Prince on tour: Muhammad bin Salman

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. How would you like to dodge a quarter of your taxes every year? That's the fraction of the worldwide tax bill its estimated corporations could be avoiding entirely legally. We take a look at where all that money's going and the efforts to keep it where it belongs. And in the run up to the Academy Awards, we speak to Nadine Labaki, the first Arab woman in line to win a feature film Oscar. But first, Saudi Crown Prince Mohammed Bin Salman is pivoting eastward. This week he's on a tour of Asia.

We believe that Pakistan gonna be very, very important country in the coming future.

And we want to be sure that.

We are part of that. With stops in Pakistan, India and China, the trip is a strategically important one for the prince.

He has had a very rocky six months. He's been accused of ordering the murder of dissident journalist Jamal Khashoggi. Saudi CONSULATE n Istanbul his violent death.

Has rocked relations between the west and Saudi Arabia.

So this tour is a way of cleansing away some of the diplomatic opprobrium that is attached to him in the West.

Shashank Joshi is our defense editor.

He is looking for friends who will perhaps focus on other more harmonious matters. In Pakistan, he has a very pliant friend, but also India and China who will not obsess over Saudi Arabia's human rights record and will deal with him on more pragmatic bases.

Which is to say they can talk oil.

They can talk not just oil, but other types of investment, regional security, counterterrorism. With India particularly keen to get Saudi help on chasing up Pakistani wrongdoers. And they can talk missiles and strategic weapons with China.

But in that region there is quite a lot going on. Let's take those sort of destinations. One by one, he's already been to Pakistan. What are his ambitions and what are the issues there?

Well, Saudi Arabia and Pakistan have historically been extremely close. Part of it for Pakistan is money. They are being squeezed towards the IMF for a bailout and Saudi Arabia has just agreed $20 billion of investment agreements. Pakistan also sends troops to Saudi Arabia to train with the Saudis. It has contributed forces to the campaign in Yemen. But of course, Pakistan also neighbours Iran, which is Saudi Arabia's arch rival. So there's a lot more going on in terms of also containing Iran's influence.

So what exactly was he trying to secure in Pakistan?

Well, one of the most important projects he's looking at is funding a big oil refinery in the port of Gwada in Pakistan's Balochistan province. And that's important for a number of reasons. Right now, it's the centerpiece of China's economic corridor in Pakistan. So he's competing with Beijing. It's very near the Iranian port of Chabahar, where India is investing, so he's competing with Delhi. But perhaps more importantly than all of that, Balochistan neighbours Iran, and so he is building a presence right next door to Iranian territory. There have been rumors that Saudi Arabia has funded groups in Balochistan, which is where Gwadar is located, that have conducted attacks inside Iran. So I think this is likely to be another step in the Saudi campaign to push back at Iran.

I suppose I'm wondering why this visit might be so welcome on the part of all of these countries. If what he's doing is stepping into some pretty tricky local dynamics, kind of on all fronts, every direction, why isn't he viewed as kind of a destabilizing force?

Well, I think for the Indians, of course, where he is now, they historically might have seen Saudi Arabia as a destabilising force supporting radical Islamist movements that were causing trouble in places like Kashmir and other parts of India. But in recent years, India has tried to reset its relationship with Saudi Arabia. It wants Saudi investment and it wants to coax Saudi Arabia away from Pakistan.

And officials in New Delhi are still reeling from last week's terror attack in Indian Administered Kashmir, which it blamed on Pakistan. Isn't that sort of complicating the dynamics?

I think it probably is. I think that India is focused on this terrible attack that took place, the worst attack in Kashmir in decades. And there's profound anger in India and a desire among many people to take some sort of retaliatory military action. Now, Mohammed bin Salman's presence in Pakistan, first of all. And then his visit to India has complicated that for the Indians. But I, I think what they will be doing is using the opportunity to try and say to him, look, we know you're close to Pakistan, we know you're building a relationship, but we are a bigger, more important country. Don't you want to work with us and try and put pressure on the Pakistanis to end their support of terrorism?

So quite the opposite then of everyone trying to shun him. Everyone instead wants his ear quite badly.

I think that's right. I think that for the Chinese as well, where he will be heading after India, China will think, well, here's an American ally. If we can give him weapons, advance technology, perhaps build economic ties, here's an opportunity to try and peel away another American ally and win one over the Americans.

Do you suppose that this tour will accomplish its goal of kind of shaking off the shadow of the Jamal Khashoggi affair?

I think it will show the west that Saudi Arabia has other partners. And that will probably push some people to say, look, we can't stop talking about Khashoggi, but we have to be aware that Saudi Arabia is an important partner. Indeed. Only in the last week, British officials have been complaining that a German arms export ban on Saudi Arabia has grounded its fleet of Typhoon fighter jets. So people are already worried that some of the pressure on Saudi Arabia is resulting in lost commercial opportunities. And the more he can show that he has friends in other parts of the world, even potential suppliers of arms, the more he will be able to say to the west, you better talk to me at some point, because if not, I will find other people to speak with.

And I'm also intimately involved in all of these other sort of cross border conflicts that you might need my help with.

Well, absolutely. And I think the biggest of all and the biggest prize here is the peace talks over Afghanistan. Saudi Arabia has had a relationship with Afghan insurgents. Pakistan is central to the process of the peace talks. And so if the west feels that Saudi Arabia could play an important role in cajoling Pakistan to push the Taliban to the table, if it could coax the insurgents directly to the table, then that may be one more step on the road to rehabilitation for Mohammed bin Salman Shashank.

Thank you very much for joining us.

You're very welcome.

In 17th century Jamaica, English and Dutch privateers lost their contracts to plunder attacking Spanish ships. So they turned to another form of piracy.

They became full on pirates and they continued to use Jamaica as their main base. And that earned It a reputation for debauchery.

Jamaica still has something of a piracy problem, but today's buccaneers aren't sailing the high seas.

Jamaica faces problems like many countries do with corporate tax avoidance. The pirates these days are not on Jamaica itself, but based in tax haven, some of them not too far away from the island.

Corporate tax avoidance is on the rise and developing countries such as Jamaica suffer disproportionately. By some estimates, tax authorities around the world lose between $100 billion and $240 billion a year. And it's all legal, if a bit convoluted. Our special assignments editor Matthew Valencia has been looking into how big corporations navigate the choppy waters of the global tax system. Matthew, tell me the scale of this problem.

The problem is big and growing. I mean, the OECD estimates that revenue losses around the corporate tax avoidance are up to $240 billion. The IMF had a study a couple of years ago which put the number at around, well, potentially over $600 billion, which is equivalent to about a quarter of all corporate tax receipts worldwide.

Right, and which are the countries, what are the kinds of countries that are kind of losing out the most?

I mean, most countries suffer to some extent or other rich OECD countries. They've complained for years about leakage, corporate tax leakage. The Europeans have been complaining for years about problems that they' with companies from elsewhere, including Internet, digital companies from America and other parts of the world. But it's lower and middle income countries, developing countries, which are hit the hardest.

Why is that?

Well, there are a number of reasons. First of all, those are countries where there's a lot of production, increasing manufacturing and you have profits there which could be shifted to tax havens in other countries. You also have a resources problem in poorer countries. They just lack know how. Basically companies are using some sophisticated tax planning out there. Some of these tax administrations in lower income countries just can't really keep up. And then I'd say a third reason is that the budgets of poor countries tend to be more reliant on corporate tax revenues than rich countries.

You describe sort of complicated means of doing this. Kind of like walk me through it a bit. If I'm in a place with a tax rate that I don't much care for and I want to move some of that tax obligation elsewhere entirely legally. How do I do it?

A common way of doing this is to shift profits to a tax haven by essentially moving intellectual property to one of these havens. Having a company in a tax haven charge a company in another country for services. The money then flows through to the company in the tax haven. That company can then essentially claim the business. And of course the profits are taxed in the tax haven at a low or zero rate.

From what you've seen, the fraction of avoided taxes on the rise, why is that?

Largely that's to do with the rise of intangible assets like intellectual property, which are just easier to shift to tax havens than physical assets are. If you have a factory and it's making stuff, you can play some games, you can move stuff around, but what you can do is limited.

Right, so all of this is a fiddle rather than law breaking per se. But is there any sort of mix of the two where you find avoidance, do you find also full on evasion?

Tax avoidance is often said to be legal, tax evasion illegal, but it's a little bit more complicated than that. If you're a big multinational and you're using cross border activities to avoid tax, a lot of what you're doing is exploiting mismatches between national tax laws. So you may not be breaking the tax law of a particular country, of any particular country, but what you're doing, when somebody from the outside looks at it, it looks a little bit funny, it looks a bit strange. You're not paying taxes anywhere or you're paying a much lower level of tax. Often that is because of this wriggling through gaps. If you like mismatches between different countries tax laws, if it is then just.

Sort of a mess of all of these different national level laws, then it must be a mess to try to fix it.

Right, right, it is. And there have been a number of efforts over the years. It's very complicated stuff. At the end of the day, the main effort to try and deal with this, a program called Base Erosion and profit Shifting, that should tell you how complicated this is. They've had a good stab at it. But to be honest, there's been more disagreement than agreement on many issues. In particular the really important issue of the digital economy. Countries have been getting practical help as well in certain instances. So there's this program that's run by the OECD and it's called Tax Inspectors Without Borders. And essentially what they do is they parachute in tax experts, auditing experts from a variety of countries, mostly from North America and Europe, into lower income countries where tax authorities have been having problems essentially sort of keeping up with the game.

And so those parachuted in sort of international tax experts, how are they doing? Does that work?

Well, they've done it in a whole bunch of countries and it seems to be working pretty well. I think there are 51 programs so far in over 40 countries. My understanding is that for every dollar that the program costs, they've helped countries to recoup about $100 in lost revenue.

And what about the response from the companies that have formerly been able to sort of move a lot of their money around? They must not like, they don't like it too much.

They've complained about a variety of things, not least compliance costs, the extra compliance costs, but generally they've sort of come to accept it. They've also interestingly started to look to poach people from tax authorities that have had tax inspectors without borders in because of course, you know, the people working there have a better understanding of the issues from the side of the government, but they could also be useful as employees for some of the companies that have to deal with them from the other side.

Well, what about an effort to kind of essentially sort of reduce the chance for arbitrage for kind of like a genuine international agreement on how to do corporate tax? Is there any hope of that? Because this seems to be tackling one of the symptoms and not the cause.

Well, yes, as I said, it's very complicated stuff. But the OECD looks like it wants to have another stab at this in light of the problems that they've had with getting global consensus on the digital issue on taxing Internet companies. So there's some radical rethinking going off. If they can get agreement on will lead towards a fairly radical reallocation of taxing rights which will essentially see more of the pie going to so called market and source countries, which are essentially the countries where the customers are, the users are and where companies do more sort of manufacturing and production, unless for the residents countries, that is, where they're domiciled, often with dubious justification and less for tax havens.

Matthew, thank you for your time.

Thank you.

On Monday, the Academy Awards ceremony will unfold in all its glitter. But several nominated films have unglittery themes, such as Roma, about an indigenous Mexican housekeeper. Another is Capernaum, which is about street children in Lebanon.

So Capernaum is nominated for best Foreign Language Film. It's directed by Nadine Labaki, who is the first Arab woman to be up for an Oscar for a feature film.

Alice Fordham is a producer here on the show who used to live in Lebanon.

I was interested to see this film because when you live in Beirut, there's constantly an uncomfortable feeling that you live in a City that exists on two planes. On the one hand, it's a warm, sociable place and the streets are full of people outside cafes and bars, chatting and smoking. But because you're outside, it's impossible to ignore what's happening below eye level, which is that there are lots of small children, really young, really ragged, pulling on your sleeve, begging and selling things. And it's heartbreaking. And this film, Capernaum, is about that underworld. It's about a little Lebanese boy who ends up living on the street. And I had the chance to. To call Ms. Labicky and ask why she chose to make this film.

The sight of those children on the streets, children working, children begging, children selling gum. I felt, you know, I should do something about it in a way. I can't be silent because I felt like I was collaborating in a way in this crime.

The little boy is called Zane. And the first scene we see him in is actually in court. And he's explaining to the judge that he's wound up in a juvenile jail for stabbing someone, that his parents never registered his birth, that he's about 12, and that he wants to sue his parents. And then we go back and learn his story. That he never went to school, that his beloved sister was married when she was still a child, that his parents got him involved in low level drug dealing, that kind of thing.

And is that a common story among kids in Lebanon?

Well, to be honest, I was rather shocked by it. I reported there for years and I knew there were desperate people in Lebanon. A lot of people there are refugees from the Syrian war. But I'd never seen this kind of poverty and desperation in Lebanese families. And I'd never seen families and social relations totally broken down. Never seen child marriage. But I asked Ms. Lebecki about it and she said she had done a lot of research and worked with charities.

Many, many. There's thousand and thousands of cases like that in one family. And this is something that, you know, we observed so much. In one family you have all of the children are not registered, all of the children don't go to school.

An interesting thing about her is that on the one hand she makes movies with these strong social themes, and then on the other, she's an active politician in Lebanon. She was part of a new political group that ran in Beirut's municipal elections.

And what was the group's platform? How did it go?

Well, it was called Beirut is My City. And what was different about it was that it didn't have a sectarian affiliation. It was anti corruption Sort of pro things like infrastructure projects. It didn't win, but it got on pretty well. And it's still active, still building up its grassroots support.

And I think I felt the need to do something about it. In a way, you know, politics was completely failing and the system, I think, is still completely failing. So at one, I think at one moment you feel like you have to just dig in it.

And how much do you think her politics, her activism, influences her work as a director?

I think enormously. I think her work takes on these themes really strongly.

I think we know that art is a sort of a mission, especially living in this part of the world where everything needs to be re questioned and changed and re examined.

And I think that she sees art basically as an extension of activism.

And how about her chances? Do you think she's in line for winning an Oscar?

Well, she's nominated in a very strong category this year. It does include the big hit Roma from Mexico. But I think that she's delighted that it's received this much attention.

I personally truly believe in the power of art and the power of cinema in really changing things. And I truly believe that politics need art in order to change its perspective.

Alice, thanks for coming this side of the glass.

You're most welcome, Jason.

That's all for this episode of the Intelligence. You can subscribe to the economist@exterator.com radio offer 12 issues for $12 or 12 pounds. See you back here tomorrow.