Monday, April 20, 2009

Tax Havens Hamper Development in Poor Countries

According to the Boston Consulting Group, an estimated $7.3 trillion is stashed in offshore financial centers around the world, places such as the Cayman Islands, Switzerland, and Monaco, by corporations and wealthy individuals seeking to lower their tax burdens.

"Tax havens have a bigger impact on developing countries than on developed countries," Jeffrey Owens, director of the Centre for Tax Policy Administration at the Organization for Economic Cooperation and Development (OECD), recently told Reuters, claiming that tax drainage to havens was equal to 7 or 8 percent of the gross domestic product of the African continent. A 2008 Christian Aid report put it in even starker terms, claiming that because revenues that could be used for healthcare and education are lost to havens, nearly 1,000 children in the developing world die each day as a result of trade-related tax evasion.

"We consider [the capital lost to tax havens] the most damaging economic condition hurting the poor," says Raymond Baker, director of the Global Financial Integrity Program at the Center for International Policy. "Nothing hurts developing countries more. It is a permanent outflow ... and leaves poverty in its wake."

That tax evasion can happen in several different ways. In some cases, proceeds from outright illegal activities - human trafficking, drug running, and fraud - are hidden offshore. In other cases, corrupt officials use tax havens as a way to conceal their earnings from bribes and illegal activities. And finally, multinational companies are able to dodge the taxman through "transfer pricing," moving profits around the world to tax-friendlier jurisdictions.

According to the World Bank, illicit flows of cash from developing economies amount to between $500-$800 billion a year, of which around 60 percent is commercial tax evasion.

via News Hour


Audacious Epigone said...

Tax havens are the inevitable consequence of income tax systems. Consumption (sales) taxes defeat their purpose.

Fat Knowledge said...

Interesting point. I would guess there would still be corruption leading to money going to tax havens with a consumption tax, but I bet you are right that it would be less than there is currently.

Anthony said...

Tax deferral, tax haven – it’s all the same.
That just isn’t true.

Let’s start with the definition of tax haven:

According to the IRS, a tax haven generally involves “foreign jurisdictions that offer financial secrecy laws in an effort to attract investment from outside their borders." In addition, "Tax haven service providers and their clients know their actions are veiled from tax authorities by banking and commercial secrecy laws and by lack of tax treaties or tax information exchange agreements."

BTW - None of the above applies to the Caymans, where the financial sector operates under full transparency. In fact, the Caymans have comprehensive agreements and treaties in place with both the U.S. (Tax Information Exchange Agreement) and EU (All Crimes Anti-Money Laundering Treaty) that provide complete transparency and prevent tax evasion.

As for tax deferrals, the issue of offshore financial centers and tax deferral laws for U.S. multi-nationals are separate. Tax deferral arises from provisions of U.S. tax law designed to provide a competitive advantage to American companies in global trade. There is nothing covert about this. It is recognized that the extension or repeal of those policies is an internal American tax matter.

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