The other powerful statement to come out of the meeting in Cannes was from French President Nicholas Sarkozy, who had some very strong words for uncooperative low tax jurisdictions. Sarkozy intonated that a list of eleven uncooperative jurisdictions should be “excluded from the international community,” including: Barbados, Trinidad and Tobago, Antigua, Botswana, Brunei, Panama, Seychelles, Uruguay, Vanuatu, Switzerland and Liechtenstein. He added that a list of countries which do not conform to acceptable tax practices would be published at all future G20 summits. “We don’t want to have tax havens any more.” He said “Our message is very clear.”

Loud and clear, sir.

The countries on Sarkozy’s list have reacted with varying degrees of hostility, indigence, and feigned bewilderment. In Barbados, for instance, the Minister of Foreign Affairs and Foreign Trade Maxine McClean insisted that “Barbados is a low-tax jurisdiction…not a tax haven.” Well, sure, you can label it any way you want, but the fact remains that Barbados surrounds its banking sector with a shroud of obscurity and will not participate in automatic tax information exchange. And for the record, yes, it’s also a tax haven.

There were also reactions from some jurisdictions that did not appear on Sarkozy’s list. This included Isle of Man, a British Crown Dependency and a tax haven according to the OECD. Or if that’s not compelling enough evidence, see this eHow article, titled “How to Avoid Tax with an Isle of Man Bank Account.” That’s not a joke. Needless to say, Isle of Man felt a wash of relief when Sarkozy didn’t call its name. Chief Minister Alan Bell called the news a “major step forward,” noting the statement was “very good” for the Island’s reputation. Okay. Sure. It’s just not saying much when your definition of “very good” is “not being ostracized by the world community.”

It was Switzerland, however, that reacted the strongest and most indignant. A spokesman for the Swiss State Secretariat for International Financial Matters told the world that they “were very surprised and dissatisfied.” This year’s Swiss president, Micheline Calmy-Rey, called Sarkozy’s remarks “ungrounded” and hypothesized that Sarkozy must have “a problem with Switzerland.” Calmy-Rey added that she did not know what this problem could be.

Okay. What could that problem possibly be? Here’s a thought. Maybe it has something to do with your country helping citizens of other countries, like France, avoid and evade their taxes. But that’s just the first thought that sprung into my head. I guess it could be something else, too.

Aggressive Tax planning can harm companies

The report makes it clear that there are strong commercial reasons for adopting these standards. Companies that pursue aggressive tax strategies face a number of risks including costly legal action from tax authorities, cash flow problems when a tax loophole is closed and ever increasing regulatory complexity as officials seek to keep up with aggressive avoidance schemes. Meanwhile government contracts often exclude offshore companies and increasingly public sector procurement procedures will seek disclosure about partner’s use of tax havens. Risk of reputational damage is also especially significant as spending cuts lead to greater public awareness of tax dodging in Europe. Protests by the Indignados in Spain and UK Uncut, have channelled outrage at individual companies’ tax arrangements.

Sustainable Tax planning can benefit companies

Research has shown that direct investors in low income countries tend to value political stability, the rule of law and human capital more than effective tax rates when deciding whether to invest. Sufficient, predictable tax revenue is needed to foster all of these conditions. High public investment is something companies need but some are not prepared to pay for.

Practical Steps for companies and investors

Christian Aid’s framework suggests steps that companies can take to demonstrate their commitment to development and a fair approach to taxation or that socially responsible investors could demand from the companies in which they invest. A company should, at all times, comply with the laws of the jurisdictions in which it operates, respecting the spirit as well as the letter of the law. A company ought to record profit in the countries where real economic activity such as manufacturing takes place and then pay up on time. Transparency must be a key principle of tax policy, therefore companies should report their tax planning arrangements and strategies to governments. Additionally firm’s should undertake full country by country reporting of its financial position in every country in which it operates, there is strong a business case for this.

The code considers companies with a presence in low income countries or states where governance is weak are at a high risk of not complying with this framework. Tax avoidance by multinational companies is especially problematic for low income countries where tax authorities are less well equipped and corporation tax often accounts for a greater share of government revenue.

The framework also recommends that some activities should be banned such as adding stages into a transaction solely to reduce tax liabilities and using secrecy jurisdictions. Unfortunately as Action Aid’s new report “Addicted to tax havens: The secret life of the FTSE 100” shows many companies on the London Stock Exchange are a long way from achieving these standards, with 98 out of the FTSE 100 using tax havens.

Previous reports have found this to be the case for the largest companies: In the extractive industries; At the Pan European level; As well as in Spain and France.

Over Obiang’s three decades as president, Equatorial Guinea has witnessed many disappointments.  The IMF and World Bank have both withdrawn aid programs, citing massive government corruption and theft.  The International Red Cross has accused Obiang of human rights violations.  In July 2003, state-operated radio declared Obiang to be a God who is “in permanent contact with the Almighty” and “can decide to kill without anyone calling him to account and without going to hell.”  The Alliance of Professional Africans in the Diaspora has called Obiang one of Africa’s “worst dictators,” along with Zimbabwe’s Robert Mugabe and Angola’s Jose Eduardo dosSantos.

In 2009 campaign group and Task Force member Global Witness uncovered documents showing Obiang’s son, Teodorin Obiang, purchased a $33 million private jet, a $35 million Malibu mansion, speedboats and a fleet of luxury cars in the United States. Then, earlier this year, Global Witness revealed that Teodorin Obiang, the son of the dictator, “commissioned plans to build a superyacht worth $380 million.” That’s nearly three times the amount Equatorial Guinea spends annually on both health and education programs. Given his salary of $4,000 – $5,000 a month as a minister, we must wonder where this grip of cash came from.  Teodorin himself vaguely—and insultingly—once explained “I have been very lucky in business…and I like to live well.”

For the robbed inhabitants of Equatorial Guinea, the prospect of getting their money back is dismal. As the U4 Anti-Corruption Resource Center has noted: “asset recovery is…costly and time consuming. It requires lawyers, forensic accountants, expert opinions, translators, and travel expenses.” Private law firms can prove helpful recovering assets abroad, but their proficiency comes at a price—generally ranging from $200 to $600 per hour. In fact as Tom Cardamone, Managing Director of Task Force member Global Financial Integrity, has noted: “Shockingly…only about 1 percent of all stolen government money is ever seen again.”

This is why it came as a rather startling surprise when French police entered Teodoro’s Paris mansion on Friday and seized eleven high-end cars, including a Ferrari 599 GTO, a Maserati MC12, and not one, but two Bugatti Veyrons, which are considered “the most powerful, most expensive, and fastest street-legal production car(s) in the world.” The cars are registered to Teodoro, but according to a house employee, it is his fun-loving son who usually drives them. French police believe the Obiang family purchased the cars as part of a money-laundering scheme to smuggle cash into France. In response to questions from the press, an unnamed source responded: “There is an ongoing judicial investigation into money laundering and other crimes related to the receipt of foreign aid … these seizures have resulted from this inquiry.”

As much satisfaction as we should all get from this anedecdote, it is wise to remember that this seizure is very much the exception—not the rule. As Cardamone has put it: “the opportunity costs of trying to locate, let alone recover, corrupt proceeds are just too frustratingly, maddeningly, horribly high. Given their complexity and difficulty, efforts to recoup stolen funds are Sisyphean in the extreme.”

While we should continue to pursue the Obiang family and their criminal assets, we must also remember that prevention continues to be more important than recovery. It is better to stop these funds at the source than try to pursue them after the corrupt leaders and officials have absconded with their ill-gotten cash. As the saying goes, an ounce of prevention is worth a pound of cure. On the other hand, it is rather satisfying to picture the look that must have been splashed acorss Teodorin Obiang’s face when he saw the French police load his Bugattis onto their car carrier. I hope they weren’t gentle.

En français

Tackling the Shadow Financial System: A Working Plan for the G20

2011 Annual Conference of the Task Force on Financial Integrity and Economic Development

PARIS – The 2011 annual conference of the Task Force on Financial Integrity and Economic Development will take place at the Cercle National des Armées in Paris, France from October 6-7.

Speakers and panelists at this year’s conference will address the implications of and solutions to the shadow financial system, including: country-by-country reporting, beneficial ownership of accounts, automatic exchange of tax information, curtailment of trade mispricing, and tax evasion as a predicate offense for anti-money laundering. Breakout sessions will focus on the 2011 Financial Secrecy Index, illicit trafficking, socially responsible investing, media messaging, the “Arab Spring,” and more. Together, speakers and participants will craft a message to the G20 member governments ahead of the November 2011 French summit on how they can address the global ills that result from illicit financial flows.

With Special Presentations by (but not limited to):

Jeffrey D. Sachs
The Earth Institute

Jon Lomøy
Organization for Economic Cooperation and Development

Abdalla Hamdok
United Nations Economic Commission for Africa

Christian Masset
French Ministry of Foreign and European Affairs

Sanjay Mishra
Indian Ministry of Finance

Illicit financial outflows from developing countries—the proceeds of crime, corruption, and tax evasion—total approximately $1.3 trillion per year. These outflows undermine economic development efforts and sustain corrupt and criminal elements in the developing world. With links to such historic events as the “Arab Spring” and the 2008 global financial crisis, efforts to understand and curtail these illicit flows are crucial to the G20’s efforts to foster global economic growth, tackle corruption, and strengthen financial mechanisms to prevent further economic shocks.

To learn more about attending the conference or to obtain additional information on specific panels, speakers, and conference materials, contact Monique Perry Danziger: mdanziger@financialtaskforce.org, +1 202 904 3113.

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Contact:

Monique Perry Danziger
mdanziger@financialtaskforce.org
+1 202 904 3113

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The Task Force on Financial Integrity and Economic Development addresses inequalities in the global financial system that penalize billions of people, and advocates for improved transparency and accountability.

For additional information please visit http://www.financialtaskforce.org.

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SPD Plans to Block Rubik Ratification in Germany

The SPD’s financial concept note published last Monday rejects the agreement with Switzerland. It is now quite likely that the deal will be rejected by the Upper Chamber, the Bundestat. North Rhine Westphalia’s Finance Minister Walter Borjans argued that effectively giving an amnesty to tax evaders was unconstitutional. Nicolotte Kressl and  SPD finance experts in the Bundestag said the deal should be halted as not to undermine EU efforts to secure automatic exchange of information with Switzerland.

EU to Look into Legality of the Deals

The European Commission is analyzing whether the final withholding tax deals are compatible with EU law. “We had many contacts with Germany and Great Britain, which assured us that their bilateral agreements would not infringe the European directive on savings taxation or the Union’s agreement with Switzerland. We’re going to check all that. It is clear that in the light of international law, the directive and the EU-Switzerland agreement take precedence over the bilateral agreements initialed in August,” EU Taxation Commissioner Algirdas Semeta said to reporters on 8 September. The European Council Working Party on Direct Taxation will meet on 22 September and the commission has requested that Germany and Britain present the full text of their agreements with Switzerland at this meeting.  However, it does not seem that the commission opposes the deals but rather that it might use them to win some small further concessions from Switzerland, either expanding the scope of information exchange on request or bringing in other types of investment.

Luxembourg and Austria did not want to take part in automatic exchange of information as part of the European Savings Tax Directive (EUSTD), so they won an opt-out allowing them to temporarily use a withholding tax method instead. Now Luxembourg is arguing for an extension of this arrangement in the light of the Rubik deals. The EC maintains that the original timetable must be adhered to.

If it wasn’t enough that Swiss banks have already begun to advise UK citizens to move their money to Singapore to avoid the withholding tax. There was another instance of the toothless or complicit approach of the UK authorities to tax dodging. Boilerplate concerns from business about ‘uncertainty’ were enough for the government to drop an evaluation of the UK’s double taxation treaties investigating the opportunities for tax avoidance these agreements often create. Accountants Ernst and Young cheered this saying “The Coalition pledged to take a more consultative approach to tax policy making and, from this volte face, they seem to be living up to their mantra,” i.e hastening regulatory capture and allowing companies to dictate tax policy appears to be an  official British policy.

France entered discussions with Switzerland on Rubik and rejected it for now. Some French officials reasserted their commitment to promote automatic information exchange, however other officials have hinted that the Swiss proposal might receive consideration at some point in the future. In Addition, Alfredo Gysi, head of the Association of Foreign Banks in Switzerland, one of the architects of the final witholding tax proposal, is clearly looking to tempt Italy into a similar deal. On top of vast amounts of flight capital from developing countries, it is estimated that, in total, European citizens hold roughly 700 billion Euros in Switzerland, it can be assumed much of this was never properly taxed.

Calotype46/Flickr*

The nine regional councils will ask for country-by-country reports from their banks and insurers. This will include the following details: Name and number of subsidiaries; numbers of staff employed; profits and amounts of taxes paid. This information should be provided by the company six months after its annual report is published. This information is invaluable in calculating whether a company is paying its fair share of tax in each country. The precedent this sets is very important as the EU is currently considering introducing country-by-county reporting.

The Comite Catholique Contre La Faim et Pour Le Developpment (CCFD)  has been instrumental in the campaign and is now helping the councils implement these measures.

A further six councils asked financial partners to declare any involvement they have in non-cooperative jurisdictions and the French official list of tax havens. Two more have broadly declared their desire to combat tax havens.

This the product of the ‘Stop Tax Havens’ campaign, launched in September 2009 by CCFD-Terre Solidaire, Oxfam France, ATTAC, and French Trade Unions (CGT, CFDT, SNUI, Solidaires) and the French platform against tax havens. The campaign made use of the regional elections in 2010, mobilizing supporters to write to their representatives. The first success came last year when the Paris regional council passed resolution calling for country by country reporting by banks.

See map of which regional councils are involved.

More on country-by-country reporting…

* Image license: Some rights reserved by Calotype46

White House Photo

Last summer, we reported that the Obama Administration planned to globally promote the Energy Security Through Transparency (ESTT) provisions (Sec. 1504) of the new Dodd-Frank legislation.  Now, it appears as though they’ve remained true to their word.

Last July, after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the White House released a statement about Sec. 1504 saying (underlining added by me):

This provision is an essential new tool in promoting transparency in the oil and mineral sectors. This legislation will immediately shed light on billions in payments between multinational corporations and governments, giving citizens the information they need to monitor companies and to hold governments accountable. It will shine a sustained light on the relationship between corporations and governments in the oil and mineral sectors, and make impossible the kind of back-room dealings that cost taxpayers in lost royalties.

Importantly, this provision sets a new standard for corporate transparency. The challenge for us now is to make this a global standard. The United States is committed to working with other countries to ensure the implementation of similar disclosure requirements in other financial markets and will make this a priority in the year ahead.

At the time, we lauded the White House for its commitment to making this a global standard.  We wrote:

… [T]he passage of the ESTT amendment sends a powerful message to the rest of the world: that country-by-country reporting is vitally important both to resource-rich countries in the developing world and to industrialized nations in the developed world.  The White House recognizes this and has wisely decided to act on it.  It is now up to President Obama to turn these words into action.

And, it appears they’ve heeded our call to act.  Earlier this week, The Wall Street Journal’s Joe Palazzolo reported that the White House has been lobbying its allies in Europe to adopt similar legislation.  Palazzolo writes:

The White House has been pushing for the passage of payment-disclosure laws in major financial markets in Europe, in hopes of rendering virtually all oil, gas and mining companies that raise capital on Western stock exchanges subject to the same reporting requirements, according to one administration official. (About 60% of the the largest companies within the extractive industry are listed on U.S. stock exchanges, according to the Forbes 2000.)

The National Security Council has been coordinating the effort to promote the law abroad because several agencies have a stake in the issue, administration officials said. President Obama touted the disclosure provision in a September speech at the United Nations, calling corruption “the single greatest barrier to prosperity” and “a profound violation of human rights.”

NSC staff have pressed the issue in the Group of 8 setting, as well as in meetings with officials from the U.K., the European Commission and France, the official said. Staff have also met with representatives of the extractive industry, including the American Petroleum Institute, to listen to their concerns.

We couldn’t be happier with regard to the White House’s effort on this issue.  The ball is now in Europe’s court to act upon this very important anti-corruption initiative.  We hope that the European Union, the UK and France can muster the energy to create similar laws in their own jurisdictions.

The argument against such a provision—being a threat to competitiveness—was utilized widely even before Dodd-Frank was enacted, but we now hear another argument: forcing listed companies to publish their fiscal payments in each country would go against the sovereignty of those countries.

This argument is extremely interesting because of the use of the concept of sovereignty. The companies that effectively disclose their local payments, as shown in our Promoting Revenue Transparency 2011 report, do not appear to threaten the sovereignty of the countries in which they operate. Otherwise, they would probably have left these countries long ago.

If a government really wanted all contractors to hide their fiscal payments, it could exercise its sovereignty choosing only secretive contractors. However, this is clearly not the case as an extractive company like Statoil already discloses payments in very challenging environments such as Libya and Angola.

Sovereignty can however be misused for private needs. Some time ago, we were hearing that it was against the sovereignty of some countries to disclose any data on the bank accounts that were held on their territories, and it is still what we hear from some tax havens who misuse sovereignty instruments for the benefit of some individuals and financial institutions. Flags of convenience also derive from the misuse of sovereignty instruments, with intermediaries who are in the business of representing countries in international organisations for the sole purpose to make sure that international regulation on the subject will not change. As we all know, this has consequences in safety and human rights.

There should be no other sovereignty than the one produced by the social contract for the well-being of the people. No sovereign government should oppose disclosure of its fiscal revenue, unless this revenue is diverted to private uses under the protection of a false sovereignty. We cannot expect corporations to change the world, but corporations which publicly support transparency, and often genuinely do so, should not support misuse of sovereignty.

For those who don’t read French, two things here stand out. First is the chart in the top right, reporting the answers when people were asked what the most effective measures for fighting poverty in the world. A quarter of them (in blue) said that increasing foreign aid should be the highest priority. But here is the stunner: a full 70 percent said that fighting against tax evasion and tax havens was the answer.

The second surprise was the pair of pie charts at the bottom, representing shifting attitudes towards the effectiveness of measures taken by the G20 and OECD against tax havens, amid claims by the likes of President Sarkozy that “tax havens, bank secrecy, are finished.”

In 2009, 30 percent thought the measures had been very effective of mostly effective, while 62 percent thought they had been rather or very ineffective. A year later, and only seven percent think they have been very or mostly effective, and 84 percent think they have been very or rather ineffective. Which puts the majority of the French population in line with TJN (see more on this here).

Remember, this is not a survey of people who are already committed to the fight against tax havens. This was a survey represenative of the French population at large. With extreme congratulations due to our French colleagues in the non-governmental organisations who have worked tirelessly to raise awareness of this issue.

(Update: see François Aubert’s comments about trusts, too.)

Determined to step up efforts to crack down on tax evasion, France’s Budget Minister Eric Woerth has announced his decision to demand assistance from the country’s banks.

During a recent meeting held with representatives of the French banking federation, ‘la Fédération Bancaire Française’ (FBF), the Minister confirmed his aim to ensure that a systematic exchange of tax information takes place between the banks and the tax authorities, based on the systems in place in the UK and Ireland.

Continue reading at Tax-News.com…