Tax havens: Keeping the rich richer whilst devastating the poor

Tax havens

Watch any film with a moustache twirling bad guy and he'll always be transferring money to his Cayman Island or Swiss bank account. Unfortunately, this activity isn't restricted to the movies.

Every year, hundreds of billions of dollars are illegally transferred out of developing countries devastating the region's resources, maintaining poverty and robbing the people of the right to invest in general goods and services. More often than not, it is large, powerful corporations doing this in order to escape tax authorities and regulators.

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Offshore tax havens have existed in the economic system since the 1960s and more than anything have represented the shadowy side to banking. Today there are more than 70 tax havens, many but not all based in small states such as the Cayman Islands, Bahamas, Bermuda, Panama, the Channel Islands, Monaco, Luxembourg, Liechtenstein, Singapore and Switzerland.

An entrenched part of the economic system, it is estimated that at least half of all international bank lending and approximately one-third of foreign direct investments are routed via secrecy jurisdictions such as tax havens. Not just that, but half the global monetary stock is estimated to pass through them at some point, with hedge funds approximating US$1.17 trillion at any given time.

Whilst you may be forgiven for thinking that such illegal activities have nothing to do with you, the recent recession has revealed the extent of activities such as money laundering, establishing dummy companies and concealing profit margins.

When the British government nationalised the failing Northern Rock bank in 2007, officials were stunned to discover that Euro50 billion of mortgages had been shifted to an offshore account disguised as a foundation benefiting Down's Syndrome children. Not just that, but in the same year, the pharmaceutical company Merck was assessed US$2.3 billion in back taxes for transferring its drug patents to a Bermuda shell company and then deducting from its taxes the royalties it paid itself. Meanwhile, the investigation into Enron revealed the company had a network of 3500 dummy companies, 600 of them registered in the Cayman Islands.

For many companies, much of the money is made through falsified transfer pricing. In these instances, trade between parent companies and affiliates is falsely priced so that companies can allocate profits in low-tax jurisdictions. The company might then, for example, sell an export item to an offshore affiliate at a sharply reduced price; the affiliate then sells the item at market price with the profits remaining offshore. Alternatively, the offshore affiliate might import an item at the real market price, but sell it to the parent company at a grossly inflated price so the company has a huge cost to deduct on its tax returns.

Such illegal activities saw over US$8.5 billion transferred out of the world's 49 poorest countries, resulting in tax losses of US$2.6 billion. According to a March 2009 report by Christian Aid, Nigeria lost US$740 million, Pakistan US$450 million, Vietnam US$370 million, and Bangladesh US$274 million.

As a result of such blatant 'theft', the G20 have clamped down on tax havens. This was highlighted in 2006 when German intelligence agents paid a former employee of the LGT bank in Leichtenstein to provide them with data on clients exploiting the system. The resulting investigation saw a number of wealthy Germans investigated as well as probes in Canada, Sweden, France, Italy, the US, Holland and the UK.

However putting an end to tax havens permanently will be tough. After all, they are a refuge for some of the world's richest people, and they will fight to be able to fiddle their taxes accordingly.

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