UQePressPacific Studies Series. St. Lucia, QLD: UQ ePress, 2012. xi, 411 pp. (Map, tables.) A$38.50, paper. ISBN 978-1-921902-21-2.
Tax avoidance. If you are a major, multinational company, incorporated in the UK, Australia or the United States, here’s how you do it. You re-incorporate yourself in some country that has low or, even better, no taxes on corporate profits, and that offshore tax haven becomes, for tax purposes, your new home. No, you don’t have to be doing business there; you don’t have to move your head offices there, or, indeed, any office at all. All you need there is an agent who will put your name on a brass plaque on their door, together with the brass plaques of all the other companies they represent. From then on, all your worldwide profits are credited to that offshore company, making your taxes low or non-existent.
And how, you may ask, do you, the domestic company—still operating out of London or Sidney or New York though, now, technically, a subsidiary of your own offshore holding company—get your hands on those profits without having to pay taxes when they come to you? At this point, the tax avoidance game gets even better. The domestic company borrows that money from its offshore parent, thereby realizing no income. Quite the opposite, that infusion of cash puts a great big liability on its balance sheet.
The use of offshore tax havens and financial centres is not new, although—and this insight is one of the many contributions of van Fossen’s readable and valuable study—with the decline of colonialism and the concomitant increase in the number of small sovereign states, the jurisdictions able to become offshore havens has multiplied. In the nineteenth century, most tax havens were in Europe—Switzerland, Lichtenstein and the Channel Islands, for example—close to the companies they served. The island nations of the Pacific have only recently become centres of offshore financial activity; they had to wait both for the development of rapid communications channels and for the end of colonialism, which freed them from the constraints of rule by the US and Australia, neither of which favours offshore tax havens. Now, however, the Pacific Islands are major players:
The Cook Islands concentrate on forming trusts to protect assets from seizure by courts, wives, husbands or creditors. Samoa is excellent for registering international companies, which can hold stocks, bonds real estate and other assets so that taxes can be avoided on incomes from dividends, interest, rents or profits when the holdings are sold. Vanuatu has more offshore insurers, banks, casinos and tax-free real estate than any other Oceanian haven. Offshore mutual funds operate in Vanuatu, and hedge funds register and banks book large international loans in the Cook Islands to minimize taxes, avoid regulations, and increase secrecy. (1-2)
Pacific Island nations are economically and militarily far from the equal of the UK, the US or Australia but, van Fossen points out, international law creates the legal fiction of a world made up of nation-states that are equally self-reliant. Sovereignty means that, if a country wishes to have no taxes on income or profits, or wants to encourage Internet gambling, or permit banks to keep their accounts secret, so that money can be laundered more easily, it may do so.
It is pretty widely agreed by now that the effect of offshore tax havens on the economy of their host countries is close to zero. Most of the money flowing into tax havens flows out again almost immediately. Van Fossen notes some possible financial benefits: “offshore centres may generate government fees, employment, training, investment, high-end tourism, better tele-communications and greater international recognition” (3). But, the emphasis is on the “may.” He would agree that plaques on office doors generate precious little in the way of employment, training, investment or even tourism.
The primary economic results are a relatively small amount added to government coffers—although, if a country is poor enough, even the few thousand in corporate registration fees can make a difference—and a bump up in the incomes of a score or so indigenous compradors. However, the effect of these on a host country’s politics is probably way out of proportion to the net economic benefits to the country as a whole. There is a great incentive for those few who benefit economically to make sure that the money keeps coming, an aim requiring that domestic legislation continue to be friendly to the offshore companies. Corruption is an inevitable consequence of tax haven status.
One of the easiest ways to criticize an author is to accuse him of not writing the book he never intended to write. I will not do that. But, I will say that van Fossen’s exhaustive study of the legal and political regimes that support Pacific Islands tax havens begs for another scholar or two to study the political or cultural impact of these financial centres on the countries in which they are located. How, for example, have the social structures and Vanuatu been affected by the presence in Port Vila of offshore banks and Internet gambling companies? What are the consequences for the people and cultures of the Cook Islands, say, of the cluster of large international banks booking loans from its capital?
Van Fossen does not try to answer these questions, though there is much grist for an anthropologist’s mill in his descriptions of the takeover of Pacific Islands financial centres by Australian and Asian gambling and money laundering interests, or his revelation that the nearly-successful secession movement in Vanuatu’s Espiritu Santo was backed by US multi-millionaires looking for tax free havens for their wealthy, libertarian friends.
Jean Zorn
CUNY School of Law, Long Island City, USA
pp. 652-654