Ethics and governance in the European Financial centers

Richard Murphy observes that the new UK / Liechtenstein Tax Information Exchange Agreement moves information exchange into a new era.

The preamble is worth reading as it goes beyond the OECD Tax Information Exchange Agreement (TIEA):

The Government of the Principality of Liechtenstein and the Government of the United Kingdom of Great Britain and Northern Ireland (together “the Contracting Parties”) desiring to:

(a) regulate the exchange of information with respect to taxes between the Contracting Parties and facilitate tax cooperation and taxpayer assistance, and

(b) assist the maintenance and development of the Principality of Liechtenstein’s financial services industry,

have on this date reached an understanding covering various matters including the introduction by the Government of the Principality of Liechtenstein of a five-year taxpayer assistance and compliance programme and the introduction by the competent authority of the United Kingdom of a five-year special disclosure facility.

It is the Contracting Parties’ intention that by the conclusion of the five year period contemplated by the taxpayer assistance and compliance programme, there will be no beneficial owners who are liable to taxation within the jurisdiction of one Contracting Party who are using the laws of the other to disguise such liability without paying appropriate tax in the manner contemplated by the understanding.

As Richard observes, the standard TIEA is, to all intents and purposes, a passive document. The tax haven / secrecy jurisdiction signs it, sits back and waits for something to happen whereas Mr Gurria is happy.

The deal between the UK and Liechtenstein requires action of Liechtenstein, action that will be audited. What is more, that action has a timescale attached to it and a performance criterion is set: there will be no UK tax evaders left in the place after five years.

'The fact that the UK has signed two agreements today - a TIEA and a second one, ensuring that uncooperative UK taxpayers have their Liechtenstein accounts shut down - is a clear sign that TIEAs are almost impossible to use (...) The G20 should now reflect this acceptance that TIEAs do not work by urgently bringing forward a new multilateral agreement on tax information sharing. Information must be exchanged automatically, to ensure that developing countries benefit', Christian Aid Policy Manager Alex Cobham said (Source Reuters).

Richard calls the procedure Proactive Information Exchange (PIE), giving rise to Proactive Information Exchange Agreements (PIEAs).

To comment this agreement Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration said: " I am particularly pleased about the innovative and co-operative design of this joint UK-Liechtenstein initiative which may well serve as a model for other countries".

As I said, those who thought that by signing quickly 12 or more agreements, they would be clean, did not realise the changes. The speed of the signatures only demonstrated that the OECD tax model is not an actual constraint

However, Tax Information Exchange Agreements are dead and the OECD should move to this proactive procedure as soon as possible: in the framework of the OECD meeting planned for 1-2 September?

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Jane G. Gravelle, Senior Specialist in Economic Policy, recently published a report that was prepared for Members and Committees of Congress.

The findings are the following:

The federal government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries, often referred to as tax havens. The revenue losses from this tax avoidance and evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax abuses may be around $100 billion per year. International tax avoidance can arise from large multinational corporations who shift profits into low-tax foreign subsidiaries or wealthy individual investors who set up secret bank accounts in tax haven countries.

Recent actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations have targeted tax haven countries, focusing primarily on evasion issues. There are also a number of legislative proposals that address these issues including the Stop Tax Haven Abuse Act (S. 506, H.R. 1265); draft proposals by the Senate Finance Committee; two other related bills, S. 386 and S. 569; and a proposal by President Obama.

Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of “hybrid entities” that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanding by a new regulation (termed “check-the-box”) introduced in the late 1990s thathad unintended consequences for foreign firms. In addition, earnings from income that is taxed can often be shielded by foreign tax credits on other income. On average very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting  exists, but the revenue cost estimates vary from about $10 billion to $60 billion per year.

Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, since interest paid to foreign recipients is not taxed, individuals can also evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds. There is no general third party reporting of income as is the case for ordinary passive income earned domestically; the IRS relies on qualified intermediaries (QIs)who certify nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion.

Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama’s proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Provisions to address individual evasion includeincreased information reporting, and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the proposed Stop Tax Haven Abuse Act and the Senate Finance Committee proposals; some revisions are also included in President Obama’s plan.

I was impressed by the figure page 17: U.S. Foreign Company Profits Relative to GDP, Larger Countries (GDP At Least $10 billion) on Tax Haven Lists and the Netherlands. In the case of Luxembourg, these profits are 18.2% of output. Shares are also very large in Cyprus (9.8%) and Ireland (7.6%).

Download report

A couple of weeks ago TJN quoted one of my articles and observed that my English is not perfect.

It is true. But I find it important to run my blog in English despite the difficulties to translate sometimes technical words, even more so, as I am no longer working in an English-speaking environment and I do not have a lot of time.

I know that in Luxembourg they enjoy picking up one detail out of the discussion such as an error, a bad translation or faulty grammar, blow it up into a major, major flaw, and use it as a demonstration that the whole study, argument, article is rubbish. Therefore they don't have to address the real issue anymore.

As I said, this is stupid as the issue remains and may explode later.

In the framework of an improvement process I managed to find readers that work in an English speaking environment to review the wording of some of the articles and improve clarity.

I hope that this improvement is somehow visible.