Thursday, September 03, 2009

Tax, tax havens and the financial crisis, again

Lord Turner, who made some welcome comments recently about the financial services sector, has added more to the debate. We will focus on this comment, from a new interview in the Financial Times:

"But the chairman of the Financial Services Authority said this drive would also have the benefit of unravelling banks’ structural complexity used to minimise tax.
. . .
In the past, authorities around the world have tended to be tolerant of the proliferation of complex legal structures designed to maximise regulatory and tax arbitrage. Now we may have to demand clarity of legal structure.”

This complements what Jack Blum said in a recent Tax Analysts article, which we recently blogged:

"every device which was a tax evasion device was also used to get around all of the regulatory issues that the banks wanted to get around."

And what we have been saying for some time:

"A key feature of the crisis is that the financial system became frozen as a result of mutual mistrust and impenetrable complexity making it impossible for actors to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, played a major part."

In other words, the world is waking up to the notion that those tax haven apologists (from certain BBC presenters to the Cayman lobbyists) are quite wrong to pooh-pooh the idea that the offshore world had anything to do with the crisis. As we recently noted,

"This witches (sic) brew of complex instruments, leveraged finance, regulatory arbitrage, tax avoidance, fragmented regulation, opaque structures, and the rest, shares a common denominator. Much of this activity happens in lightly regulated offshore financial centres, located in tax havens like Cayman, the Channel Islands, Dublin and London. Why? Because of the culture of lax regulation. Because of the opportunities for tax avoidance. Because of the lack of operational transparency. Because the ability for capital to structure its operations across a wide number of OFCs creates a fragmented regulatory environment in which everyone assumes that transactions are taking place elsewhere."

As a reminder, we outline any number of other reasons here.

One would think that with all the noise about tax havens, that the end is nigh for them. The OECD's Angel Gurría, laughably, said as much.

One general reason why this is nonsense is that athough there have been and will be welcome developments, the process of regulatory degradation, as a result of pernicious so-called "competition" on tax, regulation and secrecy, just marches on, and any gains will constantly be eroded.

A more specific reason is this. The City of London has been, since around the mid 1950s and probably before, the blackest black hole of regulatory laxity in the world. (The City of London is a peculiar beast - see this, if you haven't already.)

Now the two great protectors of the City of London at the heart of the British state have always been the Conservative Party, for one thing, and the Bank of England, for another. The Bank has truly awesome leeway to set the policy it wants, and enormous protection from Britain's democratically elected politicians.

Now it looks as if the Conservatives have by far the best chance of winning the next election - due by the middle of next year. And what is their proposal for regulatory reform? Ditch the Financial Services Authority, which allows Britain's democratically elected politicians to have a say -- and shovel these responsibilities towards, guess where?

Er, to the Bank of England.


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