Tax havens: Heaven or hell?

Investments in tax havens contribute to weakening poor countries economically and in terms of development, but the West shows little willingness to change.

These are among the main findings of the research project The Role of Tax Havens: In Global Governance and Regulation; In the External Financial Equation for Economic Development. The project manager is Professor Guttorm Schjelderup, head of the Norwegian Center for Taxation (NoCeT) at the Norwegian School of Economics (NHH) in Bergen. NoCeT has chief responsibility for the theoretical part of the twofold project, which aims to shed light on matters relating to tax havens and how they operate.

Draining poor countries of resources

Schjelderup and his colleagues are reviewing and analysing existing research articles and looking more closely at matters that have been left out of earlier research.

‘The economic literature shows that tax havens provide opportunities for development, as long as the users are law-biding. The project seeks to shows that this may not be true. Multinational companies, which engage in tax planning through tax havens, can drain poor countries of resources by exploiting asymmetries and differences in legislation between countries,’ says Schjelderup.
 

‘When the users of tax havens are not law-abiding, the tax havens undermine national and international regulation. Our research shows that this has a detrimental effect on growth in poor countries,’ says Schjelderup.

Global Financial Integrity (GFI) in the USA, the Centre for Economic Studies and Planning in India, the Institute for Applied Economic Research (IPEA) in Brazil and the Nigerian Institute of Social and Economic Research (NISER) are also participating in the project.

The project has a total budget of NOK 5 million and runs from 2011 to 2015.

 

Little willingness to change in the West 

Many OECD countries are tax havens. They will themselves end up with a government deficit if they have to change their legislation to avoid harming third countries. The richest of the Western countries use tax havens extensively and would prefer to legitimise and maintain the system. Without tax havens, companies like Google and Starbucks would no longer be able to find such attractive places to transfer their profits to.

’A binding multinational agreement on tax havens looks like an impossible project. We believe it would be easier to achieve results if groups of countries themselves negotiate and commit to agreements on transparency that do not affect others. But the big question is whether there is sufficient political will to do so,’ says Schjelderup.

 

From South to North

GFI is responsible for the empirical part of the project, which aims to shed light on and quantify cash flows from developing countries via tax havens to industrialised countries, and vice versa.

Our research indicates that the developing world has actually been a net supplier of capital to rich countries rather than being a net recipient of capital from such countries. The findings will likely call into question the efficacy of focusing on one side of the development equation – namely why poorer countries cannot seem to attract capital from richer countries – in favour of asking difficult questions as to what role the rich world is playing in facilitating the extraction of wealth from poorer countries,’ say Raymond Baker and Tom Cardamone of GFI.

‘This came as a surprise. We believed it was the other way round – that industrialised countries in total added more than they extracted. Now that we see that the cash flow from South to North is greater than from North to South, our project findings challenge our notions of generosity. Our findings also provide an ethical perspective on tax havens, tax evasion and secrecy,’ says Schjelderup.  


Developing countries and tax havens

The project’s findings show that about 40 per cent of the cash flow from poor countries goes via tax havens. Many of these countries are run by an elite that uses the secrecy of the tax havens to accumulate capital through corruption, development aid, natural resources or directly from the country’s treasury.

‘This elite may be interested in weakening government institutions to avoid political control and evade audits,’ says Schjelderup.
The project shows that the presidents of a number of poor countries have used the secrecy of tax havens to enrich themselves from their country’s resources.

‘There will always be dishonest politicians, but the secrecy offered by tax havens allows them to continue doing what they do without getting caught,’ says Schjelderup. 

 

Consequences of secrecy in tax havens

Trawlers registered in tax havens are responsible for a large proportion of the illegal fishing in the world’s oceans. Amounts of between USD 10 and 20 billion annually are involved. That corresponds to up to 30 per cent of all catches. The international literature uses terms such as floating coffins about many of these trawlers. On board such vessels, safety is neglected and the fishermen live in dire conditions. It has been estimated that 24,000 people die annually in the fishing industry.

‘There is reason to believe that the figure is much higher in illegal fishing. Secrecy about ownership makes it difficult to identify and punish shipping companies that sail close to the wind,’ says Schjelderup.
The research project also refers to other industries and sectors in which secrecy is a challenge in relation to the use of resources, safety and ethics.


Facts about the project


Project: The Role of Tax Havens: In Global Governance and Regulation; In the External Financial Equation for Economic Development.
Project Period: 2011 - 2015
Project manager: Guttorm Schjelderup, professor at NHH in Bergen
Contact information: Guttorm.Schjelderup@nhh.no


Facts about Tax Havens



In today's global economy large amounts of money can be moved between countries with a few keystrokes. Many wealthy individuals move their fortunes to hidden bank accounts abroad in order to avoid taxation. Large multinational companies use the financial systems to spread the tax burden, so that it benefits the company as much as possible.

Tax havens are countries or autonomous regions that earn money by offering international investors tax exemption or bank secrecy.

They might have a set of laws that seem strict, but which in reality are not enforced.

Approximately 50 countries in the world are today considered to be tax havens. One of them is British Virgin Islands, with roughly 27 000 inhabitants.

The territory was home to 830 000 registered companies in 2012, alongside an unknown number of banks, funds and trustees.

The Cayman Islands, with a population of 46 000 inhabitants, are considered to be the world's fifth largest financial center. Other well-known tax havens are Switzerland, Luxembourg, Hong Kong, USA, Singapore and Jersey.

Associated companies:


 

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