Wednesday, March 25, 2020

Coronavirus Lockdown I: Up to 300 million workers could be vulnerable and waiting for help

It is not difficult to identify the vulneraPble-landless labourers, petty traders, tailors, barbers, construction workers, rickshaw/auto/Ola/Uber drivers and many others, nor is to reach them after the Jan-Dhan and Aadhaar programmes

twitter-logo Prasanna Mohanty        Last Updated: March 25, 2020  | 13:33 IST
Coronavirus blues: Who and how many are vulnerable to COVID-19 pandemic
While several state governments have taken several measures on their own but given their tight fiscal conditions and the magnitude of the problem, the Centre needs to step in

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With the entire country under a social and economic shutdown until April 14, this could be a very trying time for those who survive on daily labour.
In absence of reliable data, it may be tough to number them, but not identify those whose livelihood would have been seriously jeopardised because of the lockdown. They include landless agricultural labourers, petty traders, tailors, barbers, construction workers, rickshaw/auto/Ola/ Uber drivers and many others.
These workers need government support to survive the crisis. Some of the states have announced various measures, including cash transfer, PDS, food supply, etc. but going by the anecdotal evidence in Delhi and elsewhere and the plight of millions of inter-state migrant workers a lot more needs to be done. But before that here is a back-of-the-envelope estimate of the vulnerable.
Who and how many are vulnerable
India's total workforce stood at 465.1 million in 2017-18, as per the Azim Premji University's 2019 study based on the unit-level data that the Periodic Labour Force Survey (PLFS) of 2017-18 provided. According to the ILO statistics (based on Government of India data), the share of agriculture in India's total workforce was 43.9% in 2018. That would be 204 million.
The rest are employed in non-agriculture sectors like industry and services.
How many are vulnerable in rural India?
Of the total agricultural workforce in India, 45.1% are cultivators (farmers with land or self-employed in agriculture) and the rest 54.9% agricultural labour (or landless), as per the Pocket Book of Agricultural Statistics of 2017.
This would mean there are 92 million cultivators (45.1% of 204 million), who are better placed and benefit from the PM-Kisan scheme providing Rs 6,000 every year to such families. But the rest 112 million landless agricultural labour are vulnerable. This isn't a harvesting or sowing season, nor is any possibility of the rural employment guarantee scheme (MGNREGS) work coming to their rescue anytime soon.
That leaves 261 million of non-agricultural workforce (465 million minus 204 million agricultural workforce). According to the Economic Survey of 2018-19, "almost 93 per cent" of India's total workforce is 'informal'. This would mean there are 242.6 million informal workers in the non-agriculture sectors.
These workers can be clubbed into three: (i) self-employed and professionals like doctors, lawyers, chartered accountants etc. (ii) regular wage earners and (iii) daily wage workers.
How many self-employed in non-agricultural sectors are vulnerable?
The PLFS 2017-18 says 39.2% of urban males and 34.7% of urban females are self-employed. Taking the ratio of male to female employment at 70:30, the self-employed would be 37.7%. This works out to be 91.4 million.
The self-employed include both the privileged professionals like doctors, lawyers, chartered accountants and the underprivileged like petty traders, tailors, barbers, construction workers, rickshaw/auto/Ola/Uber drivers and many others. According to PC Mohanan, former chairman of the National Statistical Commission (NSC), one can assume that about 50% of the self-employed are underprivileged and vulnerable. Thus, the self-employed underprivileged in non-agricultural sectors could be 45.7 million.
How many are regular wage earners and daily wagers in informal non-agricultural sectors?
Deduction of 91.4 million of self-employed from the 242.6 million in the informal non-agricultural sectors would leave 150.6 million of regular wage earners and daily wagers. They are the vulnerable ones.
That is because most of the establishments are closed and hence it is more likely that regular wage earners in the MSME sector would have lost their jobs too. This is clear from several newspaper reports in the past few days in which various MSME associations point to a collapse of economic activities and seek government assistance package to ride over the crisis. This crisis may have been aggravated by the coronavirus fear but has been long in the making as the economy went into a tailspin.
Taken together, the number of vulnerable workers in India's informal sector would then work out to be 308.3 million (112 million of the landless agricultural labourers, plus 45.7 million underprivileged self-employed in informal non-agricultural sectors, plus 150.6 million regular wage earners and daily wagers in informal non-agricultural sectors).
Migrant workers are the 'most vulnerable'
These 308.3 million would include about 9 million inter-state migrant workers (calculation of the Economic Survey of 2016-17, based on the Railways' passenger data).
Mohanan says they are the most vulnerable of all daily wage workers. Many have gone back to their home states and many others are stranded across the country without work or support.
What central government could do
While several state governments like Kerala, Delhi, Odisha, Bihar, Rajasthan and Uttar Pradesh have taken several measures on their own but given their tight fiscal conditions and the magnitude of the problem, the Centre needs to step in.
So far the Centre has focused on providing relief to the industry. For the vulnerable population, Finance Minister Nirmala Sitharaman tweeted on March 23 that the central government "has agreed to the Food and Public Distribution Department's proposal that food grain for 3 months can be lifted by states/UTs on credit from FCI".
Mohanan suggests two measures for at least next two months: (a) free PDS supply to all who demand it (he says Kerala is giving it free to both BPL and APL families) and (b) targeted cash transfers to wage labourers, particularly the migrants, for their survival as well as boosting demand in the economy.
Prof KR Shyam Sundar, labour economist at the Jamshedpur's XLRI, also bats for a temporary direct cash transfer programme for the vulnerable segments of the workforce, in addition to a host of other measures that include food support, safety gears and hardship allowances to those essential services and other social support.
Chandan Kumar, trade union leader and a member of the National Minimum Wage Advisory Board of the Government of India, warns that unless PDS supplies are ensured immediately, there could be starvation deaths. He also appeals for at least a month's minimum wage or Rs 10,000 to the poor through their Jan-Dhan accounts. Moreover, he says, it is very important to provide homeless and slum dwellers in urban and peri-urban areas with basic healthcare immediately to prevent a potential disaster that a virus contamination can cause in such areas.
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Taxing the untaxed VIII: How India and multilateral bodies are fighting tax avoidance

So far, their progress is mixed with individual countries taking more aggressive positions to bring a change to the impact of what would be known several years from now

twitter-logo Prasanna Mohanty        Last Updated: March 25, 2020  | 15:57 IST
Taxing the untaxed VIII: How India and multilateral bodies are fighting tax avoidance
Some countries like Austria, Czech Republic, France, India, Italy, New Zealand, Spain, and the UK are considering or have progressed in introducing a minimum of digital sales tax to counter profit-shifting

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Tax avoidance by multinational enterprises (MNEs) came under intense global spotlight following the 2007-08 financial crisis.
Two significant multilateral players-the Organisation for Economic Co-operation and Development (OECD) and G20 - flagged off the major areas of concerns as (a) erosion in domestic tax base (base erosion) and (b) profiting shifting to offshore jurisdictions (tax havens) because MNEs were exploiting gaps and mismatches between different countries' tax systems.
That is how the Base Erosion and Profit Shifting (BEPS) initiative began in 2012 by the OECD-G20. Over 135 countries are now collaborating in the effort, with far more than 45 members in these multilateral bodies (11 G20 members are also OECD members).
According to their estimate, the BEPS practices cost countries $100-240 billion (or Rs 7.4-17.8 lakh crore at an exchange rate of Rs 74) in lost revenue annually, equivalent to 4-10% of the global corporate income tax revenue.
Global tax avoidance initiative-BEPS
In October 2015, a 15-point action plan was spelt out by the OECD-G20 under the BEPS initiative to achieve three broad objectives.
One was to create new rules to eliminate double non-taxation. The Double Tax Avoidance Agreements (DTAAs) were meant to save those taxpayers from paying double taxes on the same income who are residents of one country but generate incomes in another. But the DTAAs ended up ensuring double non-taxation due to the involvement of no-tax or low-tax jurisdictions (tax havens) and myriad financial instruments being used.
Two, fixing the existing rules on transfer pricing, treaty shopping and definition of permanent establishment which help in tax avoidance or non-taxation.
Three, bringing transparency in tax data, when and how much tax is being paid by multinationals and country-by-country (CbC) reporting of such tax incidents etc.
In 2019, the 15-point action was grouped into "two pillars" of action for finding solutions.
Pillar One relates to allocation of taxing rights between jurisdictions; fundamental features of the international tax system, such as the nature of permanent establishment and applicability of arm's length policy; future of multilateral tax co-operation; prevention of unilateral measures and taxing highly digitalised MNEs (Google, Amazon and others).
Pillar Two relates to a minimum level of taxation or the right of jurisdictions to "tax back" where other jurisdictions have not exercised their taxing rights or the payment is subject to a low level of effective taxation.
OECD-G20's BEPS remains a work-in-progress
After their last review meeting on January 29-30, 2020, the OECD-G20 released a report.
The first paragraph of this report, Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax, as reproduced below, says it all
Given the difficult-to-understand language, here is what the statement means: (i) in case of Pillar One, an "outline of the architecture" has been agreed upon (ii) in case of Pillar Two, some "progress" has been achieved and (iii) a commitment is made to find consensus-based solutions by the end of 2020.
Before spelling out these in clearer terms, here is another extract to explain what "progress" in Pillar Two means.
Now, everything is clear: (a) no consensus yet on what to do it or how (b) there could be a consensus on these by the end of 2020.
However, this does not mean 'no' progress in the fight against tax avoidance
A mixed bag of achievements and progress
Many countries have taken various initiatives within the BEPS framework or otherwise.
Some countries like Austria, Czech Republic, France, India, Italy, New Zealand, Spain and the UK, are considering or have progressed in introducing a minimum of digital sales tax to counter profit-shifting. These range from 2% (the UK) to 7% (Czech Republic) of sales. Their focus is on corporate sales, not corporate profits, to circumvent bilateral nation-to-nation tax treaties that may exist.
Some have enacted the General Anti Avoidance Rules (GAAR), like India, the US, the UK, France, Germany, the Netherlands, Canada, New Zealand, China, Poland and Australia.
At least 84 countries, including India, are signatories to exchanging CbC reporting to bring transparency in MNEs' tax reporting. More than 65 countries, including India, have signed the Multilateral Instruments (MLIs) to ensure profits are taxed where they are generated.
The Financial Secrecy Index (FSI 2020) brought out by the Tax Justice Network (TJN) in February this year, found that the 133 countries/jurisdictions it ranked on the basis of how their legal and financial regulations allow individuals and entities to hide and launder money had, on an average, reduced their contribution to global financial secrecy by 7% from their FSI 2018 scores. The TJN uses 'secrecy jurisdiction' as another term for tax havens.
Most notably, Switzerland reduced its secrecy contribution by 12% and dropped from number 1 in 2018 FSI ranking to number 3 in 2020.
On the other hand, the UK and the US, both major players in the OECD and G20, had done the reverse.
The US increased its secrecy contribution by 15% and held on to number 2 rank in FSI 2020 while the UK's jumped by 26% to climb up from number 23 in 2018 to number 12 in 2020. The Cayman Islands increased its secrecy contribution by 24% to reach the top, from number 3 in 2018.
The overall performance of the OECD (36 members) came under sharp criticism.
The TJN talked about "hypocrisy" of the OECD countries in curbing financial secrecy by "outsourcing" financial secrecy to "their dependencies". 'Dependencies' are territories under the legal and administrative control of another country, like the Cayman Islands is a dependency of the UK (more on this later).
The relevant part of the comment is reproduced below.
Others have expressed their reservations about the OECD-G20 initiative too.
For example, Nobel laureate Joseph Stiglitz, in his October 2019 article, Corporate tax avoidance: it's no longer enough to take half measures, took note of the BEPS deliberations and said: "Unfortunately, the current proposals for reforming global taxation simply don't go far enough. Multinationals must be compelled to do their part."
OECD and G20 members in tax haven lists
It is instructive to look at the FSI 2020 list closely.
That would reveal that 35 of 36 OECD countries figure in the list of 133 secrecy jurisdictions ranked in it. The only exception is the Czech Republic.
As a matter of fact, nine of them are in the top 25 rankings and 5 in the top 10 standings.
Similar is the case with the G20 countries. Nineteen of the 20-member G20 are in the FSI 2020 list, including 2 in top 10. The only one left out of the list is the European Union.
That is not all.
They figure prominently in the TJN's Corporate Tax Haven Index too.
For the first time in 2019, the TJN brought out its first Corporate Tax Haven Index in 2019 (CTHI 2019) as a supplement to its FSI. It ranked the world's most important tax havens for multinational corporations, according to how aggressively and extensively they help MNEs to escape paying tax and erode tax revenues of other countries.
It listed 64 jurisdictions. Twenty-five OECD members (of 36) are in the list, 10 of them are in top 25.
Five of the G20 countries figure in top 25.
UK and its satellite tax havens
The UK deserves a special treatment.
It ranked 12 in the FSI 2020 list despite a relatively low secrecy score, 46 of 100. That is because the UK is "at the core of a global web (or City of London's spider's web) of closely associated secrecy jurisdictions (tax havens)".
The major ones in the web are: (a) three Crown Dependencies (CDs) which are known tax havens-Jersey (rank 16), Guernsey (rank 11) and the Isle of Man (rank 43) and (b) seven Overseas Territories (OTs), of the 14, which are recognised tax havens-Cayman Islands (rank 1), British Virgin Islands (rank 9), Gibraltar (rank 30), Bermuda (rank 40), Anguilla (rank 62), Turks and Caicos Islands (rank 92) and Montserrat (rank 130).
The CDs and OTs are jurisdictions where the British Queen is the head of state with powers to legislate, appoint key officials and the UK government holds various other powers.
The 10 UK satellites find prominent place in the CTHI 2019. The graph below presents the UK and its satellites with their FSI 2020 and CTHI 2019 rankings. This is by no means a discovery but another confirmation of what the world has known and lived with it for decades.
The fear that the UK would turn into 'Singapore-on-Thames' (low-tax, lax regulations), which first surfaced after the 2016 Brexit vote, has now revived particularly when the EU as an entity reduced their secrecy contributions by 8% in 2020 compared to 2018.
India's initiatives to check tax avoidance
Apart from enacting the GAAR, the reporting for which is scheduled from FY21, India has taken several measures.
One, it has renegotiated the DTAA treaties with Mauritius, Singapore, and Cyprus in 2016 to provide for source-based taxation on capital gains (equity participation).
Two, it has signed the Multilateral Instrument (MLI) with more than 65 countries which would modify its DTAAs to make way for taxing profits where substantive economic activities happen. This would come into effect from FY21, subject to ratification by the other signatories (22 so far).
India had signed DTAAs with 96 countries.
Three, India has enacted Country-by-Country (CbC) reporting provision for bringing in tax transparency. On March 19, 2020, the Income Tax Department notified a designated authority for it, paving the way for it from FY21.
The benefits are, therefore, for the future to count.
As of now, Swati Verma, a researcher from the Institute for Studies in Industrial Development (ISID), points out the gaps in the renegotiated treaties with Mauritius, Singapore and Cyprus. She says only the equity investment is covered, other securities are exempt.
"The gains arising from other securities like mutual funds, exchange-traded derivatives, compulsorily convertible and non-convertible debentures remain exempt from taxation in India and offer beneficial options for investing illicit cash", she comments.
Meyyappan Nagappan, a tax expert with the law firm Nishith Desai Associates, says the measures India has taken should help in targeting tax avoidance in the future. He has a word of caution though.
He says: "However, that (India's measures) should not be confused with several issues today which arise in relation to where the taxes should be paid, which remains unresolved between different governments in the world. For instance, if a multinational has to pay 20% of its net profits as taxes, the question of attribution or to which country these taxes should be paid to, is a hotly debated question. As per the current rules, source countries like India do not get much tax."
He further adds, "It is also not entirely clear whether the stand being taken that a high proportion of such amounts should legitimately be paid to India is justifiable based on evidence. As a result, when different countries cannot agree and unilaterally impose or increase taxes, companies get caught in the middle and may end up suffering from double taxation in the future, which could have adverse effects."
His warning about unilaterally imposed tax is also a hotly debated topic globally.
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Sunday, March 22, 2020

Taxing the untaxed VII: Who supports tax havens and how do they flourish?

Tax havens have powerful backers; they include big nations including the UK and the US, reputed international bankers, accountants, law firms and many others which makes it difficult to discipline them

twitter-logo Prasanna Mohanty        Last Updated: March 21, 2020  | 01:06 IST
Taxing the untaxed VII: Who supports tax havens and how do they flourish?
Tax havens have powerful backers, which have been identified and mentioned in several studies and books on the subject

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That tiny tax havens like Cayman Islands, Panama, Bermuda, Mauritius, etc. could resist the push of the OECD-G20's anti-tax avoidance initiative BEPS for years should come as a big shock. But a little probing would explain why it is so.
They have powerful backers, which have been identified and mentioned in several studies and books on the subject, especially after the 2007-08 financial crisis. These include big and respectable banks, Big 4 international accountancy firms, a bevy of international law firms, administrators and big and powerful countries.
Who supports tax havens? How do they flourish?
One of the early commentators on the subject, Prof Ronen Palan of University of Birmingham and his co-authors of Tax Havens: How Globalization Really Works wrote that the complicated rules that create and regulate tax havens did not emerge spontaneously. Rather they were "devised by the very professionals who are advising their clients to take advantage of them".
Nicholas Shaxson, British author and journalist wrote in Treasure Islands: Tax Havens and the Men Who Stole the World, "...that tax havens are projects of the world's rich and powerful people. And there's no group richer and powerful than the rich and powerful." This was after the investigations into the leaked Panama Papers revealed names of the rich and powerful benefitting from tax havens.
Here are some of those enablers and backers
Reputed international banks
Big banks have also played a big role in tax avoidance by the rich and powerful.
In December 2019, the US's Department of Justice was quoted across the international media saying that the British multinational bank HSBC's Swiss private banking unit had agreed to pay $192 million in penalties after admitting to its role in helping Americans evade tax by using undeclared Swiss bank accounts.
A report of the International Consortium of Investigative Journalists (ICIJ), which investigated the Panama Papers and many others said the investigation by the Department of Justice revealed that HSBC bankers had "actively solicited clients to hide their assets through a system of codenames, numbered accounts and offshore networks in tax havens, including the British Virgin Islands, Liechtenstein and Panama".
This was not the first instance for the HSBC. In 2012, the HSBC Holdings Plc had agreed to pay $1.92 billion in fines to the US tax authorities in connection with laundering of drug money of Mexico.
Two Swiss banks, UBS in 2009 and Credit Suisse in 2014, had agreed to pay penalties of $780 million and $2.6 billion, respectively, to the US tax authorities for helping Americans hide their assets. Palan et al had revealed that these two Swiss banks (UBS and Credit Suisse) had "set up large training facilities in Singapore for private banking operations, presumably anticipating the shift of such activities (tax avoidance) from Europe to Asia". This was a time, in and around 2008, when the European Union (EU) was closing tax loopholes to prevent tax evasion.
The big banks' connections with tax havens further unravelled during the financial crisis of 2007-08. Palan et al disclosed that Bear Stearns, a leading US investment bank which collapsed in March 2008, hemorrhaged money through many of its hedge funds registered in the Cayman Islands and Dublin's International Financial Centre, both well-known offshore (another term used for tax havens) financial centres.
Lehman Brothers, another big US investment bank whose collapse triggered a global financial panic for months in 2008, was registered in Delaware, an "internal tax haven in the US since the late nineteenth century".
Big 4 accounting firms and their India footprints
Palan et al were the first ones to point out that the Big 4 international accounting firms - KPMG, Ernst & Young, PricewaterhouseCoopers (PwC) and Deloitte - are "the very heart" of the gigantic offshore/tax haven world "without which, all this would be impossible". There was actually a Big 5 of accounting firms, Arthur Andersen being the other one which went belly up after the Enron accounting scam in the early 2000s.
The Big 4 act as both consultant on tax avoidance and auditor of accounts of the world's largest companies, a clear case of conflict of interests, and each operate in about 140 countries, including India. Palan et al give examples to say they earn substantial cuts of the tax they save for their clients (9% to 30%).
They are the voice of business too. A paper by the Tax Justice Network (TJN), which has done pioneering work in shedding light on tax havens, says: "In the tax world, it is not uncommon for a big four accountancy firm to be advising the government on tax legislation and then advising their clients on how to avoid it."
A 2018 cross-country, firm-level study, Tax Haven Networks and the Role of the Big 4 Accountancy Firms, led by Chris Jones of the Aston University (UK), found "clear evidence of a strong correlation between tax haven use and the use of Big 4".
They have a strong footprint in India too. The PwC was banned from auditing for two years in 2018 by the market regulator Securities and Exchange Board of India (SEBI) in connection with the Satyam Computers accounting scandal which had broken out nearly a decade earlier. The ban was later lifted by the Securities Appellate Tribunal (SAT) on a technical ground, that only the national auditor watchdog, Institute of Chartered Accountants of India (ICAI) had such a power. Not just in India but world over professional bodies like ICAI are known to have failed to bring discipline to the profession.
Again in 2018, the central government had sought a five-year ban on the Deloitte Haskins & Sells LLP and a KPMG affiliate for allegedly aiding and abetting a financial fraud at a unit of the debt-ridden Infrastructure Leasing & Financial Services (IL&FS). Last heard, the National Company Law Tribunal (NCLT) had rejected their appeal against it.
Tax haven-based law firms
The Panama Papers exposed how the law firm Mossack Fonseca, headquartered in tax haven Panama, was "one of the world's top creators of shell companies, corporate structures that can be used to hide ownership of assets", according to the ICIJ which carried out a global investigation.
These documents revealed a far murkier side of tax havens. The ICJI said the Panama Papers revealed information on more than 214,000 offshore companies in 21 tax havens, connected to people in more than 200 countries and territories. Among them were 140 politicians from more than 50 countries, some of them heads of state (of powerful countries like the UK and Russia), their associates, ministers, elected officials.
The TJN says that a large industry of administrators, accountants, bankers, lawyers, and lobbyists has developed to serve the tax haven economy.
But wait to be shocked even more.
Tax havens: UK, US, and other powerful countries have their back
According to Palan et al, "Some of the most successful "pure" tax havens are dependent jurisdictions; they rely on larger states for their security, diplomatic relations, and maintenance of the currency and broader macro-economic environment, as well as the collection of VAT receipts".
It then goes on to name some of the tax havens and larger states behind them.
Jersey, Guernsey, and the Isle of Man, plus Gibraltar in Europe and the Caymans, Bermuda and the British Virgin Islands (BVI) in the Caribbean are the highly successful British Crown Dependencies.
Crown Dependencies are not part of the UK but are self-governing possessions of the British Crown, the Queen's personal representatives are the Lieutenant Governors, the UK government is responsible for certain areas of policy such as defence and foreign affairs, which the Privy Council does. Thus, the British courts and British judges are the final authority on any tax dispute that arises in these jurisdictions.
(Shaxson describes this London-centric tax havens' network as a 'spider's web' which Palan et al described as "a second British empire which is at the very core of global financial markets today".
Similarly, Monaco and Andorra were identified as relying on the French state for most of their essential services and Liechtenstein on Switzerland.
Palan et al then concluded: "In sum, the reality of this interdependent world is that when one comes across low or zero-tax jurisdiction, someone else is paying additional tax elsewhere, thereby permitting that jurisdiction to offer low-tax services."
The US has its own tax haven-Delaware.
Delaware was in the news last month when Africa's richest woman Isabel dos Santos was accused of embezzlement and money laundering by prosecutors in Angola. Among others, she was accused of concealing a $1.8 million luxury apartment in the Portuguese capital Lisbon. She and her husband owned the apartment through a company registered in Delaware.
Isabel is the eldest daughter of ex-President of Angola Jose Eduardo dos Santos (1979 to 2017).
As was mentioned earlier, in the Tax Justice Network's Financial Secrecy Index of 2020 (FSI2020), the US was second after the Cayman Islands in secretive jurisdictions.
All the tax havens mentioned by Palan et al find a proud of place in the FSI2020 too, indicating that nothing much really has changed on the ground.

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Rebooting Economy 70: The Bombay Plan and the concept of AatmaNirbhar Bharat

  The Bombay Plan, authored by the doyens of industry in 1944 first envisioned state planning, state ownership and control of industries to ...