No gold at the end of the transparency rainbow

The current transparency agenda and the harmful tax practices initiative date all the way back to 1998, the year the OECD published its seminal paper ‘Harmful Tax Competition’ an Emerging Global Issue

  • rainbow blog copy.jpg

The report drew support from large countries, mainly high tax and spend OECD members, and was squarely aimed at small low tax countries where tax was openly being used as part of the competitive toolbox.

High tax countries disputed the fairness of this, while small nations argued that low taxes were part of being competitive and reducing the cost of doing business.

The attempt to blacklist mainly smaller countries was frustrated due to a lack of US support, partly as a result of a campaign run by the US Think Tank, the Centre for Freedom and Prosperity.

The debate moved from regimes and rates to transparency, with the ‘Global Forum on Tax Transparency’ formed in 2000 and the first fruits of its work, a global standard for ‘on request information exchange’ breaking cover in 2002. 

The 2009 G20 in London accelerated the process with laggards ‘encouraged’ to speed up adoption under sanction or threat of a new blacklist.

The great transparency game changer came with the introduction of US FATCA in 2010.  A response to perceived industrial scale tax evasion; a theory promulgated by the Obama administration and inflamed by the Swiss Private banking exposés, proliferating the belief that new sources of tax evaded revenue would solve the US fiscal gap.

President Obama announced on the campaign trail estimates of US$100bn pa could be recovered over a 10 year period, later scaled down by the US Treasury to US$8bn pa, and now estimated to be as little as US$800m pa by the House Ways and Means committee. Extra territorial costs for this legislation are now thought to top US$8.7bn.

According to Forbes magazine the 7.6m expatriate Americans and 13m green card holders around the world have seen a wholesale retreat of financial service providers prepared to provide banking and investment services to them, due to the costs and risks involved.

The whole transparency programme saw another huge inflexion point on the back of the Google, Amazon and Starbucks debate in Europe. These iconic American brands, initially welcomed with open arms by European countries, located their tax domicile unsurprisingly in places like Dublin and Luxembourg, where they could benefit from EU trade access and low corporation tax rates.

An EU backlash fuelled by allegations of ‘tax dodging’ put these companies in the headlights, and gave birth to the latest transparency move; BEPs, with the advent of the OECD’s work on base erosion and profit shifting. 

An interesting dynamic has opened up. Four of America’s most admired companies have come under fire from indebted European countries with the only top five American firm that hasn’t yet invoked the tax ire of the EU being Berkshire Hathaway. 

The G20 consensus, under strain, has seen the NGO tax lobby move its attention to claims that developing countries are losing a large sum each year to multinational tax dodging, estimated at US$160bn pa. This claim is speculative and has recently been dismissed by independent economists, and, notably even sceptical members of the NGO community, concerned about the undermining of collective credibility, with the claimed losses found to be the result of transfer pricing data errors.

At the same time the move to automatic information exchange under the Common Reporting Standard (CRS) of the OECD has seen a rush of early adoption as countries look to demonstrate their tax transparency credentials. With this in mind, it is somewhat perplexing that the very NGO’s calling for public access to this information rank some of the countries engaged in the information transfer programme amongst the most corrupt.

And so to recent developments; the introduction of a diverted profits tax by the UK, and a new Tax Blacklist generated by the EU Commission. To be charitable, the UK could say they are anticipating the work of the OECD, but the EU measure slaps the OECD squarely in the face, ditching adherence to global standards in the process, substituting instead an arbitrary mix of opaque historic national blacklists most of which haven’t been revisited for years. A distinctly unimpressed Angel Gurria, Secretary General of the OECD, has written to Pierre Muscovici, EU Commissioner for Economic, Financial and Tax affairs, calling for unity in the commitment to   international standards, and Pascal Saint Amans, Head of Tax for the OECD has pointed out the inequity in the listing of cooperative jurisdictions. 

The EU Commission move looks like an overtly political and protectionist measure, occupying the tax policy ground before the EU parliament can, and justified no doubt in part by the same NGO source estimate of €1trn in tax the EU is alleged to be missing every year. 

Just how inaccurate this assertion is can be illustrated by comparing the UK tax gap work, the most sophisticated of any developed country, and the relative economic outputs of the UK and EU. 

The UK is about 16% of the EU economy, and its tax gap shouldn’t be too far away from 16% of the EU total, given its average tax burden is not much lower than the EU average. HMRC estimate they lose £7.2bn to tax evasion and avoidance each year or around €10bn. Total maximum losses for the EU therefore would be €62bn, less than a tenth of the EU commission figures, borrowed from the NGO tax lobby, and a tiny fraction of EU national budgets in cash terms, and certainly no answer to fiscal deficits.

The tax transparency programme it seems to me is in danger of looking like the Emperor’s New Clothes. Most right thinking people agree taxes due must be paid, “render unto Caesar what is Caesar’s”, and there is valid work to be done to ensure effective measures are in place to prosecute tax evaders and clamp down on abusive tax avoidance structures; Jersey itself has introduced a package of such measures to reinforce that it does not welcome abusive tax schemes, and has committed to being an early adopter of CRS. But while these are worthwhile pursuits, the belief that any gained revenues will act as a panacea to all financial ills is destined to disappoint. 

Governments are being encouraged to take unwarranted discriminatory action by NGOs misrepresentation of estimated tax losses, based on research that is often funded by governments and charities who are committed to burgeoning social welfare and aid programmes they can no longer afford.

Beggar thy neighbour tax wars will leave everyone worse off and in the process have the potential to destroy citizens’ legitimate rights to compliant confidentiality, with debt laden states beginning to legislate away the ideals of sovereign nationhood and respect for international standards,  all in the expedient pursuit of cash. 

In Andersen’s tale it took a small child to point out the Emperor was wearing no clothes. With another fairy tale in mind let’s hope it doesn’t take another generation to discover there is no huge pot of gold at the end of the transparency rainbow.

Download PDF Copy Article HTML to Clipboard