Treasure Islands - Nicholas Shaxson [138]
Another major task is to tackle the intermediaries and the private users of offshore.
Rudolf Strahm, a Swiss parliamentarian, studied every historical episode where Swiss bank secrecy has been loosened in response to foreign pressure and concluded that pressure only works when applied to Swiss banks. Every attempt to pressure the Swiss government was seen as an attack on national pride—and failed.
When a kleptocrat loots his country and shifts the looted wealth offshore, the banks, accountants, and law firms that assist him are just as guilty as the kleptocrat. When a client gets caught and goes to jail, so should his or her relationship manager, accountant, trustee, lawyer, and corporate nominee. A few organizations like London-based Global Witness have sought to call these intermediaries to account—but we now need a sea change in the world’s approach. Get serious with these people at last.
As regards the end users of offshore services, many strategies are needed. I will mention just one. Its awful-sounding name—Combined Reporting with Formula Apportionment and Unitary Taxation—masks a simple, powerful, and straightforward approach to tax, which California already uses successfully to confront transfer pricing abuses.
Instead of the current approach of trying to tax each separate bit of a multinational as if it were a free-floating entity, tax authorities could treat the multinational group as a single unit, then “apportion” its taxable income out to the different jurisdictions where it operates, under an agreed formula based on real things like sales, payrolls, and assets in each place. Each jurisdiction can tax its portion at whatever rate it wants. So consider a U.S. multinational with a one-man booking office in Bermuda, with no local sales. Current rules let it shift billions of dollars in profits there to skip tax. But under the alternative system based on sales and payroll, the formula would allocate only a minuscule portion of the income to Bermuda—so only a minuscule portion of its overall income would be subject to Bermuda’s zero tax rate. The rest would get taxed properly based on the substance of what it does in the real world, rather than on the gymnastic legal form its accountants have created for it. Several U.S. states already use it quite successfully. Countries can do this unilaterally—and if this happened widely a vast part of the tax havens’ business model would disappear. Again, developing countries could be particularly helped by this.
In this context, the financial sector needs special mention as a vast area to reform. Severe pundit fatigue has already set in on this topic, so I will just make two short recommendations that have not been a part of the general clamor.
First, policymakers, journalists, and many others can start to understand and accept how tax havens have become the fortified refuges of financial capital, protecting it from tax and regulation and in the process contributing to the latest crisis in many and varied ways. The veil of silence and ignorance can be lifted and the message spread.
Second, countries worried about the safety of their financial systems could compile blacklists of financial regulatory havens based on the Jersey-Delaware notion of the captured state: a place that seeks to attract money by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere. This blacklisting will be easy enough, technically speaking, once we understand what we are looking for. With these blacklists, appropriate prohibitions and regulations—many of them very simple—can be put in place to help countries reclaim their sovereignty and respect voters’ wishes once more. Along with this another benefit would flow: Once these berserkers in the international regulatory system are out of the picture, international