Monday, March 23, 2009

Hypocrisy in 'tax haven' rules

March 23, 2009

Europe targeted offshore banking to divert eyes from actual crisis

By Jonathan Eyal

THEIR economies are in deep trouble and their popularity is in free-fall, but the leaders of Germany, France and Britain can at least claim one triumph: earlier this week, they succeeded in forcing most of the world's offshore financial centres into abandoning their age-old traditions of banking confidentiality.

In quick succession, places as diverse as Switzerland and Singapore, Bermuda and Monaco, have announced that they will comply with new international rules which call for a more transparent exchange of information about money deposited in their banks and the identity of the depositors.

In Europe, this is portrayed as a major achievement. For, as German Finance Minister Peer Steinbrueck - who led the attack against offshore financial centres - frequently points out, these are just 'tax havens' where rich people hide their ill-gotten gains.

Exposing such tax cheats by lifting the shield of banking secrecy, it is argued, is a moral imperative: nobody should be allowed to escape paying taxes, and people who have nothing to hide have nothing to fear either.

But the reality is quite different. Europe's offensive against offshore financial centres is a cheap populist measure designed to deflect voters' attention from the current financial crisis.

It will do little to improve tax collection around the world. But it may wreck the livelihood of smaller nations and, ultimately, render everyone poorer.

European politicians conveniently forget the origins of offshore financial centres. Switzerland - by far the biggest in this business - offered international banking services for centuries. And the Swiss thrived not by attracting money from crooks but, rather, by earning the confidence of law-abiding individuals.

At a time when the rest of Europe was constantly embroiled in warfare and when private property was frequently nationalised or just stolen, the Swiss remained an oasis of stability, a place where one's assets were secure.

The current Swiss bank secrecy legislation was enacted during the 1930s, in order to prevent agents of Nazi Germany from snooping on people.

So, parking one's money offshore is often a reflection of the uncertainties back home.

Nor is banking secrecy simply a smokescreen for tax evasion. Confidentiality is one of the core principles for banks everywhere, not because people have something to hide but because they wish to keep their financial affairs to themselves.

There is no question that Swiss banks occasionally broke the law. The Union Bank of Switzerland - the world's largest wealth management firm - recently admitted that it helped some of its American customers to evade US taxes. This provided the excuse for European governments to launch their offensive.

Nevertheless, the attack on the world's offshore financial centres remains both hypocritical and wrong.

First, not all such centres are the same. Although many countries have emulated the Swiss banking model, each one operates a different legal regime.

Mr Angel Gurria, who heads the Organisation for Economic Cooperation and Development, readily admits that Singapore or Hong Kong cannot be lumped together with European 'tax havens'. But lumped together they sometimes are: all were threatened with unspecified sanctions if they do not comply with demands to supply information.

Nor is the real battle about identifying tax evaders, but about forcing offshore financial centres to supply details on demand, about anyone.

The US government has presented a list of no fewer than 52,000 American citizens who allegedly have bank accounts in Switzerland. And the Germans have gone even further, by stealing banking records from Liechtenstein, a neighbouring independent state. Since offshore financial centres are often small and vulnerable, their sovereignty is, apparently, dispensable.

And meanwhile, hypocrisy rules the day. The biggest tax haven is not actually Switzerland, but the US itself, which levies no tax on the dividend, interest and capital gains earnings of foreign investors in America, thereby encouraging foreigners to escape such charges back home.

Furthermore, out of the 10 recognised offshore financial centres, four are British-ruled territories, and one - the Virgin Islands - is under US sovereignty. Before hitting at others, Britain and the US would be well-advised to clean up their act at home.

But, ultimately, what is this fuss all about?

The Tax Justice Network, a non-governmental organisation, claims that as much as S$17.5 trillion in 'assets from around the world are hidden in offshore havens'. Nobody knows how this figure was arrived at, but nobody cares: earlier this week, the New York Times ran an editorial demanding the return of these 'trillions that the world could use'.

Tax evaders must clearly be pursued. But the sums which are likely to be recovered from offshore centres will always be small, and certainly smaller than the funds lost by Bernard Madoff.

The biggest frauds and dodgy investment strategies were conducted under the noses of Western financial supervisors, not in some far-away and supposedly unregulated financial centre.

Yet facts no longer matter much in this dispute. Unable to agree on what needs to be done to handle the current economic crisis, Western politicians have concluded that kicking around small offshore banking centres provides a useful diversion.

No doubt, the storm will pass. And the world's rich will still find someone willing to accept their cash, in return for the discretion and predictability which most European countries are no longer capable of offering.

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