As chair of the summit of the G8 (the biggest industrialised countries) being held in Northern Ireland next week, David Cameron will push for global reform of the world economy’s most shadowy corners. Image: The Economist

AT FIRST blush, David Cameron seems an unlikely foe of tax dodgers and their accomplices. Conservatives are traditionally friendly to the wealthy and to big business, who gain most from fancy financial footwork. The City of London enjoys symbiosis with a cluster of offshore dependencies—including Jersey and the British Virgin Islands (BVI)—which have a reputation for, at best, inviting tax avoidance and, at worst, aiding financial crime.

But as chair of the summit of the G8 (the biggest industrialised countries) being held in Northern Ireland next week, the prime minister will push for global reform of the world economy’s most shadowy corners. He wants to improve tax compliance through the cross-border exchange of information, to improve those data by making companies, trusts and the like show their true owners, and to change outdated rules which multinationals exploit to cut their tax bills. His assault is both on the offshore tax havens and on the often dodgier, if less well-known, practices in onshore jurisdictions such as Delaware—or London.

Cynics will say this is nothing new. John F. Kennedy tried in vain to rein in tax havens in the 1960s. In the late 1990s the Organisation for Economic Co-operation and Development (OECD), a Paris-based club of rich countries, had a go but was foiled by America, which said low tax rates were a form of healthy competition. European leaders declared war on tax havens at a G20 summit in 2009 but had to retreat when China, whose wealthy citizens are big users of Hong Kong and Caribbean offshore financial centres, objected.

Mr Cameron may fare better. Since 2009 tax havens and financial secrecy have become deeply unpopular with both the public and policymakers. A furore over corporate-tax avoidance in Britain has ensnared high-street brands, such as Apple and Starbucks. A series of leaks, notably 260 gigabytes of data on clients of trust companies in Singapore and the BVI to the International Consortium of Investigative Journalists, led tax authorities in several countries to open investigations.

Breaking glass
Campaigners for transparency are in full cry. They have been “dictating the script lately”, complains Richard Hay, counsel to the IFC Forum, a lobby group for offshore lawyers: “Cameron has been reading from it.” Ernst & Young, an accounting firm, talks of a “tipping point”.

The British agenda is ambitious. It includes everything from curbing the legal avoidance of corporate taxes to the use of anonymous shell companies to hide corruptly obtained public assets, evade sanctions and launder drug money. A refreshing whiff of candour is in the air. “Instead of preaching to poor countries or promising to double aid, which we never did anyway, the idea now is for the G8 to put its own house in order, in ways that are good for us and also good for Africa,” says Paul Collier of Oxford University, who has been advising Mr Cameron. “The days of ‘do as we say and not as we do’ are over.”

Instead of increasing inflows through aid, the new approach is to curb the often bigger outflows from poor countries—whether from the illegal siphoning of the proceeds of corruption or the legal shifting of corporate profits by mispricing internal transactions. If you include those outflows, Africa would have been a net creditor to the rest of the world in 1980-2009, to the tune of up to $1.35 trillion, according to the African Development Bank and Global Financial Integrity, a campaigning group.

Rich countries will have to change a lot, starting with the creaking system of international corporate taxation, which dates from an era when companies’ main assets were immovable. Now accountants can shuffle intangible assets such as intellectual property, and the profits they generate, from one jurisdiction to another with ease. A confusing thicket of bilateral tax treaties lets them play off national rules against each other. A tasty example is the “Double Irish with a Dutch Sandwich”, which diverts profits made in, say, France through an Irish company to one in the Netherlands, and on to a second Irish subsidiary in a tax haven such as Bermuda. The result is a lip-smacking absence of tax for the owner, and a sour taste in the places that provide the public services that enable him to do business.

The OECD is working on a series of reform proposals, to be presented to another summit in July, of the broader G20 (the world’s biggest economies). Strong support from the G8 would help. A big part of the proposed changes is to tighten rules on “transfer pricing”: sales of goods or services from one bit of a company to another, at often artificially low or high prices. This allows profits to be moved to low-tax countries and losses to high-tax ones. The OECD wants firms to justify internal prices that deviate from outside norms. But the issues are complex and lobbyists canny. Even with an international consensus, closing loopholes will take years.

The other big push on tax is to move from an “on request” model of information exchange, where countries have to cajole each other to hand over data, to one where they are swapped automatically. This is already well under way, thanks to America’s Foreign Account Tax Compliance Act (FATCA), which has inspired European countries to make similar demands. It could become the global standard within a decade. Offshore centres are starting to sign up, calculating that a voluntary move now may mean better terms. European laggards, such as Switzerland, Austria and Luxembourg, are also reluctantly increasing compliance. This will make it harder to hide assets abroad.

But not impossible. Much personal wealth is held through shell companies and trusts: empty corporate vehicles, where beneficial ownership is often obscured. Though these have legitimate uses (for example, to conceal a company’s hand in negotiations), they are also useful vehicles for tax-dodgers—and criminals. They can be fronted by nominees, who may have no idea who really owns the company. Combined with other tricks (such as bearer shares, which give ownership to whoever actually holds the relevant bit of paper), the result can be impenetrable murk. In a review of 150 notorious corruption schemes, the World Bank found that each relied on an average of five shells to move or hide the loot. Mr Cameron talks of the need to “knock down the walls of corporate secrecy”.

Of 69 jurisdictions surveyed last year by Eurodad (an anti-corruption network), only six required all types of company to record beneficial-ownership information (see chart). The Financial Action Task Force, which sets anti-money-laundering standards, calls for the identity of real owners to be available in a timely manner to law-enforcement authorities. But the recommendation is non-binding and none of its own members is fully compliant.

Transparency on this front may be a lot for the G8 to manage. In offshore centres such as the Cayman Islands and Jersey, corporate service providers have had to collect ownership information since they first came under international pressure a decade ago, though they are sometimes slow or unwilling to turn it over to investigators. In America, by contrast, the information generally is not even collected. Indeed, states like Delaware and Nevada are among the easiest jurisdictions in the world in which to form a company without revealing who ultimately owns it. This frustrates and embarrasses America’s crime-fighters, but the states’ lawmakers have blocked reform. Britain, with its bearer shares and easily abused limited-liability partnerships, is little better. Complaints from police about anonymous shells helped persuade Mr Cameron to make transparency a G8 theme.

Campaigners want more. A big advantage of owning a bit of a joint-stock company is limited liability: if the firm goes bust, its shareholders do not have to pay its debts. A fair price to pay for the privilege is disclosing ownership in publicly accessible central registries (with narrow exemptions for firms with legitimate security concerns). That would help investigative journalists (we declare an interest) and anti-corruption campaigners, as well as law enforcers and regulators. Many banks support the idea, too; it would help them meet due-diligence requirements to identify who their clients really are. A study by John Howell & Co for Global Witness, another campaigning group, found that the transition costs in Britain would be modest, ranging from £10m-103m ($16m-161m) depending on the level of gold-plating.

Still, opposition remains formidable. Mr Hay argues that private-sector “tax vigilantism” could get out of hand. Transparency would make life easier for kidnappers and extortionists. Geoff Cook of Jersey Finance, a trade body, says that giving authorities, but not the public, access to the information “strikes the right balance between being able to monitor potential wrongdoing and leaving legitimate privacy rights intact for the great majority who do no wrong.”

Jason Sharman of Griffith University in Australia argues that poor countries are already overwhelmed by anti-money-laundering obligations. He would prefer to see a tougher version of the model already used in some offshore centres: service providers which register trusts and companies would have to identify owners, hold the information and pass it on promptly when authorities, domestic or foreign, requested it. Those that did not would face harsh penalties, including prison. Such service providers may also be better placed than registries to sniff out false ownership information. For this to work, though, they would have to be well regulated. At the moment, regulation is ineffective in Britain and non-existent in America.

Muck and brass
The first countries to adopt fully transparent corporate registries might suffer a competitive disadvantage. Britain’s offshore satellites fret that while they are being forced to clean up their act, clients could leave in droves for jurisdictions that are under less pressure. If China (not a G8 member) does not sign up to information exchange and corporate openness, Hong Kong and Singapore are unlikely to—so these fast-growing financial centres would continue to suck business from G8 countries and the old offshore centres. The West “could score an own goal”, muses Mr Hay. But reformers fear that the search for a level playing field means no change at all.

Mr Cameron’s advisers see a strong statement in Northern Ireland as an essential step towards further progress. If the G8 is seen to be dealing with its own shortcomings, transparency is more likely to move to the front of the agenda at the G20 (of which China is a member). The best outcome, says Mr Collier, would be a statement of commitment that gives political backing to the fiddly work being done by technocrats at the OECD and elsewhere. Enthusiastic G8 countries can take the broad principles to turn into detailed national “action plans” for peer review later.

But international tax reform will produce losers. America, for one, is loth to inflict more pain on its multinationals, which have borne the brunt of public criticism. Not all G8 countries support changing ownership disclosure rules, let alone making the data public. Germany, Russia and Canada are sceptical. America is keener, but its hands are tied by the states. Britain and France are the keenest, though neither is likely to opt for full public disclosure of beneficial ownership, at least for now.

After decades in which corporate tax fiddles have mushroomed, and colossal amounts of criminal and kleptocrat money have sloshed through the world financial system, even limited progress is welcome. Support for clarity on tax and ownership has never been broader, and calls for reform never louder. Mr Collier says the main aim of the summit is to “get the ball rolling”. And if it doesn’t get moving now, when will it?