Poorer economies, rather than wealthier banking centres, have been the big losers from a global crackdown on offshore tax havens, new research suggests.
Efforts by the world’s major economies to control the movement of money to offshore tax havens has only ended up moving the $8.2 trillion in offshore flows from poorer economies to major banking centres, such as Switzerland and Luxembourg, according to a report delivered to the Royal Geographic Society.
The report also highlights that EU’s measures to reduce the amount of money sent offshore had ‘few observable effects as at year end 2010’.
Written by Dr Daniel Haberly and Dr Darius Wójcik, the report used IMF data up to 2010 to examine the amount of money in foreign direct investment (FDI) that had been dealt with in tax havens and the effects of international legislation in bringing this money back onshore.
Speaking to PBI about the report’s findings, Haberly said: "The idea that off-shore finance is apolitical as usually suggested is wrong, it relates to politics."
The report found that after ten years of effort, the OECD’s targeting of offshore havens had done little to reduce offshoring, which could be as much as 30% of FDI.
Instead it found that offshoring had simply shifted the money from poorer economies, such as the Seychelles, to more traditional tax havens like Switzerland or the Channel Islands.
The report sees this as ‘hypocrisy’ where smaller tax havens outside of the OECD have been blacklisted while simultaneously failing to address offshoring within the OECD ‘club’.
The report puts the desire to shift money back to traditional centres partly down to the fact that ‘FDI is deeply rooted in and conditioned by face to face interactions.’ For this reason travel time for finance professionals to meet clients was found to be a more important in decision processes than language.
In addition, the control of tax havens by former colonial masters and major financial centres, in particular London, was also blamed for the transfer of assets due to a tendency to want to protect former colonies.
Haberly said: "Offshore finance is Britain’s ‘second empire,’ and London has primary control over UK-dependent tax havens."
He estimated that 69% of all outward FDI examined came from the UK, its dependencies or former colonies.
Call for UK to take ‘lead responsibility’ on tax
As a result, the report states that it is the lead responsibility of the UK to address the regulation of offshore money within the OECD and EU.
The report’s writers believe this to be the first report of this kind, but do acknowledge limitations in the data used.
The IMF data only ran up to 2010, and within its content was limited to bilateral and declared FDI.
There was also the risk that illicit money used in money laundering could affect the findings.Haberly pointed out however that Illicit money would eventually make its way back into the data as it is brought back onshore.
In its conclusion the report finds that legitimate FDI does not flow towards poorer economies but evenly between wealthy and poorer countries.