The offshore havens that sink nations


FINANCE: COLM KEENAreviews Treasure Islands, Tax Havens and the Men Who Stole the WorldBy Nicholas Shaxson
The Bodley Head, 336pp. £14.99

IN OCTOBER this newspaper reported that Google had over the past three years cut its tax bill by €2.2 billion using a strategy known as the double Irish. Profits from Google’s non-US operations were shifted through its Irish subsidiaries and onwards towards Bermuda as part of an operation that allowed the multinational to reduce its corporation tax on non-US earnings to a minuscule rate of 2.4 per cent.

In 2005 The Irish Timesalso reported that an Irish subsidiary of Microsoft made a profit of €682.4 million but paid no corporation tax. The profits came in part from Microsoft’s operations in Africa, where Bill Gates, the company’s chairman, has been busy making charitable donations. The company at the heart of the tax structure was based at the offices of Matheson Ormsby Prentice solicitors in Dublin.

It is worth considering what is going on here. Companies and people who don’t pay their due level of tax shift the burden on to those who do. They make use of the educational and other infrastructures that underpin modern economies while trying to reduce the financial contribution they make towards these social goods. They want all the pluses of modern democracies while seeking to reduce their obligations to zero. They are behaving like parasites.

Corporation tax in the US can be as high as 35 per cent. By keeping their profits in offshore locations such as Ireland, the Caymans and Bermuda, US multinationals are in effect getting interest-free loans from the US government, to the competitive disadvantage of those businesses that do not or cannot avail of offshore tax structures.

Furthermore, the corporations are using the same systems and structures as international crime organisations, the most corrupt despots on the globe and the world’s growing army of “non-resident” multimillionaires.

Sixty per cent of global trade now takes place within multinationals, but the way they account for their profits means that the tax hit occurs where they choose, usually in jurisdictions that have relatively small populations. In this excellent book the African-born journalist Nicholas Shaxson explains how this pattern has disastrous consequences for global politics and human well-being.

It is the poorest of the poor who suffer the most. Multinationals not only suck money out of the poorer regions of the earth but also undermine the efforts of underdeveloped countries to organise their societies. Taxation and the accountability that should go with it are much more beneficial to a society than foreign aid.

The development of global business in a way that hollows out the capacity for national political organisation, as well as the role of “offshore” in this process, is the subject of Shaxson’s exploration. The world’s foremost banking jurisdictions come in for particular attention.

Some of the examples offered are breathtaking. In the 1990s, for example, Russia and Angola negotiated over the latter’s debts to the former. A $1.5 billion deal was struck, but Angola’s payments never went to the Moscow exchequer. Instead the money went into UBS bank accounts in Geneva belonging to officials on both sides, as well as to Arkady Gaydamak, the Russian who helped broker the deal and whom Shaxson interviews.

Other instances are given where the populations of poor countries have to pay back enormous loans apparently given to their countries but in fact snaffled by their corrupt leaders, who stash the money in First World bank accounts. The key point is that these banks, located in Switzerland, Bermuda, the Cayman Islands, Dublin, London, Jersey and so on, welcome such deposits and fight efforts to impose obligations of disclosure. Often solicitors and accountancy firms are involved through the creation of offshore trusts and companies whose ownership cannot be established.

Capital flight from developing countries, whether legal or illegal, is of such a scale that it entirely overshadows the amounts channelled in aid to such regions by governments, charities and philanthropists. Raymond Baker, director of the Global Financial Integrity organisation in Washington DC, is quoted by Shaxson as saying the offshore system is “the ugliest chapter in global economic affairs since slavery”. Few who read Shaxson’s book will think otherwise.

After the second World War the economist John Maynard Keynes and others worked to create a global regime that caged the beast of international finance. Shaxson shows how the demise of the British empire and decolonialisation during the 1960s occurred just as the City of London worked to use locations such as Jersey and the Cayman Islands to help free banking from the restrictions that had been imposed.

By the 1970s the beast was out of its cage and the conditions that had created the “golden era of capitalism” – the two decades up to the mid 1960s – were slowly undermined. Keynes, he writes, was very clear in his view that freedom for finance means bondage for people and their democratic representatives. It is a view, surely, that few Irish people would argue with.

Shaxson gives a broad meaning to the word offshore and includes not just locations such as Bermuda, the Caymans, Jersey and Dublin but also London (aka Londongrad), Delaware and Florida. His definition includes the following: “A place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.”

His chapter on Jersey is terrifying, especially in its portrait of the obnoxious English aristocrats who spend their time thinking of new ways to attract money by undermining international regulation and civilisation generally while bemoaning modern developments such as universal suffrage.

Such regimes, through international “competition”, seek to undermine the rules more sane locations seek to put in place in order to run their societies. With so many of the bad practices of international banking having survived the 2008 crisis it is easy to believe that “offshore” is winning, and, Shaxson writes, it is easy to despair when even people such as Bono and the others members of U2 are moving their business to the Netherlands to avoid tax. But despair is not an option, he argues, because so much is at issue. Offshore needs to be put back in its cage, and in his final chapter he suggests how that can be done.

Colm Keena is Public Affairs Correspondent of The Irish Times