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Banking sector, Blogs, Macroeconomic policies

Banking sector’s auxiliary role to tax evasion, exposed by CSO report

Last summer, the international civil society network Fair Finance Guide International (FFG) launched its report on Transparency and Accountability in the Financial Sector. The report examined key aspects relating to transparency and accountability, and to reporting about tax related issues, as they apply to 47 banks in the seven countries where FFG is active.

The report assessed and scored the 47 banks on their transparency and accountability by looking at four key aspects: publication of policies and risk management; disclosure of investments; reporting on engagement with companies and voting behaviour; and stakeholder dialogue. The report also scored those banks on their transparency on tax-related issues, including the extent to which they provide detailed, country-by-country information on key indicators on transparency and tax.

The report is based on the rigorous methodology that the Fair Finance Guide network developed, in collaboration with the research organisation Profundo. The report contains country reports from Belgium, Brazil, France, Indonesia, Japan, the Netherlands and Sweden.

The fact that sixty per cent of the banks included in the research scored below four points out of ten on the transparency theme raises serious concern.

“Transparency is the fundamental condition for a financial and banking sector that sees itself accountable to society, not above it” said Ted van Hees, the Chair of the Fair Finance Guide network. “The choice of this theme for the first joint case study produced by the members of FFG aims to improve bank policies at their core, leaving no room for opacity or exemptions.”

But even more worrisome was the score on tax transparency, where thirty six of the banks assessed (an overwhelming 77 per cent of the total) were considered laggards in tax transparency.

In spite of their diversity, the FFG national reports feature a number of common issues, and one of them is the role banks play in facilitating tax avoidance and evasion. In a report on tax policy and human rights the Special Rapporteur on Human Rights and Extreme Poverty had said that insufficiently regulated financial sectors “played a role in enabling the aggressive avoidance or evasion of taxation by other actors, for instance through structured finance instruments, transfer pricing or profit shifting.”

According to the FFG: “[A] lot of internationally operating financial institutions, companies and rich private clients benefit from international differences in tax percentages and loopholes in national tax legislation to significantly reduce their overall tax burden. These activities, also called aggressive tax planning, are done using, amongst others, shell companies in tax havens. A lot of international financial institutions have branches in tax havens to help their clients and to limit their own tax payments. One can expect from responsibly operating financial institutions that they do not deliberately assist clients in avoiding taxes and that they do not avoid taxes themselves.”

Coming from countries that have to implement the European Commission’s Capital Requirements Directive (CRD IV –July 17, 2013), four of the national reports explore the potential offered by the country-by-country reporting obligations that banks will have under said provisions. Thus, the FFG contributions make an initial assessment of the struggles that went into translating it into national law and the level of expectations one can have.

All chapters report resistance by the financial sector, and laxity in enforcement. One of the difficulties is, as mentioned by the chapter on Belgium, that the translation of the European Directive to compliant national laws is not automatic and instant but gradual and could have significant gaps.

For instance, under Belgian law, financial institutions will have to report all jurisdictions within which they operate, how much revenue they generate within each of these jurisdictions, and the number of employees in each of them. But the law does not require banks to report the names of all entities in third countries, which enables banks to neglect some of their subsidiaries, and it does not yet require financial institutions to report on taxes paid and subsidies received.

Both the Belgian and French contributions also identify absence of homogeneous reporting standards set by the EU as a big limitation, because it limits the chances of inter-country comparisons among European countries reached by the Directive.

In France, country-by-country information on what banks do, including in tax havens, their annual revenue, and the number of their employees in each jurisdiction, became public in 2014, but this was far from complete, the French chapter reports.

Country by country reporting is also of significance to countries outside the European Union. Indonesia and Brazil, two countries covered in the FFG, are non-OECD countries but members of the G20, all of which have committed to the Base Erosion and Profit Shifting Action Plan.

However, in the form finally adopted by the OECD last October, country-by-country requirements in the Action Plan suffer of significant limitations: strong confidentiality protections,  financial firms are not required to independently verify all information they provide and it is possible that not all firms will be required to comply with it.

The confidentiality protection may be particularly relevant to Indonesia where the FFG chapter reported banks are required by law to collect tax due on the interest earned by their clients. To date, banks report on those tax payments in a lump sum, rather than report details of tax payments for each of their clients, which the new tax regulation requires. Banks were, at the time of the writing of that chapter, resisting the tax regulation and clinging to their interpretation of bank secrecy laws.

Click here for press release and link to full report.

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February 2017
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