Ontario Global Research

The mechanisms of secrecy

The Islands edition

3/9/2015

The fourth quarter 2007 edition of Tax Justice Focus (TJF) is a special edition on islands, edited by Nicholas Shaxson and John Christensen.

In the editorial, The Prospects for Island Havens, we look at the impact on island havens of multilateral initiatives such as those promoted by the OECD, the European Union, and the Financial Action Task Force (FATF). Two views of the future have emerged: one questions whether the island havens can survive in the face of these initiatives and competition from offshore centres like Delaware and London; the other concludes that the island havens are unlikely to disappear any time soon.

In the lead articles, The OECD and other International Initiatives: a View from the Caribbean, WILLIAM VLCEK looks at the impact of multilateral initiatives on Caribbean tax havens: while the number of offshore banks has fallen, assets on deposit have risen sharply. He explores strategies that Caribbean havens have used to stay in the game.

RICHARD MURPHY looks at Jersey, Guernsey and the Isle of Man in his article What Future for the Crown Dependencies?, and examines the islands’ evolving tax gymnastics as they try to get around the EU Code of Conduct on Business Taxation. He concludes that they have few options left, and sees economic and political trouble ahead.

NICHOLAS SHAXSON, in The Tax Haven Model: A Fragile Economic Foundation, argues that while tax havens are good at extracting wealth, they have failed to demonstrate where they add value in the process of wealth creation. He notes some similarities between the tax haven of Bermuda and oil-rich Equatorial Guinea, and explores reasons why planning an economic future on being an island tax haven looks like a risky gamble.

Other key articles: * DRIES LESAGE writes about his disappointment with the latest meeting of the UN Tax Committee in Geneva, where inexperienced delegates grappled with arcane technical matters, and failed to address key political questions that they are mandated and required to address – such as driving a development-centred global tax agenda forwards, ahead of the Financing for Development (FfD) conference in Doha in November-December 2008.

* JOHN CHRISTENSEN summarises a research paper examining how a decision to embrace the tax haven model by his native Jersey (where he was previously economic adviser) has led to a decline, or even collapse, in other sectors like tourism or agriculture, as a result of economic processes that show similarities to a “Resource Curse” afflicting some mineral-dependent nations.

This edition also contains a call for papers and an invitation to participate in a Workshop on Tax Justice, Transparency and Accountability at Essex University in the UK on July 3-4, 2008

 

The oil industry created the practice of countries (SHIPS?) flying "flags of convenience" as a means of avoiding income taxes nearly a century ago. Since the 1960s the U.S. Government itself has encouraged American banks to set up branches in Caribbean hot-money centers and more distant islands as a means of attracting foreign money into the dollar. The initial aim was to help finance the Vietnam War by turning America into a new Switzerland for the world’s hot money.

This policy succeeded in turning the United States into a flight-capital center for third-world dictators, Mexican presidents and Russian oligarchs. The former Soviet Union now finances a substantial portion of the U.S. balance-of-payments deficit with the flight capital that neoliberal "reformers" facilitated by backing the kleptocrats. The result has grown into a full-blown system enabling multinational corporations to evade taxes everywhere, including the United States itself. It enables domestic investors to globalize their operations by setting up offshore affiliates Enron-style in the Cayman Islands, Dutch West Indies or some small and newly notorious Pacific Island of their choice.

The permissive regulatory system relating to these offshore beachheads of tax avoidance has evolved to a point that enables U.S. and European investors to shed taxes simply by hiring a lawyer to set up a boiler-place office and finding an accounting firm willing to take its records at face value–which is good enough for the tax authorities to accept in these days of downsized fiscal operations. The resulting plunge in the ratio of corporate tax obligations to national income has been a major factor in America’s soaring federal budget deficit. Businesses–and especially the financial sector–establish dummy companies and adjust their transfer pricing (e.g. on sales of raw materials to refineries, and of refined or semi-manufactured products to their final distributors in the industrial nations) so as to take all their profits in these tax-free enclaves.

Flight capital would not leave countries without having somewhere safe to go. A rising number of tax-avoidance islands have made use of the fact that they are small enough to adopt whatever tax code they wish. Lawyers acting on behalf of financial and business lobbies in North America and Europe have drawn up laws to turn these banking centers into what Prof. Hudson calls anti-states.

* * *

SS: In earlier interviews you described how the economy has been "financialized" in ways that free companies from taxation. What role do offshore tax havens play in this?

Andrei Papanicoglu :Companies set up trading companies in tax-avoidance islands and declare whatever income or capital gains they earn on real estate, stocks or other investments to be made by these shells. This has led to the quip that taxes have become purely voluntary for modern businesses.

SS:How does this affect the domestic U.S. economy?

Andrei Papanicoglu :Un-taxing business income–and financial income in particular–leaves individual taxpayers to bear the fiscal burden through wage withholding for Social Security, Medicare and pension-fund contributions. Consumers also bear a rising burden through the sales tax and other local taxes.

SS:Do the statistics confirm this?

Andrei Papanicoglu :Offshore tax havens enable multinational companies to give an impression that they do not earn any income on business done in countries where taxes are levied at European and North American rates. The reality is that U.S. companies make a lot more money than they report. However, offshore banking centers free them from having to pay taxes on this income, or on capital gains. That’s why we’re running such high budget deficits today.

 

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