Brexit and the future of tax havens

This week the Tax Justice Network’s John Christensen spoke at this event at the European Parliament organised by the European Free Alliance of the Greens on Brexit and the future of tax havens. Here’s more information on the event and you can watch the whole thing here. John spoke on the impact of Brexit on tax evasion and money laundering, offering up some important recommendations on how the EU should move forward in its treatment of the UK, its satellite havens and the City of London. Here are the notes he spoke from, and the accompanying slides.

BREXIT AND THE FUTURE OF TAX HAVENS

The Impact of Brexit on Tax Evasion and Money Laundering

22nd January 2019

It will come as no surprise that at the time of the 2016 referendum the UK government did not have a clear vision of the type of relationship for trade in financial services they would be seeking with the EU27 once Brexit is finalised. Continue reading “Brexit and the future of tax havens” →

How to verify beneficial ownership information – new report

In a world where billions in laundered money can move through the world’s top banks undetected, or where kleptocrats can set up anonymous companies at the ease of a click, the fight against corruption seems to have stayed in the Stone Age. The Tax Justice Network’s new paper suggests proposals to bring the fight against illicit financial flows into the 21st century.

‘Hate the sin, find the sinner’

Today the Tax Justice Network published a report – Beneficial ownership verification: ensuring the truthfulness and accuracy of registered ownership information – that tackles  financial crime at its root: anonymity manufactured via layers of opaque legal vehicles, such as companies and trusts. While many countries, especially in the European Union, have made great advances in requiring companies and other legal vehicles to register their ‘beneficial owners’ (the individuals who ultimately control and benefit from legal vehicles), verification of this information continues to be a great challenge. What’s the point of requiring a company to identify and declare its beneficial owners if it cannot be prevented from lying to our faces?

The main proposal of this paper is the use of inter-connected government and public databases to ensure that registered information is valid and consistent: the declared name and date of birth of a shareholder should match whatever record the government has on the person; the commercial address of a company should be a real place you can find on Google Maps and should not refer to a park or a lake; the listed active director should still be alive. Verifying the validity of the information is the first step. The second step is verifying whether the information is legitimate. A company could register a real living person as its director instead of a deceased person, but that still doesn’t mean the company isn’t lying about who its real beneficial owner is. To address this risk, our paper proposes the application of advanced big data analytics to identify redflags, similarly to the analytics applied by banks and credit cards to prevent online fraud.

These advanced analytics could be trained to find patterns indicative that registered information is unreliable. For example, when a multi-million dollar company registers as its beneficial owner a person who has no declared income, no bank account and has been living for decades at the same address located in an impoverished neighborhood, the IT system would raise a redflag. Similarly, when a company is billing invoices worth millions of dollars to its commercial office, but the company has no employees and its office makes no electricity consumption, the system would raise a redflag.  The relevant authorities would be notified of the redflags and scrutinize suspicious cases. Further investigation may reveal that the company that had registered a director with no bank account as its director was exploiting a poor individual to serve as a front director. The latter company with the empty commercial office may be revealed to be a shell company.

The paper also focuses on all the data that should be collected in the first place. A country may have the best computer system in place to run analyses, but if there’s not enough data to analyse, the results will be worthless. Based on our previous reports, the paper describes all the legal vehicles that should be subject to beneficial ownership registration, the details that should be registered on each shareholder, beneficial owner and director, and the right incentives to use to help ensure information is kept up to date (spoiler alert: it’s not a US$50 fine for non-compliance).

This report is also about rethinking commercial registers and their role in the economy and the fight against illicit financial flows. Commercial registries make magic. They give life (‘legal personality’) to thin air by allowing an abstract idea (a ‘company’) to own assets, open bank accounts and engage in business as if it were a real person. Commercial registries are so vital to the economy – and to financial crimes – that they should stop being regarded as old storage houses that print certificates of incorporation on request. The fact that anti-money laundering provisions usually consider the information held by commercial registries to be so untrustworthy that financial institutions are not allowed to rely only on them when running their due diligence checks on customers speaks for itself. Instead, we propose that commercial registries should become dynamic databases required to be consulted on a real-time basis by banks, notaries, corporate service providers or brokers before they engage in any transaction with a company. Any opening of an account, signing of a contract or purchase of a house should depend on the relevant company still being listed as “active” in the commercial register. This wouldn’t happen if the company failed to file an annual return or tried to register information found to be invalid (eg a non-existing address).

The proposals mentioned in this paper will not be able to prevent every possible crime, but they would give authorities a great deal more power to use technology in their favour. Criminals are using bitcoins to pay for drugs or ransomware. Internet giants know us better than ourselves by collecting tons of data on our photos, online searches and interactions. It’s about time authorities drop the world of paper and live up to the digital challenge.

Download the report

For any media enquiries about this report, or to speak with one of our media spokespeople, please contact Mark Bou Mansour at [email protected].

For any technical enquiries, please contact Andres Knobel at [email protected].

UN expert: Don’t shy away from human rights impacts of fiscal reforms

Today Juan Pablo Bohoslavsky, the UN’s independent expert on foreign debt and human rights, published the Guiding Principles on Human Rights Impact Assessments of Economic Reforms. Its purpose is ‘to assist States, international financial institutions, creditors, civil society and others to ensure that economic policies are embedded in human rights’.  They will be presented to the Human Rights Council on 28 February 2019.

Juan Pablo Bohoslavsky notes in his announcement that the central message of the Guiding Principles is “that States cannot shy away from their human rights obligations in economic policymaking at all times, even in times of economic crisis,”. The Tax Justice Network has long argued that impact of fiscal reform and regressive tax regimes have a damaging and negating impact on human rights and inequalities.

The Independent Expert’s message has never been more pertinent and pressing as it is now. Major developed economies (US and UK) who have adopted fiscal restraint policies and aggressive tax cuts that favour the wealthy have shown complacency and lack of compassion in response to recent reports on poverty in those countries. The pattern of addressing debt as a priority over and above addressing poverty and human rights violations can be seen across the globe.  At a time where short term fiscal policy is used to leverage political populism and undermine collective public good, the Independent Expert’s report is both timely and important in its contribution to restating the human rights impact of regressive fiscal policy. This report should be seen as a clear restating of human rights obligations – for Governments to be politically bold and policy progressive; for multinational companies to be meaningful in recognition, and progressive in solution design, of their impact on the societies which they depend on a local and global level; and for those who ‘enable’ to desist in long held practices and standards that serve self-interest and elite private greed.

The UN Independent Expert’s presentation will be broadcast live on the UN WebTV, from 9:00 am (GMT+1) on 28 February 2019.

 

Image credit: © UN Geneva

Taxing for ‘true equality’: EU adopts tax and gender proposals

“Gender equality can and should be promoted at all levels, including fiscal policy. This report is an important step towards the promotion of a more equitable distribution of income, wealth, opportunities, productive assets and services. That is, true equality”. So said MEP Marisa Matias at Monday’s debate in the EU Parliament and presentation of the report on Gender equality and taxation policies in the EU (final report available shortly). The report was adopted on Tuesday 15 January by the plenary of the European Parliament with 313 votes in favour.

There is much to recommend the report and we are pleased to have contributed to its development alongside many other advocates and researchers.

The steady guidance from rapporteurs MEPs Marisa Matias and Ernest Urtasun has led to this critical milestone for gender equality. Not least because the report proposes that member states shift from joint taxation to individual taxation. This recognition rightly addresses a flawed assumption operating in most taxation regimes that households pool and share their funds equally. This is not always the case. There is much evidence that the joint taxation of adult couples and of families means that women can end up paying higher tax on their, often, lower income than their male partner. It also establishes important social and economic principles that women, as individuals, must be recognised as having property rights and legal responsibility for managing their own income and taxes and not economically subsumed into the ‘household’ .

Critically for women and girls, the report adds weight and a much needed gendered critique, which requires member states to re-examine corporate taxation policy and legislation including the importance of maximising all available resources for essential “well functioning welfare provisions”; provisions which are so necessary to support gender equality.

Essential next steps will be to enlist the strength and support of multidisciplinary and progressive advocates to integrate a tax and gender justice set of principles and norms in their agendas, and to hold  Members States and the EU to account.

The Tax Justice Network’s January 2019 Spanish language podcast: Justicia ImPositiva, nuestro podcast, enero 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! (abajo en Castellano).

In this month’s programme:

Continue reading “The Tax Justice Network’s January 2019 Spanish language podcast: Justicia ImPositiva, nuestro podcast, enero 2019” →

The German proposal for an effective minimum tax on multinational’s profits

Guest blog

The following guest is published in line with the Tax Justice Network’s aim to encourage and stir insightful international debate on tax. The views expressed in this blog, as with all guest blogs published by the Tax Justice Network, are the authors’ and do not necessarily reflect the views of the Tax Justice Network.

Johannes Becker is Professor of Economics and Director of the Institute of Public Economics at the University of Münster. He has conducted research at the Max Planck Institute for Tax Law and Public Finance in Munich and Oxford, and is a fellow of the CESifo Research Network.

Joachim Englisch is Professor of Public Law and Tax Law and Director of the Institute of Tax Law at the University of Münster. Previously, he was the Chair of Tax Law, Finance Law and Public Law at the University of Augsburg from 2008 to March 2010. Joachim Englisch has held various visiting professorships at home and abroad since 2007 and is a member of the OECD WP9, the VAT Experts Group of the European Commission and the scientific advisory board of the German Tax Juristic Society.

 

According to an undisclosed policy paper that is currently circulated within the OECD, the German government is promoting an internationally coordinated reform of corporate taxation. Specifically, Germany proposes an effective minimum tax on the profits of multinational companies.

Complex, easy to manipulate and unfair – there is widespread discontent with the current system of international corporate taxation. The increasing digitalisation of the economy adds to the pressure for reform by providing companies with further opportunities to transfer book profits or real economic activities to low-tax countries. The OECD has therefore set up a Task Force on the Digital Economy (TFDE) representing 124 countries to discuss possible responses to these challenges. While some countries, for now, want to wait for the results of the measures taken so far under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and are, until then, opposed to further changes, a majority of countries is considering further steps including a realignment of the allocation of taxation rights. However, there is no agreement at all on the direction and scope of such a reform. The most recent OECD report to the G20, published at the beginning of December, identifies two main reform approaches. One group of countries, led by the UK, focuses on the traditional internet companies. These countries mainly criticize that, in the current system, the value creation by users of digital platforms (eg Facebook) is not taken into account in the allocation of taxing rights. The EU member states among these countries tend to support the EU Commission’s digital tax proposals, including a 3 per cent tax on the turnover of certain digital companies (the so-called Digital Services Tax). Another group, including the USA, favours a more fundamental reform in which (more) taxation rights are shifted to the market jurisdictions, ie where goods and services are ultimately sold and consumed.

How does Germany’s reform proposal fit in here? The public opinion in Germany, as elsewhere, pushes for action against tax-saving arrangements and “aggressive” tax planning by big tech companies and other multinationals. But Berlin is, at best, lukewarm in its support for the Digital Services Tax. The expected revenue seems too low to justify the resulting cost in terms of complexity; and since the tax is, effectively, targeting primarily American Internet companies, there is the plausible risk of international retaliation, eg in the form of American punitive tariffs. A general shift of taxation to the market jurisdiction, on the other hand, is not in the German interest, given its huge and persistent export surplus – as such a reform would probably be costly for jurisdictions that produce more than they consume and invest.

The German Minister of Finance, in close coordination with his French counterpart, has now taken the initiative and proposed a third way: an effective minimum tax on corporate profits. This instrument does not aim at a (definitive) reallocation of taxation rights, but instead adds a general backup-rule to the traditional allocation of taxing rights: if the jurisdiction that is entitled to tax business profits under the established rules of international taxation makes “sufficient” use of its right to tax, nothing changes. If, however, the tax burden on corporate profits is too low there, a supplementary minimum tax will be levied. This subsidiary right to tax would rest either with the country of residence (ie in the country where the firm has its headquarters, or where the ultimate parent or an intermediate holding is situated) or with the market jurisdiction (the country where the goods and services are sold and paid for).

The new minimum tax would thus complement the defensive tax measures adopted under the BEPS initiative while, at the same time, reduce the importance of their full implementation. The BEPS measures are input-oriented and address transfer pricing, corporate and financing structures to ensure taxation “where value is created” (as the OECD interprets the existing rules). In contrast, the minimum tax approach is result-oriented and seeks to ensure that the overall tax burden on business profits does not fall below a (politically defined) “acceptable” level – the proposal thus puts more emphasis on taxing the “right amount” rather than taxing in the “right place”. In this sense, tax planning is effectively curbed, as the tax burden cannot be reduced below the minimum level, not even by means of tax shifting to low-tax countries.

More specifically, the concept contemplates a two-pronged approach for the allocation of subsidiary taxing rights. First, in the multinational enterprise’s country of residence, the minimum tax is to apply if the multinational enterprise’s foreign income is taxed too little. In the market country, a minimum tax should be levied if the (ultimate) recipient is not subject to appropriate taxation there. In the first case, the minimum tax is equivalent to taxing foreign profits at a special rate with a tax credit system. The profits would be taxed on accrual, not upon repatriation, and the minimum tax would thus not create the incentive to keep and accumulate foreign profits offshore (as did the recently abolished US tax on worldwide profits). In the second case, the minimum tax would have the same effect as a preliminary withholding tax levied by the market jurisdiction, combined with a refund possibility if the state that is entitled to tax the corresponding income ensures a sufficient tax burden. Obviously, to coordinate the aforementioned two-pronged approach, priority rules are needed to avoid international “double minimum taxation”. Apparently, the German proposals suggests that the allocation of responsibilities for the avoidance of hybrid mismatch arrangements in BEPS Action 2 could serve as a blueprint, albeit not necessarily regarding the specific priority order.

While it would conceptually be little short of a revolution in the international tax law framework, the technical implementation of the proposed minimum tax would therefore not raise many new issues. Developed countries have already gained some experience with the technical aspects of the proposal. In particular, standard controlled foreign corporation regimes and switch-over rules already provide for supplementary taxation in the country of the firm’s headquarters where passive income of foreign subsidiaries or branches is taxed too low. This foreign-sourced income is then often added to the domestic tax base while the foreign tax is credited. In a similar fashion, some sophisticated market jurisdiction regimes such as the German royalty deduction barrier (“Lizenzschranke”) already make the full deduction of outbound payments contingent upon their tax treatment abroad (in case of the German rule, deduction is partially or fully denied if the royalty income benefits from low taxation due to a “harmful” intellectual property regime in the sense of BEPS Action 5). Compared to some of the regimes that are currently already in place, the proposed minimum tax would merely differ in two key aspects. On the one hand, the minimum tax would not be limited to tax arrangements that are deemed abuse or artificial avoidance. On the other hand, the tax burden would not be elevated up to the standard domestic rate, but instead only to an “appropriate” minimum level of taxation.

The minimum tax proposal also has some other advantages. Regarding the prospects of becoming part of a future OECD compromise, the most important one is probably that there are some strong links to the new US tax system. When the US introduced territorial taxation in 2018, it reserved the right to tax foreign-sourced “Global Intangible Low-Taxed Income” (GILTI) – essentially defined as above-normal profits that exceed a standard return on the use of tangible business assets abroad. However, the GILTI is only partially included in the US tax base, and the US concedes an 80 percent foreign tax credit, so that the GILTI is roughly equivalent to a minimum tax on GILTI where the effective minimum rate does not exceed approximately 13 per cent. Conversely, the so-called Base Erosion Anti-Abuse Tax (BEAT) creates a kind of minimum taxation in case of “excessive” deduction of certain outbound payments to related parties abroad. It should be noted, though, that BEAT is criticised for not crediting foreign tax payments and for granting a wide range of exceptions which render its operation unnecessarily complex. Any internationally agreed minimum tax standard should do better than this (see Herzfeld 2019 for more potential lessons from GILTI).

A minimum tax is also likely to be attractive for many other countries because it tackles a focal point of the public tax justice debate: the low tax payments by some multinational companies. If the minimum tax were successful in making all companies pay an “adequate” amount of taxes somewhere in the world, the fairness issue would be reduced to the distribution of revenue between states. Some might then still find it unfair that Google, Facebook and so on pay taxes in the USA and not in Germany, France or Britain – but at least they would pay taxes somewhere.

At the same time, effective minimum taxation would impose a lower bound on international tax competition. It would no longer be attractive for companies to relocate production or book profits to tax havens or countries with effective tax rates below the minimum rate. This is likely to make corporate structures more efficient. On the other hand, low tax locations would no longer have an incentive to set (effective) tax rates below the minimum rate. In other words, a tax increase in these countries is possible without increasing companies’ tax payments (the classic “treasury transfer argument”). These countries would have to find other competitive strategies (eg by focusing on financial services, etc) which would hopefully create competition that is more growth friendly than the current one for book profits. If today’s tax havens increased their rates, this could mean, of course, that Germany, France and other high-tax countries would hardly receive higher revenues through minimum taxes. However, a fair and efficient international tax system should be desirable even if no substantial revenue increase for high-tax jurisdictions is expected.

As a caveat, the proposed minimum tax has its own complexities. One question is how to put the country that seeks to ensure minimum taxation in a position to measure the effective tax burden of income abroad. This is not a trivial task, given the differences in the rules for determining profits from country to country. The difficulties are likely to increase if there are several intermediate stages downstream (from the point of view of the country where the payment takes place) or upstream (from the point of view of the country of residence). An expansion of country by country reporting and the (automatic) exchange of information would be necessary in this context. It is also conceivable that especially in the market jurisdiction, the burden of proof is reversed, ie the minimum taxation regime would be based on rebuttable presumptions regarding the company’s income and tax payments. In this case, the taxpayer would have to prove that the foreign tax burden effectively corresponds at least to the required minimum taxation level.

The exact scope of application would also have to be specified. For example, the question arises whether the firm’s state of residence should be entitled to tax the profits of subsidiaries in low-tax locations even if the subsidiaries produce (exclusively) for the local market there. It should also be clarified whether for establishing the level of effective foreign taxation, the foreign tax payments are averaged over all foreign firm locations (as is the case with the American GILTI) or – probably better – individually for each foreign jurisdiction. For the market country, a key question with regard to the supplementary taxation of outbound payments is whether or not to limit minimum taxation to transactions between related parties.

In any event, a minimum tax alone will not address the issue that motivated the Digital Services Tax: the fact that digital companies can be economically active in a country without having a physical presence there. An accompanying reform that focuses on this specific problem is therefore likely to be part of any future OECD compromise. Elsewhere, we have outlined a concept for how the problem can be solved without compromising the logic underlying the current system of source taxation.

For EU member states, the question arises whether the proposed minimum tax would be compatible with EU law requirements. Any action taken only at the national level of Member States would be at risk of not passing scrutiny from Court of Justice of the European Union. According to settled case law, the exploitation of a lower level of effective taxation abroad does not, in itself, justify countermeasures that restrict the internal market free movement guarantees. Unless the Court changed its position, extended controlled foreign corporation regimes or minimum taxation limits on payment deductions would thus give rise to considerable concerns, because they would essentially only apply to crossborder transactions. The alternative of levying withholding taxes in the market jurisdiction on nonresident payees with an option to subsequently apply for full or partial reimbursement based on an assessment of the level of foreign taxation of the respective income would have its own intricacies. Admittedly, the Court has been more generous in its acceptance of withholding taxes, under a fundamental freedom analysis, as long as resident payees are ultimately also subject to at least the same level of domestic taxation regarding the affected income. However, such withholding taxes could only be partially implemented because of the provisions of the Interest and Royalty Payments Directive 2003/49/EC. The only feasible way forward would therefore probably be a harmonised implementation, at Union level, of an eventual global agreement on minimum taxation (“ATAD III”). While some doubts would remain, the Court of Justice of the European Union has so far been more lenient with regard to its fundamental freedom scrutiny of European secondary law. If individual countries were to block the initiative for minimum taxation, enhanced cooperation between the other member states under Article 20 TEU could do the trick.

In total, the German proposal for a minimum tax has its merits – and it is a clever move to deflect from the debate on a re-allocation of taxing rights, or at least provide strong arguments for a reduced scope and impact of the other proposals that are currently on the table. This applies not only to the proposed EU Digital Services Tax, which is unpopular with the German government, but also to broader efforts within the framework of the OECD Task Force on the Digital Economy to shift taxing rights to the country of destination (ie the sales market states). With the minimum tax now proposed, the German Finance Minister can argue that in future the destination country would have subsidiary taxing rights whenever the recipient state does not exercise its taxing rights sufficiently, and that the problem of undertaxation of large digitalised businesses would also be taken care of.

Too little interest, too little political will to address inequalities and human rights?

On Monday 7 January, an adjournment debate took place in the UK parliament on the recent UN report on poverty and austerity in the UK. It was hosted by the UK Labour party’s Shadow Minister for Children, Emma Lewell-Buck.  Scheduled at the end of the day’s parliamentary business, the debate drew a crowd of fourteen MPs. Emma Lewell-Buck gave a powerful summary of Professor Philip Alston’s findings, and together with backbench colleagues she vehemently criticised the UK government for their  ‘shameful’ and dismissive response to the report. The presentation from the Shadow Minister concluded with a question and a challenge: is there the political will to address the issues arising from Professor Alston’s report?

The UK has recently been under the spotlight concerning human rights because of the UN Special Rapporteur’s interim report published in November. Similar scrutiny came in the form of the periodic review process of the UN’s Commission on the Elimination of All Forms of Discrimination Against Women (CEDAW), to which the UK and Northern Ireland is a signatory. The Tax Justice Network has recently reported on CEDAW’s review of the UK, noting the impact of tax injustice and financial opacity across its Overseas Territories and Crown Dependencies on the rights of women across the world. We have also flagged the upcoming opportunities for civil society to contribute to the next CEDAW UK State party review (deadline 28 January), in part to challenge complacency and to call for stronger political will.

Now seems a good time to dig around for different perspectives on the valuable role that civil society can play in explaining to governments the impact of their policies, or their inaction.

In the UK, but of relevance more broadly, the important and serious evidence gathering session by the UK Parliament’s Women and Equalities Committee will be of interest in connection to the UK reporting on obligations under CEDAW (November 2018). First, there are important insights into the weaknesses of government coordination, planning, and accountability between departments and between government and civil society. Second, civil society representatives giving evidence made recommendations for improving practice and coordination with women’s organisations and with those concerned with the rights of women and girls.  Third, the exchange of information during the oral evidence highlighted areas of ongoing and common concern, including lack of gender-disaggregated data collection and analysis and the absence of an authoritative ‘national machinery for women’ that holds together the strategic coordination under a government’s CEDAW obligations.  The evidence also provides concrete examples of the damaging implications of misunderstanding of gender as a ‘neutral’ concept for the purposes of policy and legislation. All these concerns matter and resonate in setting out tax justice arguments and implementing tax just policies that support human rights and gender equality and tackle discrimination against women.

The issues highlighted in the Women and Equalities Oral Evidence Report signpost surmountable problems that can and should be grasped.  The ability to surmount the problems and make progress, does however, turn on the very point that the Shadow Minister made at the end of her speech on Monday: is there the political will to do so?

You can read the full transcript of oral evidence to the UK Parliament’s Women and Equalities Committee here.

See also:

For those who are considering preparing submissions to CEDAW concerning tax and fiscal justice issues there is helpful guidance on the CEDAW site on how CEDAW, government and civil society input operates.

2019 CEDAW Sessions – ‘List of Issues Prior to Reporting’: Ecuador, Sweden, Uruguay (March); Belgium, Switzerland, Tunisia (July); Germany, Ukraine (November).

UK Government’s report in response to the ‘List of  Issues’ and submitted to the CEDAW Committee.

Letter from EHRC to Chair of Women and Equalities Commission.

Gibraltar and the battle against the European Commission for their tax ruling practice

Guest Blog
Prof. Dr. Patricia Lampreave, EU tax and state aid expert

On 19 December 2018, the European Commission issued a final decision on the Gibraltar tax system. It´s a highly controversial decision and it’s the first time that two different decisions were coupled into one.

Following a Spanish complaint in October 2013, the Commission opened an in-depth investigation into Gibraltar’s corporate tax regime to verify whether the corporate tax exemption regime applied between 2011 and 2013 for interest (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies, which would be a breach of EU state aid rules.

In October 2014, the Commission extended its State aid investigation to also cover Gibraltar’s procedures for granting tax rulings. The Commission had concerns that tax rulings granted since the Corporate Tax Act 2010 (ITA 2010) by Gibraltar’s tax authorities, which had wide powers to issue tax law provisions, consistently misapplied the provisions of the Corporate Tax Act 2010.

Analysis of 165 tax rulings indicated that requests for tax rulings provided too little information about the company or its activity. In some cases, even the name of the requestor was not provided as the request was made through a fiduciary or lawyer. Tax authorities, without conducting any substantive ex ante monitoring or ex post control in order to safeguard its national tax base, just rubberstamped requests, holding that the activity of the company was performed wholly outside Gibraltar and therefore the income generated was exempted tax. According to Gibraltar’s legislation, only income accrued in or derived from Gibraltar is subject to a 10 per cent corporate income tax. The 165 tax rulings were categorized by type of income (income derived from intermediaries activities, consultancy fees, passive incomes, profits derived from marketing, from procurement of petroleum products and logistic organisation, income derived from trusts or holding companies and even income derived from tax rulings that prolonged benefits that the 2010 tax act was supposed to abolish). The Commission’s investigation opening in 2014 was accompanied by an annex with the name of the companies that had obtained tax rulings. The vast majority were non-EU multinational enterprises, some of which were resident in tax havens, and some were individuals who were resident in northern Europe.

The final decision issued on 19 December addressed both Spain’s complaint about Gibraltar’s corporate tax regime and the Commissions concern about Gibraltar’s procedures for granting tax rulings. The Commission’s final decision was a pseudo-Solomonic solution. From the 165 tax rulings analysed, the Commission concluded that only 5 tax rulings concerning the tax treatment in Gibraltar of passive income generated by Dutch limited partnerships are selective, and so in breach of EU state aid rules. According to the tax legislation applicable in both Gibraltar and the Netherlands, the profits made by a limited partnership in the Netherlands should be taxed at the level of the partners. In the five cases, the partners of the Dutch partnerships were resident for tax purposes in Gibraltar and so should have been taxed there. However, under the five contested tax rulings, the companies were not taxed on the royalty and interest income generated at the level of the Dutch partnerships.

These five tax rulings continued to exempt the partnerships’ incomes from interest and royalties from taxation even after Gibraltar adopted legislative amendments to bring this income within the scope of taxation in 2013 (passive interest) and 2014 (royalties). The total unpaid tax amounts have been calculated to be around €100 million, which the EU has ordered Gibraltar to recoup.

Aside from these five tax rulings, however, and despite all the analysis stated in the Commission’s investigation opening of 2014 concerning Gibraltar’s questionable procedures for granting tax rulings and the content of the other 160 tax rulings listed in the annex, the Commission has decided it has not found unlawful state aid.

Trusted with investigating Gibraltar’s practice of rubberstamping tax rulings, now the Commission is the one who rubberstamps, concluding that Gibraltar’s tax ruling practice was perfect during all these years and that tax authorities have only granted five illegal tax rulings. Of course, the five scapegoats will appeal to the European Court of Justice.

Edition 12 of the Tax Justice Network Arabic monthly podcast/radio show, 12# الجباية ببساطة

Welcome to the twelth 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 would like to broadcast it. You can also join the programme on Facebook and on Twitter.

Taxes Simply #12: We discuss what happened to the economy in 2018, we look at the “Owners of Egypt” and ask what are the economic reasons behind the protests in Sudan?

In the twelfth edition of Taxes Simply

UK next in the UN hot seat over impact of City of London, Crown Dependencies and Overseas Territories tax policies on women’s rights

Guest blog
Kathleen A. Lahey
Professor of Law, Queen’s University
Non-Executive Director, Tax Justice Network

Advocates for gender equality in the United Kingdom of Great Britain and Northern Ireland or in any of its three Crown Dependencies and fourteen Overseas Territories have a unique opportunity to address the UN Committee on Discrimination against Women in Geneva by 28 January 2019 on how the UK’s tolerance of offshore tax avoidance and financial secrecy laws undercuts gender equality.

In several groundbreaking decisions and reports released beginning in 2014, this UN Committee has concluded that all countries that have adopted the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) have obligations to raise enough budgetary revenues to fund gender equality programs in all spheres of their influence. For the UK, this means that the Government has a responsibility to ensure that businesses and wealthy individuals do not use either UK domestic facilities such as those provided by the City of London or by its offshore Crown Dependencies or Overseas Territories to avoid taxation or accountability for illicit financial gains.

Recent CEDAW actions have increasingly recommended that governments take specific steps to reduce gender inequalities. In 2014, the CEDAW Committee decided in the Blok complaint, which was brought under its Optional Protocol rules, that the Netherlands could not exclude self-employed women from maternity leave provisions, requested the government to change the legislation, and directed it to pay reparations to the women injured by this discrimination. In 2015, the Optional Protocol Canada Inquiry produced five pages of detailed directions on program and gender equality improvements crucial to help lift Canadian women from poverty.

Then in 2016, submissions by Alliance Sud, the Center for Economic and Social Rights, the NYU School of Law Global Justice Clinic, Private Eye and Tax Justice Network resulted in the CEDAW Committee issuing Concluding Observations[1] that call on Switzerland, ranked number one on the Tax Justice Network’s Financial Secrecy Index, to take undertake impact assessments on how its financial secrecy and tax laws affect women’s rights overseas and change any its domestic policies that contribute to those violations of their equality rights.

These developments provide ample basis for making similar types of submissions to the CEDAW Committee by 28 January 2019[2] on how the UK’s network of domestic and Crown Dependencies and Overseas Territories tax and financial disclosure rules impairs women’s rights to gender equality at home and overseas, and thus need to be subject to the same kinds of changes.

The CEDAW Committee called on all UK sectors to address these points in the List of Issues delivered to the UK Government on 3 August 2018:

The UK’s 16 November 2018 replies[3] to the CEDAW Committee List of Issues consist of two limited statements on which civil society, academic, human rights and other stakeholder organizations can provide crucial evidence to the Committee in its deliberations, which begin on 18 February 2019:

Virtually none of the substantive effects of the combined UK and Crown Dependencies and Overseas Territories financial secrecy and tax avoidance facilities on gender equality were addressed by the UK Government in this exchange of documents.

The challenges are great: The UK is the second biggest centre for wealth management after Switzerland, and, at the same time, its own National Crime Agency acknowledges that ‘hundreds of billions of pounds of international criminal money is laundered through its banks every year.’ The UK accounts for 17 per cent of the global market in offshore financial services, even though it is itself only ranked 23rd in the FSI. Not only is the City of London one of the world’s largest financial centres, but it is also ‘built substantially on “offshore” characteristics’ and is well known for its lax but accessible financial regulation and services.

In addition, however, the UK still provides considerable support and a great deal of control over the Crown Dependencies and Overseas Territories. Jersey Finance, the official marketing arm of the Jersey offshore financial centre, states that ‘Jersey represents an extension of the City of London.’ The Panama and Paradise Papers have shed an increasingly strong light on the antisocial and crime-fueling activities of the Overseas Territories, while illicit financial flows continue unchecked in the UK as well as in the Crown Dependencies.

In the meantime, women in both the UK and its satellites continue to face high levels of gender inequalities that are not being actively or effectively addressed by their governments.

The ground-breaking outcomes of CEDAW’s review of Switzerland’s offshore and financial secrecy policies demonstrate what can be achieved when gender equality, human rights and tax justice advocates join forces to use existing laws and international treaties to challenge in-country and cross-border tax abuse as violation of human rights.

As submissions to the CEDAW Committee’s upcoming Review session on the UK become available, they will be made available under the Tax Justice Network’s Gender and Tax Justice page.

——-

[1] United Nations, Committee on the Elimination of Discrimination against women, Convention on the Elimination of All Forms of Discrimination against Women [CEDAW Committee], Concluding observations on the combined fourth and fifth periodic reports of Switzerland, UN Doc CEDAW/C/CHE/CO/4-5, paras. 40-41, at pg 15

[2] Participation by Non-Governmental Organizations, Seventy-second session (18 February–8 March 2019), Geneva, Palais des nations, Room XVI, par. V, at pgs 1-2, setting the deadline for written submissions at 28 January 2019.

[3] CEDAW Committee, List of issues and questions in relation to the eighth periodic report of the United Kingdom of Great Britain and Northern Ireland, Addendum, Replies of the United Kingdom of Great Britain and Northern Ireland to the list of issues and questions, Seventy-second session (18 February–8 March 2019), UN Doc CEDAW/C/GBR/Q/8/Add 1, 16 November 2017, at pgs 2-3.

Brussels celebrates ‘tax freedom’ for billionaires on 4th January 2019

Our colleagues in Belgium have decided to celebrate the fourth of January as the day when billionaires in Belgium will have earned sufficient to pay their tax bill for the whole of 2019.  In an era of preposterous inequality, social fragmentation and political crisis, what’s not to celebrate? Continue reading “Brussels celebrates ‘tax freedom’ for billionaires on 4th January 2019” →

Landmark moments for tax justice from 2018 worth celebrating

From conference fringe talks to top of global agendas, tax justice issues have come along way since the turn of the millennium. Progress made in recent years, including the milestones reached in 2017, was held and built upon in 2018, cementing tax justice as more than just a fad –it’s a wholesale shift taking place across the world in how we see the role of tax in our responsibility towards each other and towards the planet. Continue reading “Landmark moments for tax justice from 2018 worth celebrating” →

How to assess the effectiveness of automatic exchange of banking information?

In December 2018 the OECD’s Global Forum published the new terms of reference to assess compliance with the OECD’s Common Reporting Standard (CRS) for automatic exchange of information. Two weeks later, the EU Commission published a report about automatic exchange of information within the EU. Both reports are show the urgent need for effective statistics. Why are civil society organisations the only ones explicitly asking for this? More importantly, when will we get heard?

The OECD, like any good monopoly, makes countries get the whole package they offer. (There’s no other show in town). First the legal framework: the Common Reporting Standard (CRS) for automatic exchange of information. Then the explanatory manual (the CRS Commentaries). Then the installation instructions (the CRS Implementation Handbook), and finally, the OECD sends its own inspectors (the Global Forum) to review countries’ use of the OECD product (the CRS) and to tell them what else they need to get. Continue reading “How to assess the effectiveness of automatic exchange of banking information?” →

The UK must face up to the gender inequality it enables internationally

Co-written by the Tax Justice Network and Oxfam GB

Oxfam GB logo

The United Kingdom is currently being reviewed by the United Nations (UN) on how well it is meeting its commitments on women’s gender equality rights guaranteed by the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW). This review includes evaluating how the UK has failed to prevent many of its Crown Dependencies and Overseas Territories from becoming some of the largest tax havens in the world.

The UK has a disproportionate influence on financial transparency and tax policies globally because of the Overseas Territories and Crown Dependencies — a network of secrecy jurisdictions which it supports and over which it has ultimate sovereignty. While the UK has made some domestic progress by improving transparency on who owns companies in the UK, its territories still refuse to publish such information. After intense campaigning within the UK parliament supported by a range of NGOs, the UK government agreed that it would require the Overseas Territories to implement a key transparency measure by the end of 2020, or else have it imposed. Continue reading “The UK must face up to the gender inequality it enables internationally” →

Research fellow in financial secrecy, for new research grant

We’re delighted to announce the start of a ‘Does Transparency bring Cleanliness? Offshore Financial Secrecy Reform and Corruption Controlnew’, a Global Integrity-DFID Anti-Corruption Evidence (GI-DFID-ACE) research project with Dr Daniel Haberly of the University of Sussex. And that means we’re looking for a star research fellow, with an interest in the issues explored by the Financial Secrecy Index, and in the kind of work that led Dan to produce the figure above. Please spread this far and wide.

Job description: Research Fellow in Financial and Development Geography (focus on Financial Secrecy and Corruption)

This position is to assist with key tasks for 22 months of a 2-year Global Integrity-DFID Anti-Corruption Evidence (GI-DFID-ACE) grant-funded project led by Daniel Haberly (University of Sussex) and Alex Cobham (Tax Justice Network): Does Transparency bring Cleanliness? Offshore Financial Secrecy Reform and Corruption Control.

There is growing international reform effort targeting the issue of financial secrecy, and in particular the role of “offshore” financial secrecy jurisdictions in enabling criminal activities including the hiding of corrupt funds by political elites. However, we have little evidence on (long-term) outcomes: has greater transparency actually reduced the illicit use of OSJs?

This project aims to fill this gap in understanding of outcome effectiveness by 1) compiling the first historical database of financial secrecy indicators by jurisdiction, and 2) using this database to examine the impact of changing offshore secrecy on the hiding and movement of corruption proceeds through shell companies, as revealed in leaked datasets (Panama and Paradise Papers).  Findings will be timely and important, providing critical guidance to still-intensifying financial transparency reform efforts.

Key tasks of the research fellow will likely include (but not necessarily be limited to) the following:

Full details of the post are available at: https://www.sussex.ac.uk/about/jobs/research-fellow-0520.
For inquiries, please contact Daniel Haberly at the School of Global Studies, University of Sussex ([email protected]).

The gilets jaunes and how NOT to implement an environmental tax: the Tax Justice Network’s December 2018 podcast

In edition 84 of the December 2018 Tax Justice Network’s monthly podcast/radio show, the Taxcast: time’s running out to tackle the climate crisis facing us all. We look at environmental taxes and making them fair, speaking to the authors of new report A Climate of Fairness: Environmental Taxation and Tax Justice in Developing Countries

Plus: we discuss the gilets jaunes in France, a movement that’s been widely reported as being anti-green taxes, but is in fact born from wider desperation for their ‘let them eat cake’ President Macron to reverse a series of policies that have worsened inequality in the country. We give Monsieur le President a lesson in how not to implement an environmental tax…

Featuring:

Tatiana Falcão and Jacqueline Cottrell, authors of the Vienna Institute for International Dialogue and Cooperation report A Climate of Fairness: Environmental Taxation and Tax Justice in Developing Countries (details below) and John Christensen of the Tax Justice Network. Produced and presented by Naomi Fowler, also of the Tax Justice Network.

this is a real economic, tax justice struggle…wherever I went [in France] I heard Macron being described as the plutocrat’s president”

~ John Christensen on the gilets jaunes in France

We have about 10, 12 years to really get the climate problem really under control and really start to bring down our emissions, I hope governments will start to shift towards this higher intervention again and to introducing a carbon price because the alternatives are much worse”

~ Jacqueline Cottrell

Continue reading “The gilets jaunes and how NOT to implement an environmental tax: the Tax Justice Network’s December 2018 podcast” →

Unbelievable! The Ethical Failure at the Heart of Corporate Tax Avoidance

In this year-end guest blog, Tristan Shirley explores the belief system that underpins tax avoidance by multinational corporations and reflects on the ethical failures revealed by their unbelievable behaviour.

Almost every commuter on the train is reading the free paper. There is a surprised headline exclaiming the negative impacts of austerity and rising inequality, although everyone remains expressionless. Although reading a London commuter’s face for feeling is folly, I wonder if it is because they  know that the political and financial system around them legally and aggressively redistributes capital out of their public purse via tax avoidance.  It is unlikely; the highly opaque, complex and supposed legality of tax avoidance hinders the public from seeing its existence and influence in everyday life. After all some may have unknowingly paid for their tickets via the tax avoiding trainline!

Around the world many people are calling for tax justice, and there is growing understanding and evidence to demonstrate the damage tax avoidance has on the provision of human rights and distribution of political power. There are also proven ethical tax reform initiatives which would massively improve on the status quo. Why then, in the face of such clear analysis do tax avoiding (not evading) multinational corporations (MNCs) believe their behaviour is still acceptable and fail to adopt reform? For me and many others it is unbelievable! From that commute I set out to prove it.

Beliefs are the acceptance that something exists or is true and they can be used to justify action, such as avoiding paying tax. Beliefs sit together within systems where they interact and influence each other in an interconnected manner. Therefore a believer has a degree of control on which part of their beliefs to modify or distort when presented with contrary evidence, often protecting a stronger core belief. For example, Flat Earthers (people that believe the earth is flat) can ‘‘…postulate that satellite photographs are affected by systematic distortions of light, that people have hallucinations about ships disappearing over the horizon…’’ so as to maintain that the earth is flat.

You will be pleased to hear that there are limits to these distortions. The limit is defined by what can be considered as plausible. The Flat Earthers distortions break the seams of plausibility and as a result their belief system isn’t credible. Sure, anyone can believe what they want to believe but it is implausible to do so.

Hang on, surely a corporation can’t believe!? A MNC can and does in fact believe, through its Corporate Internal Decision (CID) structure which organises personnel towards the corporation’s endeavour and exercise of corporate power. It is the executives and senior leadership who are responsible for formulating the CID and embedding a culture of tax avoidance. They do so because they believe in the sanctity of the fiduciary duty, in return for equity and power they place the interests of the shareholder ahead of their own and obviously, those of third parties. Usually in the pursuit of profit!

Instinctively human rights should easily challenge the MNCs belief system as being implausible. The global MNC tax avoidance of $500 billion per annum massively harms people, especially those in developing countries where governments cannot uphold their obligations to their citizens. It is clearly morally reprehensible, however, having this label does not make it something implausible to believe in. MNCs are business orientated and their function is to generate profit on behalf of their shareholders, it just so happens in doing so MNCs believe in the fiduciary obligation as more plausible than moral obligations and the rights of several billion people who are affected.

Intuitively in a similar vein, social contract theory between citizens and state seems to be hold the answer to challenging the plausibility tax avoidance beliefs. In 2016 Pakistan lost an estimated 40% of tax revenues to MNCs. Theoretically, such tax avoidance threatens the assumptions of fairness and egalitarianism on which the social contract between state and individuals rests. Citizens of Pakistan would be unlikely to actively agree to enter into an agreement with MNCs and the state, if such unfavourable outcomes were known. Unfortunately though for us, the social contract is in fact inapplicable to MNCs. They  may benefit from the provisions of the state but they do so as a third party, not as an equal contributing participant within the contract, they are not a citizen and only need to abide by the law. Laws which funnily enough promote vast tax avoidance. Unfortunately any further philosophical coercion towards paying tax  that ordinary citizens like you and I have are voluntary for the MNC.

With hindsight the fiduciary duty is resilient, these criticisms fail to diminish the nature and importance of business and the unique characteristics it bestows on MNCs. It is clearly morally reprehensible and massively damaging for the social contract to believe in avoiding tax, yet given the fiduciary contract and its vital role in business not implausible. Nonetheless, it is in the constant appeals to the ‘nature’ of business and profit that gives MNCs enough rope, to eventually hang themselves.

The market in which businesses operate does in fact provide it’s own robust moral framework. It is based on the market’s purpose of distributing goods in the most efficient manner possible by setting the best ‘price’ dictated by supply and demand. In our real-world market there are imperfections which restrain this efficiency. To behave in a way that exploits them is deemed as unreasonable, leading to market inefficiencies otherwise known as ‘Market Failure’.

Unsurprisingly, tax avoidance exploits market imperfections so that the MNC is able to charge artificial prices that are “too low,” relative to the true cost. This process of externalising costs (to the citizens of host countries who have to pay for the remaining tax liability) increases the amount of profits that executives are able to deliver in line with the fiduciary duty.

This behaviour is rife in the current competitive market and the dysfunction it creates is evident as markets fail to deliver on their purpose. It is implausible for MNCs to believe in tax avoidance, not because of human rights or social contract considerations which to some extent are independent of them, but because in doing so they emaciate and cripple the global market on which their very own and so many others existence relies on. With the damage done, retrospective pleas of ‘but it was legal!’ will hold even less merit.

Business ethics and its impact has long been restrained by appeals to the fiduciary duty. It has been sidelined and adherence to its advised ethical norms or practices have been limited to voluntary adoption to likes of ‘CSR’. Belief in the current fiduciary duty without modification is simply unbelievable. The behaviour of MNCs needs to be contextualised within the larger competitive market system in which they operate; tax avoidance for short term profit causes market failure and is not excusable and their behaviour must reflect that. For example, by pursuing with vigour ethical tax reforms like the multi-factor global formulary apportionment with a minimum corporate tax rate.

Positively, the legal interpretation of the fiduciary duty (in UK law at least) has become clearer, thanks to the work of TJN and their legal work. Farrer and Co. are of the opinion that it is not possible to construe that duty as constituting a positive duty to avoid tax, in fact to do so is ‘misconceived’. The nature of the fiduciary relationship does not in fact limit the ethical considerations of MNC boards and the payment of tax. The result being that the tax avoidance beliefs inculcated in a MNC at a leadership level are in fact not just implausible philosophically, but also perhaps implausible in law too.

Of course executives will still appeal to the sanctity of the fiduciary duty until the tide truly changes. However, given that belief  is implausible and clearly undermined, we witness their real belief that much clearer – it is simply greed.

Who knows, one day MNCs that believe in tax avoidance may be deemed as absurd as Flat Earthers. A change in this direction may result in significantly larger tax bills to MNCs, but to be honest that cost was theirs all along.

 

GRI invites feedback on its first global tax transparency standard

A new draft Standard on tax and payments to governments was published today by the GRI, the global standard setter for sustainability reporting. This is the first global standard designed to help organisations understand and communicate the impact of their tax strategies on the economies and societies they operate in using country by country reporting techniques. The GRI, whose Sustainability Reporting Standards are currently used voluntarily by over 4,000 organizations in over 90 countries, is now inviting public comment on the draft GRI Standard.

The draft Standard was developed by an expert, multi-stakeholder Technical Committee which included Alex Cobham, our chief executive. The Technical Committee was setup in 2017 with the task of making tax reporting more transparent and accessible in response to organisations’ tax affairs facing increasing scrutiny from stakeholders, tax authorities and citizens.

Tax and related payments to governments are the fundamental source of revenues, and consequently, a vital means to finance sustainable human development. The integration of national economies and markets in recent years has placed international tax rules under greater strain. Recent tax related scandals like LuxLeaks and the Panama Papers have prompted stakeholders to ask for greater and more transparent corporate reporting on tax and other payments to governments.

Tax transparency promotes trust and credibility in the taxation system and in the tax practices of organisations. It enables stakeholders to make informed judgments about whether an organisation’s position on tax and payments to governments is acceptable and informs public debate. Equal access to quality information also contributes to better-informed public debate on tax policy.

Since 1997, GRI Standards have become the world’s most widely adopted global standards for sustainability reporting. According to the GRI website, 93 per cent of the world’s largest 250 corporations now report on their sustainability performance. By helping organisations communicate their impact on climate change, human rights, governance and social well-being, GRI Standards have enabled real action to create social, environmental and economic benefits for people across the world.

The inclusion of country by country reporting in the new draft Standard on tax and payments to governments marks another milestone for tax transparency. Country by country reporting requires multinational corporations to provide a jurisdiction-level breakdown of activities, profits declared and tax paid. The practice clarifies where corporations are conducing real business activity and where they are reporting their profits, making it easy to identify risks of profit shifting for tax avoidance – and to identify the jurisdictions that are attracting profit shifting at the expense of other countries.

The first draft international accounting standard for country by country reporting was created for the Tax Justice Network in 2003 by Richard Murphy, an accountant who is also a member of GRI’s Technical Committee. The approach was initially written off as unrealistic, and a version for the extractive sector was blocked by the Big Four accounting firms at the International Accounting Standards Board in 2006 despite the support of investor and philanthropist George Soros and Publish What You Pay, a global coalition. Today though, there are a number of standards for country by country reporting including for financial institutions in the EU, and for reporting to tax authorities for all large multinationals under the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. The new draft GRI Standard will not only help catapult the practice to thousands of organisations across the world, it sets out by far the most robust implementation of the practice.

There are three main ways in the GRI’s draft Standard’s approach to country by country reporting is superior to the OECD’s approach.

First, under the draft GRI draft Standard, organisations publicly share their country by country reporting data. Country by country reporting data currently collected by tax authorities under OECD rules is kept private. Making country by country reporting data public contributes to better-informed public debate on tax policy and serves as a strong deterrent against corporate tax dodging.

Second, the draft GRI Standard distinguishes between intra-group sales (which occur between a multinational corporation’s branches) and unrelated party sales. This distinction is crucial to separating real economic activity from purely accounting transactions.

Third, the draft GRI Standard requires reporting companies to either use audited financial statements or financial information filed on public record, or to reconcile the reported information with the data stated in these. Where numbers do not reconcile, companies can explain. This avoids a situation where public country by country data simply cannot be reconciled with published financial information which would otherwise undermine trust in all of a company’s reporting. The draft Standard’s distinction between intra-group sales and unrelated party sales is crucial to reconciling this information.

The draft GRI Standard will be open for public comment for 90 days, until 15 March 2019. GRI will offer free webinars during the public comment period, where stakeholders can learn more about what’s included in the draft Standard.

Sharing your feedback will help the GRI make tax reporting more transparent and accessible to a wider range of stakeholders. Make sure you have your say on whether the draft Standard is clear and feasible to report on, and if it will deliver the valuable information you need to make sound assessments about an organization’s tax approach. Input from investors and asset managers would be of particular value.

The draft Standard is available as an interactive PDF here. You can register and provide your feedback by downloading the PDF and completing the forms. Please submit the PDF with your completed feedback before 15 March 2019. You can learn more about the GRI Standard on tax and payments to governments here. In the December edition of the GRI podcast to hear directly from Technical Committee members, including Rob Wilson of investor MFS and our chief executive Alex Cobham, about why the need for increased tax transparency is so urgent, and the value the Standard offer.

The Tax Justice Network’s December 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, diciembre 2018

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! (abajo en Castellano).

In this month’s programme:

Guests:

Continue reading “The Tax Justice Network’s December 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, diciembre 2018” →

The US can be blacklisted under the OECD’s new rules due to a forgotten commitment

We recently criticised the report the OECD sent this month to the G20 which hinted that 15 (mostly small) jurisdictions are at risk of being blacklisted. We reiterated our concerns over the new OECD criteria to identify tax havens, particularly because of one arbitrary caveat, which looks like it was added just to let the US off the hook. But thanks to the useful memory and analysis of Alex Cobham, our chief executive, we’ve realised that the US should be blacklisted, even if we abide by the OECD’s capricious rules.

In 2014, automatic exchange of information finally became the new global standard for exchanging information, which the Tax Justice Network had been advocating since 2005. Therefore, when the G20 asked the OECD to come up with “strengthened” criteria to identify tax havens, the OECD rightly added an “immediate trigger” about automatic exchange of information.

Until then, jurisdictions simply had to meet two out of three requirements: (1) compliance with “exchanges upon request” (the old but surviving global standard for exchanging information), (2) commitment to automatic exchange of information (the new global standard) and (3) signing the Multilateral Tax Convention on Administrative Assistance (that would enable both types of exchanges of information). With the strengthened OECD rules, however, it wasn’t enough to comply with two out of three if automatic exchange of information wasn’t one of the two met requirements.

As we described in our blog about the previous version of the OECD’s criteria and in our blog about the truth-stretching “largely compliant” rating awarded to the US by the OECD’s Global Forum, the OECD faced a challenge when designing the new rules: how to actually become more strict on countries, while ensuring that the US would not be disturbed? We hypothesize that they came up with a clever plan: engineering compliancy ratings that were subject to discretion, and when this wasn’t possible, to simply “fix” the requirements themselves.

The US met the first requirement by achieving a “largely compliant” rating on the exchange of information on request. While the Global Forum considers most countries to be “compliant” and “largely compliant”, that the US has achieved a “largely compliant” rating in the second round of reviews is outrageous, particularly because  in this round a country’s rating must reflect how well it ensures availability of beneficial ownership information. Not only does the US not register any beneficial ownership information, it doesn’t even ensure that more basic legal ownership information is registered. It’s not just the Tax Justice Network’s Financial Secrecy Index that has called out the US for its poor performance on legal and beneficial ownership availability.  The Financial Action Task Force (FATF) also rated the US as “non-compliant” in respect to effective implementation of beneficial ownership (this is assessed by immediate outcome 5, where the US got the lowest possible rating, “low level of effectiveness”, that would be equivalent to a “non-compliant”). The FATF also rated the US as “non-compliant” in respect to Recommendation 24 on the legal framework on beneficial ownership of legal persons.

For the other two criteria, the OECD had to manipulate the actual requirements (similar to corrupt countries that manipulate bids for public procurement).

Since the requirement on the Multilateral Tax Convention was beefed up from “sign” the convention to actually “have it in force”, the OECD added an alternative: “or have a sufficiently broad treaty network”. The US is the only major country not to have the Multilateral Tax Convention in force (they are only party to the original Convention that excluded developing countries and failed to ratify the amended Convention that is already in force for 112 jurisdictions). The OECD never defined what “a sufficiently broad treaty network” means, but we have no doubt they would consider the US’s treaty network to be sufficiently broad.

Up until now, the farfetched compliancy ratings and loophole-ridden requirements gave the US enough slack to meet two out of three requirements, but how could the US avoid the new immediate trigger about automatic exchange of information?

The OECD came up with a ridiculous caveat.

The immediate blacklist for failing to implement automatic exchange of information pursuant to the OECD’s Common Reporting Standard would be triggered only if a jurisdiction “contrary to its commitment to the Global Forum to implement the AEOI Standard by 2018, [has] not met the AEOI [automatic exchange of information] benchmark”.

This is worse than accepting the excuse “the dog ate my homework”. According to the OECD, the homework wasn’t even required, because the student never committed to submitting it in the first place! Fulfilling one’s commitments may be relevant to hold someone to account for their promises. But the OECD blacklist is supposed to identify jurisdictions that failed to be transparent, not those that broke their promises to be transparent.

This “commitment to automatic exchanges” caveat looks especially suspicious when compared to the other two requirements: jurisdictions must have a “largely compliant” rating and the Multilateral Tax Convention in force, regardless of any commitment to achieve those results.

To leave no doubt, the Global Forum 2018 report on automatic exchange of information described

“All jurisdictions asked to commit to the Global Forum’s AEOI Standard have now done so, except the United States.” (emphasis added)

We had celebrated that the Global Forum had finally called out the elephant in the room, that the US isn’t participating in the Common Reporting Standard for automatic exchange of information. But very likely, the purpose of this paragraph wasn’t to make us happy, but to leave no doubt that the US had never committed to automatic exchange of information in the first place (so that the immediate blacklist wouldn’t be triggered).

We thought the OECD and the US managed to get away with it, but then our Chief Executive Alex Cobham recalled an OECD declaration of May 2014 signed by the US showing that the US did commit to implement the OECD standard for automatic exchange of information:

“WE, THE MINISTERS AND REPRESENTATIVES of … the United States…

WELCOMING the OECD Standard for Automatic Exchange of Financial Account Information, which provides the key elements for establishing a single, common global standard for the automatic exchange of financial account information (hereafter “the new single global standard”)…

4. ARE DETERMINED to implement the new single global standard swiftly, on a reciprocal basis. We will translate the standard into domestic law, including to ensure that information on beneficial ownership of legal persons and arrangements is effectively collected and exchanged in accordance with the standard;…” (emphasis added)

This explicit declaration signed by the US confirms that the US did commit in May of 2014 to specifically implement the OECD’s Common Reporting Standard for automatic exchange of information: the declaration refers to the “new single global standard” and the recitals specify that this refers to the OECD standard. This means that the US’s commitment to automatic exchange of information was not a generic one that could have been fulfilled for instance, by the US Foreign Account Tax Compliance Act (FATCA) framework.

What is there left to say against such a blatant declaration of guilt? Perhaps some may argue that the US “declared to be determined” (but not “committed”) to implement the OECD standard. Or maybe that the US committed “to the OECD” but not “to the Global Forum” about implementing the OECD standard – the Global Forum happens to be part of the OECD. The grounds left for not blacklisting the US under the OECD’s rules are as narrow as the hairs these counterarguments would seek to split.

We hope the OECD won’t use these unscrupulous arguments, and instead will right a long standing wrong by blacklisting the US until they implement the OECD standard for automatic exchange of information. On a side note, the OECD could also hold the US to account on their other promises “including to ensure that information on beneficial ownership of legal persons and arrangements is effectively collected” since the US failed on this too.

If the OECD continues to undermine their own rules, throwing away any remaining credibility in order to avoid speaking truth to power, the EU should set aside this distortion when it comes to their own listing of non-cooperative jurisdictions. The OECD has demonstrated it cannot be used as a neutral arbiter, and any objective application of the EU’s own underlying criteria would require the US to be listed. We would, of course, recommend our earlier proposal to enlist US financial institutions as lobbyists for progress by reciprocating the FATCA threat of a 30% withholding tax.

More transparency rules, less tax avoidance

Guest blog
By Leyla Ates
Altinbas University in Turkey

The European Council has taken important steps to enhance the exchange of information between tax administrations in order to promote tax transparency and fair tax systems in EU countries. This in turn creates a deeper and fairer single market.[i] However, ambiguity in disclosure obligations and a high threshold requirement risks leave the door open wide enough for dubious tax schemes to slip through.

One of the benefits of the European single market is that EU citizens and businesses have the freedom to move, do business and invest across national borders. But since direct taxation is not harmonised across the EU, this freedom also entails that some taxpayers manage to avoid or evade paying tax in the countries they reside or do business in. In 2011, the EU Council agreed to ramp up cooperation between tax administrations to help make sure taxpayers pay their fair share (Council Directive 2011/16/EU).

On 25 May 2018, the cooperation between tax authorities was enhanced to include mandatory automatic exchange of information in relation to reportable cross-border arrangements (Council Directive 2018/822/EU).[ii]  The new directive further expands the scope of automatic exchange of information in tax matters, which had already been enlarged to include automatic exchange of financial account information in 2014, of cross-border tax rulings and advance pricing arrangements in 2015, and of country by country reporting in 2016.

Mandatory disclosure of aggressive tax planning schemes

Mandatory disclosure rules require intermediaries such as tax advisors, accountants and lawyers to report to tax administrations on aggressive tax planning schemes they are selling or making. Taxpayers are also required to report to tax administrations on the aggressive tax planning schemes they are making use of.

The mandatory disclosure rules aim to combat tax avoidance by means of helping identify regulatory loopholes, helping tax administrations to assess the risks, having deterrent effects on taxpayers and reducing the supply of these schemes by tax advisors.[iii]

In 1984, the United States became the first country in the world to introduce mandatory tax disclosure rules. Since then, a few other countries including some EU members have also introduced mandatory disclosure rules into their tax systems (the UK, Ireland, Portugal, plus Canada, South Africa, South Korea and Israel among non-EU countries). Indeed, the Lux Leaks and Panama Papers scandals and the fiscal State Aid cases pushed this anti-tax avoidance mechanism up on the EU base erosion and profit shifting agenda by demonstrating the role of intermediaries in the area of aggressive tax planning. As a first result of this political pressure, the European Council has now not only required common tax rules for mandatory disclosure in member states by 31 December 2019, but also placed an obligation on all member states to automatically exchange information on reportable cross-border schemes by 1 July 2020.

More information for all EU governments

The new directive requires the information is automatically exchanged with other EU members through a central directory. Thus, all EU countries will have access to a database on tax avoidance schemes. A similar database called the “aggressive tax planning depository” has existed within the OECD[iv]: such depository includes 400 types of schemes but is only available to a close-knit group of countries.[v] The new directive will create a level playing field for all EU member countries in terms of access to such relevant information.

Failure of the promoter-based approach

The assessment of the recent progress however is not entirely positive. The potential for ambiguity on what constitutes a tax avoidance scheme creates a serious risk that cross-border arrangements go unreported. Precisely because there are numerous and regular conflicts between tax administrations and taxpayers/advisers on the interpretation of tax laws, it should be expected that many schemes will be designed in grey areas which certain promoters might chose to interpret as not being subject to the remit of the reporting obligation. To mitigate against this risk, the reporting obligation should not just fall on either the client using an aggressive tax planning scheme or the promoter (tax advisers) of the scheme, but on both.[vi]

Unfortunately, the directive places the disclosure obligation primarily on the intermediaries, ie the tax advisors, accountants and lawyers designing and selling aggressive tax planning schemes. In some limited instances, taxpayers are also obliged to disclose tax planning schemes. If both were obliged to report independently on marketed/used tax avoidance schemes, the detection of illicit schemes would have been facilitated.

High threshold requirement: the main benefit test

The new directive sets out generic and specific hallmarks for describing whether a transaction is reportable or not. This is a general implementation under existing mandatory disclosure regimes. However, the directive also sets ‘the main benefit test’ as a threshold that a reportable scheme must satisfy before it is assessed against the generic hallmarks and some specific hallmarks. For a scheme to satisfy the test, it must be established that the main benefit, or one of the main benefits, which a person may reasonably expect to get from the scheme is a tax advantage. While threshold requirements are often used to filter out irrelevant disclosures and reduce tax administrative burdens, setting up a high threshold for disclosure can create an inappropriate justification for escaping mandatory disclosure obligations. The OECD stated that the main benefit test is a high threshold for disclosure.[vii] Thus, the European Council has opened a door through which intermediaries may inappropriately skip out on their mandatory disclosure obligations.

This article was originally published by Leyla Ates on The Progress Post on 12 November 2018. The article has been reproduced here with permission from the author and magazine.

 

References

[i] European Commission Staff Working Document Impact Assessment, SWD (2017) 236 final, Brussels, 21.6.2017, p. 4, available at https://ec.europa.eu/transparency/regdoc/rep/10102/2017/EN/SWD-2017-237-F1-EN-MAIN-PART-1.PDF.

[ii] Official Journal of European Union, L 139, 5 June 2018. According to Article 3, the Directive came into force on the twentieth day following its publication in the EU Official Journal i.e. 25 June 2018.

[iii] Tax Justice Network, Financial Secrecy Index 2018 Methodology, p. 95, https://www.financialsecrecyindex.com/PDF/FSI-Methodology.pdf.

[iv] http://www.oecd.org/ctp/aggressive/co-operation-and-exchange-of-information-on-atp.htm.

[v] Only to the members of the ATP Expert Group that is a sub-group of OECD Working Party No. 11.

[vi] Tax Justice Network, p. 96.

[vii] OECD, Mandatory Disclosure Rules, Action 12 – 2015 Final Report (2015), p. 37.

The G20 and the OECD disappoint again

We recently published an optimistic blog post about the advances made at the OECD’s annual Global Forum meeting that took place on 22 November 2018. Now, less than 10 days later, the OECD has submitted a report to the G20 and the G20 have issued a Communiqué that together bear some disappointing news.

First, the G20’s Communique.

We thought it was hard for a non-binding communiqué that superficially refers (in just one paragraph) to all relevant issues on tax and financial transparency to get any worse. We were wrong.

The G20’s 2017 Communique made these positive remarks about automatic exchange of information and beneficial ownership:

We look forward to the first automatic exchange of financial account information under the Common Reporting Standard (CRS) in September 2017. We call on all relevant jurisdictions to begin exchanges by September 2018 at the latest (…)

As an important tool in our fight against corruption, tax evasion, terrorist financing and money laundering, we will advance the effective implementation of the international standards on transparency and beneficial ownership of legal persons and legal arrangements, including the availability of information in the domestic and cross-border context (…) [emphasis added]

(That we considered these remarks to be positive gives you an idea of how low our expectations were)

One could argue that the US was implicitly covered in the call “on all relevant jurisdictions” to start implementing the Common Reporting Standard for automatic exchange of information. In addition, it was important that the G20 recognized the importance of beneficial ownership transparency for both companies and trusts to tackle corruption, tax evasion and money laundering. Arguably, this applied to the US and to many other G20 countries where beneficial ownership isn’t even available. Argentina, which held the G20 presidency in 2018, not only failed to keep the status quo set by these remarks but actually made its own corporate transparency worse. Only the EU could be said to have made progress on this issue.

The G20’s 2018 Communiqué now seems to be backpedaling on its previous Communique. The new declaration removed the call on relevant jurisdictions to start automatic exchanges and erased all references to beneficial ownership. In place of these calls, the 2018 Communiqué merely welcomes the:

“…commencement of the automatic exchange of financial account information and acknowledge the strengthened criteria developed by the OECD to identify jurisdictions that have not satisfactorily implemented the tax transparency standard.”

We’ll get to the supposedly “strengthened” criteria put forward in the OECD’s report to the G20 in a minute, but there’s another  shortcoming in the Communique. Out of the blue, the G20 took a big step backwards in the fight against tax avoidance:

“We will continue our work for a globally fair, sustainable, and modern international tax system based, in particular on tax treaties and transfer pricing rules” (emphasis added)

Not only has the G20 toned down or erased recognition of the most important tools available today for tackling tax evasion, corruption and money laundering, it has specifically given recognition to the very mechanisms that can be abused to enable tax evasion, corruption and money laundering.

We wonder if this is a response to our welcoming of the IMF questioning the sustainability of the arm’s length principle while exploring unitary taxation, only a few months earlier. Or to the long list of recent publications on how tax treaties can negatively affect developing countries.

The Communiqué published in Buenos Aires has failed to comply with a popular Spanish expression “Si no suma, que no reste” (if it won’t add value, at least it shouldn’t take it away).

Now, back to the usual suspect: the OECD.

Based on the OECD’s “strengthened” criteria which it put forward in its new report to the G20   (just imagine what the weaker version looked like!), jurisdictions should comply with two out of three requirements and avoid the two immediate triggers to prevent being blacklisted. If they fail on any of the immediate triggers, they will be blacklisted even if they comply with the two of the requirements. The three requirements are

Thanks to the OECD’s report to the G20 we know that the OECD blacklist based on the new strengthened criteria isn’t ready yet, but we can deduct which 15 jurisdictions are at risk of being identified.

It also helps to compare these 15 jurisdictions, with the Tax Justice Network’s Financial Secrecy Index’ top 15 ranked jurisdictions:

Financial Secrecy Index compared against jurisdictions at risk of being blacklisted by OECD

The Financial Secrecy Index ranks jurisdictions according to the “worst offenders”, meaning those who are mostly responsible for global financial secrecy and which, if they became transparent, would have a positive and tangible impact on reducing financial secrecy in the world. This would clearly be the case for the US, Switzerland, Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, the United Arab Emirates, Lebanon and Panama among others. These top 15 jurisdictions on the Financial Secrecy Index account for 62 per cent of the global  market of offshore financial services. On the contrary, the 15 jurisdictions at risk of being blacklisted by the OECD (mostly small islands) account for only 0.64 per cent of the global market of offshore financial services. In other words, if the 15 jurisdictions at risk of being blacklisted by the OECD became fully transparent, it would be hard to tell the difference at a global level, given that they account for less than 1 per cent of the global offshore financial services. The 15 jurisdictions at risk of being blacklisted by the OECD provide almost 100 times less offshore financial services than the 15 jurisdictions identified by the Financial Secrecy Index.

Moreover, these 15 jurisdictions at risk of being blacklisted by the OECD, don’t really need to become fully transparent to be off the hook. Small improvements will do.

Here are all the changes the 15 jurisdictions need to undertake to avoid the blacklist:

The Global Forum ratings

Obtaining a “largely compliant” rating is one of the three factors needed to avoid the blacklist. How hard is it to achieve it? Not that difficult, as long as you are a powerful country. If you don’t believe it, just look at the number of countries considered “compliant” and “largely compliant” by the Global Forum:

Table of jurisdictions categorised by Global Forum peer review ratings

Source: 2018 OECD report to the G20 (red underline added)

The vast majority of members of the Global Forum are considered to be “compliant” and “largely complaint”, including the worst offenders on the Financial Secrecy Index (underlined in red).

We wonder which rose-tinted glasses the Global Forum is looking through at the world of transparency and how they can ever explain the likes of the Russian Laundromats and other cases of grand corruption given how perfectly transparent their world appears to be.

Other organisations, including the Tax Justice Network, are not as optimistic at the Global Forum. Let’s take a look.

The OECD report to the G20 includes a colour-coded table showing the ratings of 39 jurisdictions from the second round of peer reviews against the exchange of information on request (EOIR) standard. This table, reproduced below, refers to the three sections (A, B and C) of the peer reviews that assess availability of ownership information and accounts, access to information by authorities and exchange of information.

Given that many organisations apply the same traffic-light colour coding (green = transparency; yellow = partially secretive; orange= largely secretive; red = fully secretive), we can compare colour composition of the Global Forum’s transparency table to the colour composition of the Financial Secrecy Index’ Secrecy Score and the Financial Action Task (FATF) 4th round of mutual evaluations on compliance with anti-money laundering recommendations.

To make it comparable, we only focus on the 39 jurisdictions assessed by the Global Forum’s second round of reviews that have also been assessed by the Financial Secrecy Index and the FATF. We only show the colour ratings of indicators from the Financial Secrecy Index and the FATF that are relevant to the Global Forum’s second round of review. In the case of the Financial Secrecy Index, these are indicators 1 to 3, 5 to 7, 18 and 19 on ownership information, accounts, banking secrecy and exchange of information. In the case of the FATF, these are recommendations 24 and 25 on availability of beneficial ownership information and effective implementation of these recommendations (Immediate Outcome 5).

This is what the ratings for the same jurisdictions (where available) look like according to each organisation:

Comparison: Financial Secrecy Index vs FATF vs Global Forum ratings

Both the Financial Secrecy Index and the FATF have overall much more red, orange and yellow (the FATF uses light green in place of yellow) especially with regard to ownership information (the first six columns of the Index and all three columns of the FATF). While the Global Forum overall has more green (aka compliance), the Global Forum’s first column (on availability of ownership information) does show much more colour diversity and less green. Nevertheless, the Global Forum’s last column, which shows the overall rating, is the one that matters for the OECD blacklist, and in this case, the vast majority of countries are “compliant” (green) or “largely compliant” (yellow).

In conclusion, we would love to live in the world portrayed by the G20 and the OECD, where most countries are fully transparent (including all major financial centres) and where some automatic exchange of information among some countries, tax treaties and the arm’s length principle are enough to tackle all illicit financial flows (including tax avoidance). However, we happen to live in a world where illicit financial flows are alive and kicking, in many respects thanks to the G20,OECD countries and their dependencies that fail to implement real transparency and instead engage in a race to the bottom offering less regulation, less taxes and less questions asked when it comes to accepting non-residents’ money.