1. Eurodad – Glopolis InternationalConference 2013 Tax Wars Or an Introduction to Illicit Financial Flows and Global Tax Dodging. Joseph Stead, Pooja Rangaprasad, Dejere Alemayehu, Lars Koch, Sarah Johansen 1

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3. What are Illicit Financial Flows? Illicit money refers to money that is illegally earned, transferred or used. These activities range from laundering of proceeds from crime and corruption to commercial evasion of taxes. A large network of tax havens globally aid this movement of money and enables secrecy in concealing the wealth. Tax Justice Network estimates that the global super-rich have at least $ 21 trillion hidden in secret tax havens at the end of 2012 3

4. Eurodad – Glopolis InternationalConference 2013 The Scale $21-31 trillion assets held in tax havens Africa a net creditor to the rest of the world Up to $1.4trillion 1980-2009 Lost revenues: EU €1 trillion a year Developing countries: $160bn a year lost revenues on international trade Up to three times aid flows on revenues lost to tax havens Zambia up to $2bn a year in lost revenues on mining The Inequality: MNCs with links to tax havens pay on average 30% less tax on profits than those not using tax havens The richest pay a lower % of tax than the poorest 4

5. Eurodad – Glopolis InternationalConference 2013 The Tools of the Trade Did you know? Jersey is the biggest banana exporter to Europe? In BVI there are 34 companies registered per inhabitant? A building in Cayman island hosts the office of 12 000 American firms? BVI are the biggest foreign investors in China and Mauritius in India? 1500 registered companies in Mauritius are managed by 9 people! 5

6. Eurodad – Glopolis InternationalConference 2013 Tools of the Trade Equation to remember : Profit = sales –costs In this equation, artificially reducing sales or inflating costs reduces tax liability; In essence, tax dodging is about manipulating sale and cost figures; The prison wall which separates tax evasion from avoidance has become porous: tax havens, accounting firms, lawyers etc. facilitate evasion to avoidance through this simple mechanism by enabling firms to dodge with impunity 6

7. Eurodad – Glopolis InternationalConference 2013 Tools of the Trade TAX DODGE 1: The companies in a developing country are owned by an entity registered in a secrecy jurisdiction. They pay royalties to this entity in millions of US dollars. TAX DODGE 2: Subsidiaries of the MNC in developing countries pay ‘management service fees’ to sister companies in tax havens where effective tax rates are lower. TAX DODGE 3: goods are procured by subsidiaries from another subsidiary registered in a tax haven. The subsidiary in the tax haven “sells” the procured goods to the producing subsidiary in a developing country at a huge profit. (Tax in tax haven 0 – 3%; in the country where production takes place up to 25%) 7

8. Eurodad – Glopolis InternationalConference 2013 Tools of the Trade TAX DODGE 4: the subsidiary in a developing country borrows a large amount of money from the same company mentioned in tax dodge 3. The loan is sometimes seven times bigger than the capital of the subsidiary in an African country. The interest costs on this loan will wipe out a huge amount from the subsidiary’s tax liability in the country where production takes place. These practices were identified in the Action Aid case study of SABMiller in Ghana. The study found out that a street kiosk beer vendor paid more taxes in Ghana than the multinational company 8

9. Eurodad – Glopolis InternationalConference 2013 What is to be done? End Financial Secrecy Country by Country reporting MNCs reporting broken down by country Information exchange All jurisdictions agreeing to share information with others, preferably automatically Transparency of ownership The flesh and blood behind companies, trusts etc. Reform international tax rules Make it difficult to shift profits to tax havens Enable developing countries to get a fair deal 9

10. Eurodad – Glopolis InternationalConference 2013 Momentum! Political rhetoric (offshore leakes): France/Germany: ” We think that the EU should lead the fight against worldwide financial crimes and should promote an efficient international cooperation with the view to achieving the end of opacity. We therefore support the development by the EU of a policy against non-cooperative jurisdictions which present deficiencies in the field of combatting tax crimes and money-laundering.” UK: “There is now, ahead of the G8 Summit in June, a timely opportunity for the G8 and EU to inject the political will required to raise international efforts to a new level and take radical, rather than incremental, action…” Annan: ”Tax avoidance and evasion are global issues that affect us all. The impact for G8 governments is a loss of revenue. But in Africa, it has direct impact on the lives of mothers and children…Throughout the world, millions of citizens now need their leaders to step up to the mark and lead. Fortunately, momentum for change appears to be accelerating” 10

11. Eurodad – Glopolis InternationalConference 2013 Momentum! Progress on exchange of tax information: Momentum  Luxembourg: ” Luxembourg has decided to introduce automatic exchange of information based on the current Savings Directive which today applies to interests paid to individuals…. Luxembourg accepts the extension of the scope and continues to insist on a global level playing field as it was suggested by the G 20 just last week during the Spring meetings.” Savings Tax Directive: Exchange of individual infomation between tax admistrations of EU Member States. Has been blocked for a long time. Adopted later this year (?) FATCA: Automatic exchange of individuals bank information between tax administrations. The US pushed for this. Now pilot project with 17 (?) EU Member States. Tax havens also part of it (San Marino, Jersey, Isle of Man etc.). 11

12. Eurodad – Glopolis InternationalConference 2013 Momentum! Progress on country-by-country reporting: Capital Requirement Directive: Require European banks to report on a country-by-country level: profits made, taxes paid, subsidies received, turnover, and number of employees  Transparency in business structure and payments makes it possible both to see how much the banks are paying in taxes in each countries they operate in and how much they should have paid! 12

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14. Eurodad – Glopolis InternationalConference 2013 Not good enough! Only limited corporate transparency Accounting Directive and Transparency Directive: We only got part of what we want… The same information as required in the Capital Requirement Directive are needed in order to win the tax war! Dodd-Frank Act: Same problems as with the Accounting Directive and Transparency Directive + companies have filled law suit  when will the reporting even starts? - 14

15. Eurodad – Glopolis InternationalConference 2013 Not good enough! Rethoric is not action! Heads of EU Member States: Meet on May 22. Movement on Saving Tax Directive (by the end of the year) but that’s all. Nothing on common definition on tax haven or effective non-compliance sanctions. Mostly good for tax justice within the EU. G8? G20? OECD is leading – no role for the UN? 15

16. Eurodad – Glopolis InternationalConference 2013 Excuses, Diversions and Other Agendas Excuses: It’s too difficult/expensive Often used for Country by Country reporting EU impact assessment for extractives suggested neither impossible nor prohibitively expensive Diversions: Companies are trying to sell us different versions of transparency Total Tax Contribution – MNCs claiming workers contributions as corporate taxes Developing countries couldn’t cope with more information – need capacity building first Essentially amounts to argument that developing countries need to develop before we can help them The Corruption Defence Developing countries are so corrupt that any more taxes that are paid would be stolen (much better that companies keep it) 16

17. Eurodad – Glopolis InternationalConference 2013 Excuses, Diversions and Other Agendas Diversions (cont) The Anti-Business response Don’t listen to them they’re just leftwing anti-capitalists Ignores the fact that much of the tax justice agenda it a level playing field argument – ought to make the market work better by allowing those genuinely competitive, not just with best accountants and worst morals, to thrive. Other Agendas Corporate tax is too difficult to enforce, so lets just give up Tax sales, dividends, workers and anything else that can’t move instead. In all countries based on shaky evidence – burden of corporate tax unclear In developing countries especially poor argument due to capacity issues 17

18. Eurodad – Glopolis InternationalConference 2013 Concerns of Developing Countries Developing Countries wary of taking on big businesses Indian FM: “In advanced economies, Parliamentary committees are admonishing multi-national companies and in developing countries, we find multi- national companies admonishing governments” Prioritising Climate for Foreign Investment Limited involvement of citizens in discourse on taxation Lack of evidence incentives treaty benefits tax burden on poor 18

19. Eurodad – Glopolis InternationalConference 2013 (Lack) of Involvement of Developing Countries Global Tax Architecture OECD, BEPS UN Tax Committee Automatic Information Exchange: Need for multilateral platform to benefit developing countries. According to recent report on information exchange by Indian Revenue, Automatic Exchange of Information is one of the most effective ways to improve voluntary tax compliance and decrease the incidence of tax evasion Most of India’s 84 treaty partners exchange or are willing to exchange information automatically. Challenge is to get the uncooperative jurisdictions to exchange information automatically Strong support for multilateral approach 19

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21. Eurodad – Glopolis InternationalConference 2013 Corporate transparency ”Full” country-by-country reporting for all companies Expand – more information and all sectors: EU: Non-Financial Reporting Directive? Re-open/review Accounting/Transparency Directive soon? Global: Part of International Accounting Standards Board guidelines? Watch out for implementation and use the data it provides us! Fair tax mark for corporations…? Companies and agressive tax planning…? Tax and corporate social responsibility/accountability, anti-abuse rules… 21

22. Eurodad – Glopolis InternationalConference 2013 EU Anti-Money Laundering Directive Process: The directive is up for review. EC proposal launched in February. The first meetings in council have just taken place. EP process not clear yet. Adopted within this year (?) Background: Review builds on recommendations from FATF (Financial Action Task Force, inter-governmental body, makes review of members). Key asks: -Centralised public registries on beneficial ownership. -Tax crimes as a serious offence – a crime leading to money laundering (makes it illegal for financial professionals (such as banks, accountants etc.)to help facilitates tax crimes). 22

23. Eurodad – Glopolis InternationalConference 2013 Tax incentives and other animals Reforms are needed at national level on various issues Dereje will explain… Two asks Progressive taxation systems = horizontal and vertical equity Accountable, efficient, socially acceptable spending End to race to bottom in taxes Legacy of structural adjustment Tax policy harmonisation – Uganda Revise treaties Need broader alliance of developing countries globally UN Tax Committee rather than OECD 23

24. Eurodad – Glopolis InternationalConference 2013 International Tax Reform Need to ensure developing countries included in information exchanging developments Asymmetric agreements to give developing countries benefits upfront and have time to comply with costs Same principles have with trade agreements – should be simple to agree, just need to get principle discussed Need to ensure international tax reform is progressive and works for all countries ‘Spillover analysis’ as recommended by OECD/WB/IMF/UN report to G20 Developing countries to be properly included in negotiations Rules need to work for decolonised world 24

25. Eurodad – Glopolis InternationalConference 2013 Questions? 25