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Tax havens

“Rhetorical change”

by Georg Stoll
Until recently, tax evasion was considered a trivial offence, and some of the most savvy – ranging from top managers and multinational corporations to African potentates – kept their financial assets abroad. George Stoll of the Tax Justice Network explains why the practice is fatal for many countries.

Tax havens came in for criticism during the G20 Summit at the beginning of April. The Organisation for Economic Cooperation and Development (OECD) published a blacklist, and all tax havens it mentioned have since announced that they will in future observe the OECD standards on disclosure of information. How much are these statements worth?
On the one hand, they reflect a very positive development. There is now a greater sensitivity for the issue and public pressure. A year ago, a statement against bank secrecy like the one published in the G20 final communiqué would have been totally inconceivable. So there has been a change of mentality, at least at the rhetorical level. But the announcements are only a response to intense pressure. No country wanted to see itself on the blacklist. However, the concessions are not really going to affect the tax havens' business model.

What action would that require?
It is particularly important that national tax authorities should share information automatically. If authorities don’t have reasons for suspicion, they will not launch targeted investigations. Therefore, a lot of information tax havens try to conceal is needed. The case of the former chief executive of Deutsche Post, Klaus Zumwinkel, was a telling example. If the German tax authority had not received a tip-off and a CD with incriminating data, he would have never been caught.

What else needs to be done?
We need a multilateral agreement on sharing information. At present, agreements are basically between individual countries. Even the G20 statement proposes no change in that respect. But the administrative capacities of many developing countries are overstretched. Until we get a multilateral agreement setting mandatory standards for all countries, the situation will not improve for the developing world. Apart from that, independent monitoring and sanctions are needed.

What does tax evasion mean for poor countries?
Developing countries are affected by tax evasion in two ways. First, rich individuals and members of government cliques take assets out of the county, invest them in tax havens and pay no tax on the resulting profits. Such money, moreover, often results from corruption. Even more money, however, is lost as a result of multinational corporations avoiding taxes by transferring profits and losses between subsidiaries. According to the latest estimates for the years 2002 to 2006, such transfers resulted in at least $ 370 billion a year being spirited past developing countries’ tax authorities.

So developing countries are losing more money because of tax evasion than they receive in development assistance. If all tax havens were closed, could development aid be done away with?
To judge simply from the figures, yes. But apart from the international dimension, there is also a national dimension. It is crucially important that tax revenues are generated and used to reduce poverty instead of lining the pockets of corrupt elites. That will not happen, however, unless parliaments and civil society are able to monitor national budgets.

Questions by Claudia Isabel Rittel