To state the conclusion at the outset: This latest Report from the EU propaganda factory is a dumpster fire of flawed assumption, failed analysis of international capital flows and the mechanisms of cross-border taxation, fueled by increasingly desperate and wishful thinking that searches for, but never establishes, a justification for a global taxing authority. The paradox that the authors cannot run from is that, as has been suggested , the complete transparency now in effect in the offshore financial centres, which are still willfully and pejoratively in the Report labelled “tax havens”, has established that there is and was, in fact, no offshore untaxed pot of gold. The continued attempts in the Report to maintain the flawed narrative are simply untenable.
But we should not underestimate for a moment the relentless self-belief. The EU spends multi millions of dollars (that it has to print annually ) funding “researchers” to produce pseudo technical propaganda of this sort. We expect this of Zucman (and Picketty). They are French, the self-styled enfants terrible of the new high tax world economic order and can be expected to parrot the narrative of the Organisation of Economics and Development (OECD) and its wholly owned subsidiary, the Financial Action Taskforce (FATF), both not incidentally, also headquartered in France . The EU propaganda machine is powerful and for good reason. What drives the delusion?
We find the core truth in the 280 pages recently produced by yet another EU funded researcher, Ms Kristine Saevold, in her thesis Tax Havens of the British Empire – Development, Policy Responses, and Decolonisation, 1961-1979, which expresses in a nutshell the EU concern –
“There must be a point in the spiral of controls and taxes when either the people will stand no more, or there will be nothing left to tax.”
And actually, we can agree that is a justifiable concern of any would be Super State that has but 10 per cent of the world’s population and 58 per cent of its welfare spending , the GDP of which has halved in the last decade and which now sits in third place behind the US and China . But the ‘poaching of tax revenue’ orthodoxy, in attempting to lay the fault for the parlous condition of EU tax collections at the door of the offshore financial centre, is becoming increasingly tortured to the point it is disconnected from reality. Blacklisting and demonisation, however, remain important to this flawed EU narrative. Thus, Ms Saevold’s “Master” thesis goes on to state –
“The central themes of tax haven studies from the 1990s and 2000s were as follows: International tax competition; whitewashing practices; corruptions; transnational crime; financing of terrorism; and shadowing banking – all themes closely related to the low-tax and non-transparent features of tax havens. Tax havens resurged as an issue in the wake of the international financial crisis of 2007 and 2008 due to a failure among states to collect taxes from a wealthy global elite and multinational corporations.”
This is regrettably typical but unsound EU mudslinging impersonating as academic research. No criminal activity in the Cayman Islands is cited. No financial institution in the Cayman Islands failed during the 2008/2009 financial crisis, and it is generally recognised that that financial crisis was caused by the failure of Wall Street institutions and Rating Agencies to properly understand the risk correlations suggested by a complex Gaussian Copula formula with the resulting collapse of inter-related credit defaults swaps and other derivatives.
No doubt the off balance sheet liabilities of the EU welfare programmes are causing a justifiable degree of panic in the halls of Brussels, particularly in the face of increased longevity and a declining birth rate. The classic EU social security pyramid has turned into a cylinder, and in the absence of additional tax revenues, something that looks increasingly like a failed pyramid scheme. President Macron’s attempts to increase the retirement age were met with riots in the streets, nor has he personally or nationally been able to do anything to boost the French birth rate above 1.7, as if the French, apart from writing questionable reports on the taxation of international capital flows, had anything else to do. Panic too, no doubt, at the fact that the Irish tax veto has seen off the Common Consolidated Corporate Tax Base Initiative . There is, after all, nothing in the EU welfare benefits problem that could not be fixed with an 80 per cent tax rate  on earned income across the 27 member states, but that has fallen by the wayside.
But if that is the problem, this fixation on legitimate international capital flows, and the role of offshore financial centres in facilitating them as being the cause, is dangerously delusional. The Report cannot deal with the statistics that the new transparency initiatives, particularly the Common Reporting Standard, are now producing. It correctly cites the US$12.6 trillion now thus reported but astonishingly, the Report admits that in relation to this figure, the tax evasion, as it is called in the Report, amounts to only US$120 billion or that is to say, 0.9 per cent. The Report is then forced into the indefensible position of stating that the tax evasion numbers reported are simply inaccurate because “Governments and the OECD publish shockingly few statistics hindering rigorous evaluation of the compliance and reporting requirements”. And so the Report falls back on the hackneyed cliché of “opaque ownership structures”, none of which are capable of existing in any Overseas Territories offshore financial centre given the current standard of effective transparency. Or put another way: We know that the tax evasion is there, it simply must be, but we just can’t find it.
This false emphasis on low or no “tax havens” (their expression not mine) as problematic cannot yield the correct answer. Firstly, if we look at the US$12.5 trillion (gross US$8.5 trillion net) that we know flows in and through the Cayman Islands, less than 6 per cent of it is sourced from EU investors, largely because the EU refuses to provide a passport for Cayman Islands securities for cross-border marketing purposes under the AIFMD. So even if the Cayman Islands were eliminated, virtually none of those capital flows would be redirected through the EU nor be taxable there.
The Report’s view is distorted because the Zucman (and Picketty) view is wedded to the propaganda produced by the 1998 OECD Harmful Tax Competition Report. The premise then introduced was that low or no taxes of the Cayman Islands’ sort were harmful. Not because there was any statistical analysis undertaken to that effect, but with an astonishing degree of illogical circularity it transpired that low taxes were harmful because the OECD said they were harmful. So, the OECD sought the high ground by accusing low or no tax states of violating a moral code and in doing so, acting as prosecuting judge and jury on the point creating a faux self-serving moral standard which was presented as the international benchmark of good behaviour (not incidentally, backed up by the threat of blacklisting which was neo-colonial bad behavior of the highest order).
Zucman (and Picketty) have developed the tax poaching theory which underlies this Report to an obscure art form. But in the light of the new transparency, there is no technical or legal filter that can be applied to make this argument even remotely persuasive. There is nothing whatsoever harmful about a zero-tax rate in the Cayman Islands because in no way does it, of itself, contribute to a tax avoidance or tax evasion issue. We can say with certainty that the tax rate in the Cayman Islands is irrelevant because of all of the US$12.5 trillion invested through Cayman Islands funds (and bank balances in Cayman are not here included because they are statistically de minimis), less costs of local expenses, are invested into the United States or other onshore jurisdictions where the securities markets and private equity and investment opportunities are situated. The fundamental mistake made by the OECD and authors of the Report is to ignore that every one of those dollars passed through the Cayman Islands into the onshore jurisdiction is taxed in accordance with the laws of that onshore jurisdiction. There is no offshore pot of untaxed gold sitting in the Overseas Territories offshore financial centre.
Further, there is a second layer of taxation charged to the investor when those profits net of taxation are remitted to that investor. There is now automatic reporting of income and gains of that investor in the Cayman Islands structure made under FATCA and the Common Reporting Standard. The Cayman Islands serves simply as a tax neutral conduit in which respect its zero rate of taxation is relevant only in that a third layer of taxation is not added to the investment structure and its profits and gains. If the OECD and the EU were to tell the truth about these matters, which they have never done, they would say that they are justifiably irritated that the United States system of taxation establishes wholly beneficial tax free gateways for foreign investors which attract international capital flows into the United States for the benefit of the US markets and the US treasury generally. That is by way of safe harbour legislation that provides for tax-free interest on US government debt portfolio interest, and tax-free gains on option trading and capital gains on security investments.
What the OECD really mean by “harmful” is that the Cayman Islands facilitates these through puts of investment into the United States. What the OECD refer to when they talk of harm is the highly competitive tax legislation of the United States based on specific US legislative gateways. But you would not arrive at that conclusion from reading the Report, which is as hopelessly detached from reality on the subject of profit shifting and base erosion.
I do not believe for a moment that the authors of the Report are stupid. They must see the truth of it. Indeed, the Report states that “in 2015, the OECD launched the Base Erosion and Profit Shifting Process to curb tax avoidance possibilities stemming from the mismatches between different countries’ tax systems”.
As a basic proposition, that is correct. This problem the Report complains of, although it does not identify it as such, is different again in that the United States also legislated with specific intention in the 1960’s, a modified system of capital export neutrality. That is to say, if it were not for tax deferral provisions for overseas income generated by way of the Subpart F provisions of the Code, then introduced US corporations would be taxed twice on overseas profits: Both in the point-of-sale jurisdiction and in the jurisdiction of domicile.
The EU jurisdictions favour capital import neutrality which seeks to apply taxation at the point of sale, but it is not the offshore financial centre which results in Apple paying 1 per cent tax on its gross profits. It is the flawed operation of the EU Based Double Tax Treaty networks which enable US multinationals to strip out research and development interest, royalty and licencing fees, to the justifiable concern of the EU point of sale jurisdiction. What is hopeless about the Report is that there is never the slightest recognition of the core of the problem, which is the aggressive manipulation of the EU based Double Tax Treaty networks. Rather, there is evidenced blind adherence to the BEPS initiative and the global minimum tax suggestions which, until the Double Tax Treaty abuses are solved, is analogous to sticking a Band Aid over a compound fracture. But then coming to the right conclusion would involve the OECD in accepting that its model Double Tax Treaty is the root of the problem .
In fairness, it is not simply the French who make this mistake. Alex Chobham of the Tax Justice Network, Oxfam, and Christian Aid, are equal offenders. The former referred most recently to the untaxed offshore US$5 trillion of tax evasion (or tax avoidance, the use of the expressions now in this Report appear synonymous) without a hint of statistical support.
It is also remarkable that the BEPS initiative can have gained so much traction  in the face of the thinly veiled glee with which Ireland has announced record corporate tax revenues of EU $24 billion and projected annual revenue surpluses sufficient to establish in future years a sovereign wealth fund of over Euros 100 billion. Even the Report admits -
“Nonetheless some key patterns emerge. First, the largest profit shifting destinations appear to be Ireland and the Netherlands with over US$140 billion shifted to each in recent years”.
It should be blindingly obvious to the authors of the Report that no further evidence is required of the extent to which Ireland, and to a lesser extent, the Netherlands and Luxembourg, enable US multinationals to (apparently) legally avoid taxation within other EU member states pursuant to highly aggressive Double Tax Treaty strategies.
This is the glaring fallacy that taints the Report: “Out of these US$2.8 trillion, about US$1 trillion was shifted to tax havens, ie booked by multinational companies in low tax jurisdictions above and beyond what can be explained by their presence in these havens”.
This is only correct as a statement insofar as it refers to multinationals locating themselves in Ireland and enjoying a 12.5 per cent corporate tax rate. It should be apparent that tax on the relevant profit is avoided once. If profit has been stripped out of the point-of-sale jurisdiction by an abusive or aggressive strategy pursuant to an Irish, Dutch or Luxembourg Double Tax Treaty, that is the beginning and end of the tax avoidance strategy. If those profits end up in an offshore subsidiary of a US multinational, that is no longer thereafter abusive tax avoidance. Once sitting in the subsidiary of a US MNE, it is US law which dictates the tax deferral and intentionally so. The avoidance has occurred once and can occur only once.
What the Report appears to be complaining about is the fact that US multinationals, not merely perfectly lawfully, but by design of the US Tax Code, are permitted to retain a percentage of profits generated from trading outside of the United States tax free in an offshore subsidiary. These provisions assisted US MNE’s in dominating global trade highly effectively because the provisions encouraged the reinvestment of trading profit gross of any taxation in further trading activity . Since the modification of the Subpart F provisions with the introduction of GILTI income under the Tax Cuts and Jobs Act 2017, this should be regarded as less of an issue than previously, but nevertheless, not even those suffering from the wildest of delusions could regard the deferral allowed to US subsidiaries of MNE’s as evasion.
James Quarmby has neatly coined the expression ‘EU Substance Abuse’ which describes the misguided EU paranoia about “shell” companies . In one context alone, improper access to Double Tax Treaty networks, the emphasis in the Report on corporate substance and the EU attack on shell companies makes a degree of sense. Certainly, the fiendishly cunning Double Irish Strategy had to be banned. So too the EU should focus on the equally clever provisions of the Irish Finance Acts. Otherwise, the criticisms of “shell” companies make no sense. Outside of the context of abusive access to a Double Tax Treaty, any company issuing intangibles, whether securities or debt, may be lawfully constructed as a “shell” corporation. You do not need a factory with 500 employees to render your chose in action lawful and enforceable (ironically, perhaps the only relevant phrase in international financial transactions that survives from Napoleon’s Code Civil).
7What is important to the integrity of the corporation and enforceability of rights, is not the number of employees. Rather, a solid, well-understood legal and court system and tax neutrality, which in a nutshell explains why Cayman is a so much more attractive jurisdiction for structuring international capital flows than France, and neatly describes the offshore value added. To attack corporations as in some way unlawful or improper, or engaged in evasion or avoidance, on the basis that they have no employees, runs contrary to the fundamentals of Anglo-Saxon corporate principle.
This all flows from the perverted OECD philosophy which has been swallowed by the authors of the Report, that assumes a low tax rate, attracts (or “poaches”) foreign capital investment where there is no substantial activity. But you don’t need substantial activity as the OECD define it to undertake the perfectly lawful practices of issuing enforceable debt and equity securities from a corporate, partnership, LLC or similar structure.
It would be easier to accept some of the Reports wild assertions like; “we tentatively estimate that about 25 per cent of global offshore financial wealth remains untaxed,” if there were any recognition in the Report of the effectiveness of the mechanisms that exist for cross-border taxation. Every sophisticated onshore jurisdiction (now including Brazil) has Controlled Foreign Corporation legislation, anti-avoidance provisions in relation to transfer pricing and trust structures and deemed distribution provisions, which look through offshore structures to ensure tax is assessed on relevant entities or individuals in accordance with domestic law of residence or domicile. None of these are mentioned.
Much is made in the Report of an aberration of French tax law, which apparently avoids domestic taxation being attributed through French holding companies to their shareholders, but the suggestion that this aberrant feature of French domestic tax law constitutes part of a global evasion problem is nonsense. And needless to say, it is open to the French to revise their domestic legislation and it is somewhat astonishing to an Anglo-Saxon eye that they have not. Equally nonsensical is the new argument that the missing trillions in the Report’s tax evasion projections are obviously attributable to real estate investment. Really? Perhaps Zucman (and Picketty) could explain how you avoid the provisions of FIRPTA or the ATED.
If the EU and its ‘members’ continue to obfuscate the source of their problem, there can be little prospect of them designing an effective solution. The EU needs a reset in its approach and this Report is just the opposite of that. Possibly, the correct analysis matters very little. The authors of the Report come clean in its Conclusion. What they have in mind as a solution to a very real EU problem, but one to which the offshore financial centre does not contribute, is a minimum global wealth tax on individuals and corporations, no doubt administered, as has been the intention from the outset, by the OECD. That might be a perfectly worthwhile initiative. But Zucman and Stiglitz do themselves no favours by relying on evidently flawed analysis of the taxation of international capital flows in support of it.
1 See the author, The Financial Action Task Force – Yet Another French Farce, 8th September 2021, IFC Review
2 For a more complete analysis of the parlous condition of EU finances consider the outstanding balances of T2 (formerly Target2)
3 The French have a history of regarding delusion as noble. France’s most notable general Napoleon said of Waterloo “After eight hours… the whole French Army was able to look with satisfaction upon a battle won and the battlefield in our possession”. Although, France’s most notable author Victor Hugo attributes the victory differently, “The man who won the battle of Waterloo was Cambronne. Unleashing deadly lightning with such a word counts as victory” –in describing Cambronne’s response “Merde” when called upon to surrender in the face of Wellington’s artillery battery
4 Per Dan Mitchell commenting on the statement of former UK Chancellor Osborne in 2014.
5 Which incidentally is why the UK had nothing to lose by way of Brexit.
6 And the most recent attempt to resolve issues of EU taxation by majority not unanimity has now failed.
7 Not at all inconceivable. The rate of income tax in the UK in 1975 was 82% on earned income over £20,000 a year.
8 Not incidentally, pity the poor offshore jurisdictions being bludgeoned into introducing a global minimum tax when the Under-Tax Payment Rule will ensure they do not receive dollar 1 of revenue.
9 Although possibly less now that the United Nations have intervened at the behest of the African nations
10 As good a real world example as any of the corrosive and anti-competitive effect of high corporate taxes.
11 The “substantial presence” theory was central to the OECD definition of a “tax haven” in the 1998 Report: Harmful Tax Competition but was dropped for some 20 years in the face of criticism of US Treasury Secretary O’Neill in 2000 and the lobbying by the Center for Freedom and Prosperity, a Washington D.C. think tank and the US Congressional Black Caucus.
Anthony Travers OBE
Anthony Travers OBE is the Senior Partner of Travers Thorp Alberga, former Chairman of Cayman Finance and former President of the Cayman Islands Law Society. The former Managing and Senior Partner of Maples and Calder, he has extensive experience in all aspects of Cayman Islands law and has worked closely with the Government and prepared the Cayman Islands legislation for Mutual Funds and Private Equity vehicles, in the Private Trusts area, the Asset Protection Legislation and drafted the Cayman Islands Stock Exchange Law. Anthony was made an Officer of the Most Excellent Order (OBE) for his services to the Government and the Financial sector in August 1998. Anthony has written numerous articles and has spoken regularly at conferences and seminars.