Tag Archives: havens
The Secret World Of Tax Havens
An anonymous source has provided extensive insights into a worldwide network of tax evaders. Media in more than 30 countries are currently sifting through a mountain of data. 260 gigabytes of documents – that’s the printed equivalent of 500,000 copies of the Bible. This is the massive amount of data that was passed on more than a year ago by an anonymous whistleblower to the International Consortium for Investigative Journalism (ICIJ) in Washington. More than two million emails and other confidential documents sketch a picture of a dubious shadow world. More than 130,000 people from 170 countries are alleged to have secreted their money in tax havens. Analyzing the data is a mammoth task that is still nowhere near completion. Challenge for computer forensics experts The anonymous source secretly lifted the data from two company servers and transferred it via the Internet. “Unfortunately, in order to protect the source, it’s not possible to say anything more about exactly how this was done, but it’s clear that there was a substantial leak,” says German data journalist Sebastian Mondial, who is one of those analyzing the material. This means that at a certain point these companies’ secrets were accessible in such a way that someone was able to make a copy, Mondial explained in an interview with DW. Germany’s Süddeutsche Zeitung daily writes that much of the data was not very well organized, and that some of the documents first had to be converted so they could be read by machine. “We were lucky that we had some specific forensic software that’s usually used by criminologists,” says Mondial. This, he explains, made it possible to scan these databases and examine them to find out things like what connections existed between pieces of data, when documents were created, when emails were sent and who received blind copies of emails. The Virgin Islands are just one of many tax havens Havens of tranquility and tax evasion The British Virgin Islands, the Cook Islands, the Seychelles, Panama: All of them have something very attractive to offer to certain companies and private individuals – anonymity. “‘Come to us and you won’t have to worry about the tax office finding out.’ This is the kind of slogan these so-called offshore islands use to attract rich people,” says Thomas Eigenthaler from the German financial managers’ union (DSTG). He explains that the tax evasion is made easier by the fact that the taxpayers don’t have to deal with it themselves. A whole industry has sprung up to advise them and offer tailor-made solutions. Sebastian Mondial adds that many tax havens don’t even keep any kind of register with information on company owners or capital. The EU estimates that every year around a trillion euros in tax revenue is lost through tax evasion or tax avoidance. According to a study by the non-governmental organization Tax Justice Network, a fortune estimated at between 21 to 32 trillion dollars is stashed away in tax havens. By comparison, in 2011 the gross domestic product of the United States was around 15.1 trillion dollars. The figure doesn’t even include non-financial assets and gold held abroad, foreign properties, or luxury yachts sailing under foreign flags. “According to my colleagues working on the project, there’s a particularly clever trick they pull when someone is sued by an offshore company. They agree on a settlement, and the complaint is dropped,” explains Sebastian Mondial. Then the settlement money, which, as part of a lawsuit, does not have to be taxed, is transferred to the offshore account. There are other tricks, too. For example, a company can set up a subsidiary in a tax haven to deal with its foreign operations, thereby avoiding paying tax on foreign profits. Offshore firms often are little more than a letter box Is Germany also a tax haven? Private individuals resident in Germany have to pay tax of up to 45 percent on their earnings. Companies whose main office is in Germany have to pay corporate tax and business tax. But in Germany too there are loopholes that the cunning can take advantage of. “If a German-based business seeks advice from an offshore company, the offshore company issues an invoice, and the money is transferred. To the tax office, this looks like a perfectly normal transaction,” says Mondial. However, it means that the money has been moved out of the country, and no further taxes will be paid on it. According to German law the burden of proof lies with the tax office, not with the companies. And this burden is too heavy for the German system to bear, Eigenthaler says: “We don’t have the capacity to do all the checks. Sometimes we wait years for an answer from overseas authorities. But there’s also a lack of political will. I always have the sense that people at the top are being too lax in their pursuit of tax evaders.” Furthermore, the influence of the German state ends at the border. “If money is transferred out of Germany to another country, the German treasury has no way of locating it – unless Germany has a tax agreement with the relevant state that includes the exchange of information,” Eigenthaler explains. But why would somewhere like the Cayman Islands have an interest in torpedoing its own business model by signing such an agreement? And as Eigenthaler points out, even if an agreement were reached, it doesn’t mean it would necessarily be followed to the letter. The data leak and its consequences For years now international organizations like the OECD (Organization for Economic Cooperation and Development) have been trying to establish measures against tax fraud and standardize regulations. According to the OECD, progress has been made since a blacklist was published in 2009 naming four countries as tax havens. 700 agreements were reached regarding the exchange of information, and around 40 judicial verdicts have led to some changes in the law. Might the revelations contained in these databases be of assistance in the international fight against tax fraudsters? Yes, but only indirectly, according to the computer forensics journalist Sebastian Mondial. He says he hopes that the actual data will never be published. The point of the exercise is not simply to put all of these firms’ data on the Internet and let everyone look at it to see who has transferred how much money, or who owns which companies. Rather, says Mondial, “The lawmakers and the respective countries must somehow find a way of establishing transparency.” Continue reading
Global Investment Falters But Tax Havens Prosper, U.N. Finds
By Tom Miles GENEVA | Wed Jun 26, 2013 6:05pm BST (Reuters) – Efforts to stop companies syphoning money through tax havens are failing and offshore centres increased their share of foreign direct investment (FDI) again last year, according to a U.N. report. “Tackling offshore financial centres alone is clearly not enough, and is not addressing the main problem,” said the annual World Investment Report, published on Wednesday by economic thinktank UNCTAD. While investment sinks in many economies, one country is enjoying above all is enjoying a boom: the British Virgin Islands, with a population of 30,000, is now the fifth biggest recipient of FDI in the world, the report said. The Caribbean archipelago welcomed almost $65 billion (42.4 billion pounds) of inward investment flows in 2012, just less than fourth-ranked Brazil , and 10 times the amount of FDI it received in 2006. FDI flows to such offshore tax havens have soared in the past five years, rising from an average of $15 billion in 2000-2006 to $75 billion per year in 2007-2012, the report said. “Tax haven economies now account for a non-negligible and increasing share of global FDI flows, at about 6 percent,” the United Nations thinktank said. Meanwhile, traditional FDI – cross-border corporate acquisitions and overseas expansions – has slumped. Among the worst hit are rich euro zone countries such as Belgium, which attracted $103 billion in 2011 but lost money in 2012 as existing investors sold up. The Netherlands saw a similar but smaller reversal, while Germany ‘s $49 billion haul of FDI in 2011 shrivelled to less than $7 billion in 2012. Global foreign direct investment shrank by 18 percent to $1.35 trillion in 2012 and is likely to remain at a similar level this year, the report said. UNCTAD forecasts global flows of $1.6 trillion next year and $1.8 trillion in 2015. In tax havens, the vast majority of FDI flows do not go into projects based in the country. Instead they are redirected back to the source country, a process known as “round tripping”. “For example, the top three destinations of FDI flows from the Russia n Federation – Cyprus, the Netherlands and the British Virgin Islands – coincide with the top three investors in the Russian Federation,” the report said. That could mean that global FDI is actually even weaker than it appears, since a growing proportion is simply round-tripping. Even more money is channelled through “special purpose entities” (SPEs). Firms set up these foreign affiliates for specific purposes such as managing foreign exchange risk or facilitating the financing of an investment. Money flowing to SPEs in just three countries – Hungary, Luxembourg and the Netherlands – amounted to $600 billion in 2011, dwarfing the $90 billion of flows to tax havens. Those countries’ SPE flows were not counted as FDI in the report. However, the report said SPEs were gaining importance relative to FDI flows and anecdotal evidence showed that most of the money sent to SPEs was invested in third countries. Still more tax is avoided through cross-border transfer pricing schemes, which companies can use to shift profits into low-tax jurisdictions and show apparent losses in high-tax markets, the report said. Despite the OECD trying to stem the flow of FDI to tax havens, the overall flows to tax havens overall “do not appear to be decreasing”, the report said, partly because big companies still needed somewhere to park their cash mountains. “Efforts since 2008 to reduce flows to OFCs (offshore financial centres) have coincided with record increases in retained earnings and cash holdings,” the report said. Also, although big investors such as Japan and the United States had succeeded in cutting the amount of flows to tax havens, many non-OECD members had now taken their place, ensuring the flows to tax havens continued and grew. The report called for a discussion of corporate tax rate differentials between countries, extraterritorial tax regimes and tax levied on repatriated earnings . “Without parallel action on these fronts, efforts to reduce tax avoidance through OFCs and SPEs remain akin to swimming against the tide,” the report said. (Reporting by Tom Miles; Editing by Ruth Pitchford) Continue reading
Don’t Blame The Havens – Tax Dodging Is Everyone Else’s Fault
http://www.ft.com/cm…l#ixzz2WlUNxAHS By John Kay Authorities have preferred to cut deals with big companies rather than pursue costly legal action ©Alamy The first time my research gained wide publicity was in 1979. In collaboration with another young academic, I explained that many large British companies paid no corporation tax. The issue resurfaces again as my co-author retires from the Bank of England. This week’s Group of Eight meeting produced denunciations of secrecy and tax havens. But the sources of the problem are not to be found in Bermuda or the Channel Islands. The activities that escape taxation take place in the G8. The correct starting point is the flawed structure and implementation of corporation tax in the G8 itself. Corporation tax is a levy on the profit a company earns for its shareholders. It is therefore both a tax on corporate activity and on shareholders, and it is not well designed to achieve either purpose. It is not robust administratively or economically. Complex and vulnerable to avoidance, it produces major distortions of both investment and financial decisions of companies. It makes sense to tax the incomes of shareholders. If it is desirable to tax separately the activities of companies, the most appropriate base is free cash flow, or economic rent – the amount a business earns in excess of its cost of capital. Almost every dispassionate examination of the structure of company taxation has favoured reform on these lines. Sir Mervyn King and I advocated it in 1979; the Mirrlees Review of the UK tax structure recently undertaken by the Institute for Fiscal Studies reached the same conclusion. There are several different ways of moving towards this result – removing interest deductibility, introducing an allowance for the cost of corporate equity or shifting the tax base towards cash flow rather than accounting profit – but all end up in broadly the same place. These reforms attempt to treat different levels of investment and different methods of financing in the same way. Opportunities for tax avoidance are everywhere and always the consequence of rules that treat economically similar transactions differently. It follows that there is generally alignment rather than conflict between the objectives of promoting economic efficiency and establishing administrative structures robust to avoidance. The present structure of company tax achieves neither. It would be best if these reforms could be undertaken on a co-ordinated international basis, but that is not essential: it is essential, however, to agree better rules for assigning tax revenues between jurisdictions. Since governments – even within the EU – have failed to co-ordinate rules on the principles that each taxes the worldwide income of “their” companies, there are opportunities to create revenues that are taxed nowhere and expenditures that are deductible more than once. Such avoidance is facilitated and enhanced by corporate manipulation of the prices at which capital, goods and services are transferred across borders. The resulting accounts show profit being earned in low-tax jurisdictions in which little or no real business takes place. It is disingenuous for companies to claim they pay the tax legally due when their assessments are based on accounts that defy economic and business realities. In the main, however, tax authorities have preferred to cut deals with big corporations rather than pursue costly legal action. They will not do the same for you and me. It makes no sense for a small company to pay an accountant to do anything but calculate the amount of tax that is properly due, or to incur legal fees resisting a challenge. The unacceptable outcome is an entirely correct perception that there is one law for the little guy and another for the big battalions. The potential effect of that perception on tax compliance is one that it is well worth spending millions of pounds to avoid. A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations both nationally and globally, and a strategy for effective enforcement of existing rules. Such a strategy would make clear that executives of companies which present accounts to tax authorities that are essentially false, and the accountants who support them, will in future run serious risks. The door they hear closing behind them might be the door of a prison cell rather than the door of 10 Downing Street. johnkay@johnkay.com Continue reading
