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.

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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.

Tax Justice March 2020 Portuguese podcast #11: Luanda Leaks: a cumplicidade dos parasitas do norte global

Nós da Tax Justice Network e do É da sua conta estamos respeitando todas as medidas necessárias para ajudar na contenção do coronavírus. Mas o episódio 11 é sobre um outro tipo de vírus: a corrupção. Mas também vamos falar de um de seus poderosos antídotos: os leaks, vazamentos de informação em português. Vamos mergulhar num caso recente, o Luanda Leaks, e mostrar o papel parasitário dos países ricos nesse escândalo de corrupção em Angola, com repercussões no mundo inteiro.

Ouvimos especialistas em transparência, ativistas e cidadãos angolanos para esmiuçar esse vazamento que trata de como a filha do ex-presidente angolano, Isabel dos Santos, desviou milhões de dólares dos cofres angolanos  entre 1980 e 2018, com a ajuda de bancos, empresas de consultoria e contabilidade, e paraísos fiscais do norte global. Conversamos também com o os responsáveis por divulgar os vazamentos e os advogados do denunciante. Prepare os fones de ouvidos e venha com a gente!

E uma novidade: estamos com um site novo. Em www.edasuaconta.com você tem acesso a todos os episódios do podcast. Confira! 

No É da sua conta #11 você ouve:

Participantes desta edição:

Links para assuntos citados no podcast

Reportagens sobre o Luanda Leaks – Consórcio Internacional de Jornalistas Investigativos (em inglês)

Reportagens sobre Luanda Leaks – Expresso

Angolanos pedem  reforço de investigações a Isabel dos Santos

Debate: o que aconteceu com o dinheiro que sumiu de Angola? (em inglês) 

Decreto brasileiro de proteção a denunciantes

Plataforma Latam Leaks

Conecte-se com a gente!

Download do podcast

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

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

Tax justice and the coronavirus

Update: the second article in this series is entitled Could the wealth in tax havens help us pay for the Coronavirus response?

The Covid-19 Coronavirus pandemic is, at least on available evidence, striking rich western countries the hardest so far. Lower-income countries will be hit hard too, however: massive capital flight is already underway. And in all societies, as ever, the impacts fall hardest on those who are already marginalised and vulnerable.

But for now, rich countries have an abundance of resources to feed, house and care for all their citizens adequately. The question of how those resources are shared out is a political choice. Tax plays an important role.

Western nations are now in conditions like wartime. (The world is in a kind of war, against an unseen enemy.) Today’s blogger, based in Berlin, isn’t allowed in the streets with more than one companion, without documents to show they’re a family member. In Britain, a standard-bearer for “free” [in reality, rigged] markets, the first nationalisations have begun, and a national lockdown has (belatedly) been ordered. Italian mayors are threatening “to send the police over, with flamethrowers” to people breaking curfew. As workers stay at home to avoid contagion, a shutdown threatens massive job losses: perhaps a fifth of all U.S. workers, on one estimate. A huge global economic crisis looms. And this won’t go away soon.

Governments and societies face colossal economic costs now, as they are confronted by millions of workers losing their jobs and millions of businesses going broke. Old economic orthodoxies are toppling, one by one.

Business as usual is over.

How will societies and economies deal with these costs? First, by accepting that when millions of people stop work, overall economic output must fall. The next question is, who in society will bear the burden, where will they be, and how and when will they bear it? Again, these will be political choices. We can, we must, influence those choices.

Second, governments will massively, suddenly, have to boost public spending: if they don’t, there will be riots. Denmark, for instance, has said it will pay 75 percent of the salaries of employees who would otherwise be fired. Others are following suit with a raft of measures including cash transfers for individuals and support for businesses.

How will states “pay for” this? There are two main ways.

The first, most important, will be through borrowing. There is no inflation on the horizon, interest rates are low and in some cases negative, and financial markets have been eating up government debt without so much as a burp. If there’s a time to borrow, it’s now. And it is already happening. In a move that would have been astonishing just a few weeks ago, Germany has suddenly punched through its long-held (and idiotic) “Black Zero” policies to balance its budgets and not take on new debt. As the Financial Times reports:

The time has come for governments to spend. To protect vulnerable people, broad populations, essential workers, institutions, and the economy. Even the financial sector, where its collapse could pose a threat.

But we are generally a revenue-side organisation, not a spending-side organisation, so we’ll focus on the second way governments can “pay for” the massively expensive new measures coming in, which is tax. Although tax receipts don’t need to match spending, they do still need to be collected, where possible.

Tax systems play another crucial role in that economic question at the heart of this crisis: they help governments choose how the pain of lost output is shared out.

And with all the old ideological orthodoxies are suddenly up in the air, and despite the special interests clamouring for yet more tax breaks, NOW is the time to push hard for tax justice.

In short, tax justice campaigners should be calling for a strong fiscal stimulus which will lead to poor and vulnerable people paying less and rich people and strong, profitable corporations paying more.

Lessons from history

History provides some grounds for optimism as to what comes next. In times of war, governments have tended to make wealthier sections of the population and large businesses carry a larger share of the burden than before. In the First World War, for instance, both Britain and the United States imposed an 80 percent tax rate on excess corporate profits (above an 8% annual return,) and the top income tax rate on the highest earners rose from 15 percent to 77 percent. Something similar happened in the Second War, when top income tax rates rose to 94 percent. In the United Kindgom, the top income tax rate rose to an even more eye-watering 99.25%. Similar tax measures were adopted by other countries at war.

Over time, from one war to the next, taxes have assumed a growing share of the revenue mix, as this graph shows.

Source: Goldin, C. (1980). War. In G. Porter (Ed.),Encyclopedia of American economic history: Studies of the principal move-ments and ideas(pp. 935–957). New York: Charles Scribner’s Sons. Via FT.

Taxes were preferred above borrowing or other measures at times when support for wars was high. Famed economist John Maynard Keynes produced a radical plan for funding the UK’s involvement in WW2 which involved a sharply progressive surtax on high incomes and personal wealth, and he was keen to shift as much of the cost of financing the war effort onto richer people.

It is worth adding that very high rates persisted for at least a couple of decades after the Second World War’s end, accompanied by a raft of other progressive policies and the highest and most broad-based economic growth in world history, before or since. People who have been until recently gloomy about the prospects of an increasingly entrenched, lawless, powerful and tax-free global oligarchy may have grounds for optimism.

Is this time different?

There is a big difference between now and the time of World Wars, however. Back then, employment was running at full tilt, with men heading off to fight and women flooding into the factories. Right now, the opposite is happening: workers are heading home, and millions of businesses face bankruptcy.

So is this the time to be raising taxes? Should we not be cutting taxes instead?

The simple answer is: it is time to be smart about this. Taxes should be cut to help those worst affected — but for those companies that are still making profits, and the wealthiest sections of society, they should now be increased significantly – even massively. Public appetite for this was already in place before the crisis.

But let’s start with all-important measures to support collapsing businesses and workers’ incomes. Women will pay a heavy price, since they will disproportionately be working on the health frontlines, and in the social care sectors, while also caring for children ejected from schools, and the elderly.

The most important measures to help are on the spending side and on other policy measures, such as enforced rent or mortgage delays or freezes or forgiveness. These are beyond the scope of this blog.

On the tax side, there are many ways to support people and struggling businesses. For instance, targeted reductions to value added taxes, focused on basic necessities, would help ordinary people, as would property taxes. Taxes on payrolls, business rates (on real estate) and other taxes which add to the costs of doing business, should be judiciously cut, at least for those businesses facing hardship due to Covid-19. Measures such as “accelerated depreciation” (to allow affected businesses to offset investment costs against tax more quickly) will help shore up investment, though great care is required so they don’t become expensive and pointless loopholes.

But in other areas, taxes should be raised – and raised A LOT.

Tax profitable corporations more

Take corporate income taxes, for instance. These are levied on profits. If companies are struggling, they won’t be making profits, so they won’t pay this tax. So corporate income tax rates can be increased right now, because they will only strike profitable businesses. (There are timing issues: a teetering company could be bankrupted by a crippling tax bill from a previous quarter, but these are details to be managed skilfully.)

Some businesses will do very well out of this catastrophe. Lots of people locked down at home are now turning to Zoom, for instance, to communicate with loved ones. Its share price is now several times what it was in early January.

Source: screenshot (24 March 2020, 13h24)

Likewise, many bricks-and-mortar shops (the ones that hadn’t already been slaughtered by the Amazon steamroller) are now facing temporary or permanent closure – and the American behemoth is ready to hoover up the pieces. Antitrust authorities are nowhere (as we recently remarked.) Let corporate tax pick up some of the slack.

And from a justice perspective, we have to agree with Pope Francis.

Those who do not pay taxes do not only commit a felony but also a crime: if there are not enough hospital beds and artificial respirators, it is also their fault.”

It is not only just and right that the wealthiest people and profitable corporations pay, but if they are still wealthy or still profitable, they also have a greater ability to pay.

So let’s not mess around here. In recent years mainstream governments have been bickering over whether corporate taxes should be at 25 percent, or 20 percent, or 18 percent. All that needs to go out of the window now.

Let’s now start to talk about levying excess corporate income tax rates dramatically high. Let’s start with a 50 percent rate, and start thinking about 75 percent on excess profits, above, say, a five percent hurdle rate. This is way out there on past consensus, but who knows where we’ll be in five years’ time – or in a few months?. (Update, March 27. Top US tax expert Reuven Avi-Yonah and economist Gabriel Zucman echo our call for an excess profits tax.)

This protects the weak, and gets the strong to support the weak.

Barely profitable firms that aren’t making excess profits would pay nothing: it’s those hedge funds profiting from currency collapses, tech firms eating distressed companies’ lunches, or private equity firms buying distressed assets cheaply and financially engineering them for profit – which can and must now pay their share.

Obviously, different countries, and different sectors, face different conditions. But what’s most important now is to start to shift the “Overton Window” – the realm of what is politically possible and what the public is willingly to accept – firmly in the direction of tax justice. Make no mistake: there are powerful forces that want to use the opportunity of this crisis to push exactly in the other direction.

Tax rich people more

Income tax is another flexible mechanism to tax different segments of society at different rates. Under a healthy progressive tax system, the first portion of an individual’s income (say, from 0 to $10,000 per year) isn’t taxed at all; the next portion (say, $10-20,000) is taxed at a low rate; the next portion, let’s say $20-50,000, is taxed at a higher rate, and then above a certain income level, the top rate is applied. In rich countries, that top rate is often of the order of 40-50 percent.

Remember, though, that the top rate has historically been as high as 99.25 percent. Now is a time to raise this rate a long way. It won’t hurt people in the lower tax brackets – if it means more public spending on hospitals, say, it will help them.

How high should they go? Well, there’s research suggesting that the revenue-maximising rate in the United States is somewhere like 75 percent. So let’s start shifting the Overton Window, and push our governments to aim in this direction. And let’s beef this up with wealth taxes, land value taxes, and other progressive taxes. If you’re wealthy, you can afford these.

Tighten up

People will of course shriek at these proposals. High tax rates will discourage investment, they will cry. Clever rich folks will run away with their money to Geneva or Hong Kong or Dubai, where they can get ‘friendlier’ tax rates. Or corporations and rich folk will get busy with their tax advisers, to use offshore trusts and many other subterfuges to escape paying their fair share. It’s like a balloon, they cry: if you squeeze in one place, it will just displace somewhere else, but the volume will remain the same.

Despair! The poor must pay!

Not so. As we and many others have shown many times, high corporate tax rates may affect corporate profit-shuffling, but they do not generally discourage the kinds of investment that healthy economies need. (They do, however, tend to discourage more predatory forms of investment, which is another benefit.)

Corporations say they need corporate tax cuts to invest, in the same way that my children say they need ice cream. And do not buy the old argument that corporations and rich people will stop avoiding tax or invest more if only you cut their effective tax rates. As a recent book explains:

More on all this soon.

No, the answer isn’t to kowtow and appease mobile capital and rich people. The time has come to start tightening up. Crack down properly, to stem leakage, to reduce loopholes, increase transparency, and so on. It’s not like a balloon: it’s more like a sponge. When you squeeze, you may get some displacement – but you’ll also wring out a bunch of water too.

So a slighty better slogan is this: tax the poor and fragile and vulnerable less, tax the rich and profitable more, and tighten up to make sure they pay.

We have been working for years on a whole tax justice toolkit, to achieve just this. It includes

And plenty more. The main point is that the time has come to get much more ambitious about all of these.

This blog is about the role of tax systems in the Covid-19 crisis. We will follow it with a series of others: about the role of tax havens, the role of bailouts and subsidies, and the role of a race to the bottom on regulation, tax and other areas. And more. Please watch this space.

Climate crisis, transition and tax justice: the Tax Justice Network podcast, March 2020

In our monthly podcast, the Taxcast: How many more signs do we need to tell us we must urgently reform our economies, keep essential services out of private hands and transition away from fossil fuels? As the world buckles up for a different kind of crisis tackling the Coronavirus, we look at how tax justice is key to all economic reform in the public interest. Solving the climate crisis – any crisis – is impossible without it. Never miss an epsiode! You can subscribe to the Taxcast via email by contacting the Taxcast producer on naomi [at] taxjustice.net

We speak to Dr Gail Bradbrook, co-founder of Extinction Rebellion on a vision of hope, John Christensen of the Tax Justice Network. We also bring you the voices of tax office workers from their protest outside the British Parliament against the government’s closing of tax offices, shedding up to 50,000 jobs (video below). Unfortunately this is a worldwide trend. Produced and presented by Naomi Fowler.

The majority of the public now understand that there is an emergency. But the other bit of it we haven’t done strongly enough yet is to hold out the vision that change is possible. We know that tax is a really key issue.”

~ Dr Gail Bradbrook, co-founder of Extinction Rebellion

We’re really needed more than ever now especially in the light of the coronavirus, we’ll need all the taxes we can get for all the extra care that people will need.”

“500 offices being closed, 50,000 staff being lost and yet you want the biggest budget to spend the most money, nobody’s going to be around to collect it.”

“We’re the best bargain that you’ll ever get, the money that we cost compared to the money that we raise for hospitals, for schools, for infrastructure, for the roads, we’re a great bargain.”

~ Tax office workers, UK Parliament protest

If you include all the health impacts of fossil fuel production and the damage caused by extreme climate events linked to global warming, the floods and the forest fires and the increased incidence of drought and so on, and if you bring all of those costs into the equation, the true cost of subsidies to the fossil fuel sector runs to an astonishing 5.2 trillion US dollars every year. Or get this, that’s 10 million US dollars every minute of every day of the year.”

~ John Christensen, Tax Justice Network

Further reading:

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Investors demand OECD tax transparency

Investors responsible for trillions of dollars of assets have called on the OECD to ensure that the country by country reporting of multinational companies is made public. With leading experts, standard setters and civil society groups fully in agreement, the only remaining opposition to this most basic transparency measure comes from multinationals and industry groups that benefit from opacity that allows them to hide the extent of profit shifting, and the professional services firms that advise them.

In 2013, the G20 group of countries mandated the OECD to produce a country by country reporting standard. This marked a crucial turning point in the work of tax justice campaigners, some ten years after the Tax Justice Network published the first model accounting standard. The standard came out in 2015, with a commitment to review it in 2020. A call for submissions closed on 6 March, and in a world not facing a global health crisis, this week would have seen the OECD host a public meeting to discuss the different views. While that meeting has been cancelled due to coronavirus concerns, the submissions have been published and we can now present a summary of the findings.

As context, it’s worth noting that there was criticism from all sides of the consultation itself – and in particular, of the very short window for submissions. And while some objected to the length and detail of the consultation document because it identifies too many possibilities for the standard to change, others highlighted the complete absence of provisions to address many of the larger questions. Despite this, the results are clear – as are the divisions.

Key findings

There were 80 submissions to the OECD review. Of those, half came from multinationals such as Astra Zeneca and InterContinental Hotels, and industry groups including the French Banking Federation and US Chamber of Commerce. A further 16 came from professional services firms including the big four accounting firms and various law firms and others. The remaining submissions came from investors, academics, individuals, labour organisations and other civil society groups – oh, and 33 US Senators and members of Congress*, including erstwhile Democratic presidential candidates Elizabeth Warren, Bernie Sanders and Cory Booker.

In addition to the submission from UN PRI (Principles of Responsible Investment) group, whose members have some $90 trillion under management, other investor submissions included Norges Bank, with $1 trillion, Australia’s HESTA (US$37 billion), and a joint submission from US groups with assets conservatively stated at $847 billion.

As the figure below shows, there was a decisive split in the responses to the consultation. On three key points, there was near perfect alignment between investors, experts and civil society – a result that is all the more striking in light of the fact that the OECD’s weighty consultation document did not even mention the first two.

1. Make the data public

[W]e believe it is time that members of the OECD Inclusive Framework move at all deliberate speed towards full publication of large companies’ CbC reporting to provide us and other investors the information we need to make sound decisions when evaluating a corporation’s ongoing profitability and financial risk on a country by country basis. This is an important strategic and policy matter for investors interested in long-term value creation.

– Submission to OECD: Group of investors representing investments totaling $847 billion.

Multinationals and their professional services firms used to argue that compliance costs made country by country reporting unthinkable. When the International Accounting Standards Board convened a meeting on the issue a little before the global financial crisis, a representative from one of the big four accounting firms claimed that it could double the cost of auditing. But since the G20 directed the OECD to create a standard, and the world failed to stop, that argument has been largely replaced by another.

Today, we see entirely voluntary reporting of country by country data, typically to the OECD standard or better, from major multinationals in a variety of sectors – from Vodafone to Shell, for example, and from Anglo American to NN Group.

Some multinationals, however, have simply switched out the compliance cost argument for others. Some have told civil society activists that while they are not necessarily opposed to publication of their country by country reporting in principle, there are still costs to doing so and these would not be justified if the data is not going to be well used. There are so many calls for sustainability reporting, they have said, among which they have to prioritise, that if investors are not asking for the data to be available then it won’t happen.

With the comprehensive response of investors to this consultation , that argument too has been eliminated. Investor submissions show they are increasingly aware of the evidence that shows they bear the risks of companies engineering lower effective tax rates, but receive no compensating return. At the same time, submissions from the labour movement reflect their clarity that the processes that hide profits from tax authorities are also used, all too often, to skew the starting point for wage bargaining. Broader civil society concerns are fully aligned with both, on the basis that public country by country reporting is crucial for the accountability of both tax authorities and major corporate taxpayers. Evidence that tax payments have increased by around ten per cent where the measure is already in place for EU banks and financial institutions confirms the potential scale of effects.

It should be clear to policymakers worldwide that the tipping point for public country by country reporting has been passed: the alignment in favour of this basic transparency measure is broad indeed.

2. Use the Global Reporting Initiative standard

Reporting standards should be aligned with the Global Reporting Initiative (GRI) model

GRI sets reporting standards used by 78 percent of companies in the Dow Jones Industrial Average and 75 percent of NASDAQ 250 companies […]. GRI developed this standard in consultation with multinational corporations, accounting firms, academics, and other stakeholders in addition to investors. Broadly speaking, aligning the various country by country standards would ease record-keeping burdens for businesses and present a clearer picture to users of these reports.

– Submission to OECD: 13 US Senators including Elizabeth Warren and Bernie Sanders, and 20 members of Congress.*

If support for public country by country reporting – despite its absence from the consultation document – is striking, it also follows many years of campaigning and awareness-raising. But the degree of support for the GRI standard, which was only launched at the London Stock Exchange (video available here) in January this year, reflects the remarkable level of backing that is already in place from the various stakeholder groups including investors.

Fiona Reynolds, CEO of PRI (Principles for Responsible Investment), the global investor network with over 2,600 signatories who collectively manage in excess of U$89 trillion, said: “Tax avoidance is a leading driver of inequality and as such a responsible approach to tax by business is essential. The PRI has been leading efforts to drive more meaningful corporate disclosure. GRI’s new Tax Standard marks an evolution in tax transparency and provides a much-needed and ambitious framework for corporate tax reporting.”

The GRI standard is the product of wide consultation over two years, and many, in-depth and occasionally heated but always respectful discussions in a technical committee comprising individual experts from reporting companies, investors, accountants, labour organisations, academia and civil society. That process has led to a standard which addresses, flaw by flaw, all of the technical shortcomings of the OECD standard – including but not limited to three key points raised by multiple submissions:

Convergence to the GRI standard in this review period would allow the OECD to piggyback on that work, and at the same time to eliminate for participating companies the costs of complying with multiple standards.

An interesting pointer on business expectations was provided by the World Economic Forum in January. Just weeks after the GRI standard launched, the World Economic Forum International Business Council (IBC) launched a report at Davos which “proposes a common, core set of metrics and recommended disclosures that IBC members could use to align their mainstream reporting and, in so doing, reduce fragmentation and encourage faster progress towards a systemic solution, perhaps to include a generally accepted international accounting standard. To the maximum extent practicable, the report incorporates well‑established metrics and disclosures for the express purpose of building upon the extensive and rigorous work that has already been done by those who have developed the existing standards. The objective is to amplify those standards and more fully harness their synergies rather than create a new standard altogether.”

The IBC report states, exceptionally, that it was “Prepared in collaboration with Deloitte, EY, KPMG and PwC”. While the big four’s (separate) submissions to the OECD review largely duck the issue, the IBC identifies GRI country by country reporting as a ‘core metric’.

The OECD should acknowledge the breadth of support for the GRI standard, and the fact it addresses in detail the technical flaws in the OECD standard, and make the decision now to converge.

3. Extend the coverage

The current threshold of having country by country reports applying to MNEs with a turnover minimum of EUR 750 million should be revised… While the objective of this is to include the majority of tax revenue whilst keeping burden on companies limited, what is ignored is that this high threshold is inappropriate for many smaller economies. In smaller economies, multinational companies with a much lower turnover are responsible for larger shares of economic activity and large
shares of tax liabilities. The OECD itself suggests that 85-90% of the world’s multinational corporations do not meet the threshold… there is a need to consider a threshold which would allow coverage of the highest percentage of MNEs.

– Submission to OECD: ActionAid International.

The remaining area of common ground among investors and civil society groups is on the need to extend the coverage of the OECD standard – specifically, to abolish or greatly reduce the revenue threshold, so that many more multinationals are required to provide this basic transparency.

Here, many submissions cited existing US, EU or Australian thresholds for ‘large’ enterprises – typically in the range of around $20 million – $100 million for turnover. But other submissions noted that this would still exclude many businesses with important operations in lower-income countries, and that a threshold of just a few million would be much more appropriate.

An approach consistent with the GRI standard would be to require such reporting where the underlying substance (i.e. corporate income tax in this case) is material to the business. Given existing tax rates and an accounting materiality threshold set at 5%, this brings all businesses with any significant second (or further) country operations into scope. The effect is to shift the ‘threshold’ from one of scale, to one of substance – so the question is whether a business operates multinationally, rather than with what revenue it does so.

‘Too soon’…

[We] believe it is too soon after the introduction of CbC reporting (“CbCR”) to implement major changes…

– Submission to the OECD: Business at the OECD (BIAC).

It is too soon to be able to evaluate how useful the information is and how effective it is as a risk assessment tool.

– Submission to the OECD: EY.

Lastly, we can consider the positions of those who, broadly, have opposed improvements to the OECD standard (some of whom were also involved in lobbying to introduce, from the outset, some of the weaknesses now widely recognised). There are many businesses and industry groups, to say nothing of staff at the big four accounting firms, that are supportive of tax transparency in broad terms (for example, the B Team), and of public country by country reporting in particular (not least, the multinationals named above; and the big four contributors to the World Economic Forum report).

As none of these groups made submissions to the OECD review, however, the overall position of submitting multinationals, professional services firms and industry groups, was largely negative. In addition to outright opposition to transparency, those represented largely focused on the detailed, technical questions posed by the OECD. There is a more detailed analysis to be done of these responses, which show considerable variation. But for the present purposes of assessing the main thrust, it is notable how often a particular response appears across the groups.

The single counter-argument around which oppositional submissions have coalesced is the idea that 2020 is too soon to make changes to a standard mandated in 2013 and finalised in 2015, for use thereafter. Indeed, the argument in practice relates to 2021 which is the earliest that any changes could come into force. It is tempting to conclude that this is the final evolution of the counter-arguments – and a pretty thin one at that.

Tipping point

The OECD review of its standard may well turn out to be the tipping point towards public, country by country reporting of high quality and broad coverage. While the institution itself faces heavy lobbying against taking these steps, the sheer weight of investor and other support seen in the public submissions to the review may turn out to be enough to move policymakers at the EU and elsewhere, to leapfrog the OECD and mandate public reporting.

It would be in the interests of both reporters and users of the data if there was clear convergence to the GRI standard, not only of the OECD standard but also the other existing standards such as the CRD IV requirement that applies to banks and other financial institutions in the EU already. The extractive sector would need to retain their own standards in a number of areas specific to their activities, including for project-level reporting, resource values and for other payments to governments; but would also benefit from converging to the GRI standard in the relevant areas.

The year 2023 will mark two decades since both the formal establishment of Tax Justice Network, and the publication of the first draft accounting standard for country by country reporting. Will we have full, public data by then? Watch this space.

* This article was updated on 20 March 2020 to reflect that the submission published as ’33 US Senators.pdf’ is signed by 13 US Senators and 20 members of Congress. Thanks @danielbunn!

Guest Blog: How to Tackle Audit Failures

Auditors have been described as gatekeepers of capitalism, yet there is widespread concern that the current Coronavirus pandemic, and the global recession that will inevitably accompany it, reveals a pattern of audit failures similar to recent high-profile corporate failures which surfaced in the past two years. In this guest blog, researchers Adam Leaver, Leonard Seabrooke, Saila Stausholm, and Duncan Wigan discuss the findings of their new research paper, published today.

Moments of financial stress have historically revealed weaknesses in our systems of accumulation built up over time. Whilst it is well-recognised that central banks played a defining role in steadying markets after the 2008 crisis, the growing significance of the Big Four accounting firms, and the fair value accounting system they work within, is perhaps less well understood as a feature that has shaped our economy since the crash. A string of recent high-profile corporate failures in the UK – including Carillion, Thomas Cook and Patisserie Valerie – have already revealed the parlous state of auditing at many large corporations. Now, as we enter this new period of financial uncertainty amid the rapidly spreading Coronavirus pandemic, we may soon get a better idea of just how weak our systems of financial reporting have been. As U.S. billionaire investor Warren Buffet noted, “you only find out who is swimming naked when the tide goes out”.

Our new report ‘Auditing with Accountability: Shrinking the Opportunity Spaces for Audit Failure,’ released today, explores the causes of the recent high-profile audit failures and makes recommendations for reforming the sector.

It argues, if accounting creates, rather than merely reflects, financial realities, the job of auditing is to verify that financial statements produced by a company’s management present a “true and fair view” of a company or group’s assets, liabilities, financial position and profit or loss (UK Companies Act 2006, section 393). Ensuring that mission is adhered to, is not just a concern for company shareholders. Auditing performs a social function: we are all affected when that mission fails. Confidence in companies disappears, banks will not lend, shareholders will not invest, workers will not commit their labour, suppliers will not transact and consumers will not buy. If audit failures lead to corporate failure, the state may step in to provide support for the company, or the Pension Protection Fund may pick up the tab for a collapsing company’s pension fund. So audit failures are always also failures of public accountability.

The British government commissioned two independent reviews on this: the Kingman Review, to look at regulation and the Brydon Review to examine the effectiveness of audit.  At the same time, the Competition and Markets Authority (CMA) has examined competition and resilience in the audit sector; and the Business, Energy and Industrial Strategy Committee’s analysis, ‘The Future of Audit’ fed into these reports.

These reports raise serious questions about audit culture, the problems of market concentration in auditing services and conflicts of interest inside the Big Four accounting firms (BEIS 2018, 2019; Competition & Markets Authority 2019 (CMA); Kingman Review (2019). But our report begins from a different vantage point: that these failures indicate a public ‘accountability gap’: a shortfall between what the wider public might legitimately expect auditors to do, and what the audit process currently delivers.

We argue that this accountability gap is the product of economic, cultural, and regulatory arrangements which create ‘opportunity spaces’ inside which audit failures take place[i].  Specifically, for the UK we argue that the large opportunity spaces for audit failure emerge from the interaction of:

These spaces provide senior managers with the incentive and the room for manoeuvre to produce optimistic valuations, while the proceduralism of IFRS rules creates ambiguity for auditors as to where the rules end and where judgement begins, and this reduces their incentives to challenge.

In short, we see the post-crisis period in terms of a withering of the countervailing regulatory, legal and social forces that should act as a check on bad accounting practice. Many companies do act in good faith and will strive to post ‘true and fair’ accounts. But audit failures mean we cannot be sure which do, and which don’t.  

Our report asks whether the problems are caused by the Big Four and whether they have shaped the culture of auditing through their dominance, or whether the Big Four has emerged from, and merely institutionalised, a longer-standing culture that preceded them.

We argue that the cultures and practices long predate the current environment where the Big Four dominate. So a focus just on competition, while ignoring other reform options, would ignore the documented experiences when there were five or even eight large audit firms. For us, the original problems are cultural and institutional.

It is quite possible for different cultures to co-exist within the same organisation without one necessarily overcoming the other. But consulting is often the driver of profit within the Big Four, and we argue that the institutional logic of consulting is incompatible with those of auditing.  This tension leaves auditors compromised, when they should instead feel free to exercise scepticism fearlessly.  This may be made worse by the Big Four partnership system, which can promote non-audit services in ways that diminish the status and role of audit.

Historical efforts to reform the audit industry have, however, disappointed because the very process of audit reform has been captured by the industry – they possess exclusive, technical knowledge to assert ‘what works’ in a context where audit is of low political interest amongst the general public.

So our report recommends:

Read the full report here

[i] We define an opportunity space as: ‘the room for manoeuvre within a valuation process, where opportunities to overstate accounting items are taken because auditor judgement is compromised or constrained, leading to information asymmetries between the acting party or parties and those seeking accounting accuracy and accountability.’

Financing Climate Justice

As the climate crisis comes into ever sharper focus the question of how we pay for a just transition takes on ever greater urgency. In this, the first of a two-part special edition of Tax Justice Focus, guest edited by TJN Senior Adviser James Henry, we have brought together key policy proposals to make what is now urgently necessary possible.

This two-part collection of essays is the first in a series of TJN initiatives to bring the global struggles for tax justice, financial transparency, and climate justice closer together, explore common problems and solutions, and help each other to succeed.

Many people think that economic justice is a nice add-on to the climate fight. It isn’t. Without economic justice the fight to tackle the climate crisis will fail. That is because if the great burden of this transition is placed on the shoulders of middle-income and lower-income groups (and especially if the risks of an economically unjust transition materialise, as our second edition will show,) then majorities will not only start to oppose the changes — as the Gilets Jaunes protests in France have shown us — but they will also become prey to fake news and demagogues who seek to overturn the climate justice movement. Tax justice, economic justice, and climate justice must be joined at the hip.

This edition contains five essays, to be followed by four in the next edition.

In the first essay in this edition Laura Merrill, a renowned expert on fossil fuel subsidies lays out the sheer scale of ongoing public sector support for fossil fuels, but also sets out how governments are successfully moving away from this and freeing up some funds to combat climate change — while also improving people’s lives in other ways.

The next article, by Rod Campbell of the Australia Institute, unpicks the bankruptcy of the fossil fuel lobby’s rhetoric in a country that has only recently experienced terrible bushfires.

Next, U.S. economist Professor James K. Boyce, argues in the following article that governments must urgently deploy a powerful and ingenious mechanism to restrict carbon use drastically — and in a politically popular, and just way. The answer is to auction a restricted set of carbon permits – more restricted each year – and redistribute the proceeds equally to all citizens as a universal dividend. Those who use less carbon — which means, predominantly, those in lower-income groups — will receive a net income from the scheme. Eventually the scheme will wither away, as the economy converts rapidly to green energy production, storage, transmission and use. 

Then Gail Bradbrook, a founder of the Extinction Rebellion, reflects on the movement’s (enormous) successes and (lesser) failures, and points to how activism will proceed. (Naomi Fowler’s longer version of the Bradbrook interview will be aired in our March 2020 Taxcast.)

Finally, Richard Murphy sets out new accounting proposals to shift the risks being created by large corporations to where they belong – onto balance sheets, so that investors can take a clear and reasoned view of the long-term profitability of companies whose activities harm the climate, and whose business models will now happily come under extreme pressure.

Getting these solutions adopted in a timeframe equal to the urgency of the climate crisis will require us to figure out how to tackle and defeat the shared enemies of both the environmental and tax justice movements: the world’s largest, most influential public and private fossil fuels producers, public utilities, oil and LNG shipping companies, pipeline companies, and agri-businesses — as well as, as the next edition will show the myriad of giant banks, pension funds, hedge funds, other corporate investors, law firms, and accounting firms that stand behind them: tackling the climate emergency will require tackling what academics call financialisation, and what we at TJN call the Finance Curse.

Download and read the full edition of this round of essays here.

The next edition, due on March 26th, will feature articles by

And finally, to coincide with the launch of this new TJN series, John Christensen gave a public talk to a Global Justice Now meeting in Reading on 11th March. A copy of the powerpoint presentation John used for this talk is available here.

Tax Justice Network Spanish language monthly podcast: ¿Quienes son los más responsables del secreto financiero mundial?

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 hablamos de los resultados del Índice de Secreto Financiero 2020:

INVITADOS:

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: http://traffic.libsyn.com/j-impositiva/JI_marzo_20i.mp3

Subscribase a nuestro RSS feed: http://j_impositiva.libsyn.com/rss

O envien un correo electronico a Naomi [@] taxjustice.net para ser incorporado/a a nuestra lista de suscriptores.

Sigannos por twitter en http://www.twitter.com/J_ImPositiva

Estamos tambien en facebook: https://www.facebook.com/Justicia-ImPositiva-1464800660510982/

Make Taxes Work For Women

Great that you remembered 8 March is International Women’s Day!

The Global Alliance for Tax Justice (GATJ) has too! The Global Alliance and its members around the world have been organising and today begin the Global Days of Action on #TaxJustice for #WomensRights, 8-20 March 2020!

Here’s what’s happening in 2020 and how you can join the campaign to make tax justice work for women’s rights: https://www.globaltaxjustice.org/en/action/make-taxes-work-for-women

Rev Paul Nicholson: a lifelong justice campaigner R.I.P.

We are sad to hear of the death of the Reverend Paul Nicholson.

Paul was a lifelong campaigner for social and economic justice, always fighting on behalf of vulnerable people, and happy to use his extensive knowledge and experience to push back against oppression.

This blogger had the good fortune to meet Paul on several occasions, including during his epic fight for tax justice against the council in the London Borough of Haringey, when he was prepared to go to jail in the face of what he considered (rightly, in my opinion) a flagrant abuse of power.

Paul was selfless, always supportive, and deeply critical of greed and unbridled corruption. He saw his mission as one of protecting people from the destructive forces unleashed by neoliberalism. His commitment to this mission has been a great source of inspiration to everyone who met him.

Lessons learned from organising our first virtual conference

In December 2019, the Tax Justice Network held its first virtual conference, bringing together over 150 people from around the world from Portland to Sydney. Offices, living rooms and libraries on different continents were connected into one virtual space where speakers from the OECD, G24, IMF, World Bank and ICRICT discussed leading proposals to reform the international tax system.

Following the conference, we have seen increased recognition of the necessity for such a platform, particularly as governments warn against holding large meetings amidst the Coronavirus outbreak, and organisations begin to take seriously their responsibility to reduce their carbon footprint in order to help tackle the climate crisis.

Our feedback paper and this blog detail some of the findings from our conference, including how to approach planning, the technology used and lessons learned. We hope that this will help other organisations to get to grips with the tools and knowledge needed to move virtual conferences into the mainstream.

Why host a virtual conference?

At the Tax Justice Network, we host a large-scale in-person conference once a year, bringing together hundreds of people to debate key issues on the tax justice agenda. While we recognise that this type of organising is necessary, in-person conferences are hugely time-intensive for our small team and have high overhead costs, leaving us with limited capacity to host essential debates and discussions.

On top of this, we are increasingly concerned about the climate crisis. While it ultimately falls to governments to respond in line with the scale of the calamity that we face, we are committed to making urgent efforts to reduce our carbon footprint. Following the conference, we published a blog estimating the carbon emissions averted by moving our conference online.

Another huge benefit of going virtual is the ability to increase the participation of both delegates and speakers. Removing expensive flights and hotels costs, as well the large time commitment needed to travel, meant that speakers could allocate just a couple of hours in their diary as opposed to an entire week. The demographics of delegates can also change dramatically when a conference is more accessible, and as virtual platforms are scalable, capacity limitations are removed, thereby opening the conference to a much wider global audience.

Below we provide some lessons learned for successful virtual conference planning.

Logistics and planning

Deciding on the date and timing of our conference was a challenge as we needed to be inclusive and give our audience the opportunity to connect from across the world. We settled on the time frame of 13:00 – 17:30 GMT, which meant an early start of 5.30am for participants on the US West coast, while some participants from Australia stayed up until 2.30am to join the conference.

Our session structure was driven by the content, which we split into two halves – the technical aspects of international tax reforms, followed by a wider debate on the political landscape. We opened both halves with keynotes and presentations to set the context of the discussion, followed by panel debates on each topic.

We had around seven weeks to plan our conference, as we wanted to fit in around international events and timelines for tax reforms. This was tight, especially given that it was our first time organising a virtual event, but it proved to be achievable for organising a one-day conference. We used Airtable, Zoom meetings and Slack for the bulk of our virtual planning.

Technology

After trialling many different platforms, we opted for a low-cost combination of Zoom conference call software to host the panel discussions, which were then streamed through OBS: Open Broadcaster Software to the Crowdcast platform.

Screenshot from the conference

This setup combined reliability and high-quality calls for the presentations and discussions with the user-friendly interface of the Crowdcast platform, which gives audience members the ability to setup a profile, chat, ask and upvote questions and navigate easily between conference sessions. Feedback on the technology was excellent, and almost all audience members were able to connect and view the conference without any issues – some even noted that they were able to see and hear the content more clearly than if they were at an in-person conference.

Screenshot from the conference

Whichever platform you choose, we found that testing the platform with each speaker in advance was essential for a smooth operation on the day, particularly as we had quite large panels and sessions that ran back-to-back, with just 5 or 10 minutes to gather everyone together in the ‘virtual green room’ beforehand. We had all speakers test microphones, webcams, internet connections and presentation sharing in advance of the conference, which was invaluable and meant that all of the speakers were prepared and on time for their sessions.

Session formats and hosting

Working within our limited time window of five hours, which allowed most parts of the globe to connect for at least some of the live conference (sorry Australia!), we broke our content down into three sessions – the opening keynote, a technical panel discussion, and a broader political keynote and discussion.

The host, our CEO Alex Cobham, opened the conference and advised participants in each session on the format and discussions ahead. The feedback on the sessions structure was generally positive, though the first session ran over slightly. To tackle this in future we will opt for briefer presentation sessions where possible so as to allow adequate time for Q&A, separate to panel discussions. The Crowdcast platform can be used to invite audience members on screen to pose questions to the presenter.

Improving networking channels

One commonly stated downside to virtual conferences is the lack of networking opportunities that come from hallway conversations at in-person conferences. To go some way towards addressing this challenge we used Slack channels to share materials with delegates in advance of the conference, with the intention of fostering discussions between staff and recipients and increasing the representation of ideas.

The channels were not used as fully as we had hoped, which we put down to our not dedicating enough resources to this in advance, and not promoting this as often as we should have to foster discussion. This is one area we will be investing further resources in next time around, with more engaging content such as Q&A sessions with speakers to enable debate beforehand. 

Other feedback and considerations

There was a consensus that we need to work harder to be more inclusive and represent all parties in the debate, and that we should partner with organisations that are often under-represented in international discussions, particularly those in the global south. In future conferences, we will secure key speakers for the debate earlier in the process, while also looking for ways to support audience members to access stable internet connections to participate in the debates.

What we would do differently next time

Finally, a few things we would do differently next time:

Read the full paper here, view the conference material here, or get in touch if you would like to share feedback or ideas at: [email protected].

Slander and failed advertising campaigns: how tax haven officials responded to the Financial Secrecy Index 2020

This year’s edition of the Financial Secrecy Index 2020 – our biennial ranking of the world’s biggest supplies of financial secrecy – has received more news coverage and global support than any previous editions of the index. With over 700 news articles and broadcast pieces published on the index in the past two weeks across 80 countries, it is clear that tackling financial secrecy has become an important issue to people around the world. More people are recognising the harmful impact rampant tax abuse by the ultra-rich and powerful has on their lives and want their governments to do something about it.

But perhaps, one of the best indicators of the success of the Financial Secrecy Index is the increasing hostility it receives from representatives of secrecy jurisdictions ranking high on the index. The first edition of the Financial Secrecy Index was published in 2009 so we at the Tax Justice Network have become familiar with the boilerplate responses from secrecy jurisdictions to our research. However, this year’s responses have been particularly aggressive: Luxembourg’s Finance Ministry called the index “misleading, if not often outright false”. We have been accused of making assumptions “without providing enough clear and credible evidence to support [our] analysis.” Cayman’s Ministry of Financial Services has said “TJN’s methodology remains flawed”. The UK’s Financial Secretary to the Treasury has said our research is “bogus”, except for the parts that criticise the legacy of the opposition party.

The most aggressive and coordinated attack on the Financial Secrecy Index, however, has unsurprisingly come from the Cayman government and Cayman Finance (the association of the financial services industry of the Cayman Islands). On the same day that our Financial Secrecy Index 2020 went live and ranked the British Overseas Territory, Cayman as the world’s biggest supplier of financial secrecy, the EU blacklisted Cayman as a non-cooperative jurisdiction. These two developments without a doubt have raised serious concerns for the territory and more broadly the rest of the UK’s network of secrecy jurisdictions (the UK spider’s web), particularly in this post-Brexit era.

After publishing a statement saying “TJN purposefully uses outdated, inaccurate and irrelevant information to manipulate the results of its report”, Cayman Finance then chased journalists who had published articles about the index to persuade them of the supposed inaccuracy of our research, and when that failed to yield success, resorted to promoting their tweets about the index.

As before, however, the attacks and responses have not identified any actual inaccuracies in the research or the calculations behind the index, and most are in the form of sweeping accusations. But in light of the coordinated efforts we’ve seen this year to target journalists and our Twitter followers with misinformation, and to misdirect scrutiny away from secrecy jurisdictions, we’ve prepared this blog to debunk some of the common claims used by secrecy jurisdictions to excuse their ranking on the index.

Claim 1: The Financial Secrecy Index unfairly targets or penalises jurisdictions with “successful” financial service industries.

The Financial Secrecy Index ranks countries not on how secretive their financial laws are, but on how much financial secrecy they supply to non-residents outside of the country looking to hide their finances from the rule of law. This is done by grading each country’s legal and financial system with a secrecy score out of 100 where a zero out of 100 is full transparency and a 100 out of 100 is full secrecy. The country’s secrecy score is then combined with the volume of financial activity conducted in the country by non-residents to calculate how much financial secrecy is supplied to the world by the country.

This means a highly secretive jurisdiction that provides little to no financial services to non-residents, like Samoa (ranked 86th), will rank below a moderately secretive jurisdiction that is a major world player, like Japan (ranked 7th). The point is that a highly secretive jurisdiction used by no one, does less damage than a moderately secretive jurisdiction used by many people around the world.

Secrecy jurisdictions often twist this analysis on its head, claiming they are being treated unfairly for “successfully” attracting money from non-residents. Because they can sometimes have lower secrecy scores than some of the jurisdictions which they rank above, they claim the index purposefully ignores more secretive jurisdictions and targets jurisdictions with bigger financial services industries. Cayman Finance made this claim in their statement, saying “the TJN’s weighting system penalises countries with successful financial services industries.” The Cayman government then repeated this claim verbatim in subsequent responses.

The UK’s Financial Secretary to the Treasury similarly argued that the reason the UK ranks so high on the index despite having a lower secrecy score than countries like Brunei and Liberia is due to a “fudge factor”. He argues, “In its list of 133 jurisdictions, we [the UK] supposedly come 12th in terms of offensiveness, yet near the bottom we see Brunei, Vanuatu and Liberia. Is anyone seriously suggesting that this country is a less robust and effectively transparent tax jurisdiction than those?”

These claims miss the central purpose of the Financial Secrecy Index’s ranking of countries by their supply of financial secrecy as opposed to the secrecy of their financial laws: All countries have a responsibility to safeguard against financial secrecy. The more financial activity a country seeks to pull in from other countries’ residents, the greater the responsibility that country has to make sure its financial sector is not abused by people to evade or avoid tax in other countries or to launder money they’ve obtained elsewhere through illegal means.

To illustrate the point, imagine if Samoa, which is ranked 86th and has a secrecy score of 75, and Luxembourg, which is ranked 6th and has a secrecy score of 55, became fully transparent. Which country’s change in secrecy would make a much bigger impact on the world? Hint: only one of these countries has had a global financial scandal named after them.

And anyway, if Luxembourg actually becomes fully transparent, it would get a secrecy score of zero, which would rank it at the bottom of our index, no matter how big its financial centre is. So the size of a financial centre is neither good nor bad, but when combined with the secrecy score, its level of responsibility for illicit financial flows and other global ills is well reflected.We want to see reforms in the big financial centres like Switzerland, Cayman, the US, Luxembourg, Singapore and Hong Kong: only if they became more transparent, there would be a significant impact in the fight against crime and illicit financial flows.

To answer the UK’s Financial Secretary to the Treasury directly: no, we are not ‘suggesting’ that the UK is less transparent than Vanuatu. In fact, the objectively verifiable criteria of the secrecy score provide powerful evidence that the UK is more transparent than Vanuatu – on which, well done. But the UK’s global importance means that its moderate secrecy poses a much, much higher risk to the world of facilitating tax abuse and other corruption. We would welcome improvements in Vanuatu’s secrecy; but the UK’s scale of activity brings with it great responsibility. And that is why the UK’s backsliding has seen it move up to 12th in the index, as a jurisdiction of very substantial concern.

Claim 2: We are complying with global standards on transparency.

Secrecy jurisdictions often claim in response to their ranking on the Financial Secrecy Index that they are complying with, or have committed to comply in the future with, international standards on transparency and are therefore transparent. In some cases, secrecy jurisdictions claim that the index does not take these standards into account. In other cases, secrecy jurisdictions, claim that their compliance with international standards is proof that the Financial Secrecy Index does not provide an accurate assessment.

For example, Luxembourg has claimed “…the analysis (and concomitant ranking) fails to take into account the fact that regulators and institutions of the Luxembourg financial centre are applying all the relevant EU and international standards. Luxembourg…has implemented and put in practice all applicable OECD and EU rules”. Gibraltar has similarly argued that it “complies with all global standards” and is “at the forefront of transparency and global standards in this field”. The Cayman government argued, “The Cayman Islands’s standards of transparency are based upon recognised global standards. Unfortunately, the TJN’s methodology remains flawed, as does their definition of regulatory standards, which are not recognised by any global standard setting body.”

The Financial Secrecy Index grades each country’s financial and legal system against 100 datapoints, which includes compliance with various international standards, such as the Financial Action Task Force (FATF) anti-money laundering recommendations, the Common Reporting Standard and the OECD’s Global Forum standard on access to banking information. However, many existing international standards are widely recognised as being far too weak to effectively safeguard against financial secrecy. As a result, complying with international standards is often not enough to ensure effective financial transparency in practice. The is one of the primary reasons why the OECD has been working recently on proposals to reform the century-old international tax system in place today.

Under current international tax rules, multinational corporations have been able to dodge an estimated $500 billion in tax every year and offshore jurisdictions have accrued huge concentrations of untaxed private wealth. So we often set a higher bar that reflects what truly effective safeguarding against financial secrecy looks like in practice.

Our higher standards have, over the years, helped drive better international standards. We have, since our founding, advocated a number of positions – such as automatic information exchange, country-by-country reporting, and beneficial ownership transparency – which were all called unrealistic and utopian when we first proposed them. Nonetheless, all of these have become emerging international standards in the past few years. Moreover, many countries and corporations are now voluntarily complying with our more robust transparency standards that have not become international standards yet, such as online public access to registries of beneficial ownership and local filing of country by country reports whenever the country cannot obtain it via automatic exchange of information.

Claim 3: Misquoting what the Financial Secrecy Index scores the country on

The Financial Secrecy Index evaluates countries against 20 indicators, each consisting of several sub-indicators, totaling over a hundred datapoints against which each country is scored. This data is made public on the Financial Secrecy Index website and is available to download in excel files. This data is also sent to each ranked jurisdiction ahead of the launch of the index to provide jurisdictions the opportunity to identify any inaccuracies in our research in advance.

Nonetheless, some secrecy jurisdiction do not engage with this data at all and falsely claim that the index has evaluated them on something completely different. In some cases, secrecy jurisdictions misquote our press releases. More often, secrecy jurisdictions quote the historical summaries that we provide on some countries’ financial sectors alongside our evaluation and ranking of those countries’ financial and legal system. These historical summaries are independent pieces which are not factored into countries’ ranking – they’re purely additional information we provide on the history and of the secrecy jurisdiction. Perplexingly, some secrecy jurisdictions ignore the index’s latest evaluation of their financial and legal systems and instead lambast our summary of their history for being “outdated”.

For example, Cayman Finance claims that both the 2018 and 2020 edition of the Financial Secrecy Index “cite a report by the U.S. Congress’ Joint Committee on Taxation to support an allegation that U.S. corporate “foreign earnings and profits” are shifted out of other countries and into Cayman. The report was published in 2010, making the information within it eight years old when TJN included it within the 2018 FSI and ten years old.” Neither edition of the index used this report to evaluate Cayman’s ranking. The report was mentioned in the historical summary we provided in 2018 on the jurisdiction, and since history doesn’t change, the report was mentioned in the historical summary in 2020.

A similar claim is made by Luxembourg in a Delano article on the Financial Secrecy Index 2020:

Luxembourg’s finance ministry said in a statement to Delano on 19 February: “…The research methodology, for its part, on which it is based seems to be flawed, as it fails to reflect the major progress that has been achieved over the last 5 years in the field of transparency in Luxembourg.”

Indeed, the TJN report cited Jean-Claude Juncker, Luxembourg’s prime minister until 2013, 13 times, but only mentioned Xavier Bettel, PM for the past 6 years, twice.

All of these references to prime ministers were made in our historical summary of Luxembourg. These references have nothing to do with Luxembourg’s ranking on the index. Not surprisingly, Luxembourg’s response to the index did not mention any of the data on which the country was actually evaluated and ranked.

One last claim made by the Cayman government, and on the face of it more specific, is this: “The Cayman Islands does not permit shell companies, bearer shares or anonymously numbered bank accounts that conceal ownership.” But this is again, a misdirection. The index does not claim that Cayman permits bearer shares or anonymous numbered bank accounts: see points 172, 157 and 158 on our interactive database (click on Cayman). Our secrecy scores are made up of 20 indicators, so achieving low secrecy in one doesn’t make the whole jurisdiction secrecy-free. And while there is no precise definition of a ‘shell company’, this is typically taken to relate to anonymous ownership and the Index shows that Cayman has much to improve in respect of legal ownership registration for companies.

Miscellaneous claims

Cayman Finance: “The TJN’s assessment criteria are geared toward countries with direct taxation systems. Our public revenue is collected upon transactions, principally on goods, but the TJN’s methodology doesn’t account for this. For example, one of its Key Financial Secrecy Indicators (KFSI) isn’t applied to jurisdictions with indirect taxation, and so TJN arbitrarily ascribes a full secrecy score to Cayman”

The index assesses more than 130 jurisdictions and is definitely not ‘geared’ specifically towards countries with direct taxation systems. However, a lack of direct taxation is relevant for the index, mostly because it all but guarantees lower transparency. Countries that don’t have income taxes have little interest in information to keep track of taxpayers.

Like United Arab Emirates, Bahamas, and other jurisdictions we assess, Cayman does not have a direct taxation system which means Cayman does not collect information on taxpayers like other countries do. For instance, Cayman doesn’t issue tax identification numbers (TINs) which is what most countries use to identify a specific taxpayer or company. This affects Cayman’s ability to fight against corruption and money laundering.

The absence of direct income tax is also reflected in the key indicator (KFSI9) that measures the publication of cross-border unilateral tax rulings. Since Cayman does not have a direct income tax, it does not issue unilateral tax rulings, which can be abused as a form of financial secrecy (and the LuxLeaks scandal revealed how extremely harmful these rulings can be).. Cayman claims that since it does not issue unilateral tax rulings, it should not be scored as fully secretive on this indicator. However, Cayman not issuing unilateral tax rulings does not mean that Cayman has opted for transparency, but rather that it is offering a more simple form of secrecy: the outright refusal to collect any tax information.

What is more, with the OECD’s Common Reporting Standard (CRS) for automatic exchange of information (See Annex A) Cayman has taken the “voluntary secrecy” option. That means that while Cayman does send information to other countries about many non-residents, it declines to receive information from abroad on its own residents. This gives a strong secrecy signal to individuals who pay a token investment (and fees) to become a Cayman-resident “Person of Independent Means”. This often referred to as a “Golden Visa”, which gives individuals a fake residency in a country which they can use to open bank accounts in the country. When information is collected on the accounts of golden-visa holders by more transparent countries, the information is sent to the individual’s fake resident country instead of their true country of residency, where they really should be paying taxes. For golden-visa holders “resident” in Cayman, the jurisdiction under voluntary secrecy, declines to receive the information sent by more transparent countries.

 Another key indicator which reflects the absence of direct income tax is KFSI 14 on “tax court secrecy.” Cayman argues it should not have received ‘not applicable’ (equal to 100% secrecy score in this case) only because it has no direct income tax and therefore does not have these types of tax court proceedings.  Naturally, no one needs to go to a tax court to ask for a reduction of taxes owed, if they don’t pay tax anyway but this is definitely not an indication for being transparent. As we explained above, a lack of direct taxation guarantees lower financial transparency, and this is exactly what our index attempts to measure.

The key point, as discussed under ‘Claim 1’ above, is that jurisdictions have a responsibility for the impact of their secrecy on the tax abuse and other forms of corruption that they facilitate in other countries. For Cayman to claim that it does not need a certain measure because of its own tax system is irrelevant, if the effect of that system is to promote abuse elsewhere. Cayman remains responsible for the secrecy it sells.

Despite the hostility directed by representatives of secrecy jurisdictions towards the Financial Secrecy Index 2020, they have been unable to muster any factually-based criticisms of the index. Instead, their responses have mostly fallen under the three types of claims debunked above. Perhaps this in itself is most revealing of all.

The Financial Secrecy Index 2020 has, as of the time of writing this, enjoyed media coverage in outlets with a combined audience of more than 2 billion  people. The claims put out in response by secrecy jurisdictions have reached far fewer people and likely convinced even fewer (the responses to the promoted tweets of Cayman Finance are a joyous read, for example). Nonetheless, as public pressure continues to grown on governments to clamp down on financial secrecy, some secrecy jurisdictions will become even more desperate in their attempts to misdirect scrutiny and spread misinformation. Let’s make it clear that we’re on to their act.

Featured image: “General Election – Lies & Truth – Keep the Faith!” by Diego Sideburns is licensed under CC BY-NC-ND 2.0 

Malta, murder and the finance curse: a podcast recommendation

This four-part podcast special series is well worth a listen. It’s called My Mother’s Murder, an investigation into the assassination of Daphne Caruana Galizia. It is narrated by one of her sons Paul Caruana Galizia. Here’s part of the description of the podcast series:

Daphne investigated corruption involving the most powerful businessmen and politicians in Malta where she lived. She paid with her life. Her son Paul goes in search of the men who ordered her murder.“

At the Tax Justice Network we have the highest respect for the courage of the incredible Daphne Caruana Galizia, whose work we followed closely, and also the bravery of her family who have continued the fight for justice in Malta.

Their perseverance, with massive support from the Daphne Project, has yielded impressive results, with regular visits and pressure from MEPs and eventually an inquiry by the European Banking Authority into the notorious Pilatus Bank, which you can read more about here and here. Members of the European Parliament expressed their concern that

in the absence of proper regulation Pilatus Bank has been free to pursue investigative journalists and whistleblowers with the full force of the law.”

This podcast is important particularly in the way it dissects how the corrupt can dismantle the State and capture it for their own ends, sliding so quickly into intimidation and violent repression of all who stand in their way.

Daphne’s work went way beyond Malta, to the very nature of corruption, its facilitators in the world’s most powerful countries, and of the finance curse, which we’ve written and warned so much about – Malta is an example of the worst that can happen when a nation has an overgrown finance sector which has total state protection. We’ve seen so much intimidation and fear of speaking out, particularly in small island nations suffering from the finance curse.

Malta is ranked number 18 in our most recent Financial Secrecy Index, with a secrecy score (62) which places it among the worst offenders in Europe . You can read our assessment here.

Here’s a trailer from Tortoise Media on the 4 part podcast series below. The podcast is available on various podcast platforms. Do have a listen.

One last thing. It’d be remiss of us not to mention our own monthly podcast the Taxcast which covers corruption, scandal and the fight for tax and economic justice around the world, which the mainstream media either ignores or covers badly. Check that out too!

Gender Equality: Can Taxation Make It A Reality?

© United Nations Photo

Days before the annual UN Commission on the Status of Women was scheduled to meet in New York to focus on the gender equality aims promised in global agreements, goals and declarations, writes Liz Nelson, will we finally look beyond traditional thinking about how these aims can (or cannot) be funded? Are we ready to admit that progressively targeted tax is the only effective financing solution?

We’ve all done it: promised, but not delivered. And our governments are no different. But should we really be so forgiving of our elected representatives when they fail to keep their promises on issues that are fundamental to our well-being and human development?

No: for everyone’s sake, and especially this year for women during the Beijing + 25 intergovernmental review of progress towards gender equality, we should not. We must be willing to hold our governments to account when they fail to take progressive action, or when they remain politically indifferent to the need to take substantial measures to achieve gender equality. Even when governments appear to be working toward those goals, how can we make sure they are delivering on their promises? Taxation and gender impact analysis are two of the most powerful ways we can hold our politicians to account.

Platforms, plans and priorities – and very little progress
According to the Convention on the Elimination of Discrimination Against Women (CEDAW), a United Nations treaty signed in 1979 that is frequently described as an “international bill of human rights for women”, by ratifying international human rights treaties such as CEDAW, states assume obligations under international human rights law – and as “duty bearers” they have an obligation to “refrain from making laws, policies, regulations, programmes, administrative procedures and international structures that directly or indirectly result in the denial of the equal enjoyment by women of their civil, political, economic, social and cultural rights” (CEDAW/C/GC/28).

Continue reading Liz Nelson’s blog post in full on the Atlantic Fellows for Social and Economic Equity website.

Civil society letter supporting postponement of CSW64

An official letter advocating for a postponement of UN CSW as opposed to a scaled down version and signed by 499 civil society organisations from 92 countries was sent this week to UN Secretary General António Guterres and UN Women Executive Director Phumzile Mlambo-Ngcuka.

It sets out why the Commission on the Status of Women’s (CSW) annual meeting is such an important mechanism for accountability ‘to all women and girls in all their diversity around the world’ and the ‘most important annual process to review progress and challenges towards achieving women’s human rights, gender equality and the empowerment of all women and girls.’

Download letter

The Financial Secrecy Index reached a record-breaking number of people this year

Image credit: © 2011 Jens Schott Knudsen

Launched two weeks ago, the 2020 edition of our Financial Secrecy Index has broken every record we track on the index’s reach and media impact. First published in 2009, the global coverage of this year’s edition of the index reflects a growing urgency shared by people around the world to expose and reign in rampant tax abuse by the ultra-rich and powerful.

The Financial Secrecy Index ranks each country based on how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money extracted from around the world. A higher rank on the index does not necessarily mean a jurisdiction is more secretive, but rather that the jurisdiction plays a bigger role globally in enabling secretive banking, anonymous shell company ownership, anonymous real estate ownership or other forms of financial secrecy, which in turn enable money laundering, tax evasion and huge offshore concentrations of untaxed wealth. A highly secretive jurisdiction that provides little to no financial services to non-residents, like Samoa (ranked 86th), will rank below a moderately secretive jurisdiction that is a major world player, like Japan (ranked 7th). The aim is not to penalise jurisdictions with greater scale, but simply to recognise that their secrecy poses greater risks – and so it is more important that they behave responsibly.

The 2020 edition of the index saw Switzerland reduce its ranking to the third biggest enabler of financial secrecy in the world, marking the first time the country did not rank worst on the index since 2011. Despite escalating its contribution to global financial secrecy since the publication of the 2018 edition of the index, the US remained the second biggest enabler of financial secrecy in the world after Cayman overtook both the US and Switzerland to the top of the 2020 index. This marks the first time Cayman ranked first on the Financial Secrecy Index.

These changes on the ranking told three major international stories that were covered widely around the world: a British territory topped the index for the first time on the same day the EU blacklisted the territory; the US continued to escalate its financial secrecy despite ambitions announced by Senator Lindsey Graham to improve the US’s ranking on the Financial Secrecy Index; Switzerland managed to lose its position as the world’s greatest enabler of financial secrecy amid a global trend of governments curbing financial secrecy. The index also told many regional and country-specific stories on which we worked with our partners and allies around the world to shine a spotlight on.

As of writing, the Financial Secrecy Index 2020 has been featured in over 700 articles and broadcast pieces. This coverage has spanned across 80 countries and included several high profile publications like the Financial Times, the New York Times, the Daily Maverick, the Times of India, Agence Ecofin, Al Jazeera, The Guardian, ABC Australia, Il Sole 24 Ore, Der Spiegel, Clarin and El Pais.

The launch of the index also saw an outpour of support and commentary from renowned economists, organisations and tax advocates. Gabriel Zucman, professor of economics at the University of California at Berkeley and author of The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, described the index as “a valuable tool to spot where bad regulations emerge around the world and thus be able to propose strategies for a more transparent world.” Transparency International published a comparison of the Financial Secrecy Index and Corruption Perception Index, illustrating how the two indices build a fuller picture. OpenOwnership discussed the global progress on beneficial ownership revealed by the index.

Altogether, we saw eight op-eds supporting the index published in Latin America, four in Europe, four in Africa and two in Asia. Among these were several from Independent Commission for the Reform of International Corporate Taxation commissioners, including Eva Joly former member of the European Parliament and vice chair of the Commission of Inquiry on Money Laundering, Tax Evasion and Fraud; Léonce Ndikumana, Professor of economics and Director of the African Development Policy Program at the Political Economy Research Institute at the University of Massachusetts; Jayati Ghosh, professor of economics at Jawaharlal Nehru University; Wayne Swan, former treasurer and deputy prime minister of Australia; and Ricardo Martner, economist and former Chief of the Fiscal Affairs Unit of the United Nations Economic Commission for Latin America and the Caribbean.

Discussions of the Financial Secrecy Index took place beyond just screens and broadsheets. The UK’s performance on the index was raised in the House of Commons by UK Shadow Chancellor John McDonnell, and speakers from across the parliament in a debate on tax avoidance and evasion. The index was presented in the US Senate by the FACT Coalition, with speakers from Transparency International, the National District Attorneys Association, the Fraternal Order of Police, Global Financial Integrity and Jubilee USA Network.

All in all, the Financial Secrecy Index 2020 has so far reached a viewership of over 2 billion, blasting a bright, searing light through the fog of financial secrecy. Countries that peddle in financial secrecy can no longer do so in secret and the record-breaking reach of the Financial Secrecy Index shows that people around the world will no longer stomach financial secrecy.