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Apr 3, 2009 | 21:08 GMT

5 mins read

Tax Havens and the G-20 Summit

Summary
The G-20 summit issued a statement at its conclusion declaring the intention to impose sanctions on tax havens. The global financial crisis has burdened public finances, making government officials more eager to prosecute tax evasion and international tax shelters. Since individual states will be responsible for going after those they suspect of hiding funds, the punitive actions taken could be harsh.
In the communique produced by the G-20 countries at the conclusion of the April 2 summit in London, the so-called "Declaration Strengthening the Financial System" calls for G-20 countries to take action against tax havens in countries that are non-cooperative. The declaration states boldly that "The era of banking secrecy is over," a claim reiterated by French President Nicolas Sarkozy at the press conference during the summit. The G-20's move against territorially-based tax evasion is one of the substantial outcomes of the summit, encouraging states to slap sanctions on regions where they fear that capital is being siphoned away from their public finances and financial systems. The financial crisis and economic slump have heavily burdened public finances, making authorities more zealous about prosecuting tax evasion and tax shelters abroad — governments simply cannot afford the lost revenues or the domestic outcry against tax dodging at this time. Moves were made well before the summit: German intelligence has infiltrated Swiss and Liechtenstein banking to examine records and the United States has pressured Swiss bank UBS to reveal sensitive records. Ahead of the summit, France also put emphasis on the need to bring tax havens under control. The G-20's first task was to define which territories need to be brought in line with international tax standards in order to "name and shame" them. They therefore endorsed the latest progress report produced by the Organization of Economic Cooperation and Development (OECD), which assesses where the world's financial centers stand on rules governing the exchange of tax information. This is the framework that states will use as they attempt to rein in tax evasion and boost badly needed revenues. The OECD report identifies three tiers of jurisdictions. First, states that have implemented agreements bringing them in accord with international tax standards — this list includes all of the G-20 countries, the primary motivators behind the push to bring the rest of the world under recognized tax networks. This list also consists of a number of states that are well known for seeing large capital flows rush through their borders, such as the United Kingdom, Ireland, the Isle of Man, Cyprus, Barbados, the U.S. Virgin Islands and Mauritius. The second tier includes states that have made international tax agreements but have not implemented them, and will now fall under greater scrutiny and pressure to conform to the rules — this tier includes a number of prominent European countries such as Switzerland (which took measures to be included in this category only weeks before the G-20 summit as pressure mounted) as well as the wide range of islands in the Caribbean and elsewhere that are frequently cited as tax shelters. The third tier includes states that have not agreed to anything and have effectively been blacklisted. These last are Malaysia, the Philippines, Costa Rica and Uruguay, which are now in immediate danger of getting hit with sanctions. Because individual states will be responsible for taking action, punitive measures could be harsh, and tensions could flare between some states linked by private capital flows. STRATFOR will watch for movements towards imposing sanctions on these states — Argentina, which has serious concerns about capital flight, could take this as a declaration of open season on neighboring Uruguay, with whom Argentina already has outstanding disputes. Another critical question to ask is which G-20 countries were behind the pressure on jurisdictions that have made this list. In the second tier, a number of countries and territories listed as tax havens (Bahrain, Belize, Liberia, Nauru, the Marshall Islands and Samoa) as well as some classified as "other financial centers" (Brunei, Chile and Guatemala) will bear further investigation as to which of the G-20 countries are most concerned about their citizens hiding money there. It will also be important to watch the glitches in the G-20 framework. What comes to mind is the contest between China and other G-20 countries, most notably France, who hoped to classify as tax havens China's Special Administrative Regions (SARs) Hong Kong and Macao. French President Nicolas Sarkozy and Chinese President Hu Jintao had a tense showdown at the G-20 meeting about where Hong Kong and Macao fall in the tax haven scheme — China would not formally support the communique on tax havens unless these cities were excluded. The OECD report lists China as a tier-one country with a footnote explaining that the administrative regions fall under the second tier of countries. This is a wound that will likely fester over time, as France has reasons to suppose Hong Kong and Macao are assisting French tax bandits, while China cannot afford to see any new regulations choke the flow of investment from these zones during a domestic economic crisis.

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