The Trouble with Tax Havens

In his April 6 article in the Ottawa Citizen, “Enough with the tax haven hysteria,” Bernard Shinder argued that recent media reports of the harmful role of tax havens are essentially much ado about nothing.  A Halifax Initiative Op Ed on April 12 responded.

Ottawa Citizen, April 12, The Trouble with Tax Havens

In his April 6 article, “Enough with the tax haven hysteria,” Bernard Shinder argued that recent media reports of the harmful role of tax havens are essentially much ado about nothing.

In contrast to this view, however, is an increasing body of research showing that tax havens continue to be profoundly damaging to developed and developing countries alike. The U.K.-based Tax Justice Network estimates that $21 to $32 trillion of the financial wealth of the world’s richest people has been channeled through tax havens, resulting in global tax losses of at least $200 billion every year.  This sum is so large that it has major implications for current estimates of inequality, as well as estimates of national income and debt. Indeed, in a sub-group of 139 low-middle income countries, offshore wealth is far greater that their aggregate external debts.
Tax havens provide the requisite secrecy provisions for laundering the proceeds of crime. The UN Office on Drugs and Crime estimates that more than $1 trillion of criminal money – from drug smuggling, arms and human trafficking, and corruption – is laundered through the financial system; less than 1 percent is intercepted by authorities.

Multinational corporations and banking and financial institutions routinely use tax havens to lower or eliminate their tax obligations, avoid regulation, and shield themselves from liability. Tax havens host more than two million “international business corporations,” often little more than shell companies with a postal address. The British Virgin Islands, with a population of 30,000, hosts an estimated 460,000 business corporations. One modest building in the Cayman Islands is home to more that 18,000 of these entities.

Last December, media reports in the United Kingdom revealed that Google, Amazon and Starbucks were paying little or no taxes to the national treasury despite earning billions in profits in the British market.  During a parliamentary investigation, officials from the three companies admitted they were shifting profits out of Britain into lower tax jurisdictions.  Amazon collects its U.K. sales in Luxembourg where profits are taxed at 2.5 percent. Google collects its sales in Ireland and through a complicated scheme sends its earnings to the tax haven of Bermuda via the Netherlands; Google’s tax rate in Ireland over the last 7 years was 0.14 percent.

British tax expert Richard Murphy estimated that tax evasion costs the U.K. at least £70 billion every year. A U.S. Senate investigation estimated that tax evasion costs the country $100 billion annually.  In 2002, Canada’s auditor general warned that corporate “tax arrangements with foreign affiliates have eroded Canadian tax revenues of hundreds of millions of dollars over the past 10 years.” Unlike other countries, the Government of Canada refuses to estimate the “tax gap” despite the offer to make such an analysis by Kevin Page, the recently retired Parliamentary Budget Officer.

These problems have even more severe consequences for developing countries. The Washington-based Global Financial Integrity project estimated that between 1990 and 2008, $197 billion flowed out of the world 48 poorest countries due to crime, corruption and tax evasion. A 2009 study calculated that trade mispricing by multinational companies resulted in tax revenue losses of $160 billion annually to the world’s 49 poorest countries.

Research by economists at the University of Massachusetts found that between 1970 and 2008, more than $700 billion disappeared from the economies of 33 sub-Saharan African countries. This means the sub-Saharan region is a net creditor to the rest of the world, its offshore assets far greater than its debts of $175 billion. In 2007, African “high net worth individuals” had offshore wealth of $1 trillion.

There are many people like Mr. Shinder who believe that tax havens have a legitimate place in the international economic system.  However, these opaque and secretive jurisdictions are causing serious harm, especially in the era of austerity and the attendant erosion of social support programs worldwide. The reports from the International Consortium of Investigative Journalists are shining a light into the murkiest spaces within the global economy. We should all be grateful.

Peter Gillespie is with the Halifax Initiative, a Canadian NGO coalition concerned with economic justice issues. His chapter, “The Trouble with Tax Havens,” is included in the book “The Great Revenue Robbery,” published this month by Between the Lines Press and Canadians for Tax Fairness.