Taxation is one of the most powerful means of corporate regulation. By the end of the year, the European Commission is expected to announce a new initiative that is set to transform the business taxation for the 21st century.
By the end of the year, the European Commission is expected to announce a new initiative that is set to transform business taxation for the 21st century. Earlier this year, the EU executive announced a series of measures aimed at curbing corruption by fighting tax evasion and tax avoidance, promoting good governance in the EU and beyond, as well as revising the “Automatic Exchange of Information” directive.
Brussels Morning talked with John Christensen, director of the Tax Justice Network, who in 1996 blew the whistle on a fraud involving a criminal currency trader and the local subsidiary of Switzerland’s largest bank — Union Bank of Switzerland. In 2017, Christensen, co-produced the documentary “The Spider’s Web: Britain’s Second Empire”, in which he exposed in detail how the super-rich exploit the flawed tax system to escape taxes and hide their wealth, thus contributing to widening the gap of extreme inequalities in the world.
John Christensen, Tax Justice Network Director
Brussels Morning (BM): Could you tell us what is the professional trajectory one needs to follow to become a champion of equitable taxation ?
John Christensen (JC): I originally trained as a forensic investigator and my ambition was to make documentary movies. In 1978 I started to investigate how financial market liberalisation was profoundly reshaping the global political economy, and because I grew up in the British tax haven of Jersey I was intrigued by the role that tax havens play in globalised markets. I could see that tax havens enable big companies and very rich people not only to avoid paying tax, but also empowered these people and companies to use their enormous political leverage to secure tax breaks, or deregulation, or some kind of subsidy.
Back in 1978 this subject was completely unresearched and you couldn’t even study it because there wasn’t a university anywhere in the world offering a course focusing on tax havens. It was as if tax havens didn’t exist. So I decided to head off and investigate by myself, completely alone. I finished my training in forensics investigation, studied for a degree in applied economics — looking at world trade and investment theory — and then I did a master’s degree in law and economics. After doing all that I went offshore. I returned home to Jersey and took a job with Deloittes in their offshore company and trust administration division. That’s the coal face where I learned how offshore works in practice.
After a couple of years with Deloittes, I was recruited to head the government economic service in Jersey, which I did for over a decade. By the time I left Jersey in 1998 I’d gained a lot of professional experience of working inside a tax haven, in both the private and public sectors.
BM: What led you to found the Tax Justice Network?
JC: What I learned in Jersey was that the rapid spread of tax haven activity had undermined any possibility for globalization to improve the lives of the majority of people, especially in the global South. Worse, they had become a major threat to social stability and democracy. I discussed this with activists and anti-poverty NGOs from all over the world, and in November 2002 we agreed to launch a global network to tackle tax havens. That’s how the Tax Justice Network came into existence. In 2003, I was appointed as its first executive director.
BM: What have been the main cases the Tax Justice Network has brought before the European Commission?
JC: Initially we focused on transparency measures. A lot of corrupt practices — including tax evasion and tax avoidance — are protected by the absence of accounting and legal transparency. So our focus was on a new International Financial Reporting Standard for all multinational companies to require them to publish accounting information at country level, known as country by country reporting (CBCR). CBCR reveals the ways in which big companies avoid taxes. We were successful; country by country reporting is now a global standard.
To begin with, there was a lot of resistance to CBCR, particularly from large companies and accounting firms, who claimed it would be too expensive for them to produce the information. Being trained professionals we were in a position to challenge them, arguing that because this information is material to understanding risks at country level, all boards of directors should have access to this information, and the information should also be available to other stakeholders, including employees, investors, and the communities in which they operate.
BM: What were the Tax Justice Network major achievements?
JC: Apart from the important corporate transparency demands, we also won the argument for adopting ”Automatic Information Exchange” between tax authorities as a new global standard. Tax havens had successfully blocked this approach for many years, and I was constantly told by politicians “you will never achieve that”, and “it will not happen in your lifetime”. But automatic information exchange is now the global standard, and we can claim credit for that.
We can also claim credit for pushing for a global standard for making information about company ownership publicly available. A lot of corrupt practices are hidden behind offshore shell companies, making it hard for investigators to find out who really owns these companies. In most cases the people who are listed are not the true beneficial owners. We’ve made the case, working with anti-corruption organisations around the world, for that information to be made publicly available. The EU has accepted our arguments and implemented public registers. So we’ve made some progress towards tackling tax havens, but there’s still a long way to go.
EU’s tax structure: a political failure
BM: What are the major reforms the EU should incorporate into its tax system?
JC: We must recognise that tax regimes in the EU are increasingly regressive, contributing to levels of wealth and income inequality so extreme that they threaten social and political stability. I identify two areas of tax policy where the EU has significantly failed to take sufficient action: the first involves the race-to-the-bottom on corporate tax rates, which is disastrous. The EU should have agreed a common tax base and a minimum tax rate of around 25 percent decades ago. These are important steps towards abandoning the failed arm’s length method for taxing multinational companies and adopting unitary taxation.
The EU has for a long time taken a permissive attitude towards tax competition. When talking to experts, it seems to be broadly accepted that tax competition is anti-democratic and economically harmful because the beneficiaries of tax competition are almost always multinational companies and the losers are almost always local companies. The EU’s thinking here is profoundly mistaken, and the EU needs urgently to reverse out of the race-to-the-bottom and push in the direction of enhanced cooperation to block tax havens from undermining the tax sovereignty of other countries. If the EU wants to improve the lives of its citizens, a race-to-the-top on better regulation and more progressive taxation would be far more worthwhile than the foolishness of a race-to-the-bottom.
The second crucial step which the EU needs to take follows on from the need to tackle tax havens. Recently, the European Commission removed the Cayman Islands from the list of non-cooperative jurisdictions. How did that happen? The Cayman Islands rank third, behind the BVI and Bermuda, on the Corporate Tax Haven Index, yet the EU drops it from its own blacklist. Worse, the EU blacklist doesn’t include Ireland, or Luxembourg, or the Netherlands, all of which are prominent tax havens, so we still cannot take seriously the Commission’s promises to tackle this issue. And this failure contributes in a big way to undermining public confidence in the EU itself. The Corporate Tax Haven Index and the Financial Secrecy Index, both published by the Tax Justice Network, provide objective and independent rankings of the world’s leading tax havens and secrecy jurisdictions; the EU should abandon its politically compromised blacklisting process and substitute these indices.
BM: There is a feeling that there is a huge discrepancy between income tax and corporate taxation. Why can’t we make companies pay their fair social share?
JC: It seems to me that for decades, countries in the EU, and others, have been basing their tax policies around supporting the big multinational companies to gain market positions around the world, and they have been doing this by giving preferential tax treatment to multinationals compared to small and medium enterprises. And this is not always obvious because often it is a case of being lenient towards offshore tax avoidance. But tax avoidance isn’t a legitimate activity in any circumstances, and this leniency creates a harmful market distortion: It’s essentially an indirect subsidy to big companies which allows them to operate as economic free riders.
I think this is based on the politically mistaken idea that we need to support “our “multinational companies. In the long run, this leniency towards tax avoidance strengthens monopolies and weakens small companies, innovators and job creation.
BM: Multinationals like Apple and Microsoft can use the extra cash that they don’t pay in taxes (and their competition does!) to aggressively market their products and buy out smaller firms that do. Do you feel that ‘tax competitiveness’ can be regulated in the Single Market given the reliance of a number of member states on the model?
JC: The EU needs to totally rethink its competition policy. I favour applying higher tax rates to excess profits generated by monopolies, but I think the EU needs to go much further in shaping its competition policy, accepting that many companies are given monopoly rights through their intellectual property rights that can go on for decades. That is fundamentally anti-market and anti-competition. And to make matters worse, current tax rules allow these companies to park their intellectual property rights in offshore subsidiaries registered in the Cayman Islands, Bermuda, or other tax havens, and to shift their profits there to avoid taxes. Anyone looking for the systemic roots of inequality should start by looking at how tax havens have disastrously distorted market economies.
BM: Income tax in Europe is 51% in some countries. How do you see a tax system based on consumption and not on income as a means to reform capitalism?
JC: Faced with capital mobility and massive lobbying from powerful corporations, political leaders feel themselves incapable of defending domestic tax sovereignty and resisting race-to-the-bottom pressures. In response, they have shifted tax charges away from capital by largely abolishing wealth taxes and lowering corporate income tax (CIT) rates, while at the same time increasing value added and similar consumption taxes, and cutting back heavily on welfare provisions.
The decades-long trend away from direct taxation of wealth and income must be reversed. The COVID-19 pandemic makes it imperative that the EU reduces reliance on regressive indirect taxes like VAT, and makes much greater use of wealth taxes and excess profits taxes on the monopoly rents being generated by some companies.
BM: LuxLeaks, Panama Papers, Paradise Papers, FinCEN, and with whistle-blowers like Rudolf Elmer, Hervé Falciani coming forward… It’s official that chronic excess of debt is a consequence of central banks’ reckless modus operandi, perhaps based on orthodox neoliberal practices. Yet, debt is now regarded as something normal. Is there a sense of apathy?
JC: I’m more optimistic than the question suggests. It’s not a question of people feeling powerless. We can see this in the US elections, where there is an astonishing level of political activism, whether coming from the right wing supporting Trump, or the centre-left supporting Biden. The Brexit divisions in the UK also revealed a huge level of public participation from across a wide spectrum of society. There is a degree of political activism now that I haven’t seen in my lifetime and that shows how passionately engaged people truly are. I think the same applies in most European countries. What I think is missing is a coherent sense coming from progressives that another world is possible.
Since the banking crisis of 2008, people have begun to lose confidence in any idea that returning to what was previously regarded as “normal”, amounts to a good idea. The public wants a radical departure from neoliberalism, preferably in the direction of a Green New Deal, to tackle both the climate crisis and the inequality crisis. And the COVID-19 crisis has shown that states will necessarily be key players in shaping and financing the enormous investments required to make a transition away from a fossil fuel-based economy to a genuinely sustainable, renewables-based economy. This will require a massive change of behaviour on the parts of central banks, which haven’t exactly covered themselves in glory, either in terms of preventing waves of banking crises, or in recognising the enormous existential risks posed by the climate crisis.
BM: The general sentiment of the public towards any kind of banking activity is one of great distrust…
JC: And rightly so. Banks played a key part in the 2008 financial crisis. They were bailed out by states, and then went back to business-as-usual. Ten years later we have record levels of corporate debt, record levels of household debt, record highs on stock markets, and record property prices. Clearly something is not right; the global economy is even more fragile than it was before the financial crisis.
BM: The TV documentary you co-produced in 2017 — “The Spider’s Web: Britain’s Second Empire” — is a comprehensive eye-opener about the global-scale of the tax evasion issue How is it that the City of London manages to avoid the scrutiny of political scientists and economists?
JC: This reflects the way in which neoliberalism penetrated the state and most of the institutions of modern democracy, including media concentration in the hands of unaccountable billionaires, and the massive funds flowing into bogus think tanks, which then publish bogus research to distort political arguments. I think something similar has happened to academia. Too many academics say they can’t secure research funding to do this kind of critical analysis or critical accounting, and not surprisingly they’re concerned about the consequences of exposing the corruption that lies at the heart of offshore finance.
From my own experience, going back to when I blew the whistle on corrupt politicians and regulators in Jersey, once you stick your neck out, you can expect to be personally attacked. Former friends and allies will fall back into the shadows because they’re frightened of losing their jobs. The police and judiciary will do nothing, and you run the risk of ending your career. It takes tremendous personal courage to engage in the kind of in-depth investigation of what is truly happening behind the surface of the City of London and other offshore financial centres. In most cases, we would know nothing about the corrupt practices were it not for the heroic whistleblowers behind the LuxLeaks, the Panama Papers, the Paradise Papers, and the recent Jersey offshore scandal.
BM: There was an understanding that a common OECD framework (on domestic tax Base Erosion and Profit Shifting – BEPS) would allow cooperation between developed economies on limiting tax avoidance. How is that working?
JC: When the OECD first announced the BEPS programme many years ago, I asked them whether this would open the door to a comprehensive shift away from the arm’s length method, which is flawed beyond repair, towards unitary taxation. But the OECD seemed determined to retain the arm’s length method, and the result is even greater complexity, even more possibility for lengthy and expensive disputes and arbitration processes, but still no clarity on how to tax multinational companies in this age of the digital economy.
The fact that they weren’t prepared to abandon the previous flawed system is not because of a political failure — quite the opposite. The previous system suits powerful interests — the big companies and big countries, like the US and the UK, and several other major EU countries. They’re perfectly happy to continue with this system because the losers are the poorer countries, which are not allowed to play a role in the decision-making processes. This isn’t an economic issue. This is all about the politics of corporate power.
I think this is a huge challenge facing humanity, ranking alongside climate crisis. We’ve seen the rise of extremely powerful corporations, which are highly aggressive in shaping policies, particularly around regulation and taxation, to suit their interests. And the BEPS process demonstrates the extent to which corporate power is able to resist change that would benefit the vast majority of people on this planet.
BM: The European Commission pledged to do more about tax evasion, but it seems like the system has a solid structure in place to protect those who commit the fraud and punish those who come forward to expose it. Is there any way change can be achieved by political means?
JC: Yes, I’m reasonably optimistic because we have a lot of support coming from the European Parliament to strengthen whistleblower protection, which is an important step forward.
We need to recognize that whistleblower protection is expensive. At high-level, particularly in financial services, a whistleblower is likely to suffer enormous financial damage as a result of whistleblowing. I would like to see in the EU, the development of a system of payments to support whistleblowers and, at the very least, to not allow financial penalties to discourage whistleblowing. And the payment should not come from general taxation. It should come from a levy imposed on the financial services sector and administered by an independent body.
Without whistleblowers, we would have made almost no progress during the last 30 years. We have seen how whistleblowers have been attacked — Antoine Deltour, Hervé Falciani and my own experience in Jersey. The attacks have been ferocious. The attackers have never been penalised for their bullying behaviour, which is, in many cases, criminal.
BM: Do you think EU Commissioner for Competition Margethe Vestager is doing a good job?
JC: Initially, I was encouraged by her appointment, but less so now. She hasn’t significantly changed EU competition policy, which seems to start from a confused position of thinking that in order to support European companies to compete on the world stage we must allow them to monopolise domestic markets. So, in one sector after another, we’ve seen mergers and acquisitions which have concentrated corporate power, and we’ve seen a steady modification of intellectual property rights which also concentrate corporate power, and we’ve seen the relentless rise of corporations both too big to fail and too big to jail. And the competition authorities appear powerless to take effective action to protect public interest.
BM: How will the Tax Justice Network respond to such persistent challenges?
JC: Well, our work on investigating tax havens and identifying the areas where they fail to meet standards on transparency and regulatory compliance goes on, and we will continue to explore ways in which tax havens harm human rights, democracy and international security. We have some new initiatives underway, including the imminent launch of a new anti-monopoly network to fight back against excessive corporate power. We’re optimistic that this will become as large and influential as the Tax Justice Network.
