David Cay Johnston has an article in Mother Jones in the US in which he says (amongst much else):
In 1983 just 10 percent of America's corporate profits were funneled through places that charge little or no corporate income tax; today more than 25 percent of profits go through tax havens. The Obama administration could tell the Caymans-now fifth in the world in bank deposits-to repeal its bank secrecy laws or be invaded; since the island nation's total armed forces consists of about 300 police officers, it shouldn't be hard for technicians and auditors, accompanied by a few Marines, to fly in and seize all the records. Bermuda, which relies on the Royal Navy for its military, could be next, and so on. Long before we get to Switzerland and Luxembourg, their governments should have gotten the message.
Now even I don't go that far! Actually, nor does he:
Barring gunboat diplomacy (tempting as it is), there is no reason we cannot pass laws to block financial transactions with tax havens or even, Cuba-style, make it a crime for Americans to visit or do business with them without special permission. Congress could declare the hiding of funds a threat to national security and require that anyone with offshore assets disclose them to the IRS within 30 days and pay taxes, interest, and penalties within 180 days. For the holdouts, temporary special teams in the IRS and Justice Department could speedily pursue civil or criminal charges.
The analogy with Cuba is interesting: Cayman is now much more dangerous to the US.
He also ignores things like country by country reporting. And he ignores the fact that international cooperation is essential to close the threat of tax havens, the US cannot do this one alone, but his understanding of the significance of the issue is spot on.
If the OECD is on the ball it will be calling all affected (by which I mean harmed) parties together on this issue very soon. Progress is essential.
PS I see that in Tax Notes he expands the idea....take a read....as he notes, the Cayman's defence for what they do is pure hypocrisy
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Maybe they can invade Delaware…..{scratch} and the Cayman’s defence is hypocracy? any American comments on tax havens are hypocracy until they clean up their own house.
Willem Buiter of the FT and LSE also, tongue only somewhat in cheek, mentioned the possibility of invading Andorra, Monaco and Liechtenstein, in his article “blockade the tax havens:
” The EU should adopt a directive on bank secrecy that would end the nefarious practices of Luxembourg and Austria. Belgian dentists will just have to get used to paying taxes. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively).”
http://blogs.ft.com/maverecon/2008/02/blockade-the-tax-havens/
Some interesting points here.
Cayman certainly does appear to have some major issues. That figure of bank deposits seems incredible but seems correct. But if memory serves me right, Cayman only generates revenues from banks from annual licence fees. How much are those fees currently per bank ?
It seems a conflict for Cayman to have signed a TIEA with the US without the US demanding that its bank secrecy laws be scrapped. Why did the US not insist on that ?
I remember back in the mid-80s when Cayman was initially refusing to sign the Mutual Legal Assistance Treaty with the US it was told bluntly by Washington that its planes and ships would not be able to use Miami or Tampa ports, which would have paralysed the tourism industry and bled the islands of vital supplies within days. Sure enough they signed up. Maybe not an acceptable tactic but it worked.
The reference above to Belgian dentists is interesting. Belgian residents now only pay 15% tax on savings income, but if they hold funds in Luxembourg they now suffer 20% withholding tax under the EUSD. Belgian residents actually claim back the extra 5% !
Surely there must be mileage in the Channel Islands and Isle of Man and other EUSD territories breaking rank with Luxembourg, Austria etc by voluntarily scrapping the option to withhold tax instead of automatic disclosure. What do the islands really gain from the current option ? Originally there was this fear of a lack of a level playing field but that can only surely be relevant to undeclared funds which shouldn’t be there anyway.
I’d be interested to read Richard’s views on what impact such a voluntary act by the there UK offshore islands would have on his stance towards the islands, and how it would be perceived by Washington and Brussels and Westminster ?
David
You’re right, unsubtle treatment works. It was how Jersey was forced into the EU STD, for example.
Talking of which – yes you’re right – there would appear to be mileage in breaking ranks except that you ignore the fact that it’s not just the income on capital in these locations that is subject to tax evasion – it is the capital itself that has also been evaded and they have no desire to expose that.
I have no doubt at all that such a move would be well received. It would not get them wholly off the hook – the abuse of corporations and trusts would also have to be tackled, but it would be a positive and welcome step forward, and they’d get a lot of credit for it
Richard
Richard
Ironically, with interest rates being as low as they are,
the actual amount of income earned, and thus the tax at stake, is becoming negligible.
I’m not sure that I understand your point re. tax on the original capital having been evaded. Why would it have been evaded ? I would imagine that most capital (as opposed to overseas trading profits) is generated from sales of businesses, sales of properties etc which would surely in the vast majority of cases have been generated onshore rather than offshore. The subsequent re-investment of those sale proceeds offshore does not (usually) create a tax reporting event – its only the non-reporting of the subsequent reinvestment income and resulting capital gains which is the issue.
Have I misunderstood this point ?
I also don’t quite follow re. the “abuse of corporations and trusts” point. I know your own personal moral views on this point, but even the tax authorities currently take a different view to yourself on this point and to the best of my knowlege they are yet to ever request an offshore jurisdiction to adopt an approach to offshore trusts and companies which differs from the rules of the land.
Why would/should any offshore jurisdiction do or be expected to do any more than what was agreed and accepted by the majority of the EU jurisdictions under the EUSD ? All I’m suggesting is that the offshore islands could agree to do what was originally asked of them, and which was adopted by the UK, France, Germany etc, rather than using the “level playing field” argument in relation to Switzerland, Luxembourg, Austria etc. Obviously as and when the scope of the EUSD is extended then it follows that the offshore islands would do the same. We’ve already got far higher standards of financial regulation than most other EU countries without having to operate to even higher tax standards. I don’t think that’s an unreasonable point to stress !
David
It is true that the tax lost may be falling now, but that is a side issue.
The loss of tax on the capital on which tax is being evaded refers to the fact that much of this capital has not, at least historically, and quite possibly now as well (look at my blog today) arrived offshore legitimately. I am afraid your assumption would be considered naive by most tax inspectors, and I’ll join with them.
What I agree with you about is the fact that the profits were generated onshore – almost no profit is ever really generated offshore – but that does not mean it was taxed there.
As for the abuse of corporations and trusts – we all know this happens, routinely. The fact that the Bush administration and its ilk (corrupt as they are to their core) stooped pursuit of this issue doe snot mean that the issue went away. And now we are in a new paradigm. The issue is now to be addressed, I suggest.
So what else could the jurisdictions do? On the EU STD simply adopt it in full and lobby for the currently proposed changes. But they could also put corporate ownership and accounts on public record. Don’t you think that might also help? After all, the EU STD is not the beginning and end of the issue.
As for your argument on financial regulation- see my blog on Cayman today and trust me – we don’t believe you. You’re playing a great game of from filling – but that is not effective regulation.
Richard
Richard
I can only speak from personal experience and from anecdotal awareness amongst my peers but I can honestly say that in 25 years in the offshore trust industry I have never witnessed a situation where the original capital itself was the subject of tax evasion. I don’t think that its anywhere near as common as you suggest, at least in the Channel Islands or the Isle of Man. To that extent I don’t think that your point is accurate, but if you are generalising (which always galls me) then you may be correct re other jurisdictions.
It is actually very difficult to generate capital onshore in an untaxed manner. Sales of capital assets are picked up by HMRC from multiple sources. I just don’t see how that even be possible, at least in any developed country.
I can see why the islands should opt for automatic disclosure rather than withholding tax, but I think lobbying for the extended scope would be a different matter for many reasons, not least because it is so appallingly drafted. Extending it to remote classes of discretionary trusts who are most unlikely to benefit is both uncommercial and impractical, and while the draftsmen continue to refer to the absurd “owners of trusts” it cannot be taken seriously. They clearly don’t even properly research the very thing that they wish to include !
I have already responded to your comment on TIEas under the
cayman thread. Surely if the other contracting required proactive exchange of information then that’s what the provisions would contain. They dont. An agreement signed by two parties confirms that both parties accept the terms.
As for public disclosure of corporate ownership and accounts are concerned, once that becomes a global standard in onshore countries then it would be a reasonable request of the offshore islands. Expecting us to be ahead of onshore jurisdiction is naive and unreasonable. Individuals have a right to privacy if they are complying with their tax reporting obligations. Only the tax authorities should be able to access such information. Why should every Tom, Dick or Harry be able to access it? Its bad enough when Italian taxpayer’s see their tax details published by the Italian tax authorities on the Internet and when HMRC officials leave tax data disks on trains. Surely one should be able to trust tax authorities not to be doing such things ?
What may be needed is a suitable body made up of appointees of the US, the EU and the UK, perhaps funded by the offshore jurisdiction, to deal with the proper gathering of the right tax information. A radical step perhaps, but not unworkable.
David
” I can only speak from personal experience and from anecdotal awareness amongst my peers but I can honestly say that in 25 years in the offshore trust industry I have never witnessed a situation where the original capital itself was the subject of tax evasion.”
Amazing – you mean you have never seen any cash from “commissions”, insider dealing, re-invoicing or the like arrive offshore? That’s hard to believe
This then becomes capital, of course.
Re ownership data on companies – this is not naive. How can the market work when you have no idea who you are dealing with?
But I do note your last point – the only issue being that tax is only one concern – and transparency is needed for many more reasons than that. Tax havens have massively contributed to global financial problems precisely because of the opacity they have created and nothing less than their rasparency can solev that
Richard
Richard
I swear its true. The organizations that I have worked for have always refused trading company business and many other fiduciaries operate to the same standards. I dont know where you get your market research from but I find it very surprising that you aren’t aware that there are numerous top end fiduciaries out there who operate to far higher standards than you seem to think is the case across the board. Your information is probably a decade out of date. Maybe this may help you to see why people like me get so irate at such ignorance.
Your na?Øvety re public beneficial ownership disclosure remains. Anybody wanting to find out who they are dealing with can insist on independent verification of ownership before dealing with that company. Why should Joe Public be able to see the accounts of a company out of sheer nosiness and who owns even it he has no intention of dealing with that company? its like ordering us all to place a noticeboard outside our houses with copies of our bank statements on it ! Or like the tax authorities posting details of how much tax people paid last year on the internet. Oh, I forgot, the Italians already did that.
I can see why tax authorities need more disclosure of ownership but full public disclosure to all and sundry just goes against all human rights to privacy.
My point is that its naive for you to demand that an offshore jurisdictionshould volunteer to do this when it doesn’t have a cat in hell’s chance of being introduced anywhere else.
David
No doubt some do operate to those standards – I do not dispute it. I have found them hard to find.
The tawdry ones are still easy to find.
As for the data on ownership – I have no problem at all with anyone keeping their details private – but deal in your own name in that case. If you want the benefit of limited company then that is a privilege granted by society to provide protection from your debts – in that case your forego privacy. That’s not naive – that’s a necessary step to prevent abuse
And I say the same for trusts
And of course I demand this elsewhere too – in the Uk for a start
Richard
Richard
There are more of us out there than you realise. The reason why you dont hear about us us that we dont get involved in the sort of scandals that make your news blog !
I still dont understand why individuals should in your view have to forego privacy if they choose to incorporate. How can you assume that they are up to anything abusive ? Such an assumption just doesn’t make sense. If people are not evading tax due in relation to their offshore structure then why on earth can they not choose to use whatever structure they like?
Yes, better regulation is needed to prevent frauds and other abuses but your approach is rather like banning the manufacture of tools in case a burglar might use them to break into a house ! If somebody has a criminal intent then they will disregard whatever laws are introduced.
I believe I am right in saying that Guernsey, Jersey and Bermuda are the only mainstream jurisdictions, either onshore or offshore, where government approval of the proposed ultimate beneficial ownership must be obtained before any new company is formed. These governments know who owns each and every local company and they are entering into tax information exchange informations with countries like the US whose governments dont have a clue who owns any of their companies as they simply dont ask the question. Hardly a level playing field !
David
Jersey doesn’t now – part of its deliberate policy of getting rid of as much information as possible(like tax returns) to make information exchange harder
Standards are slipping, and it is deliberate
Guernsey is certainly heading the same way
Not much of a case therefore
And I repeat: individuals are not giving up privacy. Corporations are not individuals and no one has to use one
If they want the benefit the price is information
Richard
Richard
We’ll have to agree to disagree on the privacy point re. companies as neither of us can possibly accept the other’s view. C’est la vie.
You are sadly correct re. Jersey’s and Guernsey’s recent move away from having to get pre-government clearance re. ultimate beneficial ownership. I’m not personally convinced that it was a good move, but I guess as we were unique in requiring this pre-incorporation government clearance until recently and got absolutely no credit for it from those who are determined to attack us regardless, it was perhaps not surprising that the requirement has been dropped.
You got no credit because it had no value – the abuse happened anyway
Richard
Richard – please elaborate. That seems like your standard response to anything relating to the Channel Islands, an approach which discredits anything you say which might otherwise be credible.
What do you mean that the abuse happened anyway ? Do you mean that the process of the Guernsey and Jersey authorities knowing the identities of all ultimate beneficial ownerships of Guernsey and Jersey companies was flawed ? On what basis could you make such a claim ?
The question is not about whether “abuse” happened anyway regarding those companies. I accept that we are poles apart on our views there and I acknowledge that some misuse of offshore entities clearly has happened over the years – all publicised – but I’m talking specifically here about the ability of the Guernsey and Jersey authorities to disclose information that they actually held, compared with other jurisdictions where the regulators didn’t even have that information in their possession. That was a material difference between the Channel Islands and everywhere else for many years.
David
For years Jersey secured the names of beneficial owners and refused to share them with anyone for any reason – so know one could know if they were doing a good job or not. John Christensen tells me not.
Then they agreed to share (and I agree, Jersey is slightly more open now). So they then got rid of as much data as fast as possible to negate the benefits as much as possible from being required to do so
Some of us don’t see this as a coincidence. Some of us see this as constructive non-compliance – of course you can have whatever data we have – and then, oh dear – we haven’t got it and securing it would just be too difficult for us to have to agree to share it – will be the standard reply
Do you really think we’re daft?
Richard
Richard
No I don’t think you are daft at all. Blinkered perhaps, but not daft.
If indeed that is what happened in Jersey then its shameful, but I know that many in Jersey view most of John Christensen’s statements of “fact” about what happens in Jersey to be at odds with reality. although you will predictably say that of course that’s what they will say ! Indeed, I fear that many of your blanket allegations about the Channel Islands originate from him, and as I know from hands-on experience, as far as Guernsey is concerned, your allegations are probably around a decade out of date, I suspect that a similar situation exists in relation to your current views about what happens in Jersey in 2009. What happened in the 80s and 90s is very different from what happens today (and here I’m basing this not on “Murphy’s law of what should be deemed to be abusive”, but on what the rest of the world’s legal systems actually deem to be abusive, as there is a fundamental difference). I’m not sure that you actually recognise that. How close is John Christensen today to what business has been taken on in Jersey in the past decade ? Nowhere near as close to where he was a decade ago. That’s highly relevant.
David
But do you think we don’t talk to people still?
And we do have eyes to see. We here the rhetoric: the claims of compliance and the squeals of delight as the cash continues to roll in. The claims of complete cooperation, and the obvious reluctance to participate in meaningful information exchange that might tackle tax abuse, as the EU STD desires. And we note the politics that remains fiercely right wing, embraces the likes of Dan Mitchell and the Sovereign Society and rejects the notion of the state and all that goes with it. And in this we note daily the dichotomy of claims made.
So we resort to believing what we know (remember I’m also a tax practitioner), what we’re told, what we see and what the evidence tells us.
And that suggests, unambiguously, that the claims made by tax havens are pure bunkum which can only be sustained by the secrecy that makes it hard for people to verify the truth: a bit like the average user’s tax return I suspect.
Richard
Richard
Maybe you need to be speaking to people in Jersey beyond John Christensen’s mates.
David
We do
I assure you
Richard
Probably the 100 or so people out of 15,000 working in the industry who support your stance but are happy to hypocritically keep taking the good salaries that they earn from it. Every jurisdiction has a few of them.
David
Experience suggests that about 1% with a concern speak out
So that’s 10,000 with concern
And 9,900 who are bribed to shut up or simply live in fear
And 5,000 expats who are simply and unambiguously in it for cash and turn a blind eye
About right, wouldn’t you agree?
Richard
Richard
Of course I dont agree. Not only are you clearly from a different planet with your estimates, you seem to think that there is much for employees to have a conscience about! Unfortunately for you, whilst there are people who rightly abhor tax evasion and anything illegal, there are not many who share your view that lawful tax avoidance is either immoral or abusive. As a result, they have nothing on their conscience.
If you think that so many have a conscience, how do you explain their silence ? Are there really so many hypocrites out there ? Seems most unlikely to me.