Today’s first post is from Christian Chavagneux, Deputy Editor of Alternatives Economiques, Editor of Economie politique and author with Ronen Palan of Les paradis fiscaux, (Tax Havens) whose 3rd edition is forthcoming in 2012. Below, you will find a reply from OECD’s Pascal Saint-Amans
The fight against tax havens was one of the priorities of the 2009 G20 summit in London. Three years later, the results are mixed. To combat fraud and tax evasion by the wealthy, the G20 decided to push for the signature of treaties covering the mutual exchange of information in order to develop information exchange on demand. What can we expect from this?
According to a study by Niels Johannesen and Gabriel Zucman, the announcement of the treaties had little effect on bank deposits in tax havens. Their claim is backed up by data from French budget minister Valérie Pécresse: France made 230 requests for information to 18 countries in the first 8 months of 2011. The reply rate was only 30% and the quality of the information supplied wasn’t always of the highest quality, adding weight to the demand of international NGOs to move to a system of automatic exchange of information.
The super rich are not the only ones to take advantage of tax havens, multinationals use them too. Analysis of the geographical distribution of FDI by US firms at the end of 2010 for example shows that the Netherlands, Luxemburg, Bermuda or Ireland come out well ahead of Germany, France or China.
The Banque de France recalculated FDI flows into and out of France eliminating fictitious flows transiting via tax havens. The result? France’s outward FDI flows dropped by 41% and flows into France by 81%! Adjusting data for several years this way shows a widening gap between traditional and corrected figures, a sign that use of tax havens is growing.
The G20 has done nothing to fight against such shady dealings which, according to Bloomberg allow Google for example to be taxed at 2.4%. To combat this, NGOs are asking for country by country reporting. In other words, multinationals would have to provide their turnover, number of employees, payroll, profits and taxes for each country they operate in. This would show the disparity between the place where an economic transaction was carried out and where it is taxed.
The G20 has abandoned the fight against tax havens as territories that facilitate financial instability. In November 2011, after months of work, the Financial Stability Board declared that only two countries posed problems: Venezuela and Libya. However, a 2008 report by the US Government Accountability Office showed that a part of the American shadow banking system that developed the toxic assets of the subprime crisis was operating out of the Cayman Isles.
The Northern Rock fiasco in the UK resulted from excess short-term debt hidden in its Granite subsidiary, registered in Jersey. Bear Stearns took hits on speculative funds partly based in the Caymans, and likewise the German firm Hypo Real Estate was destroyed by losing bets placed by its irish subsidiaries, and so on.
Tax havens have played a leading role in all the key epsiodes of the financial crisis. As well as that, when you realise that they are the main holders of American public debt and that according to Patrick Artus of Natixis bank, “The three main holders of French debt are Luxemburg, the Cayman Isles and the UK”, it’s easy to see that these territories are involved in speculation on public debt.
Tax havens, in the service of the richest and most powerful individuals and companies, promote global inequalities. Their offer of opaque services and risk taking contribute to speculative finance and the serious consequences in terms of loss of business and jobs. Unfortunately, the G20 is still far from having done everything to control these parasitical states.
The article (in French) in Alternatives économiques that started this debate is here
The Tax Justice Network’s Financial Secrecy Index