Wednesday, 5 December 2012

The elusive tax haven definition

The Tax Justice Network's October podcast gleefully announced that Helsinki had "declared itself a tax haven-free zone". According to its presenter Naomi Fowler, "companies who use or have links to tax havens will no longer be able to bid for contracts providing goods or services to the public. This month, city councillors voted to sever ties with such companies".

I was slightly puzzled by what they meant by this, not least because according to some Finland is itself a tax haven, so it is difficult to see how it can become a tax haven-free zone. And Richard Murphy's explanation didn't shed any light. So I went hunting for an explanation of exactly what Helsinki had agreed to do, and in particular, what they meant by a tax haven.

The first thing I found was a press release, which among other things purports to include a link to the actual resolution. But as far as I can see it doesn't: the link is indeed to a list of Helsinki city council resolutions, but tax havens don't seem to be mentioned anywhere. However, the press release does define what it means by a tax haven:
Tax havens are either territories or countries whose authorities allow businesses or individuals to deposit their wealth at very low tax rates or, in some cases, pay no taxes at all.
And it goes on to provide a link to the Tax Justice Network's list of the top 10 tax havens in the world. I shall discuss this list shortly, but first let's consider the definition of a tax haven according to that press release.

If low taxes alone were the sole reason for boycotting companies based in or linked to a country, that would undermine the right of sovereign states to define their own tax rates. In effect, a sovereign country that chose to operate very low tax rates in order to attract business would be regarded as criminal and subjected to international sanctions. But the fact is that we do not have international laws that define "acceptable" tax rates for sovereign states. Even cooperative groupings of countries such as the European Union (EU) do not have harmonised tax rates. In fact the EU includes several countries that meet the definition of "tax haven" according to that press release. As an EU member itself, Finland can't boycott them without falling foul of EU law, which allows companies to base themselves wherever they wish and trade wherever they wish without barriers. Clearly the press release is using the term "tax haven" much too loosely.

The OECD specifically rules out no or low taxes as a sufficient definition of a tax haven. It identifies four criteria (my emphasis):
Four key factors are used to determine whether a jurisdiction is a tax haven.  The first is that the jurisdiction imposes no or only nominal taxes. The no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven.  The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.  An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven.  The three other factors to be considered are:
  • Whether there is a lack of transparency
  • Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
  • Whether there is an absence of a requirement that the activity be substantial
Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation).
This is clearly a much more rigorous definition. In fact it is so rigorous that at the time of writing, NO country in the world meets these criteria. The OECD's "black list" of uncooperative low-tax jurisdictions currently has not a single member: the last three were removed in 2009. Even its "grey list" - those jurisdictions that have agreed to improve their transparency and reporting standards but haven't got round to doing anything about it yet - consists of only three tiny countries: Nauru, Niue and Guatemala. So if the OECD's definition of tax havens, and its assessment of countries according to that definition, are to be believed, what on earth is the fuss about - and where on earth is Finland boycotting?

The Tax Justice Network's Top 10 Tax Havens suggests that their definition is nothing like the OECD's - or, for that matter, the press release's. The list includes Germany (no.9), Japan (no.8), Singapore (no.6), the USA (no.5) and Hong Kong (no.4). None of these are known to have "no or nominal taxes" - in fact the USA has one of the highest corporation tax rates in the world, at 39%.  A bit more digging reveals that these are the top ten countries on TJN's "Financial Secrecy Index", which lists 71 countries, of which 16 are European Union members (this excludes self-governing dependencies of the UK and the Netherlands). Yet almost none of these appear on the OECD's black or grey lists, even though the OECD has criteria for transparency and openness. Clearly what TJN means by a "Financial Secrecy" jurisdiction is far more wide-ranging than the OECD's definition of a tax haven.

So exactly what is TJN's definition of a tax haven? Well, it's not exactly clear. They have provided an explanation of their complex methodology. It's too long to reproduce here in full, but here are the key points as far as I understand them.

TJN use the terms "tax haven" and "secrecy jurisdiction" interchangeably. Their definition is:
Loosely speaking, a secrecy jurisdiction provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.
Loose it certainly is. Almost any country that aimed to entice business to its shores could find itself falling foul of some part of that definition. And in fact further down the page TJN comments that 
"....every country in the world exhibits at least some elements of secrecy."
Indeed they do. No country is going to reveal all its financial and tax affairs to the world while tax remains a source of competitive advantage. So every country in the world is a tax haven, really. Blimey. 

Anyway, TJN then go on to provide a 2-page summary explaining this definition. It doesn't add much, frankly. But there are two features that I find simply nonsensical:
  • They claim that a key feature of secrecy jurisdictions is "lack of democratic accountability". So every tin-pot dictatorship in the world is presumably on their list simply because it isn't a democracy? Then why isn't North Korea on the list - or China (except Hong Kong), for that matter? Actually, democracy has nothing to do with this. More than half the world isn't democratic in the Western sense - but that doesn't mean that more than half the world is a tax haven.
  • They further claim that lax regulation in secrecy jurisdictions forces other countries to deregulate their economies too in order to "staunch the outflows of capital". This is extraordinary. Deregulation ENCOURAGES movements of capital, rather than staunching them. If countries want to staunch capital outflows, they either need to make their own regimes more attractive so the capital doesn't want to leave (perhaps that's what TJN mean by deregulation?), or they have to impose some form of capital controls. Neither of these necessarily involves dismantling essential regulation, though making the economy more attractive to investors might involve getting rid of unnecessary bureaucracy. Sadly TJN does not distinguish between beneficial regulation and harmful red tape. 
Further down the article there is a list of the countries evaluated by TJN, each with a link to TJN's report. There are 73 countries listed here, though the "Financial Secrecy Index" itself omits France and Nauru - apparently for legal reasons. Hmm. But the most astounding comment in the whole piece - and the explanation for the inclusion of some of the largest economies in the world in TJN's Top 10 - is this (my emphasis):
The original 2009 FSI contained 60 jurisdictions (see our original methodology here) but we have expanded this to 73. We filled it out by ensuring that the updated list contains:
  • All 20 jurisdictions with the highest share of financial services exports (so we have added France, Canada, Japan, Germany, Italy, Denmark, India, Korea)
  • Countries not previously included but with known secrecy jurisdiction characteristics: Ghana, Botswana, Guatemala and San Marino.
So the countries with the largest financial services sectors are automatically assumed to be tax havens. 

I found this absolutely astonishing, so I looked back through the piece for an explanation for this extraordinary assumption. And here it is - from the introduction:
.....the illicit financial flows that keep developing nations poor are predominantly enabled by rich OECD member countries and their satellites, which are the main recipients of these illicit flows......
.....It is OECD countries, which receive these gigantic inflows, which set the rules of the game.
So now we know. The OECD's definition of tax havens is inadequate because OECD countries have a vested interest in not defining them. And OECD countries benefit from capital inflows from poorer countries via tax havens. Citizens of rich OECD countries, you are all guilty. Oh, by the way, India, that includes you.

But this leaves a problem, doesn't it? After all, Helsinki's boycott of companies with links to tax havens is  supposedly because
".... tax evasion [sic] undermines the capacity of municipalities to provide social services"
Finland is a rich OECD country. As is France, which has also introduced local boycotts of companies with links to tax havens. So flows to tax havens, which according to TJN ultimately benefit rich OECD countries, are to be stopped because they prevent rich OECD countries from providing social services. You couldn't make it up.

But after all this investigation, I still don't know which definition of "tax haven" Finland is using for its boycott. Is it the OECD's grey list? Is it the list of 18 mainly Caribbean countries boycotted by the French administrative region Ile-de-France? Or is it TJN's Top 10 - or their whole list? Does anyone know?

And finally. The UK campaign group Ethical Consumer have produced procurement guidelines for UK local authorities which amount to a boycott of companies involved with tax havens. The proposed policy wording is as follows:
1. This authority will not make large (over £100,000) contracts for services with or make purchases from any company:
(a) registered in a country on our current list of tax havens
(b) which is part of a company group where the ultimate holding company is registered in a country on our current list of tax havens
2. Companies tendering for contracts will receive positive marks in our supplier ranking system if:
(a) they are not part of a company group of more than one related company, or
(b) if they are part of a company group, no subsidiaries in that group are registered in a country on our current list of tax havens, or
(c) if they are part of a company group with subsidiary companies registered in tax havens they publish sales, profits and tax paid on a country-by-country basis.
"Our current list of tax havens" is TJN's Financial Secrecy Index. The UK is listed at number 13. So if they adopted this proposal, UK local authorities would boycott UK firms. You couldn't make that up, either.













10 comments:

  1. This is all just some silly noise in media. Unfortunately noise misleads people, but the actual outcome of this tax haven initiative by Mr. Wallgren is conveniently outlined in the protocol
    http://www.hel.fi/static/public/hela/Kaupunginvaltuusto/Suomi/Esitys/2012/Halke_2012-02-15_Kvsto_3_El/5770F2DC-6D1A-40B1-A085-B69442391E55/Kj_-_Vt_Thomas_Wallgrenin_aloite_veroparatiisivapa.pdf
    which says (my translation):
    "The city board notes that the things brought up in the initiative by councillor Thomas Wallgren shall be taken into account in the preparation of the city's report for Global Responsibility Strategy."

    Helsinki is in barely in a position to make a strategy for its own finances, and definitely not for the world globally. This is a polite way of saying that the idea goes to a storage bin and it's not going to be taken out from there by anyone else.

    Mr. Wallgren will of course continue to make a continuous whining noise, but that he'd do anyway.

    All this just confirms the silliness of TJN. Loose definitions, sloppy economics - if any economics at all. Mostly it's about making one feel important, and making it look like they do something their voters and funders like - i.e. find scapegoats.

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  2. "Tax havens" are inherently ahead of the (government) curve, particularly when said group is, or is becoming bankrupt, not least because the smartest money on Earth streams into the havens we are supposed to hate, thus drawing towards them not only the largest organisations but also the smart individual accountants, lawyers, etc, etc. Fighting tax avoidance not likely to be any more successful than the "drug war".

    As Alan Greenspan has repeatedly noted: "deficit spending is simply a scheme for the confiscation of wealth". http://constitution.org/mon/greenspan_gold.htm

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  3. Nice article Frances, I feel you've highlighted the fickle nature of politics - this month's bogey-man is "tax avoiders" - and the bulk of people are happy to lump anyone and everyone they dislike into that category.

    I just hope more people read articles like this and educate themselves before making critical decisions. I fear they won't - the hegemony of knee-jerk reactionary thinking continues unabated.

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  4. Welcome to civilisation, where people help each other

    http://www.nhpr.org/post/nh-group-says-people-not-taxes-should-help-needy

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  5. The problem is Frances that what you've written is great, but the truth isn't particularly sexy, especially when compared to the whole "dodgy people with a big stash of ill-gotten gains in some strange foreign land" narrative that the likes of the TJN et al constantly push.

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  6. Joel@moveyourmoney.org.uk6 December 2012 at 01:49

    A useful and informative article that highlights the many inconsistencies visible when nation states attempt to stem tax evasion, whilst safeguarding their own economies which to varying extents rely on said tax evasion.

    In order to hold footloose corporations to account. An international regulator with teeth and resources is required - something akin to the International Criminal Court perhaps.

    What this local government tax and procurement policy seeks to do is encourage a shift in corporate behaviour, ensuring that Banks in particular are encouraged to moderate their behaviour (and stop use of secrecy jurisdictions) in order to retain lucrative local authority contracts.

    Research from the USA indicates that Corporation tax as a percentage of total US tax take has declined from 27% in 1955 to just 9% in 2010. Over the same period the tax burden on individuals has increased from 58% to 81%. http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and-now/

    In the short term a local authority may be better off financially by employing the services of a large corporation that employs aggressive tax-avoidance, and offshores profit. Long term however, ultimately it suffers as wealth leaves the area, small businesses decline, and jobs and tax takes implode.

    We've now had 30 years of Thatchers neoliberal project and TINA. Today, Osborne's autumn statement announcement confirmed that Govt rhetoric around slashing public sector jobs, wages and benefits in a spiralling race to the bottom is here to stay.

    With declining funding and a complete lack of economic leadership from central government, local government must do what it can to safeguard local services and communities, and to identify and support the drivers for future growth.

    Energy efficiency measures and community owned renewable energy are two such growth drivers conspicuous by their absence from the coalitions economic plans. They are also the sort of energy measures not typically funded by too-big-to-fail high street banks - which prefer to lend to rent seeking corporations - modelled around short term returns in the fossil fuels industry.

    Clearly this government would rather bankrupt the UK economy than democratise the means of energy supply by supporting renewable energy development which delivers far greater jobs and tax benefits than an equivalent investment in gas. http://t.co/ilyIqWwB

    The TJN work is important in terms of highlighting corporate abuses and pulling corporate behaviour towards a more socially acceptable/ beneficial trajectory.

    Ultimately an international regulatory agreement would be required to intervene in international tax matters, systematically tackle tax havens, and bridge the discord between competing nation states.

    A work in progress...

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  7. Joel, international agreements obligating compliance are not cheap. They require resources, in other words, but the vast majority of resources on Earth are not in the hands of "public" authorities, and neither would most of the people on Earth like to have their private property taken from them for the purpose of establishing some "international tax court". I imagine it would require not too much imagination to see the Fortune 500 spend some money on advertisements to sway public opinion over to their side, in this regard. The answer is not to tax the avoiders, but rather to allow everyone to avoid taxation to begin with. That's the natural course of progression we are now tracking. Businesses exist to serve, remember, not to dominate, as the Harvard scholar behind the infamous "embedded liberalism" has so eloquently demonstrated:

    John Ruggie -- Business Practice and Human Rights
    https://www.youtube.com/watch?v=ZLnF4qIL9lk

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  8. I wonder why the BoE didn't employ this chap -- http://www.ericgarland.co/2012/12/10/belgian-punk-revolution/ -- instead of Mr Canada? Also, Frances, what do you think about this recent article from the Harvard Business Review?

    The Economically Out-of-Date Nation-State
    http://blogs.hbr.org/cs/2012/11/the_economically_out_of_date_n.html

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  9. For creator of a trust to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settler of the trust may not be allowed to be a trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them.
    Click and visit

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  10. Well, Mr. Wallgren will of course continue to make a continuous whining noise, but that he'd do anyway. All this just confirms the silliness of TJN. Loose definitions, sloppy economics - if any economics at all. Mostly it's about making one feel important, and making it look like they do something their voters and funders like - i.e. find scapegoats

    ReplyDelete