Most developed countries have signed bilateral tax treaties with their trading partners that reduce these withholding taxes, sometimes to zero. The theory is that if the recipient country collects tax, there is no need for the source country to do so as well, because double taxation is mitigated by tax credits. Yet if one hundred countries each sign bilateral tax treaties with one hundred other countries, the result is a dense network of ten thousand treaties with slightly different terms and rates. A ten-thousand-treaty web is a playground for tax lawyers who use back-to-back transactions to claim zero withholding tax on the initial payment, and no income tax in the final host country.
Tax leasing is also an effective tool. Countries have different rules for deciding when a financing transaction is a loan or a lease. Equipment deals can be structured as a loan in one country (to deduct interest) and a lease in another country (to deduct depreciation). The parties double-dip on deductions with one piece of equipment.
The loan-lease double-dip is combined with tax treaty back-to-back structures to obliterate taxes in multiple jurisdictions. As tax counsel to Citibank, I saw triple-dip leases, where a single Boeing 747 was written off in South Africa, the United Kingdom, and Australia at the same time. The separate jurisdictions never knew what hit them.
Other structures are used to convert ordinary income into capital gains that receive favorable tax treatment. Discounts on bond sales disguise hidden interest payments embedded in the discounts. Tax deferral is as powerful as low rates because the real value of money declines in inflation. Deferring a tax liability for ten years reduces the real cost radically by the time the tax is paid.
Derivatives, not clearly addressed in tax treaties, are added to the mix to blow smoke in the eyes of tax authorities. Lobbyists are employed in the main developed countries to ensure that the rules remain unchanged.
Weighing all of the above—property shifting, transfer pricing, netting, tax treaties, leasing, conversion, deferral, and derivatives—it is no surprise that corporate tax collection by individual nations is a sieve. Corporate cash flows through the sieve to the bottom line. Countries are left empty-handed.
Policy elites in the United States, Germany, the United Kingdom, and Japan are well aware of these techniques. These elites attended the same law schools and finance programs as the corporate advisers. The government and corporate elite revolving door results in experts’ continually changing sides from tax collector to tax avoider, and back again. It’s an elite game.
It may be a game, but the G20 are no longer amused. The weight of sovereign debt, and the incapacity to generate growth, have sent the G20 on a mission to end global tax avoidance. The elite plan is for global taxation through coordinated action and information sharing. Once a developed country tax authority can see all sides of a transaction (instead of just the local piece), the transaction is far easier to attack.
This tax enforcement mission was delegated by the G20 to the G7 (United States, Japan, United Kingdom, France, Germany, Canada, and Italy). The G7 are home to the richest corporations and have the highest tax rates. The G7 have the most to lose from corporate tax avoidance, so they have the highest incentive to stop it.
The G7 use the Organisation for Economic Co-operation and Development (OECD) as their technical secretariat. G20/G7 elites often outsource missions to the IMF, yet sometimes use other multilateral organizations for specialized tasks. The UN is the preferred venue for the climate change agenda. OECD is used for the world tax plan because it represents more advanced economies with the highest incentives to recover lost tax revenue.
The world tax plan is not called the world tax plan. That’s too obvious. Technical names are given to these plans to obscure intentions. World money is called the “special drawing right” because that’s suitably anodyne. The world tax plan is called BEPS, which stands for Base Erosion and Profit Shifting. If you see reference to “OECD BEPS,” just think, “elite world tax plan,” and you’re on the right track.
Elites make no effort to hide their agenda; they advertise it, yet in opaque jargon on obscure sites that few read, and fewer understand. Here’s what the G7 leaders, including Barack Obama and Angela Merkel, said about their world tax plan on May 27, 2016:
Steady, consistent and concerted implementation of the G20/OECD Base Erosion and Profit Shifting (BEPS) package is critical . . . to achieve a global level playing field for all engaged in economic activities. We remain committed to lead the process by example. To ensure widespread implementation of the BEPS package, we encourage all relevant and interested countries and jurisdictions to commit to implement the BEPS package and join the new inclusive framework. . . .
We reaffirm G20’s call on all relevant countries including all financial centers and jurisdictions to implement . . . defensive measures to be considered against non-cooperative jurisdictions. . . .
We look forward to the initial proposals . . . on ways to improve the implementation of the international standards, including on the availability of beneficial ownership information and its international exchange.
Despite dense jargon, the meaning is clear. The G20 insist on full transaction disclosure on a global basis. They will use the information to enforce tax collections on their own terms. Jurisdictions that refuse to cooperate are subject to “defensive measures.” That’s a polite way to say they are cut off from international banking channels and their economies destroyed unless they play ball. The invitation to cooperate or be crushed is a Cosa Nostra contrivance in new clothes.
Corporate tax avoidance is a luxury developed economies can no longer afford. Global corporations hold more than $7 trillion of cash, much of it stashed in tax havens, the result of sophisticated tax avoidance. This cash is too tempting a target for government elites to pass up even if their corporate cronies are beneficiaries. A simple 25 percent toll charge on this $7 trillion yields $1.75 trillion in new G7 revenue. The money then goes toward mitigating sovereign debt burdens.
Auditing corporations one at a time, one year at a time, is a fruitless task. Auditors cannot possibly penetrate more than a few avoidance techniques used by corporations. Putting pressure on individual tax havens is a game of whack-a-mole. The list of tax haven jurisdictions is so long—Cayman Islands, Malta, Cyprus, Macao, Isle of Man, British Virgin Islands, and so on and on—that if pressure is applied to one, companies seamlessly move profits to another with a few documents and keystrokes.
Tax havens will still resist changes to their internal laws. Recently, tax havens have cooperated with anti–money laundering programs because the cost of turning their backs on dirty business is small in relation to the benefits of keeping clean businesses such as Apple and Amazon. Once clean business is besieged for using the zero tax rates legally available, tax havens may push back and side with corporate clients.
The solution in the works for G7 nations is world taxation. This starts with a centralized tax information database shared by developed nations. Tax avoidance would be like playing poker with your cards showing faceup on the table. You could play, but you could never win.
The new world tax system being planned is quite sophisticated. The problem tax authorities have today is they can see the side of a transaction conducted in their country, yet cannot see the other side because the counterparty is in another country. Tax authorities can submit information-sharing requests to other jurisdictions. Still, case-by-case inquiries are cumbersome and slow. The new world tax system is designed to decrease opacity and ease processing. World taxation is an automated digital auditor.
Each taxpayer and its affiliates are assigned a unique identification number. Each transaction type—royalties, interest, dividends, et cetera—is assigned an identifier. The counterparty to each transaction is identified using its unique code.
All corporate transactions are tagged with these digital identifiers and submitted to a shared database. This is like a tag-and-release marine
mission aimed at great white sharks. The shark may look fearsome after release, yet authorities always know where to find it.
The world tax database will be available to all participants in the system including the G20 nations. The database would be housed on high-capacity computers using sophisticated algorithms and predictive analytics. Like the shark, companies could run, but no longer hide.
Once the computers have identified tax games, the G20 will get to work with legal assaults. Transfer prices, asset moves, leases, and tax treaty structures will be challenged using broad antiavoidance statutes. A tax haven that stands in the way will find its international banking connections shut down. This happened to Belize in 2015. International banks were forced by the U.S. Treasury to cut off correspondent relations with Belizean banks. This G20 garrote choked Belizean financial oxygen; its economy crumbled. Soon Belizean banks cooperated with G20 information requests and the financial oxygen was gradually restored. Release of the infamous “Panama Papers,” consisting of client records from a law firm that facilitated tax avoidance, is another recent example.
What’s wrong with effective tax collection? Why shouldn’t corporations and high-net-worth individuals pay their fair share? They should. Yet the notion of “fair share” is debatable, and a moving target. The G20 engaged in nonsustainable borrowing to bail out major banks. That debt must be repaid either through direct taxation or inflation, a hidden tax on savers. G20 governments will not tax at fair rates; rather, they will apply whatever rate is needed to defease the debt. The G20 target rate is considerably higher than the optimal rate from a growth perspective, partly due to past profligacy. Corporations and the wealthy are sitting ducks for sovereign tax targeting.
Sovereigns are insatiable. Once sufficient taxes are secured to sustain short-run debt, history says sovereigns simply spend more on favored interests. Spending is never slashed. Corporations go from sitting ducks to cooked geese. The successful are unceremoniously looted. Sovereign optimization at this stage is to take as much as possible without destroying the corporation.
BEPS is a powerful new tool in the elite tax assault. Even without BEPS, the sovereign war on taxpayers is far along. In 2010, the Foreign Account Tax Compliance Act (FATCA) became law in the United States. It requires banks worldwide to provide information to the U.S. Internal Revenue Service about U.S. taxpayer accounts. Each bank must register with the IRS and obtain a Global Intermediary Identification Number (GIIN). Foreign banks that fail to do so are subject to formal and informal retaliation, including correspondent account termination by U.S. clearing banks. Inability to clear U.S. dollar payments through correspondents is a death sentence for most banks, so they fall into line with U.S. dictates.
FATCA also allows the U.S. Treasury to enter into agreements with entire countries (called Intergovernmental Agreements, or IGAs), rather than negotiate bank by bank. The IGAs mandate FATCA compliance by every bank in that country. IGAs are implemented coercively. Countries that refuse to sign suffer withholding tax on Treasury interest payments to their residents. Foreign banks put pressure on their own governments to sign IGAs. The United States has globalized its tax compliance to match its globalized tax collections.
The IMF, OECD, and G20 have all endorsed these efforts and have added their own calls for international information collection and information sharing. The G20 final communiqué from the November 2014 meeting in Brisbane, Australia, included technical papers describing an implementation program for data collection.
Prominent economists including Nobelist Joseph Stiglitz and Thomas Piketty have joined the chorus calling for global taxation. In particular, Piketty advanced the thesis that high tax rates are not an impediment to growth. His thesis is riddled with flaws, but attracted a following among global elites nonetheless. Piketty recognizes that high tax rates will not achieve his redistribution goals if collections are thwarted by tax avoidance. He complements his high-tax theories with calls for global taxation so his proposed taxes are actually collected.
The global tax dragnet is not limited to income taxes. Other transaction taxes, including excise, sales, and value-added taxes (VATs), are attractive to sovereigns because they are collected at source on gross amounts, and are not complicated by calculations for deductions. VAT can be avoided by booking purchases in tax havens, so VAT is also ripe for G7 information sharing to attack transfer pricing.
In a recent conversation with an influential international tax lawyer, she told me the U.S. Treasury had “given up” trying to reform the income tax due to its complexities, and the difficulties of advancing reform through Congress. Instead, Treasury and tax writing committees in Congress were focused behind the scenes on imposing VAT, referred to in the United States as a “national sales tax.” Japan increased its VAT by 60 percent in April 2014. These trends are part of a global effort to shift from taxes on net amounts, like the income tax, to taxes on gross amounts, which are easier to compute and collect.
The fusion of global information sharing, global enforcement, and global taxation of gross receipts enables developed economies to extract the maximum amount of wealth from productive sectors to sustain nonproductive elites. This continues until the social system collapses, the common fate of civilizations that reach a late stage of prelatic parasitism.
Progressives who view corporations as undesirable autonomous actors should be careful what they wish for. Economists agree that corporations do not bear the true costs of taxation. Corporations are mere agents for a vast network of customers, suppliers, investors, and employees. The global tax assault on corporations is an assault on private capital. Nor is this assault limited to corporations; they are merely the most prominent targets. The techniques applied by the G20 to companies can be applied to individuals as well.
The G20, led by the United States, acting through agents at the IMF and OECD, are well along the path of near perfect information collection and sharing. When these data are processed with the most powerful computers using advanced data mining algorithms, the result is a quantum leap in government’s ability to extract wealth from the private sector—corporate and individual. Exigencies of servicing sovereign debt accelerate this process. The prodigality of public spending drives tax rates higher in a ratchet of higher spending, higher rates, higher collections, more enforcement, and more debt to the point of collapse.
World taxation is here, very thinly veiled. Soon the veil will part, and wealth extraction will begin. There will be nowhere to hide, and no way to stop the machine.
World Order
New World Order is not new. Civilizations have devised forms of world order for millennia because the alternative to order is chaos. Order rarely includes liberty or justice. Order mainly ends disorder, and mitigates violence. That is how order achieves legitimacy. The next world order is emerging.
What is new is that world order is no longer circumscribed by a defined “world” such as in the Roman or Chinese empires. The next world order will encompass the globe and all of its civilizations at once.
The Roman world order embodied Europe south of the Danube, and west of the Rhine, and most of modern-day Turkey, North Africa, and the Levant. It was based on conquest, civic duty, military service, and perfunctory worship of state-approved gods. Like any world order, Rome had an expert bureaucracy and efficient tax collection. Rome typically found it unnecessary to destroy what it encountered. If kingdoms and cultures on Rome’s periphery were willing to subscribe to Roman order, they were free to keep most local customs and religions. Treaties of friendship and commerce proposed by Roman embassies, involving tribute, peace, and exclusive trading rights, were enough to keep Roman legions at bay. It was a carrot-and-stick approach. Commerce was the carrot, and legions were the stick. This world order was Rome’s greatest export.
The fall of Rome was followed in Western Europe by the Dark Ages, during which civilization’s unifying institution was the Catholic Church. Yet the Churc
h’s reach was attenuated and fell short of a world order. The emergence of Charlemagne’s empire in the ninth century AD, called the Carolingian Renaissance, was a partly successful new world order. Charlemagne combined military force and religion with expanded emphasis on education, literacy, and monetary reform to achieve a unified order that included the western half of the former Roman Empire, and territories in northern and central Europe that had never been conquered by Rome. This new world order was briefly successful, yet lasted less than seventy-five years after Charlemagne’s death in 814 before disintegrating into disorder again.
After the end of this first renaissance, Europe continued as a patchwork of warring feudal kingdoms and princely states until the Renaissance of the fourteenth through sixteenth centuries. The Holy Roman Empire was mostly a façade except for the half century from 1506 to 1556 when the Burgundian, Habsburg, and Holy Roman crowns were combined with new world conquests during Charles V’s reign.
Charles V’s legacy proved no more durable than Charlemagne’s. The emperor abdicated his thrones. His domains reverted to separate kingdoms. Now traditional warfare over land, titles, and wealth had the added element of deep religious division between Catholic princes and those supporting Protestant devotions.
The late-sixteenth-century religious wars culminated in the Thirty Years’ War of the early seventeenth century. From 1618 to 1648, Europe devoured itself in its first demonstration of total war since antiquity. Civilian populations were starved and slaughtered and cities destroyed in ways not seen since the pagans. What ended the desolation was the Peace of Westphalia, from which emerged the modern state system of sovereignty and diplomacy we have had ever since.
Under the Westphalian system, states existed within recognized borders. Each state’s sovereignty was recognized by others. Principles of noninterference were agreed. Religious differences between states were tolerated. States might be monarchies or republics. Permanent state interest, or raison d’état, was the organizing principle of international relations. War was not eliminated, yet it was mitigated by diplomacy and balance-of-power politics. The object of the balance of power was to prevent one state from becoming so powerful it could conquer others and destroy world order.
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