This opinion piece is written by PWYP Norway´s Secretary General Mona Thowsen and was first published in Norwegian in the newspaper "Vårt Land" on May 6 2020.
Tangen`s attitudes towards tax havens must not alter the Norwegian Pension Fund`s (Oil Fund) work for transparency among international companies.
The Executive Board of Norges Bank (Bank of Norway) writes in their 82-page response to Norges Bank`s Supervisory Board that Nicolai Tangen is a right choice. In the following sentence the following argument is offered; “He can show very good results from asset management in the international finance markets.”
If these are results built on intense use of tax havens in the company structures, why should that be qualifying? Could he have achieved the same results without using tax havens?
Qualified tax haven user
As one of the foremost within international financial management and as hedge fund manager at Cayman Island, Tangen will be especially well qualified concerning the use of tax havens and corporate havens in company structures. He will be familiar with how the various countries´ judicial systems can be utilized. He will understand the importance of complexity and fragmentation of company structures, which can keep companies outside of accounting provisions. Particularly with a background in hedging he will understand how contractual ties make it possible to retain full control over companies while at the same time keeping the control invisible.
The Oil Fund`s view on tax havens? Or Tangen`s view?
Norges Bank Investment Management (NBIM), the Oil Fund as it is popularly called, in 2017 submitted their “expectations document” on taxes and transparency.
NBIM wants companies to be transparent in tax matters. They invited the input from civil society. The expectation is now that the Oil Fund must be even better at transparency.
Norges Bank`s employment of Nicolai Tangen must not change the Oil Fund`s work for transparency in international companies.
Will Nicolai Tangen change his view on tax havens to reflect the Oil Fund`s view? Will Tangen reinforce the Oil Fund`s work in this area?
Now is the time for organizations and the media to pay close attention. Does the employment of Tangen in any way alter the Oil Fund`s attitude towards prioritizing of and further work with transparency in international companies and insight into tax havens? Will the expectations document be continued and updated? Will the Oil Fund`s role be equally active as previously, and work to improve towards the boards? What is being done to lift the expectations on increased transparency in companies? Does it change the dialogue with civil society?
Tangen must support transparency if he is to be a credible leader.
It matters what the Oil Fund does
The Oil Fund is the world`s largest investment fund. Decisions that the Oil Fund takes have macroeconomic consequences. The Oil Fund invests in a number of companies that are registered in secrecy jurisdictions, their common denominator being that they do not have an informative public company register, no or very limited accounting obligation, no retention obligation, no auditing obligation, and no obligation to inform on who the real owners are.
The business idea of tax havens is simple; to offer legal structures that can hide or disguise information on activities, capital, and ownership in the companies` home countries in exchange for a fee.
Companies can then avoid paying taxes in their home countries or the countries where they have access to resources, or where the resources are converted into goods and services. The capital investments are almost never transferred to transparent and accountable countries, such as perhaps the home country is.
The consequence is that surplus that should have been taxed in the companies` home country or where the wealth creation occurs, instead is drained out of the country. According to the UN, the world`s poorest countries lose around 500 billion annually in tax evasion.
What challenges does the Oil Fund face?
Norges Bank writes in their justification that Tangen: “..he is an innovative and engaged leader with an in-depth strategic understanding of the challenges that SPU is facing…”
A test is his understanding of tax havens` effect on the global economy.
Missing tax revenues (moving tax bases to tax havens) has a destabilizing effect on countries, and a negative effect on dividend payments to investors.
The Oil Fund themselves write in their expectations document on taxes and transparency that; “Corporate taxes pay an important role in the public finances of developed countries and may be even more critical in developing ones. Tax is one of the ways in which businesses contribute to the societies on whose legal and financial infrastructure they rely for the orderly execution of their activities.”
Functioning markets are characterized by rational decisions and transparency in transactions. Currently we see a development in the market in a negative direction. Information asymmetry leads to poor decisions both with investors and in business.
The development is not sustainable.
Norwegian companies are currently confronted with unfair tax competition against global companies that can simply move their surplus around. That reduces Norwegian tax revenues and has consequences for Norwegian businesses. This is particularly important in a situation where Norwegian businesses will need to rise again when the Covid-19 crisis is over.
The Oil Fund has, in their expectations document on taxes and transparency, three expectations: that taxes are paid where economic value is generated, that companies` tax arrangements are a responsibility of the companies` boards, and that “country-by-country” reporting is a core element in transparent companies` information on tax affairs. The expectations are primarily directed at boards and meant to function as a basis for interaction with multinational companies on the topic of taxes and transparency.
Taxes must be paid where economic value is generated. So where is economic value generated? In practice there are three places where economic value is created. Where resources are extracted, where the products “are produced”, and where products and services are sold. Economic value consists of all these three places by an investment aspect (investment that leads to earnings) and an earnings aspect – revenue minus expenses. The investments say something about how future revenue will be generated, and revenue and expenses are important in order to understand tax capacity.
The main problem is that investments and earnings are unevenly distributed between countries because of tax havens. At the same time, any company that evades requirements for transparency or avoids getting into a tax position, always claim that they are following current legislation in the countries where they are located. And so they feel free to take wealth creation out of the country.
PWYP Norway has over time been in dialogue with the Oil Fund about communicating expectations on “extended country-by-country reporting.” This would provide a far more robust follow-up of transparency around the fund`s framework for responsible investments and ensure a greater general confidence in the management of the fund.
The basis for all taxation is information, but tax havens cut off the flow of information and hinder insight. This is how both home countries and host countries are denied insight that could give the basis to tax a company, or to ask questions. While at the same time investors are denied insight in the companies` disposals that affect the companies` dividend strategy, and hinders investors in asking questions.
Large investors such as the Oil Fund should have access to key information on the companies they invest in. Equal treatment of investors and companies is necessary to protect the long-term earnings of the Oil Fund. The Oil Fund can play an important role through creating expectations concerning transparency, and the Oil Fund should have dialogue with the companies` boards on transparency.
Establish confidence? Get out of the tax havens!
Tangen has defended that the hedge fund is established in tax havens in order to avoid double taxation.
That`s nonsense. Here the media should have asked more critical questions.
When hedge funds are placed in tax havens, then no taxes are paid. This attracts investors who have arranged it so that they also pay no taxes. Then nobody pays taxes.
This leads to double non-taxation – neither hedge fund nor investors that invest out of tax havens are taxed.
If the hedge fund had been located in a country with taxation, then the taxation would be equal for all the investors, and investors could utilize deductions to avoid double taxation like is done in other instances to avoid double taxation.
The way to act in a lawful manner in relation to tax havens is to (1) be completely transparent on how they are utilized or (2) get out of them.
In the letter from Norges Bank we read that “in dialogue with the Executive Board Nicolai Tangen was clear that he is prepared to re-organize his personal economy in a way that ensures necessary distance.”
The formal requirement from Norges Bank to ensure “necessary distance” appears to be fulfilled. But we still know little to nothing.
- There is no transparency when all information lies in a trust at Jersey, or a fund in Cayman Island.
- It simply means that Tangen puts his money in a company structure without access while he is oil fund manager.
Wants to donate all his earnings to charity.
Norges Bank writes that Tangen has “high integrity and good understanding of society and various roles.”
Tangen is quoted as saying he wants to donate all or parts of the assets to charity.
That sounds nice, but taxes are not voluntary.
The tax system will not be fair if everybody is not equally obligated to follow the taxation rules. Tangen wishes to pay voluntary “taxes” to society. Even if he says he will pay half of the assets for charity (“taxes”), it is incumbent upon him how much he decides to pay, how and to whom. This means society cannot use the funds where society most urgently needs it.
Tangen could for example take all the assets home to Norway and have it taxed. That costs very little. Then society can distribute as they see fit. Then he can donate to charity after his taxes are paid, like regular people in Norway do.