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Inside the Spiders Web: Tax havens and Dirty Money

By       Message C R Sridhar     Permalink
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" My secretary is still paying higher tax rate than I am."

Warren Buffet-Billionaire Investor.

(image by Action Aid)   DMCA

Tax havens evoke images of sandy beaches, swaying palm trees, and voluptuous women gamboling in the swimming pools of luxury hotels. There is a less glamorous side to it as well- when one sees burly potbellied drug lords, mafia or tin pot African dictators getting themselves massaged by attractive masseuses near the poolside. There is also the breathtaking view of blue seas dotted with luxury yachts belonging to the uber- wealthy. No wonder the French call these places paradis fiscaux.

The popular stereotype of tax havens got a fresh lease of life in the movie 'The Firm'- a film based on the novel written by John Grisham- which explores the sinister relationship between a prestigious law firm and mafia money which had to be laundered in one of the island tax havens. As Hollywood movies go there is plenty of excitement with partners of the firm getting murdered by menacing mafia criminals but says very little about the true dimension of Tax havens in today's world.

Unfortunately, stereotype notions of paradis fiscaux conceal more than they reveal. As the authors of the book 'Tax Havens- How Globalization Really Works' point out that Tax havens are not exotic outposts that exist on the fringes of the global economy serving the interests of the criminally delinquent but function as main conduits for tax evasion for the so called squeaky clean multinational enterprises around the globe. Moreover, they exist not in opposition to major economies like US and UK but in accord with them.[i]

Prem Sikka, Professor of Accounting- Essex Business School, UK, in his hard hitting monograph 'The Pinstripe Mafia' says that tax avoidance is a very lucrative global industry which is operated not by shady banks in island paradises but by largest private banks of the world as well as leading law firms and accounting firms. These players are located not in exotic island resorts but in First World capitals of the world such as London, New York, Geneva, Frankfurt and Singapore.

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And there are no mafia enforcers employing kneecapping as a means of control to keep Tax Havens smoothly running. That responsibility is borne by respectable accountants in their business suits from the Big Four Accountancy firms (KPMG, Deloitte, Pricewater houseCoopers,and Ernst&Young) with fees of billion pounds each year who do the job of designing and implementing the tax evasion schemes for their corporate clients.

The Tax Justice Network has identified 80 offshore secret tax havens where at least $21 to $32 trillion (tax free) has been invested as on 2010. This is an estimate of financial assets alone. If non financial assets such as real estate, gold bars, luxury yachts owned by offshore entities (concealing the real owners) the figure shoots up considerably. [ii]

But what are Tax havens? What is their attraction for tax dodgers?

While academics provide arcane definitions of Tax havens, it is not necessary to wade through them. A simple rule of the thumb would be adequate to spot tax havens. Firstly, they offer secrecy, which helps tax dodgers to conceal their identity and source of their untaxed income or wealth. There is also the added attraction of Tax havens which are small sovereign states not cooperating with any tax inquires from other nations or exchange any information about tax evasion. The secrecy protection is fortified by criminal penalties such as imprisonment for employees who leak out secrets. In some Tax havens whistleblowers end up dead with their body stuffed in the boot of an abandoned car. Secondly, Tax havens offer very low or zero taxes for non-residents. This feature is especially attractive for the pinstripe mafia (the big four accountancy firms) to structure tax evasion schemes for their well heeled clients. And lastly, Tax havens have the financial sector disportionately bigger than their local economy. Using this yardstick, the IMF fingered the City of London as one of the biggest centers of offshore money laundering. [iii]

The 80 odd secrecy jurisdictions or Tax havens have spheres of influence or control and they fall into 3 groups. The first and the biggest group is the UK based City of London which controls a satellite of tax havens located in Crown Dependencies (Jersey, Guernsey and the Isle of Man) overseas territories (Cayman Island), Pacific atolls, Singapore and Hong Kong. The second group is European Tax Havens centered on Switzerland, Geneva, Liechtenstein, Monaco, Luxembourg and Netherlands. The third group is USA which controls Manhattan, Florida, Panama, smaller states of Wyoming, Delaware and Nevada, American Virgin Islands, and Marshall Islands to name a few. [iv]

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Perhaps, the most apt metaphor to describe the secrecy jurisdictions that dot the global economy is that of a spider which produces sticky webs of silk threads to trap flies for food. The tax havens, like the spider's web, catch cross border flows of global dirty money. At the top of the chart is abusive and fraudulent transfer pricing techniques which account for 60-65% of illicit global money transfers which amounts to anywhere between $600 billion to $1 trillion annually. The illicit proceeds of criminal activity, like drug trafficking, human trafficking, counterfeiting, contraband and terrorist funding amounts to 30-35% or $300 to $550 billion annually. The proceeds from bribery and theft by government officials account for a mere 3% of the illicit global flow into Tax Havens. [v]

The sad irony is that corruption of government officials which is peanuts in terms of percentage in global illicit flows has received the greatest media notice while the more significant scam of fraudulent transfer pricing has been pushed under the rug.

A documentary film, 'We are not broke,' makes the shocking disclosure that giant corporations like GE, even after earning $26 billion profit during the years 2005 to 2010, paid zero federal Income tax. Bank of America, after posting a profit of $4.4 billion and receiving a bailout of $1 trillion, paid zilch taxes. Oil giants EXXON and CHEVRON earning in the year 2009 profits of $19 billion and $10 billion respectively paid zero Federal income tax. One of the biggest banks in America Citigroup, after posting a profit of $ 4 billion and receiving a bailout of $2.5 trillion, paid nothing to the US treasury.

One of the compelling reasons for giant corporations to declare zero tax or pay low tax in countries where tax rates are more is the presence of offshore Tax Havens. Here shell companies or mailbox companies are established for the purpose of aggressive tax evasion. In an elaborate charade called transfer pricing, corporations, with their army of accountants and lawyers, create a maze of shell companies (i.e. companies which have no real business activity) in Tax Havens which have secrecy laws concealing the ownership and the source of the funds. The tax strategy is fairly simple: book the profits in shell companies located in tax havens having low or nil rates of tax and show reduced or better still zero earnings in countries which have higher rates of tax. The technique? Misinvoicing the trade transactions. In other words, under invoice the value of exports to the entity located in a tax haven which in turn exports at the full value. The difference is deposited in an offshore account. A variation to the theme would be to over invoice goods sold to the exporter. The difference between inflated value of imports and the true value of imports is deposited in an offshore account for the importer. Keeping in mind that approximately 60% of global trade is conducted within multinational corporations (MNCs), between subsidiaries of a parent company, the transfer pricing route is the most popular vehicle for tax evasion for MNC's. [vi]

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C R Sridhar is a lawyer from Bangalore,India.He writes for the Economic and Political Weekly and has contributed to the Monthly Review.He's a fan of music,movies and websites with alternative views.His writings are available at

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