2008 was a tough year for European tax havens. Sympathy was in short supply and friends seemed ever scarcer. Liechtenstein was betrayed by a disgruntled bank employee who sold a CD containing names of tax evaders to Germany, Britain, France, Italy and the States. The UK Chancellor of the Exchequer Alistair Darling took a swipe at the Isle of Man, Sarkozy made sure he was heard on the issue and the German Finance Minister Peer Steinbrueck, in fairly colourful language, warned neighbouring Switzerland that, if Geneva did not mend its ways, they were ready to “use the whip.”
Perhaps it was cynical politics at its best. Burdened with the possibility of a near total systemic banking failure, European finance ministers released the pressure by lashing out at their tax free neighbours. Yet the issue remains frustratingly prickly for countries burdened with three factors: High Net Wealth Individuals, medium-to-large sized populations and a consistent rule of law. How to control against the leakage of potentially taxable capital without bending the rules?**
The immediate benefits for tax havens are obvious. Small populations ensure that any revenue collected off tax exiles is more than sufficient. Even if tax havens enforce a total zero percent tax rate and dismantle all regulation and licensing fees the circulation of capital within their regions provides a major boost to the local economy.
Now, one could well argue that the reason why such pockets of low/free tax provinces is successful testifies to the effectiveness of trickle down. So far, so true. Yet there remain corollary political problems. Take for example the case of Sark – formerly Europe’s last fiefdom. The group of islands caught the eyes of the brothers Barclay who intent on making it a home worth living in, opened up their cheque books. Unhappy, however, with the regulations governing the region, they pressed for reform and eventually took the authorities to the EU on human rights’ pretexts. They won the petition and turned the region forcibly into a democracy with elections scheduled for later in the year. All this for a group of islands with a population of roughly 600. The brothers handpicked their candidates and sat back, expecting a comfortable margin of victory. Their failure, however, to account for local pride cost them success. Locals opted overwhelmingly to support a return to their feudal system. After a poor show at the polls, the brothers took revenge. Labelling the local victory as “suicide,” they pulled their investment out of Sark – leaving a sixth of the region unemployed.
Is the story anecdotal – or does it have wider lessons for the offshore community? Certainly the events should be warning enough for current tax havens. Ultimately small centres which attempt to play host to extreme levels of wealth run the risk of being dominated by private interests at the expense of the local populace. As much as Europe’s tax havens may chafe at the idea of being scolded by their bigger cousins – the current reprimands offer them the chance to rid themselves from the grip of vested lobbies. If not, they stand to become a plaything of the super-rich. Whether for this reason or others, it seems that Liechtenstein has already taken the lesson to heart. After the recent turmoil the principality has pledged to reform, heralding, perhaps, the ends of its days as a centre of tax evasion.
(** Of-course “the rules” can be flexible when needs be. Lakshmi Mittal and Roman Abromavich are tax exiles from their countries of origin enjoying non-dom status which allows them tax exemption – allowing them to spend their money freely in the plusher parts of London.)
