Schumpeter | Avoiding tax
Havens above
Oct 7th 2011
Save
Share
Give
By M.V. | PARIS
ONE criticism made of the Occupy Wall Street movement, a gathering of anti-bank protestors now three weeks old, is that it has not made its grievances clear. Something the great unwashed might chant more about is the damage done by offshore finance. Global Financial Integrity, a civil-society group, calculates that more than $1 trillion a year flows illicitly out of developing countries, far more than flows the other way in aid. Much of this departing money goes to tax havens and jurisdictions with high levels of financial secrecy, sent there by criminals, corrupt politicians or tax-dodging individuals and multinational companies. Banks in Europe and America profit handsomely from these flows—indeed, many are themselves heavy users of tax havens as a way to reduce their tax bills.
Not only are western banks knee-deep in offshore shenanigans, but some supposedly upstanding G20 jurisdictions rank poorly when it comes to transparency, a fact bleakly confirmed by the latest global financial-secrecy index, released this week by Tax Justice Network. It shows the level of secrecy in a number of large financial centres increasing, not falling. Switzerland may be signing tax-information sharing agreements with European neighbours, but experts say these are a joke, and the Swiss top the secrecy ranking. Also in the top ten are Luxemburg, Germany, Japan and the United States, where in some states (such as Wyoming, Delaware and Nevada) firms can be incorporated without having to register the beneficial owner. The trail has gone cold in such places in many a fraud or corruption investigation.
Despite Tax Justice Network's strong credentials (one of its co-founders, John Christensen, used to be an adviser to Jersey's financial authorities; another, Richard Murphy, used to run an accounting firm), some of the places that do badly in the ranking have reacted predictably aggressively. A media adviser to the Cayman Islands, the Caribbean home of 10,000 mutual funds, nearly 300 banks and 90,000 companies, even claimed that TJN could not be taken seriously because it is run out of a “modest house in the English countryside” (which, by the way, it is not).
A number of sensible proposals for tackling the corrosive offshore networks that have spread like wildfire over the past 50 years were aired at a conference in Paris this week, organised by the Task Force on Financial Integrity, an umbrella group for anti-tax-haven campaigners. The message was that action is needed in five areas:
● Tackling transfer pricing, or trade mispricing as opponents prefer to call it. Up to a half of flows out of developing countries are related to the under- or over-pricing of transactions between the subsidiaries of multinationals in order to shift profits to jurisdictions with lower tax rates. The problem could be reduced, if not eliminated, through tougher accounting rules.
● Country-by-country reporting. Under current accounting rules, companies can conceal profits made in tax havens by reporting consolidated results. If they were forced to reveal their sales, profits and taxes paid in every jurisdiction, eyebrows would be raised and awkward questions asked.
● More information on the beneficial ownership of companies and trusts, so tax authorities and law enforcement can find out who really controls a firm, rather than merely who the legal owner is (often a trustee or nominee).
● Greater co-operation between countries on the exchange of tax information
● Harmonising anti-money laundering rules and adding tax evasion to the list of “predicate” offences that can lead to laundering charges.
None of this should be terribly controversial, but resistance is strong among those who have grown fat feeding at the trough, and the governments over which they wield influence. For all its rhetoric about ending bank secrecy, for instance, the G20 has dragged its feet. OECD countries have agreed reasonably strong guidelines for combating money laundering, but implementation is feeble in many countries.
Some progress is being made. The European Union is inching towards requiring country-by-country reporting, of a sort. The Obama administration is pushing for greater openness on company ownership. The Isle of Man has become the first of Britain's offshore dependencies to exchange tax information automatically, as opposed to merely on request. Guernsey may follow, though Jersey remains implacably opposed, fearing a loss of “competitive advantage”.
Efforts to lift the veil that hangs over global finance are certainly patchy. But one thing seems certain. As western countries struggle with deepening fiscal woes, issues of economic fairness will move up policymakers' agendas. Expect the pace of change to quicken over the next year or two.