Tax havens have no economic justification, say some top economists

Thomas Piketty and Jeffrey Sachs among signatories of letter urging world leaders at UK anti-corruption summit to lift secrecy

 

The British Virgin Islands. More than half of the companies set up by Mossack Fonseca, the law firm in the Panama Papers leak, were incorporated in British overseas territories such as BVI. Photograph: Alamy


Patrick Wintour in The Guardian



More than 300 economists, including Thomas Piketty, are urging world leaders at a London summit this week to recognise that there is no economic benefit to tax havens, demanding that the veil of secrecy that surrounds them be lifted.

David Cameron agreed to host the summit nearly a year ago, but the event is in danger of simply turning a spotlight on how the British government has failed to persuade its overseas territories to stop harbouring secretly stored cash.

British officials are locked in negotiations with the crown dependencies and overseas territories, trying to persuade them to agree to a form of automatic exchange of information on beneficial ownership of companies. So far the overseas territories have only agreed to allow UK law enforcement agencies access to a privately held register of beneficial ownership, but the automatic exchange agreement would give a wider range of countries access to information on the ownership of shell companies.

Many overseas territories including the Cayman Islands are resisting the idea, and their attendance at the summit is in doubt.

Apart from Piketty, author of the bestselling Capital in the Twenty-First Century, the impressive roll call of economists includes Angus Deaton, the Edinburgh-born 2015 Nobel prize-winner for economics, and Ha-Joon Chang, the highly regarded development economist at Cambridge University.

Other signatories include Nora Lustig, professor of Latin American economics at Tulane University, as well as influential experts who advise policymakers, such as Jeffrey Sachs, director of Columbia University’s Earth Institute and an adviser to UN secretary general Ban Ki-moon, and Olivier Blanchard, former IMF chief economist.

In total 47 academics from British universities, including Oxford and the London School of Economics, have signed the letter which argues that tax evasion weakens both developed and developing economies, as well as driving inequality.

The signatories state: “Territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there are distorting the working of the global economy.”

To counter this, they are urging governments to agree new global rules requiring companies to publicly report taxable activities in every country in which they operate, and ensure all territories publicly disclose information about the real owners of companies and trusts. A concerted drive by the EU is now under way to require companies to declare where their profits are made, and to ensure tax is paid there rather than in the country in which it is declared.

In a tough broadside against the British prime minister, Jeffrey Sachs said: “Tax havens do not just happen. The British Virgin Islands did not become a tax and secrecy haven through its own efforts. These havens are the deliberate choice of major governments, especially the United Kingdom and the United States, in partnership with major financial, accounting, and legal institutions that move the money.

“The abuses are not only shocking, but staring us directly in the face. We didn’t need the Panama Papers to know that global tax corruption through the havens is rampant, but we can say that this abusive global system needs to be brought to a rapid end. That is what is meant by good governance under the global commitment to sustainable development.”

More than half of the companies set up by Mossack Fonseca, the law firm at the centre of the Panama Papers leak, were incorporated in British overseas territories such as the British Virgin Islands.

The signatories admit: “Taking on the tax havens will not be easy; there are powerful vested interests that benefit from the status quo. But it was Adam Smith who said that the rich ‘should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion’. There is no economic justification for allowing the continuation of tax havens which turn that statement on its head.”

Oxfam, which coordinated the letter, is urging the UK government to intervene to ensure that Britain’s offshore territories follow its lead by introducing full public registers showing who controls and profits from companies incorporated there. 

Oxfam estimates that Africa loses about $14bn (£10bn) in tax revenues annually – enough money to pay for healthcare that could save 4 million children’s lives a year and employ enough teachers to get every African child into school.

Mark Goldring, chief executive of Oxfam GB, said: “It’s not good enough for information about company owners in UK-linked tax havens to be available only to HMRC – it needs to be fully public to ensure that governments and people around the world can claim the money they are owed and hold tax dodgers to account.”

The nation at the heart of the offshore tax haven scandal is Britain

Britain's relationship with its overseas territories means it could – if it wanted – easily tackle offshore global secrecy

• 
• • James Ball
  • guardian.co.uk, Friday 5 April 2013 18.00 BST

'The British Virgin Islands are perhaps rivalled only by Switzerland as a global capital for the offshore industry'. Photograph: James Marshall/Corbis

It's a tumultuous time for the offshore industry. For decades, there's been an uneasy equilibrium: opprobrium from campaigners, torpor from regulators, apathy from the wider public, and delight for the wealthy benefiting from the arrangements to cut their tax bill or avoid regulatory scrutiny.

Recently, though, the rhetoric and action have changed. In tougher economic times – for which the financial sector has copped a huge amount of the blame – the public is more aggrieved by tax avoidance arrangements than ever, while recent proposed offshore crackdowns have been cautiously welcomed by campaigners as having the potential to actually be effective.

The leaking of more than 2m offshore files to the International Consortium of Investigative Journalists, and through them to the Guardian for our Offshore Secrets stories is just the latest in a series of unwelcome developments.

Amid this backdrop, and with ministers from George Osborne to Vince Cable willing to speak out strongly against offshoring and tax avoidance, it's easy to imagine the villains of the piece to be irresponsible foreign nations – happy to shelter the mega-rich in offshore secrecy, unconcerned about the tax avoided in other, larger countries.

If only the British government can prevail in these overseas battles, things will get better, it seems.
But such a stance ignores that one nation in particular has ties to offshore havens everywhere. It's a veritable nexus of offshore influence, related to havens in the Caribbean, and much closer to home. That nation is, of course, the United Kingdom.

The clue is quite often in the name. The British Virgin Islands are perhaps rivalled only by Switzerland as a global capital for the offshore industry, with more than 1m offshore companies registered on the Caribbean island (population 31,900). Plaques for registration agents, solicitors and more line almost every wall of the islands' tiny capital.

The islands are a British Overseas Territory: legally under the jurisdiction of the UK (and with a British governor), but in practice self-governed. Other havens with this UK imprimatur include the Cayman islands, Gibraltar, and the Turks and Caicos Islands.

Closer to home, the UK wields even more control over the crown dependencies: Jersey, Guernsey and the Isle of Man, whose role in legal tax avoidance techniques has been documented time and again for decades.
Even within the UK itself, little is done against tricks of the offshore trade that have been known for decades.

In 1999, Sark islander Philip Croshaw was struck off as a UK director for acting as a "nominee" – a sham director who hides a company's real controllers – for thousands of companies in the UK.

At the time, then-trade minister Kim Howells said: "The government today struck a fatal blow against the practice of so-called 'nominee directorships' … The trade in providing 'nominee director' services from the island of Sark has been a scandal … The courts have now effectively outlawed this abuse."

And yet today – 14 years later – more than 175,000 UK companies have had directors based in offshore havens, and the Guardian has identified 28 sham directors with tens of thousands of companies between them.

In short, a huge string of the world's foremost offshore havens have, at minimum, a strong and long-lasting symbolic relationship with the UK, and in practice are susceptible to significant influence and pressure from the UK government.

Even at home, offshore practices known and deplored by governments for more than a decade are still going strong. The temptation for campaigners and government alike is to look overseas for the villains in the offshore trade. The reality is more complex, and the trouble closer to home. The upside of this is it means that if Britain really wants to tackle global offshore secrecy, there's a lot it can do.

But so far, everywhere – on its home turf, in its dependencies, and in its overseas territories – the UK brand is on both sides of the fight. For Britain, the battle against offshore tax havens – if it wants to fight it – begins at home.

Cyprus - Treasure Island Trauma

Paul Krugman in The New York Times

A couple of years ago, the journalist Nicholas Shaxson published a fascinating, chilling book titled “Treasure Islands,” which explained how international tax havens — which are also, as the author pointed out, “secrecy jurisdictions” where many rules don’t apply — undermine economies around the world. Not only do they bleed revenues from cash-strapped governments and enable corruption; they distort the flow of capital, helping to feed ever-bigger financial crises.

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Fred R. Conrad/The New York Times

Paul Krugman

 

 

One question Mr. Shaxson didn’t get into much, however, is what happens when a secrecy jurisdiction itself goes bust. That’s the story of Cyprus right now. And whatever the outcome for Cyprus itself (hint: it’s not likely to be happy), the Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began.

So, about Cyprus: You might wonder why anyone cares about a tiny nation with an economy not much biggerthan that of metropolitan Scranton, Pa. Cyprus is, however, a member of the euro zone, so events there could trigger contagion (for example, bank runs) in larger nations. And there’s something else: While the Cypriot economy may be tiny, it’s a surprisingly large financial player, with a banking sector four or five times as big as you might expect given the size of its economy.

Why are Cypriot banks so big? Because the country is a tax haven where corporations and wealthy foreigners stash their money. Officially, 37 percent of the deposits in Cypriot banks come from nonresidents; the true number, once you take into account wealthy expatriates and people who are only nominally resident in Cyprus, is surely much higher. Basically, Cyprus is a place where people, especially but not only Russians, hide their wealth from both the taxmen and the regulators. Whatever gloss you put on it, it’s basically about money-laundering.

And the truth is that much of the wealth never moved at all; it just became invisible. On paper, for example, Cyprus became a huge investor in Russia — much bigger than Germany, whose economy is hundreds of times larger. In reality, of course, this was just “roundtripping” by Russians using the island as a tax shelter.

Unfortunately for the Cypriots, enough real money came in to finance some seriously bad investments, as their banks bought Greek debt and lent into a vast real estate bubble. Sooner or later, things were bound to go wrong. And now they have.

Now what? There are some strong similarities between Cyprus now and Iceland (a similar-size economy) a few years back. Like Cyprus now, Iceland had a huge banking sector, swollen by foreign deposits, that was simply too big to bail out. Iceland’s response was essentially to let its banks go bust, wiping out those foreign investors, while protecting domestic depositors — and the results weren’t too bad. Indeed, Iceland, with a far lower unemployment rate than most of Europe, has weathered the crisis surprisingly well.

Unfortunately, Cyprus’s response to its crisis has been a hopeless muddle. In part, this reflects the fact that it no longer has its own currency, which makes it dependent on decision makers in Brussels and Berlin — decision makers who haven’t been willing to let banks openly fail.

But it also reflects Cyprus’s own reluctance to accept the end of its money-laundering business; its leaders are still trying to limit losses to foreign depositors in the vain hope that business as usual can resume, and they were so anxious to protect the big money that they tried to limit foreigners’ losses by expropriating small domestic depositors. As it turned out, however, ordinary Cypriots were outraged, the plan was rejected, and, at this point, nobody knows what will happen.

My guess is that, in the end, Cyprus will adopt something like the Icelandic solution, but unless it ends up being forced off the euro in the next few days — a real possibility — it may first waste a lot of time and money on half-measures, trying to avoid facing up to reality while running up huge debts to wealthier nations. We’ll see.

But step back for a minute and consider the incredible fact that tax havens like Cyprus, the Cayman Islands, and many more are still operating pretty much the same way that they did before the global financial crisis. Everyone has seen the damage that runaway bankers can inflict, yet much of the world’s financial business is still routed through jurisdictions that let bankers sidestep even the mild regulations we’ve put in place. Everyone is crying about budget deficits, yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like the little people.

So don’t cry for Cyprus; cry for all of us, living in a world whose leaders seem determined not to learn from disaster.