Turning the Screws on Tax Havens

January 13, 2024
7 mins read


By Larry Smith

Saturday/Sunday, November 15-16, 2008.

Bahamians tend not to think about taxes – preferring instead to complain about the high prices of dutiable imports.

But taxation – or the lack of it – is at the heart of a multibillion dollar business that contributes a big chunk of our GDP. And this key business sector is about to face another attack on its legitimacy – just as our economy is tanking.

The Paris-based Organisation for Economic Co-operation and Development is preparing a new blacklist of tax havens around the world. That’s because experts say that 400 banks, two-thirds of hedge funds and two million top corporations have stashed some 10 trillion dollars in secret offshore accounts away from the prying eyes of tax inspectors.

“This issue has become a question of the highest political importance,” the OECD said recently following a meeting to discuss the crackdown on tax havens. “We cannot resolve the financial crisis by introducing more regulation and leaving pockets of non-regulation to prosper.”

There are about 40 low-tax jurisdictions around the world. But only three – Andorra, Liechtenstein and Monaco – are currently on an OECD blacklist for refusing to share financial information. A new blacklist could contain about a dozen countries – including the Bahamas – according to European officials.

A New Offensive

The screws are about to be turned because high-tax nations in Europe want to protect their revenue base, and they see the current global crisis as a golden opportunity to fashion a more closely regulated financial system.

According to Grace Perez-Navarro of the OECD tax policy centre (speaking in an online video), “We’ve been trying to tackle the problem of international tax evasion through tax havens. The main focus of our work is to establish transparency and exchange of information through bilateral agreements.”

But others – like Cato Institute tax expert Dr Dan Mitchell – say the OECD is trying to shut offshore centres down by creating an international cartel to keep tax rates high. Mitchell, who spoke at a Nassau Institute event here last week, argues that as labour, capital and profits have become more mobile in a globalised world, countries are under pressure to cut their tax rates.

“The bad news,” he wrote in a recently published book called The Global Tax Revolution, “is that some governments and international organisations are trying to restrict tax competition…If (these) plans gain ground, growth will be undermined, governments will grow larger, and economic freedom will be curtailed.”

But the OECD says it is not opposed to tax competition per se: “Each country can establish its own tax rates and its own tax system, but because we are now living in a borderless world we need to have greater cooperation among countries, and that includes offshore financial centres,” Ms Perez-Navarro said.

In response, Mitchell told Tough Call that the elimination of financial privacy is a direct threat to tax competition, since high-tax nations would be able to impose their laws on income and assets in low-tax jurisdictions. “In other words, tax competition is only effective if taxpayers are able to benefit from better tax law in other jurisdictions. That obviously is not the case if governments have the ability to track – and tax – flight capital.”

The Bahamas came under fire in this war eight years ago, when we were blacklisted by the OECD as one of 35 tax havens that supposedly engaged in “harmful tax competition” with rich nations. After revising our regulatory system and agreeing to exchange information with overseas authorities in tax matters, we were removed from that list in early 2002.

The intensity of American interest in these global regulatory measures fluctuates. The OECD enjoyed the full support of the Clinton administration, while the Bush administration sought to soften the assault. As a senator, Barrack Obama co-sponsored a bill to clamp down on tax evasion, so there are fears that his administration may help renew the OECD initiative – even though we already have an information sharing agreement with the US.

“Obama used some anti-tax haven rhetoric during the election campaign,” Mitchell said. “But he may not be that deeply committed…There are lots of (US) bills out there targeting tax havens that have now been given a new lease on life, but the big question is whether the US will pressure the Bahamas to sign tax information exchange agreements with (the Europeans).”

The OECD is a powerful body that evolved out of the administration of the Marshall Plan for the reconstruction of Europe after the Second World War. In 1961 its membership was expanded to include countries from other regions, and it remade itself as an intergovernmental policy bureau with a yearly budget of over $400 million.

The Cato Institute, which employs Mitchell, is a Washington-based think tank founded in 1977. It works to increase support for public policies based on the libertarian principles of limited government, free markets, and individual freedom.

What are Tax Havens for?

According to Merrill Lynch, there are an estimated 9.5 million high net worth individuals in the world – more than double the number a decade ago – and they are said to hold $37 trillion in assets. These people are the main customers of our offshore finance sector.

“The world’s wealthy hold a huge pool of mobile investment capital, they are tax sensitive, and they are increasingly international in their outlook,” explained Mitchell in his book (which he co-authored with Chris Edwards, another Cato Institute tax expert).

Mitchell cites the example of Peter Nygard, a clothing designer who who was born in Finland, started his business in Canada, works out of New York and spends a lot of time at his Lyford Cay home in the Bahamas. Joe Lewis, a British billionaire who is a neighbour of Nygard at Lyford Cay and an investor in the Albany project, also spends much of his time in Florida and Argentina.

Big corporations often seek to minimise their taxes through complex legal structures involving foreign affiliates. The Congressional investigation of Enron, for example, found that “prudent tax planning typically requires a US multinational enterprise to use a combination of many different entities in many different jurisdictions”, and acknowledged that this was a legitimate business activity.

And privacy laws in offshore finance centres like the Bahamas also help to shelter the assets of people who need protection against government persecution based on ethnic, religious, political and other grounds. In other words, tax havens can be lifelines for people who live in unstable regimes where governments fail to provide the basic protections of civilised society.

Tax Competition

Mitchell argues that the tax competition provided by offshore finance centres can be a major tool for reducing the size of big-spending governments, by promoting lower tax rates worldwide. He says this is strongly opposed by politicians from high-tax countries, who are motivated by greed for more revenue in order to buy votes.

This can be made clearer by a quick look backwards. In 1980 the top tax rate in the United Kingdom was 83 per cent and in the United States it was 70 per cent. Reagan and Thatcher were able to cut those rates to 30 per cent and 28 per cent respectively, which triggered a worldwide reduction in average top tax rates of about 26 per cent.

The overall tax burden of OECD countries – which had been steadily growing in the 1960s and 70s – has been held in check ever since. But Mitchell says that high-tax nations are trying to thwart these developments by using international bureaucracies to persecute low-tax jurisdictions.

“The OECD is all about protecting the interests of high-tax governments,” he told the Nassau Institute meeting last Thursday. “They want to create a tax cartel like OPEC (the Organisation of Petroleum Exporting Countries) and force the entire world to adopt a unified tax policy. But there is no question that tax competition has led to better policy and better results in terms of more growth, more jobs and more prosperity.”

Perhaps the best quotation to illustrate this point comes from Nobel Prize-winning economist Edward Prescott, who (modifying a statement by the 18th century philosopher Adam Smith) said: “Politicians of like mind seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise taxes.”

Role of the Financial Crisis

Meanwhile, all eyes are now trained on the November 15 meeting in Washington of leaders of the Group of 20 nations (the biggest rich economies plus selected emerging markets). They will consider a complete overhaul of the international financial system that has been in place since the end of the Second World War. And there have been calls to transform the IMF into a global regulator.

In fact, some European governments want to outlaw tax havens altogether as a pre-requisite for global financial reform: According to Mitchell, “French President Nicolas Sarkozy blames the financial crisis on tax havens. He would probably blame cavities on tax havens.”

This is a reference to the view that offshore centres contributed to the global financial crisis by allowing banks such as Britain’s Northern Rock or the US investment bank Bear Stearns to hide their losses. After the US and European government bailouts, many politicians are asking why some of those same troubled banks continue to operate in countries that encourage tax evasion.

“Is it normal that a bank that we guarantee loans to, or we allocate our own funds to…continues operating in tax havens?” asked President Sarkozy recently.

This past Sunday the Observer newspaper in England quoted “key aides” of President-elect Obama as saying that the new administration will introduce a tax haven law within weeks of taking office as part of a revenue-raising reform package.

Key measures are likely to include: revealing the beneficial owners of secretive trusts; prohibiting accountants from charging fees on specific tax services; and identifying ‘offshore secrecy jurisdictions’ that ‘unreasonably restrict US tax authorities from obtaining needed information’.

The ultimate OECD threat is to cut offshore centres like the Bahamas off from the global financial system. And Mitchell argues that appeasement is not an option because the Europeans will keep making demands to achieve their goal of eliminating tax havens.

He told the Nassau Institute last week that “All year long, low-tax people have been calling me about the US election. I told them that if the Democrats are elected there will likely be more pressure and a second offensive will be opened against jurisdictions like the Bahamas. I hope we can resist it.”

Larry Smith writes a column called “Tough Call” every Wednesday for the Bahamas Nassau Tribune. A former reporter and editor, he now operates a communications agency in Nassau (www.bahamasmedia.com). He also blogs at Bahamapundit.

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