The current discussion on tax havens is missing the point - So what do we really need to do
The discussion is generating headlines but precious little in the way of tangible progress. This is a wasted opportunity a this political space is unlikely to open again and as William Buiter has sensibly remarked that it is better to over-regulate and then loosen up than to wait for the financial community to get back up and thwart any real efforts at change.
So what are the problems that Tax Havens contribute to?
- Tax Evasion/Avoidance by OECD country citizens
- Tax Evasion/Avoidance by Developing country citizens
- Tax Evasion/Avoidance by Corporate Entities
- Regulatory Arbitrage
- Money Laundering etc
Of these the discussion on reducing (no one is eliminating bank secrecy) bank secrecy is likely to have a modest impact on Tax evasion by OECD country citizens and not much else. Precious little other change is being discussed.
The first problem is that the issues being discussed for change are bilateral tax information exchange treaties. One quick look and we realize that more than 18,000 of these would need to be negotiated in order for all countries to be covered. This is not only inefficient but is also something that will almost never happen. Developing countries in particular, which lose hundreds of billions every year to capital flight will continue to lose out as tax havens negotiate TIEA’s with select countries which belong to the OECD or G-20.
The second issue is the treaties themselves. These are very specific in their provision and most do not allow ‘fishing expeditions’ nor ‘automatic exchange of information’. This means that for these to work successfully, the authorities of country A will need to approach the authorities of country B with very specific information requests – such as “we suspect that Mr XYZ has an undeclared account with your ABC bank”. The problem arises because XYZ is unlikely to have declared the account to his home authorities. So unless one already knows what one is looking for, it would be next to impossible to find.
The third issue is that as long as the lax registration for companies, trusts, foundations and other legal vehicles is not addressed it is extremely easy for individuals to hide behind these fronts using nominees. Sometimes there are no records kept. Other times the records do not include the beneficiary owner and often these records are not made publicly available.
The fourth issue is something called jurisynergy where multiple legal jurisdictions are used – for instance a BVI shell company will start a foundation in Liechtenstein which will open a bank account in Panama which will be used to buy a bearer company in Bermuda which will then have a bank account in Switzerland with money. The current discussion, whilst making these layered Russian doll secrecy structures somewhat harder and more expensive to manufacture will do little else.
The final issue is one of regulatory arbitrage. This problem will not go away as long as significant differences in regulations such as capital adequacy, disclosure requirements, approved transactions and tax rates exist. What can be done about these is to increase the degree of standardization – perhaps through the minimum standards approach and to try maximising costs of engaging in such arbitrage.
What we need in the end is a multilateral system, incorporating public register of all registered legal entities with final beneficiary owners, a bias towards too much disclosure rather than too little, a commitment to move towards an automatic change of information an agreement to impose minimum standards and a system of penalties for non-cooperative jurisdictions.