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Offshore Tax Havens

Political Economy of Development PSCI 350
by

Roxy Vlad

on 16 July 2013

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Transcript of Offshore Tax Havens

Offshore Tax Havens
Tax Havens & Economic Growth
Actions Against Tax Havens
Regulations
Proposed Solutions
Common Misconceptions about Tax Havens
Global Private Banking
Case Studies of Tax Havens
Is a country's economic growth affected by tax havens?
Main Characteristics
of Tax Havens
How do
Tax Havens
Work?
Impacts of Tax Havens
What are Tax Havens?
Locations of
Tax Havens
Income & capital that is non-taxable/taxed significantly lower than domestic accounts
Funds which are kept secret from banks and government
Offshore tax havens provide people and companies with a safe and legal means of reducing their tax liabilities
Money saved from tax collection could be used by companies to reinvest and grow
Given the present state of the world’s economy the tax havens can provide both stability and security for clients
Companies (45%)
Individuals (25%)
Criminals (25%)
Tax Havens:
A Worldview
Power & People
Caymans 2200€
Bahamas 1300€
Ireland 1500€
Liechtenstein 7000€
Panama 1200€
Luxembourg 8000€
1) Heavier penalties for tax evaders who are caught.
Penalties should include a minimum number of years in prison, confiscation of assets, in addition to heavy taxation on the money harbored in tax havens.
2) Create an international board/group that is solely dedicated to hunting down tax evaders and penalizing them for their actions.
3) Engage the international body of nations to collaborate on an initiative to make tax havens illegal--bypassing the current neutrality of the subject and making the institution and not only the action of evading taxes illegal.
4) Develop and implement international sanctions with the purpose of penalizing countries that have tax havens.
Penalties can include reduced trade deals with the international community that are designed to force the host country economically and politically to shut down tax haven operation.

Conclusion
Our Viewpoint
World’s population is increasingly expecting higher standard living.
Increasing liberalization and globalization : Development of e-commerce and rise of virtual tax havens have created business invisibility facilitating tax evasion, as there is no longer a paper trail.
Questions for Discussion
IMPORTANT POINT: IT IS NOT ILLEGAL TO HAVE MONEY IN AN OFFSHORE TAX HAVEN, BUT IT IS ILLEGAL NOT TO DECLARE IT
Locations with very low or zero tax rates and other tax attributes designed to appeal to foreign investors (Hines, 2005)
Tax haven countries receive extensive foreign investment, and, largely as a result, have enjoyed very rapid economic growth over the past 25 years (Hines, 2005)
How does it affect the political economy?
Loss in revenue for governments
(at least $21 trillion in offshore tax havens)

In 2009, a study was released that showed that countries that grouped as tax havens grew 0.5% more economically than countries not categorized as tax havens. (CIA, 2009)
Should companies like Apple, Starbucks, and Google be penalized for using tax havens?
Money collected in taxes off of these vast hidden fortunes could help fund government projects, enrich current social programs, and even help solve world problems like poverty and homelessness.
If companies aren't formally punished for tax evasion, should consumers penalize these companies by simply refusing to buy their products/use their services?

Should penalties be harsher for companies evading taxes as opposed to individuals?
How to Rob Africa
Foreign Account Tax Compliance Act (FATCA)
OECD (Organization for Economic Co-operation and Development) is leading an initiative to counter harmful tax competition
UN Commission on Money Laundering is addressing serious international criminal activities and money laundering in particular
FATF (Financial Action Task Force) focuses on anti-money laundering
FSF (Financial Stability Forum) is examining the impact of the offshore system on the global financial stability

Global Opinion
Tax havens are successful players in the world economy: They draw large amounts of foreign investment; their per capita incomes and rates of economic growth exceed world averages; and they have well-functioning democratic governments.

Despite low tax rates, the public sectors of tax havens appear to be well-funded, accounting for roughly 25 percent of GDP, a fraction that exceeds the world average, albeit lying somewhat below those of the most affluent countries (Hines, 2005)
1) Are you surprised to know that the United States is the world's largest tax haven? Why? Do you believe this has anything to do with hegemonic power, level of development, or political/economic freedom?

2) What penalties do you believe should be put in place to prevent people from housing their money in offshore tax havens? Do you believe this will solve the problem? Should additional funds be provided to government programs that hunt down and penalize/convict tax evades?

3) Do you believe that media campaigns that encourage people to 'rat out' individuals they know or suspect of being tax havens are working? If someone you knew was evading taxes, would you declare them?

4) What do you believe the future of tax havens looks like? Will more countries be considered tax havens, or will the existing countries close down their operations? Will alternative methods of tax reduction be provided to prevent tax evasion?
THANK YOU!
Costs of Creating a Tax Haven:
Source: ROMPRESS
James R. Hines Jr.
Do Tax Havens Flourish?
Whether the economic prosperity of tax haven countries comes at the expense of higher tax countries is unclear, though recent research suggests that tax haven activity stimulates investment in nearby high-tax countries.
YES!
Tax haven countries offer foreign investors low tax rates and other tax features designed to attract investment and thereby stimulate economic activity.

BUT WHY?...

Tax havens are financing terrorism.

Actually, all the funds uncovered from terrorist financing came through OECD member countries of Islamic nations, not through tax havens (Barber 2007)
(What Barber does not touch on is that the wealthy elites confidentially holding money offshore might mobilize these funds to whatever purpose they choose, including terrorism.)

OFCs harbour vast amounts of criminal money and are havens for money laundering activities.

More money is actually laundered through OECD member nations. A larger sum is laundered through the united states than in all the world’s tax havens combined.

The offshore sector, which specializes in tax dodging, is constituted by sultry no-name banks on far-flung islands.

The offshore sector is designed and operated world’s largest private banks, law firms, and accounting firms, headquartered in First World capitals like London, New York, and Geneva. These banks are the same ones that have figured so prominently in government bailouts and other recent financial trickery.

Tax havens are a niche economy, exotic, murky havens at the fringes of global finance.

Tax havens lie at the center of the global economy. Every multinational corporation uses them routinely. On paper, half of world trade flows through tax have
Tax Haven Myths:
James S. Henry
The Price of Offshore Revisited
Henry’s main argument is that the debt problem is really a tax problem.
Most wealthy people don’t do this on their own.
The developing world owns $9.4 trillion of the known $21-$32 trillion offshore.
James S. Henry
The Price of Offshore Revisited: Cont'd
Overview
Holes in the global tax system; 21-32 trillion offshore untaxed; currently there are 73 known tax havens worldwide; has led to global economic inequality
Impacts in the Developing World
• In the developing world, this leads to increased reliance on aid, natural resources rather than tax base
• Henry argues that the debt problem is actually a tax problem
• Repatriated money could easily pay off these arrears
Impacts in the North
• OECD, G8, G20 are all meeting on this to push reforms
• Global private banking: helps wealthy people around the planet move money offshore, conceal it, manage it, and protect it against taxation
Impact on Global Wealth Distribution
• Approx. 10 million people worldwide own a net worth of at least $1 million
• Wealth inequality; vast amounts of wealth off the books — vaults holding diamonds, gold, art, (in addition to priceless items that cannot be given a monetary value)
Sophisticated Mechanisms for transferring wealth offshore
• Inter-company trade game
• Subsidiary companies forming a cartel
• Transferring income among inactive, bogus subsidiaries
Solutions
• Has to be treated as a business and as an industry, rather than an archipelago of countries that need to be individually reformed
• We can no longer assume that politicians can be relied upon to solve the problem
• a rigged game proliferating around the world
Definition:
“a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere"
-Nicholas Shaxson
Offshore wealth and the income it generates is significant
Competition Between Tax Havens:
Does Proximity Matter?
Blanco & Rogers
The success of a tax haven relies on the negative relation between FDI inflow and the number of American subsidiaries in a tax haven. This represents a race to the bottom between tax haven countries. This implies that tax haven countries would benefit from initiatives aimed at creating a harmonized tax rate between tax haven countries.
Tax havens benefit by being nearer to other tax havens, as they accommodate spillover and can encourage new investors through lower tax rates or more incentives. the nature of the competition between tax havens changes once there is a subsidiary in the nearby tax haven.
1209 North Orange Street, Delaware
The G20 Tax Haven Crackdown (2009)
Threatened economic sanctions against Offshore Financial Centers (OFCs) who would not sign information sharing agreements
Tax havens signed over 300 treaties — the largest coordinated action against tax evasion in history
Johannesen & Zucman (2010) found that this failed to reduce the total value of bank deposits held offshore
And, resulted in a shifting of deposits between OFCs that had signed many treaties to OFCs that had signed few.
After the financial crisis, G20 countries sought to improve their tax collection
Full transcript