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Waking up to the True Story of Tax

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Waking up to the True Story of Tax Waking up to the true story of tax In November and December 2008 heads of state and of government from around the world will attend a United Nations- sponsored conference in Doha, Qatar, to discuss financing for development. Tax is the big new issue. Powerful financial interests, notably from Britain and the United States, are lobbying against reforms in international taxation. Non- governmental organizations and individuals concerned with poverty around the world must engage fast, and decisively, to help ensure success. Nicholas Shaxson change information between each other regarding John Christensen We can no longer focus so strongly on aid, the incomes of each others’ residents, allowing Tax Justice Network without bringing tax into the core of the de- proper taxes to be paid. bate. Aid provides benefits, but perhaps its However, the EU scheme contains loopholes. biggest drawback is that it makes govern- Although some are being fixed, one big gap is that Europeans wishing to hide their money from taxation Historical background ments and other recipients accountable to (and dependent on) donors, not citizens. still can simply deposit their money elsewhere – in Near the end of the Second World War the econo- Singapore, for instance. The solution requires this mists John Maynard Keynes from Britain and Harry scheme to be applied on a global basis – and espe- Dexter White from the United States sketched how cially including developing nations. the world’s financial architecture would emerge from inadequate. We need the automatic exchange of tax Furthermore, more transparency is needed in the ashes of conflict. Their work led to the Bretton information between jurisdictions, and all developing other important aspects. About 60% of world trade Woods agreements in July 1944, and the creation countries must be included.” consists of internal transfers within multinational of the World Bank and the International Monetary The scale of what has been unleashed is becom- companies, and the prices at which the internal Fund (IMF). ing clear. The World Bank reports that USD 1-1.6 transfers are recorded are manipulated by these Keynes and White were especially worried about trillion of illicit money crosses borders each year, companies to minimize their tax liabilities. capital flight out of Europe: if wealth was drained out about half (USD 500-800 billion) from developing Raymond Baker, a world authority on illicit finan- of these countries, it would further destabilize the and transitional economies. That compares to just cial flows and author of the ground-breaking book shattered European nations and possibly turn them USD 100 billion in foreign aid provided annually Capitalism’s Achilles Heel, estimates that mispricing towards the Soviet bloc. They knew well how difficult by all the Organization for Economic Co-operation and abusive transfer pricing alone (as these practices it would be to control capital flows across national and Development (OECD) countries to the world’s are known) are worth USD 500-750 billion annually. borders, and they addressed this with a further pro- poorest nations. Secrecy and low (or zero) taxes Tackling this is a complex task, and requires interna- posal: transparency. They wanted the governments are the central incentives prompting illicit capital tional co-operation; one of the simplest approaches of countries receiving flight capital (such as the flows. International transparency in cross-border would involve country-by-country reporting. United States) to share information automatically financial flows is clearly one of the most important Country-by-country reporting is necessary with those European (and other) governments suf- global issues of our time. It is remarkable that the since international regulations and accounting fering the capital flight, so that the sending countries international development community has paid so standards currently do not require multinationals could ‘see’ the wealth their citizens had sent abroad. little attention to these issues for so long. to break down and publish their payments, profits This would not only allow weak countries to tax their If secrecy were removed, and capital taxed and taxes for each jurisdiction they operate. Instead, citizens’ income appropriately, but it would also re- properly, it would transform the economies and pub- they are allowed to scoop up data from several coun- move one of the great incentives for capital flight. lic finances of developing (and rich) nations, and go tries and put them into one number reflecting, say, a Secrecy lets wealthy citizens and corporations shift a long way towards preventing elites from enriching region (‘Africa’, for example). This makes it impos- their wealth outside the reach of taxation and escape themselves at the expense of ordinary citizens. sible for outsiders – be it individuals wishing to hold their responsibilities to the democratic societies their rulers accountable for secretive payments from from which their wealth is derived. The road to Doha multinationals, or national tax authorities wanting to The US financial community lobbied hard There are currently no global, multilateral agreements know if they are being cheated – to unpick the data for against transparency, and in the final IMF Articles or bodies that let developing countries know what each country. We need rules that make multination- of Agreement, Keynes’ and White’s proposals were income their residents’ overseas assets earn in places als publish this data automatically. watered down. International co-operation between like the United States, United Kingdom, Switzerland, countries was now no longer ‘required’, but merely Luxembourg, Singapore or anywhere else, and that The preparations for Doha ‘permitted’. The impact of this successful lobby- help them recover the taxes owed on that income. No single measure can eliminate the problems as- ing went far beyond Europe, and it has since had The Doha conference from 29 November to 2 sociated with the fault lines in international taxa- nothing less than catastrophic consequences for December 2008 (not to be confused with the Doha tion, and no country can achieve meaningful change ordinary people around the world, both in rich and negotiations for a global trade deal under the auspic- alone. International co-operation between nations poor countries. es of the World Trade Organization) has the potential is the key. Today very few countries benefit from infor- to lay the groundwork for putting right what Keynes The OECD, in the late 1990s, seriously attempt- mation exchange treaties, and the limited number and White were prevented from achieving – notably ed to build a coalition of developed countries to act that do exchange information do it only ‘on request’. automatic exchange of tax and other information together to require transparency in international As John Christensen and David Spencer of the Tax between countries, on a global, multilateral basis. banking. After some initial successes, however, the Justice Network argued recently in the Financial This is certainly not impossible: such a scheme efforts foundered, partly because the United States Times: “In other words, you must know what you are already exists on a regional level within Europe: defected following the 2000 election, when George looking for before you request it. This is shockingly countries within the EU scheme automatically ex- W. Bush became president. Social Watch 15 Waking up to the true story of tax 01-Temas_ing.indd 15 03.11.2008 18:01:30 What is more, an indelible problem for the OECD The reality is that the United States is as bad is being a regional institution – a so-called rich-man’s We are now seeing signs that world opinion as any offshore jurisdiction when it comes to club – that lacks the legitimacy to establish interna- is fast turning in support of action against responding to those requests. tional norms applicable to all countries. There is one the world’s tax cheats and those who help organization, however, with legitimacy to speak for them. As Mike McIntyre puts it: “A code of Much of the money flowing into the United States the global community: the United Nations (UN). The conduct can help create a climate of opinion comes, of course, from developing countries. Doha meeting it will host this year is a perfect chance where tax cheats cannot successfully pose Britain has a similar effect, though it uses for it to step up to the plate. as refugees from oppressive government slightly different mechanisms. It is adept at using The UN has already laid solid foundations for but instead are seen for what they are – self- its offshore Crown Dependencies (like Jersey or addressing tax at Doha with the 2001 Report by the ish, self-absorbed people who undermine Guernsey) and its Overseas Territories (like Cay- High-Level Panel on Financing for Development (also good government and help keep two-thirds man or Bermuda) as tentacles of the main London known as the Zedillo Report, after Chairman Ernesto of the world locked in poverty.” financial markets, using these to scoop up money Zedillo, former President of Mexico). That report from around the world. Both the United States and called for tax information to be shared on a multi- the United Kingdom run large fiscal and trade defi- lateral basis, and for countries to be given technical cally making sub-Saharan Africa a ‘net creditor’ to cits; and by shrouding financial inflows in secrecy, assistance in tax administration and tax information the rest
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