Capital Flight Discussed in the UK Parliament

The title of event was Plugging the leaks: curbing capital flight, tax avoidence and tax evasion, and presentations were given by Sony Kapoor, Jean-Pierre Landau and John Christensen.

Sony Kapoor started the debate, and he said the issue begins from the numbers which are very stark. Illegal capital flight out of developing countries amounts to $800 Bn which compared to the annual aid flows of $78 Bn, or the G8 debt forgiveness deal of $14 Bn to the poorest countries for a period of 14 years.

Financing for Development problems with aid money, since governments respond to donors, since up to 50% of budget comes from donors in some cases.

J-P Landau spoke of the political situation currently in the process of implementing the global taxation initiatives that the report, which he presided over sought to bring about. Also J-P Landau demonstrates that 50% of world trade passes through tax havens, and it's intra group trade. He accepts this figure.

John Christensen at the event made a long presentation starting by stating that the figures for dirty money are on the conservative side, meaning that they are underestimated. Paris, Mexico City and Buenos Aires also have offshore facilities. Raymond Baker in his recent book 'Capitalism's Achilles Heel' speaks of $5 Trillion of dirty money in the world, of which $1 Tr to $500 Bn originate from poor countries. 50% of rich Latin America's wealthy individuals hold cash and securities offshore, the same figure is 70% for the Middle-East, and most likely between 50% and 70% for Africa, though no figures exist for the African continent.

The Commonwealth Office encouraged the offshore finance paradigm as a development strategy for British Crown Dependencies and other members. The methods of re-invoicing, transfer mispricing and dummy wire transfers are used to facilitate the flows of dirty money from poor countries.

In the UK, the Duke of Westminster Ruling from the year 1937 states that companies and individuals should organise their tax affairs as they wish, this ruling in the House of Lords has effectively created the British tax avoidence industry. To reverse it we need a General Anti-Avoidance Principle in the corporate law to end this industry. The legal duty of companies is to minimise tax under this ruling, since it's equated by minimising business cost. Tax however is not a cost to business, it's something that is levied after business has been conducted, so the ruling is completely erroneuos on the role of taxation and the affairs of state.

The recommendations include:

1) Stop the secrecy space: Automatic information exchange between tax authorities is required as a directive.
2) EU savings directive needs to be reinforced, both to extend beyond the EU and to include other than personal bank accounts. Since hardly any wealthy individuals holds their money in a bank account with their name.
3) General Anti-Avoidance Principle is needed in countries where Common Law legal systems allow for tax evasion.
4) Accounting transparency is needed - an international financial reporting standard needs to be created that would show tax payment, and intra-company transactions.
5) We need to work out a common tax base globally
6) Global Unitary basis for taxing MNCs and Offshore banking. Switzerland says that offshore trusts (like those in Jersey) are more secretive than their accounts, but both are scams.
7) A world tax authority is also required, to see that there are no new harmful tax laws that have negative implications on the global tax base or offer loopholes for residents and citizens of other countries.
African MNCs escape tax since all is so difficult in terms of tax collection there, not enough staff in revenue authorities. He showed a book called The Next Gulf: London, Washington and Oil Conflict in Nigeria by Andy Rowell (co-author with James Marriott and Lorne Stockman, published by Constable.) Showing that if nothing is done, in Nigeria the situation could deteriorate in the future, as this book predicts.
8) Adjust to post-tax haven era. This means proposing alternative development policies for the small-island economies that are currently tax havens, focusing on other industries.

J-P Landau speaks about the politics of all this: the conditions for capital flight and the domestic environment of incentives/instability.

Recognise that capital flight is not a matter for only the poorest countries, it is what has happened in Russia for years.

Finally: it would be useful to distinguish 1) corporate tax avoidance --> illegality 2) personal tax avoidance.

For example, Microsoft doesn't pay tax , Irish law patents don't pay tax, this is a very important leak in the system too. 

Collectively between nation states, tax avoidance and tax evasion is unavoidable.

All the issues boil down to that question to reign down tax competition. Every bank account is located in a legal jurisdiction of a nation state. Democratically elected governments made the rules!! Swiss say that Singapore is the next big destination for bank savings.

Then, politics of the banking secrecy. This is a very difficult issue to look at.  Banking secrecy and  personal freedoms. We need to find a balance, limits to negative externalities. No justification for banking sources for MNCs.

Question from Lord Lea of Crondall: Figures of the extent of the issue have gone around for some time. We need rigour on the statistics, with national accounting standards. The blame game, what is true is that we have got to recognise this, to get to do this co-operation.

Question from a representative of the New Economics Foundation: What is the public pressure? Get out on the streets on this issue, on trade flows and tax evasion, or on globalisation figures.

John Christensen: About 15-16% of world trade is mispriced, by an average of 10%, in some regions it's a much higher figure as Raymond Baker estimates. The avoidance is violating the principle of the law. NGOs accredited at the G8, Co-operation in tax matters, only NGO to attend the UN group of tax experts was the Tax Justice Network. The group in the UN has been working since 1964 and attended by corporate lawyers, they know where to lobby. What we need is a global movement.

On the national level, tax avoidence/evasion is a fine line. What actually happens is that the minute the Budget is put to parliament, corporate lawyers sit to analyse the finance bill to find loopholes.

Regulation of trusts is overdue, and there need to be fees to register them.

Argentina: Kirshner said that any inward investment have to disclose the true beneficiaries to be listed out. Especially if the inward investment is originating from a tax haven. This is one possible measure to move forward, Profit Massaging or Profit Laundering needs to be curbed by MNCs.

There are things that developing countries can do, for example tax the turnover of companies if profits no longer are an indication of actual business processes.

Cayman Islands is the largest veil of secrecy. Britain loses $100 Billion on tax evasion, and progressive taxation is eroded with the tax evasion of the wealthy individuals. Continental Europe is in fiscal crisis, Luxembourg and Switzerland are the places for individuals to park their wealth, and the welfare state is threatened cross the board.

Anglo-Saxon banks benefit from this enormously. US/UK need to crack down on the terrorist threat by breaking the veil of secrecy in the financial world.

Comment by David Hillman of Stamp Out Poverty: Transfer-mispricing is not a good term in terms of campaigning, you have got to find a term that you can communicate to the public.

John Christensen answers: The term we use is Profit Laundering, and it's well linked to Money Laundering which people are more familiar with. The new book: Offshore: the dark side of global economy by William Brittain-Catlin also highlights this issue.