id21 viewpoints

Tackling the tax havens

John Christensen, Director of the Tax Justice Network, argues that developing countries lose around US$385 billion annually as a result of tax dodging and tax competition - more than twice the amount required to achieve the poverty reduction targets of the UN Millennium Development project.

The World Bank and IMF lead in global efforts to tackle money-laundering and corruption. Yet they disregard how tax havens facilitate crime, undermine efforts to reduce poverty and increase inequality.

Tax havens provide a ‘corruption interface' between illicit and licit financial markets, undermining tax regimes and onshore regulation and distorting markets by rewarding free-riding (using public infrastructure, goods, or services without contributing to their costs) and misdirecting investment.

Tax havens function through collusion between banks and other financial intermediaries and the governments of industrialised nations. The major culprits include the USA, Britain, Switzerland and other European states which promote tax havens (the Tax Justice Network has identified 72) and prevent efforts to clamp down on their activities – such as the OECD's project to combat harmful tax competition – fiercely resisted by a coalition of US organisations (funded by banks) and by tax havens themselves.

The defining feature of the corruption interface is secrecy, either in the form of banking secrecy laws or through judicial arrangements and banking practices. Crucially the techniques used for money-laundering and tax dodging involve identical mechanisms and financial subterfuges: offshore companies, trusts and foundations, correspondent banks, nominee directors, dummy wire transfers, and an absence of financial transparency.

US$11.5 trillion of personal wealth is currently held offshore worldwide. The annual worldwide tax revenue lost on the undeclared income from this wealth is about US$255 billion. Additional revenue is also lost to domestic tax evasion, tax avoidance on cross-border trade, and to pressures on national and local governments to compete for investment capital by offering unnecessary tax incentives.

In total developing countries lose around US$385 billion annually as a result of tax dodging and tax competition (this is a governmental strategy of attracting foreign direct investment and high value human resources by minimizing the overall taxation level ). This sum is more than twice the amount required to achieve the poverty reduction targets of the UN Millennium Development project.

An estimated US$1 trillion of ‘dirty' money flows annually into offshore accounts, approximately half originating from poorer countries; over 50 per cent of cross-border trade is transacted through offshore structures. Many analysts overlook the offshore economy in their models of how globalised financial markets function, which explains their inability to understand the ‘uphill' movement of capital from poor to rich nations – principally to the USA and Europe.

Secrecy creates a powerful incentive for rich people to hold assets in offshore vehicles (including offshore bank accounts, trusts, foundations, companies, and bearer shares) designed to resist investigation and dodge taxes. Some rich people also engage in ‘round-tripping' exercises, using money held offshore to buy domestic assets under the guise of foreign direct investment, which is typically granted fiscal and other privileges.

March 2007 sees the fifth anniversary of the Monterrey Consensus, which identified the mobilisation of domestic resources for development as a priority for developing countries. But this will never move beyond a dream unless steps are taken to tackle capital flight and tax evasion.

We must urgently revise our inherited perceptions of the geography and nature of corruption, shaped to some extent by the Corruption Perceptions Index published by Transparency International. The spotlight needs focus on governments which promote and protect tax havens, such as the USA, Switzerland, Britain and France.

Pressure also needs to be applied to the associations of lawyers, bankers and accountants which regulate the activities of those operating the corruption interface. The City of London and many British Overseas Territories and Crown Dependencies are major players in offshore activities, and British legal and accounting institutions shape legal and accounting regulation in many countries.

Britain is therefore well placed to assist developing countries in their struggle against corruption by taking the lead in suppressing the activities of bankers, accountants, lawyers and other financial intermediaries who provide services from offshore tax havens - an institutional infrastructure which uses British tax havens as a corruption interface for facilitating illicit capital flight, tax dodging and other corrupt practices. John Christensen Further Information
Director, Tax Justice Network
International Secretariat
New Economics Foundation
3 Jonathan Street
London SE11 5NH, UK
www.taxjustice.net
Email: christensen.tjn@neweconomics.org

See also
Tax Evasion, Tax Avoidance and Development Finance by Alex Cobham, Queen Elizabeth House Working Paper Series No. 129, Oxford, 2005
www.qeh.ox.ac.uk/dissemination/wpDetail?jor_id=286 Capitalism's Achilles Heel, Dirty Money and How to Renew the Free-Market System by Raymond W. Baker, John Wiley & Sons, Hoboken, New Jersey, 2005 www.capitalismsachillesheel.com ‘Globalisation – A Share of the Spoils: Why Policymakers Fear ‘Lumpy' Growth May Not Benefit All', by Simon Briscoe and Krishna Guha , Financial Times , 28 August 2006

Useful links
Tax Justice Focus (on tax competition), Volume 2 Number 4, Tax Justice Network, 2006 www.taxjustice.net/cms/front_content.php?idcatart=6 Follow the money – how tax havens facilitate dirty money flows and distort global markets by John Christensen, Economic Geogropahy Economic Research Group, Geogrpahies of Corruption, RGS IBG Conference, Tax Justice Network: London, 1 st September 2006 www.taxjustice.net/cms/upload/pdf/Follow_the_Money_-_RGS-IBG__final_31-AUG-2006.pdf January 2007

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