Is the G-20's War on Tax Havens a Sham?

World leaders agreed in London to blacklist tax havens, but the roll call of non-compliant countries released later by the OECD has no entries

The heads of state of the world's most powerful nations seemed somewhat tired, and yet extremely satisfied. On the Thursday of the week before last, after hours of negotiations, they had finally agreed to a plan for a new, cleaner global financial system.

"The era of banking secrecy is over," the official communiqué issued at the end of the G-20 summit in London concluded. From now on, the authors wrote, "non-cooperative jurisdictions, including tax havens," can expect to face sanctions and be placed on a list of countries not in compliance with the "international standard for exchange of tax information."

The threat promptly produced astonishing results. Less than 120 hours after the close of the London summit, the Organization for Economic Cooperation and Development (OECD) published the shortest blacklist of all time—with exactly zero entries. Apparently not a single country today remains willing to serve as a place of refuge for global capital.

The fact that all the world's tax havens seem to have disappeared overnight is primarily the result of skillful diplomacy. Even the most notorious offshore financial centers have managed to quickly purge themselves of all suspicions of aiding and abetting tax evaders.

The task was not exactly made difficult for the erstwhile offenders. All a country had to do in order to be removed from the list and accepted into the circle of the supposedly purified was to provide the OECD with the solemn assurance that it intended to abide by international agreements in the future. Whether this is a step forward remains to be seen.

As a result of these assurances, OECD Secretary-General Angel Gurría divided the international community into a mere two groups. The first includes countries that behave in an exemplary fashion, such as all of the G-20 nations. This step ensured that the London summit would not become bogged down in self-criticism.

The second group includes those countries that are theoretically opposed to international tax evasion, but until now have not always seen this as a reason to translate convictions into action—by instituting concrete rules under double taxation treaties, for example.

For experts, of course, the OECD list serves up a handful of surprises. For instance, hardly any tax officials would have believed that the OECD's so-called "white list" would include some of the most notorious tax havens of the recent past, such as the British Channel Islands Guernsey and Jersey.

Another astonishing outcome of the new system is that China is suddenly considered a model country, even though its two so-called Special Administrative Regions, Hong Kong and Macau, are considered safe havens for tax evaders. And it borders on the miraculous that even the Cayman Islands, with a population of 50,000 people and 80,000 registered companies, have been placed on the OECD's gray list of countries willing to be reformed.

The reality is that diplomats from many states spent long days making sure their country ended up on the correct list. To avoid anyone being pilloried, a series of lively negotiations began around the world in the run-up to the G-20 summit. The important thing was to show good will.

On April 1, just one day before the London summit, the Cayman Islands managed to sign seven bilateral treaties—with the Faeroe Islands, Iceland and Greenland, for example—to cooperate on matters of taxation. Although the specific concessions made by the Caymans, a British overseas territory, are modest, what counts is the spirit of willingness.

China also took pains to avoid international disgrace. According to participants in the preparatory meetings leading up to the summit, the Chinese negotiators categorically refused to be placed on the gray list, let alone the black list.

Otherwise, so the Chinese threatened, they would let the entire list project fail—an outcome that France, for its part, was determined to prevent. Before the summit, French President Nicolas Sarkozy had boldly told French voters that he planned to wage a relentless battle against tax havens.

Other diplomats now believe that it might have been better to forget about the list altogether, especially as it is unclear what exactly will happen to the fiscal rogue states. The closing communiqué of the London G-20 merely includes a vague reference to "sanctions."

"The list is complete nonsense; the process stinks to high heaven," says Luxembourg Foreign Minister Jean Asselborn, whose country was placed on the OECD's gray list. He and his fellow citizens of the Grand Duchy—which has a population of just 485,000 but is home to 3,402 investment funds—feel offended to have been lumped in with the worst of the offenders.

"Luxembourg does not protect tax evaders, but we also don't want (German Finance Minister Peer) Steinbrück to be able to find out at the push of a button how much money a given individual has in his account," Asselborn says irately.

The fact that China has been placed a step above Luxembourg is even more of a slap in the face to Asselborn. "I cannot understand how a country like France can stand up for China while opposing European Union countries or Switzerland," he says. "That destroys the glue holding Europe together."

Tax havens where politicians park their billions

e world is witnessing a severe recession, jobs are vanishing with unemployment rates rising sky-high, major businesses are going under -- financially, none of us has experienced such hard times ever.

And now visualise the other side of the coin -- trillions of dollars stashed away safely in a tax haven, wealthy tax evaders -- politicians, as well as businessmen -- saving billions and getting richer. . .

How much 'dirty' money is there? Well, there is no exact figure, but the Organisation for Economic Cooperation and Development estimates that at least $11 trillion have been stashed away globally. That is roughly about Rs 5,55,50,000 crore!

India loses a great deal of tax money as firms and individuals park billions into tax havens the world over.

However, with the financial tsunami inundating the world, more and more countries are beginning to clamour for better tax conformity and transparency. Along with the United States and Japan, Germany and France too believe the offshore system not only deprives them of taxes, but also aggravates the financial crisis further.

The issue was dramatised by the case of UBS, the Swiss banking major, who in order to settle the charge that it promoted tax fraud, agreed to divulge the names of some 300 clients to the US. But US says it is yet to receive the names of another 47,000 (American) account holders suspected of tax evasion.

So check out the favourite nations where billions of dollars have been stashed away by the high and mighty. . .

Tax Havens

A tax haven is a place where certain taxes are levied at a low rate or not at all.

Individuals and or firms can find it attractive to move themselves to areas with lower tax rates. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and or companies.

There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former Economic Adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens. Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven. According to other definitions, the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.

In its December 2008 report on the use of tax havens by American corporations, the U.S. Government Accountability Office was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of a tax haven: no or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.