JUSTICE FOCUS

the quarterly newsletter of the issue

fourth quarter 2006 volume 2 number 4 The great American jobs and tax scam 1 The great American jobs and tax scam Greg LeRoy Editorial 3 In the United States, tax competition among states is a major problem. John Christensen Greg LeRoy looks at the evidence and assesses some of the implications processing zones: for tax revenues and employment. the Kenyan experience 4 Bob Awuor ax competition is an international accountable, and most corrosive ways avoid leaving money on the table; and Tblight, but it is also a plague within states fund economic development. even an embryonic industry to help busi- Capital mobility and the the borders of the United States. In Those granted locally – especially prop- nesses buy and sell unused economic effects of tax competition 6 fact, competition for jobs and tax re- erty tax abatements and diversions – are development tax credits, now legalised in Alex Cobham ceipts within the United States has especially harmful to schools. at least four states. been an ‘economic war among the Ready, steady, GO for states’ for more than three decades. This system has a long history and many States and corporate lobbyists justify Nairobi 7 moving parts. It traces back to at least economic development tax breaks by Tax competition: a case Economic development – defined as the 1930s and the Great Depression, and claiming job creation and tax base en- of winner takes all? 8 spending by states and cities for job really matured by the 1970s. By then, hancements. But they routinely fail to Richard Murphy creation or retention – now finds the most of the key actors were in place: deliver on both counts. Investigative average state with more than 30 sub- secretive site location consultants who journalists, non-profit researchers, and Reviews and new research 10 sidy programmes: abate- specialise in playing states and cities state auditors routinely find companies – ments, corporate credits, against each other; ‘business climate’ many companies – that have failed to Campaigns and TJN news 11 sales and tax exemptions, tax experts with their highly politicised inter- create or retain as many jobs as they said increment financing, low-interest loans pretations of tax and jobs data; and an they would. Companies that are paying Calendar 13 and loan guarantees, free land and land organised corporate network orches- poverty wages or failing to provide write-downs, training grants, infrastruc- trating attacks on state tax systems. healthcare to their employees. Compa- Guest editor: John Christensen ture aid – and just plain cash grants. nies that are abandoning the cities and Editor: Jenny Kimmis email: [email protected] Today, this industry has spawned a more sprawling onto farmland and natural Published by the Tax Justice Network The bottom of the iceberg – in every elaborate cast of characters: rented con- spaces. Even companies that are out- International Secretariat Ltd sense of the word – is tax breaks. sultants packing rosy projections about sourcing jobs offshore. It is not unusual © Tax Justice Network 2006 For free circulation Those granted by states – income, sales job creation and ; subsidy- to find companies that have not created ISSN 1746-7691 and excise – are the least visible, least tracking consultants who help companies any new jobs, even some that have actu- FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS ally laid people off since receiving the point that state corporate income other words, income, property, sales, consumption taxes that many states en- subsidies. Others that got subsidised just are on the verge of disappearing in some excise, utility taxes, etc. – has declined acted. to move existing jobs from one place to states, at least with respect to new in- sharply over the past two decades. In the another, where they are proclaimed to vestment.” In other words, new factories 1980s, companies paid an average of 6.93 To give a state-specific example, in Flor- be ‘new.’ generate such large tax credits, they pay per cent of their profits in all state and ida, the St. Petersburg Times found that 98 little or no income tax. In fact, for 12 of local taxes. In the 1990s, the average per cent of companies in the state paid Less well known is the corrosive effect those 20 states, their model indicates rate was 5.12 per cent, and by 2002, the no income tax in 2002, including cruise- job subsidies have on state and local tax that typical companies building new fac- last year studied, the rate had declined ship giant Carnival Corp., with 4,220 revenue. There is a growing body of evi- tories can actually generate net tax cred- to just 4.99 per cent. That’s an overall employees in the state, more than $1 dence, from national statistics and from its – that is, the deals create negative rate decline of 28 per cent. billion in 2002 profits – and a corporate individual states, that over the past 25 income taxes. registration in Panama. years corporations – especially big ones Why are corporations paying less? – are getting lower tax rates and paying a Analysing by 16 industrial sectors (such “Perhaps the most obvious explanation is Despite such findings, progressive state smaller share of the cost for public ser- as food processing, transportation equip- the tax competition among states to at- budget advocates are cautiously optimis- vices. The evidence is especially disturb- ment, etc.) they found that for Texas, in tract business,” the CRS concludes. tic about their chances for reform. Al- ing on income taxes: in many states a 9 out of 16 sectors, companies are get- ready, 12 states have some form of an- large share of big companies are paying ting negative income taxes; in Ohio, it’s More evidence comes from the Center nual, company-specific disclosure of zero state income taxes, or tiny mini- 13 out of 16; and in Kentucky, 15 out of on Budget and Policy Priorities. In the costs and benefits (including four that mum taxes. 16. In three states – Iowa, Michigan, and second half of the 1990s, when the U.S. disclose on the web); 19 states use South Carolina – they found that in all 16 economy was sizzling, federal corporate money-back guarantee ‘clawbacks,’ and University of Iowa Professors Peter sectors, companies are getting revenues grew an average of one state, Illinois, has enacted a manda- Fisher and Alan Peters use a tax rates! six per cent a year. But state corporate tory Unified Development Budget that ‘representative firm’ computer model to income tax collections rose at just half will help expose the ‘bottom of the ice- take a hypothetical new factory – with an The aggregate evidence of revenue cor- that rate. Same companies, same profits, berg’ – breaks. average-size capital investment and rate rosion comes from government studies same years, half the tax. of profit – and project the tax result if of state revenue, academics, taxpayer the factory is built in a state’s enterprise watchdog groups, studies of large pub- It’s not just the rate of corporate taxes, zone, which bundle multiple tax breaks. licly traded companies – even from a few it is also the share of revenue companies angry governors and state treasurers. provide. In 1980, corporate income In 20 industrialised states, they find that Experts conclude that tax breaks en- taxes accounted for 9.7 per cent of state “incentive wars have proceeded to the acted in the name of economic tax revenue; by 2000, it was down to 6 Greg LeRoy directs Good Jobs First. This development are a major problem, along per cent, and for the next three years, it article is adapted from his 2005 book The with surging corporate use of loopholes averaged only 5.2 per cent. Great American Jobs Scam: Corporate Tax like Passive Investment Com- Dodging and the Myth of Job Creation panies. Put another way: if corporations contrib- (Berrett-Koehler). uted the same share to state www.goodjobsfirst.org First, the national evidence. The Con- treasuries in income taxes in 2003 as gressional Research Service (CRS) – a they did in 1980, the states would have non-partisan body that works exclusively received $27.3 billion more to help pay for Members of Congress – tracks long- for smaller school-class size, public term trends in state and local corporate safety, healthcare and infrastructure. Or taxes. It reports that the effective corpo- they could have avoided raising that rate rate for all state and local taxes – in much in taxes, especially the regressive

2 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS

Editorial “Companies get away with free-riding because they know that John Christensen tax incentives can be negotiated by playing one national or regional government off against another.” Welfare for the rich

cross the world a scandal has oc- Union, though it might be higher than vision. In practice the process which from predatory corporate behaviour the Acurred involving huge sums of pub- the US figure. politicians and journalists call tax compe- pressure is inevitably downwards. This is lic money handed out to the rich and tition creates market distortions and another instance where bad governance powerful. The handouts have taken a It is not inconceivable that the full cost should more accurately be described as - often originating in junk states variety of forms: tax holidays, lower to developing countries of so-called 'tax ‘tax incentivisation’. providing facilities - profit tax rates, property tax abate- competition' is considerably more than undermines good governance. ments, accelerated depreciation rates, this, particularly in the case of the min- Liberalisation of capital flows has created corporate income tax credits, subsidised eral exporting economies where greatest a situation in which countries have be- The solution to this problem lies with a infrastructure and energy, ex- political pressure has been put on gov- lieved themselves compelled to offer multilateral agreement, preferably nego- emptions, and so on. The recipients of ernments to lower tax and royalty rates incentives to attract or retain invest- tiated under the auspices of the UN this public largesse have generally been and where few jobs are actually created. ment. These incentives achieve nothing ECOSOC's Tax Committee, which big, long-established businesses, typically in terms of improving market efficiency; would preserve the fundamental rights of multinationals. Some small businesses How did we arrive at this scandalous on the contrary they distort the crucial sovereign states to determine their tax have benefited but not to the same ex- situation where public handouts flow feature of the theory of comparative rates by democratic means and would tent. upwards and companies are offered advantage whereby investment flows to protect these rights from unregulated negative income taxes? Well it started where it is most productive. Tax incen- pressure from large corporations and The supposed purpose of these welfare with a corruption of the meaning of the tives don't improve productivity, but their advisers to provide needless and payments has been to attract investment term 'competition'. In economic theory they do increase the returns to capital by harmful tax incentives. in new jobs, but in practice companies the purpose of competition is to provide enabling companies to free-ride on pub- only employ staff where there is a genu- consumers with a choice between the licly provided resources. As a starting point we propose one sim- ine economic rationale to do so, and the suppliers of goods and services. This puts ple thing: let it be recognised that so- handouts achieve little apart from in- pressure on companies to improve qual- Companies get away with free-riding called ‘tax competition’ amounts to creasing the corporate bottom line. The ity and keep prices low. The same argu- because they know that tax incentives nothing more than welfare for the rich. cost to the taxpayer of this upside-down ments cannot be applied to sovereign can be negotiated by playing one national socialism has been enormous. Subsidy states. Citizens cannot choose between or regional government off against an- packages in the US are estimated to ex- one state or another to provide their other. Most governments would prefer John Christensen directs the TJN ceed US$100,000 for each job created. public services, and lowering government to avoid being forced to grant incentives, International Secretariat. No attempt has been made to establish revenues by forcing rates cuts does not but in the absence of a global policy an equivalent estimate for the European translate into more efficient service pro- framework to protect weaker states [email protected] www.taxjustice.net

3 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Export processing zones: the Kenyan experience Export processing zones have been promoted as a panacea to Africa’s investment deficiency, but since 1990 the Kenyan experience has shown a reality of poor working conditions, minimal technology and skills transfer, and a massive increase in . Bob Awuor asks where do we go from here?

he use of export processing zones gard them as necessary for countries nesses established in these zones have growth in with China. But Chinese T(EPZs) as a regional or national de- wanting to attract mobile capital. recorded profits. Export volumes have interest in investing in Kenya appears to velopment strategy extends back to the also risen, particularly since the US gov- be motivated by the possibilities for us- 1920s when the first zone was estab- Kenya enacted its EPZ Act in 1990. This ernment negotiated the African Growth ing Kenyan quotas for textile to lished in Spain. More recently, the UK made it possible for EPZs to be estab- and Opportunity Acts (2000 and 2002). the US market. Thatcher government was a leading ad- lished with incentives such as a 10 year More recently there has been a huge vocate of ‘enterprise zones’ and Kenya corporation , subsidised also started to experiment with the idea credit, state sponsored infrastructure in the 1980s. and exemption from trade tariffs on im- Giving it all away ports. At that time the Kenyan govern- Investment incentives in the Kenyan EPZ Act EPZs represent a direct form of tax and ment anticipated that EPZ programmes regulatory competition in which special would create jobs, attract new types of laws provide for a range of incentives to higher value-added processing and manu- Ten year corporate tax holiday and thereafter corporate tax at 25%. attract offshore investment for export facturing activity, and diversify export Exemption from and VAT on all inputs. production. The packages of incentives earnings away from reliance on unproc- Exemption from payment of withholding tax. vary from zone to zone, with some com- essed agricultural produce. mon features including: tax holidays, Unrestricted offshore borrowing. duty-free import and export, unre- EPZs are now an established feature of Freedom from exchange controls with respect to investment by stricted repatriation of profits and ex- the Kenyan economy. Approximately 40 foreigners. emption from national labour laws. Some zones have been gazetted, and according Repatriation of dividends and operation of foreign currency accounts. countries and regions also offer exemp- to the Kenyan Commis- tion from environmental laws and regula- sion (KHRC), over 35,000 Kenyans are Work permits for technical, managerial and training staff. tions. Critics of EPZs argue that tax in- employed by businesses offshored in this Exemption from complying with various laws (e.g., Factories Act, centives shift the tax burden onto local way. The majority of these workers are Industrial Registration Act, Statistics Act). businesses and labour, and the regulatory women. High quality infrastructure at the zones, paid for by the government exemptions undermine hard-won meas- from public funds into which EPZ enterprises make no tax remittances. ures to protect labour and the environ- At face value the EPZ policy appears to Tax-free earnings for foreign workers (expatriates) of EPZ enterprises. ment. Supporters of tax incentives re- have created a lot of jobs and the busi-

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The apparent success of the EPZ policy tions have probably led to a net decrease was challenged in 2003 when a series of in tax revenues arising from the intro- wildcat strikes by mainly women work- As well as degrading the rights of Kenyan duction of the EPZ policy. ers exposed a pattern of exploitation workers, EPZs have contributed little to the and harsh working conditions. These Speaking recently in London, Kenyan strikes were organised in Nairobi and economy. The great majority of businesses Finance Minister, Mr Amos Kimunya, Athi River in protest against subsistence established are engaged in labour intensive, said: "We have sealed loopholes through wages, non-payment of overtime, sum- which people previously evaded tax, and mary dismissals, sexual harassment and low value-added garment assembly. have instituted reforms and legal meas- failure to observe health and safety stan- ures that broaden the tax dragnet, so dards. The workers were not supported And although EPZ companies are generating that financing for public expenditure is by the Central Organisation of Trade profits, there is no evidence that they are largely drawn from internal resources”. I Unions and the Trade Minister branded being re-invested in the Kenyan economy. hope that the tax dragnet will be ex- the strikers as ‘hooligans’. However, sub- tended to target EPZ enterprises be- sequent research by the KHRC has re- Most appear to go offshore through transfer cause the real cost of the EPZ pro- vealed a pattern of companies pressuring pricing arrangements. gramme far outweighs any benefits. The workers to achieve production targets question we must now ask is whether by working long hours of frequently un- there are any grounds for continuing to paid overtime. The outcome, according subsidize big, non-tax-paying foreign to KHRC, was high staff turnover, stress, business through the EPZ programme. fatigue, absenteeism and labour unrest. centives to promote links between EPZ re-established themselves in EPZs in or- The government responded in 2004 by firms and the onshore economy. The der to take advantage of the fiscal incen- calling for freedom of association for result being that economic links largely tives and lower unit labour costs. workers in EPZs but few companies have consist of employment for an underpaid Kenya’s unemployment problem remains since recognised trade unions. workforce forced to work exceptionally acute. Bob Awuor is an urban and regional development planning consultant and long hours to subsist. Some Kenyan busi- researcher specialising in issues relating As well as degrading the rights of Kenyan nesses also fear that leakage occurs as And the picture is no rosier on the reve- to globalisation, urbanization and workers, it appears that EPZs have con- EPZ output seeps across the porous nue side. EPZ companies are generating development. tributed little to the economy. For start- border between the EPZ economy and profits, but there is no evidence of prof- ers, the great majority of businesses es- the domestic economy. its being re-invested in the Kenyan econ- [email protected] tablished in EPZs are engaged in labour omy. The majority of profits appear to intensive, low value-added garment as- Even the apparent success of the EPZ be being shifted offshore through trans- sembly. The cloth is largely imported in policy in creating employment is ques- fer pricing arrangements. Some compa- finished form (increasingly from China) tionable as not all EPZ jobs are new. As nies have relocated after the expiration for assembly and export. The technolo- happened in Mexico during the 1990s of their tax holiday. Needless to say the gies involved are basic and require few when a process of ‘maquiladorisation’ workers employed in EPZs do not earn skills. Furthermore the government has occurred as local companies shifted to sufficient income to pay higher yields of not followed a strategy of targeted in- the EPZ sector, Kenyan companies have tax revenue, and the trade tax exemp- 5 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Capital mobility and the effects of tax competition International tax competition has damaging consequences for economic development in both the North and the South. Alex Cobham examines new research which shows that richer countries are better able to resist the pressures of tax competition, and discusses some of the policy and research implications.

s part of the study of globalisation, (FDI). While the results here are incon- ‘power’ of the different agents engaged Political and media commentators often Aeconomists have been concerned clusive, empirical work has questioned in the process of attracting FDI can affect give the impression that the impact of with the overall effects of greater capital the existence of growth benefits of FDI. the outcome; for example, richer coun- corporate tax competition – the general mobility. Simplistic readings of basic the- J. Benson Durham of the Federal Re- tries may be better placed to extract phenomenon of which FDI tax incentives ory suggest that greater freedom for serve Bank found no support for positive benefits from FDI than their poorer are a special case – may be limited or capital should expand global economic effects – and in many poorer countries, counterparts. To understand how to indeed beneficial. Sheila Killian of the possibilities and benefit everyone, more FDI appears actually to be associated maximise the benefits of investment University of Limerick has written that or less without caveat. Academic studies with reduced growth. (which need not be the same as maximis- “the term ‘harmful tax competition’ has in the late 1990s, however, and subse- ing the absolute volume of investment) become endemic”, contributing to the quent IMF research, highlighted a con- If power lies with investors, the growth we need to consider ways in which capi- idea that only extremes of behaviour are trary econometric result: liberalisation of effects for countries may be small, possi- tal mobility will affect countries with dif- damaging. The implied category of capital movements has had no discerni- bly negative. Evidently the relative ferent characteristics. ‘benign’ tax competition is assumed to ble growth benefits for developing allow more flexible and dynamic patterns countries. of economic activity, ultimately to the benefit of society. The actual criteria for This finding has raised questions about distinguishing the conditions in which tax whether the current structure and man- competition might be benign, harmful, or agement of international finance is bene- merely harmless, have not been ficial. In particular more needs to be delineated. known about when capital flows are beneficial, and how they may be damag- Evidence-based analysis of the impact of ing, in order to improve the outcomes. tax competition has been somewhat scarce, however. A newly-published pa- A key problem is the potential for tax per from the Central Bank of the Neth- competition to undermine states’ ability erlands offers fresh insights into the ways to benefit from economic activity in or- in which increases in capital mobility der to provide for their citizens. One have changed rates of corporate tax. strand of research has focused on Harry Garretsen and Jolanda Peters whether tax incentives are effective in analyse a sample of annual data on 19 attracting foreign direct investment high-income OECD countries from

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1981-2001, and present three main If we consider the political implications ing the costs of competition (in the ab- diture on public services, on infrastruc- findings. of this last result, it may help to explain sence of coherent international action). ture and on human capital investment, why counter-action against tax competi- has a direct impact on the level of eco- First, they confirm the reality of tax tion has been limited. If powerful coun- Two further issues require considera- nomic growth. In this way tax competi- competition: an increase of 1per cent in tries tend to be least directly damaged tion. First, to what extent are cuts in tion plays a role in vicious cycles of low capital mobility is associated with a re- by, for example, the behaviour of Ireland statutory tax rates associated with falling development and low growth. Another duction in the corporate of be- in seeking to benefit from multinationals’ revenues. We need not deal with the area for research is the direct impact on tween one half and a third of one per profit-shifting, it follows that attempts to debunked idea that policy can be made inequality and poverty rates. cent. mobilise international political will to on the basis of a ; but it is counter tax competition are likely to be certainly true that (i) more aggressive It may be only when the full costs of the Their second result is that the behaviour blocked. anti-avoidance measures and the removal current treatment of international finan- of neighbouring countries is important – of exemptions have in some cases al- cial flows are known, that policymakers where neighbours maintain higher rates, Given that these agglomeration effects lowed revenues to be maintained (in the will start to question the concept of the pressure to cut rates is lower. Tax are sufficiently large to be found in a short-term at least); and (ii) that the ex- ‘benign’ tax competition – and take steps competition may be a global phenome- sample of exclusively high-income coun- treme cases such as Ireland have shown to address it. The majority of poorer and non, but it is additionally effective at the tries, the implied costs for medium- and increasing revenues due to profit shifting richer countries will suffer in the mean local level. low-income countries may be much (albeit at the expense of global tax time. higher. Most vulnerable of all will be revenues). The third result is that agglomeration smaller, poorer countries with effects matter. Larger – and hence more neighbours that pursue aggressive tax Second, researchers need to explore the Alex Cobham is Director, Political Economy Section, the Oxford Council on Good Govern- powerful – economies like the UK and competition policies. This suggests the broader economic and social effects of ance and Supernumerary Fellow in Economics, Germany are better able to resist the possibility of regional cooperation in, for tax competition. There is an obvious St Anne's College, Oxford. pressures of tax competition. example, the Caribbean as a way of limit- possibility that falling government expen- [email protected]

Events in Nairobi get going with a Re- programme will be finalised for The second seminar, programmed for Ready, steady, search Workshop on the theme of Tax, download from the Tax Justice 4 Africa 22nd January and chaired by Odour GO for Nairobi Poverty and Finance for Development on website by 5th January 2007. Ong'Wen of SEATINI, will address the 18th / 19th January 2007. Sponsored by issue of the role of tax in tackling pov- the UK-based Network for Social During the WSF itself, TJN and its part- erty and financing development. ighteen months after launching our Change (a philanthropic group), and co- ner organisations will be holding two consultative process with African E hosted by the University of Nairobi, the seminars and two workshops. The first One workshop is programmed for 23rd , and 12 months after the African Community Development Foun- seminar programmed for 21st January, January and will be used primarily to plan proposal to launch a TJN 4 Africa re- dation, the Association for Accountancy titled 'New Perceptions on Corruption', and agree a process for launching a con- ceived a resounding yes vote at the & Business Affairs and TJN International will focus on how financial intermediaries tinent-wide TJN 4 Africa and regional / World Social Forum in Bamako, Mali, we Secretariat, the workshop programme and tax havens encourage and facilitate national chapters. Chaired by Dereje are ready to take the next steps at WSF includes papers from 12 researchers, and corrupt practices. Dr Paul Mbatia from Alemayehu of Christian Aid, Kenya, this 2007 in Nairobi, Kenya. has attracted 50 participants from 18 the University of Nairobi will be chairing workshop will be open to all organisa- countries. The workshop this seminar. tions and individuals interested in 7 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS becoming founder members and sup- porters of TJN 4 Africa. Tax competition: a case of winners take all? Richard Murphy The second workshop also on 23rd Janu- ary, titled ‘A Rich Seam’ and chaired by t taxation and economic seminars of low income countries sales taxes have In combination these arguments demon- Charles Abugre of Christian Aid, will all over the world it is suggested been increased, typically without exemp- strate that tax competition lies at the explore issues around mining investment A that ‘tax competition’ is a good thing. tions, to compensate for lower tax yields heart of the Neo-Conservative agenda. and tax competition. But, as Professor Michael Devereux of from capital. Because Neo-Conservatives believe that Oxford University admitted at the EU democratic governments are unable to TJN will also be represented at a semi- tax competition conference in Septem- Next it should be noted that those who contend with these issues, they support nar organised by Social Watch on the ber 2006, this is more a statement of promote tax competition do so for four the use of tax havens to encourage the subject of Alternative Budgeting and faith than proven fact. reasons: relocation of mobile capital and to exert Budget Monitoring on 22nd January, and pressure on the governments of popu- at a roundtable discussion on 23rd Janu- The Tax Justice Network does not ac- 1. They argue that individuals and com- lous states to reduce their tax rates. ary, also organised by Social Watch, on cept that tax competition is benign. We panies spend more wisely than govern- the redesign of global financial architec- consider it harmful because it is designed ment, the logic being that government is There is no evidence to support the case tures. and promoted by political and commer- not subject to market mechanisms in for tax competition. Firstly, taxation cial interests acting on behalf of a tiny making choices and is not therefore re- exists because societies want the State Details of the venues and times of these minority in society. ceptive to consumer preferences. to act as a provider of key services, in- events will be confirmed when WSF cluding law, its enforcement and defence. Nairobi publishes the final programme, This claim requires justification. First it is 2. They assume that in the absence of In addition, most societies recognise that which is issued to participants when they important to define what tax competi- competitive pressure, government is there are other services which only the register in Nairobi. tion is. It is a variety of processes involv- inherently inefficient, a trend exacer- State can supply because they must be ing preferential treatment whereby gov- bated by their belief that all governments provided for the benefit of their whole ernments compete to attract mobile are prone to spend for the aggrandise- population or the greater cost of not capital to locate in their country. This ment of politicians or civil servants. This doing so will be borne by all members of For further information about TJN might involve minimal or zero tax rates, tendency, they claim, is so pervasive that society and not just those that fail to events in Nairobi, contact Alvin as are offered by tax havens, but it also even the ballot box is unable to curtail it. receive them. These services include the Mosioma. includes tax holidays and the subsidies provision of health and education ser- [email protected] offered through export processing 3. They claim that business efficiency is vices and the supply of the complex zones, and other forms of direct and undermined by the administrative and physical and societal infrastructure which www.TaxJustice4Africa.net indirect subsidies which serve to attract financial burdens that taxation imposes. enable modern commerce to function. mobile capital. The biased nature of tax Access to these services needs to be competition is demonstrated by the fact 4. They suggest that taxation gives inap- available to all irrespective of their that it seldom manifests in the form of propriate price signals to markets and as means. The greatest overall beneficiary lower rates of sales tax, which are re- such all taxation should be reduced to of this public provision is business, which gressive in nature: indeed in the majority minimise market distortions. as a result of these services enjoys the

8 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS advantage of having a healthy and pro- arguments for tax competition are there- on to avoid absolute poverty. In the * The report is available on the ductive workforce with the financial fore not valid when electorates can make same report PWC also asserts: PWC website: means to enjoy the products companies a genuine choice between centre-left and www.pwc.com seek to supply. centre-right political actors. Attempts to impose internationally uncompetitive tax rates on these Richard Murphy is Director of Tax Research LLP. Second, in practice markets cannot func- Finally, the argument that low tax states forms of mobile capital may be par- tion efficiently in sectors such as health are needed to ‘correct’ the result of ticularly damaging to an economy in [email protected] care, education and pension provision. such ballots reveals contempt for the the long-term. The need to ensure service provision for concept of democracy. This contempt the benefit of all means there will never can only be based on the belief that Neither assertion is referenced or sup- be sufficient capacity to provide signifi- some in society deserve preferential ported by data. Both are statements of cant choice in these sectors. Conse- treatment, which is the belief at the core preference indicating a bias towards the quently, private supply would result in of the Neo-Conservative argument for rich and powerful. private monopoly which is universally tax competition. considered abusive. The ballot box is Our job is to offer alternative choices therefore the best regulator available to The tax justice argument is based on the which provide balance in this debate. avoid abusive market structures and indi- simple proposition that it is preferable to Our prime motive is a concern for poor cate society’s preferences. The resulting protect the well-being of the majority people, especially in the developing services may be less than perfectly effi- through regulation and taxation rather world, but we also argue that effective cient, but as has been shown by the ex- than allowing capital to roam without markets are as important for society as perience of privatisation, the market fre- constraint and untaxed. This proposition effective governments. Without the se- quently does worse. This is especially recognises that the burden imposed by curity provided by public services there true when markets are used to provide tax competition arises from the deliber- are compelling grounds for believing that welfare services to ensure that people ate actions of players pursuing self- markets will fail due to a crisis or crises live free from fear of destitution or un- interest. As an example, Pricewater- of confidence. Tax competition that un- employment. Freedom from fear is fun- houseCoopers recently wrote a report dermines state revenues could precipi- damental to the success of markets be- for the World Bank* in which they as- tate such a crisis. cause fear discourages people from serted that: spending and is an impediment to With public services crumbling in many investment. If, for example, [taxes] are used for developing countries – and with even transfer payments, then the net im- developed countries being forced to Third, the assumption that government is pact on long-term economic growth switch the tax burden increasingly away inherently inefficient is wrong, as is the may be negative. from capital and onto middle and lower assumption that market signals are income earners – the case for combating needed in the supply of all services. In Transfer payments are the pension and tax competition to protect markets and many cases those signals transmit misin- benefit payments which old, disabled, societies from predatory practices is formation and misallocate resources or sick and unemployed people – as well as compelling. result in unmet demand. Market based the providers for many children – rely 9 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Reviews and new research

Hilton McCann of offshore and the physical presence of Billions for Poverty Eradication, or of the to determine what readership this book Offshore Finance offshore finance centres on small islands. existence of the Tax Justice Network. is aimed at. Most of the ‘facts’ provided, Cambridge University Press, 2006 This causes confusion throughout the Despite the accumulated evidence of the are readily obtainable from websites. In book. Despite quoting at length from the abuses of tax havens – including several avoiding serious analysis of the recent Unreliable perceptions recent works of Mark Hampton and reports by the US Senate Permanent major critiques of the offshore economy, , the issue of how offshore SubCommittee on Investigations – in- the book fails as a work of scholarly ffshore Finance is written by a functions as an interface between the formed criticism is brushed aside on the analysis and research. But neither is it Obanker and former acting chief ex- licit and illicit is glossed over and no grounds that: “Such opinions and assess- adequate to serve as a technical manual ecutive of the Financial Services Com- mention is made of Raymond Baker’s ments are unreliable because they are for financial regulators. This is not a mission of Mauritius. The author strongly seminal work on this subject. On the based on perceptions that may or may book that can be recommended to any- supports the offshore economy and is other hand, McCann draws heavily on not conform to reality.” Nice one, one with a serious interest in the sub- unapologetic for its use in tax avoidance: the dated analysis of R.A. Johns and the Hilton. ject, not least because it is, frankly, dull. “No one is obliged to pay more tax than website of the Center for Freedom and is due” he writes, “Consequently, tax- Prosperity (a Neo-Conservative lobbying The lack of critical enquiry into the role John Christensen payers are entitled to use finance centres organisation believed to be funded by of offshore is compounded by the pau- to mitigate their tax if they so choose.” offshore banks) to support the unoriginal city of the economic analysis. No at- So far, so political, but what about the proposition that offshore acts as a plat- tempt is made to understand how off- following: “Perfect positive correlation form for tax mitigation. The default posi- shore promotes economic free-riding between ‘offshore’ finance centres and tion throughout is that paying less tax is (Hello?), or creates an un-level playing the evasion of tax has not been proved an unchallengeable virtue with winners field between economic actors (the basis beyond reasonable doubt.” How can but no losers other than the big, bad of the OECD’s analysis). McCann seems statistical evidence be deployed when State. unaware of the fact that tax is not a cost offshore secrecy obstructs quantitative of production (Hello again?) and treats analysis? This assertion, like much else The OECD’s 1998 report on harmful tax government expenditure as inefficient, about the book, is bogus scholarship, competition is referenced but dismissed despite the evidence that direct invest- which the publishers should have chal- without serious consideration of its con- ment flows to locations which provide lenged from the start. tent: “Competition is good, not bad. If good infrastructure, well educated la- tax competition is ‘harmful’, that implies bour, and buoyant private and public And Offshore Finance gets off to a very that other forms of competition may also sector demand. poor start indeed. The attempt to define be harmful also – or at least suspect. The next Tax Justice Focus offshore, and distinguish it from onshore, This type of argument is difficult to de- Other than as an endorsement of Neo- will be a special edition on is clumsy and inadequate in making dis- fend.” No mention is made of ’s Conservative politics in general and off- inequality. tinction between the political economy briefing paper on Releasing the Hidden shore tax planning in particular, it is hard

10 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Campaigns and TJN news

TJN / South Centre meeting on tax avoidance UN tax experts support the strengthening and development of information exchange Prem Sikka Bruno Gurtner and Sol Picciotto

ax Justice Network in collaboration tax treaties and information exchange. It trengthening information exchange is • Bank secrecy should not hinder infor- Twith the South Centre held a semi- covered recent history of tax treaties, Sessential - was clearly the opinion of mation exchange. nar at the Palais des Nations, Geneva, agreements, bank se- the majority of members and observers Switzerland on 30 October 2006. The crecy, tax havens and some of the real at the second meeting of the UN Com- Less clear is the outcome of the discus- aim of the seminar was to provide a world practical problems in trying to mittee of Experts on International Coop- sion related to the dual criminality re- broad overview of tax issues pertinent combat complex tax avoidance. This was eration in Tax Matters held in Geneva quirements. A proposal made by David to developing countries. The seminar followed by a presentation from Profes- (30 October to 3 November 2006). But Spencer a year ago aimed to include a was held to coincide with the com- sor Prem Sikka on (the participants did not always agree on the paragraph saying that the UN Model mencement of the 2nd Session of the prices used by multinational corpora- details of how to reform the famous Ar- Treaty does not require double criminal- United Nations Committee of Experts tions for internal transfer of goods and ticle 26 of the UN Model Double Taxa- ity as a pre-condition for information on International Cooperation in Tax services). This innocent sounding ac- tion Convention. Delegates supported an exchange. Matters. It was attended by some forty counting technique is increasingly used idea, sponsored by TJN and proposed in ambassadors from developing countries. to launder profits and avoid taxes in de- a paper submitted by Professor Mike TJN had previously proposed to veloping and developed countries. McIntyre, to start work on a Code of ECOSOC that it consider the establish- Dr. Yash Tandon, director of South Cen- Conduct on Promoting Tax Compliance. ment of a Code of Conduct on Co- tre, opened the seminar. The meeting The presentations were followed by a operation in Combating Capital Flight was addressed by Bruno Gurtner, Senior lively discussion and consideration of A subcommittee will finalise proposed and International and Avoid- Economist with AllianceSud, Switzerland policy developments. We received very changes in the wording of Article 26 by ance. This proposal generated a lot of and a member of the TJN Board of Di- positive feedback and are hopeful of fur- the next meeting at the end of 2007. interest during discussions in Geneva. rectors. Gurtner outlined the role of ther developments. Points of particular interest for TJN in- Some delegates from developing coun- TJN and NGOs in raising awareness of cluded: tries strongly supported the idea. Repre- tax avoidance and how it deprives devel- sentatives from the USA and other • Extensive support for the inclusion of a oping countries of much needed OECD countries, while not openly op- reference to ‘combating tax avoidance’. revenues for social and economic www.southcentre.org posing the idea, did raise questions about • The scope of information exchange development. the status of such a code, the relation- should be wide. ship with other codes and doubted if the • Special attention should be paid to the Professor Sol Picciotto made a presenta- committee had the resources to take on effectiveness of information exchange. tion on the development implications of the work at this time. The committee

11 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS will do more work on this subject which Stiglitz speaks out Ghana meeting shifts the focus towards TJN will monitor closely. against tax evasion tax revenue Other issues discussed included: anti- and capital flight John Christensen abuse provisions in treaties; mutual assis- Lucy Komisar tance in tax collection; the definition of a ; taxation of oseph Stiglitz, Nobel Laureate in Eco- lthough seldom discussed by civil search institutions took part in the pro- development projects; restructuring of J nomics, spoke at a meeting on 2 No- society, the sources of tax reve- gramme of seminars and break-out the UN Manual for Negotiation of Tax A vember strongly in opposition to the nues are important determinants of good meetings. TJN was represented by John Treaties; dispute resolution; and taxation system of offshore-enabled tax evasion governance, with governments being Christensen, who led discussions around of Islamic financial instruments (definition and capital flight. The event, before an most responsive to electorates in states how to introduce tax justice issues in a of interest). invited audience of civil society groups where tax regimes are broadly based. variety of countries, including Argentina, and media at Columbia University, was This was the context for a three day Bangladesh, Croatia, and hopefully so on The Committee’s agenda is dominated co-sponsored by TJN-USA and Stiglitz’s workshop in early December co- through the rest of the alphabet. by narrow technical-legal issues because Initiative for Policy Dialogue at Colum- organised by the International Budget it is mainly concerned with revising the bia . Project and the Ghana-based Integrated Judging from the huge interest shown in wording of the UN Model Tax Conven- Social Development Centre. Accra for focusing more research and tion. It tends to build on work done by Stiglitz was head of the US Council of advocacy resources on tax revenue is- the OECD Committee on Fiscal Affairs – Economic Advisors under President Held in Accra, Ghana, the workshop sues, similar workshops will be held in making some adaptation for developing Clinton, then served as chief economist considered why civil society needs to other regions in 2007, and TJN will com- countries. Political issues such as meas- of the World Bank, and is now a profes- focus more on how governments source mit to providing its expertise to support ures against tax avoidance and capital sor at Columbia University. their revenue incomes, and explored this process of widening budget analysis flight are not much discussed. The Com- several related themes, including the tax to include revenue income. mittee also has very limited resources so incidence (using a Mexican case study to much of the work must be done by the The text of his talk and a video will be illustrate the regressive nature of the members themselves. This greatly re- posted as soon as they are available. current fiscal regime); the gender im- duces the contribution that the experts pacts of the tax regime in South Africa; www.internationalbudget.org from developing countries are able to www0.gsb.columbia.edu/ipd how local government taxes impact on www.isodec.org.gh make because they are usually already development in India and Croatia; and over-stretched. Indeed, some of the de- how evasion and harmful tax incentivisa- veloping country members were not tion have undermined efforts to reduce even able to attend the Geneva meeting. poverty around the world.

There is clearly still an urgent need for a Background documents are available Drawn from 16 countries - ranging east more inclusive and transparent global for download on the FfD website: to west from Indonesia to Guatemala - organisation to tackle the issues of inter- www.un.ort/esa/ffd/Taxation 24 budget analysts representing a range national tax avoidance and capital flight. of civil society organisations and re-

12 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Tweedledum and Tweedledee go offshore Calendar 2007 The following unpublished extract from Alice in Wonderland was recently found in a attic… 2007 “It’s obvious” said Tweedledum, adopting a rather condescending tone. German G8 presidency. “Self-evidently true” snapped Tweedledee, peering at Alice over his reading glasses. January 1 “If you don’t cut our taxes,” continued Tweedledum, “profits will fall and you will have even less money in the treasury.” German presidency of the EU. Alice sighed. She had heard this before, but it still didn’t make sense. Taxes on profits were already low, businesses paid far less January 11/12 tax than in the past, but they just wanted more tax cuts and subsidy. The Technical Group of GT-7 Leading Group Countries meet in Santiago, Chile. “We need the money to invest in health and education . . ” Alice began, but before she could finish her sentence, Tweedledee jumped up from his chair and strode to the window. January18-19 TJN Research Workshop, ‘Tax, Poverty and “Privatise.” he snapped “Let business do it more efficiently.” Finance for Development’, Nairobi, Kenya.

Nonsense, thought Alice. Look at the mess that business had made of the trains and the water industry. And how many people January 20-25 can afford to pay the rates charged by private schools? World Social Forum, Nairobi, Kenya. Gazing out the window, Alice saw the expensive motorcars in the executive car park and thought about how many of her January 21, seminar: ‘New Perceptions on constituents could barely afford to pay their rent. Corruption’. January 22, seminar on the role of tax in tack- Whilst these thoughts crossed her mind, Alice heard Tweedledee and Tweedledum muttering in an agitated way about how ling poverty and financing development. business needed lower taxes and less regulation. Listening hard, she heard words like ‘globalisation’ and ‘deregulation’ and ‘share January 22, Social Watch seminar: ‘Alternative options’. Budgeting and Budget Monitoring’. “Gentlemen” she interrupted, firmly but politely, “for many years business has been demanding subsidies and tax cuts. I think January 23, workshop: ‘A Rich Seam’ business should pay its fair share towards public services.” exploring issues around mining investment and tax competition. But this made them mutter even more loudly, and after a while Tweedledum strode across the boardroom and stood rather too January 23, workshop: planning for the launch close for Alice’s comfort. of TJN 4 Africa. “You see, my dear” he said, and his smile sent a shiver down her back, “unless we pay ourselves more money, we won’t have January 23, Social Watch roundtable on the incentive to invest“. redesign of global financial architectures. Alice was not impressed by this line of argument. She knew the gap between rich and poor has kept rising, and with debt January 24-28 spiralling out of control, something needed to be done to redistribute wealth and income, because otherwise the economy World Economic Forum Annual Meeting, ‘Shaping would stagnate. the Global Agenda’, Davos, Switzerland. As Alice gathered her thoughts to ask why businesses were paying so little tax when they were making record profits, February 6/7 Tweedledum leant forward menacingly and hissed: “If you don’t give us our tax cuts we will go offshore. And then we won’t The Second Plenary Session of the GT-7 Leading pay any taxes at all.” Group of countries will be held in Oslo, Norway. But whilst Tweedledum and Tweedledee marvelled at this splendid idea, Alice leant forward to read the tiny badge on April 14-15 Tweedledum’s jacket, which said: “Only the little people pay taxes.” 2007 Spring Meetings of the World Bank Group and the IMF, Washington D.C.

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