G20 London 2009

G20 and Tax Havens: Efficiency, Yes; Legitimacy, Maybe…

Andrew F. Cooper  CIGI Associate Director and Distinguished Fellow
From the London Summit Media Centre

Offshore financial centres (or tax havens) did not cause the financial crisis. But tax havens have become one of the prime targets of the G20 in its efforts to deal with the global economic meltdown. Although there are some differences in the means to do so, the accelerating offensive against tax havens has bridged the trans-Atlantic divide that has defined the London Summit on so many other issues.

The US has become far less tolerant of tax havens in the wake of the UBS scandal, in which Swiss banking officials stand accused of facilitating tax evasion by US citizens. During the presidential campaign, Mr. Obama often cited frustration on tax havens, often referring to a single office building in the Cayman Islands that houses 12,000 US-based corporations. The UK – facing a marked decline in the role of London as a financial hub – is trying to repatriate some of the big pools of money not only from tax evaders but tax avoiders (with Labour Prime Minister Gordon Brown pledging to have Briton’s pay the ‘right amount of tax’). Germany has mounted a concerted drive against the culture of secrecy found in Liechtenstein, especially when so many rich Germans have taken advantage of that secrecy. And French President Nicolas Sarkozy has stated a successful outcome relating to the regulation of tax havens one of his ‘red line’ in which the G20 summit must deliver results.

The issue of tax havens as viewed through the lens of efficiency has become one of the unanticipated markers of the success of the G20. At the first Washington DC summit in November 2008, Sarkozy lamented the lack of success in this agenda area. Yet, as pushed by the Paris-based OECD, the G20 has moved to send a strong signal to those tax havens which have refused to sign tax information exchange deals. It appears as though a ‘naming and shaming’ approach will lead to eventual sanctions on states that don’t enter into tax sharing agreements.

If a sign of efficient action, however, the issue of tax havens raises the question of legitimacy. Can the G20 not only speak for the rest of the world but impose its will on countries that do not belong to the group. The G20 is arguably over-represented by European countries – to the point where the Czech Republic and Spain have hung on their spots from the Washington DC meeting. But it is quite striking that the countries targeted as tax havens in Europe (not just the small principalities such as Liechtenstein, Luxembourg) and Monaco but middle sized countries including Austria, Belgium and Switzerland are not included.

The question of legitimacy is even more pronounced in the case of the Caribbean, where many of the best known tax havens are located. As noted this type of niche highlights some of the defects associated of the shadow economy. The Cayman Island’s for example have more registered businesses than citizens. Yet, targeting developing countries contributes to other anomalies. While the offshore has been targeted their onshore competitors (most notably, the US state of Delaware) has been left alone. Nor has there been any move to have Caribbean regional representation akin to ASEAN or the African Union.

The site for individual or collective voice on this issue, therefore, turns away from the G20 to another forum – the Summit of the Americas, to be held in Trinidad and Tobago in two weeks time.

Disclaimer: This blog is solely intended to spur discussion, while the opinions expressed are those of the author(s) and do not necessarily reflect the views of CIGI, Chatham House or their respective Boards of Directors.