It’s time to address the double standard about tax havens - Macleans.ca

It’s time to address the double standard about tax havens

Opinion: If countries really want to get tough on tax avoidance, they should stop picking on small nations and call out close allies, instead

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Yachts are seen during sunset in Panama City, Panama on April 7, 2016. (Carlos Jasso/Reuters)

Angela Wright is a writer and public affairs professional. She holds a master’s in history from the University of Iowa. 

Canadians hate tax havens. This is according to a poll recently conducted by Environics Institute that showed 90 per cent of Canadians believe tax havens are morally wrong, while 87 per cent believe their use should be banned. And Canadians are right to be upset; tax avoidance robs countries like Canada of billions of dollars in annual revenue.

A practice once shrouded in secrecy, tax avoidance has been brought to the fore by high-profile leaks like the Panama Papers and Paradise Papers. And in their wake, the federal government has insisted the Canada Revenue Agency will be more aggressive in its fight to bring back lost Canadian tax money. But we’re doing it wrong: by going after smaller and often poorer jurisdictions with incessant tax compliance regulations and threats of blacklisting, tax avoidance isn’t curtailed, and the main culprits are not held to account. That’s because the countries who are the worst offenders aren’t the most typically vilified targets, like Bermuda, the Isle of Man, and the Bahamas—they’re some of our close allies and partners.

Indeed, while the phrase “tax haven” often conjures images of tropical locales that stash billions behind the cloak of secrecy, some of the biggest players in tax avoidance and financial secrecy are closer than we realize. Switzerland tops the list of the Tax Justice Network’s financial secrecy index—and the United States comes in third. European Union (EU) member states Germany and Luxembourg also fall in the top 10. In contrast, Bermuda—the small island nation at the centre of the Paradise Papers—is the 34th most secretive country. More tellingly, Bermuda ranks well behind the United Kingdom (15th) and Canada (29th). With the exception of the Cayman Islands (ranked fifth), no other small island nation typically associated with being a tax haven made it into the top 10.

It’s clear we can’t talk about clamping down on tax havens and financial secrecy without going after members of the G20. Real change will only come if both domestic tax laws and regulations are changed and the countries that are seldom portrayed as tax havens—despite hiding billions in assets—are also included. Otherwise, countries like Canada, U.S., and EU member states are simply advocating for a tax-haven double standard.

The latest example of this double standard is the recently released list of the EU’s tax haven “blacklist.” Seventeen countries were blacklisted, but the list didn’t contain a single EU member; the EU only considered outside jurisdictions, even though Ireland, Malta, the United Kingdom, the Netherlands, Luxembourg, and Cyprus don’t comply with the EU’s own criteria for establishing the blacklist. And George Turner from the Tax Justice Network argued that before the EU attempts to address policies that allow corporations to evade taxes offshore, it should first insist that its own member states end similar policies.

Some countries—such as the United States and the United Kingdom—have jurisdictions within their borders that operate like tax havens. British journalist Nicholas Shaxson referred to the City of London—approximately the size of a square mile situated physically within London but not subject to the same laws at the rest of Britain—as a tax haven in the heart of Britain. It’s one of the largest financial centres in the world, home to the London Stock Exchange and 18,000 businesses. In the City of London, businesses, as well as people, are allowed to vote. This separate set of laws and increased political power allow corporations to engage in tax avoidance activities with minimal scrutiny.

In the United States, the state of Delaware operates in a similar way. More than 1 million businesses are incorporated in Delaware, including 66 per cent of Fortune 500 companies. In addition to having a tax rate of zero per cent, Delaware has its own court, the Court of Chancery, to deal specifically with matters relating to corporations.

MORE: Will Bill Morneau’s crackdown on tax avoidance work?

Small jurisdictions have become increasingly aware of this double standard. Earlier this month, Bermuda’s Premier and Minister of Finance, David Burt, noted that Bermuda was being targeted by a global tax reform political agenda “that seeks to apply standards to Bermuda and other offshore jurisdictions that are not applied to EU, OECD and G20 jurisdictions.” Bermuda Attorney-General Kathy Lynn Simmons stated the country would only make public its beneficial ownership register—the document that lists the real owners of Bermudian-based companies—when all G20 members do the same. The United States, in contrast, doesn’t require beneficial ownership information for people registering corporations.

Small countries labelled as tax havens are constantly being asked to prove they are not doing anything illegal, while larger and wealthier jurisdictions are not asked to do the same—much like how tough-on-crime approaches that treat low-income and marginalized people as criminals constantly force them to prove they are not doing anything illegal. Prem Sikka, an accounting professor at Sheffield University, referred to the targeting of countries with little diplomatic, economic or military weight as a form of imperialism.

Complicating this issue is the existence of two types of activities: legal maneuvers that shelter money by taking advantage of complex tax laws, and illegal maneuvers that shelter money for the purpose of hiding or committing illegal activity. The confusion around the broad-strokes definition of tax avoidance is why countries fear being blacklisted: Being labelled as lacking transparency automatically brings with it the suspicion of abetting illegal activity. This, in turn, harms a jurisdiction’s international reputation and can ultimately harm its ability to attract legitimate business activity. Small and poorer jurisdictions have fewer resources to fight against these labels and can be more easily hurt by potential sanctions—making them more likely to bend to demands for greater regulation.

While it’s easier to bully small jurisdictions into incessant compliance measures with threats of blacklists and potential ill-defined sanctions, it’s more practical to alter domestic laws across the G20. And as it stands, in Canada, companies can create subsidiary corporations in a country with a significantly lower tax rate then subsequently transfer money to that subsidiary in order to avoid paying Canada’s higher taxes. In an effort to prevent this, NDP MP Murray Rankin introduced Bill C-362, An Act to Amend the Income Tax Act, that would deny tax breaks to companies who engage in this sort of activity in order to keep more money in Canada. But more work needs to be done in the backyards of the countries on the frontlines of the fight against tax avoidance.

In the summer of 2016, the European Commission shockingly ruled Apple had to pay €13-billion in back taxes to Ireland, arguing that the company had received an illegal tax advantage. It similarly ruled Amazon had to pay €250-million in back taxes to Luxembourg. Although these are isolated cases against particular arrangements between individual companies and countries, they show a willingness to confront unfair tax practices conducted by multinational corporations, regardless of the political ramifications. Other countries such as Canada should follow the EU’s example and take a courageous stance of their own. After all, our current tax-haven double standard does little but maintain the status quo.

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