Tax havens: a characterization essay

Mirko Hayat, Affiliate Professor of Law - February 12th, 2015
Tax havens: a characterization essay by Prof. Mirko Hayat

“No more tax havens!” was the declaration made in September 2009 by Nicolas Sarkozy, at the time President of the French Republic. Specialists on the issue were largely skeptical, because the concrete measures proposed were somewhat weak. More than five years on and the issue has changed considerably, with a notable acceleration over the past few months in a two-pronged movement towards concerted initiatives by industrialized countries (G20, OECD, the European Commission etc.) on one hand and startling revelations by whistleblowers on the other.

Mirko Hayat ©HECParis

Mirko Hayat holds a Ph.D. in Law from the Paris XIII University. He also holds a degree in Economy from the Nice Sophia-Antipolis University, and a Habilitation to conduct (...)

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Whether through declarations made by heads of State or through the recent revelations in the headlines over the past few weeks (Luxleaks, Offshoreleaks, Swissleaks etc.), the whole thing comes down to phenomena whose magnitude is poorly evaluated and that are very different in nature. This is why decisions made by States and international bodies may sometimes seem contradictory.

Magnitude

Quantifying such a phenomenon can only ever, by definition, be approximate. Indeed it is very difficult if not impossible to measure the reserves and flows of a monetary mass which all the participants in the process (such as the owners of the funds, intermediaries and financial institutions) have every interest in concealing. Some studies do exist, however, which may be compared against the contents of the recently revealed documents. In studies carried out in 2012 and 2013, the figures put forward are often divergent. Thus the work by Gabriel Zucman(1) estimates world assets placed in tax havens at 5,800 billion euros, 1,800 billion of which in are in Switzerland. The French are thought to own 360 billion euros’ worth of them, half of which through the intermediary of Swiss financial institutions.For Antoine Peillon(2) , these French assets total 600 billion, with private individuals accounting for 220 billion, half of which is placed in Switzerland and the rest belongs to businesses or trusts.Transparency International is developing a project to quantify the phenomenon within the world economy, with the aim of measuring the amount of assets held in tax havens or through tax havens and of generating usable quantitative data.

The first results(3) from these calculations, performed using IMF data, give an idea of States’ “impregnation” by the tax haven phenomenon, but still do not indicate the flows and reserves of currencies concerned. Lastly, the data from the “HSBC list” used by an international team of journalists is a particularly interesting sample, if only because it is the first of its kind and because it covers both flows and reserves. Before any extrapolation can be made, however, it must be noted that the data only concerns the subsidiary of a single banking institution (HSBC), acting in a single State (Switzerland), over a short period of time (November 2006 to March 2007).According to the journalists’ work,(4) citing “la justice française”, 180.6 billion euros for more than 106,682 clients and 20,129 offshore companies transited to Geneva via accounts with this institution. This includes 8,936 French people, whose assets amounted to 5.7 billion euros. According to HSBC Private Bank Suisse, the institution’s total assets in 2007 amounted to 118.4 billion dollars, brought down to 68 billion at the end of 2014(5) .

Extrapolation of this data could be carried out by extended the geographical scope and the number of institutions studied.

Nature

Although the reasons why the phenomenon exists are obvious (evasion of taxes that are considered unjustified, and sometimes avoiding justice when the assets come from criminal or concealed activities), the methods used to achieve this end are varied, and this variety must be taken into account in analysis.

Acknowledged tax havens

At first analysis a tax haven is a State or territory with an advantageous tax system, but very often this characteristic by is not itself sufficient because in many situations such a system is only beneficial to people living in the host location. Indeed, the tax laws in force in most States, as well as the stipulations of tax agreements, lead to taxation on all of the taxpayer’s income, especially financial income, in their State of residence. So a French resident who has invested capital in a tax haven must declare the income from it to the French tax authorities. This is why a large number of wealthy people have “relocated”, leaving their country of origin with which they should no longer have any connections. There is nothing wrong with this, at least in legal terms, because they become the tax citizens of another State that is less demanding in terms of tax receipts. 

So, to achieve the goal of evading taxes whilst continuing to reside in a State with “normal” taxation, the tax haven must offer another characteristic: opacity, i.e. the certainty for the investor that their State of residence will not be informed of these investments, nor of the income they provide. This condition of discretion is all the more important when the origin of the funds is dubious or even criminal.

For these reasons, all the efforts made by States wanting to put an end to the drain on their tax bases, target the development of the exchanges of information, in a move towards automatic data exchange. This task, which was instigated five years ago, was entrusted by the G20 to the “Global Forum on Transparency and Exchange of Information for Tax Purposes”, under the aegis of the OECD(6) . In its most recent report, the forum indicated that: “In the five years since its restructuring in 2009, it has driven immense progress in the field: not only is the era of bank secrecy for tax purposes “over,” but the era of even more transparency symbolised by the move to automatic exchange of information is now well underway."(7)  

Without wishing to dampen this enthusiasm, it should nonetheless be noted that although the step towards greater transparency in cross-border income seems to be final, it is above all the doing of large nations such as Switzerland and Luxemburg who can no longer politically and diplomatically withstand pressure from other developed States (the USA, France and Germany for example), and sometimes the opinion of their own public. It is evident, however, that territories which are less involved in international affairs, with a much smaller economic weight and whose sole profitable activity consists in providing a discreet refuge for cross-border capital, are not so inclined to join this movement. Available space for this capital has decreased considerably and will decrease even more, but without completely disappearing.

Hidden tax havens

These are States with a Tax Code that is very similar to those in most developed countries, meaning that it does not fulfill the primary characteristic of tax havens, namely an extremely lightweight or non-existent tax system. In reality, however, they grant highly favorable conditions to non-residents in contravention of the common law, presented as being very strict. This practice, better known as “ruling”, principally concerns the taxation of profits and although it is not new it was only recently brought to light(8) . It is the misappropriation of other States’ fiscal base by offering advantageous conditions only to those who artificially displace their profits or income. This practice has been theorized by the European Commission, which calls it “harmful fiscal competition” by euphemism, while others use the term “tax buccaneering”. Although the diagnostic dates back to the end of the 1990s(9) , action directed towards such practices is a lot more recent: the Commission recently announced that it “has opened three in-depth investigations to examine whether decisions by tax authorities in Ireland, The Netherlands and Luxembourg with regard to the corporate income tax to be paid by Apple, Starbucks and Fiat Finance and Trade, respectively, comply with the EU rules on state aid.”

On 3rd February 2015 it announced that an in-depth investigationwas to be opened on “the Belgian excess profit ruling system.” What is new here is that these are no longer specific decisions that are being investigated, but a whole swathe of the tax system of a European Union member State.(10) As a provisional conclusion, repression alone cannot provide the solution to international tax fraud and evasion. Similarly, as regards the acceptability of total transparency there are technical as well as social limits. Therefore, is it perhaps the construction of a new global fiscal order, in which an equitable share of tax bases would predominate, that we should work on in order to ensure tolerable and fairly distributed taxation?

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1 - Gabriel Zucman, La richesse cachée des nations. Enquête sur les paradis fiscaux. Seuil 2013 
2 - Antoine Peillon, Ces 600 milliards qui manquent à la France. Seuil 2012 
3 - http://www.transparency-france.org/ewb_pages/p/paradis_fiscaux_judiciaires.php 
4 - Le Monde , edition dated 10th February 2015, page 2.
5- Cited by Le Monde ibid. page 3. 
6- Tax transparency: 2014 OECD progress report 
7- Ibid. page 5  
8- Luxleaks, the name given to the disclosure of the contents of multiple pre-existing fiscal agreements with the Luxemburgish tax authorities.
9 - See in particular the conclusions of the ECOFIN from 1st December 1997, and the developments of the savings directive of 3rd June 2003, which came into force on 1st July 2005 and was amended on 24th March 2014.
10- European Commission news release of 11th June 2014.