Capital flight and tax havens

6 November 2012 by Sally Burch

A study on the offshore economy [1]
published in recent weeks by the Tax Justice Network — TJN — reveals the seriousness of capital flight and tax evasion, which reaches much greater dimensions than had previously been estimated. The data confirm, in addition, that this phenomenon constitutes one of the most serious economic problems faced by developing countries, and consequently results in increased poverty levels in these countries.

The study estimates — an estimate that the authors consider conservative — that for the year 2010 the funds from private wealthinvested in more than eighty offshore jurisdictions – in accounts managed undercover and practically free from taxation – amount to at least 21 to 32 trillion dollars.

Of this total, something like one third, that is to say between 7.3 and 9.3 trillion dollars, comes from 139 countries of low or medium income. Moreover, 61% of this amount comes from just ten countries, including Brazil, Mexico, Venezuela and Argentina. This is largelya question of financial wealth accumulated from the 1970s by private elites of these countries, which have not been subject to fiscal oversight in the countries of origin. These figures are limited to financial assets; other types of investment, such as gold, real estate, yachts, etc.,are not included.

Calculating the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. between assets and liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). , the study shows that a large number of the countries considered debtors wouldbe net creditors if these resources had not been removed from their financial systems. These 139 countries, which includeall key developing economies, “had aggregate gross external debt of $4.08 trillion in 2010”. Subtracting the foreign reserves of these countries, invested for the most part in First World securities, one notes that “their aggregate net external debts were minus $2.8 trillion in 2010”. From these data, the study concludes that, if one were to add to this sum the funds moved to offshore systems, these supposedly indebted source countries “are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-2010”

Nevertheless the problem is that “the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.” Tax losses are also enormous: taking into account non-declared gains generated by these offshore investments since 1970, the losses in the past 40 years could reach something like US$3,7 trillion, according to estimates in the study.

The Tax Justice Network — an international network based in the United Kingdom — developed a new methodology for these calculations which the authors consider more accurate than methods traditionally employed by internationalfinancial institutions. TJN therefore expresses a strong critique of these institutions, since they “have paid almost no attention to this ‘black hole’ in the global economy”, yet they “have ready access not only to the analytic resources, but also to much of the raw data needed to more precisely quantify the dimensions of this problem.” So, the authors ask: “Why have they turned a blind eye?”

The loss for developing countries is even greater if we take into consideration the fact that the majority of agreements concerning foreign investment — including FTAs — are accompanied by double taxation agreements. These agreements generally allow foreign investors to be taxed in their countries of origin rather than in the host country that provides them with resources, labour forcesservices, etc. Often, through maneuvers such under invoicing exports or over invoicing imports, the result is thatthese companies end up without paying taxes in either country: that is, there is a double tax evasion, and the resulting income is diverted to tax havens.

Changing the models of negotiation

It is one thing to recognize the problem and quite another to see what Latin American countries can do to resolve it. Inan interview with ALAI, David Spencer, a US lawyer specialized in financial legislation and an advisor to the Tax Justice Network, believes that a greater collaboration between governments in the region could improve their capacity for negotiation. He considers thatUNASUR, for example, could intensify efforts in this sense. At the same time, he calls attention to the lack of collaboration within groups such as the G77 when dealing with this question in the corresponding entities of the United Nations. One of the solutions suggested by Spencer is to insist that financial centres furnish information to other countries regarding funds that their residentsmaintain in their financial system.

The lawyer recognizes, however, that there is tremendous resistance on the part of developed countries to deal with this question withany degree of seriousness, since these economies “benefit tremendously from this flow of capital into their financial institutions. For example City Bank New York, from flows of capital into City Bank Cayman Islands; …or Morgan Cayman Islands, Morgan Panama… these financial institutions that depend heavily on these deposits from wealthy Latin Americans don’t want to cut off the flow of funds.” So this gives rise to pressure on their governments to prevent any change.

Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
(Organization for Economic Cooperation and Development, which is made up of the principal developed economies)has in principle expressed some preoccupation for this capital flight; but it has done little to impede it. Spencer recognizes that the OECDhas established a “black list” of 40 countries considered tax havens, but established a requirement for a country wanting to be takenoff the list, that it sign at least 12 agreements involving exchange of information. What happened was that these tax havens signedagreements among themselves, and thus almost all of them were taken off the list, without any serious change taking place.

Spencer points out that one possible negotiation tactic is the fact that the US, for example, has an interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. in obtaining tax information on their own residents who hold assets in Latin America. Hence this makes it possible to establish agreements on an exchange of fiscal information. On the other hand it is much more complex to attempt this with the tax havens, where the same rules are not applied. And in fact, a large part of regional funds so removed are found in countries such as the Cayman Islands, Bermuda, Bahamas, British Virgin Islands or Panama.

For the Tax Justice Network, the search for such solutions to the problem of capital flight and tax evasion should constitute one of the first priorities in world policies for the reduction of poverty.

Translation: Jordan Bishop and the author

Sally Burch, journalist, is part of the ALAI team.


[1James S. Henry, The Price of Off-shore Revisited, Tax Justice Network, Julio 2012.



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