Author Archives: AlexMarriage

Sweet Nothings: The human cost of a British sugar giant avoiding taxes in southern Africa

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Eurodad Member ActionAid have released a new report

The report examines the tax practices of one of the world’s largest food multinationals, the Associated British Foods (ABF) group, in one of the most impoverished places in which it operates. ABF produces staple brands like Silver Spoon sugar, Kingsmill bread, Ryvita and Patak’s, and also owns clothing chain Primark. The reports focuses on the activities of ABF’s Zambian subsidiary, Zambia Sugar Plc.

ActionAid’s investigation found that Associated British Foods group’s (ABF) Zambian subsidiary uses an array of transactions that have seen over a third of the company’s pre-tax profits – over US$13.8 million (ZK62 billion) a year – paid out of Zambia, into and via tax haven sister companies in Ireland, Mauritius and the Netherlands. Some of these transactions reduce Zambia Sugar’s taxable profits, while the structure of others avoids the Zambian taxes ordinarily levied on such foreign payments themselves. Thanks to this financial engineering, we estimate that Zambia has lost tax revenues of some US$17.7 million (ZK78 billion) since 2007.

This report shows how tackling the problem will require both national and international action across three fronts: companies’ ingenious financial engineering, weak international tax rules, and governments’ deliberate tax policies. While the group of companies detailed in this report have taken (lawful) advantage of loopholes in international tax laws, they have also benefited from tax breaks deliberately written into countries’ tax codes, responsibility for which ultimately lies with governments.

Solutions

  • Responsible companies must make paying their fair share of corporate tax a core part of their responsibilities to the countries where they make their profits.
  • Governments must close loopholes in national tax codes and tax treaties that allow the kinds of tax haven transactions outlined in this report. Donor and developed country governments have a particular responsibility to ensure that their own tax regimes and tax treaties do not make it easier for corporate profits to be siphoned out of developing countries.
  • Governments must not give away vital revenues through corporate tax breaks without evidence of real benefits to their citizens in terms of new jobs, economic opportunities and public revenues.
  • Finally, international action is needed to end the secrecy and abusive tax regimes of tax havens around the world.

Read the full report, Sweet Nothings, The human cost of a British sugar giant avoiding taxes in southern Africa

Read how Associated British Foods have responded.

Join the ActionAid’s tax justice campaign here

PRESS RELEASE Brussels misses opportunity to crack down on tax evasion and corruption

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5 February 2013

The European Commission’s new draft legislation for how to crack down on financial crime, published today, misses an opportunity to make it much harder for tax evaders, mobsters, arms dealers and corrupt politicians to use Europe’s financial system to launder their dirty money.  

There are two main loopholes in the proposed legislation, around transparency of company ownership and around tax evasion which campaigners want the European Parliament and national governments to tackle.

Criminals currently find it easy to abuse European companies to hide their identity and therefore their assets. “Who owns and controls European companies should not be secret,” said Robert Palmer, campaigner at Global Witness. “The names of the ultimate, beneficial, owners should be made public.” A European Commission study found that public registries of the beneficial owners of companies would be more cost effective than other options. 

Instead, under the Commission’s proposal, companies will only be required to know themselves who their ultimate owners are. This will be of limited help. “If the police are investigating a dodgy-looking company, they can hardly go to the company in question to ask who owns it as any criminals involved in the company will be tipped off that the police are sniffing around,” said Palmer.

The proposal does not do enough to tackle professionals that facilitate tax evasion. “The Commission proposal allows bankers, lawyers and accountants who facilitate tax evasion to get away with it. They should face money laundering charges for this insidious activity which costs developing countries billions every year” said Alex Marriage, Policy and Outreach Analyst at Eurodad.

The draft legislation does include some positive measures, including tougher sanctions for banks and individuals that handle suspect funds. National regulators will be able to impose fines of up to twice the amount of profit gained by a bank caught breaching the money laundering rules. Individuals could also face fines of €5 million. It will important for governments to use these tools to hold banks and individual executives to account.

“These new measures continue to leave our financial system open to abuse. One of the particularly appalling consequences is that it allows corrupt officials in developing countries to hide billions of pounds stolen from their national coffers, depriving citizens of vital resources to escape grinding poverty. The onus is now on parliamentarians to ensure that the new legislation isn’t a wash-out,” said Palmer.

/Ends

Contact:

Robert Palmer in London on 020 7492 5860, 07545 645 406, rpalmer@globalwitness.org.
Alex Marriage in Brussels on + 32 2 894 46 49 and amarriage@eurodad.org.

Notes for editors:

1. At present, the EU directive means that tax evasion falls foul of the money laundering laws only in cases where there’s national legislation in place with a guideline maximum sentence of over a year or minimum sentence of over six months.  The new draft legislation does not close this loophole.

2. Global Witness is a non-governmental organisation that campaigns to break the links between natural resources, corruption and conflict. It has consistently highlighted how weaknesses in the global anti-money laundering system have allowed corrupt politicians access to the financial system. Global Witness campaigner Robert Palmer recently testified before the European Parliament’s committee on organised crime, money laundering and organised crime.

3. The European Network on Debt and Development brings together 49 NGOs from 19 European countries who work on development finance issues. Alex Marriage is the author of Secret structures hidden Crimes

 

Developing countries’ private debt is on the rise, and the international institutions are ill-prepared

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By Bodo Ellmers

The latest statistics shed light on the new composition of developing countries’ debt. The share of private debt in developing countries’ total external debt is ever increasing and may by now have exceeded the public share. On both sides of the debt equation, private actors play an increasingly important role, as borrowers and as lenders. This new debt situation confronts a Global economic governance structure that is ill-fitted to deal with complex debt management and crisis prevention as functional debt work-out mechanisms are still not in place. While overall debt figures that are determined by a few larger middle-income countries look somewhat encouraging, many developing countries remain in serious debt distress. Debt service competes with financing development and poverty eradication for scarce public resources.

Private debt: Surging and increasingly unmanageable

According to the World Bank’s 2013 International Development Statistics that were released last week, external debt stocks of developing counties amounted to USD 4.9 trillion in 2011, up from USD 4.4 trillion in 2010. The debt stock more than doubled since 2000 when it stood at 2.1 trillion. However the most striking thing is the changing composition: the shift from the public sector to the private sector. While in 2000, long-term public sector debt stood at USD 1.3 trillion compared to USD 0.5 trillion of private sector debt, by the end of 2011 public sector debt was USD 1,761 billion compared to USD 1,708 billion of private sector debt. These trends continued, and private sector debt has already exceeded public sector debt.

Net inflows to private sector borrowers increased by 4% in 2011 and amounted to USD 363 billion, while net inflows to public and publicly guaranteed borrowers dipped  to USD 101 billion, down 31%. The true picture is actually unknown, the World Bank has to acknowledge that in particular reporting on private sector debt is patchy, a situation that is complicated by the sheer number of private actors that get into debt.  Thus, national governments and central banks and the international community are badly informed about the risks they ultimately have to manage.

While there is no legal obligation for governments to guarantee private debt, the recent experiences with the Eurocrisis proved that private creditors and debtors are often bailed out by governments and ultimately citizens and taxpayers, depending on perceived risks to the financial system, and on the private sector’s lobbying skills. Ireland’s government debt to GNI ratio rose from 48.2% in 2008 to 109.8% in 2011, largely due to bailouts of commercial banks and other private actors.

Full coverage debt work-out mechanisms that could deal comprehensively with situations of debt distress and settle them in a fair, transparent and sustainable manner are not in place. This governance gap is known – the IMF had called for new sovereign debt restructuring mechanisms more than ten years ago – but some governments’ political resistance lead to the situation that the international community has only fragmented and biased second-rate  institutions such as the official (Western) creditors’ Paris Club or the London Club for (some) commercial banks’. As the debt picture is changing, this debt management architecture becomes ever more dysfunctional as more and more actors and flows are uncovered.

 

Developing country debt: Sustainable for now 

Currently, developing countries’ external debt indicators appear somewhat sustainable. Most relevant indicators such as the debt to GNI ratio (21.5% in 2011), debt to exports ratio (69.3%) and debt service to export revenue (8.8%) improved. There are notable exceptions, however. Six countries even have to report debt to GNI ratios of more than 100% (Belize, Jamaica, Kyrgyz Republic, Latvia, Nicaragua, Papua New Guinea). Moreover, while some countries that profited from one-off debt relief exercises such as the HIPC and MDRI initiatives actually reduced debt levels, in many others it was mainly high economic and export growth that lead to the improvements. Progress might be fragile in particular in developing  countries where export revenue mainly come from one or a few products and commodity prices can change quickly.

Developing countries build up ever higher levels of currency reserves in order to protect themselves from such external shocks and financial crisis – in the absence of a neutral crisis prevention system and their understandable reluctance to subordinate themselves to IMF conditionality in case assistance is needed. The ratio of reserves to external debt stocks was 121% in 2011, up from 20% in 2000. The opportunity costs of reserves are high, given that they are mainly held in form of Western countries’ government bonds, and interest rates on this asset class are at historic lows.

Thus, money is missing for funding development and poverty eradication. Such self-insurance mechanisms are just second-best too, and no viable alternative to introducing fair and transparent debt work-out mechanisms that make binding decisions for all and replace the outdated global debt management architecture that is currently in place.

All data is from the World Bank’s 2013 International Development Statistics. The analysis and conclusions are Eurodad’s own      

 

 

Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries

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Tax evasion poses an acute challenge to developing and developed countries. From 2000 to 2010, illicit financial flows deprived developing countries of US$5.86 trillion. Tax evasion is not a victimless crime – for people in the developing world, the consequences of tax evasion can be a matter of life and death. If developing countries could recover this untaxed wealth, it could mobilise enormous resources for improving their public services and their citizens’ lives.

The new Eurodad report “Secret structures, hidden crimes” finds that the hidden ownership of companies and other legal structures facilitates tax evasion, corruption and related crimes. It outlines the different ways that individuals abuse companies, trusts and other vehicles in order to evade taxes.

It argues that better information about who owns and controls these companies and other set-ups is key to bringing trillions of dollars of offshore wealth back into the tax net and helping to prevent capital flight in the future.

It argues that all forms of tax evasion can be more effectively fought where they are recognised as a “predicate offence” of money laundering as this makes it a criminal offence to help someone to hide and shift tax-evaded money. For some countries tax evasion is already a predicate offence, but only in a limited set of circumstances.

A first step is to implement a robust interpretation of the Financial Action Task Force’s set of recommendations from February 2012. In Europe, the review of the EU’s Anti-Money Laundering Directive (AMLD) in 2013 will be one of the biggest opportunities. The report recommends that this political opportunity is used to:

  1. Create publically available government registers of the real owners and controllers of companies, trusts and other such legal structures.
  2. Make all tax evasion, a predicate offence of money laundering
  3. Improve compliance with and enforcement of anti-money laundering rules and introduce credible sanctions.

Read the full Eurodad report: Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries

Read the summary: Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries: summary

Read the summary report in Spanish here:: Estructuras secretas, crímenes ocultos: Medidas urgentes para hacer frente a la titularidad oculta, el blanqueo de dinero y la evasión fiscal de los países en desarrollo. Resumen

Read the summary report in French here: Ces sociétés écrans qui dissimulent la criminalité financière : quelques mesures urgentes pour mettre fin à l’opacité relative aux propriétaires effectifs, au blanchiment d’argent et à la fraude fiscale en provenance des pays en développement – un résumé

Analysis: EU Action plan to strengthen the fight against tax fraud and tax evasion

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Compiled by Eurodad with input from CCFD-Terre Solidaire, SOMO, TJN Europe and Alliance Sud

December 2012

On 06 12 2012 the EC released its Action Plan to strengthen the fight against tax fraud and tax evasion. DG Taxud simultaneously published two recommendations to member states. The first on aggressive tax planning and the second regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters. Please note that the analysis is not comprehensive and only addresses some of the points raised by the Action Plan and Recommendations. 

Overall Comments 

  • The action plan provides several opportunities, including specific measures on an EU definition of tax havens, measures related to automatic information exchange, closer cooperation to fight tax evasion and elusion (aggressive tax planning).  It also includes several other measures such as an EU taxpayers charter and the revision of the Parent-Subsidiary Directive which could open up new opportunities to promote our asks.
     
  • The Action Plan fails to mention CCCTB as a tool to fight against aggressive tax planning. For more information on how CCCTB works see the following report: Towards Unitary Taxation of Multinational Corporations. Available at: http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf
     
  • The Action Plan fails to mention country-by-country reporting by multinational companies as a key transparency initiative to address aggressive tax planning. The review of the Transparency Obligation Directive in 3-5 years (depending on the current negotiations of the review clause) would be an opportunity to include these information requirements in the directive.
     
  • In relation to Anti-Money Laundering rules good points include the suggestion that tax crimes might be made a predicate offence of money laundering, the calls for improved due diligence by relevant professionals and for greater international cooperation between tax authorities and other law enforcement. It is encouraging that the Action Plan calls for greater transparency around beneficial ownership but it is unclear if this will entail concrete measures such as requiring government registries to record and verify owners’ identities. It is interesting that it mentions a possible second directive to tackle money laundering in 2013
     
  • The Action Plan does not address the impact of the FATCA directive in EU countries. Luxembourg, for instance, is currently in negotiation with the US. This could open the door for similar provisions within the EU. The Finance Minister from Luxembourg has publicly acknowledged that such precedent would make it difficult to deny EU countries a similar treatment.

 Read the full analysis here: Analysis: EU Action plan to strengthen the fight against tax fraud and tax evasion

PRESS RELEASE EU clampdown on tax avoidance to release hidden billions to fight poverty

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BRUSSELS 06 12 2012: International development agency Oxfam and the European Network on Debt and Development (Eurodad) welcome the European Commission’s initiative to step up action against tax fraud and tax evasion, which cost billions in tax revenues in Europe but also in developing countries.

Oxfam and Eurodad are calling on Member States to follow the lead of the European Commission and agree on a common set of measures to counter harmful tax practices, such as corporate trade mispricing, which results in lost tax revenues and ultimately reduced essential services at the expense of the poorest. It is particularly important that they adopt a tougher definition of tax havens in order to minimise their impact and step up efforts to increase the automatic exchange of information.

Catherine Olier, Oxfam’s EU policy adviser, said:

“Coordinated action is the only way to clamp down on capital flight associated with tax avoidance. If the EU adopts a unified stance in tackling tax dodging, it will not only balance the books but also release the finance many developing country and European governments desperately need to pay for essential public services, like health and education. In developing countries alone, tax avoidance costs €123 billion per year. These hidden billions should be spent building schools and hospitals.”

Javier Pereira, Policy Officer at Eurodad, said:

“By promoting the automatic exchange of tax information between countries, Member States will close some of the main tax loopholes in existing regulations and provide for greater transparency of capital flows.

“To efficiently crack down on tax avoidance, the EU should hold companies accountable for their tax practices, ensuring that they pay the right amount in the countries in which they work. It is only fair that multinational companies, like Starbucks and Google, pay their share of state spending in line with their real economic activity.”  

Contact
Gaëlle Bausson on + 32 (0) 473 562 260 or gaelle.bausson@oxfaminternational.org

Notes to Editors

  • The proposed Action Plan presented today by the European Commission will now need to be approved by Europe’s finance ministers.
  • Developing countries lose out on an estimated $160 billion (€123 billion) each year as a result of trade-related tax dodging, according to Christian Aid. This represents almost twice the amount developing countries receive in international aid.
  • Tax avoidance vs tax evasion : Tax avoidance is usually considered as using complex techniques to exploit legal loopholes in order to pay less tax than is due, while tax evasion (also known as tax fraud) consists of using illegal methods to pay less tax.
  • Corporate trade mispricing: Transfer mispricing happens when a subsidiary in one country charges a vastly reduced rate for goods or services to another subsidiary based elsewhere to minimise their tax liability. It is the largest component of illicit financial flows globally, representing around 65 per cent of the total. 


EC Reciprocity proposal: a sinking ship

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By Jeroen Kwakkenbos 

Any discussion of trade, whether over general principles or of technical issues, brings to my mind images of fleets of ocean greyhounds following the trade winds to greener pastures and more exotic locales. This is particularly true concerning the current discussion surrounding the reciprocity regulation put forward by the European Commission (EC), to be exact it makes me think of the expedition of Commodore Mathew C. Perry into Uraga in 1853. But more on that later.

Reciprocity, though it sounds like a legal thriller purchased in an airport bookstore, is an attempt by the European Commission to force non-EU countries to open their public procurement markets. The target countries of this regulation would appear to be China, Japan, and other major trading partners, but encompasses all non-Least Developed Countries (LDCs) that do business with the EU, including lower middle income countries (LMICs) and countries that recently graduated from LDC status. The principle is quite straightforward: If a country does not have an open public procurement market, then firms from that country cannot do business with the EU public procurement market, self-described as the world’s most open procurement market.   

There are several major flaws with this approach to procurement liberalisation. From a development perspective there is a concern that in an attempt to force China to open its market, innocent bystanders such as the tens of millions of Chinese still living in poverty, the populations of LMICs, as well as lower income countries (LICs) will have to pay the price. Cambridge University academic, Ha Joon Chang, as well as others have pointed out that no country has successful developed without a certain degree of protectionist measures to protect infant industry, until they were in a position where they could compete internationally. Forcing developing countries to open their markets prematurely could have devastating impacts on the domestic private sector.

Furthermore, as pointed out by Patrick A Messerlin and Sébastien Miroudot, of Sciences Po and the OECD respectively, the premise with which the EC is approaching the issue is deeply flawed in the first place. European markets are not as open as they appear to be. Also the leverage that the EC thinks it could gain by wielding European procurement markets as both a carrot and a stick is not as great as the EC imagines. They point out specifically:

  • “First is the higher openness of the EU… evidence refutes such claims, in particular when coming from the EU member states the most vocal about reciprocity. “
  • “The threat of closing EU markets assumes a rapport de force. The credibility of such a threat is already gone: the combined French and German public demand, which was almost eight times larger than China’s public demand in 1995 and three times in 2000, was only 1.3 times larger in 2009.”

They further demonstrate that Chinese markets are in fact more open than the US and Europe, as illustrated in the graph below.

Openness ratios, China, EU and US, 1995-2008

The diminished appeal of European procurement markets needs to be put in context of the austerity policies that are currently being enacted by many member states. The likelihood of increased European demand in a period of economic contraction and wage stagnation in combination with austerity policies limiting public expenditure is remarkably poor.

Now back to Commodore Perry. In 1853 commodore Perry sailed to Japan in order to foster trade negotiations with the Japanese government. Japan at the time was a closed economy that would only trade with my own ancestors the Dutch. In order to encourage discussion he parked his battleships off the coast of Uraga, near the town of Edo, and threatened to begin shelling the town until someone would talk to him. An auspicious start to US-Japan relations. The EC is trying to use reciprocity as a battleship. Like commodore Perry before it, the EC wants to sail into the ports of Nanjing and shell the shore until they open their markets. Unfortunately European austerity measures mean shrinking wages which mean shrinking taxes, which means shrinking public procurement. So unlike Perry, the harbor the EU wants to bombard is already open for business, and the battleship, impressive as it might seem, is aging, has a leak in it and is slowly sinking. All the Chinese have to do is stall for time before EU municipalities and member states are begging for cheap labour and products to meet the needs and demands that a European populace is either unwilling or unable to provide. Ultimately this leaves any leverage that the EC thinks it might gain in bargaining with other countries dead in the water. 

Bias to report: World Bank releases new Global Financial Development tome

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By Jesse Griffiths

Normally, I enjoy reading flagship annual reports from august international institutions; they can provide useful overviews and normally have one or two nuggets. The World Bank’s new Global Financial Development Report 2013, however, left me hoping they don’t issue any more of these.

Not just because we already have enough flagships – even for a report junky like me.  It’s worth quoting from the comprehensive study of World Bank research undertaken by a team of (self-styled) ‘academic superstars’ led by Princeton Professor Angus Deaton:

“The large number of flagship reports makes it virtually impossible for [World Bank] management to exert sufficient quality control precisely where it is most needed.”

“We believe that the Bank produces too many of these reports.”

(Side note: This was released in 2006 – and the evaluators complained that it had been seven long years since the previous evaluation – surely it’s time for an update?)

No, what really left me tearing my hair out were too many attempts to draw one-sided conclusions about the highly contested issue of the role of the state in finance.

Here’s an obvious example that others have highlighted.  The report finds that:

 “Lending by state-owned banks is less procyclical than lending by private banks, and some state banks played a countercyclical role during the global financial crisis”

This is an interesting finding, but clearly one the authors feel uncomfortable with [though they all work for a state-owned Bank themselves, of course].  So they do some interesting contortions – highlighting past poor performance of state banks as the reason their role should not be emphasised:

“…the track record of state banks in credit allocation remains generally unimpressive, undermining the benefits of using state banks as a countercyclical tool.”

It seems to me that private banks have had a pretty disastrous recent track record in credit allocation, and have behaved in an incredibly procyclical manner, so we should be far more interested in this finding that the report authors are. Previous Eurodad research has highlighted how the rapid growth in lending by development finance insitutions, including the World Bank’s International Finance Corporation, was in part justified by the need to step in when private credit dried up. Surely a better conclusion to draw is that we need to urgently study the successful state banks, and see what can be learned?

This is just one example. There are plenty of others, leading some to be far less charitable about the report: University of London banking expert, Paulo Dos Santos called it a “rearguard action seeking to defend old policy shibboleths”. Perhaps it’s time for another group of academic superstars to do a thorough evaluation of this report…

Tax Injustice: Following the Tax Trail

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Eurodad member Christian Aid Ireland has commissioned TASC to produce a new report on tax incentives and tax dodging comparing the situation both in Ireland and at global level and showing the parallels. 

The report considers tax breaks and incentives in Ireland and also looks at the international financial architecture that facilitates mass tax avoidance and evasion, and Ireland’s role in that architecture. The report makes the link between the Irish and the international situation. Before making recommendations for how this situation could be addressed TASC recommend equality proofing and equality auditing  in government budget making process this entails “a robust evidence-based process of minimising inequity and ensuring the progressivity of the overall tax system, in order to increase income and wealth equality in society. Progressivity – where those on higher incomes pay proportionately more than those on lower incomes occurs in the income tax system but, from an equality perspective, this principle should extend to the tax system as a whole.” They also recommend  a Financial Transactions Tax, Transparency and automatic exchange of information between tax authorities. 

TASC an independent think-tank dedicated to addressing Ireland’s high level of economic inequality and ensuring that public policy has equality at its core. 

Read the full report: Tax Injustice Following the Tax Trail