Tax Justice Network research again draws flak from tax havens and critics
Last month, we launched the 2021 edition of the State of Tax Justice with our co-publishers PSI and the Global Alliance for Tax Justice. The latest edition of the annual report found that countries are losing over $483 billion in tax a year to global tax abuse, which is enough to fully vaccinate the global […]
Last month, we launched the 2021 edition of the State of Tax Justice with our co-publishers PSI and the Global Alliance for Tax Justice. The latest edition of the annual report found that countries are losing over $483 billion in tax a year to global tax abuse, which is enough to fully vaccinate the global population against Covid-19 more than three times over. The report received wide international and national coverage, spanning national papers, online and broadcast.
It has not been uncommon for our larger research pieces to draw strong reactions, ranging from genuinely constructive debate to coordinated misinformation campaigns. We’ve made it a regular practice for several years now to gather and respond openly to such criticisms in the first few weeks after the launch of major research pieces.
We always welcome feedback on our research, and acknowledge the potential for improvements of our methodologies. The criticisms of the State of Tax Justice that we summarise here, however, do not go so far and in many cases reveal simply a poor understanding of the work. We provide detailed responses below.
Cayman Finance report on the State of Tax Justice
The most prominent criticism has come from Cayman Finance, the association of the financial services industry of the Cayman Islands. Cayman Finance published a report criticising the State of Tax Justice, stating:
“TJN’s use of extremely distorted estimates and its failure to acknowledge the Cayman Islands’ tax neutrality and significant safeguards against tax evasion and aggressive tax avoidance have resulted in a report that is highly unreliable in its conclusions about the Cayman Islands financial services industry.”
This is not the first time Cayman Finance has published reports and briefings attempting to discredit the Tax Justice Network’s research. We have responded to these in the past, showing how the criticisms do not hold water and at times are based on erroneous understandings of complex tax matters.
The latest Cayman Finance report, however, takes a more problematic approach than previous reports. It attempts to shield the Cayman Islands from criticism of its role as one of the world’s worst enablers of global tax abuse by using a two-pronged approach: (1) denying that harmful tax abuse activity is harmful or constitutes tax abuse; and (2) creating doubt over the credibility of data made possible in recent years through progress on tax transparency.
The report argues:
“By lowering MNEs’ effective tax rates, profit shifting enables MNEs to invest more in innovation and/or to reduce the cost of goods and services provided to consumers. To the extent that prices of goods and services supplied by these MNEs fall, consumers have more to spend on other goods and services — which is good news for other businesses.”
The harm of profit shifting has been evidenced by decades of research from several intergovernmental bodies, organisations and academic institutions, including the IMF, the World Economic Forum, the OECD and the UN. Cayman Finance’s report attempts to deny this reality in order to deny the harm the Cayman Islands enables.
Cayman is singlehandedly responsible for an estimated US$83 billion of revenue losses worldwide, or 17% of the global total uncovered in the State of Tax Justice. Lower-income countries lose the largest share of current tax revenues to tax abuse, and these losses more than any others translate directly into lost public services, worse outcomes including child and maternal mortality, and the denial of human rights more broadly.
Cayman’s tax abuse is ‘good news’ for almost precisely no one among the world’s more than seven billion people. Even Caymanians benefit little, because of the finance curse phenomenon. As in jurisdictions like the British Virgin Islands, with its government now suspended due to claims of corruption and wider criminality, a disproportionately large financial sector tends to be associated with higher inequality and weaker governance.
When not making false claims about the “benefits” of profit shifting, the report alternates between accusing the State of Tax Justice of exaggerating the level of profit shifting facilitated by the Cayman Islands, and denying the presence of any profit shifting at all in the Cayman Islands. Since the Cayman Islands doesn’t collect tax to begin with, the report argues, the Cayman Islands cannot facilitate tax abuse:
“More credible analyses find that Cayman is not a major jurisdiction to which corporate profits are shifted. Indeed, in contrast to jurisdictions that have tax treaties with high-tax jurisdictions, Cayman simply cannot directly facilitate profit shifting. This is because Cayman is a pure tax neutral jurisdiction, which means it has no direct taxes on corporate or personal income and has no double tax agreements that allocate taxing rights.”
The use of the hollow term “tax neutral jurisdiction” is a transparent attempt to obfuscate and mislead. Not having direct taxes on corporate profits is exactly how the Cayman Islands incentivises multinational corporations to shift profit into the jurisdiction. To claim that not having direct taxes means Cayman Islands cannot facilitate profit shifting is, at best, indicative of a fundamental failure to understand how cross-border corporate tax abuse works, and, at worst, indicative of a deliberate attempt to mislead readers. This is like arguing that a person cannot spread COVID-19 simply because they are themselves asymptomatic.
Beyond the attempts to deny and obfuscate, Cayman Finance’s report heavily relies on another report criticising the State of Tax Justice 2020 that was published by Richard Murphy in July 2021. The criticisms in Murphy’s report are based on inaccurate accounts of the State of Tax Justice’s methodology and a significant misunderstanding of how the methodology works. The criticisms made in Murphy’s report, reproduced in Cayman Finance’s report, are addressed further below.
Following blacklisting scare, Cayman Finance hires Koch-linked climate sceptic to deny tax abuse
It is not a coincidence that the tactics used in the Cayman Finance report – denying the link between an activity and the harm it causes, and creating doubt over established evidence by cherry picking data and using obfuscating language – bare a strong resemblance to the tactics used to deny climate science and tobacco harm.
In December 2020, EU MEPs adopted a resolution to update the “confusing and ineffective” way in which the EU draws up its tax haven blacklist in order to better target the most harmful tax havens. The resolution specifically named the Cayman Islands as an example of a tax haven that should be on the list but isn’t. The resolution was a direct response to the State of Tax Justice 2020 published at the end of November 2020 and quoted analysis from the report. The State of Tax Justice 2020 had found that the Cayman Islands was the world’s worst enabler of global tax abuse and responsible for countries losing over $70 billion in tax a year. The effort to update the blacklist eventually failed, however, due in part to lobbying by the Cayman Islands.
When Cayman Finance CEO Jude Scott was questioned by Cayman News Service (CNS) specifically about the role of the State of Tax Justice report in prompting the EU parliament to act, Scott made clear Cayman Finance’s intentions to hire an “external expert” to discredit the report. CNS reported:
“In correspondence seen by CNS, Cayman Finance identified the problem of the EU’s reliance on research by the Tax Justice Network. CEO Jude Scott told board members that the “tremendous reliance by EU decision makers on reports by TJN”, which had fundamental statistical flaws, needed to be addressed.
“He said Cayman Finance was seeking support from the government’s statistical team or for public cash to be used to fund external experts to do a full analysis of the 2020 TJN reports to give Cayman “a credible basis for challenging, and, if appropriate, publicly discrediting, the TJN ratings of the Cayman Islands”.
“But he added, ‘To date, we have not received this support.’ As a result he is now seeking support from the Cayman Finance board to fund the external experts themselves, as he highlighted the urgency of the situation.”
Cayman Finance’s call was eventually answered it seems, allowing them to work with Julian Morris, a senior fellow at the Reason Foundation, a libertarian think tank. The Reason Foundation is funded by Koch foundations and had as a trustee for 36 years the late US billionaire David Koch. Since the early 1990s, the Reason Foundation has repeatedly been criticised for taking money from fossil fuel companies and tobacco firms while publishing writings that align with those companies’ interests.
The Reason Foundation was one of 32 organisations with links to fossil fuel interests called out by US senators in July 2016 for their role in “perpetrating a sprawling web of misdirection and disinformation to block action on climate change.” The Reason Foundation was reported to have received a total of $381,000 from ExxonMobil since 1998 (see Greenpeace’s ExxonSecrets factsheet for more info). In a 2018 policy brief, Julian Morris wrote, “The effects of climate change are unknown—but the benefits may well be greater than the costs for the foreseeable future.” The tactic of denying established evidence on the harm of climate change, and to go so far as to claim that climate change is overall beneficial, is no different from Morris’s attempt to deny the harm of profit shifting in his report for Cayman Finance and claim profit shifting is beneficial, despite decades of evidence showing otherwise.
The Reason Foundation is also listed as an “ally” of the tobacco industry on the University of Bath’s Tobacco Tactics resource. The Reason Foundation, which has argued against raising tobacco taxes and against raising the age to buy cigarettes, received donations from Altria, one of the world’s largest producers and marketers of tobacco, cigarettes and related products, from 2011 to 2016. A Philip Morris USA 1993 contribution report disclosed contributing $10,000 to the Reason Foundation in 1993, and $40,000 in the previous year as “General Support”. Philip Morris USA also reported contributions of $20,000 in 2000, with a similar sum proposed for the following year. In a 2016 policy brief, Julian Morris wrote, “The WHO’s opposition to tobacco harm reduction is dishonest and threatens public health.”
The Reason Foundation is a member of the State Policy Network, a network of conservative and libertarian think tanks focusing on state-level policy in the United States. The State Policy Network was exposed by a Guardian investigation in 2013 to be planning a “US-wide assault on education, health and tax”. The Reason Foundation was listed as a member of the Atlas Network as recently as 2020. The Atlas Network, also funded by Koch foundations is a US organisation which acts as an umbrella for libertarian and “free-market” ideology groups around the world, such as the IEA in the UK. The Atlas Network has recently taken down its global directory of partners from its website.
Cayman Finance’s false accusations of foul play over Financial Secrecy Index
Cayman Finance previously had Julian Morris author another report that similarly attempted to discredit another piece of research by the Tax Justice Network, the Financial Secrecy Index. The Financial Secrecy Index ranks countries based on their complicity in helping individuals hide their finances from the rule of law. The Cayman Islands ranked at the top of 2020 edition of the index, overtaking Switzerland and the US for the first time. The Cayman Finance’s report was published in the summer of 2021.
Cayman Finance makes three primary claims against the Financial Secrecy Index.
First, it accuses the Tax Justice Network of ignoring its own methodology by choosing to use an alternative data source to measure the volume of offshore activity hosted by Cayman Islands. Had the appropriate data source been used (i.e. IMF balance of payments statistics), which Cayman Finance claims was publicly available on the IMF website before the index’s cut-off date for sourcing data, the Cayman Islands would have ranked much lower:
“Used inaccurate methodology – the FSI report failed to follow its own methodology when calculating a Global Scale Weight (GSW) – the primary factor for determining a jurisdiction’s score — for Cayman. TJN chose to use portfolio liabilities instead of publicly-available data for financial services exports. As a result, TJN’s estimate of GSW for Cayman was nearly 9 times what it should have been. If TJN had accurately applied their own methodology on just this point, Cayman would already drop down to 6th on the FSI.”
As documented in detail below, the IMF’s Balance of Payments Statistics database held no data on the Cayman Islands on 30 September 2019 (which is the cut-off date for the index according to our methodology [see p.14]). On some occasions, additional data is collected after the index’s cut-off date where exercising leniency on the cut-off date can provide a more up-to-date picture. For the 2020 edition of the Financial Secrecy Index, a final collection of balance of payments statistics was made from the IMF database on 1 November 2019 to capture more up-to-date reporting. Nonetheless, the IMF’s Balance of Statistics database still held no data on the Cayman Islands on this date and so an alternative data source was used, as set out in the index’s methodology.
The Tax Justice Network twice contacted the Cayman Island’s Ministry of Financial Services and Home Affairs and the Cayman Island’s Office of the Auditor General (in March 2019 and December 2019) inviting them to comment on the index’s assessment of the jurisdiction ahead of the launch of the index. While the the Ministry did kindly comment on some of the index’s findings in its response in December 2019, the Ministry did not dispute our conclusion that the Cayman Island’s balance of payments statistics were not publicly available. Moreover, the Ministry shared links to CPIS data on the IMF database but did not share any links to BOPS data on the IMF database. In line with our methodology, CPIS data was used in place of the unavailable BOPS data. We did not receive a reply from the Office of the Auditor General.
Second, Cayman Finance argues that an audit of the Financial Secrecy Index by the European Commission’s Joint Research Centre found the index’s methodology to be questionable and that had the index used an alternative method suggested by the Joint Research Centre, Cayman Islands would have ranked much lower:
“The European Commission Joint Research Centre found this methodology to be very peculiar and results in an index that may not measure what it is supposed to measure.”
“TJN’s methodology for combining the GSW and SS is arbitrary and does not have a sound statistical rationale. Using a more statistically sound and intuitive method, suggested by the European Commission Joint Research Centre, Cayman falls to 16th on the Index.”
This is a straightforward misrepresentation of the European Commission’s Joint Research Centre’s audit, which we commissioned ourselves. The Joint Research Centre’s audit concludes:
“Overall, the FSI 2018 offers an extremely detailed analysis of the concept of financial secrecy based on a wealth of original research. While the aggregation (or not) of the secrecy score and global scale weight still calls for further discussion and investigation, no objectively “right” solution exists, and the methodology of any composite indicator, as necessarily subjective instruments, is always open for debate.”
The audit experimented with three alternative aggregation methods but ultimately concluded that the index should stick to its original method:
“No particular transformation is recommended here…To conclude, there are two reasons to continue with the present methodology for combining the global scale weight with the secrecy score. The first is that the cube/cube-root aggregation, in some sense, is a compromise between statistical balance (in terms of correlation) and distorting the distribution of the GSW. The second reason is simply to minimise disruption.” (see page 186)
Moreover, the Joint Research Centre made clear in its audit that the alternative method, which Cayman Finance utilises and claims was suggested by the Joint Research Centre, “comes at the price of a very heavy imbalance”. Under this alternative method, the Joint Research Centre states, “The GSW and SS are very unbalanced: the SS ranks have effectively no relation to the FSI ranks.”
In other words, under the alternative method preferred by Cayman Finance, a jurisdiction’s laws and regulations effectively have no impact on its ranking. Instead, the jurisdiction is ranked solely on the volume of financial activity it conducts from non-residents. It is unsurprising that Cayman Finance would prefer an alternative methodology that does not factor in its regulatory regime. It is also untrue to suggest that the Joint Research Centre support it.
The fact that the small jurisdiction of Cayman Islands would still rank 13th under this alternative method (or 16th with Cayman Finance’s additional alternations to the methodology) only confirms the oversized volume of wealth being sent offshore to the Cayman Islands. The jurisdiction, with a population of less than 66,000 in 2020, would rank above some of the world’s largest economies, including G20 members Argentina, Australia, Brazil, China, Japan, India, Indonesia, Italy, Mexico, Russia, South Africa, Saudi Arabia, South Korea and Turkey. Cayman Finance is admitting here the oversized role it plays in helping individuals move their finances offshore.
Third, Cayman Finance accuses the Financial Secrecy Index of “discrimination” and “bias” for holding the jurisdiction (and all jurisdictions) to a more rigorous, evidence-based standard of financial transparency. This is a criticism we often hear made against our indexes. The Financial Secrecy Index’s indicators go beyond watered-down, politically negotiated standards on transparency (such as the OECD’s standard or the EU’s tax haven blacklist) in order to capture the limitations and loopholes that enable exploitative workarounds.
The Financial Secrecy Index was constructed precisely in order to provide a level playing field for the assessment of major economies and small financial centres alike, so that the latter would not be unfairly singled out as they frequently have been in opaquely constructed ‘blacklists’ published by the OECD, IMF or EU, for example. But Cayman is a very serious threat, when reviewed on objectively verifiable criteria. Ironically, Cayman Finance accuses the Financial Secrecy Index of being “biased” precisely because the index is not influenced by the type of political pressure or lobbying that they have themselves sought to exert elsewhere.
A more detailed response to Cayman Finance’s report is available below.
|Cayman Finance criticism ||Response|
|TJN’s calculation of a jurisdiction’s GSW depends on a measure of exports of financial services. TJN’s preferred data for that metric is the IMF Balance of Payments Statistics (BOPS) if it was available by 1 November 2019. Cayman’s IMF BOPS data was available at that time but TJN did not use it. Instead, it used a measure that inaccurately represents the scale of Cayman’s financial services exports.|
– TJN says Cayman’s BOPS data on exports of financial services for 2018 & 2017 was “unknown.”
– The Cayman Islands Government Economics and Statistics Office (ESO) had published provisional data on exports of services (including financial services) as part of its Balance of Payments & International Investment Position Report 2017 in February 2019. ESO submitted 2017 report data, including data on exports of financial services, to the IMF in September 2019 and the IMF made the information available on its website the same month.
– Cayman’s BOPS data on exports of financial services was available to TJN well before its deadline and yet TJN choose to substitute estimates that massively exaggerated the scale of Cayman’s financial services exports.
– By using an inaccurate measure of Cayman’s export of financial services, TJN overestimated Cayman’s GSW by 860%, which in turn led to Cayman’s score on the Index more than doubling.
– Had TJN used the available BOPS data, its estimate would have been approximately $2.5 billion, an order of magnitude less than the figure used by TJN in the FSI, and Cayman’s GSW would have fallen from 4.5% to 0.5%, which would have dropped Cayman to 6th in the ranking.
|The Financial Secrecy Index 2020 used data from the IMF’s Balance of Payments Statistics database as of 1 November 2019. The Cayman Island’s balance of payments statistics were not available on the IMF database by this date.|
The cut-off date for data collection for the index was 30 September 2019 (see p.14 of the Financial Secrecy Index methodology document). On some occasions, additional data is collected after the index’s cut-off date where exercising leniency on the cut-off date can provide a more up-to-date picture. For the 2020 edition of the Financial Secrecy Index, a final collection of balance of payments statistics was made from the IMF database on 1 November 2019 to capture more up-to-date reporting. Nonetheless, the IMF’s Balance of Statistics database still held no data on the Cayman Islands on this date and so an alternative data source was used, as set out in the index’s methodology.
Cayman Finance contests the statistics were published on the IMF website in September 2019. However, the IMF’s archive shows that no balance of payment statistics on the Cayman Islands were held in the database in September 2019 nor October 2019. Statistics for the Cayman Islands first appeared in November 2019, indicating that the statistics were uploaded at some point in November after 1 November 2019.
Importantly, all jurisdictions ranked by the Financial Secrecy Index, including the Cayman Islands, were given two opportunities to provide us with up-to-date information on all elements evaluated by the index. Each jurisdiction’s Ministry of Finance and National Audit Offices were sent questionnaires in March 2019 featuring our detailed preliminary assessment of their jurisdiction’s ranking on the index. They were also sent our concluding assessment in December 2019 ahead of the launch of the index. All jurisdictions were asked to inform us of any incorrect or out-of-date data or conclusions in our assessment so that updates can be made were applicable and evidenced.
The Tax Justice Network twice contacted the Cayman Island’s Ministry of Financial Services and Home Affairs and the Cayman Island’s Office of the Auditor General in March 2019 and December 2019. While the the Ministry did kindly comment on some of the index’s findings in its response in December 2019, the Ministry did not dispute our conclusion that the Cayman Island’s balance of payments statistics were not publicly available. Moreover, the Ministry shared links to CPIS data on the IMF database but did not share any links to BOPS data on the IMF database. In line with our methodology, CPIS data was used in place of the unavailable BOPS data.
We did not receive a reply from the Office of the Auditor General.
The Cayman Islands had the opportunity to clarify to the Tax Justice Network that the Balance of Payments statistics had been made available on the IMF website after our assessment of the jurisdiction was concluded, which we would have considered using for the jurisdiction’s ranking.
|“TJN calculates the FSI score for each jurisdiction by multiplying the cube of the Secrecy Score by the cube root of the Global Scale Weight. The European Commission Joint Research Centre found this methodology to be very peculiar and results in an index that may not measure what it is supposed to measure…TJN’s methodology for combining the GSW and SS is arbitrary and does not have a sound statistical rationale. Using a more statistically sound and intuitive method, suggested by the European Commission Joint Research Centre, Cayman falls to 16th on the Index.”||The Tax Justice Network commissioned the European Commission’s Joint Research Centre to audit our own Financial Secrecy Index in 2016 as part of our efforts to regularly evaluate and improve our research. Cayman Finance attempts to depict the Joint Research Centre’s audit as critical of the index’s methodology and evidence of the index’s “unreliable results”. This, however, was not the conclusion of the audit, which was reproduced in full in the Financial Secrecy Index’s 2018 methodology (see pages 163-197).|
The Joint Research Centre’s audit concludes:
“Overall, the FSI 2018 offers an extremely detailed analysis of the concept of financial secrecy based on a wealth of original research. While the aggregation (or not) of the secrecy score and global scale weight still calls for further discussion and investigation, no objectively “right” solution exists, and the methodology of any composite indicator, as necessarily subjective instruments, is always open for debate. Nevertheless, a number of recommendations are offered herein as food for thought order to help the Tax Justice Network to bring the FSI reach its full potential as a monitoring and benchmarking tool that can guide policy formulation.”
The Joint Research Centre experimented with three alternative approaches to combining Global Scale Weight (GSW) and Secrecy Scores (SS). Ultimately, on whether the index should stick to its original approach or switch to one of the alternative approaches tested in the audit, the Joint Research Centre concluded:
“No particular transformation is recommended here…To conclude, there are two reasons to continue with the present methodology for combining the global scale weight with the secrecy score. The first is that the cube/cube-root aggregation, in some sense, is a compromise between statistical balance (in terms of correlation) and distorting the distribution of the GSW. The second reason is simply to minimise disruption. On the other hand, if one were to pursue the goal of interpreting the FSI as a summable quantity of two measurable variables, FSI-Alt1 seems the best option (because no nonlinear transformations are used), but comes at the price of a very heavy imbalance. If one were purely interested in balancing the correlations of the GSW and SS, FSI-Alt2 and Alt3 are both alternatives with better statistical properties, and are arguably simpler than the original FSI in that only one variable is transformed. FSI-Alt3 has the best statistical balance and also implies less upheaval than FSI-Alt2. Of course, all of the statistical considerations presented here have to be balanced against the conceptual considerations, and this is a matter left to the developers.” (see page 186)
Contrary to Cayman Finance’s statement, the Joint Research Centre did not suggest replacing the index’s original approach to combining GSW and SS with the Alt1 approach tested in the audit and used in Cayman Finance’s report to arrive at a lower ranking for the Cayman Islands. The Joint Research Centre found the Alt1 approach to have an important disadvantage: “The GSW and SS are very unbalanced: the SS ranks have effectively no relation to the FSI ranks.”
In other words, under the Alt1 approach preferred by Cayman Finance, a jurisdiction’s laws and regulations effectively have no impact on its ranking. Instead, the jurisdiction is ranked solely on the volume of financial activity it conducts from non-residents. It is unsurprising that Cayman Finance would prefer an alternative methodology that does not factor in its regulatory regime.
Critically, the fact that the small jurisdiction of Cayman Islands would still rank 13th (or 16th with Morris’ additional alternations) under this alternative ranking only confirms the oversized volume of wealth being sent offshore to the Cayman Islands. The jurisdiction, with a population of less than 66,000 in 2020, would rank above some of the world’s largest economies, including G20 members Argentina, Australia, Brazil, China, Japan, India, Indonesia, Italy, Mexico, Russia, South Africa, Saudi Arabia, South Korea and Turkey. Cayman Finance is only admitting the oversized role it plays in helping individuals move their finances offshore.
|The FSI’s “Secrecy Score” is based on twenty “Key Financial Secrecy Indicators” (KFSI), which are marred by numerous biases that considerably weaken the report’s stated goal of identifying jurisdictions that facilitate “illicit financial flows” and skew jurisdiction rankings.|
– Nine KFSIs do not provide reliable or consistent information on a jurisdiction’s tendency to facilitate illicit financial flows. For example:
KFSIs 5 and 6 discriminate against jurisdictions like Cayman that have verified beneficial ownership registration systems that make information available upon request to authorities in other jurisdictions.
KFSI-12 scores whether a jurisdiction has a consistent personal income tax, which seems based on the assumption that high- and progressive-income taxes equate to lower levels of tax avoidance and evasion – yet evidence suggests that the opposite is the case.
– The criteria for two other KFSIs (11 and 14) are biased against jurisdictions that don’t impose individual or corporate taxes, even though that has no connection to illicit financial flows.
KFSI-11 scores a jurisdiction’s administrative capacity to tax individuals and corporations. Those without such taxes were automatically awarded a score of 100, but since they do not require a tax administration they should logically score 0.
KFSI-14 rates the secrecy of tax courts, giving jurisdictions without individual or corporation taxes a score of 100 – but they have no tax courts so should clearly score 0.
– One KFSI (15) inappropriately combines two components that are strongly associated with illicit financial flows with two that aren’t, which produces higher secrecy scores for certain jurisdictions.
|Cayman Finance accuses the index of “discrimination” and “bias” for holding the jurisdiction (and all jurisdictions) to a more rigorous, evidence-based standard of financial transparency.|
The Financial Secrecy Index’s indicators go beyond watered-down, politically negotiated standards on transparency (such as the OECD’s standard or the EU’s tax haven blacklist) to capture the limitations and loopholes that enable exploitative workarounds. Cayman Finance claims that its jurisdiction is discriminated against for having a beneficial ownership register but not making the data publicly available. The Panama Papers and, more recently, the Paradise Papers have shown how even if beneficial ownership information is collected, illicit financial flows including corruption and tax abuse can still flourish if the data is not made public. For this reason, all jurisdictions – not just the Cayman Islands – are given a higher (worse) secrecy score on indicators KFIS 5 and 6 if they do not make beneficial ownership data publicly available. Cayman Finance reframes this diligence as discrimination.
However, this isn’t the only reason the Cayman Islands scores a high secrecy score on KFSIs 5 and 6. As reported in detail, the Cayman Islands does not collect information on the legal owners of all corporations and does not collect information on beneficial owners of all limited liability partnerships. This uncollected information prevents the register from being truly effective at ensuring financial transparency.
Similar to Cayman Finance’s report on the State of Tax Justice, Cayman Finance attempts to deny established evidence on the harms of financial secrecy and tax abuse in order to deny the harm it inflicts on the world by enabling global financial secrecy. This approach mirrors Julian Morris’s approach to deny established bodies of evidence on other topics, such as climate change.
For example, Cayman Finance’s factsheet states: “KFSI-12 scores whether a jurisdiction has a consistent personal income tax, which seems based on the assumption that high- and progressive-income taxes equate to lower levels of tax avoidance and evasion – yet evidence suggests that the opposite is the case”. There is of course no assumption in our work that higher tax rates within a jurisdiction are associated with lower levels of abuse.
It is not, however, contested that large tax rate differentials between jurisdictions contribute to the scale and direction of abuse – when for example a secrecy jurisdiction offers a tax zero rate for artificially shifted income. But Cayman Finance seeks to argue that since the jurisdiction does not collect taxes to begin with, it could not possibly facilitate tax abuse. The same intellectually bankrupt and openly manipulative reasoning is used in Cayman Finance’s report on the State of Tax Justice.
In addition to bringing in Julian Morris to author the reports, Cayman Finance appears to have paid for articles publicising their reports to be distributed by Business Wire, a press release distribution service. This allowed their erroneous and misleading claims about the State of Tax Justice and Financial Secrecy Index to be published in over a hundred media outlets, including high profile, reputable outlets like Bloomberg, the AP and Yahoo! Finance. While some outlets like the AP display a short disclaimer next to Business Wire articles they reproduce (eg, “Press release content from Business Wire. The AP news staff was not involved in its creation.”), the paid-for wire allows Cayman Finance to manufacture an illusion of credibility for its misleading reports. It also allows Cayman Finance’s reports to come up higher in search results. One can imagine how a report defending the Cayman Islands on the Bloomberg website instead of the same report on the Cayman Finance’s website could at first glance look more credible to a policymaker, the next time the Cayman Islands finds itself under scrutiny.
Richard Murphy report and blogs on State of Tax Justice
Richard Murphy, a co-founder of the Tax Justice Network, published a blog the day after the State of Tax Justice 2021. The blog referred to a report he published in July 2021 criticising the State of Tax Justice 2020 but also included new criticism. Richard Murphy’s report is heavily featured in the Cayman Finance report authored by Julian Morris, a senior fellow at the Koch-funded Reason Foundation.
Richard Murphy was company secretary to Tax Justice Network after the organisation’s founding in 2003, and a subscriber to the original memorandum of association of the company. He resigned as a member in 2007, and as company secretary in 2009. Richard Murphy has not been listed as a Tax Justice Network senior adviser since 2013.
Richard Murphy authored the first standard for country by country reporting in 2003. Although initially resisted by the OECD, the reporting method was eventually backed by the G20 group of countries in 2013. The OECD produced a watered-down standard for use from 2015 and finally published country by country data in July 2020. This data has made it possible for the State of Tax Justice to report on countries’ tax losses to cross-border corporate tax abuse.
Almost all of the criticisms Richard Murphy makes in in report and blog are based on erroneous accounts of the State of Tax Justice’s methodology and at times on a significant misunderstanding of how the methodology works. Murphy repeatedly accuses the State of Tax Justice’s methodology of doing things it does not do and of not doing things it does do.
The exception is one issue that was originally raised on Twitter by Dan Neidle, head of the London tax division at Clifford Chance, and reiterated in Murphy’s report. Neidle questioned whether the impact of recent automatic exchange of information measures were accounted for in the State of Tax Justice 2020’s estimate of tax loss due to offshore tax evasion by individuals. Our analysis shows that the issue ultimately has no material impact on the results of the 2020 edition of the report, as explained in further detail below.
In the table below, we respond to each of the six key issues Murphy raised in the report he published in July 2021. Some of these points were reiterated and expanded on in the blog published on 14 July 2021, where the report was first made available.
|Six key issues raised||Response|
“First, it [the State of Tax Justice 2020’s methodology] uses Bank of International Settlement data that does not differentiate personal and corporate deposits. The report, which suggests that all the losses result to wealth, does not make that clear. This is simply wrong: some of the losses are not due to those with wealth.”
“Firstly, that is because the data used for the purpose of this analysis came from the Bank for International Settlements (BIS) and relates to the balances on bank accounts held by both individuals and corporations by country. TJN, unfortunately, ignores that there are many good reasons why some companies e.g. reinsurers, might hold substantial cash balances offshore. They also ignore that some multinational corporations also run treasury functions from offshore for ease of regulation and not to avoid tax. Instead, they seem to assume that all the balances recorded by the BIS in tax havens relate to individuals. That is wrong.”
|This is a false account of the methodology.|
The methodology clearly states that BIS data does not differentiate between personal and corporate deposits, and goes on to explain how this data limitation is dealt with. We use the same approach as used in the peer-reviewed study by Alstadsaeter, Johannesen and Zucman, Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality, published in 2018 in the Journal of Public Economics. This limitation has not been ignored as Murphy claims.
The methodology explains on page 15:
“The BIS data on bank deposits has one important drawback: it does not differentiate between households’ deposits and corporate deposits. Therefore, the ultimate owner is not always attributed to the actual source country of the deposits. For example, if a German person sets up a shell company in Hong Kong and opens a bank account for this company in Switzerland, this will show up in the data as a Hong Kong-Swiss relationship, rather than a German-Swiss relationship. While this could be partially solved by only focusing on households, the BIS data does not offer a distinction between households’ and corporations’ deposits. In our approach we thus assume that households’ bank deposits are geographically distributed in a similar way as corporations’ bank deposits.”
The State of Tax Justice only uses the BIS data to estimate the distribution of offshore wealth, not to calculate its scale, and so Murphy’s claims that “the report suggests that all the losses result to wealth” is a result of Murphy’s misunderstanding of the methodology.
“Second, the estimation of tax losses does not recognise that there may be commercial reasons for some of these deposits despite this being referring to the fact in the methodology note. Some sectors that use the jurisdictions noted may have reasons to hold high cash deposits e.g. the reinsurance sector. There may be good reason to suggest that this might involve profit shifting, but to then include the cash deposits held in a second calculation risks double counting.”
“Second, TJN calculates ‘excess bank deposits’ by country in proportion to GDP as an indication of tax haven activity. It assumes all such excess deposits are subject to tax abuse and are undeclared for tax purposes. That is bound to be wrong. First, that is because multinational corporations are very likely to declare their deposits as well as the income arising on them. Very often that declaration will be in a country where tax is due, and not in the tax haven itself. There are many cases of companies registered in tax havens but actually tax resident in places like the UK. TJN has not allowed for this.”
|This is a false account of the methodology.|
The methodology clearly states that it does not assume all abnormal bank deposits to be subject to tax abuse arising from financial secrecy, directly contradicting the claim.
Normal bank deposits are used only to estimate the distribution of offshore wealth, not its scale.
Regarding the comment that not all bank deposits in tax havens are there because of tax evasion, our methodology does recognise that GDP will not explain all variation in inward bank deposits, but is merely a first-order approximation of the relationship. This is why a calculation of bank deposits in proportion to GDP is used as only a first step. Relying on this calculation alone would indeed produce inaccurate results, but the State of Tax Justice does not do this. The report only uses the abnormal deposits to estimate where offshore wealth is likely hidden; we do not assume that all abnormal deposits are hidden or that tax is evaded on all of the proceeds.
The methodology explains on page 14:
“While some of the jurisdictions that appear in Table 2.1 are not routinely considered to be important destinations of offshore wealth (such as Italy or France) and their scores on the Banking secrecy indicator (column 2) are correspondingly relatively low, we choose not to exclude these countries from our consideration as destinations of offshore wealth. For such countries, the large abnormal deposits could be explained by other factors than financial secrecy offered by the destination country – such as unusually intense cross-border economic activity – but we do not see a way accurately to estimate the size of these effects. In the light of this caveat, our estimates of inflicted loss by countries with low secrecy scores may be somewhat overstated, while those by countries with high secrecy scores are likely to be understated.”
“Third, if some of the excess bank deposits relate to genuine (rather then shell company) the use of personal tax rates to estimate all the losses is wrong. Corporate tax rates should be used in some cases, and these are almost invariably lower than top marginal personal income tax rates as used in the SOTJ calculations.”
|This is a point we have considered in the methodological review (including the possibility that the income be declared as capital gains rather than personal or corporate income, where the same logic can be applied). We quote here the full explanation from the methodology (page 15):|
“While using PIT rates might be introducing an upward bias to our estimates (in the sense that governments would in reality not be likely to tax the returns at such high rates, perhaps because some of this income would be subject to the capital gains tax (CGT), which is generally set at a lower rate), we ultimately choose to use PIT rates due to two reasons.
“First, although in theory we are considering a full range of assets, in practice the numbers are driven by financial account holdings (to which PIT rather than CGT would generally apply). Second, there is an argument that if the returns were actually declared for PIT, individuals would have an incentive to lower the relevant tax rate (e.g. by structuring as capital gains rather than individual income) – however, we focus on the tax-evading element of the returns. Therefore, the income that is being evaded as things stand (without any avoidance response) would be subject to PIT rather than CGT.
“The existence of cases such as Italy where a lower rate than PIT would apply to income streams from declared offshore assets might suggest making more conservative adjustments on a country by country basis, and we will consider this for future work. We note, however, that even in such a case, the very existence of the offshore wealth is the result of an originally undeclared income stream. For that reason, applying the higher PIT rate to a hypothetical income stream generated by the offshore wealth – rather than to the original income stream that generate the offshore wealth itself – will understate the total tax losses very substantially.”
“Fourth, it is wrong (and historically the Tax Justice Network recognised this18) to assume that all offshore holding is for the purposes of tax abuse. Such deposits can be held for other reasons e.g. for commercial confidentiality, or to hide money from creditors and spouses to prevent claims being settled, or to shield assets from taxes other than those on income, which is now thought to be particularly commonplace in offshore tax planning. None of these give rise to any reason to not declare income for tax purposes.”
|This point simply reflects a failure to understand the methodology.|
It is wrong to claim that the methodology assumes that all offshore holdings are for the purposes of tax abuse. The methodology explicitly acknowledges that this is not the case and uses a four-step calculation process to estimate private offshore wealth-related tax abuse. The methodology dedicates six pages to this issue.
“Fifth, the assumption that cash deposits pay 5% interest might be best described in a number of ways, including ‘heroic’, ‘optimistic’, ‘unaligned with real world experience’ or just ‘highly unlikely to be correct’ when real world rates on cash deposits have rarely been much above zero for a considerable period of time, whichever currency is used to hold accounts in19. This rate is likely to be substantially overstated as a result and, as a consequence, so too are the tax losses likely to also be seriously overstated.”
“But the wildest assumption is in the methodology note, where it is said that:
‘Following Zucman (2015), we assume that investments made in secrecy jurisdictions yield an average of a 5 per cent return.’
The trouble is that Zucman was considering investments, and TJN is specifically considering cash deposits. I did a little research on cash deposit rates in tax havens. In 2020 Barclays in the Channel Islands were offering 0.05% on US$5 million deposits, nothing on sterling deposits, however big, and nothing on euro deposits. I agree that rates had been higher in the past but the idea that cash earned 5% offshore when bank base rates have been close to zero in the last decade is somewhat surprising. Dollar accounts might have reached 1.5% at one time, but that was exceptional.”
|This is again erroneous.|
The methodology assumes a 5 per cent return on offshore investments – not cash deposits – like Zucman (2015).
At no point does the methodology state otherwise. The methodology does not specifically consider cash deposits as Murphy claims. Indeed, the excerpt that Murphy cites is a direct contradiction of what his claim: the methodology says “investments”, not “cash deposits”. It is difficult to understand how such an error could have been made.
|“Sixth, implicit in the methodology is the assumption that the success that tax justice campaigning has had in requiring automatic information exchange from tax havens has had no impact on taxpayer behaviour. This is particularly surprising. The whole purpose of the tax justice movements campaigning to secure this advance was to create the smoking gun that would force a change in taxpayer behaviour20. This ‘smoking gun’ data has existed in most cases since 201721, meaning that it is highly likely that aware taxpayers are not now taking the risk of not disclosing bank deposit assets in offshore locations to their domestic tax authorities when those domestic authorities are likely to receive data upon them direct from the source banks with which they are held. Whilst it was once entirely reasonable to think that many who held offshore bank accounts would not declare them because the chance of being discovered was very low tax justice campaigning has now changed this situation. [*] To presume that all excess offshore bank deposits remain undeclared despite that success is a very surprising assumption that either undermines the credibility of all previous tax justice campaigning, or is wrong.”||This issue was originally raised on Twitter by Dan Neidle, head of the London tax division at Clifford Chance. Neidle questioned whether the impact of recent automatic exchange of information measures were accounted for in the State of Tax Justice 2020’s estimate of tax loss due to offshore tax evasion by individuals. Our analysis shows that the issue ultimately had no material impact on the results of the 2020 edition of the report.|
To determine the scale of wealth held offshore, the State of Tax Justice uses estimates published by Alstadsaeter, Johannesen and Zucman in their paper for Journal of Public Economics. Alstadsaeter et al estimate offshore wealth in 2017 to be equivalent of 11.6% of world GDP. Neidle and Murphy claim that the State of Tax Justice’s application of this 2017 estimate on 2018 estimates likely significantly overestimates the amount of wealth held offshore since 2018 saw a significant rise in number of countries exercising automatic exchange of information under the Common Reporting Standard. However, data published by ECORYS finds the scale of offshore wealth in 2018 to be equivalent to 11.4% of GDP: an immaterial difference. We will continue to track this phenomenon, and share with the aim and the hope that the automatic exchange of information will become an increasingly effective deterrent.
[*] This again is a completely erroneous account of the methodology. As explained above, the State of Tax Justice does not assume all offshore bank deposits are related to tax abuse and goes to great lengths to account for this.
Richard Murphy made new criticisms in his blog published the day after the launch of the State of Tax Justice 2021. We address these new criticisms in the table below.
|Additional issues raised||Response|
|Murphy makes the following statement about the corporate tax abuse figures in the report:|
“I will leave aside the figure for the loss of corporation tax. I have already published peer-reviewed research that shows that the basis for this claim is unlikely to be sound.”
|The study that is referred to analyses country by country reporting data from EU banks, whereas the State of Tax Justice analysis country by country data published by the OECD on multinational corporations from around the world. Since both the source of the data and the underlying reporting standards are entirely different, it is unclear how the study relates to the State of Tax Justice or what implication could be drawn.|
|Regarding tax abuse by individuals, Murphy claims that the report has three main flaws:|
“The first flaw is to assume that all offshore deposits belong to individuals. They clearly do not.
The second is to assume that none of the sums in tax havens are declared to the tax authorities that need to know about them. That is obviously absurd, and has never been true.
The third is to assume that a 5% rate of return can be earned offshore when it is widely known that most illicit funds held in those places are held in cash, and they will not be paying anything like that sum at present.”
|All three of these claims made by Murphy result from a complete misunderstanding of the methodology, only possible by ignoring the explanations published.|
Regarding the first claim, we do not assume that all offshore deposits belong to individuals, as we have already explained above.
To the second claim, we do not assume that none of the sums in tax havens are declared to tax authorities. We agree that would be absurd, and for that reason it is simply not how our methodology works.
The 5% rate of return on all offshore financial wealth is assumed by other researchers as well (following Zucman, 2015). It is the combined rate of return on all offshore wealth, ie including securities and bonds. We do not claim anywhere that these are returns on cash deposits.
The State of Tax Justice is the first study to report detailed country level breakdowns of global tax abuse. This unprecedented level of information and accuracy is helping push tax justice issues up international and domestic agendas and usher in meaningful tax reform.
Research like the State of Tax Justice that has the power to inspire and support change, and to reach millions of people, will inevitably come under scrutiny and attack. We welcome and encourage that scrutiny and accountability. As with all our research, we will continue to evaluate and refine where necessary our methodology in future editions of the State of Tax Justice. From the review of criticisms here, however, no claims of error stand up, and in most cases simply reflect a failure to engage with the methodology. But this is also valuable feedback, and may suggest for example the need for simpler versions of our methodology documents. We will in any case continue to seek expert stakeholder feedback on each of our flagship publications, and to welcome additional input.