"We want to implement rapidly a broad based financial transaction tax in the framework of the Enhanced Cooperation Procedure in the EU. Such a tax should include preferably all financial instruments, in particular shares, bonds, investment certificates, currency transactions as well as derivatives. The tax should be designed in a way, which prevents tax avoidance. The effects of the tax on pensions, small investors and the real economy have to be assessed and negative consequences should be avoided, while undesired business models should be pushed back."(Page 64).
"The German government position continues to press for a introduction of the financial-transaction tax soon,” the ministry said today in an e-mailed comment to Bloomberg. “We continue to aim for a broad base combined with a low tax rate.”For those who read German, the full text of the coalition agreement (185 pages) can be downloaded here.
"We've seen real support growing behind the idea of public registers - from businesses, law enforcement and even the banks themselves."For examples, he cites Simon Walker, head of the UK's Institute of Directors, a large business lobby groups, who has come out in favour of public registers of beneficial ownership, here.
"I hope G8 Leaders will consider publishing national Action Plans by June that set out concrete steps that their governments will take to achieve this – including, for example, by enhancing the availability of beneficial ownership information through central public company registries."Many others in other countries support such an idea. See, for example, Frank Knapp's article in The Hill in Washington, D.C. supporting the idea, or this, from the Manhattan District Attorney.
EU leaders must end financial secrecy
In three steps, the European Council can end financial secrecy and take decisive action on corruption and tax evasio
Brussels, 21 May 2013 – EU leaders meeting tomorrow have an opportunity to end the financial secrecy that facilitates corruption and tax evasion. As many cases of proven corruption have shown, anonymous shell companies and other opaque legal structures based in secrecy jurisdictions are the favoured vehicles to hide illicit financial gain. Finding out who ultimately profits from these legal structures - the question of beneficial ownership - is central to efforts to close down this avenue for ill-gotten gain.
Building on recent international developments, EU Member States can help stop the flow of corrupt funds with three simple steps:
- Unanimously agree to the proposed reforms of the EU Savings Tax Directive . The proposed reforms would address major loopholes in the legislation, for example by obliging trustees and directors of shell companies to collect and transmit information on the beneficial owners of these legal entities.
- Agree that automatic exchange of financial information should be the global ‘gold standard’. Corruption and tax evasion are not just problems in the EU. Developing countries suffered $586 billion per year in illicit outflows in the first decade of this century . EU leaders should recognise their obligations to citizens in the developing world by committing to a global, multilateral system for the automatic exchange of financial information, based on the model that 10 EU countries have agreed to pilot . EU legislation should also reflect this commitment.
- Agree to mandatory public registers of beneficial owners. To help banks and other financial institutions do their work properly, EU leaders should agree to revisions of EU anti-money laundering legislation that would require Member States to establish and update public registers of beneficial owners of companies and other legal entities. Today, information on beneficial ownership is provided by business registers in only four EU Member States (Estonia, Italy, Romania & Slovenia).
“At a time when citizens are going through the toughest economic crisis in years, EU leaders have an opportunity to clamp down on illicit financial flows”, said Carl Dolan, Senior EU Policy Officer at the Transparency International EU Office. “Effective action has been prevented before by Member States putting narrow national interests before doing the right thing. It is time to end the squabbling over perceived competitive advantage and recognise that by facilitating corruption everyone loses”.
Transparency International has also demanded action from G8 and G20 governments against financial secrecy in order to prevent corruption and illicit financial flows.
Notes to editors:
 The 2003 Savings Tax Directive requires EU Member States (as well as Andorra, Liechtenstein, Monaco, San Marino and Switzerland) to automatically exchange information on bank accounts held by residents of these countries. Exemptions were granted to Belgium, Luxembourg and Austria. Proposed amendments to the Directive would require banks and other financial institutions to establish whether the beneficial owner of certain entities or legal arrangements established in secrecy jurisdictions are EU residents or residents of the participating countries. It would also require legal entities such as companies and trusts to automatically transmit information about their beneficial owners to competent authorities in EU member states. The amendments also address loopholes relating to the beneficial owners of certain financial instruments such as investment funds.
 A report by Global Financial Integrity has estimated that developing countries lost at least $586 billion per year in illicit outflows between 2001 and 2010.
 In April 2013, Belgium, Czech Republic, France, Germany, Italy, Netherlands, Poland, Romania, Spain and UK agreed to a pilot multinational initiative for reciprocal exchange of tax information. The pilot initiative will be based on a model agreed with the U.S. government following the passage of the Foreign Account Tax Compliance Act (FATCA). FATCA requires non-US financial institutions to report directly to the Inland Revenue Service (IRS) information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
Carl Dolan, Senior EU Policy Officer (Private Sector Policies)
T: +32 (0)2 23 58 603
M: +32 (0)488 563 435
Benjamin NorsworthyEU Policy Officer (Anti-Money Laundering)
T: +32 (0) 2 23 58 645
An e-book by the acclaimed economist Ann Pettifor, Just Money: How We Can Break the Despotic Power of Finance. In it she explores the role of credit in the economy and its relationship with the money supply. She goes on to set out a set of policies to bring the economy back under substantial democratic control.This is not, strictly speaking, a core tax justice issue. But we have recently been doing a lot of work on the political economy of financial centres - not least with our Finance Curse analysis. "Breaking the power of finance" is certainly something that interests us.
Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”And it is a campaign: in the United States, the United Kingdom - everywhere, really. It's based on ideology, not practical realities. A U.S.-based correspondent to TJN, with many connections in U.S. tax circles, added in an e-mail yesterday:
"Larry is a leading right-wing Boston U economist who is otherwise best known as a former Reagan Council of Econ advisor and a deficit hawk. He means well, but he is generally clueless when it comes to the Real World. Unfortunately his piece is only the latest in a crescendo of right wing voices calling for abolition in the US. And the idea is gaining traction in business circles."Our arguments yesterday - and CTJ's arguments to follow - illustrate that if you support the abolition of the corporate income tax you either have no idea what you are talking about, or you are a shill. We can't think of another explanation (apart from where you are a mix of both.)
Such a move by the world's largest economy would badly hurt developing countries like Argentina that count on corporate income taxes and MNCs for a large share of their revenue base. It would dramatically accelerate global tax competition -- the race to the bottom.(We at TJN have decided to stop using the term 'tax competition' and instead use the more accurate term 'tax wars' - which is what we are talking about here. Occasionally, if we do use the more common term, we will put 'competition' in quote marks.)
"First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.Crucial points. They then expand on our point about tax 'incidence':
Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed."
"The corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.And then they make another argument that we didn't make.
This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.
For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax."
"Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.And, as we also mentioned:
But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby."
"Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses."And let's not forget something else that that last report CTJ cites mentions:
"The Corporate Income Tax raises a significant amount of revenue for the federal government—$242.3 billion in fiscal 2012, or almost 10 percent of total federal revenues. However, the corporate income tax is less important now than in the 1950s, when it accounted for about 30 percent of total revenues."
"Some of us are taking the international corporate income tax for granted, and are trying to improve it -- by, for example, refining the OECD's recent attempts to fix digital tax regimes and the the arms-length pricing approach to international corporate taxation, or by pursuing longer term objectives like country by country reporting or formulary apportionment.And let's not forget: this doesn't just affect the United States. This affects everyone in the whole world. And it's potentially a very, very dangerous move that would have horrific effects on income and wealth economy, rent-seeking and much more. This campaign must be stopped.
These are worthy long term objectives. But let us not forget that they PRESUME that countries still have corporate income tax regimes to enforce in the first place. So it is time to take seriously this latest very aggressive strategy by the US Right and respond to it vocally."
|Source: Flickr/Attac France|
The resource curse, or the paradox of poverty from plenty
By Nicholas Shaxson
Is finance like crude oil? Countries rich in minerals are often poverty-stricken, corrupt and violent. A relatively small rent-seeking elite captures vast wealth while the dominant sector crowds out the rest of the economy. The parallels with countries ‘blessed’ with powerful financial sectors are becoming too obvious to ignore.
While serving as the Reuters correspondent in oil-rich Angola in the mid 1990s, I wondered how such a ‘rich’ country could suffer such poverty. The shortest answer at the time was ‘War’. Angola’s conflict had many causes, but without the diamonds to fuel rebel leader Jonas Savimbi’s army, not to mention the government’s offshore oilfields, it would have been less bloody, and shorter.
As I arrived in Angola in 1993 a British academic, Richard Auty, was putting a name to a then poorly-understood phenomenon: what is now widely known as the ‘Resource Curse’. Countries that depend heavily on natural resources like oil or diamonds often perform worse than their resource-poor peers in terms of human development, governance and long-term economic growth. Studies by renowned economists such as Jeffrey Sachs, Paul Collier, Terry Lynn Karl, Joseph Stiglitz and many others have now established the Resource Curse in the academic literature, and in the public mind too.
A weak version of this Curse, which few would disagree with, holds that resource-dependent countries tend to be bad at harnessing those resources to benefit their populations. The windfalls are squandered. A stronger version is more surprising: natural resources tend to make matters even worse than if they had been left in the ground, leading to higher rates of conflict, more corruption, steeper inequality, deeper absolute poverty, more authoritarian government, and lower long-term economic growth. I am in no doubt that the stronger version of the curse applied to Angola on all these metrics when I lived there.
To be fair, the wider cross-country evidence here is more complicated. Some countries like Norway that already have good governance in place before resources are discovered seem to fare relatively well – but being rich first is no guarantee of success either. Michael Edwardes, the former chairman of ailing British car manufacturer British Leyland, spoke of this with some prescience in 1980, following the OPEC oil price shocks: “If the cabinet does not have the wit and imagination to reconcile our industrial needs with the fact of North Sea oil, they would do better to leave the bloody stuff in the ground.” Even if some rich countries can suffer from mineral windfalls, it is poor, badly governed countries that tend to suffer the most. The picture also varies with the global commodity price cycles: things look particularly bad during troughs in these cycles – as in the mid 1990s – and look less bad, at least on the surface, in the boom years.
How do we explain this ‘curse?’ The explanations fall into three main categories. First is the so-called “Dutch Disease.” Large export revenues from oil, say, cause the real exchange rate to appreciate: that is, either the local currency gets stronger against other currencies, or local price levels rise, or both. Either way, this makes local manufactures or agriculture more expensive in foreign-currency terms, and so they lose competitiveness and wither. Much higher salaries in the dominant sector also suck the best skills and talent out of other sectors, out of government, and out of civil society, to the detriment of all. Overall, the booming natural resource sector ‘crowds out’ these other sectors, as happened when many oil producers saw devastating falls in agricultural output during the 1970s oil price booms.
Finance-dependent economies, it turns out, suffer a rather similar Dutch Disease-like phenomenon, as large financial services export revenues in places like the United Kingdom or the tax haven of Jersey raise the cost of housing, of hiring educated professionals, and the general cost of living. A Bank for International Settlements (BIS) study last year found that finance-dependent economies tend to grow more slowly over time than more balanced ones, and noted that, by way of partial explanation, ’finance literally bids rocket scientists away from the satellite industry’. My short Finance Curse e-book, co-authored with John Christensen, provides plenty of detail on this.
A second standard explanation for the Resource Curse is revenue volatility. Booms and busts in world commodity prices and revenues can destabilise the economies of countries that depend on them, further worsening the crowding-out of alternative sectors. Gyrations in the world oil price – from below $10/barrel in the late 1990s to well over $100 within 10 years – have played havoc with budgeting in many oil-dependent countries, often with terrible effects on economic and political stability and broad governance. Those alternative sectors that were crowded-out during the booms aren’t easily rebuilt when the bust comes: it is a ratchet effect. Again, there are close parallels with the financial sector, a source of great volatility, as the latest global financial crisis shows. Britain’s industrial base, decimated by (among many other things) over-dependence on the financial sector, is proving slow to recover, post-boom.
The third category for explaining the Resource Curse – the biggest, most problematic, and the most complex – falls under the headline ‘governance’.
Why do natural resources tend to make governments more wasteful, corrupt, and authoritarian?
A big part of the answer lies in the fact that minerals in the ground provide unproductive economic ‘rents’: easy, unearned money. As the Polish writer Ryszard Kapuscinski so brilliantly put it:
"Oil is a resource that anaesthetises thought, blurs vision, corrupts. Oil is a fairy tale and, like every fairy tale, it is a bit of a lie. It does not replace thinking or wisdom."
When easy rents are available, rulers lose interest in the difficult challenges of state-building, or the need for a skilled, educated workforce, and instead spend their energies competing with each other for access to a slice of the mineral ‘cake’. While those neglected sectors wither, this competition among ‘godfathers’ can lead to overt conflict, particularly in ethnically diverse societies, but it can also lead to great corruption as each player or faction in a government knows that if it does not act fast to snaffle a particular mineral-sourced financial flow, another faction will. This is the recipe for an unseemly, corrupting scramble.
The financial sector, likewise, contains a multitude of potential sources of easy ‘rents’. A secrecy law, for instance, has long been a source of rents for Swiss bankers, who haven’t needed to do much else apart from watch the money roll in. More grandly, the network of British-linked secrecy jurisdictions scattered around the world, serving as ‘feeders’ for all kinds of questionable and dirty money into the City of London, is another big source of rents for the financial sector. Financial players’ special access to information is another. Martin Berkeley, a former British banker, described one mechanism deployed by his bank as it sought to sell its customers dodgy derivatives:
"On their client database they had in big letters written ‘Client Has Screens’ - meaning the client actually knows what the markets are doing: these tricks couldn’t be played on them."
The Libor scandal provides another example of rent-seeking. One might reasonably also make a comparison between owning an oil well and having – as the banking system does – the ability to create money. Yet there is a difference too: rising credit creation – and the growing private debts that accompany it – generate fees for the financial sector that are extracted not from under the ground, as with oil, but from debtors, taxpayers and others: from the population itself.
Another source of the trouble in resource-rich states is that when rulers have easy rents available, they don’t need their citizens so much to raise tax revenues. This top-down flow of money undermines the ‘no taxation without representation’ bargain that has underpinned the rise of modern, accountable states through the rise of a social contract based on bargaining around tax, and through the role that tax-gathering plays in stimulating the construction of effective state institutions. If the citizens complain, those resource rents pay for the armed force necessary to keep a lid on protests.
In economies dependent on finance we don’t see the same kind of crude, swaggering petro-authoritarianism of Vladimir Putin’s Russia or José Eduardo dos Santos’ Angola. But we do see some surprisingly repressive responses to criticisms of the financial sector and the finance-dominated establishment, particularly in small tax havens like Jersey, as Mike Dun’s article in this edition – along with the main Finance Curse e-book and my book Treasure Islands – repeatedly illustrate.
All these processes – the economic crowding-out of alternative economic sectors such as agriculture or tourism, plus the ‘capture’ of rulers and government by the dominant mineral sector, who become apathetic to the challenges posed by trying to stimulate other sectors – add up to a mortal threat not just to democracy, but also to the long-term prospects for a vibrant economy. Since Angola’s long civil war ended 11 years ago, politicians have routinely called for a ‘diversification’ of the economy and a ‘rebalancing’ away from dependence on oil. The fact that petroleum still makes up over 97 percent of exports and contributes to 60 percent of GDP, is testament to the difficulty even the most well-meaning reformer faces. Similarly, calls for ‘rebalancing’ away from excessive dependence on the financial sector have tumbled from the mouths of politicians in the United Kingdom and Jersey. But these calls will prove equally empty if they do not actively work to shrink and contain the financial sector.
"The relevant representatives of the European Parliament, Council and Commission have agreed a compromise text of the EU Accounting and Transparency Directives which, taken together, will create the EU equivalent to, which goes beyond, Dodd-Frank Section 1504 (the law that requires all oil, gas and mining companies that have to report to the SEC to disclose all payments over $100,000 that they make to any government anywhere in the world).A long list of comments from interested parties is available here.
The EU legislation goes beyond the US version by including logging companies as well as large, privately held companies. This is a massive victory because there were a lot of details being discussed that could have watered down the law in the EU, but those efforts were thwarted."
Reaction to EU agreement on transparency of extractive industriesThe Directives still have to approved by the European Parliament’s Legal Affairs Committee (likely in May) and then by the full sitting European Parliament (likely in June) before the laws can be said to have been formally adopted. This process is expected to go smoothly.
BRUSSELS, 9 April. Today the European Commission, the European Parliament and the Council of the EU agreed a compromise text on transparency of extractive industries. The text will be adopted by the Parliament and the Council in the coming months.
If passed, this law will oblige EU-listed and non-listed big oil, gas, mining firms and the logging industry to declare payments they make in resource-rich nations.
In response to today’s developments,
Catherine Olier, Oxfam’s EU development expert, said:“It’s excellent news that the EU is moving towards a law that will help ordinary people harness the natural resource wealth of their countries to be lifted out of poverty. But EU politicians today could have taken a bolder stance against tax evasion and corruption by including other sectors such as telecommunications or construction. Strikingly, poor countries lose more to tax dodging than they receive in aid each year.”Øygunn Sundsbø Brynildsen, senior policy officer at Eurodad, the European Network on Debt and Development, said:“Despite today’s promising progress, there is still a long way to go to have EU legislation that properly fights tax dodging. While it is very important to know how much companies pay to governments, this figure alone does not give a clear picture of whether they pay their fair share of taxes. Multinationals will continue plundering developing countries until they are obliged to report information such as sales volumes, assets, staffing and profits. The currently negotiated EU banking sector reform is an example to follow in this regard.”Although welcoming the Directive, Oxfam and Eurodad have mixed feelings about the deal:
We strongly welcome the proposal because it is a huge step in the fight against corruption. If the legislation is finally adopted by the EU:
It will help citizens in resource-rich countries like Nigeria and the Democratic Republic of Congo to hold governments to account for their use of natural resource revenues and make sure that these benefit the many and not just the few.
It will oblige companies in the extractive and forestry sectors to disclose the payments they make to governments in all countries at project level - as opposed to reporting at government level only- and without any exemptions. The latter has been a contentious issue in negotiations as companies claimed that in some countries they would have to break national criminal laws which prohibit the disclosure of such information. However, such laws do not exist and companies couldn’t come up with any examples and EU member states finally agreed to remove that exemption which would have been a massive loophole.
On the other hand, the proposal failed to:
Include other sectors beyond extractive and forestry such as telecommunications and construction which would widen corporate accountability and help both developing countries and EU member states better combat tax evasion and avoidance. In October 2012 the European Parliament’s Legal Affairs committee voted in favour of expanding the reporting requirements to the telecommunications, construction and banking sector.
Require companies to report on additional financing information such as production or sales volumes, numbers of employees and profits. Such basic accounting information that are already available to companies would allow to identify potential cases of tax dodging.
For more information and comments, contact:
Oxfam: Angela Corbalan on + 32 (0) 473 56 22 60 or email@example.com
Eurodad: Øygunn Sundsbø Brynildsen on + 32 (0) 2894 46 44 or firstname.lastname@example.org
The head of ProtInvest, an investor-protection group, has sent a letter to Michel Barnier, an EU commissioner, in which he criticised Mr Frieden’s move to appoint his senior adviser Sarah Khabirpour to the board of the CSSF, the country’s financial regulator. The letter pointed out Ms Khabirpour also sits on the board of Banque International a Luxembourg, one of the country’s biggest banks, and is a director of the Luxembourg Stock Exchange – both institutions the CSSF regulates.If you were looking for a case of the fox guarding the henhouse, you would be hard pressed to find a clearer case. This is a very clear case of state 'capture' - one of the central elements of offshore tax havens that we have identified in a range of publications, most recently in our short Finance Curse e-book. Today's FT spells out state capture in Luxembourg:
"Ms Khabirpour’s multiple jobs showcase the cosy relationships that tie Luxembourg’s business community, which centres largely on fund management, to its regulators and political leaders, suggests Fred Reinertz, ProtInvest’s president."Our narrative report for Luxembourg published for the 2011 Financial Secrecy Index, which will be updated in a few weeks with plenty of new and juicy details, cites this email to TJN from a former Luxembourg businessman:
“One very important aspect of the Luxembourg financial centre is the absolutely scandalous discrepancy between the texts of the law, and their application in everyday judicial life. . . . while international pressure managed to force Luxembourg to adapt stricter legal constraints to the financial activities under its jurisdiction, looking into the lack of judicial application of said constraints becomes even more important.This is just the latest in a long line of Luxembourg offshore scandals, which date back to the days of the fraudster Bernie Cornfeld, the tale of BCCI, arguably the most corrupt bank in world history, and running through to more recent episodes such as the Bernie Madoff scandal (originals here, here and here, and the European bond scandal last year, which was summarised:
. . .
Unlike in larger countries, there is no such thing as an independent representation of any civil interests in a tiny country like Luxembourg. You just don’t make it in this country unless you’ve proven your absolute loyalty to the system in place, including being ok (if not more) with all of its malpractices.”
"Both the investors in the Petercam bond fund and the Madoff fund investors are scathing in their criticism of the CSSF. They argue that the regulator rubber-stamped the funds and turned a blind eye to subsequent problems.And that's just a taster of the rottenness. There is plenty more, such as this long series of complaints, containing the following:
"To all of you out there who consider depositing money in a Luxembourg based bank, who consider working in Luxembourg, who consider establishing a company in Luxembourg or who consider dealing with Luxembourg in any way, and to all of you who feel its in violation with your inner compass entering into anything that involves deception, cheating or stealing from other human beings; STAY AWAY from this country."We don't know the facts of this case, nor do we have a good grasp of the case outlined by our email correspondent outlined above. But it does seem that wherever you turn in Luxembourg, scandal is not far away.
“Whoever controls the Bank of Cyprus controls the island,” said Andreas Marangos, a Limassol lawyer whose clients include many Russians.We mention this for two reasons. First, the story itself is interesting. The first three paragraphs give the flavour:
"When European leaders engineered a harsh bailout deal for this tiny Mediterranean nation in March, they cheered the end of an economic model fueled by a flood of cash from Russia. Wealthy Russians with money in Cyprus’s sickly banks lost billions.The story isn't quite as simple as these paragraphs suggest, of course: among other things, the "Russian" ownership stake seems to be fairly dispersed, at least at this point. But there's another issue we want to point to, which is the main point of this blog. It's that this provides yet another example of the extreme forms of 'state capture' which we have seen, again and again, in small islands with large financial sectors: tax havens. The NYT story continues:
But the Russians, though badly bruised, are now in a position to get something that has previously eluded even Moscow’s most audacious oligarchs: control of a so-called systemic financial institution in the European Union.
“They wanted to throw out the Russians but in the end, they delivered our main bank to the Russians,” said the Cypriot president, Nicos Anastasiades, in a June interview."
"Despite its wobbly condition, the Bank of Cyprus still holds a uniquely influential position in the economic and political affairs of a sun-swept nation that sits on potentially large reserves of natural gas and straddles strategic fault lines between East and West.Particularly thanks to David Officer and Yiouli Taki at the University of Nicosia, we already had plenty of information of the "capture" of Cyprus by the offshore financial services sector - see here and here and here. This blog is a reminder, and a confirmation, of one of the most important political-economic phenomena in the modern global economy.
President Anastasiades, in a June letter to the European Central Bank that pleaded for help to keep the Bank of Cyprus afloat, described it as a “mega-systemic bank” that, if it failed, could bring down the entire Cypriot economy. With 5,700 employees and around half of all the island’s deposits, it dwarfs its rivals and reaches into every corner of the country."
“second largest investment fund centre in the world after the United States, the premier captive reinsurance market in the European Union and the premier private banking centre in the Eurozone.”
‘We were dealing with those “Belgian dentists” who keep bonds under the mattresses,’ Krall remembers. ‘Sometimes they all came in at once – what we called the coupon bus would arrive. They came from Belgium, Germany, the Netherlands, filling the lobby, spilling out the door, getting angry, waving their coupons and getting their cheques.’ The vaults held, among other things, enveloppes scellées (sealed envelopes) relating to ‘Henwees’ – HNWIs or high net worth individuals. ‘We didn’t know what the hell was in there,’ she said. ‘The private bankers and relationship managers put those things in there – we never had an inkling.’
“Mr Kim’s operatives then withdrew the money - in cash, in order not to leave a paper trail - and transferred it to banks in Luxembourg. The money is the profits from impoverished North Korea selling its nuclear and missile technology, dealing in narcotics, insurance fraud, the use of forced labour in its vast gulag system, and the counterfeiting of foreign currency.”
“The current legal framework does not sufficiently guarantee the full operational independence of the CSSF; the CSSF is placed under the direct authority of the Minister; its missions include the “orderly expansion” of Luxembourg’s financial center; its general policy and budget are decided by a Board whose members are all appointed by the government upon proposals from supervised entities and the Minister.”
"The head of ProtInvest, an investor-protection group, has sent a letter to Michel Barnier, an EU commissioner, in which he criticised Mr Frieden’s move to appoint his senior adviser Sarah Khabirpour to the board of the CSSF, the country’s financial regulator. The letter pointed out Ms Khabirpour also sits on the board of Banque International a Luxembourg, one of the country’s biggest banks, and is a director of the Luxembourg Stock Exchange – both institutions the CSSF regulates.
Ms Khabirpour’s multiple jobs showcase the cosy relationships that tie Luxembourg’s business community, which centres largely on fund management, to its regulators and political leaders."
“It is well known jibe within the industry that favourable low-tax deals with the Luxembourg tax authorities can be reached over dinner (Michelin starred of course.)”
“One very important aspect of the Luxembourg financial centre is the absolutely scandalous discrepancy between the texts of the law, and their application in everyday judicial life. . . . while international pressure managed to force Luxembourg to adapt stricter legal constraints to the financial activities under its jurisdiction, looking into the lack of judicial application of said constraints becomes even more important.
. . . Unlike in larger countries, there is no such thing as an independent representation of any civil interests in a tiny country like Luxembourg. You just don’t make it in this country unless you’ve proven your absolute loyalty to the system in place, including being ok (if not more) with all of its malpractices.”
"A proposal by the Netherlands to renegotiate its tax treaties with 23 least-developed countries marks a turning point for a country that has until now deflected accusations that it is a key player in tax avoidance by multinational corporations.This comes in the context and the spirit of today's G20 leaders' declaration, which includes a statement that:
The initiative, which comes as the G20 meeting in St. Petersburg is putting tax harmonisation issues high on the agenda, is the most concrete move yet by the Netherlands to address the criticisms. Tax justice advocates say the country’s network of treaties with over 90 countries makes it a nexus for tax avoidance, allowing multinationals to reroute their profits through Dutch “letterbox companies” that do no real business in the Netherlands and exist largely for tax purposes."
"We call on member countries to examine how our own domestic laws contribute to BEPS [TJN: Base Erosion and Profit Shifting, OECD-speak for corporate tax dodging] and to ensure that international and our own tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions."There is, of course, far less to the Dutch plans than Weekers' words would perhaps suggest. The FT article describes an official Dutch report presented last week, which seeks to insert new anti-fraud provisions in their tax treaties with the 23 countries; will pass on information to tax authorities in developing countries; and will 'crack down' on letterbox companies with no genuine substance behind them. The article also cites our excellent Dutch NGO colleagues at SOMO as saying, among other things, that new demands for letterbox companies to have 'substance' will be too easy to comply with.
"promises to put more 'substance' in shell companies MNCs [Multinational Corporations] use. Turns out the "substance" ain't gonna be much."(For those interested, more details on this lack of substance in the Annex below.)
“Over the past 10 years the trend has been for the number of letterbox companies in the Netherlands to keep growing. I want to turn that trend around,” Mr Weekers said. “I see the Netherlands being portrayed in a bad light. I don’t want to be portrayed in a bad light.
The Dutch move stems from a government-commissioned report over the summer which, for the first time, agreed with tax-justice groups that developing countries miss out on substantial tax revenues because of their treaties with the Netherlands.”Here is a clear and public admission by the Netherlands government that this tax haven activity is causing great harm around the world. Or, to put it more succinctly, Tax Havens Cause Poverty.
"Next week there will be a Round Table, organised by the Dutch Parliament about national tax policies in order for them to gain more insights on the matter. Tax Justice Network Netherlands as well as SOMO will participate as speakers, a.k.a. spokespersons for a fair tax system."Annex update: a Dutch correspondent sent us this commentary on the relative lack of substance, via e-mail:
"About the substance demands: the government does not propose to raise or increase the substance demands, they only want to expand the group of companies that have to comply with them. Right now, only companies applying for a tax ruling (Advance Pricing Agreement or Advance Tax Ruling) have to meet the requirements. This will change so that all companies that function as a vehicle for channeling through royalty and interest payments (so called "schakelvennootschapen" which would be literally translated into "linking companies") have to meet these requirements.
The problem is, as you already pointed out in the blog, that the substance requirements are much too easy to comply with. The government, in their reaction published last Friday, actually said that it carried out a random sample and found that most "linking companies" already comply with the requirements. Requirements include things like: at least half of board members have to live or be "officially situated" in the Netherlands, they need to have "the necessary professional knowledge to carry out their tasks", the (important) management decisions need to be taken in the Netherlands, the company needs to have an address situated in the Netherlands, and the company needs to have equity that is "fitting for the activities it carries out".
As you can see, all requirements are fairly easy to fulfill and open for interpretation. The government, however, stated that - based on research published earlier this summer - there's no point in raising the requirements by for example asking for a number of employees, since this will lose all effect if companies find a way of hiring personnel without increasing their real economic activity. The mailbox companies indeed already do the same with recruiting board members: trust offices offer companies to find Dutch board members, which are persons that are member of numerous boards at the same time.
So the Dutch governement, by saying that they do not raise substance requirements "since that will have no effect", combined with finding that almost all companies concerned already meet the existing requirements, are seemingly taking a kind of useless measure to obligate all "linking companies" to comply with current requirements. It seems an empty measure really."
"The economic collapse in Cyprus highlighted how the Finance Curse hollows out the domestic economy of small islands and corrupts their entire political systems. I’ve seen exactly the same processes at work in my former home of Jersey.Nicholas Shaxson, author of Treasure Islands, said:
Alarmingly, the City of London is having similar effects on Britain. The Finance Curse presents a clear and present danger to social and economic development."
"After spending 14 years living in and studying the Resource Curse in oil-rich countries in Africa, I was astonished to find the very same things happening in rich countries with big financial centres.For further comments, please contact:
Having an oversized financial centre in your neighbourhood is a bit like striking oil. It may well bring lots of money. But it will bring huge problems. And the evidence is overwhelming: too much finance is bad for you. Britain, the United States and many other countries need to shrink their financial centres dramatically.
This goes way beyond the damage caused by the latest global financial and economic crisis. Once our politicians understand this, they will see that they can tax and regulate our financial sectors appropriately, with no loss of ‘competitiveness’ - even if other countries don't.
When the financiers cry: ‘We will run away to Geneva or Hong Kong’ then that is to be welcomed. For if they do so, the financial sector will shrink and many benefits are likely to ensue."