Who's evading whose taxes when everywhere is offshore to everywhere else?

This was first published in Issue 207, June 2010 of Offshore Investment magazine and is reproduced with their kind permission.

President Obama noted that a small, five-storey office building in the Cayman Islands capital George Town, Ugland House, is officially home to more than 18,000 companies, yet only 241 people work there. According to the President it was "either the biggest building in the world or the biggest tax scam in the world". Note the language: not tax avoidance, not tax planning, but tax scam.

In the last four decades we have witnessed an increase in freedom of movement for businesses, people, money and services, at the same time as warning signs have appeared that sovereign states are losing control over such movements. Unfortunately, the development of this new global economy has created the means and the cover to move illegally-obtained assets between states at great speed and without detection.

In order to recover the funds obtained from "delinquency" e.g. tax evasion and tax avoidance, and to deter further outflows, states appear to be making a unified, global effort to introduce regulatory standards and legislation that are workable and compatible. Above all else, states seem readier to recognise that everywhere may be "offshore" to everywhere else.

Fraudsters have tended to exploit loopholes in the global banking system, in particular, tax arbitrage, once encouraged by the desire for inward investment in developing countries, island communities and even in some developed countries, e.g. the Netherlands.

The Pursuit of Offshore

The pursuit of offshore funds is a state's attempt to stem the flow of potential tax revenues escaping their grasp. This is particularly poignant when the public purse is feeling a little light, as it is in a recession. What many articles on tax avoidance ignore is the fact that England itself is offshore to other countries. In 2001, the UK Financial Services Authority, investigating the movement of funds suspected of being the proceeds of Sani Abacha's corruption, established that transactions totalling USD1.3 billion had been carried out via 42 personal and corporate account relationships linked to Abacha family members and close associates in the UK. These accounts were held at 23 banks which included UK banks and branches of banks from both inside and outside the European Union.1

State Parties are beginning to make a unified effort against such behaviour. There has been an increase in multilateral and bilateral treaties and agreements, and mutual legal assistance and international moves to increase regulation. Countries like Switzerland are being named and shamed, along with Liechtenstein, Monaco, and even our close islands of Jersey, Guernsey and the Isle of Man.

Events in 2009 and 2010, such as the purchase of the details of a number of UK residents with bank accounts in Liechtenstein and with accounts in HSBC Private Bank, have also underlined the determination of OECD member countries to tackle the long-standing problem of their citizens using structures established in the most opaque jurisdictions to help them evade tax.

Regulation

The 2 April 2009 Communiqué of the G20 contained an undertaking to strengthen international financial regulation and enforcement and to act against non-cooperative jurisdictions including 'tax havens'. It also committed to strengthen the Financial Stability Board (FSB), previously known as the Financial Stability Forum (FSF). The FSB was designed to reinforce international co-operation in implementing the principles agreed by members of the G20. It will be expanded to include Spain and the European Commission. Its new mandate will include: assessing vulnerabilities affecting the financial system; identifying and overseeing action needed to address them; and monitoring and promoting co-ordination and information exchange among authorities responsible for financial stability amongst others.

International Tax Standards

On 2 April 2009, the OECD issued a progress report on jurisdictions surveyed by its Global Forum to see whether they had implemented the internationally agreed tax standards. The report named 40 jurisdictions that had substantially implemented the standard; 31 that had committed to the standard but had not yet substantially implemented it; and eight financial centres (such as Luxembourg and Switzerland) and four jurisdictions (such as Malaysia and Uruguay) that had not yet committed to the standard.

At the G20, France and Germany made it clear that they wanted to blacklist unco-operative tax havens. The UK and US initially opposed such a measure but later relaxed their position. China strongly opposed it on the basis that the OECD would have been responsible for it (China does not participate in the OECD) but conceded it would support a UN blacklist.

In November 2009 the G20 Finance Ministers buttressed this policy by commending the progress achieved by the Global Forum on Tax Transparency.

The Forum participants agreed to establish a Peer Review Group to carry out in-depth monitoring of implementation of the transparency and exchange of information standards at the meeting in Mexico in September 2009. Notably the Forum also explored the means to accelerate negotiations of information exchange agreements through the use of multilateral instruments.

The November Communiqué called on the Forum, FSB and FATF to continue tackling non-cooperative jurisdictions by completing their peer review processes and publishing lists of NCJs.2 In March 2010 the countries participating in the Global Forum on Transparency and Exchange of Information launched the peer review process covering a first group of 18 jurisdictions: Australia, Barbados, Bermuda, Botswana, Canada, Cayman Islands, Denmark, Germany, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway...