The Trouble With Tax Havens

James S. HenryCongresso Internacional de Educacao

FiscalFortaleza, BrazilNovember 27, 2012

1(c)JSH/ TJN 2012

The Trouble With Tax Havens¶ Background¶ Key Costs

1. Odious Debt/ Privatizations2. “Pirate Banking”3. Rampant TNC abuses 4. Global Corporate Tax Race

¶ What is To Be Done?

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Summary¶ Global tax haven industry is huge; hurts growth and

development¶ Huge global stock of “missing wealth:” $21 - $32 trillion ¶ Growing TNC abuses – transfer mispricing, corruption¶ Solutions require citizen pressure

¶ Transparency¶ End “tax+rule competition” ¶ Crucial role of “Enablers”

Tax Justice Network

• TJN–Intl Sec. (2002-)• TJN-US affiliate (2003-)• R. Murphy/J. Christensen – country X country reporting • J. Blum – Barclays case, unitary taxation• J. Henry – numerous articles, books on havens, debt, offshore • D. Spencer – numerous articles on Intl tax, TP standards• N. Shaxson: Treasure Islands (2010)• M. Meisner: Secrecy Index (2009 - • Key Partners: Oxfam, ChristianAid,LatinDad,EuroDad, CCFD,GFI, Global Witness, GFI,

ActionAid, Save The Children, etc.• Emphasis on quantitative research+organization

o “Mapping Financial Secrecy” (2009, 2011): secrecyjurisdictions.como “Tax Loss” (Oxfam GB) (2009) o “Price of Offshore” (2005, 2012)

• Founding member, Task Force on Financial Integrity & Economic Development ('08-) • More info:

o http://www.taxjustice.net o http://www.secrecyjurisdictions.com

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If you cannot express it in numbers, your knowledge is of

a meager and unsatisfactory kind.

-- Lord Kelvin, 1889

Why Do We Care?

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Government revenue + taxes by country/ group

(Median % of official GDP, 2000-09)

Country Group

Population (2009)(Billions)

Per Capita Income

(PPP-Adjusted’

09)

Gov Revenue X Grants

Income Taxes

Sales Taxes

Payroll Taxes

Taxes on Intl Trade Other Taxes

Other Gov

RevenueGrants

OECD 1.22 $33153 26.1% 6.6% 7.3% 8.9% .1% 1.0% 2.2% 0%

EU .500 $31384 35.2% 7.4% 11.3% 12.%2 .02% 1.2% 3.1% 0%

US .310 $45989 17.9% 9.5% .6% 6.8% .2% .3% .5% 0%

China 1.331 $6828 9.5% 2.1% 6.2% 0% .3% .1% .8% .1%

Other Middle Income

3.481 $6245 21.%3 4.%6 6.1% 4.5% 1.3% .4% 3.2% .8%

Low Income

.846 $1205 11.5% .1% 2.3% 0% 7.0% 1.5% .6% 9.6%

World 6.775 $10686 25.0% 5.1% 8.1 7.1 1.31% .59% 2.57% .23%

Source: World Bank data (2011) , JSH analysis © JSH 2011

Tax justice impact

10

More capital than ever before for developing countries…..(including poor ones, the subprime equivalent…)

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11

Disappointing Real Growth(1980 - 2005)

China India Poorest (UN) All Other Developing Countries

High Income

World

Countries (n) 1 1 49 105 54 210

% of Pop --1980-- 2005

22.1%

20.3%

14.4%

17.1%

8.1%

11.4%

33.0%

35.8%

22.5%

15.3%

100%

100%

% of Real Income ($95

PPP)

3.2%

13.6%

3.5%

6.3%

1.9%

1.9%

29.3%

24.5%

62%

54%

100%

100%

Real Income Per Capita

2005 ($95 PPP) $4,972 $2,752 $1,249 $5,123 $26,191 $7,428

1980-2005 RAAGR (%) 8.1% 3.8% .7% .8% 1.9% 1.6%

2005 Population (B) 1.3 1.1 .74 2.3 .98 6.43

Source: World Bank data (2008), JSH analysis(c)JSH/ TJN 2012

 •Roberto Benedicto $747.6 million•Marcos family members $726.5•Roberto Cuenca $676.9•Herminio Disini $258.4•Eduardo Cojuangco $201.2•Jobo Fernandez $180.0•“Kokoy” Romualdez $150.4•Manual Elizalde Jr. $104.1•Jose de Venecia $71.4•Lucio C. Tan $51.8•Placido Mapa Jr. $50.6•Ramon Cojuangco $30.9 •Ricardo Silverio $30.6•Juan Ponce Enrile $28.6•Vicente Chiudian $15.6•Roberto Villafuerte $15.2•Bienvenido Tantoco $6.0•Salvador Laurel $5.8•Other Marcos allies: $134.4

TOTAL: $3.58 billion

OTHER (not identifiable:) $3.4 billion

Insider Recipients - Philippine Central Bank loans ($mm outstanding, 1986)

Source: JS Henry, The Blood Bankers (2003)(c)JSH/ TJN 2012 12

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Compare current $700 billion+ US bank bailout, 500 billion UK bailout, $135 billion (so far) AIG bailout, $200 billion Fannie/Freddie bailout, etc..

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Privatization Abuses

• Brazil case, 1995 – 1999: • Companhia Siderurgica Nacional: $1 b in “moeda podres” • Ferrovia Paulista S.A., Banerj, Rio Light, Embraer, Usiminas, Copesul,

Acesita, CVRD, etc.

• Brazil received R$85.2b, paid $87.6b: net –R$2.4b o -- Biondi, Brasil Privatizado

• Similar results all over the world

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What a difference leadership makes…

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is

*1990-99

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Heavily Indebted Rich Countries (HIRCs)

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Thirty Years of Globalization “ The Globalization of Crisis”

1980s• Heavily-indebted developing

countries• 3W capital flight, private banking• MNC, bank abuses concentrated

in 3W• Inequality, poverty:

“development” problems• Debt cancellation, Fx controls,

protection, nationalization: 3W policy instruments

2010s• Heavily indebted rich countries• First World capital flight (France,

Spain, US, etc.)• 3W private banking (Singapore,

Brazil)• MNC/ bank abuses everywhere• Growing inequality everywhere• New interest in intervention

everywhere

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Unrecorded Capital Flows and Stocks ( 139/ 154 developing countries)

Private Bank AUM

s

(world’s top 50 PBs)

Cro

ss-B

orde

r

Portf

olio

Mod

el

(BIS

dat

a/ P

B in

terv

iew

s)

Triangulating on the offshore hole in the global economy….

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Source: bank financials, private banking industry interviews, JSH analysis

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Capital Flight Estimation -Russia Example

Debt Flows ($B)

Net Foreign

Investment ($B)

Total Sources

($B)

Reported CA

Deficit

Ch in Reserves

Total Observed

Uses($B)

Annual CFEstimate

($B current)

Annual CF Estimate ($B US 95)

1994 -5.8 0.4 -5.4 7.8 3.4 11.3 5.9 6.0

1995 2.1 1.5 3.5 7.0 -4.9 2.1 5.6 5.6

1996 7.1 3.7 10.8 10.8 6.1 16.9 27.7 27.2

1997 5.4 3.0 8.4 -0.1 -0.4 -0.5 7.9 7.6

1998 46.3 2.2 48.5 0.2 10.5 10.7 59.2 56.3

1999 0.7 0.8 1.5 24.6 -5.4 19.2 20.7 19.4

2000 -12.6 -0.4 -13.0 46.8 -18.9 27.9 14.9 13.7

2001 -3.3 0.7 -2.6 33.8 -12.0 21.8 19.1 17.1

2002 -5.6 2.6 -2.9 29.1 -12.8 16.3 13.4 11.9

2003 28.6 -1.4 27.3 35.8 -27.2 8.6 35.9 31.2

Total $62.8 $13.2 $76.0 $196.0 $-61.6 $134.4 $210.4 $195.9

Source: data from IMF/World Bank (2008), JSH analysis

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Unrecorded Net Capital Outflows from Latin America, 1970-2010

(Real Value of Cumulative Net Outflows by Period, $2000 Billions)

Source: data from World Bank/ IMF (1979-2008); JSH analysis

S =$263.5

**30 other Latin American and Caribbean countries

S S=$1376.0

(Real $2000), UnrecordedCF Outflows

LAC REGION, 1970-2010

(c) JSH 2008, 2011

Huge debt- and oil-financed real flight flows by region…

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S =$278.2

S =$362.2

S =$259.3

S =$82.4

S =$33.7S =$22.5S =$39.8

S =$33.8

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Source: Project data models, JSH analysis

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TOP 8 LATIN AMERICAN SOURCE COUNTRIES:CF vs. NFI: % of Real $GNI

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S Top 20 = $ 7.6 Trillion

S 139 countries = $ 9.4 Trillion

Global Flight Wealth - Key Countries, Including China

($2010 Billions)

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External Debt Vs. Estimated Flight Wealth, By Key Country - ( 2007 $Billions)

Source: data from IMF/World Bank (2008); JSH analysis

© JSH 2008

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Global Flight Wealth, Vs. All Developing Country Debt**

(1975-2003)(Billions US $Current)

Source: data from IMF (2005), World Bank (2005); JSH analysis

First crossover: 1989-90

**Including China

Flight Wealth “Surplus”

© JSH 2008

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Growth Factors – TP Abuse

• Corporate globalization • `Abusive industry growth

– Software– Big pharma– Extraction– Finance

• Rise of secrecy jurisdictions

• Rise of “enabling experts”– Accounting firms– Law firms– Major banks

• Official tolerance (OECD)

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• Developing country tax resources and skills

• Competing jurisdictions (vs. MNC solidarity)

• Global resources • Policy analysis• Training• Enforcement

Many recent TP abuses involving leading MNCs and havens…

• Intellectual property abuses: Apple, Google, Pfizer, GE, Cisco, Forest Labs, etc. (current – WNB)

• Banana exporters cases (2006-)• SABMiller (2008-): South Africa, 4 other countries

• Glencore (2011-): Zambia• Grain exporters (2011-): Argentina• Big bank tax evasion

TNC Corruption Cases

• Siemens ($800->$1700,’08)• Halliburton/KBR ($579,’09)• BAE($400,’10)• Technip ($338,‘10)• Daimler ($185,’10)• Alcatel-Lucent ($137,’10)• Shell/Panalpina ($82,’10)• ABB ($58,’10)• Pride ($56,’10)• Baker Hughes (’07)• Willbros (‘08)• Chevron (’07)• Titan (‘05)

• Alcoa• Allianz• AstraZeneca• Avon (grand jury re China)• China NE Petrol Corp• BHP Billiton• Bridgestone Tire• Deere & Co • Glaxo• HP (Europe)• IBM• Ingersoll• Johnson & Johnson • Lilly• LV Sands/Adelson• Merck• Morgan Stanley• Pfizer• Raytheon• Tyco, etc etc. etc.

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Top 10 US penalties ($MM) as of 1/12 Now in the works…(DOJ/SEC:+75)

Illustrative

Source: FCPA Blog.com (2011) (c)JSH/ TJN 2012

Recent Aggregate TP Cost Estimates

Study Approach Estimated Lost Tax Rev

Simon Pak (2003-6) • Goods trade misinvoicing - Bilateral Customs data

“+$200 billion/ yr.`”

GFI (2011-12) • Goods trade misinvoicing “$98-$106 b./ yr., 2002-06 “

Christian Aid (2009) • Goods trade misinvoicing – partner discrepancies

“+$160 billion/yr.”

TJN (2012) • Country studies •`intangibles``’ abuse

• Case studies of Mx, Zambia, Swiss, India, China

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Isle of Man : 4p for insurance services

Cayman Islands : 8p for use of purchasing network

Ireland : 4p charged for use of brand

Jersey : 6p charged for management services

Produced in Latin America Export price: 13 pence1.5p labour costs / 10.5p production costs1p taxable profits

Consumed in UK : Import price : 60p39p retail mark-up1p taxable profits

Bermuda : 17p for use of distribution network

Luxembourg : 8p for financial services

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ZAMBIA

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SWITZERLAND

MexicoMisinvoicing Vs. Net FDI as a % of GDP, 1970-2011

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MEXICO

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$182.4

$445.3

(Cumulative Total, 1962-2010; Real $2000 Billions)

Source: JSH 2012

Total = $627.8 b,1962-10

Apparent

Apple – China ”value chain”

• 20 mm Ipads/yr @ $500 retail = $10 b.• 65k US workers (35k in retail stores)• 1.2 mm Chinese workers (Foxconn)• $40/Ipad = $800 mm to China• $2.2 b royalties for IP, brand to offshore jurisdictions w

3% tax rate• Total non-China gross margin = $9.2 b – sales and

marketing – royalties = $6 b• Total effective tax on non-COGS margin =<10%, mainly

to US IRS

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http://werenotbrokethemovie,com

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The Global “Tax Race”

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What Is To Be Done?

• Policy collaboration vs. “competition”– Tax regimes– Trade– Reserves/ sov. wealth– Financial regulation– Enforcement

• MNCs/ Banks– Information/ investigation– Penalties– Regulate global enablers

• Private elite – Information/ investigation– Global industry enablers– Taxing global wealth– Attracting capital home

A Hallowed Tradition: Debt Forgiveness

“We shall never be able to move again, unless we can free our limits of these paper shackles. A general bonfire is so great a necessity that Unless we can make of it an orderly and good-tempered affair in which no seriousInjustice is done to anyone, it will….grow into a conflagration.”

- J.M. Keynes, The Economic Consequences of the Peace (1920).

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Summary¶ Global tax haven industry is huge; hurts growth and

development¶ Huge global stock of “missing wealth:” $21 - $32 trillion ¶ Growing TNC abuses – transfer mispricing, corruption¶ Solutions require citizen pressure

¶ Transparency¶ End “tax+rule competition” ¶ Crucial role of “Enablers”

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“It is capitalism thatis truly radical.”

-- Brecht

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Odious Debt

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• Citibank/MHT (Bataan/CBk/Philippines)• JP Morgan (Brazil dams,nukes)….• Panama/Torrijos’ buffalo farm• Indonesia power projects• Argentina/Yacyreta• Peru/Majes-Siguey• Mexico/Laguna Verde• Stroessner’s phone calls• Chase (Venezuela, Iran)• Deutsche Bank (Iraq)• Chile privatization fiasco (BT)• Sandinista debt deal…• Lesotho (LHWP dam)• Carlos Andres’ offshore fund…• Guatemala/Chixoy

…..Clearly a systemic problem

Pirate Banking

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MAY 1976

J.S. Henry(c)JSH/ TJN 2012 57

“Unusual” Demand for US$ Currency –1970-2011

-- $ per Capita

(c)JSH/ TJN 2012 58

.

Key issues – aggregate TP estimates Trade

Misinvoicing Capital Flight

Bias

• Country concentration ✔✔ ++

• All negative flows omitted ✔✔ ✔✔ ++

• Data quality (timing, cif costs, aggregation, etc.)

✔✔ ✔ ?

• Stocks vs. flows ✔✔ ✔✔ -

• Income on offshore stocks ✔✔ ✔✔ -

• Post-2000 focus ✔✔ ✔✔ -

• Missing data ✔ 53 zeroes +72 missing /217

✔69 zeroes + 72 missing/217

-

• Imputed values ✔LDCs +

• Mispricing in traded services omitted

✔ - ?

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US AS A TAX HAVEN

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63

FINANCIAL SERVICES34%

REAL ESTATE38%

INSURANCE28%

THE US ”FINANCIAL-INDUSTRIAL COMPLEX" --TOTAL REAL SPENDING ON FEDERAL POLITCAL INFLUENCE*,

1990 - 2010(Cumulative $2010)

$2.292 B$1.930 B

$2.601 B

∑ =$6.823 Billion

Source: Opensecrets.org (2010) data, my analysis

(c) Submergingmarkets.com, 2010

* Total real cumulativespending on federal lobbyingand campaign contributions,by industry

** Asuming 220 workdays per year, which may be generous

$2973 per Con-gressman and Sen-ator per day** -- for 20 years

(c)JSH/ TJN 2012

“Dark matter” • 1970s :

– “Underground economy” – “Intl. currency demand“– Drug money in Florida

• 1980s: – “Odious debt”– “Capital flight”– Citibank’s “debt-flight cycles” – Noriega/Stroessner – JP Morgan’s bribery in Brazil– Marco’s Central Bank

• 1990s– “Banqueros” (‘96)– “US as a tax haven”– “Flight wealth”

• 2000s– “Blood Bankers” (‘03-’05)– Shadow banking (’08-)– “We’re Not Broke” (’12)– “Pirate banking” (‘12)– “Offshore wealth” – Human capital flight– Hidden offshore earnings– Hidden labor flows

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Investigative economicsInvestigative Economics Neoclassical Economics

•“Just look at the f’in data.” (J. Tukey’s inter-ocular significance test)

• Optimization model-centric

•Anomaly-driven: Puzzles tell us where to look (often with night vision)

•Models tell us where to look

•Skeptical of “methodological individualism” •Bias toward “methodological individualism”

• Plausibility counts: case based + inferential

• 19th-century positivism lives on: “prediction” trumps “explanation”

• If you want to know how someone feels, you can ask them

• 1960s behaviorism: “You look pretty good today; how am I?”

• Get out of the armchair, go to the field ( vs. “abstract empiricism”) (C. Wright Mills)

• “But I want tenure!… and my armchair is very comfortable!”

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Basic Concept –- Adjusted Partner Trade Measure

(c)JSH/ TJN 2012 66

Total Misinvoicing = Export Misinvoicing + Import Misinvoicing

`’Export Misinvoicing`: ∑∑ ((X*ijt (1+CIFijt) – ∑∑Mwijt))

”Import Misinvoicing”: ∑∑ (M*ijt – ∑∑ (Xwijt(1+CIFijt)))

Where: X* = Country X’s Reported FOB goods exports per commodity per trading partner at time t, in a common currency\

M* = Country X’s Reported CIF goods imports per commodity per trading partner at time t, in a common currency

Xw = Sum of world’s reported FOB goods exports per commodity per trading partner at time t , in a common currency

Mw= Country X’s Reported CIF goods imports per commodity per trading partner at time t, in a common currency

CIFij1 = `’normal trade costs,” including customs, insurance and freight, for commodity j and trading partners j at time t

(c)JSH/ TJN 2012 67

Country X

World

Exports

Imports

Imports Exports

< > > <

CONVENTIONAL TRADE MISINVOICING

”Export Under-invoicing”

”`imports Overinvoicing”

(c)JSH/ TJN 2012 68

IN PRACTICE...NOT MUCH FUN…!!!

Forty years in the underground economy• 1966 - $1/hr making pizzas in Minnesota• 1976 - “Calling in the Big Bills” – demand for US currency• 1978-81 - Fed Res data, Castle Bank, ABA Income Tax compliance • 1984 – Film on Honduran land reform• 1986 - “Debt Hoax” - relation between debt and flight

• Sachs runs Bolivia; Pinera buys LAN Chile; Cavallo runs Argentina1987-90 -Noriega, Marcos, Stroessner, Brazil, Tienanman Square

• 1992 – Brazilian Supreme Court libel case• 1996 - “Banqueros y Lavadolares” – first book on int’l tax havens

• Sachs runs Russia; Pinera a billionaire • 2003/ 2004 - “Blood Bankers” (Basic Books) – odious debt book• 2005 - “Banking the Poor” (WBk)• 2006 – Doc film about Evo Morales: “Cocalero” • 2007 – “A Game as Old as Empire” (debt relief estimates)• 2009 – Oxfam GB cap flight estimates for G20• 2010 – Initial estimates of untaxed offshore wealth (Forbes)

• 2012 “Pirate Bankers” – Film: “We’re Not Broke” (Sundance doc on corp tax evasion)– “Transfer Pricing Abuses” (TJN Helsinki conference) – “ The Price of Offshore Revisited (TJN Research Paper)

• Pinera: President of Chile; Sachs at Colombia; Cavallo at NYU

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“Unusual” Demand for US$ Currency –1970-2011

-- Trends in Velocity

(c)JSH/ TJN 2012 70

19701973

19761979

19821985

19881991

19941997

20002003

20062009

0

10

20

30

40

50

60

70

80

90

$100 Bill VelocityVelocity - Other US Cur-rency

(c)JSH/ TJN 2012 71

http://werenotbrokethemovie,com

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US dominance…(∑=632 foreign bribery prosecutions, 1977-2011)

(c)JSH/ TJN 2012 73Source: Trace Intl (2011 data, my analysis)

…has increased….

70%78%

1977-1999 2000-2011

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Growth Industry

(c)JSH/ TJN 2012 76

The Philippines Long-Term Development -

Real Per Capita Incomes, Five Asian Economies(1972 = 100)

Source: WB (WDI Data), 2003, author’s analysis © JS Henry, 2003

Underground roots of the globaldevelopment crisis

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“Apparent” Capital Flight From China, Hong Kong SAR and Macao SAR, 1982-2010

(Real $2000 Billions)

Source: World Bank/IMF data (2012); JSH analysis

China (Mainland) Hong Kong SAR* Macao SAR

$0

$100

$200

$300

$400

$500

$600

$700

$800

$742.1

$125.9

$8.6

*HK, Macao data: 1998-2010; (c) JSH 2008

S S=$876.7

.3,

CHINA

1982-2010

China’s apparent flight is exaggerated, due to round tripping…

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Solutions?

Key problems• Rise of financial impunity

– Global elite– Trans-nationals

• “Enablers” – Secrecy Jurisdictions– Pirate banking– Hedge funds– Intl law firms/ accounting

firms

• Tax/ bank systems

TJN Remedies…• Automatic tax info exchange• Country x country reporting• New standards for transfer

pricing (beyond OECD)• Beneficial ownership

disclosure• “Enabler” regulation• New tax systems• Payments transparency…

(c)JSH/ TJN 2012 83

(c)JSH/ TJN 201284

Country X

World

Goods Exports

Goods Imports

Goods ImportsGoods Exports

< > > <

NEW TRADE MISINVOICING FOCUS

”Underinvoicing”

”Overinvoicing”

Traded Services

Traded Services

A

B

C

Summary¶ Global haven industry – huge, diversified¶ Abuses can be quantified¶ Huge global stock of missing wealth: $21 - $32 trillion ¶ Leading MNC abuses – transfer mispricing, corruption¶ Solutions require end to “tax+rule competition” among

countries¶ “Enablers” role is crucial

Recent TP Abuse Estimates• Since 2000, flurry of aggregate ITP misinvoicing estimates• Most based on ”trade partner comparisons” • Rough consensus on global tax revenue loss: $100- $200 billion/ yr.• No aggregate estimates for services, intellectual property • Aggregate estimates obscure haven role

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Mexico – Trend in ”Real” Mispricing

(Real$2000 $Billions, 1962-2011)

Source: UN Comtrade raw data (2012), JSH analysis

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2009

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