tax havens

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Taxing the World

President Trump’s sword of chaos, in relation to global diplomacy and trade, has been much discussed in recent weeks. But there is another area where he is attempting to impose his “might is right” doctrine which has not got as much coverage.

An area which, arguably, is equally as significant in the long term. This area is global taxation policy. As a topic you might understand why it slips under the radar! Whilst it may not set the pulse racing, nevertheless, a major initiative at the United Nations (UN) relating to this aims to address a whole series of problems with the current mechanism used to structure and manage international taxation. It impacts on relations between and within nation states and involves many billions of $s per annum currently being avoided in tax.

At the beginning of February, this year, negotiations began on the UN Framework Convention on International Tax Cooperation. (UNFCITC)The only nation to object to the start of the negotiations was the United States who walked out and encouraged delegates from other nations to do the same. No other nations did, which leaves the US isolated and no longer with a voice in the negotiations. Which may prove to have been a mistake.

The UNFCITC is the culmination of a process which started it’s journey in the UN in 2022. It originated in the actions of the The African Group. This is one of the geographical areas that member states of the UN are grouped into to facilitate voting concerning various UN agencies and bodies. The representative from Nigeria proposed a resolution which aimed to shift the responsibility for global taxation policy from the The Organisation for Cooperation and Development (OECD) to a new body at the United Nations.

Why did they want to do this? In essence because the OECD, which was set up in 1961 by a number of predominantly Western European nations does not effectively represent the interest of all the members of the UN. There are criticisms that the membership is really a club of the wealthy whose principal objective is to protect the interests of its members. Not to establish a just and fair framework of international taxation. The members are overwhelmingly European states, white state, and many with a history of colonialism. There are no African members of the OECD. It is argued that the rules it established and maintains for international taxation are structured to favour the developed nations over developing ones. There are a variety of ways in which this is done but one of the most significant is the agreement allowing the point at which multinational companies are taxed to be their Head Office which they may locate anywhere.

This means that vast amounts of sales revenues can be generated in developing countries (and developed for that matter) and none of the profit associated with this has to be taxed in that country. This means there is a net outflow of wealth from developing nations mainly to the developed but also a net reduction in the in the total tax that should be paid. This is what prompted the race to the bottom in corporate tax rates as countries vied with one another to attract corporate HQ’s. By reducing its rate of corporation tax Ireland was able to become the preferred location of corporate headquarters of many global companies.

The initial resolution from the African states, supported by the G77, essentially called for the UN to begin a formal process to investigate the benefits that might accrue from having a UN based organisation to set international taxation policy. Whilst many opposed this idea, notably the US and the UK, the political machinations of the voting process meant that the proposal was not formally opposed. Which meant it was adopted unanimously by the General Assembly.

The next step in this story occurs in December 2023. The UN then considered a motion entitled: “Promotion of Inclusive and Effective International Tax Cooperation at the United Nations”. This time the opposition was beginning to break cover. This meant that the motion went to a vote. This produced the following: In Favour 125; Against 48; Abstentions 8. A landslide of General Assembly members in favour of taking forward the proposal from exploration to promotion of shifting global taxation management from the OECD to the UN.

There were a number of wrecking amendments but these were all defeated by substantial majorities.

The next step forward was in November 2024 when a UN Draft Convention on tax was produced. This pretty much contained everything the proposers could have hoped for. The objectives of the draft set out to create a fully inclusive and effective mechanism for international tax cooperation. Further that this was delivered by an organisation operating under the auspices of the UN. It also establishes principles that the international tax system should be aligned with state’s obligations under: international human rights law; sustainable development goals; environmental issues; and above all fairness. There is also a specific commitment to address the abuses related to high-net-worth individuals tax affairs.

The kinds of issue it may address include: Automatic Exchange of Information, where the financial activity of individuals and businesses in a country they are not resident or based is automatically shared with the country in which they are resident or based; Country-by-Country Reporting, forcing businesses to disclose the scale of their activities and thus level of revenue and profit they generate in each country the operate; Tax Havens or Secrecy Jurisdictions currently provide cloaks of anonymity shielding corporate and high net worth individuals from paying the taxes for which they are liable. Requiring countries to support registers of beneficial owners. In other words, registers of the flesh and blood beneficiaries of complex trusts and a variety of other financial instruments.

There are a host of abuses which need to be addressed but above all is the need to establish a truly representative body of all nations, which can ensure that current abuses are addressed but also ensure that in the long term future abuses can be prevented and a genuinely fair taxation system is established. One which does not advantage some nations at the expense of others.

Huge progress has been made on this issue and there seems to be a substantial majority of the UN General Assembly’s members who are in favour of the establishment of a global tax management system under the auspices of a UN body. Much work remains to be done. It is certain that, as the proposal comes closer and closer to being realised the forces opposed to it will focus their efforts more intensely and attempt to bring pressure to bear on the nations that support the proposal.

The achievements to date give reasons to be hopeful. They should be seen as part of a changing international landscape. One in which developing nations are beginning to challenge the international network of global organisations established by the victors of World War Two (WW2). Victors who were or had been imperial powers keen to create institutions and conventions which maintained for them a systemic advantage over former colonies and other developing nations.

This can be seen as another example of the old, post WW2, order breaking down. It is, however, a piece of good news in a depressing global environment. We should cling to it and support it.

The information in this article is taken mainly from blogs produced by the Tax Justice Network. If you are interested in tax justice I strongly recommend the site as a source of information about current tax avoidance practices and wider abuses of the tax system. It also sets out practical ways in which tax systems in individual countries, and globally, can be improved.

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Zahawi Tax – Cabinet Defence

Mr Gove was interviewed by Nic Robinson this morning on the Today Programme about the tax affairs of Mr Zahawi. Mr Gove’s characteristically carefully worded response was clear, stating his “firm understanding” was that Mr Zahawi had “paid all his taxes”. He went on to say”People paying their tax is not a story. People not paying their tax is a story.” This soundbite has all the marks of an agreed cabinet line on the issue. We will see in the course of the next few days.

Nic’s original question was about whether the public have a right to know if senior cabinet members are not paying their taxes? Mr Gove’s response begs a couple of questions.

Firstly, if Mr Zahawi has made a payment to resolve a dispute with HMRC then he clearly had not paid all his taxes at the appropriate time. Should the public have had a right to know at that point? And was this the case when he was appointed to the post of Chancellor

Secondly, there is a matter of intent. We can agree that people paying their taxes is not a story, and, that people not paying their taxes is a story. However, what about people trying not to pay their taxes but being found out? Is that a story? Particularly if the people involved are senior members of the cabinet, indeed have been, albeit briefly, Chancellor of the Exchequer. Should they not be like Ceasar’s wife, above suspicion.

This has real real political jeopardy for the government. Public sector workers up and down the country are being told one of the reasons their pay demands cannot be met is because the public finances are so weak. In other words the level of income from taxes is not meeting the levels of public expenditure. This position would be much less the case if there were not all manner of techniques whereby those on the largest incomes were able to manipulate their liabilities through opaque tax regimes.

At the very least this story undermines the moral authority of the government’s arguments with public sector workers whose tax affairs are dealt with via Pay as You Earn (PAYE) where the scope for getting into dispute with HMRC is very limited.

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Sharing the pain of CovEcon-19

Covid-19 has had a devastating impact on families across the country and made exceptional demands on the health service. At the same time it has brought the vast bulk of the UK’s economy to a hard stop. Responding to both the health service costs, the social and economic lockdown the Treasury has spent billions of pounds.

The automatic stabilisers of transfer payments during times of recession have been magnified by both the depth and breadth of the economic impact. This has added enormous sums to the Government’s annual deficit which will in turn increase total government indebtedness to levels last seen after World War Two.

This level of indebtedness is certain to increase before it comes down. Cuts to government expenditure and increases in taxation in the midst of an historically unprecedented economic downturn will only deepen the depression and make recovery even slower.

At some point however a reckoning will come and taxes will have to be increased to address the costs of the combined health and economic consequences of CovEcon-19. When that day comes there needs to be some principles as to how the pain is distributed.

The first principle is taxation should be fair. In other words those with the broadest shoulders should carry most weight. This means the rates of taxes applied should be progressive with the rich and super rich paying very significantly more than those who are not within those categories.

There are a number of reasons for this. Firstly there is a moral argument that the riches of the rich and the super rich are so far distant from personal effort. The argument they are the just rewards to innovation or hard work have always been thin but now are non-existent in the vast majority of cases.

Second, the claim that the enormous rewards are what makes the economy grow thus providing the tide to lift all boats is discredited by the fact even when the economy grows most boats are stuck in the mud. Their crew’s, far from being lifted up are being drowned.

What is more in the 1950’s and 1960’s when the distribution of incomes was much less extreme than now the economy was more productive with better growth levels. As the captains of industry have increased their pay growth has gone down. It is time this was reversed.

There is another, economic, argument which is critical in societies based on consumer capitalism. Basically, the need for consumers. The rich and super rich tend to save very significant proportions of their incomes, buying financial assets.

The vast majority of the population save much less, indeed, many save nothing. All of their income is spent. They are the consumers of consumer capitalism. In aggregate, over the past thirty years the share of income going to workers as opposed to owners of capital has gone down. Thus reducing aggregate demand in the economy. A bad thing.

Redressing the balance therefore would not just be morally, but also, economically good.

The second principle is that everyone should pay their taxes. This seems obvious and for the vast majority of the working population is an inescapable given. For those with large incomes however taxes become more optional.

Governments talk about addressing this at the same time as they reduce the number of tax inspectors, and allow the Crown Dependancies like the Isle of Man and British Overseas Territories, like the Cayman islands to provide opaque financial locations for those with large fortunes to hide their wealth.

As the recent Report of the Intelligence and Security Committee has indicated, London, always an innovative financial centre, became the ‘laundromat’ for the illicit finance of Russian oligarchs. This enabled them to park the wealth extracted from their country into a stratospheric property market having detrimental knock-on effects for the rest of the housing market in the City.

The Russian elite are not the only ones using the City to hide their wealth. Plenty of locals take advantage of the creative skills of the big four accountancy firms to avoid and evade taxes, a distinction which needs to be redrawn to provide clarity and more tax.

The two principles do not appear revolutionary. But they are. To make them effective will certainly require new legislation and investment in resources to implement that legislation. However, much more than this will be a political determination to drive through the radical transformation to the economy they require.

Failure to do so will undermine the support for taxation which is critical in a democracy. Eventually, consent to tax will be withdrawn and we will no longer be able to purchase civilisation.

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The Hidden Wealth of Nations

Recently read a really interesting book on the issue of the moment following the leaking of the Panama papers. It is by Gabriel Zucman and in a very concise and clear 116 pages sets out the scale of the problem of tax havens, how they operate and what might be done about them.

He estimates on a conservative basis that some 8% of personal financial wealth amounting to $7.6 trillion is held in tax havens. By way of comparison the UK’s total GDP is about $2.5 trillion. Also this does not take any account of income that is hidden by corporations.

Zucman looks at the history of the growth of private banking in Switzerland at the centre of much of the operations that utilise other tax havens to make as opaque as possible who owns what and where it should be taxed. He addresses a number of myths about Swiss banking and illustrates that any reform predicated on the goodwill of the bankers is doomed to fail as it has done in the past.

He goes on to contrast the European Union’s Savings Tax Directive (STD) which he believes to be essentially flawed with the United States approach through the Foreign Account Tax Compliance Act (FATCA) (where is that final T?). Whilst FATCA might not be perfect it is having an impact and has much to recommend it.

Essentially if banks do not themselves let the US tax authorities know what holding US citizens have in their overseas accounts then the US will impose a 30% tax on all interest and dividends payments from the US to that bank. They can also levy substantial fines. To ensure bankers apply FATCA they encourage whistle blowers to let them know of abuses. What is more they pay them handsomely. Bradley Birkenfield an ex-employee of UBS was paid $104m for revealing the non-compliant activities of his former employer.

Whilst FATCA is a real step in the right direction Zucman identifies three other things that should be done on a global scale to address the problem of very wealthy people hiding their wealth from the tax man.

Firstly, he proposes a worldwide register of wealth that would be a public record of the beneficial owners of stock, share and bonds and ultimately all derivatives. In fact national and regional registers of stocks and shares already exist however they are private documents. By bringing them into a single, public register it would make visible the financial wealth of all individuals.

Secondly he recommends that sanctions against tax havens should be proportional to the losses that they impose on other countries. This is in essence what FATCA does with banks. By doing this the economics of being a tax haven break down.

Finally, he recommends that international taxation agreements should be amended for corporations. In essence this would mean taxation of multinationals should derive from their consolidated profits. So if Starbucks sells 50% of its products in the US and employs 50% of its people there and has 50% of its plant then it should pay 50% of its tax there. This gets around the issue of having transfer-pricing arrangements where subsidiaries, providing services based in tax havens, charge large fees to the US subsidiary thus reducing its tax bill their, shifting it to the lower rates in the tax haven.

It would also address the nonsense that a company like Apple with $500bn in the bank borrows money in the US to pay dividends because if it repatriated the profits from abroad they would be subject to tax.

Others have suggested that individuals should have a strict liability to inform the state of all their wealth and income. If they fail to do so and thus hide wealth from the state then they forfeit the right to state protection for that wealth. If it is found then 100% of it is immediately confiscated, and to assist the process anyone who reveals the existence of the wealth can claim 50% of it as a bounty. I do like something that is clear and simple.

We have had years of fine words about what we are going to do about tax evasion and tax havens it is time something started to happen. The governments seems to have two responses first “well Labour did nothing about it”. So what. Labour aren’t in power. Second, the Prime Minister has been spearheading the issue in Europe. Well the tax deals done so far with large multinationals suggest he might want to get his spear out over here.

The first step might be to appoint a few tax inspectors to replace those that have been made redundant since the government came to power. They are an unusual part of the government machine in that they bring in vastly more in tax than they cost. Surely austerity demands we maximise our income. What business, even one wanting to save money would sack people collecting more than they coast to employ?

If the MP’s expenses scandal was anything to go by, the press will probably have more interesting revelations to bring out of the 11m+ documents over the coming days and weeks.

Now is the time to push our politicians to do something significant about tax havens and tax evasion. If you want to get a good overview of the issue in a short but well argued book this is it.

The Hidden Wealth of Nations: The scourge of tax havens. G Zucman. The University of Chicago Press. 2015.