Opinion Sur
About a third of global private wealth is hidden in these dens. They house the companies that allow the richest people in the world to control their fortunes by evading social responsibilities, while the middle class and the poor have to pay their taxes. The peripheral countries are the main victims of capital flight.
One of the faces of globalization are “tax havens”, created to guarantee tax evasion and money laundering. According to Oxfam, a tax haven is a territory where fiscal taxation is very low or practically zero and transactions and operations of almost any kind can be carried out without the need for records or controls. Of course, not all of them have the same characteristics. Some are preferred for personal fortunes, such as Monaco, and others are the perfect breeding ground for bad business practices, such as Panama or Liberia. Within tax havens there is a specialization in different tax matters.
Although they are a key part of the modern economy, their origins date back to ancient times. In Tales of Tax Havens: Crackpots, Bandits, and Swindlers, Charles Adams points out that tax havens played a very important role in the growth and stability of the Roman Empire. “The Roman government rewarded cities that were loyal to it by giving them the status of tax-free ports or Libertas,” he says. On the other hand, the tribute, according to the historian Cicero, was rather a punishment for all those who rebelled against Rome.
In the 1950s, the term “tax havens” began to be coined. However, the foundations of tax havens as they are known today, i.e., territories whose tax law allows zero or very low taxes in order to attract clients from abroad, emerged in the nineteenth century.
In History of Tax Havens, Professor Ronen Palan points out that at the beginning these territories were not independent nations, but rather the American states of New Jersey and Delaware. These districts, at the end of the nineteenth century, implemented the policy of “easy incorporation”, used by all tax havens today, which allows someone to “buy any prefabricated company and start trading in less than 24 hours”. The company is already structured and you only have to put the names of the owners.
In Europe, at the beginning of the twentieth century, the Swiss cantons, particularly the impoverished canton of Zug, near Zurich, copied this practice. In this way, the Zurich-Zug-Liechtenstein triangle emerged as a real center of tax havens in Europe in the 1920s, says Palan.
Benefits
Tax havens offer secrecy as a benefit. Since the money is usually the product of illicit activities, so it was not declared for tax purposes, the ownership of the bank accounts is not revealed. Bank secrecy emerged in Switzerland in 1934 and served the Nazis during World War II. Corruption runs in tax havens, having all the facilities to launder money without knowing its origin, evade taxes, triangulate profits or expenses of multinationals to over- or under-invoice and thus reduce the tax burden.
On the other hand, another fundamental tool of the tax haven scheme is the virtual residence of a company, created by the British. This allows companies to join the UK without paying tax, a development that some believe is the linchpin of the offshore phenomenon.
Currently, tax havens make up an important part of the world economy and approximately a third of the 200 richest people in the world, with an estimated net worth of 2.9 trillion dollars, control part of their personal fortune through companies located in these havens. This makes it easier for the so-called “1 percent” to evade their social responsibilities, while the middle class and the poorest have to pay their taxes.
As Professor Mario Rapoport points out, “tax havens are all over the world. England has about 20, starting with London itself and on islands that depend on the Kingdom such as Bermuda and the Virgins. At the heart of Europe are Luxembourg, Monaco, Andorra along with Ireland and Delaware in the United States.”
The IMF and an American economist, James Henry, estimate that about a third of global private wealth is hidden in the global system of tax havens. In the case of Argentina, Jorge Gaggero estimates that 500 billion dollars, almost an Argentine GDP, is housed there.
Some of the most important tax havens are under the sovereignty of the world’s major powers, which profit greatly from their existence. The problem arises when their own taxpayers migrate to other regions and escape their control. The then president of the United States Barack Obama said: the problem is that the existence of tax havens is legal. On the other hand, the United States requires Europe and other countries to provide comprehensive information on the accounts of U.S. residents in European banks, but does not provide information on European residents or other countries with accounts in U.S. banks.
Multis
Apple is accused by U.S. senators of tax evasion by having created offshore entities to avoid being a resident in the United States for tax purposes. This avoided the payment of 9 billion dollars in 2012. Most of Apple’s production is based in Singapore, China, and other regions of Asia, adding to the U.S. trade deficit.
The so-called “Big Four” (the English term used to refer to the most important firms in the world in the consulting and auditing sector) in partnership with banks and law firms develop what is known as “International Tax Planning”, which is a way to avoid and evade taxes in favor of large companies.
For example, Apple, through the creation of two subsidiaries in Ireland, where taxes are lower, reduced its tax obligations, given that in the United States the payment of tax is governed by the residence of the legal entity, in this case Ireland. But for the latter, paying taxes is where the control and direction of the company lies, which is the United States. This discussion took center stage in the negotiation of Britain’s exit from the European Union due to the risk that the United Kingdom will become a “mega platform” for tax evasion.
Approximately 40 percent of the European headquarters of the top 250 multinationals are in London. Brexit opened up two possibilities: 1) that companies move to the continent with a significant loss of tax revenue for the English; 2) that England be transformed into a kind of “mega platform” for tax evasion, which today in part is already so with the Virgin Islands, Bahamas, Bermuda, Anguilla, Cayman, Maldives, Turks and Caicos, Man, Jersey, Guernsey and the Malvinas Islands, which are under British sovereignty. This worries Germany and Austria for their own tax haven Liechtenstein, France for Monaco, Andorra, and Luxembourg. The gamble is impressive since these tax havens have deposited 7.5 trillion dollars, 80 percent of which comes from tax evasion.
Periphery
Peripheral countries, such as Argentina, turn out to be the main victims of capital flight to the benefit of the central countries, which dominate the most important offshore markets.
According to Boston Consulting Group, in the case of Latin America, the foreign assets of its residents are distributed in Switzerland, with 29 percent; the United States, with 28 percent; the Caribbean and Panama, with 29 percent and 7 percent going to the United Kingdom and its dependencies such as Guernsey, Jersey, and Ireland.
Since 1970, the flight of foreign currency has represented a structural problem for Argentina, associated with the behavior of local and multinational economic groups, which in order to maximize their profits avoid paying taxes and locate their financial assets in tax havens, beyond the reach of local authorities. Over time, a constant floor of foreign exchange outflows is maintained, regardless of the economic and political stability of the country. While flows are heightened in times of crisis, high levels are also recorded in times of political stability and economic growth.
Thus, the effective tax rate paid by the highest decile is 8 percent (ECLAC, 2016) compared to 14 to 20 percent in the developed world. On the other hand, the tax collection that finances investment or public spending is mostly based on indirect taxes, where the rich and the poor pay the same percentage of taxes.
In Argentina, the tax contribution or pressure is not high but is tremendously unequal. An estimate by Alex Cobham and Petr Janský (2017) shows a tax loss for Argentina of 21,400 million dollars in 2013, due to the diversion of profits from multinational companies, which represents an annual loss of 4.42 percent of GDP. On the other hand, the flight of foreign currency decreases the level of domestic investment, which the countries of the periphery require to achieve a higher degree of economic development. Argentina’s significant levels of capital flight have been financed through a policy of indiscriminate external indebtedness, which has current consequences on the problem of how to pay the IMF.
What to do
There are many measures that can be taken to control this drain on resources and improve income distribution through appropriate public policies. It is essential to strengthen the control systems of the State, use all available technological and legal instruments, and install the issue with force in public opinion.
For countries like Argentina, it is crucial to make visible the criminal maneuvers of Argentine foreign trade operators that are known in the rest of the world. During Macri’s administration, China was amazed at the discrepancy between the official figures of Argentine exports to that country, which are lower than the imports registered by the People’s Republic from Argentine ports.
It is important to strengthen the exchange of tax information between countries and to carry out a global and public registry of final beneficiaries, that is, to know who are the real owners of multinationals. They also control the “enablers” who make these evasive and elusive schemes possible and unify the lists of tax havens including the City of London and Delaware. Address global tax reforms to end tax breaks and end bank secrecy.
Published in CASH January 2, 2022
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