The hidden wealth of nations

Since the 1960s, tax havens have morphed into 'offshore financial centres' (OFCs) and expanded their roles. Apart from accumulating illicit capital (in the tax haven role), channelling this capital back onshore dressed up as foreign investment (in investment hub role) and deploying it to engage in destructive financial speculation (in OFC role), these strongholds of finance capital also serve a political function: they undermine democracy by enabling financial capture of the political levers of democratic states. G Sampath explains.

THIS could be a bumper year for the ever-lucrative tax avoidance industry. The 2015 final reports of the Organisation for Economic Co-operation and Development (OECD)-led project on Base Erosion and Profit Shifting (BEPS) - which refer to the erosion of a nation's tax base due to the accounting tricks of multinational enterprises (MNEs) and the legal but abusive shifting out of profits to low-tax jurisdictions respectively - lay out 15 action points to curb abusive tax avoidance by MNEs. As a participant of this project, India is expected to implement at least some of these measures. But can it? More pertinently, does it have the political will?

The BEPS project is no doubt a positive development for tax justice. If India's recent economic history tells us anything, it is that economic growth without public investment in social infrastructure such as health care and education can do very little to better the life conditions of the majority. Which is why curbing tax evasion to boost public finance is part of the United Nations' Sustainable Development Goals (SDGs).

However, notwithstanding the BEPS project, MNEs and their dedicated army of highly paid accountants are not about to roll over and comply. Again, if past history is any indication, the cat-and-mouse game between accountants and taxmen will continue, with new loopholes being unearthed in new tax rules.

Empowering tax dodgers

The primary cause of concern here is the quality of India's political leadership, which has consistently betrayed its own taxmen. All it takes - regardless of the party in power - is for the stock market to sneeze, and the Indian state swoons. We've seen it happen time and again: the postponement of the enforcement of General Anti-Avoidance Rules (GAAR) to 2017, and more spectacularly, on the issue of participatory notes, or P-notes.

Last year, the Special Investigation Team (SIT) on black money had recommended mandatory disclosure to the regulator, as per Know Your Customer (KYC) norms, of the identity of the final owner of P-notes. It was a sane suggestion because the bulk of P-note investments in the Indian stock market were from tax havens such as the Cayman Islands. But the markets threw a fit, with the Bombay Stock Exchange's Sensex index crashing by 500 points in a day. The National Democratic Alliance (NDA) government, which had come to power promising to fight black money, promptly issued a statement assuring investors that it was in no hurry to implement the SIT recommendations. Given such a patchy record, what are the realistic chances of India actually clamping down on tax dodging?

Let's take, for instance, Action No. 6 of the OECD's BEPS reports: it urges nations to curb treaty abuse by amending their Double Taxation Avoidance Agreements (DTAA) suitably. The obvious litmus test of India's seriousness on BEPS is its DTAA with Mauritius. By way of background, Mauritius accounted for 34% of India's foreign direct investment (FDI) equity inflows from 2000 to 2015. It's been India's single largest source of FDI for nearly 15 years. Now, is it possible that there are so many rich businessmen in this tiny island nation with a population of just 1.2 million, all with a touching faith in India as an investment destination? If not, how do we explain an island economy with a GDP less than one-hundredth of India's GDP supplying more than one-third of India's FDI?

We all know the answer: Mauritius is a tax haven. While not in the same league as the Cayman Islands or Bermuda, Mauritius is a rising star, thanks in no small measure to India's patriotic but tragically tax-allergic business elite. In Treasure Islands: Tax Havens and the Men Who Stole the World, financial journalist Nicholas Shaxson notes how Mauritius is a popular hub for what is known as 'round-tripping'. He writes, 'A wealthy Indian, say, will send his money to Mauritius, where it is dressed up in a secrecy structure, then disguised as foreign investment, before being returned to India. The sender of the money can avoid Indian tax on local earnings.'

In other words, it appears that India's biggest source of FDI is India itself. Indian money departs on a short holiday to Mauritius, before returning home as FDI. Perhaps not all the FDI streaming in from Mauritius is round-tripped capital - maybe a part of it is 'genuine' FDI originating in Europe or the US. But it still denotes a massive loss of tax revenue, part of the $1.2 trillion stolen from developing countries every year.

What makes this theft of tax revenue not just possible but also legal is India's DTAA with Mauritius. It's a textbook example of 'treaty shopping' - a government-sponsored loophole for MNEs to avoid tax by channelling investments and profits through an offshore jurisdiction.

For instance, as per this DTAA, capital gains are taxable only in Mauritius, not in India. But here's the thing: Mauritius does not tax capital gains. India, like any sensible country, does. What would any sensible businessman do? Set up a company in Mauritius, and route all Indian investments through it.

India signed this DTAA with Mauritius in 1983, but apparently 'woke up' only in 2000. India has spent much of 2015 'trying' to renegotiate this treaty. But with our Indian-made foreign investors lobbying furiously, the talks have so far yielded nothing. Meanwhile, China, which too had the same problem with Mauritius, has already renegotiated its DTAA, and it can force investors to pay 10% capital gains tax in China.

Changing profile of tax havens

Tax havens such as Mauritius thrive parasitically, feeding on substantive economies like India. Back in 2000, the OECD had identified 41 jurisdictions as tax havens. Today, as it humbly seeks their cooperation to combat tax avoidance, it calls them by a different name, so as not to offend them. The same list is now called - and this is not a joke - 'Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters'. Distinguished members of this club include the Cayman Islands, Bermuda, Bahamas, Cyprus, and, of course, Mauritius.

Today the function of tax havens in the global economy has evolved way beyond that of offering a low-tax jurisdiction. Shaxson describes three major elements that make tax havens tick. First, tax havens are not necessarily about geography; they are simply someplace else - a place where a country's normal tax rules don't apply. So, for instance, country A can serve as a tax haven for residents of country B, and vice versa. The US is a classic example. It has stringent tax laws and is energetic in prosecuting tax evasion by its citizens around the world. But it is equally keen to attract tax-evading capital from other countries, and does so through generous sops and helpful pieces of legislation which have effectively turned the US into a tax haven for non-residents (see following article).

Second, more than the nominally low taxes, the bigger attraction of tax havens is secrecy. Secrecy is important for two reasons: to be able to avoid tax, you need to hide your real income; and to hide your real income, you need to hide your identity, so that the booty stashed away in a tax haven cannot be traced back to you by the taxmen at home. So, even a country whose taxes are not too low can function as a tax haven by offering a combination of exemptions and iron-clad secrecy - which is the formula adopted by the likes of Luxembourg and the Netherlands.

Third, the extreme combination of low taxes and high secrecy brought about a new mutation of tax havens in the 1960s: they turned themselves into offshore financial centres (OFCs). The economist Ronen Palan defines OFCs as 'markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to other non-residents free from most regulations and taxes'. It is estimated that OFCs are recipients of 30% of the world's FDI and are, in turn, the source of a similar quantum of FDI.

Such being the case, all India needs to do to attract FDI is to become an OFC or create an OFC on its territory - bring offshore onshore, so to speak. That's precisely what the US did - it set up International Banking Facilities (IBFs) 'to offer deposit and loan services to foreign residents and institutions free of . reserve requirements'. Japan set up the Japanese Offshore Market (JOM). Singapore has the Asian Currency Market (ACU), Thailand has the Bangkok International Banking Facility (BIBF), Malaysia has an OFC in Labuan island, and other countries have similar facilities.

OFCs, as Palan puts it, are less tax havens than regulatory havens, which means that financial capital can do here what it cannot do 'onshore'. So every major hedge fund operates out of an OFC. Given the volume of unregulated financial transactions that OFCs host, it is no surprise that they were at the heart of the 2008 financial crisis.

Apart from accumulating illicit capital (in the tax haven role), channelling this capital back onshore dressed up as FDI (in investment hub role) and deploying it to engage in destructive financial speculation (in OFC role), these strongholds of finance capital also serve a political function: they undermine democracy by enabling financial capture of the political levers of democratic states.

It is well known that political parties in most democracies are amply funded by slush funds that would not have accumulated in the first place had taxes been paid. But today, not least in the Anglophone world, global finance's capture of the state appears more like the norm.

A lone exception seems to be Iceland, which began the new year on a rousing note - by sentencing 26 corrupt bankers to a combined 74 years in jail. Meanwhile in India, we continue to parrot long-discredited cliches about the need for more financial deregulation and a weird logic that mandates a smaller and more limited role for public finance.        

First published in The Hindu (India) on 21 January 2016. Reprinted with permission.

Rothschild proves that elite bankers rule the world - by establishing billionaire tax haven inside the US

Jay Syrmopoulos

THE US is quickly becoming known as the new Switzerland of international banking, due to its refusal to sign on to new global disclosure standards issued by the Organisation for Economic Co-operation and Development (OECD), a government-funded international policy group.

The process of moving massive amounts of international capital from typical tax havens into the US is being driven by a familiar name in the world of international finance - Rothschild & Co.

Rothschild, a centuries-old European financial institution, manages the wealth of many of the world's most wealthy families and has been instrumental in helping move the global elite's wealth from traditional tax havens like the Bahamas, Switzerland and the British Virgin Islands to the US.

Driving the phenomenon of international capital flow into the US is its refusal to agree to the new international disclosure standards that it essentially wrote. After coercing almost 100 countries to sign on to the OECD disclosure standards, the US now refuses to become a signatory.

'How ironic - no, how perverse - that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,' wrote Peter A Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal, as cited by Bloomberg Businessweek. 'That "giant sucking sound" you hear? It is the sound of money rushing to the USA.'

The US Treasury Department has proposed similar standards to the OECD's for foreign-owned US accounts, but those proposals have failed due to political and banking industry opposition.

According to Bloomberg Businessweek: 'For decades, Switzerland has been the global capital of secret bank accounts. That may be changing. In 2007, UBS Group AG banker Bradley Birkenfeld blew the whistle on his firm helping US clients evade taxes with undeclared accounts offshore. Swiss banks eventually paid a price. More than 80 Swiss banks, including UBS and Credit Suisse Group AG, have agreed to pay about $5 billion to the US in penalties and fines.

'The US was determined to put an end to such practices. That led to a 2010 law, the Foreign Account Tax Compliance Act, or Fatca, that requires financial firms to disclose foreign accounts held by US citizens and report them to the IRS [the US Internal Revenue Service] or face steep penalties.

'Inspired by Fatca, the OECD drew up even stiffer standards to help other countries ferret out tax dodgers. Since 2014, 97 jurisdictions have agreed to impose new disclosure requirements for bank accounts, trusts, and some other investments held by international customers. Of the nations the OECD asked to sign on, only a handful have declined: Bahrain, Nauru, Vanuatu - and the United States.'

After opening a trust company in Reno in the US state of Nevada, Rothschild & Co. began ushering the massive fortunes of the world's most wealthy individuals out of typical tax havens, now subject to OECD international disclosure requirements, and into the Rothschild-run US trusts, which are exempt from the international reporting requirements.

The impetus for the wealthy to put their money in the US is the promise of confidentiality, which in itself is interesting - considering how little of it Americans actually have at this point.

In an odd twist of fate, the US Treasury Department takes a very strong stand against international tax evasion - unless you put that money into a US trust account - which coincidentally is being helmed by Rothschild & Co.

The words of Andrew Penney, a managing director at Rothschild & Co., are extremely clear to international investors. In a draft for a presentation in San Francisco, Penney wrote that the US 'is effectively the biggest tax haven in the world'.

Penney, 56, is now a managing director based in London for Rothschild Wealth Management & Trust, which handles about $23 billion for 7,000 clients from offices including Milan, Zurich and Hong Kong, according to Bloomberg Businessweek. A few years ago he was voted 'Trustee of the Year' by an elite group of UK wealth advisers.

For decades, Switzerland was the global capital for confidential bank accounts. But, in what seems like some kind of odd parallel universe, the US has now become one of the only countries in the world where financial advisers actually promote that accounts will remain secret from international authorities.

So let's be clear - if you are part of an international uber-elite with vast amounts of wealth you can hide that capital in the US to evade taxes, but if you are an average American citizen that refuses to pay your taxes, expect to be locked in a cage.

Jay Syrmopoulos is a political analyst, free thinker, researcher and ardent opponent of authoritarianism. He is currently a graduate student at the University of Denver in the US pursuing a Master's in Global Affairs. His work has been published on Ben Swann's Truth in Media, Truthout, Raw Story, MintPress News as well as many other sites. The above article is reproduced from

*Third World Resurgence No. 305/306, January/February 2016, pp 16-18