Category Archives: Paradise Papers

The Paradise Papers should lead us towards a new global tax system

Last week, I published an op-ed in Danish newspaper Politiken with my colleague Saila Stausholm. I reproduce it below, liberally translated, for those interested. Given the op-ed format, it naturally has certain limitations and a certain style that differs from my usual writings on this blog – so take that into account. Here we go:

The Paradise Papers should lead us towards a new global tax system

Last Sunday, the International Consortium of Investigative Journalists (ICIJ) lifted the dam that had been holding back a new giant offshore leak, the Paradise Papers.

While the stories of tax haven usage do not necessarily reveal any illegal activity, the reactions tell us that citizens and politicians are outraged by the implications in the leaks of leaders and elites in the world’s richest countries.

Exactly because much of this activity is legal, the leak highlights the massive chasm between what ordinary people see as reasonable, and what the global elite can do within the limits of the law.

The Paradise Papers thus clearly showcase the structural problems of a nationally anchored tax system that works globally for mobile capital.

It is outdated, and there is a need for not just outrage and political attention, but also new, concrete ideas and the courage to change the system radically.

Small “quick fixes” here and there are not enough. On the contrary, we need to change the tax system fundamentally in order for it to match the ongoing reconfiguration of the global economy.

As illustrated by the tax haven leaks of the past few years, the opportunities to use tax havens and the offshore world are a key symptom of a tax system where regulation has not kept pace with globalisation.

Before the Paradise Papers, we had the Panama Papers, which created outrage in 2016, implicating the Icelandic Prime Minister, the Saudi Arabian king, the Pakistani Prime Minister, football world star Lionel Messi, and actor Jackie Chan.

In Denmark, too, the Panama Papers had consequences: The Danish tax administration is continuing its investigations into the affairs of at least 500 Danes.

Before the Panama Papers, we had the LuxLeaks, which revealed that PwC had helped a string of global corporates attain hugely favourable tax terms in Luxembourg. This had happened while current European Commission President Jean-Claude Juncker was Prime Minister in the Grand Duchy.

LuxLeaks also fostered significant political reactions, and became the starting point for Margrethe Vestager’s high-profile state aid cases against Luxembourg involving Amazon, Fiat, and McDonald’s.

And again before LuxLeaks, we had the Offshore Leaks in 2013. In addition, we have had the SwissLeaks and the Bahamas Leaks. These many leaks must be viewed in light of the increasing focus on tax havens and the issues created by the international tax system for both rich and poor countries.

Since the global financial crisis broke out in 2007-08, nation-states have increasingly identified the strengthening of national and international tax systems as a central part of the solution to the economic challenges we face today: debt crisis, public budgets under pressure, low growth and growing inequality.

As a consequence, both national governments and the international community has ramped up political initiatives against tax havens, against aggressive tax planning, against money laundering, and against tax evasion.

Today, we have much more transparency and better international exchange of tax information; we have closed some of the worst loopholes; and we have changed what is acceptable in terms of bank secrecy, shell companies, etc.

But the political reforms from the past decade have not really taken on the fundamental causes of the problems we are seeing today in tax havens and in the international tax system.

All the key components of the international tax system, established in the early 20th century, have not changed substantially.

Countries can still undermine each other by commercialising their sovereignty and offer favourable terms to foreign capital and thus reduce the economic and democratic capacity of their neighbours. And despite initiatives in the EU and the OECD, international cooperation is still relatively limited and, to a large extent, controlled by a small core of actors from the world’s richest nations.

Global corporations are still, essentially, taxed like they were 100 years ago, when they were small regional networks primarily trading physical goods.

This means that global capital – large corporations and rich individuals – are still able to structure tax liabilities with little friction across borders, while governments are largely bound by geographical and territorial borders.

If we want to address the fundamental challenges facing the international tax system today, we need a complete overhaul of the system. We need global innovation. Innovation is needed because old solutions will not do. And global scope is needed because solutions need to encompass all relevant countries and interests, if we harbour any ambition of finding sustainable and lasting answers.

First of all, we need innovation in terms of more and better inclusion of various interests in political decision-making processes. This is particularly relevant at the international level, where the group of decision-makers involved has historically been very narrow.

Our research has shown that a small group of actors play a disproportionate role in international tax policy-making. And that a core group of technical experts contribute to setting a course for regulatory initiatives that widely differs from the perceptions and goals of the general public and of politicians.

International tax policy is very important, and should have broad participation in all phases from the public, from civil society, from researchers, from interest organisations, and from politicians from all sides. This is not the case today. This would improve the quality of the democratic system and the political decision-making.

One model for such an expansion of participation is a World Tax Organisation. Today, taxation is just about the only major global political issue area where we do not have a global organisation with active participation from across the globe, where global challenges can be discussed, and common guidelines can be laid out.

We have a World Trade Organisation, a World Bank, a World Health Organisation, and so forth. But we do not have a World Tax Organisation.

This is not to say that these organisations are flawless, nor that a new organisation will solve all of our problems on its own. It is just one suggestion and just one part of the solution. What such an organisation does provide is a common global forum, where a broad range of issues can be raised and addressed, which simply does not exist in the area of taxation.

The “global” political discussions we have today largely take place in the OECD, the G20 and the EU; they play a key role in setting the agenda.

This makes it difficult for other countries and other stakeholders to join and influence discussions, despite the fact that many of the issues caused by the current international tax system hit emerging and developing countries disproportionately hard.

Without assuming the full design of a World Tax Organisation, we can at least imagine that it would function as a global forum that could take up key questions about international tax policy and tax havens, start political reform discussions, carry out global consultations, set out global guidelines, etc.

A more expansive idea of such an organisation could, like the World Trade Organisation, be entrusted with the power to assess and enforce whether any one country’s tax system would live up to globally agreed minimum standards, in order to ensure that it did not harm other countries with its policies or allow harmful discrimination of certain persons or companies.

In addition to creating a better forum for the negotiation of common ground rules, we also need to rethink how we tax cross-border activities in the global economy of today.

Today, global corporations and rich individuals have particularly large scope to lower their tax bills by manipulating mobile income across borders because our tax systems are still based around outdated ideas of how and where value is created in a global economy.

For instance, a substantial part of global corporate assets today are intellectual property: patents, copyrights, etc. In short: ideas.

In contrast to traditional assets such as factories, ideas and mobile and malleable. Where and when does an idea originate, and how does it create value?

Despite hundreds of pages of guidelines and regulation, multinational companies retain a great deal of flexibility in answering these questions and thus determining the location and size of their taxable incomes.

Large and complex global ownership networks equally allow corporations to move ideas, services and profit relatively friction-less across borders.

This is why taxation of corporations, and individuals, who effectively operate on a global scale, should also work effectively globally.

In the area of corporate taxation, one proposal in this vein is unitary taxation, where global corporations’ taxable income is consolidated at the global level, before it is distributed to each country of operation based on a predetermined formula.

In this way, it becomes far less important where corporations locate their profits, and thus harder to avoid tax liabilities as in today’s system.

In the area of personal taxation, a truly global tax regime might utilise multilateral tax assessments and audits for globally mobile individuals.

Again, these proposals are not silver bullet panaceas that will solve everything in a second. But they may be part of the solution, and they serve as important pointers towards a positive future for tax systems.

In order for these innovations to realistically happen, we also need a complete rethinking of attitudes to national sovereignty.

A key cause of today’s relatively limited international cooperation in tax matters, and of continued resistance towards a World Tax Organisation, is that governments across the world are terrified to surrender absolutely sovereignty over their tax systems.

However, as German philosopher Peter Dietsch has illustrated, international tax cooperation is not about surrendering sovereignty, it is about strengthening it.

Today, we have de facto lost sovereignty when tax havens induce limitations on our economic and political latitude. And yet we refuse to challenge their rights to do so.

Paradoxically, this insistence on the absolute sovereignty of others’ in tax matters thus weakens our own sovereignty.

If we are to achieve the needed global innovation in tax matters, we need to acknowledge that global cooperation provides a unique opportunity to regain lost sovereignty.

Another acknowledgement that is required for global tax innovation is that international tax politics is not a zero-sum game.

Today, many governments resist good ideas for change because they fear an absolute reduction in national tax revenue.

The Danish government, for instance, has expressed skepticism about a common European corporate tax system, proposed by the European Commission, which has the purpose of eliminating many of the most important current channels of tax avoidance used by large corporations in Europe. This skepticism is caused by a fear that Danish tax revenue would suffer due to our small market size.

There are many good reasons to be skeptical of the European Commission’s proposal, but tax revenue fears must be understood in the context of the long list of indirect benefits to the Danish public coffers, which are likely to outweigh any direct, absolute revenue losses. These include administrative cost savings and reduction in tax avoidance.

There are countless examples of hesitation around new political ideas because of this zero-sum mentality in tax matters.

But it is crucial that we view global innovation in tax policy as a unique opportunity to ensure a sustainable international tax system for the future.

Global tax innovation can be a critical way to future-proof our tax systems and thus our public finances. With a typical Treasury expression, the dynamic effects of global tax innovation are potentially enormous.

A World Tax Organisation and a global tax system will not solve all of our problems on their own, but they are a important steps in the right direction – and it is unlikely that we can effectively address our current challenges without effective organisational support and global policies.

However, global fora and global politics of this kind today are also plagued by large inequalities in resources, competencies and capacity between national representations. This will not be solved by establishing a new global organisation or new global policies.

This is why we also need to acknowledge the broader global political inequalities that lead to lack of cooperation, both in terms of a lack of will and in terms of lack of capacity.

For instance, a key reason that many small island states have historically pursued “tax haven strategies” is that they simply have not identified or been able to execute viable alternative strategies for economic development, and that they have been encouraged to do so, for instance by successive British governments.

Another challenge lies in the dominance that large Western states exercise in global politics. They tailor global tax rules to their advantage, while small tax havens and developing countries have almost no influence on international standards and regulation.

This gives substantial incentives to defect and to counteract global cooperation.

The USA, for instance, has played a key role in reducing bank secrecy in Switzerland, but in parallel it has strengthened its own secrecy industry at home, effecting what political scientists Lukas Hakelberg and Max Schaub have called “redistributive hypocrisy”.

We need to recognise and address these types of global political inequalities if the fight for global tax innovation is to succeed.

And there are good reasons for trying to do just that. The Paradise Papers and the increasing public attention to the challenges of tax havens and the international tax system underline the necessity of altering the current political course.

Small “quick fixes” of an outdated international tax system will not do.

We are hoping that the continuing stream of offshore leaks will not just lead to outrage but also to fundamental disruption of our whole approach to questions of global political inequality, globalisation, and, specifically, global taxation.

There is a need for broader and better participation in global political discussions of tax havens and tax systems. A World Tax Organisation would be a great place to start.

And there is a need to move towards tax systems that are truly anchored at the global level in order to deal with global economic activity.

There is also a need to rethink our approach to national sovereignty and to depart from the zero-sum mentality.

And finally, we need to address the global political inequalities that pose such a significant barrier to progress in the fight against tax havens.

If we can begin to move in this direction, just a bit, the future suddenly looks much brighter for the international tax system, for public finances, and for the modern global economy.

Law and morality in the Paradise Papers

Predictably, responses to the release of the Paradise Papers, another leak showcasing the activities of “the offshore world”, has tended to fall onto a familiar continuum.

At one end, there’s the “it’s all about the law” fraction. This group maintains that since the leak reveals seemingly little outright illegal activity, any issues arising from the stories should be taken up with politicians – it’s their job to change the laws, change the system, after all. Most of the people and companies at the centre of revelations have opted for this line of argument. Apple, for instance, said in a statement, “At Apple we follow the laws, and if the system changes we will comply”. Translation: If you want us to change, change what’s lawful. Myself, I had the rather mixed pleasure of being chastised in a major Danish newspaper this week for my comments on the leaks by a tax advisor who suggested that the revelations were a witch hunt given the absence of illegality.

At the other end, there’s the “it’s all about morality” fraction. This group maintains that while few laws seem to have been broken, it is the morality of the revealed affairs that requires scrutiny. The implication here is that the onus of change is upon the taxpayers involved to modify their behaviour. Amongst others, most of the media outlets involved in the Paradise Papers seem to have taken this as their starting point, and that seems to be the line of thought by many in the general public too. Nick Hopkins at the Guardian noted, “Thanks to the Paradise Papers leak, the world will get a chance to scrutinise and pass judgment on the tapestry of schemes and networks politicians say they find so unpalatable – and many ordinary people find offensive and unfair.” Various academics have also highlighted what is, in their view, the positive nature of these morality debates.

Of course, this is a simplistic representations, and there is inevitably other dimensions and a large middle ground, where discussions are now developing on the interplay of law, morality and other dimensions in the Paradise Papers and beyond.

Unfortunately, it seems from my vantage point, this middle ground remains minuscule compared to the outsized presence at each end of the scale, especially in the popular media discussions.

So I want to strike another blow for considering both law and morality in responding to the Paradise Papers.

Why? Because both the “it’s all about the law” and the “it’s all about morality” mantras are letting important issues slip by, and letting those responsible off the hook.

To start, the “it’s all about the law” crowd let taxpayers, companies, celebrities, elites and others involved off the hook. Yes, they may acting in accordance with the law (although lawfulness is usually impossible to ascertain from the documents), but the law is unfortunately not always a fixed and readily identifiable line across which we can easily distribute those in and out of compliance. The letter of the law is one thing, the spirit of the law is another. That is, of course the reason we have legal institutions such as the courts – to make final determinations about legal compliance, and fortunately so.

However, the opportunities to play at the margins of this compliance line are extremely unevenly distributed. For instance, a regular salary-earner (the vast majority of taxpayers in any developed country) has rather limited possibilities to engage in tax evasion and avoidance; most of her taxable income and economic affairs will be subject to third-party or verified reporting, which is hard to abuse. Meanwhile, Nike – a resourceful globally operating corporation with mobile income and fungible assets – has much more scope to engage in such activity. In general, the opportunity for avoidance and evasion is simply highly progressive (the richer, the more opportunity), as illustrated by recent research. As I have also written previously, the legal and institutional framework is the key element in determining whether people comply with tax laws, but other important factors include levels of wealth, tax rates, audit probability, and tax morale – each of which is unevenly distributed across the population of taxpayers.

Moreover, as my own and others’ research has shown, politicians do not have exclusive authority over the content and nature of national nor international tax rules. A range of stakeholders, including those who use the offshore system, play a role in shaping the political discussions and outcomes that support the offshore system in the first place.

In this context, when commentators claim that Nike’s global tax set-up, or the use of offshore investment vehicles, are entirely unworthy of discussion because of their legality, or compare these to an ordinary taxpayer claiming a regular tax deduction, there are good reasons to be skeptical. This ignores the fuzziness of the law and compliance, and it neglects the role of personal and corporate behaviour, and thus responsibility, in the offshore system.

And it ignores the broader societal imperatives at play, and the contemporary context of widespread condemnation of “the offshore”, of inequality, of public frustration, etc. Utilising the offshore system brings additional risk – financial, but also reputational and legitimacy-wise – because it may look off from the perspective of the general public. As I wrote just a few days ago, this increased risk brings with it added responsibility “to address the broader societal concerns, to take them into account, not just in communicating actions but also in assessing those actions in the first place”.

In a similar manner, the “it’s all about morality” crowd is letting politicians, political institutions, international organisations, and also the media and the public off the hook. On the former, it is, after all, indeed the political system which is ultimately responsible and accountable for crafting laws which make it possible to utilise the offshore system. “Tax havens” are notoriously difficult to regulate because of fundamental principles of the international tax order, such as fiscal sovereignty and the collective action problem – but that doesn’t mean we should give up and shift the blame.

Moreover, the “it’s all about morality” crowd is unfortunately also guilty of letting the worst offenders involved in the leaks somewhat off the hook. When the court of public opinion becomes “all about morality”, we risk pooling the very bad with the not-so-bad. The mere use of investment vehicles in the Cayman Islands is chugged in with regulatory arbitrage, tax avoidance, money laundering and outright corruption. Is Queen Elizabeth’s offshore investment as bad as Glencore’s secret loans, in terms of the law or in terms of morality? If so, then by extension almost any cross-border activity involving “offshore” site becomes a no-go. As I wrote the other day,  I do not think encouraging a total shutdown of the Bermudan economy is advisable. That does not mean we should not discuss the impact of such activities but rather that we should not support outright bans of whole countries. I do recognise that many smart people have sought to distinguish between these shades of offshore activity, but my perception is it still does not have sufficient impact to really translate in to the public domain.

We also risk conflating a range of issues when saying “it’s all about morality”. In the case of Queen Elizabeth’s fund, the combination of personal wealth, investments unfamiliar to the general public, and offshore structuring has made for widespread condemnation. Each of these elements are issues that are open for discussion, e.g. in terms of inequality, but to mix them all up creates an unnecessarily neatly pooled picture of what is going on and what is at stake.

Finally, “it’s all about morality” provides a neat excuse for actors to call for rash, politically satisfying initatives, rather than deliberated, effective reform. As Shu-Yi Oei and Diane Ring have argued, recent years’ tax haven leaks have given rise to non-rational responses by political actors. “Quick fix” unilateral action by politicians under pressure, for instance, can undermine broader global progress. The need to do something can overshadow the need to do right. There is also the risk of undermining existing reforms. The recent progress on automatic exchange of tax information, which only started this past September, has rarely been mentioned in the wake of the leaks although it is likely to have a significant effect upon the practices showcased in the media.

Thus, when commentators lump all practices revealed in the Paradise Papers together as equally problematic, there are similarly good reasons to be skeptical. This neglects political responsibility, the very real effects of political (in)action, and the varying relationships of varying offshore practices to law. It also risks undermining actually effective and meaningful political reforms, including those already in place but which we are yet to see the full effect of.

All of this is unfortunate because the Paradise Papers, as with previous leaks, provide unique momentum for real transformative change, which is needed if we are to really get at the issues underlying the revelations. One of the key messages I have tried to convey in the wake of the leaks is that we have still not genuinely tackled crucial questions about how to tax multinational firms in a modern global economy, how to regulate fiscal sovereignty in an age of harmful tax competition, or how to ensure the global legitimacy of tax governance and cooperation.

These are questions that go to the heart of the Paradise Papers revelations, as well as revelations from prior leaks. And these are questions we should be asking these days, while the momentum is there. It becomes difficult to do so if we do not recognise the role of both law and morality because we let those responsible off the hook and we let important issues slip by.

Instead, I think that the best way forward is to genuinely consider the role of both law and morality. And that we consider the fundamental underlying questions that lead to outrage and leaks and political trouble in the first place. That includes paying attention to both political action and behavioural change on the part of taxpayers. It is not possible to bring about meaningful transformative change, I believe, without addressing both norms and politics. And the issues at stake are too important to let those with the power to change the state of affairs off the hook.

So what does that kind of way forward look in practice? I have some ideas. Stay tuned..

ParadisePapers and guilt by association

The new leak is upon us. 13,4 million new documents from Appleby, an upscale offshore service provider headquartered in Bermuda, as well as 19 company registries have provided fodder for politicians, professionals and the public since the stories began to flood in late Sunday night.

Inevitably, the headlines will tell tales of the various offshore activities of the rich and famous, with extensive detail provided by corporate ownership documents, contracts, internal communications, and so forth.

However, the leaks illustrate a range of different activities which might usefully be segmented in terms of both law and broader societal concerns.

At the “very bad” end of the law spectrum, there is likely some outright evasion of taxation or regulation, corruption, and some highly dubious and opaque dealings involving problematic individuals and corporations. Although many more stories are to come, the lack of adequate anti-money laundering management on the part of Appleby points in this direction, as does the secret loans of Glencore, and the case of Mrs Brown’s Boys.

At the other end of the law spectrum, there will be relatively innocuous investments, holdings, etc. Queen Elizabeth’s offshore investment vehicle, for instance, appears in line with common investment practice. (I realise many will say these are not innocuous whatsoever – I’ll pick this up below).

And in between, in the “grey zone”, there will be instances of tax avoidance, structures established in unusual and unexpected locations and manners, secretive ownership set-ups that do not pass the sniff test, etc.

While these different issues vary in terms of their relation to the law, they are bound to be bundled together in stories from and in reactions to the Paradise Papers.

And the reason for that is broader societal concerns. From the perspective of many people, the mere association with “the offshore world” and with Appleby implies guilt in some sense, morally if not legally. No doubt this is partly caused by recent years’ rise in media stories and political rhetoric on “cracking down on tax havens”, which leaves little room for nuance.

But the broader societal perspective is no less important to take into account than strictly legal questions. Here we need to understand the association with Appleby and offshore in the context of the implicit or explicit support granted to “the offshore system” and the large system issues in the international order by such association.

The use of offshore structures bring with them increased risk – reputational risk certainly (as the leaks firmly illustrate), but also risk of exacerbating the problems of the international system (both in terms of tax, economy, investments, etc.) through financial and normative support to those profiting from these problems and/or to the offshore system as a whole, and even to the issues of the global economy as a whole, such as inequality. I stress risk here because offshore structures may well not lead to such a result but nonetheless they maintain the potential for it, even if that is not the intention.

Increased risk implies increased responsibility. In the same way that the corporate tax mantra may not suffice for the public when corporations are explaining their tax affairs, the reference to purely legal compliance (which in itself is difficult to impossible for journalists and others to challenge without detailed insight) may not be sufficient to really address broader societal concerns. There is a responsibility, whether you think it is fair or not, to address the broader societal concerns, to take them into account, not just in communicating actions but also in assessing those actions in the first place.

This responsibility to address claims of “guilt by association” simply comes with the territory of offshore investments. Some may not like it, but that’s reality.

And this responsibility is especially incumbent on high-profile individuals and corporations, who are figures of society, and who play a heightened role in shaping society-wide norms, e.g. the trust and belief in the tax system and the willingness of ordinary people to pay the correct amount of taxes.

And it is also especially incumbent in an era where there is widespread polarisation of debates on tax and the offshore, as well as widespread problems with the international tax system.

The answer to this responsibility, I hope, should not be to avoid entirely engaging with cross-border investment involving “offshore” sites, or to shy away from the discussions entirely in order to shield one self. Encouraging a total shutdown of the Bermudan economy, or a total shutdown of discussions on the offshore, is clearly not advisable. In order to fix the underlying structural issues, we need to continue working towards a better offshore system, better global cooperation, a better international tax system, a better global economy. This may sound like platitudes but really the root cause of many of the issues we are faced with, and the issues people perceive today, run deep.

In the short term, we should be able to move discussions and policy forward by paying attention to and responding to both legal concerns and the concerns of a wider societal nature. We should not accept outright claims of “guilt by association”. But we should also not accept outright claims that this boils down exclusively to an issue of legal compliance.