Recent media reports might lead one to believe that there is some connection between tax havens and the global financial crisis. However, the connection is rarely explained. Offshore financial centres (OFCs) are certainly relevant to the discredited international financial system, but their role tends to be exaggerated or misconstrued.
Illustration: Jayachandran / Mint
The Group of Twenty (G-20) communiqué issued at the London 2009 Summit stated that “major failures in the financial sector and in financial regulation and supervision” were fundamental causes of the financial crisis, and few informed observers would disagree. As one aspect of their commitment to strengthen financial regulation and supervision, the G-20 leaders agreed that they would “…take action against non-cooperative jurisdictions including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD (Organization for Economic Cooperation and Development) has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information.”
OECD itself draws a connection between tax havens and the financial crisis when it states: “Removing practices that facilitate tax evasion is part of a broader drive to clean up one of the more controversial sides of a globalized economy.” But these statements leave unexplained the exact role, if any, of tax havens in the crisis. To understand this issue, one must distinguish between three different concepts: tax evasion, tax avoidance and financial regulation avoidance. OFCs have been popular with the financial industry in facilitating avoidance, and in some cases evasion, of both taxes and regulatory requirements of larger countries.
Geoffrey Loomer and Giorgia Maffini
Tax evasion is criminal behaviour—for example, deliberate concealment of taxable income. In most nations, evasion is punishable by fines, imprisonment, or both. A notorious example is the 2008 investigation of high networth individuals from the UK, Germany, US and elsewhere, who are alleged to have evaded tax by funnelling billions of dollars to secret bank accounts in Liechtenstein, a German-speaking principality in Western Europe.