Kyran Fitzgerald tracks the rise and rise of a trillion-dollar global industry designed to avoid taxes, protect the wealth, and much worse.
The writer, Somerset Maugham, once described Monte Carlo as a “sunny place for shady people”. These days, there are plenty of locations serving as places of refuge for funds amassed by sometimes shadowy characters.
However, there are signs that the tide may, at last, be turning and that the heyday of the international tax haven may have passed.
The ‘Panama Papers’ disclosure is being described as the largest leak from an offshore tax adviser ever. Tax experts have been quick to point out that many of the high-profile people caught up in the net may be innocent of the charge of tax evasion, or of a more general accusation of dodgy dealing. Nevertheless, the leak will have caused consternation right across the globe.
Democratic politicians, such as UK’s David Cameron, and Iceland’s departed prime minister, Sigmundur David Gunnlaugsson may be bearing the brunt of popular outrage, but you can bet your last bottom dollar that powerful autocrats and their entourages will have been experiencing deep discomfort.
The great firewall of China has re-emerged as part of an effort to clamp down on the Panama revelations involving that country’s political and financial elite. Russia’s leaders have opted for the usual combination of bluster and accusation.
The activities of Mossack Fonseca, the firm at centre of the leak, are merely the tip of a much larger iceberg.
Bodies such as Transparency International have been quick to point out that tax havens are not the only facilitators of corrupt officials and criminals seeking to launder their ill-gotten gains. In a number of US states, for example, it is possible to incorporate a legal entity without disclosing the names of the ultimate beneficiaries, or the true owners.
A whole tribe of ‘middlemen’, lawyers, accountants and bankers, have come into being as tax havens have emerged and multiplied.
According to one recent estimate, the global tax avoidance and evasion industry could be worth as much as $1 trillion dollars (€877bn).
The Bank of International Settlements has estimated that around a half of all international bank transactions are routed through offshore financial centres, including our own IFSC. Over half of US company offshore profits end up offshore.
As President Barack Obama reminded us, last week: “The problem is that a lot of this stuff is legal. Tax avoidance is a big global problem. Folks are taking advantage of the same stuff, not that they are breaking the same laws, the laws are so poorly designed.”
Wholesale avoidance and evasion on the scale highlighted in recent days is pouring petrol on the flames of public anger.
It is nonsense to suggest that the leading developed countries are pure as the driven snow in this regard.
According to reliable estimates, Panama ranks as the 13th most attractive place in which to hide assets. The US is in third place.
Writing in the Guardian, Jana Kasperkevic predicts the Panama disclosure could lead to the holders of hot money diverting away from locations such as the Cayman Islands to US jurisdictions, such as the State of Delaware which is home to around a million legal entities.
Professor Ronen Palen has traced the rise of tax havens back to the late 19th century and the “easy incorporation” strategy followed by New Jersey and Delaware. Leaders were awakened to the potential of earning revenues by attracting capital from other more highly regulated states.
In the 1920s, the canton of Zug near Zurich offered low regulation and tight secrecy to the wealthy. A 1934 Banking Act made it a criminal offence even to make enquiries into the trade secrets of investors. Gradually, the ‘gnomes’ grew fat as custodians of other peoples’ gold.
The neighbouring principality of Liechtenstein followed suit. In 1929, Luxembourg came up with the idea of the holding company for those seeking exemption from income tax.
Around 1960, the emergence of the London euro-dollar market provided another alternative for those seeking to avoid national taxes.
The euromarkets also boosted the City of London, providing the basis for its contemporary position as the leading global financial centre. Dublin has carved out a niche as the lead centre for global aircraft leasing while Holland is a major centre for film finance and as a great place in which to use capital allowances.
Small states from the Isle of Man to Singapore have based much of their development strategies on the attraction of mobile global finance. The Cayman Isles by some measure was by 2008 the fourth largest financial centre in the world.
Singapore’s private banking sector experienced huge growth, with assets under management rising from $150bn in 1998 to almost $1.2 trillion by 2008. Bahrain and Dubai have increasingly got in on the act.
But the global downturn, together with a rise in disclosures and scandals, have generated a backlash against such havens, whether offshore, or onshore.
The wealthy with their large yachts attract just as much opprobrium. It is one thing to be rich and generous. It is quite another to be rich and stingy, without a care for the common good.
The US government crackdown on tax-driven mergers, the so-called tax inversion arrangements, is one response. The sabotaging of the Pfizer-Allergan deal may disturb those in this country with a short-term focus. In the end surely we are well rid of such tax-driven practices because a bigger prize is to hand.
Two Democrat members of Congress, Carolyn Maloney, and Senator Sheldon Whitehouse, are promoting a new bill aimed at boosting transparency. The law is unlikely to pass the current House of Representatives, but a shift of power in Congress in November, along with shifts in the composition of the Supreme Court, could bring real change.
At the level of the OECD and EU, efforts to promote tax harmonisation and transparency are continuing.
The Irish authorities will have to walk a delicate line in protecting the country’s tax competitiveness while not standing in the way of broader reforms aimed at boosting transparency and curbing tax evasion or questionable avoidance.
There is a danger that large states may seek to clamp down on small states while maintaining intact domestic capital raising activities.
The US, in particular, should look at activities going on closer to home, even if it involves Federal intervention in areas viewed as the domain of each individual state in the Union.
tracks the rise and rise of a trillion-dollar global industry designed to avoid taxes, protect the wealthy, and much worse
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