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July 27, 2011updated 05 Jun 2017 11:36am

A game of cat and mouse

They were once the domain of secretive high net worth individuals and companies, but tax havens arenow on the defensive amid growing pressure from governments around the globe. Nick Huber reportsthat efforts to crackdown on tax havens have been a mixed bag.

By Nick Huber

Picture of desert island


They were once the domain of secretive high net worth individuals and companies, but tax havens are now on the defensive amid growing pressure from governments around the globe. Nick Huber reports that efforts to crackdown on tax havens have been a mixed bag.


Pir chart showing how Offshore financial centres are largely Caribbean based, with nearly three-quarters of the financial flows finding a home in the Cayman IslandsGovernments and tax authorities are closing in on tax havens from Switzerland to the Cayman Islands, passing new laws to make tax evasion harder and increasing penalties for individuals who are caught trying to dodge tax by hiding their money in financial centres.

In the battle against offshore tax evasions, officials are swapping information on suspected tax dodgers through information disclosure facilities and introducing withholding tax agreements, where banks collect a%age of tax owed from interest on bank accounts and pass a share of the proceeds to the tax authorities, maintaining the customers’ anonymity.

These measures are providing a deterrent, but one expert warns some of them have been ineffective such as the Organisation of Economic Co-operation and Development’s (OECD) Tax Information Exchange Agreement scheme.

Whistleblowers are also giving tax investigators a hand. Last year, data on thousands of client accounts was allegedly stolen by an ex-employee of HSBC Private Bank (Suisse) and passed to French authorities, who farmed it out to UK and other European authorities.

Earlier this year, two British citizens were arrested on suspicion of using Swiss bank accounts at HSBC bank to evade tax. The UK’s tax collector, HM Revenue & Customs (HMRC), analysed the leaked data to help it track the electronic flow of money from the UK to Switzerland – the world’s best known tax haven which is estimated to manage an estimated $1.8trn of foreign wealth.

Some tax havens, or secrecy jurisdictions (see table, page 9), are running a deficit. Richard Murphy, director of Tax Research UK and anti-poverty campaigner, believes tax havens will not survive in their current form.

“Some tax havens will still offer zero% tax rates in 10 years’ time, but I suspect there will be very few left, and the ones that do survive may have to become transparent,” Murphy says.

In addition to tougher global regulations, tax havens are also facing calls to change from the general public. In the UK this year, for example, campaigners have targeted branches of large banks and corporations in protest against alleged corporate tax avoidance.

“Anti-tax haven campaigners in civil society have only been campaigning for eight years but have already changed the political debate,” Murphy says.

Bar chart showing the amount of assets and liabilities held around the world


Transparency drive

The economic downturn has given added momentum to the crackdown on tax havens as governments look for ways to boost flagging tax receipts.

Meanwhile, offshore centres may be squeezed further when the European Commission announces a review of the Savings Directive, under which all EU member states and more than a dozen offshore financial centres from the Cayman Islands to Liechtenstein must share account holder information with relevant local tax authorities or levy withholding taxes on interest from savings.

Two proposals under the review, says Murphy, are to extend the directive to companies and trusts, not just individuals, and to require that all offshore structures be proven as to ownership and tax be declared on the basis of their ownership. For example, interest paid to an offshore company will be declared to the tax authority of the shareholders of that company.

“This means that offshore transparency is massively increased and the opportunity to evade massively reduced,” Murphy says.

The EC may finalise the changes later this year.

The initiative against tax evasion is being championed by the OECD (see box, below), a Paris-based think tank.

Pascal Saint-Amans, head of the global forum on transparency and exchange of information at the OECD, says secretive tax havens are no longer viable.

“If you define a tax haven as lack of transparency, bank secrecy and opaque [this is becoming unacceptable],” he tells Private Banker International.

“All our country members and financial centres such as Switzerland, Hong Kong and the Cayman Islands are agreeing to a level playing field. They are agreeing to peer review [for transparency and information exchange].”

Tax inspectors from countries in the OECD meet twice a year to share information on “aggressive tax planning” schemes. Sharing the characteristics of the schemes (the names of the companies involved are not disclosed) has probably boosted tax receipts bybns of pounds in euros, Amans says.

But some experts question the effectiveness of the OECD’s strategy.

Nicholas Shaxson, an expert on tax havens and author of the book Treasure Islands, says the OECD scheme has “produced a little bit of a deterrent effect, but when you look at what’s been actually done, the whole game looks like a charade”.

Shaxson says that the OECD scheme, in which tax havens sign up to Tax Information Exchange Agreements (TIEA), does not provide automatic information exchange, as with the EU’s Savings Directive. In addition, authorities are required to request for information and requests can only be made if an authority knows who a taxpayer is, what they are suspected of doing, and demonstrates they have exhausted all other avenues to get the information.

“And even if you know all this information already, you then have to fight through the tax haven courts to get confirmation of the information you already have,” Shaxson says. “Tax haven secrecy remains alive and well. What’s more, few of these OECD-styled agreements have actually been signed – and developing countries have been left on the sidelines as usual.”

The OECD plans involved drawing up ‘name and shame’ black lists, grey lists and white lists. Soon after the OECD’s initial statement, there were no havens on the black list, Shaxson says. In the grey list there are only eight jurisdictions and financial centres while the vast majority, including the most high profile tax havens, are white listed.

Part of the problem, Shaxson says, is only 12 TIEAs are needed for a tax haven to move onto the OECD’s white list. To date, a fifth of all TIEAs have been signed with Greenland, Iceland and the Faroe Islands and several are between tax havens.

Saint-Amans, defended the record of the OECD’s exchange of information agreements on tax, saying that they had helped to erode bank secrecy in tax havens.

“Saying the OECD standard is useless because you need to have all the information before asking for it, is factually wrong. Bank secrecy was absolute and, even when you knew that somebody had money somewhere, you just could not get the information to assess the tax. [The opposite is true now],” Saint-Amans says.

Saint-Amans says the OECD’s “white, grey and black” list had obliged major financial centres to change their policies and give up bank secrecy. The OECD has signed almost 700 agreements committing financial centres to being transparent over tax, he adds.

Another problem is that developing countries are suffering most because the crackdowns only protect the country cracking down – often OECD members. US think tank Global Financial Integrity estimates that more than $1.2trn in illicit flows came out of developing countries to OECD countries in 2008.

The loss of tax revenue is a growing problem for developing nations as money that is rightfully theirs is siphoned away.

Table measuring the 20 leading secrecy jurisdictions


Counter terrorism and tax havens

In the developed world, the current push against tax evasion can be traced back to the September 11 terrorist attacks on the US in 2001.

In an effort to counter money laundering and terrorist funding, governments tightened oversight of tax havens more closely.

Governments and tax authorities have co-operated in the fight against tax evasion. Tax havens ranging from Switzerland to Hong Kong and Liechtenstein to Singapore have bowed to international pressure and have promised to adopt international standards on transparency, while protecting investors’ privacy.

An HMRC spokesman said 1,300 account holders have registered with the Liechtenstein Disclosure Facility (LDF) with the average settlement of £200,000 ($322,174) to £300,000, according to varying sources.

High-level discussions are currently on going between HMRC and Swiss Government officials to ensure the UK receives its correct share of tax revenues arising on the investments of UK residents in Switzerland, the spokesman says.

He adds: “The days when hiding assets off shore provided an effective and relatively safe way of evading UK tax have long gone.

“The net is tightening as more and more countries seek to agree properly regulated standards of information exchange with tax authorities around the world, ensuring properly regulated and transparent global taxation so that fiscal authorities receive what is due to them under the law.”

Shaxson says the UK-Switzerland agreement is a “disgrace”.

“Not only is its effectiveness uncertain, but it fails to lift the veil of secrecy on a wide array of crimes – not just tax evasion. It keeps impunity intact. It also blows a hole in European efforts to co-operate to tackle Swiss secrecy,” he says.

Tax experts view the LDF as a turning point in measures to counter tax evasion.

“The Liechtenstein Disclosure Facility took everyone by surprise, including us,” says Ronnie Pannu, part of the tax dispute resolution team at PwC. “It was a landmark agreement.”

For bankers and accountants, tax disclosure facilities can provide business opportunities.

“Bankers we spoke to shortly after the Liechtenstein agreement were worried that the veil of secrecy was being lifted, but then they saw the business opportunities in providing advisory services to people on transferring money from tax havens,” says Pannu, who adds that similar tax-disclosure facilities could be used elsewhere.

Gary Ashford, head of tax investigations at UK firm RSM Tenon, also thinks that tax advisers can benefit from the global crackdown on tax evasion by advising clients on new rules and tax disclosure facilities.

“Over the next five years or so, more and more people who haven’t declared income offshore will regularise their tax affairs, for example by using the Liechtenstein Disclosure Facility,” Pannu says.

For decades, tax havens appeared to operate in a kind of parallel universe, where the normal rules of taxations didn’t apply. But now this is changing as governments and tax authorities use various methods to make tax havens become more transparent and willing to disclose financial information.

Derek Scott, senior manager, tax investigations at KPMG, adds: “There will continue to be an important role for offshore financial centres but the idea that people can continue to use these jurisdictions to evade tax is coming to an end.”

See also:  Rich nations head the secrecy list



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