Offshore financial centres and international development:

An NGO perspective

Read our article in the Cayman Financial Review Magazine, eversion 

This article gives an NGO perspective on the role of offshore financial centres in global development and why it is in the self interest of OFCs to share information.

Since 2008, the world has changed dramatically with offshore financial centres at the centre of this storm. Initially, some responsibility for the 2008 financial crisis was laid at the door of light touch regulation in OFCs, and with the fiscal bases of OECD countries depleted by bank bailouts, the G20 sought to crack down on tax evasion and tax havens.

More recently, the ‘Occupy’ movement has sought to articulate the frustrations of global and national inequalities under the banner ‘We are the 99 per cent’.

Are these campaigns designed to bash big business or small financial centres for the sake of some media exposure? For some people, this may be the case, but at Christian Aid, we have a different agenda.

Tax for development

We have consistently sought to highlight the importance of taxation for development and expose the harmful impact of financial secrecy on the poorest countries, as they seek to raise revenue for investment in healthcare, education and welfare, despite significant challenges and capacity constraints. This is a growing consensus shared by credible and respected institutions such as the IMF, the World Bank, the UN and the OECD.

In the words of US Secretary of State, Hillary Clinton “Weak tax systems rob states and citizens of the resources needed. Why? Either because the taxes are not levied at all, or because it’s very easy for people to avoid paying them…in the absence of funding public services, it’s very difficult to achieve the kind of outcomes for prosperity, growth, opportunity that we seek.”

By paying taxes we are investing in our collective development: tangibly, by the services states can provide; and intangibly, by the strengthened bonds between each other and between ourselves and the state.

Countries can make striking inroads into poverty thanks to improved tax systems. In Rwanda for example, an improved revenue authority has resulted in a three-fold increase in tax revenues between 1998 and 2006. These higher revenues have led to more money being spent on services such as health and education.

There is also a business case for strong tax systems. It is much preferable to do business in countries where investments are protected by stable judicial systems, where there are good roads, an educated population, where the electricity doesn’t cut out every other hour. Countries with strong tax administrations and a high tax to GDP ratio tend to be more stable and have stronger protection of property rights.

Many developing countries face huge challenges in raising revenue. With their limited resources, they often find it difficult to deal with relatively simple tax issues, never mind the complexity of taxing multinationals.

Here we need to build capacity in revenue authorities. Many would want the debate to stop here. But this is not enough.

For tax policy to be credible, it needs to be scrutinised. Christian Aid has been working with our partner organisations in countries like South Africa, Philippines and Nicaragua, to engage in tax debates – monitoring budgets and challenging corruption. But again, this on its own is not enough.

As developing countries engage in international trade we need a framework in place to ensure that they can capture the benefits – enabling them to attract investment while collecting revenue. Unfortunately, financial secrecy undermines this kind of international cooperation and increases the difficult for developing countries in taxing wealthy elites.

Unscrupulous multinational businesses operating in developing countries are also culpable – with tax evasion and avoidance resulting in estimated revenue loses greater than what they receive in aid. This and other forms of ‘Illicit capital flight’ have been recognised by the IMF, World Bank, the UN and OECD, as a major problem for developing countries that must be addressed if we are to achieve the Millennium Development Goals.

The role of the offshore financial centres

Some have suggested that OFCs are a cancer eating away at the global financial system and should be eliminated. Others suggest that offshore centres play an important role in greasing the wheels of the global economy and facilitating investment in fragile states.

Christian Aid takes neither position but rather focus on the provision of financial secrecy. Any enforcement officer will know that to collect taxes you need strong legislation and you need timely information.

We need effective information exchange between states – so that one state does not undermine the tax base of another through providing financial or banking secrecy.
If secrecy is the problem, then transparency is the solution.

We want a level playing field where jurisdictions are transparent with one another though effective information exchange agreements. We want international standards to go further than simply exchange of information on request by moving towards Automatic Exchange of Information – providing significant deterrent effects to tax evaders.

Of course, there are checks and balances that need to be put in place in order to ensure taxpayer confidentiality and so on – but this is a long term project where capacity building goes hand in hand with a willingness to exchange information.

The European Savings Tax Directive is perhaps the best opportunity for this to take place – but there are other opportunities. G20 members recently agreed to sign the Convention on Mutual Administrative Assistance in Tax Matters which provides for information exchange on request, spontaneously and automatically in some circumstances.

Transparency in the interest of offshore financial centres?

Of course, some argue that it is not necessarily in the interests of offshore financial centres to share information. But this is changing. The business model of offshore financial centres is predicated on having a strong reputation. But increasingly financial opacity is becoming unacceptable among citizens, civil society groups and in the international political sphere.

Some of the criticism of offshore jurisdictions is fair – and some of it isn’t. There may be legitimate reasons and honest business that occurs in these jurisdictions and some are small economies, geographically isolated, and facing numerous threats – not least, climate change.

But whether criticism is fair or not, the demand for better governance, less corruption, more transparency will increase and 2012 may well be a tipping point.

The Arab spring showed us the power which people have to transform their countries – even under the most oppressive regimes. And this discontent is spreading among those who witness the inequalities and injustice of how our economic system is managed. One only has to look at the Occupy Wall Street movement which within days spread right across the globe to witness this discontent. Tax evasion and avoidance is firmly on the agenda and OFCs will not escape this sentiment.

The pressure for OFCs to be more transparent will not go away. More major NGOs are starting to campaign on these issues while local campaign groups are thinking more about the impact of beneficial ownership transparency as they consider issues such as housing quality. So how can offshore financial centres respond to these changes? I think there are three possible responses.

The first is what I call the ‘Tax Taliban’ approach. Bury your head in the sand and demonise anyone who criticises you as nonsensical, having vested interests and so on. This does not seem a constructive way to move the debate forward.

The second is to hire PR firms and repeat statements such as “we are a well regulated and transparent jurisdiction” to any criticism that comes your way. I would argue that people are already starting to tire of this message if they don’t see evidence of change.

The third is to recognise that the tide is turning with regard to transparency and exchange of information – and respond to this in a way which protects your economies, supports stability in the global economy, challenges corruption and assists developing countries to mobilise revenue.

This year that Isle of Man dropped from 24 to 36 in the Financial Secrecy Index due to its adoption of the European Savings Directive. Other OFCs should demonstrate leadership by proactively agreeing to share information with other jurisdictions automatically.

When these changes are made in a way which delivers effective transparency, NGOs, multilateral organisations, governments and investors have an interest in welcoming them. Of course this will mean change for some OFC’s business models.

Change is not always comfortable, but in a world where 22,000 children die each day as a result of extreme poverty, where 80 per cent of the world’s population live on less that $10 a day, where the poorest 40 per cent of the world’s population accounts for 5 per cent of global income while the richest 20 percent accounts for three-quarters of world income, change is necessary.

Greater transparency and accountability in the long term will address some of these inequalities in a structural and transformative way. It is not just in the interests of the poor. We believe it is now in the interests of all – including OFCs – to join this effort.

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David McNair

He leads a team working on economic policy and advocacy, focused on growth, livelihoods, resource constraints, social protection and markets. Previously, David led Christian Aid's work on tax and development, and played a key role in turning a niche NGO campaign into a global issue on the agenda of the G20, EU, OECD, UN and many international businesses and civil society networks. David has served as a trustee for Tax Justice Network, Jubilee Debt Campaign (UK), and Debt and Development Coalition Ireland. He was also an active member of the OECD's Informal Task Force on Tax and Development. He holds a PhD in Social Geography from the Queen's University of Belfast.

Dr David McNair
Head of Growth, Equity and Sustainable Livelihoods
Save the Children UK
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