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COVID-19 puts offshore tax havens in the firing line

Friday, 01 May 2020
This is an opinion article by an external contributor. The views belong to the writer.

Even as they scramble to support tens of millions of companies and employees whose activities have been disrupted by the COVID-19 pandemic, some European governments are going out of their way to stress that companies based in offshore tax havens will be excluded from their financial assistance schemes.

France became the third country to do so last week, joining Denmark and Poland, though not all countries are using the same list to identify tax havens. Denmark uses the EU’s official list of “non-cooperative jurisdictions,” while France includes both those locales and additional tax havens in its national anti-fraud law.

Closing down the loopholes that deprive European treasuries of €170 billion every year has been a goal of finance ministers, activists, and civil society groups for decades. In the age of coronavirus, though, the need to pay for the hundreds of billions of Euros in economic stimulus EU governments are now injecting into their economies may well produce a new sense of urgency. Major hurdles do of course remain: many of the havens in question are linked to key partners, including the United States and the United Kingdom. Others which have been left off the EU blacklist but singled out by NGOs such as Oxfam are EU member states themselves.

Rising tensions, even before the crisis

The issue of tax havens was already taking on added significance before the COVID-19 crisis hit Europe because of Brexit. Against the backdrop of difficult negotiations over the parameters of Britain’s future relationship with the EU, Boris Johnson’s government revisited plans to open “free ports” in the UK that the European Commission sees as a money laundering threat. Those free port plans echo of the push by some forces in the UK for a so-called “Singapore-on-Thames” model, wherein the City of London would undercut European financial regulations by deviating from the bloc’s rules.

While the British financial industry has itself rejected that push for deregulation, Brexit has already brought the EU and the UK into conflict over the British Overseas Territories associated with tax dodging. Just weeks after the UK officially left the European bloc on January 31, the EU added the Cayman Islands to the aforementioned “black list.” The move reflected the acrimony in the negotiations between London and Brussels over their separation. It also represented the loss of British influence over the EU’s regulatory decisions, as the UK had been able keep the Cayman Islands and the British Virgin Islands on the EU’s so-called “grey list” for as long as it was still inside the bloc.

The EU is not the only supranational bloc vexed by the issue of offshore tax havens like the Caymans. The Gulf Cooperation Council (GCC)’s investment arm, the Gulf Investment Corporation (GIC), has gone to court in both the Cayman Islands and the United States in pursuit of hundreds of millions of dollars it holds have gone missing from the Port Fund, a Caymans-based investment vehicle controlled by KGL Investment. According to the GIC’s application for discovery in the Southern District Court of New York, the Port Fund concluded a $1 billion asset sale in the Philippines in 2017 but only publicly declared $496 million of that amount, with the remaining half-billion dollars still unaccounted for.

The GIC’s filings give voice to the body’s suspicions that at least some of those funds have gone towards paying for a controversial lobbying campaign staged on behalf of Marsha Lazareva and Saeed Dashti, two KGL Investment executives convicted of embezzlement by Kuwaiti courts. As detailed by Bloomberg earlier this year, that $4.9 million effort has recruited prominent political personalities, such as former FBI director Louis Freeh and Cherie Blair, to generate diplomatic pressure on the Kuwaiti government. It has also funded staged protests as well as “misleading” media coverage, with a number of right-wing American publications portraying Marsha Lazareva in particular as a Christian being persecuted by the judicial system of a Muslim country.

What are the next steps?

While this and other episodes serve as reminders of the global challenge posed by opaque jurisdictions such as the Caymans, the current crisis may give the EU a unique opportunity to impose new standards of transparency and accountability on both tax havens and the companies and individuals who use them. Polish finance minister Tadeusz Kościński has put forward a number of proposals to this effect, pushing for the EU to expand its own powers of taxation by levying duties on American digital heavyweights such as Google and Amazon.

Experts such as the University of London’s Richard Murphy point out that the current bailout packages give EU governments a significant amount of leverage over companies engaging in problematic behaviour. EU leaders are now well placed to use that leverage to force companies to adhere to greater standards of transparency and compliance, on tax issues but also on matters of environmental sustainability and fair compensation for employees.

The greatest possible step towards reform, however, would entail certain EU member states getting their own houses in order. This is especially true of the Netherlands, which has emerged as the spoiler of Italian and Spanish pleas for greater European solidarity in terms of pooling debt but which has itself been denounced as a tax haven responsible for $10 billion in lost corporate tax revenue every year. A significant proportion of those losses, as determined by the Tax Justice Network (TJN), have come at the expense of Italy and Spain.

The Tax Justice Network has put forward recommendations for ending the use of tax havens entirely, including by setting minimum corporate tax rates EU-wide and requiring companies to pay taxes in the same jurisdictions where they employ workers, as opposed to where they declare profits. Such moves are likely to be bitterly opposed by intra-EU tax havens such as the Netherlands and Ireland, such drastic measures may now be unavoidable if EU governments want to keep themselves on sound fiscal footing.