The case for supporting economic justice


The crisis of philanthropy

“We live in an age that loves the solution. But a lot of problems are problems of justice rather than problems of tinkering with an engine. And when you have a problem of justice, you can’t just move forward. You have to evaluate the whodunit.”

So says the author and journalist Anand Giridharadas in his recently published book, Winners Take All: The Elite Charade of Changing the World. The book has thrown down the gauntlet to philanthropists – society’s winners – to support efforts to reform the system that has made them rich while failing to improve living standards for the majority, rather than funding ‘sticking plaster’ initiatives that sound good but do little more than tinker around the edges.

Giridharadas argues that the top 1 per cent have a vested interest in perpetuating a system that produces ever greater inequality. In the USA, the incomes of the top 1 per cent tripled since 1980, while those of the bottom half stagnated. Similar trends are visible in other countries. This didn’t happen by itself. Vested interests successfully lobbied for low tax rates, less regulation and fewer social protections. These policies delivered an economy where the rewards of growth go to those at the top.

Many members of this elite recognise that the world has problems, but where they try to fix them, they do so in ‘safe’ ways that do not challenge the rules of the system: for example, by supporting entrepreneurship and social impact investing. Worse still, they support ‘safe’ initiatives while fighting the efforts of governments to address the real structural issues, because this would undermine their status, challenge their legitimacy and hurt their bank balances. (This has parallels with the historic and ongoing efforts of many Western governments to frame the causes of poverty in developing countries as anything other than an unjust global economic system that has been designed by the West to serve its own interests.)

As a result, concludes Giridharadas, most philanthropy is ineffective, and worse, it hides the real solutions. It is ‘fake change’. Many initiatives funded by the winners of the current system do help people in desperate need. But as they give back, elites aim to protect the system that causes many of the problems they try to fix. Their philanthropy masks the harm done by an economy that works in their interests. What we really need, he argues, is real systemic change to address the most pressing global problems in a sustainable way. Elites talk about promoting opportunity for all. But this is only possible when the economy is genuinely inclusive. This means higher taxes, more regulation, better social protections, and properly funded public services. Economic growth alone is not enough to produce a more equal society.

Broken economy, broken politics

At the Tax Justice Network, we strongly support the view that those people with wealth need to recognise that the global economic system that enabled them to become wealthy is deeply flawed and needs to be reformed if we are to have any hope of reversing inequality. And it’s not just about saving the economy – it’s also about saving democracy. Rocketing inequality is fuelling discontent around the world, as the principles and institutions of democracy and global cooperation are undermined and attacked by nationalist demagogues. The social compact that has shored up public support for open, democratic regimes has been weakened by the increasing dominance of a strain of market fundamentalism that has restricted the benefits of economic growth to the very top of society, without sharing it with everyone else.

Over the last 40 years, the neoliberal project has successfully persuaded people that a free and unregulated market is inseparable from individual liberty, and therefore from democracy. But neoliberalism has failed. The global financial crisis in 2008 and the subsequent downwards pressure on living standards has given birth to a breed of right-wing nationalists across the world who falsely blame these problems on immigration and free trade, when the systemic roots of these issues are rising household debt and falling real incomes combined with weak regulation and lack of transparency within the global financial system.

As it happens, the neoliberals were wrong. Liberty and democracy do not go hand in hand with unfettered capitalism. In fact, the opposite is nearer the truth. Democracy can only thrive if the economy can deliver fair and sustainable growth, support the social contract and provide the opportunity for everyone to participate in society. Political freedom is linked to freedom from want. The rise of antidemocratic forces as a result of the failure of neoliberalism to distribute the fruits of economic growth fairly are testament to this dependency. The unequal sharing of the proceeds of growth has been exacerbated by reduced tax and regulation, leading to reduced revenues for governments and the consequent haemorrhaging of public service budgets, coverage and quality. This has undermined public faith in the willingness and ability of governments to take steps to protect the living standards of its citizens and has led to the growing appeal of politicians who identify convenient scapegoats to blame for these problems.

Organisations like the Tax Justice Network, which seeks to make the global tax and financial system fairer and more transparent, have a critical role to play in defending democracy from the demagogues, as well as building the foundations of a fairer economy. The Tax Justice Network pursues systemic changes that address the international inequality in the distribution of taxing rights between countries; the national inequalities – including gender inequalities – that arise from poor tax policies; and the national and international obstacles to progressive national tax policies and effective financial regulation.

Our challenge to philanthropists

We are looking for those brave philanthropists who can give things up, not just give back, and help us. Philanthropists need to get out of the mindset that they can make a real difference by supporting projects that tinker around the edges. The only way to see real change is to tackle the deep structural roots of inequality, and to support governments to provide services for all of their citizens.

This especially applies to people who work in finance and who want to change the world for the better. A recent Guardian article by our colleague Nick Shaxson, author of Treasure Islands and The Finance Curse, outlines the damage done to the wider UK economy by its oversized finance sector. A research paper by Sheffield University estimates that the ‘finance curse’ has taken £4.5 trillion out of the UK economy between 1995 and 2015. Many well-meaning finance professionals give to charities, either directly or through their own foundations; some even embark on finance careers in order to ‘earn to give’, encouraged by the effective altruism movement. But, as Giridharadas has argued, this philanthropy risks doing more harm than good by diverting attention away from the significant damage that the finance sector in its current form does to the rest of the economy and to society at large, and from the urgent need to reform it in order to reduce this damage.

So, whether you work in finance or have become wealthy by other means, or if you work for a foundation that is interested in progressive change: if you want to change the world for the better, don’t just do what’s comfortable. Support genuine, global reform in pursuit of economic justice. Be the change; don’t indulge in ‘fake change’.

And if you’re part of the 99 per cent, not the 1 per cent, then you need to be part of the solution too. Philanthropists won’t change the world by themselves, even if they ditch ‘charity’ in favour of justice. Your support is needed – in voting and campaigning for change, in exercising your rights (and responsibilities) as consumers, and of course in helping those organisations that aim to tackle the systemic problems that we face.

How oversized finance sectors are making us poorer in the Tax Justice Network’s October 2018 podcast

In the October 2018 Tax Justice Network monthly podcast/radio show, the Taxcast:

Continue reading “How oversized finance sectors are making us poorer in the Tax Justice Network’s October 2018 podcast” →

Country by country reporting for the Sustainable Development Goals

I had the honour this week of addressing ISAR35, the 35th annual session of the UN’s Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (all presentations are available here; my slides are also below). The focus was on developing a framework to carry the logic of the Sustainable Development Goals (SDGs) into a set of core indicators for reporting by individual companies.

The ISAR experts include accountants and integrated reporting specialists from all over the world as well as country delegations. Excitingly, they are well along the road to establishing meaningful country by country reporting – which would fit perfectly with the logic of our proposal, now going into country pilots, for an indicator for SDG 16.4 on the profit shifting component of illicit financial flows.

What remains for company reporting is to ensure that the scope is sufficient to deliver the relevant accountabilities for SDG progress; and that there is a single, robust, underlying technical standard. And there’s every reason to think this will be achieved…

Continue reading “Country by country reporting for the Sustainable Development Goals” →

Why the German government’s blockade of corporate transparency is harming all of us

The German government is currently blocking a measure to publish country-specific balance sheet data, known as country by country reporting, in Brussels. Citizens and European politicians could use this data to free themselves from the headlock of the world’s most powerful lobbyists and tax avoiders. So far, however, the German government has failed to recognise both the inherent opportunity for a renewal of the European project and the EU’s great weight as a standard-setter in the global economy.

Since the global financial crisis of 2008, journalists have used leaks and painstaking research to show the industrial scale of tax trickery by the world’s largest economic players. Whether Google, Apple, Facebook, Amazon, Ferrero, Starbucks, BASF, Ikea, Vorwerk or SAP: their stories all too often give rise to a picture of brazen bilks who are flouting the public on top of causing the injury of unpaid taxes when they reel off their mantra of paying taxes everywhere in accordance with the law.

This assertion is only partially correct, as is shown by the billions in additional taxes assessed to be due during corporate tax audits. In 2016, for example, the tax authorities in Germany collected over €10 billion in taxes that large companies had failed to include in their tax returns. Data by the OECD shows that in 28 countries that reported data for 2015, on average additional 10.7 per cent of total corporate tax revenues are assessed through corporate income tax audits. In these 28 countries, on average fifty percent of all corporate income tax audits resulted in additional taxes assessed. To claim that corporates always pay tax everywhere in accordance with the law is thus simple corporate spin.

But the corporate mantra is badly misleading for another reason, too. It contains the subtle pretense that these companies are completely detached and uninvolved in the legislative process. In reality, global corporations afford a highly efficient lobbying machine and professional helpers. These are privileged professional groups such as tax advisors, lawyers and accountants who devise highly complex legal constructs for tax avoidance on the assembly line. To do this, they resort to artistically woven networks that reach from the economy to the highest political circles in order to guarantee impunity and tax loopholes.

These insider relationships function as long as they can work in secret. Essential for this opaque, criminogenic environment is that the extent of industrial tax avoidance is not exposed to public scrutiny. In this respect, Paradise Papers, LuxLeaks & Co. are serious system errors, anomalies in the matrix that have allowed a rare look behind the scenes. Individual errors, however, cannot paralyze a system.

The worst case scenario, the system breakdown for industrial tax avoidance, on the other hand, would be the regular measurement of tax dodging by public country by country reporting. These reporting obligations would reveal important indicators of economic activity, profits and tax payments for all countries in which corporations operate. Similar obligations already exist in the EU banking sector. A few months ago, German economists at the University of Cologne showed that these disclosure requirements have led to significantly higher tax ratios, especially for banks with tax haven operations.

Public country by country reporting generates more tax revenue due to incalculable reputational risks. If a company has to assume that the “fruits” of the elaborate tax acrobatics will be easily visible to the public at the end of the day, then suddenly other goals than aggressive avoidance play a more important role: management must act for the good of the company and therefore avoid possible calls for boycotts and negative headlines. When in doubt, corporate leaders are more afraid of reputational damage and shareholder pressure than tax authorities. The same applies to the tax authorities: their political leadership is more likely to shy away from unlawful or questionable deals if they threaten to entice enquiries.

The EU Commission and the EU Parliament have therefore proposed introducing such reporting obligations for the largest corporations in all sectors. Annual, complete financial transparency for the largest corporations could trigger incalculable reactions from voters, small and medium-sized domestic companies and consumers. Equipped with such corporate data, they could make better informed decisions at the ballot box, in the chamber of commerce and at the supermarket shelf on how they want to use their vote, their influence and their household budget.

Those who suffer most from corporate tax dodging are average and low-income earners, because they can hardly evade taxation via value-added tax and payroll tax and thus step into the breach for missing tax revenues. In line with the trend of recent decades, these groups shoulder a growing share of the tax revenue. Generally, these are the same social strata that also suffer most from a lack of quality public services due to a lack of taxes – be it a shortage of teachers at public schools, under-equipped public universities or under-funded social services for single parents.

The same applies to small and medium-sized companies, which are losing out against big companies. Double standards are also applied when it comes transparency. Insofar as they are only active domestically, the annual financial statements of small and medium-sized enterprises usually contain the balance sheet data, the publication of which the global monopolistic giants have so far successfully resisted.

No wonder, then, that the EU Commission’s request rouses powerful, ancient forces to resist. In 1978, such a system breakdown was looming on the horizon when the United Nations was on the brink of obligating multinationals to publish annual accounts for every single subsidiary in their global corporate web – including in all tax havens. With the help of the USA, Japan and other OECD countries, economic lobbyists succeeded in stopping this push at the last minute. Instead of the United Nations, private accounting firms have since been enthroned by the OECD as standard setters.

In a classic manner, the fox was appointed guardian of the hen-house: to this day, it is above all the Big Four accounting firms that set the influential accounting standards for corporations. The European Union and many other countries in the world have so far nodded off these as supposedly non-political, purely technical standards.

This could change if the Federal Government finally gave up its opposition to the proposal for public country by country reporting. In the European Council of Ministers, Germany is playing the key role – and has so far rejected public country by country reporting alongside Luxembourg, Ireland, Cyprus, Malta, Hungary, Sweden and Austria. With the exception of Sweden, all other countries are more or less notorious corporate tax havens, and thus hardly surprising opponents of the reform.

In short: it is one of the regulations where the SPD-led ministry would be well advised to take an example from the CSU Minister of Agriculture and his Glyphosat decision and “do the Schmidt” – simply to give its approval in Brussels on its own. There are more unworthy plans to jeopardize coalition peace. Instead, every argument, however far-fetched, against this proposal is being made by the business community – and unfortunately many of them have so far been taken up by the government coalition and the SPD finance minister.

As long as Germany hides behind narrow-minded legal arguments, irrational fears of the decline of Germany as a business location or the retracting of half-baked intermediate steps already achieved, Europe cannot prosper. It is time for Germany to find its way from being Europe’s taskmaster to a new role. Germany should no longer deny Europe’s weight as a standard-setter for the world economy and help give globalisation a more human face. Europe needs to expand its efforts on this ethical mammoth project to the extent that its great transatlantic ally is failing.

For this very reason, however, Europe and Germany still have an important lesson to learn from the USA: to finally use our market access as a lever to enforce (transparency) standards. The window for the adoption of the proposal ready for signature in Brussels is closing rapidly – there are only a few weeks left to get it through before the EU elections. What are we waiting for?

How the UK can raise £2.5bn from tax-avoiding multinationals today

15 years ago the Tax Justice Network proposed that multinational companies be required to report publicly on their operations, profits and taxes paid in each country where they operate. Our aim was to bring the transparency of the world’s biggest economic actors more in line with that of individual companies operating in a single country. Tax expert Richard Murphy wrote a draft international accounting standard, and then we took it to the world.

In 2013, the G20 and G8 groups of countries recognised the importance of this data in the fight against tax avoidance, and mandated the OECD to introduce just such a standard. But as yet, the data remain private to tax authorities. The UK passed legislation two years ago that would allow it to make the data public – but for unknown reasons, the government has not used this power.

Now, in joint work with our independent sister organisation Tax Justice UK, we present new evidence showing that public country by country reporting could raise revenues of £2.5 billion a year. The Chancellor Philip Hammond should simply say the word in his budget speech next week.

Continue reading “How the UK can raise £2.5bn from tax-avoiding multinationals today” →

Desperate marketing: Jersey Finance trolls The Spider’s Web film

Viewers of Michael Oswald’s seminal film on Britain’s tax haven empire have been bemused in recent days by a pop-up ad put out by Jersey Finance, the finance industry lobby in tax haven Jersey.  The ad, running under the title ‘Reality Check – Dispelling the Tax Haven Myth’, plays the usual tax haven trick of claiming that Jersey doesn’t tolerate tax evasion while ignoring concerns about tax avoidance and non-cooperation with anti-corruption transparency measures.

Since uploading The Spider’s Web for free viewing last month, close to three quarters of a million viewers have accessed the English language version (and over ten thousand the French language version). Jersey Finance’s ad campaign appears to be a panic reaction to this huge success – although we doubt that tax haven claims to having given up on the bad old ways will convince many people viewing the film.

Continue reading “Desperate marketing: Jersey Finance trolls The Spider’s Web film” →

Call for papers: Tax Justice Network annual conference #tjn19

CALL FOR PAPERS AND PANELS

2-3 July 2019

City, University of London

  

Download PDF summary | Submit abstract or panel proposal

The challenges of tax justice do not exist in a vacuum. It is not an accident that billions of dollars are lost worldwide each year to tax avoidance and tax evasion. Nor is there anything random about the failure to tackle loopholes, or to move forward proven measures to improve transparency and accountability of the actors, or simply to maintain progressive taxation.

The professional enablers – including banks, law firms and the major audit and accounting firms, along with real estate agents, trust companies and others, and myriad lobbying groups– are key players in both the design of schemes for tax abuse and the prejudicial political influence that undermines tax justice, and in some cases in facilitating criminal activities. The resulting impacts on human rights, including women’s rights, are dramatic.

This year, our conference will focus on qualitative and quantitative research that explores the role and the influence of the enablers, and innovative proposals for their better regulation.

The 2019 conference is co-organised by the Association for Accountancy & Business Affairs, City, University of London (CityPERC) and the Tax Justice Network.

The organisers wish to invite original, high-quality papers for presentation.

While we particularly welcome papers that focus on the role of professional enablers, proposals will be considered on any aspect of tax justice:

  • Tax competition and the race to the bottom, including the finance curse and possible implications of the UK’s exit from the European Union
  • Tax justice and human rights, including economic and social inequalities
  • Financial secrecy: mechanisms for hiding ownership, income or profit shifting, and policy responses at the national, regional or global level
  • Scale of revenue losses from tax abuses, and the human (eg inequality) impacts
  • Issues and policies affecting whistleblowers

In addition, we welcome proposals for panels (a chair and two or three speakers) and for innovative session formats addressing a particular theme. We will only consider gender-balanced sessions.

Please submit abstracts or panel proposals of up to 500 words, along with the required supporting information, using our online application form. The deadline for submissions has been extend to 31 December 2018. The review panel will communicate decisions in January 2019. Final papers will be due by March 2019.

Financial support may be available for speakers. Please indicate with your submission if you would require support to be able to attend. This year’s conference will take place in English only.

Registration will open when the preliminary programme is published in January 2019. More information will be published in due course at https://taxjustice.net/tjn19.

For any queries, please email [email protected].

This conference is the latest in an annual series dating back to 2003. The events bring together academics, researchers, journalists, policy staff of civil society organisations, consultants and professionals, elected politicians, and government and international organisation officials to facilitate research, open-minded debate and discussion, and to generate ideas and proposals to inform and shape political initiatives and mobilisation. Recent events in this series: 2018 | 2017

The European Union, tax evasion and closing loopholes: new report

Today, a new report commissioned by the Greens/EFA group in the European Parliament and written by the Tax Justice Network’s Andres Knobel demonstrates that despite progress in recent years on closing down opportunities for tax evasion, there are still significant loopholes for citizens and multinationals to evade paying taxes where they are based.

The study, “Reporting taxation: Analysing loopholes in the EU’s automatic exchange of information and how to close them”, shows that in order to close down loopholes for tax avoidance and evasion the EU urgently needs to revise the DAC2 and DAC3 directives, which provide for the automatic exchange of financial information and of tax rulings respectively. The EU must be ready to sanction financial centres that fail to exchange complete information with the EU and should include non-cooperative jurisdictions on its tax blacklist, including Tax Haven USA. The report also calls for much greater due diligence and monitoring of Golden Visa schemes to be sure that individuals aren’t just buying their way out of their tax obligations.

As the Greens/EFA spokesperson on tax Sven Giegold says:

Europe must speak with one voice and say to those currently cheating on their obligations to either play by the rules or quit the game.”

Continue reading “The European Union, tax evasion and closing loopholes: new report” →

Tax Justice Network’s October 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, octubre 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:

Continue reading “Tax Justice Network’s October 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, octubre 2018” →

It’s time to tax wealth properly

Wealth taxes are now rising fast up the global political agenda. For OECD countries, taxes on “property” have declined as a share of all taxes, from close to eight percent of all taxes in the 1960s, to a little over five percent in 1980, a level at which they have stagnated ever since.

Continue reading “It’s time to tax wealth properly” →

How City of London finance is making us poorer – infographic

A new report published today by the Sheffield Political Economy Research Institute at the University of Sheffield reveals the UK’s oversized financial sector has cost the economy £4.5 trillion in lost economic output between 1995 and 2015 – equivalent to £67,500 for every person in the UK.

The report finds that the UK economy would likely have performed much better in overall growth terms if its finance sector was smaller, and if finance was more focused on supporting other productive areas of the economy.

Also published today is a new book by Nicholas Shaxson, entitled The Finance Curse: How Global Finance is Making Us All Poorer. The book sets out a new economic framework referred to as the “finance curse” for understanding how a financial centre that has grown above its useful size and role becomes predatory and harmful to the economy that hosts it. He argues the City of London is draining resources and talent from other economic sectors, creating large economic inequalities and spurring financial crises.

Scroll down to view infographics and videos about the finance curse and how it impacts on us all. You can read Nicholas Shaxson’s Guardian long read here, his blog here and our full press release here.

 

 

Video: The Finance Curse

Video: What is Financialisation?

Video: The ‘Competition Agenda’ – why market competition between nations is a bad idea:

The Finance Curse and the £4.5 trillion hit to the UK economy

The Finance Curse, a concept first developed by John Christensen and Nicholas Shaxson for TJN, is now the subject of a Long Read article in The Guardian.

The article mentions a new study by Andrew Baker of the University of Sheffield, Gerald Epstein of the University of Massachusetts Amherst, and Juan Montecino of Columbia University, estimating that the UK has suffered a cumulative £4.5 trillion hit to its GDP from 1995-2015, due to its financial sector being too large and having turned away from its proper traditional functions towards more harmful and predatory ones.  That is equivalent to 250 percent of GDP – or £170,000 per UK household.

Continue reading “The Finance Curse and the £4.5 trillion hit to the UK economy” →

Edition 9 of the Tax Justice Network Arabic monthly podcast/radio show, 9# الجباية ببساطة

Welcome to the ninth edition of our new 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.

In the ninth issue of الجباية ببساطة (Taxes Simply) we start with a summary of September’s tax news from around the Arab region and the world, including:

Continue reading “Edition 9 of the Tax Justice Network Arabic monthly podcast/radio show, 9# الجباية ببساطة” →

The Tax Justice Network seeks two new board members

The Tax Justice Network board ensures that we have the necessary resources, systems and policies to achieve our objectives, and works closely with the rest of the team to ensure that we have identified the right strategic and tactical priorities and opportunities.

The Tax Justice Network is an independent international network, launched in 2003. It is dedicated to high-level research, analysis and advocacy in the area of international tax and financial regulation, including the role of tax havens. The Tax Justice Network maps, analyses and explains the harmful impacts of tax evasion, tax avoidance and tax competition; and supports the engagement of citizens, civil society organisations and policymakers with the aim of a more just tax system.

We currently have eight board members, including four executive directors (each leading one of our four strategic programmes), and four non-executive directors. The existing board provides unrivalled depth of knowledge and experience in a diverse range of fields linked to tax justice, including economics, law, accounting, audit, human rights and gender, and organised labour, as well as a geographic spread across three continents (Europe, North America and Africa).

We are now looking to recruit two additional non-executive directors:

Tax expertise is not necessary for either position, since the Tax Justice Network is staffed by technical experts and can draw on a group of senior technical advisors. We are looking for people who can start in early 2019. The Tax Justice Network is a global virtual organisation, with no offices, and the board meets four times a year (three times online, and once in person at our annual research conference). The roles are unpaid, but reasonable expenses will be covered.

Click the link below for more information, including the background to this recruitment and how to apply. Applications are due by 30 November.

Tax Justice Network Non-Executive Director Advertisement 2018

UNCTAD journal highlights tax thought leadership

We’re delighted to share a guest blog from Bruno Casella of UNCTAD (the UN Conference on Trade and Development), highlighting the newest edition of their journal Transnational Corporations, which we heartily recommend (and our paper on the history and use of Country-by-Country Reporting will be published soon…)

As Bruno lays out below, this edition showcases some of the most important new research and policy change around the tax transparency and accountability of multinationals. It also reflects another step in UNCTAD’s return to international thought leadership in this area. In the 1970s, UNCTAD was the lead organisation in working to achieve corporate disclosure to support development efforts (an important fore-runner for the proposal for an international accounting standard on country-by-country reporting which we first put forward in the early 2000s, Murphy 2003). Now there is a resurgence, visible from the World Investment Report 2015 which included new estimates of the scale of multinational tax avoidance (of which Bruno was a co-author), to UNCTAD’s establishment of an intergovernmental expert group on Financing for Development, and co-ownership of the Sustainable Development Goal target 16.4, to reduce illicit financial flows – in which the first proposed indicator now under testing would use country-by-country reporting data to construct a measure of profit misalignment.

A most welcome development – as is this journal edition.

Continue reading “UNCTAD journal highlights tax thought leadership” →

Lifting the Veil on Capital Flight and Tax Havens in Africa

Cross-posted from Review of the African Political Economy with kind permission from the author, Nataliya Mykhalchenko

Odd-Helge Fjeldstad, Sigrid Klæboe Jacobsen, Peter Henriksen Ringstad, Honest Prosper Ngowi Lifting the veil of secrecy: Perspectives on international taxation and capital flight from Africa (Bergen: Chr. Michelsen Institute, 2017). The book is available as open source and can be accessed here.

This is a timely collection. Published when newspapers are saturated with tax-related scandals and fraud allegations, the book analyses some of the main issues surrounding illicit financial flows, in particularly concerning tax heavens. The focus of the book is Africa – the continent that suffers most from capital outflow, not only but especially in terms of economic development. Targeted at, among others, policy makers, tax practitioners, civil society organisations, students and researchers, the aim of the book is to contribute to widening the debate around tax havens and offer policy-relevant data and findings.

The book starts by considering the scale of the problem. Loss to African countries in corporate tax evasion is higher than anywhere else in the world – with a tax system which enables tax avoidance. Particularly egregious is the behaviour of multinational companies in the extractive industry who pay absurdly small amount of tax by registering profits to tax havens. Among the continent’s rich wealth is frequently hidden in havens outside national tax authorities and beyond judicial reach.

As the book tells us, ‘the global network of offshore financial centres … popularly known as ‘tax havens’ or ‘secrecy jurisdictions’ … make it possible for rich elites and large multinational companies to drain large amounts of wealth out of Africa.’ Many of these tax havens are located in predictable places, small tropical islands such as the Cayman and the British Virgin Islands, but also in rich OECD countries such as Ireland, the Netherlands, Luxembourg, Singapore, and the United Kingdom.

Despite the notorious difficulties in assessing the scale of the problem, the authors present some shocking figures. Globally, there is approximately USD 8 trillion of personal financial wealth in offshore accounts. This figure rises to USD 32 trillion when tangible asset like property, artwork and jewellery are included. Yet as a proportion of total wealth, Africa is the most afflicted continent in the world. ‘Africans hold USD 500 billion in financial wealth offshore, amounting to 30% of all financial wealth held by Africans.’ In terms of lost taxation from this ‘flight’, it is suggested that African countries are deprived of an estimated annual figure of USD 15 billion. However, as the book states, ‘The inclusion of non-financial wealth, or higher estimates from available literature, could push this figure as high as USD 60 billion annually.’ In short, the situation is catastrophic.

One of the many strengths of the book, is the representation of experts from the Global South. This can be seen in the make-up of the team of this collection: Thirty in total, they include experts, academics, activist, political and economic advisors, and importantly come from a variety of backgrounds and geographies. As a few examples: Professor Annet Oguttu – first black woman to get a doctorate in tax law at the University of South Africa, where she later became the first female Professor; Dr Honest Prosper Ngowi – an Associate Professor of Economics at Mzumbe University in Tanzania; Professor Leonce Ndikumana – Professor of Economics University of Massachusetts at Amhest and Dr Caleb Fundanha – the Director of the Institute for Finance and Economics and Chief Executive Officer of Macroeconomic and Financial Management Institute of Eastern and Southern Africa.

The volume is organised into five sections: each one opens by introducing a topic and is then complimented by shorter articles with more in-depth discussion and case studies. Setting the scene in the introduction, the authors take up, what seems an unwieldy task: not only understand the impact that tax havens have in economic terms on the continent, but also explore ways in which the global networks of offshore financial centres affect domestic tax bases, political institutions, and citizen’s participation. To note briefly, there is no clear explanation as what kind, or in what, the ‘citizen’s participation’ is referred to.

After defining some important concepts and giving an overview of the historical evolvement of tax heavens, the book moves to talk about its estimated scale and impact on the African continent as well as about the intricate relationship between capital flight, global corporations, bank secrecy and the elites, i.e. the power-accumulation nexus.  Importantly, there is an acknowledgement of the difficulty in quantifying the exact amount of money being lost due to, amongst other things, the mismatch in trade statistics and often inaccurate methodologies used to estimate losses. This is an argument that is widely adopted by the international community as the search for more reliable methodologies continues.

The actors involved in the network of tax heavens, including the so-called ‘Big Four’ (EY, Deloitte, PwC and KPMG) are explored in detail. These actors – also referred to as ‘lobbyists’ – according to the study, play one of the central roles in pushing for tax incentives and benefits for multinational companies, to the extent that this influences legislation in certain countries as explored by John Christensen here. The exploration of the extractives sector on the African continent and its relationship with tax havens is probably one of the most insightful parts of this collection. Detail-rich, it illustrates how multiple actors (including domestic players), navigate their way in interests-driven financial schemes in order to – to put in simple terms – squeeze as much revenue and pay as little tax.

The final section of the book gives an overview of some of the actors involved in trying to tackle issues associated with tax havens as well as the measures and initiatives these actors are supporting. The overview is comprehensive, covering the historical development of these initiatives, mentioning the current changes and importantly underlining the importance of building capacity in the African countries in tax administration, including taxpayer services and increasingly important e-tax systems.

Structurally, the book has various shortcomings. Due to the fact that some of the shorter articles in the five sections were not written specifically for this collection (but rather adapted), at times there is a sense that the information is fragmented. The lack of cross-referencing within sections and shorter articles throughout the book also adds to this effect. Moreover, there are several times where the same concepts are being defined and explained repeatedly, while it helps in our understanding, this repetition breaks the flow of the book.

What the structural inaccuracies also do is that they take away from effectively conveying the response to research objectives that were laid out at the start of the book. The data and analysis to further understand how tax havens affect domestic taxation bases, political institutions and ‘citizen participation’ gets somewhat diluted in lengthy explanations. While it is understandable that when trying to unveil the complex financial and political structures at play, there is a sense that there is not enough emphasis on how the material connects to the research questions. What is also lacking is a conclusion. The book seems to end abruptly and leaves the reader ‘hanging’; I would have liked to see the analysis being comprehensively concluded.

What the book does do however, it is it opens up a much-needed debate around the importance of looking beyond financial impacts of tax havens to start a wider discussion on its effects on domestic law-creation, people’s perceptions and attitudes toward taxation, in order to understand the mechanism and policy that can be used to deter the abuse of the global financial system. The book offers a solid grounding that can inform future research, studies and debates. Available as open source, graphically appealing and detail-rich, the book is an accessible resource for those interested in peering behind the veil of secrecy.

Lifting the Veil of Secrecy is available as open source and can be accessed here.

Nataliya Mykhalchenko graduated from the University of Leeds in International Development. Supported by ROAPE she researches anti-fraud initiatives on the African continent. Recently she has investigated anti-fraud measures in South Africa, Ghana, Botswana, Nigeria, Tanzania, Kenya, Malawi, Rwanda and Zambia. Working with ROAPE’s Jörg Wiegratz, Nataliya’s research is linked to the political economy of anti-fraud measures in the Global South. She is now based at the Social Research, Law and Legal Studies at Birkbeck University. 

Featured Photograph: From the article ‘Africa is Poor’ they said! on Quora

Moneyland: plutocracy, contagion and crisis in the Tax Justice Network’s September 2018 podcast

In the September 2018 Tax Justice Network monthly podcast/radio show, the Taxcast:

Continue reading “Moneyland: plutocracy, contagion and crisis in the Tax Justice Network’s September 2018 podcast” →

Leaving Jersey – an island cursed by finance

The Tax Justice Network was set up in 2003, after three Jerseyfolk, Pat Lucas, Jean Andersson and Frank Norman, traveled to London to see John Christensen, the island’s former economic adviser. Christensen had left the island in 1998, appalled at the corruption and malfeasance he had encountered every day, and they knew it. They pleaded with him to to “rescue our island” from offshore finance.  Christensen recalls:

They were talking about liberating the island. I said that if you want to do that, you have to take on the entire issue of tax havens and the global economy. They grasped that pretty fast, and asked: ‘if that is what it takes, how do we set about doing that?’ I said that we will have to create a mammoth global campaign to raise public awareness. It was clear to me by the time they left, three hours later, that this was the call to arms.”

Continue reading “Leaving Jersey – an island cursed by finance” →

The Spider’s Web film – now available for free online

Michael Oswald’s seminal documentary film on Britain and its tax haven empire is available now on YouTube.

Released in 2017 to considerable critical acclaim, The Spider’s Web has been screened across the world, from USA to New Zealand.  It is now available for free download by anyone who wishes to watch in either English, French, Italian or Spanish language versions.

Continue reading “The Spider’s Web film – now available for free online” →

Tax Justice Network’s September 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, septiembre 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:

Continue reading “Tax Justice Network’s September 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, septiembre 2018” →

Is Germany’s finance minister the puppet of Big Finance?

2017-09-04 BSPC Hamburg Opening by Olaf Kosinsky-2.jpg

Olaf Scholz (Wikimedia Commons)

Update, Feb 22, 2019: German Finance Minister Scholz blocks tax transparency.

The Financial Times is carrying an article this week titled “Berlin falls in love with big banks” in which it quotes Chancellor Angela Merkel and her centre-left finance minister, Olaf Scholz, as having started a rapprochement with financial institutions:

wooing large, global lenders and positioning themselves much closer to the financial sector. Mr Scholz has called for a “reappraisal” of active industrial policy in favour of the financial sector, arguing that Germany’s banks are too weak to support corporate interests.”

Scholz, whom we criticised recently for his deference to multinationals and tax havens, has also brought in the former Goldman Sachs banker, Jörg Kukies, as his deputy. Kukies told the FT:

We want to be perceived as a country which appreciates when banks create jobs in Germany and bring over capital and knowhow.”

Scholz also told a Goldman Sachs conference that he wants the central clearing of trillions of dollars of derivatives trades moved from London to Germany. Worse still, though, the FT reports elsewhere:

Scholz . . . has time and again stressed that the German economy needs strong and globally competitive banks to support its export-oriented economy . . . Berlin is warming up to the idea of eventually merging Deutsche and Commerzbank.”

That old ‘national champions’ argument, which is a version of the ‘national competitiveness’ arguments made in the UK all the time: giant global banks as a path to a better future. We’ve been here before, and not that long ago.  In fact, Germany’s own Monopolies Commission warned about this, ahead of the global financial crisis. Here is one among many of its criticisms:

The following point is more disturbing: similar policies helped cause the financial crisis in Germany in 1931, which in turn contributed to the rise of fascism and eventually global warfare.

All this is incredibly dangerous. Large financial institutions have always been influential in Germany, of course — witness, for example, Germany’s dangerous and austere response to the Greek crisis, caused in significant measure by reckless lending to Greek borrowers by German banks. But it’s probably fair to say that German carmakers have had more political clout. This now appears to be changing. And let’s not forget that Germany is already a major tax haven.

Overall, Germany is actively courting the finance curse, and Scholz appears hell-bent on accelerating this process. When a financial sector grows beyond its useful size and role, it starts to inflict damage on the country that hosts it. Jobs and tax revenues generated in the financial sector are offset by much larger damage in other parts of the economy and society, in a complex range of areas: too-big-to-fail banks, a brain drain out of other productive sectors, the financial equivalent of the Dutch Disease (where local price levels rise, crowding out other sectors), the capture of the establishment by financial interests, the transformation of finance away from its useful wealth-creating roles into more profitable wealth-extracting roles, rising inequality, and much, much more.  To illustrate the potential pitfalls, compare productivity in the two countries to see how poorly finance-dependent Britain does compared to car-crazy Germany.

Here’s the latest OECD data.

This woeful British performance has many causes, but the finance curse analysis may well provide the best general framework for understanding what has gone wrong.

There’s more to Scholz

Yet this isn’t all that’s dangerous about Scholz. Back in July we wrote a piece entitled Why is Germany siding with the tax havens against corporate transparency? in which we argued that Scholz was sabotaging a key European transparency measure through procedural measures, apparently designed to allow multinationals and tax havens veto any measures.

Now German newspaper Bild is carrying a story entitled Scholz bends in front of Google, Facebook and Co, which is summarised (web translation here) by Sven Giegold, the European MEP (and a founder of the Tax Justice Network):

the Federal Ministry of Finance rejects the introduction of a digital tax for companies such as Google and Apple. The “demonization of large digital companies” was “not effective.” 

So large global technology monopolies and their aggressive efforts to squash competition are just fine, Mr. Scholz appears to be saying.

What is more, Scholz appears to be unfriendly towards a financial transactions tax (FTT). As Giegold put it:

Scholz has already reduced the financial transaction tax to a stock exchange turnover tax.”

The SPD was the political party that had campaigned hard for an FTT – but once in office it simply threw the measure out of the window.

Former German Finance Minister Wolfgang Schäuble was, for all his faults, rightly suspicious of big banks, once telling Deutsche Bank’s boss Jürgen Fitschen that banks had shown “great creativity” in escaping regulation, with Fitschen arguing back that this was “irresponsible” and “populist” and that “it’s unacceptable for people to stand there and say that banks are still circumventing the rules.” This is somewhat reminiscent of the words of former British Prime Minister Tony Blair, another ‘centre-left’ politician enamoured with the financial sector, when he said, soon before the global financial crisis substantially caused by British banking deregulation, that the regulators were:

seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone”.

“Seen as” – but by who? By Blair’s good friends in the City of London, of course. Now this same reckless class of global finance bosses who captured the British establishment seems to be getting a good hearing in Berlin.

Oxfam in Germany gave a good summary of what’s going on, in a direct appeal to Scholz:

After 150 days of social democratic fiscal policy, important tax policy demands from the election campaign seem forgotten – because they do not correspond to the interests of the financial industry and multinationals.”

It may seem odd that the centre-left politician seems to be bowing down to these global giant monopolies, while his predecessor, from the right wing, has taken the more cautious and pragmatic view. Germany’s Tagesspiegel newspaper summarised things a different way:

The longer the SPD co-governs, the more unclear it is what it stands for. . .because Europe’s Social Democrats do not dare to conflict with the [owners of capital], they are losing their credibility and voters at a staggering pace.”

It’s hardly surprising that the SPD is in free fall. As one observer of Germany described it to us, via email:

Since the Bundestag election in 2017, where the SPD had its worst result ever (20,5%). it is now in free fall. In the most recent poll the scoial democrats only received 16 %, now behind the far-right Alternative for Germany (AfD) and in many federal states polls in fourth or fifth place.”

Have they not observed what has happened in other countries? If citizens do not have a credible voice on the mainstream left to turn to, where are they going to turn? As Martin Wolf said in an excellently argued article, also in the FT:

the centre’s complacency invites extremist rage.”

Are the latest unpleasant events in the German town of Chemnitz really such a surprise?

 

Edition 8 of the Tax Justice Network Arabic monthly podcast/radio show, 8# الجباية ببساطة

Welcome to the eighth edition of our new 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.

In the eighth issue of الجباية ببساطة (Taxes Simply) we start with a summary of August’s tax news from around the Arab region and the world, including:

Continue reading “Edition 8 of the Tax Justice Network Arabic monthly podcast/radio show, 8# الجباية ببساطة” →