25/2/2018: Tax Havens and Financial Secrecy ca 2018

The notion of what defines a tax haven is a complex one and does not easily lend itself to a precise definition. This presents numerous problems. As a personal example is an academic paper that I am currently working on with three other co-authors in which we had to use several different definitions of tax havens, primarily because the official (OECD) designations were so deeply politicized as to exclude a wide range of countries.

Tax Justice Network this week published its Financial Secrecy Index (https://www.financialsecrecyindex.com/). The Index is based on 20 tax policy-specific indicators, which are described here (https://www.financialsecrecyindex.com/introduction/method-and-concepts) and in broad terms provides a view of just how open the country is to facilitating tax avoidance or tax evasion through its financial laws, regulations and systems. The 20 indicators are:

  • Banking secrecy
  • Wealth Ownership disclosures, covering: existence of a public Trust and Foundations Register, Recording of Company Ownership disclosures, and Other Wealth Ownership
  • Limited Partnership Transparency, Public Company Ownership, Public Company Accounts
  • Country-by-Country Reporting, and Corporate Tax Disclosure, Legal Entity Identifier, and Tax Administration Capacity
  • Consistent Personal Income Tax
  • Does the jurisdiction facilitate tax avoidance and encourage tax competition with its treatment of capital income in local income tax law? Is there tax court secrecy, and are there harmful tax structures, e.g. bearer shares; use of large banknotes, existence of trusts with flee clauses, etc
  • Public Statistics disclosures about international financial, trade, investment and tax position
  • Anti - Money Laundering regime 
  • Automatic Information Exchange, Bilateral Treaties, and International Legal Cooperation
Using the methodology described in the above link, the Tax Justice Network arrive at the country rankings in terms of how open the country system is to facilitation of tax avoidance and evasion, including through provision of financial secrecy and non-disclosure facilities that help international companies and investors avoid tax payments in their jurisdictions of origin.

The results are surprising, because they stand in a stark contrast to politically sanitized version of tax avoidance lists published by the likes of the toothless and politically controlled OECD:

Here's the top shocker: the U.S. - a country that routinely bullies other jurisdictions when it comes to extracting tax data that serves the American own purposes is number two most active tax avoidance facilitation countries in the world.  Germany, another stalwart of anti-tax avoidance rhetoric and co-sponsor of the OECD's BEPS anti-tax avoidance process alongside the U.S. is ranked number 7. Japan is number 13. Canada is number 21. And so on.

Another surprise, Ireland - previously ranked 37th in 2015 Index, with a secrecy score of 40 (see https://www.financialsecrecyindex.com/Archive2015/CountryReports/Ireland.pdf), the country is now ranked 26th, with a secrecy score of 51 (this year's country report here: https://www.financialsecrecyindex.com/PDF/Ireland.pdf). In other words, things are not quite improving for Ireland.

A third surprise is Lichtenstein. This country has been commonly accused of being a major secrecy tax haven for financial flows, quite often, without any serious consideration of the more recent reforms in the country's financial services sector. Yet, Lichtenstein ranks lowly 46th in the index, just below Norway. IN the same vein, Cyprus - that has been effectively labeled a dirty money Island for Russian mobsters during 2011 financial restructuring episode - ranks reasonably low at 24th place, well better than Germany - a country from which these accusations originated.

These, and other considerations, arising from the Index results should remind us of the complexity involved in assessing the extent of financial and tax systems facilitation of illicit and ethically questionable activities. Tax havens come in all forms and shapes, some benign, others damaging to the socio-economic environments, many having an adverse impact only in the long run.

It is quite easy for the media to label a jurisdiction a safe haven for crime. It is much harder to establish an empirical basis to either support or reject such a label.