Saturday, September 13, 2008

Europe and the anti-states

We recently noted the description of Liechtenstein and other "little financial whorehouses" in an article in the US-based publication Tax notes. The same article also called these tax havens "anti-states" - in effect, they don't raise tax revenues - they suck it out of countries. (We are not sure who coined the term - but it may be the interviewee in this fascinating 2004 article.

The Tax Notes article (unfortunately, we cannot provide a link as it is only available on subscription) looks at a discussion on September 3 at a meeting of the International Fiscal Association on revising the European Savings Tax Directive (STD). The directive supposedly combats tax evasion by either making taxpayers' income visible to the relevant tax authorities, or applying a witholding tax if they wish to remain secret. In reality, it is full of loopholes.

The report makes it clear that people recognise how inadequate the STD is in cracking down on tax evasion. As we have often pointed out, it only applies to individuals, so people can easily avoid it by using entities such as companies or trusts. The article puts it sharply: `Essentially, it reaches only the unsophisticated tax cheats. The better-advised cheats hide behind trusts and other entities.' In these arrangements the funds on deposit are usually held by professional nominees on behalf of the beneficial owners. These arrangements are not covered by the Directive.

Among the unsophisticated cheats, of course, is Klaus Zumwinkel, now the ex-CEO of Deutsche Post, as well as hundreds of others under investigation in Germany and several other countries. Clearly, many wealthy people are more sophisticated, so we must assume that Zumwinkel and his ilk are the tip of a much larger iceberg. They no doubt earn secrecy service providers in Liechtenstein and other centres even larger fees, for creating and operating trusts as well as bank accounts.

Indeed, research by the Offshore project conducted by Marty Sullivan, also published in Tax Notes, has produced estimates of assets which are likely to be evading tax in so far four jurisdictions, as follows: Guernsey $300bn, Isle of Man $200bn, Jersey $500bn, Switzerland $600bn. Those figures cover only the likely tax evasion by individuals, not the often dubious uses of havens for corporate tax avoidance, such as captive insurance, and artificial booking of loans and so on.

The Tax Notes report suggests that some serious thought is being given in Europe to applying the STD to entities used to shelter assets, perhaps by treating them as paying agents unless they themselves pay tax. Not surprisingly, European banks squealed that extending automatic reporting in this way would damage their competitiveness, citing a fear that business will be re-directed to dirty-money centres like Singapore. Efforts are being made by the OECD to persuade such centres to join in information exchange but they remain reluctant, even though they are only being asked to provide information on request, and not the much more effective automatic information required by the STD. Jeffrey Owens of the OECD is quoted in the report as saying that centres such as Singapore would never accept automatic exchange of information, which is why the OECD is not even asking them for this. We think this is feeble.

So the official attempts to establish adequate measures to deal with tax evasion seem deadlocked. And the clients continue to flock to the whorehouses.

(Article by a guest blogger, who wishes to remain anonymous.)


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