By Rob Stock
stuff.co.nz
April 10, 2011
British Author Nicholas Shaxson wants you to forget everything you think you know about tax havens. The author of Treasure Islands believes even calling them tax havens is a misnomer.
They should be called "obligation havens", he says, because dodging tax is just one of many obligations the world's rich and crooked avoid by using them.
Havens are the regulatory equivalent of nowhere – places where there is no police force looking for the proceeds of crime, places where there are no regulators, or courts of public opinion.
Shaxson said havens even played a role in bringing about the global financial crisis by allowing financial firms to flog toxic debts out of the sight of regulators.
They also provide a means for kleptomaniac political leaders and organised criminals to hide and launder their money.
People may not even realise they live in a tax haven. Anyone with a bit of nous can reel off a dozen or so island tax havens – Jersey, the Caymans, the Bahamas, Guernsey... but Shaxson is fairly sure they won't name the islands of Manhattan and Great Britain.
He could include New Zealand for that matter, because international "asset planning" firms are making a play of selling New Zealand trusts as safe places to stash wealth discreetly.
This country offers first world stability, and a low-visibility trust system where foreigners can hold assets away from the eyes of their own tax authorities.
New Zealand is mentioned alongside Delaware companies, Barbados trusts, private foundations in Netherlands Antilles and tax-exempt companies in the Cayman Islands.
Shaxson said New Zealand was one of the unrecognised tax havens of the world, but that its profile is about to rise.
"The Tax Justice Network has a Financial Secrecy Index, which looks at jurisdictions and ranks them according to how secretive they are, weighted according to how big the offshore financial sector is. The current index doesn't include New Zealand, but it is on their radar screen and I anticipate New Zealand will be on the index by about 2013," he said.
The other mistake people make about tax havens is that they are a "sideshow", an unfortunate but tolerable underbelly of international capitalism.
Treasure Islands describes a world in which an increasingly large portion of the world's assets are owned in tax havens through which around half of global trade now passes.
He reels off statistics: 83 of the US's top 100 companies have subsidiaries in tax havens; small island economies are home to $US18 trillion of assets, the equivalent of some 50% of world GDP.
Havens are tolerated because the UK and US and other developed economies tolerate them, he said. They do so because they benefit from use of the assets.
But the US itself is home to an estimated $US3 trillion, which has found its way there because of "favourable privacy laws".
But back to the the global financial crisis. Havens allowed toxic brews of subprime loans to be mixed, repackaged and sold away from the eyes of regulators, Shaxson said. They allowed companies to grow and take on vastly more risk than regulators realise because they could see only a part of the operations of multi-nationals such as Lehman Brothers.
Shaxson dismisses pro-haven cheerleaders who claim they keep politicians honest by capping the tax they can impose on their citizens. Tax havens are for the rich, the criminal and the powerful, and opposed to the interests of the rank and file of society, who can't afford the lawyers, accountants and tax advisers to take advantage of them, he said.
Can tax havens be beaten?
Shaxson told the Sunday Star-Times he is not without hope.
"Until recently, the prospects for reform were absolutely zero," he said. "We are talking about immensely powerful forces in the global economy. The offshore system is at the heart of the global economy now: half of all world trade passes through tax havens, on one measure, and `offshore' is pushing its way steadily onshore, so that supposedly onshore countries like the US, the UK are steadily becoming more and more tax haven-like."
Confronting the fiercest defenders of offshore havens – the financial services sector and large corporations – is not easy.
"What is new now is that whereas nobody really understood the offshore system before – seeing it as some kind of marginal sideshow to the global economy, peopled by a few celebrity tax dodgers, mafiosi and assorted spivs – there is now the beginning of an understanding that offshore finance is central to everything that happens in global markets – and that it is, by and large, a malign force.
"Once people – and especially economists I think – begin to understand how important and dangerous this stuff is, then we begin to see the possibility of change. I don't think we are there yet, but we are getting there."
If nothing changes, Shaxson said the reason will be a simple one. "It boils down to two words: political power. That is, the power of wealthy individuals and corporations to protect their interests. Offshore finance not only helps them shift the tax burden onto the backs of everyone else, but it enables financial interests to shift the risks of their activities on to ordinary taxpayers.
"It enables crime to flourish; it enables insiders to rig markets at the expense of everyone else, and so on. If nothing really changes it will be because these insiders are too powerful."
