Making history: an end to anonymous companies in the UK’s Overseas Territories

The UK Parliament today has taken a significant step toward global tax transparency – by imposing public registers of beneficial ownership of companies on the UK’s Overseas Territories (OTs). The OTs are relatively small but highly secretive financial centres, responsible for just over 4% of the global provision of financial services to non-residents – but nearly twice that share of our measure of global financial secrecy (see “FSI Share”, below). This table below shows the measures of financial secrecy for those seven Overseas Territories which we reviewed in our Financial Secrecy Index 2018, and which will now be covered by the new measures. Compared to the average secrecy score of 66 for all 112 jurisdictions we reviewed, the average secrecy score of those 7 UK overseas territories covered by the FSI is substantially higher with 74%. This tells you what a significant contribution their secrecy services make globally.

Overseas Territories on the Financial Secrecy Index 2018

RankJurisdictionFSI ValueFSI ShareSecrecy ScoreGlobal Scale Weight
3Cayman Islands1267.684.00%72.283.79%
16British Virgin Islands502.761.59%68.650.38%
36Bermuda281.830.89%73.050.04%
56Anguilla195.040.62%77.500.01%
83Gibraltar107.440.34%70.830.00%
87Turks and Caicos Islands98.080.31%76.780.00%
112Montserrat16.530.05%77.500.00%
SUM7.79%4.21%
Average73.80

Continue reading “Making history: an end to anonymous companies in the UK’s Overseas Territories” →

Tax justice, women and UN human rights conventions: our April 2018 podcast

In this month’s Taxcast: Tax justice, women and UN human rights conventions: how we may be beginning to hold governments to account. Also:

Produced and presented by Naomi Fowler, featuring Liz Nelson and John Christensen of the Tax Justice Network and lawyers and members of the United Nations Committee on the Elimination of Discrimination against Women (CEDAW) Patricia Schulz and Marion Bethel.
Continue reading “Tax justice, women and UN human rights conventions: our April 2018 podcast” →

New report: The Global Battle for Corporate Transparency

On 25 May 2018, the European Council will meet in Brussels and will likely consider new rules on corporate transparency, the introduction of public country by country reporting. The meeting will take place 40 years to the day since the OECD sabotaged attempts to introduce similar transparency measures via the United Nations.

The long and arduous road towards country by country reporting is the subject of a new report published today by Markus Meinzer and Christoph Trautvetter with the Tax Justice Network. To download the full report, click here.

The report details how greater corporate transparency, and specifically rules to compel multinational companies to break down their consolidated accounts to a company specific, or regional, basis have been blocked by the business lobby for a period of over forty years. This is despite widespread support for the measure from the public and many governments.

One of the most promising initiatives came from the UN Commission on Transnational Corporations which was founded in 1975. The commission convened a group of experts to come forward with proposals to increase the transparency of multinational corporations. The group proposed compelling companies to publish accounts for each company the multinational operated and details of transactions made between them.

Had this been adopted it would have been a game changing move. As has been amply demonstrated in recent years, large multinational companies can use accounting secrecy to move money between the companies that they operate, and hide profits in tax havens around the world.

The proposals attracted a strong reaction from the business lobby, who opposed the measures. However, as the Commission worked on a majority basis, and developing countries supported the idea, it seemed likely to be implemented.

The measures failed. Representatives from OECD countries threatened to walk out, and cut off funding for the Commission if the rules of the game were not changed to make sure decisions were taken on a unanimous basis. As a result, the proposals were never adopted.

This shameful period of the OECD’s history, and the multiple failures of attempts to bring in country by county reporting since, has resulted in a tragedy for public services around the globe, starving countries in the developed and developing world of the resources they need to implement economic development and social welfare development programmes.

The story of the 1978 proposals is also particularly relevant to the story of the current debate on Country by Country reporting.

County by Country reporting was developed as an idea in 2003 by Richard Murphy, working with the TJN. Rather than compel companies to publish all of the accounts of every company they operate, the measure would compel corporations to provide figures for their operations on a country by country basis. The measure was taken up by numerous civil society organisations and gained popularity, driven by numerous corporate scandals involving profit shifting. As a result, Country by Country reporting has already been adopted in some sectors, such as extractives and the banking sector in the EU.

However, progress has been slow. Just as in 1978, the tactics of the pro-business lobby has been to try to steer the process in a direction which makes the adoption of CbCR rules more difficult.

The latest proposals being considered by the European Union have been slowed by years of debate over process. Within the European Union, matters concerning the internal market, including accounting issues, are decided on the basis of majority voting. Tax matters require unanimity. Much of the effort from corporate lobbyists has been to shift the discussion of CbCR into the tax forum.

That debate on the legal basis of CbCR is still being fought between the European Council and the European Parliament, who have twice voted in favour of public Country by Country Reporting.

As demonstrated in this new paper (pdf, here), the European Union would do well to learn the lessons of the past if it is to drive through this vital transparency measure.

Veils of secrecy: enhancing tax and ownership transparency in development projects

We’re sharing here new research from the Egyptian Initiative for Personal Rights which evaluates the role played by a member of the World Bank Group, the International Finance Corporation (IFC) in development projects. The full title of their research is Veils of secrecy: evaluating the IFC’s role in enhancing tax and ownership transparency in development projects.

On their website the IFC say since 1956 they have “leveraged $2.6 billion in capital to deliver more than $265 billion in financing for businesses in developing countries”. It’s big. It’s the largest development institution in the world focusing exclusively on private-sector operations in developing countries. This new Egyptian Initiative for Personal Rights research focuses particularly on the IFC’s role in Egypt, where it’s been operating since 1995. They say,

We have found through our research that the IFC invests in operations that are deeply involved with some of the most secretive offshore jurisdictions in the world, where information about the real owners of these companies is in many cases obscured. The use of such secrecy jurisdictions normally goes hand in hand with aggressive tax-planning schemes used to circumvent the law (without necessarily breaking it) to significantly reduce corporate tax bills and conceal the identity of the owners of the enterprise.”

And,

we have identified and detected many cases of aggressive tax avoidance by IFC investee companies during all time periods and across various sectors using a wide variety of techniques.”

Continue reading “Veils of secrecy: enhancing tax and ownership transparency in development projects” →

The bell tolls for arm’s length pricing

Listen closely, and you might just hear the beginning of the end of the international rules that have made tax more or less voluntary for multinational companies.

This weekend, as part of their regular spring meetings, the International Monetary Fund and World Bank will hold a day-long conference on the leading alternative: unitary taxation with formulary apportionment. Long promoted by the Tax Justice Network and key figures such as our senior adviser, Prof. Sol Picciotto, but for years treated as unthinkable by the closed circles of corporate tax advisers and OECD country policymakers, this approach has the potential not only to eliminate much of the tax abuses of multinational in high-income countries, but also to deliver a dramatic rebalancing of the global inequalities in taxing rights from which lower-income countries in particular suffer.

Continue reading “The bell tolls for arm’s length pricing” →

Continuing the work of murdered journalist #DaphneCaruanaGalizia, 6 months on

We’d like to draw attention to the Daphne Project, announced by the OCCRP and Forbidden Stories which honours the life and courageous work of murdered Maltese investigative journalist Daphne Caruana Galizia. The project begins today, marking six months since her brutal assassination. Malta is ranked 20th in our Financial Secrecy Index and it’s often referred to as the EU’s rogue or pirate state, offering extreme levels of secrecy for certain services – for more detailed data on that, see here. The rule of law and democratic institutions appear to have been seriously undermined in Malta, which shows all the signs of a captured, corrupted state. This project is important, not only to honour Daphne Caruana Galizia’s memory and work but because there is so much yet to come out, as one of her sons tweets here:

Continue reading “Continuing the work of murdered journalist #DaphneCaruanaGalizia, 6 months on” →

Our April 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, abril 2018

Welcome to this month’s latest podcast and radio programme in Spanish with Marcelo Justo and Marta Nuñez, downloaded 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 “Our April 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, abril 2018” →

Economic reforms and austerity: A ‘wicked problem’ impacting on women

In March 2017 the UN Human Rights Council adopted a resolution mandating the United Nations Expert on Foreign Debt and Human Rights Mr. Juan Pablo Bohoslavsky to consider the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights.  We were especially pleased that he sought to extend his inquiry to understand the impact of economic reforms and austerity measures on the human rights of women. Continue reading “Economic reforms and austerity: A ‘wicked problem’ impacting on women” →

Financial Secrecy Index updates and the importance of open data

The Tax Justice Network’s Financial Secrecy Index (FSI) latest edition was published on January 30th, 2018. As always, the FSI offers a ranking of the world’s largest contributors to global financial secrecy as well as narrative reports for most of the most famous secrecy jurisdictions, describing their “tax haven” history and summarizing the FSI findings.

Furthermore, the FSI offers detailed database reports for each of the 112 covered jurisdictions, describing their legal framework on financial transparency and available loopholes. These detailed reports (which contain the corresponding description, source and date for each answer) provide the explanation for the secrecy score of each country as well as additional details on a jurisdiction’s transparency. The secrecy score is one of the two components driving the FSI ranking of each jurisdiction.

The latest edition of the FSI offers the detailed reports not only online and for free (as always), but now also in open data format (downloadable as Excel documents). The FSI also offers two interactive maps to play with the data.

The availability of FSI data in open data format underlines TJN’s commitment to full transparency. We are already beginning to reap the benefits. Committed experts have started to look in-depth at our data and advised us of glitches and other issues that require fixing.

The glitches we have acted upon and ‘fixed’ do not affect the secrecy score of a jurisdiction and the FSI ranking remains the same. However, we cannot rule out that more changes will be required in the future. The FSI team spends considerable amount of time assessing each question (especially those affecting the secrecy score of a country). Contested issues are discussed in the team, and final audits and cross-checks of information take place before publication. Still, the detailed database reports include up to 186 questions and answers for each of the 112 jurisdictions. That’s a lot of questions and, of course, we are human and not immune from error! One strategy to minimise the risk for errors is to release all of our data and sources to the public, for others to use it, to check it and also to question it, and thereby improve it if necessary.

The FSI database is a living document and we have now published a new layout version with some additional fixes (e.g. rephrasing some questions for greater clarity, removing some superfluous items from display, etc.). Once again, we would emphasise that the changes do not affect the secrecy score or the ranking of a jurisdiction.

We welcome others to look in detail at the FSI data and report any question or comment they may have. Those interested in doing this should consider:

-Focus on questions with an asterisk *, because this indicates that the question feeds into the country’s secrecy score and thus affects the jurisdiction ranking.

-The FSI applies the lowest common transparency denominator. This means for example that if a country has many types of companies that are very transparent (e.g. they all must register their beneficial owners), but one type of company  is very secretive, then the secrecy score of the country will be based on the most secretive type, because we understand that anyone engaged in illicit activities would likely use the secretive type. Some may argue that this is misleading, because the secretive type may be the exception, but not the rule. However, this is precisely what the FSI looks for: exceptions, loopholes, ring-fences, gaps or anything that could be exploited to abuse secrecy or tax rules, despite general rules. These exceptions prove that countries – and not the FSI – can be misleading: the apparent high statutory tax rates, or comprehensive transparency measures are usually undermined by fine print loopholes.

All comments received will be analysed and responses given to the commentator, but changes would only apply if a source is provided and the change is consistent with the FSI criteria (e.g. notifying us about the “general rule” or a “best case” will not suffice to change an answer if the loophole or exception still applies). While we cannot guarantee to constantly change the published data, all relevant changes that have not been (publicly) addressed will be implemented in 2019/2020 when we undertake the biannual reassessment of the FSI.

You can access the updated FSI database reports here, and the updated Excel extracts, here. Anybody interested to compare against the previous versions, a zipped archive of the database reports published on 30 January 2018 can be accessed here (to open the xml files, please extract the entire zip in a folder and open with internet browswers. For technical reasons this might only work with PCs, not with MACs – sorry!), and of the old Excel extracts, here.

The EU’s latest agreement on amending the anti-money laundering directive: at the vanguard of trust transparency, but still further to go

Our view on the EU’s latest agreement on amending the anti-money laundering directive is that it’s at the vanguard of trust transparency, but there’s still further to go…

The EU Parliament and Council recently reached an agreement on an amendment to the 4th Anti-Money Laundering (AML) Directive of 2015 that required central beneficial ownership registries for companies and some trusts. Given this agreement, it is likely that the proposed amendment will become the text of the 5th AML Directive (if finally approved by all EU relevant legislative actors). Not only did the 4th Directive (to be amended) suffer from loopholes in relation to companies and trusts, but as the Financial Secrecy Index 2018 edition showed, not all EU countries even managed to transpose it to domestic law on time, or were not compliant with the Directive’s requirements. Continue reading “The EU’s latest agreement on amending the anti-money laundering directive: at the vanguard of trust transparency, but still further to go” →

Empowering rural women through tax justice policies: 62nd session of the UN Commission on the Status of Women

How do we empower rural women through tax justice policies? That’s what we at the Tax Justice Network were at the 62nd session of the UN Commission on the Status of Women to discuss recently at the UN Headquarters in New York City. This annual session is an opportunity for State delegations and other relevant governmental and non-governmental actors to comment on, discuss, and work on issues relating to the advancement of women’s rights globally. This year’s priority theme was  ‘Challenges and opportunities in achieving gender equality and the empowerment of rural women and girls’. It’s the largest global gathering focused on gender equality. The 62nd session involved roughly 11,000 participants, over a hundred official side events hosted by governments, and over four hundred parallel events hosted by non-governmental organisations.

The Tax Justice Network co-sponsored two parallel events. The first, “Tax and Gender Justice: Empowering rural women in mining-affected communities”, was also sponsored by the Global Alliance for Tax Justice (GATJ), Public Services International (PSI), Christian Aid, Center for Economic and Social Rights (CESR), and the Association for Women’s Rights in Development (AWID). The panel highlighted the experiences of activists and campaigners from Africa and South America in challenging both global macroeconomic structures and national policies that allow extractive companies to erode women’s rights through environmental degradation (rights to land, water), displacement (right to housing), profit shifting (less funding for provision of public services), and corporate capture of the state.

The second session, “Taxing Rural Women in Developing Countries: Worst and Best Practices sponsored by the Feminist Legal Studies Department at Queen’s University (Canada) Faculty of Law and the Tax Justice Network, focused on how tax regimes such as property tax, value added tax, income tax, and corporate tax disproportionately affect and disadvantage women, and especially rural women. It also explored the issue of ‘control’ and ‘influence’ in the creation of these tax regimes (hint: it’s big corporates) and and noting how few of its influencers are women. In the words of one of the panelists, Professor Kathleen Lahey, “women are still trying to escape the last economy. Women are still trying to escape feudalism in some places.”

So, how will women fare in this ‘corporate’ economy where corporate interests have captured states and their most effective economic re-distributive tools of taxation and tax policy making at the highest levels? This is the question tax justice and gender justice communities need to address. How will we tackle those forces which we consider to be so undermining for women?

This is an emerging issue only just beginning to be understood by policy makers and influencers and linking macroeconomic policies to women’s rights seemed like a marginal concern within the broader gender rights discussion at UNCSW. Instead, policy advocacy efforts in the realm of economic policy focused mostly on microeconomic issues like financial inclusion, access to [micro]credit, and access to financial literacy education. At the macroeconomic level, the discussion centred on issues of [increased] female labour force participation and [freedom from] unpaid care work, often used as a kind of shorthand suggesting women’s economic empowerment.

Substantively missing from this critical global gathering was discussion on the opportunities to extend literacy and analysis on the impacts of tax regimes (i.e. low corporate tax rates, joint filing of income taxes, VAT), international financial structures (i.e. trusts, secrecy jurisdictions, profit shifting) and tax evasion on the full realisation of women’s rights including economic empowerment.  Wrongly, these concepts are seen as ‘far away’ from the grassroots reality of women. This is perhaps because the mechanisms and pathways of these impacts are deemed too complex by a broad swathe of women’s rights advocates as these concepts require a level of theoretical literacy that can be hard to communicate in orthodox models and language. Moreover, the ability to demystify these concepts is another way to dismantle the vested interests that want to keep this understanding out of the hands of women through exclusive language and use of jargon.

The inclusion of illicit financial flows is a foot in the door for tax justice and gender justice advocates; it challenges state parties and requires them to question what is being lost (from the funding pot) and how. This can help bring tax justice in from the margins of the debate, but not without the tax justice movement doing more to build alliances at the grassroots levels in order to mainstream the idea and create better and simpler understandings of the complex and myriad ways that macroeconomics impacts women’s rights. These issues are key to how we discuss funding the realisation of rights.

The document summarising the outcomes of the 62nd session of the UN Commission on the Status of Women makes reference to domestic resource mobilisation, official development assistance and very importantly, the need to combat illicit financial flows (s43). In the context of UNCSW, the inclusion of illicit financial flows is a big win and is a result of concerted hard work by a small group of macro-economic policy warriors.

Responsibility for funding the realisation of rights is often couched in what can be positively realised in terms of domestic resource mobilisation and official development assistance. In other words, instead of looking at what’s being lost and could be utilised, the focus is often on how much money is coming in and can be made available to fund the realisation of rights. So, all eyes are on the 10 tax dollars coming in that can be used for development assistance, not on the 8 dollars being lost to tax evasion, illicit financial flows etc.

Last but not least, multinational corporations have shown us that they’re not going to behave well when it comes to paying fair taxes, or police themselves in this area. Section 46 (o) of the outcome document says the Commission “emphasize[s] the need for business enterprises, including transnational corporations and others, to identify, prevent, mitigate and account for human rights abuses by their operations, products or services on the wellbeing of women and girls in rural areas and provide for or cooperate in their remediation”

We agree, and it’s what we, and many others have been advocating for many years. However, it is critical that we continue to build the capacity to hold these transnational corporations to account through more targeted advocacy and campaigning and leveraging international instruments such as the reporting structure of Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) to bring public pressure on them.

Your emails and us: an important notice

New European Union regulations for personal data protection are coming into force on the 25th May 2018. At the Tax Justice Network we’re committed to sharing our ideas and research with a broad global audience, in pursuit of tax justice across the world. We do some of this through our email list of subscribers to whom we send details of the latest tax justice news, research and events, our own commentaries, blog posts, and monthly podcasts. It’s a great way to catch up for those who want to keep track of things quickly in a kind of ‘one-stop shop’. Continue reading “Your emails and us: an important notice” →

A lower effective corporate tax rate is associated with a lower rate of job creation: new research

We’re often told that cutting corporate tax rates will lead to the creation of more jobs. We all want to see more jobs created but what does the evidence say about that? Australian economist and Member of Parliament Andrew Leigh has recently published new research on the subject which makes for interesting reading. His research looks at data for 1,000 profitable Australian firms, comparing their tax rates with the pace of job creation. The data shows that companies that pay less tax actually tend to create fewer jobs. Continue reading “A lower effective corporate tax rate is associated with a lower rate of job creation: new research” →

Edition 3 of the Tax Justice Network Arabic monthly podcast/radio show الجباية ببساطة

Here’s the third 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 It’s 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.

Edition 3:

Why has the democratic transition failed to achieve social justice in the Arab region? We discuss this topic with Mr.Abdessatar Mabkhout, an international consultant and a financial analyst from Tunisia, and El Mehdi Fakir, an economist and a strategy and risk management consultant.

لماذا فشل الإنتقال الديمقراطي في إرساء عدالة إجتماعية في المنطقة العربية؟

هذا  هو التساؤل في العدد الثالث لبرنامج “الجباية ببساطة” الذي إستضاف المستشار المالي عبد الستار مبخوت من تونس والمستشار والخبر الجبائي المهدي فقير من المغرب للنقاش فالموضوع.

“الجباية ببساطة” برنامج إذاعي باللغة العربية يهدف لنشر ثقافة العادلة الجبائية في المنطقة العربية. يقدمه وليد بن رحومة وتنتجه شبكة العادلة الضريبية

OECD rules vs CRS avoidance strategies: not bad, but short of teeth and too dependent on good faith

The OECD’s Model Mandatory Disclosure rules for CRS avoidance strategies are not bad in our opinion, but short of teeth and far too dependent on good faith by rogue intermediaries and taxpayers…

On March 9th, 2018 the OECD published the Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures and an FAQ. They are a set of rules to be adopted by interested countries, requiring intermediaries and taxpayers to report on schemes that could be used to avoid reporting under the Common Reporting Standard (CRS) for automatic exchange of banking information. This is a step in the right direction, including the intention to consult widely. (Yet as we’ve pointed out before, and continue to do so: the fact that the standard has been drawn up without wide consultation, and by excluding developing countries, is still casting its shadow over it all, as issues of relevance continue to be ignored – see more details here, here and here). We sent our proposals on the Mandatory Disclosure Rules through the Financial Transparency Coalition. Unfortunately, none of our proposals were taken into account. Continue reading “OECD rules vs CRS avoidance strategies: not bad, but short of teeth and too dependent on good faith” →

How come Mauritius is the biggest foreign investor in India?

We’re pleased to share a new study by Suraj Jaiswal for the Centre for Budget and Governance Accountability on Foreign Direct Investment in India and the role of tax havens. As their summary of this study says:

Governments across the world are trying to attract Foreign Direct Investment (FDI) as a policy tool to promote growth, employment, etc. India has also adopted policies for promoting FDI and has seen significant increase in FDI in the decade of 2000 and onwards. In this context, the paper looks at the FDI flows to India between 2004-14. It analyses where the FDI is coming from, especially countries who are regarded as tax havens such as Mauritius and Singapore, and tries to explain the reasons behind it.

The paper makes use of a unique dataset which identifies the ultimate parent/controlling entity of the individual FDI inflows, and thus able to identify which FDI inflow is coming directly from the home country of investor and which are routed through the other country. To find the reasons behind the routing of FDI through a third country, it analyses the secrecy aspect as well as the tax agreement of that country with India to find the linkages between secrecy, tax agreements and routing of FDI to India.”

Continue reading “How come Mauritius is the biggest foreign investor in India?” →

Regulation of Beneficial Ownership in Latin America and the Caribbean

My paper – Andres Knobel – on “Regulation of Beneficial Ownership in Latin America and the Caribbean” which I wrote for the Inter-American Development Bank is now available in Spanish and English here. The paper, published in November 2017, provides an explanation on the concept, obstacles and nuances of the definition of beneficial ownership. It also mentions typical loopholes, the differences in regulation when it comes to legal entities or trusts, and what to do when the ownership chain contains a mix of different types of legal structures.

For newcomers, the paper also explains the importance of beneficial ownership for tackling many of the worst type of abuses and crimes. The annex, for instance, shows how beneficial ownership could be key to resolving a scheme involving tax evasion, corruption, money laundering, round-tripping and market abuse:

The second part of the paper assesses beneficial ownership regulation in 26 countries, quoting each country’s definitions of beneficial owners of companies and trusts, and assessing whether those definitions are compliant with international standards (e.g. what threshold they use, do they cover all the parties to a trust, etc).

Most of the Tax Justice Network’s work (e.g. the Financial Secrecy Index) considers beneficial ownership registration with a government authority to be the only acceptable standard. This paper checks availability of beneficial ownership regulation in different countries, and whether they are compliant with the OECD’s Global Forum’s and the Financial Action Task Force (FATF)’s much less demanding standards. According to these organisations, as long as beneficial ownership is available and authorities may ask for it, that’s considered good enough.

Hopefully in the near future, both the OECD and the FATF will join us, and other civil society organisations in considering that the only acceptable standard should be beneficial ownership registration in public registries available in open data format.

Welcome oligarchs, erode democracy: our March 2018 podcast

In this month’s Taxcast: They say history is written by the victors. So how can we rethink the way we use words about tax havens that reflect the reality of what’s really happening? We talk to Alain Deneault about his new book in which he writes about ‘laundering with language’ – Legalising Theft: a short guide to tax havens.

Plus:

Produced and presented by Naomi Fowler, featuring John Christensen of the Tax Justice Network and author, philosopher and sociologist Alain Deneault. Continue reading “Welcome oligarchs, erode democracy: our March 2018 podcast” →

PRESS RELEASE: European Commission digital tax plan is a nail in the coffin for OECD tax rules

The Tax Justice Network welcomes the European Commission’s new measures to combat tax abuses in the digital economy – in particular, the intention to ensure taxes are paid in the places where business is done, and where profits are really made.

For the last decade, some of the worst offenders in the world of corporate tax dodging have been the digital giants, companies like Google, Facebook, Amazon and Apple. These companies present a particular problem for governments, in that so much of their business takes place online, making it easier for them to locate their profits offshore.

Today’s main announcement is the introduction of a ‘Digital Services Tax’. This short-term measure will apply a 3% tax on the revenues of companies related to specific online services, introducing the concept of a virtual ‘permanent establishment’ so that companies become taxable in jurisdictions where they have users – even if there is no employment or tangible assets.

An analysis of several major digital services companies operating in Europe for the Tax Justice Network reveals that such a tax would be roughly equivalent to an effective corporation tax rate of around 10%.

The European Commission estimates that digital services companies currently pay an effective tax rate of just 9%, whilst companies operating in the rest of the economy pay an effective rate of 23%.

However, there have been many well publicised cases demonstrating how some companies have used accounting tricks to get their tax rate down to close to zero. As such, the new measures will set a limit, preventing the most extreme abuse.

In addition, the Commission has announced a longer-term aim to align profits of digital companies much more fully with the location of their real economic activity. In keeping with the ongoing work to introduce a Common Consolidated Corporate Tax Base in the EU, such a measure would ensure that taxable profits were allocated in proportion to EU members’ share of activity.

This confirms the intention of the EU to break, comprehensively, with the OECD’s international tax rules – which require adherence to economically illogical transfer pricing rules, with profit divided between multinational groups’ subsidiaries on the basis of contrived, theoretical ‘arm’s length prices’.

Alex Cobham, chief executive of the Tax Justice Network, said:

“The European Commission’s digital tax directives are a welcome step. Not only do they put an immediate limit on the scale of these companies’ tax abuses, but they also set the course for the radical shift in international tax rules that we have campaigned for since our formal inception in 2003 – namely, the abandonment of the arm’s length principle and the switch towards unitary taxation of multinationals.”

Liz Nelson, a director of the Tax Justice Network, said:

“The EU is flexing its muscles, acting against OECD norms to protect its tax base, because it has the power to do so. But the whole world needs to make that shift, so that lower-income countries too can protect their tax base and support the progressive realisation of human rights to which the UN Sustainable Development Goals framework commits us all. Ultimately, this requires that tax policy be set in an international forum, breaking the rich countries’ hegemony, in order to allow all countries to act against multinationals’ tax abuse.”

New report: German-African research linking illicit and criminal financial flows with global poverty

The Tax Justice & Poverty research project is a co-operative effort between three institutions run by the Jesuit Order of the Catholic Church: the Jesuitenmission based in Nuremberg (Germany), the Jesuit Centre for Theological Reflection in Lusaka (Zambia) and the Jesuit Hakimani Centre in Nairobi (Kenya). Work started in 2012 and Dr. Jörg Alt of Jesuitenmission summarises some of the conclusions in this short version of the main report on their attempt to bring together aspects of joint interest arising from work in three very different countries. Continue reading “New report: German-African research linking illicit and criminal financial flows with global poverty” →

Our March 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, marzo 2018

Welcome to this month’s latest podcast and radio programme in Spanish with Marcelo Justo and Marta Nuñez, downloaded 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 “Our March 2018 Spanish language podcast: Justicia ImPositiva, nuestro podcast, marzo 2018” →

Questions raised over offshore dealings of Serbian PM’s former company.

The Croatian political magazine, Nacional, is running a story which implicates the International Finance Corporation in a deal involving offshore companies and more than a hint of a conflict of interest in Serbia. One of the main protagonists in the deal is the Serbian Prime Minister, Ana Brnabic.

As with most offshore stories, the long and complicated twists and turns of the strings of offshore companies involve can be hard to follow but some facts emerge that at the very least highlight the severe deficiencies in the management of the international development finance sector in managing risk in their investments.

The basic story is as follows:

Prior to entering the Serbian Government, Ana Brnabic worked for an energy company that was investing in wind farms in Serbia, Continental Wind Serbia. Continental Wind had an exceptionally poor relationship with the Serbian Government. In 2015 the company was involved in a major scandal when the wife of its founder, Mark Crandall (one of the founders of Trafigura), was recorded in a phone conversation telling an opposition politician in Serbia that Continental had been asked to pay a bribe to the director of Serbia’s national energy distribution company in order to connect their wind farm to the grid. The man who was alleged to have requested the bribe was a close friend of the then Prime Minister of Serbia, Alexander Vucic.

Very shortly afterwards, Vucic visited Washington DC and a group of Congressmen organised a letter to Vice-President Joe Biden outlining allegations of corrupt practices in the country under his leadership. Vucic suggested that Continental was behind the letter, and wanted to use it as leverage to help win projects, saying: “Some want to build wind farms in Serbia where there was no proper regulation, with the idea of selling electricity at three times the market price…. They wished to win this deal at any cost”.

Brnabic, as the head of Continental in Serbia held a press conference denying that the company had been involved in any wrongdoing, stating that the bribery allegations were false. The scandal ended there.

Ten months later, in August, 2016 Brnabic was appointed by Vucic to be the Minister of Public Administration (taking over from the sister of Crandall’s wife). The following year she was surprisingly elected by the Serbian Parliament to become Prime Minister, when Vucic became President. During that time the relationship between Continental and the Government of Serbia had suddenly thawed. One affiliate of Continental won a 12 year contract to sell energy into the Serbian grid at a fixed price. Before the contract was signed the government amended its legislation to introduce greater price incentives for wind power.

This culminated in the launch of a major wind power project in 2017, funded by 190m Euro in loans from the International Finance Corporation and the European Bank for Reconstruction and Development. The project launch was attended by Alexander Vucic himself.

Questions to answer

This kind of potential conflict of interest – political decisions being key to private returns, and individuals associated with private companies holding high political positions – should raise eyebrows. Add to this the fact that all of these investments were structured though highly murky offshore structures – involving shell companies and trusts in Malta, Luxembourg, Cyprus, Guernsey and Delaware. Structures that Ms Brnabic appears to have been, at the very least, aware of.

One might think, what on earth is the IFC doing getting involved in such a deal? As we have reported before, the IFC is all too comfortable with the use of tax havens to structure its investments. In this case a spokesperson for the IFC told Nacional:

“As with all projects funded by IFC, IFC undertook a thorough due diligence of the project, including the legitimate use of intermediary jurisdictions, to ensure that it meets all IFC investment criteria.”

The EBRD said:

“As with all projects funded by the EBRD, we undertook a thorough due diligence of the project, including the legitimate use of intermediary jurisdictions, to ensure that it meets all our investment criteria.”

Now there is no evidence that Ana Brnabic personally benefited from the deals between her former employer and the government, and she has said that she was not involved in any decisions made by the government of Serbia that concerned these investments by Continental.

Her statement to Nacional was as follows:

“I was not involved in creating the ownership structure outside of Serbia and I have no idea what it is… I have reported to the Anti-Corruption Agency that I was the CWS Director and that I do not want to have any influence on any decisions that generally concern the policy of renewable sources in Serbia. As the Minister of Public Administration and Local Self-Government, I absolutely was not involved or had no contact points with the legislation concerning renewable energy sources…. I was not personally involved in drafting and accepting regulation on state incentives as I was not in the Government at the time….

All taxes were paid to the Republic of Serbia and we always tried to be a socially responsible company, as best confirmed by numerous donations and contracts with local government that part of the company’s profit is paid directly to the budget of the municipalities.”

But isn’t the real issue this: Large scale infrastructure projects rely on key government decisions in order to be viable, at which point the owner is granted stable, often taxpayer-funded, long term profits. In this particular case the benefits appear to have been particularly generous. In a world where people move between the public and private sector frequently, and particularly in smaller economies where the pool of people working at the top of government and in business is small, there exists the potential for huge conflicts of interest.

Policy responses

In this context there needs to be a much greater obligation placed on these companies to be transparent. It is not good enough for the IFC and EBRD to simply say ‘we looked at it, and trust us, it’s all fine’.

Large international financial institutions should use the market power they have to drive out financial secrecy, not to acquiesce with it – otherwise the kinds of scandals being reported in Serbia today will only continue.

At the national level, there is a full policy agenda. Alex Cobham, chief executive of Tax Justice Network, told Nacional that this deeply worrying story of financial secrecy and the mingling of public and private interests confirms the importance of key transparency policies, in order to protect the public from the risks of corruption and tax abuse.

“First, it is crucial that we have public registers of the ultimate beneficial ownership of companies and of trusts and foundations. Such a measure, now required in the EU through the revised Anti Money Laundering Directive, is the new international standard. Relatedly, governments should only allow companies to do business in their countries if they publish their true ownership and their accounts. At the same time, politicians and senior civil servants must be required to declare publicly their assets to guard against conflicts of interest.

“Secondly, this case makes clear that all public contracts must be in the public domain. There can be no good reason to prevent the public seeing how their own money is being spent by their elected representatives – and that logic extends equally to subsidies and tax incentives. The importance of incentives for the global switch to renewable energy makes this an industry of particular concern, likely to attract unscrupulous operators with no interest in sustainable development,” Cobham said.

“Finally, this story highlights the shocking failures of the World Bank’s IFC, and of the EBRD. These are institutions that claim to invest for the public good, but consistently refuse to ensure financial transparency or appropriate tax behaviour of their projects – and so once again find themselves associated with risks of corruption and tax abuse. Their policy choice to accept financial secrecy regardless of the public harm is shameful,” he added.