If you want to know why the nearly 40 million leaked documents about the release of assets in offshore financial centers haven’t resulted in a global change since the revelations began eight years ago, Billie Holiday provides a clue: those who are not there must lose. So the Bible says, and it’s still news.
The latest round of leaks to the International Consortium of Investigative Journalists is the largest to date. After sifting through the data, the media named King Abdullah II of Jordan, associates of Russian President Vladimir Putin, Czech Prime Minister Andrej Babis and Kenyan President Uhuru Kenyatta in connection with hidden assets abroad. For all the remarkable revelations about the shadow global financial system for wealthy individuals and corporations since the ICIJ’s first revelations in 2013, it is striking how little has changed.
Measures to roll back this system appear to be ineffective at best. Eight years have passed since governments pledged coordinated action to crack down on the use of offshore structures to minimize corporate taxes and deprive states of revenue, but the movement has instead been in the opposite direction.
So much money is now circulating in the offshore financial centers of the world that such paper transactions now represent a larger flow of capital than any country receives from genuine foreign investment. The royalties and license fees that underpin these structures are growing faster than trade in physical goods and conventional services.
Far from taking a larger share, most developed countries have faced the drain of taxable profits over the past decade by cutting their own corporate tax rates – an unspoken admission that enforcement has failed. Mandatory disclosure rules introduced in 2014 to prevent European banks from using tax havens appear to have made no difference, according to a report released last month by the EU Tax Observatory.
Why have all these meritorious efforts been so unsuccessful?
One explanation suggested by the list of powerful figures named in the latest leaks, dubbed the Pandora Papers, is simply that those charged with drafting the laws and treaties that underpin international capital flows have a lot to gain from the current setup. . As long as an unreasonable amount of wealth and power is concentrated in the hands of a few individuals and companies, they will seek ways to move their assets to places that promise to treat them most leniently. The consultants will aim to take advantage of the assistance in this trade and, in doing so, to become experts in finding loopholes, further accelerating the concentration of wealth and the erosion of the tax base.
In the United States, there is a revolving door between managerial positions in large law and accounting firms and government jobs, as the New York Times reported last month, with a similar situation regarding secondments in the UK. United. “Tax bills often play a role in shaping policies that will decide how much the same customers will pay.
There is a deeper problem, however. These tax laws and treaties are, by their nature, long and complex. When spread across the world’s 320 national and subnational jurisdictions spanning up to five different countries, as with the famous “Dutch Irish Double Sandwich” tax avoidance structure, the possibilities for loopholes are almost limitless.
Any attempt to hold them back is like a game of Whac-A-Mole. This even applies to attempts by the Organization for Economic Co-operation and Development to reset global tax rules via a 130-jurisdictional agreement due to be finalized this month. The centerpiece of the proposal, an overall minimum tax rate of 15% that can be applied unilaterally by governments who feel they are losing out, is over time as likely to end up as an overall maximum tax. Attempts by the Biden administration to reinstate the cut rates to 21% under Donald Trump will stop at 26%, rather than the 28% initially sought or the 35% that previously existed. There are few signs that the four-decade-long race to the bottom is about to end.
Ultimately, the problem lies in the frantic flows of capital that have moved around the world since the decline of the Bretton Woods system in the 1970s. While capital can cross borders without restriction, a small portion of this money will always be available for those who want to keep their wealth out of the hands of legal or tax authorities.
The global financial architecture is only now beginning to question whether the opening of capital accounts – and the inevitable loss of monetary independence or exchange rate stability – has been a good deal or a devil’s deal. If governments want to tackle the cause of tax avoidance rather than endless dressings on symptoms, this decision must ultimately be reconsidered.