Tax havens and globalization

There is no consensus over a definition

“A country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no

financial information to foreign tax authorities. Individuals and businesses that do not reside a tax haven

can take advantage of these countries' tax regimes to avoid paying taxes in their home countries. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its

tax policies.”(Investopedia 2015)

Tax haven (TH) characteristics1. Low/no taxes

2. Flexible normativity => it is possible to create quickly a bank/subsidiary/company with few requirements; as well as Holdings* or Hedge Funds**

3. Usually it offers a banking secrecy to the clients => Total lack of transparency of financial activities

4. Usually there is a dual regulatory system: residents vs foreigners

5. It can be a territory within a country (Examples: Delaware, Hong Kong, San Marino)

6. Many MNFs (from ICs and DCs) use THs to export:– They export at a very low price from the country

of production to the subsidiary located in a TH (so they almost do not pay any tax on exports)

– Then they export from the TH to the final market– Merchandise does not transit physically through

this territory– It is also used for the transfer of intermediate

products within the global value chain of a MNF (transfer of auto-parts)

=> It generates competitiveness with the complicity of the States

*A holding company

• It is a company that owns shares of other companies to form a corporate group

• This company does not produce goods or services itself

• It allows:• To hide business transactions for one or more

members (shell corporation)• To control one or several companies with total secrecy • To create huge monopolies escaping to the national

legislations like in the agroindustry sector but also the mass media, pharmaceutical sector… (Hirsh)

**A hedge fund

• This is an investment platform that pools capital from institutional investors

• It is administered by a professional management firm; usually it belongs to transnational bank

• Its purpose is to generate high returns on investment Þ They make very risky and aggressive investments out of

the national legislationsEx.: they can lend money without any certainty that beneficiaries would be able to pay back their credit: It was the case during the financial crisis in 2008

Crisis of 2008

• During the 2000s, many Banks, using their Hedge funds, lent money in an irresponsible way to households with a low purchasing power (with high interest rate)

• They were able to do it, despite the US legislation, because they were taking these decisions from THs

• In 2008 many Hedge funds faced a situation in which many households could not make their payment (=> transferred their liabilities/debts to the banks)

• Actually Hedge funds (or banks) lent because: (1) They have a very short term vision (high profitability right now)(2) They knew that they will be beneficiating from a national/international bank rescue plan due to their “critical mass” in the international economy (“too big to fail”)

According to the US Government Accountability Office report:

Where are the TH? According to the source and definition the list can be different

According to G20 and OECD

Source: Tax Justice Network, 2010

According toTax Justice Network: advocacy group consisting of a coalition of researchers and activists with a shared

concern about tax avoidance and tax competition

According to Grant Thomton: one of the world’s leading organizations of independent audit, tax and advisory firms

Examples of holdings in the agroindustry sector: The oligopolies tends to control/increase the price for food => making it difficult the access to alimentation above all in DCs (they organize the division of the world market and set

the price)

The case of News Corp belonging to Murdoch (Australian American business magnate): holding

which creates a great concerns about the control of information worldwide

News Corp Empire is present in every field

More than 60 companies from News Corp are registered in THs (Caimans, Bermuda, Netherlands Antilles, Virgin Islands…with no employees = shell

corporations)

=> Does not pay taxes, takes the control of medias everywhere y organize a monopoly in several

countries => control of information

The case of Apple: profits have soared but tax payments have risen much more slowly

Clients of the THs

• Banks• Collective investment funds• Insurance companies• Individuals (big fortunes)• MNFs• Governments • Transnational Criminal Organizations (TCO; they

deposit dirty capital in THs and then Governments or MNFs use it to finance investment or public budget => hypocrisy)….

Tax Havens’ data (Chambost 2008; La Tribune 2008)

• 55% of international commerce transit through THs• 35% of the MNF’s FDI are located in THs• 35% of the financial flows transit through THs• THs’ weight (financial assets) is 10M trillion of USD• 2/3 of Hedge Funds are in THs• Tax evasion caused by THs which corresponds to USA’s +

Japan’s GDP• Transnational Criminal Organizations (TCO) represent 15%

of international commerce and 50% of their assets in THs • Caiman: 35 000 habitants; 20 000 registered companies;

575 banks (only 106 physically present)• Sark Island: 575 habitants; 15 000 companies

The tax that US MNF pay abroad=> Incentives to declare profits in THs

Top THs used by US firms

Tax Havens

Caimans Islands

Bahamas

Switzerland

Ireland

Netherland

Luxembourg

Ile of Man and Jersey

Bermuda

Hong Kong

Singapore

Source: Global Financial Integrity (GFI) 2009

Top Tax Havens used by European Companies

Tax Havens

Netherlands

Delaware

Luxembourg

Ireland

Caimans

Belgium

Austria

Hong Kong

Switzerland

Jersey…

Color represents the level of

taxation in the TH (dark: very

few)

Chronology

• After 1929: fiscal pressure rises upon ICs firms (due to Welfare State as a product of Labor Unions activism) Þ fiscal gap started to grow between ICs and

States whose fiscal legislation was low due to absence of necessities for tax revenues

Þ 1920-1930: tax evasion from very wealthy people (Man Island; Bahamas; Liechtenstein; Switzerland; Luxembourg; Monaco)

• 1960s: Eurodollars (dollars outside the US economy and generated by the overseas activities of the first US MNFs) seek refugee (to avoid USA’s fiscal restrictions)

• 1970s: – Arabic countries invest the petrodollars in THs (USD earned

through exports of petroleum after the nationalization of oil production) : they place these USD in TH to avoid national instability*

– It allows high liquidity for investment Funds/Banks located in THs– Big Banks started to invest in THs and to create speculative

mechanisms in THs– MNFs started to use THs to facilitate commerce between their

subsidiaries and to export

• From 1980s, THs, MNFs, Banks, Transnational Criminal Organizations complement each other = Financial globalization

*Large inflows of petrodollars into a country often has an impact on the value of the national currency (=Dutch Disease)

Ex.: it was shown in the case of Canada that if the price of oil increases by 10% => Canadian dollar value Vs USD by 3% [when the authority or private sector change the currency: there is a supply of USD and a Demand of CAD] (The Economist 2012); consequences:- National firms lose competitiveness

(unemployment)- Imports increase => Deficit of the Trade balance…

Þ Many countries exporting huge amount of primary commodities (ICs and DCs) prefer to avoid converting in their own currency the USD obtained from exports

Þ They keep this capital in national Fund established/managed in a TH (= Sovereign Wealth Funds)

Þ These Funds turned to be important/essential actors in the Globalization because they orientate/canalize huge amount of capital to:

• competitive global sectors • or to specific Gvts depending on the decision they are

taking

=> Political actors

Sovereign wealth funds• Investment funds held by the State

• It is a Contra-cyclic instruments

• Financed by the revenues from raw materials exports and obtained by public firms (oil, gas, coper, nickel…) or all kind of exports (China channels vast sums of USD into these Funds)

• Mainly in USD; main reason:

To avoid to destabilize the national currency (converting USD to national currency) (it could affect the competitiveness of the national economy)

Biggest Funds:• China:

– “Safe Investment Company” (1990)

– “China Investment Corporation” (2007)

• United Arab Emirates (1976)

• Norway (1990)• Saudi Arabia (1952)• Singapore (1974 and 1981)• Kuwait (1953)• Russia (1998)• Qatar (2003)• USA (1976)• Australia (2006)

Most important Funds

Country Assets US$ Billion Name Year of creation

Norway 882 Government Pension Fund

1990

United Arab Emirates 773 Abu Dhabi Investment Authority

1976

Saudi Arabia 757 SAMA Foreign Holdings

1952

China 652 China Investment Corporation

2007

Kuwait 548 Kuwait Investment Authority

1953

China 547 SAFE Investment Company

1997

Source: Sovereign Wealth Funds Institute, 2015

Source: SWF Institute 2014

Most of the Sovereign wealth funds capital comes from Oil and Gas

Global actors are looking for different pruposes in THs:

• Escaping from taxes (MNFs and individuals)

• To get cheap financing (MNFs and Governments)

• To transfer passives i.e. transfer debts. Purpose: when an actor does not want to exhibit a negative image (Enron has 900 companies in THs partly to transfer passives) (Garzón)

• To realize risky investments/loans through bank subsidiaries (Hedge Funds) => it allows to escape existing legislations– Reason: more profitable (high interest rate)– Banks are aware that they could benefit from a rescue if they do bad

in financial markets

• Some MNFs create companies in THs for maritime activities to reduce cost transportation and because it allows fleeing from justice

Example: Prestige (Super-tanker) which caused an oil spill in 2002; it was impossible to determinate the responsibility in this case

• It had Bahamas pavilion• Ship: Property of a Liberian company• Merchandise registered in Switzerland but

belonging to a Russian holding registered in Liechtenstein

=> nobody was guilty and paid for the pollution caused and economic damaged

THs Impacts• They protect Transnational Criminal Organizations and Terrorist

activities due to the banking secrecyIt allows to launder funds generated by illegal activitiesÞThen, dirty funds obtained from illicit activities (traffics of drugs, migrants, prostitutes, organs, arms, protected animals, gambling, etc.) can finance easily (1) MNFs investment or (2) public budgets with a total discretion (it transforms dirty money into clean money) Þ Difficult to combat these activities because :

– Actors operate using THs– Big international actors (MNFs, Banks and Governments) take

advantage of the huge amounts of money they allow => there is no interest for the disappearance of these activities (it is part of the competitiveness => par of the global Balance of powers)

– There is no real coordination between States

TCO• TCOs represent 15% global economy (IMF 2012)• 50% of their revenues transit through THs (IMF 2012)• They developed transnational activities (alliances and

agreements between TCOs, specialization, division of the global market: places to produce and place for consumption, routes for distribution, … operate like MNFs and does not respect any legislation and using THs => high competitiveness (affect formal sectors)

• Control many economies, territories, social sectors and important presence in the political context (above all in failed/weak states): Albania: 50% of its economy depends on TCO

• They control increasing part of informal economy in many countries (this economy can be very important: Brazil 40% GDP; Turkey 35%; Sub-Saharan countries: 40%; LAC: 35%; Asian countries: 35%)

• Russian Mafia (Finnie 2012):• It controls 10% of the Russian territory• Controls over 25% of the Russian economy• Controls 40% of the state-companies, specially energy

sector (influence in decision making)• Controls 80% of the Russian banks (strong presence in

Cyprus)• It is divided in almost 8000 groups (200 with global

influence)• 300000 members

• Richest/biggest companies and individuals are the ones with access to tax havens

Þ They can escape to the tax legislation or decrease their cost of production/exports and they have also access to fresh and cheap money to be able to invest; while others (smaller) does not

Þ They distort competition and increase inequality (GINI) as well as poverty because they affect:

• Tax revenues that is financing public policies such like social, education, infrastructure…

• Competitiveness of the small businesses

• Due to the low/no tax rate

Þ It makes difficult to maintain (or increase) taxes in ICs and DCs because if they do it then many actors (biggest contributors) will declare their profits in TH and States will suffer tax evasion

Þ TH represent high competition for Gvts that affect tax revenues (fiscal legislation)

Currently, States tend to reduce their tax pressures on high incomes to slow down tax evasion (it affects the progressive income taxation => unfair)Þ Reduces public tax revenuesÞ THs affects the efficiency of Welfare State and the

capacity for the State to operate a redistributive public policy through progressive taxes and public policies

Þ Increases the level of public debt (to compensate for the decreasing amount of tax revenues)

DCs are affected because they have few instruments to monitor tax evasion; for instance: most MNF in DCs do not pay taxes and informal economy is important

The most important losers among DCs from tax evasion are (according to Tax Justice Network 2012):

- China: 1200bn USD (cumulative capital flight from 1970s to 2010)

- Rusia: 800bn USD- South Korea: 780bn USD- Brasil: 520bn USD- Kuwait: 500bn USD- Mexico: 420bn USD- Venezuela: 410bn USD- Argentina: 400bn USD- Indonesia: 330bn USD

Capital flight from DCs to TH (cumulative capital flight from 1970s to 2010)

Victims of tax evasion according to Reuters (2011):

Country Amount (billons of USD)

Share of the GDP

USA 327 8,4% (10)Brazil 295 40% (2)Italy 234 37% (3)Rusia 221 44% (1)Germany 215 18% (5)France 171 17% (6)Japan 171 12% (8)China 134 13% (7)UK 109 13% (7)Spain 107 32% (4)

The OECD (throught its Global Forum on Transparency and Exchange of Information*) has been mandated by the G20 to

develop toolkits to support DCs addressing their base erosion

=> OECD and G20 pursue efforts to curb tax evasion from MNFs

*The Global Forum is the OECD’s answer to address the risks to tax evasion posed by THs

OECD started to work on this issue at the beginning of the last decade

The original members were OECD countries: they agreed to implement transparency and exchange of information for tax

purposesIt has 126 members (OECD 2015)

• Nowadays, there is huge competition between DCs to draw capital and FDI

Þ Governments (in order to attract FDI) give the possibility to transnational actors to declare benefits in THs

Þ ↓ fiscal raising Þ ↓ efficacy of public policies Þ Maintains inequality in the national society

• Objective of the THs = To draw global financial capital: It is quite easy because THs offer higher profitability than in productive projects (through very speculative and risky financial operations)

• Due to the high returns offered by activities in THs, Banks prefer to invest money in financial market and not in the productive sector Þ Less money for the productive sector Þ It increases the interest rate (above all for small companies)

They participate to the “financialisation of the economy” (Strange) with important implications for employment: affects job creation and growth (=> political instability)

Banks through their subsidiaries decide which sector has to be supported and which not (using global indicators); Strange says that the power of the international system is in hand of those actors who have control over the credit (and THs give them a huge power; may be more important than many gouvernments)

Nowadays, Funds in THs have the capacity to generate growth or economic crisis (they have an important political power)

• Banks and Funds can dictate the public policies of governments (since they decide which policy program to finance or not)

It affects freedom of countries in fiscal matter and economic policies

It affects democracy

Some proposals from NGOs and Governments into G20 and OECD

• To eliminate THs (Garzon 2011)

• To pressure THs to publish information (EU & OCDE)

• To reduce the velocity of money circulation and to reduce attractiveness of the speculation (make it more difficult for TH to draw money) introduction of a financial transaction tax (Tobin Tax) (advocated by ATTAC or OXFAM)

• Coordination of fiscal policies at a global level (like in the EU) to avoid competition and to reduce tax evasion for ICs and DCs with the purpose to favor their development

Activity:

• Form groups of 3

• Answer the questions (15 minutes):– What is the most important challenge for DCs?– What is your vision of the future?

• Make your presentation