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The Problem With Tax Havens

A tax haven (or "fiscal paradise" in french) seems like a benign, if rampant, breach of the law. It's just a matter of shifting money around, right? Except when a secret company/tax haven is used to shield the activities of a notorious African dictator. Suddenly, the mysterious offshore world no longer seems so harmless.
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Canada Should Embrace Global Movement towards Tax Transparency

The French, it has oft been said, have a wonderful way with language. What sounds rather bland in English, rolls off the French tongue with a touch of elegance and élan. And so it is with the rather clumsy term the English-speaking world uses when referring to where many people hide their wealth from prying eyes: tax haven. The French have a far more pleasant term for these places: they call it a paradis fiscal, a fiscal paradise.

Fiscal paradise, doesn't that sound much better? No references to unseemly topics like taxes, or worse, worrying about whether to pay them. By using the French term, all the tawdry dealings of the rich and powerful get a makeover that would make any Caribbean hotel spa proud. All that might be sinister or criminal about what is hiding behind the veil of a nominee trust or an anonymous shell company seems somehow rather innocuous when it happens in 'paradise.'

Except when a secret company is used to shield the activities of a notorious African dictator, then the mysterious offshore world no longer seems so harmless. The case of the dictator's account was included in a revelatory report last month by the International Consortium of Investigative Journalists, which showed some 120,000 offshore companies and trusts were used by royalty and rogues to "dodge taxes, and [fuel] corruption and economic woes in rich and poor nations alike." The deputy speaker of Mongolia's Parliament, the husband of a Canadian Senator, and -- mais non! -- the campaign treasurer of the French President were among those found to be hiding troves of funds offshore.

While few countries are immune from this scourge, the loss to the developing world is immense. Global Financial Integrity estimates that close to $1-trillion in illicit money flows out of developing country economies each year and into the murky world of international finance. To put that figure in perspective, for every dollar of foreign aid that flows into a poor country, about $10 of illicit funds flow out through the use of disguised shell companies, nominee trusts, and other mechanisms. At the current rate of outflow, there is no way that foreign aid can begin to help poor economies develop.

To be sure, substandard governance in developing countries is a large part of the reason illicit capital exits poor nations in such massive quantities. But the other side of the equation is that financial instruments used to facilitate the movement and laundering of the illicit funds are a product of the West. And since those instruments hurt developed nations (with their very good governance systems) as well as developing countries, it should be incumbent upon the wealthiest states to correct the part of the problem within their ability.

Eight of the world's richest nations (the G8) meet each year to address the most pressing issues in the global economy. British Prime Minister David Cameron, the chair of this year's G8 Summit, is focusing the meeting on curtailing tax haven secrecy, as he spelled out in The Wall Street Journal last month. However, the Canadian government is unreasonably reticent to embrace Mr. Cameron's push to clean up the global financial system, despite news earlier this month that Canadians have twice-as-much money squirreled away in offshore tax havens than they did eight years ago.

As a start, implementing transparency -- rather than regulatory -- measures will go a long way toward curtailing the offshore problem. Requiring that owners of companies, foundations, and trusts be available in public registries -- if not known to law enforcement -- in the jurisdiction in which they are created would be a master stroke to eliminate the current shadowy nature of offshore finance. The Canadian Parliament failed to make this a priority in its major May report on tax haven abuse, despite testimony from leading experts explaining that anonymous shell companies are the number one tool used by criminals and tax evaders to launder their biens mal acquis -- their ill-gotten-gains.

Further, requiring the multilateral automatic exchange of tax information globally between jurisdictions would end hide-and-seek banking by the super-rich. At least ten European countries and most of the British overseas territories -- including notorious tax havens like the British Virgin Islands, Bermuda, and the Cayman Islands -- announced this Spring that they will begin sharing tax information automatically amongst themselves. Still, the Canadian Parliament remains a laggard here too, with the Finance Committee's report failing to embrace automatic exchange of tax information as a necessary step. Representatives of the G20 -- the twenty largest economies in the world -- noted in April that the automatic exchange of tax information is "expected to be the standard" moving forward. It's time for Canadian policymakers to catch up with a world moving beyond tax haven secrecy.

Finally, multinational corporations should be required to publicly disclose their subsidiaries, profits, taxes paid, sales, and employee levels on a country-by-country basis. As the recent U.S. Congressional hearings on Apple's tax practices highlight, it is now the norm for multinational corporations to manipulate trade transactions between their own subsidiaries to 'magically' shift their profits from countries like Canada and the U.S. (where they're selling products) to low- and no-tax countries like the British Virgin Islands and Luxembourg. Measuring the scale of the problem is made more difficult by the fact that these companies are not required to disclose where their profits are made. Canada should join world leaders to make country-by-country reporting a mandatory requirement for international businesses.

Implementing transparency, unlike regulation, is not technically difficult to accomplish. Mr. Cameron has placed these issues at the forefront of next week's G8 Summit. Canada should embrace this agenda and become a constructive leader in the fight against tax haven abuse. Transparency is relatively simple to achieve. And simpler is always better. N'est-ce pas?

Tom Cardamone is Managing Director of Global Financial Integrity, a non-partisan, non-profit research and advocacy organization based in Washington, DC. In February, he testified before the Canadian Parliament's Standing Committee on Finance as it prepared its latest report on "Tax Evasion and the Use of Tax Havens."

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