GLOBALIZATION AND GREAT BRITAIN – DEMYSTIFYING THEIR ROLES IN NURTURING OFFSHORE BANKING SECRECY AND TAX HAVEN

Definition – A Tough Hoe to Row

Offshore banking secrecy, Offshore Financial centres, Judicial Secrecy, Tax Havens, and many more, these all are synonyms of “artificial movement of money to evade jurisdiction or rules and regulation of a particular country” or “artificially manipulating paper trails of money across borders”. It is very difficult to have a uniform and straight definition which encapsulates almost all the features because it has gradually evolved. In truth Tax Haven or Offshore Banking Secrecy is a bit of misnomer, it is an escape route not just from taxes but from many other rules and regulation too. Offshore Banking Secrecy has existed since the early twentieth century, and was used primarily but not exclusively to evade and avoid taxes. They served other purposes as well, including money laundering and capital flight, and offered stringent secrecy provisions, which proved attractive to couples seeking to avoid punitive divorce settlements.[1]

However, Richard Murphy has tried to put things into perspective: Secrecy jurisdictions or tax Havens are places that intentionally create regulation for the primary benefit and use of people and legal entities not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that the people from outside the jurisdiction making use of its regulation cannot be identified.[2]

There cannot be any universally accepted definition. The difficulty in offering such definition is twofold: First, there are majority of states which offers financial incentives, which includes reduction in taxes and removal of red tape, to various sectors and industries to boost their economy; described in academic jargon as Preferential Tax Regimes (PTR). PTR can create a situation where it can act as potential haven from the taxation of some other countries for instance it may offer substantially low taxes on manufacturing to attract mobile capital. There is no line which can clearly demarcate between aggressive PTR and Tax Haven. Second, the secrecy provided by the various countries on the grounds ranging from national interest to social interest. Under the guise of national interest and commercial interest, many countries facilitate tax evasion

Globalization – A catalyst

Globalization, indeed, has opened various avenues for the investment. On one hand it has opened the doors for capital influx and on another it has also opened the door for capital outflow. Transfer pricing or mispricing, Capital flight, etc is a concomitant of that and used as a special purpose vehicle for tax avoidance and tax evasion. Capital no longer flows simply to where it gets the best return but to where it can secure the best tax subsidies, the deepest secrecy, and to where it can most effectively evade the laws, rules, and regulations it does not like.[3]

Amartya Sen is most articulate on these issues. He speaks of “. . . the general process of globalization, from which there is no escape and no great reason to seek escape.” “What is needed is a fairer distribution of the fruits of globalization. The central issue is inequality. The principal challenge relates to inequality—between as well as within nations. The basic concerns relate to the massive levels of inequality and poverty—not whether they are also increasing at the margin.”[4]

J.M Keynes – a British Economist who suggested government intervention as a solution to Great economic Depression, 1929 – understood the basic tension between democracy and free capital movements. In a world of free capital flows, if you try to lower interest rates, say, to boost struggling local industries, capital is likely to rain out overseas in search of higher returns, thwarting your original intent.[5] Capital controls were necessary to permit domestic autonomy, so that wealth could not seek out better interest terms in other economies; the concern over capital flight is a complementary but different perspective.[6]

In 2009 the IMF published a detailed report explaining how tax havens, combined with distortions in onshore tax systems, cranked up the global debt engine by encouraging firms to borrow rather than finance themselves out of equity. The availability of low rates on capital income in some jurisdictions creates opportunities for tax arbitrage, including through high leverage—leading to further opaqueness of financial arrangements. The exemption of foreign profits — either permanently or until repatriation—creates an incentive to lend from low tax jurisdictions to high (taking interest deductions at a high rate and paying tax at a low rate)—making debt finance in high-tax countries even more attractive.[7] The core principles the IMF outlined are simple. A corporation borrows money from offshore, then pays interest on that loan back to the offshore financing company. It then uses the old transfer pricing trick: the profits are offshore, where they avoid tax, and the costs (the interest payments) are onshore, where they are deducted against tax.[8] Clear and unambiguous evidence showed that secrecy jurisdictions create what might in economic terms be called an “artificial factor of production.” The structures they permit are intended for use solely or mainly by non-residents in order to undermine the regulation of the state in which the beneficial owner resides— and this is possible only because tax havens offer legally enforced secrecy so that other states, whose regulations are undermined, cannot identify what is happening or who is doing it.

In October 2010 a Bloomberg reporter explained how Google Inc. cut its taxes by $3.1 billion in the previous three years through transfer pricing games known by names such as the “Double Irish” and “Dutch Sandwich,” ending up with an overseas tax rate of 2.4 percent.[9] The problem is getting worse. Microsoft’s tax bill has been falling sharply, for similar reasons.[10] They are all at it. Transfer pricing alone cost the United States an estimated $60 billion a year[11]—and that is just one form of the offshore tax game. In February 2010 the

IMF issued a paper[12] outlining what would have been considered heresy just a few years earlier, arguing that capital controls are sometimes “justified as part of the policy toolkit”[13] for an economy seeking to deal with surging inflows. Very often countries can, as Keynes believed, get along perfectly well with their own domestic credit systems and localized capital markets, without exposing themselves to the killer seas of global offshore finance.

The war of financial dominance has aggravated, the countries are quietly locked in a titanic struggle for financial dominance. Each country is lowering its taxes to lure more and more companies to land up on their shores. The Secrecy jurisdictions have been the heart of globalization from the beginning. Capital is not only free to flow across borders but is actively and artificially encouraged to flow, lured by Offshore Banking Secerecy. Multinational companies are growing because they’re multinational, they know where to trade and where to transact – squeeze them at the producer end, squeeze them at consumer end and push all the profits into middle (to the offshore) - this is the formula which underlines the functioning of MNCs today and this is how globalization has played a significant role.

Great Britain – Secrecy a new way to built overseas empire

As the Bretton Woods system that Keynes helped design got properly under way after the Second World War,[14] Wall Street was tied down at home with domestic regulations, many dating from the Great Depression. Financial flows across borders were constrained, taxes were high, and the U.S. economy was growing very nicely indeed. Across the country working people were buying refrigerators, televisions, and new cars for the first time. Wall Street bankers wanted an escape route. They found it in a new offshore market in the City of London, the financial district at the geographical centre of the greater London metropolis. Nobody quite agrees when this new strain of offshore activity first emerged, but it was probably first spotted by a financial regulatory authority in June 1955 when staffers at the Bank of England, the UK’s central bank, noticed some odd trades going on at Midland Bank, now part of the globetrotting HSBC.[15]  British Empire started crumbling after the Second World War, several countries revolted against the British Empire and gained Independence. Subsequently it marked the end of British Empire as world power. Sterling started to sink, British authorities raised interest rates and applied new curbs on overseas lending to protect the pound. But the London banks, having noticed that the Bank of England had decided not to stop Midland’s trades, sidestepped the new curbs by shifting their international lending away from sterling and into dollars, in this new market. The Bank of England not only did not stop Midland’s trades, but it actively decided not to regulate the market either. It simply deemed the transactions not to have taken place in the UK for regulatory purposes. Since this trading happened inside British sovereign space, no other regulatory authority elsewhere was allowed to reach in and regulate it, either.

The new unregulated Euro market that emerged amid the dust and fire of Suez would grow explosively and become nothing less than the heart of a new British financial empire cantered on the City of London. It would raise the City to even greater financial glories, provide a new playground for U.S. banks, and prove the key to resurrecting an old alliance between the City of London and Wall Street, helping each other to break the grip of their governments at home and restore them to their full powers.[16] As the imperial basis of its strength disappeared, the City survived by transforming itself into an ‘offshore island’ servicing the business created by the industrial and commercial growth of much more dynamic partners.[17]

Conclusion

 “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”[18] But the financial system is vastly more dangerous and pervasive now. Changes to domestic banking regulations matter but will never suffice. Reform must be based on a thorough grasp of the new, globalized reality—and anyone who wants to understand the modern financial machine must understand what tax havens are and how they work. Taxation is one of the ways of equitable distribution of wealth; it enables the government to facilitate citizens the requisite infrastructure, necessary for their upliftment. If a corporation is evading or avoiding taxes, it clearly means someone else is paying for them. Generally, the developing countries bear the brunt of offshore banking secrecy, they open their gates for more and more investment but ultimately become the victim of capital flight and mispricing, which impedes the economic development of the country.

There is dire need of transparency; Multinational corporations siphoning their money to the tax haven must be compelled to divulge all the information. If a person in one country owns an income-generating asset in another country, his or her tax authorities need to know about it. There should be an automatic information exchange treaty or Bilateral understanding to share the relevant information.

The attention must be focussed towards developing countries; there is need of stringent on -shore laws where the manipulation and manoeuvring in the name of aid and debt can be curbed.

The third big change should be confrontation of British Spiderweb, one of the major hubs of offshore banking secrecy. The need of the hour is to raise a collective voice against the tax havens floating around the city of London and that must be submerged.

The Off Shore Banking Secrecy is undermining a de jure government and hallowing the tax base. There are various luxuries which have been provided to corporate houses like limited liability, separate legal entity which not only remain intact but also getting enhanced but their obligations have withered. When we start to make corporations feel they are accountable not only to shareholders but to societies too, a whole new area will be created in which the offshore system can be questioned and challenged.

[1] Zucman, Gabriel, Hidden Wealth of Nations - the Scourge of Tax Havens, 23-24, The University Of Chicago Press, 2016

[2] Richard Murphy, John Christnen, Tax us if you can, Tax justice Network, (2012) https://www.taxjustice.net/cms/upload/pdf/TUIYC_2012_FINAL.pdf

[3] Richard Shaxason, Treasure Islands: Tax Havens and the Men who Stole the World, 39- 40( Random House 2016)

[4] Amartya Sen, “If It’s Fair, It’s Good: 10 Truths about Globalization,” International Herald Tribune, (July 14, 2001) https://www.iht.com/.

[5] Robert Skidelsky, John Maynard Keynes: Fighting for Freedom, 1937–1946 (New York: Penguin, 2000).

[6] Geoff Tily, “The Policy Implications of the General Theory,” Real-World Economics Review, no. 50 (2009): 16–33

[7] “Debt Bias and Other Distortions: Crisis-Related Issues in Tax Policy,” IMF Fiscal Affairs Department, (June 12, 2009). https://www.imf.org/external/np/pp/eng/2009/061209.pdf

[8] William Brittain – Catlin, Offshore : The Dark Side of global economy, Picador, 49-51 (1st Ed. June 13, 2006)

[9] Jesse Drucker, Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes, https://www.bloomberg.com/news/articles/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes ; Edward D Kleinbard, Stateless Income’s Challenge to Tax Policy, https://www.taxhistory.org/www/features.nsf/Articles/67BEF665EC348BE985257E1A0062230D?OpenDocument

[10] Sullivan, Martin A. “Microsoft Moving Profits, Not Jobs, Out of the U.S.” News and Analysis Tax Notes, (Oct. 18, 2010). https://taxprof.typepad.com/files/129tn0271.pdf

[11] John W. Diamond, “International Tax Avoidance and Evasion,” National Tax Journal, (December 1, 2009).

[12] Jonathan Ostry, Atish Ghosh, Karl Habermeier, Marcos Chamon, Mahvash Qureshi, and Dennis B. S. Reinhardt, Capital inflows: the Role of Controls, IMF Staff Position Note, (Feb.19,2010). https://www.imf.org/external/pubs/ft/spn/2010/spn1004.pdf

[13] Ibid

[14] Supra Note 5 at 338-339

[15] Catherine R. Schenk, “The Origins of the Eurodollar Market in London: 1955–1963,” Explorations in Economic History 35, no. 2 (1998): 221–238.

[16] Eric Helliner, States and the Re emergence of Global Finance, Cornell University Press (Apr.11, 1996)

[17] P. J. Cain and A. G. Hopkins, British Imperialism: Crisis and Deconstruction 1914–1990 (London: Longman, 1993),

[18]John Maynard Keynes, The great slump of 1930, Signalman Publishing (January 28, 2009)