Tax Havens1
Andrew Conio. A.Conio@wlv.ac.uk
Tax havens are the most important single reason why poor people and poor counties stay poor. 2
The government is not managing the economy for the people of this nation. It is managing it for a
tiny transnational elite, a kind of global gated community.3
Our political system protects and enriches a fantastically-wealthy elite, much of whose money is, as
a result of their interesting tax and transfer arrangements, effectively stolen from poorer countries
and poorer citizens of their own countries.4
In a singularly impressive unpacking of the financial crisis for the London Review of
Books,5 John Lanchester presents a summary of the key features of the Royal Bank of
Scotland Group Corporate Report released on the 27th Feb 2008 which shows a robust
financially secure company built on solid foundations in rude good health. By the 22 nd
April the Bank was attempting to raise 12bn to cover losses and a mere two months
passed before the taxpayers paid £45.5bn (and potentially much more) to prevent the
company from bankruptcy. It should come as no surprise therefore that information on
the value of wealth held offshore, the amount people and organisations pay in tax, the
extent of tax avoidance and the operations of tax havens is hard to come by. Figures are
deliberately obfuscated or hidden in complex financial systems so that frankly no one
knows the true picture of global finance. However, the figures presented here are as
reliable as can be found.
1
This paper was written in 2009. In 2011 Nicholas Shaxson published Treasure Islands, which Richard Murphy,
describes as ‘the best book on Tax havens’, and George Monbiot calls it, the best book written so far this year. All of
figures presented in this paper are supported and in some cases updated by Treasure Islands. In turn, I taken the
opportunity to filch a few quotes from Shaxson
2
Nicholas Shaxson. Treasure Islands: Tax Havens and the Men who stole the world. London: Bodley Head. (2011)
George Monbiot, Gaurdian 11 Feb 2011
4
George Monbiot. Gaurdian 8th Feb 2011
5
Lanchester John. It’s Finished. London Review of Books. 28th May 2009
3
1
The 11th annual World Wealth Report (2007) from Merrill Lynch/Capgemini6 finds the
number of High Net Worth Individuals (HNWI) has grown to 9.5 million with their
assets rising to US$37.2 trillion. That is, 0.015% of the world’s population have an asset
worth of more than half of the world’s GDP, which in 2007, according to the World
Bank, was US$54tn7. A third of HNWI’s assets are held in offshore accounts or tax
havens (this fits with Oxfam’s findings that 1/3 of global GDP is sequestered into tax
havens)8 which would give a figure of US$12.4tn. This fits almost exactly The Tax Justice
Network9 estimation (2005) that placements by high net-worth individuals in tax havens
totaled US$11-12tn in 2004 and both figures accurately reflect the very steep rise in the
use of tax havens in the last few years leading the writers of the single most authoritative
report yet written about tax havens10 to state ‘official statistics suggest that the scale of
such placements increased sharply in subsequent years’. However, this world is one of
dissemblance and deliberate concealment by the major financial institutions. For
example, the I.M.F. does collect data in Government Financial Statistics but will not release
it to either researchers or financial analysts. Or, when the British Government talks of
closing tax havens as if they were semi-legal shadowy operations outside the mainstream
it fails to mention that ten of the OECD’s list of 35 tax havens are UK overseas
territories or dependencies of the British Crown11. No mention is made of the fact that
the accounts in tax havens are often run by major financial centers, (London, New York)
and according to the IMF ‘50% of international positions in the world’s banks are held in
Offshore Financial Centre’s12. It will come as no surprise, then, when Obama and
Brown’s huffing and bluffing about tax havens come to nothing in a few months time,
because their economies are structurally dependent upon them. Returning to HNWI’s,
if we estimate 1/3 of their assets are held in tax havens that would total US$12.4tn.
Given the norm 7.5%13 growth p.a. this would yield US$930bn annual return.
(Although the American Bureau of Economic Analysis puts the rate of return from tax
6
Capgemini (Euronext: CAP) is a major French company, one of the world's largest information technology,
transformation and management consulting, outsourcing and professional services companies with a staff of over
91,000 operating in 36 countries.
7
http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20535285~menuPK:1192
694~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html
8
Tax Havens: Releasing the hidden billions for poverty eradication. SERIES: Oxfam Briefing Papers 2000
9
Tax Justice Network is an international campaign group with headquarters in London that promotes transparency in
international finance and opposes secrecy. It appears to the most respected and authrotive organization devoted solely
to the investigation of Tax Havens. According to the Norwegian Royal commission into Tax Havens their findings and
assumptions appear reliable
10
Tax havens and development Status, analyses and measures. Report from the Government Commission on Capital Flight
from Poor Countries. Appointed by Royal Decree of 27 June 2008. Submitted to Erik Solheim, Minister of the
Environment and International Development, on 18 June 2009.
11
Nick Mathiason. The Observer, Sunday 29th March 2009.
12
IMF (2000): Offshore Financial Centres – IMF Background Paper
13
Figure provided by McKinsey consulting and Boston consulting Group
2
havens at 12%).14 As 30-35% tax is the prevailing rate in most OED countries this
would yield US$279bn. Actual tax paid by HNWI is 7.5%
15
or US$69.75bn. In sum,
HNW individuals pocket US$209.25bn per annum in unpaid taxes although the highly
respected Tax Justice Network put this figure at US$255bn in 2005. To put this in
perspective $16bn a year would be sufficient to give every child in the world a school
place16.
The sole purpose of Tax Havens is to conceal activities from juridical and public
scrutiny17 to allow for the avoidance of tax and thus creating a shortfall that has to be
born either by other taxpayers, exchequers or the social infrastructure (roads, schools,
hospitals). They are to all meaningful sense simply vehicles for deception.18 Profits are
shipped overseas so that little or no tax is paid by a spurious company that produces
nothing, employs no one and creates nothing of value. In Tax Havens no accounts are
required, few standards for fit and proper governance and regulation are imposed. For
example in the British Virgin Islands one single office is the registered address for 18,000
companies. The British Virgin Islands has an inward investment ratio of 2.7bn per
capita. Not only do unpaid taxes seriously limit the capacity of any country to invest in
the vital services, education, health systems and infrastructure needed to sustain the
heath and well being of that country, they also distort the economy by diverting capital
from investments which have other social values as practitioners spend more time
creating new systems for tax avoidance rather than wealth creation.19 Not least amongst
these effects is the distortion of national priorities and a weakening of the capacity of a
nation to manage its own affairs20 and to bring to justice or public accountability
14
The Commission's calculations based on U.S. Direct Investment Abroad: Balance of Payments and Direct
Investment Position Data, The Bureau of Economic Analysis (BEA)
15
Average CapGemini portfolio
16
Sebastien Fourmy, Policy and Advocacy Director from Oxfam France.
17
The great majority of the reports on suspicious transactions are shelved without investigation. Only a modest
proportion lead to charges and a court judgement. Many of the tax havens have extremely large international activities
relative to the size of their population and economy. In a number of cases, it is virtually inconceivable that these
jurisdictions have the capacity to control money laundering, and not least to pursue cases through investigation and
trial. Tax havens and development Status, analyses and measures
18
The UK tax authorities gained access in 2006 to a list of depositors with the tax-haven branches of a major bank. Of
the almost 10 000 British depositors, only 3.5 per cent had provided account information to the tax authorities (confer
Sullivan, Martin A. (2007): Keeping Score on Offshore: UK 60 000, US 1 300, Tax Notes, 7 July 2007).
19
Potentially the most serious consequences of tax havens are that they can contribute to weakening the quality of
institutions and the political system in developing countries. Tax Havens and development. Norwegian Ministry of
Foreign Affairs.
20
Take South African mining company AGA’s agreement with Tanzania. Of US$1.43bl worth of gold extracted from
200 to 2006, it paid US$96m in taxes and royalties to the Tanzanian government. Death and taxes pg 12.
3
practices that lie outside of the countries jurisdiction21. The global financial system
therefore makes a major contribution to the continued existence of nation states that are
essentially incompetent or perpetuate grotesque distortions of national priorities.
We are not done there, a new analysis for Oxfam (March 2009)22 by James Henry,
former Chief economist at McKinsey & Co, found that at least $6.2 trillion of developing
country’s own wealth is held offshore, depriving developing countries of annual tax
receipts of between $64-$124bn p.a. even though, according to the Tax Justice
Network, this figure is an underestimation:
‘If money moved offshore by private companies was included this figure would be
much higher’. Even that estimate tells only part of the story: with tax havens now
involved in an estimated half of all global trade, the sums passing through will be
even greater.23
This figure is far in excess of the £28-42bn the World Bank estimates will be required
annually to meet the Millennium Development Goals (MDGs) aimed at halving extreme
poverty by 2015. Or, according to Christian Aid, ample funds to save the lives of
350,000 children under five a year.24
In fact, these examples are only part of a far larger system of expropriation of labour
value and wealth and the shift of capital from the poor to the rich. According to
Christian Aid a full 50 per cent of world trade takes place through tax havens.25 Indeed,
globalisation is far from a simple vehicle for exchange and trade, as 60% of world trade
takes place within rather than between multinational corporations. (Not surprising when
we note that 200 corporations account for more than a quarter of the world’s economic
activity).26 An analysis loosely supported by Nicholas Shaxson; ‘about two thirds of
Global cross border world trade happens inside multinational corporations’.27 A full 50%
21
Suharto’s embezelment of UD$15bn from Indonesia is only the largest of this type; none of which have been
recovered.
22
Tagged: Tax Havens. http://www.oxfam.org/en/pressroom/pressrelease/2009-03-13/tax-haven-could-deliver120bn-year-fight-poverty. Accessed 28/07/2010
23
Closing the Floodgates, Tax Justice Network, 2007, www.globalpolicy.org/nations/launder/
haven/2007/2007taxjustice.pdf
24
Death and Taxes: the True Toll of Tax Dodging, (Andrew Hog et al) Christian Aid, 2008.
25
Death and Taxes: the True Toll of Tax Dodging, (Andrew Hog et al) Christian Aid, 2008.
26
Prem Sikka, Prof Of Accounting At University Of Essex. ‘Enterprise, culture and accountancy firms; new masters
of the universe’, Accounting, Auditing and Accountability Journal, vol 21, no 2, 2008, p 268-295,
27
Nicholas Shaxson. Treasure Islands: Tax Havens and the Men who stole the world. London: Bodley Head. (2011) pg 12
4
of these intra-company trades are devices such as transfer pricing, mispricing or false
invoicing which are used to transfer profits to low-tax jurisdictions to maximize tax
avoidance. For example, Adobe Corporation had a turnover of US$2.6bn last year but
paid a paltry US$5m in corporation tax.28 The Norwegian Royal Commission report
states ‘estimates suggest the tax loss could be on the order of 30 percent of the potential
revenue from foreign multinational enterprises’. Given the amount of world GDP
transacted ‘intragroup’ by multinationals this would indeed be a colossal Similar to the
7% of entire Global GDP Raymond Baker, Senior Fellow of the US Center for
International Policy, estimates is accounted for by mispricing and false invoicing.
Indeed, these processes are part of, but do not fully account for the monumental flow of
capital out of developed countries over the last few years. For reasons that have become
obvious, the scale of illicit money flows from developing countries to tax havens cannot
be determined precisely, but it unquestionably far exceeds development assistance or
direct legitimate investment in these countries. Thus, whilst the total registered capital
flows into developing countries in 2006 are estimated at US$571 billion (World Bank
(2007). Donor aid accounted for US$70 billion of this figure. The most qualified
estimate (Kar & Mamadov (2008)) for illegal money flows from developing countries
indicates that illegal capital flows totaled US$641-979 billion. Even the lowest estimate
suggests that the illegal capital outflow exceeds the net legal inflow, and the illegal
outflow corresponds roughly to ten times the development assistance given to
developing countries. Ndikumana and Boyce29 have calculated that ‘accumulated over
the 1970-2004 period, capital flight is estimated at US$420 billion (converted to 2004
prices). With calculated interest accumulation, capital flight is assumed to total US$600
billion over the period. This corresponds to almost three times the total foreign debt of
the countries concerned.’30
In many countries, particularly in sub-Saharan Africa and Latin America, capital flight is
accompanied by increased foreign borrowing. This borrowing is not used to finance
investment or consumption, but to finance the capital flight itself (Rodríguez 1987,
Boyce & Ndikumana 2005). The ensuing debt burden will hurt the poor most, since
28
This is by no means an isolated example. In 2006 the worlds biggest banana companies Del Monte, Dole and
Chiquita, did nearly $750 Million worth of business in Britain but paid £235,00 in tax. (Shaxson pg 12). 1/3 of
Britains top 700 companies paid zero tax in 2007
29
James K. Boyce and Léonce Ndikumana Department of Economics and Political Economy Research Institute,
University of Massachusetts Amherst, MA 01003
30
Ndikumana and Boyce – estimate of capital flight from Africa
5
public spending on the social sectors and on investment in infrastructure must be cut to
service the debt.
Taking into account all these factors; tax evasion by HNWI, developing countries’ own
use of tax havens, capital flight and mis- and transfer-pricing and the combined effects of
distortion of rational governance, we find a global financial system, which is coincidental
with globalization, that is systematically, structurally and constitutionally geared towards
the extraction of the wealth from the poorest, and the sequestration of the labour value
and resources of such magnitude that it actually dwarfs the exploitation of the slave
trade. Here is George Monbiot;
Wealth is being transferred from the poor and middle to the rich at stupefying
speed and on a stupefying scale. The financial sector seeks to wring every drop
from the productive economy, heedless of the eventual impacts. The
government is there to help.31
As Raymond Baker says: ‘for the first time in the 200-year run of the free-market
system, we have built and expanded an entire integrated global financial structure the
basic purpose of which is to shift money from the poor to the rich’. Indeed, between
2005 and 2007, the total amount of capital flow from bilateral trade mispricing into the
EU and the US alone from non-EU countries is estimated conservatively at US$1tn. Of
which Christian Aid says;
The situation is stark and urgent. We predict that illegal, trade-related tax evasion
alone will be responsible for some 5.6 million deaths of young children in the
developing world between 2000 and 2015. That is almost 1,000 a day. Half are
already dead.
It is hard to imagine a more estimable advisory board (which includes the Chairperson of
the European Parliament’s Committee on Development and the Managing Director of
the World Bank) gathered to produce unimpeachable reports into the global financial
system than that recruited by the non-profit organisation Global Financial Integrity32 who
31
Guardian 15th February 2011
Their advisory board includes Lord Daniel Brennan QC.. Francis Fukuyama. Ms Ngozi Okonjo-Iweala is the
Managing Director of the World Bank. She is the former Finance Minister and Foreign Minister of Nigeria. Thomas
Pogge is a professor of Philosophy and International Affairs at Yale University.."John G. Heimann is Chairman of the
Financial Stability Institute of the Council on Foreign Relations. Kenneth M. Jensen is on the Executive Committee of
32
6
say of decolonization and the spread of multinational corporations – ‘the 1960s marked
the point at which the expansion of the illicit financial structure took off in earnest’.
33
Their Chair Raymond Baker concludes;
Economic deprivation brutalizes billions of people. This makes it necessary for
us to be brutally honest with ourselves. This reality has been going on for
decades and cumulatively has moved trillions of dollars out of poor countries
into rich countries. This reality … propelled by the illicit financial structure that
we created in good part of (sic) accomplish exactly this end, is, in my reading of
history and in my judgment, the ugliest chapter in global economic affairs since
slavery. The poor deserve better from us. 34
the American Committees on Foreign Relations. Eva Joly is a member of the European Parliament, and the
Chairperson of the European Parliament’s Committee on Development (DEVE). David S. Landes is a professor
emeritus of Economics at Harvard University. James S. McDonald is President and CEO of Rockefeller & Co. Moisés
Naím is the Editor in chief of Foreign Policy magazine. In the late 1980s and early 1990s, Mr. Naím served as
Venezuela’s Minister of Trade and Industry. John C. Whitehead is the former Chairman of both Goldman, Sachs & Co
and the Board of the Federal Reserve Bank of New York. Mr. Whitehead served as the Deputy Secretary of State
under President Reagan.
33
‘Illicit Financial Flows and their Impact on Development’ Global Financial Integrity
34
Raymond W Baker, ‘The ugliest chapter in global economic affairs since slavery’, speech to Global Financial
Integrity Program, 28 June 2007.
7