Why tax havens are here to stay

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Why tax havens are here to stay

The release of the now infamous Panama papers has once again brought to the

forefront an issue that has long been the subject of much political discourse. What is

unique about this particular revelation however, is the sheer scale of information

leaked within these files. An unprecedented 11.5 million files from the database of

April 15th, 2016 Author: RSS-Feed

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Mossack Fonseca was made public. The documents expose the seedy intricacies of

how the rich can exploit offshore tax regimes through the secretive loopholes and

dubious accounting strategies that exist in these havens. The leak is indeed, as

revealing, as it is unprecedented. Not since the release of offshore secrets in 2013 by

Edward Snowden has such a wealth of information on something as secretive as how

the rich hide their money been brought to the public’s attention. What’s more, the

leak has exposed a myriad of high profile figures, including national leaders.

Of course, all this is well documented, and while such a leak may raise new

discussions on certain issues and mechanisms behind the intricacies of tax evasion

(not least with some of the individuals involved) the fundamental question on tax

havens remain. The most pressing one of course, being, why do they still exist? After

all, it is estimated that a colossal $21 trillion could be stashed away in low tax, low

regulation ‘off shore financial centers’ around the world. That equates roughly to the

total annual economic output of both the USA and Japan combined. It is estimated

that there are currently around 50 - 60 tax havens worldwide, and they exist in more

or less all parts of the world. Many of them tend to have their own area of ‘expertise’.

Panama for example, tends to focus on a flags of convenience strategy, while

Bermuda appears to be the destination of choice for international insurers.

The damage inflicted to the global economy as a result of these off shore havens is

considerable, and it’s the developing nations that suffer to the greatest extent, by

some margin. Since the 1970’s African countries alone have lost an estimated $1

trillion in capital flight. Compare that figure to the continents current debt levels of

$190 billion, and you begin to comprehend the injustice at play here. This state of

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affairs has effectively enabled a situation to take place where for every dollar of aid

provided by OECD countries to developing nations, roughly ten dollars flows directly

out again. Its destination? While of course, not all outward capital ends up on the

database of offshore satellites controlled by OECD nations, a sizable portion does.

The result of this, is of course, a perpetual cycle of unfulfilled potential and

squandered opportunity for the populations of these jilted nations.

One of the questions most frequently asked on this subject is why these tiny and

vulnerable states (with the exception of Switzerland) are able to continue operating

as tax havens, or excuse me, off shore financial centers? Well, as you may well

expect, the answer is as complex as it varied. After all, as the panama, papers reveal,

tax havens not only continue to survive, they are thriving. An argument that may be

hard to comprehend, particularly given, the facts aforementioned, is that tax havens

do come with their benefits, and no, not just too rich individuals looking to minimize

their tax bill.

The simple reality is that tax havens exist because the larger states allow them to

exist. Indeed it was widespread changes in financial regulation that allowed these tax

havens to develop and grow. Furthermore their accessibility was enhanced

dramatically by technological change which made it much easier to move money all

over the world. British overseas territories have been allowed, even encouraged to

attract global financial institutions to reduce their dependence on British state

support, and in many cases, this has been achieved with great success. Should the UK

to start imposing stringent legislation, even sanctions on these territories then there


is a real risk of causing significant damage to their respective economies, thus

increasing their dependency on more state aid.

Tax havens (whether governments would ever admit or not) also serve as an

effective tool for allowing companies to remain competitive regardless of domestic

policy. While many may scoff at such an argument, given the unquestionable

negative implications that lost revenue for diminished tax receipts has on public

services. The reality is that tax havens can also help strengthen companies,

predominantly by improving cash flow and liquidity. Strong, secure and competitive

companies as we all know, are the bedrock of stable employment levels. So often the

issue of tax havens seems to ignite condemnation on the usual culprits, Starbucks,

Google, Amazon etc., but the reality is that there literary thousands of companies,

that integrate such accounting techniques into their financial planning. An attack on

these regions therefore, becomes slightly more complicated than a righteous crusade

against ‘greedy’ multinational conglomerates, the implications extend far beyond the

big boys. We’re talking pension funds (both private and public), sovereign wealth

funds, local government funds, the list goes on.

Finally there is the undeniable reality that closing one tax haven would simply just

strengthen the others, or possibly even just create others. The nature of finance these

days, and the digital revolution that has and will continue to disrupt the sector,

means money anywhere and at any time can be transferred to just about any

location in the world with considerable ease. Yes, governments and compliance

departments can work round the clock to impose and regulate the toughest

legislation possible, but the reality is, the vast majority of the time they are simply justPDFmyURL lets you convert a complete website to PDF automatically!

playing catch up and scratching the surface of the situation. The simple reality of the

situation is this. If you want to end tax havens or ‘offshore financial centers’ here’s

what you have to do. Get every single world leader in a room and get them to agree

on imposing significantly tighter regulations, sanctions and penalties on taxation

policy. Maybe even throw in a global wealth tax on top.

Good luck with that.

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Why tax havens are here to stay