Citizens Closing the Gap

FINANCE: Tax Havens in Spotlight at G20 Meet
Lucy Komisar*
NEW YORK Mar 29 (IPS) - This could be the moment when a fatal
blow is delivered to the worlds tax havens. Or it could be
another largely cosmetic change that allows offshore financial
centres such as Switzerland the Cayman Islands and Liechtenstein
to deflect attacks on the system by sacrificing the few tax
miscreants that governments catch in their nets.
Decisions at the G20 government leaders meeting in London Apr. 2
will set the direction.
Financial centres with bank secrecy laws are blamed by the
Organisation for Economic Cooperation and Development which
represents 30 developed economies for hiding some 5 to 7
trillion dollars offshore so the profits they produce evade
taxes. This costs the U.S. 100 billion dollars in taxes annually
says Michigan Senator Carl Levin who has introduced legislation
to combat offshore tax evasion. The numbers are guesses as bank
secrecy masks the figures.
Officials in Germany and France the two western countries that
have pressed hardest for reform believe the offshore system not
only deprives them of taxes but helped cause the financial
crisis. Germanys Finance Minister Peer Steinbrueck said
These tax havens are also places where unregulated
financial market deals are made. A leaked French government
paper agrees that Uncooperative jurisdictions may threaten
the global financial stability by creating regulatory loopholes
and opacity.
Offshore centres worried what may happen in London are
falling all over themselves promising to cooperate with the
major powers on the trail of tax cheats. But the holes in the tax
havens promises are as big as those in Switzerlands
famous cheese.
The issue is dramatised by the case of UBS. The bank to settle
a charge that it promoted tax fraud agreed to turn over the
names of some 300 clients to the U.S. Treasury. But it has balked
at turning over another 47000 names of U.S. account holders
suspected of tax evasion.
And thats the point. Tax havens including the
aforementioned as well as Singapore Hong Kong Andorra the
Cayman Islands Monaco and others are agreeing to sign bilateral
tax information exchange agreements. OECD spokesman Nicholas Bray
told IPS on Thursday The situation is changing daily with
new announcements from jurisdictions around the world that they
are ready to commit to the international standards.
But the OECDs tax standards call only for cooperation with
foreign tax authorities if there is a particular and justifiable
case. Bray said that means Inquiries by tax authorities
based on reasonable and justified suspicion of tax evasion
individuals and companies - no fishing expeditions no automatic
exchange of information.
The section on companies opens many possibilities. Not only
could governments go after individuals using shell companies to
carry out fake transactions to cheat on taxes but they could
pursue real companies who move their profits offshore via
transfer pricing to evade home country levies.
Transfer pricing occurs when a company sells to an offshore
intermediary at a fake low price (paying low taxes on low
profits) and then sells from the intermediary into the market at
the real higher price assigning the true profits to the tax
haven - which levies no tax. Or if a company assigns excessive
profits to an offshore sales or service subsidiary.
Grace Perez-Navarro head of OECDs International
Cooperation and Tax Competition Division said that if France
for example had a tax haven subsidiary that the government
suspected was used for transfer pricing it could request
information about the subsidiarys offshore accounts.
That could have impact in developing countries Trade between
companies often done for transfer pricing to evade taxes is at
least half of global trade. Grand Cayman is Brazils second
largest trading partner - obviously a transfer-pricing way
station. Brazil this year amended its transfer-pricing
regulations and expanded the legal definition of tax havens.
Christian Aid in London says that tax evasion costs developing
countries estimated 160 billion dollars in tax a year a lot more
than they get from global aid.
However under the agreements signed governments have to go
after suspects about which they already have evidence - and that
evidence may be in the accounts. The Swiss Bankers’ Association
said in a statement that the privacy of foreign clients not
under suspicion will continue to be protected by Swiss
bank-client confidentiality. And An automatic
exchange of information is excluded.
Its impossible even for rich governments to investigate
and provide evidence to tax havens about more than a very small
number of their tax cheating citizens and companies. Requests for
administrative assistance take money staff legal expertise and
time. Many believe that automatic exchange of information is the
only really effective way to end pandemic tax evasion.
And where do such bilateral agreements leave developing
countries with limited resources or bargaining strength? The
Isle of Man has signed 14 agreements of which only two are with
non-OECD countries. Will such arrangements be acceptable to G20
members Brazil and India?
Bray said This is an ongoing issue which will have to
be resolved by more diplomacy. The UK is trying to encourage the
idea of multilateral agreements I believe.
The other part of the equation the G20 must deal with is how
tough the sanctions are that it endorses.
The leaked French working paper makes the strongest proposals.
They include that G20 members punish countries deemed to be
uncooperative by breaking off bilateral tax
conventions. This would discourage corporations from using those
financial centres.
Equally important the French would put some onus on a G20
countrys own financial institutions. They would require
those banks to spell out in their annual reports if they worked
with non-cooperative financial centres and would make supervisory
authorities take this extra risk into account in the capital
requirements for the banks.
The paper says Clear reporting mechanisms should be put
in place in order to increase the accountability of the
management in business decisions leading to operations located in
non cooperative jurisdictions. It says banks should be
required to report accounts of their customers located in tax
havens and the related capital flows.
The French suggest refusing to allow payments to a blacklisted
haven to be deducted from taxable income. They propose requiring
international financial institutions to end their activities in
blacklisted havens. Finally they suggest restriction or ban of
money flows to and from that offshore centre - which would
essentially end G20 banks and company operations offshore.
The British are an unknown factor. About a third of the
worlds tax havens are British dependences. It is currently
reviewing the policies of what it acknowledges are British
offshore financial centres. So when Prime Minister Gordon
Brown told the U.S. Congress recently How much safer would
everybodys savings be if the whole world finally came
together to outlaw shadow banking systems and outlaw offshore tax
havens? the question was why hasnt he dealt with
British tax havens.
The answer sits in London where financial institutions exist
in a seamless web with the offshore centres.
Other key G20 members also have tax haven concerns: China has
attempted to crack down on tax evasion India loses a great deal
of tax money through Mauritius and Russian officials are
intimately aware of how the oligarchs moved assets and cheated on
taxes through Cyprus Switzerland Jersey and the Isle of Man.
As for the Americans U.S. banks already inform tax authorities
about how much interest they are paying on clients
accounts. Barack Obama co-sponsored the Stop Tax Haven Abuse Act
as a senator and has endorsed it as president. It would allow the
U.S. to bar its own banks from doing business with foreign banks
that refused to cooperate with U.S. tax authorities.
Treasury Secretary Timothy Geithner told Congress Thursday that
the U.S. would launch a new initiative to address
prudential supervision tax havens and money laundering issues
in weakly regulated jurisdictions. He said President
Obama will underscore in London on Apr. 2 at the Leaders’ Summit
the imperative of raising standards across the globe and
encouraging a race to the top rather than a race to the
bottom.
However the U.S. has provided no specifics about where it
stands on the key issues.
*Lucy Komisar is an investigative journalist who writes about
the offshore bank and corporate secrecy system. Her articles are
posted at http://thekomisarscoop.com/.
(FIN/2009)