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Every few weeks the press mentions statistics and reports indicating that as a result of tax havens’ existence cows cease producing milk, children are food deprived and widows mourn their husbands, all because trillions of dollars are sent there. Dollars, whose owners - in view of the reports’ authors, should for some reason be forced to keep their money elsewhere. Preferably in countries with high taxes and developed welfare systems, which would enable that money to be taken away from them and transferred to ‘the poor’, in other words to state administration which is supposed to have the income redistributed.

 

The truth is that all of these statistics, so overwhelmingly precise, are provided by one source only – namely a small company with its registered seat in England, called TAX JUSTICE NETWORK LIMITED, which, according to its financial statement from 2010, achieved profits of £2,676 and £13,949 in 2011, therefore the total profit of the company was around twice lower than the average annual wage of a regular worker in the United Kingdom.

Tax Justice Network is in fact a minor leftist think tank, the concept of which arose during a meeting of anti globalists (also called ‘alter globalists’) organized within the framework of the 2003 World Social Forum. Not so long ago TJN used to be a leisure project of a small group of retired ‘revolutionaries’, once linked to the Greens and the Christian left. TJN was an element of a charming and colourful margin of the metapolitics, right next to various anarcho-syndycalists, anticyclists, Zapatistas, eco-feminists and pacifists.

However during the period between 2009-2011 due to its political support from the OECD spin doctors, Tax Justice Network became the main star of the world media, bewildering everyone with a growing number of new statistics characterized by the fact of being cited by everyone although no one could explain how the authors reached their conclusions. This is relevant inasmuch one looks at TJN’s financial reports and sees that this organization lacks infrastructure, resources and tools to create its statistics otherwise than taking them out of nowhere. What is interesting, by the way, is that the Tax Justice Network company presents profitability at the level of 2,61% of its income, therefore not higher than the ‘Western corporations’ it criticizes so doggedly. The majority of income which amounted to £533,905 in 2011 is eaten by ‘administrative costs’.

I personally believe that TJN’s methodology is based on chiromancy, with elements of both hydromancy and daphnomancy since it is truly hard to imagine such precise conclusions to be reached by the authors with any other means in a situation where there are no basic output data to conduct such estimations. The better it is for the OECD, because no one is able to effectively question Tax Justice Network’s statistics than the Organization itself.

What is it really like?

No rational observer of the social, economic and political life questions the fact that money laundering and tax fraud constitute a serious challenge and threat to the present times. Dangerous enough for the British Prime Minister David Cameron to plan focusing on the fight against protectionism in international trade and so called tax havens within the framework of the British presidency of G8 and their leaders’ summit (17-18.06), treating them as the most important causes of the ongoing financial crisis.

Indeed, the British attempted to convince the other partners during the summit to consent to the creation of an open, publicly available, global company register. It was supposed to be a silver bullet for the common – in their view – process of tax evasion by large corporations and their owners. As a result of such move the companies would know the identity of their owners, would settle taxes where their profits are made and finally it would be hard for them to hide their assets. The summit is over, there is a declaration but no specifics. All these actions seem reasonable however a question keeps arising: what does it all have to do with tax havens?

We aim to show that it has to do something, but not much. But this is also not what it is all about when it comes to this huge global economic game. It is about looking for the responsible parties, rather invented than actual, who may at least for some time distract the society from a sloppy state management, from abandoned economic reforms, including tax reforms. The crisis lasts, its effects will be felt for a long time, the citizens are getting more impatient, many governments have already received yellow or red cards from their voters.

The time has come for tax havens, although initially covert attacks took place. Not tax havens as a whole were hit, but particularly chosen targets: Swiss banks which were too discreet such as UBS or Fürstenbank LGT in Liechtenstein, dishonest corporations such as Starbucks, Amazon, suspicious businessmen and politicians. Within the last dozen of months the public opinion learned, through populist media, that there are individuals responsible for the crisis, such as Mitt Romney, accused by the democrats because of his holding companies registered in the Cayman Islands; Jack Lew, the candidate for the Treasury Secretary of the US, for maintaining a fund in the Caymans. And Ulli Hoeness, a legend of the German football and the president of Bayern, who pleaded guilty to tax fraud since he held millions of Euros in his accounts in Switzerland without reporting them neither to the German nor to the Swiss tax authorities. Finally there is Gerard Depardieu, guilty as well, because he was not willing to pay a 75% tax.

However the media message was that all the mentioned persons constitute barely a tip of the iceberg, there are tax havens behind them. They are mainly responsible for the crisis – it was suggested by the governments of the US, UK and many other Western European countries. It evoked imagination, it convinced. Nevermind the fact that we were faced with a political campaign and immensity of hypocrisy.

It must be stressed: investigation and prosecution of unfair businessmen, politicians or companies evading taxes and committing fraud is admirable and worthy of support. But these phenomena must be fought are solved within the framework of the existing systems of criminal law rather than through a fight with tax havens themselves, demolishment of tax competition and foreign investments. It is not a matter of coincidence that disputes and discussions about tax havens arose during the period of the largest financial repressions since the 70s of the XX century. Leaders, having no idea how to mitigate the crisis other than tax escalation, being unable to get their own houses in order and take care of a reform of the tax system put forward topics which are catchy but utterly false: tax havens. Let us shed some light at this problem.

Hypocrisy of tax moralizers

The biggest moralizers, who have most to contribute in the topic of these allegedly unfair tax havens, are these states which should rather gloss it over in the face of some shameful facts: United States and United Kingdom.

According to „The Economist” (16.02.2013) President Obama likes to cite Ugland House, a building in the Cayman Islands, which serves as an official address for over 18,800 entities, as an embodiment of falsehood system („either the biggest building in the world or the biggest tax scam in the world”). It does not bother the President that his recently nominated Treasury Secretary Jack Lew was accused of investing in that place in the past. He should also be aware that Ugland House does not even come up to the American state of Delaware, with its population of 917,092 people, in which 945,000 companies were registered (many of which are seen as ‘suspected’). Moreover, Miami is a banking centre, offering depositors coming from the so called emerging economies protection against inquisitiveness, from which they cannot hide anymore in their countries of residence. Due to the American FATCA legislation, which has been separately analyzed by us, the goal to make the financial centres in tax havens transfer information on clients to the clients’ domestic states was achieved to a great extent, whereas the US is not eager at all to exchange information with the Latin American states whose residents keep deposits in Miami.

The London City, which was once a tax haven for trade in currency from the 50s of the XX century, still specializes in advising investors how to evade law. British partnerships and limited liability companies fall under criminal law on a regular basis. Starbucks paid only £8,6 mln taxes since 1998. In 2011 in the United Kingdom Starbucks earned £398 mln. Yet it did not pay any corporate tax. For 14 years of its business activity in the UK, Starbucks earned over £3 billion and it did not pay even 1% of the corporate tax, because it showed losses in its statements for the last 5 years. In fact it made many payments between the companies from inside its group, but which are based outside of the UK. Is this also tax havens’ fault? Or the fault of the British fiscal policy? Prime Minister D. Cameron, during the G-8 summit, acted as the chief moralizer, whereas the UK has only just (middle of June this year) signed tax information exchange agreements with its overseas territories such as Bermuda, Cayman Islands and the British Virgin Islands.

When it comes to money laundering control – ‘The Economist’ asserts – London does not outrun the Cayman Islands. Other states of the European Union constitute global networks for the avoidance of different kinds of taxes. Companies transfer their profits to their subsidiaries in low-tax countries such as Luxemburg, Ireland or the Netherlands.

Tax havens’ media image is a set
of myths and clichés

Daniel Lacalle dealt with many of these myths in the Spanish ‘El Confidencial’ (20. 05.2013). It is worth taking a closer look at them also in order to strengthen some of the author’s arguments.

The name ‘tax haven’ is a mistaken European translation, made not by accident. In many European countries ‘tax havens’ are translated as ‘tax heavens’. The first meaning relates to a ‘harbour, tax shelter’, the second one to a ‘fiscal paradise’. It is a very significant semantic difference. Now, the Cayman Islands, Bermuda or Liechtenstein are no ‘heavens’, but often a shelter from financial repressions. What is interesting is that this mythical heavenliness is used by states characterized by the most interventionist economic policies.

Tax havens are not the ones contributing to tax raises, but fleeding into tax havens is indeed a result of financial repressions in other countries. Since 2001, banks’ assets in tax havens increased by around $10 bln. According to Harvard University studies such raises are always recorded following escalation of tax burdens, with a shift of around one year. It is therefore a flow of capital from a ‘tax hell’ to a ‘tax heaven’ – treating of course both terms in a symbolic way.

Linking tax havens to illegal activities is another myth. According to the Tax Justice Network portal, at the end of 2010, 50 largest banks had $12.1 bln deposited in tax havens. These are official numbers, covering legal operations, both investments and corporate accounts. The majority of the accounts was kept by companies confirming their due diligence with international trade agreements. This way they performed their growth and development of their activity around the world without risking double taxation. Furthermore, any funds coming from nondemocratic countries have been safeguarded to avoid institutionalized capital control and assets confiscation.

A catchy argument is the one claiming that tax havens cause losses of other states due to unpaid income tax of their clients. According to a study of scientists from the Michigan and Harvard Universities (Mihir A. Desai, C. Fritz Foley James R. Hines Jr.) „Do Tax Havens Divert Economic Activity?” of 2005, such hypothesis is untrue. Empirical studies prove that tax havens not only do not divert economic activity in high-tax countries but also contribute to its growth. This is due to the fact that the accumulated assets are being re-invested in public debt, stock exchange or business projects in OECD countries with high taxes. It must be remembered that tax havens also safeguard funds coming from the totalitarian regimes, which are then reinvested in the US, UK and other countries. The critics forget that vast part of that money consists of deposits of honest citizens from nondemocratic states who do not want to feed the respective regimes with their savings.

There is also no foundation for the thesis that tax havens create unfair tax competition. States having tax burden at their hearts never give up. They do not spare their citizens even in times of prosperity. It is competition with tax havens that resulted in a situation where the taxpayer in developed countries does not work for the government until September each year and only starts earning his own money from October on – as it was just a few decades ago. Now, due to openness and tax competition, fiscal burdens are generally lower.

We do not believe in the myth that removal of tax havens would help solve the crisis and ensure a common fiscal happiness. There will still be tax competition. Just like France used to be a tax haven for the British in the 70s, there will always be some sovereign country attracting capital with low taxes. No person of sound mind may believe that Brussels will impose its tax system on the Chinese Hong Kong, Singapore or Dubai. How?

Capital restrictions brought this world to the worst recession since the II World War and most of all they failed. Tax avoidance and grey economy in Europe in the 70s was larger than today, if one assesses it taking account of the GDP. Another thing is transparency. According to the World Bank, the majority of the so called tax havens is better managed and more transparent than for instance France.

The thesis that funds deposited in tax havens have financed terrorism and the offshore states sanctioned money laundering does not sustain empirical tests. The Management Institute of the University of Basel conducted a comprehensive analysis of countries with high risk of financing terrorism and money laundering. Out of the selected 28 countries, ony one was identified as a tax haven.

In the end it is worth dealing with a populist and naïve, and therefore dangerous, argument that if it was not for the ‘normal’ states facing the problem of their citizens (enterprises, capital) running away to tax havens, there would be no crisis at all. What amounts of money are we talking about? We are being overwhelmed with various numbers, however these are all estimations. According to Boston Consulting Group, $8 bln were deposited on accounts in tax havens, according to the Tax Justice Network, keen on overestimating numbers - $21 bln. Let us assume after Daniel Lacalle, hypothetically, that these numbers are correct and the deposited funds constitute property of only OECD member states’ citizens. Let us assume that a one-off 20% tax was levied on these amounts. It turns out that this money may not finance the annual deficit in these countries, neither in 2010, 2011 nor in 2012. If the same 20% tax was levied on foreign deposits of American enterprises, the sum received would not cover the deficit of the US in 2012. Let’s call it a fairy tale then that tax havens’ money are a cure for the financial crisis.

Time for conclusions

It is not our intent to unconditionally protect tax havens. There are certainly cases of both tax fraud and money laundering in these territories however - it must be explicitly underlined – these also take place in many developed European and American states, which do not want to be seen as tax havens, but definitely love to act as moralizers. One should not give in to populists claiming that tax havens are the cause of the world crisis or any other miseries.

Globalization, free movement of capital and free trade have enabled persons and corporations to use the rights that many now complain about. Tax havens do not bloom when friendly economic environment and low taxes are offered in other countries. A return to capital control and welfare states is a return to equality in poverty. Creation of a ‘tax hell’ is not a good method of fighting tax havens.

Authors: Attorney-at-law Robert Nogacki, PhD Marek Ciecierski

2013-06-30 Law Firm Skarbiec

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