THE RESEARCH EDITION VOLUME 4, NUMBER 2 JUSTICE FOCUS Shadow regulation and the shadow banking system Jim Stewart 1

Editorial Not on my watch please The quarterly newsletter of the and John Christensen 4

Features Financial flows – the big picture Phillip Sarre 6 In need of a fix Thomas Rixen 9 Making the link: tax, governance and SHADOW REGULATION AND Oliviia McDonald 11 ReportS THE SHADOW BANKING SYSTEM Offshore Financial Centres: Creating Turmoil John Christensen 13 The role of the Dublin International Centre Tax Justice Attiya Waris 14

Book reviews The emerging financial problems in played by tax havens and offshore financial This shadow banking system has boomed International Tax as International Law global markets have been described centres with “light touch” regulation. This over the last decade or so, as a variety of Sol Picciotto 15 article focuses on their role in the crisis and new players have evolved or emerged in the as “the worst financial crisis since Analysis looks specifically at the Dublin International international financial system. Some are The language of offshore John Christensen 16 the Great Depression.” The crisis is Financial Services Centre (IFSC,) where many funds or investment banks, or more arcane Conduits or Structured Investment Vehicles ongoing, and it is uncertain how deep of the funds that have collapsed or have been Photo COMPETITION 17 (SIVs) which are artificial structures created or protracted it will be. in difficulties are located. by banks or other institutions, off their balance CALENDAR 18 A shadow banking system sheets. These players in the shadow banking here has been much analysis of this system behave rather like traditional banks – The Bank for International Settlements Editor: Nicholas Shaxson topic and various policy reforms have they borrow -term money and then lend Contributing editor: John Christensen T been proposed: these include looking (BIS) in its 78th annual report identified one it again at longer-term maturities – but outside Design and layout: www.tabd.co.uk at the role of ratings agencies, mark-to-market of the main roots of the crisis. “How,” it asked, traditional regulatory structures. Instead of Email: info(at)taxjustice.net Published by the Tax Justice Network International rules, greater transparency, and especially “could a huge shadow banking system emerge taking deposits, like “normal” banks do, they Secretariat Limited reform of .Very little has without provoking clear statements of official raise funds in other ways, such as by issuing © Tax Justice Network 2008 been written, however, on the role in this crisis concern?” commercial paper. For free circulation, ISSN 1746-7691 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS

“The shadow banking system has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime into a host of three- letter conduits that only Wall Street wizards could explain.”

Most of the activity associated with the so- The role of tax havens called ‘conduits’ (off-balance sheet vehicles) One important reason for the lack of official is regulatory arbitrage: it exists to avoid attention to the growth of the shadow restrictions placed on banks. Bank supervisors banking system was the extensive use of tax turned a blind eye to it. Bill Gross, founder of havens. the US financial firm Pimco, said this shadow banking system “has lain hidden for years, Historically, hedge funds were often domiciled untouched by regulation, yet free to magically in the , or the and mystically create and then package . However, competition subprime loans into a host of three-letter between financial centres on regulation conduits that only Wall Street wizards could (and tax) is considerable, and more recently explain.” European jurisdictions, notably the Channel Islands, and , have been Bank regulation exists for very good reasons. “streamlining” regulation, among other things, Banks must set aside cushions of capital to to attract funds. protect the banks against downturns and other unforeseen events, to prevent problems In Ireland, for example, if the relevant Taken in June, this photograph shows the Cayman-registered motor vessel Turmoil reflected in the front door of turning into systemic panics. Such panics are documents are provided to the regulator by Citigroup’s offices in Dublin. Investors are currently nervous about more than a trillion dollars parked by Citigroup in off-balance sheet vehicles. rare, but the collapse of Britain’s Northern 3 p.m. the fund will be authorised the next Rock last year was a clear example of one. day. A prospectus for a quoted instrument is a It was not especially the low-tax regime that Bear Stearns hedge funds incorporated in complex legal and financial document (a attracted funds to Dublin, but other features: the Cayman Islands announced considerable In the shadow banking system, institutions instrument issued by Sachsen Bank ran to 245 Ireland ticks certain boxes for funds and the losses. Bear Stearns had two investment were able to sidestep this kind of regulation pages) so it is unlikely it could be adequately regulators in their home countries, including funds and six debt securities listed on the and borrow money against much smaller assessed between 3 p.m. and the normal close the fact that certain EU directives apply, and Irish Stock Exchange, and it also operates capital cushions than traditional regulators of business (5 p.m.) Even worse, Luxembourg being within the Euro currency zone is also three subsidiaries in the Dublin IFSC through would accept. As a result, systemic risk has a new law stating that as as the highly attractive. Perhaps most alluring of all, a holding company, Bear Stearns Ireland Ltd., increased dramatically. “Perhaps,” the BIS fund manager “notifies” the regulator within however, is its “light touch regulation.” for which every $1 of equity financed $119 report said, “it is simply that no one saw any a month of launch, the fund can enjoy pre- of gross assets – an exceedingly high (and in pressing need to ask hard questions about authorisation approval. The Financial Times Bear Stearns is so far the biggest institution most circumstances dangerous) ratio. the sources of profits when things were going has noted that the Luxembourg regulator to have collapsed from this crunch. so well.” does not “scrutinise promoters”. Problems emerged in June 2007 when two (Cont’d)

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Where is the regulator? “ ‘financial innovation,’ Box 1: How, and by whom, was Bear Stearns Ireland Ltd. regulated? The accounts state that the EU Directive on Financial Regulation 2006/48/EC), states in the current crisis Irish group and subsidiaries are regulated by Art 21: Irish Financial Services Regulatory Authority. appears to have The host member state should be responsible for the supervision of the liquidity of the EU directives seem clear the host country motivated by opaque branches and monetary policies. The supervision of market risk should be the subject of – Ireland in this case – has responsibility for close cooperation between the home and host member states. regulation. (See Box 1.) shifting of risk, Yet despite the location of managed funds Art. 22 and substantial operations in Ireland, the and avoidance of The competent authorities of the host member state, should be able, in an emergency, to Irish regulator does not feature in any verify that the activities of a credit institution comply with the relevant laws, etc. media analysis or discussions relating to the regulation.” insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considers his remit is to ‘Irish banks’ – that Box 2: is, banks that have their headquarters located in Ireland. Four German banks with funds quoted in Dublin ran into difficulties in the subprime crisis – Bayern LB, IKB, Sachsen LB and West LB. One of these banks, IKB Bank, sustained Nineteen funds reported as facing difficulties losses of €2 billion from an off balance sheet conduit called Rhineland PLC with funds in the sub-prime crisis, have been identified quoted in Dublin. as located at the Dublin IFSC. Almost always, the IFSC link is not discussed. There is an Eventually the German government was required to provide the bank with €7.8 billion exception, however: the case of four German in state aid. Sachsen bank required emergency funding of €17.3 billion because of liquidity banks (see Box 2). Between them, they difficulties with a Dublin based subprime fund called Ormond Quay and received state required state aid from the German taxpayer aid of €2.8 billion. totalling €16.8 billion as a result of the losses from the shadow banking system. And yet none of the accounts or prospectus for any of the years examined mentioned regulation or the Irish regulator. Within Ireland the Financial Regulator has been quoted Some people argue that financial innovation as saying that they have no responsibility for entities whose main business is raising and associated with risk management has been a investing in funds based on subprime lending. major source of economic growth, particularly in the US. But “financial innovation,” in the This stance has been repeated by commentators in the media. The Financial Times, for current crisis appears to have motivated example, blamed the difficulties faced by German banks exclusively on the state-owned by opaque shifting of risk, and avoidance of banks and the structure of the German banking industry. regulation.

Jim Stewart is Senior Lecturer in Finance, Trinity College, Dublin.

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NOT ON MY WATCH PLEASE editorial

We are living through a period of consequences. At the time of writing, the U.S. under traditional banking rules. The high tide is receding, and we are now starting to see government is working to stave off the collapse of the mortgage giants Freddie who has been swimming naked. Mac and Fannie Mae, which own or guarantee over five trillion dollars’ worth of loans. Financial excesses over the past 15 years are unwinding. The billionaire To a very large degree, the innovation has been all about circumventing regulation. investor George Soros says the world is now seeing “the most serious financial Regulation exists for very good reasons. It crisis of our lifetime.” is especially important in finance: the effects of a collapse of a manufacturing company are bad enough, but a bank failure can damage a his is an appropriate moment In June, TJN made a long and detailed whole economy, and cause systemic damage to consider transparency and submission to the UK Treasury Committee, on a global scale. Numerous banks are now T accountability, the theme of a which launched an inquiry into the role of seriously at risk. research workshop that TJN co-hosted at offshore finance centres. We explore this on Essex University on July 3–4. Papers from pages 13–14. As we said in our submission: What has driven this regulatory degradation? that workshop provide the basis for this “The offshore world is designed to make Competition between jurisdictions on tax edition of Tax Justice Focus. things appear other than they are, and by and and regulation, driven by tax havens, are at large succeeds in doing so. This, in a nutshell, the root of all this. These places are a menace: Lack of transparency is at the root of the is the threat that they pose to the world.” they hide risk, promote instability, distort current financial crisis, which is now becoming markets, foster crime, and contribute to a full-blown global economic crisis. This will Financial innovation and regulatory insecurity and widening wealth gaps. affect us all deeply: through our pensions, our competition , our public services, and much more. For years a process of financial “innovation” Jim Stewart’s article highlights how the rot has Astonishingly, as Jim Stewart notes in our lead has been underway, centred around New spread from places like the Cayman Islands, article focusing on the International Financial York and the City of London and their offering regulatory vacuums for financial Services Centre in Dublin, almost nothing satellite havens, triggering an explosion of wizards to exploit, to places like Luxembourg “ is a : What is the Church’s response?” This painting of the front door of Saint has been written about the role that tax lending and credit, especially (though not and Ireland. Regulators in each place have come under tremendous pressure to relax Thomas’ Catholic Church in Saint Helier, Jersey is havens have played in this crisis. This edition exclusively) in Britain and the . from an exhibition of original paintings by local artists their standards. The launch earlier this year of Tax Justice Focus will be among the first to In many cases, borrowing has grown to levels to benefit relief workers in Africa. in the tax haven of Jersey of unregulated address this issue seriously. (relative to their safety cushions of capital) Painting by Pat Lucas of TJN-Jersey. that far exceed what would be tolerated hedge funds illustrates the point.

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In boom times, central bankers and the main say that it was disclosed. Investors are saying, that the two countries that are regarded as involving Dutch finance ministry officials, international financial institutions, loath to ‘Yeah, but it was cryptic. We really didn’t being at the forefront of financial innovation tax practitioners, and non-governmental regulate complex structures, have been happy know what you were telling us.’ ” – the United States and the organisations. Attiya Waris describes this on to avoid taking responsibility. The responses – have been among the largest debtors, page 14. TJN has encountered in discussions with UK Complexity is the enemy of transparency. accommodating these surpluses. Their regulatory authorities can be summed up as Warren Buffett, another billionaire investor financial “innovation” enabled these foreign And more “let’s pray that nothing bad happens on my who has been critical of abusive tax surpluses to be channelled into the shadow Again and again, in the context of the watch.” practices, says he never buys a stock he banking systems free from regulatory current crisis, we see language distorted does not understand. Tax havens are masters constraints, where dangerously large and by the practitioners of offshore. Financial Complexity is the enemy of at generating complexity. First, they distort unbalanced borrowings have been allowed “innovation,” as they called it, was really about transparency real investment by re-directing it to where to build up. escaping regulation. “Light-touch” regulation Lax offshore regulation has created a systemic it achieves the largest tax break or the replaces the real term: lax regulation. And contagion, poisoning onshore regulation. least regulation. Complex structures are History and mechanics of the system so on. John Christensen’s article The “The creation of the Special artificially sliced and diced between multiple Jurisdictions “compete” with each other not Language of Offshore on page 16 probes Purpose Vehicle (SPV) that houses $30 billion jurisdictions, adding to the mess. Regulators only on regulation, but also on tax, which the issues, and provides a light-hearted table worth of the most toxic waste from the Bear claim it is not their problem and they shift we have warned about for years. Countries for translating what they say into what they Stearns balance sheet,” Professor Willem it “elsewhere” – which ultimately means engaged in a on tax slash really mean. This is then complemented by Buiter of the London School of Economics nowhere. their taxes on capital, while boosting it on Silke Ötsch’s article (on page 17) announcing wrote recently in the Financial Times, “is the labour, consumption and other factors. The a photo exhibition that aims to deconstruct clearest example of quasi-fiscal obfuscation Combine lax regulation and complexity with net effect is widening inequality. Thomas the positive imagery of tax havens based I have come across in an advanced industrial tax haven secrecy – and how could anyone Rixen’s important article In Need of a Fix on palm-fringed beaches and conspicuous country.” Delaware, it should be noted, is a possibly know where the risks and liabilities looks at the history of , and consumption, which is an important step state within the United States that aggressively are parked, or how big they are? Worse still, reveals the current international web of tax towards raising public awareness about what plays the tax competition game against other the complexity and secrecy fostered and treaties as a central aspect of the whole tax havens are really about. states, and where almost anything goes. “At enabled by tax havens also provides ample problem. every juncture Delaware has underbid its cover for downright fraud, as happened with On a separate tack, Olivia McDonald’s feature competitors,” one analyst wrote in 2002. Enron, which held nearly seven hundred This is nicely complemented on page 15 article Making the Link: Tax, governance “Who needs the Cayman Islands when subsidiaries in the Cayman Islands alone. by Professor Sol Picciotto’s review of and civil society looks at what Christian Aid there’s a tiny, secretive on Reuven Avi-Yonah’s book International Tax is finding out on the ground about the links Global flows U.S. soil?” as International Law which looks at other between tax and accountable government. How big is this problem? Philip Sarre’s aspects of the mechanics of the international This is a large and expanding area for new Which brings us to the next way in which tax informative mapping of and its history, and how multinational research, and her organisation is at the havens have contributed to the crisis. Sam flows on page 6 provides some (extremely and others grew to structure forefront of non-governmental groups now Golden, a former ombudsman for the U.S. large-scale) answers. But he makes another themselves to minmise their taxes. Both starting to probe this crucial question. Office of the Comptroller of the Currency important point in this context. Countries Rixen’s and Picciotto’s articles offer strong (now in private practice) was quoted recently like and the oil-exporting nations pointers for reform. This issue, among many Nicholas Shaxson and John Christensen as saying, in the context of huge potential have accumulated large surpluses of savings, others, was discussed in an event held by hidden losses at Citigroup: “The banks will which they needed to . Sarre notes TJN-Netherlands in Amsterdam on May 21,

 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS GLOBAL FINANCIAL FLOWS feature The big picture Phillip Sarre

Since 1971, financial markets have been progressively freed from government Figure 1. Financial assets regulation. This was done in the expectation that they would work more efficiently 60 and make investment more available to less developed countries, fostering their 56.1 development. 50 $ trillion 40 37.6 or a decade or more, the media China has a third of the financial assets of 30 have portrayed international the whole of the less developed world, which financial flows as the leading edge of total $24 trillion, only 14.7% of the world 20 F 19.0 globalisation, growing ever bigger, faster and total – proportionately less than their 21% 10 less bounded. Activity and movement are share of GDP. 10.0 8.1 certainly mushrooming, but the flows are not 0 Inflows, outflows, cross-border flows quite what was expected, even as portrayed USA Eurozone Japan UK China Developing by official figures. There are substantial In 2006 annual net cross border capital Countries (excl. China) unreported flows. inflows totalled $8.2 trillion. The US had the largest inflow, at $1.86 trillion (compared to Official figures, most of which rest onIMF the outflow of $1.05 trillion); the Eurozone Rapid growth P Annual net capital flows increased national accounts collected for 80 countries, countries totalled inflows of $3.3 trillion Change over time is also striking. McKinsey eightfold, to $8.2 trillion. portray a highly uneven in (half with each other, half with the rest of the data from 2008 shows that from 1990 to So cross border flows are growing at faster space and time. world); the UK received $1.25 trillion. Since 2006: rates than other economic activities, and 1996, 45% of the growth in inflows was to financial transactions faster than production For example, data show that Eurozone countries, with another 35% to the P World GDP doubled, to $48 trillion high income countries, with 16% of the or . Net annual flows of capital remain US and UK . Even after several years of fast (thousand billion). quite small in relation to financial assets, world’s population, have 79% of world GDP growth, less than 10% of the growth in inflows (as measured using exchange rates for P World trade tripled. however, and more than half of those are went to Less Developed Countries (LDCs). still owned and invested in the same national currencies). P World financial assets quadrupled, to Yet the $704 billion that they received in economy. 2006 was exceeded by net outflows of over a $167 trillion. Most of the $167 trillion in financial assets trillon, making them net exporters of capital are held in just a few countries (Figure 1 P Cross border investment assets To make matters even worse, in 2005 the to the high income countries. shows the main locations). quintupled, to $75 trillion. World Bank had reported capital inflows

 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS to the less developed world as $571 billion States and the United Kingdom – are among “To sum up, the open capital markets that were expected to – in a table that also included an ‘adjustment the largest debtors (along with Mexico and line’, composed of errors, omissions and Brazil, whose economies have grown slowly make investment available to less developed countries have acquisition of overseas assets, of $345 billion, since the late 1970s), while the two major in fact operated to concentrate capital in more developed indicating a very serious margin of error. (And, economies that have been regarded as in countries, using both legal and illegal transactions, often amid the $8.2 trillion net cross border inflow trouble over the last decade, Germany and figure above, outflows were $87 billion less, Japan, are amongst the largest creditors through a network of offshore financial centres.” suggesting that some exporters of capital do – along with the big oil exporters and new not report it.) growth phenomenon China. Developed Countries”(MDCs) tripled from detailed analysis showed that International Foreign investment assets, liabilities Financial integration, discrepancies, 1970 to 2004, but for LDCs it grew by only Financial Centres were among the worst By the end of 2006, foreign investment assets and outflows from poor countries 50 per cent, levelling off in the 1990s. under-reporters of foreign asset ownership. held by Eurozone countries had overtaken Lane and Milesi-Ferretti (2006) use a range of those in the US. official data and academic studies to build the Second, there was an overall cumulative There were substantial unrecorded inflows to most comprehensive database on the financial discrepancy between reported assets and , the UK and US, running at about In 2006, the difference between countries’ assets and liabilities of 145 countries. Their liabilities, reaching 6 per cent of world GDP $100 billion each, and outflows from Russia, net foreign assets and net foreign liabilities data reveals some rather interesting features in 2002, or about $2 trillion. More than half Italy, China and . High percentages ranged between the largest debtor, the US, in the international financial landscape. the overall discrepancy was accounted for by of GDP were lost to countries including and the largest creditor, Japan. Interestingly, foreign owned portfolio equity holdings in the Mozambique, Oman, Ethiopia, Bolivia, Zambia, the two countries regarded as being at the First, financial integration – measured as USA, Luxembourg and Ireland, for which no and Lebanon. forefront of financial innovation – the United combined assets and liabilities – among More other jurisdiction claimed ownership. More

Table 1. Figure 2: Net foreign assets/liabilities

Country Foreign investment assets held ($US trillion)

United States 12.5 Japan $1,815 bn UAE $802 bn Eurozone countries 29.2 (half with each other, half outside) Germany $729 bn $698 bn UK 10.4 China $607 bn Japan 4.7 Switzerland $459 bn Brazil –$387 bn China 1.4 Mexico –$396 bn –$477 bn Switzerland 2.4 UK –$573 bn Spain –$739 bn Gulf States 2.2* USA –$2,599 bn 1.8 -3000 -2500 -2000 -1500 -1000 -500 0 500 1000 1500 2000 2500 US$ billions *according to McKinsey the IMF figure of $824 billion for the Gulf states is ‘unlikely to be accurate’

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Figure 3: Capital outflows from less developed countries (US$ billion) “The two countries regarded as being at the forefront of financial innovation – the United States and the United Kingdom – are among the largest debtors, while the two 130 300 Profits on FDI major economies that have been regarded as in trouble over Debt service the last decade, Germany and Japan, are amongst the largest Commercial mispricing (chart shows upper creditors.” 540 end of 300–500 range 500 Proceeds from crime and corrupt practices (chart shows upper end of 200–300 range)

There have been various studies and estimates estimates suggest that twice as much capital References of unreported movements of capital, most was spirited out of Africa between 1970 and Lane P and G Milesi-Ferretti 2006 The external recently by the European Network on Debt 2005 as the total debt recorded for that wealth of nations mark II: revised and extended and Development (2008). These studies both continent (see here). estimates of foreign assets and liabilities 1970- identify the nature of these flows and suggest 2004 (IMF Working Paper) that they outweigh the flows of aid (about To sum up, the open capital markets that $90 billion a year) and investment into less were expected to make investment available McKinsey Global Institute 2008 Mapping developed countries. Figure 3 shows flows to less developed countries have in fact global capital markets: fourth annual report. out of LDCs. operated to concentrate capital in more McKinsey Global Institute, San Francisco developed countries, using both legal and The disparity in treatment of flows is stark. illegal transactions, often through a network European Network on Debt and Development Past loans and investments are meticulously of offshore financial centres. Forays of finance 2008 Addressing development’s black hole: recorded and payment demanded, while into some less developed countries have regulating capital flight transfers by dictators, money laundering of been small and volatile, contributing to crises drugs profits and manipulation of internal as much as to development. prices between divisions of MNCs move even larger sums – without attribution. Unrecorded Phillip Sarre is Senior Lecturer in Geography at flows use offshore financial centres, with low The Open University. taxes and bank secrecy, to obscure flows, but assets end up being held in mainstream institutions in developed countries. Recent

 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS In Need of a Fix feature Double rules as the institutional foundation of tax competition Thomas Rixen

International tax competition is becoming a hot topic in academic and political and tax system, independently from other taxpayers can use the indeterminacy of the debates. Nearly all recent tax reforms have been justified by claiming that it is governments. So double tax avoidance rules arm’s length standard to manipulate transfer operate only at the interfaces of national tax prices (legally), or they can use shell or necessary to maintain a “competitive” tax system vis-à-vis other countries. regimes. There is no attempt to harmonise “letterbox” companies to manipulate their tax systems between countries. formal and earn profits tax-free – without relocating real economic activity ax competition is generally taken investment. In the 1920s, when the League of The rules for allocating the taxable profits or changing real residence. They become free as given; a ‘natural’ corollary of Nations drafted the first principles of double of multinational enterprises (MNEs) riders enjoying tax-financed public goods T economic globalisation. Of course, tax avoidance, the intention was to liberalise between jurisdictions are emblematic of this and services at their places of residence or economic globalisation is a necessary condition the international economy. The principles and sovereignty-preserving principle. Under a production, without contributing sufficiently for tax competition: if production factors were rules of double tax avoidance were codified in a “separate entity” approach, allocations are the towards them. immobile, it could not happen. Yet it is not a non-binding model convention that developed same as would result if the different entities sufficient condition. Whether there is tax into a de facto standard. Since the 1960s, the of a multinational group were independent In essence, tax arbitrage is possible because competition at all, and how it is structured, model convention has been sponsored by the actors transacting in a market – the “arm’s double tax avoidance rules leave governments’ depends on the rules governing how trans- Organisation for Economic Cooperation and length” standard. Governments can define formal tax sovereignty untouched: they may border movements are taxed. These rules are Development (OECD), which has become the tax base and the as they wish. design their tax systems so as to attract laid down in the double tax avoidance regime. the central forum for discussing and co- other countries’ tax bases. So the regime of Unintended consequences Analysing how these rules work, and how ordinating international tax issues. The model agreements (DTAs) not only they generate today’s particular structure of convention’s fundamental principles have not This setup does achieve market liberalisation, succeeds in preventing double taxation; it harmful tax competition, could open up tax changed, though its technical details undergo but its sovereignty-preserving aspect has also provides the institutional foundation for unintended consequences in the form of policy debates to co-operative international ongoing modification. Governments have today’s structure of harmful tax competition. , avoidance, and competition. approaches, rather than sinking into ultimately now concluded more than 2000 bilateral tax Explicitly, the rules only tell states how to With increasing internationalisation of self-defeating national responses. treaties based on this model convention. avoid international double taxation. Implicitly, the economy, the negative effects of tax The double tax avoidance rules The double tax treaties preserve sovereignty. however, they also tell taxpayers how they competition become more pronounced, can “optimise” tax payments. For example, and governments have failed to regulate it constitute the structure of tax They merely allocate rights to tax among the competition jurisdictions involved, without prescribing The original purpose of international tax how they should exercise these rights “Globalisation means it is necessary to share formal tax co-operation was to avoid double taxation, (including the right not to levy taxes at all). sovereignty with others, to regulate international tax and to co-ordinate overlapping tax claims National governments have exclusive formal competition effectively and regain real tax sovereignty.” of nation states on international trade and authority to determine the tax base, tax rate,

 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS well, for several reasons. First, many low-tax quite apart from the fact that there are gaping countries and tax havens see themselves as holes in the system – that it only provides Rule-stretching and formula apportionment/unitary taxation “winners” of tax competition, and oppose an ex post remedy. Better information stricter regulation. Second, even, high-tax exchange and administrative cooperation , for example, often involves rule-stretching. With the globalisation of countries have ambivalent interests: they do are certainly necessary and worthwhile. But production, and the rising importance of intangibles – trademarks, patents, and other not want to lose tax revenues to tax havens, while national tax systems retain so many – it is almost impossible to apply the arm’s length principle, because but they also do not want to close all tax differences, they will present opportunities there is simply no market for such transactions. So the benchmarks needed for determining loopholes for “their” own multinationals. for international tax arbitrage, and the costs the price are missing. Third, they do not want to endanger the tax of ex post administrative enforcement will be In reality, tax administrators often have to rely on a combination of arm’s length pricing and treaty regime’s coordinating function – the high. What is needed in the medium to long formula-apportionment methods (where governments agree on a common, consolidated established solution to double tax avoidance term, is more ex ante cooperation, where tax base, then apportion the taxes between the countries where an MNE operates according – which rests on a non-binding standard. So governments are willing to harmonise at least to an agreed formula; this is also known as unitary taxation.) Over time, national transfer they act cautiously: they try only incremental parts of their national tax codes. pricing guidelines have been amended to allow for such apportionment, if arm’s length reforms, and selective deviations from the prices cannot be determined. established principles. One solution would be unitary taxation with formula apportionment (see box). The With the introduction of advanced pricing agreements (APAs) – mechanisms by which Some reforms could be called rule-stretching. formula would ideally be based on factors like MNEs and tax administrations commit to certain prices before the transactions actually Governments take great care to reconstrue sales, payroll, or capital invested, to ensure that occur – there has been a trend towards implicit consolidation of accounts across borders. new rules to concur with the arm’s length economic activity is taxed where it actually It has been argued that APAs are just a covert way of applying formula apportionment on standard, rather than acknowledge their happens. A typical letterbox company in a tax a case-by-case basis. inherently unitary nature. (See Box.) They haven would only be assigned a very small formally reinforce the “separate entity” or no part of the enterprise’s profit, because accounting principle, in order to continue to hardly any real economic activity, measured how harmful the effects would be, will depend directive on a common consolidated tax rely on the established DTA regime principles. by these factors, happens there. This would on the formula. It may be necessary to agree base this year –resistance is strong and the Governments also pursue a strategy of make arm’s length pricing superfluous, but it on a binding minimum tax rate. Nevertheless, chances of real change in the near future layering: they layer additional regulations would require states to harmonise their tax such a system would be better than the are low. Governments seem not to have on top of existing ones so as to soften the bases and thus share some formal sovereignty current state of affairs. Instead of relying on an yet realised that globalisation means it is negative consequences of the DTA regime with others. But they would remain free to opaque, hybrid system of arm’s length pricing necessary to share formal tax sovereignty and keep it operable. apply the tax rate they wish to their share of coupled with ad hoc formula apportionment with others, in order to regulate international the consolidated base. through the administrative back door, effective tax competition effectively and regain real What can be done? formula apportionment would require elected tax sovereignty. Only collectively can they Rule-stretching and layering do not explicitly However, a unitary taxation system, with a governments consciously to decide on recapture what they have each lost. challenge the sovereignty-preserving setup common consolidated tax base and formula appropriate definitions of the common tax Dr. Thomas Rixen is a political scientist and of double tax avoidance. Governments apportionment, would face problems too. Tax base and the formula. Democratic legitimacy economist at the Social Science Research Centre still remain largely free to devise national competition would no longer be mostly about would be increased. Berlin (WZB). His book, The Political Economy tax laws as they wish, and the unintended shifting “paper profits.” Instead, companies and of International Tax Governance will be consequences – tax evasion, avoidance, or countries would structure tax competition on Currently, the political prospects for this are publshed by Palgrave MacMillan this year. competition – are only addressed through the factors that are part of the apportionment poor. Even in the European Union – where administrative cooperation. The problem is – formula. How far this would be possible, or the Commission planned to propose a

10 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS Making the link feature Tax, governance and civil society Olivia McDonald

Drawing on our own experience and on analysis by experts in this field, and Aid and its partners are closely involved with. Yet it is also important to generate a sense comparing different sources of , Christian Aid is now starting of ownership amongst citizens of natural to explore the links between development finance and accountable governance. resources. The Alaska Permanent Fund is a We have found evidence that tax, rather than aid and natural resources, is well-documented model of how the revenues from natural resources can be distributed more closely linked to better governance. The way tax is raised, and who pays to citizens, boosting people’s incomes and The groundwork is being laid for this to it, play an important role. For an organisation like Christian Aid, working with increasing citizen interest in – and scrutiny of change. Research by Mick Moore (TJF Second approximately 600 partners in 50 countries, this analysis has major implications – the use of natural resources. Quarter 2007, Vol. 3, Issue 2), Michael Ross, for our lobbying and campaigning with the UK and Irish governments, and for James Mahon and others has shown a strong Donor commitments to improve aid link between democracy, liberalism and tax. our work with local civil society organisations. effectiveness are important, and welcome. has for long been the terrain of Yet even if donors displayed model behaviour the technocrats, but the political implications – allowing recipients space to set policies in are now coming into focus. At the OECD hile aid brings about much Is aid like oil? consultation with citizens – aid would still Development Assistance Committee, the weaken accountability to citizens because needed resources for The ‘Curse’ that accompanies the prevalence governance network has now noted a it remains a revenue source independent of W inflows often of natural resources like oil is well documented potentially long-term dividend of improved them. Full, proactive transparency of donors place heavy reporting burdens on governments and broadly accepted. It is particularly evident governance to be gained from tax: a social to citizens in recipient countries about what with limited capacity and can actually weaken with non-renewable resources like oil but fiscal contract. they are paying to governments and asking their abilities to budget effectively. Aid a correlation has been identified between governments to do in return will mitigate this often bypasses not only institutions that natural resource dependence (measured by “Tax systems and tax problem, but not overcome it. scrutinise the government, like parliament, the ratio of primary to GDP) and the reforms should clearly but government itself. Aid conditions mean probability of authoritarian government. Oil The Tax Consensus has failed recipients are more accountable to donors revenues do not come from citizens, so these be designed with good Tax systems and tax reforms should clearly than to their citizens. Yet tax, and especially revenues do not create the beneficial links of be designed with good governance as a direct taxation like income taxes – can build accountability that tax does. Aid can pose a governance as a core core objective. Unfortunately, however, healthy links of accountability and political similar problem. representation between governments and this does not happen at present. A widely- objective. Unfortunately, their citizens. A government’s imperative to Greater transparency can help, and this drives accepted international “tax consensus” (TJF however, this does not collect taxes can also stimulate it to build civil society campaigns such as Publish What You Second Quarter 2007, Vol. 3, Issue 2) focuses better and stronger institutions so that it can Pay and the Tax Justice Network’s Country-by- strongly on revenue, at the expense of happen at present.” do so. County reporting initiative – which Christian redistribution, re-pricing and perhaps most importantly representation. (Cont’d)

11 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS

VAT in some countries, for example, have What does this mean for Christian Aid Magic passes in the Democratic Republic of the Congo been met with protests. and our partners? For our policy and lobbying work, this On the road from the village of Kandolo to the nearest market in the town of Kalima, P Who pays tax and how? Indirect taxes analysis means promoting reforms that make civil servants sit in small, often camouflaged huts, waiting for passers by. They demand like VAT may not be as effective as direct revenue from natural resources and aid work a percentage of the produce – such as rice, cassava leaves or fruit – as tax and provide taxes in improving state-citizen relations. ‘more like tax’. But it also means calling for no receipt. Unaware of their legal rights, and afraid of the police, people pay up. A few States are more likely to pursue tax policies development of tax systems to be prioritised kilometres down the road, they pay again. And again. By the time people reach the market that benefit favoured sectors of society. as the development finance source that they may have has less than two thirds of the produce they started with. Broadening the tax base is important, delivers best for governance. yet in many developing countries very Many farmers stopped trying to sell their produce in Kalima, struggling by without the few people pay , including the In developing countries we should, for precious extra income. But things have improved since they joined the local Farmer’s middle classes. This also means thinking example, support projects that mobilise Association established by Christian Aid partner UKPA, and learned about illegal taxation. about how to bring poor people into the citizens as taxpayers. We should support formal tax system. partners to analyse how people are taxed, to Mwanzo Walimbwa and other members of the Farmer’s Association now each wear a consider if it is done in a way that promotes ‘magic pass’. “We wear passes so as to visibly be a member of the association, and, so, P Is the taxation coerced, or accountability. And if it doesn’t, as in the ‘educated’ – like [as with] the university students who put their school cap in front of negotiated? Coercive taxation is DRC example above, we should support our their bikes – they know not to even bother us.” Mwanzo shares what he learned with arbitrary and forced, so those who are partners to challenge that. others in his community. taxed are not in a strong to demand accountability. This can damage As we increase our work on ‘If one of the civil service asks for taxation we say “no papa – we know all about what is state-society relations. By contrast, evasion, we need to ensure that our belief legal and not legal” and he runs away. UPKA taught us how to do that.’ Members of the revenue-bargaining sees taxes being that tax forms a social contract remains farmer’s movement now confidently ask for receipts when they pay legitimate taxes, so negotiated between state and society, with central; that we ourselves do not reduce tax they won’t be taxed again. taxes being paid in exchange for services policy to a technical discussion about how to and security in ways more acceptable to raise revenue. citizens. Olivia McDonald is Senior Governance Advisor, What tax systems deliver better “For our policy P Where is tax paid? Decentralisation Christian Aid governance? can make governments more responsive and lobbying work, Technical quick fixes rarely work in to citizens’ preferences than centralised this analysis means development, but our analysis has identified ones; and local taxation can bring four main areas to think about: opportunities to strengthen links between promoting reforms that people and governments. But local tax P How are tax policies decided? Donors systems are not without problems: they make revenue from should focus more on the mechanisms can be complicated, opaque, coercive natural resources by which tax policies are set, and who and poorly coordinated with national participates. Civil society needs to be able government. More research at this level and aid work to offer its perspectives on tax policies. is essential. This occasionally happens, but not in a ‘more like tax’.” systematic way: attempts to introduce

12 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS report

Tax Havens: Creating Turmoil by John Christensen

At the end of April the UK Treasury stability and transparency expected and thousands of SPVs set up in Committee, a powerful economic from the world’s leading financial offshore world-wide, the problem is policy-making body, announced an centres. of systemic proportions. inquiry into the role of offshore financial centres in the current About a quarter of the written Sol Picciotto (University of global financial markets crisis. submissions (they are available in Lancaster) notes how OFCs “offer This comes exactly ten years after draft form here) came from non- the cloak of their laws and regulations Andrew Edwards presented the OFC sources. and to persons who are not resident in findings of his review of financial Anastasia Nesvetailova of the their territory” and concludes that: regulation on the British Crown noted Dependencies (see here) – which that offshore entities can easily OFCs have acted as a corrosive failed to drive significant reform be used to isolate ownership of factor on other countries’ fiscal as a result of inaction by the New offshore financing vehicles from and financial laws and regulations. Labour government. their onshore parents to shift them Their existence has led states with off their balance sheets and obtain major financial centres, including st and especially the UK, to introduce By July 1 , the Tax Justice Network higher credit ratings. This is just From the Department of You-Couldn’t-Make-It-Up: the MV Turmoil, registered in (TJN) and 26 other groups, mostly what happened, and it precipitated laws and regulations which Georgetown, Cayman, and moored outside Citigroups offices in Dublin’s offshore financial representing Offshore Financial the current financial crisis. They cite effectively make them participants centre. Centre (OFC) interests, had made the failed British bank Northern in the offshore system. The result dirty money, including tax avoiding of accountants present in every formal submissions. The submission Rock as an example: has been serious distortion of the monies, through OFCs. major and most minor tax haven by Jersey Finance Limited (an international allocation of investment, jurisdictions around the world, can industry promotional body), gives a No one knows for sure if, for the undermining of national tax TJN-UK’s submission, argues that move their operations to wherever flavour of the OFC submissions: instance, Northern Rock will take the systems, and the creation of such a international regulation focusing they want at a moments notice. They responsibility for the estimated £50 high degree of opacity as to create on tax havens has largely failed due have used this power to threaten to There is no theoretical or practical billion of what was assumed serious risks for the international to the political capture of these evidence to suggest that Offshore to be its offshore SPV [Special leave any jurisdiction that does not and monetary system. jurisdictions by OFC interests: Financial Centres (OFCs) threaten Purpose Vehicle], Granite, because comply with their wish to secure the legislation they desire. financial stability. Jersey meets legally, Granite is a separate entity. Edmund Valpy Fitzgerald of Oxford OFC operators, many of them or exceeds all of the relevant Since this particular relationship is University draws attention to multinational companies or banks, international standards for financial replicated through the thousands security risks arising from routing and some like the Big 4 firms

13 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS report

Offshore Financial Centres A Tax Justice seminar in Amsterdam (Cont’d) by Attiya Waris

As a result, in the last decade The money of the UK taxpayer is not A ground breaking tax justice new and highly abusive forms of being effectively spent to support conference was held on May 21 in and trust have development, since this incoherence Amsterdam, the second of its kind been developed, which have been of broader policy on OFCs and organised by TJN-Netherlands. The little documented and much less international financial regulation aim of the conference, in a country understood but are able to float free undermines the value of the aid reckoned to have more tax lawyers of almost any regulatory control. given. than any other, was to analyse the links between tax, the Dutch Christian Aid’s submission outlines The inquiry will resume oral approach to tax, and the effects on how OFCs undermine efforts by hearings after Parliament’s summer developing countries. Speakers and poorer countries to raise domestic recess. TJN-UK, along with Christian participants included economists, Richard Murphy makes the case for a TJN Code of Conduct for Taxation. (Click here) revenues to finance their own Aid, Action Aid, Global Witness and lawyers, ministry officials, tax development. Global Witness others, hopes to attend a hearing in practitioners, and representatives of as the only sustainable source of approach towards taxation and its complemented this with an in- early October. non-governmental organisations. development financing, He also international tax treaties; André depth study examining how offshore discussed Christian Aid’s major Nagelmaker from the Dutch Trust Click here for a full text of all written mechanisms including UK-linked Albert Hollander, President of Tax new report on tax and developing Associations explained about the submissions. offshore centres provided “the means Justice Netherlands, explained TJN’s countries (see the Christian roles his member organisations play for mismanagement and looting of John Christensen is a former Economic aim to stimulate research and long- Aid report here, and Cobham’s in reducing transaction costs for state oil revenues in the Republic of Adviser to the States of Jersey, and term dialogue on these issues, to Amsterdam presentation here). international players, among other Congo.” These submissions highlight directs the Tax Justice Network help find common ground in finding things. In the afternoon, Richard His presentation prepared the ground a fundamental policy inconsistency: International Secretariat. ways forward, in line with the event’s Murphy gave different options that the UK government commits to title In Search of Balance. for my own presentation on the link the accountancy profession can take increasing its aid budget, but fails between tax and development in towards its treatment of tax issues, to regulate the activities of its tax Alex Cobham looked at the roles Kenya, Africa and other developing while R van der Laan compared haven dependencies and blocks tax plays in developing countries, countries (See here). Sony Kapoor the different approaches being international efforts to clamp down including how it can build strong, looked at different tax systems around undertaken in the accountancy on capital flight and tax dodging. accountable government. This the world, including a brief foray into profession. Developing countries are net losers. expanded on research he described Brazil’s (now-suspended) innovative As Christian Aid said: in a previous edition of TJF (see CPMF financial transactions tax, A list of speakers’ presentations is here) about the shortcomings of among other transactions taxes. available here. a well-estabished international Leo Zuliani from the Dutch Finance “Tax Consensus.” Underlining tax Ministry explained the Netherland’s

14 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS reviews

International Tax as be taxed by the state of residence than business carried out purely became adept in exploiting International Law. of the investor, while `active’ income domestically. However, there is residence rules, by pioneering the from actually carrying on a business ample evidence that it has failed in use of tax havens for the formation An Analysis of the should be taxed primarily by the this aim. Transnational corporations of intermediary corporations and International Tax Regime source state, where the business (TNCs) have generally succeeded other entities: the typical TNC is is carried on. He rightly sees these in exploiting the system to reduce now a complex network of often Reuven S. Avi-Yonah principles as the mainstays of the tax their effective tax rates well below hundreds of affiliates. The large Cambridge University Press, 2007 treaties, developed since the 1920s, the nominal rates, often to zero. TNCs are also as much financial that now form the main skeleton of Data from the General Accounting as business firms, which makes the international tax system. Office in 2004 show that in the US the distinction between active and from 1996 to 2000, some two-thirds passive income virtually impossible With this point of departure, the of TNCs paid no tax at all, and over to apply to them – a fact that they International is a vital, on income and profits reveals the rest of the book examines in detail 90% paid below 5% of their total exploit. The integrated nature but complex and difficult subject. complex patterns of interaction, the main provisions through which income. Similarly, in the UK, last of their activities, as well as the Reuven Avi-Yonah is one of its accommodation, cooperation, but they are applied. In this respect, year’s National Audit Office report often unique technology resulting leading academic lights, with an also competition, through which has the main focus in the book is revealed that in 2005-6, 220 of the from their oligopolistic character, exceptional capacity to explain the emerged what one must describe as United States tax law as applied to 700 largest firms paid no UK tax completely undermines the `arm’s policy and practical implications of an international tax system. However, international business, and Avi-Yonah at all, and a further 210 paid under length’ principle on which the the most arcane rules. Yet, I suspect recognising this is a long way from deftly demonstrates his undoubted £10m; these 700 firms account for control of transfer pricing between that a non-specialist would need to saying that positive, legally binding expertise in explaining the rules, a little over half of the UK’s total companies within a group is based concentrate hard to understand the international rules now ineluctably illustrated with interesting cases and tax receipts, and 67% -- at least ostensibly. In perhaps the analyses in this book. prescribe the basic principles of that examples. As the analysis unfolds, of these receipts came from only 50 best chapter, Avi-Yonah traces how system. one begins to wonder whether the firms in 3 main sectors. far in practice the transfer pricing The central aim of the book is author’s aim was indeed to use the rules have actually moved away from entirely laudable. It seeks to oppose Avi-Yonah puts forward two detail to exemplify and justify the Avi-Yonah’s careful dissection of the the arm’s length principle. the common, indeed predominant, principles as establishing the basis existence of the two basic principles, application of the second principle view among tax lawyers that states of the system. First, the ` or rather to develop an immanent (the “benefits principle” separating What this book demonstrates, are free to adopt whatever tax laws principle’: that income from cross- critique of them. passive and active income) starkly in my view, is the urgent need they wish, in pursuit of their own border economic activity should reveals the reasons for this. TNCs for a fundamental reform of the interests. This clearly makes no be taxed once (i.e. there should be Undoubtedly, the aim of the system operate as internationally integrated international tax system, especially sense in an interdependent world neither double taxation nor double as it developed among the leading firms. This makes it very difficult in as it applies – or fails to apply – to where one country’s tax system non-taxation). Second, the `benefits capitalist states was to try to ensure practice to apply source-based tax TNCs. What is more, where the affects others. The slightest study of principle’: that `passive’ income that international business is taxed rules to them. As the international TNCs have led, in creating and the historical development of taxes (from investment) should primarily neither more nor less heavily system developed, they quickly exploiting tax havens, others have

15 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS reviews (Cont’d) analysis

followed, notably hedge funds and of closer cooperation between so-called high-net-worth individuals. national tax authorities. This should The Language of Offshore This creates severe distortions be within the framework of a by John Christensen in the allocation of capital and comprehensive multilateral treaty investments, not to mention creating for cooperation in “What’s in a name? that which we call a rose many, like Jersey, are dependent difficulties for governments wishing and collection, not just bilateral tax territories of European states. Sol By any other name would smell as sweet;” to set up systems information exchange agreements as Picciotto felt the term tax haven as their voters would want. Taxation is now being pursued by the OECD. William Shakespeare, Romeo and Juliet (II, ii, 1-2) does not adequately capture the of TNCs on a unitary basis, with In fact, the OECD and the Council of regulatory uses of this phenomenon, formula apportionment – under Europe drew up such a multilateral Or maybe not in the case of tax These questions were core to a and he prefers to talk about ‘tax and which a TNC would be taxed as treaty in 1988, although states have havens, most of which furiously deny lively panel discussion at the AABA/ financial havens’. Others suggest the a whole, then these tax revenues been very slow in joining it: it is in being tax havens. Some even resent TJN research workshop in early July. term ‘secrecy jurisdiction’, more allocated to different states where force for only a dozen OECD states being labelled offshore financial Richard Murphy pursued his line of widely used in the USA, and more it operates -- would cut through (plus Azerbaijan), although it came centres, which is less pejorative than reasoning in the recently published evocative of key TJN concerns, be st complex corporate group structures, in for the UK on 1 May 2008, and tax havens, but not half as grand as “Tax Havens: Creating Turmoil” (see adopted into wider usage. resolve most transfer pricing issues, Germany just signed (though has not ‘international ’. page 13) – that tax havens are the and strike a major blow against yet ratified). Its scope is also highly enabling jurisdictions, and should There was less agreement on the tax havens. Far from a pipe-dream, restricted. But it is a start. But language matters, not least since be treated distinctly from offshore definition of offshore financial this approach is essentially already public opinion about tax havens financial centres, the cluster of centres (OFCs). Ronen Palan applied in the profit-split method Far from entailing the abandonment remains confused. The French and financial service providers (banks, argued that OFCs should be seen which is now officially sanctioned of national sovereignty, reform of the Spanish terms, ‘paradis fiscaux’ legal and accounting firms and other as part of a distinct offshore capital by the OECD (see p.117 of his international tax system is essential and ‘paraísos fiscales’ respectively, intermediaries) and their clients, who market, historically known as the book), as well as in Advanced Pricing to retaining the effectiveness of sound altogether heavenly. Further exploit the opportunities that tax Euromarket. According to this line Agreements (118-9). The European national tax systems in an integrating confusion arises when commentators havens provide. These opportunities of reasoning, OFCs are centres that Commission is actively preparing the world. This means going beyond the and politicians treat the terms ‘tax include tax avoidance and evasion, specialise in non-resident financial way for its adoption within the EU, clumsy system devised in haven’ and ‘offshore financial centre’ but exploiting lax regulation is transactions, especially those related and there are good prospects that a the first half of the last century. as inter-changeable. But are they? And equally (if not more) important to to Euromarket activities. new US administration could put its what can be done about inherited many companies using tax haven Sol Picciotto, Emeritus Professor, weight behind such an initiative. language that has become firmly facilities. Central to this debate is the issue Lancaster University Law School, established in public consciousness? of how, and to what extent, financial Indeed, the emergent principles of a and Senior Adviser to the Tax Justice Should we try to persuade journalists A consensus soon emerged on service providers operating from reformed international tax system Network. and other opinion formers to use treating tax havens as politically tax havens have evolved beyond can perhaps be discerned already in terms that more accurately describe distinct geographical entities, which being used merely for booking outline. Fundamental is the principle the phenomenon?. may or may not be sovereign states: transactions offshore. Tax havens

16 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS analysis (Cont’d) competition such as Montserrat, Andorra and The power of language to shape that more effectively enables opinion Vanuatu probably fall within the ideas and debate is well recognised. formers and policy makers to Photo exhibition on tax havens booking centre category, but others Terms such as “tax innovation”, understand the phenomena that we by Silke Ötsch like Jersey and Grand Cayman have recently used by the Irish rocker are dealing with, and identify policy attracted sufficient banks, legal and Bono to deflect public concern solutions tailored to its different A call for photos geographically, not politically – so accounting firms with the requisite about his tax avoidance practices, aspects. The session in Essex took places like Switzerland or Jersey are (often expatriate) expertise to and “agile and flexible regulation”, us a certain way down that route, Tax havens and offshore centres are included.) be able to provide the package of which created the long and slippery concluding with recognition that the commonly associated with positive images of remote sunny islands. banking, legal and accounting facilities slope down which many banks have language used in academic papers We aim to interest a broad public, used to create offshore structures. fallen into amid the credit crunch, might not always transfer directly to Providers of offshore services like to talk about tax paradises, sunny especially those who are interested Sol Picciotto described this as an have been very effectively deployed the broadcast or printed media. The in politics but who shun tax as an evolutionary process, with most tax by the proponents of tax havens and discussion continues. islands and freedom, where capital is agile (or, as Germans say, as “flighty issue because they find it dry and havens aiming eventually to attract de-regulation. (See box.) difficult. We also want to attract “Tax Havens: Creating Turmoil” can as a fawn”.) They like to contrast a sufficient critical mass of financial people with an interest in culture. TJN needs to cut through this be downloaded here. this with notions of tax hells and service providers to become a fully Many such people are affected by obfuscation and arrive at a language obsolete state bureaucracies. fledged OFC. finance. We also hope local groups We aim to deconstruct this positive will organize the exhibition in their imagery and use our exhibition towns – especially, if possible, in tax The Tax Justice Network dictionary of offshore obfuscation to show tax havens not as island offices of the tax authorities. What they say What they mean paradises, but as juridical constructs central to the existing economic We want to degrade the prevailing We are not a tax haven We are a tax haven, but don’t tell anyone system and offering special privileges image of the tax avoidance and evasion service industries and of We offer agile and flexible / “light touch” We offer lax / complacent regulation to wealthy people and corporations. regulation We want to show what tax cooperating elites, by providing a more accurate image of what they We respect privacy We will turn a blind eye to your dirty money havens really look like: letterboxes, billboards, tiny banks on the German- are about. This way, we hope to add Tax-friendly Friendly for us, but probably not for you Austrian border, for example, or to the pressure on politicians to act seriously against tax havens. This should be regulated elsewhere This will be regulated nowhere. big banks sited next to cow sheds. We want to stress that tax havens Each participant can send up to 5 We maximise our tax efficiency We avoid tax (“The Bono defence”) are not exceptional and exotic, but photos, with 300 dpi resolution. core elements in the global financial No tax was due, so no tax was avoided We dodged the tax, so it was not due ( “The Philip Green defence.”) Please add a short description of system, so we will focus on tax We manicured our tax affairs We evaded our taxes (“The Yukos defence”) each one. havens and offshore financial centres in Europe (by Europe, we are talking We use innovative tax planning You paid your taxes? Sucker! (Cont’d)

17 SECOND Quarter 2008 Volume 4 Issue 2 TAX JUSTICE FOCUS competition (Cont’d) Calendar

August 18–20 – Alpbach, Criteria for selection Prizes Reform symposium at the 64th European Alpbach forum: Taxing for Sustainability. Keynote The jury will then evaluate the First prize: A Panasonic Lumix DMC- speech by TJN’s John Christensen. For preliminary programme, click here. submissions with the following FS3 Blue Compact Camera criteria in mind: September 18 –Paris 2nd and 3rd prizes: One of these High level dialogue on the draft outcome document of Doha between the French EU 1. Does it show a component of books (the winners can choose): a tax haven or of the offshore presidency and European civil society. TJN is among the co-organizers of the event. For economy? P Ronen Palan, The Offshore World: more information, please contact Taylor Exantus at [email protected] Sovereign Markets, Virtual Places, 2. How relevant is it? Does it Sept 17–21 – Malmö, and Nomad Millionaires, Cornell provide new information? (For European Social Forum. Includes Tax Justice Network seminar, and a screening (13:00 on University Press, 2006 example, a photo of billboards in Sept 18) of the filmThe End of Poverty? (Won critics’ choice at Cannes Film Festival.) the Swiss City of Zug is better P Ernst Schmiederer und Hans October 9 – UK than using a montain lake with Weiss, Asoziale Marktwirtschaft, Department for International Development (Dfid) and TJN to co-host a seminar on tax a flower in front of it. But if it Köln, 2004 shows a billboard advertising justice and development at DFID, London. Open to NGOs to attend. “Nord Stream AG,” whose P The catalogue of the exhibition October 21–22 – Oslo, Norway supervisory board is headed by (to come out in spring/summer Third meeting of Norwegian-led task force on . the former German chancellor 2009) Gerhard Schröder – so much the October 23 – Oslo, Norway better.) The first prize is kindly funded by Norwegian government and World Bank task force: combined research workshop on illicit John Christensen. 3. The quality of the photo. financial flows.

The Jury Deadline October 27–31 – Geneva The jury is composed of: John The deadline is September 30, 2008. Session four of UN Tax Committee, click here. Christensen (Director, Tax Justice Send contributions by email to: October 29–31 – Rome Network International Secretariat, [email protected], or If it London), Ronen Palan (expert on exceeds 10 Mb please send it by post Event organised by Italian episcopal conference, where Debt, Jubilee and Justice report Offshore Economy, University of to: Silke Ötsch, Schneeburggasse 43, 2006–2008 will be released. TJN will participate. A-6020 Innsbruck (Austria) Birmingham), Detlev von Larcher HIGHLIGHT: November 29-December 2, 2008 – Doha, . (TJN Germany), Silke Oetsch Follow up International Conference on Financing for Development (FfD) to Review (working group on financial markets and taxes of Attac Germany), Celia di Implementation of the Monterrey Consensus. For more details, click here and for a list of Pauli (planning agency “Stadtblind”), events leading up to Doha click here. Philipp Schwarz (planning agency “Stadtblind”).

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