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“We don’t pay taxes. Only the
little people pay taxes.” Leona Helmsley
The motto of the ineffable
billionairess came to mind with the publication of the Panama Papers. This huge
set of files leaked from a Panamanian law firm, Mossack Fonseca, documented the
tax haven dealings of the world’s richer denizens. While the law firm’s name
sounds like a toxic cocktail, the information revealed in its files has also
been toxic for Iceland’s Prime Minister Gunnlaugsson, who had to resign. So
far, there have been no other scalps, but there have been sleepless nights for
many and plenty of work for their PR companies.
I would venture to predict that
there will be no more casualties from the revelations. Although there will
doubtless be more expressions of anger from those who believe an influx of
previously elusive tax revenues into the national pot might cushion the iron
heel of austerity, this elaborate tax haven-offshore network is entrenched in a
capitalist system that most critics do not venture to criticise.
Avoidance and evasion
There is an important
distinction, of which many people are unaware, between tax ‘avoidance’ and tax
‘evasion’. Tax avoidance is legal; it just means you arrange your affairs in a
way that lowers how much tax you have to pay. However, that also includes
putting money in a tax haven, having your revenues accounted for there, and
paying their lower tax levels. Evasion, on the other hand, is illegal.
It involves not paying the taxes due to the authority in the relevant
jurisdiction, for example, not declaring that you have an income to the
government and so not paying the tax on it. The distinction between avoidance
and evasion can be complicated. Making sure you have the correct set up
involves expensive advice, afforded only by the rich, and this is a source of
income for tax lawyers like Mossack Fonseca. But this is not the only rationale
for the existence of tax havens.
Tax havens rose to prominence
largely in the post-1945 period, when income taxes in major countries were
often very high for the rich. Havens offered lower rates of tax and, as a
result, a flood of rich people from around the world began to park their
financial assets, and the income flowing to them, in these welcoming climes,
even if they did not move there themselves. This was often done by setting up
shell companies that owned the assets. Directors of the shell companies may
have been residents of the particular haven, but they were usually acting on
instructions from the real owners of the assets and recipients of the income.
It was not long before capitalist corporations began to see how they could also
play the game, for example, by channelling revenues from the rest of the group
that appeared as their ‘costs’ paid into a special company set up in a haven
where little or no tax is paid. The subsidiaries doing the channelling could
then argue that their ‘costs’ meant they earned little or no profit in the
higher-taxed countries in which they were based.
These havens were not
necessarily islands or ‘offshore’. Although many were islands, since this was a
way for a one-dimensional economy to branch out, when it was otherwise
dependent upon seasonal tourism or a single crop or mineral, there was also
Monaco, Andorra and Luxembourg in the heart of Europe, plus Ireland and others,
including Delaware in the US. In Switzerland, for example, the tiny lakeside
canton of Zug is reputed to host 27,000 companies, about one for every four
inhabitants! No, Swiss people do not have an unusually high degree of
entrepreneurial spirit; this was many foreign people and companies taking
advantage of local tax laws. The havens get important revenues – from financial
fees paid to the local government, as money paid in the employment of locals
who would be ‘directors’ of these companies, and in other ways, including the
business generated by a rich elite who might like to go shopping, sail in a
yacht or stay in a nice hotel.
Rich people, but powerful companies
Essentially, tax havens are a
commonly used release valve for the burden on the revenues of rich people, and
companies, from the costs of maintaining the state and public services financed
from taxation. In more recent decades, especially from the 1980s as
international financial flows became less regulated by the key powers, these
offshore and other centres grew dramatically in size, attracting vast volumes
of funds. In 2004, when the US Congress passed a Homeland Investment Act that
gave corporations a tax break if they repatriated funds held overseas, nearly a
thousand US companies later repatriated more than $300bn of cash! This is one
indication that the individuals named in the Panama papers are really a side
issue: big corporations are the main holders of the international funds.
Ironically, Panama, at the
centre of the latest revelations is a relatively small-scale offshore centre. A
good measure of size is given by the volume of funds going into and out from
these centres. Panama, with $106bn of funds outstanding in 2015, is less than a
twentieth of the size of the largest one, the Cayman Islands, which has
$2,610bn of liabilities plus claims. This stupendous sum for the Caymans is
made up from roughly $1,300bn coming in as liabilities (or deposits and other
lending from overseas) and $1,300bn going out as claims (or loans and other
investments outside the Caymans). This reflects the fact that the money is
doing more or less nothing in the Caymans itself – apart from the hotel and
shopping bills and paying some fees to the government and a small proportion of
the population of less than 60,000 people. As you might expect, the locals do
not actually own the $800bn or so of US equities and bonds that are registered
in the name of Cayman Island corporate entities.
Another interesting detail of
the Cayman Islands is that this is the main offshore location to which the UK
banking system sends a net volume of funds, amounting to $53bn at the
end of 2015. While the UK-based banking system obtains around a net $100bn from
its own local offshore islands – Jersey and Guernsey, especially – it also
plays a big part in redirecting funds to other locations. A theme song of the
movie Cabaret, ‘Money makes the world go around’, very much applies to
the role that tax havens/offshore centres play in the global capitalist system.
The UK-based banking system is at the core of this international network and,
not surprisingly, the UK economy accrues big revenues from doing the in/out
deals involved.
God Save the Queen
The location of the Cayman
Islands in the Caribbean Sea might make one think that they have little or
nothing to do with far away Britain. Nevertheless, at official occasions they
sing ‘God Save the Queen’, although, as far as I am aware, it is not a widely
downloaded itunes song and has never won any music awards. The reason is that
the Caymans, while not technically being part of UK territory, are given a
special status by the UK authorities as a British Overseas Territory.
Similarly, other offshore islands are members of the British Commonwealth (the
Bahamas) or are British Crown Dependencies.
UK officials do not like to talk
about them very much and, at most, only propose measures that would have little
effect on the tax avoidance/evasion taking place, such as calling for a
‘central register’ of who owns the more than two million companies and
partnerships registered in these havens. The proposal is not expected to make
much difference. The UK has been heavily involved in establishing this
financial network. UK-linked havens, particularly the Cayman Islands,
the Bahamas, Jersey, Guernsey and the Isle of Man, not only sing the same
national anthem, if added together they would rank as the sixth largest
international banking centre, just behind Germany, despite their minuscule
populations. Why should the UK bother to do anything about this, when the US
and many other European countries are also involved in the same kinds of deals,
and when all the capitalists benefit?
All offshore centres are closely
linked to the interests of the major capitalist powers. Britain has the closest
links with the largest number. My experience of working for London-based banks
included several business trips to Jersey, and some contact with other centres.
When it comes to hanging out as a member of the rich elite, Jersey has some way
to go in competing with the ‘offshore’ centres in the Caribbean and Central
America. Nevertheless, like other centres, it plays an important role in
allowing the capitalist class to do what it likes. Such is the exercise of
their freedom. They have been free to exploit the working class worldwide.
Surely they should also be free to do what they want with the proceeds?
Who are you?
Another feature of these havens
is that the identity of who owns the funds is usually hidden. Interestingly,
that is not necessarily to avoid tax. For example, one of the individuals cited
in the Panama Papers is King Salman of Saudi Arabia. Presumably, he has no
reason to avoid taxes set by the rules of the government he controls. The
rationale here was instead to use the offshore accounts as a means of hiding
the fact that a Saudi-owned company was doing a particular investment. So ABC
Corp registered in Offshore Island X, but owned by the ruling Saudi family,
would be a shareholder in a major US, European, or Asian, etc, corporation, but
nobody would be any the wiser.
The publication of the Panama
Papers has been amusing for the embarrassment they have caused to usurpers of
wealth, in particular to those whose hypocrisy is shown by their former public
pose. But little or nothing should be expected to change in society if people
are critical only of individual excesses, and not of the more systematic
crushing of the life chances of those oppressed by capitalism, in which tax
dodging is a relatively minor issue.
Tony Norfield, 4 May 2016
* This article puts in a broader context some points made previously on this blog. A copy of this article first appeared in the
New York journal, BrooklynRail, in the Fieldnotes section. Further
details of the role of tax havens in the international financial system are given
in my new book, The City: London and the Global Power of Finance.
