Over a year ago, I started reading a book called “Treasure Islands: Tax Havens and the Men Who Sold The World”. I’ve been trying to finish it ever since – but I can’t. The level of vitriol makes my eyes hurt – to the point where I’m not sure whether his point is condemning offshore tax havens or ranting like a lunatic. Here’s a citation I selected at random:
“Financial deregulation and globalization? Offshore is the heart of the matter, as I will show. The rise of private equity and hedge funds? Offshore. Enron? Parmalat? Long Term Capital Management? Lehman Brothers? AIG? Offshore. Multinational corporations could never have grown so vast and powerful without the tax havens. Goldman Sachs is very, very much a creature of offshore. And every significant financial crisis in the world since the 1970s, including, as noted, the latest global economic crisis, is very much an offshore story.”
Come now. You can’t blame tax havens for everything. Because that makes it sound like you’re raving*.
Nevertheless – the book is on point when it comes to political sentiment, which is rapidly moulding public sentiment on the topic of tax havens**. And there have been some recent news items and articles that have highlighted the issue:
- The Cypriot Bailout: Cyprus has long been considered a tax haven, although it turned itself into a low tax jurisdiction in order to enter the eurozone. And the speculation is out there that the hefty requirements for the EU bailout were basically a targeted destruction of the Cypriot banking sector, thereby destroying its tax haven status*** (wrote about it here).
- This article topping the “most popular” list on Bloomberg: “Billionaires Flee Havens as Trillions Pursued Offshore“.
- Also: all the drama around Starbucks and other corporates paying next-to-no tax in places like Britain.
What Is a Tax Haven?
A pure tax haven is a country/region-within-a-country where there are particularly relaxed rules about doing business, and where there are easy-to-understand tax regimes. And by “easy-to-understand tax regimes”, what one means is “where you pay no tax”.
What Is a Low Tax Jurisdiction?
A low tax jurisdiction is a country/region-within-a-country where there are particularly relaxed rules about doing business, and where there are still-easy-to-understand tax regimes. And by “still-easy-to-understand tax regimes”, what one means is “where you pay less tax than in most other places”.
Some Oft-Missed Points
America and the European nations are regularly up-in-arms about the whole tax avoidance aspect of these low-tax areas. But here are some things to consider:
- Most tax havens are, in fact, the former colonies of the United States, the United Kingdom and France…
- Two of the most famous tax havens are the State of Delaware (in the US) and the City of London (in the UK) – both of which seem to operate quite independently of standard US and UK laws (and you should also note that those two are missing from the above tax-haven map as reported by the US Government Accountability Office).
- In order for these tax havens to exist in practice, they need to have effective double-taxation agreements**** between themselves and these countries that are getting so annoyed. Otherwise, said country could just tax the offshore company anyway.
Let’s Talk About the Article
The article is all about a shocking statistic (according to Tax Justice Network, “wealthy individuals were hiding as much as $32 trillion offshore at the end of 2010”), how the web crumbles when the rich folk get divorced, and this picture entitled “Offshore Fury”:
Also, this pithy quote at the end from a “tax advisor”:
“We live in a world where you only have two choices: play by the rules of the country you live in, or get out if you don’t want to play by the rules.”
Alright – let’s say we hear that, and all these recognised tax havens get annihilated by bailout requirements like Cyprus. My question would be: “What then?”
Well let me put it this way:
- If you go on holiday for three weeks to Paris – do the French Authorities suddenly demand that you pay tax on the salary that you earned while you were on leave? No, they don’t.
- What about if you’re travelling in France for 3 months? Also no.
- Conclusion: there are periods of time when even the most rigid of tax jurisdictions operate as tax havens.
An illustrative example: let’s say that you’re a billionaire earning $25 million a year. You stay in your home country the entire year through, and you get taxed on 40% of that ($10 million). So I say to you: “I’ll hypothetically pay you 10 million bucks to go on holiday all year round; the only rule is that you can’t stay in any place for longer than 3 months at a time; and the $10 million is the tax that you’ll be saving.” What would you do?
At some point in time, every country is a tax haven. And the wealthy will always find ways to minimise their tax obligation – even if it makes them a little uncomfortable.
I’m just saying that the only way this current haven-targetting trend ends is for the world to reach the point where there is a single, global, über-efficient tax collection authority. Probably run by the Germans.
Firstly, that sounds like the alternative ending to World War 2.
Secondly, is human nature is genuinely capable of that level of unity?
Thirdly – yes, that question is rhetorical.
*And as a general aside, “rhetoric” is NOT a method of argument. If you have to resort to riling emotional support for your cause – then you’re not right; you’re prejudiced.
**With rhetoric. Obviously.
***A tax haven without a banking sector is just an island.
****Double-Taxation Agreements are there to prevent individuals and corporations from being taxed twice. So, for example, say that a British Resident invested in an Apple share last week Monday (at $390 per share), and wished to sell it today (at $430 per share). He’s made a gain (income) of $40. Who gets to tax that: should it be the US government, because the gain was made on a US stock listed on a US exchange; or should it be the British government, because the man is British and used his British money to make the investment which gave rise to the income? Without a DTA – the man would have to pay tax in the US and then pay tax in the UK (he’d be double-taxed). But because there is a DTA between the US and the UK, there would already be guidelines to determine which Revenue Authority collects the tax in such a situation.