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Tax Wars


Tax Wars Or an Introduction to Illicit Financial Flows and Global Tax Dodging. Joseph Stead, Pooja Rangaprasad, Dejere Alemayehu, Lars Koch, Sarah Johansen * – PowerPoint PPT presentation

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Title: Tax Wars

Tax Wars
  • Or an Introduction to Illicit Financial Flows and
    Global Tax Dodging.
  • Joseph Stead, Pooja Rangaprasad, Dejere
    Alemayehu, Lars Koch, Sarah Johansen

(No Transcript)
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

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
  • Up to three times aid flows on revenues lost to
    tax havens
  • Zambia up to 2bn a year in lost revenues on
  • The Inequality
  • MNCs with links to tax havens pay on average 30
    less tax on profits than those not using tax
  • The richest pay a lower of tax than the poorest

The Tools of the Trade
  • Did you know?
  • Jersey is the biggest banana exporter to Europe?
  • In BVI there are 34 companies registered per
  • 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!

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

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)

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 subsidiarys 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

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

  • 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
  • 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
    childrenThroughout 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

  • 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.).

  • 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!

(No Transcript)
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
  • -

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 thats 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?

Excuses, Diversions and Other Agendas
  • Excuses
  • Its 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 couldnt 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)

Excuses, Diversions and Other Agendas
  • Diversions (cont)
  • The Anti-Business response
  • Dont listen to them theyre just leftwing
  • 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 cant move instead.
  • In all countries based on shaky evidence burden
    of corporate tax unclear
  • In developing countries especially poor argument
    due to capacity issues

Concerns of Developing Countries
  • Developing Countries wary of taking on big
  • 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
  • Lack of evidence
  • incentives
  • treaty benefits
  • tax burden on poor

(Lack) of Involvement of Developing Countries
  • Global Tax Architecture
  • UN Tax Committee
  • Automatic Information Exchange Need for
    multilateral platform to benefit developing
  • 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
  • Most of Indias 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

(No Transcript)
Corporate transparency
  • Full country-by-country reporting for all
  • 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
  • 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

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
  • Key asks
  • Centralised public registries on beneficial
  • 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).

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

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
  • Rules need to work for decolonised world