Eurodad – Glopolis International
Conference 2013
Tax Wars
Or an Introduction to Illicit Financial Flows and Global Tax Dodging.
Joseph Stead, Pooja Rangaprasad, Dejere Alemayehu, Lars Koch, Sarah
Johansen
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Eurodad – Glopolis International
Conference 2013
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• Illicit money refers to money that is illegally earned,
transferred or used.
• These activities range from laundering of proceeds from
crime and corruption to commercial evasion of taxes.
• A large network of tax havens globally aid this movement
of money and enables secrecy in concealing the wealth.
• Tax Justice Network estimates that the global super-rich
have at least $ 21 trillion hidden in secret tax havens at
the end of 2012
Eurodad – Glopolis International
Conference 2013
What are Illicit Financial
Flows?
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• $21-31 trillion assets held in tax havens
• Africa a net creditor to the rest of the world
• Up to $1.4trillion 1980-2009
• Lost revenues:
• EU €1 trillion a year
• Developing countries:
• $160bn a year lost revenues on international trade
• Up to three times aid flows on revenues lost to tax havens
• Zambia up to $2bn a year in lost revenues on mining
Eurodad – Glopolis International
Conference 2013
The Scale
• The Inequality:
• MNCs with links to tax havens pay on average 30% less tax on
profits than those not using tax havens
• The richest pay a lower % of tax than the poorest
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Did you know?
• Jersey is the biggest banana exporter to Europe?
• In BVI there are 34 companies registered per inhabitant?
• A building in Cayman island hosts the office of 12 000
American firms?
• BVI are the biggest foreign investors in China and Mauritius
in India?
• 1500 registered companies in Mauritius are managed by 9
people!
Eurodad – Glopolis International
Conference 2013
The Tools of the Trade
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• Equation to remember :
Profit = sales –costs
• In this equation, artificially reducing sales or inflating
costs reduces tax liability;
• In essence, tax dodging is about manipulating sale and cost
figures;
• The prison wall which separates tax evasion from
avoidance has become porous: tax havens, accounting
firms, lawyers etc. facilitate evasion to avoidance through
this simple mechanism by enabling firms to dodge with
impunity
Eurodad – Glopolis International
Conference 2013
Tools of the Trade
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• TAX DODGE 1: The companies in a developing country are
owned by an entity registered in a secrecy jurisdiction.
They pay royalties to this entity in millions of US dollars.
• TAX DODGE 2: Subsidiaries of the MNC in developing
countries pay ‘management service fees’ to sister
companies in tax havens where effective tax rates are
lower.
• TAX DODGE 3: goods are procured by subsidiaries from
another subsidiary registered in a tax haven. The
subsidiary in the tax haven “sells” the procured goods to
the producing subsidiary in a developing country at a huge
profit. (Tax in tax haven 0 – 3%; in the country where
production takes place up to 25%)
Eurodad – Glopolis International
Conference 2013
Tools of the Trade
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• TAX DODGE 4: the subsidiary in a developing country
borrows a large amount of money from the same company
mentioned in tax dodge 3. The loan is sometimes seven
times bigger than the capital of the subsidiary in an African
country. The interest costs on this loan will wipe out a huge
amount from the subsidiary’s tax liability in the country
where production takes place.
• These practices were identified in the Action Aid case study
of SABMiller in Ghana.
• The study found out that a street kiosk beer vendor paid
more taxes in Ghana than the multinational company
Eurodad – Glopolis International
Conference 2013
Tools of the Trade
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• End Financial Secrecy
• Country by Country reporting
• MNCs reporting broken down by country
• Information exchange
• All jurisdictions agreeing to share information with others, preferably
automatically
• Transparency of ownership
• The flesh and blood behind companies, trusts etc.
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Conference 2013
What is to be done?
• Reform international tax rules
• Make it difficult to shift profits to tax havens
• Enable developing countries to get a fair deal
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Political rhetoric (offshore leakes):
France/Germany: ”We think that the EU should lead the fight against worldwide financial crimes
and should promote an efficient international cooperation with the view to achieving the end of
opacity. We therefore support the development by the EU of a policy against non-cooperative
jurisdictions which present deficiencies in the field of combatting tax crimes and money-laundering.”
UK: “There is now, ahead of the G8 Summit in June, a timely opportunity for the G8 and EU to inject
the political will required to raise international efforts to a new level and take radical, rather than
incremental, action…”
Annan: ”Tax avoidance and evasion are global issues that affect us all. The impact for G8
Eurodad – Glopolis International
Conference 2013
Momentum!
governments is a loss of revenue. But in Africa, it has direct impact on the lives of mothers and
children…Throughout the world, millions of citizens now need their leaders to step up to the mark
and lead. Fortunately, momentum for change appears to be accelerating”
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Progress on exchange of tax information:
Momentum  Luxembourg: ”Luxembourg has decided to introduce automatic
exchange of information based on the current Savings Directive which today applies to
interests paid to individuals…. Luxembourg accepts the extension of the scope and
continues to insist on a global level playing field as it was suggested by the G 20 just last
week during the Spring meetings.”
Savings Tax Directive: Exchange of individual infomation between tax
admistrations of EU Member States. Has been blocked for a long time.
Adopted later this year (?)
FATCA: Automatic exchange of individuals bank information between
tax administrations. The US pushed for this. Now pilot project with 17
(?) EU Member States. Tax havens also part of it (San Marino, Jersey,
Isle of Man etc.).
Eurodad – Glopolis International
Conference 2013
Momentum!
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Progress on country-by-country reporting:
Capital Requirement Directive:
Require European banks to report on a country-by-country level:
• profits made,
• taxes paid,
• subsidies received,
• turnover, and
• number of employees
 Transparency in business structure and payments makes it possible
both to see how much the banks are paying in taxes in each countries
they operate in and how much they should have paid!
Eurodad – Glopolis International
Conference 2013
Momentum!
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Conference 2013
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Only limited corporate transparency
Accounting Directive and Transparency Directive:
We only got part of what we want… The same information as required
in the Capital Requirement Directive are needed in order to win the
tax war!
Dodd-Frank Act:
Same problems as with the Accounting Directive and Transparency
Directive + companies have filled law suit  when will the reporting
even starts?
Eurodad – Glopolis International
Conference 2013
Not good enough!
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Rethoric is not action!
Heads of EU Member States:
Meet on May 22. Movement on Saving Tax Directive (by the end of the
year) but that’s all. Nothing on common definition on tax haven or
effective non-compliance sanctions. Mostly good for tax justice within
the EU.
Eurodad – Glopolis International
Conference 2013
Not good enough!
G8? G20?
OECD is leading – no role for the UN?
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• Excuses:
• It’s too difficult/expensive
• Often used for Country by Country reporting
• EU impact assessment for extractives suggested neither impossible
nor prohibitively expensive
• Diversions:
• Companies are trying to sell us different versions of transparency
• Total Tax Contribution – MNCs claiming workers contributions as
corporate taxes
Eurodad – Glopolis International
Conference 2013
Excuses, Diversions and Other Agendas
• Developing countries couldn’t cope with more information –
need capacity building first
• Essentially amounts to argument that developing countries need to
develop before we can help them
• The Corruption Defence
• Developing countries are so corrupt that any more taxes that are
paid would be stolen (much better that companies keep it)
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• Diversions (cont)
• The Anti-Business response
• Don’t listen to them they’re just leftwing anti-capitalists
• Ignores the fact that much of the tax justice agenda it a level playing
field argument – ought to make the market work better by allowing
those genuinely competitive, not just with best accountants and
worst morals, to thrive.
• Other Agendas
• Corporate tax is too difficult to enforce, so lets just give up
Eurodad – Glopolis International
Conference 2013
Excuses, Diversions and Other Agendas
• Tax sales, dividends, workers and anything else that can’t move
instead.
• In all countries based on shaky evidence – burden of corporate tax
unclear
• In developing countries especially poor argument due to capacity issues
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• Developing Countries wary of taking on big businesses
• Indian FM: “In advanced economies, Parliamentary
committees are admonishing multi-national
companies and in developing countries, we find multinational companies admonishing governments”
• Prioritising Climate for Foreign Investment
• Limited involvement of citizens in discourse on taxation
• Lack of evidence
• incentives
• treaty benefits
• tax burden on poor
Eurodad – Glopolis International
Conference 2013
Concerns of Developing
Countries
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• Global Tax Architecture
• OECD, BEPS
• UN Tax Committee
• Automatic Information Exchange: Need for multilateral platform to
benefit developing countries.
• According to recent report on information exchange by Indian Revenue,
Automatic Exchange of Information is one of the most effective ways to
improve voluntary tax compliance and decrease the incidence of tax evasion
• Most of India’s 84 treaty partners exchange or are willing to exchange
information automatically. Challenge is to get the uncooperative
jurisdictions to exchange information automatically
• Strong support for multilateral approach
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Conference 2013
(Lack) of Involvement of
Developing Countries
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Conference 2013
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”Full” country-by-country reporting for all companies
• Expand – more information and all sectors: EU: Non-Financial
Reporting Directive? Re-open/review Accounting/Transparency
Directive soon? Global: Part of International Accounting Standards
Board guidelines?
• Watch out for implementation and use the data it provides us!
Eurodad – Glopolis International
Conference 2013
Corporate transparency
Fair tax mark for corporations…?
Companies and agressive tax planning…? Tax and corporate social
responsibility/accountability, anti-abuse rules…
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Process: The directive is up for review. EC proposal launched in
February. The first meetings in council have just taken place. EP
process not clear yet. Adopted within this year (?)
Background: Review builds on recommendations from FATF (Financial
Action Task Force, inter-governmental body, makes review of
members).
Key asks:
- Centralised public registries on beneficial ownership.
- Tax crimes as a serious offence – a crime leading to money
laundering (makes it illegal for financial professionals (such as banks,
accountants etc.)to help facilitates tax crimes).
Eurodad – Glopolis International
Conference 2013
EU Anti-Money Laundering
Directive
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• Reforms are needed at national level on various issues
• Dereje will explain…
• Two asks
• Progressive taxation systems = horizontal and vertical
equity
• Accountable, efficient, socially acceptable spending
• End to race to bottom in taxes
Eurodad – Glopolis International
Conference 2013
Tax incentives and other
animals
• Legacy of structural adjustment
• Tax policy harmonisation – Uganda
• Revise treaties
• Need broader alliance of developing countries globally
• UN Tax Committee rather than OECD
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• Need to ensure developing countries included in information
exchanging developments
• Asymmetric agreements to give developing countries benefits
upfront and have time to comply with costs
• Same principles have with trade agreements – should be simple
to agree, just need to get principle discussed
• Need to ensure international tax reform is progressive and
works for all countries
• ‘Spillover analysis’ as recommended by OECD/WB/IMF/UN report
to G20
• Developing countries to be properly included in negotiations
• Rules need to work for decolonised world
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Conference 2013
International Tax Reform
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Eurodad – Glopolis International
Conference 2013
Questions?
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