Global Financial Integrity

WASHINGTON, DC – Global Financial Integrity (GFI) today applauded the introduction of a bill, which would close several major tax loopholes and curtail abusive tax haven secrecy.

The Cut Unjustified Tax (CUT) Loopholes Act, which was introduced in the U.S. Senate today by Senators Carl Levin (D-MI) and Kent Conrad (D-ND), contains several provisions to permanently close offshore tax loopholes, raise revenue, and increase transparency and accountability for multinational enterprises.

“Enactment of the CUT Loopholes Act would be a huge step forward,” said Raymond Baker, director of GFI. “It would scrap several egregious offshore tax loopholes—eliminating incentives to send money and jobs overseas, help level the playing field between small businesses and multinational corporations, increase information and transparency for corporate investors, and strengthen law enforcement and tax collection abilities.”

According to the Joint Committee on Taxation and the Office of Management and Budget, the CUT Loopholes Act would reduce the deficit by at least $155 billion over the next decade with $130 billion of that reduction being attributable to the bill’s offshore tax provisions.

Significant provisions of the legislation would:

• Stop companies run from the United States from claiming foreign status and dodging U.S. taxes on their foreign income (§103) by treating foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes.
• Require annual country-by-country reporting (§111) by SEC-registered corporations on employees, sales, financing, tax obligations, and tax payments.
• Strengthen John Doe summons (§115) by streamlining the process used by the IRS to issue summons to a class of persons, such as the clients of an offshore bank, accounting firm, or law firm, while strengthening court oversight.
• Strengthen penalties (§§121-122) on tax shelter promoters and those who aid and abet tax evasion by increasing the maximum fine to 150% of any ill-gotten gains.

GFI was particularly pleased to note the section on country-by-country reporting.

“The country-by-country reporting provision adds a layer of pro-investment, best practices accountability to this bill,” said Mr. Baker. “For investors, the more information available about a company’s business practices and balance sheets, the better. This reporting requirement would also help anti-corruption and economic development efforts in developing countries by creating more transparency with respect to whether a multinational is contributing to the tax base of the developing countries in which it operates, or whether it is engaging clever accounting tricks to move that money to tax havens.”

A full summary of the legislation can be found here.

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Notes to Editors:

1. Click here to read Sen. Levin’s and Sen. Conrad’s press release on the legislation
2. Click here to read a full summary of the legislation.
3. Click here for more information on country-by-country reporting.
4. Click here to read the Financial Accountability & Corporate Transparency (FACT) Coalition’s statement on the legislation.

Contact:

Clark Gascoigne
+1 202 293 0740 ext. 222
cgascoigne@gfintegrity.org

__________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org.

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Indictment

The bankers, had helped American clients open accounts with their bank, many of these clients had fled UBS after an earlier US probe. The bankers told their clients that the bank was less at risk as it did not have offices outside Switzerland. However this proved to be untrue. This case alone covered some $1.2 billion in assets hidden from the US tax collectors. The bankers could be sentenced for up to five years if convicted. Contrast this, with Dave Harnett departing senior UK tax official’s statement, in August justifying the amnesty he had just initialled as part of Rubik, saying “I don’t think it does let fraudsters off, because we weren’t going to catch them anyway,”

Legality and efficacy of Rubik both questioned

The Rubik concept was drafted by the Association of Foreign Banks in Switzerland (AFBS) and by Swiss banks to protect banking secrecy against the international moves towards automatic tax information exchange, which followed the global financial crisis.
It has since been enthusiastically promoted by the Swiss finance ministry.

The European Commission has stated it will take Germany and Britain to court if they implement the Rubik treaties. However the EU accepts the amnesty for past tax evasion but is opposed to the anonymous return of tax in the future which contradicts the European Savings tax directive, which calls for automatic information exchange on relevant types of information, such as interest on savings. The EU argues that Germany and Britain have already handed authority to negotiate direct taxation treaties over to Brussels. The deals also contradict the directive by fixing different tax rates than those agreed by member states at EU level.

The EU has been planning to extend the scope of this directive. Without the final withholding tax element, intended to protect bank secrecy it appears Switzerland would have little incentive to proceed with the deals. An expert briefing argues the Rubik deals will not protect Swiss banking secrecy in the long term. This strongly suggests that all those involved should stop wasting their time and abandon these deals.

Manilla, Philippines - flickr / tEdits

According to an upcoming report that estimates the magnitude of illicit money leaving developing countries, the Philippines lost US$142 billion between 2000 and 2009.  The amount of illicit money that left the economy puts the Philippines in the top 15 countries in outflows during the period.  The report, titled Illicit Financial Flows from Developing Countries Over the Decade ending 2009, will be published by Washington, DC-based research group Global Financial Integrity on December 15.

The study found that the majority of the illicit outflow, US$113.7 billion, is due to the mispricing of imported and exported goods. Trade mispricing is a phenomenon where individuals and corporations use fraudulent commercial invoices to smuggle money out of the country, usually in order to facilitate tax evasion. A large corporation or very wealthy individual in the Philippines will trade with a counterpart in another country, but will manipulate the price and quantity of exported goods to send more money offshore than represented by what they report to the government. The individual or corporation then collects the extra money later, usually in a bank account in a tax haven or secrecy jurisdiction.

This means that while the Philippines has seen significant outflows from corruption, bribery, and kickbacks, their biggest priority when addressing illicit capital flight should be to tackle trade-related tax evasion. Tax revenue loss represents teachers that are not hired, hospitals that are understaffed, and additional taxes levied on those already paying their fair share. We believe that the very real cost in human suffering and loss of life from tax evasion in the Philippines, and elsewhere throughout the developing world, is massive.

The Philippines is a country with enormous economic potential. It has a high literacy rate and significant economic growth over the past decade. However, growth failed to keep pace with many of the Philippines’ neighbors. To make matters worse, much of the economic gain in the country has gone to relatively few people.  Income inequality in the Philippines, as measured by a Gini index of 45.8, ranks among the worst in the region. These same wealthy Philippine citizens are the ones who are likely using trade mispricing to move money out of the country. This helps explain why despite economic growth, tax revenue as a percentage of GDP has been declining since 1990.

Unfortunately, the Philippines cannot solve their tax evasion problem alone. The shadow financial system that facilitates tax evasion is international in nature. Corporations and individuals use a combination of tax havens and loose accounting practices to hide money abroad. The international community, namely the G20 countries, needs to support new transparency measures such as country-by-country reporting so that multinational corporations will report revenues and costs for their network of subsidiaries in each individual country. This will help Philippine authorities effectively tax multinationals.  Concrete steps must also be taken to establish a worldwide system of automatic tax information exchange so that the Philippine tax authorities can effectively track their citizens who keep their money abroad. These reforms will help the country reverse trends of declining revenue, and provide the public services necessary to fulfill its enormous potential.

Editorial Note: Thursday, December 15th, Global Financial Integrity will release its new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” measuring illicit financial flows out of 160 different developing countries.  Revealing more data from the upcoming report, Ms. Freitas has written three other blog posts highlighting illicit financial outflows from Russia,EthiopiaandSyria.Sign up here to receive notices when new GFI reports are released.

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In November of this year, more than 30,000 people, most of them from China, donated about $1.4 million to one man. The donations flowed in all shapes and sizes—wrapped around fruit and thrown into his lawn, folded into paper airplanes, and one even wired in from the German government’s human rights commissioner. The man wasn’t a spiritual leader. He wasn’t ill and he wasn’t going to donate any of it to charity. In fact, he deposited nearly the entire sum into a government account—as a guarantee on his tax evasion charges. The man—not a leader or a humanitarian—is an artist.

His name is Ai Weiwei and the Chinese government claims his design firm, Beijing Fake Cultural Development Ltd, owes it nearly $2.4 million in back taxes and fines. Ai has responded he doesn’t even own the company.

It is likely Ai Weiwei’s true crime is not tax evasion, but dissent. Ai’s art, most of it exhibited abroad, is called “social sculpture” by most of those in the West, but labeled “political protest” at home. For much of his art he uses Twitter and a blog as a platform to reach and interact. His installations include a piece in Germany made of 9,000 children’s backpacks, in memory of the students who died in the poorly built schools in Sichuan that collapsed during the earthquake in 2008.

There is a deeper problem underneath, though. The truth is China doesn’t have the luxury to be wasting time on trumped up tax evasion cases when there are so many real cases to deal with.

Global Financial Integrity has been warning about illicit financial flows (IFFs) out of China for years. These outflows have ranged from an annual US$169 billion in 2000 to US$344 billion in 2008. With numbers like these China is, by far, the largest transmitter of illicit financial flows in the developing world. And despite its giant domestic economy, these numbers are still unbelievably large when put in scale. For a point of comparison, the PRC’s stock of total external debt in 2008 was $378 billion, just slightly greater than its total illicit outflows in that year alone. In the same year China’s net inflows of foreign direct investment were US$147 billion, less than half of its total illicit outflows (note: I’m comparing a net figure to a gross one, there).

Corruption also costs China’s economy a pretty penny. A report from China’s own central bank estimates that “up to 18,000 corrupt officials and employees of state-owned enterprises” have absconded with 800 billion yuan, or $123 billion, of state money since the 1990s. In a recent speech given to celebrate China’s Communist Party’s nineteenth anniversary, President Hu Jintao  specifically addressed the importance of “rampant corruption” and the impetus to create a “clean government.” And Minxin Pei, a former scholar for the Carnegie Endowment for Peace, estimates that China’s government loses as much as 10% of government spending in kickbacks and corruption, calling it “one of the most serious threats to the nation’s future economic and political stability.”

China’s financial woes are not confined to the black market. In fact, we are now seeing a so-called “rich drain,” which means that high net worth Chinese individuals are not only sending their money overseas, they’re looking to emigrate, as well. According to a recently published study by China Merchants Bank, The 2011 Private Wealth Report , at least 60% of Chinese citizens with at least 10 million yuan (US$1.53 million) are either “considering emigration through investment overseas or are already finalizing the process.” In fact, there has already been a 73% increase in Chinese investment immigrants to the United States in the last five years.

This problem is big and it’s deep.  And it isn’t going away. The Chinese government needs all the tools at its disposal to deal with this problem—and public trust is one of them. The Chinese people need to trust that the system is fair or they will go on cheating their taxes and sending their money abroad. And to gain that trust, the government must put in place a system that is indeed fair. It can start by going after the real tax evaders and leaving the dissidents alone.

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In a study conducted between November 2010 and February 2011 on ill-gotten money and the economy, the Financial Integrity team looked at the experiences of Malawi and Namibia. We approached the project with an open mind and without any assumptions, finding that for Malawi, corruption and tax evasion as a percentage of GDP represent a significant drag on economic development. Corruption is estimated at 5% of GDP and tax evasion, at a whopping 8-12% of GDP.  Meanwhile, we estimated that tax revenue actually collected by the Malawi Revenue Authority is only 22% of GDP. Thus, if the national tax authority had successfully collected all the taxes it was due, government revenue would increase by 50 percent. This is approximately about how much Malawi receives in foreign aid (11.7 percent of GDP). As one Malawi Revenue official stated when being interviewed during the study: “if we collected all the taxes, we will then not have to depend on foreign aid”.

The Namibian tax evasion situation is no better, as uncollected taxes are equivalent to about 9% of the GDP. This is larger than education’s share of the economy and almost as large as the mining sector—which generates most of the country’s export income. What makes things worse is that Namibia suffers from the highest income inequality in the world: The Gini co-efficient, which measures the gap between rich and poor, is estimated at 70.7. Tax evasion siphons away money that could be invested in productive resources needed to diversify the economy and address urgent social problems.

Furthermore, the revenue lost through corruption and tax evasion represents a diversion (“leakage”) of financial resources away from the national budget toward private spending. And these private expenses or expenditures have much lower “multiplier effects” than expenditures on, for example, agricultural fertilizers, education, health, and infrastructure.

There are four key things that practitioners can take away from the new World Bank study “Ill-Gotten Money and the Economy, Experiences from Malawi and Namibia”.

1. Losses caused by corruption and tax evasion are powerful examples of how criminal activities can potentially have tremendous negative effects on economic development.
2. Ill-gotten money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few.
3. Policymakers in governments and development institutions such as the World Bank cannot afford to ignore issues that stand in the way of achieving economic progress, because it means that many people remain in poverty. So, in the case of Malawi and Namibia, addressing corruption and tax evasion should be part of a continuing dialogue with the two governments in our engagement with policymakers.

The study confirms the importance for developing countries to adopt, for their own benefit, customized legal regimes and institutions to go after dirty money. The regimes should reflect local political, economic and social contexts.

As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or a bloated public sector—is our responsibility. No matter how contentious or uncomfortable it may be, we should avoid ignoring this “elephant in the room” and not look the other way when we know that any of these big issues are affecting a client country. We should explore initiatives that target the root of the problem—helping governments implement solutions to critical problems like tax evasion in the short-term, and exploring behavior-changing programs by educating youth on the perils of corruption in the longer term. We hope that policy makers will take our findings into account and do the same.

It is largely people’s desire to to evade taxes that creates most of the so called ‘shadow economy’ that is hidden from officialdom’s view to make sure that tax is not paid.

In this report, we first estimate the absolute size of a country’s shadow economy based on its own published estimate of its GDP and recently-reported data on the size of shadow economies published by the world bank. This, and other data we use, is what we think the best currently available for the purpose of this report and, as such, should provide the best estimates possible.

By the definition used here, economic activity in the shadow economy of a country will be tax-evading. So we next calculate an estimate of the amount of tax lost as a result of the existence of that shadow economy. We do this by looking at how much taxes are on average in the state as a share of GDP, and then apply the same tax share to the shadow economy, to reveal our estimates of lost taxes by state. We then compare these lost taxes to health care spending in each country surveyed. This data has also been compared by continent.

The global pressure on Switzerland to cede further concessions in a tax evasion row is showing no signs of relenting after comments last week at the G20 summit.

French President Nicolas Sarkozy called on Switzerland and ten other so-called tax havens to be “excluded from the international community” for refusing to sign up to an automatic exchange of information agreement.

Switzerland is currently playing a game of chess with various other countries in an effort to manoeuvre itself through a global minefield of criticism and clear its reputation as a responsible international financial centre.

What did Credit Suisse do today? They announced to U.S. clients suspected of tax evasion that they would be handing information over to the IRS. Clients must either voluntarily allow the information to be sent to the IRS or hire a Swiss layer and contest the action. It is a huge victory for the United States, and a major blow to Swiss banking secrecy. Credit Suisse is the second-largest bank in Switzerland.

I’m very happy that the IRS is going to be able to track tax evasion, recover tax dollars, and maybe even find some justice for U.S. taxpayers. International pressure works – who thought a few years ago that the Switzerland would force its banks to give this kind of information to the United States?

What we shouldn’t mistake this for is a major victory for the developing world, at least for now. It’s great that the largest and most powerful economy in the world can penetrate the legendary banking secrecy of Switzerland and recover a few dollars stashed away, but the rest of the world needs access to that information as well. The United States demonstrated that international pressure can work to open up secrecy juridictions, but we’re going to need a whole lot more international pressure to make a real dent in poverty and create an equitable international finance system for the developing world.

ProgressOhio/Flickr

Two prominent advocacy groups have released major reports last week exposing unsettling truths about bribery and tax dodging schemes among large corporations in the United States and around the world.  Berlin-based Transparency International published its annual Bribe Payers Index on Tuesday, ranking 28 countries on the perceived likelihood of bribery within their companies, followed only days later by the Corporate Tax Payers & Corporate Tax Dodgers 2008-2010 report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

These reports might come as a windfall for Occupy demonstrators who have ramped up the scope of their protests by shutting down the nation’s fifth busiest port in Oakland, Calif. on Tuesday.

Even as prosecutions under the U.S. Foreign Corrupt Practices Act have produced record sentences in recent years, the United States’ bribery score according to Transparency International has remained stagnant since the organization first published the index in 2008, with many of Europe and Asia’s advanced economies scoring consistently higher.

Most inflammatory, however is the finding from the CTJ/ITEP report that 30 of the nation’s 280 largest corporations paid no federal taxes over the same period from 2008 to present, with 78 of them showing at least one of those years without taxes.  On paper, the federal tax code dictates that corporations pay 35% taxes on profits.  However, the existence of loopholes granting credits and refunds to large corporations has actually translated to net negative tax rates among several firms, for instance Pepco Holdings (-57.6% tax rate), General Electric (-45.3%), Verizon (-2.9%), and many more.

The corporations included in this latter survey collected total pretax profits of US$1.4 trillion while claiming US$223 billion in subsidies.  Company spokespersons for the biggest corporate tax dodgers insist that they have “have fulfilled all tax obligations to federal, state and local communities where we serve our customers.”  Yet, the fact that this behavior is legal is not in question.  The question is, as a recent post on this blog argues, not even whether this is fair, but if it can even be considered “decent”.

Despite considerable distraction out of Greece and the greater Eurozone, the G20 summit wrapped up in Cannes, France at the end of the week.  In the final communiqué, issued on Friday, the G20 leaders committed to promoting “social inclusion” and making “globalization serve the needs of the people”.  If protests around the world have not effectively communicated those needs, or at least a segment of them, then perhaps in combination with expanding research by civil society groups, our international leadership will be galvanized to stronger action.

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Following the restructuring of the Global Forum, a program of indepth peer reviews was launched in 2010. This 2011 Report on Progress publication describes the progress made since the Global Forum launched its peer review mechanism in 2010.

To date, 59 Phase 1 and Combined reports have been published complemented by seven supplementary reports covering more than half of the Global Forum members. All peer review reports can be accessed through the EOI Portal: www.eoi-tax.org. The EOI Portal contains all the latest information on the Global Forum member jurisdictions, including information on the peer reviews and any recommendations for improvements made, news on what actions have been taken to address deficiencies and comprehensive information on jurisdictions’ exchange of information agreements.

The Global Forum reported the findings of the peer review reports to the G20 Leaders at their Cannes Summit on 3-4 November 2011 and, in particular, the quality of cooperation with the Global Forum, the level of compliance and the unresolved deficiencies. The Progress Report
to the G20 is presented in Part II of this publication after a brief introduction of the Global Forum and its Secretariat (Part I). In addition, Part III includes the report that the G20 also asked for in the context of the G20 Multi-Year Action Plan on Development. Finally, this 2011 Report on Progress includes the statements of outcomes of the two Global Forum meetings held in 2011 (in Bermuda and France).

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Although most people don’t know this, the tailspin that Greece’s economy is in now did not begin in 2008, but rather in 2001, when it joined the euro. Although that statement doesn’t necessarily imply causality. The problem was there, but festering. When the financial crisis did get going, it didn’t so much create Greece’s problems, as it revealed them. At the beginning of 2010,Greece found itself on a precipice of financial ruin, driven by years of excess spending and borrowing and insufficient revenue.

To prevent the country from defaulting on its debt, in May of 2010 the International Monetary Fund and the European Union promised to provide Greece with a €110 billion rescue package. But in the terms of this agreement, Greece was to meet certain deficit goals: including reducing the budget deficit to 7.6% of GDP.

To meet this challenging goal, Greece has implemented a series of austerity measures, including spending cuts in the public sector, mainly in the form of pay cuts, pension cuts, and privatization, and also increases in taxes, whether they are indirect, like those levied on alcohol and tobacco, or the VAT. Every step of the way, Greek citizens have greeted these prospects with protests, which have sometimes turned violent. And despite the government’s efforts, the response from the international community has largely been “not enough.” In January, Moody’s and Standard’s and Poor downgraded Greece’s debt to junk status.

Though there are several key variables which play into this shortfall, one major component is Greece’s rampant tax evasion. According to Athens-based EFT Eurobank, Greece has one of the poorest rates of tax collection in Europe; more than 33 percent of workers list themselves “self-employed” and remit just 4 percent of revenue. There are anecdotes of Greeks paying “tips” to tax officials in exchange for a reduction in their owed taxes. And a recent estimate by Elena Panaritis, an economics expert for Prime Minister George Papandreou, shows that more than 30% of income taxes inGreece go uncollected. In fact,Greece’s revenue from taxes is 32.6 percent of GDP one of the lowest in the EU.

But Greece recognizes this problem, even at the upper levels of government. Finance Minister George Papaconstantinou has repeatedly asserted the Greek government plans to tackle tax evasion as part of its deficit reducing approach. As a part of this effort, the Greek government has seized 555 yachts and raised $4.7 billion in fines for tax evasion. This might seem like a big number, and to some extent it is, but it’s still just a fraction of the $56 billion Greece officials estimate are owed in uncollected taxes, going back decades.

Greece must continue on its current course to achieve stability. Let’s hope the government—and its taxpayers—are able to pull through.

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