No safe haven for artful tax dodgers
Big countries have got the world’s tax havens running scared. They must now press home their advantage to stop such countries providing oases for tax dodgers and money launderers.
Switzerland, Austria, Luxembourg, Liechtenstein and Andorra have all responded to a global crackdown on tax evasion by offering to relax strict bank secrecy laws. This is an important victory for campaigners to put tax havens on the straight and narrow. Until their recent climbdown, Liechtenstein and Andorra were two-thirds of a trio of hardliners that refused to commit to Organization for Economic Co-operation and Development (OECD) standards on transparency and the exchange of information, earning them a place alongside Monaco on the OECD’s blacklist of uncooperative tax havens.
G20 nations are right to point to the shift as progress, but they must not let it lie there. The concessions are too little, too late. They smack of opportunism, giving G20 leaders a chance to trumpet a crowd-pleasing success at a time when governments are failing to get a concerted grip on the financial crisis.
Some of the targeted countries make no secret of their intention to drag out reforms. Just look at the timeframe that Andorra, a safe-deposit-box-sized Pyrenean principality whose two rulers are a Spanish bishop and the French president, has set itself for complying. It plans to pass a law on relaxing bank secrecy by November. Switzerland’s finance minister has said it could take years for his country to renegotiate 70 separate double taxation agreements and have them approved by parliament or referendums. Monaco, a glamorous Riviera principality that attracts millionaire tax exiles, has so far said nothing about its plans.
With estimates of between $1.7 and $11.5 trillion in assets held in the so-called offshore financial services industry, the OECD is unequivocal in its position: “Tax havens deprive governments of revenues needed for vital infrastructure, and undermine the confidence that citizens have in the fairness of their tax laws. Countries must take firm action to stop this loss of revenue.”
TAX HAVENS NOT TO BLAME
The argument that tax havens are sovereign states whose independence must be respected cannot be used in good faith to protect countries that make a living by tacitly allowing citizens of other states to evade tax, or in the worst cases conceal the proceeds of crime. Tax havens didn’t cause the global financial crisis. But with tax receipts dropping as the recession bites, governments are going to need every penny of revenue they can recover to pay for essential public services and keep already heady borrowing plans in check.
So U.S. senator Carl Levin, a Michigan Democrat and the author of legislation attacking offshore tax havens, is right to say the recent moves by Andorra and Liechtenstein are long overdue and to push ahead with a bill which will target dozens of offshore havens for increased regulatory attention. It’s not surprising U.S. President Barack Obama has his eye on the Cayman Islands, America’s principal offshore center. A U.S. Senate report last year estimated that some $100 billion in taxes could be being evaded by the use of offshore tax abuses.
It is not just the wealthy nations that are losing out as a result of capital and income being sheltered offshore. British charity Oxfam says developing nations lose as much as $124 billion in taxes a year, outstripping the $103 billion they receive in foreign aid. Oxfam’s study found that citizens of developing countries hold more than $6.2 trillion abroad and capital flight is increasing by $200-$300 billion a year.
The tax havens will need the help of the United States, Germany, France and others to help them disentangle themselves from the business which has provided them with their economic backbone for so long. As with Afghan poppy farmers or Colombian coca growers, just blitzing their fields is not the answer. They need alternative crops and sources of income.
Switzerland, the world’s biggest offshore financial center, is big enough and has a sufficiently well established asset management industry to survive in a post-haven world. The country has been under pressure to relax its bank secrecy rules since its biggest bank, UBS, agreed last month to pay a $780 million fine and identify some of its U.S. clients in a legal deal to end U.S. criminal fraud charges.
Singapore and Hong Kong have both made moves toward complying with OECD standards on exchanging information and both can adapt to survive. For others such as Andorra, skiing and tourism may have to take the place of dusting gold bars. But for some of the island paradises which have made discreet money management their hallmark, more comprehensive plans will need to be put in place to ensure that disruption is minimized.
The OECD is the best vehicle to ensure proper rules are put in place globally, and to monitor the performance of individual countries. But the political momentum has to come from across the spectrum. The G-20 has begun this work. Its members owe it to their taxpayers to follow through.
— At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —