To Pay for the Pandemic, Dry Out the Tax Havens

BY DAVID L. CARDEN

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The costs associated with the COVID-19 pandemic and its massive economic fallout are difficult to estimate, but the sums will be enormous. The first U.S. stimulus package alone exceeded $2 trillion. Then there is the loss of life, reduced economic productivity, and the personal financial ruin many will face. More stimulus packages likely will be required. Worldwide, the total costs will be even higher.

The bitter truth is that the costs and consequences of the pandemic likely could have been avoided or dramatically reduced if leaders had done their jobs. In 2013, the World Bank estimated that an annual expenditure of only $3.4 billion would have let developing countries build up a robust pandemic prevention capability, making a global outbreak much less likely. Yet this relatively modest expenditure wasn’t made.

It’s also well documented that many leaders, including U.S. President Donald Trump, were too slow to respond to the pandemic, increasing its human and financial consequences. These failures exacerbated the damage suffered by other countries around the world. With economies struggling and sharply reduced tax revenues for the foreseeable future, how will the world pay for this calamity?

Activists stage a protest on a mock beach representing a tax haven outside a meeting of European Union finance ministers in Brussels, Belgium, on Dec. 5, 2017. REUTERS/FRANCOIS LENOIR

Paying for the pandemic

The money needed to pay for the pandemic is actually close at hand, hidden away in offshore financial centers (OFCs), more commonly known as tax havens. OFCs are estimated to hold up to $36 trillion in cash, gold, and securities, not including tangible assets such as real estate, art, and jewels. (For comparison, U.S. federal tax revenues are a little over $3 trillion a year.) OFCs are located around the world and include Switzerland, Hong Kong, the Cayman Islands, the British Virgin Islands, the Bahamas, the Isle of Man, Luxembourg, Lichtenstein, Ireland, Singapore, Panama, Trinidad and Tobago, the Seychelles, and Vanuatu. And the Financial Secrecy Index, published by the Tax Justice Network, ranks the United States as the second-most complicit country after the Cayman Islands in helping individuals to hide their assets.

For decades, these and other OFCs have allowed individuals and corporations to amass and shelter tremendous fortunes from taxation. In the process, they’ve exacerbated income inequality, increased global financial instability, and allowed multinational corporations and their shareholders to pocket trillions of dollars in what they should have paid in taxes. OFCs have been tolerated (and even used to hide personal assets) by current and former political and business leaders. The Panama Papers investigation revealed that 140 politicians from more than 50 countries, as well as celebrities, drug dealers, arms traffickers, and others, had secret accounts in the country. And Panama is but one of scores of tax havens around the world.

Offshore tax havens have exacerbated income inequality, increased global financial instability, and allowed multinational corporations and their shareholders to pocket trillions of dollars in what they should have paid in taxes.

Why have OFCs not been shut down? Lee Sheppard, an American tax expert, offered one colorful explanation: “We fuss about them, howl that the activity is illegal, but we don’t shut them down, because the town fathers are in there with their pants around their ankles. Tax havens cannot exist without the consent of the countries whose transactions they accept.” The financial consequences of this selfishness have been exposed by the pandemic. Tax havens have beggared the world, depriving countries of the resources they need to avoid and manage global crises.

But the COVID-19 pandemic has given leaders a chance to learn from their mistakes and shut down OFCs once and for all. Doing so will require a combination of political will, legal action, concerted global pressure, and publicity. It must begin with the realization that it’s no longer acceptable for public and private sector leaders to use and tolerate OFCs. But something else also will be required. Leaders must stop thinking in the short term for their own political purposes, which only increases the magnitude and cost of the challenges future generations will face. The COVID-19 pandemic is just one example, where Americans and others around the world will need to pay back the trillions of dollars they borrowed to manage its consequences. The costs associated with climate change, human migration, the depletion of natural resources, and other future crises may eclipse those related to COVID-19.

Finally shutting down the tax havens

So how do we shut them down? The money held by OFCs falls in two broad categories. The first is untaxed money held by wealthy individuals, some of it the result of criminal activity. It includes more than 70 percent of the financial wealth held by citizens of the United Arab Emirates, almost 50 percent of Russian wealth, and an average of 15 percent in Continental Europe, with this figure estimated to be much higher for countries with notoriously tax-evading elites, such as Greece, Portugal, and Belgium. The estimate for the United States is below 10 percent, but even that is a huge sum considering Americans are worth almost $100 trillion. The second category of money held in OFCs is the tax savings of multinational corporations, which use OFCs to shelter earnings from taxation through tax arbitrage and creative accounting mechanisms. In effect, they often pay no or little taxes on revenues they earn overseas. It’s estimated that this practice diminishes tax revenue in countries where it otherwise would be paid by up to $600 billion every year. This includes $200 billion forfeited by developing countries, which can least afford it. Meanwhile, taxpayers are providing foreign aid, a significant part of which also lands in personal accounts in OFCs.

Condo buildings line the beach in Sunny Isle, Florida, on April 5, 2016. The Panama Papers found a possible tie between condo purchases in South Florida and secret offshore accounts in Panama, putting the United States among more than 50 countries using Panama as a tax haven. JOE RAEDLE/GETTY IMAGES

Recovering the money owed by the world’s wealthy

Some governments recently have taken a first step to identify offshore accounts and recover the taxes owed by individuals. For example, the U.S. Justice Department and the IRS have an aggressive program to identify OFC accounts held by Americans. Banks found to be sheltering Americans’ untaxed assets and income have been prosecuted and fined. The U.S. Treasury Department and the IRS have teamed up with numerous countries and jurisdictions to improve tax compliance through the Foreign Account Tax Compliance Act (FATCA), which requires information to be exchanged on American depositors at foreign banks and the taxes withheld on their transactions. FATCA punishes foreign banks that fail to provide the names of its American depositors. Given the centrality of the United States to the international banking system and of the dollar in international trade, most banks have complied, resulting in some notable recoveries on behalf of U.S. taxpayers. For example, Israel’s largest bank, Bank Hapoalim, and its Swiss subsidiary recently agreed to pay a fine of over $874 million for sheltering $7.6 billion in Americans’ assets.

Israel’s largest bank, Bank Hapoalim, and its Swiss subsidiary recently agreed to pay a fine of over $874 million for sheltering $7.6 billion in Americans’ assets.

Compared with the estimated $36 trillion amassed in OFCs, the United States hasn’t gone nearly far enough. FATCA itself fails to provide full reciprocity to jurisdictions that share account information with U.S. authorities, depriving foreign countries the opportunity to collect taxes they’re owed. FATCA also does nothing to require European OFCs to disclose information on their non-U.S. account holders to the jurisdictions where they owe taxes, no doubt because U.S. lawmakers thought the United States had no interest in doing so. But it does have an interest, given the need for other countries to manage crises that can, and do, affect the United States. In addition, states such as Delaware and South Dakota, by allowing the establishment of opaque trusts and the incorporation of companies without disclosing the identities of their beneficial owners, enable individuals to hide their assets from tax authorities and creditors. This is one of several reasons the United States is ranked second in helping individuals to hide their assets by the Tax Justice Network.

The U.S. House of Representatives recently introduced a bill to counter money laundering and improve U.S. tax enforcement. In addition, there have been other governmental efforts to enhance the transparency of tax havens that have yielded some benefits. For example, in 2014 the Organization for Economic Cooperation and Development (OECD), following the lead of FATCA, established Common Reporting Standards, which require financial institutions to report on virtually all foreign investments they handle. These standards are broader than FATCA and have resulted in the disclosure of 47 million accounts and improved tax compliance.

Britain, too, has recently taken some small steps to boost tax collection, requiring targets to reveal the source of unexplained wealth. The failure to do so can result in their assets being seized, although the process involved can provide time for the assets to be transferred out of the country. But despite this policy change, the U.K. is at the center of the largest global tax haven system and one of the greatest enablers of tax avoidance. It long has tolerated tax havens among its dependencies such as Guernsey, Jersey, the Isle of Man, and the Cayman Islands, ranked as the most secret of OFCs on the 2020 Financial Secrecy Index. It’s true that the U.K. Parliament recently attempted to make the corporate registries of these tax havens available to the public, but the British government has a long history of issuing empty statements and ineffective initiatives regarding its dependencies. Whether Parliament’s recent efforts will mark a turning point in Britain’s tolerance of its own OFCs remains to be seen. Meanwhile, the European Union has put the Cayman Islands on its blacklist of tax havens.

Countries could ban air and sea travel to and from nontransparent OFCs, denying the citizens of these OFCs entry into their countries.

All of this gives the appearance of progress. But given the long-standing failure to shut down tax havens despite the vast sums they maintain, it’s difficult to be optimistic. Something more will be required to recover the money in these secret accounts, and it’s time to bring the hammer down. These necessary steps include:

denying all OFCs that don’t disclose the identities of their depositors the ability to clear dollar-denominated transactions in New York, which would have the effect of denying them access to the international banking system;

denying noncompliant OFCs the ability to purchase the debt instruments of the United States and other OECD members, which would increase their depositors’ investment risk;

passing legislation to make illegal all tax structures whose effect is to shield individuals from tax liability;

denying foreign aid to noncompliant OFC countries;

subjecting accountants, lawyers, and bankers to criminal prosecution for aiding and abetting tax evasion, including by creating structures whose only purpose is to minimize or avoid taxes;

legislating pre-judgment attachment statutes and other attachment agreements to prevent depositors from moving their assets when their OFC accounts have been revealed or their tax structures are under scrutiny;

paying bounties for those who identify foreign account holders and tax-avoidant structures;

negotiating extradition treaties to enable more prosecutions of tax cheats;

passing laws allowing the confiscation of assets on which taxes were never paid—where the confiscated amounts are a multiple of the taxes, penalties, and interest owed;

providing additional resources to increase the number of tax investigations and criminal prosecutions for those utilizing tax havens; and

requiring long, mandatory jail sentences for convicted tax cheats and their enablers.

Other forms of old-school pressure also should be applied. One example of what could be done was the action taken by French President Charles de Gaulle in the 1960s to stop French citizens from hiding their income and wealth in Monaco. At the time, France had a tax rate over 50 percent, whereas Monaco didn’t tax the income of French nationals. De Gaulle stopped the practice by shutting down the one road to Monaco until the principality disclosed the names of French citizens using its banks. The equivalent today would be for countries to ban air and sea travel to and from nontransparent OFCs, denying the citizens of such OFCs entry into their countries, and to implement trade embargoes.

A critical mass of countries prepared to take all or some of these actions would begin to put enormous pressure on OFCs that fail to disclose the identities of their depositors and make life for those using noncompliant tax havens very difficult.

Activists set up a faux hospital in the Apple Store in Saint-Germain near Paris, France, on June 30, 2018, in protest of Apple’s tax evasion and government inaction on tax havens and health care funding. JULIEN MATTIA/NURPHOTO VIA GETTY IMAGES

Forcing multinationals to pay their fair share

How to eliminate or minimize the tax avoidance mechanisms of multinationals is even more challenging than recovering the money hidden by individuals. The reason is that unlike the practices of individual tax cheats, what multinationals are doing often is legal. The law as it presently stands in many countries allows them to incorporate offshore in tax havens with no or only low taxes. The result has been trillions of dollars in savings for the companies. Perhaps the most unjust aspect of this practice is that by increasing profits through tax avoidance, multinationals are increasing the value of their stock. This amounts to taxpayers subsidizing, through lost taxes, these companies’ shareholders.

One legal mechanism used by multinationals to avoid taxes is to shift earnings from a jurisdiction with a high tax rate to one with a lower rate. While legal, this results in the avoidance of an estimated $600 billion per year in taxes by multinationals. U.S. corporations are thought to be the most aggressive users of this scheme, being responsible for over half of all corporate profits shifted to OFCs. Indeed, although the corporate tax rate in the U.S. is 21 percent, 60 companies on the Fortune 500 list paid no tax at all in 2018 on profits of $79 billion, in part because they kept their revenues offshore. Instead of paying taxes on these profits, they received a rebate of $4.3 billion. The effective tax rate for U.S. corporations overall in 2019 was only 11.3 percent. It should come as no surprise that corporate tax collections declined 31 percent between 2017 and 2018. These immense taxpayer subsidies to corporations and their shareholders are not only unjust but also shortsighted. Tax avoidance beggars the countries on whose markets and financial health multinationals depend.

The financial shell game played by multinationals such as Apple is enormously destructive.

The financial shell game played by multinationals is enormously destructive. For example, Apple’s overseas operations are incorporated in Ireland, enabling the company to avoid hundreds of billions of dollars in taxes for all of its international operations. A large part of these savings would otherwise have been paid to developing countries, which desperately need the resources to manage the challenges they face. Why does Ireland help Apple and other multinationals in this way? For a few jobs. Apple has 137,000 employees, of which a mere 6,000 work in Ireland.

The injustice of these taxpayer subsidies reflects a profound shift in the role of corporations in society. The practice of multinationals using OFCs to minimize their taxes is a relatively recent development. There was a time not so long ago when the leaders of major corporations recognized that the relationship between their companies and the communities from which they drew their employees was symbiotic. As a result, they were far less likely to minimize their taxes.

Fortunately, the unfairness of this situation has not gone unnoticed. In 2016, the European Commission ruled that Ireland had granted illegal tax benefits to Apple and ordered the company to pay Ireland 13 billion euros ($14.8 billion). Was Apple chagrined, and did it take steps to make amends? Not at all—it appealed the tax assessment. Astonishingly, Ireland also appealed, despite the fact that the ruling would have increased its tax revenues. On July 15, their appeal was successful when a European Union court overruled the commission, a major setback for the EU’s effort to counter tax avoidance schemes. Apple also moved some of its operations to Jersey as an additional jurisdiction for its tax avoidance scheme. During the Obama administration, the U.S. Treasury also expressed its concern about tax avoidance by U.S. multinationals such as Apple. But it decided against signing an OECD initiative banning these kinds of tax avoidance schemes, arguing it would have put U.S. corporations at a competitive disadvantage and resulted in lower U.S. tax revenues.

The U.S. Treasury’s position must not be the end of the story regarding tax avoidance by multinationals. Tax havens are beggaring too many countries where multinationals actually make their money. It will be difficult for any one country suffering the loss of tax revenues to stop this selfish and destructive practice because it would run the risk of companies relocating, resulting in a loss of jobs and whatever taxes companies do pay where they are incorporated. But if a substantial group of countries, such as OECD members or the EU, acted together, they could begin to stop or limit the practice of multinationals using taxpayer money to subsidize their shareholders. Agreements to standardize corporate tax rates among them would be one approach.

If a substantial group of countries acted together, they could begin to stop or limit the practice of multinationals using taxpayer money to subsidize their shareholders.

Even without full participation by all countries, such a collective effort would limit the options of multinationals and expose their tax avoidance efforts. It is one thing for Apple to be incorporated and have operations in Ireland. But it’s unlikely the company would relocate to Vanuatu or the Marshall Islands if Ireland began to tax Apple at the same rate as its fellow OECD or EU member states. Recruiting problems, for one, would prohibit such a move. The resulting publicity likely would damage Apple’s brand. At some point, multinationals could even feel pressure to rethink their civic responsibility to taxpayers and the communities in which they operate, not just to those owning shares of their stock.

The pandemic has made clear that the world needs to change the equation by which we’ve lived. We must act to lessen the potential financial and health impacts of global crises before they emerge and take steps to be able to finance them when they arrive. We can begin by shutting down the tax havens that threaten the future of the many for the benefit of the few. And we can expect our leaders to be more focused on the future. Some people may think the future is a luxury we can’t afford, believing we don’t live there. But another thing the pandemic has made clear is that sometimes the future draws near. Now is such a time. Our leaders should act accordingly and find a way to pay the price a safe and prosperous future will require of us.