Tax Havens in the Light of Tax Havens in the Light of the Current Crisisthe Current Crisis

Ronen PalanRonen Palan

• Tax Havens are specialists jurisdictions Tax Havens are specialists jurisdictions offering facilities for tax and regulatory offering facilities for tax and regulatory avoidanceavoidance

• So far the focused of discussion had been So far the focused of discussion had been on tax on tax

• In the light of the current crisis, their role In the light of the current crisis, their role in security regulatory avoidance and in security regulatory avoidance and opacity in the financial system is under opacity in the financial system is under discussion discussion

Tax Havens and EuromarketTax Havens and Euromarket

• The Euromarket, or offshore financial The Euromarket, or offshore financial market, emerges in London in 1957market, emerges in London in 1957

• Certain international financial Certain international financial transaction are ‘unregulated’ or transaction are ‘unregulated’ or ‘deemed’ by the bank England to be ‘deemed’ by the bank England to be taking place elsewhere.taking place elsewhere.

• Transaction between two non-Transaction between two non-residents and in a foreign currencyresidents and in a foreign currency

• By the early 1960s British banks set By the early 1960s British banks set up branches in the Channel Islands, up branches in the Channel Islands, Jersey, Guernsey and Island of ManJersey, Guernsey and Island of Man

• American and Canadians set up American and Canadians set up branches in Cayman Islands, branches in Cayman Islands, Bermuda, BahamasBermuda, Bahamas

• In the 1970s, Luxembourg, In the 1970s, Luxembourg, Switzerland, Benelux. They are Switzerland, Benelux. They are specialists type of financespecialists type of finance

International Financial Centres, International Financial Centres, 20082008• All countriesAll countries $29,164.7 bn$29,164.7 bn % share% share

• 1. 1. UKUK 6,769.36,769.3 23.2 23.2• 2. 2. USUS 3,601.13,601.1 12.3 12.3• 3.3. FranceFrance 2,332.02,332.0 7.9 7.9• 4. 4. Germany Germany 1,768.2 6.01,768.2 6.0• 5.5. CaymansCaymans 1,691.31,691.3 5.8 5.8• 6.6. SwitzerlandSwitzerland 1,413.0 4.81,413.0 4.8• 7.7. NetherlandsNetherlands 1,226.3 4.21,226.3 4.2• 8.8. IrelandIreland 1,218.8 4.21,218.8 4.2• 99 ItalyItaly 1,003.0 3.41,003.0 3.4• 10.10. BelgiumBelgium 938.5 3.2938.5 3.2• 11..11.. JapanJapan 798.8 2.7798.8 2.7• 12.12. SingaporeSingapore 773.5 2.6773.5 2.6• 13.13. LuxembourgLuxembourg 761.5 2.6761.5 2.6• 14. 14. SpainSpain 759.3 2.6759.3 2.6• 15. Hong Kong SAR15. Hong Kong SAR 459.2 1.6459.2 1.6• 16. Bahamas16. Bahamas 436.5 1.5436.5 1.5• 17. Jersey17. Jersey 326.3 1.1326.3 1.1• 18. Canada18. Canada 289.0 0.9289.0 0.9• 19. Portugal19. Portugal 250.5 0.8250.5 0.8• 20. Sweden20. Sweden 242.6 0.8242.6 0.8• 21. Guernsey21. Guernsey 210.1 0.7210.1 0.7• 22 22 BahrainBahrain 205.0 0.7 205.0 0.7

Isle of ManIsle of Man 71.971.9

• OtherOther 140.8140.8 0.5 0.5

Offshore financial centresOffshore financial centres

•• All countriesAll countries $29,164.7 bn$29,164.7 bn % share% share

• CaymansCaymans 1,691.31,691.3 5.8 5.8• SwitzerlandSwitzerland 1,413.0 4.81,413.0 4.8• NetherlandsNetherlands 1,226.3 4.21,226.3 4.2• IrelandIreland 1,218.8 4.21,218.8 4.2• SingaporeSingapore 773.5 2.6773.5 2.6• LuxembourgLuxembourg 761.5 2.6761.5 2.6• BahamasBahamas 436.5 1.5436.5 1.5• JerseyJersey 326.3 1.1326.3 1.1• GuernseyGuernsey 210.1 0.7210.1 0.7• BahrainBahrain 205.0 0.7205.0 0.7• Isle of ManIsle of Man 71.9 71.9 • • Total Total 8334.0 28.5 8334.0 28.5• Source: BIS 2008. Source: BIS 2008.

Tax Havens as Offshore Tax Havens as Offshore Financial CentresFinancial Centres

• Fundamentally ‘booking centres’Fundamentally ‘booking centres’

• Corporation of London, 338,000Corporation of London, 338,000

• London, 1.2 million work in financial London, 1.2 million work in financial servicesservices

• Jersey Jersey 12,00012,000

• Cayman Islands Cayman Islands 5,4005,400

• European havens, Ireland, Benelux, European havens, Ireland, Benelux, to a degree Switzerland are specialist to a degree Switzerland are specialist ‘coordination centres’. Harvesting ‘coordination centres’. Harvesting profits accruing from intangible profits accruing from intangible property, logos, etc. property, logos, etc.

Financial stability and OFCFinancial stability and OFC

• First discussed during the East Asia First discussed during the East Asia financial crisis, 1997financial crisis, 1997

• Conclusion, offshore hedge funds Conclusion, offshore hedge funds accelerated the crisisaccelerated the crisis

• Not much was doneNot much was done

Northern Rock and GraniteNorthern Rock and Granite

• Northern Rock was a UK mutual Northern Rock was a UK mutual building society that was converted building society that was converted into a public limited company in into a public limited company in 19971997

• After demutualization Northern Rock After demutualization Northern Rock became a bank, and in early 2007 became a bank, and in early 2007 became the fifth largest mortgage became the fifth largest mortgage lender in the UK. lender in the UK.

• Distinct from conventional commercial Distinct from conventional commercial banks in that it had a small deposit banks in that it had a small deposit base and relied heavily on wholesale base and relied heavily on wholesale money markets for funding (75%). money markets for funding (75%).

• 2006 accounts show that it raised just 2006 accounts show that it raised just 22% of its funds from retail depositors, 22% of its funds from retail depositors, and at least 46% came from bonds.and at least 46% came from bonds.

SPVSPV

• Bonds issued by Jersey Special Purpose Vehicle Bonds issued by Jersey Special Purpose Vehicle (SPV) called Granite(SPV) called Granite

• Granite was a charitable trustGranite was a charitable trust• The trust never paid a penny to charityThe trust never paid a penny to charity• Granite is legally separated from NR so NR can Granite is legally separated from NR so NR can

get rating from the rating agencies for its get rating from the rating agencies for its structured debtstructured debt

• It was also a way of transferring profits to low tax It was also a way of transferring profits to low tax JerseyJersey

• When NR collapsed, Granite had £50 debt but no When NR collapsed, Granite had £50 debt but no personnelpersonnel

• Northern Rock nationalizedNorthern Rock nationalized• What is the status of Granite?What is the status of Granite?• ‘‘Granite is not owned by Northern Granite is not owned by Northern

Rock; nor will it pass into the hands Rock; nor will it pass into the hands of the public sector’ of the public sector’

Yvette Cooper, chief Yvette Cooper, chief secretary to secretary to the UK Treasurythe UK Treasury

• Granite is an independent legal Granite is an independent legal entity owned by its shareholders… entity owned by its shareholders… Northern Rock owns no shares in Northern Rock owns no shares in Granite’ Granite’

Alistair Darling

• ‘‘Granite is part of the funding Granite is part of the funding mechanism for Northern Rock and it mechanism for Northern Rock and it is on the bank’s balance sheet’ is on the bank’s balance sheet’

Yvette Cooper Yvette Cooper

• Ambiguity of ownership, debt, lack of Ambiguity of ownership, debt, lack of transparency, all generate mistrust transparency, all generate mistrust and in bad time, lack of confidenceand in bad time, lack of confidence

• The international credit market The international credit market simple ‘froze’simple ‘froze’

• Over the counter (OTC) and offshore Over the counter (OTC) and offshore have made things much worse.have made things much worse.

Do we need tax Do we need tax havens/OFCshavens/OFCs• Do they serve any social or economic Do they serve any social or economic

purpose?purpose?• They evolved as ‘booking centres’ They evolved as ‘booking centres’

primarily for tax purposesprimarily for tax purposes• They offer ease of transaction, They offer ease of transaction,

particularly syndicationparticularly syndication• But they add little value, but add But they add little value, but add

considerable amount of risk to the considerable amount of risk to the systemsystem