Why are banks still operating in tax havens?

By Antoine d’Abbundo and Mathieu Castagnet in La Croix

European regulations oblige banks to publish their profits and taxes on a country-by-country basis. Using these data, the NGO Oxfam yesterday revealed that the twenty biggest European banks remain active in these corporate tax havens and gain a quarter of their profits here. “La Croix” spoke to two experts.

Manon Aubry, Senior Tax Justice Advocacy Officer, Oxfam France

By operating in tax havens European banks benefit in three ways. Firstly, like all multinational corporations, they engage in tax evasion themselves. That is, they move part of their profits to these countries in order to minimize their own taxes.

Oxfam Report Slams Europe’s Biggest Bank for Using Tax Havens, by Kevin Lui, Fortune, Mar 26, 2017

Europe’s biggest banks reportedly funneled as much as $27 billion (€25 billion) through overseas tax havens in 2015, according to a report from the anti-poverty NGO Oxfam International.

That’s 26% of the banks’ total profit that year, reported Oxfam—yet just 12% of turnover and 7% of these banks’ aggregate workforce could reportedly be accounted for in these locations. The Oxfam report was based on data released after new EU regulations requiring banks to list their earnings by each country came into force in 2015.

“New EU transparency rules give us a glimpse into the tax affairs of Europe’s biggest banks and it’s not a pretty sight,” Manon Aubry, the group’s senior tax justice advocacy officer, said in a press release.

Focusing on the continent’s 20 biggest banks, Oxfam found that lenders paid no tax on up to $416 million in profits registered in seven tax havens in 2015, with a total of $5.32 billion in profits registered in tiny Luxembourg—more than U.K., Germany and Sweden combined.

Additionally, $681 million in profits were registered in tax havens where the banks employ nobody at all, according to the report.

The banks’ maneuvers involving tax havens or low effective rates would translate to lost tax incomes for countries that are not havens, argues Oxfam.

“Governments must change the rules to prevent banks and other big businesses using tax havens to dodge taxes or help their clients dodge taxes,” Aubry said. “Tax dodging deprives countries throughout Europe and the developing world of the money they need to pay for doctors, teachers and care workers.”

Extending transparency:  OECD and Bahrain expands its capacity to fight international tax avoidance and evasion

29/06/2017 – Today, at the OECD Headquarters in Paris, H.E. Sheikh Ahmed bin Mohammed Al Khalifa, Minister of Finance of Bahrain signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in the presence of OECD Deputy Secretary-General, Mr. Douglas Frantz, therewith becoming the 112th jurisdiction to join the Convention.

Bahrain expands its capacity to fight international tax avoidance and evasion H.E. Sheikh Ahmed bin Mohammed Al Khalifa, Minister of Finance of Bahrain with OECD Deputy Secretary-General, Mr. Douglas Frantz
OECD Headquarters, 29 June 2017

The Convention is the most powerful instrument for international tax cooperation. It provides for all forms of administrative assistance in tax matters: exchange of information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection. It guarantees extensive safeguards for the protection of taxpayers’ rights.

The Convention’s impact grows with each new signatory; it also serves as the premier instrument for implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters developed by the OECD and G20 countries. In this respect, Bahrain has today also signed the CRS Multilateral Competent Authority Agreement‎ (CRS MCAA), re-confirming its commitment to implementing the automatic exchange of financial account information pursuant to the OECD/G20 Common Reporting Standard (CRS) in time to commence exchanges in 2018. Bahrain is the 93rd jurisdiction to sign the CRS MCAA.

The Convention can also be used to swiftly implement the transparency measures of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project such as the automatic exchange of Country-by-Country reports under Action 13 as well as the sharing of rulings under Action 5 of the BEPS Project. The Convention is also a powerful tool in the fight against illicit financial flows.

The Convention was developed jointly by the OECD and the Council of Europe in 1988 and amended in 2010 to respond to the call by the G20 to align it to the international standard on exchange of information and to open it to all countries, thus ensuring that countries around the world could benefit from the new more transparent environment.

The 112 jurisdictions participating in the Convention can be found at: www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf

Media queries should be directed to Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration (+33 6 26 30 49 23).

Global Citizen reports, World’s 16 biggest tax havens

Corporate tax avoidance, tax dodging, secret offshore tax havens, tiny tropical islands that are the mysterious headquarters of global companies. In the past few years, there has been an increasing amount of talk about how to get giant companies to start paying their fair share of tax.

But I’m a bit of a curious type. When I read a term like “secret offshore tax haven”, I tend to wonder “yeah, but where?”. Luckily, an organisation called Tax Justice Network has an answer for “yeah, but where?”, in the form of its Financial Secrecy Index.

Splendid. How does the Financial Secrecy Index work?

The short answer* of how the index works, is that it uses 15 different “secrecy indicators” to determine which countries make it easiest to hide money and avoid tax. Then, it factors in how big the country’s financial services industry is. This second step is important because a tiny country with a small number of shady financial transactions isn’t as much of an overall problem as a large country with millions of secret foreign transactions per day.

Clear as mud? Good. Here are the world’s 15 biggest tax havens, and there’s a bit of a twist at the end.

15. Guernsey

I’ve heard of this place, but if you told me to point it out on a map, I’d be in big trouble. Back in Australia, we call the shirt part of our football uniforms guernseys, but that’s completely unhelpful. Guernsey is actually an island between England and France, and belongs to the British Crown. While the island is loyal to the British Crown (technically it’s not UK territory, or in the EU), it makes its own laws on matters such as taxation. The island of 65,000 people has made a big push towards being an offshore finance destination, and its main street is lined with private banks, law firms, and accounting firms.

14. Bermuda

Despite its name being most closely associated with shorts, missing ships, and triangles, the island is actually the shape of an abstract lobster claw. Located a couple of hours off the east coast of the USA, Bermuda is another piece of UK territory that has long been known as a tax haven. The unlikely home of tennis stars and actors, Bermuda’s tax system puts taxes on staff payrolls, but not on corporate earnings or investment income. Its largest customer for offshore transactions is the United States.

13. Bahrain

No, this is not the classic Guns n’ Roses song “Novem Bahrain”. This is a small country in the Persian Gulf, just off the coast of Saudi Arabia, with a population under 1.5 million. Much of its economy is related to oil, but there’s also a large and growing financial sector, including Islamic finance. Bahrain doesn’t charge income tax or corporate tax, but does have a social security tax. Overall, this makes the country an attractive place to funnel financial transactions through.

12. Malaysia (Labuan)

Not all of Malaysia, but just Labuan – a small island located just off the coast of Borneo. In 1990, the Malaysian government designated the island as an international offshore financial centre, and a very low tax system was created. While the government takes measures against money laundering, it doesn’t tax the international income of companies registered in Labuan, and only charges 3% on any income from within Labuan. Handy fact: Labuan is only a short ferry ride from Brunei, which banned alcohol in the 1990s. The tax free alcohol in Labuan makes the island an appealing day trip for people living in Brunei.

11. Panama

Home of the Panama Canal, a very handy shortcut route for ships trying to get from the Pacific Ocean to the Atlantic. The French initially tried to build this canal 135 years ago, failed spectacularly, and it was finished by the Americans a few decades later. Panama’s economy is very reliant on international shipping, trade, and logistics. An international finance industry has sprung up around this, with Panama-registered companies not having to pay local tax on any income received outside of Panama. Foreign authorities can only gain access to the financial records of Panamanian companies with the permission of Panama’s court system.

10. Japan

This is a bit harsh on Japan… it’s only this high up on the list because its financial services industry is one of the world’s biggest. The problem here is that while most countries are getting better at cracking down on tax avoidance, Japan is arguably going the other way. In the past, any Japanese company that had a subsidiary registered in a tax haven country had to send their profits back to Japan so that they’d be taxed in Japan. Until 2011, Japan defined “tax haven country” as a country taxing 25% or less tax on income. That was downgraded to 20% or less in 2011, and in 2015, this has changed again to “under 20%”. What this means is that fewer companies are having to send their profits back to Japan for full taxation, making it easier to avoid tax.

9. Jersey

This one is just confusing. Remember how I said that a guernsey was a name for an Australian football jumper? Or is it a jersey (no, it’s not)?! Aside from being another clothing-named place, Jersey is another small British Crown dependency in the English Channel, 25km from Guernsey. Similar to Guernsey, Jersey prints its own banknotes and makes its own tax laws. A culture of secrecy and non-disclosure in the island has resulted in Jersey housing an estimated 5 billion dollars of wealth per square mile. Its close connection to the UK (almost half of Jersey’s tax avoidance trade comes from the UK), and location in Western Europe have long made it a popular choice for people wanting to avoid tax.

8. Germany

Another major economy, and home to some of the world’s most famous manufacturers (and allegedly David Hasselhoff). The income tax system for normal workers is pretty watertight, but it’s a different matter for large companies. Only 2.8% of Germany’s tax revenue comes from corporate tax paid by corporations, with private tax specialists creating very complicated company structures to help major companies to avoid tax. Germany is currently pressuring countries like Malta to tighten its tax laws, with numerous countries having used Malta as a place to direct money towards in a quest to reduce tax within Europe.

7. Lebanon

Lebanon, located at the eastern end of the Mediterranean, is a bit different to the other countries on this list. While Lebanon is only home to 4.5 million people, the Lebanese diaspora (Lebanese living overseas) is estimated at anywhere between 5 and 16 million (this is why no matter where in the world you are, you can find a kebab van at 2am). The Lebanese are a prominent presence throughout West Africa and the Middle East, and control numerous large commercial operations. Lebanon’s tight financial secrecy laws enable the diaspora to direct money back to Lebanon without full disclosure to the government.

6. USA

The home of liberty/freedom/Mexican food is also the home of some major tax dodging. Similar to Germany, the world’s largest economy is good at taxing normal workers, but not so good at getting large companies and wealthy individuals to pay their fair share. Much of the wealth being stored in small island tax havens actually originated in the US, so current American tax laws are failing to prevent companies from transferring money out of the country, and into secrecy. State laws in Nevada, Delaware, and Wyoming also enable companies to easily avoid corporate taxes.

5. Singapore

When Malaysia kicked Singapore out in 1965, it was a tiny island that didn’t even have enough fresh water for its people. Since then, it has become an international trade and financial services powerhouse, and one of the richest countries in the world. While it’s very easy to open a bank account there, Singapore’s financial secrecy laws are tighter than most, so it’s difficult to track the millions of transactions that pump through this thriving Asian trading hub every day.

4. Cayman Islands

Well well well, another ocean outpost of the UK, this time located near Cuba and Jamaica in the Caribbean, and home to fewer than 60,000 people. These islands are one of the original tax havens, with no income tax, capital gains tax, company tax, or inheritance tax applied to offshore companies registered there. There are also tight secrecy laws that help to protect companies from revealing their finances and transactions, making the Cayman Islands a popular choice for tax avoidance and yachting.

3. Hong Kong

Since being transferred from the UK 20 years ago, Hong Kong has been a “special administrative region” of China, with its own currency, laws, and political system. Hong Kong has always embraced capital markets and low taxation, and has significant secrecy laws. With China booming right next door, Hong Kong has been used by Chinese companies to undertake vast amounts of international financial transactions, and also by overseas companies wishing to have a reliable location from which to deal with China.

2. Luxembourg

Tucked in between France, Germany, and Belgium, Luxembourg isn’t a sneaky tropical island in the middle of nowhere. Actually, the country was a founding member of the European Economic Community (which grew into the EU), and is signed up to all sorts of treaties. Luxembourg cuts discount tax deals with multinational companies who run part of their company through there, enabling giant tax savings. Though the country only has 500,000 people, there are 148 banks from 27 countries in the capital city, and an estimated $1.25 trillion is being stored there by American companies. Sound fishy? But change is hopefully on the way… in January 2015, Luxembourg ended its long practice of bank secrecy.

1. Switzerland

The Swiss bank account has long been the iconic way for wealthy people and companies to secretly park their money out of the reach of their governments at home. It’s like you weren’t even a proper villain unless you had a Swiss bank account. The secrecy laws have been chipped away at a little bit by international lawmakers in recent years, but the sheer scale of what’s going on in Switzerland makes it the grand champion of this list. Countless highly wealthy people and companies have money hidden here, and because Switzerland is not a part of the EU, it makes the country better able to resist international pressure to change its laws.

Aaaaand the real #1?

Clue: It’s not Switzerland.

If the UK and its satellite secrecy jurisdictions were counted together, it would be number one on this list by an absolute mile. So while you might hear politicians in London crying foul about how other countries are acting as tax havens, the lion’s share of them sit under the British Crown.

Tax havens: “We’re not tax havens”

Nobody likes to be called a tax haven, partly because that scrutiny might make it harder for a tax haven to do business. Many so-called tax havens have gone to great lengths to cooperate with international efforts to stamp out gigantic tax avoidance… but only in ways that mean they can continue to host gigantic tax avoidance. Sorry, the term they prefer is “international finance centre”. You guys, can you please just call them “international finance centres”? Yes, that little island of a few thousand fishermen and retirees is an International Finance Centre. I’m glad we’ve cleared that up.

Why does all of this matter?

Well, for every major company that isn’t paying its fair share of tax, there are scores of teachers and nurses that can’t be employed, roads that can’t be repaired, schools that can’t be built, and hospitals without livesaving equipment. And that’s in the already-wealthy countries.

The global nature of the tax avoidance game has even bigger consequences in developing countries, where the missing tax dollars could be used to help citizens out of extreme poverty.