Accountancy Age has reported that the UK is in urgent talks with its tax havens about how they will respond to new pressures.
I am hearing at the conference I am attending of countries desire to put pressure on tax havens.
Meanwhile, tax havens are also facing criticism for oiling the wheels of the shadow banking system. They provided a tax-neutral platform for creating the off-balance-sheet structured investment vehicles that played a big role in the late stages of the credit bubble.
The offshore centres can argue they were not the root cause of the crisis. But they are implicated in the wider failings of the regulatory system and financial institutions that used them.
That is being kind to them. The reality is France is calling for tax havens to be closed. Germany wants the 1998 OECD initiative against tax havens revived and new sanctions to be imposed. I have long argued for both, but I am going to add a note of caution.
We know the harm tax haven / secrecy jurisdictions cause. It is indisputable. We know they must be closed as art of a new financial architecture. But first w have to say that this is not part of a desire to impose unified tax rates. If a place can charge low taxes and meet its democratic mandate, so be it. All well and good, so long as a further condition exists. That is that there is absolute transparency on the official ownership of those entities that are relocated to that location to take advantage of those rates, both on public record and through tax information exchange to ensure that tax is paid in the right place, at the right time in the right amount by the right person. To date tax havens have done their utmost to foil this reasonable requirement, and that is why their reform is overdue. In addition, nations that might lose revenue to these places must have the right to protect their tax base from artificial relocation of income out of their domain. That does not stop real relocation of real activity: if that happens I cannot argue. It is artificial relocation of financial and intellectual property to secure a tax advantage that worries me, considerably.
Second, the speed of this process of change has caught almost everyone unawares. Those states calling for change must now reflect on what it means. Very few have considered this and extensive thought is required to make it effective. It is wise to recall that the 1998 initiative failed because the reaction of havens and their allies had not been anticipated. We cannot make that mistake again.
So, an agenda to consider something like the following is needed:
1) What does 'closing' a haven mean. What would signify this?
2) How do we identify the havens this time? How do we make clear what action is needed to get off the Is it? It cannot be a meaningless letter offering cooperation at same distant date in the future on this occasion.
3) How will the action be imposed? Is it just a 'black list'? Is it by sanction? What sanction? How likely is that to be imposed? If not universal, what would the consequences be?
4) What reactions are likely? It would be very frustrating to find Switzerland closed and Singapore booming. Worse still London and its trust market that creates something very similar to banning secrecy booming?
5) How will the banks, accountants and lawyers react? Where will they react?
6) What measures will be put in place to protect local populations affected. I have heard people say of late these populations are so small we need not care. I do care. They are victims in this in many ways. I won't compensate the migrant tax haven workers who have profited. Indigenous locals are different.
7) What abuses are likely in a post tax haven world? Where will they happen? How? What needs to be done to anticipate these threats.
I admit I have answers to many, but not all of these issues, and positive research programmes going on some of them.
But those who are making the proposals now need to engage with those in the forefront of this thinking if this process is to work. In 2001 civil society pulled down the OECD tax haven initiative. This time civil society has to be pulled into the thinking to make sure it works. Please don't make the same mistake twice is my request.