Under The Umbrella: Tax Haven Cocktails
By Mike SeccombeNovember 7, 2013
Australia is cleaning up some of its own tax-avoiders, but for those with money to launder – especially from Papua New Guinea – it’s a nice place to wash up.
Australia is getting better at protecting its own revenue base from tax dodgers, but remains far too complacent about accepting investment from those who have dodged the taxes of other countries, according to a new report.
The 2013 update of the Financial Secrecy Index, compiled every two years by the international Tax Justice Network (TJN), finds that Australia still hosts “significant quantities of illicit funds from other jurisdictions”, notably from Papua New Guinea.
The secrecy index scores countries according to the openness of their financial systems as well as the amounts of dubious money flowing through them.
The “secrecy score” is compiled by assessing each country against 15 indicators, and the results are represented on a 100-point scale, on which a higher score represents greater secrecy, and a lower score greater transparency.
“Australia has been assessed with 47 secrecy points out of a potential 100, which places it in the lower mid-range of the secrecy scale,” the Australia section says.
Of 82 jurisdictions assessed by the group, Australia came in about half-way down, at number 44.
It remains a “tiny player” in the global scheme of things, says the report, because it accounts for less than 1 per cent of the global market for offshore financial services. Nonetheless, as we have reported before, wealthy Australians and Australian multinational companies are enthusiastic users of tax havens overseas. A survey earlier this year found the majority of Australia’s top 100 companies had subsidiaries in tax havens – in some cases, scores of them, as you can see in this interactive graphic.
“Australia has taken significant steps to address tax evasion and tax avoidance, especially as it relates to revenue loss from Australia,” the TJN report, released November 7, says.
The most notable of those steps, it says, was Project Wickenby, “the multi-agency taskforce … focused on tax evasion activities by Australians and Australian companies through secrecy jurisdictions. Indeed, it is seen as a model for other countries to follow in curbing tax evasion and tax avoidance.”
Not only had Project Wickenby raised over $1 billion in tax liabilities and collected over $563 million over five years to June 2011, the report notes, it had seen the flow of funds from Australia to various secrecy jurisdictions fall dramatically: by 80 per cent to Liechtenstein, 50 per cent to Vanuatu, and 22 per cent to Switzerland.
“Overall fund flows from Australia to 13 secrecy jurisdictions decreased by 22 per cent between the 2007- 2008 and 2010-2011 financial years, from $55 billion to $43 billion,” says the report.
Nonetheless, Australia continues to lose huge revenues to tax dodging; the report cited one estimate that in the period from 2005 to 2007, €1.1 billion was lost through profit shifting on trade with the European Union and USD1.5 billion through profit shifting on trade with the US.
The report noted, with approval, the changes to Australia’s general anti-avoidance rule made last year, by the Labor government, and also the passage of legislation that allowed the Tax Office to make public the tax liabilities of companies with revenues of more than $100 million, which it called “a small step towards greater tax transparency by transnational companies”.
So Australia is apparently getting better at protecting its own revenue base from tax avoiders.
But the report was critical of Australia’s performance when it came to co-operating with other countries trying to take on tax avoiders and evaders.
It stressed that PNG was a particular victim of “Australia’s role as a host for illicit finance”, and highlighted the accusation by the head of PNG’s anti-corruption body, Task Force Sweep, Sam Koim, that Australia has acted like the “Cayman Islands in relation to laundering and housing the proceeds of corruption from Papua New Guinea”.
In 2012, Mr Koim told officials of Australia’s major investigator of money laundering, the Australian Transaction Reports and Analysis Centre (AUSTRAC), that the Australian financial system was being used to systematically launder tens of millions and possibly hundreds of millions of kina.
Mr Koim complained, and the Tax Justice Network report reiterates, that Australian authorities have done very little to assist in providing intelligence about suspicious investments, particularly in real estate in North Queensland.
“[This is] an issue that has become increasingly pertinent as PNG investments in Australia have recently reached over $1 billion,” the report says.
“One reason for the failures [to make progress against widespread corruption in PNG] appears to be weaknesses in Australia’s anti-money laundering laws.
“In 2007 the Federal Government released draft legislation to extend anti-money laundering provisions to real estate agents in relation to the buying and selling of property, dealers in precious metals and stones, lawyers, accountants, notaries and company service providers.
“Yet this legislation was never implemented.”
Among the 15 criteria used by the network to compile its “secrecy index”, Australia was found inadequate in six and seriously wanting in another four.
These four most serious failures are that: Australia does not maintain company ownership details in official records; it does not require that company accounts be made available on the public record; it does not require country-by-country financial reporting by all companies; and it does not participate fully in Automatic Information Exchange.
And the man who prepared the Australian section of the report, Mark Zirnsak, director of the Justice & International Mission for the Uniting Church, fears the new Abbott government lacks commitment to the cause of tightening up on tax avoidance.
He cites the November 5 announcement that the new government intends to drastically water down so-called “thin capitalisation” rules that apply to companies operating here.
The previous government moved to reduce and cap the size of tax deductions available to big companies that use disproportionate amounts of debt to fund their Australian projects.
“Now it appears that instead of a blanket limit on the amount of interest and debt you can claim repayments on, they’re going to go for an approach of investigating each case,” says Zirnsak.
“I think that’s likely to be ineffective. It will be highly resource intensive to try to identify any examples of tax avoidance and to do anything about them.
“It is a worrying sign about how serious this government is about cracking down on corporate tax dodging within Australia, and it also sends a bad signal as to their will to investigate and crack down on companies that may be involved in tax evasion in developing countries in particular.
“I’m concerned that the political will to investigate tax dodging by Australian companies overseas is very low,” says Zirnsak.
Still, by comparison with many countries, Australia doesn’t look so bad.
Of the 82 jurisdictions assessed by the Tax Justice Network, the most egregious contributor to global tax avoidance is – no real surprise here – Switzerland.
It ranks top of the list, not because it has the most secretive financial regime – that dubious honour goes to Samoa – but because of a combination of great secrecy and great capital flows.
Some of the other jurisdictions in the top 10 are more surprising.
Luxembourg, which the network describes as “the dark horse of the offshore secrecy world”, comes in second.
“Offering a toxic cocktail of secrecy, tax loopholes and lax financial regulation, it is serviced by a huge offshore financial services industry and has recently been working with Switzerland to derail emerging European transparency initiatives,” the TJN says.
Hong Kong, the Cayman Islands, Singapore, the United States, Lebanon, Germany, Jersey and Japan round out the top 10.
The TJN finds some small improvement in the openness of some of the European countries since the publication of its last report, but not much, and also points to an eastward movement of the tax-avoidance centre of gravity – which it says has come about largely as a result of the greater wealth now concentrated in Asia.
“Some positive trends are evident,” says the TJN.
“With public tolerance for offshore financial secrecy having fallen sharply in many countries since our last index in 2011, we see potential for real political change: for example, citizens are demanding full disclosure in public registries of the beneficial owners that lie behind offshore shell companies, trusts … foundations and so on.”
However, despite increasing lip service paid to addressing the issue in western countries, particularly in the UK, it says, “little has been done so far to rein in the menagerie of offshore trusts, foundations, shell companies, loopholes and subterfuges that make up the global secrecy system.
“Rolling back the secrecy that shrouds up to $32 trillion in offshore financial assets remains one of the great challenges of the 21st century.”