What is being done?

The secrecy world is so complex and varied, there is no magic bullet that will tackle it. New and widespread public and professional awareness, backed by international co-operation, will be essential. This page outlines briefly some key areas, on each of which TJN has advocated since our establishment in 2003, and each of which has now come to occupy a central position in global policy discussions. They are technical changes, but they each represent a significant shift of power, which is why they have been – and still are being - resisted. Nevertheless there has been significant progress on each aspect of our ‘ABC’ of tax reform: Automatic Exchange, Beneficial Ownership transparency, and Country by Country reporting, as set out below.

However, the repeated revelations in offshore leaks such as the Panama Papers in 2016 and the Paradise Papers in 2017 has shown, more than ever before, the truly systemic nature of the secrecy and offshore problem. They have brought into the open how the wealthy, the corporate world and their political cheerleaders – aided and abetted by the banking, accountancy and legal professions – are systematically undermining the global economy, human rights and, arguably, democracy, in countries both rich and poor. While the changes set out below are still necessary, it is becoming clear that a systematic approach is also needed: a global summit convened by the UN, to find truly global solutions to tax evasion and avoidance and other illicit financial flows.

Beneficial ownership

The true ownership or effective control of an asset, whether it be a painting, an office block or a bank account, can be masked through the use of any number of different entities and arrangements - such as trusts and offshore companies - so that it is impossible to ascertain for the public, or business partners, or law enforcement or others.

We believe it is essential that the beneficial ownership, control and accounts of companies, trusts and foundations, and their like, must be readily available on public record, and it must be explicitly required (and enforced) that financial institutions identify the ultimate beneficial owners or controllers of any company, trust or foundation seeking to open an account. Read more about trusts here, and more about company ownership, here.

Since 2013, following a lot of campaigning by many organisations, TJN’s proposal for publicly available registries of beneficial ownership is starting to be accepted as a new global norm, adopted in principle by the G20, the Extractive Industries Transparency Initiative, and the EU, which has enshrined it as part of its 4th Anti-Money Laundering Directive. Several other countries have committed to it or are working towards a version of it. There are problems with the standard, which means it is possible to be compliant with the FATF standard and EU regulation while still permitting real owners to go identified. The lower threshold for an ownership stake, in much of the legislation so far at 25%, is too high. Most are not public. Trusts are rarely included. And hypocrisy reigns: the UK has created a public register itself and, under former Prime Minister David Cameron, helped put the topic on the G8 agenda, but has so far failed to force its satellite secrecy jurisdictions to do so too – something that is well within its powers. But the progress so far is an acknowledgment of the importance of this issue. For more details, see TJN’s beneficial ownership page with links to further information, and Key Financial Secrecy Indicator 6.

Automatic Information Exchange

When the G20 in April 2009 declared that 'the era of banking secrecy is over' and mandated the OECD to lead a crackdown on secrecy jurisdictions, it pushed forwards a process of highly ineffective information exchange, where a jurisdiction wanting to find out information about its taxpayers must make a very specific request - and in effect must already know the precise information it is looking for before it even asks for it.

A far better principle, which we have long promoted, is that of automatic information exchange (AIE). In 2013 the G8 and G20 endorsed AIE as the global standard for exchange of information and requested the OECD to develop a legal framework to implement it. In February 2014, the OECD published the “Common Reporting Standard” (CRS) which is based on FATCA IGA Model I A, although adapted to a multilateral context (e.g. reference is made to residency instead of nationality) and other changes (lower thresholds, lack of sanctions for non-compliance in contrast to FATCA’s 30% withholding tax, etc.).

As of September 2017, 102 countries had signed the Multilateral Competent Authority Agreement, which provides the legal framework to exchange information. Some have already begun exchanging during 2017, more will start doing so in 2018. They are not all exchanging with each other, though – they have to mutually choose to do so, which means in effect that they can still choose not to exchange with a fellow signatory country, even if it has met the legal and confidentiality criteria set by the OECD. Countries can also choose to postpone exchange of information with certain other signatories, or opt for ‘voluntary secrecy’, in which they provide information but decline to receive it; all of these limitations reduce the scope and potential effectiveness of the scheme. Some rogue jurisdictions are seeking further ways round it by offering passports for sale, so that they become the ‘home’ country which receives tax information, from elsewhere, on people who buy the fake nationality – with no intention of doing anything with the data they receive. One of the other main problems with the Common Reporting Standard is that it lacks provisions that could facilitate implementation by developing countries. For example it does not allow for a non-reciprocal relationship between developing countries and developed countries in the early stages of implementation. This would allow developing countries to participate in information exchange whilst they are building the capacity needed to collect the information on their residents. The significance of this is that although there may be a great number of people from the developing world hiding their money in Switzerland, there are unlikely to be many Swiss citizens hiding their money in say, Sierra Leone. Despite these and other problems, the CRS still offers the best available platform for a global AIE which could eventually benefit developing countries.

For more details, see TJN’s Automatic Information Exchange page with links to further information, and Key Financial Secrecy Indicator 18

Country-by-country reporting

Under current international accounting standards, corporations can publish their accounts on a regional or even global basis, with no country detail. It is impossible to unpick these numbers to work out what is happening in each country concerned. This means they can shift their profits from the countries where they earned them to no/low-tax jurisdictions, sometimes even with the connivance of tax authorities, as the LuxLeaks document trove showed. TJN estimates global annual tax losses from corporate tax-dodging at $500 billion.

Country by country reporting, on the other hand, would shine a light on the misalignment between economic activity and profits; it would require all multinationals to report publicly on each country in which they operate. Following TJN's leadership on country-by-country reporting over a decade, the OECD was mandated by the G8 and G20 groups of countries in 2013 to produce an official standard. The resulting Base Erosion and Profit Shifting (BEPS) Action Plan has 15 components, four of which are minimum requirements for countries signing up to its Inclusive Framework. One of these four (Action 13) is country by country reporting, which as a consequence is now being legislated in 108 countries (as of November 2017). As a result of EU legislation, public country by country reporting is also required for certain sectors: banks (under Capital Requirements Directive IV) and the extractive industries (Directive 2013/34/EU; there are also some requirements in the US, Canada, Norway and Hong Kong, see the Key Financial Secrecy Indicator 8 for details).

These developments are an excellent start. But the OECD standard only requires that a multinational company’s country-by-country report be provided privately to a single tax authority in its home country, or to the tax authority in a country where it has subsidiaries – but under multiple and complex restrictions imposed by OECD model legislation.

This information must be made available to all tax authorities if the OECD is not to exacerbate the inequality in countries' ability to enforce their taxing rights. Nor is it public, which is necessary if the intended benefits in terms of the accountability of both multinationals and tax authorities is to be achieved. The EU is discussing a proposal towards public country-by-country reporting during 2018. For more details, see TJN’s web page on the subject and Key Financial Secrecy Indicators 8 and 9.

Private intermediaries

The system of global financial secrecy and secrecy jurisdictions is administered by an infrastructure of private intermediaries: primarily bankers, accountants, lawyers and corporate and trust service providers. As was demonstrated in the Panama Papers, Luxleaks, HSBC leaks and the Paradise Papers, they are highly active players in the secrecy world. It is essential that international initiatives seek to target those who actively create secrecy and facilitate illicit financial flows, in improve the conduct of financial services firms which abuse the international finacnial system. This can be done in various ways.

Break up the big four

Following the 2007 finanical crisis there was a growing consensus that the concentration of power within several of the world’s largest banks was damaging to the financial system. The size of the banks had made them difficult to regulate and removed market incentives for them to conduct themselves appropriately. As a result some countries introduced legislation to break up large banks, or at least force them to separte different parts of their operations. A similar problem exists in the world of accounting, tax advisory services and auditing – professions that are dominated by the big four accountancy firms – PwC, KPMG, Deloitte and EY. Companies that have been deeply involved in many financial scandals over the last ten years.

We believe that governments should introduce legislation to break up the big four. The audit function of these firms would be a good place to start. Auditors play a particularly important role in the regulation of our economies. They are external whistle-blowers with wide ranging powers to investigative the internal affairs of companies. However, there are concerns that auditors from firms which have other contracts with the company they are auditing will not speak out if they see wrongdoing taking place.

Governments should insist that firms doing this important work are independent companies who do not provide other services on the side. This will make sure that the management of auditors is focused on auditing, and not on winning their next contract for other services.

The regulation of lobbyists and public affairs professionals is an important part of setting up a more responsible financial system. Governments should introduce regulations to ensure that lobbyists publish who their clients are, how much they spend and a record of their meetings with government officials. Firms engaging in lobbying and public affairs should not be able to act as advisors to government.

Financial and legal services should not be allowed to be marketed into a country from offshore locations. Instead, firms marketing services should be compelled to operate through a significant presence in the jurisdiction from which they are soliciting funds. This includes having management and directors resident in the country where they operate. This will make sure that professional services companies are not able to escape regulation by acting offshore.

All of these measures, as well as having the benefit of improving the incentives around good governance of the financial sector, would have the added benefit of encouraging competition in the market for professional services.

Regulating the enablers

In many countries the regulation of professional sector is in the hands of the self-regulatory bodies. Regulators must be well funded and independent from those regulated. The regulation of the conduct of financial professionals should be taken out of the hands of their colleagues, and given to a statutory body.

Rules setting out appropriate conduct by professionals should be drawn up by regulators, which should include rules designed to end the revolving door in the financial industry. Auditors should not be able to be employed by a company they have previously audited for several years after they leave the audit profession. Regulators should be prevented from immediately taking higher paid jobs in the private sector when they leave their regulator.

There should be a prohibition against professionals promoting artificial schemes one of whose main purposes is to create a tax advantage.

Finally, when a tax professional advises on a transaction they know how much tax their client will save if their client follows their advice. Tax Justice Network supports the adoption of legislation that would require tax advisors to report to tax authorities their estimate of the amount of tax avoided though the advice they have provided to companies and individuals. This would allow tax authorities to risk assess taxpayers based on how aggressive the advice they have taken is. Furthermore, there should be statutory rules adopted in each jurisdiction that forces both taxpayers and tax advisers to report full details about uncertain tax positions as declared in the annual group accounts, as well as full details on all tax avoidance schemes employed.

Read more on the Tax Justice Network's web page dedicated to private intermediaries.