Getting the rules right

Interview with John Christensen, executive director, Tax Justice Network

You are a strong advocate of tax transparency. How pleased are you with recent developments?

We are pleased it is on the agenda and that it is recognized there is an issue. As always we have to wait until we see the details.

We are very pleased there is a commitment to multilateral automatic information exchange. We are concerned that the technical processes, the protocols to make this work, will be devised in ways which don’t bring non-OECD countries to the table, so that they don’t have an opportunity to shape the processes to meet their needs. That is a priority.

We are pleased to see progress towards country-by-country reporting. We have been delighted behind the scenes many company directors, many accounting firms, have said “we don’t have a problem with this.” But again we have to see the detail, what will the standard look like in practice. And obviously we want a standard that would rise not only to the extractive sectors but to all the sectors.

I think it would be harmful if we had different standards applied to different sectors. It might well lead to distortions of investments. So we would like to have as far as it’s practicable a universal standard, some kind of template, which might be adjusted for certain industries. The progress there is perhaps better than we anticipated.

The big question for us is how far will governments be prepared to go with a public registry of beneficial ownership details? There is resistance. Now we know there is acceptance for the need of a registry but the word public is causing problems. We push for a full disclosure with Internet searchability, modest fees (so you don’t have to pay $100 for information which is not actually what you are looking for, which is frequently the case). We want to be able to drill down, if a BVI registered company belongs to a trust in Bermuda, and you cannot look behind who the beneficial owners are of that trust in Bermuda. So we want extension to include trusts.

In what way? Just the settlor or also the beneficiaries?

We are looking for a registry of trusts. We want to know who are the settlors, who are the trustees? And in the case of many offshore trusts, which are discretionary and you don’t have any named beneficiaries, information such as disbursements should at the very least be made available to registrars and tax authorities.

What are the obstacles to country-by-country reporting that you see at the moment?

There are a variety of obstacles, partly because there is a state of dilution of some of these standards that are being discussed, for example Dodd-Frank is not based on country-by-country reporting, it is project-by-project. And that is only partial disclosure. The European transparency bill is taking this further, but again there is a risk of dilution. There is a heavy lobbying effort to dilute what we regard as the full country-by-country reporting.

There are risks it won’t be extended to all sectors, and that’s a big issue. I think we have overcome the barriers of those who said it will impose an expensive reporting requirement for companies. The companies have that information, they need that information, it is relevant to investors, it is relevant to other stakeholders, and therefore it should not be an extensive operation to modify the way in which they produce their reports to make country-by-country reporting feasible.

You are saying that globalization is necessary, but you are also saying that it is not working and that the system is broken. What exactly is not working?

I would argue that globalization should be a force for good, it should serve a public interest. It is certainly not achieving that at the moment. Wealth, far from trickling down, is cascading upwards to an increasing concentration in the hands of a very small minority.

One issue that was not addressed properly at the time is taxation of transnational corporations and how to resist the downward pressure of the race to the bottom of regulations, the race to the bottom in the taxation of capital. There is a comprehensive failure in those areas. Far from seeing regulation improve, we are getting arguably more regulation but not better regulation.

And the opportunity for regulatory arbitrage undermines society’s ability to democratically decide what they wish to have in terms of regulation and the same with taxation. I think these are the two most fundamental failures with the globalization project.

Some initiatives are under way to improve international tax rules, for example driven by the OECD, but you are not happy with the rules that they are implementing?

We have met the OECD prior to the announcement of their BEPS project, and they were rightly very excited. For the first time in many, many years they had political support to move forward with what they termed a comprehensive review of taxation rules. I was sitting opposite Pascal Saint Amans and I said to him: “Does this mean that we can now start talking about alternatives, including unitary taxation?”, which we have been advocating for a very long time. And he said, “no, it does not mean that.”

It seemed to me that right from the start they closed off one important avenue for reform. Why did they do that? Well, arguably because there is very strong corporate resistance to unitary taxation, [under which a parent and all of its subsidiaries are viewed as though they were a single], because unitary taxation is probably the most effective way of overcoming this issue.

And we laid out a program. We don’t think that one needs to go to unitary taxation in a single move, we see steps towards it. We see steps which increase transparency through combined reporting and country-by-country reporting. Combined reporting associated with country-by-country reporting would provide a great deal of information about the economic substance and the activities of transnational companies.

And that would be an important milestone. We are seeing countries outside the OECD increasingly say “we are going to a profit split arrangement.” And that’s not so far away from unitary taxation.

Profit apportionment makes sense because, not withstanding that there are endless opportunities for different formulae applied to sales, labor and capital employed, this at least has the merit of being based on genuine economic substance rather than legal fictions.

We also think the OECD’s view, which I respect, is that it is very difficult to get political agreements on unitary taxation, particularly around the issue of formulae, to which all countries agree.

We think it would be immensely difficult to achieve. They have 15 action points around which they have to achieve agreements and some of them will be straightforward and some of them will be far from straightforward.

The same difficulty also applies to transparency. For example with regard to a register of beneficial ownership the attitude is that it will only be adopted if everybody else is doing it and it becomes a global standard, to avoid having a competitive disadvantage. How do you overcome that?

In the context of globalization obviously when the project was launched in the 1980s they failed to pay attention. They failed to recognize you need to have rules here. I think we are only now catching up and recognizing that globalization will fail. Capital will move South to North rather than North to South, as globalization theory had it, if you don’t get the rules right.

I have been working in my career in forensic audits and lesson number one in forensic audit is if you don’t have the systems correct, the rules don’t work, and you are inviting fraud, you are inviting embezzlement. And that’s precisely what happened. I would say that the international institutions have acted irresponsibly – IMF, OECD, World Bank and others – because they should have foreseen the problems that would arise, as a result of the failure on their part to get the rules right.

So I have a degree of sympathy for the position “we don’t want to lose our competitive advantage.” One has to ask what is this competitive advantage in? A competitive advantage should not lie with furnishing secrecy, providing secrecy space for crooks. What they are saying is, “we have a blocking vote.”

This is the way in which you end up with regulatory wars, tax wars and it is remarkably irresponsible, and it reflects the policy of this moment.

That’s one of the reasons why we at the Tax Justice Network recognize the political weaknesses of most leaders within Europe and elsewhere, and we recognize the only way of unblocking this impasse would be through civil society actions.

The Tax Justice Network as an organization focuses mainly on offshore tax evasion and avoidance. What about domestic tax evasion and tax avoidance. Isn’t this arguably a bigger problem?

Of course it varies from country to country and I would not say that we only focus on offshore, we focus on domestic as well, but bear in mind I am representing the global activities of TJN. We have national chapters in Germany, Kenya, Latin America and other countries. Those domestic chapters will have a focus both on the international aspects but also on the national ones.

Now, I think it is quite right to say that in many countries tax evasion on the domestic level is numerically the bigger issue. And very often this reflects a weak compliance culture, a weak political attitude towards this issue, political and business cronyism, a weak tax authority. All of these things have to be addressed in their totality.

In my view, corruption normally starts from the head, like a fish rots from the head. And you have got to get the overarching frameworks correct as well.

One of the biggest problems, of course, we have in so many countries is the political leaders are the biggest crooks of all – embezzling, moving their money offshore and so on. There is a real problem with turkeys not voting for Christmas. A lot of politicians will not support strengthening tax authorities and genuine efforts to combat tax evasion and tax avoidance, when they themselves are heavily involved.

The only way of cutting this corruption is to create huge public concern, awareness and civil society action.

You say tax evasion or tax avoidance does not make a difference to me, because the results are the same. But you can understand why people in OFCs struggle with that?

I think culturally we have allowed tax avoidance to become far too acceptable. Avoidance is available to wealthy individuals, powerful companies, because they can afford smart lawyers and accountants and it has all become dressed up in fine language. But the end result is revenue losses, a shift of the tax burden.

I reserve a particular criticism for my profession: economists. First of all, most economists don’t know very much about tax, particularly development economists, and those that do are very often in the pay of very powerful players.

But look at the global picture, the shifting of the tax charge. The shift away from direct taxation, which is generally progressive, towards indirect taxation, which is generally regressive, has unquestionably contributed to rising inequality.

At the World Economic Forum, inequality was raised as one of the big issues. We could have told you this 30 years ago when you were pushing for corporate tax cuts and pushed for switching the tax charge onto the VAT and equivalents. I am old enough to remember when VAT was introduced in many countries in Europe at 7.5 percent. Now it is over 20 percent and rising. And I think that reflects political laziness. It is far easier to burden consumers with higher taxes than to come to the kind of global agreement that would make taxing capital viable again.
Because politicians think short term, they have consistently failed to take this issue on.

Isn’t tax avoidance also a reflection of the complexity of the tax system and the desire of politicians to give certain interest groups advantages?

Yes, absolutely. There is a very big problem there. There is mounting evidence that global tax exemption offered serves absolutely no real purpose whatsoever. The IMF has come to that conclusion, the OECD has come to that conclusion, I certainly share that view. I would certainly love to see national treasuries required to report to parliament in the annual financial statements, saying: These are the tax expenditures on tax exemptions, this is the cost. Because if the public knew how much these tax exemptions cost in terms of revenue foregone, it would be appalled.

This is corporate welfare. And it particularly ticks me off how much waste goes on. As a company director, the expenditures on golf and rugby tickets, posh cars. This is tax exempt? No, it should not be.

The expenditures involved run to billions and billions in most countries and serve no usefulness. At a time when most welfare states are having to cut back on benefits payments to poorer people, I think it is time we looked at the corporate welfare cost.

If you could only do two things to achieve the biggest effect on global financial taxation, what would they be?

I think the transparency agenda is the one that is commissioned to open up, that is very high. We all recognize that transparency makes markets work more effectively. That’s number one.

Number two is perhaps a little bit more radical. What has astonished me throughout my career is how little people actually know about this area. It is very important for most people but I think the financial issues, tax issues need now to be part of a citizenship curriculum at secondary level, so we bring our young people up with a far greater knowledge of these issues and of their responsibilities, that is of the social contract between citizens and the states that are there to serve them.

One area that I do agree with a lot of people that are critical of tax is that we know that there is a lot of wastage. We know there is waste in government expenditure. And I am sympathetic to that. But far from going down the route of all governments are bad, kill the state off. I say no. Actually we need to make democracy work better. And that means a better informed citizenry.

Do you notice any progress in places like Cayman?

Yes, if you look at the financial secrecy index since 2009, I am delighted to say that we are seeing progress. And I am confident in the 2015 results, bearing in mind it is a two-year index, we will see further progress.  We tend to see Cayman as a quick adapter, much quicker than places like Jersey. In Switzerland or Jersey there is a kind of European arrogance, which I think is actually their Achilles’ heel. I think the fact that I am invited to talk here in Cayman in a respectful and very intelligent discussion, time and time again I asked for similar events in Switzerland, Guernsey, Jersey and they have point blank refused. I think that reflects an arrogance and that is partly because I think they are not particularly adaptable. 

This is a game where the first movers will probably survive and the ostriches, who stick their heads in the sand saying “well we can probably blag our way through this,” will not.

Our report about Cayman notices that we have seen progress in specific areas, and we did not see it elsewhere. Places that move towards transparency faster will probably be able to capture a larger share of the legitimate offshore activities. And, let’s be clear, the world of globalized financial markets and globalized markets have to have offshore centers, have to have specialist expertise. It does not necessarily mean you have to have massive opportunities for tax arbitrage and regulatory arbitrage.

 

John-Christensen
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Michael Klein
Michael Klein Editor Pinnacle Media Group Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: mklein@pinnaclemedialtd.com Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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