Tax Analysts Blog

Tax Havens: The Second Crusade

Posted on Feb 19, 2013

If the cover of this week's edition of The Economist is to be believed, there are about 50 tax havens around the world that have soaked up an estimated $20 trillion in concealed private wealth. The magazine's cover photo includes images of a sandy beach, palm trees, and a grinning solitaire figure -- but I doubt you'll confuse it with the Sports Illustrated swimsuit edition, which is also out this week. Let's just say their cover boy possesses a different set of charms. He represents the typical offshore investor: greedy, gluttonous, and having a much more fun than the rest of us.

Private wealth is certainly no vice. And there's no harm, per se, in the residents of country X holding money in country Y. Rather it's the concealment of wealth that the magazine's editors condemn. "The best weapon against illegal activities is transparency, which boils down to collecting more information and sharing it better," they write. (By the way, they imply that Delaware is among those 50 tax havens and suggest the new U.S. response to tax havens is hypocritical given the lack of reciprocity.)

An increasing number of governments seem to be jumping on this bandwagon. The European Union has a savings tax directive that it's eager to expand. The U.K. Prime Minister David Cameron has promised to make offshore tax avoidance the top item on the G-20 agenda. In the United States we now have the Foreign Account Tax Compliance Act (FATCA) and a new bank reporting regime for deposits held by nonresident aliens. There's been a genuine sea-change in our attitudes toward offshore tax evasion. What explains this?

Many of our readers will remember the first organized crusade against tax havens. Back in the mid-1990s, the G-7 leaders called on the OECD in Paris to study the offshore sector and stomp out the problem. The OECD produced various policy reports that gave us the phrase "harmful tax competition," as identified by four specific criteria: (1) low or no tax rates, (2) ring-fencing, (3) lack of effective information exchange, and (4) lack of fiscal transparency.

The project was entertaining while it lasted. It enjoyed the support of President Clinton and presidential candidate Al Gore, but crumbled when the Bush administration objected. Then-Treasury Secretary Paul O'Neill described reports of offshore tax cheating as "amusing." The U.S. government was desirous of low tax rates (or at least it was then). And, of course, the U.S. is probably the biggest ring-fence regime there is. Only the latter two criteria were kosher.

As a result, the once mighty OECD campaign was reduced to a feckless drive to get countries to sign tax information exchange agreements (TIEAs) that are essentially meaningless. Under a TIEA, a tax haven government promises to exchange tax information with revenue officials from other countries, assuming they possess such information. Of course they never do because all vital tax information on nonresident accountholders remains bottled up within the bank. Let's be honest, that's the whole point of putting cash offshore. If concealment wasn't your priority, you'd use the local bank down the street. Nobody uses Cayman banks because their recordkeeping is better than ours.

That was the status quo for several years until the UBS scandal broke. Thank you Bradley Birkenfeld. We also experienced a global financial crisis that left almost everyone in the country hating bankers and Wall Street financiers, We are now living through the second great crusade against tax havens. The very measures we rejected a generation ago are now the law of the land, and likely to expand in scope. What's different this time around? One major difference is that the OECD's role is greatly diminished. In fact the OECD is strangely silent on FATCA. Having been previously burned, it's sitting this crusade out.

FATCA is no exercise in cooperative multilateralism. Had FATCA been left to 'international consensus' it would not exist. It's governments themselves which are doing the heavy lifting -- often ones that face huge deficits and angry citizens who don't want their taxes raised or their services cut. What better place to find revenue than scofflaws like The Economist's cover boy. Will this second crusade endure where the earlier effort failed? Only time will tell, but momentum seems to be building.

Read Comments (2)

Christopher BerginFeb 19, 2013

"As a result, the once mighty OECD campaign was reduced to a feckless drive to
get countries to sign tax information exchange agreements (TIEAs) that are
essentially meaningless." Great and true statement. And thanks to the United
States. Those who look at FATCA and call us hypocrites have a point, I think.

von gneisenauFeb 21, 2013

"Rather it's the concealment of wealth that the magazine's editors condemn.
"The best weapon against illegal activities is transparency, which boils down
to collecting more information and sharing it better," they write"

Yes, I can't wait till we start sending tax information on Venezuelans and
Cubans fleeing Chavez & Castro to the People's Republics.

And think of all the wealth that left a certain Mittel-European country in the
30s (though, to be fair, some of it only after a "tax") - would it not have
been swell to have reporting back then!

"American" apologists seem to operate on the notion that other countries and
governments are just like us - a belief which, of course, explains various
phenomena like the famous Kansas Boat People fleeing Amerikkka at the end of
the Vietnam War for Ho Chi Minh City.

But as Good Unc Joe said "if the facts do not fit the theory, all the worse for
the facts"

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