Wednesday, February 20, 2008

PRESS RELEASE - Liechtenstein

Germany, Europe and the OECD must now act decisively on tax haven abuse

Tax Justice Network, Februry 20, 2008

Germany is in the throes of its biggest ever tax scandal. On the occasion of the visit to Berlin of Liechtenstein’s Prime Minister Otmar Hasler, the Tax Justice Network demands that Germany and Europe now act decisively against Liechtenstein and close it down as a tax haven forever. As a first step, Germany should publicly commit itself to handing over all relevant tax information that it now possesses to the authorities of all the other jurisdictions that have been victims of Liechtenstein’s activities. This scandal must also spur decisive efforts by Germany and Europe to invigorate hitherto feeble international efforts against tax havens by the OECD and others.

Worrying signs are emerging that Germany’s response risks being as weak-kneed as other international schemes. Torsten Albig, a spokesman for German Finance Minister Peer Steinbrück, recently said that

The problem is not the possibilities in Liechtenstein, but the problem is the criminal energy of German tax evaders.

Tax evasion and other forms of financial crime have a demand side – in this case German tax evaders – and a supply side, the international infrastructure that promotes and harbours evaded taxes and other criminal money, and the lawyers, bankers, accountants and others who make the secrecy work. While the wider context for Albig’s statement is more nuanced, the comment itself is unambiguous. The Finance Ministry must repudiate it and declare that it is the “possibilities in Liechtenstein,” not the German tax evaders’ criminal energy, that are the main problem.

Liechtenstein’s tax system harms not only Germany, but the whole world. Many billions of dollars of dirty money have fled Africa and elsewhere into Liechtenstein in pursuit of its secrecy, leaving poor governments starved of tax revenues and draining local economies of vitally important investment capital. Liechtenstein, for example, played a central role in the “Elf Affair” where French investigating magistrates discovered money from France’s former African colonies being used for illegal, corrupt purposes around the world. Bribes have been allegedly funnelled through Liechtenstein foundations by American oil companies in pursuit of lucrative oil licences in Kazakhstan. But these and several other cases cases are just the tip of an iceberg. If Germany has to use its intelligence services to bribe an insider to obtain basic tax information then weak nations in Africa and elsewhere are especially vulnerable: they effectively have no chance of securing the information they need to prevent corrupt politicians and others undermining their states’ revenue bases.

The right political climate for a serious worldwide crackdown on tax havens is now at hand. Public revulsion in Germany at this emerging scandal will promote action in Europe, and the recent co-sponsoring by U.S. Senator Barack Obama of the Stop Tax Haven Abuse Act reflects a fast-changing political climate in America. In Britain, arguably now Europe’s leading tax haven, a dramatic public backlash has emerged recently weeks against legislation allowing wealthy “non-domiciled” citizens to escape proper taxation. Germany, Europe, the OECD and others should take this opportunity to start cracking down seriously on tax havens at last.

John Christensen, director of the Tax Justice Network, said:

It is an international disgrace that these tiny jurisdictions continue to abuse their privileged status. Liechtenstein is a clear example of a pirate state. We have a prince running his own bank, and Lichtenstein where he wields power is clearly and systematically abusing its offshore secrecy status to undermine other nation states and abuse their citizens. When élites remove themselves from the tax regime, they subvert democratic processes and undermine respect for the integrity of laws and institutions. Evaded taxes are stolen public assets, and tax evasion is corruption at its worst.

Richard Murphy, senior adviser to the Tax Justice Network said:

This affair shows that tax havens set out to create structures whose only use is to subvert the taxation and regulatory systems of other countries. That’s a form of international aggressiuon to which the states affected must respond. But they have to go beyond that. They must also tackle the lawyers, accountants, banks and trust companies providing these services. Many of these are household names, facilitating corruption and yet still expecting to be held in high regard in the states that suffer the cost of their actions.


International initiatives on tax havens are inadequate.

The European Union has made some progress on tackling tax havens. But its current efforts focus on business taxation and the taxation of interest income. This leaves enormous gaps such as trusts, which are notorious vehicles for tax abuse and which are widely exploited by tax evaders and other criminals.

The OECD in 2000 identified 35 jurisdictions as uncooperative tax havens but only three remain: Liechtenstein, Andorra and Monaco which refuse to exchange even limited tax information with other jurisdictions. Some progress has been made. Yet many countries effectively declared clean by the OECD, like Switzerland and the UK, still offer of tax structures that facilitate large-scale tax abuse. (See an in-depth research report into Switzerland by the American research organisation TaxAnalysts here.)

What is a tax haven?

The OECD in 1998 defined a tax haven as a place that offered at least two of: a) No or only nominal taxes. b) Lack of effective exchange of information. c) Lack of transparency. d) No substantial activities in the location recording a transaction.

Thinking has moved on since 1998 but these definitions remain broadly relevant. A simpler way of thinking about tax havens is:

A tax haven creates laws and other measures that it knows can be used to evade or avoid the tax laws or regulations of other jurisdictions and which have little or no other purpose.

How is Liechtenstein a tax haven?

Using the OECD criteria Liechtenstein is a tax haven. In fact, it is one of the world’s most secretive jurisdictions. Tax evasion is not a criminal offence in Liechtenstein so normal international cooperation agreements on criminal matters do not apply.

The Liechtenstein foundation is its main tax haven product. There is almost no official record of its activities as long as it is set up for personal or family use by a non-resident. The name of the person creating the foundation is not recorded. The foundation must have a constitution but many foundations do not require registration to acquire their legal identity: they are known only to the lawyers and bankers supplying services to them, who are legally bound by absolute secrecy. Even where registration is required, no information about the foundation is available to the public. Liechtenstein foundations trading only outside Liechtenstein are not required to keep accounting records, and no accounts ever have to be sent to any authority. A small tax charge is paid annually. Liechtenstein is part of the EU Savings Tax Directive whereby jurisdictions either exchange tax information with others or they require paying agents to apply a witholding tax (currently 15%) on interest income which is then mostly passed in bulk to the relevant national authority. Liechtenstein has taken the witholding tax route, so it does not have to exchange tax information with other authorities.

About the Tax Justice Network.

The Tax Justice Network is led by tax experts and economists and it campaigns for greater transparency in international finance and opposes abusive tax practices. It advises and works with governments, international bodies and non-governmental organisations in matters of international taxation and corruption.


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