27 April 2009

Tax Havens, Politics and Scapegoats (3/3)


On the question of transparency, which seems to be central to discussions regarding tax havens, the OECD established a Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practice where:
Each party will ensure that its regulatory or tax authorities have access to information regarding beneficial owners of companies, partnerships and other entities organized in its jurisdiction, including collective investment funds, and to information on the identify of the principal (as opposed to agent or nominee) of those establishing trusts (settlors) and foundations under their laws and those benefiting from trusts and foundations.
Clearly, the State of Delaware in the US does not comply.
The very interesting study conducted by Bruce Zagaris, a Partner of the Washington based law firm Berliner Corcoran & Rowe, demonstrates the double standard applied:
Some U.S. states, such as Alaska, Delaware, and Nevada, have enacted asset protection laws to attract persons, especially foreigners, seeking protection from creditors. (…) Delaware has advertised that its new trust law ensures “confidentiality of information and records.”
At least two other states, Montana and Colorado, have offshore banking laws designed to attract foreign investors by offering tax exemptions, confidentiality, and ease of establishing accounts and doing business. (…) especially the fact that Colorado's was enacted in 1999, after the release in May 1998 of the OECD's initial report on harmful tax practices.

The state of Delaware also is trying to attract business based on its laws and reputation as a domicile where corporate debtors can quickly obtain bankruptcy.Virtually no OECD country requires corporations to keep ownership information on file with a central or other governmental authority on a routine basis, except for certain types of corporations, although the OECD HTC MOU requires the targeted countries to do so.

Interesting enough, On June 23, 2008, Brazil's Congress published Law 11,727/2008, which, effective as of January 1, 2009, will amend Brazil's transfer pricing regulations and expand the legal definition of tax havens. The surprising news in all of this is that it is widely believed that these changes were made specifically so that the exotic state of Delaware could be designated as a tax haven, or at least a jurisdiction with the characteristics of one.

Paul Mason, from the BBC, analyzed what happened at the G20 meeting in London regarding the OECD list. It appears that last minute negotiations occurred between Sarkozy, Hu and Obama not to include Macau in the grey list of the OECD. But, hold on, wasn't it the OECD that was establishing the list independently...? This BBC story is worth reading!

So, all countries attending the G20 meeting escaped in one form or another to be named and shamed, whilst the usual small countries were used as scapegoats for the crisis. Making the public (read the voter) thinking that tackling tax havens and putting them under the control of large deficit countries will solve the crisis, is ludicrous.

Clearly tax havens make tax hells losing tax receipts; this is however a drop in the ocean of accumulated budget deficits over the years from lax budget spending (voting bribery?) and poor public governance, governance
hailed however by the very same politicians as the new Graal of the New World Economic Order (don't misread: I very strongly support governance in general and corporate governance in particular as well as I believe its lack of it is one of the roots of the financial crisis).

In addition, imagine what would happen to tax rates, if low taxation jurisdictions did not exit. Already, The US, the UK and Ireland announced an income
tax increase; this is only the beginning of the tunnel. And why blaming countries that are managing their budget in a proper way and do not need punishing taxation?

What to conclude?

First, China showed once again its power on the international stage and will become more and more assertive
Second, Continental Europe is firing a bullet in its foot as usual: the reading of the OECD list is self explaining.
Third, the US and UK continue successfully to divert attention away from their backyard: do what I say and not what I do...
Fourth, the G20 meeting and the preceding negotiations about the OECD list showed the lack of transparency and governance from countries that insist on them, and discredited the OECD.
Fifth, Large countries found their scapegoats: small, well managed countries that offer high living standards to their populations; instead of following their path, they point the finger at them as responsible for the financial
crisis (one of the two causes of the crisis was outlined by President Sakorzy in October as being tax havens - a joke! -).