TAX HAVENS: THE LITTLE ISLANDS THAT ARE COSTING YOU BIG MONEY
TAX AND TRANSFER POLICY INSTITUTE
AUSTRALIAN NATIONAL UNIVERSITY, CANBERRA
FRIDAY, 21 SEPTEMBER 2018
I acknowledge the Ngunnawal people, on whose lands we’re meeting today, and pay my respects to their elders past and present.
Friends, we can’t put it off any longer. The time has come to talk about Peter.
As you may know, Peter is the CEO and owner of the famous company Peter & Co.[i] Peter is well connected and has the means to create an anonymous shell company where ownership disclosure regulations are relaxed. I hear he’s chosen the Cayman Islands.
Many banks in tax havens cater to the wealthy and are not reliable in sharing information with foreign tax authorities, so Peter has opened an account under the shell company’s name in another tax haven. Word on the street is that Peter has selected Panama for this part of his business dealings.
The last piece of the elaborate puzzle is for Peter & Co. to buy consulting and legal services from his Cayman shell company, with the money wired to his shell company’s Panama account.
The arrangement, on paper, looks legitimate at first glance, but the result is Peter reducing his company’s tax-assessable income – shifting profits out of Australia.
Peter may be fictional, but there’s nothing hypothetical about such an arrangement. Lurks like this are being perpetrated on governments - and therefore on honest taxpayers - by some of the wealthiest people on the planet. And they rely on tax havens.
As a result of the extraordinary leaks in the Paradise Papers and the Panama Papers, the work of United States and Australian Senate Committees, and the campaigning by tax advocacy groups, we have had glimpses at how the Peter and Co’s of the world, and firms such as Nike, Google, Amazon and Facebook, use shell companies and tax havens.
Globally, around $600 billion of profits are estimated to be shifted to tax havens, representing almost 40 percent of multinational profits.[ii]
The case against tax havens can be summarised in five points.
First, tax havens siphon taxable profits away from jurisdictions like Australia. This means either increasing the tax burden on individuals and businesses, taking on more debt, or cutting social services.
These shenanigans are not always illegal. But what is legal is not always moral or economically sound. Australia’s fiscal foundations are threatened by the erosion of the tax base by tricky tax tactics.
Aggressive tax planning can erode public confidence in the tax system itself. After all, one reason most of us pay the taxes we owe is that we believe we live in a society where our fellow citizens do the same.
A fascinating new dataset released by the Australian Bureau of Statistics helps shed light on this problem. Across multinational firms operating in Australia, the bureau reports their operating profit and their taxable profit.
What is unique about these data is that they are reported for firms with majority owners in different countries. So it is possible to compare across countries, and ask the question: which nation’s firms have the biggest gap between operating profits and taxable profits?
For the typical Australian firm, the gap between operating profits and taxable profits is 30 percent. The figure is pretty similar for multinationals whose owners reside in the United States (28.4 percent), United Kingdom (26.6 percent) and Japan (28.5 percent).
But for some nations, it’s a different story. If you’re a Bermuda-owned multinational operating in Australia, then on average the gap between operating profit and taxable profit is 88 percent. If you’re a British Virgin Islands owned multinational, the reduction is 92 percent.[iii]
So if you start with ten dollars of operating profit, then Australian firms report about seven dollars of taxable profits. The same is true for American, British and Japanese-based multinationals – ten dollars of operating profit produces seven dollars of taxable profit.
But for firms based in Bermuda or the Virgin Islands, and operating in Australia, ten dollars of operating profit produces just one dollar of taxable profit. That’s a startling difference.
Perhaps it has something to do with the fact that Bermuda and the British Virgin islands effectively have a corporate tax rate of zero per cent. Those two tax havens have no income tax, and no capital gains tax.
Second, tax havens are the hiding ground for a lot of crooks. Tax havens are used by drug-runners, extortionists and money-launderers. They are used to hide the proceeds of fraud, corruption and tax evasion.
Gabriel Zucman, an economist at University of California, Berkley, estimates that around four-fifths of money in offshore bank accounts is there in breach of other countries’ tax laws.[iv] North Korea has used tax havens to hide the proceeds of its sale of nuclear technology and drugs, counterfeiting and projects using forced labour. Al Qaeda financiers have routed payments through tax havens to evade detection. Mexican narcotics kingpin, Rafael Caro Quintero is just one of many drug lords to park his profits in a tax haven.
A recent study in the journal Nature Ecology and Evolution found there are even egregious environmental vandals there too. Following the Panama Papers, the study found seventy percent of fishing vessels implicated in illegal, unreported and unregulated catches had been registered in Belize, Panama, or other tax havens at some point. [v]
Third, tax havens increase inequality. Offshore wealth held by Australians in tax havens was approximately 6 per cent of GDP, according to Zucman’s work in 2013. In today’s prices, that would mean over $100 billion in assets held offshore by wealthy Australians. [vi]
And we know that these people are not just wealthy – they are super-wealthy. When billionaires in advanced nations get access to a special tax dodge, inequality rises. Matching data from high profile leaks to what we already know about taxation statistics, researchers found that half the money in tax havens is owned by the top 1/10,000th of the population. [vii]
This makes sense, given that offshore private banks typically require customers to have a minimum amount of financial assets to invest. You won’t pass the million-dollar investment threshold if you’re not a multi-millionaire.
As those researchers conclude, taking offshore wealth into account increases in the rise in inequality seen in tax data markedly, and forces us to start looking beyond just tax data and to study wealth accumulation among the very rich in a globalised world.
Fourth, inequality can hurt residents in tax havens, and in developing nations more broadly.
Take Bermuda, a subtropical paradise with a population of 65,000, and a GDP per capita of US$85,748 as of 2013. For comparison, in 2013, Australia’s GDP per capita was US$69,770, and globally it was $10,725. Bermuda is, incidentally, home to the company Google Ireland Holdings Unlimited.
Economists Sebastien Laffitte and Farid Toubal found that firms operating in tax havens such as Bermuda, the British Virgin Islands, and Barbados report profit per employee that are many larger than the average in non-tax haven jurisdictions. [viii] For example, profits per worker are a whopping 37 times larger in Bermuda than they are in Australia.
Yet these resources don’t actually flow to most workers in tax havens. Indeed, many citizens of these tax havens live in poverty. You know the Resource Curse, in which developing nations with significant natural resources are more prone to autocracy and economic stagnation. Now, some researchers believe there is such a thing as a ‘Finance Curse’, for developing nations that are overly dependent on that sector.[ix]
Many argue that Bermuda, where financial services account for 85 per cent of the island nation’s GDP, is afflicted by the Finance Curse.[x] Because it has no income or company taxes, Bermuda relies on customs duty and payroll taxes. This means that the tax burden is highly regressive, with the poorest fifth of Bermudans paying 22 per cent of their income in taxes, compared with 12 percent for the richest fifth.[xi
Tax havens hurt other developing countries. The International Monetary Fund’s research found that spillover effects - the effects on corporate tax bases and rates from tax haven activity - “are especially marked and important for developing countries. . . . The amounts at stake in a single tax planning case now quite routinely run into tens or hundreds of millions of dollars… [and] The spillover base effect is largest for developing countries. Compared to OECD countries, the base spillovers from others’ tax rates are two to three times larger, and statistically more significant. . . . The apparent revenue loss from spillovers. . . is also largest for developing countries.”.[xii]
Fifth, if the case for a big business company tax cut wasn’t already pretty lacklustre, tax havens make it even weaker. The more that multinationals stash their profits in tax havens, the less it makes sense for advanced nations to engage in a race to the bottom in their company tax rates. Like Lance Armstrong’s competitors in the Tour de France, countries who play by the rules stand no chance of winning against tax havens. They might try riding the downhills without putting on the brakes, but the only result is likely to be an ugly crash.
As Gabriel Zucman puts it: ‘This idea that if you cut taxes, you’ll attract a lot of physical capital, a lot of investment to the United States, I don’t think is supported by the evidence… Paper profits [don’t] boost wages for workers. What boosts wages is actual factories.’[xiii] As Republican Senator Marco Rubio admitted in a surprisingly candid interview with the Economist, ‘“There is still a lot of thinking on the right that if big corporations are happy, they’re going to take the money they’re saving and reinvest it in American workers. In fact they bought back shares, a few gave out bonuses; there’s no evidence whatsoever that money’s been massively poured back into the American worker.”
* * *
At a time of burgeoning right wing populism, we need to be careful that the critique of tax havens is not conflated with the hostile anti-migration and anti-foreign investment sentiments those fringes inspire.
Last year, I wrote Choosing Openness, a short book that makes the case for trade, migration and foreign investment, and the policies needed to support them.
The hardest of these is foreign investment, which is about as popular in Australia as cane toads and unexpected changes in Prime Minister. Yet unlike those, we really do need foreign investment, because it fills the significant gap between domestic savings and domestic investment. About one-ninth of total domestic investment depends on foreign investment. As a recent Treasury study concluded: ‘restrictions on capital inflow… would reduce the wellbeing of Australians’. [xiv]
Yet if the public doubt that multinational firms will pay their full share of tax, it will be difficult to maintain public support for openness. Multinational taxation is a particular issue in industries that are highly capital-intensive, such as technology and mining. If the profits mostly go offshore and the employment impact is limited, then tax becomes one of the main ways that the community can directly benefit.
So, what can Australia do about tax havens? How do we prevent Peter and his ilk from avoiding tax - thereby shifting the burden onto the rest of us?
In 2017, Labor leader Bill Shorten announced the first tranche of Labor’s tax haven transparency package. This package contained initiatives to shine a light on tax havens, and the firms and individuals who exploit them.
Labor committed to the following measures:
- Public reporting of country-by-country reports. A Labor government will mandate the public release of high level data on how much tax is paid in jurisdictions in which the firm operates, the number of employees, and related material.
- A public registry of ultimate beneficial ownership, including trusts. This is to ensure transparency over who actually owns a company, rather than just who is listed on company paperwork.
- Whistle-blower protection and incentives/rewards. Labor will provide protection for whistleblowers who report on entities evading tax to the Australian Taxation Office. Where whistleblowers’ information results in more tax being paid, we will allow them to collect a share of the tax penalty (a reward of up to $250,000).
- Tighten debt-deduction loopholes used by multinational companies, by leaving the ‘worldwide gearing ratio’ as the sole debt-deduction test – raising billions of dollars over the decade.
- We will appoint a community sector representative to the Board of Taxation to ensure community sector voices are heard in tax design and review processes.
- Introducing public reporting of Australian Transaction Reports and Analysis Centre (AUSTRAC) data and requiring the annual public release of international cash flow data.
- Requiring government tenderers to disclose their country of tax domicile. All firms tendering for Australian Government contracts worth more than $200,000 should state their country of domicile for tax purposes.
- Developing guidelines for tax haven investment by superannuation funds. This will be done by the Australian Tax Office, in collaboration with the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.
- Requiring that the Australian Taxation Office’s annual report provide information on the number and size of tax settlements.
- Delivering more tax transparency by restoring Labor’s $100 million threshold for public reporting of tax data for private companies.
- Finally, Labor is committed to the mandatory reporting of tax haven exposure to shareholders. Companies would be required to disclose to shareholders as a ‘Material Tax Risk’ if the company is doing business in an international tax haven jurisdiction. This measure involves the creation of a Tax Haven Blacklist; a list of jurisdictions that would be maintained by the ATO, which would be similar to the design of the European Union’s ‘blacklist’.
Today, I am pleased to announce an extension of the application of the Tax Haven Blacklist as Labor looks to place further pressure on tax havens and those who use them.
Under Australian tax law, a company executive can receive tax-free allowances related to travel in the Bermuda, Panama and similar jurisdictions.
Indeed, the loophole allows wealthy employees to receive allowances of up to $2000 tax-free - $400 per day, up to five days - for trips to Bermuda.[xv]
Other Australians are entitled to ask – is this travel likely to be for the purposes of creating assessable income in Australia?
A Labor Government will flip the onus. This means that claims for unsubstantiated tax-free allowances in tax havens would be automatically denied by the Commissioner of Taxation. Exceptions would require a detailed application to the Commissioner of Taxation. If you can demonstrate the travel expenses were incurred for the purposes of producing taxable income in Australia, then you’re fine.
But if your claim cannot be substantiated and justified as incurred in the production of assessable income, it would attract a fringe benefits tax liability of 47 per cent.
This proposal will not affect the overwhelming majority of travel and meal allowances for employees, and is targeted to ensure that no additional compliance cost is put on firms who do not engage in tax haven jurisdictions. The independent and non-partisan Parliamentary Budget Office estimates this will raise $9.3 million over the forward estimates.
Alongside this, Labor will also implement an integrity measure targeting people who ‘shop for citizenship’ in tax havens in order to avoid the automatic reporting and exchange of tax and financial account information on foreign tax residents between countries.
Some tax havens deliberately structure ‘Passports for sale’ or ‘citizenship for sale’ to undermine the OECD’s Base Erosion and Profit Shifting program, particularly measures that share information about financial institutions with other countries.
In the process of developing this policy, I showed some of my Labor colleagues an advertisement from The Economist magazine for Henley & Partners who proudly promoted themselves as “the global leader in residence and citizenship planning”.
Ironically, The Economist’s spin-off magazine, 1843 writes about such “citizens of anywhere” and cites Henley & Partners chairman Christian Kälin, who estimates that several thousand people spend a combined $2 billion a year on adding a passport or residence permit to their collection[xvi]. According to 1843 magazine, “St Kitts and Nevis helped pioneer the business over a decade ago [and has] sold more than 10,000 passports at $250,000 or more”.
Some of those with backup passports may have good justifications - such as political dissidents in authoritarian regimes. But others are more likely to have additional passports for more nefarious purposes. St Kitts and Nevis are not a jurisdiction that is well-known for its willingness to share taxation data with other nations.
Under a Labor Government, individual Australian taxpayers would need to notify and declare to the Australian Taxation Office if they have residency or citizenship of any other jurisdiction and the name of that jurisdiction. False declarations to the Tax Office would attract penalties.
These policies build on the record of the last Labor Government, which closed multinational tax loopholes. They deserve strong bipartisan support from the Morrison Government. After everything we’ve learned from the Luxembourg leaks and the Panama Papers - after all the evidence of rip-offs and shonky behaviour uncovered by the banking Royal Commission, surely a crackdown on tax havens should win the support of the Coalition?
And yet, we in Labor are not holding our breath.
In 2013, when Labor closed multinational tax loopholes, the Coalition voted to keep them open. With extraordinary chutzpah, Scott Morrison even tried to claim credit for a $300 million tax judgment against Chevron, which relied on laws that he and his colleagues had voted against.
When it came to tax transparency, the Coalition voted against transparency laws from Opposition, then watered them down in 2015, taking two-thirds of the private firms out of the list of companies that the tax office reports on each year. They talk about a beneficial ownership registry, but we’re yet to see anything emerge that would shed light onto Australia’s opaque system of share ownership.
The Coalition has spent millions of dollars running advertisements that pat themselves on the back for getting tough on multinational tax avoidance. Alas, part of that money has come from the tax office itself, which has lost 4000 staff since 2013.
And when it came to banking scandals, Scott Morrison responded to Labor’s call for a Royal Commission by calling it ‘a populist whinge’.
That’s not so much a track record as a rap sheet. So it would be quite a turnaround if the Coalition now decided to support a crackdown on tax havens.
Still, I got into politics because I’m an optimist, so I’m not giving up hope that the party of the ‘forgotten Australians’ might actually remember who pays when they turn a blind eye to tax havens.
And if the Abbott-Turnbull-Morrison Government won’t act, a Shorten Government will. So if you see Peter, pass on a message: under Labor, the game is up.
Authorised by Noah Carroll, ALP, Canberra.
[i] This example is derived from the example published by Gabriel Zucman (2017) “How Corporations and the Wealthy Avoid Taxes (and How to Stop Them)”, The New York Times (10 November 2018), available at: https://www.nytimes.com/interactive/2017/11/10/opinion/gabriel-zucman-paradise-papers-tax-evasion.html
[ii] E Crivelli, R De Mooij, & M Keen (2015, 2016) Base Erosion, Profit Shifting and Developing Countries, IMF Working Paper
[iii] Australian Bureau of Statistics (2018) 5494.0 - Economic Activity of Foreign Owned Businesses in Australia, 2014-15, available at: http://www.abs.gov.au/ausstats/[email protected]/mf/5494.0
[iv] Zucman et al (2018) “Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality”, Journal of Public Economics, 162: 89-100, available via: https://gabriel-zucman.eu/offshore/
[v] Reuters (2018, “Illegal Fishing, Harm to Amazon Forest Linked to Tax Havens: Study”, in The New York Times (13 August 2018), available at: https://www.nytimes.com/reuters/2018/08/13/world/americas/13reuters-environment-tax.html
[vi] Zucman (2018)
[vii] A Alstadaeter, N Johannesen, & G Zucman (2017) Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality
[ix] J. Christensen, N Shaxson, & D Wigan (2016) “The Finance Curse: Britain and the World Economy”, The British Journal of Politics and International Relations, vol 18(1) pp. 255-269, available at: http://enlightenproject.eu/wp-content/uploads/2018/03/WP2-The-Finance-Curse_Britain-and-the-World-Economy.pdf
[x] There is a lack of reliable government statistics about Bermuda. One of the few estimates of poverty rates in Bermuda, by Bermudan economist Robert Stubbs, is that 23 per cent of Bermudans live in poverty, as defined by those living on less than half the median household income. This is in a jurisdiction with a GDP per capita 23 per cent larger than Australia’s. Stubbs estimates that the excess between Average over Median household income has grown from 26 per cent in 1993, to 40 per cent in 2016.
[xi] R Stubbs (2018) Inequality, Poverty and the Economic Imperative of Living Wages: By These Measures, Just How Bad Are We?, available at: https://www.taxjustice.net/2018/06/21/bermuda-inequality-and-poverty-in-uk-overseas-territory/
[xii] International Monetary Fund (2014), Policy Paper: Spillovers in International Corporate Taxation, available at: http://www.imf.org/external/np/pp/eng/2014/050914.pdf
[xiii] J Tankersley (2018) “Tax Havens Blunt Impact of Corporate Tax Cut, Economists Say”, The New York Times (June 10 2018), available at: https://www.nytimes.com/2018/06/10/business/corporate-tax-cut.html
[xiv] J Gali & B Taplin (2012) ‘The Macroeconomic Effects of Lower Capital Inflow’, Economic Roundup Issue 3, 2012, Treasury, available at: https://treasury.gov.au/publication/economic-roundup-issue-3-2012-2/economic-roundup-issue-3-2012/the-macroeconomic-effects-of-lower-capital-inflow/
[xv] ATO (2018) Taxation Determination TD 2018/11 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2018-19 income year?, available at: http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD201811%2FNAT%2FATO%2F00001%22
[xvi] M Valencia (2017) “Citizens of Anywhere”, 1843 Magazine (Oct/Nov), available at: https://www.1843magazine.com/features/citizens-of-anywhere