Deputy Geoff Southern in Jersey has tabled an amendment to the current Jersey budget that shatters the myth that this is still the case. As his amendment says:

Geoff is right to acknowledge there is a race to the bottom in Jersey, Guernsey and the Isle of Man. Promoted by the pinstripe infrastructure of lawyers, accountants and bankers, the pernicious influence of these groups has driven these three jurisdictions on a destructive path towards shattering their tax base by eliminating corporate taxes for their clients.

The result is all too apparent. The tax burden has shifted dramatically from businesses using Jersey as a tax haven to the local population who are now paying for the privilege of hosting the tax abuse industry whilst at the same time their economy is facing ruin as local politicians realise they have no idea how to plug the continuing deficits they face and are now suggesting plundering the rainy day fund – a sure sign they are on the slippery slope to running out of money, as I have long predicted.

Geoff Southern has in this case study provided the evidence of what I and the Tax Justice Network have long argued – that the ‘race to the bottom’ in corporate taxes is simply an excuse to shift the tax burden from those able to pay tax (let’s call them the 1%) on to those less able or unable to afford them (again, for simplicity, let’s call them the 99%).

This is happening everywhere but Jersey’s clearly leading the way.

This is what the Tax Justice Network is about.

This is what #occupy is about.

Beating this pernicious process is what re-engagement in democracy should be about for many who feel disenchanted by it.

And this is what beating the exploitative activities of the City of London – the most undemocratic local authority in the UK – has to be about.

Thanks to ActionAid’s report Addicted to Tax Havens, we know that 98 of the top 100 companies on the FTSE have money parked away in offshore tax havens, in 9892 separate offshore subsidiaries. 1649 of those belong to just four banks.

The UK’s Channel 4 News decided to go to the Channel Island of Jersey, where over 600 of these subsidiaries are registered, to investigate the problem further. Its a great summary of the issues facing the United Kingdom, and how companies use jurisdictions like Jersey to brazenly avoid taxation.

Ryan Morrison/Flickr*

I, like many in the tax justice arena, was very dubious when the OECD set up the Global Forum on Transparency and Exchange of Information for Tax Purposes to undertake peer reviews of the operation of tax information exchange by participating states in the aftermath of the financial crisis and the rush to sign tax information exchange agreements (TIEAs).

TIEAs are deeply flawed and the OECD designed and promoted them.

The OECD was also remarkably cagey about this whole process: civil society was excluded from most involvement, far too many tax havens appeared to get positions of influence over it, the nature of the peer review process was not clear and there was some real doubt about whether the process might be a bit of a whitewashing exercise.

However, I was one of several speakers at the Tax Justice Network conference last week to comment that although reservations about process remain (and they do, and remain valid) the outcome of the review processes to date suggests that this is no whitewash.

The case of Jersey is an example. The fist phase report was critical of issues in Jersey’s access to data that we in civil society would have found hard to identify. Although it was noted that the deficiencies in the accounting requiremnts for many orgasiations in the island had not as yet given rise to any practical difficulties in exchanging data the review still demanded that they be remedied. That was welcome, of course.

That however was stage one, and the easy part. Having the right pieces of paper in place has been something that we’ve always said that a secrecy jurisdiction should be able to do without much problem – after all their legislatures are captured in very many case by the local financial services industry to ensure they meet its needs, and this was just another one of those needs. But, stage 2 was something else. We’ve always said that the test of these places would come when a review of actual activity was undertaken.

The OECD have delivered on this. They’ve revealed, in unambigupus terms, how little information exchange Jersey has actually done And they’ve also not avoided the fact that a perceived failure has occurred and they have levelled criticsm at Jersey for the fact that this has happended and have demanded reform.

This shatters Jersey’s reputation. Firstly it is not transparent when tiny amounts of data are made available. Second it is shown to be non-cooperative (as the UK has already officially labeled it).

And I have to say that I did not think the OECD would do such things.

So I say that although reservations still exist about this process and tax information exchange agreements themselves remain fundamentally flawed and in need of replacement with automatic information exchange the actual peer review proicess itself seems to be delivering, so credit is given where credit is due, and I offer it on this occasion, as I know others in TJN do as well.

Image License: Some Rights Reserved By Ryan Morrison

Ryan Morrison/Flickr

John Christensen, founder of the Tax Justice Network, a Task Force member, was profiled by the Guardian on Thursday.  Bibi van der Zee writes about Christensen’s decades-long experience fighting tax evasion, talking about the impacts these illicit flows have not only on the United Kingdom, but on the developing  world as well:

“[T]ax avoidance is a problem that is not only taking money out of the pockets of UK taxpayers but directly impacting the economies of developing countries.

‘Western leaders look at Africa and blame their leaders for corruption but they don’t recognise that the systems we’ve put in place – above all the tax havens jurisdiction economy – are an open invitation to criminal behaviour, fraud, tax evasion, embezzlement, and non-disclosure.’”

Read the full piece here, and read more about Christensen and the Tax Justice Network at their blog.

The OECD says of the peer review process that:

The international fight against cross-border tax evasion has entered a new phase with the launch by countries participating in the Global Forum on Transparency and Exchange of Information of a peer review process covering a first group of 18 jurisdictions: Australia, Barbados, Bermuda, Botswana, Cayman Islands, Denmark, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway, Panama, Qatar, San Marino, Seychelles and Trinidad & Tobago.

The reviews are a first step in a three-year process approved in February by the Global Forum in response to the call by G20 leaders at their Pittsburgh Summit in September 2009 for improved tax transparency and exchange of information.

Note Jersey is involved.

There’s just one problem for them: I gather that Jersey has failed its second part of the peer review process. I understand that at least one country is saying Jersey is not exchanging information as expected under the OECD process.

Some of us aren’t surprised.

Some of us might say that this blows apart all the claims Jersey makes about being a transparent, cooperative state.

But then some of us know that it’s no such thing, and that’s why we’re not surprised.

As they say:

These new penalties come into force from 6 April 2011 and apply to Income Tax and Capital Gains Tax.

The legislation can be found in Schedule 10 of Finance Act 2010.

The new penalty is an enhancement of the penalties for

• failure to notify
• inaccuracy on a return
• failure to file a return on time

Under the new legislation, these penalties will be linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country will be higher.

There will be three new levels of penalty:

• where the income or gain arises in a territory in ‘category 1′, the penalty rate will be the same as under existing legislation
• where the income or gain arises in a territory in ‘category 2′, the penalty rate will be 1.5 times that in existing legislation – up to 150 per cent of tax
• where the income or gain arises in a territory in ‘category 3′, the penalty rate will be double that in existing legislation – up to 200 per cent of tax

So far, so good.

But then note the lists of places that are in categories 1 and 3. Guernsey and the Isle of Man are in category 1.

Jersey is in category 2.

What are H M Revenue & Customs trying to tell us?

And what’s the official response of Jersey to this? Surely they must have one?

–

This post was originally published on the Tax Research UK blog…

regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.

The evidence became very clear ina  presentation given last Friday by Jersey Finance to the members of the States of Jersey. The title slide of their presentation was:

Note what Jersey Finance says of itself in its web site:

So there we have it: a non-profit company whose job is to promote the finance industry.

But then note what Jersey Finance said it had done in 2010:

Hang on – Jersey Finance is saying it developed 18 laws and regulations? That seems to be the case.

And it wasn’t a mistake. This is what it says it wants to do in 2011:

Yes, it’s working hard on developing new lines and regulation.

So there we have it – absolute proof of the fact that Jersey has been captured by finance.

And wasn’t it kind of the real government of Jersey - Geoff Cook and his ex-finance industry team at Jersey Finance (almost none of them Jersey people, please note) to go along to the states and tell them what they’ll be doing when it comes to law making this year? Because this is exaxtly what that meeting was about.

The people of Jersey and the politicians of Jersey please take note – the evidence that your legislature has been captured for the benefit of the finance industry is overwhelming. Now, what are you going to do about it?

–

This post was originally published on the Tax Research UK blog…

WRITTEN QUESTION TO THE CHIEF MINISTER

BY THE DEPUTY OF ST. MARY

ANSWER TO BE TABLED ON TUESDAY 18th JANUARY 2011

Question

Can the Chief Minister inform members how many Tax Information Exchange Agreements were in force at the beginning of 2005, 2006, 2007, 2008, 2009 and 2010?

Can he further tell members, for each of those years, how many requests for information have been received, from how many countries they were received, and in how many cases was the information requested found and sent to the requesting authorities, and how many staff (FTE’s) were employed in this work?

Answer

The number of Tax Information Exchange Agreements in force at the beginning of each of the following years on a cumulative basis is –

2005 – nil

2006 – nil

2007 – 1

2008 – 1

2009 – 2

2010 – 12

2011 – 15

In addition there was one Double Taxation Agreement with equivalent tax information exchange provisions in force at the beginning of 2011.

I am unable to provide members for each of the years the number of requests for information received and from how many countries they were received. Jersey has been requested by some of our treaty partners not to publish the number of requests received. Quoting figures for the earlier years would identify the number of requests received from the USA, which is one of the countries concerned. What I can say is that for the period from 1 January 2007 until the 31 December 2009 there were 12 requests and for the year 2010 there were 27 requests. Over the period as whole requests have been received from Australia, Denmark, Germany, Iceland, the Netherlands, Norway, Sweden and the USA.

Of the total of 39 requests received by the end of 2010, two were subsequently withdrawn by the requesting authority and three have given rise to issues relating to the distinction drawn in the agreements between criminal and other tax matters, and the definition of what is a criminal tax matter, which issues we are currently seeking to resolve in discussion with the countries concerned. Otherwise all requests have been responded to within the forty days set by the Jersey competent authority (the Comptroller of Income Tax). This is significantly faster than is required by the OECD Model Agreement.

All the requests to-date have been dealt with by the Comptroller of Taxes personally as a normal part of his duties, and there are no staff specifically employed in this work.

So now we know several things:

a) Until 2010 Jersey did almost no information exchange – which confirms what we always suspected;

b) The UK has not made a request for information exchange (which is extraordinary);

c) The amount of information exchanged is so pitifully small the requesting countries do noit want their tax payers to know that the system really does not work, and therefore has no compliance effect;

d) As I’ve always said, this proves how hopelessly ineffective the Organisation for Economic Cooperation and Development tax information exchange agreements are, and how badly they failed the G20 when suggetsing this programme in 2009;

e) As a result there is still no effective mechanism for information exchange in existence because the obstacles to making a request are so enormous it is almost impossible to make one. In effect a tax authority has to know all the information it is requesting before a request can be made.

The campaign for effective information exchange goes on.

My suggestion is here. And it would really work, at very low cost.

There are those who do, of course, wish to ignore the news and that is their prerogative. I admit that this is a leak, but one which I’m entirely confident is right. Failure on three out of five counts is a dramatic rejection of the deliberately abusive structure of zero / 10. It is also a resounding slap for those who think that getting round obligations is acceptable. The tax avoiders of the Crown Dependencies thought they could do this. It has been shown that they cannot. They have failed, as I understand it from what I have been told because of non-compliance with the following tests:

1. Whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents;
2. Whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base;
3. Whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages;

I predicted each of these in 2005.

Why the Crown Dependencies have failed

It is very obvious that if a company trading in Jersey is not taxed if it is owned by non-residents but is forced to distribute dividends that are taxed if it is owned by a Jersey resident person that there are clear tax advantages provided to non-residents. The failure of the first test was so predictable it is amazing that anyone in any of the Crown Dependencies, or in London, thought that they could get away with this abuse by arguing that the discrimination existed in personal tax, not business tax, which was the defence they used.

It has to follow on the same logic that test two also fails: the only reason for enforced distribution must have been to protect the national tax base by solely charging the domestic market to tax when the international market was not charged.

The third is a little more complex I suspect, and requires consideration of another issue – which is in the preamble test for the Code – which seeks to determine whether the rate of tax offered to business is itself harmful because it is seriously out of line with the overall tax rate in a jurisdiction. Since the claimed headline rate of tax in Jersey is 0% then clearly that is out of line when he prevailing income tax rate, which is 20% on most forms of income. This, I think, has to be born in mind when assessing the impact of the failure. It is not just the specific tests that have, I suspect, given rise to this rejection of the Crown Dependencies’ tax systems. For the specific tests to be undertaken there had to be a significant and deliberate tax differential to indicate the presence of abuse. That means I think that the 0% tax rate is itself under review and considered abusive. If true this is much more serious than the Crown Dependencies currently anticipate, and very welcome.

How does this impact on the third test? Well, if a 0% tax rate is offered to non-residents then it is very obvious that some activity without any real economic substance or presence will be recorded in the Crown Dependencies even though no real activity actually is undertaken there. This means that the 0% tax rate is, in itself, now part of the review, in my opinion. I cannot see how else the third test failed.

What does this mean for the Crown Dependencies?

First, and most obviously, zero / 10 is dead.

Second, and probably as importantly, confidence in the economic judgement of these locations will be severely dented. After all, if they cannot deliver a legal tax system when what business claims it needs is certainty, why should anyone take the risk of locating transactions in their jurisdictions again?

Thirdly, any new tax system in these islands must remove all differentials between the local population and those who seek to use these locations for tax abuse. A consistent tax rate must be applied to business transactions, and that consistency must overflow into any personal tax system. In other words, the tax base for business and personal transactions must be similar. It is, I think, very obvious that the argument that they can be different has now been rejected by the Code of Conduct group. The decisions that have been reached would not have been possible if that were not the case.

There are some immediate advantages in this for the islands. Some glaring anomalies, such as UK high Street stores trading being untaxed in St Helier, St Peter Port and Douglas when their locally owned competition is taxed must go. But since there is no prospect, whatsoever, that Jersey or Guernsey could balance their budgets without imposing a positive local rate of tax on companies this does imply that a consistent positive rate of tax will be applied to all profits arising in Jersey and Guernsey from now on. If, as I suspect, the UK continues to chip away at the Isle of Man’s VAT subsidy the same will be true there too.

This means, at the very least, that a territorial basis for taxation will be adopted in the Crown Dependencies, with all income arising in these places being subject to local taxation. But, remember, that these places do currently apply a residence basis of taxation to their warm blooded populations. To be consistent, and avoid the risk of abuse falling foul of the Code, a territorial basis might also be necessary with regard to the human population of these islands as well, especially if the corporate tax rate is lower than the income tax rate. That would have massive impact: the local population could easily ship income out of the local tax base if this were introduced. I think this may be a major constraint on the potential for a territorial basis for tax, at least with differential tax rates.

And there are, in any event, other risks. Take for example the recent trend for UK quoted companies to be incorporated in Jersey but be tax resident in a location such as Ireland or Switzerland. The assumption here was that the Jersey company would avoid all tax: that is not so obviously the case if a territorial system were to apply. The immediate of certainty which was the underpinning of these arrangements will have been blown apart.

And then there is something more significant still: if it were possible under a territorial taxation arrangements for a Crown Dependency company to still enjoy a 0% tax rate, which would be a significantly different rate from the standard rate of tax in the Crown Dependencies then the preamble test inherent in the Code of Conduct, which suggests that if there are major differential tax rates available to non-resident companies the existence of abuse does prima facie exist, will continue to be a problem, indicating that the Code may not be complied with if a territorial basis for tax is created with this deliberate intention of offering 0% tax to some companies.

I think there is a real chance this will be the case, and this shatters the complacent assumption in the Crown Dependencies that territorial tax will solve all their problems because none of the tax abuse they promote supposedly takes place on the islands – all of it, in the mysterious make believe world of the secrecy jurisdiction, supposedly taking place “elsewhere” (a concept I explain here).

Finally, territorial tax will, in any event, increase pressure on the Crown Dependencies to exchange information with other tax authorities. The simple fact is that if a company incorporated in one these places claims to have no trade arising in that place then its trade must be somewhere else. The Crown Dependencies would in that case be beholden to determine where that other place is and, I think, exchange information with it. If they did not then the opportunities for abuse would be enormous, and they would be deliberately facilitating it.

None of this puts the Crown Dependencies in a pretty situation. But I am not going to get upset about that. This is a problem of their own making, and one that they could have avoided if only they had been willing to listen.

A new Reuters story (hat tip: Offshore Watch) highlights one of the effects:

Leumi (LUMI.TA), Israel’s biggest bank, is requiring U.S. clients to declare their deposits to the Internal Revenue Service, amid heightened scrutiny of offshore accounts by U.S. authorities. The bank is asking its clients to declare that they are not U.S. clients, or to reveal their accounts to U.S. authorities, according to a letter to clients obtained by Reuters.
. . .
“No longer will a bank turn a blind eye to whether their customer is a U.S. taxpayer,” said Bryan Skarlatos, a lawyer for wealthy individuals whose firm has clients that have received the letter.”

Well, this is progress. And this is not a limited case.

“Other foreign banks are sending clients similar warnings, according to private attorneys. “Most banks will have to do this sort of thing,” said Scott Michel, a lawyer for wealthy clients with cases before the IRS

Israel is a pretty secretive secrecy jurisdiction, ranked 20 according to our index.

In Jersey, they are finding transparency “onerous,” however. As one practitioner says:

There will be a requirement for finance industry firms in Jersey and Guernsey to amend their account opening procedures, there will be significant challenges to existing IT systems and the measures will impact on product development.”

One has to ask, then, what they have been doing in Jersey until now. Allowing U.S. taxpayers to operate in secrecy?

Originally published on the Tax Justice Network blog.