Scratch his back

TJN doesn't usually get involved in subjects like US healthcare reform - we tend to focus on the revenue side of the picture, not on expenditure decisions.

But this Jon Stewart video is, at least in this blogger's opinion, too funny to ignore, taking a dig at certain Americans' suspicions of European-styled "socialised medicine."

(Please avoid this if you have a sensitive disposition. For the more serious part of the Daily Show edition, click here)

Britain's industrial policy

Last week Britain's Treasury issued a policy document on reforming the financial markets. Though it contains many sensible ideas, it is overall a horrible piece of work, summed up in this policy objective noted in an article by Martin Wolf of the Financial Times, to:

“maintain the future pre-eminence of the UK’s international financial services markets”

We don't always agree with Wolf (we often do, however) but today Wolf gets right to the point about what competitiveness means in terms of jurisdictions:

"Alas, a competitive advantage in the supply of global “bads” is really a disadvantage."

Just as we have been saying all along.

And Wolf adds another note on this: he calls it "an industrial policy perspective on finance." (that is, government planning to decide which sectors to support.) Now one can have a debate over whether industrial policy is a good thing or not - many countries have done very well out of planning the structure of their economies to a degree as noted by, among others, the Korean economist Ha-Joon Chang (whom, as an aside, Wolf praises as "probably the world's most effective critic of globalisation".) The point is that industrial policy is not regarded as part of the "Anglo-Saxon" economic canon and it seems somehow ironic that it should be used to support the ultra-free market playground that is the City of London.

TJN's John Christensen at a recent public debate at the Oxford Union challenged Michael Devereux of the Oxford Centre Against (sorry, for) Business Taxation (whom we've just talked about in depth) on his advocacy of a "competitive" tax policy for Britain - asking Devereux where the intellectual roots of this kind of "competition" theory lie. Devereux could not respond - for there is no such intellectual underpinning: only ideology.

Later, speaking (in the Thatcher Room, ironically again - see the photo) at the launch at the UK Parliament on 14th July of Our Taxes, Our Lives - a new alliance of civil society organisations, Christensen delivered this important paper explaining what Martin Wolf might have meant by the supply of social "bads" being in reality a disadvantage.

"By shaping our tax system to subsidise investors and attract Russian billionaires, we have arrived at the bizarre situation whereby, under the current government, the poorest 10% of the population pay proportionately more of their household income in tax than anybody else, while the wealthiest 10% pay less than those on average incomes."

This is partly a result of what we have discussed before - crowding out and the Dutch Disease effects of a large financial sector on the economy. And Christensen added:

"Britain has played a lead role in promoting tax competition. Just to remind you, tax competition does not benefit consumers. It doesn’t create additional employment. It doesn’t encourage enterprise or innovation. The only beneficiaries of tax competition are the companies, who can cut their tax bills by forcing a race-to-the-bottom in corporate tax rates. But instead of cooperating with other countries to resist these tax competition pressures, Britain takes the lead in blocking cooperation and protecting our tax haven economy."

What has been the result of Britain's "competitive" tax policy on Britain itself? The result has been this: Britain has failed to leap ahead of other rich-world countries in terms of average income per capita, as one might have expected from a policy that has attracted half the world's money to the islands - and yet it is a far, more unequal society: look at the astonishing effect that inequality has. In other words, British people are worse off than their peers in other countries - and its industrial policy in support of the free-wheeling City is squarely to blame. And this was true even before the economic crisis took hold. Now things are going to get worse. (Tax Haven Ireland next door is arguably in an even worse situation.) Christensen continues:

"A complete change of direction is needed. As a starting point, we should recognise that tax concessions to rich people and companies do not encourage enterprise or long-term investment. Real investors look for strong domestic markets, productive workers, reliable sources of raw materials, good transport and communications infrastructure and economic stability. All of which requires public investment."

There is another word for these concessions: subsidies. And who in Britain would argue that these are the routes to a more competitive economy?

Now here's another tantalising question, raising the role of the BBC, which has largely failed to open its eyes on these issues:

"Almost daily we read that such and such a company has threatened to shift their corporate base from London to Dublin, Luxembourg, or Switzerland. BBC’s Today programme interviews endless numbers of corporate pundits lobbying for tax breaks to keep the City of London competitive: interestingly the interviewers never ask why City lawyers and bankers don’t reduce their massive fee rates in order to stay competitive – its always a case of “we need more tax breaks, or our most talented people will shift to Monaco or Guernsey.”"

Back to the FT now: Martin Wolf also looks at the mess Britain is in (see the graph below) and points to a new paper for the Liberal Democrat think tank CentreForum which proposes, among other things, that:

"the next government should take a fresh look at the way in which property wealth is taxed. The private sector in the UK owns over £3 trillion in housing assets – a figure that dwarfs the national debt. The wealthiest members of society have gained a great deal from the active fiscal policies deployed to protect their assets from the destruction wrought by a much deeper recession."

It's certainly worth examining, though going as far as to propose "that the rental value of land should be collected and used as the principal source of public revenue, as a replacement for present taxes on wages, profits, goods and services," as one pressure group wants to, is going way, way too far - we believe in a broad, multi-faceted and just tax system, not a narrow one.

And the new Liberal Democrat paper adds that the next government, likely a Conservative (pro-offshore) one:

"should drop their plan to virtually eliminate inheritance tax; this does little either for economic efficiency or social justice. Nor is their pledge to cut taxes on savings income either appropriate or socially just."

Now there is something we can all agree on.

European Investment Bank - in tax havens

The European Investment Bank (EIB) is the EU’s house bank, whose role in developing countries is increasing. Yet a new study has just been published, showing that many projects and beneficiaries funded by EIB money involve tax havens and transnational companies that use them for tax purposes. It is entitled Flying in the face of development: How European Investment Bank loans enable tax havens.

As the report notes:

"Public and political opinion have swung more solidly than ever in recent years behind bold moves against tax evasion and for progressive taxation. The EIB should take the opportunity of updating its policy to ensure that it closes the loopholes identified in this report and ensures that greater transparency and a stronger threat of punishment are used to demonstrate to clients that the EIB is serious about this agenda, and not merely defensive."

It's an important report, looking first at illicit capital flows more generally, then looking at whom the EIB is bankrolling, then offering pointers for action. Read it here.

Channel islands operators encouraging dirty money

From the Wall Street Journal:

"Offshore financial centers might be feeling the heat from Washington, Paris and Berlin but could yet come out of the financial turmoil with a new ally - the wealthy from emerging markets."

And then a nasty little detail:

"Wealth managers in Switzerland, however, say there has been an extraordinary surge of money from the Middle East and Latin America in the past six months. Members of the Channel Islands financial community make regular trips to Asia and the Middle East to sell their offshore services. They say these efforts are paying off with accounts coming in from these regions."

Channel Islands secrecy jurisdictions, notably Jersey and Guernsey, are on the OECD's hopeless white list. Switzerland, it seems, is about to get onto the white list. Shame on you, OECD, for legitimising these places - epicentres of global corruption.

Time to bury the Oxford report

On several occasions we have written about a report produced by the Oxford Centre for Business Taxation, which is critical of estimates of illicit flows and other offshore-related phenomena published by TJN and its colleagues.

Professor Michael Devereux of the Centre has replied in the Financial Times to an earlier letter from TJN and its partners. Devereux’s riposte says little of interest, but accuses us of seeking “to spread innuendo about the messenger rather than to engage in constructive debate about the research” – without noting that the letters page of a newspaper – ours was just 263 words long – simply isn’t the place to offer a detailed rebuttal of a detailed report.

A blog, however, is an excellent place to do this. So here we go!

We’ve already exposed some of the fatal flaws in the report in several earlier blogs; this blog seeks to look at this report in a slightly more organised way. In short the Oxford report cannot be supported by their research, and the researchers are not in control of their materials. The estimates by TJN and its colleagues are by far the best estimates that are out there, and the report has strengthened our case for further research in this area, (and we only wish that the World Bank and others would get on the case as we have been urging for so long). The Oxford report has quite simply failed to knock our numbers down -- and what doesn’t kill us, as we recently remarked, makes us stronger. They haven’t, it should also be noted from the outset, produced any numbers of their own, though that wasn’t the focus of their report.

Until more research has been done, ours remain the key references in this area.

This long blog is in four sections:

1. Errors of analysis
2. Errors of omission
3. Errors of fact
4. Process, Context, questions and conflicts of interest

Errors of Analysis

There are too many errors of analysis to cover exhaustively here. We will focus on just a few important ones. One key mistake – reproduced in the Financial Times as a potential headline rebuttal of TJN’s and other estimates, goes like this:

“Tax revenue losses due to mispricing are overestimated drastically.”

This is unsupported and, as we shall see, the researchers must have known that this was unsupported. To appreciate this, it is necessary to look at the paragraph in which the sentence is embedded:

“A key shortcoming of many existing studies based on mispricing is that they only take into account overpriced imports into developing countries and underpriced exports of these countries. But the mispricing approach would also allow to identify underpriced imports into developing countries and overpriced exports. Both shift income into developing countries. Estimates of tax revenue calculations have to take into account income shifting in both directions. If only one direction is taken into account, the results are misleading. In this case, tax revenue losses due to mispricing are overestimated drastically.”

That last sentence is of course, the headline from this entire report. But it is just plain wrong. Here’s why.

At first glance, they might seem to have a point. For completeness’ sake it would certainly be useful to measure the flows going in both directions, as they say. However, let’s consider what this means.

What TJN’s colleagues have measured in terms of mispricng is capital flight out of developing countries into secrecy jurisdictions and other locations. What it does not measure is capital flight into developing countries. To illustrate: TJN’s colleagues have measured capital flight out of, say, Congo, and into Switzerland – but have not measured capital flight from Switzerland into Congo. This is not to say that there is not an issue here – there is – but this now brings us to two important points.

First, it is fanciful to think that capital flight into developing countries from tax havens and elsewhere is likely to be anything like as big as capital flight out of developing countries. Even if, say, capital flight into developed countries were, say, 20% of capital flight losses out of developing countries – which seems unlikely (see Richard Murphy’s analysis of this here) - and we were to subtract one from the other, that would be no grounds at all for concluding that there has been a “drastic” overestimation.

In addition to this, how could they possibly come up with “drastically” if they have not measured this themselves – which they haven’t? The use of this -- headline soundbite – word cannot be supported.

Yet the second point is more fundamental. For the researchers have made an elementary yet crucial error. They say we should subtract tax revenue losses in one direction from tax revenue losses in the other direction – when in fact we should add them.

If a country loses revenue from overpriced imports into developing countries and underpriced exports, it does not somehow magically recoup illicit money going in the other direction which suffers losses from, say, flows evading VAT or import duties. No, it loses revenue in that direction too. Dev Kar, a former Senior Economist at the IMF who put together the data for Global Financial Integrity, has sent us a more detailed analysis of this particular issue. His full analysis is here but the key section says this:

“The traditional approach to estimating annual illicit outflows through trade mispricing has been to simply take all signs as they are and allow them to wash out into a net position. For instance, if the CED (Change in External Debt) model estimates illicit outflows of 100 but the net trade mispricing (based on Direction of Trade Statistics or the DOTS model) shows inflows of 150 (i.e., -150), then, according to the traditional method, the country has received a net inflow of 50. No economists have questioned this “traditional approach”
. . .
the traditional method yields strange regional distribution of illicit flows—Africa as a whole receives illicit capital (which flies in the face of its continued dependence on bilateral aid). The traditional method would also have us believe that Russia is a net receiver of illicit capital." (Once again, read the full analysis here.)

Let’s repeat that last sentence. No economists have questioned this traditional approach. Perhaps it is time for a certain section of the economics profession to make some downwards journeys from their ivory towers, all the way down to street level.

Or, as Murphy put it: the inward and outward abuses do not match in terms of transactions, and do not net out against each other. “No one is going to do dual transfer pricing abuse in and out to arrive at a net correct position.”

From this one can only conclude that our estimates, by only considering flows in one direction, must be underestimates, not overestimates, of tax revenue losses.

What were the Oxford researchers thinking?

Next, the Tax Justice Network’s analysis is not, as the researchers put it, a “rough back of the envelope calculation.” It is based on data drawn from the Boston Consulting Group, Merrill Lynch, and Ernst & Young Cap Gemini, with supporting evidence from the Bank for International Settlements. They say our cited rates of return are based on “strong assumptions”. Yet our rates are based on considerable research at the practitioner coalface, and are put together by a practicing and highly experienced chartered accountant and a former Economic Adviser to the British tax haven island of Jersey. We cannot allow academics to dismiss these as “strong” without any basis for dismissal. They entirely misconstrue the research by TJN and others. Read more on this, and why our estimates contained some extremely conservative assumptions, here.

Errors of Omission

The Oxford report is entitled “Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the existing literature.”

A literature review should aim to take a look at all the best estimates out there. But why has the Oxford report been so selective in this review? We cannot answer that for them. We can only conclude that either the researchers were incompetent and did not know about these reports, or they purposefully excluded results. The former is extremely unlikely, given that the different estimates, and many more are all laid out and clearly linked to, here. They miss, or avoid, crucial sets of estimates such as:

• Offshore Explorations: the most detailed and thorough study of some of the world’s most important secrecy jurisdictions, by the high-brow tax publication TaxAnalysts.
• Research by James Boyce and Léonce Ndikumana of the University of Massachusets, Amherst, estimating capital flight from 40 sub-Saharan African countries from 1970-2004 at $607 billion in 2004 dollars (including interest earnings), compared to $227 billion external debt in 2004.
• Assessing the Development Squeeze: Income Loss to Less Developed Countries as a Result of Tax Incentives, Tax Evasion and Tax Avoidance (2004) Alan Muller, David Frans and Rob van Tulder, SCOPE Expert Centre, Potterdam School of Management.
• Refinements in the work of Alex Cobham in the 2007 report prepared for the Oxford Council on Good Governance.
  

Why did they not mention estimates such as these in a literature review? We will take this question up again in the section under Process, below.

They have also omitted to define their terms. What is a tax haven, or a secrecy jurisdiction? We mention this partly because a paper published by the Oxford Centre For (or should we say Against?) Business Taxation seems to think that tax havens are all about tax, when we know very well that the more fundamental issue is secrecy. That is why we use the terms “tax haven” and “secrecy jurisdiction” interchangeably.

Finally, there is another important error of omission. They did not produce their own estimates to back up their case. They simply sought to knock down what was published. Now in a sense that is fine – this was a literature review, after all, and their recommendation that “more research is needed” is of course well received – but the ways that they set about filling the holes raise serious questions about their experience and understanding of this field. Here are a few examples.

1. The report suggests a future programme of study that would require accurate assessment of the role of tax havens based on firm-level data. All we can say is this: “Good luck, guys!” Do they really think this is achievable? It would be virtually impossible to do this, due to the secrecy veil offered by many havens: such data is impossible to secure. Do these researchers have any understanding of these issues? As our letter in the FT stated: “It is a shame that such prominence was given to a first contribution from researchers whose expertise in corporate finance, rather than development, has perhaps hindered their ability to consider problems where data are inevitably limited.”

2. A “micro” approach that they suggest for estimating the tax gap based on tax audit data of individuals or firms would prove to be impossible in many developing countries due to the ease with which full information on income, particularly offshore income, can be hidden. Strangely, they add this: “Data to implement micro methods is seldom available for developing countries.” What are they saying – use this data even though it isn’t available? Once again, good luck guys on getting the data. Read more here.

3. Estimating the tax gap based on national accounting data, as in the Swedish example, would be impossible in many developing countries due to inadequacies in the collection and compiling of accurate data on sources and uses of funds. It may be that the IMF and the World Bank could come up with something useful here, at least in a rough and ready way. But they haven’t. Why not? Are developing countries not a priority?

And we should refer to one other sentence in our letter to the FT:

“It is not reasonable to treat absence of the data needed to conduct strictly conventional analysis as evidence of absence of a problem. Instead, this implies that more transparency is needed.”

To suggest that this problem cannot be proven to exist because it does not fit the modelling capacity of conventional economics does not suggest there is nothing wrong with the world: it suggests that the modelling techniques of economists must be developed in ways we and our associates have pioneered.

Once again we have pointed out how so many economists at the IMF, World Bank and elsewhere have conflated an absence of data with the absence of a problem. They haven’t measured this stuff – and they still aren’t measuring it (see more here.) For this reason, the Oxford report which concludes that this research is required, is to be welcomed despite its shortcomings. This is almost certainly the biggest data gap in the entire global economy.

(There are further errors of omission in the fourth section under Process, Context, questions and conflicts of interest.)

Errors of fact

There are a number of factual errors worth pointing to. Here is a selection:

• The authors completely misstate the basis of the study of illicit financial flows by Global Financial Integrity (GFI), which draws on extensive data sets for IMF Direction of Trade Statistics and for the World Bank Residual Method of analysis.
• Contrary to what the researchers say, GFI’s methodology is not dependent on categories of items traded or on the quality of goods traded. To suggest that this is so is a gross factual misstatement.
• Price differences within product groups of the Harmonized Code, as analyzed by Simon Pak and John Zdanowicz, have prevailed in U.S. courts. The argument that such price differences may only reflect quality differences has been legally overruled.
• Reference to the internationally used Harmonized Commodity Description and Coding System is omitted. This system breaks down commodity descriptions to as many as 25,000 categories and is widely used by almost all governments in trade classifications and customs collection.
• The database used by Pak is drawn from U.S. sources and is not drawn from the customs agencies of other countries.
• Apart from the glaring error pointed to above, GFI’s analysis of illicit financial outflows from developing countries is conservative, since it does not include a number of potentially very large elements that were simply not included in the measurements. These include
  - Trade mispricing that occurs within the same invoice
  - Illicit financial flows due to smuggling and trafficking
  - The mispricing of services.
• The notion inherent in the report that “illegal activities which would be stopped if detected and thus would not generate tax revenue” is wrong. To cite a few examples, oil bunkering out of Nigeria, diamond smuggling out of Sierra Leone, and illegally cut timber exported from Indonesia would indeed contribute tax revenues if shifted into the legal economy.
• The four permutations of trade mispricing need to be clarified in the report. These are i) between unrelated parties within the same invoice, ii) between unrelated parties via reinvoicing, ii) between related parties within the same invoice, and iv) between related parties via reinvoicing. This is not recognised in the report at present.
• The Oxford researchers claim that TJN, in its Price of Offshore, has “combined” its estimates from commercial operators such as Merrill Lynch with those from the Bank for International Settlements. Not so. The results have not been “combined” but have been triangulated – we took three quite separate sources of data to see to what extent they converged on a data range. It is a perfectly valid statistical technique. We now know that one element of our analysis – $2 trillion in “other assets” for which data is almost impossible to come by – was drastically underestimated. Read more here.
  

Process, context, questions and conflicts of interest

The errors of process the academic researchers have committed are strange, but important. The questions about the competence, and more importantly the intentions, of the researchers, simply cannot be ignored. Devereux seeks to dismiss this in his letter to the FT – he claims that the fact his centre was funded at the outset by the Hundred Group of companies is irrelevant. No influence? It happens all the time: read more here.

Here are some specific things to consider.

First – and this is peculiar – the researchers seem to have decided not to speak to or otherwise contact any of the people who worked in this area. Though there is a caveat -- Richard Murphy adds this:

“Of the eleven authors whose work is reviewed by the Oxford team nine are personally known to me. Only one was given any opportunity to discuss his work, and that because he asked to do so.”

And he cites further examples of their peculiar omission in a blog entitled “Why didn’t you ask, Oxford?” here.

This omission could go a long way towards explaining their multiple, often elemental and elementary, errors. “How did you arrive at this?” they might have asked. They didn’t. And they had ample opportunity – TJN’s John Christensen and Oxford’s Michael Devereux debated publicly at the Oxford Union in May, for example (and guess who won the debate hands down – you should have been there!) But at no point did Devereux ask any questions on this crucial research.

“I’ve been a professional researcher for most of my life,” says Christensen, “and normally you begin by talking to people.” Why would the Oxford researchers avoid talking to the authors of the estimates they were studying, even when standing in front of them?

Very odd.

Next, the report was supplied to the Financial Times by somebody before it was published, resulting in the wholly erroneous “drastically overestimated” soundbite being put out there in the public domain. We’re not against journalists getting scoops and digging out hidden documents – far from it – but those who lose control over their documents tend to get shirty about it. What we are doing in fact is asking not so much who leaked this to the FT, interesting as that might be (was it HM Treasury? – note the context of the story where it appears) but more importantly, why?

Next, all of us have repeatedly made the case for others such as the World Bank or the IMF to produce estimates of their own as to the scale of these problems. That has been one of our declared aims in producing our own estimates – to prompt others to start measuring. Yet at no point do the researchers mention this point. Why not? Read more here.

Yet there is something else. The Oxford Centre for Business Taxation does not look like an independent research institute. It looks more like a campaigning organisation or lobby group, which uses a lot of its own research to support its case against taxation of businesses. This is a problem almost generic in academic life – see here. This is by no means a small matter. Funding on international taxation around the world has come in very large measure from corporations. And guess what results have emerged to date? Fortunately, the balance is now starting to shift back.

But we can be more specific than that, in the case for the Oxford Centre for (against) Business Taxation. Let’s start with Clemens Fuest of Oxford, one of the authors of the report. He is, according to his biography, “member of the Academic Advisory Board of Ernst and Young AG, Germany.” Read Richard Murphy’s description of the conflict of interest here.

Yet there is something larger. Take a look at this article in Accountancy Age, reporting on the centre’s aims from the outset:

“The culmination of this mission, he (Christopher Wales of Goldman Sachs) says, was the creation and launch of the Oxford University centre for business taxation (see box) on 4 November this year. Based at the Saïd Business school and backed by £5m-worth of funding from the influential Hundred Group of Finance Directors, the centre has been set the goal of using academic weight, alongside HM Revenue & Customs and business expertise and assistance, to achieve a more competitive tax system for British businesses.”

Two things. First, the last sentence makes it clear they are aligned with British business interests -- or rather, their view of 'British business' which seems to elevate UK-listed multinational companies above all others. (Most British business, providing much needed employment in these difficult times, are smaller players without access to international tax minimising strategies – there is no level playing field.) Second, anyone who is familiar with TJN’s blog and its website knows exactly what “competitive” means in this context (if you don’t – then click here, and read the rest of the Accountancy Age article which shows how we have interpreted it correctly.)

The fact that the centre has this aim means it is more of a lobby group than an independent research institute (we are an advocacy organisation – but we are completely open about that and we seek to serve the public interest, not a narrow set of interests.) The fact that the Centre has no background in development policy, combined with its focus on making UK tax policy “competitive” - raises serious questions about Devereux' claim to be 'independent'.

Debt versus equity and the scandal of deductions

Recently we pointed to the IMF waking up to the idea that distortions in international taxation might be, to use the IMF's ugly term, "macro-relevant" in terms of the economic crisis. In other words, these have huge systemic effects. As our blog about this new report notes,

"Why did it take so long for the penny to drop at the IMF of all places? . . . It is hard to exaggerate the extent to which tax arbitrage has shaped cross-border trade and investment flows"

And the IMF notes something specific:

"Divergences in national tax rates, bases, and practices create substantial opportunities for international tax arbitrage, further increasing opacity and reinforcing tax biases to debt."

This is important. When businesses raise money, how do they do it? One way is to resort to equity (issuing shares to the public and so on.) One is to borrow: to use debt. The economic crisis has taught us that the latter - debt - is the dangerous one. And yet tax policies favour debt, the world over.

This is an issue that we intend to revisit: the tax treatment of debt, versus the tax treatment of equity. (A comment article in the FT yesterday had some radical approaches - but that is not the point of this blog.)

The main point of this blog is to point to something that Richard Murphy has written today, entitled "Rebuilding the bias to equity." Read it.

Bab time for bankers

From the FT:

"Pay at Goldman Sachs this year is set to beat the boom levels enjoyed before the financial crisis, when top executives raked in tens of millions of dollars in year-end bonuses."

We thought this cartoon might be appropriate at a time like this.

PS: BAB = Bonuses Are Back!

Wall Street Journal: Offshore Tax Evaders Deserve No Sympathy

Articles in the media criticising the mess that secrecy jurisdictions have made of this world are now commonplace. The Wall Street Journal has often taken an editorial line in support of secrecy (though some of its journalists, we have to say, have been excellent in exposing abuses too). We are therefore refreshed to see a comment piece on its pages, entitled Offshore Tax Evaders Deserve No Sympathy.

It contains much that we like:

"Earlier this year, UBS agreed to pay a fine of $780 million, admitted that it helped U.S. citizens evade taxes and agreed to cooperate with U.S. investigators. But now it is balking at turning over its clients’ names. UBS says it would violate Swiss financial privacy laws if it complied. In that case, UBS (and its government) should be faced with a simple choice: continue its policy of strict secrecy, in which case UBS should forfeit the right to do business in the U.S.; or compromise, aligning its banking laws with those in the rest of the civilized world."

Well said. And he continues:

"I have no sympathy for the bank’s plight. Switzerland is a sovereign nation, free to pursue whatever banking laws it deems appropriate. That doesn’t mean the U.S. has to open its borders to the exploitation of its citizens for tax evasion and other nefarious purposes, nor should other countries.

Nor do I have any sympathy for those Americans whose identities may be made known, especially those like Mr. Olenicoff, a billionaire who owned a yacht and maintained foreign accounts in multiple so-called tax havens. Those who have accepted an offer of amnesty should count themselves lucky. Paying taxes is an obligation all American citizens share, but somehow tax evasion seems more reprehensible when committed by the rich, who owe their prosperity to this country and could so easily meet their obligations.

With the Madoff scandal still fresh in the public mind, I hope the Justice Department maintains its tough stance. The wealthy need to be reminded that all Americans stand equal before the law."

Well said.

If you're interested - there are a couple of things we don't agree with. This, for instance, is nonsense:

"I’ve been wondering just why anyone needs or wants a Swiss bank account. For African dictators, international arms traffickers and terrorists, the answer is pretty obvious. And there are certainly citizens of countries whose own banking systems are so precarious, and the risks of persecution for any number of reasons so great, that a Swiss bank account may provide welcome security."

This argument is utterly bogus. For one thing, Anyone who has a foreign bank account in a totally transparent jurisdiction faces no risk of expropriation or persecution - all they face is tax on the income from that assset. Why is secrecy required to protect them. Yet that is just one point. There is a whole body of argument in this respect - see this important TJN blog on this subject here.

Is France soft on its own little tax haven?

There is often a symbiotic relationship between small secrecy jurisdictions (or tax havens, if you must) and wealthy élites in larger economies. Germany is surrounded by Switzerland, Liechtenstein, Luxembourg and Austria; Portugal has Madeira; the United States has a string of options in the Caribbean; and Britain has cast a whole spider's web around the world, not least in the Channel Islands and the Caribbean. Monaco, of course, is France's special secrecy jurisdiction.

A new story from Wealth Bulletin notes the France-Monaco relationship is a bit like the one between, say, Britain and the Cayman Islands.

"The principality, which benefits from zero income and inheritance tax, shares a central bank with France. Paris also picks its chief of police and its financial regulator chief, who are always French nationals."

And it notices that for all of French President Nicolas Sarkozy's words against tax havens, he seems to have been mysteriously reluctant to get tough with France's own little haven for dirty money, with Monaco wealth managers having covered some $130 billion away with their veil of secrecy.

"For the French crackdown to be taken more seriously the country is likely to be forced to take a tougher stance against offshore centre Monaco, which effectively enjoys many privileges because of its links with its big neighbour."

Quite right. Take a look at your own back yard, Sarkozy, and crack down.

Links - July 14

** Also see our searchable archive of past story summaries; and Offshore Watch **

U.S. trial delay seen bringing UBS tax deal nearer
Jul 13 (Reuters) - A federal court judge in Miami approved a delay in a high-profile trial on Monday in which U.S. tax authorities hoped to force UBS AG to reveal the identities of thousands of Americans suspected of using the Swiss bank to evade taxes.

Swiss tax rules lure McDonald’s from UK
July 12 (FT) Mcdonalds is to leave London for Geneva, joining the growing ranks of US companies moving their European headquarters to take advantage of preferential intellectual property tax laws.

Corruption rules as illegal imports flood Kenyan market
July 11 (The Nation) - The Kenyan taxman is losing an estimated Sh100 million every week in a tax evasion scheme involving unscrupulous importers working with corrupt customs and airport officials, according to the findings of a Sunday Nation investigation.

Baucus Gives Cautious Welcome To US Treasury's New 'Tax Gap' Plan
July 13 (Tax-News) Senate Finance Committee Chairman has given a qualified welcome to the Treasury Department’s latest plan to reduce the estimated USD345bn in legally-owed taxes that go unpaid each year, otherwise known as the ‘tax gap.’

Luxembourg Deemed Fully Compliant By OECD
July 13 (Tax-News) Luxembourg has revised its double tax convention with Norway to include provisions for the exchange of information in tax matters. The agreement brings the number of OECD model agreements it has concluded to twelve, ranking Luxembourg as a jurisdiction that has 'substantially implemented' the internationally agreed standard in this area.

Rich Britons help to drive up house prices in tax havens
July 12 (Guardian) While house prices across Europe have plunged in recent months, a stream of wealthy tax exiles is continuing to push up property prices in offshore tax enclaves across the continent.

UBS tax trial is delayed as talks continue
July 12 (Guardian) A keenly awaited court showdown between the US government and the Swiss bank UBS will be delayed until August. The trial, in which the US is seeking to force UBS to hand over details of thousands of wealthy Americans suspected of evading US taxes, was due to start today, but both sides submitted a request for a delay, to allow them "to continue their discussions seeking a resolution of this matter".

Swiss, UK Governments Reach Dual Taxation Agreement
July 9 (WSJ) The Swiss and U.K. governments have reached a dual taxation agreement which will permit an exchange of information on tax matters in individual cases where a specific and justified request has been made, the Swiss Federal Department of Finance said Thursday.

IMF: Lower corporation taxes and tax holidays may not boost growth
July 9 (TJN) The IMF has issued a new working paper entitled Empirical Evidence on the Effects of Tax Incentives which reaches some conclusions that are contrary to what the IMF so often teaches. And it seems to be an important one, for as the study says...

Tax Justice in History: The Peasant's Revolt
July 12 (TJN) In the summer of 1381 England was riven by grassroots revolt. London was invaded and the Tower of London, previously thought impregnable, was over-run by rioters. Simon Sudbury, Archbishop of Canterbury and foremost prelate in the land, was beheaded outside the Tower. One in an occasional series.

The OECD thinks Luxembourg is clean. Pull the other one

Luxembourg, it seems from news reports, has graduated from the OECD's grey list, onto its white list. So the OECD has, in effect, declared Luxembourg to be clean. If this is the OECD's idea of a joke, it is in exceedingly poor taste. (If you are still wondering why we disagree with the OECD, you might start here and read our recipe for a better way forward here.) But first, Tax-News.com:

"Luxembourg has revised its double tax convention with Norway to include provisions for the exchange of information in tax matters. The agreement brings the number of OECD model agreements it has concluded to twelve, ranking Luxembourg as a jurisdiction that has 'substantially implemented' the internationally agreed standard in this area.

As a consequence, the Progress Report initially published by the OECD Secretariat on April 2, 2009, in conjunction with the G20 has been updated, to move Luxembourg into the category of ‘Jurisdictions that have substantially implemented the internationally agreed tax standard’."

Now let's point to something more realistic, from a truth-telling Luxembourg expert, Jérôme Turquey. He runs an excellent blog (though unfortunately his English isn't perfect; we've occasionally tinkered with his words below to aid comprehension; check the original for what he actually sent). He's written an open letter to Pascal Saint-Amans who's been a big player behind the scenes at the OECD. Turquey notes that Luxembourg won't allow "fishing expeditions" - the classic stance of a secrecy jurisdiction (which means, Yossarian-style, that you already have to know what you are looking for before you request the information) and adds a few more details. For instance, Luxembourg:

"doesn’t allow for internal criticism of the abuses because of the fear of exclusion (the auditee is the auditor’ client and can change the auditor; the internal auditor or compliance officer have a subordinate link because of their employment contract) and professionals have no ethical awareness."

This is mentioned as an aside in his blog, but we can confirm from our extensive experience of secrecy jurisdictions (tax havens, if you must) that this problem - in short, a pervasive culture of fear -- is central to the perpetuation of the abuse, the world over.

Turquey describes another pervasive problem, through an example:

"an influential member of the new parliamentary majority as a former president of the ABBL (Association Banques et Banquiers Luxembourg) stated a doctrine, that was not repudiated, according to which it is not the duty of bankers to control if the taxpayer was honest"

This is utterly crucial to the future of transparency in global finance. Will bankers simply wash their hands of the dirty money that flows through them? It is time - high time - that things changed in this respect. (Read more on an interesting TJN initiative on this here.) What we are pushing for here, among other things, is long-term cultural change.

Now how about this for an interesting statistic on Luxembourg?

"according to the CRF, the Luxembourg Financial Intelligence Unit, most banks (60%) never report any declaration of suspicion."

And this:

"criminal liability for legal persons does not exist despite an injunction from the OECD last year (Press release dated 27 March 2008)"

And you might take a look at our earlier blog for more Luxembourg mischief.

Turquey goes on to argue, just as we have done, that the OECD criterion of 12 tax information exchange agreements (TIEAs) as a condition for graduating onto its white list (which contains many a notorious secrecy jurisdictions) - is:

"a joke: it is neither fair, nor coherent"

Quite so. He proposes a different kind of index, moving away from Transparency International's hopelessly flawed but famous Corruption Perceptions Index.

Indeed. And in this context, he might want to take a look at this.

Citizens for Tax Justice proposal mulled

We recently linked to proposals from our friends at Citizens for Tax Justice in the United States on how to pay for Medicare reform - arguably President Barack Obama's biggest domestic project in the long term. It might cost a trillion dollars, some analysts reckon. Bloomberg now reports on a new proposal in the Senate Finance Committee:

"The proposal, modeled after a plan released this week by Citizens for Tax Justice, would force people living off investments to contribute taxes to the health-care system, said Steve Wamhoff, legislative director for the Washington research group. It was raised yesterday in a closed-door meeting of Finance Committee Democrats, according to people in the room.

'If the only income Paris Hilton gets is capital gains, stock dividends, interest and other types of investment income, currently she is completely exempt from the one big tax we have right now that is dedicated to health care,” Wamhoff said. “We’re saying that probably doesn’t make sense.'"

And this could be big, big money.

"The move would potentially raise hundreds of billions of dollars in revenue over the next decade by boosting taxes by 1.45 percentage points on income from dividends, interest, partnerships and rentals, the people said. Dividends and long- term capital gains are now taxed at 15 percent.. . . The proposal would raise $500 billion over 10 years"

The lobbyists will attack this one for sure; all we can do is keep our fingers crossed.

England and Wales: a sedition law for millionaires

A year ago we blogged on Britain's international hooliganism in the field of libel, noting this remark from a well-known columnist, quoting this:

"The libel laws of England and Wales are tilted so heavily against the defendant and involve such monumental costs that they amount, in effect, to censorship by private interests: a sedition law for the exclusive use of millionaires.

A new article in The Guardian newspaper revisits the theme:

Britain has become the libel capital of the world, home of what has come to be known as "libel tourism", the destination of choice for Russian oligarchs and others to prosecute not just journalists, but book authors, even NGOs."

As you can imagine, we are greatly interested in this issue. The article continues:

"The problem with British journalism is that it shouts a great deal, throws many bricks, but uncovers precious little. Investigative journalism is a declining art. Much of that is due to economics. . . . But the main impediment comes from Britain's horrific libel laws. The chilling effect is hard to quantify, because beyond the prosecutions lies the self-censorship that is affecting so much journalism."

And now for something really terrifying.

"The Commons select committee on culture, media and sport is due in a few weeks to publish its report on "press standards, privacy and libel" – note the order. They will be tempted to use the latest scandal to do the opposite of what they should. Instead of loosening libel, they are likely to harden rules on privacy."

Another of our blogs adds this little detail:

"A recent study by the Centre for Socio-Legal Studies at Oxford University revealed the astonishing fact that the cost of libel litigation in England and Wales is 140 times the average elsewhere in Europe."

Index on Censorship and English PEN are fighting it. Give them all the support that you can.

Reminder: for a fascinating study on English libel laws in the field of tax and tax havens, look no further than here.

Netherlands: group interest box

From our friends at Tax Justice Netherlands:

Following our June 16 blog Fiscal fireworks: Dutch announce a 5% rate, we now offer an unofficial, unauthorised translation of a proposed change to the Dutch corporate income tax regulations (it is here.)

This concerns the optional Group Interest Box which was introduced in 2007. As very brief background: a detailed report from our colleagues at Somo said that year:

"From 2007 it is possible that the Netherlands will be offering tax rates as low as 5% on interest income under the ‘group interest box’ in the current “Werken aan Winst” proposal for modifying tax legislation . . . this might mean that the Netherlands will be offering the lowest tax rates on financial flows in the developed world."

Yet this proposal never entered into force pending formal approval from the European Commission. The new proposals make the Group Interest Box compulsory, thus apparently avoiding a European Commission challenge to the regime as unlawful state aid under EU law. The news is that on 8 July 2009 the Commission endorsed the group interest box scheme. From its press release it appears the Commission has already taken some of the proposed measures into account.

“Initially, the measure notified was optional for a period of at least three years. Following discussions with the Commission, the Dutch authorities undertook to make the measure compulsory for all entities subject to corporate income tax in The Netherlands. The Dutch authorities also undertook to enlarge the definition of a group for the application of the measure to take account of situations where one entity has, directly or indirectly, effective control over the financing of the other entity, or where a third party has effective control over the financing of the two entities involved in the loan arrangement. In addition, the Dutch authorities announced their intention to remove the existing statutory €18,000 capital requirement for the creation of limited liability company.”

So, after introduction of the compulsory group interest box, interest received from group companies would be taxed at 5%, while paid group interest would also be deductible at a rate of 5%.

All stakeholders and interested parties are invited to comment on the proposals. Tax Justice Netherlands in particular encourages developing countries, especially those with tax treaties with The Netherlands, to respond. Comments can be submitted prior to 1 August 2009, directly to the Dutch Ministry of Finance by e-mail - vpb (at) minfin.nl . Reactions will not be published.

Tax Justice in History: The Peasant's Revolt

This is the first in an occasional series on how tax justice has shaped the history of many countries.

England on the brink

In the summer of 1381 England was riven by grassroots revolt. London was invaded and the Tower of London, previously thought impregnable, was over-run by rioters. Simon Sudbury, Archbishop of Canterbury and foremost prelate in the land, was beheaded outside the Tower. The King, young Richard II (pictured here) was forced into making concessions to the rebels, including a charter of rights and a pardon for their actions, which were treasonable under the then prevailing laws. He quickly reneged on his deal.

Tax played a key part in fomenting this revolt. Since the 1330s England had been engaged in expensive and unsuccessful war with France. Public finances were in a state of near-collapse. In 1380, the King's parliament, meeting in Northampton, recommended that he should levy a flat rate tax of three groats on every adult in the country.

Dissatisfaction with the war, and the imposition of this new tax, coincided with mounting anger amongst working people at the controls on wages introduced in 1351. These controls, implemented at the behest of landowners and gentry, imposed an upper ceiling (but not a minimum wage!) on the earnings of virtually all skilled and unskilled workers. Underlying the worker's fears was the thought that serfdom, which had been considerably reduced as a result of rural labour shortages arising from the Black Death, was in the course of being revived.

The combination of restrictions on earnings and a regressive poll tax rankled in the minds of ordinary people, who could see all too clearly that their money was being wasted and powerful elites were prospering whilst they were being impoverished and oppressed.

The Two Johns

Two figures bring the Peasant's Revolt to life. The Duke of Lancaster, John of Gaunt (seen here in portrait) was effectively the King's regent during Richard's childhood and youth. Gaunt was particularly loathed by the ordinary people of London, and was widely blamed for what they perceived as the corrupt practices and cronyism at the King's court. John Ball, on the other hand, had a strong following amongst ordinary people. An extrovert and radical preacher, he was a forceful opponent of the war, called for an end to all forms of serfdom and the land-owning aristocracy, and appears to have had a peculiar talent for inciting people to riot. He openly tormented Sudbury, who prior to 1381 had had Ball arrested and imprisoned on charges of sedition. Whilst John of Gaunt represented all that the people disliked about the remote and arrogant ruling class, John Ball was the people's champion, and a noisy one at that.

Things came to a head in the early summer of 1381. Villagers in the Thames estuary region of Essex, east of London, organised meetings to resist the poll tax and protest against the oppressive royal commissions sent to subdue them. The protestors sent envoys into other counties, particularly Kent in south-east England, to rally support. By June the revolt had achieved a huge momentum. Over 60,000 people - a sizeable part of the regional population at that time - congregated at the village of Blackheath outside London, and on 13th June, the festival of Corpus Christi, they stormed the capital.

Without effective leadership some of the rebels ran amok. Perhaps understandably, the Palace of Savoie, owned by the hated John of Gaunt, was torched. However, other less discriminate acts followed, including massacres of bystanders, looting and the settling of private scores. One of the leading rebels, Wat Tyler, believed to be an Essex man, was rumoured to be planning to burn the City to the ground.

Faced with the prospect of anarchy, William Walworth, Mayor of London, rallied troops loyal to the King. After persuading Richard to step back from further concessions to the rebels, Walworth set up another meeting at Smithfields, outside the city walls, and during the course of this meeting Tyler was murdered (seen here in a detail from a painting by the chronicler Jean Froissart) and the rebels subdued. The preacher John Ball was also arrested and subsequently hanged, drawn and quartered in the presence of King Richard.

Despite vicious repression the rebellion continued in other parts of the country. Ultimately the revolt prevented the re-imposition of serfdom and is credited with setting a pattern for popular rebellion that has shaped class relations in Britain since the 14th Century.

History doesn't repeat itself, though sometimes it rhymes

Aversion to the poll tax, hated because it made no allowances for ability to pay, triggered what is arguably the first rebellion of English workers against their rulers. But, as Dan Jones argues in his new book on the revolt (Summer of Blood: The Peasant's Revolt of 1381, 2009) other resentments played a part in bringing the people onto the streets. Firstly, the war against the French was costly, unpopular and badly managed. Second, a massive income gap had emerged between the wealthy gentry and working people. The former were seen to be lightly taxed whilst the latter felt themselves to be taxed beyond what they considered just. Finally, oppressive actions by tax collectors and royal commissioners mobilised workers who were already seething about the caps imposed on their earnings.

Public hatred of the poll tax never went away. It brought the people back onto the streets of London when Prime Minister Margaret Thatcher tried to re-introduce the idea in 1990. But some of the other bones of contention at the time of the Peasant's Revolt also resonate in contemporary Britain: costly and unpopular overseas wars; administrations seen as corrupt and oppressive; huge wealth and income inequality made worse by regressive taxation. Who says history never repeats itself?

Paying Taxes is Public in Finland

The Nordic countries have peculiar tax practices – not only do we pay taxes but we do so as a public matter. Every year around October-November the tax administration publishes a publicly available (though pay-per view at 0.36 cents per line) list of taxpayers income and capital gains taxes, for the previous tax year. As the wealth tax was abolished in 2006, wealth no longer is public.

The practice has created a number of publications and services that buy and publish the data, to find out - for instance - your colleague’s or friend’s incomes. One of them is Veropörssi, which publishes the taxable income of all citizens who made more than 10,000€ in taxable income, and even has a text message service for quicker answers.

Newspapers, both broadsheets like Aamulehti and tabloids like Ilta-Sanomat among other media publish similar figures in an easily accessible format to the point that the public broadcasting company YLE has a “tax machine” to look up the top income and capital gains tax earners in each municipality.

My parents' tax returns are public, so are my neighbours', and so would mine if I weren’t a student in 2007 not making more than 10,000€ in taxable income. Gifts and grants are not made public as gift tax is not under the publicly available returns. So students, athletes and artists on scholarships can at times are absent from these publications. Debates are ongoing as to whether they should be made public, and also require pensions contributions, and I rather support making all forms of pay -- from grants to stock-options -- equally part of the public tax information.

Top income tax earners are public figures in Finland as a result of heightened media scrutiny on top income tax earners. The CEOs of Nokia and other major corporations are all well-known not only for their public role in business, but also for their tax returns. The chairman of the board of Nokia and Shell, Jorma Ollilla had 9,8€ million in taxable annual pay in 2007, while the CEO of fashion group Marimekko Mika Ihamuotila had a pay of 5,1€ million. Both are well respected corporate leaders.

Other technology companies, and investment banks are among the other top income tax earners. Surprisingly many new start-ups of the past 10 years are among the top league of capital gains tax payers - raising some suspicions of older wealth having gone offshore. The highest capital gains tax payer was Göran Sundholm, the CEO and founder of Marioff, manufacturer of fire extinguishers, making 81 million in capital gains. He sold a part of the company's shares in 2001 to Nordic Capital, a private equity firm - domiciled in Jersey! The company was sold on from Nordic Capital in 2007. Despite recent tax information exchange treaties between the Nordic countries and the Channel Islands, knowing what information to ask from a Jersey-domiciled fund would be difficult for the tax authorities.

Not many people make a big fuss about how much your neighbour makes, and the cultural transparency goes far beyond taxes in the Nordic countries. Names of residents and companies are always posted outside buildings in post boxes and doorbells. Businesses often have large neon-lighted names attached to the buildings they occupy, partly due to dark winter nights, but also the idea of knowing who is based where – crucial also for tax purposes.

The history of the practice is also interesting, as pointed out by Osmo Soininvaara, a Green MP in Helsinki, in a recent debate. The practice comes from times when income tax was a discretionary issue to be negotiated mainly on the municipal level with local tax authorities. To avoid abuses in such a discretionary system, all tax payments were made public.

Countries still applying discretionary tax payments, such as the UK for its non-doms, or Switzerland for its incoming residents should take a lesson here in transparency in publishing at least all these tax deals so the public could have an informed debate. Same would apply for tax holiday and tax exemptions for companies.

Arguably the worst tax system is an arbitrary one, where direct dealings with tax authorities determine the applicable taxes. Today some consider that taxes in Finland are based on a strict tax code, and the old rationale for combating arbitrary taxation is no longer legitimate. However, arbitrary practices still exist as the tax planning industry is also present in Finland in coming up with ever more industrious schemes to avoid taxes. The way to keep the integrity of a tax system is to keep it public.

There are also critics to the practice, as it’s seen as an infringement of privacy, and others point out special cases such as income from crime tip-offs also appearing on annual income tax records placing whistleblowers at risk. A crime victim-protection scheme does exists, where your tax returns remain hidden where the court has ruled so – mostly applied in cases of personal harassment.

The system produces some distinctive features, such as the role of artists who complain that as finishing works of art take several years, annual returns give a distortionary picture of their incomes as some years are phenomenal, others nearly nil. However such windfall gains, and especially ones in the financial sector, are part of the current economic model and an informed debate on them is rather better than being left in the dark.

These returns also reveal some common tax planning strategies. If you happen to be a major owner of the company your work for, the company (or you yourself as its main shareholder) can decide to pay you a minimum wage of 15,500€, while making most income in capital gains taxed at 28%. In comparison, marginal income tax rates vary between 8.5% to 31.5% to which you need to apply a municipal tax, which in 2008 was on average 18.6%, bringing the top income bracket to about 50.1%.

The publicity of tax returns in Finland has its admirers and its critics, currently a complaint has been filed at the European Court of Justice, based on a Supreme Administrative Court case in Finland, where publications were sued for reselling tax information by text messages to clients, something that needs to be discussed under the freedom of speech debates if it intrudes the privacy of personal surroundings making chats in the café or restaurant rather more public. The effect however is very similar to looking the same information up the following day in a publication.

Also demands are made to for the tax authority to provide the information free of charge on thier website, as is the case in Norway, rather than reselling it to newspapers and third parties. This would be an improvement, as often transparency in the simplest form is the best manner.

Watch this space in October for the annual who is who in tax in Finland.

Matti Kohonen - the author is a Finnish citizen working as a consultant for the Tax Justice Network International Secretariat.