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May
4

The European Parliament wants stronger measures against tax evasion

Alex Marriage

flickr / Oxfam International

The European Parliament voted through a resolution calling for measures against tax evasion. The resolution was passed with an overwhelming 538 votes in favour, and only 73 against and 32 abstentions. The resolution of 19 April goes far in echoing Eurodad’s demand in calling for Automatic Information Exchange (AIE), Country-By-Country Reporting (CBCR), a mandatory Common Consolidated Corporate Tax Base (CCCBT) amongst other useful suggestions.

Single EU tax base for companies

The resolution calls for a mandatory Common Consolidated Corporate Tax Base (CCCTB) This would create a single European standard for what income is taxable and what is exempt. Taxable income would then be split between the countries where the company operates on the basis of the real economic activity that takes place within those countries (calculated by looking at staff levels and other factors). Compulsory CCCTB would be a major step in the fight against transfer pricing abuse ensuring more income is taxed where it is actually made. The European Commission has a proposal to introduce CCCTB on a voluntary basis for countries and companies an approach which would make tax competition worse, unlike the mandatory approach Parliament asks which would improve the situation.

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May
4

Investing in financial intermediaries: a way to fill the gaps in public climate finance?

Diana Hulova

flickr / NASA Goddard Photo and Video

Large amounts of money are needed to address the impacts of climate change. If we succeed in limiting global warming to 2°C, this will still require as much as US$275 billon. A new report released by Eurodad calls into question the latest desperate initiative of donors to fill the gaps in public climate finance: investing in the private sector with the aim of leveraging additional funds.

Rich countries promised to mobilise resources to help developing countries deal with climate challenges. However, they are failing to meet their commitments. According to the World Resource Institute’s preliminary analysis of the Copenhagen’s Fast Start pledges, not more than half of the US$30 billion pledged to be provided between 2010-2012 has been accounted for, and it is not yet clear how much of this money has been or will be delivered.

The report published by Eurodad focuses on financial intermediaries, one of the main tools to leverage private funds. According to many Development Finance Institutions (DFIs), financial intermediaries, such as banks, insurance companies or private equity funds have the ability to use public money to overcome the barriers to private investments in developing countries and leverage substantial amounts of private money. For instance, the public money that is invested in a local bank should make the institution stronger and more profitable, hence attracting more private capital.

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May
3

Reuters exposé: Out of Control at HSBC

Robert Palmer

flickr / Kansir

Reuters published a fascinating report today, ‘Out of Control at HSBC’. It draws on leaked documents from a number of criminal investigations into the bank that assert the bank violated U.S. anti-money laundering laws.

The report confirms what Global Witness has been saying for several years: despite a global system of anti-money laundering laws, banks in practice fail to carry out their obligations to combat financial crime.

According to prosecutors, the bank intentionally broke the law. HSBC created an operation that was a “systematically flawed sham paper-product designed solely to make it appear that the Bank has complied” with the US anti-money laundering regulations. It will be interesting to see how HSBC responds to this.

According to the documents that Reuters have seen, the bank failed to review thousands of internal anti-money laundering alerts and so did not file suspicious activity reports.

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May
3

Could Tax Benefits Be Contributing To The Tech Company Patent Wars?

EJ Fagan

flickr / mcwetboy

Tech companies have been racing to acquire as many patents as possible. Last month, Microsoft announced that it had reached a monster deal with AOL, buying 925 patents from Facebook for $1 billion, and then quickly reaching a deal to share the patents with Facebook for a cool $550 million. Many, many more examples of all the top tech companies – Yahoo, Apple, Google, Motorola, RIM – buying and selling huge numbers of patents have proliferated. Many of these patents are frivolous. For example, Apple patented ‘smartphone multitasking’ and ‘swipe to unlock‘ years ago. Nevertheless, the companies have rushed to create as many patents as possible.

Why is this fight going on? The headline reason is to avoid lawsuits. These certainly happen, and are on the mind of tech executives dishing out huge sums of money to acquire libraries of patents. They are probably the biggest factor behind the tremendous value placed upon patents. But I think there is another potential, not mutually exclusive, explanation out there: tax avoidance.

The New York Times expose on Sunday showed that Apple uses patents as a key cog in its tax avoidance apparatus. In part by moving patents overseas, claiming royalties from those patents as income in offshore tax havens, and not repatriating the profits back to the United States, Apple is able to get its global effective tax rate down to 9.8%. They saved $2.4 billion in U.S. taxes in 2011 according to one estimate. Wal-Mart, a company making plenty of money, but trading and owning more physical assets than intellectual property, couldn’t get their rate lower than 24%. Not all of that can be attributed to profit shifting via patent, but the New York Times report makes it clear that patents are central,

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May
3

Foreign Bribery and Wal-Mart: Not a Victimless Crime

Ann Hollingshead

flickr / karathepirate

The fallout from the scandal surrounding the discovery that Wal-Mart headquarters suppressed an internal investigation when it discovered its Mexican subsidiary had been systematically paying bribes has been swift and significant. According to an investigative piece in the New York Times, Wal-Mart used bribes not only to obtain permits for its stores, but to reduce the time required for those permits, from months to days or weeks. The public outcry to denounce the corporation has been loud.

But not everyone has joined the opprobrium. Many have said, either implicitly or explicitly, that Wal-Mart was doing business the way business needs to be done and that ultimately Mexico came up better off for Wal-Mart’s presence, both for the consumers and its thousands of employees. For example, an article by Holman Jenkins in the Wall Street Journal argues this point. He notes:

Indeed, Wal-Mart will likely be more severely mauled now for failing to act on its own inquiry than for any bribery its Mexican affiliate may have engaged in.

It’s an outcome that will fill many with ambivalence. Mexico’s failure to provide itself with better governance hardly seems a reason to deprive Mexicans of the benefits of Wal-Mart. Just the opposite: Multinational investment is usually seen as a fillip to development, and development as the antidote to corruption, environmental recklessness, human-rights abuse and all the debilities poor countries are thought to be prone to.

This is partly true. At least the part about economic development being an antidote to corruption certainly is.

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May
1

New research shows how far we are from corporate ownership transparency

Rosie Sharpe

flickr / J. Stephen Conn

The Open Government Partnership – 55 countries which all claim to want to be more transparent, effective and accountable – recently met in Brazil.  Increasing corporate accountability is one of their five ‘grand challenges’.  However new research by the information provision group OpenCorporates highlight the scale of the challenge: governments are not doing very well on making even the most basic of company details available, let alone the more detailed ownership information that’s actually required to prevent corrupt politicians, terrorists and arms traffickers from moving dirty money around the world.

OpenCorporates scored each country on six criteria, including whether information on directors and shareholders is available and whether it is possible to carry out free searches online.  The average score of the Open Government Partnership countries was just 21 out of 100, even though the criteria against which they were being judged were pretty basic.  Several major countries, including Spain, Greece and Brazil, scored zero, meaning no company information is available at all without payment or registration.

The OpenCorporates research looked at whether information on the legal owners of companies was available.  This is an important first step.  But what’s really needed is for information on the beneficial owners of companies – the people who pocket any profits – to be made available, as advocated by Global Witness and others.  You might think that the legal owners of a company would be the people who’d get such profits, but this isn’t necessarily the case as the legal owners may be ‘nominees’ paid to front the company for someone else, or another company rather than a real live human being.  Being able to find out who is behind a company would help prevent criminals from hiding their identity in order to move dirty money around the world, and would be no extra burden to those carrying out legitimate business. This last point has been emphasized by a leader in the pro-business Economist newspaper supporting greater transparency over corporate ownership.

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Apr
30

Angry About Multinational Profit Shifting? We Can Fix It

EJ Fagan

flickr / niallkennedy

On Sunday, The New York Times ran a massive, 3700-word, story on their investigation into aggressive, but legal, tax avoidance at Apple. Apple uses a wide network of subsidiaries in tax havens to shift profits away from high-tax jurisdictions like the United States. Apple has previously been a noted innovator in the tax strategy department, pioneering techniques to drastically reduce their tax bill. Despite explosive growth in Apple’s profits, their tax bill has barely budged in recent years. The article reports,

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

 Apple may be an early adopter, but they are not unique. Profit shifting – using abusive transfer pricing to move revenue to subsidiaries in tax havens – is a common strategic by U.S. multinationals. While the U.S. nominally has a 35% tax rate, its effective rate is much lower due to this profit shifting. If you have a skilled enough tax department  and lots of intellectual property, you can dramatically reduce your tax bill.

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Apr
30

Europe Needs to Reduce Underground Economies, Fight Tax Evasion

Dev Kar
Larry Summers

World Economic Forum, Flickr*

This morning, Larry Summers, former U.S. Treasury Secretary under President Clinton and former top economic advisor to President Obama, wrote that European austerity is holding back economic growth, which is making their sovereign debt problem worse, both in individual countries passing austerity budgets and on a continent-wide basis. He argues,

The premise of European policymaking is that countries are overindebted and so unable to access markets on reasonable terms, and that the high interest rates associated with excessive debt hurt the financial system and inhibit growth. The strategy is to provide financing while insisting on austerity, in hopes that countries can rein in their excessive spending enough to restore credibility, bring down interest rates and restart economic growth. Models include successful International Monetary Fund programs in emerging markets and Germany’s adjustment after the expense and trauma of reintegrating East Germany.

Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. Outside of Greece, which represents only 2 percent of the euro zone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago, with ratios well below Germany’s. Italy had a high debt ratio but a very favorable deficit position. Europe’s problem countries are in trouble because the financial crisis underway since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. And treating symptoms rather than underlying causes is usually a good way to make a patient worse.

Mr. Summers is quite right that Europe’s need of the hour is to stimulate economic growth rather than embrace ever-more austerity to cut debt. Misguided policies to reign in debt, an idea being touted around in this country in an election year, can only make matters worse by choking off an economic recovery and hamstringing the very means to pay down debt. In the United States, disagreements between Republicans and Democrats about the need for austerity versus more government spending to foster growth sound like couples quarreling over last month’s water bill as the house is burning down.  Clearly, we should douse the fire first and worry about the water bill later.

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Apr
27

Transparency, Large-Scale Land Acquisitions, and Beneficial Ownership in the Developing World

EJ Fagan

flickr / James Harris Anderson

In my short time here with the Task Force, I’ve learned that shell corporations show up around every corner when trying to fix problems in the developed and developing world alike. This was proven true again last night, when I attended an event sponsored by Task Force member Global Witness. The event was to present their new report, Dealing With Disclosure: Improving Transparency in Decision-Making Over Large-Sale Land Acquisitions, Allocations, and Investments.

Large-scale land acquisition is an enormously important issue for many developing countries. These acquisitions are surging in many countries, as globalization push up the value of owning large tracts of land for agriculture, the extractive industries, and the like. While this kind of economic activity can be good for people in developing countries, it can also bring significant negative trade-offs. If improperly managed and governed, large scale land acquisitions can negatively impact the environment, local property rights, food security, and human rights.

The report prescribes an important medicine to help cure these problems: transparency. I don’t want to go into the details, but the report convincingly makes the case that by opening up information about the large-scale land acquisitions of multinationals and major economic actors  and domestic investors in a way that allows governments and civil society to effectively understand the deals, we can solve a lot of these problems. The report makes four important recommendations about how to bring about effective transparency.

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Apr
26

Truth or consequences? The problem with settlements and the World Bank’s debarment of Alstom units

Transparency International

Cross posted with permission from Transparency International’s Space for Transparency blog.

By Craig Fagan

flickr / photosmith2011

While the year-long allegations of misconduct against the Alstom Group (ALO) have led to some significant consequences for the company – US$9.5 million worth of them – a lot of questions about what happened remain.

At the end of February, the World Bank decided to debar two Alstom subsidiaries for three years and agreed on a Negotiated Resolution Agreement worth US$9.5 million in restitution payments with respect to its conduct in Zambia. However, because of the nature of the settlement, the company has not had to publicly disclose the nature and scope of the alleged activities. There is currently a campaign in Zambia for the local anti-corruption commission to investigate and release the name(s) of the person(s) involved.

The current claim against Alstom by the World Bank dates back to 2002. In that year, according to the World Bank, two Alstom subsidiaries made improper payments of 110.000 Euros to a former senior Zambian government official and his consultancy company for work that was done as part of a World Bank-financed hydropower project in the country. The World Bank classified the payments as ‘improper’ given the allegations of different connections and conflicts of interest involved.

The World Bank’s decision has consequences beyond its headquarters in Washington, DC. A cross-debarment agreement with other regional development banks, signed in April 2010, means that the two blacklisted Alstom units will not be able to go after contracts with these entities, including the Inter-American Development Bank and the Asian Development Bank. The European Investment Bank is absent from the cross-debarment agreement although there is a current push to get them to sign-on as well.

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Apr
26

Is Financial Privacy a Human Right? (More Unlikely Questions)

Ann Hollingshead

flickr / epSos.de

A couple of weeks ago, I wrote a blog post criticizing the philosophies of Dan Mitchell, a libertarian scholar from the Cato Institute. I asked for a “thoughtful discussion” and I got it—both from the comments section of our blog and from Dan himself.[1]  On his own blog, Dan replied with a thought-provoking point-by-point critique of my piece.

Dan made several interesting points in his rebuttal. As much as I’d like to take on the whole post right now, my reply would be far too long and I don’t think our readers would appreciate a blog post that approaches a novella. Rather I’ll focus on a couple of his comments that I find interesting on a philosophical level (there were many) and which demand a continued conversation because, I believe, they are the basis of our differences.

We’ll start with a rather offhand remark in which Dan indirectly refers to financial privacy as a human right.[2] This is an argument we’ve heard before. And it is worth some exploration.

Unless I am very much mistaken, Dan’s belief that financial privacy is a human right arises out of his fundamental value of freedom. My disagreement with Dan, therefore, does not arise from a difference in the desire to promote human rights (I believe we both do), but rather in the different relative weights we each place on the value of privacy, which Dan (I’m supposing) would call an extension of freedom.

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Apr
25

Financial Action Task Force needs to focus on banks in its new money laundering crackdown

Robert Palmer

flickr / Images_Of_Money

Last weekend the international body that sets global anti-money laundering rules, the Financial Action Task Force (FATF), announced its new 8 year mandate. This document sets the international framework for the fight to tackle financial crime.

In it, FATF made explicit reference to its work combating the laundering of the proceeds of corruption.

This, believe it or not, represents a big step forward from its last mandate renewal when the “c-word” was deemed too politically sensitive to include. Pressure from the G20 is partly behind this development and it’s a sign of how fast the corruption question has risen up the international political and economic agenda.

However, FATF still has not had the courage to specifically include tackling the laundering of corrupt money as an objective in and of itself, citing it merely as an example of the kind of work they do. So the G20 and civil society still have work to ensure that FATF pays as much attention to corruption as it does to curbing the financing of nuclear proliferation, which is stated as a full objective.

The new mandate also emphasises a crucial point: the need to ensure “full and effective implementation of the FATF recommendations by all countries”.

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