THE ISLANDS EDITION JUSTICE FOCUS VOLUME 3, NUMBER 4 The OECD and other international initiatives William Vlcek 1

EDITORIAL The quarterly newsletter of the tax justice network The prospects for Island Havens 3

FEATURES What future for the Crown Dependencies? 5 Richard Murphy

The model 7

NEWS AND RESEARCH THE OECD AND OTHER INTERNATIONAL Letter from Geneva: UN Tax Committee 9 Dries Lesage

INITIATIVES: A VIEW FROM THE CARIBBEAN presses the self-destruct button 10 John Christensen Over the past decade the Caribbean the local economy have recovered. St. Vincent the EU have focused on individuals (those who islands have certainly felt the impact and the Grenadines hosted thirteen offshore avoid or evade , or clean ill-gotten WORKSHOP banks in 2000 but as of June 2007, there were gains) and not on the financial activities of Tax Justice, Transparency and Accountability of initiatives by the OECD, the EU and none. In the , the number of corporations. In this context, however, it is not Invitation to participate 12 the Financial Action Task Force (FATF) banking firms has fallen from a high water mark a simple matter to determine the actual extent to counter , money of 475 in 1997 to 265 by September 2007. of activity. Assets may represent, laundering and terrorist financing. say, multiple iterations of the same underlying Nevertheless, throughout the Caribbean foreign deposit – such as through securitisation and assets on deposit have not fallen: instead, the derivatives, for example; and offshore financial overall trend is upwards. Data reported to the assets are far more than simply the savings he number of offshore banks has fallen, Bank for International Settlements showed accounts of high net worth individuals. Many across the board. In , for deposits in Caribbean OFCs growing from $1.3 assets of individuals are also held offshore T example, legislation was rewritten in trillion in 1998 to $3.3 trillion in 2006.1 This through corporate structures and trust Editor: Nicholas Shaxson 2001 in response to an FATF blacklist, leading to may be partly because the OECD, the FATF and companies. Government revenues, however, are a decline in the number of offshore banks and Contributing editor: John Christensen Design and layout: www.tabd.co.uk trusts licensed by the government (from 395 in 1 For more details on the Bahamas, Cayman, and St Vincent and the Grenadines, see William Vlcek (2007) “Why Email: [email protected] 1999 to 226 in 2006.) This reduced government Worry? The Impact of the OECD Harmful Tax Competition Initiative for Caribbean Offshore Financial Centres” The Published by the Tax Justice Network International license revenue, but local employment in Round Table: The Commonwealth Journal of International Affairs 96: 331–346. Several other Caribbean jurisdictions are Secretariat Limited described in Oral H. Williams, Esther C. Suss, and Chandima Mendis (2005) “Offshore Financial Centres in the Caribbean: banking and its direct economic contribution to Prospects in a New Environment” The World Economy 28: 1173–1188. © Tax Justice Network 2008 For free circulation, ISSN 1746-7691 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS

“Data reported to the Bank for International Settlements showed deposits in Caribbean OFCs growing from $1.3 trillion in 1998 to $3.3 trillion in 2006”

the EU.2 The Directive came into force in July Limiting our analysis to offshore financial 2005, and after the first full year the revenue centres and island tax havens, however, collected was far less than expected. Two obscures the full extent of the challenge. major gaps in the Directive have allowed EU Any country may function as a tax haven citizens to continue to avoid tax payments: for the residents of any other country. first, a failure to include some recognised The barrier to tax equity is not simply the offshore centres in the programme, leading operation of Caribbean OFCs, but national to significant financial flows to borders and national sovereignty. If we agree and . The second gap is that, like that tax equity is a global problem, then it the OECD’s tax competition project, the EU clearly requires a global solution. This, then, Directive only covers the savings of citizens: confronts us with the hard reality of national so any OFC with a company registry could differences over taxation. Ugland House: more than 12,000 companies “work” in this building. Photo: thanks to Cayman Net News. provide EU citizens with a corporate vehicle to transfer their assets into in order to avoid As long as tax laws are national, shifting assets generated by license fees, independent of the have done so by diversifying, or by improving tax. to another country will continue to be used quantity of assets that transit the Caribbean. on their specialisations in specific sectors. as a way to avoid . The future is likely to What does the future hold? Officials in the be a more complex version of the present, at For the Cayman Islands, figures represent The European Caribbean territories (, Caribbean OFCs recognise the benefit in least until co-operative global solutions are assets on deposit for the 8,707 (as of , , , diversification. have put into place. September 2007) mutual/hedge funds Antilles, Turks & Caicos) are attempted to establish offshore Internet- registered there. For the British Virgin Islands, subject to the ’s Savings based gambling. The Cayman Islands, noting William Vlcek is Lecturer in International Politics at data includes assets channelled through more Tax Directive. After years of work, the Middle Eastern investors’ and depositors’ the Institute of Commonwealth Studies, University than 774,000 (December 2006) international EU achieved a compromise on some worries about possible asset freezing by of London and author of the forthcoming study, business companies (IBCs). In , member states’ objections to exchanging the US government in its “war on terror” Offshore Finance and Small States: Sovereignty, assets on deposit to some extent represent account holder information to help other are creating regulations to support Islamic Size and Money (Palgrave Macmillan). capital used to underwrite policies issued Member States collect taxes owed by financial services. Public and Congressional by 1,460 (December 2006) international their citizens. The compromise introduced frenzy against the proposed acquisition of insurance and re-insurance firms. the alternative of a withholding tax American ports by the Dubai firm, Dubai instead of taxpayer information exchange, Ports World, did little to mollify these The OFCs that have weathered the but the geographic coverage of the concerns. international campaigns most successfully Directive did not extend very far beyond

2 See also Tax Justice Focus, Third Quarter 2007 (vol 3, issue 3).

2 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS THE PROSPECTS FOR ISLAND HAVENS editorial

Change has swept through the offshore world in the past decade and island tax services providers: collecting, verifying and the Pacific ( and the ) exchanging information is laborious and and the Caribbean (Antigua & Barbuda, havens have been buffeted by inter-linked multilateral initiatives from the OECD, expensive. Aruba, Dominica, , Montserrat, the the Financial Action Task Force (FATF,) the EU and others. , St Lucia, St Vincent Financial centres in rich countries are often and the Grenadines), face stagnation of their spared these new requirements – so they industries. compete on a playing field tilted in their favour. oncerns about , money Titles like ‘The Death of Tax Havens’ or ‘A For example, most of these centres still offer Yet many people doubt that island havens are laundering and financing for Death Knell for Tax Havens’ back up the first bearer securities (which confer anonymity); doomed. For one thing, the most prominent C terrorism have generated pressure view. Hampton and Levi (1999) suggest that they do not regulate corporate service and established ones seem to be booming. on island havens to give up some of their these centres may be ‘spinning into oblivion’. provides; and they allow non-residents to The Cayman Islands, the British Virgin Islands, selling points, and many have tightened An industry insider holds that: ‘It is likely form de facto anonymous companies. Island Bermuda, the , Jersey and regulation and relaxed strict secrecy. Even that many of today’s tax havens will not be havens and others offering such services now are enjoying steady – and sometimes more threatening is competition from major fit enough to survive’ (2002: 98). Richard risk being blacklisted and jeopardising their spectacular – growth; the same is true for offshore financial centres like and Hay, a prominent member of the industry, international banking links. Singapore and Hong Kong. Perhaps this is London which now, in some cases, offer has claimed that island OFCs adopting more compatible with the first analysis: business tighter secrecy and looser regulation than stringent regulations than competitors like Some evidence also supports this view that will become concentrated in a few leading what is available in the island havens. Delaware are committing ‘financial suicide’ tax havens’ heyday is over. For example, centres, while most are squeezed out. (STEP 2005). Many predict that the number the Pacific islands of , and Two broad views about the future have of tax havens will fall sharply in a few years. Tonga have withdrawn from the offshore What is more, some newer entrants using emerged. The first one questions whether market due to external demands for tighter supposedly out-moded or unsophisticated the island havens can survive: at a minimum The new initiatives require OFCs to collect regulation. Some smaller OFCs, especially in models – such as selling International Business they face big challenges; some even hold that more information on their clients, and to be the end of offshore is nigh. Yet proponents of more willing to exchange this information “Even more threatening is competition from major offshore a second view point to rapid growth in the with other tax and law enforcement most prominent and established island-based authorities. They are asked to provide greater financial centres like Delaware and London which now, in offshore financial centres (OFCs), and to the transparency, and to impose new regulations some cases, offer tighter secrecy and looser regulation than success of an array of newcomers. and standards which impose compliance burdens on OFC governments and financial what is available in the island havens.”

1 Tim Bennett: International Initiatives Affecting Financial Havens (Butterworth Tolleys)

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“News coverage and analysis of offshore centres tends to look disproportionately at changes in NEWS HIGHLIGHTS the “supply” side of offshore financial services, especially with the regulatory impact of new multilateral initiatives. Much less attention is given to demand-side changes: trends such as The Ford Foundation has confirmed a grant to TJN for research into the rising prosperity in , rising African oil wealth or a transition to market economics in the nature of, and institutions that enable, former Eastern bloc.” cross border illicit financial flows out of developing countries, and recommend reforms. This will run parallel to research by the Global Financial Integrity Companies (IBCs – offshore shell companies Shaxson challenges their claim to play a bloc, may be cushioning or even cancelling program into volumes of cross border generally without any physical presence and useful role in the global economy; Murphy out the impact of the supply-side trends. For illicit flows from developing countries. relying on secrecy) are thriving. (1988), looks at the problems facing the UK Crown example, although the British Virgin Islands (1990), the (1990) and Dependencies, exploring trouble that has given in to demands from the OECD, the (1994), for example, have all might lie ahead. Separately, Lesage’s article FATF and EU, its IBCs are a continuing Following criticism from TJN, seen rapid growth in numbers of companies, examines how the UN, which has been success, based on demand from Chinese Transparency International said and gains in revenue. Some centres that had eclipsed by the OECD initiatives in global customers who are indifferent to the it will now start a “second wave” of declined have recently staged a come-back: tax affairs, could and should play a stronger Western initiatives. corruption campaigning focusing more notably , but also and role in this field. on corruption facilitated by bankers and the Bahamas. New jurisdictions have also We must also consider what options small financial centres. entered the field like (in 2000), and There are other reasons for the divergence states have, other than offshore finance. In (more ambiguously) Anjouan (in 2001),2 Sao of views on whether tax havens are agriculture, the market has been wrecked by In a keynote speech, South African Tome e Principe (2006),3 and even Somalia thriving or dying out. News coverage rich country protectionism (sugar, bananas), Finance Minister Trevor Manuel (2003),4 calling into question whether and analysis of offshore centres tends to or it may be unsustainable (fish), or it is attacked abusive tax practices and barriers to entry have in fact been raised. look disproportionately at changes in the fickle (tourism.) This lack of other options called for global co-operation on tax, “supply” side of offshore financial services, helps explain why small states hang on to the saying that smaller, poorer countries are How do we explain these two conflicting especially with the regulatory impact of new offshore option so fiercely. especially vulnerable. analyses: first, that tax havens are dying; multilateral initiatives. Much less attention is second, that they are flourishing? Other given to demand-side changes. Even if OECD articles in this edition explore the question countries can coerce their own citizens TJN and its issues continued to emerge further. Vlcek looks at how the multilateral and firms to give up the offshore option, prominently in the world’s media. For initiatives have focused heavily on individuals, or entice them back with their own rival example, a TJN programme won a neglecting the financial activities of products, trends such as rising prosperity in radio programme of the year award corporations. Christensen highlights the China, rising African oil wealth or a transition in ; and the UK’s Guardian fragility of Jersey’s tax haven model and to market economics in the former Eastern newspaper ran a front-page splash about tax tricks in the banana industry.

2 See http://www.anjouan.gouv.km/content_eng/creation.html See more news on TJN’s home page, 3 See http://www.princemanagementsa.com/english.html 4 See http://www.somaliaweb.biz/sifc.htm www.taxjustice.net

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WHAT FUTURE FOR THE CROWN feature DEPENDENCIES? Richard Murphy

For the Crown Dependencies of Jersey, Guernsey and the Isle of Man the threat of external regulation has become – unlike for the other major tax havens – very real. All the major tax havens that are normally given this status by organisations like the OECD, the IMF, the Financial Action Task Force (FATF) or the European Union are accustomed to external regulation now. Yet it is only in the Crown Dependencies that this regulation has resulted in major changes in tax (as opposed to regulatory) systems.

hese three havens are not EU exempt status or negotiate rates as low as members but the EU’s Code of 0.5 percent. This discriminates against locally T Conduct on Business Taxation owned entities, and was judged to contravene applies to them (see Box 1). Unlike the the EU Code. OECD initiative on harmful tax practices, the EU Code has proved to have real teeth In response, the Isle of Man said in June when each jurisdiction has depended for a 2000 that it would charge zero per cent significant part of its state income from taxes tax on all companies -- except for some in on company profits. This is particularly so for the financial services sector which would My Beautiful Laundrette: the financial centre in St. Helier, Jersey Jersey, where about 40% of all state income pay 10% (this has been called ‘zero / ten’). has come from this source (such dependency This set a benchmark that Guernsey and That was the easy part. The Isle of Man could pooled, then allocated between them on a is probably unique in the tax world). The Jersey had to follow to stay competitive. afford to lead the way: only a minor part of somewhat arbitrary formula. This benefits figure for Guernsey is 32%, and just 8% for There is intense rivalry between these its revenues came from taxes on companies. the Isle of Man hugely: it receives a wholly the Isle of Man. administrations. It has also enjoyed a unique arrangement disproportionate level of VAT income.1 In with the UK since the introduction of Value effect, the UK subsidies the Isle of Man by The EU Code requires that ring fences be In June 2003 the European Commission Added Tax (VAT) in both jurisdictions in more than £200 million a year. This gave it removed from business taxation. Before judged that ‘zero / ten’ complies with the 1973. Under this unusual arrangement, VAT room to offer the zero percent tax charge. the Code was introduced, locally owned EU Code, and that a discriminatory rate for receipts of the UK and the Isle of Man are companies in all three locations were taxed particular business sectors was allowed – as at 20 percent, while companies owned long as the sector was not determined by 1 This must be the case: its VAT allocation amounts to 21.7 percent of its GDP and yet the maximum VAT rate is 17.5 by non-residents could either claim tax- residence. per cent. In the UK, which has an identical VAT system the VAT recovery rate is 6.1 per cent of GDP.

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“While the Isle of Man might survive on its subsidy from the Box 1: The Crown Dependencies and the EU UK, Jersey and Guernsey face huge deficits that they can only The Crown Dependencies are related to, but not part of the European sustain for a few years based on current reserves and limited Union: they are not signatories to the EU’s Treaty of Rome but are treated separately in the Treaty’s Protocol 3. For international affairs, the UK is scope for privatisation revenues.” responsible for ensuring the good governance of the Crown Dependencies and negotiates on their behalf in international fora – and by agreement the EU’s Code of Conduct on Business Taxation has been extended to them. None of the islands, however, could afford economies. Jersey assumes annual growth of to lose the revenue from tax on company more than 5% just to break even. But with a profits. Jersey estimates the loss from this global credit crunch underway, which directly Box 2: Contortions in response to the EU Code. source at around £85 million a year (my affects the products these places supply, The Isle of Man passed a law in 2005 deeming the profits of locally estimate is nearer £120 million, since the economic decline seems more likely. As the owned companies to be the property of the shareholders. This requires government’s estimate did not consider the deficits accumulate, these jurisdictions will no them to pay tax on the profits of the companies they own -- even if they whole affected tax base.) Each state has used doubt try to pile extra tax burdens on locals, had not received any payment from the company! The inconvenience of strange tax gymnastics to protect its revenue. but there must be a breaking point. this was then circumvented by requiring the company to pay the tax on (See Box 2.) their behalf. The effect was, of course, that the company continued to pay For these two islands, the future looks bleak. income tax exactly as before. The ring fence survived intact; it was simply While the Isle of Man might survive on its The effects of the EU Code could even called a personal tax now and the Isle of Man thought this sufficient to subsidy from the UK, Jersey and Guernsey undermine the stability of their governments, get round the Code. face huge deficits that they can only sustain effectively closing them down as tax havens in for a few years based on current reserves the coming years. All it requires is for enough Jersey planned a similar arrangement but in 2005 I warned them that and limited scope for privatisation revenues. European countries to sustain the political it would fail the EU Code. They changed their plans. The Isle of Man did will to ensure that the Code Group maintains not, and in October 2007 the EU Code of Conduct Group told the Isle Jersey is seeking to fill part of the hole in its its objections to their abusive tax practices. of Man that it failed the Code and that its law must be revised. It now budget with a Goods and Services Tax (GST). We will campaign towards that end. plans to adopt Jersey’s approach to require a company with local resident Like all such taxes this is regressive (i.e. it hits owners to either pay a substantial part of its profits as a dividend (or be the poorest hardest), as is Guernsey’s plan to deemed to do so.) The local shareholders are then taxed on this dividend increase social security contributions. Neither or deemed dividend. The only difference from the Isle of Man’s previous, can survive without massive growth in their failed arrangement is that the company cannot be required to pay the tax for the shareholder: they must pay themselves.

Guernsey heeded PricewaterhouseCoopers’ advice provided after I told Jersey and the Isle of Man that their schemes would fail: Guernsey simply “In October 2007 the EU Code of Conduct Group told the opted to tax dividends when paid. I think Jersey and the Isle of Man will Isle of Man that it failed the Code and that its law must be fail the EU test. We’re waiting to hear the result. revised.”

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THE TAX HAVEN MODEL: feature A FRAGILE ECONOMIC FOUNDATION Nicholas Shaxson

The Tax Justice Network likes to remind people how tax havens impoverish other Global top-10 countries by GDP third worst negative difference – 54 places – between its ranking in terms of human countries using secrecy, zero (or ultra-low) taxes or weak regulation to attract 1 $71,400 welfare and its income per capita. wealth-creating capital out of them, depriving the victim nations’ governments of 2 Bermuda $69,900 for development. 3 Jersey C.I. $57.000 When well-funded libertarian institutes 4 Equatorial Guinea $50,200 proclaim that being a tax haven will make 5 U.A.E $49,700 you rich – look behind the headlines, and Defenders of tax havens point to high income warehouse, where he has an evening job 6 $46,300 never forget the harm tax havens cause to growth and wealth in several tax havens as operating machinery. Late tonight, he will 7 Guernsey $44,600 other countries. And remember, of course, evidence of their success (see box). Yet move on to his third job, as a nightclub 8 $44,500 that international initiatives aimed at curbing although tax havens extract wealth, they have bouncer. At weekends, Tony, 28, drives a truck. 9 U.S.A. $44,500 tax haven abuses focus on protecting the tax failed to demonstrate how or where they add “I’m a young black man who’s still working 10 Cayman $43,800 systems of rich countries, leaving poor, more value in the process of wealth creation. And four jobs,” he said. “I still can’t afford my own vulnerable countries unprotected. behind the headline numbers on economic home.” Source: CIA, 2007; note: countries in red are tax havens. growth, a different story emerges, which is The tensions in Bermuda highlight one of especially pertinent for island havens. John Tony’s story is not unusual. Bermuda has the Tony Black’s story reminds me of a man I once several reasons why tax haven economies Christensen’s article in this edition of TJF highest GDP per capita in the world – 50 met in the corrupt oil emirate of Equatorial – especially small islands with little else to fall examines his native Jersey to highlight some per cent higher than America’s – and it has Guinea. He was helping chop down part of back on – are inherently unstable. But there of the human costs of being a tax haven, and zero unemployment. Mega-wealthy Britons, a forest to make way for an oil terminal in are other reasons. Murphy’s article, on page 5, reveal similarities with a “Resource Curse” among them actress Catherine Zeta Jones the once-beautiful port of Luba. He worked highlights intense rivalry and tax competition afflicting many mineral-rich economies, where and insurance magnate John Charman, rub a fifteen-hour day, on pitiful wages, and was between three jurisdictions of the UK strong headline GDP growth and high wealth shoulders with even wealthier American lucky to get that. The oil-rich island’s once- Crown Dependencies, which is destabilising per capita mask high domestic inequality, tycoons such as Ross Perot and Michael proud cocoa industry, one of the biggest their economies and politics. In a past poverty, social tensions, corruption, and the Bloomberg. Meanwhile, the average black employers, had all but collapsed in the face edition of TJF,1 Sheila Killian described how withering away of alternative industries. Bermudian takes two or three jobs just of the oil boom. In the UN’s latest Human pressure from other tax havens has forced to make ends meet. And the problem is Development Index, Equatorial Guinea has her native Ireland into a second round of This excerpt from Britain’s Daily Telegraph worsening. Now the issue of inequality has the dubious distinction of having the world’s tax competition, with worrying implications newspaper in December, illustrates the lives spawned a power struggle that some say of ordinary people in one of the Caribbean’s risks destroying the tax haven’s economy prime tax havens: overnight. One Brit - who, like most executives, “Tax havens extract wealth, but have failed to demonstrate does not want to be named for fear of Tony Black lives on the richest island on how they add value in the process of wealth creation.” making matters worse – said: “My son got Earth. Today is a typical day: after driving home and said: ‘Dad, am I a racist?’ 1 a taxi for eight hours, he will head to a Vol. 3, Issue 1: First Quarter 2007, p6

7 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS “Island tax havens are heavily exposed to boom- news and research bust swings in international finance; if the current international “credit crunch” proves to be as deep and Letter from Geneva durable as some fear, many havens face a bitter future.” 2007 Meeting of the UN Tax Committee: Link with FfD Process? for Ireland and with sinister implications for of offshore: an example of the awakening is This year’s meeting of the UN Tax UN member states also attend and actively poor countries elsewhere. TJN’s ongoing campaign against abusive tax Committee between 29 October and 2 participate in meetings. Yet it was clear that privileges being offered to wealthy “non- November in Geneva disappointed the TJN most Committee members (and tens of As Christensen describes, when the financial domiciled” UK residents, which has caught delegation that attended. The Committee is delegates from UN member states) have sector becomes dominant in an island the public imagination and forced changes not driving a development-centred global little affinity with the FfD process – and economy the result is political “capture” by in the law. At the time of writing this, Barack tax agenda forwards, and is far short of representatives from important countries the lobbyists and cheerleaders for financial Obama had just won the first U.S. Democratic realising its potential. Yet it is, unlike the far bluntly admitted this when asked how they services. The dominant sector also sucks primary in Iowa, with John Edwards in second more influential OECD, the only multilateral could contribute to Doha. This is regrettable, skilled personnel out of the others, eroding place. Obama has co-sponsored the “Stop institution dealing with global co-operation since a high-level FfD follow-up Conference them further; and by raising prices locally, Tax Haven Abuse Act” in the U.S. Congress; on tax. is scheduled in Doha, from November people in other sectors are effectively poorer Edwards has said that “as president, I will 29 to December 2, 2008, and the Committee and further marginalised. The dominant sector declare war on offshore tax havens.” The After the UN conference on ‘Financing for could have a substantial positive input. thus becomes yet more dominant. Again, this is race is still wide open, but more and more Development’ (FfD) in Monterrey in 2002, a bit like like mineral-rich economies afflicted Americans would agree with him. Chavagneux the UN Economic and Social Council decided Instead of firmly addressing political questions, by the Resource Curse, where the natural and Palan, writing in the last edition of Tax that the Committee would be administratively the discussions were highly technical. The resource sectors crowd out other productive Justice Focus (page 1) describe a palpable and politically linked to the FfD process, Committee traditionally spends most of sectors like agriculture, manufacturing or mood swing in the European Union in the last and the Committee’s mandate was clarified its time modifying the ‘UN Model Double tourism, leaving politicians to rail impotently two or three years against tax havens and tax in 2004, stating that the committee “give Taxation Convention between Developed about the receding dream of economic abuse. special attention to developing countries and Developing Countries’ which guides how diversification. Like oil-dependent economies and economies in transition.” Its mandate taxing rights are allocated between tax payers’ vulnerable to world oil prices, island tax haven The global mood is shifting against tax unequivocally allows it to address all major home and host countries. ( economies are heavily exposed to boom-bust havens, and TJN is working to push it further. tax issues, such as capital flight and tax conventions or treaties are enormously swings in international finance; if the current Gambling an economic future on being an havens, exchange of information, the adequate important: among other things they dictate international “credit crunch” proves to be as island tax haven looks like a risky bet. taxation of multinational corporations, and where multinationals pay tax, and many of deep and durable as some fear, many havens so on. them let multinationals shift tax payments face a bitter future. Nicholas Shaxson is a consultant to TJN and an out of poor countries where their activities editor of Tax Justice Focus, an Associate Fellow The Committee (whose full name is the are located and into rich ones or tax havens These are not the havens’ only vulnerabilities. of Chatham House, and author of the book UN Committee of Experts on International – depriving poor countries of many billions of In the past few months we have noticed a “Poisoned Wells: the Dirty Politics of African Oil,” Cooperation in Tax Matters) consists of 25 dollars in potential revenues.) The Committee sharp increase in interest in tax justice issues. Palgrave MacMillan, 2007. experts, mostly high-ranking officials of their holds extensive technical discussions on the In the UK, non-governmental agencies and national finance ministries, acting in their wording and phrasing of a document that journalists are fast catching on to the scandal ‘personal capacity’. Delegates from many is important but not binding, and which is

8 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS news and research

Letter from Geneva (Cont’d)

# Upgrade the Committee from advance any modifications to an expert group to a genuine the UN Model Convention, so intergovernmental political body, that the annual five-day plenary to give the Committee and its session does not get bogged agenda a higher profile. Reform down on technical matters but the Committee (an ‘International instead focuses more on the Tax Organisation’ may be crucial political matters in global preferable, but is politically not tax. feasible in the short term) and give the FfD Office, as secretariat # UN member states should ensure of the Committee, considerably that their officials participating in more resources and staff for its the Committee are well informed tax work. and instructed concerning the FfD process and the overall tax # In a lunchtime lecture at the agenda. Hopefully, in the coming Geneva meeting, Prof. Vito Tanzi, months a coalition will be built former head of the IMF Fiscal among UN delegations in New Affairs Department, urged the York to achieve a breakthrough creation of a global knowledge on these and other issues in centre to provide aggregate Doha. data on global tax trends (as Palais des Nations in Geneva, home to the UN Tax Committee the OECD does for developed The UN Tax Committee should play countries) and to carry out its role properly in future as a global research on global tax issues. tax body and pay special attention only a small part of a much broader prevail over bank secrecy rules in but it would set a moral norm that A better-equipped tax division to the needs of developing countries global tax agenda. What is more, if the UN Model Double Taxation would further isolate tax havens in the FfD Office could do part – which is what its current mandate a discussion on a technical issue is Convention (Article 26, paragraph whose secrecy rules prevail over of this work. With more staff requires it to do. not settled, it is simply moved to the 5). A subcommittee will work on a exchange of information requests and resources, more issues next annual session. draft ‘Code of Conduct on from other countries. could be thoroughly dealt with: Dries Lesage, Political Science Cooperation in Combating Department/ There were positive steps, however. We would now make several subcommittees could draw International Tax Evasion’, which Research Group, Ghent University, The Committee decided (as the recommendations to UN member more on its own expertise, have (it is hoped) will be agreed before . Dries attended the meeting OECD did a few years ago) to make states: more meetings, and engage more Doha. This would be non-binding, as part of the TJN delegation. exchange of information requests experts, and prepare better in

9 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS news and research

Jersey presses the self-destruct button by John Christensen

Table 1: Jersey’s gross national income by sector – 2006

Sector Share of Jersey’s GNI

Financial services 52 %

Hotels, restaurants, etc 3 %

Wholesale and retail 6 %

Construction 5 %

Agriculture 1 %

Public administration 7 %

Transport, storage, etc 4 %

Other, including property services 20 %

Look what they have done to my beautiful island: Jersey’s waterfront, 2007 Source: States of Jersey Economic Digest, 2007

I am a Jerseyman. When I was not want to put all our eggs into sector, depend heavily on offshore and are closely involved with The island aggressively competed to appointed economic adviser to the one basket. finance. banks and law firms linked to attract more banks -- and demand Jersey government in the 1980s, offshore finance, and self-interest for offshore services took off. Money the States of Jersey was committed Fast-forward to today, and Jersey What happened? Why has my has frequently been conflated flooded in, and headline economic to economic diversity. For three is transformed. Financial services beautiful island, once promoted as with public interest. In the macho growth was impressive: what could decades tourism had been the account for over half the island’s Britain’s “South Sea destination”, let political environment of 1980s be wrong with that? engine of growth, with significant economic base (see Table 1) tourism wither and die? Britain, reticence about promoting agriculture and light manufacturing and all other activities, including abusive tax haven activity succumbed Unfortunately, as any good economist alongside it. That was the Jersey construction, retailing, public Much of the answer lies in local to pressures to take ‘Jersey PLC’ will tell you, things are not so simple. that most people wanted: we did services, even the hospitality politics. Many Jersey politicians were down the profit-maximising route. When money floods in, local prices

10 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS news and research

Jersey presses self-destruct button (Cont’d)

costs were more than twice Tourism in Jersey has crumbled some of its abusive tax practices those in and south west under the weight of high labour (see Richard Murphy’s article England. Today Jersey has one of and construction costs. Tourism’s on What Future for the Crown the world’s highest costs of living, local defenders were no match Dependencies?), Jersey faces a and average house prices are over for the well-connected and amply precarious future. To make matters 20 per cent higher even than in resourced representatives of the worse, financial market instability in London – which is really saying finance industry. Although lip the second half of 2007 has exposed something. service was (and still is) paid to high levels of risk associated with the quest for economic diversity, securitised debt instruments, one of Visitors to Jersey are often the number of tourist bedspaces the few areas of expertise in which shocked by the high incidence has more than halved just in the Jersey is a world leader. Demand of poverty amongst local people. last decade, and tourist volumes for securitisation services has fallen This is partly because of the high have fallen below the critical mass flat. cost of living, but also because of needed to sustain many retailing the paucity of social protection. and leisure activities. Economic concentration is no Wage levels are depressed for accident: tourism’s demise in Jersey semi-skilled and unskilled workers. The accepted wisdom of the 1970s links directly to political decisions The minimum wage is set low at and 1980s was that tourism and taken in the 1970s and 1980s, at £5.40 per hour, below the level financial services were compatible which time the island became of all EU states when adjusted on small islands. Jersey shows that captive to the global ambitions for cost of living. Many workers resource constraints induce huge of the offshore financial services A much-loved historic cinema was torn down to make way for these Citibank offices. are forced by low wages and high competitive pressures between the industry. and costs go up. As things get Disease (after huge gas discoveries rents to work multiple jobs and industries, and financial services Other small island tax havens – more expensive, other industries in the Netherlands in the1960s, accept very poor accommodation. end up crowding out pre-existing Beware! cannot compete – and they die which led to serious harm for the Taking the EU’s benchmark for activities. out. Tourists find other places to economy.) assessing relative poverty (60 per I challenged the wisdom of this “Competing Industries in Islands” by visit, at lower cost. Locally grown cent of median income), 45 per development strategy in the 1980s, Mark Hampton and John Christensen agricultural goods are elbowed out When I started working in the cent of single pensioners in Jersey, to no avail. Now the tables have was published in Annals of Tourism by cheaper imports. This is similar sector in 1987 inflation was twice the and 64 per cent of single mothers turned: confronted with stiff Research, volume 34, number 4, to what has happened to many oil UK rate. Unqualified school leavers and their children, are currently competition from other tax havens, November 2007. producing countries: a phenomenon were earning higher salaries than living in relative poverty. and external pressure to remove commonly known as the Dutch graduates in the UK. Construction

11 tax justice network FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS

Invitation to Participate in a Workshop on TAX JUSTICE, TRANSPARENCY AND ACCOUNTABILITY Essex University, 3–4 July 2008

The role of transparency and accountability in creating No doubt others will emerge as the workshop agenda Offers of papers are especially welcome and early tax justice will be the main theme of the sixth annual develops. submission is encouraged as applicants have exceeded research workshop in the current series jointly organised available spaces in recent years. Any submissions will be by the Association for Accountancy & Business Affairs The aim of this workshop is to bring together researchers, actively considered by the organising committee which (www.aabaglobal.org) and the Tax Justice Network academics, journalists, policy staff of comprises: (www.taxjustice.net). organisations, consultants and professionals, elected politicians and/or their researchers, and government or # John Christensen (Tax Justice Network) Having explored the themes of tax and poverty and tax international organisation officials to explore issues on and finance for development in our last two workshops, these and related themes. The purpose of the workshop # Jo Marie Griesgraber (New Rules for Global Finance) is to facilitate research through open-minded debate and we thought a different perspective appropriate in 2008. In # Prem Sikka (Essex University) focussing on accountability and transparency we wish to discussion, and to generate ideas and proposals to inform highlight the fact that the supply of honest information to and shape the political initiatives and campaigns already # Richard Murphy (Tax Research LLP) taxing authorities is a prerequisite of a just tax system. under way. # (Birmingham University and IDS, Sussex) There will be a small charge for attendance at the The themes that might be explored within this remit are Workshop. Participants are usually expected to finance # Sol Picciotto (Lancaster University) wide, and might cover: their own travel although applications from students and 1. Problems of taxation of mobile capital; others with limited means for bursary support will be considered. Accommodation at Essex University will be 2. International cooperation and transparency for tax available at modest cost. purposes; Anyone interested in participating should provide details 3. Accounting and tax transparency; of the nature of their interest, affiliations and any relevant 4. Secrecy, tax havens and offshore finance centres; research or publications to: 5. Relationship of tax to and investment Richard Murphy FCA, Director, Tax Research LLP agreements; The Old Orchard, Bexwell Road, Downham Market, Norfolk PE38 9LJ 6. Are national governments losing the power to tax?; tax justice network 7. The accountability of government for taxation +44 (0) 1366 383500 / +44 (0) 777 552 1797 revenues. [email protected]

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