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Global powers top new financial secrecy ranking

09 November 2015

Salman Shaheen

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Major world powers rank highly in the latest edition of the Tax Justice Network's Financial Secrecy Index. The NGO acknowledges progress made in improving transparency since its last index, but says there remains a way to go.

Right at the top of the index, which is compiled every two years and ranks jurisdictions according to their secrecy and the scale of their offshore financial activities, are some of the biggest, richest and most powerful countries in the world. "Rich OECD member countries and their satellites are the main recipients of or conduits for" illicit flows of capital, the Tax Justice Network (TJN) report states.

Switzerland ranked first on the list, but the TJN says the UK "would easily top" the index if it were treated as a single entity along with its dependencies and overseas territories, which include the Cayman Islands, the Channel Islands, the Isle of Man and the British Virgin Islands. Treated individually, the UK ranked 15th. The US came third and Germany eighth.

Hong Kong and Singapore continued their rise through the rankings and are now ranked second and fourth respectively, in part because tighter regulations in the West have displaced illicit wealth eastward.

The index upends stereotypes about tax havens, or 'secrecy jurisdictions’, as the TJN prefers to call them, because of the way it is constructed. Each jurisdiction is given a secrecy score based on 15 indicators, including banking secrecy, and the TJN then weights these scores with a measure of each jurisdiction’s financial muscle.

"In this way", the group argues, "the Financial Secrecy Index offers an answer to the question: by providing offshore financial services in combination with a lack of transparency, how much damage is each secrecy jurisdiction actually responsible for?"

The TJN stresses that whether or not a jurisdiction is a tax haven is a question of degree: every country falls somewhere on a spectrum of secrecy.

The dangers

In a study published this summer the TJN and James Henry, former chief economist at McKinsey, a major consultancy firm, estimated that between $21 trillion and $32 trillion of unreported private financial wealth was hidden in tax havens by the end of 2010. That’s more than the US and Japanese economies - the biggest and third biggest in the world - combined.

"Developing countries are among the biggest losers from financial secrecy," John Christensen, co-founder and director of the TJN, told The World Weekly. This is "not only because they suffer from large outflows of much needed capital which could usefully boost investment and employment, but also because they suffer from widespread tax evasion, which undermines their public finances and inhibits long-term growth prospects due to underinvestment in education, health services, security and other public services."

In a 2012 study, James Boyce and Leonce Ndikumana of the University of Massachusetts, Amherst, estimated that 33 sub-Saharan African countries lost more than $1 trillion because of capital flight from 1970 to 2010 (in 2010 dollars, adjusted for inflation). The OECD has estimated that developing countries lose around three times more to tax havens than they receive in aid every year.

Richer countries suffer, too. The public finances of Greece, Italy and Portugal have been crippled in part because of decades of tax evasion and "state looting via offshore secrecy", the TJN notes.

Beyond its impact on public accounts, financial secrecy brings with it a host of social, economic and political side-effects. It can help concentrate power in unaccountable political and business elites and distort financial markets by channelling capital to where it can be stored most secretively, instead of to where it would be most productive.

Large companies counter that their activity invests in economies and creates jobs around the world.

"While profit has become something of a dirty word, it’s important to remember that many corporations reinvest their profits in research and product development, which in turn tends to lead to job creation, further economic growth and, ultimately, more tax," Eric Schmidt, chairman of Google (now Alphabet), wrote in The Guardian in May 2013.

Henry also prefers to look on the bright side, but in a different sense. He sees the vast sums of hidden financial wealth as "a huge pile... that might be called upon to contribute to the solution of our most pressing global problems".

A work in progress

Tax professionals are also criticised in the report. "The market for financial secrecy is highly profitable, both for the banks, law firms and accounting practices that sell secrecy products to their clients, and for the tax haven countries like Switzerland, the US and UK which attract huge volumes of illicit financial flows," said Christensen. "Illicit flows boost the value of both the US dollar and the pound, helping to prop up economies that have been running current account deficits for decades."

Multinationals rightly indicate that politicians set the law, that they abide by it, and that they would be mad to pay extra tax voluntarily. "Politicians - not companies - set the rules," wrote Schmidt. "When legislators are doing the lobbying and companies are articulating the law as it stands, it’s a confusing spectacle for everyone."

In recent years, however, politicians have taken major steps to combat financial secrecy, through initiatives such as automatic exchange of information (AEoI) and the Common Reporting Standard (CRS) – measures the TJN thinks will "significantly tighten up global financial secrecy".

Additionally, a form of country-by-country reporting (CbCR), which forces multinational corporations to break down their tax dealings in every country in which they operate, is now endorsed by the G20.

The European Union’s Fourth Anti-Money Laundering Directive, adopted this summer, requires member states to record the beneficial owners of companies within their borders in public registers, a measure that should fill some gaps in the information gathered by the CRS.

Factor in the OECD’s base erosion and profit shifting (BEPS) action plan, and tax authorities now have a huge arsenal of new powers and legislation with which to clamp down on multinationals compared to just five years ago.

Christensen said pressure from civil society has been "absolutely crucial" in driving this political sea-change. "More has been achieved in the past five years than in the preceding 50 years, and this is largely due to demands from the TJN and its affiliates for specific policies like CbCR and a multilateral convention on automatic tax information exchange."

Some companies think these initiatives are overly aggressive. Representatives of the banking sector, for example, have said the CRS will be too expensive to implement and that, since the costs are not recoverable, the burden will ultimately fall on shareholders.

Another concern is that the new regulations will make double taxation more likely. Defending the system in place in 2013, under which Google paid most of its taxes in the US, Schmidt wrote: "This system ensures that the same profits are not taxed twice, or even more than that, across different countries, something that would reduce any company’s ability to invest in future research or new jobs."

As Terry Hayes, senior tax writer at Thomson Reuters, wrote last year, it has also been suggested that "BEPS reforms that impose new compliance costs may dampen innovation and entrepreneurship", especially for small and medium-sized enterprises.

But there are also analysts who think recent measures do not go far enough. Some areas, such as the creation of a public registry of offshore trusts, appear to have seen little progress, while developing countries have largely been sidelined in the decision–making process. Despite the UN Financing for Development conference held in Addis Ababa in July, which saw NGOs argue for extended powers to be given to the existing UN tax body, the OECD retains huge influence over global tax policy, with its members arguing that they hold the expertise to lead on tax issues.

US concern

The TJN describes the US, one of the few countries with a secrecy score that has worsened since 2013, as the jurisdiction of "greatest concern". It has taken aggressive action to claim taxes from US individuals and companies in jurisdictions such as Switzerland, but has failed to crack down on those using the US to escape taxation elsewhere. It has not signed the CRS, instead implementing its own programme, the Foreign Account Tax Compliance Act (FATCA), which collects information on Americans abroad but does not exchange much information about people exploiting the US as a secrecy jurisdiction.

Meanwhile, the UK government has pursued "what can at times appear a Janus-faced approach" to financial secrecy, according to a report compiled by the Eurodad network of NGOs in conjunction with the EU. It has nudged its dependencies and overseas territories forwards in AEoI but has not pressed them to adopt public registers of beneficial ownership, despite leading international calls for such records.

A spokesperson for HM Treasury, the UK government department responsible for public finances and economic policy, told The World Weekly that "effectively tackling tax evasion and avoidance is a UK priority" and said "this government has taken a number of steps to ensure multinationals pay their fair share of tax and played a critical role in establishing the OECD’s BEPS plan".

"We want to ensure the UK has some of the most competitive taxes in the world but that these taxes get paid," the spokesperson added.

Richard Murphy, director of Tax Research, told The World Weekly he was "cautiously optimistic" about recent regulatory developments, but said it remains to be seen if there are concrete results. This, he said, depends on whether sufficient data on financial secrecy exists and, if so, whether it can be collected and shared. "We are in a period of interesting limbo."

This is based on a longer article, written by Joe Wallace and published by The World Weekly






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