Archive: October 2013

This section provides a selection of media items posted in October on issues within TaxWatch’s area of interest.


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US state court invalidates web sales tax

The Australian, 19 October 2013

THE Illinois Supreme Court has thrown out a state law that taxes certain internet sales, saying the so-called “Amazon tax” violated US federal rules against “discriminatory taxes” on digital transactions.
The 6-1 ruling represented the first time a US court had invalidated an internet sales tax law among 18 states that have them.
It brought an immediate cry from traditional, store-based retailers for congress to step into regulating taxes on web sales.
The court determined that Illinois’ 2011 Main Street Fairness Act was superseded by the federal law, which prohibits imposing a tax on “electronic commerce” and obligates collection that’s not required of transactions by other means, such as print or television.
Illinois’ law required out-of-state retailers to collect state taxes on annual sales of more than $US10,000 ($A10,400) that involve in-state “affiliates,” or website operators and bloggers, that draw consumers to the retailers’ sites in exchange for a cut of each sale.
That prompted several high-profile departures from Illinois by companies such as CouponCabin.com, which fled rather than lose so-called “click-through-nexus” payments from the internet retailers.
But Justice Anne Burke, writing for the court’s majority, questioned whether there was any substantial difference between out-of-state businesses reaching Illinois consumers through a click-through-nexus approach or through other approaches that aren’t taxed.
“The click-through link makes it easier for the customer to reach the out-of-state retailer,” Burke wrote.
“But the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts.”
Justice Lloyd Karmeier dissented, saying the federal law does not apply because the state statute doesn’t “impose any new taxes or increase any existing taxes,” but rather changes the definition of who’s obligated to collect them.
But Illinois residents should not expect refunds for the books, neckties, CDs or other items they bought by click during the past two years.
Regardless of how an item is purchased, Illinois shoppers must pay 6.25 per cent sales tax.
If a retailer doesn’t collect it online, taxpayers must do the math and add the owed sales tax when figuring their state income-tax return in the spring.
Illinois’ tax collector, the Department of Revenue, said it’s considering asking the US Supreme Court to intervene.
Amazon.com did just that in August, when it sought a review of the New York Court of Appeals’ March ruling upholding the law there.
New York was among the first to argue that a business with “affiliates” within its borders gives the company a physical presence there – a must if a state hopes to collect taxes from it, according to a 1992 US Supreme Court ruling.
Revenue officials also said they would continue to push the Marketplace Fairness Act in congress to “level the playing field for all businesses”.
Friday’s Illinois ruling “underscores the need” for Capitol Hill action, said David Vite of the Illinois Retail Merchants Association.
“Brick-and-mortar businesses, which pay property taxes, and income taxes, and are hiring people, are at a significant competitive disadvantage with their remote-selling counterparts,” Vite said.
“It’s time for the federal government to clarify and finish putting retailers, who are making payroll and putting people to work, on equal footing.”

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Infrastructure funding
Roads less travelled
Oregon wants to tax motorists for miles driven, not petrol burned. Will it work?

The Economist, 19 October 2013

PAYING for roads in the United States was once straightforward. Petrol (gasoline) taxes, easy to administer and collect, were directed into the federal Highway Trust Fund. Those revenues were in turn distributed to the states for maintenance and investment. State petrol taxes provided further funds. And because petrol consumption was a rough proxy for road use, the system satisfied the principle that consumers should pay for a product in proportion to their use of it.
That old model no longer works. First, the federal petrol tax has failed to keep pace with prices: it was last raised, to 18.4 cents per gallon (3.8 litres), 20 years ago. Most states also do not index their petrol taxes. Second, petrol taxes no longer serve as an adequate stand-in for road use. Cars are becoming increasingly fuel-efficient: by 2025 new vehicles must, by law, run at an average 54.5 miles per gallon (mpg). The more efficient a vehicle, the less tax is paid to go a certain distance; drivers of electric cars pay no petrol taxes at all. So not only are revenues falling, but drivers of gas-guzzlers are being asked to carry more of the burden. Petrol taxes may be green, but they are gobbling up the tax base. And third, Americans are simply driving less than they once did. All this helps explain why the Treasury has had to bail out the Highway Trust Fund to the tune of $41 billion since 2008. A recent report from the Tax Foundation, a think-tank, found that almost half of road spending in America came from general revenues rather than user payments like petrol taxes.
Congressional committees have considered alternative funding models over the years but, as observers of Washington over recent weeks may have noticed, the capital’s politicians sometimes struggle to get things done. So states and municipalities are seeking to plug the gap. Various ideas have been thrown around, from sales-tax rises to tolls to bond issues. But the most radical comes from Oregon.
The state invented the petrol tax in 1919, but officials now want to replace it with a vehicle-miles-travelled (VMT) fee. Under it, drivers would be charged for the distance they travel, rather than taxed on the petrol they consume. GPS-equipped gizmos would track journeys, ensuring that motorists were not charged for driving on private roads or out of state. Those who preferred to keep their whereabouts secret could opt to be charged on odometer readings, or simply to pay a flat fee. A bill that would have applied a VMT fee to all new vehicles doing 55mpg and above died in the last legislative session; instead, 5,000 volunteers will join a new VMT scheme in July 2015. They will be charged at 1.5 cents per mile rather than paying the state petrol tax (30 cents per gallon).
Oregon has been mulling a replacement for the petrol tax since 2001. The VMT policy has been fine-tuned in pilot programmes; the once-sceptical American Civil Liberties Union is now satisfied with the privacy protections (personal data is destroyed after 30 days), and local environmentalists cautiously back the idea, though they would like lower fees for more efficient vehicles. Some economists would prefer a more sophisticated system, with charges that vary by time and place (to reduce congestion) and weight of vehicle (SUVs inflict more wear and tear than Minis). The review of Oregon’s first pilot suggested that an element of congestion charging could be included. But Jim Whitty, the mastermind of the scheme, says that issue is probably best handled at local rather than state level.
Still, Oregon’s long slog is telling. The design of its scheme shrewdly addresses the most acute public concerns, says Trey Baker at the Texas A&M Transportation Institute. Yet its backers could not persuade legislators to pass it in mandatory form (the watered-down bill passed with big bipartisan majorities). In many states, including Oregon, new taxes require legislative supermajorities. And even with Oregon-style safeguards, many drivers will heartily dislike handing over their personal data to governments. “It’s as much a political challenge as a technical challenge,” says Dan Sperling, a transport expert at the University of California, Davis.
But something will have to be done. Earl Blumenauer, an Oregon congressman, backs a national VMT fee but admits he is “swimming upstream”; the Obama administration has rejected such proposals before. Mr Blumenauer wants the Treasury to sponsor Oregon-style pilot programmes in other states, in the hope of building momentum for a national scheme. (Some other states are already considering VMT programmes.) In the meantime, to keep the Highway Trust Fund solvent, he wants to raise the federal petrol tax. Given the goings-on in Congress lately, some may find that ambitious.
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Tax Office to scrap returns for 1.4 million people

Fleur Anderson, The Australian Financial Review, 17 October 2013

The Australian Taxation Office is close to achieving what former treasurer Wayne Swan failed to do – ¬getting rid of the hassle for millions of taxpayers of lodging a tax return.
Instead of Mr Swan’s failed $2 billion plan to introduce a standard tax deduction to free taxpayers from the burden of lodging tax returns, the Tax Office will simply fill in taxpayers’ forms for them and ask them to tick “yes” or “no”.
The standard tax deduction plan was abandoned in 2012, just two years after it was announced, because the mining tax failed to produce the billions of dollars to pay for the $500 or $1000 standard deduction for taxpayers who wanted to opt out of lodging a tax return.
Instead, the Tax Office has been quietly using technology to come up with a plan to achieve the same ¬outcome – eliminating tax returns for taxpayers with simple tax affairs – at very little cost.
ATO second commissioner Neil Olesen revealed the breakthrough at a CPA Congress in Canberra on ¬Thursday and said as many as 1.4 million people may be offered the new “push” tax returns next year.
Instead of e-tax, which allows taxpayers to fill in their tax returns online, push tax returns will be sent to taxpayers with their information already filled in by tax officials.
The ATO already “pre-fills” taxpayer information – such as income earned, Medicare claims, bank interest and shares and dividends – through the e-tax system.
“The key principle here is to use the information we already routinely receive about taxpayer affairs . . . to send the tax return to the taxpayer, rather than the current way where all we offer is a pre-fill service, while still requiring the taxpayer to prepare and lodge a return each year.”
The ATO’s prototype was “ looking pretty good”, Mr Olesen said, and had reduced the number of screen pages from 140 under the e-tax system to just 10 pages, which took about 20 minutes to complete in ¬initial testing.
Less work for taxpayers
Countries such as Denmark and Norway send almost three-quarters of tax returns to the taxpayer.
In Norway, there is “silent acceptance” that if you do not respond in a certain period, the tax return would be treated as final.
“In Australia, there are some ¬reasons why we could not offer this service widely – for example, some complex deductions – but over time and with some careful and creative thinking, we think we could effectively liberate around 4.5 million taxpayers from any significant response burden at tax time,” Mr Olesen said.
As many as 75 per cent of taxpayers are estimated to use tax agents to file their tax return, which ranks Australia as one of the highest in the world in the use of tax professionals for individuals’ tax affairs.
The Henry tax review recommended simplifying the tax system so that the “time and resources individuals devote to complying with the requirements of the law could be allocated to more productive or satisfying activities and therefore represent a significant cost to the economy”.
Mr Swan announced in the 2010 budget that taxpayers using the standard deduction would no longer have to keep shoe boxes full of receipts to justify tax-deductible expenses.
CPA Australia head of policy Paul Drum welcomed the ATO’s move.
“It will be very good for taxpayers with simple or straightforward tax affairs,” Mr Drum said.
The standard deduction was meant to save time for taxpayers with simple affairs, and could mean a ¬bigger tax refund for 6.4 million taxpayers, but it proved too expensive to implement.

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Welfare doesn’t cause poverty – it is necessary for more equality

 

John Falzon, The Guardian, Wednesday 16 October 2013

 

Rising inequality and differential exposure to economic risk has caused one group to see themselves as the “makers” in society who provide for the rest and pay most of the bills, and the other group as “takers” who get all the benefits.

You couldn’t really get a better re-phrasing and re-framing of the prime minister’s favourite Menzies axiom that we’re a nation of “lifters, not leaners”.

The problem with this view is that it is built on a rather convincing lie. Thoma goes on:

The upper strata wonders, “Why should we pay… when we get little or none of the benefits?” Even worse, this social stratification leads those at the top to begin imposing a virtue and vice story. Those at the top did it all by themselves, those at the bottom, on the other hand, are essentially burning down their own houses just to collect the fire insurance.

According to this logic, welfare causes poverty and inequality and you only have to look at the lives of those who are “welfare-dependent” to be convinced. This is like saying that hospitals cause sickness and that you only have to look at all the sick people in hospitals to see how true this is. It’s as if you could do away with sickness by tearing the hospitals down.

Hospitals actually can cause sickness – along with the stories of healing come some stories of harm. Parking people on income-support payments when they are able to work is no substitute for helping them into employment. But this doesn’t mean that you help people into employment by means of cruelty and punishment. You don’t build people up by putting them down. You don’t help someone into employment by pushing them into poverty.

Disability advocates have long made the excellent point that the idea of “disability” largely depends on how we structure our society and our economy. If someone cannot walk up the steps we can decide as a society that it’s tough luck or even that they should be blamed for falling. On the other hand, we can be sensible and build a ramp. The same goes for other experiences of exclusion. Unemployment is painted as a moral failure. The causes, however, are primarily structural rather than personal. For one thing, there are just not enough jobs. Then there are issues such as inadequate or inappropriate skills, housing stress and homelessness, health problems, and difficulties accessing transport or childcare. Welfare payments, by themselves, are not the solution to poverty and inequality. But neither are they the problem, any more than a hospital is the problem that causes ill health.

The conditions for the creation of a healthy population actually lie pretty much outside the hospital. Nutrition, the natural and built environment including appropriate housing, income adequacy, empowerment, social connectedness, access to sport, recreation and cultural activity, education… these are the social determinants of health. They are why, for example, the most disadvantaged postcodes in Australia, according to the COAG Reform Council, have four times the number of avoidable hospitalisations.

So too with our social security system. An adequate income is crucial, which is why, despite the constant ideological resistance, we continue to advocate for a much-needed $50 a week increase to the Newstart payment (which currently sits at 40% of the after-tax minimum wage) and a change in the way it is indexed. But income support is not enough. We need to look at what locks people out of the labour market. We’re usually not talking about the need for ramps instead of steps in this case. We’re talking about bloody great walls that we’ve built around people before condemning them for lacking the ‘aspiration’ to scale them!

This week is Anti-Poverty Week, an annual national awareness event which aims to engage communities in activities to highlight or overcome issues of poverty and hardship here in Australia or overseas. The St Vincent de Paul Society of Australia has today released Two Australias – a report on poverty in the land of plenty, which outlines the investments required to tackle social inequality.

Tackling inequality means investing in high quality social and economic infrastructure for the benefit of all. It means high quality education and health being completely accessible to everyone regardless of their income or their postcode, their gender, the colour of their skin, or their disability. It means guaranteeing appropriate housing rather than abandoning people to a private rental market that is notoriously bad at meeting the needs of low-income households.

In 2004, Tom Calma, then Aboriginal and Torres Strait Islander social justice commissioner, explained the difference between formal and substantive equality:

[I]f there are two people stuck down two different wells, one of them is 5m deep and the other is 10m deep, throwing them both 5m of rope would only accord formal equality. Clearly, formal equality does not achieve fairness. The concept of substantive equality recognises that each person requires a different amount of rope to put them both on a level playing field.

Tackling inequality means giving everyone enough rope. As things stand we often think nothing of giving extra rope to those who stand above the wells while leaving those who are stuck down the wells with nothing but the view from below and the dream of sunlight.

Which brings us back to where we started. Social spending, regardless of the screams of blue murder from those who have more than enough rope, helps build greater equality. This isn’t just good for the people stuck down the wells. It’s good for everyone since the higher the level of inequality the higher the rates of crime, mortality and physical and mental illness. Inequality is literally bad for our health. Social spending includes, but does not stop at, income support for the people who are outside the labour market either because they are unable to participate in paid employment, due to such reasons as age or sickness or caring responsibilities, or because they are able to work but remain unemployed or underemployed.

Well-targeted spending is an investment in the health and well-being of the nation as well as in the overall productivity and participation of the population. It means spending on education and training, on health, housing, transport; all the important elements of social as well as economic infrastructure, without which we will all be poorer as a nation.

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Ireland closes loopholes that led to tax haven allegations

Henry McDonald, The Guardian, 16 October 2013

Ireland’s finance minister has pledged to crackdown on “stateless” multinational companies who use addresses in the republic to avoid paying tax in their home countries.
The Irish government has come under repeated fire this year from tax campaigners to tie up loopholes that some claim have turned Ireland into a tax haven for transnational corporations such as Apple and Facebook.
Michael Noonan has promised a new finance bill that will include a measure to ensure that no Irish registered company can be stateless for tax purposes. “Let me be crystal clear. Ireland wants to be part of the solution to this global tax challenge, not part of the problem,” Noonan said.
The US Congress sharply criticised Ireland earlier this year over low corporation tax and the fact that Apple paid less than 2% tax on the $100bn (£62.5bn) it made over four years. Irish registered companies were used to process most of the money, Congress complained.
The new rules to stop stateless companies will come into force from January 2015. They will be seen as a sop in particular to EU states such as Germany as Ireland seeks to defend its low corporation tax rate of 12.5%.
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Repealing the carbon tax: hidden costs and unanswered questions

Rosemary Lyster, Professor of Climate and Environmental Law at University of Sydney, The Conversation, 16 October 2013

There are reasons Australia has a price on carbon. Let’s recap.
The IPCC has released its Fifth Assessment Report stating that the increase in atmospheric concentrations of CO2, methane, and nitrous oxide is unprecedented in the last 800,000 years.
Data sets show a globally averaged combined land and ocean surface warming of 0.85C between 1880–2012. There’s a 95-100% probability that more than half of the observed increase in global average surface temperature from 1951 to 2010 is human induced.
By 2081-2100, under the IPCC’s best case emissions scenario, temperatures could rise by as much as 1.7C and in the worst case scenario by 4.8C. Our last summer broke 123 extreme weather records in 90 days. Last month was Australia’s hottest ever September on record.
So what are our current emissions?
Australia’s December 2012 National Greenhouse Gas Accounts show that since 1990, emissions from the electricity sector grew 47.3%, the stationary energy sector 44.5%, transport 47.5%, fugitive emissions (including from coal mining) 30.5% and industrial processes 30.8%.
These sectors are all covered by the carbon price mechanism (CPM).
Let’s recap the Abbott government’s agenda to reduce our emissions. The Climate Commission has been abolished. The Clean Energy Finance Corporation will be abolished. We no longer have a Department of Climate Change. Yesterday, the draft legislation to repeal the carbon price mechanism, to be the first item of business for the 44th Parliament, was revealed.
This means, briefly, that if the legislation passes the following will occur.
There will be no annual cap on Australia’s escalating emissions.
Financial year 2013-14 will be the last year that the carbon price mechanism applies and all charges for non-compliance will be repealed. The government will not extend what it calls the “carbon tax” even if the Parliament does not pass the repeal bills until after 1 July 2014. If the bills are not repealed at all, the government will be in breach of the law if it refuses to apply the carbon price mechanism and other carbon price legislation. Calling a double dissolution is a possibility.
Until then liable entities must comply with the carbon pricing mechanism and reporting obligations, but can use Carbon Farming Initiative (CFI) carbon credit units to offset their liability. February 2, 2015 is the final date for compliance before unit shortfall charges apply. An entity has to pay shortfall charges if it does not have enough carbon credit units to surrender to meet its liability.
All carbon levies applying to aviation fuels and synthetic greenhouse gases under separate legislation are abolished but 2013-2014 liabilities must be paid.
Once final commitments are met, refunds will be provided for any auctioned units, existing carbon units will be cancelled and over-surrendered carbon farming carbon credits will be re-credited.
The government denies that the repeal of the carbon price mechanism amounts to an “acquisition of property” other than on just terms under the Constitution. If it does, legislative provisions are included to pay a reasonable amount of compensation.
Industry assistance provided under the Jobs & Competitiveness Program (JCP) for Emissions Intense Trade Exposed Industries, under the Energy Security Fund and all assistance to electricity generators, will continue in 2013-14 but will cease thereafter. Any under-allocation of free units, which is expected, will be rectified while over-allocated units must be relinquished, or a levy will apply as well as a late payment penalty. The Steel Transformation Plan will also cease on 1 July 2014.
The Australian Competition & Consumer Commission will monitor prices and prohibit corporations from making false or misleading claims about the effect of the repeal on prices.
The independent Climate Change Authority will be abolished. Instead, the performance of the Renewable Energy Target, the Carbon Farming Initiative and the National Greenhouse & Energy Reporting Scheme will be reviewed by the government’s own Department of the Environment.
Legislation such as the National Greenhouse and Energy Reporting Act 2007 will be retained to support the Coalitions’ direct action policy.
Consequential changes are made to the current regulation of carbon permits as financial instruments and to tax treatment of various charges.
The income tax cuts scheduled for 2015-2016 to compensate Australians for the shift to an emissions trading scheme on July 1 2015 will be abolished.
All this, according to Mr Abbott, just to “save Australians A$550 a year”, or A$45.8 a month.
Yet, the Abbott government conceals so much.
What will the refunds, rectifications and potential compensation payments arising out of repeal cost taxpayers?
What will it cost taxpayers to deal with extreme weather events? So far extreme weather events influenced by climate change have cost Australia billions of dollars. Insurance premiums are rising and areas becoming uninsurable. Before the 2013 floods, Munich Re reported that financial losses from extreme weather events in Australia rose four-fold over the past 30 years
How will Direct Action work? We haven’t even seen independent modelling indicating whether it can deliver our Kyoto Protocol second commitment period obligations. Australia’s emissions reduction targets are likely to increase under a new international agreement expected in 2015.
What we have been told is that if the money for emissions reduction runs out there won’t be any more forthcoming.
At this point, one can only speculate on what the legacy of the Abbott government on climate change will look like when that government is voted out.

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IMF eyes tax potential of the world’s super-rich

Larry Elliott, The Guardian, 14 October 2013

US budget crisis should not deflect attention from the fact the rich need to help economies balance the books, writes Larry Elliott
It was impossible to find anybody at last week’s meeting of the International Monetary Fund willing to believe that the US will actually default on its debts. The universal belief was that the game of chicken would end before Thursday’s deadline for raising the debt ceiling, if perhaps only at the eleventh hour.
Even so, the budget battle overshadowed the meeting of the fund. The first question for every finance minister or central bank governor was: “How bad could it get if there is no deal?” Very, very bad was the unsurprising reply. Five years ago this weekend, Alistair Darling and Mervyn King flew home early from the IMF meeting to put the finishing touches to the bail-out plan for Britain’s banks. Other governments were doing likewise. Nobody wants to go through that again.
In reality, a replay of the events following the collapse of Lehman Brothers looks unlikely, and that would be the case even if the US went into technical default. There is a difference between a US treasury bond and the trash that passed for AAA-rated assets five years ago, and Washington would eventually honour its debts in full.
That doesn’t mean the budget row is a storm in a teacup. On the contrary, it is of great significance, although not for the reasons that have been prominent in the past few weeks.
The reality is that the short-term budgetary position in the US has been improving rapidly. After avoiding the temptation to front-load austerity, the US began its recovery before most other advanced countries and is experiencing a period of modest growth. The IMF estimates the US budget deficit will be down to 3.6% next year, much lower than the 5.8% pencilled in for the UK.
The US’s budgetary problems – as with most other developed nations – are medium-term ones, caused by the cost of benefits to an ageing population. In recent years, the US has seen its growth rate fall and its labour participation rate plummet. These trends are not compatible with rising bills for social security and medical entitlements. Especially not when corporations and rich individuals are becoming ever more skilled at minimising their tax bills.
This tension was acknowledged by the fund in its fiscal monitor, its half-yearly analysis of how well member countries are doing when it comes to balancing the books.
Traditionally, the fund has been seen as siding with those who believe licking the public finances into shape is really just about cutting spending. Many developing countries that have been subjected to harsh structural adjustment programmes would testify there is some truth in that reputation.
But the current fiscal monitor belies that because it suggests there are ways of raising extra tax revenue, beyond the fund’s long-term support for broadening the tax base through the wider application of VAT.
First, it supports the idea of a financial activities tax, which would be levied on the wages and profits of financial institutions. This would be the equivalent of levying VAT on financial services, which are currently exempt. It is the fund’s alternative to the financial transaction tax.
Second, the IMF thinks it is time to do something about an international tax system that allows companies such as Google and Starbucks to pay little corporate tax. The fund says they can do this because the global tax order is mind-bogglingly complex and outdated. Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation. This is not going to be easy, as the fund freely admits, but it adds: “The chance to review international tax architecture seems to come around about once a century; the fundamental issues should not be ducked.”
Finally, the fund comes out in favour of having a long hard look at whether those on the highest incomes should pay more. In some countries, the US in particular, the IMF research suggests the rich are substantially under-taxed.
Over the past quarter of a century or so, tax systems have tended to become regressive due to the increased reliance on indirect taxes, which weigh more heavily on the less well-off. Despite that trend, income tax is still progressive because the rich pay a large proportion of revenue from that source. The top 10% of earners account for 30%-50% of all revenue from personal income tax and social contributions, with the top 1% accounting on average for 8%.
The IMF study looked at whether there is untapped revenue potential at the top. It compared the current tax rate paid by highest earners with the tax rate that would maximise revenue, taking into account a number of factors such as whether rich people would work less hard if they were taxed more heavily, and whether they would find ways round a tougher regime.
This is quite a complex process, and sensitive to the assumptions made by those doing the calculations. So while the fund concluded the top rate of tax that maximised income was 60%, it was careful to set a range for each country studied. In the US, the current top rate of tax was more than 10 percentage points below the bottom of the range following the reductions in taxes on the rich in the past three decades.
Returning the top rate of tax on the US’s rich to the level in the 1980s would, the fund estimates, raise about $150bn a year for the US treasury. That would comfortably solve the country’s budget problems.
In the UK, the position according to the fund is less clear cut than it is in the US, but also less clear cut than George Osborne would have had us believe when he cut the top rate to 45%. The IMF’s calculations for Britain use data for 2010, when the 50% tax rate introduced by Alistair Darling was in force. Even then, the UK only just crept into the bottom end of the revenue-maximising range. The fund’s conclusion is that “in many countries it might indeed be possible to raise more from those with the highest incomes”.
How much more? “The implied revenue gain if top rates on only the top 1% were returned to their levels in the 1980s averages about 0.25% of GDP but the gain could in some cases, such as that of the United States, be more significant.” Applying the IMF’s formula to Britain would mean that the exchequer would raise an additional £4bn from taxing top earners, since 1% of national output is about £15bn.
This is not exactly a fortune but in tough times better than nothing. The Treasury’s argument is that cutting the top rate to 45% is raising more tax. But that claim is based on little hard evidence; the IMF work suggests it should be scrutinised extremely carefully.

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Higher tax rates to fix budget ‘emergency’

John Richardson, Crikey – letters, 1 October 2013

John Richardson writes: Re. “Budget emergency? Not if you look at Hockey’s new numbers” (yesterday). What I found interesting in Stephen’s piece is not that he identified the federal budget’s structural problem, brought about by the collapse in government tax revenues over the past eight years, but that he offered no explanation as to the drivers of that collapse, including the fact that 40% of big businesses in this country pay no income tax at all and corporate income tax as a share of GDP has dropped by a staggering 20% since 2007. And whilst the drum-beat in support of increasing the GST to fix the revenue problem grows louder by the day, we hear nothing of more equitable ideas to redress the taxation revenue shortfall, including adopting a wealth tax, abolishing excessive tax advantages on superannuation, abolishing negative gearing, adjusting capital gains tax concessions and introducing a genuine resources rent tax regime, just to name a few. It would seem like Joe Hockey’s culture of entitlement is under no real threat?

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The case for why Australians should pay even more tax

Miriam Lyons, Shaun Wilson, Adam Stebbing and Adrian March, Crikey, 26 August 2013

It’s time to reconnect the tax debate with our fundamental assumptions about what Australia’s future should look like. The Henry Tax Review got it right when it asked for submissions to link recommendations for our tax system to “the community’s aspirations for the type of society that Australia should become over the next two decades and beyond”.
How we tax and what we do with the taxes we collect is a statement of what we value as a society. We could use our tax system and government spending to deliver the improved services and reduced inequality that Australians say we want, without hurting our economy. The fact that we are not currently doing this is a matter of choice, not necessity.
Tax allows us to collectively pool our resources to solve shared problems and to build the common infrastructure we need to fulfill our individual needs. It’s the price we pay for knowing that medical bills won’t send us bankrupt, that any child can get a decent education regardless of his or her parents’ incomes, and that losing our jobs won’t put us on the streets. An adequate tax base alone doesn’t guarantee these things — effective government is also required. But the failure to raise enough tax revenue does guarantee inadequate services over the long term.
Australian taxpayers are currently paying bargain basement prices for the services our governments deliver. We have the fifth lowest taxes in the developed world. Yet we have one of the best health systems in the world and we have a better-educated population than many other rich countries. Our overall living standards are remarkably high: Australia ranks behind only Norway in the UN Human Development Index and tops the OECD’s Better Life Index.
However, like many bargains, Australia’s low taxes have hidden costs. We are starving important public services of the funds they need to do the job properly, and we are setting ourselves up for permanent structural deficits. We are also leaving ourselves with little room to respond to challenges like our ageing population, a hotter and more unstable climate, and the need to build a diverse and robust economy that can thrive in the face of global competition.
Some of our low spending on public services is the result of careful design. Universal health insurance through Medicare is a smart way to get great health outcomes at a low cost. Our welfare system is the most targeted in the rich world, which means it does more to reduce inequality per dollar of government spending than in any other developed country. However, in some cases we’re just being downright miserly:
• Australia’s income support for people who can’t find work, Newstart, has fallen from 54% to 40% of the minimum wage since 1996. In 2010, the latest date for which comparable data is available, Australia had the fifth lowest unemployment benefit among OECD nations. The OECD has taken the rare step of suggesting that Australia’s unemployment benefits might be too low. The Business Council of Australia agrees.
• Our public investment in education is low compared to other developed countries (1.1% of GDP, compared with an OECD average of 1.4%). We also neglect early childhood education, with low participation rates and public funding compared to other OECD countries.
• Australia was the second last developed country to introduce paid maternity leave (the United States remains the only developed country without it). The new 18-week scheme introduced by Labor is a little under the OECD average, making it less generous than the support given to new parents in many poorer countries.
Then there’s the structural deficit problem. In April the Grattan Institute made headlines by arguing that deficits of around 4% of GDP could be hard to shake if current trends continue.
Most businesspeople are familiar with the “good, fast and cheap” triangle. Sometimes called the “reality triangle”, the idea is that a product or service can have any two of these desirable qualities, but you should be wary of anyone who promises all three. Modern governments face their own version of the reality triangle, which is that they can have low taxes and balanced budgets, or balanced budgets and high-quality public services, but they can’t have all three. In other words, low taxes are fiscally unsustainable in a high-service country. A trade-off is required.
No government can escape this choice for long.
The instinct to promise the full trifecta without thinking through the consequences helps explain about-turns by both major parties this year.
The International Monetary Fund fingered the final years of the Howard government for “profligate” tax cuts. But Labor is far from blameless; then-opposition leader Kevin Rudd matched then-PM John Howard’s promised income tax cuts in the lead-up to the 2007 election purely to neutralise them as a political issue. George Megalogenis quotes a senior Labor figure at the time saying, “We’ll have to f-cking wear it”. The Australia Institute estimates that the income tax cuts implemented between 2005-06 and 2009-10 cost the 2011-12 budget around $38 billion. Labor would have had a lot less red on its ledger this year if it had resisted the temptation to make such an ill-considered promise back in 2007.
Landmark policies like the National Disability Insurance Scheme (now DisabilityCare) and Gonski are also made precarious by Labor’s reluctance to implement revenue-positive tax reform; it has tended to push spending far out into the forward estimates, and it keeps shifting large parts of the responsibility to cash-strapped states. The 0.5% increase to the Medicare levy will help fund DisabilityCare, but falls well short of the expected cost of the scheme.
The Coalition began 2013 promising both budget surpluses and tax cuts, while suggesting that public services would not be greatly affected. The carbon tax would go but the associated income tax cuts would continue. The mining tax would also go, but a business tax cut was still on the way. A party that won government on the back of such a platform would face a choice between breaking promises on surpluses or spending, increasing other taxes, or adopting the kind of unpopular cutbacks pursued in Queensland. There’s always privatisation, of course, but so much was sold off the last time the Coalition was in government that there’s not much left to hock. It’s not surprising that by April the Coalition had already backed away from the commitment to “deliver a surplus in our first year and every year after that”.
Until they face up to the reality triangle, the promises of both major parties will either lack substance or set them up for embarrassing reversals.
*This is an excerpt from “Facing up to the reality triangle in Australia” in upcoming publication Pushing Our Luck from the Centre for Policy Development

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Bedroom tax means more tenants face eviction, says housing group boss

Daniel Boffey, The Observer, 6 October 2013

The head of one of the country’s biggest housing associations has warned of a rise in evictions of tenants because of the government’s new under-occupancy penalty, more commonly known as the bedroom tax.
Mark Rogers, chief executive of Circle Housing Group, which manages 65,000 homes, said he felt it was inevitable that there would be a long-term increase in the number of people failing to pay their rent.
Nearly 4,000 of Circle’s households are affected by the new rule, which reduces the amount of benefit paid to claimants if they are deemed to have too much living space.
In recent weeks the group has seen a “new pattern of arrears developing” likely to be repeated nationally, with 50% of tenants paying the charge in full, 25% part-paying and 25% not paying at all.
Rogers said there were simply not enough vacant smaller properties for people affected to move into to avoid the charge.
He said his group was offering financial advice and encouraging those affected to look at a house exchange scheme, for which he reported a 26% rise, but an increase in evictions could be expected. He added: “The under-occupation charge is hitting a lot of people very hard, as you would expect. They are losing money and by the very nature of being on benefits, they are on very low incomes. People can’t down-size because there aren’t enough properties for them to move in to.
“We did a survey and one finding was that if you let every single bedroom that came vacant, and you housed an under-occupier there, it would take eight years to clear the backlog. Our view is that the transfer system isn’t tenable; for the vast majority it is untenable.”
He added: “We won’t evict someone if we can’t find a solution for them. If they don’t take that solution then we will do, but we see it as our job to make sure we don’t go down that route.
“If that happens we see it as a failure; it is expensive to the local authority, it is expensive to the person, traumatic for the person, often not good for the community. We see [evictions] generally as a last resort. From our perspective I think as time goes on they could go up a little but our plan is that by using our solutions we minimise the impact.”
Last month, Circle carried out a cost of living survey that found around 10 million adults have taken out a loan in the last year and a third of them used loans to pay for food and basic essentials.
Rogers said that in the wake of these findings he had serious concerns that the government’s flagship welfare policy would lead to unacceptable outcomes.
He said: “There are elements of this which I think are very blunt instruments. You know, asking children to share bedrooms as a standard I don’t think is a 21st-century lifestyle choice, I don’t think it is what we should be aspiring to. Asking people with disabilities who do need the extra room to pay for it seems to be fundamentally difficult.”
Critics of the welfare change won a victory last week when a disabled woman who was told she would have to share a room with her husband challenged the decision in court. The woman, from Glasgow, who suffers from multiple sclerosis, was forced into rent arrears when the government ruled the couple only needed one bedroom and were penalised for having two.
The government is also likely to be forced in to a U-turn on a separate piece of legislation. Labour is expected to receive Liberal Democrat assistance in the Lords to amend the government’s care bill so that local authorities will have a duty to take into account the importance of ensuring adults with care and support needs have access to suitable accommodation. The amendments are to be debated on Wednesday.
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UK’s tax gap rises by £1bn to £35bn

Rajeev Syal, The Guardian, 12 October 2013

HMRC officials said the gap had fallen steadily over the last six years, from 8.3% of tax due in 2005-06 to 7% in 2011-12. The amount of tax lost through non-payment and avoidance increased last year to £35bn, according to official figures released on Friday.
Revenue & Customs (HMRC) said the gap between tax owed and tax paid had increased by £1bn in 2011-12, up from £34bn the previous year, which it partly blamed on the rise in the standard VAT rate to 20%, which meant the amount owed had increased.
An HMRC spokesman said the longer-term trend was still downwards, as inspectors clamp down on individuals and companies. But the increase has been seized upon by critics as evidence that the government is failing to stop criminals or close loopholes.
Mark Serwotka, general secretary of the union PCS, which represents HMRC staff, said the figures were an underestimation of the true tax gap and that ministers’ claims that officials were clamping down on tax avoidance and evasion while cutting staff were nonsense.
“We think this seriously underestimates the extent of uncollected tax – our research shows our public finances miss out on more than £120bn a year,” he said. “But even by the government’s estimate, these are huge sums that we are owed and should be collected and it makes no sense to cut staff and resources at the department responsible for doing that.”
Fiona Mactaggart, a Labour member of the Commons public accounts committee, said HMRC was too relaxed about the problem. “The government targets benefit fraudsters, but that bill is a fraction of this figure. If we dealt with the tax gap, we would get rid of the deficit.”
The tax gap is compiled from about 30 separate estimates for different taxes. It is broken down by type of tax, customer group and customer behaviours, including tax evasion and avoidance, customer error, the hidden economy, criminal attacks and where tax cannot be collected because of insolvency.
HMRC officials said the gap had fallen steadily over the past six years, from 8.3% of tax due in 2005-06 to 7.1% in 2010-11 and 7% in 2011-12.
The Exchequer secretary, David Gauke, said: “The vast majority of businesses and individuals pay the taxes they owe. But where they don’t, it is for HMRC to challenge non-compliance fiercely.
” Since 2010, the government has invested nearly £1bn in additional compliance initiatives over the spending review period. HMRC is on track to secure a further £44bn in tax revenues over the next two years.”
The figures suggest £5.1bn was lost as a result of evasion, £4.7bn as a result of criminal activity including fraud and smuggling, and £4bn through avoidance schemes.
Official estimates indicated £11.4bn of VAT, £15.3bn of income tax, £4.7bn in corporation tax and £2.5bn excise duties was not collected in 2011-12.
Labour said the figures showed the government was failing to tackle the problem.
Shadow exchequer secretary Shabana Mahmood said: “At a time when millions are struggling with the rising cost of living and the deficit is high, it’s even more vital that everyone pays their fair share of tax.
“But these figures show the Government is failing to tackle tax avoidance and evasion with the value of the tax gap now up to £35 billion,” she said.

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Treasury signs tax information sharing agreement with Isle of Man

Larry Elliott, The Guardian, 12 October 2013

The Treasury hailed a breakthrough in the fight against tax evasion last night after signing an agreement with the Isle of Man for the automatic exchange of information about the bank accounts of suspected tax dodgers.
George Osborne said in Washington the deal demonstrated the progress that was being made in the battle to prevent wrongdoing and said the UK intended to press for further action by the G20 group of developed and developing countries.
Under the agreement with the Isle of Man, Britain will automatically receive information about bank accounts rather than have to make a request to the authorities in the tax haven.
Information received by HM Revenue and Customs will be passed on to other countries that are taking part in a pilot scheme launched by the UK-hosted G8 summit earlier this year. Agreements with other UK crown dependencies and overseas territories will be announced in the coming weeks, the Treasury said.

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China to have carbon tax and ETS by 2020

 

Larissa Nicholson, The Canberra Times, 11 October 2013

Traffic moves through a thick haze in Linfen, Shanxi province, China. Photo: Bloomberg
China will put a price on carbon by the end of the decade, according to experts surveyed by the Australian National University.

 

The ANU Crawford School partnered with the Beijing-based NGO China Carbon Forum to survey 86 people who are based in China and work in research, industry and carbon trading institutions.

 

The study found there was confidence among the experts that China would introduce carbon-pricing mechanisms, and would have in place a national emissions trading scheme (ETS) and a carbon tax by 2020. The people surveyed also predicted the price of emissions trading and a carbon tax would rise over time, starting at $12 a tonne in 2020.
Frank Jotzo, director of the Centre for Climate Change Economics and Policy at the ANU, said while the survey was by its nature not representative, it was the first time researchers could put numbers to the action those with close knowledge of the situation thought China would take on carbon.

 

Advertisement ”It is simply of a select subgroup of experts, but it probably provides a reasonable indication of where expert opinion is at,” he said.

 

Professor Jotzo said there was a lot of speculation about what action China would take on carbon, so the research group thought it crucial to aggregate those opinions and put them in the public domain.

 

”What this means is that individual people, including government departments, but most importantly industry, will now be able to have a reference point against which to compare their own expectations,” he said.

 

Professor Jotzo said it was significant for China, which was transitioning from a command and control to a market-based economy, to be seriously considering a market-based instrument for greenhouse gas emissions. ”[There's] a strong realisation here that this is the way of the future, and this is the most cost-effective way of dampening the growth of greenhouse gas emissions,” he said.

 

He said if China put a price on carbon it would have significant implications for Australian exports to China, particularly coal.

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Government haste to axe the tax could cost the budget $2b

Tristan Edis, The Climate Spectator, 11 October 2013

 

A new report says the federal government’s mandate to axe the carbon price would cost $2 billion in returns to polluters. It’s a poison pill the Coalition should be wary of.

 

It appears Prime Minister Tony Abbott can now draw upon a group of like-minded, conservative cross-bench senators to execute his agenda. This will be made even easier given the announcement that the Palmer United Party will enter an alliance with another senator.

 

But there’s a poison pill within the carbon pricing legislation that suggests the scheme will be in place until June 30, 2015.

 

Carbon and energy market analysts Reputex has released a report which shows that if the government abolished the scheme part-way through a compliance year (same as the financial year), it would crystalise a cash payment of as much as $2 billion from government to polluters with free permits.

 

To explain, under the carbon pricing scheme high emitting coal generators and emissions-intensive trade-exposed industry receive a significant amount of their carbon permits for free. There is a clause in the legislation which allows these holders of free permits to cash them in to the government at the fixed carbon price prevailing at the time (between $24.50 and $25 per permit). For example, a coal generator might decide to shut down for part of the year, just as Northern and Playford have done, and so they don’t need all their free permits to meet their compliance obligations. Consequently, the government allowed for such circumstances by providing for a buyback facility.

 

Now the thing is that the government provides a large proportion of these permits in advance of when companies emit CO2 into the atmosphere, and a liability to surrender a permit to government is incurred. Free permits are issued to companies in two tranches: the first are provided early in the compliance year covering 75% of direct emissions as well as various other incurred carbon costs. Permits to cover the remaining 25% of direct emissions costs are issued at the start of the following financial year (which is after the liability is incurred).

 

Both the prospective Labor leaders in Bill Shorten and Anthony Albanese have ruled out Abbott’s repeal of the carbon price in the Senate. So in combination with the Greens they can block repeal until the new senators elected in last month’s election take their seats in July next year.

 

Abbott might be able to go to a double dissolution election before the new senators take their seats but, given he faces a relatively repeal-friendly upper house post-July he’d have trouble justifying such a move to the electorate. So this seems unlikely.

 

Reputex suggests that, provided the government can pass the repeal bill through the new Senate in August next year, the carbon price could cease operation as early as October 2014.

 

At this point Reputex estimates polluters would have a surplus of 86.9 million free permits in excess of their emissions liability to that date. With repeal self-evident, the holders of the free permits could act in advance of repeal to cash-in their surplus free permits at a price of around $24.55 per unit. This would grant them a tidy windfall of more than $2 billion at the expense of the government budget.

 

Even if the government were to cease operation of the scheme later in December they would still face a free permit payout of $1.14 billion.

 

From a political perspective Abbott can publicly claim he has axed the tax when the repeal bill passes the Senate. The electorate are unlikely to notice or greatly care if the scheme does not formally cease until July 2015.  It would be an incredible act of ideological masochism if the government was prepared to incur a cost to taxpayers of $2 billion, just so it could cease the operation of the carbon price as soon as it possibly could.

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Revealed: £4.7bn corporation tax lost through evasion and avoidance as Royal Mail is sold for £650m less than it is worth

Oliver Wright, The Independent, 11 October 2013

The Government is losing more than £1 in every £10 it tries to collect from companies to tax evasion and avoidance, official figures have revealed. A report from HM Revenue and Customs shows that the “tax gap” for businesses operating in Britain is around 13 per cent of total liabilities and costs the public purse £4.7bn a year.
The real loss is likely to be significantly higher, as HMRC does not count controversial “profit shifting” schemes – run by companies such as Google, Amazon and Starbucks – as tax avoidance. One expert tonight estimated the true figure could be as much as £12bn a year. The figures were published as ministers were accused of handing private investors a £700m “taxpayer subsidy” in the form of Royal Mail. Shares in the newly privatised company, which started trading today, closed 38 per cent higher than the Government’s offer price of 330p, valuing the firm at £3.3bn.
Margaret Hodge, chairman of Parliament’s powerful Public Accounts Committee, said she would be recalling the head of HMRC to give evidence about its failure to collect the tax it was due, describing the situation as “ridiculous”. “I don’t think they are assertive or aggressive enough,” she said.
“I am really disappointed that, despite all the public concern expressed by hardworking people who do pay their taxes, there has not been greater success. What is so ridiculous is that these figures don’t even include the tax avoidance that companies that Google and Amazon are responsible for, because HMRC don’t even accept that it is money that they owe.
“Whilst I recognise that we have to take action internationally, it doesn’t excuse HMRC not defending the taxpayers’ interest or their failure to make a noticeable dent in the figures.”
The HMRC report reveals the total “tax gap” between what it expects to receive in revenue and what it actually collects now stands at £35bn. This is an increase of £1bn from the figure given in 2010/11, although the percentage tax gap was broadly stable at 7 per cent.
HMRC’s failure to increase the amount it collects will disappoint ministers, who have made tacking tax avoidance a key priority and invested £1bn to beef up the organisation’s investigation and compliance arms. The figures suggest £5.1bn was lost to the Exchequer as a result of illegal evasion, £4.7bn due to criminal activity, including fraud and smuggling, and £4bn through legal avoidance schemes.
Of the £4.7bn estimated to have been lost in Corporation Tax, around £1.4bn came from large companies. Experts said this figure was low because most are international and are legally able to move their tax liabilities offshore – which is not counted in the HMRC figures.
An example of this emerged yesterday with news that the controversial payday lender Wonga had become the latest firm to alter it tax structure to reduce its UK liabilities. Wonga has been lending to UK customers through its Swiss operation since last year – even though it does not offer loans to people in Switzerland.
Wonga’s main UK arm paid £38.5m last year in fees to its sister company in Switzerland to administer the scheme. Foreign firms can pay as little as 1 per cent tax on profits made in the country. Tax experts said the setup could be used to reduce the company’s tax bill in the future, but Wonga denied it had used an “artificial or aggressive scheme” to avoid tax. It said it “pays and will continue to pay full UK corporation tax on its UK profits”.
Richard Murphy, from Tax Research UK, said such practices, while legal, were potentially costing the revenue £12bn a year. “If the amount of money being lost to the Government from large firms avoiding tax was only £1.4bn from a total tax take of around £640bn, do you really think you would have international conferences trying to deal with this problem?” he asked.
“The truth is HMRC don’t even count this money in their tax gap and until they start doing those estimates they will not be providing an accurate picture of just what is at stake here.”
But David Gauke, the Exchequer Secretary, said HMRC would continue to “fiercely” challenge tax dodgers. “These figures show the tax gap is continuing to fall and the vast majority of businesses and individuals pay the taxes they owe,” he said.
“But where they don’t it is for HMRC to challenge non-compliance fiercely, protecting money that would otherwise be lost. Since 2010, the Government has invested nearly £1bn in additional compliance initiatives over the Spending Review period. HMRC is on track to secure a further £44bn in tax revenues over the next two years.”
Labour said the figures showed the Government was failing to tackle the problem. Shadow exchequer secretary Shabana Mahmood said: “At a time when millions are struggling with the rising cost of living and the deficit is high, it’s even more vital that everyone pays their fair share of tax. But these figures show the Government is failing to tackle tax avoidance and evasion with the value of the tax gap now up to £35bn.”

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Govt rejects cost of carbon tax repeal

The Courier, 10 October 2013

THE Abbott government has rejected suggestions it could be forced to pay companies more than $2 billion if it presses ahead with scrapping the carbon price before 2015.
New analysis from energy advisory firm RepuTex warns the government could be facing a $2 billion bill if companies rush to cash in their freely allocated permits before the carbon price is repealed.
Brown coal generators and other high-emitting companies were given free permits to help them get used to carbon pricing, which they could use to pay for their emissions or sell back to the government.
But without a carbon liability to pay, and millions of free permits up their sleeve, RepuTex claims these industries could be set for a “significant windfall” when the carbon tax is ditched.
If the scheme is abolished in October 2014, RepuTex forecasts the government could be left with a bill in excess of $2 billion as companies cash in nearly 87 million free carbon dioxide permits.
But if the repeal was delayed until April 2015, when companies would need their permits to pay for their carbon liability, the damage would be considerably less at around $138 million.
Finance Minister Mathias Cormann said he didn’t accept the modelling, adding the new government’s timeline for repealing the carbon tax remained unchanged.
“Our intention is to scrap the carbon tax with effect from 1 July 2014,” he told Sky News on Thursday.
It’s less than certain how the government will achieve its aim, given the hostile make-up of the Senate until June 30.
RepuTex claims the earliest the carbon tax is likely to be disbanded is the start of October 2014, assuming a deal has been struck with the new Senate.

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Five suggestions for DIY super reform

Graeme Troy, Australian Financial Review, 9 October 2013

I refer to Agnes King’s article “DIY super a balm for business costs” (AFR, October 7).
On the one hand superannuation funds are being utilised to increase business investment and efficiencies.
On the other hand the funds are being inappropriately utilised as geared tax savings business structures.
A better system would simply allow self-managed superannuation fund (SMSF) loans to younger entrepreneurs at an age when riskier superannuation investments are more acceptable.
During the last fortnight the AFR has published much commentary and reporting in relation to SMSFs.
The following recommendations come from a long background as an accounting practitioner and business adviser, registrations as tax agent, company auditor and SMSF auditor; property investment and management experience and body corporate executive committee involvement, as well as dealing with SMSFs before the 1983 Keating reforms:
1. Disallowing SMSF borrowing in relation to future investments. Problems in relation to fuelling residential property inflation solved. Investment risks reduced. Tax equity.
2. Impose maximum limits to superannuation fund member balances of $1,500,000 per member. Some equity issues addressed.
3. Add superannuation pensions to other taxable income of retirees so that the pension remains tax free but other income is taxed at appropriate marginal tax rates. Equity with other taxpayers restored.
4. Requirement for future superannuation investment to be 30 per cent in infrastructure bonds. Future productivity and quality of living improved; widespread jobs and opportunities created.
5. Target taxation concessions towards annuities. Less taxpayer subsidisation required.
Graeme Troy
Wagstaffe, NSW
Letters

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New Corporate Tax Shelter: A Merger Abroad

David Gelles, The New York Times, 8 October 2013

Executives at a California chip maker, Applied Materials, highlighted a number of advantages in announcing a merger recently with a smaller Japanese rival, but an important one was barely mentioned: lower taxes.
The merged company will save millions of dollars a year by moving — not to one side of the Pacific or the other, but by reincorporating in the Netherlands.
From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.
“It’s almost like the holy grail,” said Andrew M. Short, a partner in the tax department of Paul Hastings, which advises a number of American corporations on deals. “We spend all of our time working for multinationals, thinking about how we’re going to expand their business internationally and keep the taxation of those activities offshore,” he added.
Reincorporating in low-tax havens like Bermuda, the Cayman Islands or Ireland — known as “inversions” — has been going on for decades. But as regulation has made the process more onerous over the years, companies can no longer simply open a new office abroad or move to a country where they already do substantial business.
Instead, most inversions today are achieved through multibillion-dollar cross-border mergers and acquisitions. Robert Willens, a corporate tax adviser, estimates there have been about 50 inversions over all. Of those, 20 occurred in the last year and a half, and most of those were done through mergers.
When Applied Materials announced its deal for Tokyo Electron, it said that its effective tax rate would drop to 17 percent from 22 percent as a result. For a company that had nearly $2 billion in profit in 2011, that amounts to savings of about $100 million a year.
Last year, the Eaton Corporation, a power management company from Cleveland, acquired Cooper Industries, based in Ireland, for $13 billion, and reincorporated there. The company expects to save $160 million a year as a result of the move.
In July, Omnicom, the large New York advertising group, agreed to merge with Publicis Groupe, its French rival, in a $35 billion deal. The new company will be based in the Netherlands, resulting in savings of about $80 million a year.
Also in July, Perrigo, a pharmaceutical company from Allegan, Mich., said it would acquire Elan, an Irish drug company, for $6.7 billion. Perrigo will also reincorporate in Ireland, bringing its effective tax rate to 17 percent from 30 percent, and saving the company an estimated $150 million a year, much of it in taxes.
Ireland’s 12.5 percent corporate tax rate is a big draw for some companies. Earlier in the year, Actavis, based in Parsippany, N.J., bought Warner Chilcott, a drug maker with headquarters in Dublin, and said it would reincorporate in Ireland, leading to an estimated $150 million in savings over two years.
“These companies are doing the math and seeing they can save a couple hundred million dollars by doing this,” said Martin A. Sullivan, chief economist at Tax Analysts, a nonprofit group that publishes analysis about global taxes.
But the small fortunes saved by inverted companies amounts to billions in revenue not collected by Washington.
“The impact in any one year may not be material, but the cumulative impact over time adds up,” said J. Richard Harvey, professor at the Villanova University School of Law. “Over time, more multinationals may want to expatriate or invert, and we could wake up in 10 or 20 years and it might be a meaningful number.”
The first corporate inversion occurred more than 30 years ago, when McDermott Inc., an oil and gas company, moved to Panama in 1982. Twelve years later, Helen of Troy, which makes household goods like blow dryers, reincorporated in Bermuda. Both those inversions got the attention of the Internal Revenue Service, which enacted rules intended to stem the outflow of corporate tax dollars from the United States.
But the regulations were largely ineffectual and did not stop another wave of inversions from taking place in the late 1990s and early 2000s. Tyco went to Bermuda in 1997 to lower its tax bill. A year later, Fruit of the Loom moved to the Cayman Islands. And in 2001, Ingersoll-Rand reincorporated in Bermuda.
That flurry caught the attention of Congress, and Senators Charles E. Grassley and Max Baucus proposed legislation to further curtail inversions. “These corporate expatriations aren’t illegal,” Mr. Grassley said in 2002. “But they’re sure immoral.”
The Jobs Creation Act of 2004 included a provision that made it more difficult to invert, stating that companies that did so must have substantial business activity in the country where they reincorporate. Still, companies again found a way. In 2009, Ensco, a Dallas-based oil services company, reincorporated in London.
The Internal Revenue Service tried to clamp down further, saying that “substantial business activity” means a company must have 25 percent of assets, income and employees in the country where it moves its legal domicile, unless other conditions are met.
Now, after these successive rounds of legislation and rule tightening, the only effective way for an American company to invert is by increasing foreign ownership of its stock to more than 20 percent. And the only feasible way to do that is by reincorporating abroad as part of a merger or acquisition.
After the political scrutiny last decade, companies that invert are loath to say they are doing so for tax reasons. When Aon, the giant insurance broker, moved to London from Chicago, it denied that it was doing so for tax purposes. But in filings with the Securities and Exchange Commission, the company highlighted its tax savings.
“You don’t want anybody to think you’re doing these deals for tax reasons. They don’t want a spotlight on it,” Mr. Sullivan of Tax Analysts said. “That’s like the kiss of death.”
Indeed, few mergers are consummated solely to lower a company’s tax bill.
“You’re not going to do a merger just to get the company offshore,” said Stephen E. Shay, professor at Harvard Law School. “This should be an opportunistic benefit on top of a strategic rationale.”
Many companies that have recently moved their domicile for tax reasons have chosen European countries with low tax rates, like Ireland and the Netherlands, rather than be tarred by relocating to Bermuda or a Caribbean tax haven.
In moving to Europe, companies are looking to avoid the scrutiny brought on by moving to such obvious tax shelters, and take advantage of the more favorable business conditions in countries like Ireland, which also has a highly skilled work force.
Once inverted, companies save money through three main techniques. First, they do not have to pay the United States statutory tax rate of 35 percent on their worldwide earnings. That alone can amount to tens of millions in savings each year.
Many companies already get around this by keeping cash from foreign sales abroad. But inverted companies are free to use this cash without paying the steep repatriation tax faced by American companies.
Finally, multinationals that invert have an easier time achieving “earnings stripping,” a tax maneuver in which an American subsidiary is loaded up with debt to offset domestic earnings, lowering the effective tax rate paid on sales in the United States.
The savings can be huge. Mr. Sullivan of Tax Analysts found that four oil services companies that inverted had saved $4 billion in taxes over the course of a decade. One of those companies, Transocean, the owner of the Deepwater Horizon platform that exploded in the Gulf of Mexico, saved $1.9 billion.
There are signs that the Obama administration and Congress may try to tighten the rules again. Both the House Ways and Means Committee and the Senate Finance Committee are working on draft legislation for comprehensive tax reform that is expected to include new rules intended to curtail inversions while also trying to make the United States a more competitive place for multinationals to call home.
“There are real financial benefits, and that creates a motivation for management to look for opportunistic opportunities,” Professor Shay said. “It’s not going to change until the law changes.”

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Facebook’s UK corporation tax bill: £0

Juliette Garside, The Guardian, 8 October 2013

Facebook paid no corporation tax in Britain last year, according to its latest accounts, despite taking an estimated £223m share of the digital advertising market.
The social network’s tax bill fell from £238,000 in 2011 to zero, while its reported UK income rose by 70%.
Together with Google, Facebook accounts for almost half of the £6bn expected to be spent on digital advertising in the UK this year, according to forecaster eMarketer.
Google will take the lion’s share, with a 43% slice, but Facebook’s influence is increasing. Its share is projected to grow to 5% of spend, or £303m, in 2013.
In the last two years, its estimated British revenues have risen from £181m in 2011 to £223m in 2012, according to eMarketer.
However, those numbers are not reflected in its accounts. In common with fellow American technology leaders Google and Apple, Facebook funnels the vast majority of its income from advertisers targeting its 33 million British users through Ireland. “This is yet another example of what appears to be deliberate manipulation of accounts of economic activity to deprive the British taxpayer of a rightful tax contribution, according to the profits they make in the UK,” said Commons public accounts committee chairwoman Margaret Hodge. “I am getting fed up of this constant stream of stories and little sign of a challenge from HMRC and a strange silence from government.”
Accounts filed at Companies House show that in 2012 just £35m of Facebook’s UK income was booked in the market where it was generated. This was a 70% increase on 2011, when revenues were reported at £20m.
France is pushing for Europe to adopt a new corporation tax regime which would see multinationals such as Google and Facebook regulated and taxed in the countries where customers use their websites.
Fleur Pellerin, the French digital economy minister, is expected to push for the reforms at a summit of European leaders scheduled for the end of October, which the EU digital commissioner, Neelie Kroes, is also expected to attend.
Legislation would be changed to ensure companies are taxed according to where revenues are generated, rather than the geographic location of subsidiaries used to collect the revenues.
“What we have in mind is to find the criteria to define the taxable basis that we can attach to European territory,” she told the Financial Times. “When we talk to Google or Facebook or the others … of course they are not happy about paying more corporate tax. But they are happy to agree to play by the rules. The thing that bothers them is uncertainty.”
A Facebook spokesman said: “Facebook pays all taxes required by UK law and we comply with tax laws in all countries where we operate and have employees and offices. We take our tax obligations seriously, and work closely with national tax authorities around the world to ensure compliance with local law.”
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The tax man is watching: new surveillance force for ATO

Chris Seage, Crikey, 3 October 2013

The tax man is stepping up the war on fraud and dodgy claims, using the Australian Crime Commission to monitor suspected cheats. Tax consultant and former ATO manager Chris Seage reports it’s a first.

A note to paranoid tax cheats: they probably are following you. In an historic first, the Australian Crime Commission has entered into a $2 million two-year contract with the Australian Taxation Office to supply static and mobile surveillance to catch out tax cheats.

The new contract appears to have slipped through during the election period without any parliamentary scrutiny. And it comes as the United States Internal Revenue Service is under increased political scrutiny for conducting secret surveillance on Tea Party-aligned groups, searching and seizing citizens’ digital communications without a warrant and purchasing surveillance equipment — including coffee trays and plants with hidden cameras.

The new ATO surveillance team will be directed towards key focus areas of tax crime, according to statements from both the ATO and ACC. An ACC spokesperson told Crikey: “The ACC supports its partners in a number of ways. Under this specific contract, the ACC provides static and mobile surveillance skills and expertise to assist the ATO in addressing the highest tax crime priorities.”

The tax office has identified tax crime hotspots that can expect to be placed under the new surveillance arrangements — which it says cost Australia between $10-15 billion dollars every year:

1.International tax evasion, especially the people who advise cheats;
2.Refund fraud: people deliberately and dishonestly claim refunds, rebates or offsets from the ATO that they are not entitled to;
3.The cash economy: when people do not declare the cash they receive as income;
4.Fraudulent “phoenix” activities: when a company goes into liquidation and leaves its debts behind while the assets are shifted into a new corporate entity that begins trading again, often under a similar name; and
5.Tax avoidance schemes: many arrangements involve the use of a trust or series of trusts to circumvent tax and super laws.
In declaring war on people who promote tax crime the ATO’s deputy commissioner of serious non-compliance, Greg Williams, said last month:

“Generally, you don’t just wake up in the morning and say, ‘you know what, I am going to restructure my business around a secrecy jurisdiction’ … someone is putting those ideas into people’s heads, and soon we’ll be tapping these people on the shoulder.”

ACC surveillance officers are drawn from current and former police officers and they must hold a current or recent qualification in operational safety and tactics, which includes the use of a firearm.  In a recent advertisement for a physical surveillance officer it listed the key objectives for the position:

•Foot surveillance;
•Vehicle surveillance;
•Operate specialised electronic equipment;
•Monitor and record from electronic devices;
•Capture, record and manage images and associated surveillance product;
•Compile accurate and comprehensive accounts of surveillance activities; and
•Attend legal proceedings and give evidence as required.
Prior to the election, Treasurer Joe Hockey said: “If elected a Coalition government will immediately establish a standing parliamentary committee with a singular focus: the oversight of tax administration.”

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Economically, what’s love got to do with it?

Ross Gittins, The Sydney Morning Herald, 5 October 2013

What can economists tell us about love and power, why people are loyal, how groups form and how they get their members to abide by the group’s norms of acceptable behaviour? Not much.
Everyone knows conventional economics is built on a stick-figure conception of humans and the way they work.
Until now. An economics professor at the University of Queensland, Paul Frijters, has attempted the remarkably ambitious project of developing a unified theory of human behaviour, turning the mainstream model of the economic system into a model of the socio-economic system.
With help from Dr Gigi Foster, of the University of NSW, he’s set it all out in the book An Economic Theory of Greed, Love, Groups and Networks. We’ll find out soon enough what the rest of the economics profession makes of it.
He starts with the principles of mainstream economics, then adds and integrates selected ideas his research has determined have considerable power in explaining human behaviour.
The bit he starts with, which comes straight from the mainstream, is the assumption that humans are carefully calculating maximisers of their personal benefit. Or, as Frijters prefers to put it, ”humans are mainly motivated by greed”.
This conception of ”homo economicus” – economic man – emerged in the Enlightenment period. In the early Middle Ages, by contrast, materialism was seen in society as strongly immoral, Frijters explains.
Even so, it’s a quite one-dimensional conception of human behaviour. We’re a lot more complicated than that. This assumption accounts for much of the criticism of conventional economics (including from yours truly).
So the ”core concepts” Frijters adds to the conventional assumption of ”greed” aim to broaden the model’s explanation of human motivations and behaviour.
The first concept he adds is ”love”, by which he means love for other humans, but also love for one’s beliefs. ”Love is defined as a form of unconditional loyalty, and will be said to be present whenever a person would be willing to help advance the interests of the object of his love, even if the object of his love would not notice the help and even if the loving person would receive no observable reward,” Frijters says. So love includes the ideas of altruism and loyalty.
”Selfish materialism is extremely powerful in explaining many of our laws, our customs, our politics, and our choices as consumers. Yet selfish materialism alone cannot lead to the kind of human organisations we see in reality.
”I expect to see love as a major player involved in almost every facet of an individual’s decision making … Love within companies should be an integral part of how teams of people actually get things done within organisations.”
Another major criticism of the simple model of conventional economics is its assumption that each of us acts only as an individual, unaffected by the behaviour of those around us. This means no ”economic actor” has more power than another.
In truth, humans are a group animal whose self-image is inextricably linked to the groups of which they are part. And the reality is that the dominant power relations in modern societies aren’t between one individual and another, but rather between individuals and groups.
So the second feature Frijters adds to the mainstream view is groups and the power they generate. Each of us is a member of any number of groups, affecting our family life, social life and working life. Beyond that, our religion, ethnicity and nationality make us members of more, often powerful, groups.
It’s because groups generate and exercise power that they need to be added to the model. Power is the ability to influence the behaviour of others. Part of this power comes from the development of norms of acceptable behaviour within the group. Many of us feel considerable loyalty to the groups we’re in, which partly explains why we confirm to group norms.
Frijters argues there are five basic types of social groups: small hierarchies, with a clear leader, a few of high rank and a group of underlings totalling no more than a few dozen individuals in all; small circles of reciprocity, with people who are equals and share a common goal; large hierarchies, where members don’t know each other; large circles of reciprocity; and networks.
Networks are his third addition to the mainstream view. They are facilitators of exchange – of goods and services, or just information. They exists because of the need to overcome ”frictions” in markets arising from the information and transactions costs the simple mainstream model assumes away.
Individuals search for goods, buyers and suppliers within networks of small size or large anonymous networks such as the internet.
So how does Frijters’ model improve on the answers to questions from the mainstream model? What questions does it answer that the mainstream can’t?
On the common questions of whether international trade should be encouraged or protected against, what governments should do about monopolies and how to discourage firms from polluting, his model doesn’t much change the conventional answers.
But it can answer some questions the conventional approach can’t. With its assumption of calculating, self-interested behaviour, the old approach can’t explain why people go to the bother of voting when the chance one vote will change the outcome is minuscule.
Frijter’s model says people vote because they’re idealistic and identify with the group that is Australian voters.
Nor can the old approach explain why people don’t avoid or evade paying tax a lot more than they do. Rates of ”voluntary compliance” are, in fact, surprisingly high (though not as high as in the old days).
Frijter’s model says people feel loyalty to the group of fellow Australians and conform to the social norm that paying taxes is a form of reciprocity that’s reasonable to expect of members of the group.
And this is no idle question. He says getting people to pay taxes is probably the single most important ingredient supporting our system of governance.
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Tax breaks should encourage investors to build new houses, not buy existing ones

Simon Schrapel, The Sydney Morning Herald, 4 October 2013

As the housing market heats up, the elephant in the room remains tax reform, including tax breaks for geared property investments.
Australia has a severe shortage of housing, with half a million more homes needed for people on low incomes. We are also relying on housing construction to pick up the economic slack from the phasing-down of the mining boom. Yet even at this early stage in the housing recovery, there are concerns the market is overheating. House prices in Sydney have risen by 9 per cent since the start of the year.
It’s too early to say whether this is another house price bubble in the making but if it is, it would extinguish the hopes of low- and middle-income home buyers and tenants.
We’ve been here before. Between 1996 and 2004, house prices rose by about 80 per cent in real terms. This was largely driven by a surge of borrowing to invest in rental housing. The proportion of taxpayers with an investment property doubled over the decade to 2004, reaching 17 per cent in that year. House prices rose because of land shortages, easier access to bank credit and generous tax rules for property investors.
Property spruikers convinced many people the best path to a comfortable retirement was to take advantage of easy credit, offset the expenses against their wages, and ride the property boom in search of concessionally taxed capital gains.
Easy credit, rising house prices and tax breaks are a heady mix. It’s time to look seriously at tax policy, which is a large part of the problem.
It was no accident that the last residential investment boom followed a government decision in 1999 to halve capital gains tax rates for individual investors while leaving negative gearing rules intact.
The vast majority of negatively geared housing investment is in existing properties. Prospective owner-occupiers were displaced from the market and tenants were eventually squeezed by higher rents when supply failed to keep up with demand.
Expensive housing is by far the main cause of cost-of-living pressures in Australia. More than a million people on low incomes are experiencing housing stress, spending more than 30 per cent of their income on housing costs, with the majority in private rental. The solution to our housing affordability crisis is to divert investment into new, lower priced homes and remove bottlenecks from the supply of such housing, especially in our cities.
Instead of encouraging individual investors to borrow to the hilt to buy existing houses, the tax system should encourage them (and, better still, institutional investors) to build new ones. The Henry review of taxation recommended our unique system of unlimited tax deductions for loss-making property investments be scaled back. If part of the savings were used to encourage investment in new affordable housing, for example through an expanded version of the National Rental Affordability Scheme, then the tax treatment of property investment could be part of the solution rather than part of the problem.
Rules allowing self-managed super funds to borrow to invest, and to dispose of assets without paying capital gains tax, should be reviewed. The superannuation system should grow savings, not debt. And state governments could tax land more and property transfers less, as the ACT government does.
In tax policy, timing is (almost) everything. In the 1980s Treasurer Paul Keating cut back tax concessions for geared property investments just as a housing boom was coming to an end. It was higher interest rates and a shift of investor preferences to shares that killed off that boom, not the curbs to negative gearing, but a myth was born.
If the subsequent government had curbed deductions for investment in property and shares in 2000 instead of cutting taxes on capital gains, it could have taken some of the steam out of the property boom that followed, and people would have called it sensible economic management.
That hissing sound suggests now may be a good time to revisit this issue as part of a tax reform process.
Simon Schrapel is the president of the Australian Council of Social Service.
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Google and ExxonMobil run rings around outdated tax laws

Prem Sikka, The Conversation, 2 October 2013

Tax avoidance shows no sign of abating. Google, the company with the slogan “Don’t be evil”, is at it again. The company has been named and shamed by the UK House of Commons’ Public Accounts Committee, but that has not persuaded directors to change their ways.
According to information filed with the US Securities and Exchange Commission (SEC), the Google group of companies generated global revenues of US$50.175 billion last year. Some US$4.872 billion (nearly £3.25 billion) of revenues came from the UK.
Google explains these revenues are “based on the billing addresses of our customers for the Google segment and the ship-to-addresses of our customers for the Mobile segment”. But this does not mean the revenues are necessarily booked in the UK, which acts as a marketing mechanism for its Ireland operations. As the Public Accounts Committee heard, through careful attention to detail, a large part of the revenues is booked in Ireland.
Despite the US data, Google’s UK operations reported a revenues of just £506m in 2012, some way short of the figure reported to the SEC. This gave rise to a UK profit of £36.2 million and a corporate tax bill of £11.2 million.
Google’s Irish arm reported revenues of €15.5 billion (£13 billion), of which €11 billion is wiped out by “administrative expenses”. The Irish operations reported a profit of €154m (£131m) in 2012, but paid just €17m (£14.5m) in tax.
Google uses complex corporate structures. Royalty payments, masquerading as administrative expenses, are a key part of the profit shifting strategies. For example, its intellectual property is held in Bermuda, which does not levy corporate taxes. Various subsidiaries pay royalty fees which result in tax deductible expenses in Ireland and elsewhere, but tax-free income in Bermuda.
Google’s SEC filing shows the company had foreign income before taxes of just over US$8 billion for 2012. Most of the income from foreign operations was recorded by an Irish subsidiary. The foreign tax paid/payable was US$358m, equivalent to a rate of 4.43%. The accounts received the customary clean bill of health from auditors Ernst & Young.
Another company using complex corporate structures and intergroup transactions to avoid taxes is ExxonMobil. Its Spanish subsidiary operated for a while from the same address as its auditors PricewaterhouseCoopers. The Spanish company apparently had one employee on an annual salary of €55,000, but it reported net profits of €9.9 billion for the period 2009 to 2011. The key to this was a strategy designed to take advantage of Spanish laws for attracting foreign investment. The company shuffled the payment of dividends and avoided taxes in the US elsewhere.
We can all ask companies to honour their promises of ethical and responsible conduct, but such calls have little effect. All over the world tax authorities are overwhelmed by the tide of avoidance and lack the financial and political resources to investigate giant corporations.
Yes, they can be more aggressive and governments can move to deprive tax dodging companies of any public contracts. But such efforts need to be accompanied by a fundamental reform of the way corporate profits are taxed. The current system is over a hundred years old and is fundamentally flawed.
For example, Google, ExxonMobil and other companies may have hundreds of subsidiaries, but they are unified entities with a common board of directors, common share ownership and a common strategy that directs their operations. The companies publish consolidated financial statements for the group as a whole, which recognise that transactions within the group of companies, do not add any economic value. These transactions have zero effect on their consolidated profits.
Yet the tax treatment is entirely different. For tax purposes Google and ExxonMobil are not treated as a single entity. Instead they are treated as hundreds of separate entities. This encourages them to play royalty and other games and shift profits through artificial transactions and arbitrage the global tax systems.
So the obvious solution is to treat multinational corporations as single unified entities. Their global profit, with some modifications, needs to be allocated to various countries on the basis of employee, sales, assets or other key determinants of profits and taxed at the appropriate rates.
Such a system already operates within some federal states, most notably the United States, Canada, Switzerland and Argentina. It prevents companies from artificially locating domestic profits to internal tax havens. Thus, a company trading in California cannot easily avoid taxes on its local profits by claiming that it is a located in Delaware, which offers minimal taxes on varieties of corporate income.
The above reforms do not necessarily need international agreement and can be implemented unilaterally by any government. It has considerable similarities with the Common Consolidated Corporate Tax Base proposed by the European Union.
The EU’s plan could make a serious dent in tax avoidance, but is opposed by the corporate dominated Organisation for Economic Co-operation and development (OECD). The OECD’s preference is to tweak the current system, which cannot address the fault lines.
Without a fundamental reform companies like Google and ExxonMobil will continue to deprive national governments of much needed revenues.
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Abbott must reboot ‘Australia tax’ reforms

Ross Gittins, The Sydney Morning Herald, 2 October 2013

When government changes hands, it’s possible for important issues to fall between the cracks and useful work to be lost. In late July, a Labor-constituted parliamentary committee issued a report about the ”Australia tax”. It drew a fair bit of media attention at the time but, coming so close to the election campaign, was soon forgotten.
But the report made some important recommendations – recommendations the Coalition members of the committee were happy to support – on measures the government could take to reduce the ”Australia tax” and it’s important the new government takes up those recommendations.
The report was an inquiry into the prices of information technology hardware and software sold in Australia, conducted by the House of Representatives standing committee on infrastructure and communications. It found, unsurprisingly, that Australian consumers and businesses must often pay much more for their IT products than their counterparts in comparable economies. Hence the term ”Australia tax”.
”Evidence presented to this inquiry left little doubt about the extent and depth of concern about IT pricing in Australia. Consumers are clearly perplexed, frustrated and angered by the experience of paying higher prices for IT products,” the report says.
Submissions to the inquiry compared the prices of more than 150 professional software products and found an average price difference – usually between Australian and US prices – of 50 per cent. The median price difference was 46 per cent for Autodesk products, 49 per cent for Adobe products and 67 per cent for Microsoft products. Submissions compared the prices of more than 50 IT hardware products and found a median price difference of 26 per cent. Comparisons of 70 music products found a median price difference of 67 per cent. For 70 games products it was 61 per cent and for 120 e-books it was 13 per cent.
How can such differences be justified? A lot of possibilities spring to mind. Taxes might be higher in Australia. For physical products, freight and handling costs would be higher. Australian companies may face higher rent and wage costs. And our much higher dollar has greatly improved the comparison between the prices of imports and local prices.
Obviously, the inquiry needed a lot of help from the representatives of the global IT companies to explain these puzzles and possibilities. It didn’t get it. The big companies repeatedly declined to appear before the committee, sometimes saying they’d be represented by their industry body while the body said it couldn’t represent the views of individual members.
So in February the committee took the unusual step of summonsing Apple, Adobe and Microsoft. The evidence they gave was incomplete, conflicting and unconvincing.
It’s hard to see how claims of higher costs in Australia can account for the price differences, particularly in the case of content that’s delivered digitally. And when the same overseas site puts up its prices for such content as soon as it discovers you’re from Australia, it’s hard to avoid the conclusion there’s something funny going on.
The inquiry concluded that ”many IT products are more expensive in Australia because of regional pricing strategies implemented by major vendors and copyright holders”.
Just so. To anyone with any training in economics it’s obvious what’s going on: global IT companies are engaging in ”price discrimination” by charging different prices for the same product in different parts of the market. They maximise their profits by charging what the market will bear in each market segment, taking advantage of differences in customers’ ”willingness to pay”.
Economists have long studied this phenomenon and regard it as perfectly normal profit-maximising behaviour. Global companies charge higher prices in Australia than in the US because they know Australians have a higher willingness to pay than Americans have. Why? For no reason other than that we’re used to paying higher prices than the Yanks are used to.
As the inquiry’s report acknowledges, there’s nothing new about international price discrimination. It’s been going on for decades. What’s new is the digital revolution. The internet has made it much easier for us to see what’s going on – and get around it.
Economists know that for price discrimination to succeed, you have to be able to keep the two markets separate. Otherwise people will switch to buying in cheaper markets – or some middleman will make a quid by doing it for them.
To keep national markets separate in the old, physical world, many governments used legislative bans on ”parallel importing”, where companies buy in the cheaper market and sell at a discount in the local market.
To keep national markets separate in the digital world, big companies use various forms of ”geoblocking” – ”the use of internet addresses, credit card numbers or other means of electronic identification to block internet sales and downloads of electronic products … based on the geographic location of the consumer”.
There are ways around geoblocking – ask any teenager to show you – but it’s not certain all the ways around are strictly legal.
So the committee recommends the government remove the few remaining parallel importation restrictions in the Copyright Act and also secure consumers’ rights to circumvent measures supposedly intended to protect copyright, which are being used to impose higher prices on honest customers.
And it should amend the Competition and Consumer Act to render void consumer contracts that seek to enforce geoblocking.
Let’s hope Tony Abbott is still listening.
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Environment minister claims carbon tax failed and outlines ‘different approach’

Tracy Bowden, ABC Radio, 2 October 2013

Environment minister Greg Hunt says the Government aims to combat climate change with a system that will reduce emissions but not damage the economy.
Transcript
TRACY BOWDEN, PRESENTER: Climate change was a key issue in the federal election and remains a political hot potato.
In one of its first actions on taking office, the Coalition government abolished the Climate Commission, which had been established by Julia Gillard to provide the public with information on global warming.
Now the latest report from the Intergovernmental Panel on Climate Change concludes that there is a 95 per cent probability that humans are responsible for global warming.
The Environment Minister Greg Hunt has promised the Federal Government’s Direct Action plan will reduce carbon emissions by five per cent by 2020, but environmental groups claim this is nowhere near enough.
Greg Hunt joins me now from Canberra.
Greg Hunt, the IPCC report paints a picture of rising sea levels, bushfires, higher temperatures. How urgent is it that Australia act on this?
GREG HUNT, ENVIRONMENT MINISTER: Well I do think it is important that we act, and one of the great tragedies of the previous government’s system is that in fact our emissions between 2010 and 2020 go up during the period of the carbon tax from 560 to 637 million tonnes. That’s why I’m determined that we take real action to actually reduce emissions. So, do we accept the science? Yes. Do we accept the targets? Yes. Do we think that there is a far better way of both taking pressure off households and reducing emissions? Absolutely.
TRACY BOWDEN: Let me just pick you up on the comment you just made about the reports showing that emissions would go up in the next seven years under the carbon tax.
GREG HUNT: Correct.
TRACY BOWDEN: What you failed to mention is that under the very same modelling, emissions would go up even further without a carbon tax. You just failed to mention that.
GREG HUNT: Look, this is the report Australia’s emissions for 2012, which was not just released last year, but it was provided in form to the United Nations only days before the election. And the critical point here, which you would never hear from the ALP in government, is that under the carbon tax between 2010 and 2020 Australia’s emissions go up, not down. They go from 560 to 637 million tonnes.
TRACY BOWDEN: But I don’t want to harp – I don’t want to spend all our time on this, Minister, but the fact is that the report shows that they would go up even further without a carbon price. Do you disagree?
GREG HUNT: The real point here is that we end up having to buy 100 million tonnes of emissions reduction from offshore, whether it’s from Europe or from Kazakhstan or elsewhere, at an average price, according to the Government during the election campaign of $38, as they then were, or $3.8 billion a year. So, what does this mean for Australians? If you care about climate change, you’d look at the carbon tax and you’d say, “It didn’t even do its job.” The whole reason for having this was to reduce emissions. In the end, it didn’t do its job, it doesn’t do its job, the ALP said they’d terminate it, we’re still living with it and it’s not going to achieve the outcome of reaching our targets without having to go offshore to buy $3.8 billion a year by 2020 of emissions reduction.
TRACY BOWDEN: Let’s not talk about the past, let’s talk about what you’re going to do.
GREG HUNT: Sure.
TRACY BOWDEN: You’re saying you can achieve a five per cent emissions reduction by 2020. How certain are you that you can do that?
GREG HUNT: I am very confident. I am certain that we can do that.
TRACY BOWDEN: Is there any independent analysis that supports your projections?
GREG HUNT: Sure. At the time of the policy being released on 2nd February, 2010, we set out 10 different papers, including the work of Frontier Economics. Since then I haven’t become less certain, I’ve become more certain and really for three very simple reasons. Firstly, the actual size of the task has decreased. We now know that instead of a task of 750 million tonnes over eight years, we’re looking at a task closer to 440 million tonnes – exactly the sort of thing we said pre-election. Secondly, the cost of these emissions reductions – so we’d actually go and clean things up; cleaning up waste coal mine gas, waste landfill gas – is less than we had anticipated at the time of the policy. And the third thing is – and this is very important – the pool of potential emissions reduction or what’s known sometimes as abatement is likely to be greater than we’d anticipated in 2010. So on all three fronts everything has moved in the direction of a policy which cannot only be achieve, but when you look around the world you’d say, “Where exactly has a carbon tax worked?,” because it didn’t work in Australia – the Labor Party said they wanted to terminate it – and it hasn’t, I’ve got to say, been particularly successful in the European model.
TRACY BOWDEN: Now let’s talk about this, this undertaking you made when in opposition that you’d honour a Labor government commitment to increase the emissions reduction target if necessary. Do you stand by that? Will you increase that target if necessary?
GREG HUNT: Well we haven’t changed our position and we’ve always had bipartisan support for the five per cent target and the conditions for any change. So that’s not an issue of debate. The debate isn’t about the targets. I’m not saying that we’re there yet; there’s a long way to go. We’ve always said we’d do the review in 2015.
TRACY BOWDEN: Under the Cancun Agreement Australia said that it could potentially go as high as a 25 per cent reduction. So there is room to move there, isn’t there? Is that the case? You could go as high as 25?
GREG HUNT: Look, I don’t want to set particular figures. We’re committed to the minus five per cent and we have given bipartisan support to the conditions for any change in target. That’s something that we’ll assess further down the track in 2015. The important thing is that we actually do things that don’t hurt the economy, but do reduce emissions. The problem with the carbon tax is it does hurt the economy and it barely has any significant impact on emissions. That’s why we want to get rid of that and we hope that the ALP will respect the will of the people and that’s also why we want to take direct action to clean up waste coal mine gas, to clean up power stations, to clean up waste landfill gas, to capture carbon in our soils and our trees and through a grand initiative on energy efficiency.
TRACY BOWDEN: Now the Prime Minister’s said that he won’t budge on the budget. There’s a certain amount of money allocated and whether you reach …
GREG HUNT: Correct.
TRACY BOWDEN: … the target or not, that’s it. Does that suggest you won’t reach the target? There’s a possibility you won’t. And what does that say how about serious the Government’s taking this?
GREG HUNT: No, we said from day one, again, back in February, 2010, that the budget is capped. It’s an allocation of $300 million, $500 million and $750 million a year. That compares with a carbon tax of $9 billion a year in its current form. So it is a very different approach. But remember, the carbon tax is just an electricity tax. What we’re doing is proposing to go and directly clean things up, so there is a very different approach. Is it a capped budget? Absolutely. I argued that it should be a capped budget when we were setting this out because I thought that was the right way to do it. And since we set out those very conservative figures, I think that we were generous in the allocations, as I say, the price of abatement or emissions production has dropped, the volume of potential abatement has increased and the gap which we have to bridge has decreased. So am I confident that we can reach our targets? Yes. Am I certain that we can reach our targets? Yes.
TRACY BOWDEN: Well we shall see. Greg Hunt, thanks for speaking to us.
GREG HUNT: Thanks very much.
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FATCA: a law that will surely reduce tax evasion

Dayle O. Blair, The Gleaner, 2 October 2013

How will FATCA work?
THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States of America’s efforts to improve tax compliance, with the Internal Revenue Services (IRS) focusing on Foreign Financial Assets (FFA) and offshore accounts in order to catch tax dodgers, tax cheats, and even those living overseas and unaware that they should file tax returns and pay Uncle Sam.
There are two aspects of FATCA, one that puts the onus on the persons filing income-tax returns and the other on Foreign Financial Institutions (FFI) to report to the IRS whenever a United States person has more than US$50,000 in FFA.
Persons filing income tax returns
A United States citizen, green-card holder, corporation, partnership, etc. filing a tax return is required to attach a tax form with certain relevant information, if certain thresholds are met, with respect to financial assets that are held offshore i.e. outside the United States.
Financial institutions
With respect to FFIs, the objective of FATCA is the direct reporting of FFA and all the required information on their accounts holders whenever the US$50,000 threshold is met.
What FFIs must do under FATCA?
FFIs must report details of all accounts held directly or indirectly by US taxpayers, carry out identity checks on account holders, file annual reports on any accounts held by US taxpayers that include: the name, address and taxpayer identification number (TIN) of all US-account holders.
If the account is held by a US entity, the name, address and TIN of each substantial US owner of the entity, the account number, the US dollar end-of-year balance in the account, gross deposits and withdrawals in the year, gross amount of dividend, interest, other income such as the sale of property paid to the account and the name and address of the branch that maintain the account.
What happens to FATCA information?
To minimise the reporting burden, the US and some countries like the UK, France, Spain, Germany, Japan and Italy plan to share information on US citizens.
This will set up an international tax network, with the US reciprocating, by providing information to the network on those countries citizens on their financial assets held in US financial institutions. Taxpayers in every county that join can cross compare information submitted on tax returns and other government documents, thereby, verifying that everyone is paying the correct amount of tax in their country.
What the IRS will do with the information received?
The IRS will use the information provided by the taxpayers and the FFIs to review and analyse the taxpayers’ tax situations. Upon a review of tax situation, if the IRS reasonably believes that the taxpayers have unreported income or have failed to file tax returns, then the IRS will assess the taxpayers for additional income, apply civil penalties and interests where applicable, inform the taxpayers and, if criminal penalties apply, then the IRS will forward the information to the Criminal Investigation Division for prosecution.
With respect to taxpayers filing a tax return and failing to report FFAs on the required tax form, the IRS will assess a FATCA penalty of $10,000 (and a penalty up to $50,000 for continued failure to file after IRS notification).
Given that FATCA is effective for tax-year 2011 and beyond, the IRS can go back from 2011. Further, underpayments for taxes attributable to non-disclosed FFA will be subject to an additional substantial understatement penalty of 40 per cent.
However, with the IRS now having this information on taxpayers, it is a gold mine for the IRS, as it can use the information not just for FATCA purposes, but also for Report of Foreign Bank and Financial Accounts, underreporting of income penalty, accuracy-related penalty, failure to file, failure to pay, interest, the potential of having a fraud penalty apply at 75 per cent, and the potential of substantial information-return penalties, if the foreign account or assets were held as a trust or corporation and the required information returns were not filed.
An example may illustrate the point. In 2003, John Doe got an insurance payout of US$1 million after an accident in New York, he then packed up his belongings and returned home to the Cayman Islands.
He placed the cool million dollars in a fixed-deposit account, uses his New York address to open an account at a Caymanian bank. He then received US$50,000 per year in interest and pays no taxes as the Cayman Islands do not tax income. In 2013, the IRS got wind of the account because of FATCA. To become tax compliant with the IRS, it would require John to pay over US$ 4.5 million in taxes, penalties and interest in 2013. John may also owe taxes to the state of New York.
FATCA is one of the most far-reaching laws that has ever envisioned by any government and its effect are deadly and will surely reduce tax evasion by not just Americans, but citizens of other nations, given the international tax network where countries get to share tax information on their citizens with each other.
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Release of offshore records draws worldwide response

By Kimberley Porteous, Michael Hudson and Sasha Chavkin, The International Consortium of Investigative Journalists, 2 October 2013

ICIJ’s investigative series on offshore secrecy – which draws from a cache of 2.5 million secret records – has ignited reactions around the globe.
Since the initial release of stories by the ICIJ and its media partners across the world, public officials have issued statements, governments have launched investigations, and politicians and journalists have been debating the implications of the records and the reporting.
Among the latest reactions and responses:  The Parliament in Dhaka, Bangladesh, where Zafarullah and his wife have both been members.
• The Anti-Corruption Commission in Bangladesh decided on Monday to open an investigation into the offshore activities of Kazi Zafarullah, a leading member of Bangladesh’s governing Awami League political party. In July, ICIJ and its reporting partners at the Bangladeshi daily New Age revealed that Zafarullah and his wife, Nilufer Zafar, were directors and shareholders of two offshore companies.  The couple had also opened a joint account at the Singaporean branch of the Swiss bank UBS AG. The Anti-Corruption Commission decided to investigate Zafarullah’s activities after a two-month assessment of ICIJ and New Age’s findings, an official with the commission said.
• The son of disgraced former South Korean president Chun Doo-hwan issued a public apology and vowed that his family would pay the government $154 million in fines related to corruption during Chun’s rule. Prior to the announcement, the former dictator’s family had claimed for years that Chun was bankrupt and unable to pay the fines. But earlier this year, ICIJ and the Korea Center for Investigative Journalism revealed that Chun’s son, Chun Jae-kook, had a secret offshore company in the British Virgin Islands. Chun Jae-kook denied any connection between his offshore holdings and his father, but South Korean prosecutors recently raided both men’s homes in a search for hidden assets.
• Members of the G20 announced new measures to combat offshore tax evasion, including a plan to automatically share tax data among G20 nations by the end of 2015. Today’s G20 Leaders Declaration, released from a summit in St. Petersburg, Russia, also pledged the G20’s assistance to developing countries seeking to establish automatic tax information sharing, but stopped short of providing a timeline for doing so.  According to the advocacy group Global Financial Integrity, illicit financial flows cost developing countries nearly $6 trillion between 2001 and 2010.
• South Korea has ordered 11 individuals named in the Offshore Leaks investigation to pay a total of $64.6 million for using offshore paper companies to evade taxes. According to Yonhap News Agency, South Korea’s state news service, the country’s National Tax Service reviewed a list of Koreans suspected of running paper companies in offshore locales that was published by ICIJ and the Korea Center for Investigative Journalism. Thirty-nine of those individuals were chosen for further investigation, and today’s news marks the completion of 11 of those cases.
• The Premier of the British Virgin Islands, Orlando Smith, said his government has entered into talks with the US Treasury about compliance with a US law designed to crack down on offshore tax evasion. The British Virgin Islands is one of the world’s biggest offshore trust jurisdictions, with 30,000 people and more than 500,000 registered companies. Thousands of the secret offshore documents revealed by ICIJ related to dealings that were conducted under the laws of the British Virgin Islands.
• India’s Minister of State for Finance, Shri J.D. Seelam, in charge of the revenue, confirmed in a written response to Parliament that income tax authorities are investigating the information published by ICIJ on Indian citizens with connections to offshore companies, including two members of Parliament. One of them denied any relationship with the entity in ICIJ’s Offshore Leaks Database. The finance minister had previously said that “not a single case” would go unpursued.
• The OECD has proposed what Bloomberg News describes as “a blueprint” for cracking down on tax-dodging strategies used by international companies such as Google, Apple and Yahoo. The new report by the Organization for Economic Cooperation and Development was released during a meeting in Moscow of the Group of 20 government finance and banking authorities. AFP reports the move, in part, follows widespread public anger over the “Offshore Leaks” revelations.
• South Korean authorities have raided the home of former President Chun Doo-hwan along with businesses connected to his eldest son. Some 90 prosecutors, tax collectors and investigators ransacked the former president’s home in Seoul, carrying away paintings and other big-ticket items, The New York Timesreported. The raids come in the wake of an investigation by ICIJ and its “Offshore Leaks” reporting partner, the Korea Center for Investigative Journalism, into the offshore activities of the older son, Chun Jae-kook.
• Australian tax authorities said they are stepping up efforts to crack down on corporate tax dodging and taking a hard look at wealthy Australians and small companies with offshore holdings following “Offshore Leaks”. The Australian Tax Office’s plan includes 680 reviews and 115 audits of individuals and small businesses suspected of using offshore hideaways help them avoid taxes.
• India’s Finance Minister said government probes into the offshore holdings of hundreds of Indians have made significant headway. “I am reviewing the progress every fortnight and can say that not a single case will go unpursued,” Finance Minister P Chidambaram said. The government’s effort was sparked by a joint investigation by ICIJ and The Indian Express.
• In the wake of ICIJ’s reporting about large numbers of Israelis using tax havens, a top tax official says Israel is stepping up efforts to crack down on offshore tax dodging. Israel Tax Authority chief Moshe Asher urged citizens with money hidden offshore to voluntary declare these funds. “If you have black money abroad now is the time to report it,” he said. Asher noted that the authority is setting up a unit of analysts who will focus on tracking down black capital overseas.
• A joint declaration by the G8 leaders at their Northern Ireland summit has agreed to an automatic exchange of tax information and to share ownership information of offshore companies and trusts with tax authorities, but these registers will not be made public. The declaration also says the use of bearer shares and nominee shareholders and directors “should be prevented.”
• Leaders of Britain’s overseas territories – long known as key cogs in the global tax haven system – have agreed to begin sharing tax information with other countries.  UK Prime Minister David Cameron said officials from Britain’s network of territories and dependencies have pledged to sign on to an international convention that provides for automatic exchange of information among tax authorities. “I commend their leadership and I look to other international partners to work with their own territories to reach similar agreements,” Cameron said.  He called the agreement a “very positive step forward” in the fight to ensure that “those who want to evade taxes have nowhere to hide.” The British Virgin Islands, Bermuda and other UK overseas territories and dependencies also agreed to begin working to remove the veil of secrecy that often hides who owns offshore companies, Cameron said.
• Philippine authorities said the launch of ICIJ’s Offshore Leaks Database will prompt them to review the tax records of Philippine residents whose names appear in the data. Kim Jacinto-Henares, commissioner of the country’s Bureau of Internal Revenue said she welcomes the public release of the database, saying it can aid the agency’s efforts to gather information that could lead to tax investigations and cases. “We will look into it and match (the information on Philippine residents in the database) with income tax returns,” Henares told the Philippine Center for Investigative Journalism, an ICIJ reporting partner.
• Algirdas Semeta: wants ICIJ and partners to keep digging.EU Commissioner Algirdas Semeta says the Offshore Leaks investigation by ICIJ and its partners has transformed tax politics and amplified political will to tackle the problem of tax evasion.
“I personally think Offshore Leaks could be identified as the most significant trigger behind these developments … It has created visibility of the issue and it has triggered political recognition of the amplitude of the problem”, he told EU Observer. He added that tax transparency overrides the principle of data privacy.
• South Korean financial regulators have opened an investigation into possible illicit fund transfers by hundreds of Koreans whose names are included in ICIJ’s “Offshore Leaks” database.  “We will investigate every one of them,” a top regulator said. “When doing capital transactions, they’re required to report to the authorities prior to the trades, so now we are investigating whether they violated the law.” ICIJ’s investigative partner, the Korea Center for Investigative Journalism, revealed that it had identified at least 245 Koreans who established companies in the British Virgin Islands, Cook Islands and other offshore havens.
• Canadian Senator Vern White has called for a probe into a fellow legislator’s role in her husband’s use of an offshore hideaway in the South Pacific.  The conservative Senator said he has asked the Senate’s ethics officer to look into Liberal Senator Pana Merchant’s role in the matter, saying there are “serious questions” to be dealt with.  The Senate ethics office said in a statement that will give Merchant a chance to respond before deciding whether to launch a formal investigation. CBC News and ICIJ revealed last month that Merchant’s husband, famed class-action lawyer Tony Merchant, had shifted some CA$1.7 million (US$1.1 million) into a Cook Islands trust while he was locked in battle with Canadian tax authorities.
• Herbert Stepic. Photo: APThe Chief Executive Officer of eastern Europe’s second-biggest lender, Raiffeisen Bank International AG, has resigned a day after officials began a probe into his investments revealed through Offshore Leaks.
Documents show Herbert Stepic, who has worked with the Raiffeisen banking group for four decades and took its eastern European division public, used companies in Hong Kong and the British Virgin Islands (BVI) to conduct property deals he did not report to his employer.
Stepic did not answer any questions at a press conference called by the bank this morning. In a statement, he referred to the potential damage to the bank because of the “media debate” around the Offshore Leaks revelations and that he took the responsibility to resign to avoid this.
He repeated an earlier statement that he made his offshore investments with income that had been taxed in Austria, and said he was resigning “for personal reasons”.
• European Council President Herman Van Rompuy says there has been a “real breakthrough” in the EU’s efforts to combat offshore tax evasion. At the council’s May 22 meeting, Reuters reports, Rompuy said the current aggressiveness of the EU’s push is “unprecedented. We couldn’t speak in those terms on those issues, let’s say, a month or two months ago. . . . There is a strong political will by the leaders, not only the Europeans but also on a global level, to go forward in attacking tax fraud and tax evasion.”
• Luxembourg has announced that it will begin automatically sharing information with U.S. tax authorities about bank accounts held by American citizens. The tiny western European nation, long known as a haven for banking secrecy, had previously pledged to do the same in regards to citizens of European Union members. “Luxembourg wishes to see the same conditions apply to all competing financial centers and to see the automatic exchange of information accepted as the international standard,” Luxembourg’s finance ministry said. Reuters news service said that the U.S. had stepped pressure on Luxembourg to become more transparent after the release of ICIJ’s high-profile investigation of offshore financial secrecy.
• The Council of the European Union issued a statement May 14 calling for efforts at the national, EU and international levels “to combat tax fraud and tax evasion” and “aggressive tax planning.” The statement noted that the council’s presidency plans to ask ICIJ to supply EU member states “with the names and details regarding all EU citizens on the ‘offshore leaks’ list.” ICIJ has said that it will not turn over the data to government agencies, but that it is exploring the possibility of publicly releasing some entity ownership data.
• After meeting with President Barack Obama at the White House, British Prime Minister David Cameron made a strong call to tackle what he called “the scourge of tax evasion,” one of the key topics in next month’s G8 meeting in Ireland. “We need to know who really owns a company, who profits from it, whether taxes are paid.  And we need a new mechanism to track where multinationals make their money and where they pay their taxes so we can stop those that are manipulating the system unfairly,” Cameron said.
• British, U.S. and Australian tax authorities announced that they are pursuing tax evasion investigations based on a cache of offshore documents that link to the Cook Islands, Singapore and the Cayman Islands, among other jurisdictions. The secret records are believed to include those obtained by ICIJ
and that are the basis of the Offshore Leaks investigation. British tax authorities said the files “reveal extensive use of complex offshore structures to conceal assets by wealthy individuals and companies.” The three agencies plan to share the information with their counterparts from other countries in what could be the beginnings of one of the largest tax investigations in history.
• Canada’s revenue minister Gail Shea announced a $30 million commitment to fight tax evasion and target the practice of hiding money in offshore accounts, and the formation of an international tax expert “SWAT team”. Asked if her department now has the list of 450 Canadian names contained within the documents obtained by ICIJ, Shea said: “We currently don’t have the list and I can assure you that we’re looking at all of our options. We’re working with our international partners to get that list.”
• The UK Treasury announced that following the lead of the Cayman Islands, all British overseas territories – including Bermuda, the British Virgin Islands, Anguilla, Montserrat and the Turks and Caicos Islands – have agreed to share information about individuals holding bank accounts in their jurisdictions with the UK, France, Germany, Italy and Spain.
• The South China Morning Post reported that the new information exchanges will have real implications for Hong Kong and China companies, which do significant business through the Cayman islands, the British Virgin Islands and other offshore locales.
• European finance ministers may reach an agreement to eradicate tax havens on May 13, after a meeting in Helsinki between finance ministers from Finland, Luxembourg, Greece, Slovakia, and Lithuania as well as the European Commissioner on Taxation  to discuss measures against tax evasion.
• The European Commissioner on Taxation Algirdas Šemeta  and Irish Finance Minister Michael Noonan sent a letter to all EU Finance Ministers, setting out 7 key areas for immediate action in improving the fight against tax fraud, evasion and avoidance. Member States were asked to agree on these actions at the ECOFIN in May. The letter credits the offshore leaks investigation with “sharpening the focus” on tax fraud, and says it will ask ICIJ to supply names and details of European citizens from its data.
• Finance ministers and central bankers at the G20 meeting in Washington said in a communiqué that automatic exchange of tax-relevant bank information should be adopted as the global standard to overcome international tax evasion. Skeptical European leaders reportedly “became more enthusiastic” after the public outcry over ICIJ’s offshore leaks revelations.
• Bayartsogt Sangajav, deputy speaker of the Mongolian Parliament, has been dismissed from his post following ICIJ’s revelations about his undeclared offshore company and bank account. In a parliamentary session he was asked to explain his actions. Several MPs called for further disciplinary action, including expelling him from Parliament entirely.
• Santosh Kumar Agarwal (Kedia), a member of the board of directors for the Antwerp World Diamond Centre, has resigned from the organization after his offshore dealings were revealed. “In the interest of the integrity of the Antwerp World Diamond Centre as [an] organization and the industry as a whole, Kedia has taken the initiative to withdraw from the AWDC’s board of directors, awaiting the outcome of a potential investigation,” said a statement released by the company.”
• French president Francois Hollande has published the personal financial details of  government ministers on the official government website, following the Jerome Cahuzac and Jean-Jacques Augier offshore assets scandals. The list of assets includes details of bank accounts, life insurance, property and other expensive items such as cars, art works and antiques. Various properties in Paris and the south of France have already been itemized by ministers, as well as designer lounge chair (Industrial Renewal Minister Arnaud Montebourg) and a David Beckham t-shirt (Culture Minister Aurelie Filippetti).
• European Council president Herman Van Rompuy announced that tax evasion will be discussed at the next European Council in May, saying “we must seize the increased political momentum to address this crucial problem.”
• BVI government officials have announced they are opening a new business headquarters in Hong Kong, with Orlando Smith, BVI Premier and Finance Minister, confirmed to officiate the opening. Executive director of BVI International Finance Centre, Elise Donovan, said the data obtained by the ICIJ was “a small fraction” of the total number of BVI firms. She later added, “We want to reassure clients in Hong Kong and the region that this is an isolated incident. We remain committed to clients’ privacy and confidentiality.”
• The Swiss and U.S. governments are investigating a possible solution to the dispute over wealthy Americans using Swiss banks to hide their money. These talks come at time when Switzerland’s banking sector is under increased pressure to surrender personal information about suspected tax evaders. Swiss Finance Minister Eveline Widmer-Schlumpf said all countries should be treated equally in the drive for bank transparency. “We consider it very important that rules must apply to all and are engaging ourselves for a level playing field in multilateral forums,” Widmer-Schlumpf said.
• German Chancellor Angela Merkel urged UK’s PM David Cameron to crack down on tax havens during talks in Berlin, following a public outcry in Germany over the “offshore leaks.” Sources “close to Cameron” claim he was actually the first to raise the issue, spelling out how his government was cracking down on tax avoidance in places such as Jersey and Guernsey.
• Russian Deputy Prime Minister Igor Shuvalov.Russian Deputy Prime Minister Igor Shuvalov is moving his offshore assets back to Russia after ICIJ’s revelations that Shuvalov’s wife Olga Shuvalova was either a shareholder or owner of several secretive offshore entities. The Shuvalovs had a declared income of $12.7 million in 2011, most of which was earned by Olga.
• Spanish political party Unión Progreso y Democracia submitted written questions to the Spanish Congress today in the wake of French president François Hollande’s announcement that French banks had to declare their tax haven subsidiaries. The questions read: Is the government going to present in the European institutions any initiative to eradicate the tax havens within the Member States? and Is the government going to force banks to disclose the subsidiaries they have in tax havens and what are their activities?
• Francois Hollande: called for tax havens to be “eradicated.”French president François Hollande called for “eradication” of the world’s tax havens and told French banks they must declare all of their subsidiaries. He also announced the creation of a special prosecutor to pursue cases of corruption and tax fraud. French government ministers have been ordered to declare their assets publicly within days.
• Luxembourg’s Prime Minister Jean-Claude Juncker announced his country plans to lift bank secrecy rules for European Union citizens who have savings based in the country, ending decades of bank secrecy in Luxembourg. “We are following a global movement,” Juncker told parliament in a state-of-the-nation address. The new transparency regime would begin in January 2015. Austria is now the only EU country not sharing data about bank depositors. In a recent interview, Austrian Vice Chancellor and Finance Minister Spindelegger Fekter said: “How much money someone has in the bank is a matter between the bank and the customer and is no one else’s business.”
• Algirdas Semeta, European Union Tax Commissioner stated in a recent interview that it is time to move “quicker and harder” against tax evasion. He said the “growing willingness to act” increases the likelihood of a more coordinated EU stance against tax havens.
• Europe’s five biggest economic powers — Britain, France, Germany, Italy and Spain — announced they would begin regularly exchanging banking and tax information as a way of identifying tax dodgers and other financial wrongdoers.
• Meanwhile, the British Virgin Islands (BVI) authorities are not fans of the ICIJ investigation. The BVI premier and Finance Minister Orlando Smith told the South China Morning Post that “BVI authorities are actively investigating how this private information has been illicitly obtained and used to attack the BVI financial services industry, which operates compliantly within international guidelines and the law.”
• Athens’ district attorney Panayota Fakou has started a preliminary probe to find out if Greeks who own offshore companies unearthed by the ICIJ investigation have evaded taxes or laundered money. According to the Greek newspaper Ta Nea, prosecutors will send information requests to British Virgin Islands’ financial authorities asking them to turn over records of 107 entities connected to Greek citizens.
• An investigation by Finnish State Televisionand ICIJ exposing the offshore connections of state-owned postal company Itella has been received with surprise by the Finnish Finance Minister, Jutta Urpilainen. The minister said that “state owned companies should be an example for other companies. That is why it is especially unacceptable that Itella owns a company in a tax haven.” Urpilainen said the Finnish government should adopt clear rules on the use of offshore jurisdictions by state-owned corporations and called tax havens “one of the biggest threats to the Finnish welfare state.”
• Canada’s national revenue minister Gail Shea says the government may pursue the Canadian Broadcasting Corporation in court to force it to share the offshore leaks records.
• Quebec Premier Pauline Marois has declared that neither she, nor any other elected officials in her government have dealings in the offshore world. Marois also supported the handover of internal documents to Canadian authorities, stating the Quebec government would not hesitate to use “all legal means” to ensure this.
• French budget minister Bernard Cazeneuve joins the clamor from governments around the globe in urging ICIJ and its media partners to release the offshore tax haven files to them, to “aid justice and help them do their job.” Le Monde’s response: “It is up to the justice system to establish responsibilities at a time when the law might have been broken … It is up to the press to enlighten the reader…”
• Austrian Chancellor Werner Faymann says he is ready to make concessions on banking secrecy, to bring the nation in step with Switzerland and Luxembourg. “Austria should participate in talks on banking secrecy,” Austrian Chancellor Werner Faymann declared to Die Presse.
• The European Commissioner for Taxation, Algirdas Šemeta, called for an automatic exchange of information between countries and a “tough common stance.” “Recent developments, fuelled by the outcome of the Offshore Leaks, confirms the urgency for more and better action against tax evasion …. Now it is time to put words into action.” He said he was “very pleased” to see many of the Member States reviewing where they stand on the issues and “intensifying their political will to act.”
• The Swiss government has distinguised itself from other world governments by publicly stating it does not want access to the offshore leaks records. Finance minister Eveline Widmer-Schlumpf said Switzerland has worked hard in recent years to curb fraud and tax evasion and that much of the activity pointed to in the leaked documents can be perfectly legal. She says the Swiss government does not want access to the data as “it was acquired illegally and Bern wants no part of that”.
• The Philippine Presidential Commission on Good Government probe into the disclosure that Maria Imelda Marcos Manotoc, the eldest daughter of the late dictator Ferdinand Marcos, was a beneficiary of a secret offshore trust in the British Virgin Islands, will release its report within two weeks.  “We are duty bound to investigate and, depending upon informed preliminary findings, decide whether to pursue the matter,” said Andres Bautista, the chairman of the Presidential Commission on Good Government, tasked with recovering the Marcos family’s alleged ill-gotten wealth.
• The president of the Association of German Banks denied that his group’s members had helped customers engage in tax evasion. “First in line are the individuals and the organizations that invest their money in tax oases,” Andreas Schmitz said.”
• The Berne internal revenue service authorities announced they will re-open the Gunter Sachs case after ICIJ’s revelations about the former Mr. Brigitte Bardot’s intricate offshore scheme.
• In Canada, a Liberal senator urged his caucus colleague, Senator Pana Merchant, to answer questions in the wake of CBC News and ICIJ reports that she has been listed as beneficiary of an offshore trust created by her husband, a well-known class-action attorney. “We’re all innocent until proven guilty in this country, but I want to hear her explanation,” Senator Percy Downe told CBC News in an interview.
• In the Philippines, two lawmakers dismissed a report by an ICIJ media partner, the Philippine Center for Investigative Journalism (PCIJ), that they had offshore holdings. Senator Manuel Villar said his offshore entity was a “1-dollar shell company” that he wasn’t required to report, because he hadn’t made any real investment in it. Villar said that he hadn’t conducted business with the British Virgin Islands company “because I decided to concentrate in the Philippines.” Congressman Joseph Victor ‘JV’ G. Ejercito suggested the story about him was politically motivated. “To the best of my knowledge, I have truthfully and accurately declared all my assets, liabilities, and net worth” on required disclosures forms for public officials, he said in a statement.
• Germany’s Economics Minister Philipp Rösler urged the media to pass the data on to the government, stressing that tax evasion was a “criminal act.”
• Luxembourg’s Finance Minister Luc Frieden says he is open to greater transparency of its banks in order to cooperate further with foreign tax authorities.
• The Indian Finance Minister P. Chidambaram said an inquiry had been initiated by the authorities against individuals whose names figured in the global media report. “Yes. We have taken note of the names and inquiries have been put in motion in respect of the names that have been exposed,” he told a press conference.
• The Mongolian Deputy Speaker, Bayartsogt Sangajav, admitted to an “ethics failure” over his undeclared million-dollar Swiss bank account. He told a press conference: “It is true that there is 1,658 Euros or 2.9 million MNT in a Swiss bank account. I opened the account to trade in international stocks with three other acquaintances in 2008. My failure of responsibility is that I did not include the company in my declaration of income. I have admitted my ethic failure and I am ready to take responsibility.”
• Philippine government officials said they will investigate evidence that Maria Imelda Marcos Manotoc, a provincial governor and daughter of the late dictator Ferdinand Marcos, was the beneficiary of a secret BVI offshore trust.
• George Mavraganis, the Deputy Finance Minister of Greece announced that the Greek government is moving to address offshore-driven tax dodging. Greek members of parliament asked Mavraganis what he planned to do about the 103 offshore companies that ICIJ found hadn’t been registered with Greece’s tax authorities.
• George Sourlas from Greece’s Ministry of Justice said the revenue loss caused by offshore was huge. “By the actions of offshore companies in Greece, the revenue loss to the Greek government is in the order of 40% or more of the debt of our country,” Sourlas said. “The offshore companies cast a shadow at this time of great crisis, when some get rich and many get poor.”
• In France, President Francois Hollande denied knowledge of the offshore accounts held by his 2012 campaign manager, Jean-Jacques Augier, asserting that it’s up to the tax administration to monitor Augier’s private activities. Reports about Augier’s offshore dealings by Le Monde, the BBC and other ICIJ partners came in the wake of news about tax fraud charges against Hollande’s ex-budget Minister, Jerome Cahuzac.
• The office of Azerbaijani President Ilham Aliyev asserted there was nothing unusual about the information in the leak – which showed that his two daughters were shareholders of three offshore companies. The statement said the President’s daughters “are grown up and have the right to do business.”  A spokesperson for Azersun – a holding company controlled by Hasan Gozal, a corporate mogul who was listed as the director of the daughters’ companies – said the report was biased and based on inaccurate information. “I regret that authority of Press Council doesn’t go beyond Azerbaijan and there is no such institution worldwide to fight racketeer journalists,” the spokesman said.
• Ex-Colombian President Álvaro Uribe Vélez publicly defended his sons’ involvement in offshore business. Uribe stated that his sons Tomás and Jerónimo are entrepreneurs and “have participated in business dealings since they were children” and “they are not tax evaders.”
• In the UK, David Cameron is facing renewed pressure to take action over Britain’s entanglements within the offshore world. Lord Oakeshott, a senior Liberal Democrat said that the secrecy haven of the British Virgin Islands “stains the face of Britain.” Oakeshott and others are questioning whether Cameron will raise the issue in June of at the G8 summit of wealth nations. “How can David Cameron keep a straight face calling for the G8 to make big business pay tax when we let the BVI use British law and British protection to suck in billions in dirty money?” Oakeshott asked.
• German Finance Minister Wolfgang Schäuble stated on public radio that he was “pleased” with the ICIJ reports. He went on to say, “I think that such things as have been made known will increase the pressure internationally, and we will be able to increase the cooperation with those who have been more reticent,” a sentiment reflected in Germany’s previous lobbying to stamp out tax avoidance.
• Canadian Federal Revenue Minister Gail Shea called the released of offshore banking information as “good news” for Canadians and bad news for tax evaders. Ms. Shea urged ICIJ or anyone else with information on tax cheats to come forward.
• Pascal Saint-Amans, director of the Organization of Economic Cooperation and Development, said: “Secrecy is no longer acceptable. We need to get rid of it. If the rules make it possible, then we’ll change the rules.”
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