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Why tax havens must go! Tax havens are drivers of global corruption and hurt developing countries the most. And as more than 300 leading economists from 30 countries affirmed in a letter to the London anti-corruption summit (see text below), they serve 'no useful economic purpose'. TAX havens create an uneven playing field. Some multinational corporations (MNCs) are well positioned to take advantage of tax havens, but other businesses, whether large domestic companies or smaller businesses, are unable to do the same. Similarly, it is only very wealthy individuals that can afford the armies of tax lawyers and accountants needed to hide wealth in tax havens, so ironically it is those with the greatest financial means who are best placed to avoid paying their fair share of tax. As tax revenues from MNCs and wealthy individuals fall short, governments are left with two options: either to cut back on essential spending needed to reduce inequality and poverty, or to make up the shortfall by levying higher taxes on other, less wealthy sections of society and smaller businesses in the domestic economy. Both options see those at the bottom lose out and the inequality gap grow. Tax revenue is essential to fund vital public services such as education, health and infrastructure, as well as cash transfers such as child benefit and state pensions. Universal, free public services are proven to tackle inequality and poverty. Ending the era of tax havens will ensure that the necessary funds for these services can be raised in a more redistributive fashion - in particular, through direct taxation of income, profits, wealth and capital gains, rather than through consumption taxes such as VAT that are likely to be more regressive and can lead to the poor subsidising the rich. By hiding income and assets, tax havens allow both MNCs and unscrupulous individuals to evade or avoid direct taxation, thereby allowing them to amass even more wealth and making inequality worse. This makes direct taxation less effective - damaging revenues and the scope for redistribution. Perhaps more importantly, the secrecy promoted by tax havens makes corruption pay, and with impunity. The majority of us do not have access to this global tax haven network: it is the preserve of big business and a wealthy elite. When the wealthy fail to pay their fair share of tax, the rest of us are left to pick up the tab. The revenue costs of tax havens The most easily quantifiable cost of tax haven secrecy is the scale of revenues lost around the world due to tax not being paid. There is no doubt that this has a huge impact on development potential, despite the inevitable uncertainty about estimates of the sums involved and the need for better data. Global estimates of individual and corporate wealth held 'offshore' span a wide range. The highest estimate of individual wealth hidden away in 'secrecy jurisdictions' suggests a range of $21-32 trillion, based on triangulation of multiple methods (and data sources). A conservative estimate looking at the mismatch between the publicly acknowledged bilateral assets and liabilities of a list of 'tax haven' jurisdictions is that $7.6 trillion was hidden by wealthy individuals 'offshore' in 2013. Taking into account nominal tax rates in countries of origin, it is estimated that $190 billion of revenue is lost globally as a result of individuals' wealth being hidden offshore, with at least $70 billion being lost to the world's poorest regions. New estimates of revenue losses due to corporate tax abuses all point to a larger scale than previously recognised. In 2015 International Monetary Fund (IMF) researchers examined a broader measure of tax haven 'spillovers', estimating total tax losses in the long run of approximately $600 billion globally. A Tax Justice Network (TJN) study found that the profit shifting of US-headquartered multinationals alone was likely to have resulted in around $130 billion of revenue losses globally in 2012. While developing countries are hit hardest by corporate tax dodging, it is important to note that rich countries also suffer. It is often assumed that the richest and largest economies, home to most of the world's multinationals, defend the current system because it is in their own interests to do so. However, among the biggest losers to the broken global corporate tax system in absolute terms are G20 countries themselves, including the US, the UK, Germany, Japan, France, Mexico, India and Spain. This shows that even developed countries with state-of-the-art tax legislation and well-equipped tax authorities cannot stop multinationals dodging their tax without a thorough reform of the global tax system. Tax havens: drivers of global corruption Tax haven secrecy also undermines good governance - and prevents policy makers from resisting capture by self-interested elites. Tax rules are just a subset of the wider laws and regulations that are undermined by the ability of the wealthy to hold assets anonymously. Corruption is commonly understood as 'the abuse of power for private gain'. When individuals and organisations seek to use their power to avoid paying the taxes they owe by utilising preferential facilities such as tax havens, which provide them with undue tax-free rewards, this is a form of corruption. The financial secrecy that many tax havens provide facilitates grand corruption, money laundering, the hiding of political conflicts of interest, the manipulation of markets and the evasion of anti-trust law. This undermines democracy and creates the conditions for insecurity to flourish. Organisations including Global Witness and Transparency International have led the way in highlighting just how pervasive anonymous ownership is, not least in the London property market. Global Witness recently reported that substantial parts of the city's famous Baker Street are owned by a mysterious figure with close ties to a former Kazakh secret police chief accused of murder and money laundering. Transparency International's analysis shows that 36,342 London properties covering a total of 2.25 square miles are held by anonymous companies. Using police data, it also showed that 75% of properties whose owners are under investigation for corruption made use of offshore corporate secrecy to hide their identities. A recent Channel 4 television documentary, From Russia with Cash, revealed the apparent willingness of London estate agents to facilitate corrupt purchases. Deutsche Bank analysis suggests that Russian money constitutes a major part of the roughly œ1 billion a month of hidden capital inflows to the UK. There is also increasing agreement that tax dodging by MNCs should be seen in this light - that is, as another form of corruption. World Bank president Jim Yong Kim has labelled it explicitly as 'a form of corruption that hurts the poor'. Overall, tax havens undermine not only tax systems but also the wider effectiveness of states. The Norwegian Government Commission on Capital Flight Out of Developing Countries made the case powerfully: 'Potentially the most serious consequences of tax havens are that they can contribute to weakening the quality of institutions and the political system in developing countries. This is because tax havens encourage the self-interest that politicians and bureaucrats in such countries have in weakening these institutions.' Tax havens: drivers of economic crashes Last but far from least, tax haven secrecy has a significant impact on the ability of financial regulators to identify and mitigate risk in capital markets. This was an important contributory factor to the global financial crisis that began in 2007 and continues to cast a long shadow. Given the growing economic inequality we have witnessed in the aftermath of the financial crisis, the role that tax havens played in creating the conditions for it is doubly important. We need to tackle tax havens in order to challenge the causes and symptoms of the financial crash. The evidence from the crisis shows just how little national regulators were aware of the offshore activities of subsidiaries of major financial institutions in their charge, and how this facilitated the extraordinary credit boom that led - as credit booms do - to bust. From the nominally Irish entities of German and US banks such as Bear Stearns which violated international regulations on asset-capital ratios many times over, to the repeated story of apparently highly performing London-based operations exposing US parents to untold risk (most dramatically in the case of AIG), the consistent findings are that home-country regulators either did not know what was happening or did not feel it was in their remit to intervene, while the 'offshore' regulator (UK or Irish) seems to have felt home regulators were in charge - so regulation fell between the cracks. The deliberate and systematic exploitation of financial secrecy to circumvent capital market regulation provided the basis for higher profits in the short term - largely enjoyed by a wealthy few - and at length a global crisis for the many. The crimes that tax haven secrecy enables give rise, therefore, to greater economic inequality and to less well-functioning and competitive markets, and to greater political inequality through the corruption of systems of democratic representation. Tax havens are corrupting global markets. Tax havens hurt developing countries the most It's estimated that poor countries lose out on a staggering $170 billion of taxes every year because of tax havens - vital revenue that is desperately needed to pay for public services like healthcare and education. Individual studies can give a powerful indication of the scale of impacts. An ActionAid case study found that Australian mining company Paladin had cut $43 million from its tax bill in Malawi. This could have paid for either: 431,000 HIV/AIDS treatments, 17,000 nurses, 8,500 doctors or 39,000 teachers. In terms of both corporate profit shifting and individual undeclared wealth, the evidence supports the view that developing countries are worst affected. For corporate profit shifting, IMF researchers estimate that losses are around 1% of GDP for OECD countries and 1.3% for developing countries. However, the GDP comparison does not show the full difference in intensity of losses, because developing countries have lower tax revenues in general: often 10-20% of GDP, rather than 30% or more in OECD countries. The proportion of revenues foregone is therefore substantially greater in comparison: perhaps 6-13% of existing tax revenues in developing countries, as opposed to just 2-3% in OECD countries. Estimates of undeclared individual wealth also suggest a particular intensity in developing countries. One estimate is broken down by region; see Table 1. With the exception of Russia and the Gulf countries, the proportion of wealth held offshore is largest for Africa and Latin America - more than twice that of Europe and many times higher than that of the US. While it is difficult immediately to construct an equivalent share of current revenues, the estimated revenue losses for Africa and Latin America appear disproportionate to their shares of world GDP. Oxfam calculates that the $14 billion a year that African countries lose to individuals hiding their wealth offshore would be enough to pay for healthcare that could save the lives of four million children and employ enough teachers to get every African child into school. Supporting this finding for Africa, there are also regional estimates of lost capital that strongly imply that the region is a net creditor to, rather than a net debtor of, the rest of the world. Former African Development Bank chief economist Léonce Ndikumana and co-author James Boyce have produced a series of estimates of the stock of African capital flight offshore since the 1970s, most recently for a new volume produced by the African Economic Research Consortium. They estimate that the stock of flight capital built up between 1970 and 2010 for 39 African countries and held offshore is approximately $1.3 trillion, or 82% of the 2010 GDP of these countries. In contrast, the stock of external debt stood at $283 billion - so the scale of African wealth hidden offshore is estimated to exceed recorded external debt by a ratio of more than four to one. Finally, a narrower study, but with global coverage, provides additional supporting evidence for the view that developing countries in general suffer a greater intensity of tax haven exposure. The 'Swiss Leaks' data, leaked in 2008 by whistleblower Herve Falciani, revealed the pattern of foreign holdings in the bank accounts operated by HSBC Switzerland. The data provide only a snapshot, and cannot be extrapolated with any confidence due to the continuing lack of consistent data on international banking. Nonetheless, they provide a unique insight into the business model of a major global bank operating in the jurisdiction which is consistently shown to be the biggest global tax haven. For some countries, such as Kenya, Egypt and Burundi, HSBC held assets worth more than 1% of GDP. African countries both north and south of the Sahara are consistently the most exposed to corporate tax dodging in terms of proportion to GDP/tax revenues. This is exacerbated by economist Gabriel Zucman's startling estimate that 30% of African wealth held by individuals is held offshore in a narrow range of financial assets. A number of countries in both Latin America and South Asia also show significant exposure. Few countries have as little exposure, in proportional terms, as the United States, which has been by far the most aggressive in unilaterally challenging Swiss bank secrecy. In stark contrast, the UK is the only OECD country with an exposure comparable to the majority of developing countries - and yet the UK's response has been puzzling, to say the least (see box). The evidence shows clearly the broad scale of damage done to development through the financial secrecy provided by tax havens. It is no coincidence that one major difference between the Millennium Development Goals (MDGs) agreed in 2000 and the Sustainable Development Goals (SDGs) agreed in 2015 is the inclusion both of supporting tax and of combating illicit financial flows in the latter. Pressure from developing countries to move past the aid-driven MDG agenda is an important element of this progress. The material above is extracted and adapted by Third World Resurgence from 'Ending the Era of Tax Havens: Why the UK government must lead the way' (2016) with the permission of Oxfam GB, Oxfam House, John Smith Drive, Cowley, Oxford OX4 2JY, UK (www.oxfam.org.uk). Oxfam GB does not necessarily endorse any text or activities that accompany the materials, nor has it approved the adapted text. The Oxfam GB briefing paper 'Ending the Era of Tax Havens: Why the UK government must lead the way' was written by Alex Cobham and Luke Gibson. Table 1: Estimates of undeclared individual wealth broken down by region
Offshore wealth Share of financial Tax revenue
loss Europe 2,600 10% 75 United States 1,200 4% 36 Asia 1,300 4% 35 Latin America 700 22% 21 Africa 500 30% 15 Canada 300 9% 6 Russia 200 50% 1 Gulf countries 800 57% 0 Total 7,600 8% 190 Source: G. Zucman (2014). Taxing across Borders: Tracking Personal Wealth and Corporate Profits.
*Third World Resurgence No. 309, May 2016, pp 12-16 |
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