Is accounting data any use (for tax)?

From the Tax Justice Research Bulletin 1(6).

One of many happy things about the Tax Justice Network is the range of experts involved, by discipline and by professional background. And one of the great things this gives rise to is analysis that is often so far ahead of the immediate public policy discussion that you might not even be able to see it from over there. For example…

Two TJN stalwarts from the accounting side – one an academic, Prof. Prem Sikka, and the other practitioner-turned-campaigner, Richard Murphy – have come together to address the prickly question of whether accounting data can actually be part of the solution to the corporate tax base erosion and profit shifting of multinationals.

Their working paper is published by the International Centre for Tax and Development, in its important series addressing unitary taxation. [Full disclosure, just in case it’s not completely clear already that I’m biased: I have an unrelated paper in that project, and am working with the ICTD on other stuff too.]

A little background: TJN started up in 2003 with a project to promote country-by-country reporting by multinationals (notably, Richard’s draft standard), as a major transparency tool to limit tax abuse. Since then this esoteric proposal has moved steadily from the extremist fringes to centre stage, with the 2013 meetings of the G8 and G20 directing the OECD to produce such a standard for global use.

One effect of this is that accounting data has probably become more central to high-level political proposals (and scrutiny) than – well, perhaps ever. (I still remember a meeting of the International Accounting Standards Board in the mid-late 2000s, marked by the then-revolutionary presence of NGOs which pointed the way forward to that greater public interest. Happy days…)

The tendency, conscious or otherwise, has been to assume that accounting data is accurate (though not necessarily addressing the right things), and at least broadly consistent across jurisdictions. As such, it can provide the basis for powerful measure such as country-by-country reporting (for both red-flagging by tax authorities, and holding to account by civil society).

Sikka Murphy 2015 tab1 abridgedBut if there’s one, top line message from the new Sikka & Murphy (2015), it’s this: accounting data does not at present provide a good basis for this greater understanding of tax. Rather, accounting data not only provides a means by which tax positions can be obscured from view; it also provides an additional vector by which tax positions can be manipulated.

How so? The abridged Table 1 gives a sense of it (scroll down or click for larger version). The differences around the world in accounting treatment for tax purposes are manifold and fundamental. The opportunities are legion for multinationals to exploit differences in national treatment, in order to achieve preferred global tax outcomes.

Now since “no jurisdiction which we can identify relies upon unadjusted traditional accounting profit as a basis for the taxation of corporate income”, and reliance on International Financial Reporting Standards would exacerbate not ameliorate the problem, the authors argue that “tax-specific measures of income and expenses for taxation purposes need to be defined” – not least, for any proposal for a full shift towards unitary taxation of MNEs. Their specific suggestion is this:

“[W]e think it possible that a taxation base for unitary taxation that is broadly, but not precisely, equivalent to the accounting concept of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) could be developed. This resulting tax base before offset of locally-determined allowances could then be apportioned in accordance with a formula that is likely to exclude assets, because relief for expenditure on capital will be given locally and capital costs do not therefore need to be considered for formula purposes.”

Even more than usual, this summary is nowhere close to doing justice to the deep and rich set of questions that the paper raises. It’s a difficult paper, technically challenging in more than one way and requiring the reader to think well ahead. And it’s an important paper. We may not hear much about it for a while, but it wouldn’t be at all surprising to see it being referred back to as a foundational piece of problematisation in years to come.
Sikka Murphy 2015 tab1 abridged

How could you not be excited by the Palma?

This is a joint post with Andy Sumner and Luke Schlogl.

Global income inequality guru Branko Milanovic has confessed that he is “still not excited by the Palma“.

Since Branko is not only ace but also one of the few people that you might actually expect to get excited by an income inequality measure, it seems worth trying to address this sorry state of affairs.

The Palma, proposed by Cobham and Sumner, is the ratio of the income share of the top 10%, to the income share of the bottom 40%. The reason for choosing this particular ratio, and for the name, is Gabriel Palma’s finding that those in the middle (deciles 5-9) capture approximately 50% of national income share, even in countries at quite different per capita income levels.

Branko’s post draws on a paper by Alice Krozer which argues that the stable middle of the distribution is actually a little larger, and so the ratio of the top 5% to the bottom 40% (Palma v.2) should be used instead.

Branko’s main point is this:

Palma’s logic is, as we have seen, to find parts of the distribution that, in terms of their shares,  do not change regardless of the changes elsewhere, and to build a measure of inequality around these immovable parts.  But these immobile chunks are no more immobile than Pareto’s top shares were. What is immobile may change between the countries, or across time. We see this it in Krozer’s own paper:  there is no superior argument to assume that only the “central five deciles”  are constant than to assume that “the central 55 percentiles” are constant.

With Palma we are thus building a general measure of inequality on the quicksand of what seems today more or less an empirical regularity.  (Note that even when the regularity holds the five central deciles do not take exactly 50% of total income, but approximately 50%.)

But if  the distribution changes and the middle loses while the bottom gains, and it turns out, for examples, that the deciles’ 4-7 shares are suddenly fixed, should we change our measure of inequality to look at the ratio between the top three deciles and the bottom three? Or if growth of incomes is concentrated in the top 1% or the top 5%, should be again redefine the Palma formula as Krozer has done? An infinite number of such permutations is possible, and an endless dispute will open up regarding what deciles’ shares are fixed and what not. The virtue of Krozer’s paper, despite what I think was her original intention,  is to highlight the fragility of the empirical nature of the index and thus its basic arbitrariness.

Branko also reiterates two points that we have highlighted in respect of the typical technical axioms for inequality measures, which is that the Palma is insensitive to transfers within any of the three ‘chunks’ (the top 10%, middle 50% or bottom 40%).

Finally, he adds that “its decomposition properties—what is the Palma of two distributions whose Palmas and mean incomes are known—cannot, I think, be determined in general.”

We discuss these points in a little detail, including as they apply to other measures, in the CGD working paper introducing the Palma. So let’s focus here on the main charge: that the Palma relies on an empirical regularity which may change.

Palma D5-D9 change distributionAnd… it’s true. The reason we choose this particular ratio is indeed because of the regularity that Gabriel Palma identified, and which further research has shown to hold over the range of available national income distribution data. Here, for example, is a histogram showing percentage point changes in the national income share of deciles 5-9. It’s centred closely around zero (ok, the median is slightly negative at -0.23).

But as anyone who enjoyed Scotland’s football team qualifying for five consecutive World Cups from 1974 can testify, past performance is no guide to the future.

 [Press play for consolation.]

So the Palma might be the right measure for today; but what if the empirical regularity were to cease to hold in the future?

Gabriel’s main argument, of course, is about the driver of inequality: It’s the share of the rich, dude. And the data back this up too, as the correlations between the Palma and ratios of the top decile to other bits of the distribution confirm.

Palma correlation with other D10 ratios

But let’s say that the future does hold a sufficiently dramatic change in the relative stability of the deciles 5-9. What would we be left with?

The Palma as a measure of income inequality, which:

  1. remains meaningful;
  2. pays insufficient attention to a part of the distribution that we may care about; and
  3. is explicit about doing so.

Just for fun, let’s consider the Gini on the same basis. The Gini is by construction oversensitive to the middle, and less sensitive to the tails. As such, it is an inequality measure which:

  1. remains meaningful;
  2. pays insufficient attention to a part of the distribution that we do care about; and
  3. is not explicit about doing so.

Note that this is true today, not in some imagined future. In fact, we would suggest that most people using the Gini do not realise that it is less sensitive to the tails; nor that it becomes increasingly less sensitive at higher levels of inequality.

As such, use of the Gini can hide the true extent of inequality – inadvertently or otherwise.

But we are guilty here of what Scottish football fans refer to as whataboutery: the defence of one (possibly bad) thing, by reference to a different (definitely bad) thing.

Instead, we should recognise there are weaknesses to any single measure of inequality. As Tony Atkinson, the grandfather of all modern economic analysis of inequality wrote in 1970, all measures reflect a subjective view – the difference is whether this is made explicit. And the class of measures Atkinson himself proposed in response are a technically outstanding response to the problem, only limited by their complexity from easy use for more popular communications.

The solution, such as it is, is to avoid the tyranny of single measures and to insist instead upon a breadth of measures. As Mike Isaacson put it in responding to Branko’s post:

My major point of contention with Milanovic here is not so much on the superiority of one index over the other, but rather the implication that we should invest ourselves in finding a superior index for inequality. Indices, merely by virtue of distilling the data from an entire economy down to one number, are inherently going to be problematic in terms of universal application. The choice of index (or indices if you’re into that whole “robustness” thing) should be guided by the data you have and the questions you intend to answer.

While the Palma versus Gini comparison may well favour the Palma, ultimately that’s the wrong question to address. We should ask ‘how best to measure’ (in a given context), not which (single) measure to use.

The Palma is exciting, if that’s your sort of thing, because it sheds light on the major aspect of inequality that the Gini quietly conceals – but not because there should be a tyranny of the Palma to replace the tyranny of the Gini.

And if that’s not exciting enough, here’s a Scottish defender opening the scoring against Brazil with a toepoke screamer from 20 yards. Wha’s like us?

A tracker for the new UK government’s tax commitments

The new UK government comes to power with what is probably the most ambitious package of international tax commitments of any elected party, anywhere, ever.

And Prime Minister David Cameron has been absolutely explicit that they will deliver on their promises.

So, in the spirit of public service, and of this blog in making sure things don’t go uncounted, here’s a cut-out-and-keep guide to each of the three main commitments on international tax and transparency, and some proposed measures of progress.

Commitment 1: We will lead international efforts to ensure global companies pay their fair share of tax

  1. External analysis of UK positions in OECD BEPS initiative
  2. Evaluation of UK policies in BEPS areas
  3. Evaluation of BEPS outcomes (BEPS Monitoring Group)
  4. Progress in reducing BEPS (tracked by BEPS 11 or alternatives if this Action Point itself fails)

Commitment 2: We will review the implementation of the new international country-by-country tax reporting rules and consider the case for making this information publicly available on a multilateral basis

  1. Review takes place
  2. Review engages seriously with views of multilateral partners, especially EU where discussion is currently ahead of UK
  3. Review findings are well supported by evidence on costs and benefits of publication

Commitment 3: We will ensure developing countries have full access to global automatic tax information exchange systems

  1. UK provides full access to developing countries
  2. UK ensures its territories and dependencies provide full access to developing countries
  3. UK works to ensure other leading economies and financial centres provide full access to developing countries
  4. Extent to which each developing country ultimately has access to automatic tax information exchange (e.g. % of world GDP, or share of global financial services exports, of those providing information to each country)

cons manifesto-tax 2015

The politics of country-by-country reporting

Since the OECD approved a decent country-by-country reporting standard, the lobbying to undermine it in practice has really kicked on. Here’s an update on some of the politics of country-by-country, including the manoeuvring in OECD, US, EU and UN processes; and on what may follow…

OECD

First, the OECD standard for country-by-country reporting is pretty good – probably all that could have been hoped for in the context of a process designed to defend arm’s length pricing.

As I wrote last week, though, and the Financial Times (£) picked up, the standard has been strangled at birth by the changes to BEPS Action Point 13. Lobbying on implementation has very substantially eroded the potential value of the measure, because data:

  • will only be provided directly to home country tax authorities;
  • will only be shared with other tax authorities under slow and uncertain information exchange processes; and
  • will never be made public.

I miss the old days, when country-by-country reporting was a transparency measure…

These deliberately inserted weaknesses mean that most tax authorities (especially but not only those of developing countries) will not receive timely data (i.e. within the tax year under investigation) for most of the MNE affiliates in their jurisdiction; and there will be no greater possibility of civil society holding tax authorities or MNEs to account.

In addition, the erosions of the standard mean there will be no central repository or access mechanism for the data. This means that the OECD has, in effect, agreed to fail to meet its commitment under BEPS Action Point 11 – which requires the establishment of a baseline for the extent of profit-shifting, and the tracking of progress over time. The very good team working on BEPS 11, who have comprehensively shown how no existing data can do the job, appear to have been completely undermined.

US

US MNEs have been highly effective in their lobbying, but evidence of serious, remaining concerns emerged last week. In a joint letter to Treasury Secretary Jack Lew, the chairs of the Senate Finance Committee and the House Ways and Means Committee (Republicans Orrin Hatch and Paul Ryan, respectively) set out a range of concerns about the BEPS process – and make a fairly explicit threat to take a different path from the administration:

Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy… We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.

It is the specifics which are most revealing. While there are passing references to rules on permanent establishment and controlled foreign companies, the bulk of the text refers to concerns over country-by-country reporting.

[W]e are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations.  We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies.  […]

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals.  We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments.  In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.

The push is on to prevent even the OECD’s now limited, and probably unworkable mechanism to provide CbC information to non-US tax authorities.

EU

Meanwhile… the European Commission’s repeatedly trumpeted new package on tax avoidance has been leaked, and falls substantially this side of impressive. On CbC in particular, prevarication around public data continues – now with a proposed consultation.

Similarly, the UK government reiterated at a conference on Friday its manifesto commitment to consider the possibility of public CbC.

The European Parliament will debate the issue again on 7 July, with a possible vote to follow, and so this now becomes a major test.

UN process

Finally, it seems that public CbC has been excised from the latest draft of the draft Financing for Development text for the UN conference to be held in Addis, in July, leaving a line on CbC for tax authorities which adds nothing to the OECD position. Sigh.

Where does this leave us?

Is this the end for hopes for CbC as a meaningful international transparency and accountability measure? I don’t think so.

What has already been achieved, lest we forget, is the overcoming of what was always presented as the greatest obstacle: compliance costs. Aside from the possibility of US withdrawal, the OECD standard pretty much locks in the collation of the necessary data, by more or less all MNEs worldwide.

The claims around costs were always inflated (who remembers one of the big four accounting firms suggesting it could add 25% to their bill?), and so once the political tide turned the objection did not hold much water.

And this is why, of course, the US letter reflects a shift towards the real underlying issue: an objection to transparency itself. An interesting though unexpressed implication of the concern is that US MNEs are apparently willing to operate in multiple jurisdictions where they would not trust the authorities with even quite basic data about their global operations.

An alternative view, of course, is that US MNEs are aware of the potential for such data to lead to material changes in their effective taxation rate, in multiple jurisdictions and perhaps at the global level too.

(In fact ongoing research suggests that the US is such a big loser from the profit-shifting of its own MNEs, that BEPS success in reducing profit ‘misalignment’ would produce substantial additional revenues there – as well as in many other jurisdictions. It’s arguably a real mark of lobbying success that there hasn’t yet emerged an all-conquering coalition of countries in favour of much deeper change.)

What happens next in the politics of country-by-country?

Are we approaching that point where the anti-transparency lobbying has been so successful that supporters should give up? Or once this becomes clear in practice, might one or more host countries simply demand CbC data directly, starting the crucial leak in the dam?

Such a move might well circumvent the OECD caveat around not using the data for formulary apportionment, which would open up all sorts of interesting further possibilities.

Or will the EU resist the lobbying and go for public CbC? This would not only set a standard for others, demonstrating the absence of armageddon-level side-effects and also undermining any ‘competitive’ arguments for opacity.

It would also, on its own, provide a great deal of the globally relevant data for other tax authorities and civil society to use. Expect 3 weeks of (more) intense lobbying…

One way or another, the current period is likely to mark an important turning point in international tax transparency.

The weakening of the OECD standard in practice has been a resounding counter-strike against transparency. The question is whether that remains the story – or if it is overturned at the European level, or incrementally by individual countries.

A final thought: not too much has been heard in these moments from the private sector  advocates of transparency. Whether the likes of Paul Polman, head of Unilever, who has called explicitly for MNEs to pay tax where they do their business; or from investors and analysts who have identified the risks of tax opacity increasingly clearly; or from professional services firms including some of the big four accounting firms, who seemed to have identified the advantages of country-by-country. Now would seem like a good time…

OECD country-by-country reporting: Strangled at birth

Update: this post featured in passing in a Financial Times interview with OECD tax chief Pascal St-Amans. (Spoiler: he’s more optimistic than I am.)

This is a bad day for international tax transparency, and for those who steered the great G8 agreement through in 2013.

The OECD has released details of how the standard for country-by-country reporting by multinationals will be implemented. The short answer is: to the minimum possible benefit of developing countries.

The slightly longer answer, drawing on the details of the package, is that the agreement on this important measure to provide transparency and limit the extent of unashamed profit shifting, has been diluted in such important ways that, as Richard Murphy has blogged, means that it will not meet the remit given to the OECD by the G8 group of countries in 2013.

Major issues include the large exclusions (a threshold of EUR 750m in annual turnover), but most importantly the hamstringing of effective transparency. Data will only be collected by host countries, and then exchanged through bureaucratic, formal processes where the necessary inter-state instruments exist.

The effect is to exclude many developing countries which will not have such instruments in place with home countries of the multinationals they host; and to ensure the impossibility of timely information provision in the other cases, meaning that tax authorities will not have the data during the tax year they might wish to investigate.

While this clearly increases uncertainty for multinationals, the lobbying for this outcome may reflect a belief that in many case tax authorities simply won’t bother to ask for, or to use belatedly, any information that is eventually provided.

In addition, there will be no sharing of the data in a common database or IATI-type registry, so it will be impossible for OECD or other international experts to use the data – as I’ve written would be required for BEPS 11, for example – in order to track progress in reducing multinational tax avoidance.

And, ironically or otherwise, the US and UK are apparently behind the high exclusion threshold – because of a claim to be worried about the administrative costs, as home countries for many multinationals. So: exclude any good mechanism for info-sharing, and then use the costs that result as a justification to limit the amount of data actually available. Well done chaps.

So, what is almost certainly the greatest multinational corporate transparency measure to be agreed by international policymakers in recent decades, has been strangled at birth.

The OECD’s country-by-country reporting mechanism, unless there is a dramatic late change, will not provide the information for developing countries (and many others) to reduce multinational corporate tax-dodging effectively. Nor will it allow national or global progress to be monitored or evaluated.

But – the lobbyists against effective tax transparency may want to hold off a while on their celebrations. Such is the extent of their success that in most developing countries, from a transparency point of view, it will simply be business as usual.

By which I mean, the transparency will be minimal and so too will many of the MNE tax payments. So this doesn’t seem likely to be the end.

It’s not hard to imagine that some developing countries at least will simply cut out the middle man, by demanding the country-by-country information directly from the MNEs they host. And perhaps even publishing it, who knows? Not to mention thinking about using it for formulary apportionment approaches. All these things which were safely excluded from the OECD approach by successful lobbying, might come back on the table at the national level…

HSBC, money-laundering and Swiss regulatory deterrence

Number-crunching, a la Private Eye: the case of HSBC and its Swiss fine for “organisational deficiencies” in relation to money-laundering.

 

[table id=1 /]

 

Not all the assets under management were laundered, of course. Far from it, we must hope. But the “organisational deficiencies” – including reassuring clients that no information would reach their home authorities, or using offshore accounts to circumvent disclosure requirements – represent risks that applied to the whole operation.

To put it another way, the fine is about a fifth of the £135 million in tax that HMRC recovered in the UK alone.

Even the prosecutor imposing the fine was embarrassed, and “launched a stinging attack” on the Swiss law that apparently prevented anything within yodeling distance of being a deterrent.

International commission calls for corporate tax reform

When we look back, might today be the day that momentum swung decisively against current international tax rules? An independent commission made up of leading international economists, development thinkers and tax experts (see graphic) has called for a radical overhaul of international rules for corporate taxation.   ICRICT declaration commissioner stirip

There are six main recommendations, set out below. Taken together, it’s possible that they will provide the basis for the kind of comprehensive reworking of tax rules that the G20 and G8 signally failed to deliver when they allowed the OECD mandate on BEPS (corporate tax Base Erosion and Profit-Shifting) to be watered down to a tweaking of the current system. Here’s the start of the Commission’s press release:

Trento, IT – Today, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) launched a global declaration calling for an overhaul of the outdated international corporate tax system and demanding broad, sweeping changes in the current rules and governing institutions. The declaration will be discussed later today by a panel of ICRICT commissioners at the Trento Festival of Economics in Trento, Italy beginning at 5pm CET.

“Multinational corporations act and therefore should be taxed as single and unified firms – It is time for our leaders to be bold and recognize the legal fiction of the separate entity principle,” said Joseph Stiglitz, professor and Nobel Prize winning economist. “During the transition, leading developed nations should impose a global minimum corporate tax rate to stop the race to the bottom.”

So far, the media coverage has been impressive – from Handelsblatt, La Repubblica and Le Monde, to Reuters, CNN and the Wall St Journal. With the launch event about to get underway, more is likely to follow. [Update: more in the Guardian – thanks Rhiannon, and a cracking write-up in the Financial Times.]

Drawing on expert consultations held in New York in March this year, the ICRICT Declaration (pdf) contains recommendations for reform in six areas:

  1. Tax multinationals as single firms
  2. Curb tax competition
  3. Strengthen enforcement
  4. Increase transparency
  5. Reform tax treaties
  6. Build inclusivity into international tax cooperation

I can only recommend reading the full piece, but a few points stand out.

  • Unitary taxation: States should ‘reject the artifice’ of current separate accounting, and tax MNEs as a single unit, apportioning profit among the jurisdictions in which they operate according to the relative scale of their economic activity in each.
  • Public country-by-country reporting: States should make country-by-country reports (of MNEs’ economic activity, profits and tax) available to the public within 30 days of filing.
  • Public beneficial ownership: states should include the names of ultimate beneficial owners (the warm-blooded type) in public corporate registries.

Following the IMF paper showing how developing countries appear to lose around three times as much revenue as OECD members (1.7% of GDP, or more than $200 billion), the pressure is really on the BEPS process to deliver wider progress.

At present, despite the best efforts of OECD staff working on Action Point 11, it remains unclear if the final BEPS recommendations will include even sufficient transparency measures to allow the tracking of progress.

Politically, it seems that there was a victory before BEPS began for those who did not wish to see the rules opened up more widely; and some further success within the process, not least in terms of preventing (thus far) public reporting of country-by-country disclosures.

But if leading opinion continues to sway towards seeing the current approach as part of the problem, and the resulting process opens up the entire basis of international tax rules, it may turn out to have been a pyrrhic victory indeed.

Full disclosure: TJN is one of the organisations that helped to establish ICRICT, and I’m a member of the preparatory group – but nobody should imagine the commissioners have anything but carefully developed personal views on these issues. 

Tax Justice Research Bulletin 1(5)

May 2015. Welcome to the fifth Tax Justice Research Bulletin, a monthly series dedicated to tracking the latest developments in policy-relevant research on national and international taxation. (Full version coming over at TJN, naturally!)

BEPS 13 comment letters - Corlin Christensen fig16This issue looks at a fascinating thesis on the different people and organisations that influence the OECD revision of corporate tax rules; and a new analysis from the IMF on the scale of corporate profit-shifting, with particular attention to developing countries’ revenue losses. The Spotlight falls on the Financial Secrecy Index, which has just been published in Economic Geography.

This month’s backing track, suggested by Nick Shaxson, goes out to free-riders everywhere: ‘Paid in Full’:

Just one thing to flag this month – the imminent launch of the report of the Independent Commission on Reform of International Corporate Taxation (ICRICT).

I can’t say for sure what Joe Stiglitz and colleagues (economists, tax folks and others) from around the world will have made of their analysis of current tax rules, but it can only be useful to have a high-level, critical expert intervention. Those closed circles of tax professionals may be useful for channeling a certain policy convergence, but perhaps less so for the kind of wider thinking that may be needed.

As ever, submissions for the Bulletin, including musical offerings, are most welcome.

Tax professionals: Who makes the international rules?

From the Tax Justice Research Bulletin 1(5).

Last month, TJRB 1(4) looked at the OECD’s review of research on base erosion and profit-shifting (BEPS) by multinational enterprises (MNEs). That review revealed a dearth of findings in a number of areas, as well as broad consensus on the importance of the problem. Untouched in that review, and little researched in generally, is the process by which policy on BEPS is made.

The historical record, back to the League of Nations and beyond, has been laid out by Prof. Sol Picciotto. Sol, one of our senior advisers, now leads the BEPS Monitoring Group, the hub for technical submissions to BEPS from civil society.  And the BEPS process itself has now been subject to a detailed process analysis, in a seriously impressive Copenhagen Business School Master’s thesis by Rasmus Corlin Christensen.

The main focus is on BEPS 13, which deals with transfer pricing documentation including country-by-country reporting (CBCR), and the findings reflect many interviews as well as analysis of submissions and consultations. The summary of literature, and detail of the methods, are well worth the time.
BEPS 13 comment letters - Corlin Christensen figs1-2Figures 1 and 2 show the simple range of submissions to BEPS 13, in terms of organisation type and geographical origin. There’s little surprise to find that less than 10% of submissions came from academia and civil society; and even less from South America, Africa and Asia combined.

Similarly, figures 3 and 4 confirm that business groups and professional services firms expressed preference for much more restricted transfer pricing documentation than did academia or civil society. Figure 5 shows tax practitioners with the greatest intra-group variation of views expressed, compared to other private sector groupings, with business lobbies the least; while academia provided the most varied range of views, and civil society the least. The latter point is perhaps unsurprising given the technical nature of the process (hence relatively limited engagement); and that BEPS 13 addresses an area in which civil society consensus has emerged over a decade or so. {Indeed, the content of BEPS 13 is in good part a product of successful influence by civil society in non-specialist, political processes, not least in the UK – but that would be a whole other study.}

BEPS 13 comment letters - Corlin Christensen figs3-5The analysis goes to a much more detailed level, tracing the paths of leading individuals in the process, identifying ‘professional competition’ as a key factor, where “influence in highly technical policy discussions is contingent upon expertise (being able to speak authoritatively) and networks (being listened to)… I distinguish two types of influential professional: career diverse professionals (“octopuses”) and well-connected specialists (“arrows”). The former are influential because of their varied expertise, the latter because they are respected through key tax/transfer pricing networks.”  In figure 16 (click to expand, as ever), the red dots indicate organisations with a ‘managing professional’ who is influential in the process.

BEPS 13 comment letters - Corlin Christensen fig16The full thesis contains a great deal more, including on the career paths of influentials. These are just some of the broad conclusions:

[A]nalysis of the BEPS Action 13 consultation shows that it was dominated by Western tax advisers and business representatives, that there was a general preference for a limited [transfer pricing documentation] package, and that there was significant variation in attitudes between similar participating organisations. Furthermore, the discussions were highly complex, requiring substantial technical expertise, and thus limiting the range of participating organisations… Looking at the pool of BEPS Action 13 professionals’ expertises, I find that while legal and private sector views are important in the reform, several other expertises are also relevant, signifying the need for varied expertise in order to obtain policy influence…

Finally, the significance of access to the right expertise and networks is visible in another articulation of professional competition in BEPS Action 13: lobby centres. Lobby centres are specific interest groups where different professionals and organisations collectively engage the policy process, spearheaded by one particular professional, who most often is influential. Peripheral professionals and groups without access will use this lobbying strategy to leverage the expertise and networks of influential professionals. This strategy highlights the importance of being able to access the right professional expertise and networks in order to make engage successfully in policy debates. However, this importance is not sufficiently recognised by the interest group literature, which emphasises organisational finances or issue attributes.

The Financial Secrecy Index: Beyond definition-free ‘tax haven’ research

From the Tax Justice Research Bulletin 1(5).

Research using tax haven lists is inevitably compromised, showing at best a partial view. It is unfortunate, to say the least, that most economic analysis of tax-havenry has simply taken as read the politically-distorted identification.

The TJRB won’t plug TJN’s own research very often. But the Financial Secrecy Index is one of the bigger research contributions the network has made. It adds the possibility of rigorous definition, to the inevitable vagueness of debates on ‘tax havens’ (on which see e.g. my chapter in the World Bank volume); as well as helping to shift views (and policy) away from seeing corruption as a poor country problem. The origin of the index lies in these two points.

The leading journal Economic Geography has now published our paper, which we hope will accelerate the ongoing process of its adoption into academic research. Here’s the abstract:

Both academic research and public policy debate around tax havens and offshore finance typically suffer from a lack of definitional consistency. Unsurprisingly then, there is little agreement about which jurisdictions ought to be considered as tax havens—or which policy measures would result in their not being so considered. In this article we explore and make operational an alternative concept, that of a ‘secrecy jurisdiction’, and present the findings of the resulting Financial Secrecy Index (FSI). The FSI ranks countries and jurisdictions according to their contribution to opacity in global financial flows, revealing a quite different geography of financial secrecy from the image of small island tax havens that may still dominate popular perceptions and some of the literature on offshore finance. Some major (secrecy-supplying) economies now come into focus. Instead of a binary division between tax havens and others, the results show a secrecy spectrum, on which all jurisdictions can be situated, and that adjustment for the scale of business is necessary in order to compare impact propensity. This approach has the potential to support more precise and granular research findings and policy recommendations.

The ungated version is published as a CGD working paper.  We explain in some detail the definitional debates around the terms ‘tax haven’ and ‘offshore financial centre’, and the unresolved issues in each case that make them unsuitable for categories in research. In the case of tax havens, the impossibility of definition was most famously noted in a 1981 report to the US Treasury – and yet it remains the most common term in research as well as media reporting. In policy, this has led to the use of subjective lists of jurisdictions, from e.g. the OECD or IMF.

Such lists reflect the politics of the creating institutions, and of the moment of creation, as well as the purpose. For example, a list created specifically to sanction ‘non-cooperative’ havens will be subject to much more political pressure, exacerbating the problem of small, politically weak jurisdictions being over-represented. It is highly unfortunate, in terms of generating robust research findings, that economists in particular have tended to rely on such lists for their analysis of the effects of tax havens.

A similar dynamic affects the lists of offshore financial centres (OFCs); since everywhere (else) is arguably offshore, it turns out that offshoreness lies in the eye of the beholder. Few deny the UK’s role in creating leading offshore financial markets; but few institutions have been willing to put the UK on their lists of OFCs. And once again, the absence of objectively verifiable criteria lead to a tendency to over-represent small jurisdictions, and to woolly research findings at best.

The alternative we propose is to focus on financial secrecy instead, defining ‘secrecy jurisdictions’ using objectively verifiable criteria (around e.g. banking secrecy, international tax cooperation, and corporate transparency), and combining this with a scale weighting based on each jurisdiction’s share of global financial service exports.

FSI fig1Figure 1 compares some FSI findings with the most commonly used lists (the blue diamonds). Two points can be seen clearly: first, most lists capture less than half of the global market (only one captures more of the market than the ten biggest jurisdictions); and second, most lists are a little more secretive than the FSI in general, or the top ten FSI jurisdictions (albeit not nearly as secretive as the ten most FSI secretive jurisdictions, which together account for c.0% of the global market).

Scale matters; and so does objective analysis of secrecy. As the FSI is increasingly used in policy and research analysis, including political risk ratings and other indices, we hope to see the emergence of a much more rigorous evidence base on the effects and determinants of ‘haven’ activity.

One last thing: with the launch of the 2015 FSI in November, we’ll be getting into a serious process of evaluation, which we expect to lead to some non-trivial changes in the construction of the index. If you’d like to weigh in on this, just drop me a line. (Or we may come and find you with a survey or interview request anyway…)