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Africa/Global: Rich Without Borders
AfricaFocus Bulletin
May 31, 2013 (130531)
(Reposted from sources cited below)
Editor's Note
"For every country losing money illicitly, there is
another country absorbing it. These outflows are
facilitated by financial opacity in advanced Western
economies and offshore tax havens. Implementing
transparency measures to curtail tax haven secrecy and
anonymous shell companies is crucial to curtailing
illicit flows." Raymond Baker, Global Financial
Integrity
With austerity pummeling European economies, and the call
for deficit reduction at the expense of public interests
still dominating U.S. political discourse, governments
and media in rich countries are focusing new attention on
income that escapes national taxation by both illegal and
legal mechanisms. Apple, for example, has recently been
exposed as avoiding taxation by registering income earned
elsewhere in Ireland that ends up being taxed by nobody,
and companies in industries as diverse as Starbucks and
Amazon exploit a variety of loopholes to minimize what
they pay to any government. Oil companies are notorious
for their opaque agreements with oil-producing countries
around the world.
The same mechanisms are at work in African countries,
with even more damaging consequences. And this is now
catching the attention of not only radical critics but
also of more and more mainstream analysts and
institutions. The bottom line: if economic development is
to benefit the majority rather than a privileged few,
civil society and governments have to follow the money,
to ensure that a fair share goes to benefit the society
rather than escaping scrutiny in tax havens that serve
the "rich without borders."
This AfricaFocus Bulletin contains a recent report from
ActionAid making this point. Other sources confirming
this reality are multiplying day by day.
For one example, see a just released report from the
African Development Bank and Global Financial Integrity
on Africa's net capital transfers to the rest of the
world, see http://www.gfintegrity.org/content/view/615/70/
For the Africa Progress Panel's report last month,
strongly emphasizing the same point, visit
http://africaprogresspanel.org/
An international group of non-governmental organizations
working on these issues is the Financial Transparency
Coalition, at http://www.financialtransparency.org
For previous AfricaFocus Bulletins on illicit capital
flows, tax havens, and related topics, visit
http://www.africafocus.org/debtexp.php
See particularly
http://www.africafocus.org/docs12/cap1211b.php
and
http://www.africafocus.org/docs12/cap1211a.php
For a special issue of the Bulletin of the Association of
Concerned Africa Scholars on the topic, see
http://concernedafricascholars.org/bulletin/issue87/
++++++++++++++++++++++end editor's note+++++++++++++++++
How Tax Havens Plunder the Poor
ActionAid May 2013
Executive summary
Tax havens have recently become big news, as well as big
business. But amidst all the scandals of ministerial
Swiss bank accounts and celebrity tax avoiders, there has
been much less discussion of the impact of tax havens on
the poorest countries in the world.
This briefing aims to fill that gap. It shows the primary
role of the UK's and the G8's own tax havens in a global
merry-go-round that helps keep
1.3 billion people in poverty and hunger, while denying
developing countries the ability to benefit from their
own wealth, and raise the public funds needed to fight
poverty.
1) New analysis by ActionAid reveals that just under one
in every two dollars of large corporate investment in
developing countries is now being routed from or via a
tax haven.
A third of these developing country tax haven flows are
being routed through tax havens under the jurisdiction of
countries represented at the G8.
2) While not proof of tax avoidance, such routing can
often result in billions of dollars of tax foregone by
both developed and developing countries, through three
key mechanisms outlined in detail below. In just one case
we examine, the Indian revenue authority has claimed that
a single offshore transaction deprived it of an estimated
US$2.2 billion of tax revenues -- almost enough money to
pay for a year's subsidised midday meals for every
primary schoolchild in India -- a transaction that the
Indian supreme court ruled could not be taxed because it
took place offshore.
3) New data recently published by ActionAid about the
presence of the UK's largest multinational companies in
tax havens confirms the scale of this mismatch between
where global business actually takes place, and where it appears on paper. Nearly four years after
G20 leaders announced "an end to tax havens"
Every new entrant to the FTSE100 ([n index of the 100
largest companies on the London Stock Exchange] since
2011 has tax haven operations. Collectively the FTSE100
now has more companies registered in Jersey than in
China; more in the Cayman Islands than in India.
Ninety-eight of the 100 FTSE100 have companies in tax
havens, 78 of which also have operations in developing
countries. In two cases that we analyse in greater
detail, over 60% of the firms' tax haven companies are
linked to operations in developing countries.
While the number of overseas companies owned or
controlled by FTSE100 firms has shrunk since 2011, the
proportion of those companies in tax havens has actually
slightly risen. Over 38% of the 21,771 overseas
subsidiaries and associate companies of the largest 100
UK-listed multinational groups are now located in tax
havens. The proportion is largest amongst FTSE100 real
estate firms: 80% of their overseas subsidiaries and
associates are registered in tax havens -- nearly 60% in
UK- linked havens alone.
4) Multinationals' use of tax havens continues to be
opaque. Existing transparency measures are not working.
One in 10 of the UK's largest multinationals failed in
2011-12 to disclose their subsidiary and associate
companies until ActionAid pointed out the non-compliance
to Companies House, despite this being a requirement of
UK company law and often the only way to determine the
existence and ownership of tax haven companies. This is
despite the UK government back in 2011 promising an
inquiry and possible legal action against companies
keeping their subsidiaries secret.
5) However, our research also finds that not every
profitable multinational is addicted to tax havens, or to
secrecy. Two of the FTSE100 (Hargreaves Lansdown and
Fresnillo) are still tax-haven free, despite operating in
sectors -- mining and financial services -- that are no
strangers to 'offshore'. Some companies now have tax
policies that specifically avoid the use of tax
structures or strategies deemed risky by revenue
authorities. Others are going further than their legal
requirements to disclose their tax structures and
positions around the world, either in their public
reporting or on request.
As chair of the G8, the UK cannot credibly lead action on
tax havens without addressing its own network of tax
havens -- larger than any other country in the world. The
UK is responsible for one in five of the tax havens we
identify in this paper -- more than any other single
country. Indeed, the countries represented at the UKhosted
G8 Summit in June are collectively responsible for
40% of these tax havens. G8 members have started in
recent months to force tax havens to open up to their own
tax authorities, but so far developing countries have not
been offered participation in these initiatives or their
benefits.
The G8 have the opportunity and the responsibility to
ensure the solutions to tax evasion and avoidance
produced at the G8 Summit are of benefit to the rest of
the world, not just wealthy countries themselves. This
briefing sets out why, and how.
Foreword
Professor Jeffrey Sachs (Director of the Earth
Institute, Columbia University)
When G8 leaders meet this June, they have a
responsibility to end one of the biggest and most
dangerous scams in the world economy: the global web of
tax and secrecy havens that they so lovingly have
nurtured over the years. These havens facilitate tax
evasion, money laundering, bribery, and lack of
accountability for environmental and social calamities.
The public did not really know the facts until recently.
The rich and powerful kept the public distracted when
stock markets were rising and budgets were full. Yet the
tax haven system was eating away at the roots of the
world economy, making it increasingly easier for wealthy
individuals, corrupt businesses, money launderers,
political parties, and of course the ever-more-powerful
banks, hedge funds, and multinational companies to
protect their profits from taxation.
But recently, the veil has started to fall, and the sight
is not lovely. Mitt Romney ran for US President with vast
wealth in the Cayman Islands, and he was never willing to
account for that wealth. The French Budget Minister, and
then the Socialist campaign finance manager, got caught
with their own offshore accounts. Rich Greeks with secret
accounts abroad are on IMF-provided lists. Senior Spanish
officials have been caught receiving stipends from
secret, offshore party accounts. And this is only the tip
of the iceberg. The International Consortium of
Investigative Journalists has recently begun to release
the names of rich and powerful offshore banking
customers, with much more to be revealed.
Cyprus exposed the macroeconomic risks of this nefarious
system. Everybody knew that Cyprus was a tax-and-secrecy
haven especially for Russian funds, but few people
anticipated that the Euro would almost die in a blowup of
the Cypriote banks. But why shouldn't they have known?
This is par for the course when a country is home to bank
assets and liabilities that are many times larger than
the country's national income. The banks have no
backstopping. How many times do we really need to learn
the lesson?
Thanks to wonderful writing by many advocates and eyeopening
(indeed eye-popping) books such as Treasure
Islands by Nicholas Shaxson, we also come to appreciate
better that the havens are not the un-pluggable gaps of a
well-regulated global economy, but are actually part of
the core design of the global system. Switzerland and the
United Kingdom essentially invented much of the system
during the early to mid 20th century, and the US became
its great champion more recently. The Caribbean havens --
Bermuda, the British Virgin Islands, and the Caymans --
are British Overseas Territories. The US is itself
increasingly a haven for foreign investors, especially in
Delaware, and it is also the great proponent of the
Caribbean haven system.
And how absurd and dangerous this system has become. The
Caymans have around 57,000 people, but 92,000 companies.
The BIS estimates that $1.4 trillion in bank assets and
liabilities are there. This is a time bomb, not a
financial system. And not surprisingly, the so-called
'boards' of many tax haven shell companies, which are
supposed to 'govern' the companies, are routinely filled
with individuals who sit on dozens, or even hundreds of
boards. The governance situation is absurd, dangerous,
and out of control.
The politicians continue to protect their exorbitant
privileges, or listen to their billionaires and continue
to wink at mega-tax evasion, or listen to their major
companies and continue to tolerate unpardonable games of
transfer pricing into the havens, are playing with fire.
The days of high living are over. We are now all sharing
austerity. The havens represent unacceptable privilege
and abuse, not fair sharing.
Developing countries are also saying that enough is
enough. For decades they've been on the receiving line
of lectures about good governance. For decades, the
hypocrisy has been out of control. The tax havens have
served the purpose of paying bribes to potentates, and
providing easy ways for elites in poor countries to keep
their money safe from tax collectors. Yet it is the rich
countries that have fostered that system. And now poor
countries understand it clearly. They are the ones
insisting more than anybody to turn off these abuses.
After all, the governments of the poorest countries are
trying to invest their oil, copper, gold, diamond, and
other earnings. But they can't succeed if the money just
makes a beeline for the havens, all protected and
supported by Wall Street, the City of London, Swiss
banks, and the rest of an industry all too happy to move
money unaccountably and irresponsibly around the world.
On top of this basic affront to the capacity of states to
provide for their citizens' wellbeing, the same
facilities of secrecy and tax-free income make possible
much of the illicit financial flows at the heart of
money- laundering, grand corruption and the financing of
transnational crime. And as Nigerian Finance Minister
Ngozi Okonjo-Iweala and IMF chief Christine Lagarde have
pointed out, tax havens have provided a regulation-free
platform for many of the opaque and toxic financial
vehicles which, together with 'cosy financial regulation'
onshore, have posed such serious threats to the stability
of the global financial system itself.
This new study provides powerful evidence that four years
after world leaders promised an 'end to tax havens' in
the wake of the financial crisis, the scale of tax
havens' hold over developing economies, and the
systematic exploitation of their facilities by wealthy
investors and businesses in those economies, has only
increased. Put simply, the revenue lost as a result could
enable developing countries to finance their own futures
free from poverty.
It is the world's wealthiest countries that have the
capacity to end this global injustice and end it now.
Powerful countries can sometimes track down the income
and assets siphoned offshore by individuals and
businesses in tax havens, or as America's bilateral FATCA
agreements have shown, crack open secrecy through
threatening to limit tax haven banks' access to their
taxpayers. For developing countries with much smaller
administrative resources and economic clout, it is
virtually impossible to do the same on their own.
The world's most powerful countries also have a unique
responsibility. They created this system. It's their job
to end it. Taxes worldwide need to be paid, not hidden or
absurdly sheltered; banks, hedge funds, and nonfinancial
companies need to be domiciled where they can
be properly overseen and regulated, not in small islands
that can't possibly oversee these businesses; and hot
money and corruption need to be brought decisively under
control.
The politicians need to understand that their publics are
now on to the game. There is no more time to delay.
Small businesses bear the brunt
Last year ActionAid met Caroline Muchanga, a small
business owner in Mazabuka, Zambia, who sells sugar
produced by a UK-controlled sugar company, zambia Sugar,
a few kilometres from her stall. While Caroline has no
choice but to pay the business tax collected from her
stall every day, the multinational company next door has
had its Zambian corporate tax bill shrunk to little or
nothing in recent years: partly through legitimate
capital allowances, but also through special tax
incentives, and by routing fees, loans and dividends
through tax haven sister companies, which has -- perfectly
legally -- saved the group millions of dollars of zambian
withholding taxes. Faced with her own unavoidable tax
bill and rising wholesale sugar prices, Caroline told us
simply: 'Our profits are not enough.Zambia Sugar should
be paying more tax than us.' Some UK business leaders
are starting to agree: Andy Street, CEO of high- street
retailer John Lewis, has argued that companies avoiding
taxes via tax havens risk driving others out of business:
'they will out-invest and ultimately out-trade'.
Introduction: money on an island
Tax havens are jurisdictions around the world that make
wealthy taxpayers from other countries an offer that is
hard to refuse: a combination of low- or no-tax rates for
many types of income deriving from outside their borders,
and near-complete financial and corporate anonymity.
Caricatured as 'sunny places for shady people', tax
havens are often criticised by public and politicians for
playing host to money- laundering and celebrity tax
evasion. But tax havens have another side too: they are
depriving some of the world's poorest countries of vital
resources to fight poverty.
Some estimates suggest that the concealment in tax havens
of financial assets alone may constitute a loss to
developing countries' public revenues of some US$120-160
billion a year. This is nearly three times the estimated
cost of the agricultural investment needed to achieve a
world free from hunger, and twelve times the cost of
ending the global scourge of malnutrition, which each
year claims the lives of 2.3 million children.
While wealthy countries' tax authorities struggle to
chase money through these opaque places, their less wellresourced
counterparts in developing countries have
neither the resources, nor the economic or political
muscle, to obtain the information they need about wealth
squirrelled away in tax havens by companies and
individuals.
Illegal tax evasion is not the only drain on the fragile
public finances of developing countries. Billions of
dollars are also lost through legal tax avoidance by
multinational companies and wealthy investors, also
enabled to a large extent by the world's tax havens. Tax
havens make it possible and profitable for many
multinationals to shift profits out of poor countries
where real business takes place, and into associated
companies in tax havens -- sometimes with no real staff or
business activities, and where those profits go largely
untaxed. Other havens act as conduits, with special tax
regimes allowing income to pass tax-free through their
shores and on to other havens or tax-exempt companies,
while avoiding other cross-border taxes. Much of this
'profit- shifting', 'treaty shopping' and use of
'letterbox' conduit companies, while not illegal, takes
abusive advantage of loopholes and weaknesses in complex
and outdated international tax rules. And evidence
suggests that multinational profit-shifting into and via
tax havens is even more prevalent in developing than in
developed countries.
This not only deprives developing countries of public
revenues needed to fight poverty, but may also be
hindering those countries' domestic businesses from
flourishing. Unlike their multinational competitors and
contractors, domestic businesses and investors -- which
may generate 90% of all investment in developing
economies10-- generally cannot shrink their tax bills by
taking advantage of cross-border tax haven transactions.
This tilts the playing field against them in competing
for market share, and for better terms of trade.
Likewise making investment profitable in developing
countries depends on functioning infrastructure such as
roads and airports, and on a healthy and educated
workforce. When global businesses and investors use tax
haven structures and offshore profits to avoid paying
taxes in poor countries, they are both undermining their
own long-term financial prospects, and free-riding on
other individuals and businesses in developing countries
that do not have access to tax havens, and which shoulder
an excessive share of the tax burden.
The cost to the poorest countries of such activity is
difficult to calculate, precisely because of the secrecy
usually involved in these operations. Individual
examples, however, indicate that globally the foregone
tax runs to billions of dollars every year.
Without governments themselves ending the opacity and
preferential tax regimes of tax havens, multinationals
with internationally-mobile capital have little incentive
not to take advantage of the facilities they offer. Nor
is voluntary compliance going to help stop
straightforward tax evasion by wealthy individuals around
the world hiding wealth and assets offshore.
The UK government has publicly promised action on tax
havens at this year's G8 summit. Prime Minister David
Cameron has said that, '[t]here are too many tax havens,
too many places where people and businesses manage to
avoid paying taxes.' responding to ActionAid's findings
about tax avoidance in Zambia by subsidiaries of the UK
multinational Associated British Foods, Chancellor George
Osborne has called for particular protection for
developing countries: 'often the poorer a nation is, the
more it needs the tax revenues, but also the weaker its
capacity to tackle tax avoidance'.
The UK is uniquely placed to put an end to this drain on
the poorest countries' public finances. The UK is
responsible for one in five of the tax havens we identify
in this paper -- more than any other single country.
Indeed, the countries represented at the UK- hosted G8
Summit in June are collectively responsible for 40% of
these tax havens. yet measures promised so far have
failed to materialise. In November 2011, for instance, G8
members were among the G20 countries committing to a new
Multilateral Convention to crack down on tax evasion by
sharing tax information with other countries, including
some developing countries; and in July 2012 were among
G20 leaders calling on all jurisdictions to sign up too.
yet no G8-linked tax haven has yet joined, severely
limiting the utility of the Convention. And despite the
UK government telling parliament it has been
'encouraging' its own Crown Dependencies and Overseas
Territories to join, none has yet done so. Meanwhile UKand
G8-linked tax havens have begun in recent weeks to
agree to open up their hitherto secret financial
institutions and share tax information with other G8
members, through the US' 'FATCA' deals and the 'G5'
information-exchange deal between the UK, France,
Germany, Italy and Spain.16 But developing countries are
so far not included. It is incumbent on the G8 not to
keep the benefit of these deals for themselves; but to
make them, and the information they will generate about
wealth and assets held in tax havens, available to the
rest of the world too.
We've heard good words and goodwill. Now it's time for
action.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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