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2013-06-19 10:05:19
Britain s leader envisages a world of tax compliance and clear corporate
ownership. The obstacles have become a bit less daunting
Jun 15th 2013 |From the print edition
AT FIRST blush, David Cameron seems an unlikely foe of tax dodgers and their
accomplices. Conservatives are traditionally friendly to the wealthy and to big
business, who gain most from fancy financial footwork. The City of London
enjoys symbiosis with a cluster of offshore dependencies including Jersey and
the British Virgin Islands (BVI) which have a reputation for, at best, inviting
tax avoidance and, at worst, aiding financial crime.
But as chair of the summit of the G8 (the biggest industrialised countries)
being held in Northern Ireland next week, the prime minister will push for
global reform of the world economy s most shadowy corners. He wants to improve
tax compliance through the cross-border exchange of information, to improve
those data by making companies, trusts and the like show their true owners, and
to change outdated rules which multinationals exploit to cut their tax bills.
His assault is both on the offshore tax havens and on the often dodgier, if
less well-known, practices in onshore jurisdictions such as Delaware or London.
Cynics will say this is nothing new. John F. Kennedy tried in vain to rein in
tax havens in the 1960s. In the late 1990s the Organisation for Economic
Co-operation and Development (OECD), a Paris-based club of rich countries, had
a go but was foiled by America, which said low tax rates were a form of healthy
competition. European leaders declared war on tax havens at a G20 summit in
2009 but had to retreat when China, whose wealthy citizens are big users of
Hong Kong and Caribbean offshore financial centres, objected.
Mr Cameron may fare better. Since 2009 tax havens and financial secrecy have
become deeply unpopular with both the public and policymakers. A furore over
corporate-tax avoidance in Britain has ensnared high-street brands, such as
Apple and Starbucks. A series of leaks, notably 260 gigabytes of data on
clients of trust companies in Singapore and the BVI to the International
Consortium of Investigative Journalists, led tax authorities in several
countries to open investigations.
Breaking glass
Campaigners for transparency are in full cry. They have been dictating the
script lately , complains Richard Hay, counsel to the IFC Forum, a lobby group
for offshore lawyers: Cameron has been reading from it. Ernst & Young, an
accounting firm, talks of a tipping point .
The British agenda is ambitious. It includes everything from curbing the legal
avoidance of corporate taxes to the use of anonymous shell companies to hide
corruptly obtained public assets, evade sanctions and launder drug money. A
refreshing whiff of candour is in the air. Instead of preaching to poor
countries or promising to double aid, which we never did anyway, the idea now
is for the G8 to put its own house in order, in ways that are good for us and
also good for Africa, says Paul Collier of Oxford University, who has been
advising Mr Cameron. The days of do as we say and not as we do are over.
Instead of increasing inflows through aid, the new approach is to curb the
often bigger outflows from poor countries whether from the illegal siphoning of
the proceeds of corruption or the legal shifting of corporate profits by
mispricing internal transactions. If you include those outflows, Africa would
have been a net creditor to the rest of the world in 1980-2009, to the tune of
up to $1.35 trillion, according to the African Development Bank and Global
Financial Integrity, a campaigning group.
Rich countries will have to change a lot, starting with the creaking system of
international corporate taxation, which dates from an era when companies main
assets were immovable. Now accountants can shuffle intangible assets such as
intellectual property, and the profits they generate, from one jurisdiction to
another with ease. A confusing thicket of bilateral tax treaties lets them play
off national rules against each other. A tasty example is the Double Irish
with a Dutch Sandwich , which diverts profits made in, say, France through an
Irish company to one in the Netherlands, and on to a second Irish subsidiary in
a tax haven such as Bermuda. The result is a lip-smacking absence of tax for
the owner, and a sour taste in the places that provide the public services that
enable him to do business.
The OECD is working on a series of reform proposals, to be presented to another
summit in July, of the broader G20 (the world s biggest economies). Strong
support from the G8 would help. A big part of the proposed changes is to
tighten rules on transfer pricing : sales of goods or services from one bit of
a company to another, at often artificially low or high prices. This allows
profits to be moved to low-tax countries and losses to high-tax ones. The OECD
wants firms to justify internal prices that deviate from outside norms. But the
issues are complex and lobbyists canny. Even with an international consensus,
closing loopholes will take years.
The other big push on tax is to move from an on request model of information
exchange, where countries have to cajole each other to hand over data, to one
where they are swapped automatically. This is already well under way, thanks to
America s Foreign Account Tax Compliance Act (FATCA), which has inspired
European countries to make similar demands. It could become the global standard
within a decade. Offshore centres are starting to sign up, calculating that a
voluntary move now may mean better terms. European laggards, such as
Switzerland, Austria and Luxembourg, are also reluctantly increasing
compliance. This will make it harder to hide assets abroad.
But not impossible. Much personal wealth is held through shell companies and
trusts: empty corporate vehicles, where beneficial ownership is often obscured.
Though these have legitimate uses (for example, to conceal a company s hand in
negotiations), they are also useful vehicles for tax-dodgers and criminals.
They can be fronted by nominees, who may have no idea who really owns the
company. Combined with other tricks (such as bearer shares, which give
ownership to whoever actually holds the relevant bit of paper), the result can
be impenetrable murk. In a review of 150 notorious corruption schemes, the
World Bank found that each relied on an average of five shells to move or hide
the loot. Mr Cameron talks of the need to knock down the walls of corporate
secrecy .
Of 69 jurisdictions surveyed last year by Eurodad (an anti-corruption network),
only six required all types of company to record beneficial-ownership
information (see chart). The Financial Action Task Force, which sets
anti-money-laundering standards, calls for the identity of real owners to be
available in a timely manner to law-enforcement authorities. But the
recommendation is non-binding and none of its own members is fully compliant.
Transparency on this front may be a lot for the G8 to manage. In offshore
centres such as the Cayman Islands and Jersey, corporate service providers have
had to collect ownership information since they first came under international
pressure a decade ago, though they are sometimes slow or unwilling to turn it
over to investigators. In America, by contrast, the information generally is
not even collected. Indeed, states like Delaware and Nevada are among the
easiest jurisdictions in the world in which to form a company without revealing
who ultimately owns it. This frustrates and embarrasses America s
crime-fighters, but the states lawmakers have blocked reform. Britain, with
its bearer shares and easily abused limited-liability partnerships, is little
better. Complaints from police about anonymous shells helped persuade Mr
Cameron to make transparency a G8 theme.
Campaigners want more. A big advantage of owning a bit of a joint-stock company
is limited liability: if the firm goes bust, its shareholders do not have to
pay its debts. A fair price to pay for the privilege is disclosing ownership in
publicly accessible central registries (with narrow exemptions for firms with
legitimate security concerns). That would help investigative journalists (we
declare an interest) and anti-corruption campaigners, as well as law enforcers
and regulators. Many banks support the idea, too; it would help them meet
due-diligence requirements to identify who their clients really are. A study by
John Howell & Co for Global Witness, another campaigning group, found that the
transition costs in Britain would be modest, ranging from 10m-103m ($16m-161m)
depending on the level of gold-plating.
Still, opposition remains formidable. Mr Hay argues that private-sector tax
vigilantism could get out of hand. Transparency would make life easier for
kidnappers and extortionists. Geoff Cook of Jersey Finance, a trade body, says
that giving authorities, but not the public, access to the information strikes
the right balance between being able to monitor potential wrongdoing and
leaving legitimate privacy rights intact for the great majority who do no
wrong.
Jason Sharman of Griffith University in Australia argues that poor countries
are already overwhelmed by anti-money-laundering obligations. He would prefer
to see a tougher version of the model already used in some offshore centres:
service providers which register trusts and companies would have to identify
owners, hold the information and pass it on promptly when authorities, domestic
or foreign, requested it. Those that did not would face harsh penalties,
including prison. Such service providers may also be better placed than
registries to sniff out false ownership information. For this to work, though,
they would have to be well regulated. At the moment, regulation is ineffective
in Britain and non-existent in America.
Muck and brass
The first countries to adopt fully transparent corporate registries might
suffer a competitive disadvantage. Britain s offshore satellites fret that
while they are being forced to clean up their act, clients could leave in
droves for jurisdictions that are under less pressure. If China (not a G8
member) does not sign up to information exchange and corporate openness, Hong
Kong and Singapore are unlikely to so these fast-growing financial centres
would continue to suck business from G8 countries and the old offshore centres.
The West could score an own goal , muses Mr Hay. But reformers fear that the
search for a level playing field means no change at all.
Mr Cameron s advisers see a strong statement in Northern Ireland as an
essential step towards further progress. If the G8 is seen to be dealing with
its own shortcomings, transparency is more likely to move to the front of the
agenda at the G20 (of which China is a member). The best outcome, says Mr
Collier, would be a statement of commitment that gives political backing to the
fiddly work being done by technocrats at the OECD and elsewhere. Enthusiastic
G8 countries can take the broad principles to turn into detailed national
action plans for peer review later.
But international tax reform will produce losers. America, for one, is loth to
inflict more pain on its multinationals, which have borne the brunt of public
criticism. Not all G8 countries support changing ownership disclosure rules,
let alone making the data public. Germany, Russia and Canada are sceptical.
America is keener, but its hands are tied by the states. Britain and France are
the keenest, though neither is likely to opt for full public disclosure of
beneficial ownership, at least for now.
After decades in which corporate tax fiddles have mushroomed, and colossal
amounts of criminal and kleptocrat money have sloshed through the world
financial system, even limited progress is welcome. Support for clarity on tax
and ownership has never been broader, and calls for reform never louder. Mr
Collier says the main aim of the summit is to get the ball rolling . And if it
doesn t get moving now, when will it?