Statement from OECD Secretary-General Angel Gurría
The “Panama Papers” revelations have shone the light on Panama’s culture and practice of secrecy. Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities. The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20. Through the Global Forum on Transparency and Exchange of Information, we have constantly and consistently warned of the risks of countries like Panama failing to comply with the international tax transparency standards. Just a few weeks ago, we told G20 Finance Ministers that Panama was back-tracking on its commitment to automatic exchange of financial account information. The consequences of Panama’s failure to meet the international tax transparency standards are now out there in full public view. Panama must put its house in order, by immediately implementing these standards.
While the “Panama Papers” data expose nefarious activities, they also show a decline in the use of offshore companies and bearer share companies, which is a testament to the incredible transformation effected in the last 7 years to establish robust international standards on tax transparency, including on beneficial ownership: 132 jurisdictions have committed to the standard on exchange of information ‘on request.’ Of those, 96 jurisdictions will introduce automatic exchange of financial account information within the next 2 years. Almost 100 jurisdictions have joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. As a result of our in-depth peer review process, the use of bearer share companies is close to being eliminated across the world, and the beneficial ownership rules have been strengthened to ensure that information is now available to tax authorities when they need it.
Establishing global standards and making commitments are just the start though. Effective implementation is the key to lifting the veil of secrecy once and for all and eradicating tax evasion. The time has come to make sure that no jurisdiction can benefit from failing to meet their commitments. In the run-up to September’s G20 Leaders Summit in Hangzhou, we must use every opportunity to deliver. The next G20 Finance Ministers meetings and the Global Anti-Corruption summit taking place in London in May will be critical.
Q&A on Panama Papers
What does the release of the “Panama Papers” actually tell us?
The Panama Papers describe in detail how a veil of secrecy is still allowing funds to be transferred between jurisdictions and held offshore, where it can be hidden from tax authorities. Panama’s consistent failure to fully adhere to and comply with international standards monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes is facilitating the use of offshore financial centres for hiding funds, depriving governments of tax revenue and often aiding and abetting criminal behaviour.
The Panamanian government says that the OECD has recognised its efforts to improve access to information about beneficial ownership of entities and its willingness to share such information with authorities in other jurisdictions. Is this actually true?
The OECD has been working for more than seven years to establish robust international standards on tax transparency and ensure their implementation. In 2009, when the initial objective of the Global Forum was to reach international agreement on the Exchange of Information on request, most countries and jurisdictions were quick to get on board, while a few, including Panama, were reluctant to make commitments or move forward along with the rest of the international community. After many years of resistance, Panama updated its domestic legislation in 2015, which provided the basis upon which to engage in the phase of the review process that assesses whether effective information exchange is actually taking place. Panama remains well behind most other comparable international financial centres.
To push the transparency agenda forward, the G20 identified Automatic Exchange of Information as a new international standard in 2014, and almost 100 jurisdictions and countries have already agreed to implement it within the next two years. Whilst almost all international financial centres including Bermuda, the Cayman Islands, Hong Kong, Jersey, Singapore, and Switzerland have agreed to do so, Panama has so far refused to make the same commitment. As part of its ongoing fight against opacity in the financial sector, the OECD will continue monitoring Panama’s commitment to and application of international standards, and continue reporting to the international community on the issue.
Is Panama the only outlier, or is it the tip of the iceberg? Are there other jurisdictions posing similar problems?
Having conducted well over 200 Phase 1 and 2 peer reviews in the past 7 years, the Global Forum has identified a number of member countries and jurisdictions whose legal and regulatory framework for the exchange of information are as yet not up to international standards. They include Guatemala, Kazakhstan, Lebanon, Liberia, Micronesia, Nauru, Trinidad and Tobago and Vanuatu. It is clear that there are other jurisdictions where a lack of information on beneficial ownership of corporate and other entities is facilitating illicit flows.
Today’s post is from OECD Secretary-General Angel Gurría.
Six years since the onset of the Crisis many advanced countries continue to face high unemployment, sluggish growth and weak public finances. Growth is also slowing down in emerging markets.
Meanwhile, as recent revelations have demonstrated, the frayed international tax system has long allowed multinationals to plan their way around paying corporate taxes. And bank secrecy has let individuals stash money undetected, and untaxed, in hidden corners of the world.
Such practices erode the integrity of our tax systems, damage the capabilities of our governments, diminish economic growth and corrode the trust of our citizens who are the vast majority of taxpayers. The way tax is levied and spent is one of the most important levers to address social inequalities, create jobs, pay for education, infrastructure and other public services and encourage investment in innovation.
The OECD has helped put the international tax system at the forefront of the international policy agenda. Our work has been endorsed by the G20, whose leadership deserves praise and recognition for giving top priority to calling time on tax havens and recognising that an international tax framework developed 100 years ago is no longer fit for purpose.
Accounting for almost 90% of the global economy, 44 countries including the G20 have tasked the OECD with finding ways to fix this situation. Our Base Erosion and Profit Shifting (BEPS) Project aims to ensure the rules governing these systems are transparent, and that multinationals cannot exploit gaps between national tax laws or artificially shift profits to low tax jurisdictions where no real economic activity takes place.
We’re moving fast. The first results of our BEPS project were released in September and we are on track to deliver the final package of measures a year from now. These efforts will neutralise the “cash boxes” companies use to keep trillions of dollars of profits offshore and free of taxation. They will also ensure that patent boxes can’t be used to shift profits to countries where no substantial activities are carried out to generate those profits. Countries have also been spurred into action: Ireland will put an end to “double-Irish” tax planning schemes and the Netherlands will renegotiate its tax treaties with developing countries to ensure they can’t be abused by multinationals to avoid paying tax. And the European Commission has launched high-profile state-aid investigations into tax practices by its members that could breach EU law.
We have also witnessed a sea change on the tax transparency front since 2009 when strict bank secrecy was still the rule in many countries. The Global Forum on Transparency and Exchange of Information for Tax Purposes now has over 120 members. The Forum has issued over 70 compliance ratings on its members and over 500 recommendations have resulted in changes to laws and practices that will improve tax transparency worldwide.
Implementing Automatic Exchange of Information (AEOI) is the next major objective. We have developed a new global standard in close cooperation with G20 countries and 93 jurisdictions have now committed to launching automatic exchange by 2017 or 2018. Only last month in Berlin, 51 countries and jurisdictions took the first step toward implementation by signing a multilateral agreement. Luxembourg, Switzerland, Singapore and many other financial centres are already on board, and more will follow. This robust standard will allow authorities to track income and offshore assets. These efforts are bearing fruit. Voluntary disclosures by tax evaders have already yielded 37 billion euros of additional revenue to OECD and G20 countries since 2009.
Extending the benefits of these changes to developing countries is a top priority. They have a big stake in this effort but lack the resources to crack down on their own. The OECD is involving them fully in shaping the new global standards. Initiatives such as our Tax Inspectors Without Borders are specifically designed to help developing countries prevent the erosion of their tax bases and the illicit outflow of revenues through tax evasion.
Now is the moment for governments to take action in a concerted international effort. Corporate profits must be based on the true cost of developing products and services, not on clever distortive tax arrangements that favour multinationals over domestic businesses. Too many multinationals are getting away with paying as little as 1% -2% on their global profits, and in some cases paying nothing at all.
Overhauling the global tax system and its practices is fundamental if we are to deliver stronger, cleaner and fairer growth for a post-Crisis world. What happens in the next 12 months, starting with the G20 Brisbane Summit, will be critical for the success or failure of this exercise. Making historic changes means taking tough decisions and takes political courage. In the current circumstances, nothing less will do.
Are you following the G20 leaders’ summit in Brisbane this weekend? The OECD Observer magazine is here to help. OECD Secretary-General Angel Gurría and Australian Treasurer Joe Hockey lead this fact-packed “300th edition” through the G20 issues on the table at Brisbane, with articles on growth (notably the 2% growth challenge), trade, gender and jobs. In our Ministerial Roundtable on employment, ministers from Australia, Germany, Korea, Spain and the US outline the actions they have been taking to create more and better jobs. Business and labour representatives add their perspectives. The edition also asks whether Europe can avoid deflation, and traces the fall in productivity growth across OECD countries since the 1960s. With Brisbane the focus of world attention, the OECD Observer casts a spotlight on Australia’s economy, and asks why the “lucky country” is also a happy one. We recount how Australia came to join the OECD (not as smooth a path as you might imagine), and outline the country’s future challenges in the Asian Century.
Prawo Jazdy was the most reckless driver Ireland had ever known, travelling at unlawfully high speed around the country, pausing only to park illegally. And yet despite getting caught innumerable times, he avoided prosecution simply by changing address. Then one day a particularly gifted member of the Garda began to wonder if it all might not be a hideous mistake and looked up the Polish bandit’s name, not in the Interpol database, but a dictionary. Imagine his surprise when, as the Irish Times relates, he learned that Prawo Jazdy means “driving license”. Case solved.
Here we’re talking about minor traffic offences committed by people who were actually cooperating with the police and not trying to avoid paying, and yet the basic information wasn’t getting across. A few studies published recently deal with the far more complicated and expensive business of international tax paying, or tax dodging, depending on how you look at it.
The Tax Justice Network estimates that individuals hold about $21 trillion of unreported wealth offshore, the equivalent of the combined GDP of the US and Japan. They think the figure may be even higher ($32 trillion) but even a previous, far lower estimate of $11 trillion still represents around $250 billion dollars in lost tax revenue each year – five times what the World Bank calculated was needed to address the UN Millennium Development Goal of halving world poverty by 2015. The usual term for these places offering low or zero taxes is tax haven, but TJN thinks that “secrecy jurisdiction” is a better description, since they provide facilities to get around the rules of other jurisdictions using secrecy as their prime tool.
The core of the problem is that taxes are a national affair while finance is international. The OECD has been working for years to help tax administrations cooperate across borders and the OECD Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world, and its Commentaries have been cited by courts in virtually every OECD member country, as well as in many non-OECD countries. The Convention has just been updated to allow tax authorities to ask for information on a group of taxpayers without having to name them individually, as long as the request is not a “fishing expedition” launched in the hope of netting a few tax dodgers in a batch of honest citizens.
These are so-called targeted requests, but the OECD is also looking at how to make automatic exchange of information more efficient (some countries call this “routine” rather than “automatic” exchange). This is the systematic and periodic transmission of “bulk” taxpayer information collected by the source country to the country of residence concerning income from dividends, interest, royalties, salaries, pensions, and so on. Denmark has the most relationships of this kind, sending information to 70 other countries.
According to a survey carried out for the OECD’s Centre for Tax Policy reported in Automatic Exchange of Information: What It Is, How It Works, Benefits, What Remains To Be Done the sums represented range from a few million to over 200 billion euros. Automatic exchange seems to work both to detect tax evasion and as a deterrent. EU experience with the Savings Directive suggests that without automatic exchange, over three-quarters of taxpayers may not have complied with their tax obligations in their country of residence. Denmark helped 440 of its absent-minded citizens to remember foreign income after the tax administration carried out 1000 audits and sent out 1100 letters announcing that it received automatic information from abroad.
Automatic Exchange contains plenty of practical advice on implementing agreements. For instance, as Prawo Jadzy shows, it’s essential to get the basics right by using a standard format to make sure each side of the exchange understands what it’s looking at in different languages, when multiple first names and family names may be involved or addresses may include both flat number and street number.
Information on taxes is sensitive, and Keeping it safe: the OECD guide on the protection of confidentiality of information exchanged for tax purposes sets out best practices related to confidentiality and provides practical guidance, including recommendations and a checklist, on how to meet an adequate level of protection.
I to by było na tyle. Jedź ostrożnie!
Today’s first post is from Christian Chavagneux, Deputy Editor of Alternatives Economiques, Editor of Economie politique and author with Ronen Palan of Les paradis fiscaux, (Tax Havens) whose 3rd edition is forthcoming in 2012. Below, you will find a reply from OECD’s Pascal Saint-Amans
The fight against tax havens was one of the priorities of the 2009 G20 summit in London. Three years later, the results are mixed. To combat fraud and tax evasion by the wealthy, the G20 decided to push for the signature of treaties covering the mutual exchange of information in order to develop information exchange on demand. What can we expect from this?
According to a study by Niels Johannesen and Gabriel Zucman, the announcement of the treaties had little effect on bank deposits in tax havens. Their claim is backed up by data from French budget minister Valérie Pécresse: France made 230 requests for information to 18 countries in the first 8 months of 2011. The reply rate was only 30% and the quality of the information supplied wasn’t always of the highest quality, adding weight to the demand of international NGOs to move to a system of automatic exchange of information.
The super rich are not the only ones to take advantage of tax havens, multinationals use them too. Analysis of the geographical distribution of FDI by US firms at the end of 2010 for example shows that the Netherlands, Luxemburg, Bermuda or Ireland come out well ahead of Germany, France or China.
The Banque de France recalculated FDI flows into and out of France eliminating fictitious flows transiting via tax havens. The result? France’s outward FDI flows dropped by 41% and flows into France by 81%! Adjusting data for several years this way shows a widening gap between traditional and corrected figures, a sign that use of tax havens is growing.
The G20 has done nothing to fight against such shady dealings which, according to Bloomberg allow Google for example to be taxed at 2.4%. To combat this, NGOs are asking for country by country reporting. In other words, multinationals would have to provide their turnover, number of employees, payroll, profits and taxes for each country they operate in. This would show the disparity between the place where an economic transaction was carried out and where it is taxed.
The G20 has abandoned the fight against tax havens as territories that facilitate financial instability. In November 2011, after months of work, the Financial Stability Board declared that only two countries posed problems: Venezuela and Libya. However, a 2008 report by the US Government Accountability Office showed that a part of the American shadow banking system that developed the toxic assets of the subprime crisis was operating out of the Cayman Isles.
The Northern Rock fiasco in the UK resulted from excess short-term debt hidden in its Granite subsidiary, registered in Jersey. Bear Stearns took hits on speculative funds partly based in the Caymans, and likewise the German firm Hypo Real Estate was destroyed by losing bets placed by its irish subsidiaries, and so on.
Tax havens have played a leading role in all the key epsiodes of the financial crisis. As well as that, when you realise that they are the main holders of American public debt and that according to Patrick Artus of Natixis bank, “The three main holders of French debt are Luxemburg, the Cayman Isles and the UK”, it’s easy to see that these territories are involved in speculation on public debt.
Tax havens, in the service of the richest and most powerful individuals and companies, promote global inequalities. Their offer of opaque services and risk taking contribute to speculative finance and the serious consequences in terms of loss of business and jobs. Unfortunately, the G20 is still far from having done everything to control these parasitical states.
The article (in French) in Alternatives économiques that started this debate is here
The Tax Justice Network’s Financial Secrecy Index
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, replies to Christian Chavagneux’s article.
Christian Chavagneux is right to criticise tax havens and argues that more needs to be done to combat their negative consequences for developed and developing countries alike. But it’s wrong to imply that the G20’s actions have been ineffective since it pledged to tackle the issue in 2009.
The study he quotes by Johansen and Zucman on whether bank secrecy has ended actually answers another question, namely the effect of the G20 push for tax information exchange on the location of bank deposits. The location of the deposits themselves is not the issue – funds do not need to be repatriated to a country in order to be taxed by that country. What is important, and what the G20 initiative focuses on, is making the existence and ownership of those deposits more transparent to tax authorities.
The information exchange agreements signed since 2009 are only now beginning to enter into force, and the expansion of each country’s network of agreements is continuing. Even so, an OECD survey of 20 rich and poor countries showed that early measures to deter tax evasion have already resulted in 100,000 individuals paying a total of $14bn in unpaid tax on assets worth between $120-150bn.
We now have commitments by all the major international financial centres to eliminate bank secrecy for tax purposes. In most cases, including Switzerland, Singapore and Austria and Liechtenstein, those commitments have already been implemented.
Nor are governments abandoning the fight on tax havens as Christian Chavagneux suggests, including on automatic exchange of information. In 2011, the updated multilateral Convention on Mutual Administrative in Tax Matters entered into force and now has 33 signatories including Costa Rica, France, Georgia, Germany, Indonesia, Norway, Russia, the UK and the USA. The Convention looks beyond mere information exchange on request, allowing parties to engage in automatic exchange as well as international assistance for tax collection. In November 2011, we saw the G20 support automatic exchange of information as appropriate.
In February 2012, the Financial Action Task Force refined its criteria for assessing anti-money laundering frameworks, with more targeted requirements that will improve transparency. That same month, the US proposal to implement the Foreign Accounts Tax Compliance Act led to the UK, France, Italy, Spain and Germany agreeing to explore a common approach to improved reporting of bank transactions. These changes will lead to stronger domestic frameworks to ensure all relevant information is available, and tax authorities relying on broader networks of information exchange agreements can expect to benefit from these developments.
The Global Forum on Transparency and Exchange of Information for Tax Purposes already has 107 members and continues to expand its membership to cover emerging financial centres. By the next G20 Summit in Mexico in June, the Forum will have published more than 70 Phase 1 country reviews, while the Phase 2 reviews commenced in 2012 provide for an in-depth investigation into the procedures and resources available, to make sure that each jurisdiction can meet their commitments to the international standard.
The role of governments is primordial of course, but we also recognise the efforts of civil society in continuing to draw attention to the issue of tax transparency. That is why OECD initiatives like the Taskforce on Tax and Development are bringing together tax authorities, business and civil society to share proposals to move towards our common goal of fairer taxation.
Tax havens have been around since the late 19th or early 20th centuries, depending on how you define them. They are defended by powerful vested interests and the fight against them will not be won quickly or easily. However, combined with new OECD projects to strengthen inter-agency cooperation to tackle tax crimes and other financial crimes, there is good reason to be optimistic that we will continue to build on the substantial progress made since 2009.
The outcomes of the 59 country reviews published so far by the Global Forum are available on the Exchange of tax Information (EOI) portal along with an interactive map showing the network of agreements to exchange tax information: