Black Wealth in Tax Havens

taxBlack wealth bleeds the national economy and world economy altogether. The amount of tax evaded stocked in the tax havens are shocking. More than $4 trillions have been deposited in the safety lockers of tax havens which have been protected by the developed world in the name of freedom.

The Times of India writes (10 October 2009)

As economies were sucked into the black hole of the recession last year, the underbelly of the moneyed world suddenly found itself exposed. The
tax haven was under siege. Why should the big boys whose greed had gutted corporations be allowed to laugh all the way to their Swiss bank? The serpent of scrutiny slithered into the paradis fiscaux (financial paradise , pronounced paradee fisco), and it has yet to leave.

The immediate cause of the uproar against tax havens was fortuitous. Bradley Birkenfeld, a banker with UBS (Union Bank of Switzerland), blew the whistle on how this giant bank was helping US citizens evade tax. Across the Atlantic, Heinrich Kieber, a computer programmer in LGT, Liechtenstein’s biggest bank, copied details of 1,400 clients with 4,500 beneficiaries in 13 countries, put it on a CD and sold it to the German government for 4.2 million Euros. More worms crawled out of the woodwork and the tax haven vault soon split wide open.

So, what are these tax havens – aka tax shelters, offshore financial centres (OFCs), secrecy jurisdictions? How have they evolved, how do they work and how on earth does one get information from them?

Estimates of wealth salted away in these havens are difficult to work out. After all, the whole point is to keep the money secret. But several international bodies have done detailed calculations and come up with eye-popping numbers. According to a report by the Washington-based Global Financial Integrity (GFI) programme, about $11.5 trillion is held in these havens. The economic significance of these hidey holes can be gauged from the fact that over 60 per cent of global trade is routed through them.

The GFI report provides a glimpse of where all this wealth is coming from. It estimates that between 2002 and 2006, over $3 trillion flowed into tax havens from the developing world. That’s an average growth of a staggering 18 per cent per year. India itself lost over $115 billion during this period – Rs 1.1 lakh crore per year. To get a handle on this staggering figure, try this for size: It’s about three times the money spent by the mid-day meal scheme over the last years to feed 120 million primary school children, and it’s more than the country’s combined budget for health, education and internal security.

The most common reason for the existence of tax havens is that people and corporations with huge amounts of wealth want to escape taxes. If your money is stashed away in Switzerland or the Cayman Islands, you could sleep easy. Tax rates are negligible or even zero and nobody – not even governments – can pry into the details of your transactions or account.

Tax Justice Network, an advocacy group, identified 69 tax havens across the world. These include countries (like Switzerland and Liechtenstein), dependencies and territories (like the British Virgin Islands or Cayman Islands) and special zones within countries where a separate legal system has been ‘ring-fenced’ to provide tax benefits (like in New York or Malaysia). The Organisation for Economic Cooperation and Development (OECD), a club of 30 rich countries, currently lists 38 tax havens, leaving out small tax shelter jurisdictions within larger countries. In addition, OECD has brought out a list of 21 countries with potentially harmful tax regimes. An IMF study, focusing only on those tax havens that provide financial services, identifies 46 OFCs.

It is a common misconception that all of this money is crime-related . Raymond Baker, who runs the GFI programme , estimated in 2007 that global illicit financial flows amount to between $1.1 trillion and $1.6 trillion annually . About 30 per cent is of criminal or corrupt origin. The rest – $700 bn to $1 tn – is proceeds from commercial abuses. Companies trading internationally often take recourse to mispricing , transfer pricing and even fake transactions, generating millions as illegal profits. These do not appear on their individual books and can be located only by comparing accounts of all independently held subsidiaries.

Alex Cobham of the Oxford Council on Good Governance conservatively estimates that poorer countries lose $385 billion in revenues annually due to tax evasion. Angel GurrÃa , OECD secretary-general , says, “Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid.”

Moreover, the huge concentration of mobile money in tax shelters is also cause for instability in the financial system . It flows into equity or derivatives markets when the pickings are good and flees when better options are available elsewhere. That’s not how good cash should behave. But then, when have money and morals walked together?


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