Bigger nations tightening up

Robert Matau




The Pacific tax havens are now under severe attack particularly from initiatives proposed by the Obama administration in the US.
President Obama’s initiatives are designed to make it more difficult for Americans to use Pacific tax havens and to pressure them to be more transparent about their financial dealings, which will make them less attractive for some tax-shy clients.
In addition, Griffith University’s Dr Anthony van Fossen said the global financial crisis and the leftward shift in American politics have also contributed to the problems of offshore financial centres in general, and those in the Pacific Islands, in particular. 
“Many people see the secrecy provisions of tax havens as contributing to the global financial crisis by helping banks and other financial institutions engage in ‘creative accounting’ to allow them to continue to make risky loans while temporarily hiding their losses on old ones.  
“The leftward shift in American politics means that there are louder calls for measures against the wealthy usind havens in the Pacific and elsewhere to minimise or eliminate their tax obligations,” he said.
Ideal host: van Fossen is the author of a chapter in the book Small Economies and Global Economies. In that chapter titled 'Why are Tax Havens in Small States?', he explores the links and nature of small states and why they are so ideal for hosting Offshore Financial Centers (OFC).
He identified 36 nations as being OFCs and in the Pacific it includes Cook Islands, Samoa, Vanuatu, Niue, Nauru and the Marshall Islands.
 van Fossen said the world’s most important tax havens or offshore financial centers (OFC) are concentrated in relatively small states.
“Samoa has historically been very diplomatic (and consequently very adept) in dealing with these kinds of challenges, and the Cook Islands government has announced it will be taking proactive measures to attempt to satisfy the critics of tax haven practices,” he said. 
“In the past, the Cooks has sometimes assumed a more confrontational approach, which did not work very effectively. 
“The Marshall Islands has very strong ties with Washington and should continue to devise tactics and strategies which minimise the damage that foreign governments do to its offshore financial centre. 
“Vanuatu’s policy seems less defined. Figures on the banks’ external assets are not available for the Marshall Islands (which does not have any offshore banking) and the Cook Islands which recently repealed laws allowing purely offshore banking, although ANZ can still operate both onshore and offshore).
“The figures reported by the Bank for International Settlements for Samoa and Vanuatu are, however, revealing. They indicate impressive growths of Samoa’s offshore banking and the decline of Vanuatu’s.
“Samoa’s banks’ external assets grew from US$846,000,000 in December 2006 to US$1,210,000,000 in December 2007 and US$1,473,000,000 in June 2008. 
“Vanuatu’s banks’ external assets fell from US$292,000,000 in December 2006 to US$120,000,000 in December 2007 and US$116,000,000 in June 2008.” 
van Fossen says Offshore Financial Centers account for 26 percent ($6.9 trillion) of all reported external currency assets of banks in the world ($24.5 trillion) in September 2006. But a good number of number of small state OFCs (for example Samoa and Cook islands) do not report their offshore bank deposits, so this figure is understated
Cook Islands Deputy Prime Minister and Finance Minister Sir Terepai Maoate told ABC news that he welcomed the G-20 call for more transparency in the international flow of tax information and has told his officials to make the necessary amendments to its tax laws.
According to Tax Justice Network (a pressure group), developed countries lose $180 billion a year in evaded taxes.
van Fossen believes there are enormous benefits from tax havens and cited Monaco, one of the first small state tax havens, as an example.
 “The nation established its own offshore gambling casino to benefit from foreigners that became profitable that it allowed the small population to enjoy freedom from taxes,” he said.
“Monte Carlo’s tax haven attracted rich tax exiles and bank depositors, whose demand for financial services in the microstate led to even greater per capita benefits for the residents.”
van Fossen said there could also be conspiratorial collusions. For instance, in the Cooks, “local lawyers were able to persuade Cook Islands Government officials to issue certificates stating that their clients’ companies had paid substantial taxes in the Cooks.
“Almost simultaneously, the state-owned Cook Islands Government Property Corporation returned amounts (slightly lower than the taxes paid) to other Cook island companies owned by the same clients—in the form of profits on artificial tax-free securities transactions.
“This process resulted in tens (if not hundreds) of millions of dollars of tax deductions in their clients’ home countries, including New Zealand, Australia, Japan and the United States.”
He said the Cook Islands was the best example of a legal laboratory, where lawyers devised solutions to the problems of wealthy clients using their influence over parliament to have bills they draft, passed quickly, sometimes in camera.

Who’s who in the Pacific Very active tax havens in the Pacific include Samoa, Vanuatu, the Cook Islands, and the Marshall Islands. Nauru still conducts a little tax haven business (offshore company registrations) and Norfolk Island is a residential tax haven (no income taxes on residents, but little offshore business). There are some other Pacific jurisdictions which have tax haven features for some activities (e.g., the Northern Marianas for tax exiles), but they are not generally labelled as tax havens. Niue has repealed its tax haven laws.

“During the first 20 years of the Cook Islands OFC (1981-2001), offshore finance was the topic of about ten percent of all acts passed into law by the country’s parliament, with most of the legal drafting having been done by the private sector (Asian Development Bank, 2002),” he stated.
van Fossen said small and often little known nations have become remarkably powerful influences on the global political economy.
“They provide venues for the world’s (often sensational) secret business and secret politics.
“Their offshore financial centers allow wealthy and powerful clients to escape from metropolitan taxation and regulation.
“Tax haven nations are part of a process in which competitive advantage has been moving from the bounded, regulated economies of scale within the borders of large metropolitan states to smaller political units oriented toward liberalised global markets.
“Small islands nations and secluded continental mini states have been prominent in this contemporary world historical transformation,” van Fossen said.
Tax evaders: On May 4, CBS news reported that President Obama vowed to “detect and pursue” US tax evaders and go after their offshore tax shelters.
Obama complained that existing laws make it possible to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”
He wants to prevent US companies from deferring tax payments by keeping profits in foreign countries rather than recording them at home, and called for more transparency in bank accounts that Americans hold in notorious tax havens like the Cayman Islands.
“If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly,” he said.
Under Obama’s plan, companies would not be able to write off domestic expenses for generating profits abroad.
The goal is to reduce incentives for US companies to base all or part of their operations in other countries.  On the global level, the G20 leaders have agreed to:
• The creation of a new Financial Stability Board to replace the current Financial Stability Forum. Although it will have a “strengthened mandate” to oversee the world’s financial system, it will not have specific controls over financial companies.
• To extend regulation and oversight to all systemically-important financial institutions, instruments and markets, including the largest hedge funds.
• To impose new rules over banks’ capital requirements once the crisis is over.
• To “take action” against tax havens and other non-cooperative jurisdictions, including the threat of sanctions if necessary.
• To impose new rules on credit ratings agencies.
The G20 also considered a number of sanctions which include:
• Increased disclosure requirements by companies and individuals using tax havens;
• Withholding taxes on transactions with tax havens;
• A ban on the use of interest paid in a blacklisted country to offset tax;
• Reviewing tax treaty policy;
• Putting political pressure on global companies to withhold investment to a haven; and
• A reduction in aid.