What’s in a Name?

June 18th, 2009

These days, the phrase “tax haven” carries with it an acute sense of shame.   Perhaps it’s because tax havens have increasingly become associated with money laundering, terrorism, and crime.  Or perhaps it’s a result of the G-20 “naming and shaming” campaign on April 2nd of this year, in which the G-20 placed countries in categories based on their compliance with international tax laws and drew up a “blacklist” of tax havens.  Personally, I think it has more to do with tax payers’ personal shock and horror at massive budget deficits, huge bailouts, and a reeling global financial crisis… coupled with our imaginations running wild with thoughts of corporate executives sitting on Caribbean beaches, sipping Piña Coladas, and watching their untouchable profits pile at their feet.  Of course, this particular image is a bit of an exaggeration.  However, it does not negate the fact that in 2008 the Government Accountability Office (GAO) found that of the 100 largest corporations, 83 have subsidiaries in tax havens.  And it doesn’t make it any less offensive that in 2004 U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – an effective U.S. tax rate of about 2.3%.

There’s no doubt about it.  To be called a “tax haven” by the OECD is about the same as being called a “bat-fowling hedge-pig” in Shakespeare’s day.  This might explain why we’ve seen a massive recoiling from those fingered “tax havens” in recent months.  For example, the Isle of Man, Malta, the Cayman Islands Financial Services Association and others have spent more than $800,000 on lobbyists to keep the Stop Tax Havens Abuse Act from naming them specifically.  Switzerland, also offended by name calling and finger pointing, has taken a slightly different tack.  In order to be remembered as the land of attractive outdoorsmen and not sleazy bankers, Switzerland has created a calendar documenting so-called “lingerie farming.”  In other words—pictures of half-naked, brawny men “throwing around bales of hay with what appear to be cowbells stuffed into their underwear.”

So what IS a tax haven??  Well, no one is really sure.  As Richard Murphy—an expert on tax policy and co-founder of the Tax Justice Network—tells us “One of the biggest problems anyone has when addressing issues relating to tax havens and offshore financial centres (OFCs) is in agreeing what these terms mean.”  For example, the OECD defines a tax haven under the following four basic conditions (these are simplified for the sake of space): 1) No or nominal tax on the relevant income; 2) Lack of effective exchange of information; 3) Lack of transparency; 4) No substantial activities.  But the EU, IMF, and Financial Task Force on Money Laundering all have their own definitions.  And Tax Justice Network defines them as:

…places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

This situation was somewhat alleviated when the G20/OECD announced the previously discussed tax compliance categories in April.  In this guideline a tax haven is defined as a jurisdiction which has signed fewer than twelve Tax Information Exchange Agreements (TIEAs) set by the OECD.  Those which reach that threshold by year’s end will be taken off the gray list.  As a result, Tax Analysts has noted that tax havens have opted to pursue TIEAs with Nordic jurisdictions because they can “negotiate seven treaties at once, allowing them to quickly achieve more than half the number of agreements required to be moved to the OECD’s white list of cooperative jurisdictions.”  As Richard Murphy notes, this means that Bermuda, by signing “agreements with governments representing 0.43 percent of the world’s population, [can get] 66 percent of the way to international acceptability on tax, which shows just how badly wrong the OECD got its tax haven listing.”  Indeed.

Juliet might innocently ask, “What’s in a name?  A tax haven by any other name would still be sheltering billions in untouchable assets.”  But the name does matter if it means something, if it implies action on the part of the accusers, perpetrators, and victims.  This is why it’s necessary, but not sufficient, to label tax havens and demand tax exchange agreements.  To fix our broken system, we cannot just point fingers and expect shame to root out tax injustice.  Rather it is essential that we pursue automatic tax information exchange and require that governments collect and share data on income, gains, and property paid to non-residents.   At least so that Switzerland stops making all those calendars of attractive men.  Or on second thought, I don’t mind those so very much.

Written by Ann Hollingshead

Follow @FinTrCo