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To defend offshore finance bods looting developing countries of their tax cash

Well, someone's got to do it

Worstall @ the Weekend I have been set a task by Reg reader Salamander: to critique or defend the offshore finance system. This should be easy enough as I'm clearly a pig dog running lackey of the plutocrats and so the answer is just yes. Whatever they pay me to say.

Sadly, there are no plutocratic cheques flying around, just those from the editors who hire me, so the answer is going to be a little more complex. A yes on one side, and no, a horrible idea on the other.

The question is asked when we were talking about the Quid a Day Nosh Challenge here:

I wonder when Tim will be publishing a critique or defence of the offshore finance system. One reason why developing countries find it hard to get ahead is because they lose so much money through the offshore system.

I believe it is something like for every dollar in aid the developing countries receive, they lose 10 dollars. A lot of developing countries are not actually poor. The countries just have a problem in maximising the benefits of their wealth.

Given that a lot of developing countries assets are in the form of mineral wealth, I would think that Tim is well placed to give an analysis of this situation.

Re: the minerals, the easy part, this offshore tax dodging is horrible, terrible, no good at all. This is because there is a crucial difference between the taxation of mineral values and of corporate profits.

Some part of a mineral value is just that the bloke that God gets in to design worlds sticks a nice lode of minerals in a place where a certain tribe ends up living. There's no particular reason why a company, or group of shareholders, should profit particularly from this bounty of nature.

If anyone at all does deserve to do so, it should be the people living above it. This is very different from people making a profit digging them up, you understand. That happen-stance value is called a resource rent. And resource rents should be taxed until the eyes water.

BP should make no money just because the man brought in stuck oil under the North Sea. BP most certainly should make profit from applying its capital, expertise and technology to pumping it up. Tax the first heavily (we do) and the second normally (we do).

One of the complaints about offshore is that it allows dodging of those resource rents. One particular and specific example used is that Glencore was telling Zambia that copper was worth one amount and then telling Switzerland that it was worth quite another. That this happen,s I have absolutely no doubt at all, and it's bad. No good. Pipsqueaking taxation of resource rents is a good idea.

This particular tale also benefits from the work of an excellent researcher, Maya Forstater. I doubt that she and I share any political or economic opinions at all, I could imagine us disagreeing about whether kittens are cute. But my word she is an accurate and detailed researcher.

For she went and looked at exactly this Glencore allegation and found it to be total bollocks. The claim was that if the values had been fairly declared, then Zambia's GDP would have nearly doubled with obviously an interesting effect on those resource rent taxes.

But as Forstater was able to show, what was being measured was 214 million kilos of copper going out of Zambia and 1,909 kilos (yes, 2 tonnes, not 2,000, or 2 million, or anything) going out of Switzerland. There was a price difference between these flows, sure. A 5x price difference. We'd all be very hesitant about claiming that 2 tonnes will tell us much about the price at which that larger amount would be sold.

That claim was, therefore, bollocks, and you can see the admission of this by the people who made that original claim here.

I was even able to point out why this was happening (I happen to know one of the blokes at the people who got it wrong). The copper moving out of Switzerland, that 2 tonnes, would have been one or two cathode sheets at a time as samples – 25 kg each sheet. That 200 million kgs would have been at least in container loads.

And net customs prices (their source for pricing) are based upon net landed costs: material price plus transport cost is the customs value. And if you're using DHL to send a 25 kg sample to someone, of a bulky item, then transport alone is going to take up tens of dollars at least per kg of that customs' value. In a manner that slinging a dozen containers on a passing ship won't.

OK, this is a detail, I agree it's a detail. But this paper about Zambia really has been one of the main proofs that the developing countries are losing fortunes through such practices.

I don't, by the way, doubt that all that there's dodginess around. I doubt that much coming out of Congo is paying much in the way of tax: maybe to warlords, but not to the State. But this is a rather smaller amount than what has been claimed about the multinationals.

Forstater does a similarly magnificent demolition job on the claims that the developing countries lose some vast amount to corporate tax dodging here. Completists might want to read her points but they make no difference to my argument.

For, while I'm against offshore being used to dodge resource rent taxation, I'm all in favour of it being used to dodge corporate profits taxation in developing countries. Do please note there's a heavy emphasis on the word “developing” in that previous sentence. Which is why we'll need to pick up a couple of pieces of economics.

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