandemic is shining a light on the wealthy fat cats who are shoring up money in secrecy jurisdictions while asking for bailouts and the devastating impact of tax avoidance on EU states, including the effects on public services spending.

But the voices of tax advocates will not be silenced. As stated by Nick Shaxson, while some “Important People” may think that “our ideas were utopian, even crazy” the reality is that in the post Covid-19 world, the likes of the UK’s Chancellor, Rishi Sunak, and others who hold the budgetary keys in OECD countries, will need to sit up and take notice of the need to rewrite national tax laws and thereby help to undermine the financial bases of criminal organisations and also those businesses operating at the murky end of legitimacy – rather than rejecting calls to bar tax haven companies from bailouts. Bureaucratic law makers should not be able to draft legislation in a way that benefits the wealthiest (whether professional criminal entrepreneur or savvy tax avoider), while demonising those whose lives are enveloped by persistent financial hardship.  Laws which undermine genuine law enforcement concerns to tackle crime, corruption and inequality. Laws which continue to support the threats posed by financial secrecy jurisdiction to the world’s poorest countries. Laws, which when all is said and done, allow criminogenic environments to flourish with the support of the British government.

Along with Dr Michael Woodiwiss (History, University of the West of England), we have this week published an article with the journal Trends in Organized Crime, on anti-money laundering law-making by some of the policy makers operating in Whitehall and Threadneedle Street in the late 1980s. Our research focused on the retrieval and analysis of a substantial, previously secret, UK Treasury file from 1987, which contains the letter writing correspondence between Thatcherites based at Whitehall and Threadneedle Street at a time when the UK felt under pressure to conform to US policies emanating from the “war on drugs”. Correspondence evidences the ways in which the UK and US were able to quietly manipulate anti-money laundering policies to suit the economic priorities of the banking and finance sectors on both sides of the Atlantic; for example flatly rejecting calls for increased vetting of bank customers, retaining secrecy jurisdictions as prominent financial centres, and shooing away the efforts of Interpol to highlight financial crime in the banking sector. Simply put, the existing international anti-money laundering framework – which, let’s not forget, generally falls under the heading of criminal law, given the crimes it covers – has been created and developed by bankers and Treasury civil servants, with minimal input from law enforcement. Some such as Rachel Lomax (who later became Deputy Governor of the Bank of England), Graham Kentfield (who later worked as the Chief Cashier at the Bank of England), and Colin Gregory (promoted to Deputy Director, Government Legal Department) progressed to work in high profile positions within the banking sector and government.

The narrative which unfolds in our article, helps us gain a new, and timely insight into the faults which run through the international anti-money laundering framework as part of the wider issue of failing organised crime control laws. A framework built on obfuscation, vested interests and personal whims, and which ultimately allows multifarious tax crimes to continue unchecked.

Read here.

New group to promote beneficial ownership verification pilots around the world

On 2 April 2020 the Tax Justice Network co-organised together with the Financial Transparency Coalition, Transparency International, Global Witness, Global Financial Integrity, Open Ownership, The B Team and the World Economic Forum’s Partnering Against Corruption Initiative (PACI), the first exploratory virtual call to form a multi-stakeholder advisory group to promote short term pilots on verifying beneficial ownership information.

Beneficial ownership transparency has entered the mainstream and is rapidly spreading around the globe. Within three months since the publication of the Financial Secrecy Index in January 2020, three more countries have approved beneficial ownership registration laws, including Panama, taking the number of jurisdictions with a beneficial ownership register to 79. However, verification of beneficial ownership information held by registers (to make sure registered data is updated and truthful) remains a challenge.

To promote beneficial ownership verification around the world, as a corollary of our paper on how countries can verify beneficial ownership information, we have co-developed a concept note to set up a multi-stakeholder group to share experiences and best practices among activists, investigative journalists, international organisations, governments and the private sector. The goal of the advisory group would be to promote short-term pilots to verify beneficial ownership information in at least two countries, a developed and a developing one. Lessons learnt would be used to either expand or replicate pilots in other countries.

The first exploratory call to receive feedback on the concept note had a great turnout despite Covid-19. More than 50 people joined the call (some in an “observer status”), including experts from the World Bank, the IMF, the EU Commission, Europol, the UNODC, the Inter-American Development Bank, the Inter-American Center of Tax Administrations (CIAT), the Latin American FATF (GAFILAT), EITI, Open-Government Partnership (OGP), international banks and online payment companies including Citi, HSBC, Bank of Montreal and Paypal, European and Latin American authorities, and technology companies such as Refinitiv. Here’s a summary of the first exploratory call.

Based on the interest and feedback, we will now host three focused calls:

1) The needs of users: To discuss current needs of beneficial ownership users such as banks, investors, law enforcement, prosecutors, investigative journalists, activists, etc.

2) How to select countries for short-term pilots: To discuss the criteria to select countries and their pilots.

3) Mapping current verification strategies: To discuss current strategies, technologies and best practices used to verify information that could be used to verify beneficial ownership information.

Participation at the call (by invitation only) does not necessarily mean being an active member in the advisory group, which is still being developed. At the same time, while stakeholders may have different views, there is a commitment not to undermine the call for public beneficial ownership registries or the fight against illicit financial flows. If you have any questions or comments, please send an email to andres [@] taxjustice [.] net.

Healthy economies: the Tax Justice Network podcast, April 2020

In the Tax Justice Network’s monthly podcast, the Taxcast: from the ashes of the coronavirus crisis how can we build a better economic and socially just system that works for all of us? The pandemic also exposes the pile-up of unaddressed crises which we must also fix. A transcript is available here due to popular request (not guaranteed to be 100% accurate)

We discuss:

Interviews:

I think it’s quite likely that we’ll see a much longer period of full depression, closer to what happened in the banking collapses in 1873. Far too many commentators have failed to grasp that we’re not facing one crisis in 2020 but we’re facing multiple crises, some of which have been building up for decades. If ever there was a moment to launch a truly radical departure from the neoliberal world order, this is that moment.”

~ John Christensent, Tax Justice Network

It’s about reclaiming the collective ideal and the idea that if we all get together and pool our resources and share risks, we will do a lot better. And it’s about putting people in control of how services are designed, to help each other, to look after each other.”

~ Anna Coote of the New Economics Foundation on Universal Basic Services

Further reading:

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

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Fiança ou resgate? Especialistas da Tax Justice Network elaboraram teste em cinco etapas para governos aplicarem antes de resgatar empresas diante da #Covid-19

This is a Portuguese translation of the Tax Justice Network’s proposal of a 5-step test for coronavirus bailouts. A Spanish translation is available here (external website).

Dinamarca, Polônia, França, Argentina já anunciaram e outros países europeus estão estudando não auxiliar empresas que registradas em paraísos fiscais. Essa medida vai numa excelente direção, mas pode ser melhorada em alguns aspectos.

O teste foi desenvolvido para evitar que o dinheiro de contribuintes acabe em paraísos fiscais corporativos e para garantir a transparência tributária dos benefícios recebidos.

  1. O grupo corporativo possui uma ou mais subsidiárias em uma das 10 principais jurisdições do ranking no Índice de sigilo financeiro (https://fsi.taxjustice.net/en/ e detalhado no @e_dasuaconta – https://bit.ly/2VDmwmc) ou no Índice de paraíso fiscal corporativo (https://corporatetaxhavenindex.org/ e detalhado no @e_dasuaconta – https://bit.ly/2VCUHul)?

Se sim – e a corporação não publicar relatórios completos por país que opera até o final de 2020, de acordo com o padrão da Global Reporting Initiative para demonstrar que a presença no paraíso fiscal é para atividade comercial legítima e não com a finalidade de reduzir as obrigações fiscais em outros lugares – ela deve ser desqualificada para receber um resgate.

A Tax Justice Network convida os governos a confiar no Índice de Sigilo Financeiro e no Índice de Paraísos Fiscais Corporativos, em vez de listas de paraísos fiscais nacionais ou regionais, como a da União Europeia, já que elas provaram ser políticas e fracas demais para serem eficazes no combate ao abuso tributário. As listas da UE desde a primeira em 2017 nunca cobriram nem 10% dos serviços de sigilo financeiro do mundo.

Se sim, a corporação deve ser desqualificada para receber um resgate.

Se não, os governos devem estabelecer uma condição para que os beneficiários do resgate façam isso até o final de 2020. Se a condição não for atendida dentro do prazo, o dinheiro do resgate deve ser devolvido.

Se não, os governos devem estabelecer uma condição para que os beneficiários do resgate façam isso até o final de 2020. Se a condição não for atendida dentro do prazo, o dinheiro do resgate deve ser devolvido.

Se não, a corporação deve ser desqualificada para receber um resgate. As empresas resgatadas, no mínimo, devem comprometer-se a não demitir funcionários que precisam ficar em quarentena ou hospitalizados e pagar a todos os funcionários significativa porcentagem de seus salários, até o reembolso total dos fundos de resgate ou a insolvência da empresa. As empresas resgatadas também não devem distribuir dividendos, recomprar seu próprio capital social e converter outras reservas de capital, como prêmios de ações, em bônus para os acionistas até que a empresa pague integralmente seus empréstimos de resgate e retorne à lucratividade.

A pressão sobre o governo para enfrentar os riscos que os paraísos fiscais das empresas representam para os esforços para combater a pandemia de Covid-19 vem crescendo. A França perdeu mais de U$ 2,7 bilhões em impostos corporativos para a Holanda. Itália e Alemanha perderam mais de U$ 1,5 bilhão cada e a Espanha perdeu quase U$ 1 bilhão para o paraíso fsical holandês.

Alex Cobham, diretor da Tax Justice Network: “A pandemia de coronavírus expôs os graves custos de um sistema tributário internacional programado para priorizar o interesse dos gigantes corporativos em relação às necessidades das pessoas. Elaboramos o teste de “fiança ou resgate” para ajudar os governos a garantir que os impostos sejam direcionados à proteção do emprego e do bem-estar das pessoas, em vez de recompensar os abusadores fiscais”.

Argentina finally has a beneficial ownership register. Now, it should make it public

The Tax Justice Network, together with Fundación SES, the Financial Transparency Coalition and PROCELAC (Argentina’s anti-money laundering prosecutor) have been co-hosting an event in Buenos Aires for the last five years to promote public beneficial ownership registries in Latin America. It looks like our efforts have paid off. On 15 April 2020 the Argentine tax authorities (AFIP), who have been participating at this event from the beginning, finally approved Regulation 4697 to require beneficial ownership registration for a wide range of legal vehicles including companies, partnerships and investment funds. This is a great step forward in tackling financial secrecy and tax abuse. Unfortunately, though, the register will not be public and so falls short of its full potential as a tool for transparency and tax justice.

By approving this new beneficial ownership regulation, Argentina will surpass Panama’s transparency on beneficial ownership. Panama has already approved a beneficial ownership register, but it still has problems with bearer shares because they need not be immobilised by a government authority and thus Panama has been unable to obtain companies’ ownership information in a few cases. Bearer shares give ownership of a company to whoever is physically holding the bearer share in their hand, making it impossible to guarantee  that information held by the register is up to date. Nevertheless, Argentina is still far away from the UK which makes information held by the register available to the public online in open data.

Beneficial ownership transparency has entered the mainstream and is rapidly spreading around the globe. The Financial Secrecy Index published in January 2020 found that 41 countries had beneficial ownership laws that were robust enough to meet the index’s criteria for effective transparency. This criteria included requiring information held by the register to be regularly updated. At least three more countries have since approved beneficial ownership registration laws, including Colombia, Panama and now Argentina.

In the case of Argentina, while the Financial Secrecy Index acknowledged that beneficial ownership registration was superficially mentioned under article 26 of its Law 27444 on “simplification and de-bureaucratization of the State”, there was no central register of beneficial owners. Beneficial ownership information for companies was only required in two provinces and the city of Buenos Aires.

Regulation 4697 establishes a beneficial ownership registration to be centrally managed by the tax authorities (AFIP). Here are some preliminary observations on the new regulation.

Positive aspects

  1. Wide scope: unlike other countries’ beneficial ownership laws that cover only companies, Argentina’s new regulation covers a wide range of legal vehicles: companies, partnerships, associations, and importantly, investment funds, which generally present high secrecy risks as described by our paper on beneficial ownership in the investment industry.

Some countries, especially in Latin America, have established much lower thresholds, including Uruguay and Costa Rica (15 per cent), Peru (10 per cent) and Colombia (5 per cent). Positively, Argentina has joined Ecuador is establishing what we consider to be the ideal threshold: any person holding at least one share (or interest in an investment fund) should be considered a beneficial owner.

However, Argentina’s definition is even better than Ecuador’s because it goes beyond ownership criterion (anyone holding at least one share), to also include anyone with voting rights or with control through other means.

As described by this blog, most countries including the European Union, only require beneficial ownership registration for companies based on incorporation (condition i) and for trusts when the trustee is resident in the country (partial condition ii). The 5th EU Anti-Money Laundering (AMLD 5) innovated by also requiring trusts’ beneficial ownership registration whenever the trust acquired real estate or established a relationship with an obliged entity in the EU (partial condition iii).

Argentina’s new beneficial ownership applies to entities incorporated in Argentina (condition i).  However, the regulation also adds disclosure requirements in relation to foreign entities that have Argentine shareholders, directors, or people with a power of attorney over the foreign entity (condition ii). First, resident individuals have to disclose any foreign entity that they own as legal owners (but not a foreign entity that they indirectly own as beneficial owners). The same applies if a resident individual is a director, manager or supervisor (“fiscalizador”) in a foreign entity. Second, there is another requirement for foreign entities that are considered “passive” because most of their income comes from dividends, interests, royalties, etc. Argentine taxpayers (individuals or entities) who own more than 50 per cent of the capital, voting rights or rights to profits in a “passive” foreign entity, have to disclose this “passive” foreign entity to the tax administration. To determine if a legal owner passes the threshold of 50 per cent, the ownership held by other related entities (for corporate shareholders), or by the spouse or close relatives (for natural person shareholders) must also be considered. “Passive” foreign entities will also have to be disclosed if a local taxpayer has the right to dispose of the “passive” foreign entity’s assets, or appoint or remove the majority of the board of directors (regardless of passing the 50 per cent threshold).

Based on the above explanation, there may be an overlap for individual taxpayers: they would have to disclose a foreign entity over which they own at least one share or vote, as well as any “passive” foreign entity over which they own more than 50 per cent. This redundancy may be explained because for “passive” foreign entities, disclosure requirements include also reporting the gross income of the “passive” foreign entity.

The following figure summarises the beneficial ownership requirements for local entities and the legal ownership requirements for foreign entities (including “passive” foreign entities):

The following figure gives examples of who gets to be reported (in black) and who avoids being reported (in red):

On the other hand, shareholders and beneficial owners must report the number of shares or votes they own, and their value. As described by our paper on “beneficial ownership verification”, by reporting the value of the acquired shares, authorities could also check whether the person could have afforded those shares in the first place, based on their declared income, to detect cases of illegal nominees or money laundering.

Negative aspects

  1. No public access: the 2019 Financial Action Task Force (FATF) paper on “Best practices on beneficial ownership for legal persons” recognises that “the trend of openly accessible information on beneficial ownership is on the rise among countries”. All EU countries now must establish public beneficial ownership registries based on the 5th anti-money laundering directive. Even the UK has required its dependencies to open the beneficial ownership register and Cayman has already promised to make it public by 2023.

In Latin America, Ecuador is already making beneficial ownership publicly available online and Paraguay is considering giving public access to the name of beneficial owners. Other countries, like Uruguay at least give access to law enforcement authorities, including the financial intelligence unit in charge of anti-money laundering. In Argentina’s case there is no mention of access, suggesting that information will be confidential and only accessible to tax authorities.

This is a big problem. Many stakeholders have an interest and need for beneficial ownership information. In the UK, the public online beneficial ownership register was accessed 6,500 million times only in 2018. Publicly accessible registries allow verification of the information by journalists and activists, as exemplified by Global Witness’ analysis of the UK beneficial ownership data. This public verification was also recognised by the Financial Action Task Force paper on best practices on beneficial ownership.

By ensuring access to obliged entities such as banks, the EU is also able to require them to report any discrepancy to the beneficial ownership register based on the information that they obtain from their clients, eg when opening a bank account. Argentina will be missing out on this verification system.

Lastly, beneficial ownership is relevant not only for tackling tax evasion and abuse, but also money laundering and corruption. In 2018, Argentina signed the Global Forum Punta del Este declaration committing to use information to tackle tax and corruption. At the very least, Argentina’s tax authorities should sign memoranda of understanding to give access to information to the financial intelligence unit and the anti-corruption office.

Potential for improvements

While the beneficial ownership resolution is rather brief, given that it will be managed by the tax administration, there are several synergies that may be exploited:

  1. Verification of beneficial ownership information. While registering information with a government authority is of utmost importance to guarantee availability of beneficial ownership information, verification of information is indispensable to confirm the accuracy and veracity of registered information.

We have written a paper on how countries could verify beneficial ownership information. It’s not only about establishing validation mechanisms (eg to prevent a company from registering another entity rather than an individual as a beneficial owner), but also to cross-check information with other databases and to do big data or data mining analysis to detect suspicious patterns and red flags. AFIP will be a in great position to verify the newly registered beneficial ownership information given their sophistication in the access and use of data. They already have an intelligence unit to detect patterns of tax abuse and other red flags. They also obtain wealth and income information on all taxpayers from the private sector and other state agencies to determine their risk profile. AFIP’s data includes information on real estate and automobile ownership, bank accounts, credit card consumption, private school fees, private health insurance fees, insurance contracts, etc. This data can be used to cross-check information submitted to the beneficial ownership register and vice versa.

Commendably, as recognised by the Financial Secrecy Index, Argentina is implementing the “widest approach”. This means that Argentine tax authorities receive information on all account holders (regardless of their country of residence). Therefore, AFIP should be able to compare the beneficial ownership information reported by local financial institutions (based on their own customer due diligence) as part of automatic exchange of bank account information, with the information reported by entities directly to AFIP, based on the new beneficial ownership regulation. For example, if an Argentine entity reported to AFIP that John is its beneficial owner, but the same entity – when opening a bank account- told its Argentine bank that Mary is the beneficial owner, then Argentina’s tax authorities will be able to detect this discrepancy.

In addition, authorities should be able to compare information reported by resident legal owners about their foreign legal vehicles, with the banking ownership information automatically received from abroad based on the Common Reporting Standard.

In other words, AFIP should cross-check:

Recommendations

Based on the above analysis, we would propose that Argentina should take the following measures:

  1. Publish guidance and organise trainings for the private sector (companies, lawyers, accountants, etc) to provide clarity and explanations on the new beneficial ownership regulation.
  2. Establish beneficial ownership registration requirements for trusts. Add beneficial ownership definitions for complex structures that combine legal persons and trusts (eg when a trust owns a company, all parties to the trust should be considered the beneficial owners of the company).
  3. Sign memoranda of understanding to allow at least other local authorities to access beneficial ownership information, and to cross-check with data available in other agencies, including the commercial register, the securities regulator, the real estate registry, etc.
  4. Publish at least basic beneficial ownership information through Argentina’s “National Register of Companies” (Registro Nacional de Sociedades) which is the recent federal online public register that publishes basic company information. AFIP is already providing data to the National Register of Companies, which is also fed with data from the local (provincial) commercial registries.
  5. Verify beneficial ownership information obtained pursuant to the new regulation, with information already available to AFIP based on wealth and income information reported by the private sector and local government agencies as well as bank account information related to the automatic exchange of information.

Tax Justice Network Spanish language monthly podcast: La lucha contra el Coronavirus

Welcome to this month’s latest podcast and radio programme in Spanish with Marcelo Justo and Marta Nuñez, free to download and broadcast on radio networks across Latin America and Spain. ¡Bienvenidos y bienvenidas a nuestro podcast y programa radiofónico! (Ahora también estamos en iTunes.)

En este programa especial sobre el Coronavirus:

Invitados:

MÁS INFORMACIÓN:

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My billionaire bosses funnelled money offshore for years. Now they want a bailout

We’re sharing this personal story from an anonymous writer who has been made redundant in the past month. The consequences of a world where we tolerated the excesses of so-called ‘wealth creators’ are becoming starkly clear as their lack of responsibility or loyalty to employees and to the society that has enriched them is hitting us hard. The wealth they extracted has flowed almost entirely one way – into their pockets via tax havens and through bending and breaking rules with impunity, leaving societies thoroughly weakened and less able to cope with the pandemic than they would otherwise have been. Now read on. [Photo by Anders Nord on Unsplash]

If you’re not careful, you’ll be next: How offshore finance has managed to make the coronavirus crisis even more unpleasant

You love your job. You’re doing good work, providing a vital service that’s making the world a better place. You work in a beautiful office, with free fitness classes, healthy snacks, social events, all the resources you need to do your job. You even get monthly emails from HR telling you how much of a valued team member you are. It’s a far cry from the drab and depressing places you worked at for years, gaining valuable experience but horrifically underpaid and making do with only just enough resources. There’s just one thing not quite right. You report to a head office based in a tax haven, and the finance department have some very specific rules around contracting and invoicing, as if they really do want to keep the operations in the ‘high-tax’ location very separate from those in the ‘low-tax’ location.

Until recently, this was my life, and I’ll admit that I thought it was brilliant. I turned a blind eye to the tax avoidance and the company’s conspicuous wealth. We were being provided for, so who minds if the family that owns the business has a couple of private jets and a bunch of multi-million pound mansions? There’s enough money to go around for everyone.

Then coronavirus happened. Demand took a huge downturn and the company’s revenue dropped close to zero. Within weeks entire departments were being cut. Years of work and experience was being lost, and people were being made unemployed just in time for the biggest recession in a generation. The founder, who before the crisis had always made a point of developing a cult of personality around himself suddenly disappeared from sight. Redundancies were handled by managers, who would in many cases soon be laid-off themselves. Not a word of apology or even acknowledgement from the owners that people were being let go. We were even told to tell suppliers that we weren’t going to pay them the money they were owed for work done. A global company, owned by billionaires, deliberately pushes small business owners and their families into destitution, simply because the cost of enforcing the contract would be too high for a small trader.

But how has offshore finance made this worse? Put simply, for years I worked to help funnel money offshore, into a place that’s only accessible to a chosen few. I skirted the very edges of the law because I had no choice, but when the going suddenly got tough, we were told that there’s no money in the business and that we have to be let go. That may be true, but since the company is privately held offshore, there’s no way at all of knowing.

We were offered the bare minimum in terms of redundancy, but as far as I know, the owner still has his private jets. The company even offered to furlough staff on the understanding that they’ll be laid off once the furlough period ends. We’ll make a few hundred pounds more but the company is going to save hundreds of thousands by reducing redundancy payouts, letting the state make up the difference through furlough payments. This company, which spent years (legally?) cheating the taxpayer out of the funds it needs, now dips into the public pocket when things turn bad, just so it can protect the offshore wealth of a family of billionaires. They’re ripping off the state, which is currently engaged in its biggest and most deadly battle since the Second World War to keep the rich in the lifestyle that they’re accustomed to. All while National Health Service workers struggle to get the equipment they need.

The coronavirus doesn’t discriminate based on how rich you are, and I hope this realisation sinks in with the people remaining at the company, especially those protecting the offshore assets. When your grandchildren ask you what you did during this crisis, do you really want to tell them that you helped swindle the same public sector that kept you and your family alive? If now isn’t the time to finally recognise that for a healthy world, we need properly funded government, then that time will never come. To all those who are working for companies that abuse the tax system, I say this: The offshore world has no loyalty to anyone. Blow the whistle, expose the fraud, let’s build a better system. Do it now, before it’s too late. Last month, I lost everything after years of defending this system. It could be you next.

Costa Rica: a bill threatening to render its beneficial ownership register useless

Costa Rica has been at the vanguard of beneficial ownership registration in Latin America and the world. The country approved its beneficial ownership registration law 9416 in December 2016 and continued to strengthen the robustness of its beneficial ownership registration requirements since then, as recognised by the 2018 and 2020 editions of the Financial Secrecy Index. A new bill making its way now through Costa Rica’s legislative assembly threatens to render the country’s beneficial ownership register useless by delaying the requirement to update information held by the register from once a year to once every five years on shareholders below a certain threshold.

While Costa Rica still has room to improve its beneficial ownership transparency even further by making its register publicly accessible, following the example of Ecuador and most countries in Europe, Costa Rica has been a leader in beneficial ownership registration for trusts since 2018. The country has also set a leading example on the implementation of automated verification of beneficial ownership information, as described in our report here (see pages 42-43).

However, a new bill is threatening to throw away Costa Rica’s progress on transparency by rendering the country’s beneficial ownership register obsolete and of little use. The new bill delays the requirement to update information held by the register from yearly to once every five years. While the bill still requires information to be updated whenever someone acquires more than 15 per cent of ownership, it no longer requires updating information on lower shareholdings on  a yearly basis, which may still be relevant if an individual controls the entity through other means. For example, if the beneficial owner controls the entity not by holding many shares, but by having voting rights or significant influence over the entity’s decisions. No matter how comprehensively a beneficial ownership register is staffed, resourced and verified, it will be of little use if it’s not updated on all beneficial owners.

For the Financial Secrecy Index to consider a country’s beneficial ownership register to be effective, based on global norms set by the Financial Action Task Force and the OECD’s Global Forum, it requires countries to update legal and beneficial ownership information at least annually or whenever a change occurs (whatever happens first). Costa Rica’s current law requires this as well. However, this will no longer be the case if the new bill proposing to postpone the update of legal and beneficial ownership information from each year to every five years passes. To put this into perspective, imagine using a five year old used car listing to contact the owner of the car about buying it!

The most puzzling part of the bill however is the argument underlying the proposal. It doesn’t question the importance of safeguarding against money laundering and tax evasion, but it considers the process of updating information every year to be too costly for companies. This is a false economy. If there has been no change in ownership or control, then updating the information should cost little to nothing. A company is able to get the last filed data from the register (in case they forgot to keep a copy), so they could simply copy-paste the information when it’s time to file beneficial ownership information again. On the other hand, if there has been a change, say there is a new shareholder, the company should already have the information on record, not for the sake of reporting it to authorities but for the company’s own operations. Otherwise, how would the company know who is allowed to vote or to receive dividends?

We all know that there is a big stretch between approving a law and properly implementing its enforcement. However, if the beneficial ownership law of 2016 is weakened by making the information it gathers obsolete, there won’t be enough improvements to enforcement that could make up for its weakness.

We hope that Costa Rica will keep up its transparency leadership and take it forwards (towards publicity) instead of backwards (towards outdated data).

HSBC threatens UK amid Coronavirus crisis

The Financial Times reports:

The Bank of England’s pressure on HSBC to cancel its dividend for the first time in 74 years has reignited a debate at the top of the bank over whether it should redomicile to Hong Kong.

This is shocking, on several levels.

First, that’s a direct threat by HSBC against UK policymakers – in the middle of a pandemic and a global economic shock. Classy timing.

Next, the Bank of England’s gentlemanly discouragement of dividend payments to help tackle the Coronavirus crisis is far too timid: we (and many others) have recently encouraged permanent bans on share buybacks (which used to be illegal) and temporary bans on dividends – especially banks which should now be ploughing money into shoring up their capital safety cushions in the current environment.

Furthermore, we have seen exactly this intimidation before, from exactly the same global bank, deploying the very same kinds of anonymous whispers, to favoured journalists who the bankers judge will put the “right” spin on the story.

This is, once again, the Competitiveness Agenda. Threaten to relocate elsewhere if you don’t get what you want — knowing all along that you’re not going to carry through on this threat. Talk, after all, is cheap. (HSBC is going to throw itself decisively into the arms of the Chinese Communist Party? Really?)

The same FT story cites an anonymous HSBC director accusing the Bank of England of “put[ting] a gun to the head of the board of directors . . . the calls for redomiciling will increase”.

No, it’s the other way around: HSBC is trying to put a gun to Britain’s head. Here’s how this game tends to pan out: Large multinational threatens to relocate, knowing secretly it has no plans do so. Yet an obsequious British state gratefully hands over goodies, extracted from current and future taxpayers and other sections of society. The bank then piously decides, after “careful consideration”, not to relocate. We described it thus, after the last big round of empty threats in 2016:

The bank’s been conducting a ‘review’ of its operations, and constantly drip-leaking panic-inducing details about these supposed internal deliberations, as a way of maximising pressure on British politicians to relax regulations and minimise pesky things like criminal probes, capital requirements, bank levies, and plenty more. And boy, have some concessions been made . . .

Those concessions alone have since cost the UK an estimated billion pounds a year, equivalent to the cost of educating 200,000 schoolchildren. HSBC didn’t, of course, relocate. (This kind of game happens all the time: it’s the same basic ploy as Amazon’s widely-reported efforts to engineer a “Hunger Games environment” to create ‘competition’ between US states to host its second headquarters, in which it sought to squeeze maximum subsidies and tax breaks out of the states. As one analyst put it, “Amazon already knows where it wants to be” – and in the end, his prediction proved exactly right.

To be fair, this time the FT journalists didn’t let the bank have it all its own way, pointing out that HSBC originally relocated from Hong Kong to London after Britain handed its colony Hong Kong to China in 1997: as an investor put it:

“it’s the price to pay if you’re going to domicile in the UK with all the protection that gives you.”

But here’s an even more important thing. The British financial sector is too big – much too big. There’s an ocean of research out there now, showing that countries with oversized financial sectors tend to become less prosperous as a result. Shrink the financial sector, for prosperity. Two images, the first from the IMF, and the second from us, show the basic issue, which is the Finance Curse.

The right hand graph is pretty much unarguable. Shrink the red, and keep the blue, seems to be a sensible approach. The left hand graph – an upturned banana shape (repeated in study after study) shows that we all need a functioning financial sector, and countries with underdeveloped financial sectors need to expand them to support prosperity. But there is an optimal point — the UK and the UK probably passed it some time in the 1980s – when the sector is providing the services an economy needs. Further growth of a financial sector beyond that optimal point starts to damage economic growth.

Why? For a number of reasons, most important of which is that once a financial sector has (to put it crudely) set up the useful services an economy needs, it finds that there are further profits to be mined by penetrating into other parts of the real economy – from agriculture to healthcare to the film industry to tourism – and finding ways to extract wealth from those parts. Frequently, it’s done by financial sector players buying up perfectly good companies then financially engineering them – running their financial affairs through tax havens, say, or by increasing their debt, or sitting astride and milking some sort of monopolistic choke point — to extract more wealth from them, and in aggregate this leaves behind a more fragile corporate landscape. This is in essence what private equity and a lot of merger and acquisitions do – or it could happen in a related guise, public-private partnerships (see the Private Equity and the March of the Takers chapters here).

These pigeons will soon come home to roost: after which we might get a better idea of the costs. It’s impossible to estimate the scale of the damage from oversized finance with any degree of accuracy, but the best estimates suggest it is very large indeed. Much is not measurable: such as the fact that in 2013 and 2015 when Britain signed a series of deals with the Chinese Communist Party to give the City of London financial sector access to lucrative financing, the quid pro quo was that Britain would have to allow the China General Nuclear Power Corporation (CGN) to take a large stake in Britain’s mega-nuclear power station, Hinkley C. Here is one reaction to that:

(Source)

What the UK should be doing is taxing and regulating this rather lawless global bank, and taking a very hard line — so that it either shrinks its operations to the useful core of services it provides, or the bank relocates to Hong Kong, taking its political, economic and democratic damage with it.

When the factory gates are bolted shut, women need country by country reporting

In recent days a number of sudden and dramatic changes have happened in the labour market in already fragile economies, as the Business and Human Rights Resource Centre has shown.  Many workers who are poorly paid and in precarious relationships [read zero or no contracts] with ‘absent’ employers – are losing their incomes. Many of these workers are women and girls. 

Even under normal circumstances women and girls don’t get a great deal.  Only half of women in developing regions receive the recommended amount of health care they need, and while 17,000 fewer children die each day than in 1990, still more than 6 million children die before they are five years old for a lack of adequate health care and well-being, according to UN Women.  Women and girls face many gender based inequalities, generated from exclusive policy and provisions, violence, discrimination and poverty. All of these will be exacerbated as women and girls continue to care, and experience more extreme conditions for their health, security and safety. ‘Social distance’ is a health luxury that most women and girls in developing regions will be unable to achieve.

In a COVID-19 environment public health workers and cleaners are on the COVID front line.

But it is not just the frontline health and social care workers, 70% of whom globally are women. Other professions employ a disproportionate number of women on fragile contracts. In India alone 45 million people work in the garment industry – 60% of them women . At the same time women most often are the ones who are providing care for children, the sick or at-risk family and community members.  

In many of the countries where the garment industry operates, for instance, workers create economic profits for the multinationals that employ them but often create little taxable profit, so little of the value these workers create is yielded as government revenue or translates into social protections and targeted services for those on the lowest incomes.  

With no or little savings, and no prospect of redeployment or re-employment, governments need urgent and reactive solutions – but they also need sustainable and progressive tax regimes to help meet adequate social care, health and well being needs.

Country by country reporting (CBCR) – the transparency mechanism where multinationals are required to produce information on economic activity in each country where they operate, offers a protective measure to help governments find the information they need to tax companies appropriately – and fulfil their human rights obligation to promote women’s health and well being. 

This would be a unique moment in corporate history to record a step change in leadership for CEOs, Boards and shareholders. As UN Women’s Executive Director stated last week, this is a ‘time of reckoning for our national and personal values and a recognition of the strength of solidarity for public services and society as a whole’. Financial transparency and paying a fair share is fundamental to this notion of solidarity.

Women are at the sharp end of any health crisis, but the impact of this pandemic will have first order and secondary impacts that will devastate the lives of, and kill, many women. Country by country reporting is one significant progressive step which all multinational corporations need to establish as part of their responsibilities to their workers and the communities from which they extract wealth. It won’t help women with this health pandemic, but it could have profound implications when the next one breaks.

Feedback to EU Commission’s roadmap to tackle tax fraud and evasion

The EU Commission has called for feedback from the public on its new roadmap for tackling tax fraud evasion. Recognising that “every year in the EU, billions of euros are lost to tax evasion”, the Commission has outlined an initial action plan, presenting key initiatives to:

The Tax Justice Network submitted feedback which can be found here and which has been reproduced below.

Tax Justice Network feedback to EU Commission’s “Action Plan on fight against tax fraud ” initiative

With the Corona pandemic exacerbating inequalities and ushering in extreme stress on the budgets of EU member states, the Action Plan of the European Commission is planned during the most severe crisis of the European and global institutional architecture in 70 years, exposing hundreds of millions of citizens inside and outside the European Union to extreme economic vulnerability. In this context, the role of corporate tax havens and secrecy jurisdictions within and outside the EU in undermining solidarity cannot be tolerated any longer and calls for decisive action in order to safeguard the European Union’s cohesion and help preventing the further spread of populist and extremist movements.

The scope of the EU Action Plan should be broadened to include personal and corporate income tax matters, including tax avoidance in a legal grey zone. Options for an EU supported wealth tax and options for an excess profits tax on firms profiteering from Corona should urgently be explored and included in the Action Plan, jointly with reviving plans for a broad and comprehensive tax on financial transactions.

The EU would benefit from the European Commission hosting or acting as a European Tax Intelligence Centre (EUTIC), transmitting innovative data and policy analyses for improved tax compliance and fairer taxation. Among others by applying a novel geographic risk assessment tool, EUTIC would assess vulnerabilities to illicit financial flows in Europe including from tax evasion, tax fraud and tax avoidance. A more detailed proposal for scope and data implications of an EUTIC are enclosed in the draft summary recommendations of the Horizon 2020 research project “COFFERS” (Combating Fiscal Fraud and Empowering Regulators). This project has concluded end of January 2020 and offers a wide range of relevant research findings and innovative policy recommendations (full details accessible under http://coffers.eu). 

While the European Union has taken many bold legislative steps in the past years, some policy gaps remain that need addressing. In the realm of automatic information exchange of financial account information and personal income and wealth taxation, the effectiveness of the entire system is jeopardised by recalcitrant jurisdictions that refuse to engage in fully reciprocal information exchanges. To ensure a level playing field, the EU should consider implementing a withholding tax policy against non-participating banks that fail to provide financial account data on a fully reciprocal basis, using its market access as a leverage to ensure compliance.

Furthermore, the validity of passports issued under golden passport schemes by some members states should be constrained in order to prevent tax evaders and criminals to open foreign bank accounts with purchased citizenship to circumvent reporting to tax authorities at their place of primary residence. The efforts to counter tax evasion and money laundering through beneficial ownership disclosure need to be complemented by disclosure of legal ownership in all cases, by expanding the disclosure to EU real estate and the registration to freeport users, and by abolishing bearer shares or immobilising them with a government authority.

In order to rein in corporate tax havens, various conditions for participating in the Single Market should be enacted, ensuring a level playing field and robust tax revenues: group-wide public country by country reporting, full publication of unilateral cross border tax rulings including the name of the companies and minimum corporate tax rates. Other policies to consider are discussed in the current special issue of “Intertax”: Leyla Ates, Moran Harari and Markus Meinzer, ‘Positive Spillovers in International Corporate Taxation and the European Union’, Intertax, 48/4 (2020), 389–401). Full details of reform options are detailed in the 20 indicators of the Corporate Tax Haven Index.

Recommendation 1: Establish tax intelligence centres in member states and at the EU commission

The cross border integrated tax planning departments of investment banks, accounting and legal firms require a response by the state that transcends regulatory silos. A robust response that will safeguard the interests of ordinary citizens by countering the multi-billion tax avoidance and money laundering industries must include not only operational capacity to detect the latest complex cases, but equally capacity for strategic orientation. This needs to be innovative and responsive to changing dynamics. At the moment, this capacity is fragmented at the national level and absent at the EU level. As a result, there is increased risk of disconnects and time lags between policy making and regulatory implementation, with the EU public COFFERS suffering from billions in lost tax revenues and uncounted costs in terms of crime and money laundering.

An EU-level Tax Intelligence Centre (EU-TIC) would meet both of these challenges, monitoring macro-economic trends for risks of illicit financial flows and the spillover effects of domestic tax policies, and building advanced data mining and analytical capacity to support targeted tax audit and policy formulation. An EU-TIC would facilitate the prioritization of the negotiation of international agreements, shape policies and programmes for tax compliance, and support local tax administration in operational decision making (staffing, auditing). At the request of member states, the EU-TIC would provide support in policy and operational analyses, as well as tactical and strategic advice.

Dedicated tasks of the EU-TIC would include the identification of abusive tax avoidance structures in EU financial systems and the internal market, and the design of suitable responses. The identification of structures would rely inter alia on the new directives on mandatory reporting of aggressive tax planning schemes (Council Directive 2018/822/EU) and on the protection of whistleblowers (Council Directive 2019/1937/EU). Furthermore, the role of the EU-TIC would encompass the identification of tax evasion and money laundering risks across the entire EU, and individual EU member states, by providing data-driven country profiles of vulnerability and exposure to illicit financial flows. This would rely in part on bilateral financial secrecy index analyses. The EU-TIC would also provide and review tax gap estimates.

The EU-TIC would set an example in transparency, by publishing periodic reviews, documenting in detail its activities and impact.

Recommendation 2: Addressing data gaps

Without reliable data, tax evasion and avoidance and money laundering cannot be countered successfully and sustainably. Public data for researchers and the wider public and the integrity of confidential administrative data require improvement. This will foster trust in institutions, contribute to a level playing field and fortify the rule of law.

Interoperability of available registry data is a pressing concern that requires a response both within, and beyond the European Union. With some economic groups in the financial sector controlling up to 25,000 separate entities, a need for the unambiguous identification of ownership structures is evident. The potential of the Legal Entity Identifier to allow interconnectivity, or even to replace EU-wide separate numbering systems of domestic legal entities, should be explored. Incentives to keep the data valid and updated have to be implemented consistently. Measures to ensure integrity and timely information include ensuring public access to financial statements, ownership data, and statistics on regulatory and enforcement actions taken by the registries in cases of non-compliance.

The current lack of data on country by country information should be remedied to construct a level playing field between SMEs and large multinationals. SMEs often operate in one country and are unable to shield relevant accounting data from public scrutiny. Large multinational companies do so by consolidating accounts and structuring corporate networks strategically.

To ensure the continued success of the automatic exchange of tax information on financial accounts, commitment by participating jurisdictions and data quality should be monitored. Comprehensive statistics on the data exchanged by country of account holder, controlling person and bank location should be published. Public statistics on golden visas and similar programmes should be made mandatory to protect against the undermining of the effectiveness of automatic information exchange of financial account information.

Standard statutory tax rate datasets should be complemented with measures of the lowest available corporate income tax rates (LACIT) legally available in jurisdictions, to improve the validity of academic research and policy analyses. Such data on LACIT is provided by COFFERS’ in the Corporate Tax Haven Index.

Recommendation 3: Addressing policy gaps and loopholes

While the European Union has taken many bold legislative steps in the past years, policy gaps remain that urgently need addressing. In the realm of automatic information exchange of financial account information, the effectiveness of the entire system is jeopardised by recalcitrant jurisdictions and banks that refuse to engage in fully reciprocal information exchanges. To ensure a level playing field, the EU should consider implementing a withholding tax policy against non-participating banks that fail to provide full financial account data on a reciprocal basis, using market access as leverage to ensure compliance.

Furthermore, the validity of passports issued under golden passport schemes by some members states should be constrained, at a minimum by requiring this status to be declared on the passports and through information exchange protocols. Without this measure, tax evaders and criminals are able to open foreign bank accounts with purchased citizenship to circumvent reporting to tax authorities in their place of primary residence. In order to improve pan-European cooperation in prosecuting cross border tax evasion and money laundering, legislative efforts should be directed towards creating harmonised and clear definitions of both crimes. A pan-European prosecutorial agency for these matters should be instituted. Efforts to counter money laundering through beneficial ownership disclosure need to be complemented by disclosure of legal ownership in all cases. Disclosure requirements should be expanded to incorporate EU real estate and freeport users. Bearer shares should be abolished or immobilised with government authority.

A return to a truly progressive tax system can help prevent the further spread of populist and extremist movements. Effective cooperation on business taxation supports this. To date no breakthrough in the area of business taxation comparable to automatic information exchange has been achieved. A first step t is the speedy enactment of public country by country reporting rules for large corporate groups. This is as is proposed in a directive under negotiation amending Directive 2013/34/EU in regard to the disclosure of income tax information by certain undertakings and branches. Minimum taxes should complement the adoption of the Common Consolidated Corporate Tax Base (CCCTB).

Fundamental corporate tax reforms (towards unitary taxation/CCCTB) will take some time. They should be complemented by intermediate policy steps that can be implemented unilaterally and immediately. Examples of such intermediate steps include the abolition of patent boxes and notional interest deductions, the inclusion of capital gains in the corporate income tax base, constraining loss utilization over time, and the introduction of robust deduction limitations on intra-group royalty and service payments.

These new EU policy-making efforts should be implemented in a way that contributes to stronger democracy in the EU. This can be achieved by establishing channels for the greater participation of independent academics and civil society organisations in the reform process. Reform should no longer be dominated by private interests and a closed and technocratic network.

Edition 27 of the Tax Justice Network Arabic monthly podcast 27# الجباية ببساطة

Welcome to the twenty-seventh 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 post it. You can also join the programme on Facebook and on Twitter.

Taxes Simply #27 – The Coronavirus and tax justice

This month Walid Ben Rhouma and Osama Diab discuss the economic consequences of the coronavirus crisis that the world is currently experiencing. They also present the most important tax and economic news from the MENA region and the world, including:

الجباية ببساطة #٢٧ – فيروس الكورونا والضرائب

أهلا بكم في العدد الجديد من الجباية ببساطة، ونتمنى أن تكونوا بأفضل حال في هذه الفترة الاستثنائية. في الجزء الأول من العدد يتحاور وليد بن رحومة وأسامة دياب حول التبعات الاقتصادية لأزمة فيروس كورونا التي تعيشها العالم حاليا. أما في الجزء الثاني من العدد، نعرض أهم أخبار الضرائب والاقتصاد من المنطقة العربية في العالم في شهر مارس/آذار، وتشمل أخبارنا: ١) حرب أسعار النفط تشتعل بين روسيا والسعودية؛ ٢) البنك المركزي الأوروبي يطرح 1 تريليون يورو هذا العام للتخفيف من وطأة فيروس الكورونا؛ ٣) اقتصاد المنطقة العربية قد ينكمش بمعدل ١.٧% ومنطقة اليورو بمعدل ١٢.٥%؛ ٤) لبنان يتخلف عن سداد الديون.

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

Edition 14 of the Tax Justice Network’s Francophone podcast: édition 14 de podcast Francophone par Tax Justice Network

Here’s the 14th edition of Tax Justice Network’s monthly podcast/radio show for francophone Africa 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.

Impôts et Justice Sociale, Edition 14 : Malgré ses cadeaux fiscaux, L’Afrique abandonnée face au Coronavirus 

Dans cette quatorzième édition de votre podcast « Impôts et Justice Sociale » nous revenons sur le Coronavirus, et le risque qu’il représente pour les économies africaines. Nous explorons surtout le fait, que la région qui a accordé de nombreux avantages fiscaux aux multinationales qui exploitent ses ressources, et à des pays riches dans le cadre des accords fiscaux avantageux, obtenus de manière agressive, tarde à recevoir un soutien, alors que partout on annonce des milliers de milliards $ de subventions.

Pour en parler

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Corporate financial resilience in times of COVID-19: a perfect storm?

Guest blog by Professor Colin Haslam, Queen Mary University of London

In our working paper Safeguarding financial resilience for sustainability’ we argue that large companies listed on the European and the US stock exchanges have become financialised, leaving many with weak, financially exposed balance sheets and higher risk of insolvency. As the Covid-19 crisis hits, we are on the verge of a perfect financial storm as the European and US financialised corporate sectors have sacrificed financial resilience for shareholder value.

In response to the COVID-19 crisis governments are stepping up to underwrite company liquidity through wage and salary subventions. France, Spain and the UK, for instance, have unveiled emergency packages including direct pay-outs to employees as well as loans and guarantees for companies to mitigate the economic blow from the coronavirus. These economic interventions are about securing the financial stability of companies.

In accounting and auditing practice, company viability is tested by looking at both liquidity and balance sheet solvency. Companies need cash for liquidity to cover everyday business expenses. But to maintain balance sheet solvency, a company also needs a surplus of assets over liabilities, in the form of shareholder equity reserves. These reserves provide a critically important loss-absorbing buffer.

For example, when a company suffers a deterioration in income because of a downturn in product markets, any negative earnings need to be absorbed by shareholder equity reserves if that company is to remain a going concern.

In a financialised company, the primary modus operandi is asset value extraction for shareholders, through paying dividends and buying back its own shares. Aggressive distributions to shareholders can reduce retained earnings accumulated in shareholder equity, undermining the loss-absorbing buffer.

During the period 2009 to 2018 we estimate that net income earned by all FTSE 100 companies was £898bn, while dividends amounted to £571bn and share buy-backs £167bn. So in total, roughly four fifths of total net income was distributed. Nearly half of FTSE 100 companies distributed more than three quarters of their net income, while 25 distributed more than 100 percent of their net income!

This high distribution of earnings is a pattern that resonates across all the major European and US large company quoted stocks. To modify this behaviour, dividends could be added back to earnings for the purposes of calculating corporation tax. Where a company increases debt to fund distributions to shareholders the interest payments on this debt would be treated as being non-tax deductible. Stricter restrictions could include: stronger criteria for what constitutes realised earnings available for distribution to shareholders and changes to the UK companies act, that is, prohibiting company repurchases of their own share capital.

Table: Net income distributed to shareholders as dividends and share buy-backs[1]

  Dividends Share buy-backs Total
  % % %
EuroStoxx 600 65 7 72
S&P 500 36 51 87
FTSE 100 64 19 83

Source: Thomson Eikon datasets

Financialised companies that have hollowed out their equity reserves are vulnerable not only to losses made in the normal course of business: they are also vulnerable to impairments of speculative asset values reported on their balance sheets.

The COVID-19 crisis will undermine company revenues and profits from selling goods and services as we now all lock down. But when company cash flows dry up there will also be a compounding negative impact on asset valuations that have been speculatively “marked to market” as part of fair value accounting (FVA) practices. The current market value of many assets recorded on a company’s balance sheet are speculative valuations. This is because these valuations are based on estimates about future cash flows that may or may not be realised by these assets.

Assets adjusted to speculative market value include not just goodwill but also property, financial instruments, hedging products, pension funds, biological assets, brands, patent and licenses. These speculative asset valuations will also become compromised. Our working paper reveals that 15-20 percent of European and US companies would not have enough equity reserves to absorb just one asset class ‘goodwill’ being impaired – let alone all the other asset classes marked up to speculative market value.

So what’s to be done?  A new social settlement.

The COVID-19 crisis has resulted in unprecedented state subvention of wages and grants to sustain our corporate sectors. When this crisis is over it will be necessary to demand corporate obligations, not just entitlements, attached to the granting of the social license of limited liability.  A new social settlement will be required, as it will no longer be possible for corporate governance to operate solely for shareholders.

A starting point would be to restore prudential resource management, conservative accounting practices, and the preservation of capital and solvency for a going concern.

Policy interventions should now:

●        Promote a default to historic cost accounting to limit speculative asset value impairment, and in the short run put in firebreaks to prevent asset value impairment and its transmission into the company equity funds.

●        Restrict distributable dividends out of shareholder equity to accumulated realised earnings rather than realised and unrealised earnings that arise when asset values are inflated.

●        Modify company tax law on dividends and tax deductible interest charges attached to debt finance used to fund distributions of all kinds to shareholders: adding these expenses back to compute corporation tax.

●        Restrict the capacity of a company to convert other shareholder equity reserves, such as share premiums, into bonus issues for shareholders and other manipulations.

●        Reform our company’s acts to stop companies from buying back their own share capital. We need to revert to the previous common law position prohibiting companies from buying their own shares.

In this time of crisis it is essential to ensure that, in the immediate short-run, companies do not liquidate assets because this will very quickly threaten company balance sheet solvency: a systemic Carillion effect.  

In return for subvention, and beyond this current crisis, we should now all demand that companies fulfil broader obligations to society (not just shareholders).

This will require companies prudently safeguarding capital for a going concern in return for the social license granted by limited liability.

Company capital management: Safeguarding financial resilience for sustainability, Colin Haslam (Queen Mary University of London, George Katechos (University of Hertfordshire) Yuri Biondi (National Centre for Scientific Research, CNRS, Paris), 2020

[1] Over period 2009 to 2018

Could the wealth in tax havens help us pay for the Coronavirus response?

As economies crumble under coronavirus pandemic, powerful interests are hoping to get rich from huge government bailouts. A well-informed Washington D.C. insider described the latest U.S. bailout package, for instance, as a “corporate coup” to reshape the U.S. economy:

“it’s really really bad, and much of the bad stuff is not being included in the sleazy marketing materials . . [it is] a Christmas wish-list of corporate lobbyists.
. .
The bill establishes a series of boring-sounding slush funds [with] alphabet-soup names . . that’s where the real money is.”

Economist Gabriel Zucman has described it as literally a $170 billion tax cut for real estate tycoons.

With President Trump declaring that “I’ll be the oversight” for the bailout, and potentially receiving a personal bonanza from it, this looks bad. And the pandemic is giving other authoritarians elsewhere opportunities to erode political freedoms further.

But on the positive side, governments are having to throw out broken old orthodoxies and bring in progressive policies — such as versions of universal basic income, or nationalisations — that would have been unthinkable just a few weeks ago. Everyone is scrambling for money.

In this context, “Michael” in Ireland raised a pertinent question:

“Do you think that it is possible (technically) for governments to tap into the trillions which are hidden offshore?”

To which the answer is: yes, plenty of it. There’s some $8-35 trillion or so sitting offshore, depending on how broadly this is measured, which can certainly be tapped with stronger political will. And we must never forget that while all countries are victims of offshore chicanery, lower-income countries are the worst hit, as dictators and oligarchs loot national treasuries and sew up their economies into private fiefdoms, then transfer their ill-gotten gains overseas and stash it offshore.

There’s lots more scope for cracking down on this now than most experts think. Until the (last) global financial crisis, when we were bleating in the wilderness about the need to tackle tax havens and other abuses through country by country reporting, automatic exchange of information, public registers of beneficial ownership information, or unitary taxation , we were scoffed at, and told by Important People that our ideas were utopian, even crazy. Now these ideas are all widely, if imperfectly, accepted, by the OECD countries, the G20, and many national governments.

Now, in the COVID-19 era, old orthodoxies are crumbling fast, and popular demands for new, radical measures will grow explosively. Already food security for millions of people is threatened, and the worst is yet to come. There will be riots, and worse. We can now, with luck, achieve a lot.

We just wrote about how national tax systems should be adjusted to cope with the Covid-19 pandemic: a large fiscal stimulus, with spending running far ahead of tax revenues — but no blank cheque. The poor and vulnerable should pay less and receive more, while rich people and strong, highly profitable corporations should pay more — a lot more.

So far, according to this OECD list of Covid-19 measures, countries have been radical on the spending side, but not on tapping the wealthy or large profitable corporations. Corporate tax rates on “excess” profits of 50-75 percent? It’s the monopolists, hedge funds and financial engineers that are making excess profits — this proposal wouldn’t hurt fragile companies or ones with low profit margins.

This proposal is nowhere now — but let’s start the ball rolling. And we need a lot more than this.

But first, we must walk through a minefield or two.

The great dilemma

Imagine a large multinational has been aggressively shoveling profits offshore for years, lobbying for and getting tax cuts and state subsidies, buying back its own stock, paying its employees peanuts while delivering its bosses exorbitant compensation. If a company has spent the better part of the past decade enriching its owners and executives, should it get a bailout?

The scale of what’s been happening is shocking. The largest 500 U.S. multinationals, for instance, spent over $1.5 trillion in 2018 and 2019 just buying back their own stock, to boost their share prices and their executive stock rewards. On top of that, they paid out nearly a trillion more in dividends. This has sucked colossal productive investment out of the real economy, and mostly into the pockets of the wealthiest 10 percent of Americans. They monopolised, extracting wealth from consumers, workers, and many others. Then, after gorging on a gigantic job-killing corporate tax cut in 2017 (“I don’t think we’re ever going to lose money again,” an airline boss gushed that year), US corporations alone continued to shift $300 billion in profits offshore each year to dodge tax (and other rules of civilised society.) Luxury cruise lines have been registering offshore to escape taxes and regulations, then sailing on amid pandemic on their own ships. They took huge risks with borrowed money, juicing profits and bosses’ bonuses, and the risks now fall on society’s shoulders. And on, and on.

Do we bail these people out? Do we “foam the runway” for crime-soaked banks if they face collapse? Justice says ‘no.’ But if the consequences of letting these firms collapse is worse still, how do we proceed?

On balance, a company whose collapse will cause social catastrophe should likely be saved. But no blank cheque. Instead, there must be powerful conditions. Here are a few: some of which must continue long after this shock has passed.

These opportunities, and more, must now be grasped. More on this soon. But now, about those trillions sitting offshore . . .

How to squeeze the tax havens.

After the global financial crisis, world leaders came under pressure from angry populations to finally do something about tax havens. And they did, up to a point. The OECD, the club of rich countries that appointed itself as the standard-setter for these tasks, created the most important of several initiatives. These can be divided into two (somewhat overlapping) areas: corporate tax haven activity, which is costing world governments some $5-600 billion a year, while that involving wealthy individuals, which may be costing $200 billion just in lost income taxes: there are plenty of other costs too. If you include the role that tax havens have played in driving a global race to the bottom to cut tax rates, the sums lost are far greater.

And there has been progress in both areas. Each, now, in turn.

For individual wealth, they put in place the Common Reporting Standard (CRS), a set of rules by which countries shared information about each others’ citizens financial assets, to pull back the veil of secrecy. It is leaky, of course, but widely accepted and far better than what went before: the OECD reckoned last year the moves had cut bank deposits by 25 percent or so. Our latest financial secrecy index published in February 2020 calculated that the global “pot” of financial secrecy had fallen by seven percent since the last index in 2018. That’s an improvement, but there’s far to go.

Here are some radical ideas. We can’t accept half measures any more.

Individual wealth

First, we must curtail secrecy further. The Financial Secrecy Index identifies many glaring holes. Here are a few big ones.

Some ideas go beyond the CRS.

Corporate wealth

On corporate wealth, the OECD has been trying to patch up a broken, century-old system that isn’t fit for the modern age. Progress has been patchy, and glacial. But last year it finally admitted that the system cannot be patched up, and that new ideas are needed.

These are all ways to protect our economies from tax havens, and to tap into offshore wealth. And if we combine these with highly progressive “excess profits” taxes on corporations and higher taxes for wealthy individuals, then hard-pressed nations can reap tens, even hundreds, of billions of dollars each year.

This blog focuses on tax havens and the Coronavirus crisis. We will follow it with others in the context of Coronavirus: one on the Climate, due on April 2, also on how the crisis intersects with the Finance Curse, with the role of women, and one highlighting the great failure of tax cuts on large corporations and individuals.

Please watch this space.