Tuesday, March 04, 2008

Europe versus the tax havens: a word of caution

Following our recent blog about "spivs, swindlers, cheats and cads", tax havens are once again at the top of the news in Britain and other European countries. There are too many stories today to mention here, but try these for size. The Independent, in an article entitled "Europe vs the super-rich" starts like this:

The European Union will declare war today on Liechtenstein, Monaco, Andorra and Switzerland. Weary of losing billions of tax euros, the EU's 27-strong high command of economics and finance ministers, Ecofin, is meeting in Brussels to agree a strategy aimed at bringing the continent's tax havens under control.

Their weapon of choice will be a strengthened version of the EU's 2005 savings tax directive, which has proved pathetically easy for armies of accountants, lawyers and specialist tax planners to outflank.


The story uses a calculation that appears to be heavily influenced by the TJN web site:

Globally, estimates of the total funds parked by individuals in offshore havens vary from $7trn (£3.5trn) to $12trn (£6trn). Depending on assumptions about returns and tax rates, such sizeable funds could yield around $250bn (£125bn) for legitimate public spending. That ought to be enough, for example, to achieve many of the UN's Millennium Development Goals by 2015.

In a follow-up article, The Independent looks at the spoiler role Britain has played in the face of efforts by Germany, France and the Scandinavians to introduce Europe-wide rules to crack down on tax havens. And it contains a startling indication of the rapid shift in mood in Britain.

Where once the rallying call to the world's wealthy was, "It's good to be rich. Come here and enjoy it without tax", the new cry is, "It's intolerable to be rich and not pay tax".

The excesses of the financial community in rewarding themselves, and their absolute refusal to co-operate with any kind of transparency for their wealth, have become a national outrage. So long as the economy kept growing it was deemed tolerable. Given the whiff of recession, fuelled by catastrophic investment decisions made in search of quick profits, and passive distaste has turned into active resentment.

We suspect that the sub-prime crisis and associated economic malaise may well do the same thing in America. The tide is turning. TJN's Richard Murphy looks into this in more detail, in a recent blog which says this:

I think that we have passed a tipping point; the occasion when the momentum for change becomes unstoppable.

And he outlines another important component of the change that is now happening:

Apologists in the accountancy profession, CBI and government (Digby Jones, for starters) are saying they’re indispensable. The middle classes no longer believe that. They no longer see those in the City and elsewhere as ‘terribly clever’. Northern Rock and the credit crunch have shown them to be a bunch of gambling chancers who had no real idea what was going on and who had no contingency for a down side. That’s obviously not clever; that’s very obviously dumb, but they’ve been massively well paid for it.

And the mood appears to be changing inside the British government Britain too. A headline in today's Guardian, "Home Office and Treasury now owned offshore" underlines the outrage and the bizarre tax gymnastics that Britain has enveloped itself in:

Billions of pounds of private finance initiative (PFI) projects approved by Gordon Brown, including the refurbished Treasury headquarters in Whitehall and the new Home Office, have been moved offshore by their City owners to avoid paying tax on their profits.

This story about PFI and tax havens was floated a while ago by the wonderful British satirical magazine Private Eye, and the Guardian has provided us with new details and insights, which are fleshed out further in another story: a more in-depth exploration of how some of these deals work. The article quoted a senior advisor to TJN:
"The way these contracts are being handled ought to be investigated by the Commons Treasury committee," Prem Sikka, professor of accounting at Essex University, said yesterday. "The taxpayer is losing out. They are having to pay rent for these projects but the tax base is declining."
Following the Guardian's investigations of Tescos, and of the banana industry, and similar kinds of things now emerging in the Netherlands, this is yet more fuel for the growing bonfire. And it seems that the UK government may be starting to listen at last. Look at this Times story, for example, which says:

The chancellor is to step up hostilities against Britain’s super-rich by pressing for sanctions against Monaco, the Mediterranean tax haven.

“So far the attention has been on Liechtenstein, but Monaco is the goldmine,” said a Whitehall official. “Germany has got the bit between its teeth now and Monaco is where they want to go next – and we’re right with them.”

And yet while all this new political will for action is most welcome, a word of caution is advised. While it is still unclear what direction Europe's thrust against tax havens will take, current international initiatives being looked at so far are full of holes. For one thing, developing countries need to be considered more centrally in proposals to improve matters. And there is more. We will be bringing you more details on this before long.

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