Tax havens exist because of the hypocrisy of larger states
By John Kay
Published: March 20 2009 20:00 | Last updated: March 20 2009 20:00
By the pool of my French house in Menton, I often contemplate the economic consequences of the least-known uprising of Europe’s year of revolutions in 1848. The citizens of Menton and Roquebrune wrested independence from the neighbouring principality of Monaco. The rebellion ended six centuries of Grimaldi rule. The result deprived the state of its agricultural hinterland and cost the Grimaldi dynasty the major part of its revenues.
Prince Florestan hatched a scheme with the entrepreneur, François Blanc, to restore the family fortunes. Blanc built a casino on the hills of Monte Carlo opposite the royal palace, where punters could indulge in games of chance that were illegal in France and many other European states. The venture had a shaky start, but a new railway brought visitors from across the continent. Gambling made the tiny state prosperous.
Florestan and Blanc brought the concept of the sanctuary, or haven, to economic policy. A small jurisdiction attracts business by implementing a more liberal fiscal or regulatory regime than its neighbours. Smugglers and pirates had occupied territories for centuries, but their activities were outside the law, and anyone who dealt there did so at real risk to their property and person. The haven provides the apparatus of the legal state while enabling its clients to escape the inconveniences of regulation and taxation and unwanted attention to their affairs.
Doing business in a haven is expensive. In the 19th century, the rail fare to Monte Carlo was substantial. Today the costs of establishing an offshore company or trust put such arrangements out of the reach of ordinary people. So the clients, individuals and corporations are necessarily affluent. Since the disreputable simply disregard the law, and the morally upright observe its spirit as well as its letter, the customers of the haven are respectable, but not very respectable, citizens – the gambling aristocrats of the 19th century, the tax exiles of today. Monaco has never shaken off Somerset Maugham’s tag of “a sunny place for shady people”.
From its inception, the existence of the haven depended on the hypocrisy of its larger neighbours, which tacitly acknowledged the utility of the haven as a safety valve. Their politicians could denounce excesses of wealth and proclaim the need to regulate improper or immoral behaviour, but their rich and famous citizens could always ensure that the restraint on them did not become too onerous.
Governments can make life difficult for the havens or for the people who use them. But they rarely do. After decades of pontification, only mild bullying was needed to persuade Switzerland, the most respectable and most powerful of havens, to modify its banking secrecy. The Monaco casino project would have been stillborn if there had been genuinely principled opposition from neighbouring states. Monaco, then and now, is completely dependent on France for its physical infrastructure and on the European financial system for its financial infrastructure. Minor harassment of returning visitors, and a more determined refusal to co-operate with companies that did business in the haven, would have ended the project.
People are willing to make agreements under the laws of Bermuda, not just because they know that the laws of Bermuda are not very different from the laws of England, but also because they also know that the consequences of agreements made under the laws of Bermuda will be enforced by the courts of England. Such formal recognition is the essential difference between dealing with a haven and dealing with smugglers, and a difference that exists because we choose to facilitate it.
Few managers of hedge funds based in St James’s in London or Connecticut could locate their registered offices on a map. Many havens are islands, which is why we use the term offshore. Most are under present or former British jurisdiction, accidental relics of empire and naval power. The territories have been allowed, even encouraged, to reduce their dependence on British government aid by attracting global financial services activity. With great success, in many cases. The tiny population of the Cayman Islands has a per capita income well above that of the mother country.
So when the haven falls into disrepute – as recently in the Turks and Caicos Islands – it falls to the British government to sort it out. If you operate in the penumbra of legality, as havens do, it is easy to slip outside the bonds of legality altogether. Where there is legal avoidance of tax and regulation, illegal avoidance of tax and regulation is rarely far behind, and often hard to distinguish: where there is secrecy the motive is frequently impropriety; where there is impropriety, criminality is rarely far behind, and hard to distinguish. To turn a blind eye to avoidance of the law is to undermine all law.
Today’s political outrage is humbug. Havens exist only because larger states allow them to exist, and larger states allow them to exist because the customers of havens are the rich and powerful. In the 1860s, the typical client of a haven was a patron of Blanc’s casino: in the years after 2000, the typical client of a haven was a hedge fund registered in Grand Cayman. Plus ça change, plus c’est la même chose.
John Kay’s latest book, The Long and the Short of It, was published in January
Onshoring taxes
Published: March 13 2009 20:11 | Last updated: March 13 2009 20:11
The very rich, as F. Scott Fitzgerald unstartlingly observed, “are different from you and me”. For a start, they will always find somewhere to secrete their money from the taxman. But that just got a lot harder.
On Friday, the Swiss government said it would adopt standards for tax co-operation set by the Organisation for Economic Co-operation and Development. Whichever way this is dressed up, that means sharing more information on suspected tax evaders. Luxembourg said it would also make life more difficult for tax dodgers. On Thursday, the principality of Liechtenstein and tiny, opaque Andorra discovered the virtues of complying with OECD standards. Even Monaco, a particular bête noire of the OECD, is reviewing its position. All this comes hard on the heels of moves by other offshore centres, including Singapore, Hong Kong, Jersey and the Isle of Man, to open up.
“We are currently experiencing a fundamental and rapid change at the global level in the direction of stronger cross-border co-operation and international regulation,” observed Prince Alois, ruler of Liechtenstein. Well spotted, sir.
Germany has taken to using its spies against tax havens such as Liechtenstein that lurk on its borders and siphon off its revenues. The US has mobilised its justice system, last month extracting a $780m penalty from UBS. But as the financial meltdown turns into recession and starts shaping up into a violent fiscal crunch, everywhere the cry has gone up against the “pinstripe pirates” and “parasites” believed to hold some $11,000bn in clandestine personal wealth.
Next month’s Group of 20 summit in London, promising a crackdown on tax havens, has acted as a catalyst to co-operation.
In theory, the position should be clear. There can be no objection to tax competition or legal tax avoidance. Nor should there be any tolerance of tax evasion, amounting to stealing from one’s fellow citizens.
In practice, big countries will find it easy to beat up little enclaves living on their (borderline legal) wits, while indulging in similar (borderline legitimate) practices. The UK, for example, has overseas territories and dependencies that rival Switzerland in private wealth management. Both groups will find the current climate makes it harder to provide shelter from the taxman.
Copyright The Financial Times Limited 2009
Offshore banking
Published: March 13 2009 09:20 | Last updated: March 13 2009 22:57
Where can the rich put their fortunes now? Offshore banking is under renewed attack in the run-up to next month’s G20 meeting, where tax evasion is on the agenda. As the global downturn slashes tax receipts, governments are doubly keen to close loopholes that allow the wealthy to evade their taxes.
It is easy to see why: the Organisation for Economic Co-operation and Development estimates that $11,500bn lurks offshore. Some havens have already caved in to OECD pressure. Andorra, Liechtenstein and even Switzerland this week agreed to relax banking secrecy laws and share limited client information with foreign tax authorities. Germany, for example, has long waged a sustained campaign against Liechtenstein to track down German tax-evaders who stashed their cash in Vaduz. This follows the US’s success in extracting a $780m fine from UBS, Switzerland’s largest bank, for its role in helping US clients dodge the Internal Revenue Service.
To be clear: tax evasion is only one reason why someone might want to secrete their money offshore. Indeed, there is a moral argument that people should be able to do so. Swiss bank secrecy laws, after all, were introduced in 1934 in part to protect German trade unionists and Jews from the Nazis, who punished offshore account holders with prison, or worse. The wealthy are also as entitled as any to protect themselves and future generations from the runaway inflation, exchange controls and worthless currencies that can accompany oppressive, or simply incompetent, regimes. Ask any number of South Americans.
As governments hound offshore banking centres for mostly sound reasons, they should take care not to take an indiscriminate approach that extinguishes them altogether. The very presence of offshore banks is a stick across the backs of repressive governments everywhere.
| BACKGROUND NEWS | |
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Switzerland, Austria and Luxembourg each made concessions on bank secrecy on Friday following earlier initiatives by other offshore banking centres, including Liechtenstein and Andorra, in response to a global crackdown on tax evasion ahead of the G20 meeting in London next month. |
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UK hails 'beginning of end' for tax havens
By Vanessa Houlder
Published: March 14 2009 02:00 | Last updated: March 14 2009 02:00
A cascade of concessions on tax secrecy by some of the world's leading private wealth centres has been hailed as a breakthrough in a decade-long international assault on evasion.
Gordon Brown, British prime minister, talked yesterday about "the beginning of the end of tax havens".
The pursuit of tax evaders by foreign countries will be made easier by the promises of greater co-operation by Switzerland, Austria, Luxembourg, Hong Kong, Singapore, Liechtenstein, Andorra and others. They have bowed to pressure by adopting international standards on transparency, although insisting they will continue to protect investors' privacy.
Richard Hay of Stikeman Elliott, an international law firm, said "Switzerland's capitulation to the OECD is a game-changer".
The anti-tax haven initiative led by the Organisation for Economic Co-operation and Development has been stymied by charges of hypocrisy. The tiny islands and states accused of harbouring undeclared money deflected attacks by pointing out that similar charges could be levelled at OECD member states such as Switzerland as well as Asian financial centres such as Hong Kong and Singapore.
Concessions by big players such as Switzerland and Singapore rip that defence away from the remaining offshore centres such as Panama that cling to secrecy. They also dilute the threat that the closure of one haven will simply divert money to another.
The moves pave the way for intense pressure to be applied to the remaining hold-outs. Angel Gurría, secretary-general of the OECD, noted that "many jurisdictions still maintain arrangements that prevent them from assisting foreign authorities in tax investigations". Offshore centres reluctant to co-operate with foreign tax authorities face the threat of being "blacklisted" at next month's London summit. Sanctions ranging from higher withholding taxes to restricting banking transactions could be applied.
But critics of tax havens are sceptical about the OECD's initiative. Foreign tax authorities wanting to take advantage of tax information exchange agreements need to supply evidence of their suspicions. If they have no "smoking gun", they will be unable to extract information. More-over, the bilateral deals on information exchange rarely help developing countries chase down evaders. Oxfam, the charity, said this week that losses from offshore evasion may cost developing countries more than they receive in foreign aid.
Bankers and lawyers in the finance centres affected by this month's announcements have been keen to emphasise the limits to the concessions. Jean Schaffner, a Luxembourg partner of Allen & Overy, said the state's proposals were a "good compromise between the need to co-operate with foreign tax administrations and the desire to preserve privacy". Fears that foreign authorities could make "blanket requests" for information were not realised.
Moreover the crackdown on evasion does not tackle complex issues concerning corporate use of offshore centres, which companies often favour for their tax-neutrality and legal structure. The US administration has promised action against avoidance by US companies using tax havens.
Offshore centres are also anxiously eyeing anti-tax haven bills introduced in both US Houses of Congress last week, which were endorsed by Timothy Geithner, Treasury secretary, who promised "a much more ambitious effort to deal with offshore tax havens".
The legislation listed 34 "secrecy jurisdictions", although there was provision for jurisdictions to be removed if they have "information exchange practices that effectively overcome those secrecy barriers".
Offshore centres are also braced for a new attempt by the European Commission to close loopholes in the Savings Directive, its 2005 anti-evasion legislation. The Commission is keen to extend its geographic reach to ensure that evaders do not simply shift their money to centres such as Hong Kong, Singapore and Dubai.
Some offshore centres said yesterday they hoped that the political furore over tax havens before next month's G20 meeting might die down. Geoff Cook of Jersey Finance, which represents Jersey's finance industry said the concessions: "will defuse it to a large degree." But some influential politicians were guarded yesterday about the impact of the concessions.
Christine Lagarde, French finance minister, warned that "the devil is in the detail". She said: "We must go all the way and see if banking secrecy is sufficiently lifted."
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