Under intense international pressure to lift banking secrecy, the first and biggest of the world's "tax havens" -- places that charge low or no taxes to foreigners -- is ceding some ground. In a deal signed on Oct. 6, Switzerland agreed to tax money held in its banks by British residents (it had already done a similar deal with Germany). These customers face a levy of up to 34 percent as well as a withholding tax, which starts in 2013.
That could bring the British treasury around $7.8 billion. But Nicholas Shaxson, author of "Treasure Islands," a book on offshore finance, calls it a "Swiss tax swizz": the country will in effect pay a fat fee to avoid revealing clients' names. That undermines efforts at the Organization for Economic Co-operation and Development, a Paris-based club of mostly rich countries, to set international standards on tax evasion.
The fact that Switzerland did a deal at all reflects a changing climate for offshore finance, which has flourished for 50 years. Its defenders still have strong arguments to muster. The most controversial is the Swiss stance, which sees tax as a morally neutral battle of wits against the fiscal authorities: quite different from money-laundering or fraud. From that viewpoint, banking secrecy is a human right and states that try to overturn it are overreaching their powers.
Other less idealistic arguments abound. Some say that companies' legal duty to shareholders necessitates using offshore finance to reduce and simplify taxes; it is all the more important when regimes and rates differ wildly in the onshore world. Offshore jurisdictions also provide the tax and regulatory competition that keeps grasping governments and officials in check. Even if a company's profits are higher as a result of using a tax haven, that money will flow out and eventually be taxed, for example as dividends when it reaches shareholders.
As public faith in the universal benefits of markets and globalization wobbles and public coffers empty, such arguments become wearisome. Small firms are angry that clever offshore schemes favor their bigger competitors. Citizens and policymakers are readier to hear a broader case: that offshore finance skews the global distribution of wealth, away from poor countries and those that levy taxes to pay for public goods.
Global Financial Integrity, a campaigning group, says poor countries "lose" more than $1 trillion a year to tax havens, around 10 times the aid they receive. Two-thirds of this is tax evasion and avoidance, the group says, the rest transfers by criminals and the corrupt. Another outfit of fiscal inquisitors, the Tax Justice Network (TJN), cites research by the Bank for International Settlements, the Boston Consulting Group and McKinsey to calculate that global offshore deposits amount to at least $9 trillion, some $2 trillion more than the total held at home by American banks.
Legal and rational though this activity may be, the results of the offshore boom can be startling. Mauritius is the largest investor in India and the British Virgin Islands is one of the biggest in China.
Tax havens make easy money from registering companies and processing payments -- in effect, earning a rent from their sovereign status. Most would otherwise be merely indifferent tourist destinations.
