Opinion Sur
The financialization process of the world economy and, with that, the deregulation and liberalization of international finances exacerbated the opacity of offshore financial centers (tax havens). Simultaneously, capital flight expanded significantly in peripheral countries. It is necessary to develop an international regulatory framework to address this burdensome situation, which will complement national fiscal systems to eliminate tax and financial secrecy.
Tax havens are those countries or jurisdictions that have special tax regimes, with low or no taxation on certain incomes or subjects; they also have flexible commercial legislation: they neither request the presentation of financial statements nor the inscription under an official registry, nor keeping accounting books, daily registries, etc. With strict laws, they shield banking secrecy and do not share financial or tax information with other countries.
According to Nicholas Shaxson (in his book Las islas del Tesoro, 2014), tax havens can be divided in groups. One of them are the European havens created after WWI, such as Switzerland, Luxemburg, Netherlands, Austria, Belgium, Liechtenstein and Monaco.
Another group is formed by United Kingdom and their offshore network of tax havens. Hong Kong and Singapore are well known offshore financial centers with strong ties with England. Channel Islands (Jersey and Guernsey) are dependent territories of the British Crown. Cayman Islands, Bermudas and British Virgin Islands are British overseas territories. Others, such as Bahamas and Mauricio, are sovereign States members of the British Commonwealth of Nations. They all are traditional tax havens, countries with scarce population and insignificant development; they form the offshore system of the United Kingdom, whose center is in the City of London and concentrates most of the international capital inflows that enter those jurisdictions.
Lastly, United States and the jurisdictions under their influence form another recipient group of important international financial flows. At the national level, they offer tax exemptions to attract monies from non-residents and, at the State level, some of them such as Georgia, Florida, Wyoming, Arizona, Nevada and Delaware among others have specialized themselves in offshore services and secrecy for foreign enterprises. Furthermore, United States maintains an overseas satellite newtork that includes Virgin Islands, Marshall Islands, and Panama.
Most of the financial assets that flow towards those jurisdictions are originated in developing countries and belong to millionaires and large multinational enterprises. The Boston Consulting Group estimated in 1.2 trillion dollars the offshore financial wealth originated in eight of the main economies of the region for 2016 (Mexico, Brazil, Venezuela, Colombia, Argentina, Chile, Peru and Uruguay), that is 25% of the total Latin American private wealth. Meanwhile, James Henry (2012), from Tax Justice Network, estimated that Latin American and the Caribbean external assets summed 2 trillion dollars for 2010. Among the worst affected countries by the capital flight are Venezuela, Mexico, and Argentina.
It is clear from the foregoing that large part of the positive trade balances of these countries was neither directed towards enlarging international reserves nor increasing the level of domestic investment, but rather to larger financial flows towards main global centers. These growing financial outflows operate as a severe restriction for the formation of capital and economic development.
Most of the jurisdictions with larger financial secrecy (according to the Tax Justice Network index) have small populations and scarce industrial development and, despite that, have very high levels of GDP per capita, as a consequence of the volume of offshore services they provide thanks to their financial and fiscal opacity. They also have an absolutely disproportionate number of banking entities in relation with the populations that inhabit those countries and that can only be justified by the existence of substantial external financial flows.
Multimillionaires and multinational corporations have multiple accounting, tax, financial and legal advisors that assist them in eluding or evading taxes through tax havens.
Among accounting firms, the Big Four stand out (the four largest multinational auditing, consulting, and tax firms) they provide services of tax planning geared towards minimizing global taxes of economic groups. Among tax planning services we can find the so-called “transference prices” for multinational corporations, in reference to the prices of intra-group operations (i.e., among related enterprises), that are frequently fixed arbitrarily by these experts with the clear objective of diverting the largest possible benefits of the groups towards tax havens, to avoid taxes. At the same time, these large firms are in charge of auditing accounting statements of these enterprises, issuing expert opinions that endorse their operations.
On the other side, international banks, through their private banking sector, and financial boutiques devoted to wealth management business provide advising and investment management services to wealthy individuals and entities related to them.
Services include opening of offshore bank accounts for individuals and corporations, mergers and acquisitions advisory services, as well as in capital market transactions, planning of successions, and investment advice on several financial instruments. It is also offered the creation of offshore companies, foundations or trusts, in tax havens to conceal ultimate beneficiary owners. In many occasions, large law firms or small specialized law firms are the ones in charge of mounting these corporate structures in tax havens in connection with international banks.
In this way, peripheral countries, among them Latin America, end up being the main adversely affected party in this business, in favor of central countries, that act as recipients of capitals and dominate the major offshore financial centers.
A tool that could ameliorate the current situation could be the creation of an international regulatory framework that would complement national tax systems that have large legal gaps among them, in order to integrally address international tax evasion and elusion practices and capital flights. It is imperative that this regulatory framework be developed in a space with participation of peripheral countries, as in the case of UN (United Nations) and not that of the OECD (Organization for Economic Co-operation and Development) that represents the interests of their member countries (35 in total) mainly central countries. On the other hand, UN expresses a much more representative space of the will of diverse world nations, where each one of its 193 State members has one vote.
Furthermore, Empirical evidence shows that measures promoted within OECD are inefficient. Together with the Action Plan called BEPS (Based Erosion and Profit Shifting) of 15 actions against tax elusion of multinationals, OECD still endorses the principle of “arm’s length.” The latter considers related and independent entities, simulating a fictitious price fixation by establishing the value of intra-group operations of multinational corporations. Instead, the criterion of “economic reality” should prevail, and adopt a perspective that considers multinational corporation as an “economic group” (Aristides Corti, 2012) or as a “unique corporation” (Sol Picciotto, 2014).
At the same time, the “automatic exchange of financial information,” set by OECD that would let 100 signing countries to exchange information regarding bank accounts, interests, investment funds, could be of limited effectiveness; for a double reason.
On the one hand, controls and revisions of committed countries are deficient. In the last revision of the global forum on transparency and exchange of information (August 2017) 119 jurisdictions were analyzed and 21 ended up as “in compliance,” 90 “largely in compliance,” 7 “partially in compliance” and just 1 “non-compliant,” Trinidad and Tobago. For these jurisdictions, it is enough to comply with just certain normative to achieve that category of “partially in compliance,” managing to avoid being qualified as “non cooperative” under OECD criteria (Sol Piccioto, 2016). In turn, 13 jurisdictions of the ones considered “largely in compliance” have a provisory qualification, obtained by the fast-track procedure, of quick revision and weak controls.
On the other hand, some loopholes persist that should be resolved first so the automatic exchange were effective , as well as the creation of the real beneficiaries’ registry (final beneficiary) and the control chains of companies and other opaque instruments in all the countries, apart from the automatic exchange of those registries. What is happening is that today instruments such as trusts, foundations, and ghosts companies that conceal the identity of true owners are widely used, which affect the credibility of financial information that is the object of such exchanges.
Another very important measure would be to establish legislations that protect those who alert about financial crimes (whistleblowers) to preserve the identity of complainant, safeguard the security of the individual and his/her family, provide economic support to pay for lawyers and relocation expenses and that would offer a reward system. Most of large scale tax evasion cases, such as HSBC leaks, Lux leaks, Panama Papers, among others, were made public by internal complainants. The information and knowledge that these people have are extremely valuable for the general interest, though they are currently prosecuted and sent to prison.
Bibliography
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Henry, J., S. (2012) The Price of Offshore Revisited. Tax Justice Network. Julio de 2012.
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