Tax havens and offshore sovereignty

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  1. The Romance languages use the expressions tax havens, paradise fiscaux and praises scales because of an erroneous and by now consolidated translation from English tax havens. But these jurisdictions are, literally, tax shelters for individuals and companies that, in the absence of a substantial economic link with the territories in question, benefit from them in terms of low or no taxation and enjoyment of particular conditions of opacity and secrecy. The attractiveness exerted by these States on economic operators is not limited to the fiscal dimension alone: the regulatory gaps in financial regulation and surveillance, typical of modern offshore centers, also offer mobile capital opportunities for investment and speculation free from the constraints normally imposed by public authorities.

Although the problem has been present for years on the agenda of political decision-makers, the crisis has given it new characteristics of urgency. The economic and financial difficulties faced by the States impose to stem the flight of offshore capital and to find a solution to the instability of the international context, which resistance to the cooperation of tax havens contributes to fueling. In recent years, the renewed topicality of the topic has favored the emergence of new points of view and perspectives of analysis, such as that proposed by Alain Deneault in his Offshore essay. Tax havens and criminal sovereignties, published in Italian translation last year by Ombre Corte.

The originality of Alain Deneault’s contribution lies in his attempt to conceptually redefine the image of tax havens, insisting on their nature as «positive and sovereign political organisms» 1, jurisdictions placed «outside the hinges of any public institution»2, but an integral part of world economic circuits. Offshore capital, once sheltered from tax and judicial authorities, does not remain inactive. As explained by Deneault, “this money works: without any obstacle […] without regulations […] without control” 3. Above all, tax havens do not constitute an isolated anomaly, a marginal elsewhere of finance, not directly and immediately connected with the States of law. On the contrary, “these parallel economies are nothing but our economies” 4: offshore markets are leading financial centers, from which a dense network of investments is spreading all over the world.

According to estimates by the Tax Justice Network, the total private wealth held offshore fluctuates between 21,000 and 32,000 billion dollars, despite being owned by less than 10 million individuals. The dark side of the global economy is of the order of magnitude of the GDP of Japan and the United States but corresponds to 0.1% of the world population. Calculating on this figure an annual return of 3% and a tax rate of 30%, the lost revenue appears to be between 190 and 280 billion dollars: far more than the OECD countries are currently able to invest in policies of development. Offshore flows should be added to the tax evasion flow of legal persons of the profits of multinational corporations and banking and financial institutions perfectly integrated into the official economic circuits, realized through refined strategies of fiscal optimization. The three private banks that hold the majority of assets in tax havens are UBS, Credit Suisse, and Goldman Sachs. The boundary between lawful and illicit and between onshore and offshore is less defined than one might imagine.

Researcher of economic sociology, but a philosopher of training, Alain Deneault opens up a new scenario of wide-ranging reflection on offshore centers, based on a profound rethinking of the interactions between politics and economy and their articulation around the concept of sovereignty. Tax havens are first of all States, endowed with a stable and defined political structure, and with an exclusive power in their territory. However, these are states that make strategic use of this sovereign power, marketing it to attract mobile capital. Untaxed and uncontrolled, economic operators gain room for maneuver and decision-making power, presenting themselves as new sovereign actors, capable of profoundly affecting social reality.

2. In the wake of Deneault’s reflections, a definition of the sovereign status of offshore centers therefore it appears as a particularly complex operation. It is essential to start from a reconstruction of the formation and evolution of tax havens. According to the interpretation of Ronen Palan and the British school of international political economy, they are the fruit of the clash between the fragmentation of the political system into rigid state entities and the deployment of economic forces in a single integrated market. Starting from the end of the nineteenth century, tension was created between political evolution, characterized by the juridical isolation of the rule of law, and economic evolution, dominated by mobile actors and difficult to classify only in the national order. From the forcing of the interstices between the national legal systems implemented by the market operators, on the one hand,

From the registration of convenience for tax reasons to banking secrecy, the various devices for the benefit of precise economic and financial categories have been adopted by an increasingly wider number of jurisdictions. From late 19th century prototypes to modern offshore financial centers, the mechanisms of rivalry and competitive emulation between States have contributed to the spread of tax havens throughout the world. These competitive dynamics of sale and purchase of sovereign spaces took place at an accelerated rate starting from the 1980s, in a context of financial deregulation, increased capital mobility, strong technological innovation. The political choices made at national and international level and the affirmation of the neoliberal paradigm have contributed to the creation of a favorable climate for the self-discipline of market forces and a reduction of public control over them: the definitive success of the offshore space.

The political dimension is fundamental. Through an effort of conceptual abstraction, offshore spaces can be usefully conceived as under-regulated legal arenas, but they always coincide with sovereign states. However, identifying these jurisdictions concretely is not an immediate operation: it underlies a method, an approach, a look at the offshore reality. In fact, there is no single definition: in general terms, the OECD and international organizations still remain faithful to the classic fiscal parameters, while the academic literature and non-governmental organizations use different criteria, both qualitative and related to the regulatory environment offered by the State in question, both quantitative, such as the disproportion between the export of financial services and the size and needs of the national economy.

Each methodological approach corresponds to a different map of the offshore world: for example, institutional blacklists have on several occasions qualified as tax havens the British Isles of the English Channel and the Caribbean dependencies of the United Kingdom and the United States but have never stigmatized directly the two great powers. On the contrary, the alternative approaches recognize them as real organizational poles of the offshore reality, further blurring the border with the onshore world. More generally, many of the devices offered by tax havens, among which the corporate screens that allow you to change your residence, conceal the nature of your economic transactions or hide the origin of your income, are placed between the lawful and the illicit. They are part of the corporate strategies of some of the main actors of contemporary capitalism.

The consequences caused by the existence of tax havens are very significant because they are offshore economic operators find the tools to avoid the burdens and constraints imposed by their member states, first of all, the payment of taxes. As an instrument of tax avoidance and evasion, they deprive states of the revenue needed to finance public policies, arbitrarily increase inequalities and undermine the solidity of democratic principles. Strategically positioned in the focal points of the international financial architecture, they also represent an element of instability and systemic crisis, because they encourage the formation and circulation of enormous and uncontrolled financial masses and contribute to the propagation of shocks.

If offshore is synonymous with under-taxed and under-regulated space, production and export free zones and jurisdictions offering flags of convenience can also be traced to this definition. Both EPZs ( Export Processing Zone s) and free ports make it possible to reduce the costs of registering companies, to minimize the payment of taxes, to reduce obligations regarding labor law and environmental law. Once again, these are juridical innovations created and managed by sovereign states but actually offered to the needs of private operators. To the tax and financial consequences of the offshore phenomenon then additional social and environmental costs are added, due to unequal and responsible management of economic activities.

A further widening of the angle of analysis also consists in taking into consideration offshore centers as factors that contribute to the impoverishment of the countries of the South of the world. Not only do they represent a tax shelter for local elites, but at a systemic level, they involve the countries of the South in offshore dumping mechanisms or the downward revision of the level of taxation and prudential standards. Finally, since most tax havens do not coincide with weak, isolated and marginal jurisdictions, but with countries protected and coordinated by great powers, the offshore appears as a channel of a real regressive flow of capital from the South to the North of the world. According to a study by economist Alex Cobham, developing countries lose at least 385 billion dollars every year for tax reasons: an estimate, however, that is more conservative than those of Oxfam and the Tax Justice Network, which hazard figures between 500 and 1,000 billion.

3. Because of the effects that the offshore phenomenon produces, European institutions and international bodies have initiated policies to combat tax havens, starting with the black list of non-cooperative countries published in 2000. The measures have been tightened after the crisis of 2008 and the scheduling of the problem of offshore tax evasion and the instability of the financial system by the London G20 in 2009. On this occasion, a new catalog of countries not complying with international standards was drawn up, with the obligation to sign at least twelve bilateral tax information exchange treaties to be withdrawn, under penalty of economic sanctions, and under the supervision of a mechanism of peer review. This policy, which is certainly more incisive, has led to still limited results, mainly triggering a reallocation of funds to the jurisdictions that have been able to preserve the highest degree of opacity.

The decisive factor seems to lie in the accumulation of the necessary political capital and in the willingness to spend it, as demonstrated by the results obtained by the aggressive American action against Swiss banking secrecy. Threatened to be cut off from the US market, Switzerland was forced, starting in 2009, to reduce its privacy practices. Thanks to the Foreign Account Compliance Act, voted in 2010, foreign financial institutions willing to operate on American soil will have to disclose to the tax authorities the identity of their US customers. On the other hand, tax havens can, in turn, enforce their political relations: the Swiss Confederation, in order to maintain the anonymity of its accounts, has, in fact, negotiated amnesty with important European partners, such as Germany, United Kingdom, Austria and perhaps, in the near future, Italy.

4. Political profiles are a fundamental aspect of the offshore phenomenon. The advantages granted by tax havens to a wide range of economic operators have resulted in a significant transfer of power for the latter. Politics seems to struggle to follow and contain a financial system that has grown in an uncontrolled way, also benefiting from the privileges offered by offshore markets. But this does not mean that the game has been played outside the space of inter-state relations: as the political will has marked the modulations of sovereign power at the base of the formation of tax havens, so the lack of incisiveness of the collective actions undertaken so far also highlights States’ reluctance to tackle the problem.

The anomalous under-sizing of the tax and regulatory system of offshore countries seems to make them look like states, to use an expression borrowed from the cold war vocabulary, with limited sovereignty, instrumental to the superpower now represented by the economy and finance globalized: a profound threat to public affairs. However, this statement must be clarified. As Deneault argues, the offshore phenomenon is producing degeneration of the rule of law, a manifestation of popular sovereignty, in “States of law” 5, who act as managers of legal provisions serving private interests. The confinement of the State subject in a limited space, where it is relegated to the role of bureaucrat and administrator, is witnessed by the increasingly wider use of the term governance: “management replaces politics”6.

In the interpretation of Alain Deneault, this weakening of the public takes the form of a sort of abdication of states to the advantage of new private sovereignties. This movement reproduces the transfer of power that, in contractual theory, occurs between individuals and state entities at the time of the transition from the state of nature to civil society. But in the transfer of power prerogatives to financial actors, a further step is taken: there is no longer any obligation towards the people, which is rejected, denied, excluded from the contract. It is, therefore, the sovereignty of the people, and not the formal legal sovereignty of the state, that is compressed and threatened by the offshore phenomenon.

5. The tools to remedy this situation, bringing the well-being of citizenship back to the center of political action, exist and coincide with the measures invoked by non-governmental organizations and increasingly wider sectors of civil society. We must first promote transparency. Banks and companies must be obliged to publish detailed financial statements, in which the financial information appears to be disaggregated, with separate country-by-country reports, in order to uncover doubtful tax practices. Similarly, multilateral systems for the automatic exchange of information between states must be promoted, requiring each jurisdiction to share data on the incomes and assets of the respective taxpayers with others, without the need for an explicit request. Moreover, at a global level, it is essential to redefine the theme of international tax evasion and include it in the debate on the reform of the financial system, dedicating adequate space also to the needs of developing countries. Finally, on a cultural level, the construction of a new conceptual framework must be promoted, in which the fiscal aspect appears as an indispensable condition of justice.

The problem is that touching tax havens means threatening consolidated economic and financial interests and hitting jurisdictions that are dependent or protected by great powers. The difficulty to be faced is a reality in which there is no clear cut between tax havens at the service of private operators and states of law with full sovereignty. The situation is far more complex: “every tax haven is the negative double […] of a rule of law” 7 and the offshore phenomenon appears to be characterized by an irrepressible contradiction. On the one hand, the State subject seems to have exhausted its role as the exclusive holder of the capacity to act on social reality and appears suffocated by the consequences caused by the offshore network. On the other hand, this same subject would need “a stroke of the pen” 8 to eliminate tax havens. As stated by the French jurist Jean de Maillard: “tax havens are nothing but illusions in the international financial system and exist only because the large industrialized countries need it. We are in full hypocrisy: we pretend that these countries are independent and that it is not possible to interfere in their business when instead they are three-quarters dependent on the United States and Great Britain. They would not exist if we only decided that they should not exist “9.


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