Tax Havens under Attack

Management Today, March 3, 2009 | Go to article overview

Tax Havens under Attack


Governments, cash-strapped as never before, are looking to claw back billions in unpaid tax from offshore regimes that hide away secret fortunes. Public opinion may be in favour, but are they justified in doing so, and is it necessarily in their interests?

So far, 2009 is looking like a bad year to be a tax cheat. On 26 January, former Deutsche Post boss Klaus Zumwinkel was found guilty of dodging EUR966,000 in unpaid taxes - and fined EUR1m. Zumwinkel, and hundreds of other German bigwigs, had been hiding money in LGT, a secretive bank in Liechtenstein. But they hadn't reckoned on the German intelligence service paying an LGT whistleblower a reported EUR4.5m to hand over a computer disk full of client details. To date, this operation has already yielded EUR150m in extra tax revenues - so it's no wonder the British government quickly swallowed its scruples and bought the CD too. The Liechtenstein row has also scuppered the public-service career of banker Glen Moreno, tipped as the permanent chair of the body that manages the UK government's bank investments - until he was found to be an LGT trustee.

Meanwhile, on the other side of the Atlantic, Swiss bank UBS has been accused by the US tax authorities of running a scam that helped wealthy Americans squirrel away up to dollars 18bn in offshore accounts. Raoul Weil, the bank's former head of wealth management, has been declared a 'fugitive from justice'; Bradley Birkenfeld, the private banker whose devotion to his billionaire clients was such that he smuggled diamonds into the country in his toothpaste, is behind bars after agreeing to testify in exchange for a lighter prison sentence. For the bank's wealth business, the scandal has been disastrous. Nervy clients withdrew about dollars 105bn in funds last year, and it could even lose its US banking licence.

With tax issues so high on the international agenda, tax havens have been dragged out of the shadows and into the firing-line. These (often tiny) countries stand accused of oiling the wheels of international tax evasion by helping individuals and companies hide their taxable income and assets away from the relevant authorities. As a result, those of us who can't afford this privilege have to make up the shortfall in tax revenues - which, according to one pressure group, Tax Justice Network, adds up to a whopping dollars 255bn a year worldwide.

A few years ago, this whole issue might have attracted less attention. When times were good, we could, like Peter Mandelson, afford to be 'intensely relaxed about people getting filthy rich'. But now that the financial sector has brought the world economy to its knees, the public mood has changed violently - bankers such as ex-Lehman boss Dick Fuld have become public hate figures, castigated for their avarice and overweening ambition. The wealthy elite will no longer be allowed to get away with flagrant abuse of the rules for their own gain, and tax havens are seen as one of their main instruments. Back in 2006, a Grant Thornton study suggested that they helped Britain's richest people pay just pounds 75m tax on their combined pounds 126bn fortune.

And governments have never needed those tax revenues more. Every big country in the world is spending money like a drunken sailor on shore leave in the fight against recession, and they'll be able to pay off these mounting debts only by ramping up the tax take. Consultancy BCG estimates that there's dollars 6trn of undeclared money sloshing around the world, much of it in tax havens - and cash-strapped politicians are naturally keen to get their hands on it.

'Governments need to raise revenues at a time when they can't raise taxes,' says Philip Marcovici, an international taxation partner at law firm Baker McKenzie. 'So they need to find money from somewhere, and one possible place is the world of undeclared money.'

But this issue hasn't sprung up overnight. 'In the last 10 years we have begun to see this focus on leakage of tax gathering momentum,' says Andrew Watt, a managing director at law firm Alvarez & Marsal Taxand. …

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