The role of offshore tax havens have come under increasing fire amid growing global concern over tax revenues, with a calls for greater transparency from the recent G8 summit and the recommendation of international tax rules by the OECD in next month’s G20 meeting.
An online database of private offshore banking entities, launched last month by the International Consortium of Investigative Journalists, has only added fuel to a fire that has been fanned by voter dissatisfaction over austerity measures and higher taxes.
But the hardline push by developed countries making up the “Global North” has been met by the softer line of the “Global South”, where the region’s economic powerhouses are home to clients who account for the plurality of Pacific Island tax-haven business.
And with the economic power shift from the north to the south, the future of Pacific Island tax havens may rest on the outcome of a much bigger struggle between the United States and Europe, and the emerging economies of Asia.
Spotlight on tax havens
Tax havens offer low levels of tax and regulation, and thick layers of secrecy. These offshore financial centres are integral to the shadow banking system that many see as having caused the GFC by helping to engineer complicated, high-risk financial structures that are far removed from underlying assets.
This parallel banking system used unregulated tax havens to channel vast flows of foreign and domestic money into mortgages, creating a speculative price bubble in residential and commercial real estate around the world. This sparked intense and reckless competition between lenders to make bad loans and created substantial debt burdens, especially between 2004 and 2007. The credit crisis emerged when this shadow banking system started to implode on 7 August 2007.
The aftermath of the global financial crisis has created worries among many policy-makers in the Global North regions of North America and Europe, about the extensive use of tax havens in the contemporary financial world.
The persistent recession in those economies - with declines in real estate prices, consumption, investment and household wealth - has required expensive government stimulus programs and has produced tax revenue shortfalls and gaping budget deficits. It has also increased politicians’ attacks on offshore havens for facilitating tax evasion. The collapse of the banking systems in Iceland and more recently, Cyprus have added to calls for further regulation or even elimination of such offshore havens.
Advocacy groups for the poor in developing countries have also mobilised against havens, blaming them for abetting capital flight, under-investment, corruption, drug trafficking and elite wealth/public squalor in the Global South. Tax havens seem to be battling for their survival, with governments and international organisations proclaiming they will be restricted or eliminated altogether.
But are these images helpful for understanding the offshore financial centres in Oceania? Samoa, the Marshall Islands, the Cook Islands and Vanuatu are the largest centres, but there are also small niche offshore financial centres in the region, such as Nauru and the Federated States of Micronesia.
Samoa focuses on the growing China trade. Its offshore centre is one of the major conduits for investment in China and the two countries enjoy very close relations.
The Marshall Islands excel in flags of convenience for ships and offshore oil rigs. The decline in international trade following the GFC produced a shipping crisis, which accelerated the moves by maritime companies to reduce labour, tax and regulatory costs by using the flags of convenience offered by offshore centres such as the Marshall Islands. The islands had already been prospering as the legal domicile of many of the world’s largest shipping companies, with the third-largest fleet of ships in the world (over 2780 vessels totalling more than 87 million gross tonnes).
Vanuatu is also a major supplier of flags of convenience, registering about 600 ships with about 2 million gross tonnes. The Cook Islands play a pioneering role in asset protection trusts. Vanuatu is more oriented toward offshore insurance, banking and gambling. Nauru registers offshore companies. The Federated States of Micronesia tailor offshore insurance companies for Japanese clients.
North vs South
Since the GFC, European and North American governments have led international organisations such as the G8 and OECD in a more aggressive attack on offshore tax havens. However, the crisis dramatically changed the power relations between the Global North and Global South, as North America and Europe no longer contribute as much to global economy growth as the developing countries of the Middle East, Russia, Latin America and especially Asia.
Leaders of governments in the Global South take a much softer line against offshore havens. Clients in these countries account for a major and growing proportion of tax-haven business. It is consequently much easier to mount an assault on tax havens at the G8 (where the Global North dominates) than at the more globally inclusive G20 (where China has been notable, among developing countries, in derailing some of the more aggressive moves against offshore centres).
And Pacific Islands tax havens are well placed to take advantage of the shift of economic power from the Atlantic to the Pacific. Data from the Bank for International Settlements (BIS), the bank for central banks, highlights their vitality. The BIS is likely to understate banks’ asset claims by not reporting off-balance sheet activity (which is probably several times greater than on-balance sheet activity) and excluding assets owned by mutual funds and private companies and trusts, which are very important in the Pacific Islands offshore centres for which we have BIS data.
Between year end-2006 and year-end 2012, consolidated asset claims of all reporting banks (onshore and offshore) grew only 14% in the global economy as a whole. In the Marshall Islands asset claims more than tripled (from US$11.2 billion to US$37.4 billion), in Samoa they more than quadrupled (from US$1.0 billion to US$4.7 billion), and in Vanuatu they more than doubled (from US$0.3 billion to US$0.7 billion). No appropriate figures are available for the Cook Islands, but the trend in the Marshall Islands, Samoa and Vanuatu is clear and consistent over the six-year period.
Some offshore centres may be battling for their prosperity or even their survival, but the future of those in the Pacific Islands may rest on the outcome of the much bigger North-South battle.