Industrialized Nations Go Tax-Haven Hunting…Again
Traditionally the month of May brings warmer weather, blooming daffodils, and thoughts of love. This year, however, there is a different mood afoot. The members of the Organization for Economic Cooperation and Development (OECD) are in the hunting frame of mind and their attention is aimed squarely at tax havens with many high-tax countries are taking up the sport.
President Clinton promised new steps to fight "the growing problem of international crime" on May 12, according to the Wall Street Journal. Part of this battle involves an intensified crackdown on tax-related crime. The U.S. joins the other OECD nations in a plan to attempt to stop tax cheats from using tax havens to hide money from authorities. Finance ministers from the U.S. and other leading countries, who agreed to exchange information as part of an anti-money laundering network, are now moving to address taxation issues. The subject of the discussion was "the number of countries and territories, including some financial offshore centers, which continue to offer excessive banking secrecy and allow screen companies to be used for illegal purposes." The ministers hope to improve the exchanges for information among tax officials to curb international tax avoidance and evasion.
In another meeting, finance ministers of the 15 European Union countries got together, and announced a campaign against harmful tax competition May 20. One directive is to charge a withholding tax on bank deposits and bonds, or at least provide details of any interest paid to a saver's home tax authority. Member nations need not impose a withholding tax if they don't want to, merely fulfill the reporting requirement, according to the Globe and Mail. The directive includes dependent territories which in Britain's case would include the Channel Islands, the Caymans, and Bermuda. The directive is aimed at getting banks and other paying agencies to tell on their non-resident account holders.
The heavy-taxing French and German governments are working to encourage the Luxembourgers and British to report any income paid to foreigners if they would rather not charge withholding tax on foreigners themselves. That way, the Frenchman, for example, who opens an account in Luxembourg will no longer get off tax-free on his gain.
A case being pursued in Belgium involving a disgruntled member of a Luxembourg bank staff, who decided to take revenge and sent the tax department in Brussels a list with the address of hundreds of Belgian account holders, according to Peter Cook in the Globe and Mail article. Those caught in the act face heavy fines and back payment of taxes they owe.
Even well mannered Britain has joined the hunt. Over the years, successive governments have tightened the rules on offshore investment and have closed a number of loopholes. Britain's new Labour government sees offshore investment as a means of tax avoidance and has pledged a crackdown which is likely to close down some if not all of the remaining loopholes, according to the Investors Chronicle.
In February, UK Foreign Minister Robin Cook announced UK Dependent Territories that are also offshore financial centres have until 1999 to comply with a "check-list" of four key areas of financial regulations to improve standards. Cook’s new guidelines include making offshore centres "co-operate fully with over-seas regulators" and ensuring that independent regulatory bodies are set up in each jurisdiction to regulate financial laws free of interference from local politicians, according to Offshore Alert. The checklist did not specifically discuss divulging tax-related information but it is certainly a step in that direction. The government also ordered a complete review of financial regulations in the dependencies of Jersey, Guernsey and the Isle of Man.Such moves by Britain would severely strain the relationship between tax haven British Dependent Territories and the U.K. David Marchant, publisher of Offshore Alert believes "it could well force these countries to choose between their economic health and their continued ties to the U.K." Britain could not find a more effective way of 'encouraging' the Territories towards independence if that is in fact their aim. Offshore services have become the mainstay of economies for low-tax and no-tax Dependent Territories.
The Group of Seven Industrialized Nations (G7) also announced that tax-related crimes would be attacked with the same laws used to combat money laundering according to a May 21 article in the Wall Street Journal. This follows closely behind the OECD's campaign against "harmful tax competition" that calls for "severe countermeasures" against tax havens that flagrantly cater to tax avoidance and evasion.
In all, 29 member states of the OECD, including Canada, face an ever-growing challenge from low and no-tax jurisdictions that are attracting fleeing tax dollars and high-paid talent who are taking their money and investing it offshore.
International pressure has had its dividends. The recalcitrant Swiss signed a new treaty with the U.S. in January expanding its ability to exchange tax related information. The Swiss agreed for the first time to cooperate on tax evasion investigations with one major caveat. The offense must involve a crime other than tax evasion such as forging or falsifying documents. Failure to pay one's taxes is not a felony in Switzerland.
High-tax nations are no doubt encouraged in their fight by the successful campaign against money laundering launched in 1986 by the U.S. Gone are the days when anyone could walk into a tax haven bank with a dufflebag full of cash and deposit it with no questions asked. Offshore bankers now complain that they must now go through an exhaustive series of procedures to ensure that funds being deposited are not from criminal activities and are reluctant to accept more than $5,000 US in cash from a new client. Their caution stems from a number of charges against international banks by the U.S. for accepting and transferring funds determined to be from the proceeds of crime. Many of the high-profile offshore centers have or are in the process of passing laws aimed at curbing money laundering.
But if OECD tax hunters think that tax haven cooperation in tracking down money laundering will be as forthcoming in going after tax avoidance or evasion, they are in for a fight. These activities aren't crimes in most offshore centers. Persuading them to pass anti-tax avoidance and evasion laws would immediately cause a breach of confidence with investors and a mass exodus of capital to more friendly shores.
It was estimated in 1997 that more than $5 trillion U.S. resides in or passes through tax havens, providing mighty tempting targets for tax-hungry governments. The question is, will imposing new laws to stem the flow of tax dollars offshore increase taxpayer compliance? History tells us that is has the opposite effect.
This is not the first attempt to curtail the use of tax havens. In 1962 President Kennedy passed the United States Revenue Act which amended the Internal Revenue designed to curtail the flow of U.S. dollars offshore. Few pieces of legislation have had a greater impact of overseas operations of U.S. businessmen, according to Walter Diamond, author of Tax Havens of the World. The strategy had the opposite effect helping to make the Cayman Islands the world's fourth largest banking center, and firmly establishing many other tax havens around the world.
When the U.S. imposed the withholding tax, it sent capital fleeing to Europe, creating the Eurobond, according to Peter Cook. Millions of German marks flowed out of Germany into Luxembourg and Switzerland when the Germans imposed a withholding tax on interest held in German banks. Britain experienced the same fate when it imposed a withholding tax on foreign funds in British banks. It is relatively easy to move money from Barclays in London to Barclays in the Channel Islands. Recently the Japanese have been forced to reduce their taxes but have a long way to go before stemming the tide of yen moving offshore. They are now considering abolishing their withholding tax. The European Union runs the risk of condemning their bonds to a similar fate.
The challenge facing the OECD is daunting. The vast increase in the international flow of capital has made it more difficult to monitor taxpayer compliance and easier for money to flow to jurisdictions offering the greatest tax incentives and investment returns. "International capital flows have great benefits, but they do pose policy challenges, including tax avoidance and tax evasion," Lawrence Summers deputy U.S. Treasury Secretary stated in the Wall Street Journal.
The incredible growth of electronic commerce is allowing funds to be moved at the speed of light around the globe, making it all but impossible to track its source. The growing number of methods for transferring funds via the Internet is further complicating tax collection efforts. Cybercash, offshore credit cards, Smart Cards, automatic teller machines as well as the more traditional wire transfers, fax cheques and offshore chequing accounts make it almost impossible to properly track all but the largest fund transfers by tax collection agencies.
So far, the net result has been frustrating for tax authorities. Of the $5 trillion US controlled by offshore centers, $3.5 trillion has moved there since 1989. That amount is estimated to be increasing by $500 billion per year. Walter and Dorothy Diamond identify 68 tax havens in their most recent update of Tax Havens of the World and more are emerging every year. Yet nations such as Germany, France and Canada adhere to punitive tax regimes that are driving funds and skilled labour offshore in ever-increasing numbers.
Desperate times call for desperate measures and desperation is greatest on the part of the highest taxed nations. Germany, France, Sweden, Italy, Belgium and Canada have some of the highest taxes in the world as a percentage of GDP but they have other things in common too. All share high unemployment, over-burdened social security systems less able to care for aging citizens and welfare systems plagued with growing numbers of poor and underprivileged. Increasing taxes have only served to widen the gap between rich and poor. Obviously high taxes are not the answer, unless you're an accountant, tax lawyer or bureaucrat. No wonder that those with capital are moving it offshore as fast as they can!
Will tax havens eventually fold and cooperate with tax investigators from high tax countries? With the growing competition in the offshore arena, if a few were to give in, they'd be quickly replaced by new jurisdictions eager to take advantage of the large and ever growing business of assisting those with money to invest. As history has proven, time and again, when governments find new ways of extracting taxes, money has unlimited ways of finding a new, friendlier home.
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