Business in India not taking ball, going home

When India pushed back on tax avoidance after the Vodafone case, lobbyists came out in full force opposition and people predicted investment would flee in the face of the tax reform, while I said that "if U.S. businesses really don't like what India is doing, they have a perfectly viable option, which is to do what they say they are going to do, namely, take their assets and go home.  But they do not want to do that."  This week in the Economist we get confirmation that business is not in fact fleeing India, tax & regulatory state notwithstanding:

At the start of 2012 India offered a cocktail that seemed guaranteed to be lethal for foreign investment: a faltering economy, corruption and political gridlock. In March came the final flourish, the equivalent of the barman spitting into your Death in the Afternoon. A budget was passed that aimed retroactively to tax Vodafone, the country's biggest foreign direct investor, and to clamp down on the holding structures used by most foreign investors, in particular the routing of money through the low-tax paradise of Mauritius.

In April alone, foreigners sold almost $1 billion of portfolio investments...Since April, however, portfolio investors have piled back in ... with net buying of some $5 billion of shares and bonds. This is surprising. There has been no clear improvement in India’s fortunes. Yes, there is a new finance minister and those tax rules have been delayed and diluted (although Vodafone’s fate is still unclear). But the political climate has soured further, lessening the chances of reforms or more prudent fiscal policy. 

The Economist concludes that it is the "resilience" of the firms, and not India's economy, that is responsible.  Maybe so, but it is at least as clear that a government that tries to prevent tax avoidance is not an obstacle to investment.  There is not much discussion of the diluted and delayed tax reform; the last I have seen suggests the matter is still on the table.

 

The ultimate gated community is just a free zone with a new name

MR cautions not to "equate charter cities with extraterritoriality": a charter city works either "because a dominant hegemon — perhaps at a distance — supports the external system of law" or because "the external system of law serves up some new and especially tasty rents to domestic interest groups."  Either way, the charter city is not sovereign, rather some established sovereign is exerting control.  So a charter city is really just a free zone: another experiment in relaxing regulation that Honduras has already tried (along with many many countries, yes, including the U.S.), this one just has a name that taps into some emotional sentiment having to do with freedom and choice and entrepreneurialism.  If Honduras just called this another free zone project, perhaps few would take notice or wonder about it.

As this is just a new name for an old idea, it should not be surprising how quickly we see the familiar accountability/transparency issues pile up.  MR points to the Guardian, which reports:

Plans to create a neo-liberal start-up city in Honduras with its own laws, tax rules and police force suffered a setback on Friday when the economic guru who inspired the project said he has been unable to act as its guarantor and watchdog. 

...days after the deal was announced, Romer said he had not been given the powers and information necessary to fulfil his role as chairman of the transparency commission, which is meant to ensure governance of the new development zones.

Romer said he and four other international figures were appointed by presidential decree to the commission, which has wide-ranging powers to appoint and fire governors, nominate judges and hire auditors in the proposed new zones. But the five will issue a statement distancing themselves from this week's announcement and calling into question the legality of their appointment, which they say has not been published in the official gazette as required by Honduran law, ostensibly because of a challenge in the constitutional court.

Free zones have been around for a long time, they have been studied extensively, and they don't have a great track record, most especially when they lack major up front governance policy planning.  Calling the project a charter city won't avoid these difficult problems.

As an aside, I notice that the Guardian puts a price tag on the deal: a business consortium called NKG is paying $14 million for its city.  Who is NKG?  Not the Northern Kite Group or the Neumann Kaffee Group, I suspect.

 

 

One fraudulent voter, and 3 things as likely to occur as that

a 3-mile-wide meteorite hitting the earth.   finding an orange lobster.  And one vote actually impacting the outcome of an election.  These three things have about the same percentage chance of happening as a person fraudulently voting in Florida.

This is because among the 10 million voters on Florida's rolls, a months-long search for a virtual tidal wave of fraudulent voters by Republican leaders in the state has turned up but one: a Canadian citizen who pretended to have U.S. citizenship so he could own a gun and vote.  Perhaps not in that order.  The Globe and Mail has the story here.  The man pled guilty and faces a sentence of up to five years and deportation back to Canada; most of the remaining 179,999 persons identified as potentially fraudulent voters were cleared:

Under pressure from the [Florida] governor, the state’s electoral officials had initially flagged more than 180,000 names (many of them Hispanic-sounding) for checking. All but 2,600 of those initially flagged – some of whom turned out to be not only citizens, but military veterans with service in Afghanistan and Iraq – were quickly determined to be bonafide citizens and restored to the voter rolls. 

After further investigation, only one name – Mr. Sever’s – was sent to law-enforcement authorities last spring. Six other “suspect” cases, in a state with more than 10 million names on the voters’ list, are still being investigated.

All that effort to catch one in ten million: curbing voter fraud is a costly lottery.  From Slate:

Here’s the paradox of the new voter ID crackdown, of the 38 states that have debated or passed legislation that puts more demands on voters. The new laws—and in Florida, new executive campaigns—ask voters to show driver’s licenses at the polls, or prove their eligibility with birth certificates, or prove that they’ve never had a felony, or prove that they are citizens of the United States.

Doing that involves navigating your state’s bureaucracies. Those bureaucracies have been shrunk or frozen by years of belt-tightening. They rely on data from other cost-cutting organs of the state. Imagine giving some endomorphic amateur athlete a low-calorie diet and limited access to a gym. He’s training for a mile-long fun run, so there’s no pressure. All of a sudden, you panic about the threat of Sprinting Fraud or something, and you inform the runner of his new task: Run a timed 3.5-mile circuit, tomorrow.

The calorie restriction imagery is apt.  Starve-the-beast led to the strangling of administrators; now those same administrators are meant to spend what little resources they have left to chase after a problem that statistically doesn't even exist, in the meantime cutting off some 2.2 million eligible voters.  A strategy in which the taxpayers, the administrators, and democracy lose should not be a winning strategy.  Yet as we well know, non-voting by certain constituencies will help certain politicians claim victory.

The Ultimate Gated Community

Disappointing that AP saw no need to report on what it costs to buy your own private city.  It couldn't be nothing ... could it?  I would like to see the memorandum.  Does it read like a contract?  Like a treaty?

What Americans Do All Day

They commute, work, and sleep, mostly.  48 minutes to groom, 34 minutes to care for others, 6 minutes to learn something.  Oh, for a country by country comparison.  From NPR:

FATCA & Multilateralism

I have suggested before that FATCA seems to me to be a bargaining chip to get other countries to negotiate on tax info exchange with the US.  The OECD seems to support this objective:

 The OECD welcomed today a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments, reduces compliance costs for financial institutions and provides for reciprocity.   

...OECD Secretary-General Angel Gurría said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.” 

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike. 

A major irony in the model agreement is that it's not at all clear to me that the US can furnish what it requires to be furnished by other countries, from the get go:

The information to be obtained and exchanged is:

(a) In the case of [FATCA Partner], with respect to each U.S. Reportable Account of each Reporting [FATCA Partner] Financial Institution: 

(i) the name, address, and U.S. TIN of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth in Annex I, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such entity and each such Specified U.S. Person;...

This will be hard for the US to do in the face of anonymous incorporation, nor do I understand how a multilateral agreement can work if it cannot ensure reciprocity.  Nevertheless, it now begins to come clear that FATCA looks like a unilateral attempt to accomplish that which is not being  accomplished multilaterally through the usual (OECD) channels, namely, automatic info exchange with the US.  Steven Dean disagrees, though, and says the multilateralism envisioned here won't lead to more information being shared.  I hope he will weigh in and give his insights on this.

Meanwhile, one of FATCA's architects recently defended it in "A Report from the Front Lines."  Using imagery like "the front lines" gives the general idea about the tone: this is war.  He takes on the sovereignty issue as follows:

[T]he United States also has the sovereign right to protect its tax base by implementing a FATCA regime, and that if a Swiss FI does not want to be part of the regime, it is free to either avoid the U.S. financial system or incur a 30 percent withholding tax. Said differently, if tax haven and bank secrecy jurisdictions want to build their banking system to cater to tax evaders, the United States and other countries should not be prevented from taking counteractions.

He concludes with this on multilateralism:

Nevertheless, the United States needs to continue aggressively pursuing FATCA, especially in the multilateral context. Obtaining significant progress toward a multilateral FATCA regime could provide many benefits:

• reducing discrimination against U.S. citizens living abroad; 
• providing relatively standard customer due diligence procedures; 
• reducing the number of investment options available to U.S. persons attempting to hide money overseas; and 
• eliminating the complex passthrough payment rules. 

...In summary, the U.S. government has made significant progress toward addressing the use of offshore accounts to evade U.S. tax, but the war is not yet won. Much work still needs to be done. In addition to implementing FATCA in the United States, Treasury and the IRS should be pursuing an agreement among major countries as to the proper level of customer due diligence, and, ultimately, a multilateral FATCA regime involving several major countries. A multilateral approach will provide many benefits.

It is left to the reader to wonder, what benefits, and to whom?

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)