If tax havens scare you, monopolies should too. And vice versa.

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.

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.

Source: NYT

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:

Source: UN Conference on Trade and Development, 2017 (Chapter VI: “Revenge of the Rentiers”)

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?

(Source: Economic Policy Institute.)


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:

  1. Save US householders $600 billion a year
  2. Increase GDP by $1 trillion
  3. Increase private labour income by $1.25 trillion, while cutting corporate profits by $250 billion

Away from the United States, studies have also found:

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.

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:

Source: author’s estimates, based on EC merger statistics, July 2019.

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.

Edition 9 of the Tax Justice Network’s Francophone podcast/radio show: édition #9 de radio/podcast Francophone par Tax Justice Network

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:

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.

Enfin vous pouvez nous écrire à notre adresse [email protected]

Tax Justice October 2019 Portuguese podcast: O que ganhamos com isenções fiscais à empresas? #6

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.

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

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…

Participantes desta edição:

Inocência Mapisse, pesquisadora do Centro de Integridade Pública (CIP) de Moçambique 

Leonardo Albernaz, do Tribunal de Contas da União

Livi Gerbase, assessora política do Instituto de Estudos Socioeconômicos (Inesc)

Naiara Bittencourt, advogada popular da Terra de Direitos

Nelson Barbosa, professor de economia da Fundação Getúlio Vargas -São Paulo e Universidade de Brasília

Nick Shaxson, jornalista e integrante da Tax Justice Network

Paolo de Renzio, pesquisador do International Budget Partnership (IBP)

João Villaverde, analista econômico e autor do livro Perigosas Pedaladas

Denise Neumann, jornalista especializada em economia e colaboradora do Cepesp-FGV

Élida Graziane Pinto, procuradora do Ministério Público de Contas do Estado de São Paulo

Beatriz Helena de Assis Prado, aluna de ciências sociais da Unifesp Guarulhos

Links para assuntos citados no podcast

Estudo do IBP “Tax expenditures in Latin America: Counted but not accountable” (2019) – https://www.internationalbudget.org/wp-content/uploads/tax-expenditure-transparency-in-latin-america-english-ibp-2019.pdf 

Campanha do Inesc por transparência dos gastos tributários no Brasil “Só Acredito Vendo” (2018/2019) – www.soacreditovendo.com.br

Estudo da TJN “Comparing tax incentives across jurisdictions: a pilot study” (2019) – https://taxjustice.net/wp-content/uploads/2018/12/Comparing-tax-incentives-across-jurisdictions_Tax-Justice-Network_2019.pdf 

Texto do CIP que pede a revisão do contrato da Kenmare Moma Mining (2019): https://cipmoz.org/wp-content/uploads/2019/08/E%CC%81-URGENTE-A-REVISA%CC%83O-DO-CONTRATO-DA-KENMARE-.pdf

Conecte-se com a gente!

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

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

Taxing multinationals: a new approach

Our headline is also the title of an important new report by Public Services International, a global trade union federation, looking at the fast-changing international tax system.

Co-authored by Public Services International’s Daniel Bertossa and Sol Picciotto, a Tax Justice Network Senior Adviser, it explains in clear and straightforward terms the deep flaws in the principles and practices of the international tax system, and lays out the case for a clear alternative: Formula Apportionment (with unitary taxation.)

The timing is especially appropriate, since it is only in the last few months that we have started to see the unravelling of a philosophical consensus that has underpinned international tax for the past century or so, which is no longer fit for purpose in the digital age of financial globalisation. As the report explains:

Underpinning the system is the “arm’s-length principle” – the quaint notion that legal entities controlled by the same multinational will set prices for transactions between themselves as if they were independent market transactions (i.e. at arm’s-length).

The problem is, of course, multinationals aren’t just loose bundles of independent affiliates trading with each other, which can be taxed separately by each place where they do business:

an MNE is not a collection of independent businesses – it acts as one global company through central coordination of its various activities.

And the way forward:

The answer is simply to tax each multinational as a single entity – the “unitary principle”. Companies can then structure themselves any way they wish, knowing that they will be taxed on their total global profits by each country according to where they have real activities.

This simple change in paradigm eliminates the ability of companies to shift profits to tax havens. It would benefit everybody except tax avoiders and tax havens.

For the details, read on.

The paper focused on the United Kingdom, arguing that it can play a leading role in pushing for reform. Although Brexit is top of most senior UK politicians’ agendas right now, the UK’s main opposition the Labour Party has just outlined a new tax strategy, which aligns with the new Public Services International report. As The Times newspaper explains:

It won’t be easy to change a century-old system, whose principles are baked into all manner of tax laws and international commitments. But now the OECD, which co-ordinates global tax rules, and the IMF, which also has great influence in them, have both finally and publicly accepted that such radical medicine may be required. That suggests that it is only a matter of time before this alternative — for which we have campaigned for some years — is widely accepted.

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

Let’s shrink the City of London finance sector, for prosperity’s sake

This week journalist and Tax Justice Network writer Nicholas Shaxson sounded the alarm in Britain’s Guardian newspaper about plans for a “Singapore-on-the-Thames” economic model, a tax haven strategy, after Brexit:

The strategy to win the great global race to attract financial capital by lowering taxes, loosening regulations and turning a blind eye to the world’s dirty money.”

As he points out, and as our Financial Secrecy Index and Corporate Tax Haven Index demonstrate, the UK, with its network of satellite jurisdictions is already arguably THE top global offender in the tax haven game. Awareness of the damage that’s doing to the tax base of poorer countries and the harm that’s doing to real people has been rising for years now.

But what’s much less understood is that this model of attracting the world’s dirty money is hurting ‘us’ in Britain too. As Shaxson wrote here recently for the IMF,

The billions attracted by tax havens do harm to sending and receiving nations alike. . . for many economies hosting an offshore financial centre is a lose-lose proposition: it not only transmits harm outward to other countries, but inward, to the host.”

This is the core of the finance curse thesis, which is backed by a large and growing swathe of academic research, as this IMF graph illustrates:

Source

The Guardian article continues:

Every nation needs banking and finance, but only up to the point where it provides all the useful services the country needs: taking deposits, lending, handling business payments and so on. But once finance expands beyond this ideal size…the City of London passed this point long ago – it turns nasty. It reduces economic growth, boosts inequality, distorts the economy and curbs entrepreneurialism and productivity (the UK’s is about 10% below France’s or Germany’s, according to the Organisation for Economic Co-operation and Development)“

And here’s the latest graph from the OECD, to illustrate (in fact, these data show the UK’s productivity about 13 per cent below France’s or Germany’s, and about 20 per cent below Denmark’s.)

Source.

Indeed, a Sheffield University study last year reckoned the UK lost a cumulative £4.5 trillion in income between 1995 and 2015 due to the City’s bloated size. You can read more on that here. It’s not just Britain, of course: this report Overcharged: The High Cost of High Finance looks at the United States where estimates of supersized finance are also pretty sobering.

The full Guardian article summarises the core point: shrink oversized finance, for the sake of prosperity.

We interviewed Nicholas Shaxson on his recent book “The Finance Curse: How Global Finance Is Making Us All Poorer” on our monthly podcast the Taxcast which is well worth a listen. The interview starts about 12 minutes in, which we’ve cued up here:

Taxing wealth – how to triumph over injustice: Tax Justice Network October 2019 podcast

In this month’s episode we speak to Gabriel Zucman about his new book with co-author Emmanuel Saez – The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.

Plus, as Extinction Rebellion holds protests around the world over the climate emergency, we point the finger at the surprisingly small number of companies which determine whether investment will go into a better future, or onto a continued path of destruction. How can tax justice and a different vision of growth lead us back from the brink?

Also featuring John Christensen of the Tax Justice Network. Produced and presented by Naomi Fowler.

So many people have become convinced that with globalisation and modern technology it has become very hard or impossible to tax the rich, to tax big multinational companies. And what we want to say is that this is wrong. The choice is ours when it comes to the future of tax justice, if there is a political will, there is a bright future for tax justice.

~ Gabriel Zucman

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

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Historic US vote to tackle shell company secrecy

From the FACT coalition in the United States:

With a bipartisan vote of 249 to 173, the U.S. House of Representatives passed a bipartisan bill Tuesday night to update federal anti-money laundering laws and end the incorporation of anonymous companies in the U.S.  After more than a decade of debate in Washington, Tuesday’s vote in favor of the Corporate Transparency Act of 2019 (H.R.2513) represents the first time that legislation to end anonymous companies has made it through either Chamber of Congress. 

The White House, too, issued a statement of support. The bipartisan support illustrates once again that the fight against tax haven activity can appeal all across the political spectrum. Police, prosecutors, and virtually the entire national security establishment has supported it. As the bill itself notes, secret shell companies have facilitated

terrorism, proliferation financing, drug and human trafficking, money laundering, tax evasion, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.

The United States is, on some people’s reckoning, the world’s biggest secrecy jurisdiction. The draft legislation (which isn’t law yet – it needs to get through the Senate first) requires that most corporations and limited liability companies report to the US government the names of anyone with a significant financial stake or control over operations. That will only be of limited help to foreign forces of law and order. But it still represents a major step forwards.

Gary Kalman, Executive Director of FACT, said:

“After more than a decade of debate to bring anti-money laundering protections into the modern era, Congress just took an enormous step forward. Make no mistake, this is an historic vote.”

This is progress, and a cause for celebration.

“The longer we wait, the greater the loss of life and damage to the world economy”

Title quoted from the IMF’s recent blog, “Fiscal Policies to Curb Climate Change”

The decision to end fuel subsidies in Ecuador have sparked days of protest and driven the cost of petrol and diesel to suddenly spike with the inevitable effect of driving up the cost of daily essentials – food and transport to name but two. The hardships are shouldered by those least able to sustain their wellbeing and livelihoods, particularly indigenous women and all those on low or no incomes. Those suffering are already living under a regime of austerity and find themselves denied their rights to food, adequate housing, education and health. This “orthodoxy” of austerity is replicated in Haiti, Argentina and across the region, dished out by governments, but driven by a power and ideology far greater than any individual state.

The irony of austerity forced upon the people of Ecuador targeting cuts to fuel subsidies (albeit now making a U-turn as a result of the protests) is that carbon taxing is one of the many solutions the global community desperately needs to accelerate a collective reduction in carbon emissions. Many of the regional economies are weakened by debt and the primacy given to interests of foreign investors and multinational companies leaving governments little power or leverage but to ‘tow the line’ of free-market policies. 

The heaviest polluters (multinational companies and wealthy elites) are rewarded by fuel subsidies, low taxes, tax incentives – favourable and asymmetrical terms in which to do business and in which the costs of environmental and ecological degradation, lost land, homes and food are passed to the poorest.

While the protests in Ecuador exposes the complexity of the climate crisis set against austerity, it also uncovers the self-interest of rich companies and investors and calls into question the role of the IMF who, as seen in the quote above, seem to be putting their weight behind climate just fiscal policies. But the IMF statement rings hollow as countries like Ecuador, having received a $4.2 billion IMF loan, find themselves pushed to make choices between regressive fiscal measures or progressive climate measures such as rescinding fuel subsidies. These are choices that Ecuador, Argentina, Haiti, burdened by debt, should not have to make. The counter narrative; one which calls for climate justice and uses the principles tax justice and progressive tax regimes is desperately needed. 

We should be cheering to read the IMF say “Finance ministers must play a central role to champion and implement fiscal policies to curb climate change. To do so, they should reshape the tax system and fiscal policies to discourage carbon emissions from coal and other polluting fossil fuels.” The recent events in Ecuador make this no more than words.

Today Tax Justice Network has joined others in signing a Declaration of Civil Society Organisations At The World Bank and International Monetary Fund Annual Meetings in Light of the Impacts of Austerity Policies in Ecuador, Argentina and Haiti (October 2019). The Declaration addresses the concerns of loans, debt repayment, fiscal austerity, the need for progressive tax regimes and the cost to people’s fundamental human rights.

You can read the Declaration here in English and Spanish.

The Tax Justice Network’s October 2019 Spanish language podcast: Justicia ImPositiva, nuestro podcast, octubre 2019

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:

INVITADOS

MÁS INFORMACIÓN:

Enlace de descarga para las emisoras: http://traffic.libsyn.com/j-impositiva/JI_oct_19.mp3

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

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

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New website: massive rise in tax injustice in the US

Gabriel Zucman has developed a high profile creating new data on tax systems, tax havens and inequality. To coincide with the release of his new book The Triumph of Injustice: How the rich dodge taxes and how to make them pay, he has launched a new, user-friendly website, Tax Justice Now. It’s focused on the tax system in the United States, and it starts with:

America’s runaway inequality has an engine: our unjust tax system

This statement is not without controversy: other explanations for inequality include the rise (especially in the United States) of monopoly and market power: an enormous issue that intersects with tax justice, as we will soon explain. Nevertheless, Zucman’s site is immensely useful, and contains some marvels. Here are a couple:

The site also allows you to design your own tax system (up to a limited point), adjusting sliders and tax rates and so on, to project the effect of reform on particular billionaires. You can also look at the effects of adjusting the total tax rate on corporations combining state and federal taxes.

Overall, another useful resource.

The quadrillion-dollar elephant in the room: beneficial ownership in the investment industry

Read and share your comments on the Tax Justice Network’s new working paper on beneficial ownership and investment funds, available to download here. The paper proposes new transparency measures since neither beneficial ownership registries or the OECD’s Common Reporting Standard (CRS) for automatic exchange of information are sufficient to address the secrecy created by investment funds and financial assets.

After the Panama Papers, the need for beneficial ownership registries to identify the individuals operating behind companies and other legal persons became largely undisputed as a way to tackle illicit financial flows related to corruption, money laundering, tax abuse and the financing of terrorism.

Transparency improvements, especially in the EU, focused on expanding registration requirements for trusts and on giving public access to beneficial ownership information. As the Financial Secrecy Index showed in 2018, more than 40 jurisdictions already had, or committed to have, beneficial ownership registration.

By 2019, the number of jurisdictions with beneficial ownership registries had become even larger, and more countries committed to making their registries publicly accessible. Despite the progress, there remains one tiny loophole with astronomical consequences: there is no public information on the beneficial owners of investment funds or companies listed on a stock exchange, even though trillions of dollars are invested there.

For example, during an investigation into a potential conflict of interest involving a group of companies related to the family of Argentina’s president and a public tender for wind energy fields, Emilia Delfino described how it was impossible to identify the individuals who financed part of the contract because they used an investment fund. When trying to obtain information about the investors, Argentina’s securities regulator refused to disclose them invoking “stock market confidentiality” (secreto bursátil).

Not within the scope of beneficial ownership registries

Firstly, investment funds and listed companies are exempted from beneficial ownership registries either altogether by the law[1] or in practice. Secondly, even companies that are covered by beneficial ownership registries may add secrecy to the investment industry.

Legal vehicles such as companies and trusts may be creating secrecy in the investment industry in three different instances (marked with three different colours in the chart below).

Chart: End-investor's beneficial owner

First, the investor (John) could decide to invest his money through an entity instead of directly under his name, for example through a limited liability company (LLC) called “John’s Company”. This would create the first transparency obstacle. While this company would probably be subject to beneficial ownership registration (if the country has such a law), nothing would indicate that this company is an investor. It would look like any regular company.

Second, the investment fund may be organised as a trust or a limited partnership (which are not always required to register their beneficial owners). Even if they are registered, investors would likely own less than 1 per cent of the fund, so if the fund is organised as a company or partnership, the investor wouldn’t pass the threshold to be identified as a beneficial owner.

Third, through the possible assets held by the investment fund, either real assets (eg real estate) or financial assets (eg financial instruments like futures or swaps), the investment fund may hold shares of a company listed on the stock exchange. Listed companies, despite being companies, are usually exempted from registration, and even if they had to register, investors such as John would likely hold less than 0.01 per cent of the company’s shares, which is far below the beneficial ownership thresholds.

The rationale for these exclusions is that companies listed on a stock exchange and retail investment funds are already subject to high regulation and other disclosure requirements, including publishing a prospectus, appointing an independent auditor and so on. But this is clearly no replacement for identifying the individual investors ultimately owning or benefitting from financial assets (eg shares of a listed company) through investment funds.

The other argument, which we tackled in this blog, is that if an investor has less than one per cent of an investment fund or listed company, they clearly have no control to decide on anything. Besides, the argument goes, companies listed on a stock exchange are already required to disclose who owns more than 3 or 5 per cent of their shares.

However, control and decision making is not the only point. Not only does reporting about 3 or 5 per cent rely on self-reporting by the investor (and so is hard to enforce), but even a much lower ownership may still be extremely relevant. As of September 2019, the value of 0.1 per cent of Apple’s shares comes in at USD $220 million! Identifying the individual ultimately owning this 0.1 per cent would be key for anyone measuring inequality or for any authority trying to find out whether this person is able to justify how they afforded these shares in the first place, and whether they have paid the applicable income, capital gains or wealth tax on them.

In 2019, the Investment Company Institute reported that the total assets invested in mutual funds, exchange-traded funds and institutional funds was more than USD $46.7 trillion. Preqin reported that assets invested in “alternative investment funds” such as hedge funds, real estate funds and private equity funds was USD $8.8 trillion in 2017. Investment funds do not always hold these assets long-term. Usually they engage in securities trading or other financial transactions, where financial assets may be held for just a few seconds. In 2018, the total value of financial instruments processed in the US was USD $1.85 quadrillion (USD $1,850 trillion). To put these astronomical numbers in perspective, in 2017 the US gross domestic product (GDP) was ‘merely’ USD 19.4 trillion.

Does the OECD’s Common Reporting Standard (CRS) for automatic exchange of information solve the secrecy?

Not really (mainly because it is not meant do it, anyway). There are several loopholes, which we have written about, undermining the Common Reporting Standard that are at play here. The main one is that not all investment funds nor all investors are covered by the standard, mainly because not all financial centres are participating in the framework (eg the US). In addition, there is no reporting on wealthy individuals resident in developing countries unable to join the standard’s automatic exchange system, nor on local residents (an investor holding an account with a financial institution resident in the same country). Lastly, even for investors who are covered, exchanged information only covers the income and value of their investment, without always disclosing which investment funds they hold interests in or the underlying securities that they ultimately hold.

So no one checks anything?

Custodian banks, investment fund managers, central securities depositories, and regulators all have obligations to make anti-money laundering checks, but the industry’s structure involves many different intermediaries where many have partial information but no one has a full picture. This makes it almost impossible for anybody to know who ultimately owns what, and how they own it. The use of omnibus accounts by these intermediaries where money and financial assets from many different investors are pooled together doesn’t make the job any easier either. In other words, only one intermediary may have access to the identity of the end-investor who put money into the investment fund. Other intermediaries would only see an omnibus account without being able to identify (and run checks) on each end-investor and without being able to identify the origin of their money to detect money laundering and other illicit financial flows.

In addition, the intermediaries who may be in touch with the end investor are usually banks or other financial institutions that don’t always have the best track record. Either because of negligence, lack of available information, wrong incentives or lack of enforcement, history has repeatedly shown that banks and other financial institutions have, at best, been unable to prevent major money laundering schemes and, at worst, have been actively involved in helping individuals engage in tax abuse. The recent Cum-Ex scandal is a stark example.

One could argue that anti-money laundering laws and other regulations on banks became stricter in the past years. Still, some scandals (eg Danske Bank, the Cum-Ex files) broke out only in 2018, suggesting that not much – or at least not enough – has changed.

Another concern is that values involved in the investment and asset management industry may involve a lot of money, especially many wealthy people. One would think that the more money involved, the more risk and the more checks carried out by banks. It appears the opposite is true. A comment we heard by corporate service providers from Panama and Uruguay suggested that banks or service providers will undertake no risks for little money or if it’s an unknown new client. They will go so far as to ask about the colour of your underwear or the name and hobbies of your great-great-grandmother. However, for accounts in the millions or dollars, or referred by a current client, the situation is much different. These comments are somehow confirmed by an article published in the eve of automatic exchange of information. Swiss banks told Argentine clients they would close any account below USD $5 million. That’s right, the criteria to close an account was not suspicious activity or lack of supporting documents, but accounts with less than USD $5 million.

The investment industry had its own “Panama Papers” moment in 2014 (the Clearstream case), when the US found out that Iran was investing in US securities. However, as a response to these findings, Iran’s investments in US securities did not end, but they were simply hid behind one extra intermediary. Clearstream in the end had to pay USD $150 million, but the industry’s secrecy was not overhauled.

In this context, trusting banks and other intermediaries to police a trillion dollar industry without any public scrutiny poses a huge risk.

Proposals

Complete transparency may eventually be achieved through a global asset registry. In the meantime, out of all the possible assets that individuals or investment funds may hold, it is necessary to determine the ownership of all financial assets, including especially companies listed on a stock exchange.

To cross-check the information, or as a preliminary step, it is also necessary to identify the individual investors of all investment funds, given that they could be investing in financial assets or in real assets. For example, Blackstone alone reported to hold USD $250 billion in real estate. Christoph Trautvetter, who investigated real estate ownership in Berlin, described how it may be impossible to identify the investors behind these investment funds. On top of this, by investing in real estate through investment funds it is possible to pay less taxes than would be normally required if an investor owned a house under their own name.

Beneficial ownership transparency for the whole investment industry may sound too general a rule for intermediaries and types of investment funds that may be very different from each other. To put it simply, a hedge fund available only to high net worth individuals may pose much more illicit financial flows risk than a mutual fund or a pension fund for Californian teachers. The same could be true for any highly supervised institution. Hardly anything is more regulated than a bank, but still Odebrecht, Latin America’s largest construction group, managed to buy its own bank to undertake the global corruption scheme. Besides, the need for transparency makes no difference: as long as some types of funds or types of financial assets are excluded, it will not be possible to know who owns what and to detect cases of underreporting or double reporting. It would only be an invitation for abuse or other shenanigans. Criminals or anyone trying to remain hidden could set up an offshore company, “hire” investors or accomplices as “employees” and then create a fund for these “employees”. It would require many more resources to ensure that regulators all over the world are properly supervising the excluded funds.

A similar exemption could have been proposed for regular companies. After all, a company involved in procurement, with politically exposed persons (PEPs) or with offshore structures may pose more risks than a company owned by just one shareholder that is only involved in selling pizza. But beneficial ownership registries intelligently cover all companies, not those that “look suspicious” or risky. Therefore, the best solution is to avoid loopholes by requiring the same level of transparency for all funds.

Our paper describes different proposals, from the most ambitious and comprehensive (lowering beneficial ownership thresholds and identifying the beneficial owners of all financial assets, investment funds and all intermediaries involved in the ownership chain), to only identifying the beneficial owners of financial assets (without disclosing how they own them)  or beneficial owners of investment funds (without disclosing which underlying securities they ultimately hold).

Given that interests in investment funds and in financial assets may be part of securities traded by algorithms where securities are held for just a few seconds, ownership could be reported as of the end of each business day.

Conclusion

Investment funds and financial assets involve many intermediaries, all with partial information, but ultimately holding and trading assets worth trillions of dollars. However complex and sophisticated the industry may be, there is one simple reality: neither the public nor the authorities have a full picture of all existing financial assets and who ultimately owns them, let alone whether they are paying the corresponding taxes or whether they are part of money laundering schemes.

This paper is set to start the conversation about what needs to be done to increase transparency in this highly relevant industry forgotten until now by beneficial ownership transparency.

All comments and feedback are welcome: [email protected]

Download the paper

[1] For example, the EU anti-money laundering directive defines beneficial owners of companies as:  “the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information.” (emphasis added); the UK guidance on beneficial ownership: “This guidance applies to those companies which are registered under the Act and to which Part 21A applies. As a result this guidance may be relevant to companies limited by guarantee, and unlimited companies as well as companies limited by shares. Part 21A does not, however, apply to certain companies, for example, those which are listed on a UK main or “regulated” market” (emphasis added); OECD’s Global Forum 2016 Terms of Reference: “A.1.1. Jurisdictions should ensure that information is available to their competent authorities that identifies the owners of companies and any bodies corporate.10 [Footnote 10. (Please note, however, exceptions for publicly-traded companies or public collective investment funds or schemes)]” (emphasis added).

How to supercharge overseas aid

Overseas aid is a “curate’s egg” – good, in parts. It can be a sticking plaster that merely patches over a global economic system that is structured to benefit richer countries and groups at the expense of the poor. It can be worse: last year, a group of concerned academics wrote an open letter to the World Bank, over its plans to expand the use of shadow banking techniques such as securitisation, derivatives and “repo” that underlay the global financial crisis – to attract more private finance into development. This could, they warned, usher in dangerous effects. These could include:

“permanent austerity along the lines of ‘privatizing gains, socializing losses’. More fundamentally, this seeks to re-engineer poor countries’ financial systems around capital markets”.

Used wisely, however, aid can help. If it acts as a catalyst to reform the underlying structural issues, then it can be especially effective.

One of the best (and most under-used) examples of using aid effectively for structural reform is investing in “domestic resource mobilisation” – techno-speak for countries building more effective and progressive tax systems.

Here are some killer facts.

There are promising signs. Twenty large donors have pledged to double their aid for domestic resource mobilisation between 2015 and 2020 through the Addis Tax Initiative. By next year, total global aid in support of tax systems should reach almost $450 million, though this is still well under 1 per cent of all aid. Even Bill Gates supports this, commenting at a recent United Nations financing event that “mobilising tax in developing countries is the most important source of finance for development.”

But how can donors best spend this money on helping low-income countries to raise more money through their tax systems?

Unfortunately, with some honourable exceptions, many donors that invest in tax systems go for the sticking-plaster approach – the uncontroversial, straightforward “quick wins” that promise easily measurable benefits. This means investing in what Oxfam describes as “narrow technocratic reforms”, mostly by providing “capacity-building” to help countries’ tax administrations and ministries of finance administer their tax systems more effectively. This is better than nothing, but there are two big problems with this approach.

First this does little to support countries in tackling the many barriers they face in making their tax systems more progressive. Many donor governments are still in the grip of a tired ‘tax consensus‘. As Oxfam points out, the barriers to effective reform include “excessive tax incentives for corporations and investors, a lack of taxes on wealth and assets (such as property and capital gains taxes), and failures of transparency, accountability and citizen trust in public institutions.” Countries need more help raising revenues in a progressive way, such as through direct rather than indirect taxes.

Second, Oxfam make the case for better “policy coherence” by donors. This means that rich countries (like the UK) should stop the two-faced practice of supporting low-income countries to improve their tax systems on the one hand, while undermining their ability to raise tax revenues on the other by, for example, blocking much-needed reforms to the global tax system.

So, a clear case of ‘do no harm’. But that’s not enough. As the Overseas Development Institute argue in a report published last week on civil society engagement in tax reform, donors should support a broader tax ecosystem, including civil society tax approaches that are politically savvy as well as technical.

We’ll bang our own drum for a second here. TJN was the pioneer in calling for automatic exchange of information across borders, as a tool to tackle tax evasion and other ills. We were laughed at, dismissed as utopians, and told that “this will never happen.” On a shoestring budget in our early years we pushed and pushed this idea. Now, a recent IMF article (written by a TJNer) summarises the result of the OECD’s ensuing global project on automatic information exchange:

The OECD estimated in July 2019 that 90 countries had shared information on 47 million accounts worth €4.9 trillion; that bank deposits in tax havens had been reduced by 20 to 25 percent; and that voluntary disclosures ahead of implementation had generated €95 billion in additional tax revenue for members of the OECD and the Group of 20, which includes major emerging market economies.

Now there is no way we can claim credit for all of this. But we can claim some. And there’s a lot more where that came from.

So we can make a double argument to donors: by curbing tax evasion and other assorted ills, we are not just helping low-income countries, but we are boosting the donor countries’ own national budgets too. In fact, this is right at the core of our strategies.

The joy of tax is that it’s a positive sum game: good policies can ensure better outcomes for everyone, in countries at all income levels. Shifting narratives about what constitutes effective aid can help us deliver tax justice.

The Tax Justice Network fights for fairer tax systems, and fights against tax havens and the abuses they facilitate. We depend on support from people who share our belief in doing the right thing for a fairer world. If you’d like to support us to carry on our vital work, please click here to make a donation.

The dangers of the residual profit split

With the OECD tax reforms apparently converging towards a version of the residual profit split approach, new Tax Justice Network researcher and former advisor on transfer pricing for multinational companies Verónica Grondona explains the origins and risks of the approach.

The OECD and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) presented its “Programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy” on 20 June 2019.

In January 2019, the OECD and G20 had co-published a policy note on “Addressing the Tax Challenges of the Digitalization of the Economy”, which underlined that there was an agreement to examine proposals involving two pillars which could be the basis for consensus: the allocation of taxing rights and remaining BEPS issues.

What are the OECD and G20 proposing?

The more recent programme comes after launching a consultation and engaging in further negotiations between the countries participating in the OECD and G20 Inclusive framework.

In the chapter on pillar one, three proposals on which to build a consensus are mentioned:

  1. User participation
  2. Marketing intangibles
  3. Significant economic presence

As mentioned by the OECD itself, the three proposals “all allocate more taxing rights to the jurisdiction of the customer and/or user”, the market jurisdictions, something which already represents a problem for developing countries’ tax collection, as their contribution relies more on other factors such as employees and not normally in sales.

The programme also notes that “this work will consider the feasibility of business line or regional segmentations, different mechanisms to allocate the profit to the relevant market jurisdictions…”.

The segmentation by business line has been used by the Big Four and other medium tier consultants as part of their application of the arm’s length rules for the last 20 years, and goes in the opposite direction to unitary taxation, as it not only abides by the separate entity criteria, but it subdivides entities even further by segmenting their financial data not only by business segment, but also by type of transaction, as has been observed by Grondona in 2014.

The programme proposes 3 methods for the allocation of taxing rights: the modified residual profit split (MRPS), the fractional apportionment method, and the distribution-based approach.

The modified residual profit split: new tires, same old car

The modified residual profit split is a re-launch of the ‘residual profit split’, a well-known method that has been used for years and had already been incorporated to several legislations by 2012, eg Colombia, Ecuador, Mexico, Peru, Japan and the United States, as noted by PwC.

As described by PwC, in such applications of the residual profit split method, allocation is done by determining first the profit of routine activities using any of the other methods available and then allocating the residual profit in proportion to the value of the intangible property and to what they contribute or own.

The programme describes that the options regarding the modified residual profit split are expected to include “the development of rules to bifurcate total profit into routine and non-routine Components”, and that this “would require an evaluation of the relative merits of using current transfer pricing rules and simplified approaches”, and adapting such transfer pricing rules to fit the new purpose under discussion.

On June 24, David Bradbury, Head of Tax Policy and Statistics Division at the OECD commented at the 2nd conference of the Parliamentary Platform on Tax Justice held in Paris, that the post-allocation and application of this to non-routine returns would be new, so the old and ‘new’ system would apply in parallel.

It may be accepted that the available options of the modified residual profit split are different from the old ones, but the differences seem quite thin, at least from what can be interpreted out of the alternatives described in the OECD’s programme.

The modified residual profit split privileges developed countries

What is the problem with the allocation of profits using the residual profit split?

The modified residual profit split in practice involves a segmentation of financial data per business segment and type of transaction. This results in routine profits generally being estimated based on the most popular method, which according to a CIAT study for Latin America, is the transactional net margin method (TNMM), which basically assigns a net profit to the activity by comparing its activities to a benchmark. For example, if a company in country X selling air tickets online is part of group A, then what would normally happen is that the financial accounts will be segmented in order to separate activities as follows: contract distribution for related parties, marketing activities for related parties, administrative services for related parties, etc. All these transactions would be considered “routine” and would be allocated a profit based on a benchmark with “contract” activities of similar type.

Since “contract distribution” involves few functions, risks and assets, such activities would be assigned a minimum profit. The related party which centralises such activities and has been “contractually” assigned the assets, risks and functions related to such transactions would keep all remaining profits. Justification is generally found for such centralisation of assets, risks and functions to take place in corporate tax havens.

The non-routine activities, those related to value creation, the main part of the profit attributable to the development of the intangible goods associated to the transaction, would then be allocated among the participating entities using an allocation formula. This approach privileges developed economies.

Thus, such way of estimating intragroup prices does not solve existing transfer pricing conflicts for both developed and developing countries, as tax administrations will bump into the same obstacles as they run into today when trying to use the arm’s length principle to estimate a multinational entity’s tax base.

It would still be possible, as things stand today, to contractually locate non-routine activities in the convenient countries. This would make the new measures redundant, leaving the door wide open for companies to shift both types of profit to corporate tax havens.

Dispute resolution is of course on the menu, something that does trigger some alarms in developing countries, because the rules are quite subjective as it is well described by the BEPS Monitoring Group.

Let’s be clear: the residual profit split is not a close substitute to unitary taxation with formulary apportionment. Therefore, the fight for a fairer international tax system has not finished. Alternatives are on the table, such as the one proposed by India and the G24 on the use of a fractional apportionment that should be paid attention to. Accepting an OECD proposal for residual profit split would risk delaying real progress beyond the current reform.

Not just about control: one share in a company should be enough to be a beneficial owner

We have written a lot about beneficial ownership registration, definitions, thresholds, complex structures, verification and so on. However, there seems to be a philosophical confusion about who should be considered to be (and registered as) a beneficial owner for a company, and what the consequences of that should be.

The Financial Action Task Force (FATF) in charge of anti-money laundering recommendations is the main source for “beneficial ownership” definitions. It is used as a basis or reference by the OECD Global Forum’s international standard, the Common Reporting Standard (CRS) for automatic exchange of information and by most countries beneficial ownership registration laws, such as the latest EU anti-money laundering directive (AMLD 5).

Based on the Financial Action Task Force’s recommendations, most countries use the “more than 25 per cent” ownership threshold where only individuals that own more than 25 per cent of a company or legal person are considered beneficial owners. Some countries have gone below that threshold, including Argentina (20 per cent), Uruguay (15 per cent) and Peru (10 per cent). We have often argued, however, that any individual holding at least one share of a company or legal person should be considered and registered to be a beneficial owner. Here’s why.

Ownership, control, or both?

The Financial Action Task Force contradicts itself as to whether beneficial ownership refers to “ownership” or to “control”, or to both.

The Financial Action Task Force’s glossary defines a beneficial owner as such:

Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. (emphasis added)

The glossary thus includes three triggers for considering a natural person to be a beneficial owner:

However, the Financial Action Task Force‘s Interpretative Note to Recommendation 10 only refers to the second trigger. It establishes a cascading test to identify beneficial owners for legal persons (which is used by most countries’ beneficial ownership registration laws) based on control:

(i) For legal persons:

(i.i) The identity of the natural persons (if any – as ownership interests can be so diversified that there are no natural persons (whether acting alone or together) exercising control of the legal person or arrangement through ownership) who ultimately have a controlling ownership interest in a legal person; and

(i.ii) to the extent that there is doubt under (i.i) as to whether the person(s) with the controlling ownership interest are the beneficial owner(s) or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person or arrangement through other means.

(i.iii) Where no natural person is identified under (i.i) or (i.ii) above, financial institutions should identify and take reasonable measures to verify the identity of the relevant natural person who holds the position of senior managing official. (emphasis added)

In essence, the Interpretative Note to Recommendation 10 refers to:

We disagree with Interpretative Note to Recommendation 10 and prefer the Glossary’s definition. Beneficial ownership should be about any individual who:

1. Owns,

2. has control or influence through means other than ownership (because all owners should already be covered by the first ownership trigger), or

3. on whose behalf a transaction is conducted or who benefits from the legal vehicle (this may be hard to prove or enforce, but this residual “anyone else who is relevant” should be kept to prevent future loopholes).

Consequently, anyone with only 1 per cent of a company’s shares, or even with only one share should be considered and registered as a beneficial owner, even though this person would have no control at all over the company.

“Control”, from our perspective, should be another trigger to cover people who are not already covered by the “ownership trigger” (eg someone who deliberately decides not to own shares so as not to be identified, but still has enough influence or control over a company). However, the “control trigger” should not replace nor add thresholds to the “ownership trigger”, as it currently does under the Financial Action Task Force’s Interpretative Note to Recommendation 10.

At the same time, the senior manager should never be considered a beneficial owner solely on the basis that  nobody else could be identified as a beneficial owner. Based on our proposal, if beneficial ownership is firstly (but not only) about ownership, any company with at least one shareholder, partner or member would always be able to be identify at least one beneficial owner (even if they only hold one share).

Won’t many more people will be identified? Yes, and all the better for it.

If countries applied our proposal requiring anyone with one share to be considered a beneficial owner (Curacao already does this), many more people would be identified as beneficial owners. Many of them may have no control over the company or legal vehicle. But control is not the only point. Beneficial ownership is about transparency. It is about knowing all the individuals who are ultimately related to a legal vehicle, and who could be using it for illegal reasons, or who may be accumulating wealth through it.

Anyone with 0.1 per cent of Apples shares clearly has no control over the design of the new iPhone. However, their Apple shares are worth USD $220 million! Any researcher measuring inequality, or any authority fighting money laundering or tax evasion on income, capital gains or wealth taxes may want to know who this person is.

Being identified as a beneficial owner gives the person no extra right to dividends or voting power. It should only mean: “you either own or control this legal vehicle, and that’s why you are identified”.

For those who may think this is  too radical, it’s worth remembering that this all-encompassing approach to recognition already applies to legal owners of companies and to beneficial owners of trusts.

In the case of a company, all shareholders have to be identified as legal owners, even those with only one share.

In the case of trusts, the Financial Action Task Force’s Interpretative Note to Recommendation 10 establishes that all the parties to a trust have to be identified as a beneficial owners (without applying any thresholds): all settlors, trustees, protectors and beneficiaries, regardless if the trust is irrevocable, or discretionary.

No extra costs (for most people)

This may sound like a phony commercial, but it is possible to lower beneficial ownership thresholds to eventually cover many more individuals, without adding extra costs for most people.

If John and his business partner Paul own a company or partnership to run a legitimate business, they most likely own the company directly without adding layers of offshore entities and trusts. This means they should already be registered as the beneficial owners (supposing they each own 50 per cent). Lowering the threshold to one share, changes nothing for them. It’s still only the two of them who would have to register as beneficial owners.

These lower thresholds would affect only those who create complex structures, adding offshore layers of entities, combining trusts and companies, or establishing circular ownership schemes to remain below the beneficial ownership definitions’ current thresholds.

In other words, for people with simple ownership structures, these lower thresholds would change nothing. Only those who until now manage to remain hidden would now have to be identified.

Edition 8 of the Tax Justice Network’s Francophone podcast/radio show: édition #8 de radio/podcast Francophone par Tax Justice Network


We’re pleased to share the eighth 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 huitième 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 huitième édition de votre podcast, nous parlons du partage des outils de Tax Justice Network (Corporate Haven Tax Index, Financial Secrecy Index et surtout le Rapport sur la vulnérabilité et l’exposition aux flux financiers illicites) avec l’administration fiscale du Burkina Faso.

Nous revenons aussi sur la diffusion de ces outils dans le cadre d’une formation avec des journalistes et la Société Civile au Cameroun, dans le cadre de la formation pour l’investigation en matière de flux financiers illicites

Comme intervenants, nous avons

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.

Enfin vous pouvez nous écrire à notre adresse [email protected]

Job vacancy: Researcher, Francophone Africa

The Tax Justice Network is recruiting a Francophone Africa researcher, who will form part of our core research team for the Financial Secrecy Index and the Corporate Tax Haven Index, and will work on our Financial Secrecy and Tax Advocacy in Africa (FASTA) project, funded by Norad. Read more here. To apply, please upload a CV (resume) and answer a series of questions (addressing the skills listed in the person specification as well as your motivation) here by Friday 25 October 2019.

Le « Tax Justice Network » recrute un Chercheur Afrique-francophone, qui fera partie de l’équipe de recherche principale travaillant sur l’Indice d’opacité financière « Financial Secrecy Index » et l’Indice de paradis fiscal pour les sociétés « Corporate Tax Haven Index » et travaillera sur notre projet FASTA « Financial Secrecy and Tax Advocacy in Africa » financé par la Norad. Pour en savoir plus, cliquez ici. Pour postuler, veuillez télécharger votre CV et répondre à une série de questions (ayant trait aux compétences mentionnées dans la section qualités personnelles et à la motivation) ici au plus tard le 25 Octobre 2019.

Edition 21 of the Tax Justice Network Arabic monthly podcast 21# الجباية ببساطة

Welcome to the twenty-first 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. You can also join the programme on Facebook and on Twitter.

Taxes Simply # 21 – Tunisia’s elections: an economic interpretation
Welcome to the 21st edition of Taxes Simply الجباية ببساطة

We begin with a summary of the most important tax and economic news in September from the Arab region and the world, including:

In the second part of this edition, Walid Ben Rhouma talks with Tunisian financial analyst Bassam Ennaifer about the economic dimensions of the programmes and discourse of presidential and legislative candidates in the elections currently taking place in Tunisia.

الجباية ببساطة #٢١ – قراءة اقتصادية لانتخابات تونس

مرحبًا بكم مجددًا في العدد الحادي والعشرين من برنامجكم الجباية ببساطة. في هذا العدد نبدأ بملخص لأهم أخبار الضرائب والاقتصاد في شهر سبتمبر/أيلول من المنطقة العربية والعالم. يشمل ملخصنا للأخبار: ١) زيادة معدلات البطالة من جديد في تركيا؛ ٢) السعودية تناقش فرض ضريبة بنسبة ١٠٠% على كل منتجات المطاعم المقدمة للتبغ؛ ٣) الإمارات تتوسع في ضرائب الاستهلاك؛ ٤) ٤٠% من الاستثمار الأجنبي على مستوى العالم “وهمي”.

في الجزء الثاني من العدد، يجري وليد بن رحومة حوارًا مع المحلل المالي التونسي بسام النيفر عن الأبعاد الاقتصادية في برامج وخطابات مرشحي الرئاسة والانتخابات التشريعية التي تجرى حاليا في تونس.

http://traffic.libsyn.com/taxessimply/Al_Jibaya_Bibasata_20190929_.mp3

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Tax Havens: Britain’s Second Empire

In August 2012, the UK-based New Left Project published an article entitled “Britain’s Second Empire,” which involved an interview with the London-based academic Ronen Palan (pictured). The idea is that after the collapse of its formal Empire, Britain created a new, more hidden financial “empire” of tax havens around the world, which handled increasing amounts of money from around the world.

This imperial theme had already been explored in the book Treasure Islands, and its relevance has been underlined by a number of recent studies and intiatives, not least our Corporate Tax Haven Index, which is dominated by British tax havens.

Unfortunately, the three websites that had originally hosted this interview are now defunct. So we have decided to re-publish it, with permission from Palan, and from Jamie Stern-Wiener of the New Left Project. The interview follows.

Britain’s Second Empire

Originally published in August 2012, New Left Project.

Why, in the era of Wall Street hegemony, do close to half of global financial transactions still flow through territories linked to Britain? New Left Project’s Jamie Stern-Weiner spoke to Ronen Palan, Professor of International Political Economy at City University London and co-author of Tax Havens: How Globalisation Really Works, to find out.

What has London’s preeminent international financial position got to do with British empire?

Historically there is a strong interlink between the rise of the City of London and the rise of the British empire. Usually, large financial centres emerged in the world’s large trading centres. In 1850 Britain was the largest manufacturing centre—about 50% of all global manufacturing was produced in the UK—and so, not surprisingly, it was serviced by the largest financial centre. So the City of London was at the core of the British economy and the British empire.

How was Britain’s imperial decline after WWII reflected in the financial sphere?

This was an interesting period and a challenge to the City of London. The City’s power and success during the twentieth century had been in servicing not only the ‘formal’ British empire, but also the ‘informal’ empire: areas, for example in Latin and Central America, which were under the informal tutelage of Britain without being formally part of the empire.

To understand the success and function of the City of London you have to recall that this was a period before the internet and before faxes. At a time when information was relatively immobile and inaccessible, it was very difficult to maintain investment overseas. But in the City of London there emerged all sorts of middle- and small-sized commercial institutions that were really specialists on different countries: they had specialists on Nicaragua, on Peru, on Colombia, on Ghana, and so on. This was the bedrock of the City’s success: highly specialised knowledge of various areas in the world.

With the decline of the British empire after WWII this specialised knowledge was still required, and so the commercial institutions in the City continued to be the main vehicle for investment in what were then called ‘developing’ countries (i.e. decolonising countries). But that was a shrinking business, and the City of London was, in terms of its importance within the British state as a whole, in decline. It was still a very important financial centre, but in relative terms it was in decline.

That said, we should recall something that most people have forgotten: after WWII the British state re-established what was called thesterling area, which ensured that trade between certain countries was conducted in sterling. It was initially established in 1932, but was broken up at U.S. insistence. However it was then re-established in 1946. As a result, until the early 1960s about 40% of all international trade was denominated in sterling, and the City of London of course played an important role because of that.

What was the Euromarket?

The Euromarket was essentially an informal agreement between the Bank of England and the commercial banks in the City of London that any transaction through London between two non-residents and in a foreign currency—at the time, mainly dollars—would not be subject to British regulations.

The agreement arose out of the run on the pound of 1956-7 and a subsequent desire to avoid harmful effects on the British balance of payments. Rumours at the time suggested that the currency crisis was partly engineered by U.S., which was unhappy about the British and French invasion of Egypt to reverse Nasser’s nationalisation of the Suez Canal. In response to the run on the pound, the Treasury raised interest rates from 5 to 7% and imposed a moratorium on lending to non-British borrowers. The two policies aimed to strengthen the pound. The moratorium cut many commercial banks, which specialised in lending to ex-colonies or the ‘informal empire’, off from their business. It appears that they reached an agreement with the Bank of England—through the services of George Bolton, former CEO of BOLSA (the Bank of London and South America, which was acquired in 1971 by Lloyds Bank) and at the time the deputy director at the Bank of England—that they could continue lending as long as they interacted in dollars (or any other non-sterling currency) and intermediated between non-British clients. Such transactions—in foreign currency, between non-British clients—would not affect the British balance of payments. But the agreement seems to have yielded an unintended consequence: such transactions were ‘deemed’ by the Bank not to be taking place in London. This liberated them from the regulatory regime not only of the UK, but also of any other country. This was the origin of ‘offshore‘.

Effectively it created a new market. That wasn’t the intended impact: indeed, some eminent bankers felt sure it was only a temporary market that was likely to decline and disappear fairly quickly. But sure enough, once British banking institutions began to understand that by organising banking transactions in such a way they could sidestep key regulations, like capital / reserve requirements, they quickly realised that they had here an opportunity. And from that point, in the early 1960s, the market grew rapidly.

If the proximate cause of the emergence of the Euromarket was the 1956-7 sterling crisis, was there also a broader context of attempting to compensate for imperial decline?

That’s a very good question, and I don’t think we have a definitive answer. It’s a matter of interpretation. There is no doubt that successive British governments understood the importance of the City of London and wanted it to remain the global financial centre. There’s no doubt that there was the political will to support the City of London, and there’s no doubt that the City was always powerful politically, regardless of whether Labour or the Conservatives were in power. But the circumstances that gave rise to the Euromarket are so specific that it appears more like a series of accidents, an unforeseen result of decisions taken in response to very local issues, rather than an intentional strategy to revive the City.

Were there particular political forces that pushed for the development Euromarket and others that were resistant?

I don’t know of any resistance. We know that some of the people who pushed for it had previously worked in the commercial banks, like the George Bolton I mentioned above. He understood the interest of the commercial banks and many of us believe he acted on their behalf. But I don’t know of any resistance.

Did the development of the Euromarket have implications for the sustainability of the Bretton Woods financial order?

Yes, it punched a hole in the whole Bretton Woods system. Bretton Woods was based on financial regulations and restrictions on capital movements: that was the whole basis of the Bretton Woods agreement. But now you had a whole market with no regulations, a market that was truly global because it existed nowhere. It had no boundaries. It’s a bit like the World Wide Web: initially it was everywhere and nowhere. It simply created a new space. That space attracted a lot of funds and basically undermined the entire system of national regulation that was the basis of Bretton Woods.

Has the Euromarket persisted in the decades since the 1960s?

Yes. It grew enormously during and after the 1973 oil crisis. Today basically the entire wholesale global financial market is effectively an expansion of the Euromarket: it’s effectively offshore. It was for a long time completely unregulated, until it became subject to ‘voluntary’ regulation: Basel I and Basel II. These are sets of voluntary agreements agreed at the Bank for International Settlements (BIS) in which banks agreed to abide by certain rules of capital requirements and so on. So it’s no longer true to say that international financial markets are unregulated, but until recently they were subjected to largely voluntary regulation.

Presumably the existence of this market facilitates tax evasion, and enabled sidestepping of national regulations which contributed to the 2007-8 financial crisis?

Absolutely. People talk about financial deregulation as one of the causes of the crisis, but in fact financial deregulation followed rather than constituted deregulated financial markets. Governments essentially found themselves in a position whereby so much of international finance was already operating through this non-regulated parallel market, that they had no choice but to try and deregulate their own domestic markets in order to compete. They rationalised this ideologically—we call it neoliberalism—but the main cause was that there was already a non-regulated global financial market sucking in most of the funds in any case.

Would any attempt to impose regulations on that parallel market require concerted state action?

It would require concerted state action. The attempt that I know of to do this was made in 1978 by the United States. The U.S. came with a proposal at the BIS to effectively re-regulate the Euromarket, to renationalise it. They were resisted primarily by the UK, but also Switzerland and a few others. As a result the U.S. decided to change tack and instead of fighting the Euromarket they set up their own version of it, called the International Banking Facilities (IBF). This was initially established in New York, but now operates in L.A. and Chicago too, and about one-third to one-half of U.S. financial markets now effectively operate offshore. (The Japanese, incidentally, followed suit in 1986.)

In a journal article [£] you discussed the odd situation whereby, even at the height of what is conventionally seen as an era of U.S. and Wall St. financial hegemony, the leading international financial centres appear to be former British colonies and protectorates. How has Britain been able to sustain its leading position in global finance?

What really pricked my interest was simply looking at the data of international lending and deposits, and where they are located. On the face of it London is the largest international financial centre, followed by New York. But this data tends to treat British jurisdictions like Jersey, Guernsey, the Cayman Islands, and so on as entirely separate, independent territories. They are not: they are part of the British state. And if you add them all together, you find that at the moment roughly one-third of all international deposits and investments are going through these jurisdictions, which are remnants of the British empire and which remain part of the British state. And if you add ex-colonies whose independence was relatively recent, like Singapore, then you reach a figure of 40%. This compared to roughly 10% going through the US.

That data raises a question: why are these jurisdictions, many of which are still controlled by the British state and some of which only recently gained independence, playing such a prominent role in global financial markets? I came to the conclusion that in fact we have, to put it provocatively, a second British empire which is at the very core of global financial markets today.

There are broadly speaking two views about the City of London. One is that the City of London refers to those activities and transactions taking place in London itself. The other is that the City of London is the core of a whole network of other financial centres which are linked to it, particularly places like Guernsey, Jersey, the Isle of Man, Bermuda, Cayman Islands, and also Switzerland and Luxemburg. This second view is more useful if you want to understand how international finance operates. In many cases financial transactions are being decided and agreed upon in London, but are being registered for various reasons (mainly tax-related) in, say, the Cayman Islands. As a result the Cayman Islands appears statistically as the fourth largest financial centre in the world, about the size of Frankfurt and much larger than Tokyo. But it’s only a paper centre: most of the activities attributed to it in fact take place in London.

In the same paper you talk about ‘hegemonic cycle theory’, associated with theorists like Giovanni Arrighi and Immanuel Wallerstein. How can that help us understand the role of the City?

Within field of International Relations there is a strong theory: hegemonies (i.e. large, powerful states) emerge as manufacturing centres, develop into commercial centres, eventually become financial centres and then decline. That cycle seems to represent very well the rise and decline of the Netherlands, then London and now the United States. But the picture that emerges if you look at the role of the ‘second British empire’ described above is much more complex: whereas the old British empire declined, it re-emerged again in different guises. The second empire is not as big and doesn’t incorporate as many territories, but in financial terms it’s very significant. So while the whole notion of cycles of hegemonies, which is very seductive and simple, contains an element of truth, the world out there is, as usual, much more complex than our theories tend to allow for.

Does the story you’ve been telling of the development of deregulated global financial markets have implications for how we should understand economic globalisation in relation to state power? 

Yes, it has many conceptual, theoretical and also practical implications about how we understand globalisation. A very simple view of globalisation sees it as an expansion of market forces that will eventually undermine the anachronistic state system. If you look more carefully at processes like the expansion of financial markets, however, you find that even the most unregulated market is in fact an aspect of state regulation: it survives only as long as there are states and state regulation to sustain it. It’s a difficult idea to understand, but the two go hand-in-hand.

That doesn’t mean that outcomes are always intentional: that a group of states or governments sat together as a committee and decided to develop an unregulated financial market. For the most part they didn’t understand what they were doing. Most governments cannot see five or ten years ahead and cannot plan. Nevertheless their policies, collectively, created the structures that are determining our lives, whether they intended these structures or not.

Has the City’s role as the centre of an international network of financial centres had an impact on the balance of power between the UK and other states?

Britain is very good at not advertising its position. It’s a great coup for the British state that the Cayman Islands etc. are presented in the data as independent states. Because if other states were to notice how much funds are effectively going through the British state they’d be a lot more cautious.

My view is that the British state plays a much more central role in international regulation than is attributed to it. But the British government has a continuing interest in playing down this role.

Do states like the U.S. look at Britain’s position enviously? Have they tried to claw back some influence?

They tried to claw it back by introducing their own offshore financial centre through the IBF, and by offering, or at least tolerating, secrecy jurisdictions (i.e. tax havens) in places like Delaware, New Jersey, Vermont and Nevada. American financial centres very much see themselves as being in competition with London.

Is it worth talking here about the City of London’s weird jurisdictional status as a city within a city?

It’s very interesting, the role of the Corporation of London as a unique political entity within the British state. However, you’ll be surprised to hear that, in spite of the success of the City of London and the importance of the Corporation of London, I could find no academic study of its politics and influence in the British state. Perhaps there is one, but I couldn’t find it. We don’t understand the Corporation of London.

Which itself illustrates what appears to be a theme here, namely the affinity between finance and protection from scrutiny.

It seems like there is a certain logic that pervades the whole system there: the logic of discretion, secrecy, and informality. That’s at the very heart of the financial markets worldwide, and the City of London is a paradigm.

Since the 2007-8 crisis have you noticed any shifts in Britain’s position in international finance?

Like everyone else I’ve noticed that there is an ongoing debate about financial regulation. Clearly the Europeans are in favour of much more stringent regulations and there is also an ongoing debate within the British state. The Financial Services Authority (FSA), now run by Lord Turner, has taken a much more radical view about the need to regulate the City of London. But I don’t know how much success he’s having.

However what we don’t hear in the discussion—and I’m simply puzzled by this—is the fact that much of the market exists in non-regulated spaces. Some of it is basically the old Euromarket, some of it is over-the-counter exchanges. So when people talk about introducing new regulations, I’m not sure the extent to which they will be universally applied. And I don’t get an answer to that question. If only the onshore, official banking system will be regulated, with the offshore component—including various aspects of shadow banking, which according to some estimates amounts to nearly half the global financial markets—remaining as it is, then we achieve nothing

A new vision for Europe amid the Brexit vortex: Tax Justice Network September 2019 podcast

In this month’s episode we discuss a new vision for Europe amid, or in spite of the Brexit vortex. Plus: Britain’s about to become the neighbour from hell, post-Brexit: how can the EU defend citizens from the race to the bottom between nations on tax and regulations precipitated by Britain’s destructive ‘Singapore-on-the-Thames’ model?

We speak to David Adler, DIEM25 (Democracy in Europe Movement) Policy director and Green New Deal for Europe coordinator, and John Christensen of the Tax Justice Network. We also hear from economist Yanis Varoufakis, co-founder of DIEM25 and former Finance Minister of Greece.

Produced and presented by the Tax Justice Network’s Naomi Fowler.

Further reading (highly recommended) A New Vision for Europe.

We are facing a systemic crisis in Europe, and the one thing we have not done is to deal with it systematically. None of them are asking the question, what is going on in Europe? And what should we do with the architectural design, with economic and social policy at the level of Europe? ”

~ Yanis Varoufakis

the question is, is the EU reformable – well, we like to say the EU is not reformable, but it is transformable. We are for the EU and against this EU”

~ David Adler

With a harmonised approach, the rules of the market applied consistently, you flip the competition. It’s the companies that have to compete rather than the countries that have to compete”

~ John Christensen

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Tax Justice September 2019 Portuguese podcast: Qual Reforma Tributária o Brasil precisa? #5

Welcome to our fifth monthly tax justice podcast/radio show in Portuguese. Details of this month’s show:

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.

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

O Qual Reforma Tributária o Brasil precisa? Ouça no podcast #5.

A reforma tributária entrou na agenda política brasileira. No Congresso, há uma proposta sendo discutida na Câmara dos Deputados e outra no Senado. Ao mesmo tempo, organizações e movimentos sociais, pesquisadores e especialistas levantam o debate alternativo da reforma tributária solidária.

No nosso podcast de setembro mergulhamos nesse assunto e tentamos guiar os ouvintes pelos caminhos da reforma tributária no Brasil. Ela é suficiente? Consegue simplificar o sistema e torná-lo mais progressivo e, ao mesmo tempo, ajudar a reduzir as desigualdades do país?

No É da sua conta #5 você confere…

Além do podcast completo, você pode ouvir bônus. Confira algumas das íntegras das principais entrevistas dessa edição em:

Bonus: entrevista com Rodrigo Orair, economista e especialista em desigualdade
Bonus: entrevista com Nick Shaxson, jornalista e integrante da Tax Justice Network
Bonus: entrevista com Bernard Appy, economista e do Centro de Cidadania Fiscal
Bonus: entrevista com Luiz Carlos Hauly, economista e ex-deputado federal

Participantes desta edição:

Luiz Carlos Hauly, economista e ex-deputado federal

Bernard Appy, economista e do Centro de Cidadania Fiscal

Rodrigo Orair, economista e especialista em desigualdade

Nick Shaxson, jornalista e integrante da Tax Justice Network

Charles Alcântara, presidente da Fenafisco

Antonio Romero, coordenador de estudos socioeconômicos da Anfip

Camila Gramkow, da Comissão Econômica para a América Latina e o Caribe (Cepal)

Marcello Fragano, da ACT Promoção da Saúde.

Conecte-se conosco!

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Tax Justice Network Israel publishes three new policy papers on taxing capital gains in Israel

On 21 May 2019, Tax Justice Network Israel, in collaboration with Friedreich Ebert Stiftung (FES) Israel, organised three parallel roundtables in the College of Management related to taxing capital income in Israel. The first roundtable focused on the gaps between personal income tax and capital’s gains tax, and the way these gaps increase inequality in Israel. The second roundtable revisited the different tax rates imposed on gains from employee’s option plans and the justifications for them. The third roundtable examined ways to employ the tax system to promote innovation, and predominantly the creation of intellectual property in Israel.

The participants in the parallel roundtables included representatives from the Israeli Tax Authority and the Israeli Innovation Authority, as well as lawyers and accountants from the private sector, academic scholars and civil society organisations. Based on the roundtables’ discussions and conclusions, Tax Justice Network Israel in collaboration with FES, has published today three policy papers (in Hebrew), which include specific recommendations for each one of the topics discussed at the roundtables.

The tax rate imposed on capital gains and its link to inequality in Israel

Unlike personal income tax which is taxed through progressive tax brackets up to the marginal tax rate, capital gains in Israel are held by the capital owners and are taxed at a flat and lower tax rate.  The paper explains that the current gap between personal income tax rate and capital gains tax is not justified and increases inequity in Israel. In fact, Not only is there doubt as to whether lower tax rates incentivise capital owners to invest their fortune, there is evidence that it damages the incentives of employees and freelancers to integrate in the working market. Furthermore, the gap between the capital gains tax and the personal income tax is a fruitful one for aggressive tax planning which may also exacerbates inequity.

Tax Justice Network Israel concludes there is no justification for imposing on capital gains lower tax rates than those imposed on personal income, except in cases where the Israeli government aims to incentivise a particular sector or resource (eg in cases where, based on informed research results, there is a shortage in real estate or there is a need to encourage pension investments). Furthermore, given that raising the capital gains tax rate to the personal income tax rate is likely to lead to an increase in the tax revenues, there is room to consider whether to use the future revenues from an increased capital gains tax rate to reduce the personal income tax rate.

Download paper 

Reconsideration of taxing employee option plan in Israel

With regard to tax imposed on employees’ option plans, we take the view that there are cases where it is not justified to impose lower tax rates on the gains received from exercising the options or shares. Granting favorable tax rates on the gains from employees’ option plans in Israel has originally been created to alleviate factories in difficulties, but for many years this purpose is largely irrelevant or at least no longer a consideration in providing these option plans. Thus, the paper recommends the government to consider changing the tax rate imposed on the ‘equity track’ embedded in article 102 of the Israeli Tax Ordinance. This is because where the options or shares allotted to an employee are of a trading company, there is no difficulty in assessing the value in any given moment as well as at the end of the vesting period. As such, there is no justification to postpone the tax event to time of realisation of the shares or options. Rather, it should be preceded to the end of the vesting period and the benefits up to this date should be taxed as personal income (rather than as capital income). Nonetheless, to avoid liquidity concerns, is the paper proposes to defer the actual tax payment to the time of realisation of the shares or options, but to add interest and differentials linkage from the end of the vesting period.

Alternatively, if this recommendation is not accepted, the paper suggests that at the very least the government sets an annual limit, by a certain income or percentage of allocation, to the benefits which are taxed at a lower tax rate in the equity track. Accordingly, the employee can enjoy the reduced tax rate only on the annual benefits up to this ceiling and will be required to pay the marginal tax rate on any amount exceeding the ceiling.

Download paper

Employing the tax system to encourage the creation of intellectual property in Israel

Finally, with regard to employing the tax system to promote the creation of intellectual property, some of Tax Justice Network Israel’s recommendations are the following: extending the options of companies investing in research and development activities to deduct their related  expenses; extending the tax benefits provided under the Israeli Law of Encouraging Capital Investment to individuals (rather than only to corporations or partnerships as is currently the case); modifying the eligibility criteria for receiving the benefit and to make sure these benefits are provided for various taxpayers who carry out research and development activities and not only for a limited number of taxpayers; setting a ceiling for the financial benefit that is subject to the reduced tax and  monitoring whether   companies that have received these benefits are actually initiating  significant research and development activities.

Download paper

Global Asset Registries: a game changer for the fight against inequality and illicit financial flows?

In July a workshop was held at the Paris School of Economics to start developing the concept for a Global Asset Registry.

In essence, the point of a Global Asset Registry is to understand (and then tackle) some of the most pressing issues of our times: inequality, and financial crime. The Moldovan Laundromat; the bigger Russian Laundromat; the “Luxleaks” corporate tax cheating scandal, the Danske Bank scandal, or the Cum-Ex “tax theft” affair: new shockers seem to be emerging almost every other day.

Since the global financial crisis, several new global transparency initiatives have popped up, such as the OECD’s push to promote automatic exchange of banking information across borders, or the ongoing drive for better beneficial ownership registries. Other transparency schemes are older: many countries have long had real estate registries, or asset declarations by public officials. Yet many of these initiatives are patchy in scope, riddled with loopholes, and implemented by only a minority of countries. Worse, authorities often work in silos, without effective national coordination between the areas of tax, money laundering and corruption.

The Global Asset Registry could tackle all of these problems by centralising all relevant information about assets owned by individuals. This would give two things: first, inform the big picture about global wealth distribution and inequality, and second, give the big picture about a single person’s wealth. Can this person justify their level of wealth given their (low) declared income? Are they under-declaring their income and wealth for in order to cheat on their taxes? Or, if they are able to buy all these mansions, yachts and jets, yet they have only declared a low income – is that because their wealth stems from drugs or bribes?

An initial discussion about a Global Asset Registry took place at an event of the Independent Commission for the Reform of International Corporate Taxation (ICRICT) in New York in September 2018. On that occasion ICRICT produced a roadmap towards a Global Asset Registry, (including some of the Tax Justice Network’s ideas). In 2019 the game was opened to more players to develop the concept further. The workshop was co-organised by ICRICT, the World Inequality Lab, the Tax Justice Network, Transparency International and the Financial Transparency Coalition. Participants included ICRICT Commissioners Thomas Piketty, Gabriel Zucman and Eva Joly as well as representatives from the OECD, the IMF, the World Bank, the Inter-American Center of Tax Administrations (CIAT), the European Parliament, a former FBI agent, researchers, academia and civil society organisations.  The workshop was organised as a closed roundtable to foster dialogue and intervention from everyone on an equal footing, allowing experts to speak at a personal level (not necessarily on behalf of the institution they work for). The agenda, list of participants and a brief of the discussions held is available here.

We are still some way away from defining a final concept and scope for a Global Asset Registry. The 2019 workshop discussed which assets should be within its scope, and some intermediate steps, such as aggregate statistics on individuals by wealth bracket, and overall taxes paid.

Many thorny issues are still to be developed. Who should host a Global Asset Registry?  Which assets should be in its scope? Who should have access: local or foreign authorities only – or the wider public? What are the data security issues?

This is just the start of a new initiative that may create synergies within many of the existing transparency initiatives but can also take it one step further: identifying other areas needing more transparency, and centralising information for the fight against inequality and financial crime.