The much-vaunted secrecy of tax havens the world over is in danger as bailouts, outrage over low or no taxes paid by hugely profitable corporations, and precarious economies—such as that of Cyprus—make headlines.
Leaders from the EU to the U.S. are calling for greater transparency, tighter regulations and an end to tax evasion by multinational corporations and the high-net-worth. While the jury is still out on whether, and how much, change will come, one thing is certain: tax havens have become a much more open secret. That in itself could bring change in many areas—from taxation to earnings to business practices and even politics.
In 50 to 60 such locations in the world, corporations and individuals have sheltered what is estimated to be $8 trillion to $20 trillion; since there is such a shroud of secrecy over who owns how much, the actual amount is unknown. The EU estimated this April that it loses as much as a trillion euros per year to tax evasion. That by itself is enough to fund the complete bailouts of Greece, Ireland, Portugal and Cyprus twice over, and still have 200 billion euros left. Or, to put it another way, 1 trillion euros is equal to Spain’s annual economic output.
Dr. Eric Toder, co-director of the Urban Institute-Brookings Institution Tax Policy Center, said that there were two kinds of secrecy at issue in the current climate: “One conceals tax avoidance is a big concern about people who might be using secret accounts to conceal drug dealings or other [illicit activities],” he said.
With businesses trying to book their income in countries with the lowest tax rates and most advantageous laws, there is “public disquiet” about the effects of such activities as governments look for ways to bring in additional income to offset losses from the global economic slowdown.
That disquiet is making itself known in a number of ways, including a movement to rein in tax havens. An online petition launched in Europe seeks a “truth commission” to investigate corruption and tax evasion in Switzerland, as well as criminal action against officials and politicians who have salted money away in tax havens. The EU is discussing calls from various member states for those absent tax euros to help finance economies hurting in the wake of the financial crisis. And the U.S. has already taken action, both through investigations of financial misdeeds and the Foreign Account Tax Compliance Act (FATCA).
However, with corporations—and many politicians on both sides of the world—firmly on the other side of the issue, just how much can be done remains to be seen. The U.S., though, in March asked Liechtenstein for information on Americans with financial ties there, and it has already brought Switzerland to heel through its pursuit of American tax evaders. Switzerland’s oldest bank, Wegelin, ended a 272-year history earlier in the year when it succumbed to that pursuit. Now Switzerland is working to negotiate a settlement with the U.S. for the rest of its banks, but that’s not the only issue for the Swiss. A distaste has developed for some of the companies that use Switzerland as a means of evading higher taxes in other jurisdictions.