Why tax havens are here to stay
The release of the now infamous Panama papers has once again brought to the forefront an issue that has long been the subject of much political discourse. What is unique about this particular revelation however, is the sheer scale of information leaked within these files. An unprecedented 11.5 million files from the database of Mossack Fonseca was made public. The documents expose the seedy intricacies of how the rich can exploit offshore tax regimes through the secretive loopholes and dubious accounting strategies that exist in these havens. The leak is indeed, as revealing, as it is unprecedented. Not since the release of offshore secrets in 2013 by Edward Snowden has such a wealth of information on something as secretive as how the rich hide their money been brought to the public’s attention. What’s more, the leak has exposed a myriad of high profile figures, including national leaders.
Of course, all this is well documented, and while such a leak may raise new discussions on certain issues and mechanisms behind the intricacies of tax evasion (not least with some of the individuals involved) the fundamental question on tax havens remain. The most pressing one of course, being, why do they still exist? After all, it is estimated that a colossal $21 trillion could be stashed away in low tax, low regulation ‘off shore financial centers’ around the world. That equates roughly to the total annual economic output of both the USA and Japan combined. It is estimated that there are currently around 50 - 60 tax havens worldwide, and they exist in more or less all parts of the world. Many of them tend to have their own area of ‘expertise’. Panama for example, tends to focus on a flags of convenience strategy, while Bermuda appears to be the destination of choice for international insurers.
The damage inflicted to the global economy as a result of these off shore havens is considerable, and it’s the developing nations that suffer to the greatest extent, by some margin. Since the 1970’s African countries alone have lost an estimated $1 trillion in capital flight. Compare that figure to the continents current debt levels of $190 billion, and you begin to comprehend the injustice at play here. This state of affairs has effectively enabled a situation to take place where for every dollar of aid provided by OECD countries to developing nations, roughly ten dollars flows directly out again. Its destination? While of course, not all outward capital ends up on the database of offshore satellites controlled by OECD nations, a sizable portion does. The result of this, is of course, a perpetual cycle of unfulfilled potential and squandered opportunity for the populations of these jilted nations.
One of the questions most frequently asked on this subject is why these tiny and vulnerable states (with the exception of Switzerland) are able to continue operating as tax havens, or excuse me, off shore financial centers? Well, as you may well expect, the answer is as complex as it varied. After all, as the panama, papers reveal, tax havens not only continue to survive, they are thriving. An argument that may be hard to comprehend, particularly given, the facts aforementioned, is that tax havens do come with their benefits, and no, not just too rich individuals looking to minimize their tax bill.
The simple reality is that tax havens exist because the larger states allow them to exist. Indeed it was widespread changes in financial regulation that allowed these tax havens to develop and grow. Furthermore their accessibility was enhanced dramatically by technological change which made it much easier to move money all over the world. British overseas territories have been allowed, even encouraged to attract global financial institutions to reduce their dependence on British state support, and in many cases, this has been achieved with great success. Should the UK to start imposing stringent legislation, even sanctions on these territories then there is a real risk of causing significant damage to their respective economies, thus increasing their dependency on more state aid.
Tax havens (whether governments would ever admit or not) also serve as an effective tool for allowing companies to remain competitive regardless of domestic policy. While many may scoff at such an argument, given the unquestionable negative implications that lost revenue for diminished tax receipts has on public services. The reality is that tax havens can also help strengthen companies, predominantly by improving cash flow and liquidity. Strong, secure and competitive companies as we all know, are the bedrock of stable employment levels. So often the issue of tax havens seems to ignite condemnation on the usual culprits, Starbucks, Google, Amazon etc., but the reality is that there literary thousands of companies, that integrate such accounting techniques into their financial planning. An attack on these regions therefore, becomes slightly more complicated than a righteous crusade against ‘greedy’ multinational conglomerates, the implications extend far beyond the big boys. We’re talking pension funds (both private and public), sovereign wealth funds, local government funds, the list goes on.
Finally there is the undeniable reality that closing one tax haven would simply just strengthen the others, or possibly even just create others. The nature of finance these days, and the digital revolution that has and will continue to disrupt the sector, means money anywhere and at any time can be transferred to just about any location in the world with considerable ease. Yes, governments and compliance departments can work round the clock to impose and regulate the toughest legislation possible, but the reality is, the vast majority of the time they are simply just playing catch up and scratching the surface of the situation. The simple reality of the situation is this. If you want to end tax havens or ‘offshore financial centers’ here’s what you have to do. Get every single world leader in a room and get them to agree on imposing significantly tighter regulations, sanctions and penalties on taxation policy. Maybe even throw in a global wealth tax on top.
Good luck with that.