NEW YORK - This could be the moment when a fatal blow is delivered to the world's tax havens. Or it could be another largely cosmetic change that allows offshore financial centers such as Switzerland, the Cayman Islands and Liechtenstein to deflect attacks on the system by sacrificing the few tax miscreants that governments catch in their nets.
Decisions at the G20 government leaders meeting in London Apr. 2 will set the direction.
Financial centers with bank secrecy laws are blamed by the Organization for Economic Cooperation and Development, which represents 30 developed economies, for hiding some 5 to 7 trillion dollars offshore so the profits they produce evade taxes. This costs the U.S. 100 billion dollars in taxes annually, says Michigan Senator Carl Levin, who has introduced legislation to combat offshore tax evasion. The numbers are guesses, as bank secrecy masks the figures.
Officials in Germany and France, the two western countries that have pressed hardest for reform, believe the offshore system not only deprives them of taxes, but helped cause the financial crisis. Germany's Finance Minister Peer Steinbrueck said, "These tax havens are also places where unregulated financial market deals are made." A leaked French government paper agrees that "Uncooperative jurisdictions may threaten the global financial stability by creating regulatory loopholes and opacity."
Offshore centers, worried what may happen in London, are falling all over themselves promising to cooperate with the major powers on the trail of tax cheats. But the holes in the tax havens' promises are as big as those in Switzerland's famous cheese.
The issue is dramatized by the case of UBS. The bank, to settle a charge that it promoted tax fraud, agreed to turn over the names of some 300 clients to the U.S. Treasury. But it has balked at turning over another 47,000 names of U.S. account holders suspected of tax evasion.
And that's the point. Tax havens, including the aforementioned as well as Singapore, Hong Kong, Andorra, the Cayman Islands, Monaco and others, are agreeing to sign bilateral tax information exchange agreements. OECD spokesman Nicholas Bray told IPS on Thursday, "The situation is changing daily, with new announcements from jurisdictions around the world that they are ready to commit to the international standards."
But the OECD's tax standards call only for cooperation with foreign tax authorities if there is a particular and justifiable case. Bray said that means "Inquiries by tax authorities based on reasonable and justified suspicion of tax evasion, individuals and companies - no fishing expeditions, no automatic exchange of information."
The section on companies opens many possibilities. Not only could governments go after individuals using shell companies to carry out fake transactions to cheat on taxes, but they could pursue real companies who move their profits offshore via transfer pricing to evade home country levies.
Transfer pricing occurs when a company sells to an offshore intermediary at a fake low price (paying low taxes on low profits) and then sells from the intermediary into the market at the real higher price, assigning the true profits to the tax haven - which levies no tax. Or if a company assigns excessive profits to an offshore sales or service subsidiary.
Grace Perez-Navarro, head of OECD's International Cooperation and Tax Competition Division, said that if France, for example, had a tax haven subsidiary that the government suspected was used for transfer pricing, it could request information about the subsidiary's offshore accounts.
That could have impact in developing countries Trade between companies, often done for transfer pricing to evade taxes, is at least half of global trade. Grand Cayman is Brazil's second largest trading partner - obviously a transfer-pricing way station. Brazil this year amended its transfer-pricing regulations and expanded the legal definition of tax havens. Christian Aid in London says that tax evasion costs developing countries estimated 160 billion dollars in tax a year, a lot more than they get from global aid.
However, under the agreements signed, governments have to go after suspects about which they already have evidence - and that evidence may be in the accounts. The Swiss Bankers' Association said in a statement that "the privacy of foreign clients not under suspicion will continue to be protected by Swiss bank-client confidentiality." And, "An automatic exchange of information is excluded."
It's impossible even for rich governments to investigate and provide evidence to tax havens about more than a very small number of their tax cheating citizens and companies. Requests for administrative assistance take money, staff, legal expertise and time. Many believe that automatic exchange of information is the only really effective way to end pandemic tax evasion.
And where do such bilateral agreements leave developing countries with limited resources or bargaining strength? The Isle of Man has signed 14 agreements, of which only two are with non-OECD countries. Will such arrangements be acceptable to G20 members Brazil and India?
Bray said, "This is an ongoing issue, which will have to be resolved by more diplomacy. The UK is trying to encourage the idea of multilateral agreements, I believe."
The other part of the equation the G20 must deal with is how tough the sanctions are that it endorses.
The leaked French working paper makes the strongest proposals. They include that G20 members punish countries deemed to be "uncooperative" by breaking off bilateral tax conventions. This would discourage corporations from using those financial centers.
Equally important, the French would put some onus on a G20 country's own financial institutions. They would require those banks to spell out in their annual reports if they worked with non-cooperative financial centers and would make supervisory authorities take this extra risk into account in the capital requirements for the banks.
The paper says, "Clear reporting mechanisms should be put in place in order to increase the accountability of the management in business decisions leading to operations located in non cooperative jurisdictions." It says banks should be required to report accounts of their customers located in tax havens and the related capital flows.
The French suggest refusing to allow payments to a blacklisted haven to be deducted from taxable income. They propose requiring international financial institutions to end their activities in blacklisted havens. Finally, they suggest restriction or ban of money flows to and from that offshore center - which would essentially end G20 banks and company operations offshore.
The British are an unknown factor. About a third of the world's tax havens are British dependences. It is currently reviewing the policies of what it acknowledges are "British offshore financial centers." So when Prime Minister Gordon Brown told the U.S. Congress recently, "How much safer would everybody's savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?" the question was why hasn't he dealt with British tax havens.
The answer sits in London, where financial institutions exist in a seamless web with the offshore centers.
Other key G20 members also have tax haven concerns: China has attempted to crack down on tax evasion, India loses a great deal of tax money through Mauritius, and Russian officials are intimately aware of how the oligarchs moved assets and cheated on taxes through Cyprus, Switzerland, Jersey and the Isle of Man.
As for the Americans, U.S. banks already inform tax authorities about how much interest they are paying on clients' accounts. Barack Obama co-sponsored the Stop Tax Haven Abuse Act as a senator and has endorsed it as president. It would allow the U.S. to bar its own banks from doing business with foreign banks that refused to cooperate with U.S. tax authorities.
Treasury Secretary Timothy Geithner told Congress Thursday that the U.S. would "launch a new, initiative to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions." He said, "President Obama will underscore in London on Apr. 2 at the Leaders' Summit the imperative of raising standards across the globe and encouraging a race to the top rather than a race to the bottom."
However, the U.S. has provided no specifics about where it stands on the key issues.