How tax havens helped to create a crisis

By Sol Picciotto (Financial Times)

5 May, 2009

Banks employ large teams of highly paid people to devise transactions mainly for the purpose of avoiding tax. These activities seem to be far more profitable than the humdrum business of managing payments and channelling savings towards investment. Why?

The answer shows the close link between tax avoidance and the speculation that has fuelled financial instability for 30 years. There were clearly other causes of the current crisis but the faults of the international tax system were a big contributory factor.

International tax co-ordination depends on treaties based on a model devised 80 years ago. To prevent double taxation, the treaties generally give governments the right to tax returns from an investment in the investor's country of residence. Business profits, meanwhile, are taxable in the “source” country where the activity takes place.

But for most of the past century, international investment was dominated by multinational corporations, which could choose the location of their sources of funds and organise their affiliates' capital structures. This enabled them to devise techniques to ensure that they were not taxed unfairly, as they saw it, exploiting ambiguities in the concepts of residence and source using legal entities formed in convenient jurisdictions. Such methods were also pioneered, with rather less legitimacy, by wealthy people resentful of high income taxes.

The relaxation and final abandonment of exchange controls in the 1970s led to the blossoming of “offshore” finance and a boom in tax havens. These depend on both outright tax evasion and the exploitation of grey areas by tax avoidance. Since large multinationals are as much financial as business entities, they have freedom to devise complex financial structures – financial institutions, such as banks, even more so: in recent separate surveys by the US Government Accountability Office and the Tax Justice Network, the largest user of tax havens in every country surveyed was a bank. Tax authorities have enormous problems puzzling out these structures. If they can, it is often hard to characterise them as shams.

The leading countries themselves are also host to major financial centres, from which most of these activities are directed. The revenue authorities in these countries, not least the US and the UK, have been cowed into accepting these activities for fear of losing finance business.

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And, from Lies, damned lies and tax haven nonsense

Something pernicious is going on in the undergrowth. British tax havens are trying to establish clear blue water between their activities and those of their commercial rivals in Austria, Liechtenstein, Luxembourg and Switzerland. This is based on lies. "We are transparent they say: we do not have banking secrecy and we have signed up to tax information exchange agreements that meet the OECD standard."

Let's nail this nonsense before it goes any further. The British tax havens do not rely on banking secrecy, because they use a far more secretive mechanism for protecting their tax evading clients. This mechanism is called a trust. Trusts are a British common law entity which extend as far back as the Crusades to Palestine. But they have become the basis of highly abusive practices because they are not registered with any public authority and they are not required to reveal any information on public record. Trusts provide the underpinning for the British tax evasion industry, which is probably the largest in the world when you take account of all the British satellite tax havens on the Crown Dependencies and Overseas Territories.

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