The Tax Justice Network published its Financial Secrecy Index 2020 on Tuesday.
To recap, financial secrecy is a ‘sanctioned’ way of refusing to share financial information with legitimate authorities such as those involved in tax and law enforcement.
It facilitates the flow of corrupt money through opaque structures, thereby enabling ill-gotten gains to be hidden. It also makes it possible for corporations and wealthy individuals to avoid taxes.
Jurisdictions that sanction financial secrecy have many names – tax havens, tax-friendly countries, financial centres, tax shelters and so on.
Some purport to have developed special expertise (for example, in insurance) in an attempt to legitimise their activities.
These jurisdictions attract the brightest specialists (bankers, lawyers, accountants). And they deal in billions.
The key to any opaque structure is anonymity, where it is impossible to determine the identity of the beneficial owner of a company (or trust or foundation) or its beneficiaries.
Other common denominators of jurisdictions that offer financial secrecy include:
- The easy registration of shell companies;
- Lower taxes on companies that operate outside of the jurisdiction;
- Access to a wide double taxation treaty network; and
- Lax regulatory requirements (such as audited annual financial statements).
Islands have generally been in the spotlight for facilitating tax avoidance and other murky activities. The Cayman Islands is one example. Panama, also in the spotlight recently, confused many as it is a narrow isthmus of land with surrounding islands.
But many of the big players in this opaque world of secrecy are so-called first-world countries and, in fact, prominent members of the Organisation for Economic Co-operation and Development (OECD).
The OECD has however been spearheading the international drive to tackle tax avoidance by, inter alia:
- Issuing guidelines (such as the transfer pricing guidelines);
- Its base erosion and profit shifting (Beps) initiative;
- Introducing country-by-country reporting;
- Driving the automatic exchange of tax information standard; and
- The most recent Global Anti-Base Erosion (GloBE) initiative.
The OECD reports to the G20 finance ministers on the progress made in combatting international tax avoidance as well as proposed international tax reforms that will be suggested to its member states.
The OECD dropped the term tax haven some years ago in favour of the bland ‘non-cooperative jurisdiction’.
It is possible to be a member of the OECD and not adopt any of its proposals. The only prerequisite for belonging is the ability to pay the hefty membership fee.
According to the 2020 Financial Secrecy Index (FSI) , the top purveyors of financial secrecy in 2019 were:
- The Cayman Islands
- The US
- Hong Kong
- The Netherlands
- The British Virgin Islands, and
- The United Arab Emirates (UAE).
In 2018, Switzerland, the US and the Cayman Islands topped the index.
Is it significant that the US, Switzerland, Luxembourg, Japan, and the Netherlands are members of the OECD? And that the US and Japan are also members of the G20?
Is this why the OECD no longer publishes a list of tax havens?
With the US harbouring tax-haven states such as Delaware, Nevada and Wyoming – as well as gambling jurisdictions known for money laundering such as Miami, Nevada and Arizona – perhaps it is unsurprising that it is at number two on the index. Is it significant that the US refuses to take part in the OECD initiative of automatic exchange of tax information with other countries?
What is significant is that Africa cannot swim alone against a tide powered by some of the most financially powerful countries in the world, and their many overpaid enablers of secrecy, corruption and tax avoidance.
Having sight of the list of jurisdictions that rank high on the secrecy index is alarming.
And when there are leaks of information from those jurisdictions, the process of unravelling the complex labyrinth of structures, unpacking the evidence, and turning it into a fiscal amount is laborious, time-consuming, and requires expensive specialist skills.
Organisations such as the OECD should demonstrate their commitment to tackling financial secrecy by taking a stand – and that means going up against powerful members. The G20 should do likewise.
* Barbara Curson has represented the South African Revenue Service at many international forums, including the Commonwealth Association of Tax Administrators, Brics, the Ibsa (India, Brazil, South Africa) Dialogue Forum, the OECD (tax avoidance working party and Beps focus groups), and the Joint International Tax Shelter Information Centre.