The offshore world and the enablers of capital flight

As main characters of the offshore world, global banks, multinational corporations, fiscal havens, large global tax and auditing consulting firms and specialized law firms are the enablers of the capital flight done by multinational corporations and the “global rich.”

Among Southern countries, Argentina shows an early development of the capital flight phenomenon. After four decades of persistent outflow of resources, the most recent calculations of the stock of Argentinean-origin offshore wealth, in relation to the magnitude of Argentina’s GDP (the gross domestic product represents the annual value of the wealth created in the country), shows a record high within Latin American countries—shared with Venezuela. The estimations place Argentina within the first places of the global rank: the equivalent of almost one GDP is accumulated in the offshore world. Around 400-500 billion dollars lie outside the economic system (more than 90% of which in an illegal way). The annual flight flow represents almost 5 point of the GDP, a quarter of the total investment done every year in the country.

The entrenchment of favorable cultures towards fiscal noncompliance and capital flight among Argentinean individual residents and enterprises that operate locally is crucial data. The more than three decades of democratic restoration were not able to limit both phenomena. Meanwhile, external unfavorable circumstances got worse such as the extension of the economic-financial globalization, the setback of fiscal competencies of the Nation-State and, in particular, the expansion of the tax haven system.

In the domestic front, some of the harmful features of Argentina’s economic structure were accentuated, such as its tax structure and fiscal management, which in the last year and a half were coupled with a neoliberal economic administration that finished up the destruction of the “national financial frontier” by establishing the free circulation of capitals. This fosters local speculative activities and the accelerated accumulation of external debt, which in addition facilitates the capital flight and leads the economy towards a situation of extreme external vulnerability.

The fiscal question

In the tax sphere, inextricably linked with capital flight, the more advanced countries are the ones who set the rules for the world and the associations to which they belong are the ones that reach better normative harmonization, management coordination, and global influence.

Those countries are the ones that are able to set the international game rules that favor their enterprises, tax offices, and/or their other economic and financial interests. In the absence of multilateral organizations responsible in this field—an emptiness that tax expert Vito Tanzi proposed to fill up decades ago—the limited agreements and ad hoc consensus within the G7—lately extended to the G20—and the OECD are the ones that set the course. These agreements are becoming ever more insufficient in their territorial and socio-economic scope, as well as in their legitimacy insofar as the emerging countries of the South gain space. Moreover, they appear inadequate to face the destructive escalation of the “unleashed global forces:” uncontrolled fiscal competition that undermines normative systems; rampant elusion and evasion that ridicule tax administrations; growing capital flight that severely erodes economies and societies of the Nation-States (limiting their economic potential, as well as the quantity and quality of their labor force and the possibility of reaching higher levels of equality). The “horsemen of the Apocalypses” are the main characters of the offshore world: global banks and multinationals, tax havens, large consulting, tax and auditing firms (with the “Big Four” ahead) and the large specialized legal firms. These are the great enablers of the better use of the offshore world mainly by the multinational corporations and the “global rich.”

The future has arrived

Two decades ago, Tanzi highlighted the impact of these phenomena—which was already visible—on tax structures (an increasing regressive bias) and warned us about its worsening: “it is only a matter of time for the tax level to start reflecting the forces at play.”

The world that Tanzi forecasted has arrived. Just over a decade after its prediction, the great crisis at the beginning of the millennium (2007-2008) harshly showed the costs of the lost time. The threats of “blowing the tax haven with dynamite” done by French President Sarkozy (supported by Angela Merkel and the then head of IMF, Strauss Kahn) met with the fierce defense of the “Anglo-Saxon brotherhood” (USA and the United Kingdom). Through the G20 acceptance, this radical attempt resulted in a much more moderate, and surely less efficient, course of action: the BEPS Project (Base Erosion and Profit Shifting) whose design and implementation fall under the scope of OECD, the “club of rich countries.”

Neither Tanzi’s proposal nor the more moderate option—as institutional construction—that developing countries presented in Addis Adeba (Third International Conference on Financing for Development, July 2015) could be approved. The latter focused on strengthening the UN “Committee of Experts on International Cooperation in Tax Matters.” Rich countries, especially the “Anglo-Saxon brotherhood,” opposed that. To make matters worse, last June OECD released an empty list on tax heavens. That is to say, for this organization all the jurisdictions around the globe are “collaborators” in terms of tax information. In other words, OECD has just renewed the “letters of marquee” of the world’s fiscal havens with a double effect: the continuity of global economic piracy (favoring large banks and multinational corporations) and the promotion of the “carnival like” life of the global rich.

So, what can be done?

The global and supranational agenda

Major problems are presented by the global financial system; very briefly, the great deregulation that benefits them, their oligopolistic behavior, and the accelerated process of concentration (the three obviously linked). A very valuable, recent investigation has focused on this “world hydra” (François Morin, 2015), whose 28 member banks are clearly protected by the main States of the developed world. In this context, it is not a paradox that many of these States are being “captured” as a consequence of their debts with the oligopoly.

A main measure is to establish controls over international capital flows that could moderate the volatility of those flows. This would contribute to financial stability and comply with the decisions made by G20 in 2009—and afterwards forgotten—regarding ending with the perverse resulting dynamic of the joint action done by “secrecy jurisdictions” (fiscal havens) and the bank secrecy that stimulates the illegal capital flight.

In relation with the problem of fiscal havens, the time for cynic speeches, with no substance, must end. In the first place, transparency and accessibility to information is crucial; as a preliminary step, governments should be forced to secure an easy and generalized access to date regarding unregistered financial flows. Fiscal havens concentrate a growing portion of the global opaque “business” in the territories of developed countries and their dependencies, increasingly linked to offshore operations of the global banking oligopoly. This question must be included, without further ado, in the agenda of the global structural change.

In a context where multilateral organizations show with increased clarity their biases and limitations, it is imperative that Southern countries adopt regional actions to address the aforementioned challenges. Unfortunately today, in many parts of the developing world, as in Latin America, regional “defensive” actions are marginal.

 

 

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