Fault lines

On 2 April the leaders of the G20, the world’s most powerful nations held a summit in London with the avowed aim of addressing the world economic crisis. One of their main pledges was “to take action against non-cooperative jurisdictions, including tax havens”. The G20 leaders threatened to hit havens with a “toolbox” of “effective counter measures”, including withholding taxes, reviewing tax treaty policy, and putting pressure on development banks and aid programmes.

Although attacking tax havens was by no means the G20’s only measure, the importance world leaders attach to it is indicated by the length of their statement on it: in their “declaration on strengthening the financial system”, it was the second longest of eight statements.

Anti-tax haven rhetoric has also been a common feature of recent statements by US treasury secretary Timothy Geithner, UK prime minister Gordon Brown, German chancellor Angela Merkel and French president Nicolas Sarkozy. At the London summit, Sarkozy reportedly wanted a list of tax havens to be published by the G20 itself, but when China demurred, President Obama brokered a compromise under which the OECD would publish the list and the summit refer to it.

The OECD, in the scramble to get its list published on time, did not initially include the phrase “tax havens” but quickly replaced it by a new version including the controversial phrase (the jurisdictions concerned prefer the phrase “offshore financial centres”). The purpose of publishing the list was clear: to name and shame. Some jurisdictions on the list have complained that they were given no notice of their unwelcome inclusion.

Of course, the truth is that offshore financial centres had very little to do with the world economic crisis. The financial crisis was not caused offshore. It was caused by speculation by banks and investors onshore: in New York, London, Paris and Frankfurt – the financial centres of the G20 nations. However, politicians enjoy having someone else to blame, and they like it especially well if that someone is weaker and smaller than they are. The offshore financial centre nations, generally small island territories, have become scapegoats.

Every government has a right to set its own fiscal policy. The presence of low tax regimes in the world economy has the beneficial effect of helping to keep taxes down. The reinsurance industry in Bermuda (one of the jurisdictions named and shamed) is vital to the world insurance industry, and has protected the US from property catastrophe losses for many years. Bermuda may be moved off the OECD’s list soon, however. In April, Bermuda signed Tax Information Exchanging Agreements (TIEA) with seven Nordic countries and New Zealand; a further TIEA with Germany is expected which will bring the total to 12, the magic number required by the OECD. The OECD indicates that it will update its list as jurisdictions fulfill its criterion.

The politicians’ dislike of offshore finance predates the financial crisis. President Obama, his chief of staff, Rahm Emanuel, and his chief economic adviser, Lawrence Summers, have all been long-standing critics of tax havens. The financial crisis has given them the excuse they need. And of course they need the cash. The US Treasury Department is desperate to find revenue wherever it can to pay the mounting bill for the economic crisis. The US government is estimated to be spending and lending about $10trn on bailout and economic stimulus programmes. The warning is clear: over the next few years, expect tough US legislation against offshore financial centres.