Has the G20 meeting sounded the death knell of tax havens?

“Pandora is out of her box and is not going back again.” — Richard Murphy

Just the week before the G20 meeting in London in early April, Richard Murphy, Director of Tax Research LLP and a founder of the Tax Justice Network, briefed the Foreign Press Association on what the G20 should do about tax havens. Mr. Murphy outlined the key issues surrounding tax avoidance and evasion and how states are involved in the process. Sure of the G20’s serious consideration of curbing tax haven activities, Murphy said, “Pandora is out of her box and is not going back again. The tax haven issue is on the political agenda and this is an enormous step forward. We are on a long-term journey. But then, ten years ago, there was no journey.”

He commenced by stating that while it is difficult to define a ‘tax haven’, they are better referred to as ‘secrecy jurisdictions’. While conceding that establishing a low tax rate is the prerogative of any democratic country and that no one has a right to point a finger at that, Murphy opposed states that deliberately create legislation or regulation to the benefit of the people who do not live there – a jurisdiction that is designed to undermine the legislation of another place and provide a veil of secrecy for those who are using their legislation. “This has all along been the OECD problem. When during the last Bush regime the subject was broached, it was not appreciated by the US right wing, nor by Bush himself, who declared that his aim was to achieve low taxes. A US organisation called the Freedom of Prosperity squashed the OECD initiative in 2001.”

Murphy turned to Jersey, where he said he is officially described as an ‘enemy of the state’. “Jersey refuses to release information about people who live in the UK, as do Guernsey and the Isle of Man. They constantly undermine the UK revenue system and this country loses as much as 25% of the revenue. What’s more, there is to date no indication from Jersey to change this practice. If you place your money in Germany and live in the UK, they would send back the details of the profit made to HM Revenue, but no information is passed from Austria, Luxembourg and Belgium, where only local taxes are paid.”

“I have officially been dubbed in jersey as the enemy of the state.”- Richard Murphy

He went on to say, “Exchange Information agreements are not worth the paper they are written on. Jersey has had an agreement with the USA since 2001. It has $4 billion worth of assets, some undoubtedly from the US. But during this period of eight years, this agreement has only been used five times! In fact, it is almost impossible to use, because to prove anything, the account number is needed. Now, no one leaves around that kind of information! Even if the UK Tax authorities find that information, the account number and the sheet number, Jersey reserves the right to say that it is to the state’s commercial detriment to disclose such information, as it undermines important and valuable commercial activities of our economy. And they don’t have to say what the activity is!”

He then points out that Switzerland has just signed such an agreement. Cayman Islands, which is much bigger than Jersey and one of world’s the biggest tax havens, has also a similar agreement in place with the US, but they have ‘budgeted’ to receive only about 120 cases! Switzerland too, says it will change, but it will take 2-3 years to get it through its parliament and another 2-3 years to negotiate double treaties, so there is a long time to go before anything happens. Only then will governments start making requests for information! “The Swiss promise is pretty thin; they are rather hoping that something with happen within these six years to obstruct the process – i.e. they are playing for time!”

Murphy says that originally this veil was created to handle stolen property. And, ‘unpaid taxes’ can also be classified as ‘stolen money’. “We have tried to estimate how much there is, but only have various estimates. Each year about $800 billion comes into London, Zurich, New York, Frankfurt, from the developing world alone! We give the developing world $100 billion in aid, so eight times that amount given, flows back! Of this amount, 3%-5% is corruption money (from what we read in headlines news!), 30% approximately from criminality – i.e. drug and people trafficking, piracy, counterfeiting, etc. and 65% on tax avoidance and evasion. And this practice is being carried on by multinational firms; some of them don’t even pay corporation tax!”

He continues, “60% of world trade is done on an ‘intra-group’ basis – i.e. companies of common ownership. A conglomerate may have companies in many continents. The profits made in Africa, for example, may come into Cyprus (a very good way of bringing money into Europe!) and thence to Switzerland or the Netherlands Antilles. These deals are fixed. Christian Aid in Africa says that some $60 billion in taxes is being lost, costing some 1,000 lives a day, as medicines and vital foods are not available. It all goes to tax havens and that’s what riles me! Thus the rich get richer and the poor, poorer.”

“We will never build a self reliant Africa if we effectively help to create aid dependency.  The direct cost to the UK is about £18.5 billion per annum, which is a serious sum for our domestic as well as our world economy.”

“YES, stop these silly agreements that the OECD is playing around with!” – Richard Murphy

“We can implement automatic exchange of information – not on request! And the banks have all the information to make it work! There is always a ‘warm body’ behind this veil!”

“Swiss banking was designed to facilitate handling stolen property – criminality! Of course, we can get round it with sanctions! We should have owners’ names of every single company on world records. Trusts too, should be on public records and on data bases, in places such as Delaware in the US. Joe Biden, now Vice President, was the Senator from Delaware! We can ask large companies to change the way they prepare accounts. Why should Barclays get away with creating all those subsidiaries in the Cayman Islands?

“I therefore, suggest a country by country system of reporting from companies and the names of their subsidiaries. Of the FTSE 100, only 33 companies disclose their country by country reports. We want all their accounts and intricate details, such as sales, sales to each other, number of employees and their pays, their assets, etc.

“Now the accountants really do not want the information! Why? Because they are the suppliers of corruption practices! You will find KPMG, Price Waterhouse Coopers, Deloitte, Ernst & Young in every single tax haven of the world! Without them, the secret systems would fall apart. In my view, they are the biggest threat to democracy in the world, because they deny the elected governments from the rightly expected revenues from their citizens. They try to undermine the income stream due to the democratically elected governments!”

About Richard Murphy A graduate in Economics and Accountancy from Southampton University, Richard Murphy was articled to Peat Marwick Mitchell & Co in London. He specialised in tax before setting up his own firm in 1985. Richard has written widely on taxation and accounting, including for the Observer. He has appeared in BBC radio and television documentaries on taxation issues. Since 2000, Richard has been increasingly involved in taxation policy issues. He is a founder of the Tax Justice Network and director of Tax Research LLP which undertakes work on taxation policy for a wide range of clients including governments, government agencies, commercial organisations, aid agencies and pressure groups in the UK and abroad. He was included in Accountancy Age’s “Financial Power List for 2006” as one of the 50 most influential names to look out for in 2006. He was promoted on publication of the 2007 list and in 2009 was placed at number 25.

While the G20 have certainly started the attack on tax havens, experts say that the notion that all the world’s bank information could eventually be shared by all the countries, is perhaps ‘a dream too far’.

Just before the crucial G20 meeting in early April, UK’s Financial Times wrote that Gordon Brown was preparing to unveil a blacklist of harmful tax havens to be published. It was to include offshore centres linked to Britain, including the Cayman Islands and Bermuda. With growing criticism from France and Germany, that the UK, like Switzerland, is an obstacle to a transparent financial system, the matter was viewed as a radical departure from the Prime Minister’s historic position of protecting the pre-eminence of Britain’s financial services industry. The current system of bilateral exchange of information between tax havens and individual countries has not produced financial stability.

Brown has been criticised in the past for his opposition to measures that would help identify the beneficiaries of trusts through the EU who are withholding tax. His move came following his visit to the US, where he had told the Congress that he wanted to regulate the system and after the US treasury secretary confirmed that President Obama would back the ‘Stop Tax Haven Abuse Act’, which will soon come before Congress.

As preparations for the G20 meeting gathered pace, Paris-based Organisation of Economic Cooperation and Development (OECD) also produced its own blacklist of secrecy jurisdictions, where many structured investment vehicles and collateralised debt obligations have been based.

The FT reported that Bob Geldof had urged world leaders at the G20 summit to make tackling tax havens a main priority. Talking to reporters at London’s Excel centre,  Geldof said: “Those responsible for tax havens have to pay for what they’ve done.”

He claimed the havens were currently hiding “hugely corrupt money”, funds which he suggested needed to be tracked down. Mr Geldof said the estimation that around $800 billion in illicit money is flowing out of the tax havens was “staggering” considering the total spent on aid to Africa. He added the need to tackle the problem was “immediate”.

Times Online quoted some letters sent to it by charitable organisations, such as Action Aid International, Christian Aid and Oxfam: “A number of G20 leaders have called for a tougher approach to tax havens. Gordon Brown has promised a “crackdown on those tax havens that siphon money from developing countries”, and called for “an international agreement for the exchange of information in relation to tax cases”.

Tax evasion and avoidance are big obstacles to development: multinational corporations’ tax evasion, to take just one part, is estimated to cost developing countries $160 billion (£110 billion) in public revenue each year, far in excess of the $100 billion they receive in aid. Much of this flows to the so-called tax havens.

This is why we will expect Mr. Brown and his counterparts to deliver. The solution must be multilateral, it must be based on the automatic exchange of tax information, and tax havens must be compelled to participate through an objective system of assessment and sanctions. Anything less — especially a blacklist that can be avoided through bilateral agreements with a handful of powerful nations — will not deliver for developing countries.

The charitable organisations went on to say, “Mr Brown must take the lead on this issue at the G20 summit. The City of London is the jewel in the crown of a global finance industry that has tax havens — and tax avoidance — woven into its very fabric. Among its overseas territories, Britain counts many of the world’s most significant tax havens; its banks, accountancy firms and multinational companies include many global leaders in tax avoidance. We urge G20 leaders to support this action. But if the G20 falls short on this promise, we will look to Mr. Brown to explain why.”

Immediately the day after the G20 meeting, a host of press headlines pronounced the end of the era of financial secrecy.

“Obama brokers pact on tax havens” said the FT and commented on how Obama helped seal the deal between Presidents Sarkozy and Hu. He is said to have pulled the two aside in full view of the plenary session and elegantly brokered a compromise between the two. In essence, he confirmed that the G20 would take note of OECD’s list of rogue offshore tax havens rather than endorse that list. The need to crackdown on the offshore tax haven was anyway included in Obama’s campaign speeches.

“Leaders see an end to era of financial secrecy” claimed the FT, stating that the G20 leaders called for the immediate publication of a list of countries that fell short of international standards. The OECD countries said that they were ready to deploy sanctions to protect public financial interests. The FT went on to say that most of the tax havens listed and the 38 countries named have promised greater transparency but have not signed the agreement. Singapore and Switzerland have only recently announced plans to become more transparent. The FT concludes, “the politicians faced difficulties in finding objective criteria to target jurisdictions that do not currently exchange tax information, given the insistence from China that Hong Kong was not targeted and the resistance of European Union members to putting European countries on the list.”

Neither a party to the G20 nor a member of the OECD, Switzerland was conspicuous by its absence at the discussions of the sore topic, made more prominent by two European leaders threatening to walk out if their requests on stricter legislation on tax havens were not met. However, the world’s biggest nation’s own tax-friendly jurisdictions and Delaware companies are equally questionable!

The FT went on to say that ‘Swiss politicians and financial negotiators have negotiated badly. Over the scandal of the UBS American bank accounts, the Swiss Federal Council looked like a rabbit as the car bears down with headlights blazing. US clients, who had placed their confidence in UBS and whose names were handed over to the US tax authorities even before Swiss due legal process was completed, have a right to feel betrayed.”