Hard Times Pt. 2: EU Wages Jihad on Tax Havens

♠ Posted by Emmanuel in , at 3/05/2008 01:43:00 AM
As I said earlier, it's a sure sign that times are getting harder when governments begin cracking down on tax cheats. European governments right now are mulling much tougher measures on the three European tax havens that they have deemed uncooperative: Liechtenstein, Monaco, and Andorra (see that earlier post for the details). The heavy artillery is being deployed in a push to ensure that taxes will be paid by elites using various loopholes to escape their obligations. From the Independent comes the immodestly titled "Europe vs. the Super-Rich" [oy vey! How cool papa Marx would be proud of our fearless scribes...]

The European Union will declare war today on Liechtenstein, Monaco, Andorra and Switzerland. Weary of losing billions of tax euros, the EU's 27-strong high command of economics and finance ministers, Ecofin, is meeting in Brussels to agree a strategy aimed at bringing the continent's tax havens under control.

Their weapon of choice will be a strengthened version of the EU's 2005 savings tax directive, which has proved pathetically easy for armies of accountants, lawyers and specialist tax planners to outflank.

Urged on by Peer Steinbruck, the German Finance Minister, the new directive will seek to close the loopholes. Mr Steinbruck says tax evasion costs Germany about €30bn (£23bn) a year in lost revenue; the UK loses a similar sum; the EU may lose €100bn (£77bn) in all.

The stakes are high. But tax experts remain sceptical about the prospects for this new offensive. Mike Warburton, senior tax partner at Grant Thornton accountants, commented yesterday that, while he and his firm condemned tax evasion, which is illegal, "tax avoidance is the second oldest profession in the world, and just as difficult to control. The tax havens will survive. There are stacks of money out there. If they close down the ones in Europe, the money will move to Dubai and Singapore".

Such defeatism has not infected European governments and they are expanding their armouries. Berlin, in particular, has turned aggressive. The BND, the German intelligence service paid about €4m to a former employee of LGT, Liechtenstein's biggest bank, for a list of some 900 German tax avoiders, the most high profile being Klaus Zumwinkel, chief executive of Deutsche Post, who resigned after he was rumbled.

HM Revenue and Customs has paid for information relating to about 100 people who could collectively owe the UK as much as £100m. Reports over the weekend suggested that the Chancellor, Alistair Darling, was targeting Monaco with an almost personal zeal, threatening a levy on funds transferred there if the recalcitrant principality fails to capitulate. Other nations, from Ireland to the Czech Republic, are also intensifying their attempts to crack down on tax losses, chasing paper trails and threatening the banks to catch up with fraud.

By its nature, the extent of tax avoidance, evasion and plain fraud is what Donald Rumsfeld might term an "unknown known". Everyone knows the money is out there in mind-numbing quantities; it is tricky, however, to be definitive about how much, and where...

Globally, estimates of the total funds parked by individuals in offshore havens vary from $7trn (£3.5trn) to $12trn (£6trn). Depending on assumptions about returns and tax rates, such sizeable funds could yield around $250bn (£125bn) for legitimate public spending...

Now the blacklist is down to three; Monaco. Liechtenstein and Andorra. The US, normally in favour of "tax competition" and home to its own mini tax haven of Delaware, has also seen a shift in mood since 9/11. Barack Obama has co-sponsored a "Tax Haven Abuse Act" in Congress, a sure sign of changing times.

"What are they going to do – send the tanks in?" asked one tax expert yesterday responding to the EU's plans. The answer to that, hopefully, is no; but official sanctions, levies and a general will to make life difficult for tax havens is defiantly there. Hostilities have begun.

The Independent also offers profiles of some of the more renowned (infamous?) tax havens and the celebrities they (tax) shelter. It makes for a pretty good travelogue, actually. Take Andorra, for example. I'd love to meet Montserrat Caballe in person...


The Haven
One of the world’s smallest independent nations, with a highly secretive tax system. Highest average life expectancy in the world (83 years)

What does it offer?
No income tax, Capital Gains Tax, sales tax or death duties and an import tax of around 2 to 5 per cent. It maintains absolute discretion with foreign tax authorities. The taxes levied on businesses do not affect expatriates.

Who wins?
The Spanish soprano Montserrat Caballé, the former tennis player Arantxa Sánchez-Vicario and the French motorcycling champion Cyril Despres.

Lastly, Willem Buiter of the Financial Times actually comes down on the side of pursuing governments despite being a non-dom himself, oddly enough. Willem Buiter is a closet populist; who would have guessed:

A determined crackdown on all tax havens could start by an OECD-wide agreement that the failure by any country to mandate the prompt and efficient provision to any foreign tax authority of comprehensive information on assets held and income earned in that country by residents under the jurisdiction of that foreign tax authority would be treated the way money laundering and financing of terrorism is treated today. A sequence of graduated sanctions against non-compliant countries would then be implemented. In the case of Liechtenstein and Switzerland, exclusion from the Schengen agreement would be a neat and elegant sanction. I wonder whether it is possible under EU law to suspend the membership of Luxembourg and Austria in Schengen until they terminate the bank secrecy laws, rules and regulations that undermine the fiscal sustainability of the other EU Member States.

Tax havens, by allowing foreign tax dodgers to hide behind their cloaks of confidentiality and secrecy, are engaged in economic warfare against the countries whose tax bases they help undermine. It is time to stop them. It is of course, not just rich industrial countries with big bloated welfare states that have an interest in stamping out tax evasion by cracking down on tax havens and abuses of bank secrecy. Developing countries have had their meagre resources looted effortlessly by kleptocratic rulers, thanks to the services provided by tax havens. Emerging markets like India would no doubt actively support action to put the tax havens out of business.

In the UK, the Chancellor has been fortunate that his decision to tackle the non-dom issue was followed closely by Germany’s decision to have a swipe at one of the world’s most notorious tax havens. It is time to follow through on this bit of good fortune by deepening and broadening international efforts to combat tax evasion and tax avoidance. It’s time to put paid to the notion that you can be too rich to pay taxes.