by Ronen Palan

Tax havens have been around for decades but they were viewed as marginal if not esoteric phenomena. Attitudes are changing. As new data on international financial flows becomes available, it is difficult to avoid the conclusion that tax havens are at the very heart of 'neoliberal' globalization, aiding and facilitating tax avoidance on a vast scale.

The Bank of International Settlements began the trend in 1982 when it released data showing that half of the global stock of money goes through tax havens. A 2012 study by James Henry, previously Chief Economist at the McKinsey group, estimates the aggregate amount of private wealth held offshore at between $21 trillion to $33 trillion, or 18 to 25 per cent of all financial assets.

Tax havens exhibit three characteristics. First, they are jurisdictions with either low or no income or corporation tax, or which present certain facilities or legal 'loopholes' that allow non-residents to pay little or no tax. Second, jurisdictions that have created legal systems that ensure the secrecy of account holders' identities. Third, jurisdictions that allow easy incorporation with little or no due diligence imposed.

Among British Caribbean territories three 'classical' tax havens stand out: The Cayman Islands, Bermuda and British Virgin Islands. The Cayman Islands, considered the fourth largest international financial centre, are home to the highest concentration of hedge funds in the world. Ninety-eight per cent of the world's top 500 banks maintain subsidiaries there. Bermuda is a key insurance centre, and BVI specializes in international companies.

It is surprising, perhaps, that serious multilateral efforts to combat international tax abuses began in earnest only in the late 1990s. The publication of the OECD report, Harmful Tax Competition: An Emerging Global Issue signalled a new period of multilateral efforts to combat tax avoidance and evasion. Lacking any institutional power, the OECD relied on a name and shame campaign, compiling lists of non-cooperative jurisdictions -- most of which immediately took action to remove themselves from such lists.

The most significant development in the battle against tax havens is the enactment by the US Congress of the Foreign Account Tax Compliance Act in March 2010. The legislation requires all foreign financial institutions to report to the Internal Revenue Service from January 2014 the value of and income accruing to accounts held by US taxpayers, or by foreign entities in which US taxpayers hold an interest. More countries are joining the scheme.

FATCA does not attempt to negotiate with various jurisdictions to change their laws. Through FATCA, the US insists that any financial entity that seeks to have any business either in, or with, a US entity must provide extensive information on ownership and profits. Registration in a tax haven is no longer an excuse. Entities that do not wish to provide this information will not be able to do business in the US.

The combined effect of all these efforts is bound to change the fortune of these tax havens. Companies attracting unwelcome headlines over tax avoidance, such as Starbucks, Amazon or Apple, may reconsider their position. Equally, wealthy individuals may reach the conclusion that the dangers in using tax havens are too great.

Yet despite the growing pressure on tax havens, the statistics mentioned above are not budging. Money is still flowing to these jurisdictions. It will probably take three years before we see the impact of FATCA. It appears that tax havens are not dead yet.

Ronen Palan is professor of International Political Economy at City University London. He is co-author, with Richard Murphy and Christian Chavagneux, of 'Tax Havens: How Globalization Really Works', Cornell University Press, 2010

 

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"Tax Havens Under Attack"