Are tax havens just a mirage?

ZUU Japan

We have a deep-seated idea that tax havens are rich countries, but it seems that being a tax haven is not necessarily a good thing – some are burdened with huge debts, or a huge wealth gap between rich and poor.

Profits from the hidden assets of US$21 trillion stashed around the world end up in the pockets of the wealthy or in corporate coffers, and make no contribution to economic development in the tax havens themselves.

 

Tax haven: a way for small countries or jurisdictions to attract overseas funds


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Tax havens offer favourable tax conditions in order to entice foreign businesses and wealthy individuals. This method of attracting overseas funds is used mainly by small countries and jurisdictions.

Well-known tax havens include the European countries Belgium, Luxembourg and Austria, and Asian nations Malaysia and the Philippines. International tax standards are also insufficiently enforced in areas throughout the globe, including the British Overseas Territories of Bermuda, the Cayman Islands and the British Virgin Islands, and also the British Crown Dependency the Isle of Man, the Bahamas, the Dominican Republic, Bahrain, Monaco and Panama.

Singapore is regarded as a tax haven because of its low corporate tax rate, but the Singapore government rejects this designation.

Wealth inequality between rich and poor has been a major social issue recently, and the finger is often pointed at the existence of tax havens as exacerbating this inequality. However, it appears that, behind the scenes, there is unguessed at severe hardship in these tax havens we perceive to have such large assets.

 

In reality money does not flow into tax havens

Let us take renowned tax haven self-governing UK dependency Jersey as an example. Jersey’s economy is unnaturally skewed: it is dependent on the financial industry for 40% of its GDP, with its other economic mainstays tourism and local specialty product Jersey potatoes for only 4% and 1%, respectively (States of Jersey 2015 data).

GDP (gross domestic product) growth and GVA (gross value added) are both 2%. Productivity in the non-financial sector improved three percentage points, but this was five points lower than in 2007.

Productivity in the mainstay financial sector dropped four points, and productivity per full-time employee (calculated from GVA) fell 0.2 points. The fact that GVA in rapidly growing India is 7.9% (Reserve Bank of India 2015 data) shows how poorly Jersey is doing.

That production capacity is the cornerstone of sustained economic growth is clear from the recent global situation. The money that flows into a tax haven as a means of tax avoidance does not circulate within that tax haven. The assets remain the property of individuals resident, or companies based in, foreign countries, and often end up being deposited, say, in London bank accounts or invested in the London stock exchange.

Tax Justice Net estimates the global value of economically inactive hidden assets at US$21 trillion. But selling itself as a tax haven does not necessarily profit a country. If the wealth that is expected to flow in is a nominal influx only and does not circulate within the tax haven’s domestic economy, then that will, of course, undermine the nation’s finances.

 

Absence of democracy inflates debt

It is unexpectedly expensive to operate a tax haven. The government must spend a lot to maintain the image of being a haven, and this pushes up the government debt.

In 2016, government debt equated to 112% of GDP in Asian tax haven Singapore (Trading Economics data). Bermuda’s government debt is growing at over 10% per annum. The Cayman Islands and Jersey, which were bailed out by the UK government following the 2008 financial crisis, are still suffering its aftereffects.

Also interesting is the accusation that democracy does not exist in tax havens. British political economist Richard Murphy alleges that Singapore has been governed by the same regime since 1959. Jersey does not even hold general elections, and there are no political parties in Guernsey.

Whilst democracy is a far from perfect system, there is a high risk that social inequality will increase, resulting in extreme wealth and extreme poverty under non-democratic forms of government.

Indeed, in the Cayman Islands some poor families rely on free school meals supplied by charitable organisations to feed their children. There are children who go without school meals in school districts where the charities do not operate.

The low tax take from the richer members of society also inevitably inflates housing costs. The average cost of a house with three bedrooms and two reception rooms in Jersey is £527,000, and house prices on the Isle of Man are roughly twice those in the northwest of England, putting buying a home beyond the reach of ordinary citizens.

There are arguments for and against the role of tax havens. Many of the countries and jurisdictions that attract foreign businesses with low or zero tax rates do not have enough home-grown industries to support their economies. For them, being a tax haven is an industry essential to their very survival.

A steady increase in external pressure – for example the leaked confidential documents relating to offshore entities belonging to Panamanian law firm Mossack Fonseca, known as the Panama Papers , and the OECD blacklist of non-cooperative jurisdictions on tax – suggests we could be seeing a gradual change in the environment in which tax havens operate.

(By ZUU Japan)

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