EUROPEAN DIARY:The OECD has been tasked with drawing up a list of tax havens for possible sanctions, writes JAMIE SMYTH.
WITH EU states struggling in the worst economic crisis for 60 years, the thought of rich businessmen stashing cash in exotic locations to avoid paying tax is exercising the minds of politicians. Tax havens have suddenly become “public enemy number one” just as world leaders prepare to reshape the global financial system at next week’s G20 summit meeting and regulate the type of greed that caused the current financial meltdown.
Switzerland and Germany have been at loggerheads for years over the issue of “banking secrecy”, whereby Swiss banks promise their foreign clients not to reveal their details to the authorities in their home countries when they are suspected of being tax evaders.
Berlin has long argued such sharp practice enables thousands of German citizens to avoid paying tax on savings and has stepped up its criticism of Berne in recent months.
German finance minister Peer Steinbrück has become a hate figure in the Swiss media for his relentless attack on Swiss banking secrecy, provoking one MP last week to compare his onslaught with that of the Nazis. But there are no doubts his aggressive lobbying, combined with support offered by the Obama administration, Britain and France, has caused cracks to open up in the whole concept of “banking secrecy” in Europe.
At last week’s EU summit, all 27 leaders signed up to conclusions agreeing that the G20 meeting in London next week should “fight with determination tax evasion, financial crime, money laundering and terrorist financing, as well as any threat to financial stability and market integrity”. It said the financial system should be protected from “non-transparent, non-cooperative and loosely regulated jurisdictions, including offshore centres”. These should be placed on a blacklist and subjected to a “toolbox of sanctions”.
The OECD has been tasked with drawing up a list of non-cooperative tax havens for the G20 meeting and the threat of sanctions has had an immediate impact. Last week Belgium, Austria and Luxembourg agreed to sign up to OECD rules that will force them to comply with legitimate requests from other governments when they suspect one of their citizens is involved in tax evasion. Switzerland, which since 1934 has enshrined the concept of “banking secrecy” into legislation, has also agreed to provide information.
Fearing that non-resident account holders may withdraw their money from Switzerland, the financial authorities and banking groups have downplayed the likely impact of signing up to article 26 of the OECD’s Model Tax Convention. “Switzerland won’t allow fishing expeditions by tax authorities. It will only provide information on a case-by-case basis when there is evidence provided that tax evasion is taking place,” says James Nason of the Swiss Bankers’ Association, who argues tax evasion is not the main draw for clients to Switzerland.
“Many clients simply want security and stability for investments.”
Finding out how much cash is stashed away in Switzerland beyond the reach of other states’ tax authorities is tricky because of the secrecy laws. But a previous attempt by the EU to crack down on banking secrecy, known as the Savings Tax Directive, has provided some information.
In 2005 jurisdictions with banking secrecy laws, such as Switzerland, Jersey and the Isle of Man, agreed to collect a withholding tax on the savings held in their banks by EU citizens rather than reveal information on their clients. The tax, which is collected on the interest earned on deposit accounts held by citizens, netted the Irish exchequer almost €3 million in 2007. This suggests hundreds of millions of euro may be held on deposit in the 11 jurisdictions covered by the 2005 European directive. It also doesn’t count money held in offshore trusts and other complex financial vehicles.
Tax Justice Network (TJN), an NGO lobbying for tax havens to be shut down, estimates there may be $11 trillion assets held in offshore tax havens with the US along losing up to $100 billion in tax revenue. “Tax havens encourage criminality and undermine country’s tax bases,” says director of TJN John Christensen, who adds the recent moves by the G20 on tax havens amount to window dressing.
“The OECD’s on request system recently agreed with Switzerland will mean that it’s almost impossible for tax authorities to provide the necessary evidence to persuade a court to provide the information . . . there should be the same type of automatic information exchange as was introduced via the savings tax directive,” he says.
Christensen also criticises the hypocrisy displayed by British prime minister Gordon Brown, who has led calls for an end to tax havens while refusing to crack down on offshore trusts in Britain, which allow many individuals in the City of London to avoid paying tax. He also criticises Irish “sham tax arrangements”, which enable multinationals to funnel profits through Dublin even though they are generated in other EU states.
“Small steps are being made, but in the short term I’m not optimistic. However, I think in the long term things will have to change for the better,” says Christensen, who set up TJN after working in the finance administration in Jersey, which he considers a tax haven.