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Australian Carbon Tax To Go – What Lessons Can Be Learned?
By Phil Covington | July 23rd, 2013 There are three things governments can do in order to address carbon emissions. Firstly, they can do nothing, which is the position the U.S. Federal government has taken, since the U.S. Congress has no appetite for pricing carbon. Secondly, governments can create a carbon marketplace, such as the European Emissions Trading Scheme (ETS), and California’s cap and trade program; providing an opportunity for businesses to make money from carbon allowances and for market forces to set the price. Or thirdly, they can impose a carbon tax; the choice the Australian government opted for, and which has been causing quite a bit of disquiet within the business community over there in recent months. Soon business leaders won’t have to worry. Australia’s new Prime Minister, Kevin Rudd, a former PM who returned to power in June by virtue of a leadership change within the incumbent Labor Party, has announced the government will end what has become the unpopular carbon tax and instead, bring forward an emissions trading scheme a year earlier than planned. There are of course many pros and cons in the debate as to whether a carbon tax or an emissions trading scheme is the better way to control CO2 – and while the point of this piece is not to go into these, there is perhaps a lesson here for any countries out there trying to decide between them. Here is a very simplified perspective that may be drawn from Australia’s experience. Australia’s carbon tax at 23.09 (AUD) per tonne, was introduced to curb emissions from a country that is one of the world’s worst per-capita greenhouse gas emitters . The tax makes the biggest polluters pay, but that cost is passed on to small businesses and consumers by way of higher energy prices. This is why it has become so unpopular. By comparison, businesses and consumers in Europe, while also having to pay more to accommodate the price of carbon under their cap and trade system are, however, less burdened than Australians. Given that Europe’s price on carbon floats subject to market forces, in April the price per tonne of carbon effectively collapsed down to just 2.75 Euros – the equivalent, at the time of writing – of less than 4.00 Australian dollars per tonne. While this was generally considered to be way too low, EU countries were not prepared to prop up the price , largely because under their ongoing economic doldrums, there wasn’t much will to raise costs. Europe’s free falling carbon price even prompted The Economist to wonder if it might even spell the end of the ETS altogether. Under such circumstances, however, with Europe’s carbon price so low, Australia’s flat tax very easily became a competitive disadvantage for its businesses operating within the global economy. The disparity in price between Australia and Europe – with Australia paying almost six times as much per tonne of carbon as Europeans – makes it easy to see why even if a sensible carbon tax rate were originally set, it can start to look unfair when carbon markets elsewhere in the world set the price much lower. Furthermore, despite being designed as a disincentive for carbon emissions, carbon taxes still don’t impose a carbon cap, so their ability to mitigate carbon is still not certain. Australia’s Rudd suggests that moving to an emissions trading scheme – which will be linked to the European carbon market – will save households 349 Australian dollars a year. So despite a carbon tax being a simple way to price carbon, and despite Europe’s ETS being far from perfect, the lesson from Australia is that their carbon tax has proved to be unpalatable, uncompetitive and ultimately abandoned. Image by Quinn Dombrowski Continue reading
The Secret World Of Tax Havens
An anonymous source has provided extensive insights into a worldwide network of tax evaders. Media in more than 30 countries are currently sifting through a mountain of data. 260 gigabytes of documents – that’s the printed equivalent of 500,000 copies of the Bible. This is the massive amount of data that was passed on more than a year ago by an anonymous whistleblower to the International Consortium for Investigative Journalism (ICIJ) in Washington. More than two million emails and other confidential documents sketch a picture of a dubious shadow world. More than 130,000 people from 170 countries are alleged to have secreted their money in tax havens. Analyzing the data is a mammoth task that is still nowhere near completion. Challenge for computer forensics experts The anonymous source secretly lifted the data from two company servers and transferred it via the Internet. “Unfortunately, in order to protect the source, it’s not possible to say anything more about exactly how this was done, but it’s clear that there was a substantial leak,” says German data journalist Sebastian Mondial, who is one of those analyzing the material. This means that at a certain point these companies’ secrets were accessible in such a way that someone was able to make a copy, Mondial explained in an interview with DW. Germany’s Süddeutsche Zeitung daily writes that much of the data was not very well organized, and that some of the documents first had to be converted so they could be read by machine. “We were lucky that we had some specific forensic software that’s usually used by criminologists,” says Mondial. This, he explains, made it possible to scan these databases and examine them to find out things like what connections existed between pieces of data, when documents were created, when emails were sent and who received blind copies of emails. The Virgin Islands are just one of many tax havens Havens of tranquility and tax evasion The British Virgin Islands, the Cook Islands, the Seychelles, Panama: All of them have something very attractive to offer to certain companies and private individuals – anonymity. “‘Come to us and you won’t have to worry about the tax office finding out.’ This is the kind of slogan these so-called offshore islands use to attract rich people,” says Thomas Eigenthaler from the German financial managers’ union (DSTG). He explains that the tax evasion is made easier by the fact that the taxpayers don’t have to deal with it themselves. A whole industry has sprung up to advise them and offer tailor-made solutions. Sebastian Mondial adds that many tax havens don’t even keep any kind of register with information on company owners or capital. The EU estimates that every year around a trillion euros in tax revenue is lost through tax evasion or tax avoidance. According to a study by the non-governmental organization Tax Justice Network, a fortune estimated at between 21 to 32 trillion dollars is stashed away in tax havens. By comparison, in 2011 the gross domestic product of the United States was around 15.1 trillion dollars. The figure doesn’t even include non-financial assets and gold held abroad, foreign properties, or luxury yachts sailing under foreign flags. “According to my colleagues working on the project, there’s a particularly clever trick they pull when someone is sued by an offshore company. They agree on a settlement, and the complaint is dropped,” explains Sebastian Mondial. Then the settlement money, which, as part of a lawsuit, does not have to be taxed, is transferred to the offshore account. There are other tricks, too. For example, a company can set up a subsidiary in a tax haven to deal with its foreign operations, thereby avoiding paying tax on foreign profits. Offshore firms often are little more than a letter box Is Germany also a tax haven? Private individuals resident in Germany have to pay tax of up to 45 percent on their earnings. Companies whose main office is in Germany have to pay corporate tax and business tax. But in Germany too there are loopholes that the cunning can take advantage of. “If a German-based business seeks advice from an offshore company, the offshore company issues an invoice, and the money is transferred. To the tax office, this looks like a perfectly normal transaction,” says Mondial. However, it means that the money has been moved out of the country, and no further taxes will be paid on it. According to German law the burden of proof lies with the tax office, not with the companies. And this burden is too heavy for the German system to bear, Eigenthaler says: “We don’t have the capacity to do all the checks. Sometimes we wait years for an answer from overseas authorities. But there’s also a lack of political will. I always have the sense that people at the top are being too lax in their pursuit of tax evaders.” Furthermore, the influence of the German state ends at the border. “If money is transferred out of Germany to another country, the German treasury has no way of locating it – unless Germany has a tax agreement with the relevant state that includes the exchange of information,” Eigenthaler explains. But why would somewhere like the Cayman Islands have an interest in torpedoing its own business model by signing such an agreement? And as Eigenthaler points out, even if an agreement were reached, it doesn’t mean it would necessarily be followed to the letter. The data leak and its consequences For years now international organizations like the OECD (Organization for Economic Cooperation and Development) have been trying to establish measures against tax fraud and standardize regulations. According to the OECD, progress has been made since a blacklist was published in 2009 naming four countries as tax havens. 700 agreements were reached regarding the exchange of information, and around 40 judicial verdicts have led to some changes in the law. Might the revelations contained in these databases be of assistance in the international fight against tax fraudsters? Yes, but only indirectly, according to the computer forensics journalist Sebastian Mondial. He says he hopes that the actual data will never be published. The point of the exercise is not simply to put all of these firms’ data on the Internet and let everyone look at it to see who has transferred how much money, or who owns which companies. Rather, says Mondial, “The lawmakers and the respective countries must somehow find a way of establishing transparency.” Continue reading
Luxembourg: The EU’s Top Tax Haven
Switzerland is a well-known hideaway for assets from around the world, but the country does not belong to the European Union. Within the EU, Luxembourg is the largest tax haven – and operates fully within the law. What do investors want? Plenty of security for their money, high returns and the lowest tax rates possible. These conditions aren’t just found along the white beaches of the Caribbean. Tax havens are also thriving in Europe, says Reinhard Kilmer, a German tax fraud investigator. “We don’t have to look to the Caribbean. We can also step outside our own front door,” Kilmer said in a television interview, adding that Great Britain protects the Channel Islands and the Isle of Man, France has Monaco, and Europe still has issues with Luxembourg, Switzerland and Austria. The yields are perhaps not as high in such places as on the Virgin Islands, but the security cannot be beat, Kilmer concluded. The leading haven within the European Union is the tiny Grand Duchy of Luxembourg, a founding member of the EU. But the country’s finance minister, Luc Frieden, rejects the notion of it being a tax haven. Deutsche Bank is one of 141 banks in the tiny country “We are a European center of finance, and we don’t encourage anyone to engage in tax evasion,” Frieden has said repeatedly, most recently over the weekend in an interview with the Sunday edition of the Frankfurter Allgemeine daily. Luxembourg’s government says that 141 banks from 26 countries have settled there. More transparency? For decades, Luxembourg has cultivated its reputation as an investor’s safe haven. Around 2.1 trillion euros ($2.73 trillion) are held by Luxembourg’s investment funds, according to an estimate by the financial consulting firm Ogier. Taxes are very low on these funds, leading many international companies to open subsidiaries in Luxembourg in order to have their profits taxed cheaply by the miniature country. That is entirely legal in Europe. Money from abroad provides Luxembourgers with the highest per capita income in the EU, so it’s no wonder that residents defend their business model. Finance Minister Luc Frieden also does not want to shake things up by threatening the sense of security felt among companies and investors there. Sven Giegold, a member of the European Parliament and a finance expert within the Green Party, has called for more transparency when it comes to companies’ tax models. “A company should have to make clear in its balance sheets how many subsidiaries it has, how much in profits it is earning and where as well as how much it’s paying in taxes,” Giegold said, arguing that such a move would allow journalists and voters to determine whether the relationship between earnings and taxes paid is appropriate. “Then this whole tax shuffle would be transparent,” the parliamentarian said. Luc Frieden – finance minister in tax paradise? Luc Frieden told the Frankfurter Allgemeine that he is prepared to think about whether records of interest earned by private investors should in the future be automatically forwarded to the tax authorities in the investors’ home countries. He was sharply criticized in Luxembourg for saying so, and the youth wing of center-right Democratic Party in Luxembourg issued a statement demanding that bank secrecy be maintained. Until now, Luxembourg and Austria, the tax haven in the Alps, have blocked automatic sharing of data on investment returns and taxes in the European Union. European Commissioner for Taxation Algirdas Semeta described that practice last year as “completely unfair.” Small states need ‘large capital reserves’ The EU is not really responsible for taxation policy, which is largely left to the member states. The idea is that it’s desirable for there to be competition among the various tax models. Malta, for example, does not tax companies at all, while Cyprus taxes them at ten percent and Ireland at 12.5 percent. For years, finance ministers have sought to agree to a shared basis model when it comes to what types of wealth and income should be subject to taxation. Guntram Wolff supports policies of tax transparency In terms of financial politics, it’s not necessary for tax models to be uniform, said Guntram Wolff, an economist with the think tank Bruegel in Brussels. What’s essential, he said, is that the rules are clear: “I think tax transparency is crucial. Tax havens in the European bloc are in no way desirable. That cannot be the case because then one country is really operating its tax policy and banks at the cost of the others.” When a storm emerges over a tax haven, as recently happened in Cyprus, then other European countries may get called in to foot the bill. Government spokespeople in Luxembourg and Malta reject comparisons with Cyprus. But the banks – even in Luxembourg or Malta – could one day fall into trouble, believes Thomas Meyer, chief economist at Deutsche Bank. In an interview with online portal EU Observer, he said: “Even with the best oversight, banks can get into trouble. And when a state is too small in comparison with its banking sector, then it will go bankrupt.” In the case of Cyprus, however, EU members are rescuing it with ten billion euros. In Cyprus, the banks were worth seven times as much as the country’s GDP. In Luxembourg, they’re worth 22 times more. Meyer believes small states should maintain larger reserves of their own capital, citing Switzerland as an example that is paving the way here. In Luxembourg, Austria and other financial tax havens, Meyer says, there’s a preference for using the EU as a form of insurance. Defining tax havens Tax havens can be found well beyond the Caribbean A speaker for the EU Commission has noted that the member states have until now been unable to agree as to what constitutes a tax haven. If one applies the standards of the Organization for Economic Cooperation and Development (OECD) in Paris, then no European country can be called a tax haven. Low tax rates in one country that can lead to avoiding higher taxes elsewhere is not an illegal practice – at most just an affront to some people’s sense of justice. Finance ministers from Luxembourg, Latvia or Slovakia, where rates are lower for companies than they are in Germany or France, argue in response that high tax countries could always lower their rates in order to attract investors and new companies. The British NGO Tax Justice Network publishes a list of tax havens that weights the size of the financial marketplace as well as the level of bank secrecy. Using this index, Switzerland is tax haven number one, followed by the Cayman Islands and Luxembourg. Germany comes in at number nine. Billions owned by foreign investors are housed in Germany, as well, and the reticence of German banks toward tax authorities in Russia or Arabic states makes the country attractive to many, notes the Tax Justice Network. Continue reading
