Illustration : Thierry Cap de Coume
Liechtenstein hit the headlines in the winter of 2008 when Germany’s loss of more than 4 billion euros through tax evasion by many of its citizens in the country’s neighbouring principality came to light. Although the issue provoked outrage, it pales in comparison with the astronomical sums that pass through countless tax havens on a daily basis. The small town of Vaduz, the capital of Liechtenstein, has only 5,000 inhabitants, but it shelters 75,000 “letter-box” international businesses. This phenomenon is repeated in the Cayman Islands, the Bahamas and Pacific micro-states.
A number of international organisations, including the International Confederation of Free Trade Unions (ICFTU), were trying to alert public opinion to the extent of the problem long before recent strong calls from governments for vital action to fight the harm caused by territories that attract so many big companies. The ICFTU highlights the fact that over the past 20 years, “the number of tax havens has grown from 25 to 73. In 2004, there were around 5,000 free zones with almost zero taxation. There were only 850 in 1984.” The OECD estimates that 50 % of today’s world trade flow passes through tax havens.
Christian Chavagneux, a doctor in economics and an expert on international tax matters(1), describes tax haven territories as “driving forces behind globalisation and platforms that enable the value of trade to be increased. They also play a central financial role by serving as intermediaries for the purchase of shares and bonds.” The International Monetary Fund (IMF) states that tax havens held one-third of international portfolio investments in 2004, compared with one-quarter in 1997. So it is hardly surprising that the British Virgin Islands has become the largest investing country in China, far ahead of the United States.
The consequences in terms of tax revenue are significant. Tax paid by companies in OECD countries is now said to represent less than 10 % of GDP. Over the past twenty years, corporate tax rates have fallen from 45 % to below 30 %.
Kristian Weise, policy research officer and an expert on tax matters at the ICFTU, criticises “the race to the lowest tax rate engaged in by many governments to
increase their attractiveness. This kind of fiscal policy merely encourages a trend
towards avoidance of tax and regulatory requirements.” Developments in Japan are “particularly alarming.” Corporate tax now accounts for a mere 13% of the country’s tax revenue, compared with 16.8 % in the 1990s and 21.6 % in the 1980s. “The resulting lost tax revenue creates a huge shortfall for governments. And in the end, it is taxpayers and SMEs, who lack the resources of big companies to bypass the tax authorities, who pay the consequences,” regrets also Kristian Weise before pointing out that small businesses are the lifeblood and of society. “Logically, governments should be working hand in hand since the preservation of their economic vigour is at stake.” Kristian Weise goes on to emphasise the “irony of a situation that will also damage multinationals in the long run if nothing changes. Although the most prominent companies should be only slightly affected, most are likely to face a tricky period. It should be remembered that research and development are a central part of the activities of large groups. If insufficient tax revenue meant they could no longer benefit from substantial public investment, they would be shooting themselves in the foot. They would have less capacity for innovation and, in the end, this would significantly affect their growth.”
(1) Les Paradis Fiscaux, Christian Chavagneux and Ronen Palan. published by Éditions La Découverte (Collection Repères) 2007, 8.50 euros.
Various definitions
The OECD (Organisation for Economic Co-opération and Development) uses four criteria to define a tax haven: no or nominal imposition of taxes; a lack of transparency with regard to tax legislation; whether the territory has laws that prevent exchanges of information with foreign tax administrations; and an intention to attract investment and transactions through advantageous tax arrangements. 35 jurisdictions meet these criteria. They include the Netherlands Antilles, the Bahamas, Cyprus, Gibraltar, the Cayman Islands, the Cook Islands, Mauritius, the British Virgin Islands, the US Virgin Islands, Jersey, Liberia, Malta, San Marino and the Seychelles. These territories have, however, made commitments to the OECD to improve transparency. Other organisations believe that additional factors, such as strong bank and business secrecy, relaxed registration procedures for companies and total freedom of movement of capital, must be included to provide a more accurate definition. Based on these criteria, more than 70 territories can be described as tax havens. Transparency International considers the speed with which businesses can be set up, economic and political stability, and the existence of bilateral agreements are three factors that should also be taken into account since they provide an ideal breeding ground for the development of dubious practices.
The facts
• There are 60 to 90 tax havens (depending on how they are defined).
• According to the NGO Transparency International, the leading civil society organisation engaged in the fight against corruption, tax havens shelter 4,000 banks, two-thirds of hedge funds and 2.4 million front companies managing financial assets of 7,000 billion euros.
• For the US, the amount of annual lost revenue attributable to tax havens is 70 billion euros. For France, the amount exceeds 22 billion euros.
• Tax havens hold 26 % of the world’s capital but represent only 1.2 % of the global population.
• Tax havens manage 20 % of the world’s private wealth.
• The British Virgin Islands shelter more than 500,000 companies.
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