Canadian Tax Foundation conference: "Abusive Tax Planning"--May 1 in Montreal

The Canadian Tax Foundation will hold a lunchtime conference on May 1st in Montreal on The Fight Against Abusive Tax Planning at the Federal Level and the New Quebec Rules with respect to Non-Resident Trusts, with updates by the CRA and Revenu Québec. The event will be held from 12 to 2pm at the Center Sheraton, Salons 4 & 5, 1201 René-Levesque Blvd. West, Montréal. From an email alert: 

Mr. Dan Rivet, (Manager / GAAR and Inter-provincial Tax Avoidance Section at the CRA) will discuss the various types of abusive tax planning schemes that are currently being audited by the CRA and the success that the CRA has had in its fight against abusive tax planning both at the domestic and the international levels. 

Mrs. Agathe Simard (Director General – Direction principale de la lutte contre les PFA at Revenu Québec) will be discussing the new Québec measures that require the filing of tax returns by all non-resident trusts who hold immovable property in Québec.

En français, I expect--you can check out the program at the link above and register online.

Canada Revenue seeks source data on tax evasion from the ICIJ to bring "appropriate action"; What role due process?

Tax authorities are embarrassed by the ICIJ leak and they want the source data before anything more embarrassing hits the front page news and/or to show they really are serious about cracking down on offshore tax evasion.  As a result I am not surprised to see the Canada Revenue Agency attempt to prise the data from the CBC:

...It is my understanding that a leak of large amounts of data potentially exposing cases of offshore aggressive tax avoidance and possibly tax evasion is the catalyst for these stories. I also understand that your organization may be in possession of some or all of this data. 

You will know that the Canada Revenue Agency has already been in touch with your organization to underscore the importance of this information to our continuing efforts on behalf of Canadians to combat offshore aggressive tax avoidance and evasion. 

I would expect that both the CBC and you, as its president and CEO, have an interest in ensuring that appropriate action is taken if individuals are not respecting their tax obligations. Taking action against individuals who are not respecting their tax obligations is in the best interest of the public and law abiding Canadians. The provision of the data that your organization has in its possession would allow the CRA to pursue cases where this is occurring without in any way infringing on your journalistic mandate. 

I again respectfully request that you provide to the Canada Revenue Agency all of the data the CBC received through its collaboration with the International Consortium of Investigative Journalists so that the Agency may review and take action according to its mandate. I understand that the CBC is reluctant to provide this data, citing concerns with journalistic independence and protecting sources. I can assure you that the Canada Revenue Agency has not asked for the source of the information and will treat any information you provide with strict confidentiality in the same manner it treats all taxpayer information it receives. 

I sincerely hope that you will respond positively to this request and agree to provide this information so that the CRA can carry out its responsibilities.

Lots of loaded language there but it's clear the CRA can't compel the CBC to hand over the data, and is appealing to the CBC's sense of responsibility to society to make sure that tax cheats are brought to justice.  Notice the CRA doesn't confine itself to the data that implicates Canadian taxpayers--they want "all the data." I wonder why they don't offer the temptation of the newly-authorized whistleblower rewards. But is it not the case that the CBC, and the ICIJ, have obtained this information illegally? And if so, what are the ramifications for bringing criminal action in Canada?

The ICIJ received a hard drive in the mail containing millions of lines of personal financial data on individuals and companies that presumably were entitled to confidentiality under existing national laws--laws presumably similar to those that currently protect Canadians' financial data from being given out to unrelated third parties. Recall the CRA's “Declaration of Taxpayer Rights," which states that every Canadian:

“can expect [the CRA] to protect and manage the confidentiality of your personal and financial information ... Only employees who need your information to administer programs and legislation have access to your information. We also take other steps to protect your information and make sure it is kept confidential. For example, we follow government-wide and internal policies on the security of information and privacy.”  

The Declaration is simply an agency statement and lacks the force of law, but many of the rights it details, including the right to privacy and confidentiality, are “legislated” rights, that is, they are contained in the Charter, the Act, other statutes, or the common law.  Legislated rights do have the force of law so Canadians have mechanisms to seek redress in cases of breach of confidentiality or privacy by the CRA. Presumably, other countries have similar confidentiality rules and taxpayers have rights in those countries, too. Have these not been (and are they not being) violated by the sender of the hard drive, the ICIJ, the CBC, and the other journalists?  Of course, the CRA would be entitled to data on Canadian taxpayers from the taxpayers themselves and from relevant third parties under domestic law, but this is the major sticking point of the international tax system today: barring automatic information exchange from other governments, it is hard for the CRA to find money hidden offshore without resorting to extra-legal means of obtaining information.

So if we think the people exposed in the ICIJ leak have violated Canadian law, we must also recall that they have due process rights under that law. Would prosecution of Canadians using such illegally-obtained information pass internal due process requirements? I think the answer is probably yes, and I wonder if Canada might diverge from the US in the ability to use ill-gotten evidence in a criminal prosecution.

The reason I think that Canada could use the data as evidence in a criminal prosecution is that even though every Canadian "has the right to be secure against unreasonable search or seizure," and even though this Charter protection has been interpreted to require law enforcement authorities to seek prior judicial authorization for a proposed search and seizure if the target has a reasonable expectation of privacy with respect to the information sought, the case of Schreiber v. Canada says that the rights and freedoms enumerated in the Charter are guaranteed only against interference from actions taken by the federal or provincial governments of Canada.  Following the Schreiber decision, it seems that even tax information obtained illegally would be admissible against Canadians, so long as it wasn't the Canadian government that was responsible for the illegal action that exposed the behavior.  

In the United States, the result might be different. The cases of United States v. Wolf (1984) and U.S. v. Phillips (1979) suggest that information requested from another government by the IRS would be inadmissible as evidence against a U.S. citizen if it was seized by the foreign government in contravention of U.S. law (even if the seizure was allowed under foreign law).  Turning that around, I am not sure what happens if the IRS tries to use information that a private citizen produces in contravention of foreign law, but perhaps the cases suggest that if the information is produced in a manner that also violates US law, it could not be used as evidence in a criminal prosecution. If anyone reading this could shed more light on the subject, I'd be grateful for the insight.

Relatedly, I've been wondering what happens to the ICIJ, the CBC, etc. themselves, if they expose names and financial information about anyone that turns out not to be engaged in anything illegal? Maybe this seems improbable but it bears recalling that it is not illegal to own an account in another jurisdiction, including in the Cook Islands. What is illegal is failing to fulfill disclosure obligations under the laws of any jurisdiction that claims sovereign rights over you. That kind of information is perhaps not on the hard drive, so mistakes could be made in exposing people to public scrutiny who are not engaged in anything illegal. Thus the CRA makes the leap from data on a hard drive to evidence that Canadians are shirking their tax obligations, but it's certainly possible that not all the data points in that direction. That may be why the ICIJ has not made the source data public as Assange did--perhaps there is some sense that disclosure of all the data on the drive might not necessarily be "in the best interest of the public and law abiding" population, of Canada or otherwise.

In any event this story continues to unfold and as usual raises more questions than I can readily answer. I will be very interested to see how things proceed in terms of the CBC or the ICIJ releasing the source data to any tax authorities.

France ups the ante for EU tax evasion

Cahuzac's denials and ultimate admission about hiding money offshore while serving as the anti-evasion officer-in-chief is very embarrassing for France, and so it should be no surprise to see the rhetoric heat up as new allegations surface about his attempts to move the money around in an ultimately futile attempt at subterfuge. From AFP:

J'ai dit quoi?

France said Sunday [ed: France is a country and cannot speak. It is not so difficult to write "French leaders said", and it is ever so much less distracting.]  it was looking to tighten Europe-wide measures against tax evasion as it scrambles to contain a fraud scandal that has rocked President Francois Hollande's government.

...Finance Minister Pierre Moscovici announced that France would seek to reinforce the exchange of banking information throughout Europe, based on a US ruling in place since 2010 that seeks to fight offshore tax evasion.

Well, the "rule" may have been in place but let us recall that it is not in fact yet in force...three years later, we're still working out the kinks over here, and there are many, many kinks.

More:

"I propose that there be an automatic exchange of information, a European FATCA," Moscovici said on Europe 1 radio.

Hollande's government has been shaken by the scandal, which erupted Tuesday after Cahuzac -- once in charge of tackling tax evasion -- admitted to investigators that he had a foreign account containing some 600,000 euros ($770,000). 

...Critics have been quick to round on Hollande and his ministers, accusing them of either trying to cover up the scandal or of mismanagement for having believed Cahuzac's denials.

...Hollande has tried to contain the fall-out from the scandal, saying he was unaware of the account and announcing Wednesday that a new law would be submitted within weeks that will establish greater control over ministers' wealth. 

The law would also ban any elected representative found guilty of tax fraud or corruption from holding any form of public office.

Query whether there would be enough people left to run the world if every country made this same pledge.

Germany rejects Swiss Rubik deal...again

Also from Tax Analysts [again, gated]:

The upper house of the German parliament (Bundesrat) has again voted to reject the agreement with Switzerland aimed at taxing the undeclared assets of German taxpayers. 

This was the Rubik deal: basically, Switzerland won't share any information on individual accounts but will collect withholding taxes and pay them over. Here's a short explanation with a horrid graphic. I haven't discussed the deals much here, but it's had lots of play over on TJN [shorter and more to the point here]--it's a pretty wacky deal, really. I mean, how do you keep anyone honest in terms of withholding and paying over the "right amount" of tax if you can't pry any info from them?  From Tax Analysts:

The agreement was similar to one reached between Switzerland and the United Kingdom. It called for a one-time charge on all undeclared assets held in Switzerland as well as an ongoing withholding tax on income earned in undeclared accounts. The agreement also would have allowed German tax authorities to make a limited number of information requests that would not require the level of detail expected for standard treaty requests. 

Social Democratic Party lawmakers have long objected to the agreement, saying it was too lenient and that tax evaders should not be allowed to remain anonymous.

I take it that the deal was little more than an end run around the European Savings Directive. Certainly with Switzerland talking FATCA with the US it's hard to imagine any country in Europe settling for Rubik's weak tea.

Obama admin taking the high road on FATCA reciprocity?

I have predicted that real FATCA reciprocity would not fly in the US once people began to understand what the details entailed, but I would like to be wrong about that, and I have argued that the best course forward for FATCA is real reciprocity coupled with adherence to residence-based taxation. Here's a sign from the Chicago Tribune that I could get at least one of my wishes:

Foreigners' accounts in U.S. banks eyed in tax crackdown

The Obama administration may soon ask Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments, as part of a crackdown on tax evasion, sources said on Monday. 

In a move facing resistance from some in the U.S. banking industry, two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks. 

...At the heart of FATCA is a law requiring more disclosure by non-U.S. banks of information about Americans' accounts to the Internal Revenue Service, with the goal of exposing Americans' efforts to dodge U.S. taxes through secret offshore accounts. 

As Treasury has implemented FATCA, some countries - possibly including France, Germany and China - were said to be driving a hard bargain. They have been saying that if their banks have to tell the IRS about Americans' secret accounts, then U.S. banks should have to reciprocate by disclosing more information about the U.S. accounts of French, German and Chinese nationals. 

...China has been publicly dismissive of FATCA, but it is talking with U.S. officials behind the scenes, sources said.

...France and Germany "have been asking for something more like full reciprocity," said Jonathan Jackel, a lawyer with the law firm of Burt Staples & Maner LLP in Washington, D.C. 

The story says that "The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts."--but I am not sure that that is true, given that the only country currently on the list for automatic info sharing on portfolio interest is Canada-and Canada was already on that list anyway.


The story quotes Itai Grinberg, who has to be the foremost expert on the legislation and really ought to be listened to on the underlying principles:

"The United States should be moving toward full reciprocity," said Georgetown Law School Professor Itai Grinberg, a former Treasury official, adding it would be "deeply hypocritical" of the United States to ask for U.S. taxpayer information "without offering some kind of reciprocity."

Progress, perhaps. But this is America, so here comes a lawsuit:

The Texas Bankers Association is considering a lawsuit against the government to stop accountholder information sharing with Mexico, said Eric Sandberg, the group's president.

Why, what s the problem?  Well, you see, it's financial privacy.

"We are concerned with Latin American countries like Mexico," said Fran Mordi, senior tax counsel at the American Bankers Association. "In the past, U.S. banks didn't report interest payments to non-resident aliens ... IRS is now saying you have to report that."

Translate how you will. I think it's a clear illustration of the state at war with itself over how to gain the maximum advantage from a combination of cooperation and competition with other states on taxation. Information sharing is going to benefit the US more in terms of dollars in the economy if it is one-way street that catches US shirkers but doesn't prevent taking advantage of other countries' ignorance about the location of their own taxpayers' resources. I think the mercenary state will prevail in the end--cooperate in principle, defect in practice--but I am very much hoping to be wrong.

International tax as revealed in SEC filings

I've written before about how opaque international taxation is because most of the law is worked out in ways that are not made visible to the public, namely through non-judicial review of transfer pricing and related disputes among nations.  I've argued for both corporate tax disclosure and publication of competent authority agreements as a remedy to much of this opacity. Tax Analysts' Transfer Pricing Roundup [gated] offers a fascinating window onto this world:

Transfer Pricing Roundup summarizes significant tax disputes that publicly listed firms have disclosed to regulatory authorities. The regular monitoring of these disclosures sheds light on the friction points within the U.S. system of transfer pricing enforcement. Many of the disputes profiled here involve adjustments resulting from controversial cost-sharing arrangements.

Some of the highlights:

• Accenture PLC, a global management consulting, technology services, and outsourcing company, reported its unrecognized tax benefits could decrease by $637k or increase by $208k depending on how things go with some settlements, lapses of statutes of limitations [read: if they were going to catch us with our fingers in a cooky jar, it's about to be too late] and other adjustments relating mostly to transfer pricing matters 
• Amazon is disputing transfer pricing adjustments in the US that would result in additional tax of $1.5 billion, and in France to the tune of $250 million. 
• Amazon also recorded reserves for tax contingencies of $336M for 2012 and $266M for 2011, to cover transfer pricing, state income tax, and research and development credit positions.
• Cooper Cos. Inc., a medical device company, has $29.5M in "unrecognized tax benefit," $5M of which relate to transfer pricing and other issues "that could significantly change in the next 12 months because of expiring statutes [see above] in unnamed jurisdictions." 
• Dell continues an ongoing battle with the IRS over transfer pricing adjustments dating back to 2004-2006. Dell reports that "An unfavorable outcome in this matter could have a material effect on the company's operations, financial position, and cash flows."
• Microsoft is also involved in a protracted battle with the IRS over transfer pricing involving 2004 to 2006, which could have a "significant impact" on the company's financial statements if it is not resolved in Microsoft's favor. Microsoft does not expect resolution any time soon: must be some thorny issue to work out there. Microsoft's tax contingencies and liabilities are huge: $7.7B and $7.6B as of December 31, 2012, and June 30, 2012, respectively.

Much, much more at the link. Most of these are pharma and software companies--i.e., lots of IP that has been moved offshore and is busy stripping income out of high-tax countries with variations on the dutch sandwich, which looks a little something like this:

Now with Less Fiber!

My feeling is that it is a real shame that most or all of these cases will get settled and eventually quietly erased from balance sheets with little or no explanation and therefore no advancement in the development of international tax law whatsoever, despite all of the resources that will have been sunk into the cause by the private sector and government alike. What a shame.

How a tax haven is born

Can $1.1 billion buy you a country?  Some investors want to try it, by buying Belle Island, currently a Detroit park, and turning it into a tax haven.  Here's the plan:

Looks like Manhattan. The idea:

The 982-acre island would then be developed into a U.S. commonwealth or city-state of 35,000 people with its own laws, customs and currency.

Come on now. There is a whole city there, it's called Detroit, it's full of buildings and infrastructure that are underused, just waiting for investment.  You don't want to invest in that, though, because that would entail accountability to others and-gasp--paying taxes (well, maybe--after incentives and subsidies, maybe not). It's so much easier to make profits if you don't have to pay taxes or observe other regulatory standards such as those protecting worker's rights, the environment, etc. What you want is a regulatory haven that is conveniently located to your clients, that isn't tainted with the tax haven moniker, and that won't be caught up in any global anti-tax evasion net.  Offshore, but in your own backyard, and not treated like the rest of offshore (otherwise what is the point).  A US commonwealth or city-state just about does the trick...ingenious!

Have any doubts that this is about building a tax haven?  Just read to the end of the article:

Here's the scenario for the Commonwealth of Belle Isle that Lockwood and others want to see: Private investors buy the island from a near-bankrupt Detroit for $1 billion. It then would secede from Michigan to become a semi-independent commonwealth like Puerto Rico and the Northern Mariana Islands. 

Under the plan, it would become an economic and social laboratory where government is limited in scope and taxation is far different than the current U.S. system. 

There is no personal or corporate income tax. Much of the tax base would be provided by a different property tax — one based on the value of the land and not the value of the property. 

It would take $300,000 to become a "Belle Islander," though 20 percent of citizenships would be open for striving immigrants, starving artists and up-and-coming entrepreneurs who don't meet the financial requirement. 

I called the Honduras charter city little more than a glorified gated community; this is clearly the same. An economic and social laboratory?  Hardly--add it to a long list of contenders.  The story says "City officials are likely to reject the plan." Too bad, because it would be fun to watch the US open its own tax haven even as it tries to shut down all the others.

Manx tax strategy

Interesting: Isle of Man announces it will keep its 0/10 corporate tax rate and pretty much the rest of its tax system as is, but wil cooperate with the US on FATCA and the EU on its codes of conduct, and might join the mutual administrative assistance in tax matters agreement, and even "consider working with other countries and multilateral organisations on the development of co-operation systems similar to FATCA." I think that last one is in regards to the UK, but it could be broader in scope.

At the same time, the Isle of Man will

"maintain competitive  personal income tax rates  as one of the features making the Island an attractive place to live and work; and

maintain a competitive business tax system in the Isle of Man to support economic development;"

among other aspirations. I think they are in a tough spot, with the US and the UK focused on chasing individual tax cheats and corporate tax avoiders (respectively, perhaps) through their banks. By way of background, the tax strategy says:

The Isle of Man‟s taxation policies have played an important part in our economic success. 

...The key principles of fiscal sovereignty, economic stability and adherence to international standards which underpinned the original taxation strategy remain just as relevant today. 

I'm not sure what anyone means by fiscal sovereignty anymore. Then again, I never really did think it was a real thing.

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:

"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."

 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."

So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.

TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:

Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.

TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...

(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.

Cost to poor countries of illicit Cash flow: $859B

TJN posts this report from Global Financial Integrity, showing that

Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010

... the biggest exporters of illicit financial flows over the decade are:

• China,  $274 billion average ($2.74 trillion cumulative)
• Mexico, $47.6 billion avg. ($476 billion cum.)
• Malaysia, $28.5 billion avg. ($285 billion cum.)
• Saudi Arabia, $21.0 billion avg.  ($210 billion cum.)
• Russia, $15.2 billion avg. ($152 billion cum.)

Table 2 of the report's appendix has a complete list. This demonstrates why information gathering and exchange has got to be global and, contrary to how it's going right now, should probably start with the world's wealthiest countries imposing their gathering, reporting, and sharing regime on their own financial institutions vis a vis the rest of the world, rather than working to protect their own bases first and foremost.  This is a time for leadership by example.

Fortune 500 holding trillions offshore

Taxprof links to a Citizens for Tax Justice report (pdf) that says Fortune 500 corporations are holding at least $1.6 trillion in profits offshore.  290 of the 500 collectively self-reported the figure (via SEC filings), as at the end of 2011. Interesting: half of the $1.6T is reported by just 20 companies (7% of the self reporting, .4% of the fortune 500--the corporate 1%?).  The report includes a list of each of the 290 and the amount they reported as offshore.

It looks like notorious tax dodger GE tops the list here, with $102B waiting for a holiday to repatriate (recall that GE's global head of tax Will Morris, is also head of the tax committee of the business and industry advisory council at the OECD, winner of an "external engagement award" for his service to HMRC, and a long time and vociferous opponent of corporate tax transparency efforts through the OECD and related fora, for a discussion, see here).

Next in line comes a familiar cast of characters, all on that ever-growing tax dodger ledger:

• Pfizer (63B) 
• Microsoft (60B) (and check out Microsofttaxdodge.com)
• Apple (54B) 
• Exxon (47B)
• Merck (44B)
• Johnson & Johnson (a family company that doesn't like to pay taxes in its very own family's back yard, let alone around the world, 42B)

But really, every big American company you can think of appears on this list.  Starbucks can be forgiven for being a bit touchy on the tax dodging radar, since its offshore holdings of less than a billion look positively benign compared to the companies occupying the top of the list.  No wonder that multinationals fear increased corporate tax disclosure, because you never know where the media will train its spotlight for naming and shaming.

Canada's tax evasion problem in need of resources & leadership

Senator Percy Downe has issued a call to the Harper government to put some money and some effort into curbing Canadians hiding their assets overseas to escape taxation:

Sen. Percy Downe said the vacancy [at the head of the CRA] gives Prime Minister Stephen Harper the opportunity to elevate the job to the “importance it deserves” — to provide the resources to crack down on Canadians who stash money in havens to avoid paying taxes. 

...“It’s either a resource problem or a leadership problem and this is an opportunity for the prime minister to identify it as a problem and correct it,” said Downe. “I don’t want to see someone parked there to manage the status quo …. It’s time to shake up the status quo.” 

Former CRA commissioner Michel Dorais said it's a question of resources:

“CRA is a big collection machine and the money collected is directly proportional to the money invested. The determination of where to put the effort is a combination of ministerial direction, priorities of its clients, direction from the board of management and management decisions of the CEO/commissioner. If one of those three components is weak, the whole thing can breakdown rapidly.”

But the Senator says it is a question of will, not resources, becuase more resources put in will yield more revenues out.  The story quotes a "former CRA executive" who said “wherever you look you’ll find money.” Info on offshore accounts not being fully pursued by the CRA is a case in point:

In 2007, the government was given a list of 106 Canadians with secret accounts worth more than $100 million in a bank in Liechtenstein. They were among a longer list of clients taken from the bank by a former employee and later acquired by the German government, which shared the information with countries whose citizens were on the list. 

By April, Downe said CRA had assessed only $16.5 million owing in back taxes, interest and penalties on the money hidden in Liechtenstein. Of that, they collected only about $5 million and “not one penny has been assessed in fines.” 

“By its own admission, since CRA received this information five and a half years ago, not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada has stood before a judge,” said Downe.

More at the link.

OECD enters multinationals’ tax debate

That is the headline from the FT for a tiny little piece that says very little other than that the OECD "is tightening the rules on intellectual property to make it harder for multinationals to site their intellectual property, brands, trademarks and know-how in tax havens where there is no genuine business."  But it's a fascinating headline, isn't it, conveying the idea that this is new territory for the OECD.   No mention that it was the OECD that in effect created and continues to shape the whole international tax system as we know and love it today, tax havens and all.

RIP Prince Roy, Sealand's Head of State

This is a special shout out to tax policy at UW, fall 2011-slash-international tax spring 2012, you know who you are.  I am sorry to inform you that one of our favorite personalities has just died.  I have not yet found any information on succession: Sealand's wikipedia page has only "the Bates family" listed in the leadership category.  So please do inform me if you have any info about who now reigns over our beloved quasi-sovereign territory.  For other readers, if you don't know about Sealand and why it explains everything you need to know about international tax policy, you really must watch this video:

After which you should remind yourself of the importance of flags in establishing sovereignty:

Goodbye Prince Roy, I am very sorry I never got to meet you.

Tax games? Glencore's self-insurance plan

From the Guardian: Glencore accused of slashing tax bill by using complex insurance deals; Commodity trader's UK profits are being depressed, but company says contracts are not designed to avoid tax.

A leading tax expert has accused Glencore of cutting its UK tax bill by tens of millions of pounds after profits at the commodity trader's London arm were depressed by complex insurance contracts taken out with its own parent. 

...The derivative instruments being employed by Glencore are widely used by companies to insure – or hedge – financial risks. They theoretically guarantee a certain return.
Last year, Glencore UK's derivative trading with other parts of the group totalled $383bn (£267bn), more than twice the yearly budget of the National Health Service. The practice resulted in a $122.8m loss for the London-based business, effectively docking that amount from UK profits and transferring it to the main group based in the low-tax Swiss canton of Zug. 

Richard Murphy, of Tax Research UK, said: "Glencore is insuring itself with itself. If I insure my house for fire with myself and it burns down, I've got to pay myself for the house which has burnt down. That's what Glencore is doing, and the consequences are that the risk is never leaving Glencore; it's still inside the group. That's $383bn worth of trades that, on the face of it, make no sense whatsoever. We don't know, but it is highly likely that the motivation is not genuine insurance and it looks like a significant amount of tax planning takes place within this trading function." 

Murphy said ..."This is totally legal but what we are seeing is a significant change in the way in which multinational corporations are now looking to move their profits around the world.
"All the evidence is that throughout the extractive industries – the mining industry, the oil industry, the gas industry and so on – the way in which people are shifting profits now are derivative financial products." 

Glencore UK's accounts show that its massive turnover of $59.8bn in 2011 resulted in a pre-tax profit of $99.1m, a margin of less than 1%. A tax credit, the result of unrelated employee share awards, took total profits for the year to $115.7m. Had the $122.8m derivatives loss remained in the UK and been added to those profits, it would have attracted taxes of about $32m. 

Glencore insisted that lowering its tax bill was not the purpose of the derivative trades. 

Glencore's Baar-based spokesman said: "The derivative contracts Glencore Energy uses in London with its parent company in Switzerland are effectively tools to help it manage risk.
"They enable risk to be concentrated at the centre, where it can be absorbed due to the size of its capital base. These are standard contracts used by many companies across many industries. This is about managing risk and nothing to do with avoiding tax. Like all major global corporations, we work closely with local tax authorities to ensure that we pay the correct and appropriate amount of tax." 

In 2010, Glencore UK made a profit $186.5m on insuring itself with its parent, although those winnings were virtually all cancelled out by losses on external derivative contracts. ...

Richard Murphy carries the story and responds:

I note what Glencore say but cannot agree. There [sic] argument appears to be London cannot bear the risks of these trades so they have to be moved on but a simple guarantee (or more capital)  would overcome that issue and save the enormous cost of $383 billion of trading. However, those trades do take place which means there must be an economic justification for the cost of doing them, and tax is the only one I can see.  

Why does Apple have so much cash offshore?

And Google and GE and etc etc?  Contrary to popular sentiment, it is not that pesky uncompetitive U.S. tax regime, with its punitive rules that would impose corporate taxes on repatriated cash.  At least, there is not enough empirical evidence to pin solely on this well-worn scapegoat.  Instead, three economists examined the evidence of the growing MNC overseas cash stash and conclude that rather than regulation or governance, a company's spending on research and development intensity explains its cash overseas.  

The paper is called Multinationals and the High Cash Holding Puzzle.  Here is the abstract:

Defining as normal cash holdings the holdings a firm with the same characteristics would have had in the late 1990s, we find that the abnormal cash holdings of U.S. firms after the crisis represent on average 1.86% of assets. While U.S. firms held less cash than comparable foreign firms in the late 1990s, by 2010 they hold more. However, only U.S. multinational firms experience an increase in abnormal cash holdings during the 2000s. U.S. multinational firms had cash holdings similar to those of purely domestic firms in the late 1990s, but they hold over 3% more assets in cash than comparable purely domestic firms after the crisis. Further, U.S. multinationals increased their cash holdings since the late 1990s relative to foreign multinationals by roughly the same percentage as they increased their cash holdings relative to U.S. domestic firms. A detailed analysis shows that the increase in cash holdings of multinational firms cannot be explained by the tax treatment of profit repatriations, that it is intrinsically linked to their R&D intensity, and that firms that become multinational do not increase their abnormal cash holdings after they become multinational. There is no evidence that poor investment opportunities, regulation, or poor governance can explain the abnormal cash holdings of U.S. firms after the crisis. 

The authors discuss the paper here, including these interesting facts:

U.S. firms hold more cash than comparable firms whether these firms are in developed countries or not, in common law countries or not, in countries that tax income worldwide or not, and in Eurozone countries or not. 

...We find that U.S. multinationals held comparable amounts of cash than purely domestic firms in the late 1990s, but now hold significantly more cash than similar purely domestic firms. 

...Foley, Hartzell, Titman, and Twite (2007) show that the tax treatment of remittances makes it advantageous for multinationals to keep their earnings abroad and they find that firms for which repatriation is more costly hold more cash. Our findings suggest that the tax costs of repatriation are not the whole story for the increase in cash holdings of U.S. multinationals in the 2000s. ...[T]he Homeland Investment Act of 2004 ... failed to reduce the cash holdings of multinational firms. ...[I]t could be that the incentives of the Act were insufficient to affect firms’ cash holdings. ...[T]he repatriation tax costs could affect more where firms locate their cash rather than how much cash they hold. We expect that the tax cost of repatriation would be more important for high cash flow multinationals, but empirically these multinationals do not hold more cash than low cash flow multinationals. The increase in cash holdings of multinationals is strongly related to their R&D intensity, so that multinationals with no R&D expenditures do not have an increase in abnormal cash holdings compared to domestic firms with no R&D expenditures. Further, a striking result is that, among high R&D spending firms, firms that were already multinationals before 1998 do not hold more cash now than firms that were purely domestic firms before 1998. Among these firms, cash holdings increase sharply for multinationals relative to purely domestic firms, but that is because the cash holdings of multinationals are becoming more comparable to the cash holdings of purely domestic firms. Finally, and perhaps most importantly, we find no evidence that firms that become multinationals start holding more cash after they become multinationals. It appears that firms that become multinationals are firms with attributes that lead them to hold large amounts of abnormal cash even before they become multinationals. 

 Emphases mine.   

What can you do with a shell company?

NPR's Planet Money has a new podcast that is a must listen:

A few months back, we set up a couple shell companies — Unbeliezable, Inc., in Belize, and Delawho? in Delaware. 

On today's show, we talk to some tax lawyers to try to figure out what we can do with our companies. We draft a resolution so we can go to Belize to meet the fake director and fake shareholder of our company. And we learn owning shell companies in tax havens is a lot more of a hassle than we thought.

More on those charter cities/ultimate gated communities

Peter Spiro notes that "appeals from courts in the cities would be to Mauritius and then to the UK Privy Council... This strikes me as the leading edge of a potentially huge development, in which private actors more formally get their own pieces of turf and the lines between sovereign entities further blur.  ...  it will require legal innovation to situate the new, private city-state in the world of international law."

I still think this is just a new twist on an old idea.  But I agree that there are serious implications for thinking about the nation state, sovereignty, autonomy, and the rule of law.

How to go offshore and disappear for a mere $400k

Richard Murphy got an email advertising an investment opportunity in St Kitts & Nevis:

A US$400,000 investment in the new Park Hyatt St Kitts development entitles the buyer to:

• An investment in shares of a globally recognized brand

• Annual income estimated between 2%-5%

• St Kitts Citizenship benefits (with passport)

• Security with an international developer and globally recognized brand

• Complimentary enrollment in the Hyatt Gold Passport Diamond Level, the highest tier of Hyatt's guest loyalty programme.

As one of the oldest of its kind in the world, the St Kitts & Nevis Citizenship by Investment Programme provides the following prime benefits:

• Fast processing of passport within four months

• visa-free travel to more than 130 countries including Schengen Zone

• No tax on worldwide income

For more information please click here

Murphy responds:

So, buy your holiday apartment and get a passport thrown in for free with no worldwide taxation. Now why would that appeal to anyone? 

As an example of a secrecy jurisdiction literally putting itself and its regulation - right down to citizenship – up for sale this one takes some beating. At the same time it shows just how tax haven activity is designed to undermine the very notion of the state whilst exploiting the power of the states that tax haven abuse captures to do so. The paradox and hypocrisy is all too apparent. 

Have no doubt that when I and others suggest tax haven abuse is meant to challenge democracy, our way of life and the states that support it we mean it. Reducing the state and its processes to a commodity is part of the process of destroying it.

Glaxo Tax Dodging: Belgium Edition

This article is in French but roughly translated it asks, how could Glaxo pay something like 3% in taxes on  2.3 billion euros in profit in Belgium?  And the answer is Belgian tax policy that allows earnings stripping to the tune of a 320 million euro tax break for the global pharma conglomerate.  TJN explains:

The main story is about how the GSK Group used Belgium as a tax haven to avoid tax on over a billion Euros in royalties linked to GSK's worldwide sales of the swine flu vaccine Pandemrix in 2009-2011. In a nutshell, these royalties were taxed at less than 3%, thanks to two Belgian fiscal measures: first, a 80% deduction on royalties earned by the company, and second, the so-called "notional interests", a Belgian tax specialty. 

More generally, these two "fiscal gifts" helped GSK (through its Belgian subsidiary GSK Biologicals) to deduct €2.6 billion from its profits before tax between 2008 and 2011, and thus legally avoid 892 million euro of taxes in Belgium on worldwide sales of vaccines (H1N1 + others)