Boris Becker once declared himself a resident of Monaco but when it was discovered that he had stayed in Germany at his sister’s house for a considerable period, he could not be treated as a non-resident in Germany. He would have avoided euro 1.6 million in taxes but ultimately had to pay euro 3 million as fine and undergo two-year probation. Such incidents make interesting reading but they give the wrong impression that tax havens are marginal aberrations, a mere sideshow, a playground for the rich and the famous. That is a myth. What the authors have proved in this book is that tax havens have become the most powerful instrument of globalisation, one of the principal causes of global financial instability and one of the large political issues of our times. It is not as if tax havens are just conduits for tax avoidance and evasion but, taken together, they play a significant role in the world economy, influencing in many ways the ups and downs of the globalised world. The book does not suggest that the financial crisis of 2008-09 was caused by these tax havens but contends that they were among the most important actors participating in the crisis.
An important example of how a financial crisis is related to the shadowy world of tax havens is the collapse of British bank Northern Rock. In September 2007, only a month after the beginning of one of the most devastating financial crises ever experienced, Northern Rock, the UK’s fifth-largest mortgage provider, was on the brink of collapse. Those mortgages, however, were not issued by Northern Rock itself but by its shadow company, Granite Master. Granite was not owned by Northern Rock directly but by a UK charitable trust established by Northern Rock. Much of the management of the Trust, a supposedly independent structure, was located in Jersey, a well-known European tax haven. So many such examples have been discussed in this book.
Estimates of such tax havens and the amount of money they dealt with are mind boggling. The authors have estimated that there are between 46 and 60 active tax havens in the world right now. They are home to an estimated two million International Business Companies which comprise a bewildering array of corporate entities in the shape of trusts, mutual funds, hedge funds and captive insurance companies. They are extremely opaque. About 50 per cent of all international bank lending and 30 per cent of the world’s stock of foreign direct investment are registered in these jurisdictions. Some very small islands are among the world’s largest financial centres. The Cayman Islands, a small set of islands in the Caribbean and still a British Overseas territory, is the fifth largest international financial centre in the world.
Although there was persistent criticism the world over against the continuance of tax havens, the US and the EU were unwilling to co-operate in a battle against them. The coming of President Obama made a difference. There was the Liechtenstein debacle, where an informant, previously an employee of the bank, stole a computer disc containing information about more than 4,000 bank customers. He reportedly sold it for more than euro 4 million to the German tax authorities, which are willing to share it with the rest of the world. There are hardly any takers since many governments did not want this information so as not to embarrass the rich and the powerful. This disaster from the viewpoint of secrecy of the tax havens has opened up lots of information.
The battle against secrecy has, however, gained ground and there have also been some breakthroughs. The one obstacle has been the bilateral agreements between countries that do not include giving information about banks’ secret account. The US and Germany have taken some determined steps by seeking to deny tax relief on payments made to them from entities registered in tax havens.
The authors have suggested that the regulation of tax havens is the key to any future plan to stabilise financial markets. They have also discussed the serious limitations to enforce the regulation since the jurisdictions are often politically independent. They refused to cooperate. Many have reacted against the previous attempt to regulate them by promoting more secrecy, providing ever more sophisticated and obscure financial entities. This trend is prominent in locations like Panama, Dubai, Singapore, Jersey, Cayman Islands, Liechtenstein and so on, although Switzerland has lost its legendary reputation as a tax haven.
This is an extremely readable book and its predominant message is that the battle against secrecy has so far been lost but the battle must be won.
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The reviewer is former member, Central Board of Excise and Customs
TAX HAVENS
How globalisation really works
Ronen Palan, Richard Murphy and Christian Chavagneux
Supernova Publishers and Distributors, New Delhi
280 pages; Rs 399