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 of the world. and failing to tax them (and share the proceeds with sharing so as to allow flight capital to be taxed. There is one absolutely crucial difference be- the victim countries), they help attract inflows that As financial interests again lobbied against tween the assets and the liabilities: the private exter- finance these deficits. Britain’s and America’s efforts change, it stalled; then, in 2002, the UN convened nal assets belong to narrow and wealthy elites, while to look generous as aid contributors, while taking a meeting of heads of state at Monterrey, Mexico, public external debts are borne by the people through much larger volumes of dirty money under the table, to discuss plans for financing development in the their governments. Even worse, this capital flight look somewhat cynical. developing world. The resulting Monterrey Consen- flows, almost exclusively, into the world’s secrecy sus pushed the issue forward, and today it acts as a jurisdictions. This not only encourages tax evasion, Not just how much money is raised, foundation document on many matters, including draining African nations of investment capital and but how money is raised tax policy for development. billions of dollars of lost state tax revenues that must The scale of financial flows out of developing coun- At the subsequent 2005 World Summit the be replaced with aid, but encourages and fosters all tries helps explain why tax is so crucial to them. Yet UN resolved “to support efforts to reduce capital sorts of nefarious activities – such as corruption. there is another dimension, which may be equally flight and [to support] measures to curb the illicit For those worried about the African debts and gov- important. Tax, and especially direct taxation (as op- transfer of funds.” Then, in December 2007, the UN ernance issues, this is the hidden side of the coin. posed to indirect taxes like VAT or import tariffs), is a General Assembly resolved to hold the Follow-up Research like this should be a wake-up call. powerful force for improving governance. International Conference on Financing for Develop- The secrecy jurisdictions include not only the This is another emerging discipline in the field ment to Review the Implementation of the Monterrey traditional tax havens of lore like the Cayman Islands, of international development. A new book, Taxation Consensus – the official title for the Doha meeting Jersey and Switzerland, but also the world’s largest and State-Building in Developing Countries: Capacity this year. financial centres – especially New York and London. and Consent, edited by Deborah Bräutigam,Odd- In May 2008 Reuters reported that former Liberian Helge Fjeldstad and Mick Moore, explains how tax Tax is the next big thing president Charles Taylor, whose forces routinely used Tax, under the theme “Mobilizing domestic finan- mutilation and rape as weapons of war, stashed large (…) is the new frontier for those concerned cial resources for development”, is one of six Doha quantities of money in a US bank – which apparently with state-building in developing countries. The conference chapters. But tax, and the closely related took his money happily and did not ask questions. political importance of taxation extends beyond subject of international financial transparency, is so This happens routinely. the raising of revenue (…) taxation may play important that it must be at the centre of the Doha However not everyone in America likes this. In the ‘central’ role in building and sustaining the debates and outcomes. May 2008, US Senators Barack Obama, Carl Levin power of states, and shaping their ties to society. People are beginning to wake up to the sheer and Norm Coleman in May introduced a bill trying The state-building role of taxation can be scale of the financial resources drained out of some to restrict financial secrecy in the United States. As seen in two principal areas: the rise of a social of the world’s poorest countries. Astonishing new Levin said: contract based on bargaining around tax, and research from the University of Massachusets, Am- the institution-building stimulus provided by herst, analyzing capital flight from 40 African coun- Each year, the States allow persons to form the revenue imperative. Progress in the first tries, estimates: nearly two million corporations and limited li- area may foster representative democracy. Real capital flight over the 35-year period ability companies (LLCs) in this country without Progress in the second area strengthens state amounted to about USD 420 billion (in 2004 knowing – or even asking – who the beneficial capacity. Both have the potential to bolster the dollars) for the 40 countries as a whole. Includ- owners are behind those corporations. Right legitimacy of the state and enhance account- ing imputed interest earnings, the accumulated now, a person forming a US corporation or LLC ability between the state and its citizens. stock of capital flight was about USD 607 billion provides less information to the State than is as of end-2004. required to open a bank account or obtain a We can no longer focus so strongly on aid, without driver’s license. Criminals are exploiting this bringing tax into the core of the debate. Aid provides Nearly all the money that flows out of Africa as capital weakness in our State incorporation prac- benefits, but perhaps its biggest drawback is that it flight stays out. Compare this figure to these coun- tices. They are forming new US corporations makes governments and other recipients account- tries’ total external debt in 2004, which amounted and LLCs, and using these entities to commit able to (and dependent on) donors, not citizens. Tax to USD 227 billion. Indebted African countries have crimes ranging from terrorism to drug traffick- is different: tax is the most accountable, and sustain- been forced to undertake painful economic adjust- ing, money laundering, tax evasion, financial able, source of financing for development: it makes ments and devote their scarce foreign exchange to fraud, and corruption (…) our law enforcement states accountable to its citizens, not donors. It debt-service payments while, at the same time, they officials have too often had to stand silent when mitigates aid dependency. As the Kenya Revenue Au- have experienced massive outflows of private capital asked by their counterparts in other countries thority puts it, “Pay your taxes, and set your country towards Western financial centres. These private as- for information about who owns a US corpora- free.” Students of European and American history, sets surpass the continent’s foreign liabilities, ironi- tion committing crimes in their jurisdictions. familiar with the famous term “no taxation without
Thematic reports 16 Social Watch
01-Temas_ing.indd 16 03.11.2008 18:01:30 representation” have long known this. For some One area that will be profoundly important is the reason, its relevance is only now starting to filter idea of a UN Code of Conduct on tax. In November “…the accumulated stock of capital flight into the field of development. As Deborah Bräutigam 2006, the UN Tax Committee took a first step by vot- [out of Africa] was about USD 607 billion as explained in a recent paper:1 ing to approve the principle that a Code of Conduct of end-2004.” Compare this figure to these Discussions on taxation’s potential contribu- should be drawn up for co-operation on controlling countries’ total external debt in 2004, which tions to state-building are largely absent from capital flight and international tax evasion (which amounted to USD 227 billion. Indebted Af- the practical concerns of the aid community, is, by definition, illegal) and tax avoidance (which is rican countries have experienced massive which tends to focus on increasing aid (or cut- technically legal but, by definition, goes against the outflows of private capital towards Western ting expenditures) rather than on raising reve- wishes of elected parliaments). It has asked the US financial centres that surpass the conti- nues. The state-building role of taxation should tax expert Michael McIntyre to work on this. Nothing nent’s foreign liabilities, ironically making be a far more central issue for those concerned like this has ever been done before. sub-Saharan Africa a ‘net creditor’ to the with the problem of collapsed states, weak gov- To have maximum impact, a Code of Conduct rest of the world. ernments, and the lack of democracy across the should be adopted by the UN General Assembly. But developing world (…) high levels of aid can cre- a series of steps are needed first – technical steps ate incentives for donors and governments that within the UN system, where powerful tax haven interests will attempt to twist the outcomes towards • The IMF, the World Bank and the OECD should make it more difficult to build a more capable work together with financial centres to help and responsive state. their own ends. Civil society needs to be vigilant in monitoring progress, and must complain loudly developing countries tackle capital flight and Participants and observers to the Doha conference when things go wrong. The Doha meeting will play lost taxes. risk spending too much time focusing on how much an important role in this. Things are already moving All these measures need to be tackled not just money is raised by taxation, and not enough on how fast – and the time to act and engage is now. before and during the Doha process, but far into that revenue is raised. Much more research must be Even adoption by the General Assembly will the future. International financial reform takes done, including on the impact of international tax is- not be enough. It must also be promoted vigorously, many years. sues, tax havens and loopholes on developing coun- once adopted, by signatory governments and also by tries’ tax systems and the way they raise revenue. private actors and members of civil society. The mood is changing Codes of conduct are sometimes referred to Change has been blocked until now: the vested inter- The UN Tax Committee as ‘soft law’ because they do not provide for explicit ests have been too strong, and civil society has been Britain and the United States, in league with some methods of enforcement. They are aspirational, not all but asleep on international taxation. Neverthe- of the world’s other tax havens, have led the fight operational. They seek to mobilize public opinion (or less, the global mood is turning. One reason is that against improved transparency. The UN – and spe- at least the opinion of relevant actors); and they work there now exist civil society groups – notably the Tax cifically the UN Tax Committee2 – is one of the little- through persuasion, not legal force. Justice Network and Global Financial Integrity – that known forums where this struggle is being played For years, countries have treated international can provide high-level analysis and advice to help out. This committee is a key player feeding input into tax evasion and abusive tax avoidance with benign others to engage. the Doha conference, and it contains a mix of repre- neglect. We are now seeing signs that world opinion Also, in contrast to most issues on the ‘devel- sentatives from developed and developing nations. is fast turning in support of action against the world’s opment’ agenda, the harm provoked by tax havens But unfortunately too many of the ‘developing na- tax cheats and those who help them. As Mike McIntyre and abusive international taxation is felt not only tions’ representatives, as well as those from wealthy puts it: “A code of conduct can help create a climate of in the developing world, but also in the wealthiest countries, are in fact tax havens, including Barbados, opinion where tax cheats cannot successfully pose as nations. For this reason, political action unites a di- the Bahamas, Switzerland, the United Kingdom, and refugees from oppressive government but instead are verse group of people with shared interests. Ireland. While developing-nation tax havens like seen for what they are – selfish, self-absorbed people Events in financial markets are also now Barbados or Cayman are eager to preserve their who undermine good government and help keep two- prompting change. A financial deregulation process revenues, comparing their populations (45,000 in thirds of the world locked in poverty.” that began in the 1970s provided the oxygen allowing the case of Caymans, for example) with that of other secrecy jurisdictions and the abusive tax practices populations afflicted by tax havens (over 600 million, Other crucial areas to address they facilitate to flourish and metastasize through the in Africa’s case) must be the basis for judging where In September 2007, the Tax Justice Network pre- global financial architecture. The credit crisis that be- our priorities lie on tax havens. sented 18 recommendations to the UN Tax Commit- gan in 2007 has shattered confidence in the self-reg- Civil society urgently needs to take notice of this tee, including the following: ulating powers of markets, and thrown deregulation committee and its activities, and the broader context • Ask the IMF to include in its Reports on the Ob- into reverse, ushering in a period where international in which it is embedded, and to work hard to make servance of Standards and Codes whether a co-operation is now actively being pushed at a high sure that its voice is heard. Before now, civil society jurisdiction that is a financial centre provides level. As Lawrence Summers, a former US Treasury has been all but absent, allowing powerful vested adequate information to foreign partners and Secretary, said in May 2008: interests to drive and distort the agenda. looks at issues such as bank secrecy in tax mat- There has been a race to the bottom in the taxa- ters and effective exchange of information. Urgent: a code of conduct is needed tion of corporate income as nations lower their • Consider if capital flight (and the resulting tax rates to entice business to issue more debt and There are several crucial areas in which the UN, evasion) should constitute acts of corruption invest in their jurisdictions. Closely related is the and the Doha meeting in particular, can help foster under the UN Convention Against Corruption problem of tax havens that seek to lure wealthy progress, with the potential to do at least as much – and all parties to it, including tax evaders, citizens with promises that they can avoid pay- good as all foreign aid combined. All of these areas intermediaries who facilitate tax evasion, and ing taxes altogether on large parts of their for- need strong support from global civil society. the financial centres that handle and receive tunes. It might be inevitable that globalization tax-evading funds. leads to some increases in inequality; it is not • Consider capital flight and tax evasion as money necessary that it also compromise the possibil- 1 “Taxation and Governance in Africa”, available at:
Social Watch 17 Waking up to the true story of tax
01-Temas_ing.indd 17 03.11.2008 18:01:30 The Stop Tax Haven Abuse Act introduced recently Many of the world’s tax havens, particularly the by US presidential candidate Barack Obama, in part- British-linked ones, emerged or spread their wings nership with a Democrat and a Republican Senator, as part of the process of decolonization, as Britain’s amid a flurry of newspaper investigations into the overseas empire crumbled after the Second World tax-dodging activities of private defence contrac- War and Britain looked for ways to fill the gaps. The tors, is sharply changing the political mood in the time has come now to start clearing up these relics. United States. An awakening in civil society, particularly in Europe, notwithstanding spoilers in its midst Europe, about the pernicious and very powerful role like Austria, Belgium, Britain, Luxembourg and of tax havens in development, is now starting to get Switzerland, will be a somewhat willing partner. underway at last. The Doha process needs to be in- Revelations from a paid whistleblower about secret strumental in broadening this awakening. n accounts held by many wealthy Europeans in Liech- tenstein have helped spur a new political will to tackle Further reading
the problem of tax havens and tax abuse. Tax Justice Network:
Thematic reports 18 Social Watch
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