Several international organisations are working to unveil the secrecy of so-called tax havens or offshore jurisdictions across the world. Their efforts enhanced significantly in the last few years with some success as international media and civil societies also finally acknowledge the extent of the problems. There is increasing pressure on different governments to look into the matter.
These organisations have taken some measures to unveil the tax havens which are known globally but not well exposed. The measures include: research on tax havens and dissemination of related information. Initially, these works got little attention. Nevertheless, the organisations continued their works and are still at work. They are also working to create awareness about tax evasion by rich and powerful people of different countries and transfer of financial assets to the tax havens.
For example, Global Financial Integrity (GFI), a Washington-based organisation, annually publishes estimation of illicit financial flows from the developing countries. GFI's annual report has now become a critical document to understand the illegal transfer of money from one country to another. Or, the Tax Justice Network (TJN), a global network to work on tax havens. Initiated in the United Kingdom in 2003, the network had no strong presence in Africa and Asia.
Financial Transparency Coalition, another international platform of civil societies, governments and experts started in 2009 in Washington to work on reducing illicit financial flows through the promotion of a transparent, accountable and sustainable financial system. Different national and international think-tank, research and advocacy organisations are members of the coalition.
Due to tireless campaigns and advocacy works of these organisations, tax havens or offshore jurisdictions have been exposed one after another in different forms. The latest and biggest of these exposures is 'Panama Papers.' The leaking of 11.5 million files from the Panama's law firm Mossack Fonseca that detail shell companies and tax shelters used by the world's wealthy and the powerful is now at the centre of the global debate and discussion.
The documents got passed to German newspaper Sueddeutsche Zeitung, which then shared those with the International Consortium of Investigative Journalists (ICIJ). 107 media organisations in 76 countries have been analysing the documents since then. It is to be noted that ICIJ had earlier leaked similar kind of documents. In 2014, it made the Luxemburg leak and in 2015, there was the HSBC leak. Documents and data on these two leaks were very small.
Earlier in 2013, it made offshore leaks which contained more documents and larger data. But, none of these are comparable to Panama leaks. The ICIJ work is supported by these coalitions and organisations in different forms.
A breakthrough of the global campaigners against tax havens took place last year when the much-hyped Sustainable Development Goals (SDGs) recognised the problem and included it as one of the 169 targets to address.
Target four under the goal-16 asserts significant reduction of illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime by 2030. It is no global commitment that nations across the world will work together to contain illicit financial flows.
According to GFI estimation, during 2004-2013 period, some US$7.8 trillion had been flown out from 149 developing and least developed countries. These are illicit funds or dirty money, mostly generated through money laundering, bribery by international companies and tax evasions. During the period, Bangladesh lost some $55.87 billion, illegally taken out of the country and parked to different tax havens. Thus containing illicit financial flows also requires to crackdown the tax havens.
TAX HAVENS PUZZLE: Tax havens are places where people and corporates can safely park their tax-evaded incomes and assets. These places, mostly different small islands along with some developed and developing countries or cities, offer low or zero tax for parking or investing the money without asking any question on sources.
But, tax havens not only provide tax-free and safety of parked assets, they also facilitate to reinvest or reroute the stashed assets to origin and other countries.
According to GFI, "Tax havens aren't tax havens just because they have low taxes, rather, what makes a tax haven is its opacity of financial information. This is why, tax havens are often more accurately referred to as secrecy jurisdictions."
Thus, the scopes of tax havens or offshore secret jurisdictions are quite wide. It is widening due to new innovations to keep financial assets secret and make more money by investing those. So, it is difficult to unveil the secrets as parked assets enjoy legal protection on those countries or places.
Beside tiny tax havens like Cayman Islands, British Virgin Island, Panama or Mauritius, developed countries like Switzerland, Luxemburg, Singapore and United Arab Emirates are also considered big and powerful tax havens.
Moreover, some governments are deliberately encouraging certain parts of those countries to grow as tax havens.
One best example is Malaysia which has a 'second home' programme to attract funds from other countries in exchange of 10-year multiple visa. Beyond this, the country allows Labuan, an autonomous province, to offer relaxed business visa in exchange of investing money or opening a shell company.
Shell companies are entities without active business operations or significant assets and generally act as an instrument for tax avoidance and tax evasion of legal and illegal businesses. Tax havens have hundreds and thousands of shell companies.
Owners and directors of these companies are those who transfer their funds and assets to these jurisdictions. Many of these companies later go to invest in other countries to take advantage of relaxed foreign direct investment (FDI) regime. India is one of the best examples in this regard.
Mauritius and Singapore are sources of about 60 per cent of FDI in India. Mauritius is generally used for availing tax benefits and for ensuring anonymity of Indian businessmen, Singapore, however, is used mostly by Indian entities with a regional office there.
This year, India's Economic Survey, released on the occasion of national budget, said: "A detailed examination is needed to find out if they constitute actual investments or whether they are diversions from other sources to avail tax benefits under the Double Taxation Avoidance Agreement (DTAA) that India has with these two countries."
A SIMPLE MATH: The exposure of tax haven by 'Panama Papers' is going to help global efforts in containing illicit financial outflows as well as capital flights under the framework of SDGs. Officially termed as 'The 2030 Agenda for Sustainable Development', implementation of the agendas requires at least $2.5 trillion every year. Thus financing the SDGs is a huge challenge. But, containing the outflows of dirty or black money will contribute to reducing the financing gap.
Currently, annual average illicit financial outflow is $785 billion. No doubt, it is a conservative estimation, also recognised by the GFI. Nevertheless, if half of the outflow could be contained, the amount would be around $393 billion which the countries could use for their development activities. The amount is 30 per cent of global FDI inflows worth $1.23 trillion in 2014 and around 89 per cent of official remittance inflows worth $440 billion to developing countries in 2015.
Again, net official development assistance (ODA) from 29 developed countries, Organisation for Economic Co-operation and Development (OECD) members, stood at $135.2 billion in 2014. The amount is less than one-fifth of annual average outflows of dirty money. This simple math is good enough to understand the significance of containing such outflows, especially for poor countries.
