Tax havens: an example of banks fighting to retain opacity in the financial system

In an interesting article, the Guardian looks at the fight to bring transparency to tax havens so that countries can know if their citizens are paying what they owe in taxes.

Clearly, this is a major issue given the amount of sovereign debt outstanding.

It is another example of why transparency must be brought to all the opaque, corners of the financial system.

Regular readers will not be surprised to learn that leading the fight to block transparency are the banks.

The world is seeing the first stirrings of an emerging new architecture of global transparency in taxation which could, if pushed forwards, help governments for the first time raise serious revenues from the estimated $21-32 trillion sitting offshore. 

Switzerland, in alliance with the tax havens of Luxembourg, Austria and Britain, is leading the charge to derail it.

And who in these countries would be leading the charge to derail transparency?  Why the banks whose private client business model is based on helping their clients defer paying taxes.

The battle now under way hinges on a powerful transparency principle called automatic information exchange. According to this, governments routinely tell each other about the cross-border assets and income of one another's citizens so they can tax them appropriately. 

This is the gold standard of transparency and the basis for a multilateral European scheme, the European Savings Tax Directive, which includes 42 European and other countries. This multilateral scheme is riddled with loopholes, but it is already up and running. Amendments to plug those loopholes are being prepared. 

A second pillar of the emerging architecture is run by the OECD, a club of rich countries that contains several tax havens (including Britain, which partly controls a number of major tax havens, such as the Cayman Islands, the British Virgin Islands and Jersey). 

The OECD scheme runs on a ridiculously weak transparency principle: information exchange on request. Here, you cannot make blanket information requests to a tax haven: you must ask, on a case-by-case basis. That means you effectively have to know the information you are looking for – before you ask for it. Precious little information flows through these narrow pipes....

It is no surprise that the banks oppose automatic information exchange in favor of information exchange on request.

This is yet another example of the veil of opacity allowing misbehavior to occur.  This time the party potentially engaging in misbehavior by not paying their taxes is the client.  However, they are aided and abetted in this by the bankers.

In August last year, Switzerland threw a huge spanner into the works. It signed bilateral tax deals – "Rubik agreements" – with Germany and Britain, based on a very different principle: wealthy people with Swiss accounts can preserve their secrecy and, instead, merely pay a one-off, withholding tax on assets, and a bit of future income. "Trust us," say Swiss bankers – who have centuries of form helping the world's wealthy get around the rules of civilised society.... 

The Rubik project is a Swiss swindle – and a humiliation for this government. If successful it would, in the words of Professor Itai Grinberg of Georgetown University, "stifle the emergence of multilateral automatic information exchange". 

The Swiss Bankers' Association, which designed Rubik, has explicitly admitted that its original purpose was "to prevent" automatic information exchange: in other words, to kill the European Savings Tax Directive. In particular, crucial and powerful amendments to plug the directive's loopholes are now held up because Luxembourg says it won't accept them if Germany and Britain (and now the tax haven of Austria, which has signed its own Rubik deal) get special bilateral treatment from Switzerland. 

This obstructionism was the plan all along. ....

Thankfully, Germany's Bundesrat is widely expected to throw its Rubik deal out in a vote on Friday. ...  A top Green party official called it "a slap in the face for all honest taxpayers"; and the head of the centre-left Social Democratic party, has accused Swiss banks of engaging in "organised crime". 

If Germany rejects the deal, as seems likely, Austria will be easily dealt with, leaving Britain alone as the last big obstacle to progress in the greatest transparency project the world has seen.