Sunday, 3 April 2011

Tax Paradises and Offshore Shenanigans

The author has undertaken a big task with this book. But the task is well worthy of examination as it is so vital to the shadowy infrastructure of the global financial system. To use the term that the author himself uses throughout the book - the role of "offshore" in finance - has been hugely overlooked in mainstream academic literature on finance and economics and also hardly ever mentioned in the mainstream media.

During the 2007/2008 near meltdown, analysts referred sometimes to the importance of the "shadow banking system" and too often their inability to articulate more exactly what constitutes that system left most people none the wiser as to what was involved and how critical this element is to systemic risk.

Nicholas Shaxson provides an easily digestible overview of the labyrinthine nature of the world of offshore finance and it is, as he suggests, ubiquitous. From its origins in the UK and the development of the euro markets in the 1960's (not to be confused with the EZ single currency - which came much later), he illustrates how the elaborate structures which have been put in place, have enabled wealthy individuals and corporations to avoid - more precisely, evade - massive amounts of taxes in the world's principal tax jurisdictions by concealing much of their net income in tax havens.

The dynamics of regulatory arbitrage are explained well, and as the author suggests the financial services industry and major banks have effectively captured the policy makers in the major economies and spurred them into a race to see which onshore jurisdiction can provide the most favorable cover and opacity to its corporate citizens. The thinking goes that by turning a blind eye and with a nod and a wink here and there, the most favorable climate for offshore tax planning will at least contribute some trickle down benefits to the GDP in the "host" nations. The effort is to try to maintain some concept of domicility with respect to their corporate organizations, rather than lose these entities completely to more business friendly jurisdictions.

The real issue which the author addresses in a slightly indirect manner has to do with the "ethics" of offshore. With public balance sheets in most of the G10 nations in a shambles, and growing complaints from the "little people" in those jurisdictions as to their tax burdens, it seems likely that there can only be greater sympathy with the leading edge of civil protest about the injustice of current taxation arrangements in the world's "richest" (i.e. most indebted) economies. Those who reside and work in their home countries under "normal circumstances" are being required to pay higher taxes, while many of those who, despite have all the benefits of unlimited access to selling into these markets and economic infrastructures but, as a result of numerous shenanigans and schemes designed to dodge taxes, are left essentially untaxed.

One further sentiment which is quite well explained by Shaxson is the extent to which the UK, and the City in London in particular, has been a huge beneficiary of offshore. UK bankers and businessmen were very instrumental in getting it all started in the 1950's and 60's and it was seen partly as a way of preserving Anglo Saxon influence in a post colonial era. The UK still is the preferred haven for the rich and non-domiciled, and this helps to explain why central London has some of the most expensive real estate in the world.

The central question which remains still rather shrouded after reading the book - just like the very financial structures in the treasure islands and places like Switzerland and Luxembourg - is whether there will be any progress made to shine a strong light on to this shadowy world of offshore finance. As policy makers become even more stretched to maintain some credibility to their stewardship of the public finances, the balance may tip in favor of demanding more corporate social responsibility and transparency from their corporate citizens in their accounting systems, organizational frameworks and willingness to pay their "fair share" of taxes.

Having just re-read that last sentence and weighed it against the power of the large banks who just have to drop hints that they may relocate their head offices elsewhere, and the panic induced in the domestic establishments, I somehow think that it is naive to expect that there will be any significant changes in the status quo . The only possibility would be if the citizenry of the principal onshore hosts for tax havens have epiphany moments, admittedly of a different order of magnitude, but in some ways analagous to those now being seen by the "little people" throughout the Middle East and North Africa.

But I am not holding my breath on that happening any time soon.

Treasure Islands: Tax Havens and the Men who Stole the World [Paperback]
Nicholas Shaxson (Author)

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