The OECD process to reform the international tax rules for multinationals is at a critical point. The secretariat’s proposals have drawn widespread criticism, not least for sidelining the perspectives of non-OECD countries; and the US has blown up the agreement with France that underpinned the secretariat’s approach, threatening instead to impose trade sanctions. But the dramatic policy shift to taxing multinationals on their global profits, rather than treating each subsidiary separately, now seems to be entrenched. The question is, where will things go from here?
Yesterday the Tax Justice Network held a virtual conference, ‘Where next for global taxing rights? Technical and political analyses of the OECD tax reform’. The keynote speeches, presentations and discussions focused on assessments of the revenue redistribution between countries that various proposals could generate, and on the political prospects for the process as a whole. We were delighted to have high-level contributions from key international organisations, including the OECD secretariat. And while the debate was sharp, the degree of consensus was unexpectedly strong.
Four points of broad consensus
First, there was clear consensus that the global distribution of taxing rights is unjust, and deeply so. Far too much profit ends up in low- or no-tax jurisdictions rather than where the real economic activity takes place, and the revenue implications of this are very substantial.
Second, it was also clear that we do not yet have a combination of data and methodology to generate comprehensive results on the redistribution of taxing rights that different proposals would lead to. The quality and confidentiality of OECD country-by-country reporting data are major obstacles.
The 2020 review of the OECD country-by-country reporting standard provides a very well-timed opportunity to sort out the technical basis – and the just-published GRI standard provides a technically robust alternative, to which the OECD standard should converge. The potential EU decision to make their OECD standard data public would overcome the issue of secrecy of this data. While the conference was in session, we heard the news that the Austrian parliament has now backed publication, which could shift the decisive vote among member states (many congratulations to Attac Austria, VIDC and KOO!).
The third point of consensus was that the Inclusive Framework has definitely been a real step forward; but that the distribution of political rights over international tax reform is perhaps even more unjust than the distribution of taxing rights. It remains an open question whether the OECD process can evolve to give non-members a genuinely ‘equal say’. If not, an explosion of unilateral measures seems likely; unless a consensus were to emerge on a UN forum…
Finally, the last panel came to a very clear conclusion, starting with the World Bank and IMF speakers, and confirmed by the OECD’s Ben Dickinson: there is ‘no turning back’ on either the shift to a unitary approach, or on the political imperative of addressing global taxing rights. ‘The genie is’, well and truly, ‘out of the bottle.’
International tax rules: ‘a colonial pattern, refined for the 21st century’
Prof Jayati Ghosh of Jawaharlal Nehru University, and the Independent Commission for the Reform of International Corporate Taxation (ICRICT), gave the opening keynote speech. In it, she laid out the key injustices of the current tax rules as they form part of our current, imbalanced globalisation – ‘a colonial pattern, refined for the 21st century’; and then detailed the technical and political flaws in the current proposals and process. In particular, Prof Ghosh highlighted the arbitrary and illogical nature of imposing a distinction between residual and routine profit; the value of treating all global profits equally, apportioning them between countries according to the location of multinationals’ real economic activity; and the importance of including employment and not (only) sales as a measure of that activity.
The second keynote was delivered by Dr Marilou Uy, director of the secretariat of the Intergovernmental Group of Twenty-Four. Dr Uy presented the G24’s view of the OECD process. On the one hand, she highlighted the value of the opportunity to contribute more fully than had previously been allowed. But on the other hand, Dr Uy identified a series of obstacles in the process. These include the short timeline of the process, making it difficult to bring together the resources to provide a full response reflecting member countries’ concerns and wishes; and the damaging lack of information available to assess the options. Dr Uy closed with a quote from the IMF in respect of the process for setting international tax rules – namely, that ‘ an approach more universal in its full inclusion of countries and its coverage of fundamental policy issues is needed’ (p.46).
Data, methods and transparency
The first panel featured six speakers, offering a combination of technical insights on the reform proposals, and perspectives on the technical aspects of the process. David Bradbury, who leads the OECD team charged with carrying out the economic assessment of the proposals, laid out the broad strokes of their findings so far – namely, small but positive revenue redistribution from the secretariat’s pillar one proposals, with larger but uncertain wins possible from the less well-defined pillar two proposals. Mr Bradbury also highlighted the difficulties of data, and the weaknesses of the reporting provided by multinationals under the OECD’s country-by-country reporting standard. The secretariat has provided each Inclusive Framework country separately, and confidentially, with the basis for estimates of the revenue impact of the secretariat proposal.
Ruud de Mooij of the IMF’s Fiscal Affairs Department presented a summary of key findings, highlighting as Jayati Ghosh had done, two key points: the much larger redistribution associated with a full unitary approach (compared to the residual profit approach); and the importance, for lower-income countries above all, of including employment in any formula.
Prof Valpy FitzGerald of Oxford University and ICRICT presented the findings of a paper co-authored by Tommaso Faccio and me. Using aggregate OECD country-by-country reporting for US multinationals (the only such data currently public), the paper confirms the much greater revenue redistribution away from corporate tax havens that would be delivered by a full unitary approach (e.g. the G24 proposal, as compared to the OECD secretariat’s proposal). The paper also confirms the importance of employment as a factor, for all country groups except the US (although that pattern might well be different for non-US multinationals).
Prof Kim Clausing of Reed College provided an overview of critiques of the available data, and from forthcoming work a rigorous assessment of the value of profits shifted by US multinationals, drawing on different data sources and subject to varying assumptions.
Abdul Muheet Chowdhary of the South Centre drew on the South Centre’s own conference from earlier in the week. He was particularly critical of the lack of detail, either of methodology or actual findings, of the OECD’s economic assessment. Questions from the floor also raised the question of why governments had been told they could not share the OECD’s assessment for their country alone, with media or civil society.
Finally, Lauri Finer, a special adviser in the Finnish ministry of finance, provided a view from an individual high-income country. Finland has not yet developed its own estimates of overall revenue impacts, but from some estimates for individual countries they are expecting very small changes indeed: perhaps 0.1% of tax revenue, or 1% of corporate tax revenues, and uncertainty over even whether this would ultimately be a gain or a loss.
Politics and process: ‘We don’t want to lose the opportunity’
The second panel focused on more political aspects. Stephanie Soong Johnston of Tax Notes facilitated a discussion featuring Marilou Uy and also Ben Dickinson, the OECD’s Head of Global Relations and Development; Marijn Verhoeven, head of the World Bank’s global tax team; Vicki Perry, Assistant Director of the IMF’s Fiscal Affairs Department; and Prof Sol Picciotto, coordinator of the BEPS Monitoring Group, emeritus professor at Lancaster University, and one of the Tax Justice Network’s senior advisers.
Ben Dickinson identified three ‘quite radical departures from the past’. First, that multinationals will be treated as single entities, and so global profits will be assessed. Secondly, a formula will be applied to divide up that profit globally; and third, the idea of a fixed return for routine distribution functions. He closed with the view that ‘we are on track, heading for what we hope is the beginning of a political agreement in early 2020.’
Marijn Verhoeven argued that the level of detail available early next year may be key in determining the extent to which individual countries are able to apply what is agreed. Expecting that little detail would in fact be available, he speculated on a possible role for the Platform for Collaboration on Tax. Particular issues need to be addressed for lower-income countries to benefit, such as their right to require direct access to country-by-country reporting from multinationals. An important, open question is whether any agreement will be sufficient to see countries pull back from unilateral measures such as digital services taxes.
Vicki Perry noted the extent of agreement on (some) formulary apportionment under pillar one, and (some) minimum tax arrangements under pillar two; but highlighted just how much distance there is from those generalities to meaningful agreement on the hard specifics. The absence of solid, quantitative analysis on the revenue impacts, including for lower-income countries, is a major issue. At the same time, minimum tax arrangements – especially for inbound foreign direct investment – are key, but may be under pressure in the potential agreement. At a broad level, there are clear political risks to the process; but the potential gains are great, and it is heartening that there is a forum now for lower-income countries to engage in. Impact on the latter must remain the focus.
Sol Picciotto began his remarks by noting that ‘finally, we are now having the right conversation’. With country-by-country reporting data, we are able to begin a proper discussion of unitary taxation and formulary apportionment. The issues under discussion would potentially require coordinated revision of all tax treaties around the world, which may simply not be realistic; but in fact those treaties have been misapplied, in respect of transfer pricing approaches, and so the applicability of formulaic approaches without treaty revision can be reconsidered.
In the subsequent discussion, Ben Dickinson revealed that the Inclusive Framework Steering Group was at that moment in discussions, trying to understand the US position, which breaks sharply with both the overall work programme and the secretariat’s own unified proposal – and that the US had been clear that it is not withdrawing from negotiations.
Marilou Uy highlighted the need to make sure that the opportunity for change is not lost, and Vicki Perry confirmed this: ‘We don’t want to lose the opportunity to make some important changes that would bring the tax system more into line with reality than the one that was developed a hundred years ago.’ Sol Picciotto saw the US position as not unreasonable, however, because the secretariat’s proposal is not workable – and so a broader, principle-based approach is needed.
Overall consensus broke out again, with agreement that the major shifts in play are not now irreversible. The policy debate is now on formulaic approaches to multinationals’ global profits; and to be analysed in terms of the distribution of taxing rights between countries. Panellists agreed effusively that ‘there is no going back’, now that ‘the genie is out of the bottle’.
Thanks…
We’re enormously grateful to all the speakers and participants who made the conference such a success, and to the team here who ensured the entire thing ran smoothly. We’ll be blogging next week with a review of the exercise, including a round-up of media coverage and a rough calculation of the climate benefits of the virtual approach, and how we may use it in future.
In the meantime, you can find all the slides and video on the conference home page, which we’ll continue to update with links to relevant new research on the economic assessment of the reforms. And perhaps news of a follow-up conference…
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 radiofónica!
En este programa:
La historia detrás de las protestas en Colombia.
¿Pagan mucho en impuestos las corporaciones en América Latina?
La inversión extranjera directa en América Latina.
Y en nuestra miniserie sobre municipios, el caso de San Antonio de Areco y la crisis económica Argentina
INVITADOS:
María Fernanda Valdes de la Friedrich Ebert Stiftung de Bogota, autora de Reducir la desigualdad “El Papel de la política tributaria”
Juan Valerdi, ex asesor del Banco Central de Argentina
Giovanni Stumpo, director de la Unidad de Inversión y estrategias corporativas de la CEPAL
Francisco Paco Durañona, intendente de San Antonio de Areco de 2011 a 2019 y hoy senador de la provincia de Buenos Aires.
También tenemos ‘extra’ este mes: queremos compartir este video sobre las guaridas fiscales, una colaboración entre Justicia ImPositiva y Pagina 12 basado en nuestro mini-serie ‘la breve historia de los paraísos fiscales:’
As we enter the final week of Britain’s 2019 general election, tax justice has become a top election battleground subject. Tax justice is, as we’ve always said, a vote winner, and it’s continuing to climb up the political agenda. We’ve made a video with Reel News looking at the economically and socially damaging race to the bottom between nations on tax and regulations, something which will be highly significant in a post-Brexit scenario, if it happens. We’re sharing that video with you here with some ideas on how governments everywhere should be governing in the public interest.
The OECD’s process for reform of international tax rules has just been torpedoed by the United States. As the US announced 100% tariffs on a range of goods, in response to the French digital services tax, finance minister Bruno Le Maire said on Monday that, “having demanded an international solution from the OECD, it [Washington] now isn’t sure it wants one”. Here we explore three scenarios that could emerge.
Where do things stand?
What’s the current position of the ‘BEPS 2.0’ process, after this extraordinary development? In brief, it’s pretty bad.
The OECD secretariat appeared to have gambled the success of the process, and much of its own credibility, on pushing through a deal based on a US-French agreement. The idea was that an international solution would obviate the need for the French digital services tax (DST), and therefore also avoid any US countermeasures. Now the US has announced those countermeasures anyway, and apparently signalled its intent to quit the international process.
As the Tax Justice Network and a good many others wrote in our submission to the OECD consultation on pillar one of the reforms, the ‘unified’ proposal being pushed by the OECD secretariat involved riding roughshod over the work programme agreed by the Inclusive Framework group of 134 countries, despite the claims that G24 and other countries would be given an ‘equal say’, in order to deliver a very limited reform with revenue benefits concentrated in the hands of a few OECD member countries.
Three scenarios
Two weeks ago, we reviewed the submissions to the OECD consultation and laid out three scenarios:
Limited reform. In this scenario, intended to meet US demands, the secretariat would deliver a reform that would redistribute little profit from tax havens, with some revenue benefit for major OECD countries and little for anyone else.
Process collapses due to lack of trust. In this scenario, the refusal to allow G24 countries or others the ‘equal say’ promised to the Inclusive Framework would be met by a rejection of the secretariat, and ultimately a collapse of the process.
Reset. Here, the threat of collapse would see the secretariat forced to make concessions to the Inclusive Framework. This would necessarily include a longer timeline, recognising that 2020 is simply too short for such a major overhaul of the rules, and an agreement to evaluate fully the three proposals that the Inclusive Framework had agreed to consider, including that of the G24.
These remain relevant today – but the likelihood of each has changed.
Attaching probabilities…
With the US moving to sanction France, and Bruno Le Maire indicating that US withdrawal is likely, option 1 seems increasingly improbable. Even if it is a Trump negotiating ploy, to get a ‘better’ (even more limited?) reform for US multinationals, the chances of success are poor. Nonetheless, the imbalance of power means that it remains possible that some, very weak deal will be signed off in 2020.
With the OECD secretariat’s ‘unified’ proposal having proved so divisive, option 2 (the collapse of the process) seems more likely now. Placating the US will likely lead to an even less appealing outcome for Inclusive Framework members, whose faith in the process is already stretched. But the threat of confrontation with, ultimately, the US under its current volatile leadership, may prevent outright rejection of the process.
Option 3 may provide the secretariat with a path forward: to reset the process, and seek to bring the Inclusive Framework members back into the fold. While the US seems likely to take a hostile position, even assuming that it remains within the process, the advantage for the OECD secretariat is that a longer timeline extends the process beyond the next US presidential election.
In addition, a reset of the process could allow the OECD secretariat a chance to restore trust of Inclusive Framework members, and a genuinely more realistic schedule to do the homework on analysing probable revenue redistributions for the major reforms in prospect.
But it also faces real issues: the US may simply not accept the goalposts moving, and might impose harsh sanctions on individual countries, and/or withdraw financial support for the OECD. Other OECD members, too, may be unwilling to give a genuine voice to Inclusive Framework members.
Even if the secretariat has the space to try, it may not prove possible to regain the trust of G24 countries and others in the Inclusive Framework. It will take bravery for the secretariat even to try. But the other options look unlikely, or unpalatable.
Overall, the prospects of an eventual shift to a UN forum, and away from the OECD, have become more likely this week. This could happen more quickly, following a collapse of the BEPS 2.0 process, or more slowly as an attempt to deliver limited reforms drags on into 2020. Or perhaps there is another twist in the tail, from this unpredictable and often illogical US administration…
To explore the technical and political questions at this pivotal moment for the reform of international tax rules, we are bringing together speakers from the OECD secretariat, the G24, IMF, World Bank, South Centre, BEPS Monitoring Group and other leading experts at our virtual conference on 11 December.
You can sign up by clicking the button below, and join the pre-discussions immediately on our private Slack channel.
Welcome to the twenty-third edition of our monthly Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. (In Arabic below) Taxes Simply الجباية ببساطة is produced and presented by Walid Ben Rhouma and Osama Diab of the Egyptian Initiative for Personal Rights, also an investigative journalist. The programme is available for listeners to download and it’s also available for free to any radio stations who’d like to broadcast it or websites who’d like to post it. You can also join the programme on Facebook and on Twitter.
In Taxes Simply #23 – Understanding the Iraqi crisis:
We interview business consultant Hassanein Mohieddin about the underlying economic causes of the ongoing uprising in Iraq.
Plus: the most important tax news from the region and around the world:
Egypt starts a process for taxing social media sales
Tax fight between FedEx and the New York Times
Economist Thomas Piketty says billionaires are hurting economic growth.
الجباية ببساطة ٢٣ -كيف يمكن للعراق الخروج من المأزق؟
أهلا وسهلا بكم في العدد الثالث والعشرين من الجباية ببساطة حيث نبدأ الحلقة بحوار مع الاستشاري في قطاع الأعمال حسنين محي الدين حول الدوافع الاقتصادية للانتفاضة المستمرة في العراق، وننهي الحلقة في الجزء الثاني بملخص لأهم أخبار الضرائب في المنطقة وحول العالم وتشمل أخبارنا المتفرقة: ١) مصر تبدأ إجراءات فرض ضريبة على مبيعات منصات التواصل الاجتماعي؛ ٢) معركة ضريبية بين فيديكس ونيويورك تايمز؛ ٣) الباحث الاقتصادي طوما بيكيتي يقول أن المليارديرات يضرون بالنمو الاقتصادي.
We’re pleased to share the tenth edition of the Tax Justice Network’s monthly podcast/radio show for francophone Africa by finance journalist Idriss Linge in Cameroon. The podcast is called Impôts et Justice Sociale, ‘tax and social justice.’
Nous sommes heureux de
partager avec vous cette dixième
émission radio/podcast du Réseau Tax Justice, Tax Justice Network produite
en Afrique francophone par le journaliste financier Idriss Linge basé
au Cameroun. Le podcast s’appelle Impôts
et Justice Sociale.
Dans cette neuvième
édition nous revenons sur le premier pilier des propositions de l’OCDE en vue
d’une taxation unitaire des multinationales au niveau mondial
Nous avons l’occasion
de partager des avis de deux économistes de renom, qui sont aussi des membres
de l’ICRICT,
une Commission indépendante qui mène des travaux pour la formulation d’une
taxation unitaire et équitable des entreprises multinationales dans le monde
Il s’agit notamment de:
Ricardo
Martner, un économiste indépendant avec 30 ans d’expérience dans
le secteur des Nations Unies
Thomas Piketty, Economiste lui aussi et Professeur à l’Ecole des Hautes Etudes en Sciences Sociales de Paris en France. Il est surtout reconnu pour la qualité de ses travaux sur les inégalités économiques dans le Monde
Pour écouter directement en ligne, cliquer sur notre lien Youtube, ou l’application Stitcher.
Vous pouvez aussi suivre nos activités et interagir avec nous sur nos pages Twitter, et Facebook.
As urgent reshaping of the international tax system has risen up the geopolitical agenda, the OECD’s tax reforms announced in January 2019 are proceeding at a rapid pace. The proposals set out to go “beyond the arm’s length principle”, introducing elements of unitary taxation and formulary apportionment, with the aim of redistributing taxing rights to the countries where real economic activity takes place.
To date, however, there has been little public analysis of the likely effects of these reforms and questions have been raised as to whether the current proposals are comprehensive enough to provide the drastic changes the international tax system needs to keep up with the changing landscape of multinational companies.
This one-day virtual conference hosted by the Tax Justice Network brought together international experts including speakers from the International Monetary Fund (IMF), the Intergovernmental Group of Twenty-Four (G24), the Organisation for Economic Cooperation and Development (OECD), the World Bank (WB) and the Independent Commission for the Reform of International Corporate Taxation (ICRICT) to provide technical analyses of the current proposals and consider the following questions:
How do the current reforms compare to alternative proposals tabled by other international institutions and civil society organisations?
What are the implications of the reforms for lower-income countries, particularly on tax bases, as well as those of OECD members?
How far do the suggested reforms achieve their intended goals of redistribution of taxing rights and tightening up on tax avoidance?
What are the political challenges within the OECD reform? And, looking to the future, what potential is there for involvement in the decision making process from other international bodies such as the United Nations?
Welcome and Keynote I: ‘The maldistribution of global taxing rights, and how to fix it’ and Q&A
Panel I: ‘The revenue impacts of redistributing taxing rights’ and Q&A
Keynote II: ‘The G24 proposal, and the challenges of the Inclusive Framework’ and Panel II: ‘Which way now for the reform and redistribution of global taxing rights?’ and Q&A
Shared papers and resources
Independent Commission for the Reform of International Corporate Taxation and Tax Justice Network
Welcome to our seventh monthly tax justice podcast/radio show in Portuguese. Bem vindas e bem vindos ao É da sua conta, nosso podcast em português, o podcast mensal da Tax Justice Network, Rede de Justiça Fiscal.
Penalidade máxima: a sonegação no futebol:Ouça no podcast #7:
No futebol nem tudo é jogada bonita e bola na rede. Para muitos, o aspecto financeiro e o peso do dinheiro podem manchar a beleza do esporte mais popular do mundo.
A sétima edição do É da sua contafala sobre a falta de transparência em transações milionárias, negócios suspeitos, paraísos fiscais e como funciona a indústria de sonegação de impostos no mundo do futebol.
Um intermediário da Confederação Brasileira de Futebol conta como são as transações dos jogadores de futebol entre clubes; quem ganha quanto e como se paga impostos sobre esses valores.
Veronica Grondona, da Tax Justice Network, explica o negócio do futebol nos paraísos fiscais.
O advogado do português Rui Pinto explica os motivos de sua prisão em Portugal. Também conhecido como John do Football Leaks, Rui Pinto denunciou esquema de corrupção e sonegação fiscal envolvendo clubes internacionais. A ativista e diplomata Ana Gomes questiona a vontade política das autoridades portuguesas em combater a corrupção e a sonegação fiscal.
As dívidas tributárias de mais de US$ 600 milhões dos maiores times brasileiros.
Como a sonegação fiscal virou um negócio às avessas e o que fazer para corrigir, com Marcelo Lettieri da Instituto de Justiça Fiscal
O que pensam os amantes do futebol sobre o poder do dinheiro no esporte?
Onde pagam impostos os jogadores de futebol africanos que vão pra Europa? Comentário de Nick Shaxson, da Tax Justice Network
Call to action: O mundo do futebol precisa de mais transparência fiscal. Caso queira manifestar solidariedade ao denunciante do Football Leaks, siga-o no twitter Rui Pinto
We blogged recently that the UK’s main opposition party has committed to introducing unitary taxation by the end of the next parliamentary term. As we’ve said, it represents an important further normalisation of unitary taxation, and a potentially important step to ending the great damage done by corporate tax abuse internationally. In addition to our infographic here explaining unitary taxation, we think it’s useful to share an article for Open Democracy by one of our senior advisors, emeritus professor of law at Lancaster University, Professor Sol Picciotto. He was co-author of an important report whose recommendations have been adopted by the UK Labour Party.
In this article Professor Sol Picciotto addresses two important questions: could a UK government implement unitary taxation, and what would be the benefits? As he writes in his article:
adoption by a country such as the UK of a policy of moving towards unitary taxation with formula apportionment could accelerate the growing momentum for a more effective and comprehensive international solution. Indeed, earlier this year the Indian government put forward proposals to adopt fractional apportionment unilaterally, explaining how it could be compatible with its tax treaties. Even if not all countries follow, governments bold enough to lead the way could create a new consensus for reform of the rules to make them fit for the 21st century.”
In his view, unitary taxation is
a bold, visionary plan for taxing multinationals from the Labour Party – but it is also workable and necessary.”
You can read his full article here on the Open Democracy website.
Coauthors: Andres Knobel, Markus Meinzer and Moran Harari
The
Financial Action Task Force (FATF) which evaluates countries on their
compliance with its anti-money laundering recommendations recently published a
report on best practices of beneficial
ownership for legal persons, leaving trusts aside. The report contains interesting examples of
countries doing exactly what our paper on beneficial ownership verification proposed, but misses the point on
the issue of beneficial ownership registries, let alone public ones. While the
paper proposes many measures that we agree are useful and necessary, it fails
to endorse the most critical of measures: public beneficial ownership
registries.
Recommendation 24 (not 10)
While many
FATF recommendations refer to beneficial ownership information such as
Recommendation 10 on customer due diligence by financial institutions, this new
FATF paper on best practices (as well as most of our papers on beneficial
ownership) focuses on FATF Recommendation 24. This recommendation is about making
sure authorities’ have access to accurate beneficial ownership information. If
you want to see how the measures proposed here relate to Recommendation 10,
scroll down to the bottom of the blog post.*
The multi-pronged approach
The FATF Recommendation
24 and the OECD’s Global Forum allow countries to choose at least one of the three
following approaches to ensure timely access to accurate beneficial ownership
information: the registry approach (eg a beneficial ownership register), the
company approach (the legal person collects beneficial ownership and makes it
available to authorities on request), and the existing information approach
(use any beneficial ownership information available with banks, corporate
service providers, tax authorities, land registries, etc).
The FATF
paper on best practices describes the challenges faced when implementing each
of the approaches without endorsing any specific one as the best one. To us,
this is like if a teacher gave two students the same grade on a test because they
both answered the same number of questions, regardless of whether they answered
the questions correctly.
In reality,
the three approaches were never on equal footing because the company approach
is a pre-requisite for the other two.
The company
should always be required to identify its own beneficial owners and only then it
can report this data to a registry (registry approach) or to a bank or
corporate service provider (existing information approach) – or keep it to
itself (just company approach).
To
illustrate, let’s play out a scenario where a company would not be required to
identify its own beneficial owners:
Company A
walks into a bank to open an account.
Bank teller: “Hello Company A, please tell me
who your beneficial owners are.”
Company A: “I don’t know (and I don’t need to know).”
Bank teller: “Oh, sorry to bother you.” Then, asking in every direction: “People of the world, are any of you the beneficial owners of Company A? In such case, please identify yourself.”
While this
imaginary dialogue would never take place, Germany implicitly requires this by waiving the
company’s obligation to identify its beneficial owners, when a German company
is owned by at least two layers of foreign entities.
The new FATF paper now proposes the “multi-pronged approach” to ensure beneficial ownership transparency. In other words, it suggests implementing more than one approach out of the three possible ones because this has proven to be more effective compared to choosing just one of the three. We discuss the pros and cons of each approach below. However, from our perspective choosing a combination of any two out of three approaches is not good enough. We believe the company approach and registry approach must always be implemented together as a first step. This would constitute the bare minimum requirement. The existing information approach should only ever be implemented as a second step to cross-check, complement and verify the information retrieved by the first step.
The company approach
We consider the company approach to be a pre-requisite for any of the other approaches because the company is in the best position to identify its own beneficial owners, and maybe the only actor capable of doing so. However, relying on the company itself as the only source for authorities to access accurate and timely beneficial ownership information is risky, to say the least. A company investigated for money laundering may never reveal the beneficial ownership data when requested by authorities (especially if they have no presence in the country nor local natural persons who are liable for not complying with the law). In addition, even if we assumed all companies to be honest, ensuring access to beneficial ownership information on any company would mean supervising every local company at their office and checking that they do have beneficial ownership data. This could include millions of companies. The alternatives, sample audits or harsh sanctions for non-compliance, can only get so far. While these alternatives may encourage companies to comply, authorities wouldn’t be able to know for sure that they are complying, unless they checked each and every one of them.
The existing information approach
The
existing information approach seems comprehensive, because it may cover
anything: banks, lawyers, tax authorities, real estate registries, commercial
databases – anyone who may have beneficial ownership information on a company. But,
and this is a big but, it relies on information actually existing.
Local banks
may be required to obtain beneficial ownership information from companies, but
first a company must have engaged with a bank, eg opened a bank account.
Otherwise, the bank will have no beneficial ownership information on that
company.
Tax
authorities may be required to obtain beneficial ownership information from
companies, but first a company must be considered tax resident in the country (depending
on local tax laws) and actually filing the necessary returns with tax
authorities Otherwise, tax authorities will have no beneficial ownership information.
In other
words, the existing information approach is like a country trying to identify
its citizens solely on circumstantial identities: a credit card, a driver’s
license, a library card, a student id, etc. The country would be able to
confidently identify a person who has all those documents, but what if the
person does not have a credit card or driver’s license, and is not a student at
any school? There would be no data on the person at all for the country to
identify them by.
Even if every
company did engage with either a local bank, notary, tax authority, land
registry or any entity required to collect beneficial ownership information, a
second problem remains: enforcement would still require checking hundreds to thousands
of banks, lawyers, notaries or registries that may or may not have beneficial
ownership information. Sample audits or sanctions would again create
incentives, but they would not rule out the possibility of non-compliance.
Lastly, private
actors that hold beneficial ownership information could tip off their clients
about authorities asking for their information, which could affect
investigations.
The registry approach
The
registry approach is the only way to ensure that beneficial ownership
information has been collected (and registered). The registry would hold information
on all companies that were incorporated in the country, and could simply check
whether they filed beneficial ownership information or not. For a
well-functioning beneficial ownership registry, sample tests may not be
necessary: the registry, especially if it has digital records, would be able to
look at every local company (even if there are millions of them) and check if
they have filed beneficial ownership information or not. There would be only
one place to go instead of hundreds to millions and if information is
digitalised it would take a few seconds to bulk check if any company is missing
their beneficial ownership form.
From our
perspective, the registry approach doesn’t necessarily require the commercial
registry to be the body that holds beneficial ownership information. Any
authority would do: tax authorities, central bank, etc, as long as each and
every company has to file beneficial ownership information with that registering
authority. In other words, the registry approach assumes that an authority
holds information on all companies. Instead, if filing beneficial ownership with
an authority were optional, conditional or circumstantial, we wouldn’t consider
a country to be implementing the registry approach. At best, it would be
implementing the existing information approach. What differentiates both
approaches is not only whether an authority or a private party holds the
information, but also making sure that information on all entities is available
with the authority – not just on those companies that circumstantially had to
file information. You could think of the registry approach as the ‘leave no one
behind’ approach.
Nevertheless,
if beneficial ownership information is held by the commercial registry, it is
much more likely that the information could be made publicly accessible than if
it were held by tax authorities or the central bank.
On a
separate note, verification of information is of course not ensured by just having
a registry, although once verification procedures are implemented by the
registry, it is much easier to check if they actually took place. In contrast,
if banks, companies or other data holders are required to not only collect but
also verify beneficial ownership information, authorities would still have to do
checks to ensure that both the collection and verification took place.
The ideal approach
While the
FATF paper identifies the structural problems of each approach (eg companies’
lack of incentives to identify their beneficial owners), it still allows
countries to choose any approach. In our view, the ideal solution is the
FATF establishing the three approaches as successive building blocks to ensuring
authorities’ access to beneficial ownership information.
In essence,
the most fundamental component (in bold in the figure above) is the registry
approach, with the company approach (the company identifying its beneficial
owners) as a pre-requisite. If all beneficial ownership information is
contained in one central registry, it’s possible to easily access it whenever
needed, and to verify compliance and the accuracy of registered information,
even before the information is needed (before it’s too late). This also helps
foreign authorities access and verify information, who would otherwise have to
spend time in justifying a request for information and wait until it is
received, if ever at all.
The
existing information approach definitely adds value, but it should only be the
cherry on top. Banks, corporate service providers, notaries and even other
authorities dealing directly with the company should be able to obtain
information from the beneficial ownership registry while having the
obligation to report any discrepancy (eg “John doesn’t appear as the
beneficial owner in the Registry but he is the one who manages the bank account
and withdraws money, so he should be included”).
The law
could also require engaging with a bank, notary or a corporate service provider
in order to incorporate a company (the dotted arrow in the figure above) to add
an extra layer of verification and control of beneficial ownership information.
However, a country choosing only the “company + existing information approach” as
a way to ensure authorities’ access to beneficial ownership information (without
the registry approach) would be missing out. First, it would depend on the
company actually engaging with a local bank, notary or service provider for
these to hold beneficial ownership information. Otherwise, no one in the
country would know who the beneficial owners are. Second, it makes enforcement
much more difficult and costlier: supervisors would have to check every single
notary, bank or corporate service provider to make sure that they are doing
their job right.
The
registry approach should thus be promoted as the best approach (considering the
company approach as a pre-requisite). The FATF already requires countries to
have registries providing basic company information (company name, address,
etc). Upgrading the registries to also collect beneficial ownership information
is much more cost-efficient in the long-run than having to supervise the
hundreds to thousands of banks, notaries, lawyers and corporate service
providers.
Public registries
The FATF –
in our view – fails to endorse public beneficial ownership registries as the
best strategy to ensure beneficial ownership transparency, and it even seems to
undermine them:
For example, an openly
and publicly accessible central registry does not necessarily mean that the
information is accurate and up-to-date. (page 22)
This
statement is true, but also misleading. Establishing an under-resourced
registry that is unable to run any checks or verification and rather acts as a
repository of information could end up being of little value. But the same
applies to any measure that a government could implement. If you do something
wrong, or only half-way, of course it will not be effective. The point is which
approach (or combination of approaches) is better, if done properly. For
example, we published a checklist for any country willing to
implement a beneficial ownership registry. More fundamentally perhaps, the FATF
fails to take into account the pressures arising from public scrutiny of the
data. The use (or abuse) of low level staff (natural persons) as “premium” nominee
shareholders and directors whose identities are effectively stolen or hijacked
by superiors in hierarchical law firms (as happened in case of the Panama Papers), could be detected more easily if
public scrutiny allowed questioning the veracity of a person – not least from
within the firms, but also from any business partner and journalist.
On the
bright side, the FATF acknowledge a positive trend towards public beneficial
ownership registries, which also helps foreign investigations:
The trend of openly
accessible information on beneficial ownership is on the rise among countries. (page 74),
…it is also understood
that countries have encountered difficulties in getting information on
beneficial ownership that is not publicly available. (page 70)
Highlights
The FATF
paper does have some interesting pieces of information as described below.
Switzerland applying the “every shareholder is
a beneficial owner” (no threshold approach) to domiciliary entities
The FATF
paper describes that financial intermediaries in Switzerland are required to
obtain information from all individuals without applying the 25% threshold of
capital or voting rights when dealing with domiciliary entities (companies
as entities such as legal entities, trusts or foundations, that do not have any
operational activity):
A written declaration will be required from the domiciliary concerning
its beneficial owners. (Art. 4 para. 2 of the Federal Act on Combating Money
Laundering Act and Terrorist Financing). The threshold of 25% of the capital or
voting rights in the legal entity does not apply to such type of entities. This
means that all beneficial owners must be identified, regardless of the amount
of their participation in the company (page 55)
Countries implementing automated verification,
red-flagging and appropriate sanctions
The FATF
paper mentions many strategies to verify beneficial ownership information based
on some countries’ experiences. These include automated cross-checks against
other government databases to determine the accuracy of information, and using
data mining to establish patterns and red-flag suspicious cases. These
suggestions and examples are exactly what our paper on beneficial ownership verification proposed back in early 2019 (as
well as our paper’s previous version from 2017).
In
addition, whenever inaccurate or incomplete information was detected, our paper
proposed not allowing an entity to be incorporated, or winding it up if already
existed, or at least marking it with a warning for anyone to be aware of the
risk. The FATF paper describes that some countries are doing precisely this. Below
are some extracts from countries.
Austria
Austria requires
different measures to verify beneficial ownership information, including
automated real time cross-checks against government databases, automated
sanctions in case information is missing, adding a public remark to warn users
that a company has potentially incomplete or wrong information and a system of
risk points for non-resident beneficial owners based on their country of
residence’s risk, resulting in further investigation by Austrian authorities:
Legal entities, which report beneficial owners with foreign
citizenship or place of residence, or ultimate legal entities with a registered
address in a foreign country will receive a certain number of risk points based
on the ISO Code of the foreign country. Thus, those legal entities will be more
likely be in the risk category high or very high, resulting in a greater chance
that the BO Registry Authority will request documentation on beneficial
ownership and will carry out an off-site analyses of beneficial ownership.
(…)
Through an automated alignment with other registers, it is ensured
that beneficial owners and legal entities can only be reported if their data is
also contained in other public registers. If, for example, a person with a main
residence address in Austria is entered as a beneficial owner, there is a real
time check with the Central Residence Register in the background if the entered
person has a valid main residence in Austria. (…)
By setting a
remark the legal entity will automatically be notified about the remark
(without identifying the obliged entity that set the remark) and informed that
the reported beneficial owners could not be verified and that the legal entity
therefore has to examine its report. The remark is only removed if the legal
entity then files a new report. However, the remark will still be visible in
the historical data. Consequently, a remark will be visible in all excerpts
from the BO Register. In addition, the BO Registry Authority is monitoring the
list of all remarks set in the register and may request documentation on
beneficial ownership if a remark is not resolved by a correct report.
Implementation of automated coercive penalties. If a report is not
filed within the deadline – either within the initial reporting period or within
28 days of newly established legal entities – then the competent tax office
will automatically send a reminder letter with the threat of a coercive penalty
of € 1 000 to the legal entity. (pages 41, 46, 52, 57)
Denmark
Denmark also has automated cross-checks, including validation
checks (eg to prevent dead people from being registered). If beneficial
ownership information is not checked, a company will not be able to
incorporate:
The CVR
automatically checks information that is filed (which must be done
electronically), and will cross-check this information with various
governmental registers, the CPR number – Civil registration number / CVR number
– Unique identification number for legal entities and other details such as
address (Danish Address Register – DAR) and dates. Furthermore, business rules
are set up in the system to avoid impossible situations ex. registration of a
deceased person, and as the Business Register entails information about legal
entities, certain information about the entity is prefilled in order to ease
the registration and to avoid mistakes. These automated checks are then
followed by more detailed manual checks in suspicious cases. The system is also
designed to use large datasets and with machine learning to better identify
potential risks (….)
If the BO
information is not adequate when checked, the company will not be incorporated.
If the BO information is checked in the following phase, the DBA has the legal
basis to dissolve the company compulsorily (page 48)
The Netherlands
The Netherlands has automated cross-checks against government
databases, a risk system for further investigations and creates a network maps
of relevant relationships that could be used for investigations:
The Scrutiny,
Integrity and Screening Agency performs risks analysis by automatically
scanning several closed and public sources on a daily basis, to look for any
relevant financial or criminal records of directors, and the (legal) persons in
their immediate surroundings. Data includes the Company Registry, Citizens
Registry of the municipalities and the Central Insolvency Registry, as well as
other public sources. In addition, data is obtained from the tax authorities,
the Judicial Information Service, and the National Police Services Agency. If the
computer system reveals a heightened risk, either immediately upon registration
or later on, during the life span of the legal person, this dedicated Agency
will carry out a more in-depth analysis. If the analysis confirms that there is
indeed a heightened risk, a risk alert will be sent to a group of recipients,
including law enforcement and supervisory authorities such as the Public
Prosecution Service, the Police, the Tax Intelligence and Investigation
Service, the Dutch Central Bank, the Netherlands Authority for the Financial
Markets and the Tax and Customs Administration (.…)
The
Scrutiny, Integrity and Screening Agency also provides ‘network maps’ for inter
alia law enforcement and supervisory agencies. A network map plots the relevant
relationships between a (legal) person of interest, and other persons or legal
persons, including bankrupted or disincorporated legal persons. (page 50)
Other relevant cases of beneficial ownership verification include
Belgium (page 47), Italy (page 34), Jersey (page 36), Spain (page 40) and
Sweden (page 52).
Proposals
on how to deal with foreign companies
The FATF paper also includes proposals on how to deal with beneficial
ownership from foreign companies. While the paper doesn’t mention (our paper’s)
proposals on an automated international cross-check of information using
zero-knowledge proof tests (without needing to share the actual data with a
foreign country, but only confirming information), it does present valuable
options that require no international cooperation:
b) Rating jurisdictions’ level of co-operation – Rating
jurisdictions based on the availability and extent of their co-operation. Impose
defensive measures such as restriction of certain business activities
accordingly.
c) Requiring re-registration with a local beneficial ownership.
d) Requiring
re-approval by domestic national authorities based on detailed investigation of
the relevant legal entities. (page 70)
Option b echoes our paper’s proposed quality limits (limiting the
ownership chain of a local company by allowing it to include only foreign
entities as long as they are from countries that have public legal and
beneficial ownership information). Of course, the Financial Secrecy Index could be
a basis and source of evidence to know whether a country’s entities should be
blacklisted based on the country’s level of transparency and exchange of
information.
Need to
review data protection and privacy laws that affect access to information
Importantly, the FATF paper refers to the need to revisit data
protection and privacy laws. While these are of course relevant, they should
not be abused to prevent relevant authorities and stakeholders from accessing
beneficial ownership information:
It is also
expected that countries will take action to facilitate the timely sharing of
basic and beneficial ownership information at the domestic and international
level to address barriers to information-sharing (e.g. reviewing data
protection and privacy laws). (page 72)
Our 2017 guidance paper on a checklist
for beneficial ownership registries specifies the importance of allowing
information to be searched using different fields (company name, incorporation
date, identity of owners, their residence, etc (page 5). The FATF paper also
proposed this:
Information
in the company register is generally recorded digitally and is preferably
searchable. The search function supports searches by multiple fields. (page 73)
Conclusion
In conclusion, the FATF paper proposes many measures that we agree
are useful and necessary. It also describes best cases available in several
countries that could be followed by others. However, it fails to endorse
registries of beneficial owners, let alone public ones, as the best approach.
* How does
this blog post’s proposals relate to FATF Recommendation 10?
Another
relevant FATF recommendation, which is related but not the focus of this paper,
is Recommendation 10 on customer due diligence: how banks, and other obliged
entities (eg lawyers, notaries, corporate service providers, etc) are supposed
to obtain and verify information, including beneficial ownership information,
provided by their customers. For example, when opening a bank account for a
customer, banks and other obliged entities may use information from the
commercial registry or beneficial ownership registry (green circle in the
figure below), but they cannot rely exclusively on that information for their
customer due diligence obligations. They must use other sources too, and follow
other procedures (eg obtain identity documents, in-person meetings, etc) to
comply with Recommendation 10’s procedures.
However,
this blog post doesn’t apply to Recommendation 10, and none of its observations
or proposals refer to changing Recommendation 10 in any way nor obliged
entities’ customer due diligence obligations. This blog post focuses only on
Recommendation 24 about ensuring access to beneficial ownership information by
authorities (and ideally also by the public).
The research and advocacy seminar is organised in the context of the conference “Financialization in the Global South” (list of panels here, time table here, register here), happening from 26-28 November 2019 also in Buenos Aires. This event is free to attend. Details and location can be found below.
The seminar introduces the methodology and discusses
the research and advocacy potential of Tax Justice Network’s Corporate Tax
Haven Index (CTHI). This index combines two measures to create a ranking of the
world’s most important tax havens for multinational corporations: the Haven
Score based on 20 mostly tax-related indicators of corporate tax haven-ness,
assessing how aggressive a jurisdiction’s corporate tax haven laws, regulations
and practices are; and the Global Scale Weight showing the scale or size of
corporate investment activity as a proxy for the magnitude of the
profit-shifting potential in that jurisdiction. The jurisdictions are ranked by
how much each contributes to tax avoidance risks and the race to the bottom in
corporate income taxation. The Haven Score’s twenty indicators rely on in-depth
policy analysis in five relevant areas of corporate tax policies: the lowest
available corporate income tax rate; loopholes and gaps; transparency;
anti-avoidance measures and double tax treaty aggressiveness. Researchers and
members of social society are invited to feedback on the methodology, and to
contribute suggestions for the future geographical expansion of the index in
the Latin American region.
Another part of the seminar will introduce the present
the Tax Justice Network’s latest paper on the risks emanating from the secrecy
in the investment industry. In 2018, the total value of financial instruments
processed in the US was USD $1.85 quadrillion (USD $1,850 trillion). Still,
there is no transparency on who the beneficial owners of investment entities
and financial assets are, let alone if they are paying the corresponding taxes
or if they are part of money laundering or other financial crimes. Neither
current beneficial ownership registries nor the Common Reporting Standard for
automatic exchange of tax information solve the investment industry’s secrecy.
Seminario de presentación e investigación del
Índice de Guaridas Fiscales Corporativas 2019
El propósito del seminario es introducir la metodología, presentar y
discutir la investigación del Índice de Guaridas Fiscales Corporativas de Tax
Justice Network (CTHI, por sus siglas en ingles). El índice combina dos medidas
para crear un ranking de las más importantes guaridas fiscales para
corporaciones multinacionales del mundo: un ranking de guaridas basado en 20
indicadores de nivel de guaridas principalmente relacionadas con impuestos, que
evalúan que tan agresivas son las leyes, regulaciones y prácticas de una
guarida corporativa; y un ponderador de escala global que muestra la escala o
el tamaño de la inversión extranjera directa como un proxy de la magnitud del
desvío de utilidades potencial en la jurisdicción. Las jurisdicciones son
posicionadas en función de cuánto contribuyen al riesgo de elusión fiscal y a
la carrera a la baja global en el impuesto a las ganancias corporativas. Los
veinte indicadores del índice de guaridas se basan en un análisis detallado de
políticas en cinco áreas relevantes de las políticas de fiscalidad corporativa:
la menor tasa imponible disponible; los huecos para la elusión fiscal; la
transparencia; las medidas anti-elusivas y la agresividad de los tratados de
doble imposición. Académicos, miembros de la sociedad civil, y otras personas
interesadas están invitados a proveer su opinión respecto de la metodología y
contribuir con sugerencias para la futura expansión geográfica del índice en la
región latinoamericana.
This month on the Taxcast we speak to Tax Justice Network CEO Alex Cobham about his new book The Uncounted on the politics of counting. Who’s missing from the stats, from the bottom to the very top? And how can we count better?
Plus: For decades corporate tax cuts have been touted as the way to boost the economy. This month the Tax Justice Network’s John Christensen talks about a paradigm shift on corporate tax in the UK general election: and we look at the results of Trump’s corporate tax cuts in the US – what did they really deliver?
If the rich, if the elites, if the big companies are obviously not meeting their fair share, not meeting their part of the social contract, why should I? And you know, why should I be the only mug who pays tax? And it erodes all the way down. And this is how States and societies crumble.”
~ Alex Cobham
“Neo-liberalism is finished, it’s a busted flush, we’re going to see a change, if not at this election it’s certainly coming and I have the same sense from the US. And the tax justice agenda will feature prominently in whatever comes next”
~ John Christensen
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The Labour party in the UK has today committed to introducing unitary taxation by the end of the next parliamentary term. This is significant internationally because it marks the first such manifesto commitment from a major political party, with a realistic prospect of election success, in a major OECD member country. Coupled with the leadership of the G24 group of developing countries, the Labour commitment represents an important further normalisation of unitary taxation, and a potentially important step to ending the great damage done by corporate tax abuse internationally.
But what is unitary taxation? We’ve put together an infographic below to illustrate how unitary tax works.
Under a unitary tax approach, governments treat a multinational corporation as a group made up of all its local branches, instead of treating each local branch as an individual entity separated from the global chain. The profits that the multinational corporation declares as a group are then apportioned to each country where it operates based on how much of its real economic activity took place in that country.
Simply, put a unitary approach requires multinational corporations to contribute tax based on where they employ workers and do business, not where they rent letter-boxes and hide ledgers. That means making sure corporations pay their fair share locally for the wealth created locally by people’s work.
Today sees
the crystallisation of two potentially pivotal moments in the development of
international tax rules towards the Tax Justice Network’s long-favoured
approach: unitary taxation.
In Paris, the OECD is hosting a public consultation on the biggest reform to the taxation of multinational companies in almost a century – and there is a growing demand for a comprehensive shift to unitary taxation. And in London, the UK Labour party has today become the first major political party in one of the world’s leading economies to make a manifesto commitment to introduce unitary tax.
What is unitary taxation?
Unitary taxation is the approach that treats a multinational group as the taxable unit, rather than the individual subsidiaries in different countries that make up the group. Current international tax rules are based on separate entity accounting, where transfer pricing mechanisms are used to establish the taxable profit that each entity within the multinational group would obtain, if it was operating at arm’s length (independently) from each other entity in the group. This allows gross abuses, with huge volumes of profits being shifted from where they arise, into low- or no-tax jurisdictions. Unitary tax recognises that in reality, profits are maximised at the unit of the group as a whole. ‘Formulary apportionment’ is the name for the process that allocates those global profits as tax base between the different countries where the multinational has real economic activity (employment and final customer sales, say).
The OECD Base Erosion and Profit Shifting (BEPS) process of 2013-2015 had the single, agreed goal of reducing the misalignment between where profits are declared, and where multinationals’ real economic activity takes place. BEPS failed because OECD countries could not agree to move beyond the arm’s length principle. But the new reforms, sometimes dubbed BEPS 2.0, start from an explicit acceptance of the need to move beyond arm’s length pricing. Each of the proposals under consideration include aspects of unitary taxation, of which the proposal from the G24 group of countries is the most comprehensive. The Tax Justice Network has long called for such a reform, estimating the failure to align profits with the location of real economic activity imposes global revenue losses of around $500 billion each year.
What’s at stake at the OECD?
The OECD consultation addresses ‘pillar one’ of the
organisation’s policy reforms. While pillar two focuses on the introduction of
a global minimum tax rate for all countries, pillar one is concerned with the
distribution of the tax base between countries. This is crucial to ending the
corrosive practices of profit shifting, through which multinationals, their
professional advisers and corporate tax havens such as the Netherlands have
conspired to deny taxing rights to the countries where companies’ real economic
activity takes place.
The
consultation addresses the ‘unified proposal’ put forward by the OECD
secretariat, which was put forward following bilateral agreement between the US
and France, and then received support from the G7 group of countries before
being made public. The proposal claims to combine elements of the three
proposals that are in the agreed work programme of the Inclusive Framework
group of 134 countries. All three move beyond the arm’s length principle and
the transfer pricing approaches that have dominated international tax rules
since the key decisions of the League of Nations in the 1920s and 1930s.
The
Inclusive Framework group includes many lower-income countries, not only OECD
members, and they have been promised an equal say in the changes to be made.
However, the unified proposal sets aside entirely the one approach in the work
programme that had been proposed by lower-income countries: the proposal for
unitary taxation made by the G24 group. Our analysis indicates that compared to the G24
approach, the unified proposal would be likely to redistribute a much smaller
volume of profits away from corporate tax havens, with much smaller revenue
gains for other countries – especially non-OECD members. Simulations for the French government, just published, confirm “a negligible impact on tax
revenues” is likely.
From our
partial review of the thousands of pages of submissions now made public, a number of key
points stand out. These can be grouped into areas with broad consensus, and
areas where business and other respondents are relatively sharply divided. We
identify three areas of relatively broad consensus:
Scope. There is a near-universal
rejection of the OECD secretariat’s proposed scope. While most independent
submissions criticise aspects of the attempt to reduce the scope to only the
largest, ‘consumer-facing’ businesses, with a range of other industry carve-outs,
most business submissions seek a more limited scope, higher size thresholds,
and where relevant that their own sector be excluded through an additional
carveout.
Complexity
and uncertainty.
An overwhelming share of submissions reviewed, and from all types of
participants including business and civil society, highlight the risk that the
OECD secretariat proposal would increase complexity of the rules and
uncertainty of outcomes for taxpayers and tax authorities.
Impact
assessment. Across
all types of respondents, there is a clear desire for the OECD to release data
and analysis on the projected revenue impact of the proposals. Civil society
has made this a core demand. The US Chamber of International Business said: “USCIB
members believe a completed impact assessment is critically important to enable
progress on the proposed Unified Approach framework.” The intergovernmental
South Centre said: “The South Centre supports the call for the OECD to make
public its country-by-country reporting data on MNEs headquartered in its
member states so that countries can carry out a more thorough assessment of how
the Unified Approach proposal will affect their tax base. At present the OECD
has planned to release this data only after early 2020, potentially after key
elements of the reform proposals have been pushed through.”
In areas
with a divide between business respondents and others, we identify four main
areas:
Curbing
profit-shifting. There
is little engagement from business respondents or their professional services
providers with the question of whether the reforms would reduce the scale of
tax abuse. The major lobby group Business at the OECD (BIAC) goes so far as to
ask that the label ‘BEPS 2.0’ not be used for the process: “that language is
quite unhelpful and, indeed, misleading.
Pillar 1 is – should be – about constructing a new tax system for new
business models and a new economy. That
needs to be a tax system which takes account of the way business is working
(and even more importantly, will come to work); a system that allows
governments to raise money based on new value-creating forms of activity; but
also a system that fosters and enhances cross-border trade and investment and
creates inclusive growth. To impose an anti-avoidance narrative on Pillar 1
could frustrate that.” Non-business respondents, meanwhile, consistently
criticise the proposals for the likely failure to address the scale of profit
shifting.
Fair
distribution of taxing rights.
Here again, there is little engagement from business respondents and their
professional services providers, but a clear consensus among civil society
respondents and those from non-OECD countries that the secretariat proposal will
not redress the stark inequalities in taxing rights that characterise the current
system.
‘Equal
say’. A position
common to many of the civil society responses and those from non-OECD
countries, is to highlight the extent to which the OECD secretariat proposal
has disregarded the key tenets G24 approach, casting doubt on the commitment to
give non-OECD countries an equal say.
Dispute
resolution. Here
is perhaps the sharpest divide. While many business respondents call for rapid,
binding arbitration, often conditioning acceptance of any other changes on
this, it is anathema to respondents from non-OECD countries and to civil
society – often appearing to be a red line, even if other elements of the
proposal were to be accepted.
Where next?
Three main
outcomes can be envisaged. First, and perhaps most likely given the recent
history of the BEPS project (2013-2015), is that the OECD delivers a limited
reform meeting the constraints of major members including the US, which neither
curbs profit shifting to a significant degree nor provides substantial benefits
to Inclusive Framework members.
In this
scenario, trust in the OECD to act as the forum for international tax
rule-setting would be damaged perhaps to the point of being beyond repair. The
power of major OECD members, however, might be enough to prevent any shift of
forum to the UN. That would leave countries with the option of pursuing
unilateral measures, from the digital services taxes that are already
proliferating, to more comprehensive unitary tax approaches. The resulting
pressure from business for an international solution would likely see a quick
return to negotiations – but would they be at the OECD?
A second
scenario sees the current process collapse, due to the lack of trust. Here, a
move to the UN becomes conceivable, if major OECD members were to accept that a
more genuinely inclusive process was necessary since unilateral proliferation
would not represent a stable equilibrium. Again, a return to the OECD process,
or the start of a new one, would seem more immediately likely than a shift to
the UN; but the quid pro quo to achieve this might be a much more serious
commitment to the ‘equal say’ for non-OECD members.
The third
scenario is that the current OECD process is reset. Recognising the depth of
opposition to the secretariat proposal, key actors might decide that the aim of
completing the process during 2020 is incompatible with a full assessment of
the options and obtaining broad agreement. That would in turn open the door to
more serious consideration of the Inclusive Framework’s three approaches,
including the G24 proposal.
The
starting place is the recognition in the current process that the old transfer
pricing rules are not fit for purpose in an age of complex globalisation. In
each of three scenarios, the medium-term prospects are increasingly positive
for a complete shift to a unitary approach – whether led by the OECD or UN, or
simply as the result of cumulative, unilateral actions.
Unitary
taxation has moved from a radical civil society demand in the early 2000s, to
being a core element of the international policy debate today. It offers the
potential to reprogramme international tax, making profit shifting abuses of
multinational companies a marginal problem rather than the major cause of
revenue losses that they are today.
What’s the Labour manifesto commitment?
In the UK, the Labour party has today committed to introducing unitary taxation by the end of the next parliamentary term. This is significant internationally because it marks the first such manifesto commitment from a major political party, with a realistic prospect of election success, in a major OECD member country. Coupled with the leadership of the G24 group of developing countries, the Labour commitment represents an important further normalisation of unitary taxation, and a potentially important step to ending the great damage done by corporate tax abuse internationally.
FAQ
How much revenue would the Labour policy bring in for the UK?
The Labour
party estimates that in the fifth year of the next parliament, the tax would
bring in £6.3bn. This comes from the work of Prof Sol Piccciotto, who is
perhaps the leading international expert on unitary taxation and a Tax
Justice Network senior adviser, and Daniel Bertossa.
Picciotto
and Bertossa lay out a full proposal, and refer to our
analysis (with
Prof Valpy FitzGerald of the University of Oxford, and Tommaso Faccio of the
University of Nottingham) of data on US multinationals for the revenue impact.
We found a revenue impact of nearly $4bn for the UK, from an international
shift to unitary taxation with full formulary apportionment. Scaling up to
include non-US multinationals, and depending on the approach taken, this
implies a total revenue gain of between £6bn and £14bn.
The Labour
party have taken the lower extreme of this range (i.e. the most conservative
estimate). They then reduce it by 30% to allow for possible behavioural changes
(multinationals moving away, or finding other ways to dodge tax). This seems on
the high side for a behavioural response, so this again looks a conservative
assumption. Finally, they roll forward five years, allowing for inflation. That
gives an estimate of revenue at the end of the next parliament of some £6.3bn.
Can the UK do this unilaterally?
Yes. Countries including OECD members have quite different approaches to international tax, whether in terms of defining the tax base or setting the rates, so there is no reason the UK couldn’t go ahead and do this. As above, however, there is an increasing chance that this would be in line with an emerging international consensus to adopt unitary taxation, so the UK could be well positioned to play a leading role in that process.
Wouldn’t the UK have to renegotiate all its double tax treaties?
Many believe that current tax treaties would not pose an obstacle, just as they already allow the application of related ‘profit split’ approaches. However, a renegotiation is not out of the question. The OECD secretariat has confirmed that its current, more complex proposal, for example, would require revisions to the whole global tax treaty network. As George Turner of TaxWatch has written, instead of renegotiating it is also possible for the UK parliament to “legislate to unilaterally disapply the provisions of tax treaties. This last happened in the UK in 2008, when the government legislated to unilaterally override all of their tax treaties to close down a disguised remuneration scheme (FA 2008 ss 58 and 59, which amended ICTA 1988). The action by the UK government was subsequently upheld by the European Court of Human Rights, which noted that double tax treaties should do no more than seek to relieve double taxation, and should not be permitted to become an instrument of avoidance.”
Wouldn’t multinationals leave the UK rather than pay this tax?
Multinationals
operate in the UK because they make money in the UK. A distribution of some
percentage of that profit towards the UK exchequer, just as any domestic
business makes, doesn’t stop it being profitable to operate in the country.
While there would no doubt continue to be a lot of work from professional
service firms including accountants and lawyers trying to game the system,
unitary tax offers a much simpler way to determine taxable profit than the
current rules and so is likely to be much less open to abuse. As noted, the
Labour party’s revenue estimate assumes a 30% reduction due to behaviour
change, which may well be on the high side.
Is the information available to make unitary tax work?
Yes. Following the G20 decision in 2013, the OECD has developed a version of the Tax Justice Network’s proposed standard for country-by-country reporting. This, together with corporate tax returns, provides all the information needed to apply unitary taxation. It would be advisable to ensure that the data to be relied upon is fully audited, and to sharpen the definitions in places to reduce scope for chicanery, but the instruments are in place.
As global capitalism continues to lurch from one crisis to the next, massive levels of tax abuse and avoidance are robbing governments of the resources they need to provide basic social services while also contributing to economic instability, fuelling gender inequalities and undermining human rights.
Nowhere is this systemic malaise more
manifest than in the extractives industry, which pillages the resources of
developing countries while offering them a pittance in return. Last year the 40
largest mining companies raked in US $683 billion, mostly from the Global
South, through the extraction of oil, gas and minerals. But rather than paying
their fair share of taxation to the countries where they operate, most
extractive companies channel their revenue through a complex network of
corporate tax havens and financial secrecy jurisdictions to avoid contributing.
Meanwhile, local elites in host countries collude in providing tax incentives
and low corporate tax rates to ensure these companies pay the absolute minimum
to local economies.
On 19 November hundreds of civil society organisations around the world will join forces to demand an end to this plunder. The Global Day of Action will see public protests, educational events and vigorous social media campaigning all over the planet as people who care about justice and equality unite their voices to say enough is enough. Organized by our sister organisation the Global Alliance for Tax Justice, this co-ordinated international effort represents a crucial opportunity for ordinary people everywhere to push back against the injustice of a global economy that has been programmed to rip them off.
This mass mobilisation comes in a context
of multiple enmeshed abuses being perpetrated by the extractives industry. The
sector is notorious for its role in human rights abuses, such as forced
displacement, the destruction of livelihoods and even, in some instances,
murder, not to mention fuelling climate change and widespread environmental
destruction. By confronting the abusive tax practices of the extractives
industry, the Global Day of Action will also aim to build solidarity with and
strengthen these ongoing battles for economic, social and environmental
justice.
The organisers have made an array of resources, including infographics, social media assets and press materials, available on their website to support all those who wish to take part. Here at the Tax Justice Network, we’ll be adding our voice to this important international call to action. While the Tax Justice Network relies on high-level technical analysis and advocacy to shine a light into the opaque structures that rig the global economy, we also recognize that this alone is not enough to transform the unjust international tax system. That’s why the campaigning work of the Global Alliance for Tax Justice, which spun off from Tax Justice Network in 2013, is so fundamentally important. We hope you will join us on 19 November to demand the global Goliaths of the extractives industry pay their fair share.
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 radiofónica!
Some troubling news you may not have heard about: recently United Nations staff were informed that the United Nations will run out of money due to a 30% underpayment by member states, most notably the United States: if that nation paid what it owed, that would make up at least 60% of the total unpaid contributions for 2019. Here’s a tweet thread which purports to show the text of an email sent out to staff by the UN Secretary-General, António Guterres:
In news of other diplomatic woes, UN staff were informed by email last night the organisation will run out of money by the end of October. @antonioguterres informed them that as a result of a 30% underpayment by member states (esp Trump administration) they are nearly insolvent.
The Tax Justice Network has long argued that the United Nations is a far more suitable and democratic forum for resolving international tax rules than the OECD, which we often refer to as a ‘rich countries club.’ The Tax Justice Network CEO Alex Cobham puts these failures to pay into an interesting context:
UN currently needs $230 million to keep functioning.
To put that another way, it's less than 0.05% of the $500bn in revenues lost to corporate tax abuse each year. (An issue the UN is not allowed to work seriously on, because OECD members would rather keep it in their power.) https://t.co/ReowhYmNm4
The United Nations Special Rapporteur on extreme poverty and human rights Professor Philip Alston raised the alarm on extreme inequality levels in the United States and in the UK. His evidence-based research was immediately rubbished by both the US administration and the UK government. Since President Trump was elected in the US, there has been a deliberate attempt to weaken an institution which has told some inconvenient truths to power.
We’re not saying that the UN is perfect. But we think it might interest citizens around the world to know whether or not their country has paid its 2019 contribution:
I interviewed Alex Cobham for the Tax Justice Network’s monthly podcast the Taxcast about his new book out this month, The Uncounted. That full interview will be released shortly in the November 2019 Taxcast, but we discussed this threat to the United Nations, and how a more stable future might be achieved. Here’s an audio clip here, followed by a transcript:
I don’t think very many people are actually seized of the urgency of this, I think because the UN seems very far away for most of us, but you know, there are two things at the moment that are really deeply concerning.
So on the one hand, you know, yes because of particularly the role of the US but actually quite a lot of other countries also not doing their bit, the UN is seriously underfunded and looking at having to make quite serious cuts. But actually because it’s only, only I say, missing a couple of hundred million dollars, right? Pretty small in terms of the national budget of lots of high income countries but big in terms of absolute amounts of money and you can see how that will impact very quickly on lots of people’s employment for example, but also on the organisation’s ability to do stuff.
But look, at the same time that the US in particular is effectively imposing deep cuts on the UN, the US is also blocking, in practical terms, all sorts of measures for progress and pushing through some quite regressive positions on things like women’s rights. How this country, or rather this country’s current administration, is being allowed both to starve the organisation of funds and to continue to exert a completely disproportionate amount of power is slightly mind-boggling.
And this doesn’t feel like a position that can continue. Surely it can do one or the other but not both. But ultimately what it points to in some ways is that we need to accelerate something that should have been happening anyway, which is thinking about how the UN becomes self sustaining.
It cannot survive, because good organisations do not survive on voluntary donations, because donations bring with them influence. And that’s as true for an organisation like the Tax Justice Network as it is for a government.
We know that governments that are more dependent on tax respond more to their own populations. Governments that have large natural resource wealth or aid flows become increasingly unresponsive to their people.
For the UN we need to think about countries making payments on a tax-like basis and with a social contract, countries having benefits that stem from their participation and therefore, you know, having some incentives to take part in that.
But, if the UN continues as I’m afraid it is currently, to look at private sector financing solutions for development and indeed, partnerships for itself, rather than seeing the literally hundreds of billions in revenues lost to avoidance and evasion as an obvious place for it to find the relatively small global budget that it needs, it’s kind of condemning itself to going further down this road.
I think that the people working on illicit financial flows need to start making the case very strongly within the UN that there are revenue streams here that would allow the organisation to have a basis of reserves, at least for a kind of independence that would stop it getting back into the situation that it’s got into now through the extreme behaviour of the Trump administration. Maybe there can be a silver lining if this kicks off some structural changes that make this impossible in future.
But right now everyone should be sounding the alert and asking their governments, their own governments, first of all, if they’ve made their contribution, because so many governments haven’t yet done their bit.”
We asked our newsletter subscribers to complete a short survey to help us make sure the Tax Justice Network is delivering the research, stories and opportunities that matter to them, in the ways that help them best engage in tax justice.
We’ve put together an infographic summarising what people said about our work and why tax justice matters to them. You can view the infographic below.
Based on people’s feedback, we’ve created a new supporter scheme for individuals who want to make a one-off or regular donation to the Tax Justice Network. Our supporters will help us to undertake our research and campaigns to expose corruption, fight vested interests and build a fairer global economy by providing us with predictable, unrestricted funding.
Fighting for tax justice
Corporations and wealthy elites have made historic levels of inequality possible by taking over the tax systems of countries around the world, turning tax policy into a tool that prioritises the interests of the wealthy instead of treating the needs of all members of society as equally important. The Tax Justice Network believes a fair world, where everyone has the opportunities to lead a meaningful and fulfilling life, can only be built when we each pitch in our fair share for the society we all want.
Every day, we equip people and governments everywhere with the information and tools they need to reprogramme their tax systems to prioritise the needs of all members of society, over the desires of corporate elites. We need your support, now more than ever, to continue the fight for tax justice. With your help, we need to raise £300,000 to continue our research, advocacy and communications work in 2020, as part of our four-year strategy.
Your donation will make a big impact. We estimate that every $1 invested in the Tax Justice Network may have yielded $1,000 in additional revenues for national governments to spend on reducing inequalities and building strong public services.
Welcome to the twenty-second edition of our monthly Arabic podcast/radio show Taxes Simply الجباية ببساطة contributing to tax justice public debate around the world. (In Arabic below) 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 #22: how socioeconomic demands are overcoming sectarianism in Lebanon and Iraq
In October 2019, large demonstrations broke out in Lebanon and Iraq, countries that are both governed by sectarian politics. But, this time economic demands have transcended sectarian rhetoric.
In this episode, Lebanese economic researcher Nabil Abdou explains what protestors mean by the “down with the rule of the bank” slogan, and how the tax system in Lebanon encourages rent-seeking at the expense of all other productive sectors. Abdou also explains how demonstrations in Lebanon are organically linked to demonstrations in other Arab and Latin American countries.
In the second part of the programme, we speak with one of the participants of the Iraqi uprising; journalist Karim al-Nur, about the economic motives driving his participation in the demonstrations.
الجباية ببساطة ٢٢ – تجاوز الطائفية بالمطالب الاقتصادية في لبنان والعراق
أهلا بكم في العدد الثاني والعشرين من
الجباية ببساطة. في شهر أكتوبر/تشرين اندلعت تظاهرات واسعة في كلا من لبنان
والعراق، وكلاهما بلاد تحكمهم وتتحكم بهم السياسات الطائفية، لكن هذه المرة جاءت
الكثير من المطالب اقتصادية الطابع متجاوزة الخطاب الطائفي. في هذا العدد نلتقي
بالباحث الاقتصادي اللبناني نبيل عبدو ليشرح لنا تحديدا فحوى شعار “يسقط حكم
المصرف” و كيف أن النظام الضريبي في لبنان قائم على تشجيع الريع على حساب أي
قطاعات منتجة أخرى، فضلا عن ارتباط التظاهرات في لبنان عضويا بتظاهرات في بلدان
أخرى من العالم العربي وأمريكا اللاتينية. في القسم الثاني نلتقي بأحد المشاركين
في الانتفاضة العراقية، الصحفي كريم النور، متحدثا عن الدوافع الاقتصادية لمشاركته
في التظاهرات.
Europe Needs a “Tax Justice Network for monopolies.”
Introduction
The BBC recently carried a short article which began:
“Luxembourg’s data privacy watchdog says it is in discussions with Amazon about voice recordings made of customers who have used the firm’s Alexa smart assistant. The regulator is the “Lead Supervisory Authority” (LSA) for the company in the EU, meaning that it co-ordinates investigations into the business on behalf of the other member states.”
You may have heard stories about Alexa listening in on users’ sex lives, its occasional bursts of creepy laughter, the peculiar jokes, the story of the customer who was reportedly told to “Kill your Foster Parents,” and more. So it’s heartening to think there’s a watchdog out there, keeping tabs.
But Luxembourg? Anyone familiar with tax havens knows immediately that this monster corporate tax haven is about the last place you’d want to host a watchdog to curb abusive behaviour by large multinationals.
For those unfamiliar with Luxembourg’s role as a criminalised corporate tax haven at the heart of Europe, it’s worth reading up about the “Luxleaks” scandal (revealing the world’s biggest multinationals using Luxembourg as giant corporate tax-cheat factory;) or pondering Luxembourg’s sixth-place ranking in both the recent Corporate Tax Haven Index (CTHI) and its sister ranking of shame, the Financial Secrecy Index. Luxembourg’s stance goes back decades: consider, for instance, its central role in Bernie Cornfeld’s crime-infested Investors Overseas Services, or in the scandal of the Bank of Credit and Commerce International (BCCI,) arguably the rottenest bank in world history; its key role in the Elf Affair, Europe’s largest corruption investigation since the Second World War, in the Clearstream Affair; in Bernie Madoff’s still-unresolved Ponzi-scheme frauds; or in the Icelandic Kaupthing saga. To name just a few. As a searing Financial Times analysis summarised in 2017:
Luxembourg sometimes resembles a criminal enterprise with a country attached.”
Luxembourg’s national development strategies revolve around ‘competing’ to attract footloose global capital and the operations of multinationals, essentially by offering them an easy ride on taxes, disclosure, financial regulations, and criminal enforcement. These strategies, which have been called the ‘Competitiveness Agenda,’ are always harmful: in Luxembourg they have created a state whose political and regulatory machinery is captured by banks and large multinationals it hosts. This ‘competitive’ approach applies to data protection, as companies “forum-shop” for the jurisdiction most favourable to data firms. An adviser to multinationals explains:
Sophisticated organizations are structuring their decision-making functions concerning data in a manner which reflects a preferred enforcement forum strategy. . . . EU attorneys are seeing data planning exercises, somewhat similar to tax planning structures, emerging.”
Alert: loose language! The word “monopoly” refers to a market where there’s just one seller. There’s also oligopoly (only a few sellers), monopsony (only one buyer,) and so on. “Market power” covers these terms – and perhaps “coercive market power” is clearer. Sometimes ‘monopolies’ will be used as a loose general term, even if not strictly accurate.
Anyone familiar with ‘tax competition’ – a central issue for the tax justice movement – will recognise this language. It’s offshore business: this time not for tax, but for big data.
The location of these European Lead Supervisory Authorities (LSAs) shows a familiar pattern. Where is the LSA for Google? Ireland, another gigantic corporate tax haven. Facebook? Ireland again. Uber? The Netherlands, ranked fourth in the Corporate Tax Haven Index. Airbnb? LinkedIn? Microsoft? Ireland. And if you move beyond these privacy and data issues, to (say) cryptocurrencies, you find that the jurisdictions seeking to get ahead are places like Malta, an especially unsavory tax haven where dissidents against the offshore establishment get blown up with car bombs.
The overall result of this ‘data protection competition’? Well, in Alexa’s case, back to the BBC
It has not launched a formal privacy probe. [A spokesman for the Luxembourg watchdog said] “we cannot comment further about this case as we are bound by the obligation of professional secrecy.
Quelle (as the French say) surprise!
But now. What has all this got to do with monopolies? Well, we will get to that. The sections that follow necessarily starts by covering some widespread misconceptions about monopolies: that antitrust is just about ‘breaking things up;’ that it’s all about consumer prices; and that Europe doesn’t have much of a monopoly problem, or that its competition authorities are doing a good job.
Sections 2, 3 and 4 then lay out the scale of the issue, using both data and analysis, and Sections 5 and 6 cover some history, showing how we got here, and explores possible historical links between monopolies and fascism. It then, in Sections 7 and 8 we look at the several links between monopolies and tax havens, and the bridges between antimonopoly and tax justice, then follow this with
1. Myths and misconceptions
Monopolies are widely misunderstood, in several ways.
Many people mistakenly think that monopolies are all about consumer welfare and prices. As in, a dominant player jacks up prices with impunity, and everyone pays more. No! Prices matter, but just think: Facebook’s and Google’s services are free! Amazon’s the cheapest! Consumer paradise! Yet if you think that their awesome dominance of the markets they are in — between them Facebook and Google have a stranglehold over two thirds of the $110 billion US internet advertising market — isn’t a problem, then you haven’t been paying attention. Price is the wrong metric here. Yet under the influence of Chicago Law & Economics, especially since the 1970s, this obsession with consumers and with prices has increasingly been the central guiding principle of antitrust law and enforcement, in the United States, in Europe, and elsewhere. The central problem isn’t prices, but private power.
Many people mistakenly think that antimonopoly (or “antitrust,” as it’s sometimes known, for historical reasons) is all about “breaking things up” to increase competition. No. Breakup is just one (important one) from a spectrum of remedies. More competition in banking, for instance, won’t necessarily curb any banker’s willingness to take profitable risks at taxpayers’ long term expense: it could provoke an arm’s race to take most risks. Breaking up Google would help tame its power, but a bunch of smaller Googles may well do similar nasty stuff with our data. So remedies to corporate power must also involve better financial regulation, stronger tax laws, criminal laws, limited liability laws, accounting and audit rules, data protection and privacy rules, prison sentences, crackdowns on tax havens, and more. Exceptions need to be made for the ”little people”, who must be allowed to organise to confront corporate power. All this, and plenty more, can go in the antitrust box.
It is widely believed that European competition authorities, under the leadership of Margrethe Vestager, are global monopoly-busting heroes. They aren’t. She’s a lot better than her appalling predecessor, Neelie Kroes, and Europe is surely doing a better job than the mess they’re making in the United States, and better still than the non-existent antitrust authorities in most poorer countries. But European competition authorities operate within a price-obsessed ideology and legislative framework, and under massive corporate influence in Brussels. (The graph in Section 9 provides a taster.) Some officials in Europe, such as Germany’s top antitrust regulator Andreas Mundt, have spine, but the list is fairly short.
Many experts seem to think that the monopolies problem is an American disease: that it’s not much of a problem for Europe. Not so. Scroll down to Section 4 on Measuring Monopoly, or search in this blog for the words “false cornucopia”, to see how large and pervasive this is. Data can only measure some of its effects: there are many blind spots. What is more, power begets power, and without radical action soon the dangers will inevitably grow, and grow. The problems may be sharpest in developing countries, though there’s little data about this.
People across the political spectrum oppose antitrust for various reasons. On some parts of the right, for instance, many people see big firms as efficient. On some parts of the left, there’s often a suspicion of competition and of markets: antitrust, for some, is seen as a tool to perfect capitalism, rather than to abolish it. Our response is this: monopolies, just like tax havens, involve rigged and corrupted markets. We advocate un-rigging and de-corrupting markets – whatever other policy proposals you may have.
There is often great confusion (especially, it seems, in Europe) about the relationship between competition in markets between firms, on the one hand, and on the other hand tax and regulatory “competition” and the “competitiveness” of whole countries — the Competitiveness Agenda, as it has been called. These two processes with similar names are wholly different in the real world (ponder the difference between a failed company, like Enron, and a failed state, like Syria, to get a first sense of this difference.) The former kind of competition in markets is generally healthy, when it works, while the latter is always harmful. As the Tax Justice Network has pointed out repeatedly, policy-makers labour under elementary economic fallacies which means they conflate the two kinds, prioritising the latter as if it were the former. As the Alexa discussion above shows, this ‘competition’ inevitably promotes corporate subsidies, including lax antitrust.
In terms of civil society, a thrilling fightback has emerged in the past couple of years. But — and this is a big but — almost all the energy is in the United States. European civil society is all but asleep. Europe now needs to develop an expert, radical, snarling, non-partisan organisation, network and movement to create a deep, coherent critique, propose radical solutions at national and European levels, and to take the fight directly to the policy-makers.
More on all these soon. But for now, if you remember one thing about monopolies, make it this.
The problem isn’t about prices. It’s about power. And herein lies a key to the political extremism we’re now seeing everywhere.
2. A new gilded age: monopolies are everywhere
We are in a new Gilded Age of monopoly and coercive market power, across the world. Market-controlling behaviour by large corporations poses as great a danger to the world as tax havens do.
Monopolies — as with corporate tax avoidance, and the looting of national treasuries and the stashing of the proceeds in secret offshore accounts — thrive most happily in conditions of weak government. In a power vacuum, thuggish shake-down artists rise to the top. That’s why we think the problem is probably most acute in poorer countries. While there is little research in this area, there are plenty of stories if you look for them. Anyone familiar with Carlos Slim, who cornered Mexico’s mobile telephony to impose effectively a private tax system on Mexican phone users and become at one point the world’s richest man, or Aliko Dangote, the billionaire who dominates Nigeria’s all-important cement business (and much more besides), will know how big this issue is.
Seven of the top ten richest people – Amazon’s Jeff Bezos, Microsoft’s Bill Gates, the financier Warren Buffett, Mexico’s Carlos Slim, Oracle’s Larry Ellison (up to a point), Facebook’s Mark Zuckerberg and Google’s Larry Page – are arch-monopolists, in each case taking a genuinely useful service then using market dominance as the central, wealth-extracting plank of their corporate strategies to multiply their wealth. (The other three enjoy considerable market power too.)
Market power and rigged markets: this is where the really big money is. All these people and their businesses, of course, also use tax havens extensively: once a wealth extractor, always a wealth extractor.
Monopoly is everywhere now. That false cornucopia of goods on your supermarket shelves: investigate who owns each brand, and the trail typically lead back to just a tiny handful of giants like Unilever or KraftHeinz or Mondelez.
UK food oligopoly, in a picture. (Source: Which?)
Try the Too-Big-To-Fail global banks. There’s even an official list of these giants. They aren’t getting smaller – and a prospective “Amazonisation” of many financial functions may make things worse. Among other things, these giants have used oligopolistic practices to enjoy structural power in global capital markets, which (as Jerôme Roos has shown) have progressed from decentralised to more concentrated forms, helping creditors “act uniformly” to impose “a coordinated discipline” on borrowers, frequently poorer countries. Or try entertainment, where Disney has amassed so much market power that we are at last seeing the beginnings of a push to break Disney up. And so on.
All this is part of a broader phenomenon academics call “financialisation,” which also brings tax havens and monopolies together. Financialisation involves not just the growth of the financial sector, but also the conversion of underlying economic activities into financial forms. A private equity-like firm, say, identifies a market niche and buys up all the competitors in that niche, then extracts monopoly rents from their customers, workers, and suppliers — at the same time as also running all their affairs through tax havens, to gouge taxpayers.
The problem may be greatest in one particular sector.
3. Big Tech
Facebook, which essentially has no direct competitors, leverages its market power to force users into devil’s bargains where they have little choice but to hand over their data to infamous “third parties” if they want this awesome convenience.
Then there’s Google, which has similar market power:
Source: visualcapitalist.com
Having effectively coerced your data from you, these firms feed it into algorithms ”designed to prioritise engagement” which consequently spread propaganda and hatred, tilt elections, worsen health crises, exacerbate global warming by spreading conspiracy theories and helping the forest-killing Brazilian president Jair Bolsonaro into power – and who knows what else?
If you think social media is diverse, Instagram, Whatsapp, and many others are owned by Facebook. Youtube? Google. The Android operating system? Google (which is the default search engine, and they also pay Apple to be the default on iPhone. Deepmind? Google (OK, Alphabet, which is Google.) Your sunglasses? Gigantic market power, courtesy of EssilorLuxottica. The business of academic papers? Same again. Rail transport? Huge market power, gouging taxpayers and travelers. The water you drink? Maybe it’s under a local water monopoly. The news you consume? Filtered through those same gargantuan controlling internet giants with the power to influence what gets read. Hell, even the Helvetica, Times New Roman, Palatino and other typefaces you use are being taken over, would you believe it, by the market-power-hunting private equity firm HGGC.
As Mariana Mazzucato and many others have pointed out, the problems spewing from Big Tech won’t be fixed just by breaking them up and injecting a dose of competition, (though that, if smartly done, would help.) As already mentioned, there’s a lot more to antimonopoly than that.
4. Measuring monopoly
We can only ever measure parts of the monopoly problem. After all, what dollar price would we put on the Facebook-fueled Cambridge Analytica scandal? But here are a few indicators.
First, two thirds of all global corporate earnings now reportedly come from firms with annual revenues of $1 billion or more, according to McKinsey. These giants don’t just overwhelm competitors: governments cower before them. One could argue that entire societies are in Google’s, Facebook’s and Amazon’s thrall.
Second, look at “surplus profits” (meaning, roughly, what you’d expect: a measure of rigged markets, perhaps.) It’s getting worse, worldwide:
Surplus profit likely doesn’t capture it all. Amazon, for instance, didn’t make a profit for years: instead of returning cash to shareholders it ploughed it back into buying up (and muscling out) competitors, dominating markets, building monopolies. The threat they pose is in their capacity to strangle other perfectly viable businesses – a threat that “surplus profits” doesn’t measure.
Third, see this recent research paper by Simcha Barkai of the University of Chicago Booth School of Business, who investigated one of the great puzzles of US economics. Why has the productivity of American workers soared over the last 30-40 years, while those workers’ incomes have stagnated?
Is this divergence because of technology? Globalisation? Or is it down to the rise in market power and monopoly? (Or, to be precise here, monopsony, when it’s buyers of labour, rather than sellers, who have the market power.)
Barkai burrowed into what corporations do with the money they earn. It turns out there has been a dramatic decline in the share being invested in labour costs – but also an even bigger decline in the share going to capital costs (investment in factories, etc.). What has risen, to compensate for these declines, is profits: money returned to shareholders. He said:
only an increase in markups can generate a simultaneous decline in the shares of both labor and capital”
And the effect is big — really big. The rise in profits has been about $14,000 per worker (in 2014) — worth about half of median income! As he put it, “an increase in competition to its 1984 level would lead to large increases in output (10%), wages (24%), and investment (19%.)”
This represents both a staggering transfer of wealth, and an overall loss of wealth too. Imagine how different the political landscape in the United States would be if all (or even a big chunk) of that rise in profits had gone to workers instead of to owners. (And if those conspiracy theories hadn’t found such wonderful, monopolising transmission vehicles.)
A new book by finance researcher Thomas Philippon has some other numbers: improving competition would:
Save US householders $600 billion a year
Increase GDP by $1 trillion
Increase private labour income by $1.25 trillion, while cutting corporate profits by $250 billion
Away from the United States, studies have also found:
The rise in the capital share of income in Europe is twice as large as recorded in the official accounts (Tørsløv, Wier, Zucman, 2020 update.)
Business churn in Europe is falling, as fewer new entrants emerge. (Guinea/Erixon, 2019)
In Europe, the ten largest companies control, on average, over 80% of the market in postal, air transport, broadcasting, telecommunication, and water transport in each national market. (Guinea/Erixon, 2019)
A ‘neoliberalisation’ of European competition policies (Buch-Hansen and Wigger, 2010)
A surge in mergers & acquisitions led by private equity and other financial players (Wigger, 2012)
A dramatic drop in companies in the U.K. sharing profits with workers (Bell, Bukowski, Machin, 2018)
Matters in Europe may not be as extreme as in the U.S. on many measures, but they are extreme, and the research is sparser.
Note, once again, that prices are just one measure of the problem: monopolies (like tax injustices) generate inequality, economic stagnation, de-industrialisation, financialisation, a loss of entrepreneurship, corruption, and threats to national security.
And there is another dimension of damage to know about.
5. Older history and the f-word
Historically, monopolies have been associated with authoritarianism and even fascism. Tax havens seem to have similar associations.
Why? Well, for one thing, healthy competition with multiple players competing in markets implies dispersed economic and political power. Central control via monopolies naturally fits with authoritarianism. As Jonathan Tepper and Denise Hearn note in their excellent antimonopoly book The Myth of Capitalism:
(Here’s another study looking at that.) When the Second World War ended, the US-led Allied powers restructured the German political landscape under the three D’s: De-Nazification, De-Militarisation, and De-Cartelisation. A massive re-assertion of competition in the US economy, and to a lesser extent elsewhere, alongside other progressive policies such as high taxation of the wealthy, strong financial regulation and powerful restrictions on cross-border financial flows co-incided with what is now known as the “Golden Age of Capitalism”, a high-growth age which lasted for a generation after World War Two.
During this period, capitalism and democracy were more or less aligned. Bosses paid workers who produced goods, which generated profits. Competition and open markets kept excesses in check, and helped workers bargain with bosses, to get a fair cut of the profits. All paid their taxes, and the rich often paid very high rates. Finance was kept under control too. Economic growth in most countries was higher than at any point in world history, before or since. Politicians accepted democracy.
That golden age has given way to tax havens, monopolies and other market-rigging schemes which pit a corrupted capitalism against democracy. The ensuing unfairness and inequality has generated vast pools of anger. And, to detract from that anger, the winners from the system use the tried-and-tested tricks of the demagogue: deflect attention by blaming the poor, or people of colour, or sausage-eating Euro-weenies in Brussels. And if democracy fights back – well, the politicians’ answer is to reject it.
6. Where did the modern monopoly problem come from?
Antimonopoly zeal has risen and ebbed over the centuries, most obviously in the United States, (as this timeline shows.) The US has always, rightly or wrongly, identified itself as a standard-bearer for freedom — but for long periods of its history American society recognised that tyrants come in both public and private forms.
If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life,” said the monopoly-busting US Senator Sherman around 130 years ago. “If we would not submit to an emperor, we should not submit to an autocrat of trade.”
True freedom needs strong official fences against private predators — or you’ll get the wrong kind.
To put it a different way, powerful government intervention may be needed to keep markets clean and open, just as football games need referees and linespeople to keep play fair.
American antimonopoly laws during periods of healthy competition tended to frame the problems not so much in terms of price, but in terms of two other things: on curbing excess concentrations (and abuses) of power; and on watchfully protecting the structure and integrity of markets.
After the 1960s, however, a small handful of scholars at Chicago led by Aaron Director, Robert Bork and Richard Posner, narrowed antitrust down to consumer welfare and prices, by scoffing at the idea that big corporations would monopolise (seriously, they did argue this) — and then going on to say that it could be a good thing if they did monopolise! These, and other changes, spread not just into the Republican Party, but also into the Democratic Party, to the courts — and from there to Europe and the rest of the world.
Now, for instance, European laws have been heavily captured by this price-obsessed view of monopoly. Here’s the top of the highest-level official public statement on European competition policy.
(Source. I found this in April 2019, but it seems to have disappeared.)
Note the obsession with prices and with consumers. Lower down, this section targets “state-run monopolies” (but not, explicitly, private ones) and even states baldly that “mergers are legitimate” as long as they “expand markets and benefit consumers.”
The European approach is also predicated heavily on tackling “abuse of a dominant position” – which sounds great. Much better, though, would simply be to tackle “dominant position.” Once they’re dominant, it may be too late to get a grip on the abuses that ensue.
This is not a citizen-friendly antitrust system.
7. Where do antimonopoly and the anti tax haven movement connect?
There are several areas where tax havens and monopolies overlap. This section looks more at how this might happen in the domestic economy: the next section focuses in more detail on some crucial particular global dimensions.
Most broadly, both phenomena involve the rigging and corruption of markets, to extract wealth from a range of stakeholders. With monopolies, they rig markets by directly dominating them, while tax havens help large firms escape profit-crimping rules they don’t like. In each case, political ‘capture’ to facilitate the market-rigging is essential. In each case, a dangerous “shareholder value” ideology justifies the extraction, at the expense of wider society.
What is more, private empires built around one form of unproductive wealth extraction or market-rigging are likely to stem from the same corporate culture which encourages the pursuit of other forms. Once a wealth extractor, always a wealth extractor. It’s surely no coincidence that Amazon doubled its reported US profits in 2018 – at the same time as it reported paying zero federal taxes – in fact, it got a $129 million rebate.
Third, both monopolies and tax havens shift entrepreneurial energies in an economy away from improving productivity (by, say, producing better goods and services in cleverer ways), towards these unproductive wealth-extraction games. A recent analysis of the US economy by Thomas Philippon and German Guttierez showed that while modern “superstar firms” are highly profitable, they don’t contribute to productivity in the way that past superstars (like General Electric or General Motors) once did. And, Philippon adds, “The big difference between the superstars of today and those of the past is that superstar firms today pay much less taxes.”
Tax haven activity (whether via helping multinationals cut their tax bills, or helping them escape financial regulations,) also reinforces monopolising trends. (As a leading campaigner in this area put it, “Taxpayer subsidies help build monopoly.”) This is partly because it boosts corporate profits, making large firms (the main users of tax havens) even larger, boosting their abilities to buy up competitors. This, again, has nothing to do with genuine productivity or entrepreneurialism. Also, corporate tax cuts reduce the cost of capital relative to labour, thus incentivising them to cut labour’s share in national income (which we discussed above.) This hurts workers – while further boosting monopoly. As recent research summarises:
“A drop in the corporate tax rate reduces the labor share by shifting the distribution of production towards capital intensive firms. Industry concentration rises as a result.”
Likewise, this goes in the other direction. Monopoly reinforces tax injustice. For one thing, the bigger and more international a company is, the more easily it can expand into more jurisdictions, thus making it easier to shift profits around to dodge tax (or to escape other constraints,) further boosting profitability. And there’s evidence this happens: as a new paper shows:
Our findings reveal a striking and persistent tax advantage for big business since the mid-1980s . . . relative to their smaller counterparts.
It’s a self-reinforcing dynamic which connects with another: the lobbying power to browbeat states into changing tax laws in the multinational’s favour. The best example of all this may be 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. This was a major issue for antimonopolists and tax justice activists alike.
Here is another way that monopolisation boosts tax injustices. Corporate tax cuts can, in the right circumstances, be passed on to consumers, or to workers, or pensioners, shareholders, or other stakeholders of a firm. But the bosses of a firm with market power will have just that — power to pass tax cuts through to shareholders — the financial owners of the company — but also to pass tax hikes on to anyone except shareholders. To have their cake and eat it. (New IMF research shows, for instance, that this is a major reason why President Trump’s tax cuts have been so poor at generating jobs and investment: it’s been shareholders who snaffled the cream.)
8. Value chains and choke points
A further way to think about monopolies and tax havens is to consider how multinationals string “global value chains” around the world, generating economic value in one set of countries (for example, by setting up factories there) then sitting astride strategically positioned choke points in global markets, to extract additional profits from the chain. As corporate tax lawyer Clair Quentin explains it:
the things we buy are cheap because of cheap hyper-exploited labour abroad, we all know that, but the cheapness of that labour does not necessarily mean greater profits for the company actually employing the cheap labour. It is much more likely to mean greater profits for whichever “lead firm” (to use the global value chains jargon) is “governing” the value chain. . . making excess profits by using its governing position in the chain to force those other firms’ prices down.”
If the choke point is a powerful one, they can not only push down prices for producers (using their monopsonist power) while also pushing up prices for consumers, getting a double dose of rentier profits. These outsized profits are easy to de-materialise as financial capital and shift into what Quentin calls “swollen sacs of undertaxed capital” in low-regulation, no/low-tax tax havens. And the drivers of this offshoring of profits are also the drivers of centralisation. As one commercial analysis puts it:
“The commercial and legal drivers to consolidate ownership of a group’s intangible assets, and the tax advantages from doing so in a low tax environment, have resulted in the prevalence of structures designed to centralise the global or regional ownership of intangibles.”
These concentrated pools of financial capital offshore are vantage points in their own right: pots of mobile money to dangle in front of workers or suppliers or tax authorities in different countries, allowing multinationals to play each off against the others by threatening to pull out investment (or not to invest) from each place, so as to obtain maximum advantage at the expense of all the other stakeholders in the game. What is more, by using these tricks to shift profits into tax havens, the local subsidiary of the lead firm can easily make artificial losses – then tell workers “we’re not profitable – so, sorry folks, but there’s no money for wage increases.” When, in truth, there is an immense amount of money in those swollen sacs of undertaxed capital, out of reach, offshore.
This can lead to bloodshed. In a report on South Africa’s Marikana massacre in 2012, for instance, police fired on miners demanding wage increases, killing or injuring nearly 100 people. A subsequent investigation by South Africa’s Alternative Information and Development Centre (AIDC) found that: “Terminating the Bermuda profit shifting arrangement could have released R3 500-R4 000 extra per month for a Rock Drill Operator wage” – [which would have covered the protesters’ original demands and prevented the protest.]
Did the arms company also have a Bermuda subsidiary?
In these global strategies the lead firms obtain both escape – the tax haven thing – but they also accumulate and concentrate power in global markets (the monopolies thing.) The power enables the lead firms to intimidate and cheat both tax authorities and politicians, but also workers and others.
All this means more slippery capital floating around the world that’s hard to tax, regulate or bring under democratic control and accountability.
These games are easier to play in the digital age. In the old industrial economy, “smokestack” industries usually required large capital investments in factories and the like to generate profits. Would-be monopolists had to make gargantuan investments, often in multiple factories rooted to the ground, if they wanted to corner and control physically dispersed markets (though it did happen). Now, however, a growing share of corporate profits are realised by internet platforms and other choke-point-straddling firms which require relatively little capital investment (Uber doesn’t own cars, Airbnb doesn’t own apartments, and Google doesn’t own newspapers: these platforms free-ride off large investments and effort made by others.)
To illustrate how this can work, take a patent, which tax wonks call an ‘intangible asset.’ Patents and copyrights are state-sanctioned mini-monopolies, where you’re officially allowed to keep competitors out of a market niche you’ve created or bought into. (There are old, good justifications for the idea of copyrights or patents, but thanks to legal changes like the Mickey Mouse extension and ceaseless lobbying, protections that used to apply for a few years can now extend for a century or more.)
Can’t catch me
Patents, company brands and other “intangible” assets are bread and butter for those designing multinationals’ tax haven schemes. To oversimplify, here’s how it’s done.
A multinational sets up a shell company subsidiary in a tax haven, to own Patent Y and Brand Z.
That subsidiary charges other parts of the multinational company, elsewhere, large royalties for using Patent Y and Brand Z.
Those large cross-border royalty payments turn up as high profits in the tax haven, where the tax rate is zero, while in the high-tax country those payments are treated as costs, reducing tax payments there too. Hey presto! The multinational’s tax bill shrivels and disappears.
The international tax system also encourages monopolisation. Under principles enshrined a century ago, multinationals are treated as if they were collections of separate entities, all trading with each other across borders in independent arm’s length transactions. But as a new report explains, multinationals in the real world draw great strength and profit from their nature as unitary global entities, reaping tremendous market power and economies of scale which makes them far more profitable than a bundle of genuinely separate entities ever could. Multinationals’ accountants concoct fictional “transfer prices” for these cross-border internal transactions, thus shifting profits across borders in the direction of tax haven-based subsidiaries.
What is more, even if you were to find a multinational trading on the basis of genuine “arm’s length” prices, the fact is that those “governing” lead firms have the choke-point power to suppress the price of genuinely value-bearing inputs in the open market anyway. In other words, if the multinational’s accountancy arm don’t manipulate those transfer prices to cut the tax bill, the multinational’s monopsony / monopoly arms will. (For more on this, see here.)
An alternative international tax system promoted by the tax justice campaigners (and others), called Unitary Taxation with Formula Apportionment, would, if effectively, applied, decisively address these issues, treating multinationals like the unified powerful behemoths that they are, realigning tax with economic substance, and in the process curbing their market power. This should be considered as both an antitrust tool and a tool for tax justice. Fortunately, this system is at last gaining traction in policy circles – though as Quentin notes, there are some big questions about global value chains still to be addressed: notably how to apply the unitary / formula approach to global value chains.
Another obvious bridge between antimonopoly and the anti tax haven movement concerns the vast accounting and professional-service firms like PwC, Deloitte, EY or KPMG. Their size allows them to milk profitable conflicts of interest between different functions, contributing to a thoroughly corrupted form of capitalism. These companies are cheerleaders for and facilitators of monopolising mergers & acquisitions — and they play a similar role offshore: perhaps no other group carries as much responsibility for designing the nuts and bolts of global offshore architecture of tax havens, and for lobbying governments around the world to change their tax (and regulatory) rules and laws in ways that tend to reinforce large corporates, against wider society. As one summary puts it, the Big Four accounting firms:
“are actively facilitating the consolidation and concentration of corporate power . . . through their intimate knowledge and ability to work the international financial system, [they] are aiding in aggressive tax minimisation that ultimately undermines democratic government; implicitly supporting dubious financial regimes and other forms of sleaze.”
9. The euro-competitiveness fallacies
NOTE: We are singling Europe out here – not because it’s the worst actor but because many people think there’s no problem here. But there is. Not only that, but Europe holds keys to global trends.
In all these areas, Europe has played a strange, conflicted, and confused role.
On the one hand, the European Union seeks to portray itself as a bastion of progressive economic policies and defence against neoliberalism – and there certainly is a fair bit of that – with the result that the problem is generally sharper in the United States and elsewhere than in Europe. As Philippon said of global antitrust trends:
Europe—long dismissed for competitive sclerosis and weak antitrust—is beating America at its own game.
Indeed, Europe is also where probably the most explicit bridge between antimonopoly and tax justice has been created, with European competition authorities under Vestager taking Ireland to court over its refusal to collect €13 billion in back taxes from Apple. The underlying logic is that Irish tax rulings for Apple constituted unfair “state aid” – tax subsidies – which rig markets by giving selective advantages to Apple and undermining competition. Ireland wasn’t the only culprit: the same state aid tool has also targeted the tax haven affairs of Luxembourg, the Netherlands and the UK.
The logic that tax haven schemes constitute state aid is correct, so it’s encouraging that Europe is trying to wrest billions from a market-rigging multinational and return it to the people. Yet beyond this point European policies are incoherent and prey to corporate capture. A recent book gives a taster (p110 here, disclosure: your correspondent authored this book):
Kroes was later implicated in the Panama Papers tax haven scandal. Vestager, her successor, is of course a very different actor: in fact Kroes even criticised Vestager’s stance on Apple for being (cue tiny violins) “unfair.”
Yet despite Vestager’s apparently fresh approach, she still operates largely under old, price-obsessed frameworks. Her speeches reflect this, and her office, like those before her, may have vigorously prosecuted cartel behaviour in some areas, but it has also nodded through a string of gigantic monopolising mergers, many of which should never in a million years have been tolerated:
Even the prohibition against ‘state aid,’ the foundation of the generally welcome case against Apple and Ireland, is problematic: state aid rules effectively prohibit European nations from supporting and nurturing selected domestic industries: industrial strategies that nations have since the industrial revolution used as springboards for successful economic development.
This gets us into complex waters, and more Euro-confusions.
Vestager has called for Europe to “tear down the technical and regulatory barriers“ that keep Europe’s markets fragmented. The idea here is that if you have a single seamless market then there will be lots of European competitors jostling in every national market, thus increasing local competition. But more often than not the practical outcome has been the replacement of dominant national players with even larger, more powerful dominant pan-European players — or yet bigger global players like Amazon operating from lax-regulation, low-tax European platforms like Ireland or Luxembourg.
And Europe also, with help from little-known lobbying groups such as the European Roundtable of Industrialists, suffers from a bad old economic idea called supporting “national champions” to go head-to-head with the Chinese, or the Americans, or the Japanese, in the name of something called “European competitiveness.” Proposals are out there for a €100 billion European wealth fund to support such giants.
It’s a compelling story: who could disagree with a need for Europe to be “competititive”? Well, anyone who has read the Tax Justice Network regularly will know that once you unpack the concept, it soon reveals its incoherence.
The idea of relaxing competition rules to allow global behemoths to emerge, is really the old Competitiveness Agenda. Such ‘champions” would be bolstered by market power allowing them to exploit European consumers, workers, taxpayers and others, sto help them “compete” better on the world stage. Or, to summarise more succinctly:
make Europe more ‘competitive’ by reducing competition in Europe.
If that sounds ridiculous, it’s because it is. It’s the same basic idea used to justify multinational corporations’ use of tax havens: let them use tax havens to extract wealth from taxpayers, so as to make the multinationals — and by extension Europe — more ‘competitive.”
Robbing Peter (taxpayers) to pay Paul (the multinationals) is not a viable recipe for progress.
This isn’t the place to dissect Europe’s competition policies in detail, though. The main point of this article is to point out that — with a few disjointed exceptions — there is no serious pushback coming from European civil society against this: no coherent critique being made.
10. A global fightback is underway
The good news is that the fight against monopolies is, just like the fight against tax havens, something that can garner support all across the political spectrum, from people on the political Right who worry about the rigging and corruption of markets, to people on the Left who fret about overwhelming corporate and financial power and the rise of inequality. “I hate to admit it,” the Fox News commentator Tucker Carlson said last year, commenting on Amazon, and echoing many others on the Right, “but [the avowedly socialist] Alexandria Ocasio-Cortez has a very good point.” As the US expert Matt Stoller puts it, antimonopolism is “not some lefty crusade or right-wing attempt to seize power.”
Indeed, a nascent antimonopoly movement is now rising fast. Its epicentre is in the United States, where groups such as the influential Open Markets Institute, whose journalists combine deep expertise with uncompromising, even snarling radicalism, are spearheading a revival of old antitrust ideas, leavened with new ones for the digital age. These ideas have moved into the policy platforms of leading politicians such as Elizabeth Warren or Bernie Sanders: in fact, to pretty much all the main Democrat candidates, a move away from the Obama era when Google lobbyists all but had the keys to the White House. Here’s Google CEO Eric Schmidt — the one who said he was proud of his company’s tax-cheating ways, (“it’s called capitalism”) — wearing a Clinton campaign staff badge in 2016.
Source: promarket.org.
There has been some, though less, interest from Republicans, some of whom want to revitalise their party’s conservative, open-market roots.
The new antimonopoly is starting to spread east across the Atlantic, helped by front cover reports in The Economist and columnists like Rana Foroohar writing for The Financial Times.
As a sign of possible Euro-changes, it may be significant that those European merger prohibitions, running at close to zero for most years since 1990, ticked slightly upwards in early 2019, with a proposed Tata Steel/ThyssenKrupp merger blocked, along with prohibitions on an Alstom/Siemens tie-up, along with surely the most ghastly proposition of them all: Commerzbank with Deutsche Bank. Germany’s regulators are coming out swinging at Big Tech, in some cases at least. A very current example concerns a proposed “Nachunternehmerhaftung Gesetz” (don’t you love those German words) – draft legislation to level the playing field in the parcel delivery industry. (Read more here.)
However, European competition policies are a still mishmash of thinking, with no coherent counter-narrative. There are the German “Ordoliberals” (who believe that competition must be let rip, with a strong state as referee;) the Chicago Law & Economics movement, where the rule of law is subjugated to questions of economic efficiency; there is French state-led dirigisme; there is the ubiquitous Competitiveness Agenda (see above) and the national-champions brigade; there are components of the political left who decry monopolism as simply an inevitable result of capitalism, which must be overthrown — and by all sorts of special pleadings by various Euro-nations.
Yet if European competition policy is currently mixed up, it will be more easily dislodged in the right direction if everyone sings from the same hymn sheet. So there’s all the more reason to set up a truly progressive expert network to take on the monopolitis that seem to be sprouting everywhere.
Fifteen years ago, the year after the birth of the Tax Justice Network, Jeffrey Owens, the head of tax at the OECD, expressed his frustration with the lack of civil society action on tax havens until then, but raised a new hope:
“The emergence of NGOs intent on exposing large-scale tax avoiders could eventually achieve a change in attitude comparable to that achieved on environmental and social issues.”
In pretty short order, a new tax justice movement began to help drive massive changes to the international tax haven system.
Europe needs a new antimonopoly movement, a home-grown version of groups like the Open Markets Institute, fighting for a radical antimonopoly agenda, firing off broadsides in the media, submitting legal challenges, educating journalists, and above all unpicking the corrupt antitrust consensus from first principles, then putting it together into a large, coherent, expert structural critique — and proposing world-changing solutions.
Here are just a couple out of of a thousand examples of radical possibilities. Ban all advertising targeted on personal information. (Crazy? Maybe. But Just think of the democratic dividend. Is anyone in Europe running with this?) Why is there no movement in Europe cheering on Vestager and urging her to go further, when she says she is thinking about shifting the burden of proof onto Big Tech companies’ shoulders, in competition cases? This idea came from a panel of experts: we need ideas like this gushing forth from an independent body fighting for ordinary people.
This blog is a first attempt to make the links with the tax justice movement, and to show how much overlap there is with our issues. The Marikana massacre suggests just how many different agendas can be at play here – and how many allies and constituencies might be brought together for this fight against market-rigging and overwhelming corporate power.
Someone needs to start setting up a new body to engage on these cross-disciplinary issues and to start creating a coherent, expert and radical critique of where we’ve got to.
And they need to do it, fast.
Further reading:
Cornered, by Barry Lynn. “The Velvet Underground was a band about which it was said that they didn’t sell a lot of records, but everyone who bought one started a band. Similarly, Lynn didn’t sell a lot of books, but everyone who bought a copy became an advocate.” A touch out of date now, but still a bible for many.
The Myth of Capitalism, by Jonathan Tepper and Denise Hearn. (Like the Finance Curse book, on the Financial Times, Best Books of 2018.) More up to date, and if anything, scarier, than Lynn’s.
Open Markets Institute. Sign up for their newsletters, and why not donate? (Disclosure: I have no affiliation with Open Markets.)
The ”Big” Newsletter. By Matt Stoller. Regular updates on antimonopoly, mostly from the US but with lots of international news too.
We’re pleased to share the nineth edition of the Tax Justice Network’s monthly podcast/radio show for francophone Africa by finance journalist Idriss Linge in Cameroon. The podcast is called Impôts et Justice Sociale, ‘tax and social justice.’
Nous sommes heureux de partager avec vous cette neuvième émission radio/podcast du Réseau Tax Justice, Tax Justice Network produite en Afrique francophone par le journaliste financier Idriss Linge basé au Cameroun. Le podcast s’appelle Impôts et Justice Sociale.
Dans cette neuvième édition nous revenons sur la Conférence Panafricaine sur les flux financiers illicites, qui s’est déroulée du 1er au 3 octobre 2019 à Nairobi (Kenya)
Nous avons eu l’occasion de discuter avec des participants, dont:
Rita Bola, Directrice de la Direction Générale des Recettes de Kinshasa (DGRK)
Aissami Tchiroma Mahamadou, Directeur des Projets et Programmes, ROTAB
Comme invité: Souad Aden Osman, Directrice Exécutive de la Coalition pour le Dialogue en Afrique (CODA)
Tous ont partagé leurs expériences et impression des choses apprises lors de la PAC, notamment les outils de détection des flux financiers illicites développés par Tax Justice Network
Pour écouter directement en ligne, cliquer sur notre lien Youtube, ou l’application Stitcher.
Vous pouvez aussi suivre nos activités et interagir avec nous sur nos pages Twitter, et Facebook.
Welcome to our sixth monthly tax justice podcast/radio show in Portuguese. Details of this month’s show below. Bem vindas e bem vindos ao É da sua conta, nosso podcast em português, o podcast mensal da Tax Justice Network, Rede de Justiça Fiscal. Veja abaixo os detalhes do programa em português.
O que ganhamos com isenções fiscais à empresas? Ouça no podcast #6.
O gasto tributário é o dinheiro que os governos abrem mão de receber em impostos. Renúncia fiscal para empresas com a expectativa de ter retornos positivos para a atividade econômica e para a vida das pessoas. No Brasil, isso chega a US$ 70 bilhões. O problema é que não sabemos quem recebe essas isenções, quanto custa cada benefício e quais são seus resultados.
No sexto episódio do É da sua conta explicamos o que são os gastos tributários e questionamos a falta de transparência dessa política: quem são os beneficiários? As promessas de benefícios para a sociedade realmente são cumpridas? Também mostramos que os gastos tributários podem prejudicar os serviços públicos e falamos de sua relação com a atual política econômica baseada na austeridade fiscal.
No É da sua conta #6 você confere…
O que são gastos tributários.
Os incentivos fiscais dados às empresas que fabricam e comercializam agrotóxicos, diferente de produtos livres de agrotóxicos e da agricultura familiar, que pagam impostos.
A política de gastos tributários, com Leonardo Albernaz, auditor do Tribunal de Contas da União e Nelson Barbosa, professor de economia da Universidade de Brasília (UnB) e da Fundação Getulio Vargas (FGV), de São Paulo.
A importância da transparência aos gastos tributários, com a assessora política do Instituto de Estudos Socioeconômicos (Inesc), Livi Gerbase, e Paolo de Renzio, pesquisador do International Budget Partnership (IBP).
Um exemplo do que ocorre com a Kenmare, mineradora que atua em Moçambique quase sem pagar impostos, com Inocência Mapisse, pesquisadora e economista do Centro de Integridade Pública do país africano.
Nick Shaxson, da Tax Justice Network, apresenta um estudo que compara gastos tributários em países africanos e europeus.
Os gastos tributários e a atual política de austeridade fiscal conduzida pelo governo brasileiro.
Call to action: Revisar e reduzir os gastos tributários para poder ampliar o orçamento público desponta como uma boa alternativa socioeconômica para os países, com destaque aos que estão sob políticas de austeridade fiscal.
O download do programa é gratuito e a reprodução é livre para rádios.
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