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:

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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” →

Fintech, hotbed of offshore deregulation and crime

Reuters has just published an article titled Swiss watchdog to propose looser anti-money laundering rules for fintechs. (Fintech is short for “financial + technology” and it is about bringing technology into the financial sector.) Switzerland’s move is, apparently:

part of a drive to boost innovation and shore up the country’s position as a leading money management hub.”

For the appropriate context for this, see a recent FT Alphaville column entitled Fintech as a gateway for criminal enterprise. It focuses on money transmission services, but it’s part of an Alphaville series examining the dark side of fintech, which is disturbingly large.

Equally disturbing, tax havens are rapidly jumping on the Fintech bandwagon.  Jersey has set up a “regulatory sandbox” to allow certain startups to operate “without the normal registration requirements and associated costs.” The Isle of Man, another tax havens, has “thrown its arms wide open” to cryptocurrencies. In the words of Appleby, the star of the Paradise Papers:

The Isle of Man Government appears keen not to suffocate this evolving area with onerous regulation.”

If that doesn’t set the warning lights flashing take a look at sleazier tax havens, like Malta, which is a “hotbed for fintech” and which has dived in with “Bitcoin ATMs.” Or try the Russian enclave and “Special Economic Zone” of Kaliningrad, where participants enthuse that

Whatever is not illegal is legal . . . there are no laws regarding cryptocurrency mining because it’s a new kind of business.”

And that gets to the nub of the issue with fintech. It is racing ahead of regulatory protections for consumers and wider society — and that can be a highly profitable place to be. Which is why it is so compatible with the offshore tax haven model: these places are in the business of offering escape routes from the rules.  As one of the boosters of this technology puts it — a booster with the fitting name of ‘escape artist’ — Cryptocurrency Is The New Tax Haven. 

The word “crypto” should offer a clue — in this case, secrecy. Bitcoin, the best known of these currencies, is not just a vehicle for secrecy and crime, but also a way for those running the system to abuse millions of poor mugs who thought they could get rich by buying into this once in a lifetime opportunity (a “fraud worse than tulip bulbs,” as a top banker put it, with only some exaggeration.)

There’s a sucker born every second

And there’s this:

According to a working paper from the University of Luxembourg, lesser-known hubs like the British Virgin Islands, Gibraltar, and the Cayman Islands now count among the world’s top ten ICO [Initial Coin Offering] destinations, owing to their ease-of-ICO administration, laws, and tax benefits.”

Having made a business model of racing ahead of regulations, the best way to stay ahead is to be regulated in a tax haven.

For a dose of sanity on fintech, there’s plenty more here.

Update: the Marshall Islands, a rather secretive tax haven, is also keen to join the bandwagon. 

Tax “stability” short-changes Burkina Faso

A couple of years ago we wrote a blog entitled Beware the siren song of “tax certainty, which took apart a widespread consensus that it is important for countries to embrace ‘tax certainty’ and ‘stability.’ These motherhood-and-apple-pie terms hide a world of mischief: not least the fact that this ‘certainty’ is usually a one-way ratchet.

In other words, companies love the ‘certainty’ that taxes won’t be raised, but they don’t need the ‘certainty’ that taxes won’t be cut. This one-way ratchet is generally a bad thing for the countries that embrace it, because it prevents them from raising taxes (or from implementing other beneficial policies such as social or environmental laws) when they need to do so.  Continue reading “Tax “stability” short-changes Burkina Faso” →

Guest blog: Long Overdue Arrival of “Tax Justice Aotearoa New Zealand”

We are delighted to bring you this announcement from TJANZ, and to welcome them wholeheartedly to the growing global family of tax justice organisations:

Tax Justice Aotearoa New Zealand (TJANZ) has just been launched in Wellington. As a partner of the international Tax Justice Network, we will provide a voice for progressing tax justice in New Zealand. This blog introduces TJANZ, explains its goals and how it can contribute to making NZ and the world a fairer and better place.

Continue reading “Guest blog: Long Overdue Arrival of “Tax Justice Aotearoa New Zealand”” →

Webinar on Unequal Exchange – 29 August 2018 at 11:00 UTC – 12:00 UTC

Presentation by: Andres Knobel, Tax Justice Network

Developing countries lose billions of dollars every year due to illicit financial flows or IFFs. One of the big obstacles countries face in curbing IFFs is the access to information, especially from developed countries that happen to be tax havens. Automatic exchange of information allows countries to gauge the magnitude of illicit finance that has crossed borders. The webinar aims to demystify this issue, analyse its loopholes and its relevance from the perspective of developing countries. Click here to read more on Automatic Exchange of Information.

Register: here.

The Curse of Laffer: Trump’s tax cuts see revenues plunge 25 percent

We’ve previously blogged on Donald Trump’s plans for cutting corporate income tax, and now they’ve come to fruition we can see the results as far as the USA is concerned. Tax receipts are plummeting, despite the economic boom stimulated by his predecessor’s QE programme. Commentators have widely predicted that this will inevitably lead to a widening deficit, greater inequality, and harmful impacts on other countries as tax competition pushes the race-to-the-bottom, but these are just details!

Trump is not the first politician to be seduced by the alchemy of Arthur Laffer’s phoney curve, and he won’t be the last, but it’s not encouraging that they just keep on doing this despite the mountains of evidence refuting the idea that tax cuts yield higher long-term revenues.

Meanwhile, and notwithstanding the calamitous harm inflicted on the state of Kansas, which took the tax cutting route to its logical conclusion, some politicians just keep lapping up Laffer’s snake oil.

Are tax incentives in Nigeria attracting investment or giving away revenue?

For over a decade, Nigeria, like so many developing countries, has been granting a number of tax incentives to multinational companies in a bid to attract foreign direct investment. Proponents of the incentives argue that the measures are vital to the development of the economy, while critics point to the glaring lack of evidence supporting these claims. As the Tax Justice Network develops its Corporate Tax Haven Index, we ask: are tax incentives serving the people or a few individuals?

Recently there seems to be a move towards finding a middle ground between the proponents of tax incentives, usually the organised business sector, and the opponents, the civil society organisations and campaigners. In March 2018, at a meeting of civil society organisations organised by Action Aid Nigeria, there was a heated discussion on the role of tax incentives in the development of Nigeria. Although the meeting was intended for the third sector, it also had in attendance representation from the organised private sector and the Federal Inland Revenue Service (FIRS). One of the aims of the meeting was to gauge the perception of stakeholders on the issue of tax incentives, to discuss and agree on certain issues, and to chart a course for further action.

The interesting thing about the discussion was the diversity that it had. For example, while the representatives from the third sector were sceptical about tax incentives in general, the representatives of the organised private sector were inclined towards a more positive view about tax incentives. They support the notion that some tax incentives are good, and one example they cited to that effect is that the domestic manufacturing sector in Nigeria will simply cease to exist without tax incentives. However, the scepticism of the civil society organisations may not be unconnected to the fact that there is currently little or no evidence that suggests that tax incentives are significant to development.

The tax incentives offered by the Nigerian government

Tax incentives are generally categorized into two: cost-based tax incentives (such as tax credits and accelerated depreciation allowances) and profit-based tax incentives (such as tax holidays or reduced tax rates). The types of incentives that come under these two broad categories can greatly vary based on sector, income type, business size, and business location. The incentives can be temporary or permanent and can offer partial exemption or full-exemption.

The IMF defines tax incentives as any special tax provisions that are granted to qualified investment projects or firms that provide a favourable deviation from the general tax code. Included in the examples given by the IMF in their definition are tax holidays, which are widely used in Africa and happen to be the most abused type of tax incentive in Nigeria in the form of pioneer status. The pioneer status is an incentive governed by the Industrial Development (Income Tax Relief) Act, Cap 17 Laws of the Federation of Nigeria, 2004, and it allows certain businesses a tax holiday for three years, which is renewable for another two. The abuse of the pioneer status incentive is partly due to the discretionary powers of the Executive which enables it to grant pioneer status without the need for approval from the National Assembly. The Nigerian tax system permits registered businesses to change their name or business, or even leave the country, after the expiration of their pioneer status which creates more risk for abuse. This, among other things, raises questions about the effectiveness of these so-called tax incentives and the resultant opportunity cost.

Digging deeper or digging our way out?

Studies suggest that  tax incentives are generally considered to be the least important factors in making investment decisions in low-income countries, because the investments would have happened  with or without them. Factors such as infrastructure, security and rule of law, to mention a few are ranked higher.  Similarly, other studies confirm that tax incentives have more negative than positive impact on sustainable development in developing countries. Despite all the evidence and arguments on the ineffectiveness of tax incentives, the Nigerian government, through the Federal Ministry of Trade and Investment expanded its pioneer status regime by including 27 new industries. Although the Nigerian Government reviewed the list of companies and sectors eligible for Pioneer status in 2017, the review was premised on the notion that the businesses were mature enough not to need tax incentives, rather than carry out a thorough analysis on whether the tax incentives are at all useful.  Furthermore, last year, the Federal Inland Revenue Service, together with the Nigerian Investment Promotion Council (NIPC) launched the Compendium of Tax Incentives to promote Nigeria as an attractive investment destination using tax incentives. So on the one hand, while Nigerians have been inundated with talks about how the government intends to broaden the tax base and reduce its reliance on oil revenue and make taxation the source of development, the government on the other hand is signing away its tax revenues without any evidence that suggests that a careful cost-benefit analysis has been carried out to ascertain if the tax incentives are going to be beneficial or not. This is despite the recommendations from the newly reviewed National Tax Policy which states that:

“Any incentive to be granted should be broad, sector-based, tenured and transparent; Implementation should be properly monitored, evaluated, periodically reported and kept under review; Revenue forgone from tax incentives or concessions should be quantified against expected benefits and reported annually. Where the benefits cannot be quantified, qualitative factors must be considered; and tax policies on investments should not promote monopoly such as entry barriers or otherwise prevent competition.”

There is no evidence that shows that significant efforts towards the above have been taken, notwithstanding, Nigeria is a country where close to 70 percent of its population live below the poverty line and where, according to the UNICEF, 10.5 million children are out of school.

Perhaps another thing that complicates the issue of tax incentives in Nigeria is the fact that so many agencies are involved in its administration, which leads to the duplication of duties and lack of coordination that opens up avenues for abuse. So even if the said incentives were confirmed to be beneficial, it remains unclear if the existing complicated framework will be efficient and effective in implementation. One other concern is that the government has also never made transparent the cost of the incentives it grants, which may be attributable to the complex nature of the tax incentives framework. One can deduce that the government’s actions are not ill-conceived, however, the same cannot be said about the quality of the decisions.

The Corporate Tax Haven Index

Understanding the harmful nature of these tax incentives is part of the motivation behind the Corporate Tax Haven Index that we are developing at the Tax Justice Network, with tax incentives being a significant portion of the work. The Corporate Tax Haven Index will rank jurisdictions that contribute most to the global race to the bottom in corporate taxation. For tax incentives specifically, the aim is to analyse the problematic nature of tax incentives and how they contribute to the race to the bottom. This is an important step in addressing the inefficiency of tax incentives in Nigeria and other developing countries, because it will greatly aid in the pursuit of global tax transparency and fairness.

As a country that is desperate for funding development, with one of the lowest Human Development Index rankings in the world, and one of the lowest tax to GDP ratios, it is critical that we re-evaluate our tax incentives framework. For every tax we give away, we may be giving away healthcare, security, good roads, improved welfare for the civil service and so much more. It is vital that the Nigerian Government carries out a thorough cost-benefit analysis on tax incentives and make transparent the opportunity cost of these incentives such that it will be clear if the incentives are serving the people or a few individuals. The discretionary powers given to the executives should be reviewed so that if and when the government deems it necessary to grant any form of incentives, they should be based on evidence, approved by the National assembly and with the active participation of relevant stakeholders. Lastly, the government should implement the recommendations of the National Tax Policy to ensure that tax incentives, if and when granted achieve their purpose.

Extreme inequality levels in Bermuda despite its offshore services centre, in the Tax Justice Network’s August 2018 podcast

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

Also:

Featuring:

Bermudian Economist Robert Stubbs, formerly Head of Research for Bank of Bermuda, and John Christensen of the Tax Justice Network. Produced and presented by Naomi Fowler, also of the Tax Justice Network.

There is a reluctance to address the problem, there is a reluctance to increase spending by government. Obviously that will require higher taxes and it will require higher taxes especially from those who have more ability to pay and there is severe resistance to this…the locals have suffered by the lack of diversity in the economy and….the majority of the population don’t see the benefits [of the finance sector] and there is a widespread recognition I think in all these islands that we have to diversify the economy”

~Robert Stubbs

Continue reading “Extreme inequality levels in Bermuda despite its offshore services centre, in the Tax Justice Network’s August 2018 podcast” →

Tax Justice Network’s August 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, agosto 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 August 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, agosto 2018” →

Why is Amazon still paying little tax in the UK?

Guest blog, Sol Picciotto

Even the Daily Mail has been outraged by how little tax Amazon is paying in the UK. But none of the comments so far, even by tax experts wheeled out by the media, have pointed to the central reason.

It’s clear that the profits attributed to the UK are low compared to Amazon’s global net income of $3b in 2017. But HMRC does not look at these global profits, it starts from the income Amazon attributes to its UK subsidiaries for performing services for the group. This income has been further reduced by deducting the value of Amazon shares allocated to its top UK managers in their remuneration packages. Yet these are shares in Amazon Inc., not in the UK companies they manage, which are 100%-owned affiliates. So, while Amazon’s top UK managers share in the firm’s worldwide success, HMRC is content with taxing the meagre profits attributed by treating the UK affiliates as sub-contractors.

Amazon of course is a multinational, and it operates through scores or even hundreds of subsidiaries around the world. But they are all under central control and direction, ultimately under the CEO Jeff Bezos, now top of Fortune’s rich list. It generates its enormous revenues from its success at combining all its activities. People use Amazon because it provides next-day delivery, and an excellent website with customer reviews even for the most specialist items, backed by good customer service. Electronic books can be ordered from and delivered directly to a Kindle. Amazon Prime also offers streamed movies, and Amazon Web Services has a key position in cloud computing, linked to its Alexa voice system.

It is this whole package that has put Amazon in such a dominant global position. It is far more than the sum of its parts.

Yet when it comes to tax, this reality is ignored. What we have been told is that Amazon UK Services Ltd, which handles warehouse operations and provides fulfilment services, paid tax of £4.6 million on pretax profits of about £72 million in 2017. In parallel, Amazon Web Services UK Ltd, which provides consulting and marketing services related to cloud computing, reported paying £155,000 in total tax in 2017 on profits of £5 million. In both cases this is far less than the corporate tax rate which applied in 2017 (19.25%, because it fell from 20% to 19% as from 1st April). But we are told that the reason for this is the perfectly justifiable and legal deduction of share-based employee compensation.

What has not been explained is how the profit for these companies has been calculated. This is confidential between HMRC and Amazon. But Amazon is clearly taking advantage of the bizarre concept that is still basic to international tax: the independent entity principle. In this perspective, these subsidiaries are merely providing support services to Amazon, so their profits should be calculated by comparing them with those of standalone companies providing similar services. This means applying a so-called ‘one-sided’ method to determine the appropriate taxable profit, taking the subsidiary in isolation from the group, and applying a benchmark rate of return to an appropriate base, such as operating costs. Services such as warehousing and delivery, or marketing, are generally low-margin businesses, so the profits declared are very low. The taxable profits are even lower, because of the employee compensation deduction, calculated on the basis of the value of the shares distributed.

But wait a minute: which company’s shares are these? Not those of Amazon UK Services, or Amazon Web Services UK, which are a wholly owned part of the Amazon group. The shares are those of Amazon Inc., and have continued to increase in value, hence the massive deduction. For UK Services it was £17.5m on profits of £72m, and for Web Services a whopping £12m on profits of only £5m, several multiples of the tax collected by HMRC.

Of course, it’s laudable that employees should share in the success of the company, although this obviously doesn’t extend to the warehouse employees, whose bad working conditions have been pointed out by the GMB union. But if the top managers in the UK can share in the company’s global success, why aren’t Amazon’s tax liabilities in the UK calculated in the same way? Why doesn’t HMRC take account of the benefits of synergy from the close integration of these services with Amazon’s activities as a whole, which is the result of performing them in-house rather than contracting them out?

The tax paid is also disproportionate to Amazon’s impact on UK markets and consumers, where according to its US filing it had $11bn (£8.6bn) out of some $178bn (£139bn) net income from worldwide sales through its websites in 2017. These are routed through Amazon EU Sarl, which is based in Luxembourg. But of course, as we are frequently reminded, tax is paid on profits, not sales. Nevertheless, Amazon in 2015 agreed to treat its UK sales as booked in the UK, by accepting that the Luxembourg company has a taxable presence in the UK – in tax jargon a ‘permanent establishment’ (PE). Since the Luxembourg company’s published accounts are not broken down on a country-by-country basis (as pointed out by Richard Murphy), we don’t know how much tax this PE will pay in the UK. Nevertheless, it is very likely that this entity will also be treated as simply supplying services, in this case managing sales, and declare very low profits, probably a low margin of operating costs.

International attempts at reform

Those who recognise that this approach is unacceptable say that solutions must be sought through international channels. The UK helped to launch and has actively participated in the major initiative to reform international tax rules, the project on base erosion and profit shifting (BEPS), begun in 2012 by the tax specialists at the Organisation for Economic Cooperation and Development (OECD), and backed by the G20 world leaders in 2013. This delivered a package of reform proposals in 2015, but the OECD asked for 5 more years to complete the critical work on tax consequences of digitalisation of the economy. Under pressure to move more quickly, it managed only another interim report in March 2018, showing that countries are still deeply divided.

The rest of the 2015 package was mainly a patch-up of existing rules, as analysed in more detail here. The main advance was the creation of a system for country-by-country reporting by multinationals with turnover over €750m (£669m), although these reports will be seen only by tax authorities. In other respects, the OECD has continued to stubbornly follow the independent entity principle.

Alternative approaches for moving towards taxing multinationals in accordance with their economic reality as unitary enterprises have been examined by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which published a Roadmap for a new approach in February 2018. The BEPS Monitoring Group (BMG) has followed the international reform process since 2013, and issued detailed comments on all the OECD proposals and measures.

What has the UK done?

The UK does not have to wait, it can start to adapt its tax rules. Indeed, it jumped the gun on the BEPS project by enacting the Diverted Profits Tax (the DPT) in 2015, as well as related measures in 2016 to stop payments of royalties eroding the tax-base. It was clearly these measures that spurred Amazon to agree to book its UK sales in the UK. Recent data show that the DPT recovered £388m in 2016-7, of which £219m resulted from the tax itself, the remaining £169m is the estimated additional corporate income tax from firms such as Amazon changing their structures. Since HMRC issued only 14 DPT charging notices the previous year (which take effect after 12 months), the additional DPT revenues amount to an average of some £15.6m. The additional tax resulting from Amazon’s booking of sales to a PE in the UK would presumably be part of the estimated additional £169m resulting from behavioural change, but we do not know how many firms this covers. While these sums are substantial, they are a drop in the bucket compared to the revenues of firms like Amazon.

Clearly, better reforms are needed. In November 2017 the Treasury published a position paper stating the government’s preferred options, detailed comments on which from the BMG are available here. Regrettably, the signs are that the UK government is still unwilling to support a shift towards a unitary approach. The Treasury proposes only that the international rules should accept the contributions made by “active users” of web platforms in determining attribution of profits. In other respects, it seems to accept continuation of the independent entity approach. This would not solve the problems, it would only add another level of complexity in deciding who are active users. What about the customers who add reviews on the Amazon website? It would also ignore the enormous value generated by collection of data from users by such platforms. Under the current UK strategy, the UK tax on Amazon’s profits is unlikely to change.

What could be done now?

One way a unitary approach could be adopted under current rules is to take account of the integrated nature of the activities of subsidiaries of firms such as Amazon in a country such as the UK when deciding how to attribute profits to them. It clearly makes no sense to pretend that each affiliate operates independently of the others and of the enterprise as a whole, just like subcontractors. The OECD Guidelines on Transfer Pricing allow the use of the profit-split method, to apportion the combined profits of related entities whose activities are integrated. Clearly, the enormous volume of sales generated by Amazon Sarl are closely linked to both the website and marketing support and the warehousing and delivery services of its UK resident affiliates.

The OECD was urged to adopt such a holistic approach by the BMG in September 2017, available here. Yet the guidance finally issued in March 2018, was obscure. It still stressed the independent entity principle, while also mentioning that in some circumstances account could be taken in attributing profits to a PE of “the potential effect on those profits of the level of integration of these activities” (para. 8). It’s obviously no easy task to reach agreement by consensus among a large group of countries. This may help explain why, unfortunately, the international discussions are being conducted under a cloak of technical complexity and secrecy.

Yet it is surely time for a leading country such as the UK to state clearly where it stands on basic principles. It should support moves towards treating multinationals in accordance with the economic reality that they are unitary firms, and to move away from the fictions which allow giants such as Amazon to create complex group structures to avoid tax.

Photo credit: Scott Lewis

 

Sol Picciotto is emeritus professor of law at Lancaster University and author of ‘International Business Taxation’ and ‘Regulating Global Corporate Capitalism’. He is a Tax Justice Network senior adviser, a member of the Advisory Group of the International Centre for Tax and Development, and a corresponding contributor to Tax Analysts.

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