Financial Transparency Coalition » Blog http://www.financialtransparency.org Tue, 16 Sep 2014 18:20:16 +0000 en-US hourly 1 http://wordpress.org/?v=3.7.4 Press Release: No Role for Public Scrutiny in OECD Plan to Curb Corporate Tax Dodging http://www.financialtransparency.org/2014/09/16/press-release-no-role-for-public-scrutiny-in-oecd-plan-to-curb-corporate-tax-dodging/ http://www.financialtransparency.org/2014/09/16/press-release-no-role-for-public-scrutiny-in-oecd-plan-to-curb-corporate-tax-dodging/#comments Tue, 16 Sep 2014 18:20:16 +0000 http://www.financialtransparency.org/?p=25429

No Role for Public Scrutiny in OECD Plan to Curb Corporate Tax Dodging

For Immediate Release
September 16, 2014

WASHINGTON, D.C. — The Organization for Economic Cooperation and Development’s (OECD) new recommendations to fight multinational corporate tax avoidance look robust from the onset, but there’s something missing. Since the most vital reporting information will remain out of the reach of ordinary citizens, the recommendations don’t do enough to bring transparency to a global financial system badly in need of it.

The OECD’s project on Base Erosion and Profit Shifting (BEPS) is intended to crack down on the ability of corporations to move profits overseas, through mis-invoicing trade transactions to avoid taxes, and other dubious practices. With nearly a trillion dollars leaving developing country economies each year in illicit cash, coordinated global action to plug the loopholes is desperately needed. But key elements of the financial data collected will be kept confidential, and out of the public’s view.

“Elements of the model template for country-by-country reporting are robust, but there’s a huge value in making this information public and they didn’t take that step,” said Koen Roovers, Lead Advocate in Europe for the Financial Transparency Coalition. “The new OECD recommendations offer a veil of confidentiality that could perpetuate the very secrecy it’s intended to address.”

Conscious consumers and concerned citizens were vital in putting this issue on the international agenda. By not making financial information public, ordinary citizens, journalists and watchdog groups will simply be locked out and unable to assess if companies are paying their fair share where they operate. Governments with thinly-stretched revenue authorities can benefit from the “crowd-sourcing” effect of making data public, as it enlists the public’s help in holding corporations accountable.

Recent surveys have shown that a majority of business executives are in favor of public disclosure of thise type of financial information.

“If CEOs support making this information public, why hasn’t the OECD followed suit?” Roovers added.

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Contacts: 

Verena von Dershau (Europe)
Vvonderschau@financialtransparency.org
+33 6 95 43 29 28

Christian Freymeyer (U.S.)
cfreymeyer@financialtransparency.org
+1 410 490 6850

Notes to Editors:

[1] The Financial Transparency Coalition is a global network of nine NGOs spanning five continents, and 150 allied organizations. We work to curtail illicit financial flows through the promoton of a transparent, accountable and sustainable financial system that works for everyone. 

[2] The international auditing firm PriceWaterhouse Coopers carried out a survey of more than 1,300 CEOs around the world. 59% said they supported a requirement for multinational corporations to make country-by-country financial information publicly available.

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Why Are So Many Tax Havens Islands? The View from Economics http://www.financialtransparency.org/2014/09/15/why-are-so-many-tax-havens-islands-the-view-from-economics/ http://www.financialtransparency.org/2014/09/15/why-are-so-many-tax-havens-islands-the-view-from-economics/#comments Mon, 15 Sep 2014 04:01:41 +0000 http://www.financialtransparency.org/?p=25425 Ireland, which is well known for its emerald hills and low tax rates, is about the same size as South Carolina. Luxembourg, a tax haven nestled in Western Europe between France and Germany, is about 2,500 square kilometers, or about a third of size of Rhode Island. Bermuda, a group of islands off the coast of South Carolina, is just over 50 square kilometers. That’s about one third of the size of Washington, DC. Singapore has about the same land mass as El Paso, Texas. Hong Kong is about the same size as Suffolk, Virginia. The notorious Cayman Islands have the same land mass as Shreveport, Louisiana. These statistics might be surprising. How can nations so small garner such strongly negative reactions in the international community? Any why are so many tax havens so small? Is it coincidence? Or is there something else going on?]]> We often think of tax havens as tropical islands or tiny nations nestled in the mountains. We know most of them are geographically and demographically small. Very small. Given their huge reputations, just how small they are just might surprise you.

Ireland, which is well known for its emerald hills and low tax rates, is about the same size as South Carolina. Luxembourg, a tax haven nestled in Western Europe between France and Germany, is about 2,500 square kilometers, or about a third of size of Rhode Island. Bermuda, a group of islands off the coast of South Carolina, is just over 50 square kilometers. That’s about one third of the size of Washington, DC. Singapore has about the same land mass as El Paso, Texas. Hong Kong is about the same size as Suffolk, Virginia. The notorious Cayman Islands have the same land mass as Shreveport, Louisiana.

These statistics might be surprising. How can nations so small garner such strongly negative reactions in the international community? Any why are so many tax havens so small? Is it coincidence? Or is there something else going on?

Economists have studied this question and their literature offers one strong hypothesis for why small countries tend to have an incentive to lower their tax rates compared to larger countries.

In a series of papers in the mid-80s to early 90s, Bucovetsky, Wilson, Zodrow, and Mieszkowski (among others)  laid out the rationale for this phenomenon in the basic model of asymmetric tax competition. Under this framework, tax competition is defined as “non-cooperative tax setting by independent governments, under which each government’s policy choices influence the allocation of a mobile tax base.” That is, under tax competition, governments do not cooperate in setting tax rates. When one government raises (or lowers) taxes, we expect that action to have an effect on the location decisions of individuals’ and businesses’ for capital allocation. That is, people can and will choose to move their money in response to changes in tax rates.

Suppose we are in a world of only two nations: a large nation (Largenia) and a small nation (Tinyland). The residents of each nation are equally rich, but there are many more residents in Largenia than in Tinyland. As a result, Largenia’s economy is much bigger in absolute terms. Both nations can tax their citizens in one of two simplified ways. They can tax their earnings as they work (labor tax) or they can tax their earnings on their assets (a capital tax).

If capital is mobile, then Tinyland has a clear incentive to keep its capital taxes low. Specifically, if Tinyland raises its capital taxes even a little above Largenia’s, then its residents will transmit all of their capital abroad. Labor, while also mobile, is not so responsive.

We are left with a lower capital tax rate in Tinyland, which allows the nation to subsume a great deal of capital from Largenia. As a result, Tinyland winds up with more capital per capita than Largenia, which allows the nation and its residents to spend more on public and private goods. The conclusion of this model is that small nations have a strong incentive to lower their taxes and become tax havens.

The tax competition literature focuses on source-based taxes—which are taxes on capital located within a country’s boundaries—rather than resident-based taxes—which are imposed on residents of a nation, regardless of where their capital is located. In part, this evolution has occurred because of the difficulty policymakers have in taxing worldwide income.

Many of these papers conclude that the result of these phenomena is that taxes are below their efficient level; they are too low. As such, governments will under-supply public goods, which are goods enjoyed by everyone, such as public parks and national defense. Bucovetsky and Wilson (1991) even go so far as to conclude that it is “the absence of residence-based taxes on capital income, not taxes on wage income, which is responsible for the under-provision of public goods.” That is, in order to maintain an efficient level of taxation and government-supplied goods, we must tax capital where it is earned, not where it is located.

The world’s ability to do that, in turn, depends on its ability to increase transparency in the global financial system. And that’s where we come in.

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State Department Panel on Corruption to Include GFI’s Heather Lowe http://www.financialtransparency.org/2014/09/02/state-department-panel-to-include-gfis-heather-lowe/ http://www.financialtransparency.org/2014/09/02/state-department-panel-to-include-gfis-heather-lowe/#comments Tue, 02 Sep 2014 18:33:31 +0000 http://www.financialtransparency.org/?p=25404 Global Financial Integrity will participate in a panel discussion organized by the U.S. Department of State. The event, hosted at the OpenGov Hub in Washington D.C., will also include officials from the World Bank's Stolen Assets Recovery Initiative, the State Department, and Transparency International USA. The discussion will focus on the inherent links between governance and corruption, and how to combat them. If you aren't based in Washington, or are unable to attend the event, there's no need to worry, as a live stream will be available on the Internet. You can submit questions to the panelists via Twitter using the hashtag #StateofRights, as well.]]> Tomorrow, Heather Lowe of FTC member organization Global Financial Integrity will participate in a panel discussion organized by the U.S. Department of State. The event, hosted at the OpenGov Hub in Washington D.C., will also include officials from the World Bank’s Stolen Assets Recovery Initiative, the State Department, and Transparency International USA. The discussion will focus on the inherent links between governance and corruption, and how to combat them.

If you aren’t based in Washington, or are unable to attend the event, there’s no need to worry, as a live stream will be available. You can submit questions to the panelists via Twitter using the hashtag #StateofRights, as well. 

Here’s a full list of the panelists participating:

The event, which begins at 10 a.m. will be moderated by Nathaniel Heller, Executive Director of Global Integrity. For more information, click here.

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Is Thomas Piketty Right About Tax Havens? http://www.financialtransparency.org/2014/09/02/is-thomas-piketty-right-about-tax-havens/ http://www.financialtransparency.org/2014/09/02/is-thomas-piketty-right-about-tax-havens/#comments Tue, 02 Sep 2014 06:01:41 +0000 http://www.financialtransparency.org/?p=25402 Capital in the Twenty-First Century, written by French economist Thomas Piketty. And Capital concerns two subjects that are very near and dear to us at the Financial Transparency Coalition: inequality and taxes. Piketty’s book is all the rage among economists and policy wonks. Perhaps for good reason. In a unique exploration of a new dataset, Piketty parses through literally centuries of tax data to discern long-term trends in inequality and wealth. His conclusions are broad and many, but one of his main findings is this: wealth inequality was high before World War I, it fell after and for much of the century, and it has been on the rise again since the 1980s. That income inequality is already extreme (and getting worse) should come as no surprise to readers of this blog. We’ve heard that the richest one percent of Americans earn about a fifth of the nation’s income. Central to Piketty’s thesis, inequality is even starker in terms of wealth, rather than income. By contrast to the top earners who make one-fifth of the nation’s income, the wealthiest one percent of Americans hold about one-third of the nation’s wealth.]]> If you have had much contact with the disciple of economics in the last year, you’ve heard of the book Capital in the Twenty-First Century, written by French economist Thomas Piketty. And Capital concerns two subjects that are very near and dear to us at the Financial Transparency Coalition: inequality and taxes.

Piketty’s book is all the rage among economists and policy wonks. Perhaps for good reason. In a unique exploration of a new dataset, Piketty parses through literally centuries of tax data to discern long-term trends in inequality and wealth. His conclusions are broad and many, but one of his main findings is this: wealth inequality was high before World War I, it fell after and for much of the century, and it has been on the rise again since the 1980s.

That income inequality is already extreme (and getting worse) should come as no surprise to readers of this blog. We’ve heard that the richest one percent of Americans earn about a fifth of the nation’s income. Central to Piketty’s thesis, inequality is even starker in terms of wealth, rather than income. By contrast to the top earners who make one-fifth of the nation’s income, the wealthiest one percent of Americans hold about one-third of the nation’s wealth.

Piketty’s findings about inequality have received much more attention than his solution to the problem: a global wealth tax. In Capital, Piketty proposes a highly progressive tax on wealth –beginning with those who have assets worth more than one million euros. This tax would increase to about five to ten percent for those who own assets worth more than a billion euros. Assets (net of debts) would include everything a person owned—including stocks, art, land, and houses. Again, his tax would be global, which under this proposal, means that every nation on earth would agree to tax its citizens in this way.

The challenges associated with measuring an individual’s net assets aside, Piketty argues vehemently that this tax is technically achievable. Politically, however, even Piketty himself acknowledges that his tax is utopian. Raising taxes on the wealthy is already difficult in any country, levying an entirely new tax on the wealthy is likely impossible.

Even if a nation like the United States or United Kingdom did pass a wealth tax there is strong reason to believe that their wealthy individuals would transfer their assets abroad to tax havens.

Piketty has cited two distinct solutions to this problem: the international community should either (1) force the tax havens to participate or (2) force them to share their data on non-resident assets. What makes Piketty believe either of these solutions lie in the realm of the possible for the world of the living? Relative size, he argues. “If the U.S. (a quarter of world GDP) and the EU (another quarter of world GDP) want this to happen, then this can happen,” Piketty says. “Again, this is political, not technical.”

I truly believe that Piketty is a deeply intelligent man. Perhaps a little optimistic and impractical, but deeply intelligent nonetheless. This statement, though, makes me wonder. The United States and the European Union have, what seems like in serious earnest, attempted to pressure tax havens into compliance with existing tax laws. Tax havens, for example, were a very high priority of the 2013 G8 summit. And yet little progress has been made. So what gives?

Perhaps we have not, in serious earnest, really pressured tax havens, at all. There has been a lot of strong language and big talk, but little real action. Despite the harsh words at the G8, the group of leaders is a long way off from a real agreement with tax havens.

We’re also still making disappointing progress on existing efforts. The United States has yet to pass the Stop Tax Haven Abuse Act. The OECD’s standards on automatic tax information exchange exclude too many nations. Outside of the United Kingdom, there has been little headway on public registries of beneficial ownership. Even recently, the U.S. Congress has been reluctant at best to seriously tackle the publicly-visible, unpopular practice of tax inversion.

Maybe Piketty is right.

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South Africa’s Deputy President: Tax Evasion a Crime Against the State and its People http://www.financialtransparency.org/2014/08/28/south-africas-deputy-president-tax-evasion-a-crime-against-the-state-and-its-people/ http://www.financialtransparency.org/2014/08/28/south-africas-deputy-president-tax-evasion-a-crime-against-the-state-and-its-people/#comments Thu, 28 Aug 2014 19:55:51 +0000 http://www.financialtransparency.org/?p=25379 196266116_9c4decfddb_z

The Deputy President of South Africa, Cyril Ramaphosa, has issued some strong words against individuals and corporations funneling money out of the country to avoid taxes. Speaking at the National Council on Provinces, Ramaphosa called on citizens to report cases of tax evasion.]]>
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The Deputy President of South Africa, Cyril Ramaphosa, has issued some strong words against individuals and corporations funneling money out of the country to avoid taxes. Speaking at the National Council on Provinces, Ramaphosa called on citizens to report cases of tax evasion.

Deputy President Ramaphosa noted the importance of tackling illicit flows and tax evasion. An article in the South African outlet, iOLNews, highlights his remarks:

Ramaphosa said the issue of tax evasion “clearly is a very important one” in South Africa. “It should be important for all citizens in South Africa. Tax evasion and the illegal transfer of capital across borders are dealt with by relevant authorities in our country.”

Calling it a crime against both the state and its people, Ramaphosa asked citizens to report those who may be guilty of tax evasion.

“I think we are on record as government that tax evasion is not only a crime against the state it’s also a crime against the people of our country, ordinary people. It is a practice we would like to discourage; to root out of our body politic so that people do not avoid paying tax. And to the extent that anyone, be it an individual or a company, should be pursued.

“If anyone of us knows people or companies that are evading taxes, that should be reported to the authorities and they should take action,” said Ramaphosa.

He continued by highlighting profit shifting, which is when a corporation uses loopholes and inconsistencies within different financial jurisdictions to artificially move profits from one place to another. Often, profits are routed to a low-tax jurisdiction, so that the amount of tax owed is significantly lower.

He said the most significant form of tax evasion was often done through so-called base erosion profit shifting.

“(This) describes tax-planning strategies that rely on mismatches and gaps that exist between tax rules and different jurisdictions. These strategies are designed to minimise the corporation tax that is payable, either making tax profits to disappear or shifting profits,” said Ramaphosa.

He added that in most cases, the various strategies were not illegal.

“This essentially is a global problem,” said Ramaphosa.

But even with a focus on curbing them, illicit financial flows remain to be a huge problem in South Africa; more than $US100 billion has left the country illicitly between 2002 and 2011, according to FTC member Global Financial Integrity. In 2011, for example, illicit financial flows equated to roughly 6% of the country’s total Gross Domestic Product (GDP).

Here’s a look at illicit financial flows in South Africa by year:


Image used under Creative Commons license / Flickr User Chris Eason

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TaxCast: August 2014 http://www.financialtransparency.org/2014/08/26/taxcast-august-2014/ http://www.financialtransparency.org/2014/08/26/taxcast-august-2014/#comments Tue, 26 Aug 2014 15:18:38 +0000 http://www.financialtransparency.org/?p=25367 The latest edition of TaxCast, the podcast produced by the Tax Justice Network, is out! In this edition, you'll hear about a tug of war between Switzerland and India for information on tax evaders, how Russian sanctions are affecting business in Europe, and much more. ]]> In the latest Tax Justice Network podcast:

TJNlogo

When was the last time you used a $100 bill, a 500 euro note or a 1,000 Swiss Franc note? We look at how Western banks and Treasuries are facilitating crime through high denomination bills. Also, tax haven reputation damage-management, Switzerland pulls a fast one on India, the European bankers raking in the bonuses from sanctions against Russia and how the tax haven of Mauritius is…erm…expanding its portfolio.

 You can watch via the embedded video below, or check it out on YouTube.

The TaxCast is a project of the Tax Justice Network and is produced by Naomi Fowler.

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Why Tax Inversion Is Wrong http://www.financialtransparency.org/2014/08/22/why-tax-inversion-is-wrong/ http://www.financialtransparency.org/2014/08/22/why-tax-inversion-is-wrong/#comments Fri, 22 Aug 2014 17:53:15 +0000 http://www.financialtransparency.org/?p=25365 began assembling administrative options for deterring or preventing U.S. companies from inverting—or reorganizing overseas to avoid paying federal taxes. This move follows on the heels of a strong statement from President Obama who accused inverting firms of "cherry-picking the rules.” As he put it: "My attitude is I don't care if it's legal, it's wrong.” Particularly common among pharmaceutical and life-sciences companies, inversions are primarily a means for U.S. companies to avoid corporate taxes. In an inversion, a smaller foreign company “acquires” a large U.S. firm, allowing the domestic firm to reincorporate overseas and pay a lower foreign tax rate. Usually, this process does not change the operational or functional structure or location of the company – it just changes the way that company has to pay taxes. Historically, these tax inversions haven’t been all that common. In fact, according to the Congressional Research Service, only been about 76 companies have inverted or planned to do so since 1983. The practice has become much more frequent, however, which is why inversion has garnered the spotlight from Treasury. Of the 76 inversions since 1983, 47 occurred in the last decade, and 14 occurred just this year.]]> This week the Treasury Department began assembling administrative options for deterring or preventing U.S. companies from inverting—or reorganizing overseas to avoid paying federal taxes. This move follows on the heels of a strong statement from President Obama who accused inverting firms of “cherry-picking the rules.” As he put it: “My attitude is I don’t care if it’s legal, it’s wrong.”

Particularly common among pharmaceutical and life-sciences companies, inversions are primarily a means for U.S. companies to avoid corporate taxes. In an inversion, a smaller foreign company “acquires” a large U.S. firm, allowing the domestic firm to reincorporate overseas and pay a lower foreign tax rate. Usually, this process does not change the operational or functional structure or location of the company – it just changes the way that company has to pay taxes.

Historically, these tax inversions haven’t been all that common. In fact, according to the Congressional Research Service, only been about 76 companies have inverted or planned to do so since 1983. The practice has become much more frequent, however, which is why inversion has garnered the spotlight from Treasury. Of the 76 inversions since 1983, 47 occurred in the last decade, and 14 occurred just this year.

Many have argued that, at 35 percent, the corporate tax rate forces U.S. corporations to invert to remain competitive. “You can’t maintain competitiveness by staying at a competitive disadvantage. I mean you just can’t,” says Heather Bresch, the chief executive of Mylan, a generic drug maker that recently incorporated in the Netherlands using tax inversion.

It is true that the United States has a statutory tax rate of 35 percent, which is the second highest among developed nations. However, through loopholes like inversion and many others, corporations in this country pay an effective tax rate of just 12.6 percent.

There is a lot of talk about whether all of this is fair. Organizations like the conservative Tax Foundation echo Bresch’s sentiment that U.S. corporations need to invert to keep up with the rest of the world. Others have argued inversion is the unfortunate, but inevitable byproduct of the Affordable Care Act and U.S. tax policy.

What these statements ignore, however, is all of the benefits and perks that businesses do enjoy by establishing and doing business in the United States. For years or decades, companies employ our skilled workforce educated by our public schools; they use our taxpayer provided roads to deliver their products; and they enjoy the safety and security provided by our publicly-funded policemen and fire fighters. These benefits are not trivial – they are what allow our corporations to become successful and profitable – and our corporations should pay taxes in exchange for these benefits.

I must agree with President Obama, I don’t care if it’s legal. It’s wrong.

As Jack Lew put it: “Many of these companies are for all intents and purposes still based in the United States, and they remain here to take advantage of everything that makes the United States the best place in the world to do business: our rule of law, our universities, our research-and-development capabilities, our innovative culture and our skilled workforce.”

Democrats and Republicans in Congress generally agree that we should deter this practice, although they differ on the proposed policy solutions. I don’t want to get too far into the specifics because the Citizens for Tax Justice has some excellent proposals and you should just read that. Suffice it to say, however, we should seriously consider these solutions that would allow the United States to maintain competitiveness, to keep our tax base, and pave the way for U.S. corporations to continue to pay for all of the benefits they enjoy from establishing a business in this country.

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The U.S. Africa’s Leaders Summit and Illicit Financial Flows http://www.financialtransparency.org/2014/08/14/the-u-s-africas-leaders-summit-and-illicit-financial-flows/ http://www.financialtransparency.org/2014/08/14/the-u-s-africas-leaders-summit-and-illicit-financial-flows/#comments Fri, 15 Aug 2014 03:24:55 +0000 http://www.financialtransparency.org/?p=25352 U.S.-Africa Leaders Summit, which President Obama convened to strengthen and enhance relations between the United States and African nations. One of the stated missions of the Summit was to advance America’s “commitment to Africa’s security, its democratic development, and its people.” As such, a core promise of the Summit was more American investment in the African continent. Specifically, the Summit set the stage for more than $33 billion in new commitments to support economic growth across Africa. President Obama pledged $7 billion in new financing; U.S. companies announced $14 billion in deals in a variety of sectors, including energy and construction; and alongside the World Bank and Sweden, the United States also promised an additional $12 billion in investments for the President’s Power Africa initiative. Foreign investment can play an important role in economic development. One study, for example, found that foreign direct investment (FDI) promotes economic growth in developing countries by increasing the transfer of advanced technology and creating higher productivity in those nations. Other studies suggest that recipient nations of FDI can also benefit from increases human capital as their residents receive employee training through the investing company. Finally, and perhaps most importantly, several studies note that host nations benefit from FDI to the extent that it contributes to increased corporate tax revenue. ]]> Last week the White House wrapped up the three-day U.S.-Africa Leaders Summit, which President Obama convened to strengthen and enhance relations between the United States and African nations. One of the stated missions of the Summit was to advance America’s “commitment to Africa’s security, its democratic development, and its people.”

As such, a core promise of the Summit was more American investment in the African continent. Specifically, the Summit set the stage for more than $33 billion in new commitments to support economic growth across Africa. President Obama pledged $7 billion in new financing; U.S. companies announced $14 billion in deals in a variety of sectors, including energy and construction; and alongside the World Bank and Sweden, the United States also promised an additional $12 billion in investments for the President’s Power Africa initiative.

Foreign investment can play an important role in economic development. One study, for example, found that foreign direct investment (FDI) promotes economic growth in developing countries by increasing the transfer of advanced technology and creating higher productivity in those nations. Other studies suggest that recipient nations of FDI can also benefit from increases human capital as their residents receive employee training through the investing company. Finally, and perhaps most importantly, several studies note that host nations benefit from FDI to the extent that it contributes to increased corporate tax revenue.  

This is an important point. A critical means by which developing nations can benefit from FDI is, in fact, tax revenue. And, yet, while the Summit was heavy on promises about business and investment, it was light on ideas for improving business practices and gaining fair tax revenues from multinational corporations operating in Africa.

Here’s an example. Say a company decides to invest in a nation in Africa to build a new clean energy project. In a few years from now, the enterprise is successful and the company ends up making a sizeable profit on that investment. Under the current status quo, there is very little that can prevent that successful company from evading the corporate tax that it owes on those profits. There is very little to stop the company from misinvoicing its next shipment of wind turbines, shift its profits to an island nation in the Caribbean, and avoid taxes on most or all of the profit that was meant to benefit that African nation.

Take another similar example, this time from Sierra Leone’s Foreign Minister Samura Kamara. In a recent interview, Kamara noted that sometimes “multinationals will form subsidiaries in joint partnership with governments and then load the subsidiary with debt, reducing any dividends the government had expected to receive.” Again, the effect is that companies may look good for creating private-public partnerships or increasing investment in developing countries, but the real effect of those promises are less clear.

One important caveat to all this is that the Summit did address illicit financial flows, at least in words if not in concrete options. The Summit served as a platform for the creation of the U.S.-Africa Partnership to Combat Illicit Finance and through this announcement these leaders did take one step toward tackling illicit financial flows. This is an important symbolic moment, but in truth, it’s still light on the details.

Investment is important, but it must be paired with financial transparency and oversight. Domestically and internationally, we must watch both new and old business ventures for profit shifting, tax evasion, and trade misinvoicing. Again, as Kamara points out: “The tax structures used by multinationals must be addressed” and nations should achieve “greater transparency, particularly in the extractive industries.”

And so, we should be optimistic. We should be optimistic about the pledge of investment in Africa and the creation of the Partnership on Illicit Finance. Yet we should also be cautious. We should understand that profits from these investments are still susceptible to the same kinds of trade and financial manipulations that are today responsible more than $35 billion in illicit finance leaving the nation each year. Our work here is not done.

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Walgreens feels the heat, reconsiders tax flight http://www.financialtransparency.org/2014/08/12/walgreens-feels-the-heat-reconsiders-tax-flight/ http://www.financialtransparency.org/2014/08/12/walgreens-feels-the-heat-reconsiders-tax-flight/#comments Tue, 12 Aug 2014 18:17:32 +0000 http://www.financialtransparency.org/?p=25339 It all started last month when Walgreens, the iconic American pharmacy chain, announced that it would move its headquarters to Switzerland as part of a merger with the European chain Alliance Boots. The move, known as an “inversion”, essentially involves a company merging with another company that is based in a jurisdiction with lower taxes. Once they merge, the newly formed group will usually move its headquarters to the lower tax jurisdiction to avoid paying taxes in their home country. However, this move is usually a pure technicality, meaning that while the address may change, not much else does.]]> 14281884510_e63fd1c57b_z

It all started last month when Walgreens, the iconic American pharmacy chain, announced that it would move its headquarters to Switzerland as part of a merger with the European chain Alliance Boots. The move, known as an “inversion”, essentially involves a company merging with another company that is based in a jurisdiction with lower taxes.

Once they merge, the newly formed group will usually move its headquarters to the lower tax jurisdiction to avoid paying taxes in their home country. However, this move is usually a pure technicality, meaning that while the address may change, not much else does. The primary work of the headquarters will usually continue, uninterrupted, at the site of the original headquarters. Inversions have taken Wall Street by storm recently; a proposal from drug giant Pfizer, and another from Medtronic, a Minneapolis-based medical supply company, have come under intense scrutiny. Although some deals have attracted negative media attention, it hasn’t been enough to halt the practice altogether.

This time, something appears to be different. When Walgreens made the announcement last month, everyone from President Obama to investor and owner of the NBA’s Dallas Mavericks, Mark Cuban, criticized the move (you know you’re on shaky ground when you face criticism from other billionaires).

President Obama questioned the patriotism of companies pursuing inversion schemes and vowed to move quickly to halt the trend.

Last Wednesday, just one month after details of the planned inversion came to light, Walgreen’s backtracked and said it had reconsidered the inversion element of the merger with Alliance Boots, meaning the combined company would keep its corporate headquarters in Decatur, Illinois. Walgreen’s stock price took a hit, but analysts familiar with the deal noted that it was artificially high following the initial announcement of an inversion in July. And Ajay Jain, an analyst with Cantor Fitzgerald, advised his clients that an inversion would have actually been an investment risk.

It’s unclear whether Walgreen’s about face was actually a response to public pressure or more practical indications that it would not withstand a review from the Internal Revenue Service. While legislation being considered in Congress may or may not address earnings stripping and other inversion-related hijinks, the Walgreen’s story is a cautionary tale for would-be tax avoiders.


Image used under Creative Commons licensing / Flickr User: Mike Mozart

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Calling All Money Laundering Wonks – U.S. Treasury Seeks Comment on Rule to Keep Dirty Money Out of U.S. Banks http://www.financialtransparency.org/2014/08/08/calling-all-money-laundering-wonks-u-s-treasury-seeks-comment-on-rule-to-keep-dirty-money-out-of-u-s-banks/ http://www.financialtransparency.org/2014/08/08/calling-all-money-laundering-wonks-u-s-treasury-seeks-comment-on-rule-to-keep-dirty-money-out-of-u-s-banks/#comments Fri, 08 Aug 2014 16:57:32 +0000 http://www.financialtransparency.org/?p=25332 The U.S. Treasury is in the process of taking a big step toward making it harder for corrupt politicians, drug traffickers and terrorists to make use of the U.S. financial system, by forcing banks to know who their customers actually are. This is something we have been advocating for five years. Treasury recently released a proposed rule and is seeking comment until October 3, 2014. There’s info on how to do that here. It’s worth explaining precisely what we think the problem is, and what the rule should look like if it is going to do its job properly.]]> This post originally appeared on the blog of Global Witness, a member of the FTC.

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The U.S. Treasury is in the process of taking a big step toward making it harder for corrupt politicians, drug traffickers and terrorists to make use of the U.S. financial system, by forcing banks to know who their customers actually are.

This is something we have been advocating for five years. Treasury recently released a proposed rule and is seeking comment until October 3, 2014. There’s info on how to do that here.

It’s worth explaining precisely what we think the problem is, and what the rule should look like if it is going to do its job properly.

Right now, there is a gaping hole in U.S. law that enables corrupt individuals and other criminals to easily hide their identity behind anonymous companies. This allows them to launder dirty money through U.S. banks. The problem is twofold:

  • U.S. banks, with few exceptions, are not required to identify the real, or “beneficial,” owner of companies that open accounts. This means they are not doing nearly enough to identify the actual human that the money they are handling belongs to, or what might have been done to obtain it;
  • It is perfectly legal to set up a company in the U.S. without disclosing who ultimately owns it. This means that there is too little beneficial ownership information available to bankers or in the public domain. (We’re campaigning on this too here.)

Treasury’s rule would tackle the first of these issues, by forcing banks to identify and verify the real, ultimate owners of their corporate account clients. Unless a bank does this, it cannot meaningfully assess the risk that somebody is trying to launder the proceeds of crime.

Like the anti-money laundering wonks we are, we’ll be going through the proposed rule in detail and letting Treasury know what needs to be changed to make it really work. But on our first reading, the definition of beneficial ownership is still lacking.

To have the greatest impact, the final rule must include a stronger definition of beneficial ownership that:

  • Ensures each beneficial owner is a real person and not a nominee (someone who has lent or sold their identity to the real owner);
  • Includes individuals who control a company through unofficial means, such as trusts or power-of-attorney arrangements, outside of legal ownership or acting as a corporate officer;
  • Has no specific percentage threshold for legal ownership. This would provide money launderers with a blueprint for how to structure companies in order to avoid detection (i.e., under a 25% threshold, if five people own equal shares, none need to report).

The proposed rule must also be strengthened to:

  • Require financial institutions to turn away business if they are unable to identify a beneficial owner of the account;
  • Apply retroactively to all legal entity accounts, not just to new accounts; and
  • Oblige financial institutions to verify that the names of the beneficial owners provided by the company are in fact the company’s beneficial owners.

A rule like this would significantly strengthen the U.S. anti-money laundering framework and bring the U.S. in line with countries around the world.

The U.S. is way behind on this issue. All members of the European Union and many other financial centers, including Switzerland, Hong Kong and Singapore, already require their financial institutions to collect information about the beneficial owners of their clients.

The U.S. has known about this loophole in U.S. policy for many years. It allows those behind some of the worst problems of our time to get away with their crimes – as the spate of recent scandals with banks involved in laundering drug money, sanctions busting, tax evasion and other illegal behavior illustrates. To turn the tap of dirty money flowing into U.S. banks off, Treasury must act swiftly and issue a strong rule before the end of the year.


Image used under Creative Commons license / Flickr User: Squirrel83

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