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Large-Scale Multilateral Action on Tax Havens is Possible

April 24, 2013

By EJ Fagan

EJ Fagan was New Media Coordinator for the FTC from 2011-2013. He is now Deputy Communications Director for Global Financial Integrity. You can follow him on Twitter @ejfagan.

Joshua Keating posted some excellent information over at Foreign Policy today:

Research from Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the Paris School of Economics looks at the result ofinternational agreements taken to prevent tax evasion in the wake of the global financial crisis. The results are not very encouraging for reformers:

First, treaties have had a statistically significant but quite modest impact on bank deposits in tax havens: a treaty between say France and Switzerland causes an approximately 11% decline in the Swiss deposits held by Frenchresidents. Second, and more importantly, the treaties signed by tax havens have not triggered significant repatriations of funds, but rather a relocation of deposits between tax havens. We observe this pattern in the aggregate data: the global value of deposits in havens remains the same two years after the start of the crackdown, but the havens that have signed many treaties have lost deposits at the expense of those that have signedfew. We also observe this pattern in the bilateral panel regressions: after say France and Switzerland sign a treaty, French deposits increase in havens that have no treaty with France.

Johannesen and Zucman suggests their finding lend support to a “big bang” multilateral agreement on tax havens rather than an incremental approach, though it seems like it would be nearly impossible to wrangle an agreement big enough to make a difference.

I think that Keating is underselling a couple of things here. First, we’ve seen very few meaningful treaties signed to combat tax evasion through tax havens in recent years.  The treaty signed between France and Switzerland did not include automatic exchange of tax information or FATCA-like information exchange, so we shouldn’t expect much progress to follow it. The truth is that the aforementioned crackdown has largely been political, rather than substantive, up to this point.

But political change is a real kind of change, and we’re looking closer to substantive policy change every day. When the G20 Finance Ministers start talking about automatic information exchange being the new global standard, they are at least talking about  a “big bang” multilateral agreement. The ten EU nations, led by the UK, who have decided to start a multilateral convention for FATCA-style automatic information exchange are very clearly labeling their efforts a pilot program. We don’t know how far they are planning to extend it, but it certain looks like a potential blueprint for a worldwide system.

The US has demonstrated with FATCA, particularly in Switzerland, that developed countries hold a great deal of leverage over banks in tax havens. Incentives are clearly aligned to use that leverage, as those same developed countries want to be able to fight tax evasion and the erosion of their tax base. A deal can get done here at the G8/G20 levels. Once a multilateral convention becomes the norm for a critical number of large, important economies, compliance with it will become necessary for any large jurisdiction to do business.

Keating’s reference to the whack-a-mole problem of tax havens, where illicit money is caught up in a never-ending race to the bottom and flight to secrecy, is a smart one. We’re not going to make meaningful impacts until we prevent a great deal more secrecy jurisdictions from allowing money to be hidden inside their borders. But this kind of policy change is not impossible, and indeed may be moving substantially as we speak.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

  • Jeffrey Robinson

    EJ – The recent attacks on offshore havens are ass-backwards. You can’t blame some island jurisdiction with no natural resources trying to earn a living off the back of otherwise legal US/UK/Canadian tax avoidance, any more than you can blame ax manufacturers for Lizzy Borden. The battle must begin with the tax loopholes at home that permit offshore activities. At that point, and only at that point, should jurisdictions be encouraged to comply with what I’ve called “The Ultimate White List.” (http://www.jeffreyrobinson.com/blog/?p=291) That said, special attention must be paid to Switzerland, and the Caymans (and possibly the Bahamas) where “state-sanctioned” foreign tax evasion is openly on sale. To cope with that, criminal and civil sanctions should be enforced. (See: The Swiss Wash Whiter on Amazon.Com) But is is otherwise an exercise in futility to blame any island for selling shell companies and shelters when this sort of nonsense is allowed under the US/UK/Canadian tax codes. Of course, abuse must be prosecuted. But abuse comes from the tax evaders. As for FATCA, it is stillborn. There is no possibility it can succeed. It will, instead, in the next five years simply fade away like so many other ill-thought out exercises of its ilk. The reason why? Switzerland (and China) will not comply, simply shifting the money (and the problem) away from other jurisdictions. And if anyone thinks that the Swiss will give in… killing the goose that lays $2.1 Trillion eggs… there’s a bridge in Brooklyn I’d like to sell him. / Jeffrey Robinson

  • Jeffrey Robinson

    EJ – The recent attacks on offshore havens are ass-backwards. You can’t blame some island jurisdiction with no natural resources trying to earn a living off the back of otherwise legal US/UK/Canadian tax avoidance, any more than you can blame ax manufacturers for Lizzy Borden. The battle must begin with the tax loopholes at home that permit offshore activities. At that point, and only at that point, should jurisdictions be encouraged to comply with what I’ve called “The Ultimate White List.” (http://www.jeffreyrobinson.com/blog/?p=291) That said, special attention must be paid to Switzerland, and the Caymans (and possibly the Bahamas) where “state-sanctioned” foreign tax evasion is openly on sale. To cope with that, criminal and civil sanctions should be enforced. (See: The Swiss Wash Whiter on Amazon.Com) But is is otherwise an exercise in futility to blame any island for selling shell companies and shelters when this sort of nonsense is allowed under the US/UK/Canadian tax codes. Of course, abuse must be prosecuted. But abuse comes from the tax evaders. As for FATCA, it is stillborn. There is no possibility it can succeed. It will, instead, in the next five years simply fade away like so many other ill-thought out exercises of its ilk. The reason why? Switzerland (and China) will not comply, simply shifting the money (and the problem) away from other jurisdictions. And if anyone thinks that the Swiss will give in… killing the goose that lays $2.1 Trillion eggs… there’s a bridge in Brooklyn I’d like to sell him. / Jeffrey Robinson

  • http://www.lesperanceassociates.com/ David S Lesperance

    As Jeffrey points out there are really 2 different activities that are going on and if a given taxing jurisdiction wants to significantly reduce both then they must adopt different tactics (and will have different levels of success).

    1) Tax Evasion: While exchange of information treaties may have some impact, I think that the largest impact will continue to be whistleblowers. That is because of incentives. Tax haven countries do not have an economic incentive to enter into an exchange agreement unless sufficient leverage by sanction can be applied. An employee of a financial institution who is offered multiples of their annual salary to copy information on a USB key and deliver it to tax authorities has ALOT of motivation. As a result of this phenomena, I think you will continue to see a significant increase in non-compliant accounts being “outed”. Furthermore, a decreasing number of people will choose to “cheat the game”, as the possibility of detection (and paying the price of detection i.e. financial, criminal and reputational) has moved from remote to extremely high.

    2) Tax Avoidance: When looking at this topic, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course this would result in no net revenue and the corporation going bankrupt. Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the Canada, UK and US set up tax treaties between themselves and other countries (such as Ireland and Barbados). It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments. Until both sides of a given treaty see it in their best interest to alter that treaty, it will remain. As a result of the “prisoner’s dilemma”, this doesn’t happen vary often.

    Therefore, the only time you will see corporations chose to pay more tax on “moral grounds” is if the corporation is subject to external pressures on its gross revenue. For example Starbucks UK needed to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the UK which could be picketed or damaged reducing sales; and b) There are many UK competitors who could service UK customer needs and decrease gross revenues. As a result, it is logical that they may consider paying more tax than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

    Google UK is different in that a) it does not have or need physical facilities in the UK to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax than legally obligated.

    It is easier to predict outcomes when one looks at the incentives behind behaviour.

    • http://www.financialtransparency.org/ E.J. Fagan

      Tax haven countries have a clear incentive to cooperate: Their financial institutions will be subject to withholding taxes from the U.S. if they do not. This is why we’ve seen huge international progress on this issue over the past 2 years, and anticipate more going forward.

    • http://www.lesperanceassociates.com/ David S Lesperance

      Whistleblowers, John Doe summons, FATCA, Qualified Intermediary Regime, exchange of information treaties, public humiliation for outed tax evaders all have some impact on reducing tax evasion. Which has the greatest impact can only be answered by empirical study and is to me an interesting side note only.

      However, taxing countries do not have the big “you are hiding criminals” stick to hold over tax havens on the issue of tax avoidance. Also most taxing countries themselves have provide tax advantages to individuals and corporations to either do more or move to their jurisdiction, so they would have to “reform” themselves. I am just less convinced that there will be any wholesale changes in this area.

    • Tim12278

      To back up even further how can the US get the Cayman Islands to sign on to FATCA if they can’t even get Canada to signup.

    • http://www.lesperanceassociates.com/ David S Lesperance

      The country does not “sign onto FATCA”. Rather a financial institution (which may be in one or many countries) agrees to abide by FATCA in order to avoid various penalties for not doing so.

    • Tim12278

      However, politicans in other developed countries such as Canada have said they will not comply with FATCA such as Green Party of Canada leader and MP Elizabeth May. May has indicated she will vote against an Intergovernmental Agreement to implement FATCA between the US and Canada. At least 15 Liberal and NDP MP’s have also said the same.

      http://www.greenparty.ca/backgrounder/2013-01-28/backgrounder-canada-and-fatca

      IRS Tax Collection: Evasion of the US or Invasion of Canada?

      http://www.greenparty.ca/media-release/2013-03-13/implementation-fatca-likely-unconstitutional-says-leading-constitutional-ex

      Why are May and other FATCA critics not being attacked by the Tax Justice Community.

    • http://www.lesperanceassociates.com/ David S Lesperance

      Although I am a political agnostic and have nothing against the Green Party, I would think that not many people are bothering with Ms. May’s comments since the Green Party holds only 1 out of 308 seats in the Canadian parliament.

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