tax evasion

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It’s time for civil society to engage with the OECD to deliver the global tax deal developing countries need

Published by Anonymous (not verified) on Tue, 21/09/2021 - 3:52pm in

Very soon detailed negotiations on the OECD’s proposed new global corporation tax deal will recommence, with many issues still on the table for agreement.

John Christensen and I have engaged with the OECD and other international financial organisations as a way of advancing tax justice for almost two decades, with the primary goal of advancing the position of developing countries.

We are aware that the current deal as presently drafted does not meet all the hopes of those countries or those who campaign for tax justice. However, we are well aware that the advancement of tax justice has been an iterative process to date and expect that this will continue to be the case, with this current deal being far from the final word on a global deal that will deliver a fair global corporation tax system, to which we hope all aspire in the not too distant future.

In that case we are urging all with an interest in this issue to engage positively with the forthcoming OECD process. In particular, we think that clear demands on critical issues of substance that might really change outcomes are important at this moment as a focus for attention, both now and as indicators of long-term intention to pursue matters further.

As an indication of what those issues might be we have prepared the following statement that we will be sharing with the OECD. We welcome others who might share broadly similar sentiments to coalesce around the ongoing need for proactive engagement to deliver tax justice:

___________________________

 

Protecting developing countries on a global tax deal

Statement by John Christensen[1] and Richard Murphy[2] [3]

September 2021

We note:

  1. That more than 130 jurisdictions[4] have agreed to back the development of a new global tax deal announced by the OECD[5] in July 2021;
  2. That despite this achievement some countries withheld their agreement and others have expressed reservations[6];
  3. The range of conditionalities within the proposed deal make its delivery uncertain;
  4. That a significant number of concerns have been raised about the technical feasibility of delivering the deal, in particular with regard to the availability of necessary accounting data to ensure that it can be effectively implemented;
  5. Many countries and stakeholders are concerned that the proposed deal:
    • is biased against source countries and favours residence locations;
    • provides an insufficient return to developing countries, not least through the STTR regime;
    • applies too low a minimum rate of corporation tax;
    • contains too many carve-outs and exemptions to be truly effective, especially given the composite nature of many multinational corporations;
    • applies to too few companies as a consequence of both the profit quantum and profit margin rate thresholds;
    • will have too small an impact as a consequence.

The above being noted we welcome:

  1. The precedent implicit in this global tax deal and the capacity it creates to apply tax to profits declared either inappropriately in a jurisdiction or in a jurisdiction where an inappropriately low rate of tax is applied to it;
  2. The opportunity that this deal still provides for improvements to be made;
  3. The opportunity that this deal provides for past issues of concern e.g. on the accounting within country-by-country reporting, to be addressed;
  4. The opportunity that this deal might provide to develop a better international tax agreement on these issues in due course, work on which should, we recommend, begin as soon as this deal is agreed;
  5. The opportunity that this deal might provide to improve the international tax dialogue, which remains constrained and biased against the interests of developing countries

Whilst we suspect that there will be features of whatever deal emerges from current negotiations of which we will remain critical, we hope to engage with the process of change, in the expectation that we might eventually witness an international tax deal that delivers tax justice for all stakeholders.

To help achieve that goal we ask all those involved in the negotiations on this deal to consider the following issues:

  1. To increase the minimum corporation tax rate used within the deal to a rate equivalent to 80% of the average headline corporation tax rate of all those states that charge corporation tax weighted by their populations;
  2. To increase the STTR rate provided for by this agreement so that it shall be a sum equivalent to 80% of the average headline corporation tax rate of all those states to which such a charge might apply and who charge corporation tax, weighted by their populations;
  3. That the profit margin that a company shall be entitled to retain without apportionment applying shall be reduced to 5%;
  4. That all the profits in excess of this rate shall be subject to apportionment;
  5. That the rules for determining the profits and tax paid for use in apportionment calculations shall be made clear so that the calculations for apportionment in any company can be replicated by the stakeholders of the global tax system, or shall be required to be published instead;
  6. The country-by-country reporting data used for the purposes of apportionment calculations shall be made public by those companies undertaking an apportionment calculation so that the stakeholders of the global tax system shall be aware that taxes are being paid;
  7. That the tax paid by jurisdiction by a company subject to apportionment calculation shall be published so that the stakeholders of the global tax system shall be aware that taxes are being paid in order that the outcomes of this deal can be properly appraised.

________________________________________________________

Notes

[1] Director of the Tax Justice Network from 2003 until 2021

[2] Director of Tax Research UK and Professor of Accounting Practice, Sheffield University Management School

[3] Issued by Tax Research LLP. 33 Kingsley Walk, Ely, Cambridgeshire, CB6 3BZ www.taxresearch.org.uk/blog

Registered at the above address. Registered number OC316294

[4] Including overseas dependencies and various territories that do not enjoy full statehood

[5] https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf

[6] Developing countries are notable in having reservations about this deal

This statement is also available as a PDF, here.

HMRC’s tax gap measure suggests that its claims to be making the tax system easier to use are not justified

Published by Anonymous (not verified) on Fri, 17/09/2021 - 4:31am in

As I noted earlier today HMRC published their tax gap data for 2020 this morning. I have been distracted all day by other demands, but have now had a chance to look at the data and methodology.

The latter remains flawed, still working in the case of all taxes but VAT on what is called a ‘bottom up’ basis. This means that the estimate is, in effect, an extrapolation of errors in submitted tax returns. That this method does not work is obvious. This chart shows the various gaps:

Note the VAT gap is biggest. 8.4% of that tax is lost - which means that at least that much turnover is not recorded in the UK. If that is the case then every other tax gap must logically be as big because as an accounting fact that missing turnover can never reappear in accounts, and that income should have been subject to other taxes when extracted from the business that suppresses the income. So, logically, the income tax gap must be at least as big as the VAT, and very clearly it is not. So, the estimate is understated, I am certain.

I note another trend. It is that the gap has gone up:

The VAT gap increased this year, as did the overall gap. This is despite the claim that Making Tax Digital - which I have always opposed because it places far too much burden on taxpayers - would reduce errors. It has not. That system has failed then.

To that extent this tax gap measure is proving that HMRC is failing, but so too does the whole failure of this process - which bizarrely always produces a near identical numeric result. I acknowledge that HMRC at least does tax gaps. But it would be so good if it tried to do them properly, and matched them with tax spillover analyses to explain why they arise. Then they might be useful. At present they are insufficiently credible to be so. And that’s really disappointing when this tool could add so much value in the battle against tax abuse.

What can be done about tax havens?

Published by Anonymous (not verified) on Sat, 04/09/2021 - 5:14pm in

In the first four videos in this series on tax havens I have explored how they work, what they abuse, and why that abuse should worry anyone who is concerned for fair markets, the rule of law and democracy, all of which tax havens (or secrecy jurisdictions as I prefer to call them) actively seek to undermine.  

This then leads to the obvious question, which is what can be done to tackle the abuse that tax havens promote? I have spent years addressing this topic and in this video I highlight four of the themes that I have worked on.

The first of these tackles the abuse of tax havens by multinational corporations. In 2003 I created the concept of country-by-country reporting, which requires that multinational companies report their trading activities, tax related cash flows and limited balance sheet data for each jurisdiction in which they have an operation. My original 2003 proposal is here.  In 2015 the OECD adopted this idea as a key component of their Base Erosion and Profit Shifting programme that tackled tax haven abuse. The requirement to account in this way is now a legal requirement in more than 90 countries. However, there is a major flaw still, and that is that all this accounting for transparency still takes place in secret. We need this data in the accounts of public companies as well. Then we will all be able to see who is, and is not, abusing tax havens.

Second, there is automatic information exchange from tax havens. This involves the supply of data from secrecy jurisdictions to the tax authorities of the countries where those who have accounts in those places really live. This has been a legal requirement for several years now, but the question is, is it really working?

That brings me to my third theme, which is the need for properly functioning company registers, everywhere, and not just in tax havens. In my onion company registers should show that a company exists, what it does, who owns it, who manages it, who benefits from it if not any those previously mentioned people, and what it actually does i.e. its accounts should be available, and in full. That is because companies enjoy the privilege of limited liability which comes at potential cost to the rest of society and transparency is a requirement as a consequence of that. Almost no tax haven provides this data as yet. It is hard enough to get in the rest of the world. And without it automatic information exchange cannot really function, which is why this is key.

Fourth, extending this transparency requirement to trusts simply extends the reach of the measures I suggest for companies in a way that is necessary to break tax haven secrecy, where trusts are often used to add to the opacity of these places.

I explore all these issues in the video. We still have a lot to do, but I also stress, progress is definitely being made. We can end the abuse from tax havens.

Why are tax havens harmful?

Published by Anonymous (not verified) on Fri, 03/09/2021 - 4:16pm in

In the first three videos in this series on tax havens I explored why tax havens should really be called secrecy jurisdictions, what tax havens are used for now and how they try to undermine the regulation of other states.

In this video I move on to ask why tax havens are so harmful? Drawing on economic theory and the simple ethics of fairness that every child understands I argue that tax havens are intended to undermine fair markets, and do. As a result, for from being the bastions of free enterprise that they claim to be tax havens are actually places that seek to undermine the entire market system.

On the way to achieving that goal I argue that they also undermine two other thing as well. One is the rule of law, and the other is democracy.

In that case tax havens exist to create a form of oppression where a few can economically abuse most people through the use of offshore corporations. That is, of course, one description of fascism.

How do tax havens work?

Published by Anonymous (not verified) on Thu, 02/09/2021 - 3:38pm in

In this third video in a series on tax havens I look at how tax havens work.

As I explained in the first video in the series, the key to understanding tax havens is to understand that their primary product is not now tax abuse, but a more general abuse of the regulation of other countries. Key to that process is secrecy.

This understanding gave rise to my theory, first published in 2009, of how tax havens really work. That understanding has underpinned much change in regulation since then and is reflected in the work of a number of authors, including that of Nick Shaxson, who wrote the best-selling ‘Treasure Islands’.

My theory is based around how the users of tax havens try to get around regulation by moving the recording of transactions from the place where they really are, and might usually be regulated, (‘here’, as I describe it), to either another identifiable place that should regulate them (‘somewhere’, as I call it), or to a place that does purposely not disclose that it may be regulating the transaction (‘elsewhere’ in my description, which refers to most tax haven activity), or to the ultimate goal of the tax haven user - which is ‘nowhere’, meaning that the transaction is knowingly not regulated anywhere at all.

Understanding these stages of separation is key to understanding how tax havens work. I explain how in this video. The paper in which the thinking was first explored is here.

 

What are tax havens used for?

Published by Anonymous (not verified) on Wed, 01/09/2021 - 4:08pm in

In this, the second in a series of five videos on tax havens, I look at what tax havens are now used for.

Because of the work of international regulators, under pressure from tax justice campaigners, the days when tax havens were used for hiding away suitcases full of ill-gotten cash are now pretty much gone. But they are still in business. So, what are tax havens used for now, and why?

In this video I have two themes. The first is that tax abuse is not the only use for a tax haven now. In fact, it is just as likely that a tax haven, or secrecy jurisdiction, is being used to hide an activity from any number of regulations, none of which need involve tax. That regulation could relate to competition law, employment regulation or environmental demands. Alternatively, the use of a secrecy jurisdiction could simply be motivated by the desire to hide wealth from creditors, business partners or a spouse.

Second, when it comes to tax, I explore what taxes are most likely to be abused from these places now.  It’s still commonly thought that income taxes - whether personal or corporate - are the taxes that are being abused in tax havens. Although that is undoubtedly true in some cases and in some havens, I strongly suspect that much of the business in tax havens is now focussed on avoiding capital gains taxes, and taxes on wealth and inheritance. I discuss why in this video.

 

 

What is a tax haven?

Published by Anonymous (not verified) on Tue, 31/08/2021 - 3:46pm in

When I first began working on tax havens in the early years of this century it quickly became very clear that there was no precise definition of what a tax haven might be, and little chance of agreeing on one. The reason was simple: there were too many varieties of tax haven for one definition to cover all that they might do.

However, as I explain in this video, there was one characteristic that all the places that might have been called a tax haven seemed to have in common, and that was secrecy. What I realised was that without secrecy to hide their activities from scrutiny most of those using the paces usually called tax havens would not undertake activity there.

So, adapting the term secrecy jurisdiction that I had first heard used by the late US Senator Carl Levin, I changed the focus of attention when seeking to define these places away from tax and towards the secrecy that they almost always provide. The result was my definition of a secrecy jurisdiction, which has underpinned much of the progress on tackling these places since I first offered it in 2009.

I define secrecy jurisdictions as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain with that regulation being designed to undermine the legislation or regulation of another jurisdiction and with the secrecy jurisdictions also creating a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

I explore this issue in this video.

The paper in which I redefined tax havens as secrecy jurisdictions is here. 

This is the first in a series of five videos on the theme of tax havens.

The Scottish government needs to say what it means about fair tax

Published by Anonymous (not verified) on Mon, 23/08/2021 - 6:30pm in

I noted this in the new deal between the SNP and Greens in Scotland:

I highlighted the last paragraph for a reason. Defining tax avoidance in this context is nigh on impossible. What you can do instead is define what is good practice that must be followed if tax avoidance is to be unlikely.

No one has tried to do this better than the Fair Tax Mark, run by the Fair Tax Foundation. Now, I am biased. I founded the FTM and still advise it, but am no longer a director. Those involved in this process will need to look at what it does.

Importantly though, grants, of course, do not all go to large companies. Critically, if the Scottish government is serious it has to:

  • Demand that all companies with public grants publish their full accounts on public record;
  • If they are a group full country-by-country reporting must be available on public record;
  • Ownership should be on public record;
  • There must be a tax governance policy in place;
  • It must be monitored and audited, annually;
  • That policy must require an explanation of the tax rate with workings supplied;
  • All cards must be face-up on the table;
  • No tax haven involvement should be permitted.

That is deliverable.

But if the SNP / Greens really wanted a level playing field they would demand this of all companies trading in Scotland.

And why not? Why is it only public procurement that matters? Can't people be fleeced in any sector at cost to society at large?  Why shouldn't everyone get the protection the government is seeking?

HM Revenue & Customs is moving in the right direction on tax evasion – so why won’t it collect all the data it needs to clamp down on abuse?

Published by Anonymous (not verified) on Fri, 13/08/2021 - 4:59pm in

I had not noted a new consultation started by HM Revenue & Customs on 31 July, but which is definitely worth commenting on.

The consultation says it's about:

As the introduction says

The government invites comments from digital platforms that facilitate the provision of services, such as taxi and private hire services, food delivery services, freelance work and letting of accommodation, as well as those that facilitate the sale of goods and transport rental. The government also welcomes views from organisations or bodies that represent platforms or businesses in the sharing or gig economy.

That is because what is proposed is that all the digital platforms, from eBay to Uber and Deliveroo onwards, that support the sales of people in these sectors will from January 2023 have to report the income of the people who they are assisting make sales to HMRC on an annual basis.

I welcome this. I would almost add 'at last'. I cannot recall for how long I have been asking for this. What all those who have looked at tax evasion issues know is that the biggest reason for it happening is simply that it is possible to do it and get away with it because there is no reliable third-party source of data that has provided the smoking gun to encourage full compliance amongst the small business community. This plan provides that for some of that sector, and will massively increase compliance rates.

The other requirement, which I have promoted for even longer and which we still have not got, is automatic information exchange from UK banks to HM Revenue & Customs to provide data on the turnover of all the companies that they provide services to. This seems the most glaringly obvious omission from the automatic information exchange regime. We know that more than 2 million companies exist in the UK each year that claim they do nothing, and hundreds of thousands of them disappear each year without trace. The chance that there isn't widespread fraud amongst these companies is remote in the extreme.

Why this data cannot be provided so that this obvious source of risks within the tax system can be managed defeats me. The new planned scheme hits the small scale abuse that is a problem. What I propose would hit the large scale abuse. And I still wonder why it is that HMRC does not want to tackle that. Then we would really clamp down on the UK shadow economy. And it would be really easy to do. So why not do it? A fair market economy demands it. What has the government got against creating one?

Tax justice and tax transparency in 2021

Published by Anonymous (not verified) on Wed, 28/07/2021 - 8:32pm in

In its eighteen or so years in existence, the tax justice movement has always campaigned for tax transparency. So, it has delivered country-by-country reporting for tax, and led the calls for that data to be made public. And it has tackled the opacity of tax havens.

But, building on those successes is essential and tax transparency is a much bigger issue than this focus on multinational corporations and tax havens suggests. It is very much a domestic tax issue as well, permeating the whole way the tax system works and how it delivers fair outcomes. In 2021 I suggest it's time tax justice thinks more widely on tax transparency and in this video I explain why.

For more thinking on this issue see https://www.taxresearch.org.uk/Blog/2021/04/07/making-tax-work/

The other four videos in this series are here, here, here and here.

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