Tax havens face real sanctions

Published March 2009

The Guardian

March 2009

Offshore havens who refuse to hand over information on tax dodgers face an unprecedented campaign of economic sanctions by the world’s most powerful countries.

The campaign, which is being promoted by the G20 group of developed nations, could see the United Kingdom targeting some of its own overseas territories including the Cayman Islands and the British Virgin Islands, where British banks and corporations use scores of subsidiaries to avoid tax.

Following the G20 preparatory summit in Berlin last week, officials are preparing a new blacklist of uncooperative havens. Major centres of secretive offshore activity including Liechtenstein and Panama are among more than 30 nations who have failed to sign agreements to hand over information about corporations and invidivuals who take advantage of their secrecy and their low taxes.

Earlier blacklists which were prepared by the OECD, merely named and shamed jurisdictions who refused to co-operate. Now, the G20 nations plan to promote a series of sanctions which are designed to deprive them of billions of dollars of business. “Negotiations have been dragging on, and patience is wearing thin,” according to one official who is directly involved.

The sanctions which are being discussed include refusing to allow  payments to a blacklisted haven to be deducted from taxable income.This would hit big corporations and banks who currently channel millions of pounds out of the taxman’s reach by paying royalties, management fees, dividends and insurance premiums to their own offshore subsidiaries.

Officials are also working on a plan for international financial institutions to pull their investments out of the blacklisted havens. This is aimed at persuading the International Finance Corporation, which is part of the World Bank, and regional funds as such as the Asian Development Bank to move all their assets to nations which allow financial transparency.

There is also likely to be a general requirement, backed up by ’substantial penalties’, for all companies and individuals to tell their own tax authorities of all links with blacklisted havens. This would puncture the secrecy which allows tax evaders to conceal assets.

Gordon Brown is due to visit Washington this week for talks with President Barack Obama. It is believed that Brown will attempt to ensure US backing for the sanctions plan which may then be announced at the G20 summit in London next month (April).

The G20 is believed to be drawing up its blacklist from three overlapping groups of havens: those who still have no double taxation conventions, which allow nations to swap routine information on taxpayers in each other’s jurisdiction; those who have refused to accept the idea of new Tax Information Exchange Agreements, TIEAs, which allow one nation to require another to dig out extra information on a suspect; and those who agreed in principle to TIEAs but have failed to sign them. (see table)

Since 2000, thirty five havens agreed in principle to sign TIEAs with the OECD’s 30 member states. If all had done so, there would now be  1,050 TIEAs in place. In fact, there are only 45 – and 29 of them have been made by the three British crown dependencies, the Isle of Man, Guernsey and Jersey.

Andorra, Liechtenstein and Monaco are already listed by the OECD as unco-operative after they rejected the whole principle of TIEAs. Liechtenstein’s position is particularly weak since a whistleblower sold the German tax authorities details of hundreds of secret accounts.

The seven British Overseas Territories classified as havens are among those lagging behind. British Virgin Islands has signed only three TIEAs; Bermuda has signed just two; Anguilla, Gibraltar, Montserrat and the Turks and Caicos have signed none at all. But it is the Cayman Islands which are most frequently mentioned as a likely target among the overseas territories.

Two sources with direct knowledge of negotiations said the Caymans had been making excessive demands as a price for their co-operation. The Caymans signed an agreement with the United States in November 2001 but have since refused to sign another, even with the UK who have spent four years negotiating with them. According to one source: “They  can’t have it both ways. They can’t say they are running a clean jurisdiction and also say that they are worried about losing business if they exchange information. What business would you lose? The tax sensitive stuff.”

The UK has formally indicated to the OECD that it will apply sanctions even if its own overseas territories are on the blacklist. In its own negotiations with some havens, it has offered small aid packages to encourage co-operation.  The European Union also has agreed to offer aid to havens who agree to provide information.

It is unclear how the OECD will deal with its four member countries who have dragged their feet on tax agreements. Switzerland, Luxemburg, Austria and Belgium have all resisted EUSD and TIEAs.  Singapore, Hong Kong and Holland are also likely to become the target of some pressure.

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