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


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.

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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

“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



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

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

“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

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

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

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

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