Uncounted ownership: Time to stop hiding?

It really matters, for all sorts of things from fair taxation to the prevention of corruption, that people are unable to hide their ownership of major assets or income streams. Could the post-2015 development framework provide an opportunity to change, fundamentally, the level of international transparency about beneficial ownership?

The UK’s Deputy Prime Minister Nick Clegg has been talking about a possible ‘mansion tax’ on high-value properties. He explained to the BBC, among other things, that wealth taxes on property are much harder to avoid than taxes on financial assets which can be moved quickly around the world.

Mr Clegg is certainly right about the latter – as discussed here, the latest Tax Justice Network estimates indicate somewhere between $21 trillion and $32 trillion of hidden assets around the world, with massive implications for real levels of inequality.

I’m not sure, however, about the point on property taxes being hard to avoid. This Observer story from last year, for example, found that only 9 of 62 flats in “the world’s most expensive residential block” were registered even for council tax:

An analysis of the records by the Observer shows that 25 of the flats’ registered owners are companies in the British Virgin Islands. Other offshore tax havens used to purchase the properties include Guernsey, the Cayman Islands, Liechtenstein and Liberia.

There are two reasons relevant to tax dodging (and of course many that are not) to use companies to hold the ownership of property:

first, to hide the actual ownership – this is why you would use a company formed in a secrecy jurisdiction like the BVI rather than a UK one; and
second, to hide changes in ownership – so that individuals can sell and buy the company which owns a property, rather than property itself, since although these are equivalent actions the former allows the possibility of not paying stamp duty.
The same secrecy, of course, poses a major challenge to developing countries too – BVI companies are also involved in the ownership of Zambian copper mines, for example; and without implicating any of them, the human impacts of lost tax revenues and greater corruption can be much more direct in countries at lower income levels.

The Norwegian presidential commission on tax havens presented considerable evidence on the links between developing countries and havens, pulling out link after link that threatens development and revolving around the hiding of ownership – whether for purposes of facilitating corrupt payments, trade mispricing to dodge tax, or money laundering. In addition, the commission set out (see Appendix I) a model of how governance in a country could be broadly undermined by greater exposure to tax havens.

Because the key to havens is not in fact tax rates but secrecy, I prefer the term ‘secrecy jurisdiction’ (for reasons set out at some length in my chapter of this World Bank volume). Ultimately, it is the hiding of ownership that havens facilitate which undermines regulation and taxation around the world – not any tax competition they may engender.

A measure to address UK stamp duty avoidance in the last Budget implicitly recognised the problem that Mr Clegg’s argument faces. Instead of simply requiring the identification of the beneficial owner of a property (i.e. regardless of any intervening corporate structure), the government imposed a higher rate of stamp duty for residential properties over £2m bought by “certain non-natural persons”.

Despite the centrality of identification of beneficial ownership for international measures against everything from tax dodging to money laundering to grand corruption, the ability of even a relatively powerful government like the UK to effectively police it remains limited, and so the UK itself was reduced to working around the problem rather than challenging it. [Meanwhile, the UK itself must face the challenge of transparency in relation to the ownership of trusts, and its many satellite jurisdictions.]

What this means is that Mr Clegg’s optimism about the solidity of property reducing tax avoidance may be misplaced. The bright side, though, is this: that effective international exchange of information on beneficial ownership would deliver great benefits not only for the effectiveness of the UK’s tax system, but for a great many other countries and their citizens too.

The US has unilaterally enacted FATCA, the Foreign Account Tax Compliance Act, which demands beneficial ownership globally for “financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest”. A future with substantially lower levels of international corruption, money laundering and tax dodging relies on this type of transparency being available to all governments, not just the most powerful, and applying to bank accounts, trusts and foundations, companies and so on. FATCA for all! Or perhaps something more cooperative, like a broader version of the EU Savings Tax Directive which requires automatic information exchange among participating states.

The coming proposal is this: a requirement for some minimum, international exchange of beneficial ownership information (as once suggested by Richard Murphy), as part of the global policy package associated with the post-2015 development framework. Alongside the measures championed by the Open Government Partnership to ensure that governments are transparent and accountable to their citizens, this seems a natural complement: to ensure a higher degree of transparency and accountability to society.

A more or less continuous critique of the Millennium Development Goals has been that there is little or no accountability for international policy commitments (contained in MDG 8, on ‘global partnership’) – notwithstanding the worthy efforts of the MDG Gap Task Force. Can we envisage detailed tracking of commitments to (i) collate, and (ii) exchange automatically, data on beneficial ownership of each asset class? What’s there to hide?

The alternative would be an international convention, cutting across the multiplicity of related measures on tax, corruption, money laundering, terrrorism financing and so on, that would establish simply the responsibilities of signatories in regard of beneficial ownership transparency. Mooted by Norway in 2010, the time may have come for a group of leading nations and civil society organisations to take this forward.

Offshore trillions and uncounted inequality

Not everything or everyone that is uncounted reflects marginalisation and a lack of power. On the flip side, the story reverses and what is uncounted by design reflects the presence, not the absence of power.

But inequality is never far away. When people go uncounted through a lack of power, it both reflects and compounds the associated local inequality. When income and wealth are uncounted because of their owners’ power, it hides the scale of global inequality.

This weekend the Tax Justice Network launched The Price of Offshore Revisited, their new research on the scale of assets and income which are hidden offshore, to worldwide media coverage. [Full disclosure: I have a long association with the network, and made minor comments on the research.] Such estimates are difficult, precisely because the real numbers are not just ‘uncounted’, but by definition being deliberately hidden. Jim Henry, the former chief economist at McKinsey’s who wrote the piece, used a range of approaches to triangulate and so establish the most reasonable ‘base case’. To this end, the analysis:

employs four key estimation approaches: (1) a ‘sources-­-and-­-uses’ model for country-­by-­country unrecorded capital flows; (2) an ‘accumulated offshore wealth’ model; (3) an ‘offshore investor portfolio’ model; and (4) direct estimates of offshore assets at the world’s top 50 global private banks.

The findings are striking, because the base case comes out at between $21 trillion and $32 trillion. I won’t go through the detail of the calculation here, although I would urge you to do so if you have any doubts about the broad accuracy of the estimates – and I’d be interested to hear of any issues. My view is that while any undertaking of this kind necessarily involves a number of important assumptions, Jim has laid out clearly the ones he has taken, along with the data used, and nothing stands out as unreasonable. The triangulation process gives a good deal of confidence that the estimates are in the right area.

 

In truth, it’s not important if a better estimate would be – for example – slightly higher, or slightly narrower. The analysis takes us a good deal further down the road of understanding the nature, distribution and scale of illicit finance. As the piechart illustrates, the 139 low and middle income countries studied have ‘lost’ wealth of up to $9.4 trillion: more than twice their gross external debt which comes to about $4 trillion.

With the underpinning detail, national policymakers can have a clearer idea of the relevant pressure points, while internationally the excuses for inaction are surely all gone. The same international financial opacity that stymied national regulation before the crisis, has continued before and since to drain tax revenues that could have raised and protected social spending – for countries at every income level.

Where the research has perhaps the most profound implications is that the emphasis, rather than being on the flows themselves (as Global Financial Integrity have done powerfully, for example), is on the implied wealth distribution. In this, the work comes closer to the approach taken by Leonce Ndikumana and James Boyce of PERI at the University of Massachussetts, which estimates the African wealth that has been illegitimately drained from the continent.

The companion piece to Jim Henry’s report is authored by Nick Shaxson (author of the book Treasure Islands), John Christensen (founder of the Tax Justice Network and director of its International Secretariat) and Nick Mathiason (of The Bureau of Investigative Journalism). It is called, neatly, Inequality: You Don’t Know the Half of It.

In this piece, the authors bring together responses from leading researchers on inequality (and me), to the new data and its implications for what is known about the extent and nature of inequality. Experts ranging from the World Bank’s Martin Ravallion to Kevin Watkins of the Brookings Institution and Thomas Piketty at the Paris School of Economics concur that income and wealth inequalities are extremely badly captured at the top end of the distribution.

My small contribution to the report is to question the implications of the re-imagining of inequality that the research appears to require. Each society’s level of inequality is effectively a political choice, emerging and evolving over time through more and less representative systems to reflect popular tolerance. What then happens when it transpires that the actual levels of inequality may have been obscured, and deliberately so; and may have been rising, systematically, well in advance of the reported levels?

Perhaps people respond to the inequalities they recognise in life, rather than the statistics they are presented with – in which case the only adjustment is that the statistics may come closer to that reality. But perhaps not; how stable are political preferences in response to a shock to (perceptions of) inequality?

In the UK, the estimates have re-energised the (already quite frothy!) political debate over tax avoidance. In an interesting echo of the now widespread ‘tax patriotism‘ campaigns in countries at lower income levels (‘pay your tax and set your country free‘, as the Kenyan Revenue Authority have it), a UK Treasury minister has argued that middle class people paying tradesmen cash in hand are morally wrong to do so, because this makes them complicit in (potential) tax abuse.

As I’ve argued elsewhere, the evidence from experimental economics suggests that there are two main determinants of people’s tax compliance: the extent of redistribution that actually happens once taxes have been paid, and the perception of others’ compliance. This means that policymakers have a lot of leverage. The more they can ensure the system reduces inequality, for example through effective social protection and reduced losses to corruption, the higher compliance is likely to be. The higher is observed compliance among the most visible (elites and big business), the higher actual compliance more widely is likely to be.

All of which brings us back to the importance of being counted – or, in this case, of ensuring that not only are public expenditures transparent and accountable, but that so too are tax contributions. And if we could combine this with an effective international mechanism to make sure countries knew when their residents owned assets and income streams elsewhere… but that’s a whole other post.