Tuesday, June 01, 2010

Japan takes another step offshore

The politicians of the G20 would have you believe that their recent highly publicised stands against tax havens have, if not solved the problem, then dealt the havens a mighty blow. This, as readers of this blog will know, is very far from the truth - the moves, while not entirely insignificant, are remarkably feeble. Not only that - but offshore also involves a steady process of tax and regulatory competition - so any good deeds that are done are steadily unravelled over time by continuous processes of tax and regulatory competition.

One latest example is that of Japan, which Reuters notes has just announced that:

"Japan hopes to lure overseas investors to corporate bonds by temporarily abolishing taxes on interest income starting next month, but analysts say it may face an uphill battle due to low domestic interest rates."

This is a pure offshore move: to attract overseas business, by cutting taxes. It has happened all around the world: the U.S.' so-called Portfolio Interest Exemption of 1984 is one well-known example. That was enacted in response to offshore competition (particularly from the Netherlands Antilles) and its effect was to hasten the U.S.' descent into tax havenry.

The result of this kind of offshore move is that plenty of new (and wealthy) investors will enjoy tax-free income, and taxpayers (both in Japan, which will lose the income) and elsewhere, which will be drained of capital, will have to foot the bill. We are hardly reassured by the word "temporarily" - these temporary expedients have, as a result of lobbying by the financial services industry, a habit of becoming permanent. After all, as Reuters continues,

"Japan adopted similar tax exemptions for Japanese government bonds in 1999, and for municipal bonds in 2007."

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