EUROPEAN TAX HAVENS:ILLEGITIMISING DEBT, CAUSING CORRUPTION

AND FACILITATING CAPITAL FLIGHT

John Christensen and Sony Kapoor

«The missing piece of the development puzzle is the impact of illegal capital flight on global poverty. About $50bn (€40bn) in aid flows to developing and transitional economies from richer nations each year. At the same time, roughly $500bn in dirty money - in all its forms – flows in the opposite direction out of poorer countries.

. . . a full, unflinching look at how dirty money* sustains worldwide poverty would pay very rich dividends.»

Raymond Baker & Jennifer Nordin, Financial Times, 13 October 2004

* dirty money is money that has been obtained, transferred or used illicitly

capital flows ‘uphill’

Over 50 per cent of the total holdings of cash and listed securities of rich individuals in Latin America is reckoned to be held Offshore.Capital flight data for Africa as a whole is scarce, but according to the African Union US$148 billion leaves the continent every year because of corruption. [i] [i] See UK Africa All Party Parliamentary Group (2006)

The Other Side of the Coin: the UK and Corruption in Africa (p14) Most analysts agree that the outflows of illicit money originating in Africa tend to be permanent, indicating that between 80 – 90 per cent of such flows remain outside the Continent. [ii][ii] Raymond Baker from the Center for International Policy, Washington, quoted from oral evidence given to the UK Africa All Party Parliamentary Group in January

2006.

Looting Africa

Around 80 per cent* of Africa’s external borrowings has been captured by ruling elites and channelled offshore in the form of capital flight. As a result, external debt contracted by governments and private firms holding government guarantees have been transformed into private assets held in offshore accounts and companies.

* Ndikumana, L and Boyce, J.K. (2003) Public Debts and Private Assets: explaining capital

flight from sub-Saharan African countries World Development, volume 31, no.1

Africa’s revolving door

Despite the massive debt incurred in the past, the Sub-Saharan Africa is a net creditor to the rest of the world in the sense that external assets (i.e. the stock of flight capital), exceed external liabilities (i.e. external debt).*The stock of capital flight from SSA (estimated at $274 billion including interest earnings) was equivalent to 145 per cent of the total debt owed by these countries in the mid-1990s.

Boyce, J.K. and Ndikumana, L. (2005)Africa’s Debt: Who Owes Whom?

In Epstein, G.A. Capital Flight and Capital Controls in Developing CountriesEdward Elgar, Cheltenham

60 per cent of trade transactions into or out of Africa are estimated to be mis-priced by an average exceeding 11 per cent, resulting in a capital flight component of 7 per cent of African trade, totalling US$10 to 11 billion annually (1999 prices)

The incidence of transfer mis-pricing to achieve capital flight out of Africa has accelerated significantly. A study of import and export transactions between Africa and the United States found that between 1996 and 2005 net capital outflows to the US grew from $1.9 billion to $4.9 billion (+257%) through the use of low-priced exports and high-priced imports.[i]

[i] Pak, S.J. (2006) Estimates of Capital Movements from African countries to the United States through trade mispricing (paper

given at tax research workshop at Essex University, England on 7th July 2006)

Afr

ica’s

revolv

ing

doortransfer mis-pricing

Defining characteristics of offshore tax havens :

De jure or de facto financial secrecy arrangements

Non-disclosure on beneficial ownership

Low or minimal tax rates on income and capital gains

Deliberate targeting of non-resident businesses and high net-worth individuals

Minimal reporting and regulatory standards

Hampton’s 4 spaces* – fiscal, political, regulatory and judicial

Hampton, M.P. (1996) The Offshore Interface: Tax Havens in the Global EconomyMacmillan

1. Secret offshore bank accounts

• offshore credit cards

2. Offshore (i.e. non resident) companies

• Nominee directors

• Nominee shareholders

3. Offshore trusts and foundations

4. Tax havens – ring-fencing, banking secrecy, non-disclosure of beneficial ownership, judicial independence, minimal know-your-client compliance, political autonomy

th

e d

irty

mon

ey t

ool b

ox

“Client is a private investment company domiciled in the Bahamas used as a vehicle to manage the investment needs of beneficial owner, now a retired professional who achieved much success in his career and accumulated wealth during his lifetime for retirement in an orderly way.”

Money Laundering and Foreign Corruption: Enforcement and Effectiveness of the Patriot Act –

Case Study Involving Riggs Bank. Report prepared by the Minority Staff of the Permanent SubCommittee

of Investigations, 15 July 2004, p28

a c

ult

ure

of

sub

vers

ion

1. Lawyers

2. Accountants

3. Bankers

4. Tax havens

Does supply of these financial services stimulate corruption? In practice it is very hard to shift substantial sums across borders without using the banking wire systems.

And would corruption persist at such levels without the sense of impunity once the proceeds have been shifted offshore?

th

e p

instr

ipe in

frastr

uctu

re

a s

hadow

eco

nom

yhidden from mainstream economists

Half of aggregate world trade passes through tax havens, even though these minor economies account for a mere 3 per cent of global GDP. This anomaly arises because transnational corporations record many intra-company transactions through tax havens solely to avoid tax, with little or no basis in the economic reality of their operations;

Over the past thirty years the number of Offshore Finance Centres and tax havens has more than doubled to approximately 70 centres. The Offshore Economy is a significant and deeply embedded part of globalised capitalism.

It is estimated that Africa’s political elites hold somewhere between US$700 to $800 billion in Offshore accounts outside the Continent.[i]

[i] David Murray from Transparency International UK, quoted from oral evidence given to the UK Africa All Party Parliamentary Group in December

2005.

“ . . Wealth held in tax havens is costing governments around the world US$255 billion annually in lost tax revenues according to research published in March 2005.   This sum is over three and a half times greater than the highest estimate of the additional financial resources required to meet the United Nations' Millenium Development Goals. .”

TAX JUSTICE FOCUSthe quarterly newsletter of the tax justice network

Spring 2005 VOLUME 1, NUMBER 1

The price of offshore

“Utilizing tax haven secrecy laws and practices that limit corporate, bank and financial disclosures, financial professionals often use offshore tax haven jurisdictions as a ‘black box’ to hide assets and transactions from the Internal Revenue Service, other US regulators and law enforcement.”

“I believe the findings are explosive: the report blows

the lid off tax haven abuses that make use of

sham trusts, shell Corporations and

fake economic transactions to help some

people dodge taxes . . . Tax havens have in effect

declared war on honest taxpayers”Senator Carl Levin, Chairman

Senate Permanent Sub-Committee on Investigations

Country rank

Tax Haven countries

2005 CPI score

5 Singapore 9.4

7 Switzerland 9.1

11 Netherlands / United Kingdom

8.6

13 Luxembourg 8.5

15 Hong Kong 8.3

16 Germany 8.2

17 USA 7.6

19 Belgium / Ireland 7.4

24 Barbados 6.9

25 Malta 6.6

28 Israel 6.3

Corruption Perceptions Index: 2005

Country rank

African countries

2005 CPI score

158 Chad 1.7

155 Cote d’Ivoire / Equatorial Guinea / Nigeria

1.9

151 Angola 2.0

144 DCR / Kenya / Somalia / Sudan

2.1

137 Cameroon / Ethipia / Liberia

2.2

130 Burundi / Republic of Congo

2.3

126 Sierra Leone 2.4

INVESTIGATION – A Big Squeeze for Governments: how transfer pricing threatens global tax revenues

«What is clear is that the potential for tax arbitrage that results from globalisation creates a considerable and continuing incentive for domestic companies to internationalise their business. The pressure on the global corporate tax base can only increase.

It seems likely that many national governments will be severely disappointed if they look to the corporate sector to mitigate their mounting fiscal problems. »

John Plender, Financial Times, 22 July 2004