The New Kids on the Tax Haven Block

Hong Kong and Singapore join the usual suspects in helping to hide wealth.

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The financial skyline of Singapore is silhouetted against the morning sun on Monday April 22, 2013 in Singapore.
The financial skyline of Singapore is silhouetted against the morning sun on Monday April 22, 2013 in Singapore.

Last month was a very busy one, but I would be remiss if I didn't discuss the Tax Justice Network’s new edition of the Financial Secrecy Index. The index combines two major elements: an indicator of how secret financial information is in the jurisdictions (not all of which are independent countries) and a measure of how important the tax haven is in the market for offshore financial services. Thus, it is possible to get to the top of the list with high secrecy and modest market share (Switzerland) or moderate secrecy and high market share (United States).

While some of the names at the top of the list (Switzerland, Luxembourg, the Cayman Islands and the United States) are no surprise, they are joined in the top six by relative newcomers Hong Kong and Singapore. These two are emerging threats to efforts to rein in tax havens in fora such as the Organization for Economic Cooperation and Development and the European Union, since neither are members. Officials in EU/OECD members like Luxembourg trot out Hong Kong and Singapore with the attitude, “If they don’t cooperate in tax haven controls, we won’t either.” This has let Luxembourg drag its heels on reform for well over a decade. This, in turn, has let Switzerland defend bank secrecy, as explained here.

While Switzerland tops the overall index, the network of secrecy jurisdictions centered on the City of London (Jersey, Guernsey, the Cayman Islands and other British dependencies) is larger still. Five of these dependencies are in the top 20, and the United Kingdom itself comes in at number 21.

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As I have discussed previously, tax havens cost the world’s middle class at least $189 billion, based on James Henry’s low-end $21 trillion estimate of offshore financial wealth earning 3 percent per year. The lost taxes could easily be far higher.

And this is just tax evasion, the illegal stuff. Tax avoidance, as perfected by companies such as Apple, Microsoft, Facebook and Starbucks, lets them siphon off profits to low- and no-tax jurisdictions. One of the most common dodges is to transfer the ownership of intellectual property (patents, trademarks and copyrights, primarily) to Ireland and send royalties from every other subsidiary in the world there, rather than the United States, where the new products were actually developed. Its crown jewel of tax avoidance is to establish a subsidiary that is not taxable anywhere. How is that possible? It is incorporated in Ireland, so its income is not taxable in the U.S., but it is managed from the United States, so its income is not taxable in Ireland! This subsidiary, Apple Operations International, has not filed a tax return in five years, anywhere.

This, then, is what we are up against. The new Financial Secrecy Index helps us see current and upcoming threats, while reminding us that the United States does not have clean hands, either.

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