If you believe the OECD’s rhetoric, tax havens are about to collapse like a house of cards before the onslaught of a G20 determined to retrieve untold trillions of lost revenue. After a string of European states including Austria, Luxembourg, Andorra, Liechtenstein and Switzerland agreed to exchange information more freely, OECD director-general Angel Gurria, described this as “an important moment in the history of international tax cooperation.”
The OECD has been campaigning for international tax transparency for 12 years and is entitled to pat itself on the back. By late March, 20 countries had agreed to swap information on the desired lines. However, the death of tax-efficient jurisdictions and their historic rules on confidentiality is greatly exaggerated. And fortunately so for the preservation and growth of legitimate international wealth by UHNW families.
Behind the headlines the change in position is not that dramatic. A host of tax havens including Switzerland – the big prize for the OECD – have cautiously agreed to cooperate in the provision of information about fraudulent or tax-evading arrangements. In short, blatantly illegal deals of the sort that UBS’s now dissolved squad of bankers allegedly stitched up in the USA will no longer be possible.
So-called “fishing expeditions” for large volumes of data mounted by, for example, American investigators will be thrown straight back. No country is likely to entertain the prospect of bankers and clients being extradited on the basis of flimsy charges, as happened several times in the last few years.
Even so, the process of compliance will take years, perhaps a decade or more in some jurisdictions. For instance, the Swiss may have to vote them under the ancient cantonal system as well as through parliament. And, as president and finance minister Hans-Rudolf Merz points out, it will take a long time to renegotiate 70-plus bilateral double taxation treaties.
Nor is the OECD hell-bent on ripping up laws guaranteeing banking secrecy. After all, most countries have them and, as Gurria acknowledges, they provide important safeguards for the protection of confidential information about citizens’ tax arrangements as well as expressly forbidding fishing expeditions.
And perhaps surprisingly, the OECD officially has nothing against low-tax or even zero-tax regimes. This is despite the accepted definition of a tax haven as a jurisdiction offering nominal or no tax.
For several years now, tax-advantageous jurisdictions including onshore and offshore financial centres have been happy enough to exchange information, particularly on companies. The OECD cites only three stone-walling tax jurisdictions including Monaco.
Then there’s the 2005 EU Savings Directive, which closed a few loopholes. This law seeks information on the income from a variety of non-resident instruments including bank accounts and redemption of units from certain kinds of funds. Although many individuals avoided onerous levels of disclosure through various instruments such as portfolio bonds and several regimes including the Isle of Man, Jersey and Guernsey, Austria, Belgium and Luxembourg negotiated a withholding tax option instead, Switzerland and other countries complied willingly enough.
Indeed the Swiss government argues that the EU would get more lost tax revenue this way than through attacks on “bank secrecy”.
Tax havens started as a bolt-hole to keep legitimate wealth out of the hands of burglar governments such as Nazi Germany. Then they came to provide a way to preserve the value of assets from incompetent governments such as several in Latin America. Today they operate more as tax-effective regimes than tax havens, for instance by protecting children from crippling inheritance imposts.
As long as they provide such services, their demise is unlikely.
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