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Tax Havens and Sovereignty in the Pacific Islands
By Anthony van Fossen
University of Queensland PressCopyright © 2012 Anthony van Fossen
All rights reserved.
THE POLITICAL ECONOMY OF TAX HAVENS AND SOVEREIGNTY IN OCEANIA
Sovereignty is power. It is the ability to make laws, it is the basis of legal authority and it can be commercialised. It provides a boundary allowing practices which would be illegal, difficult or expensive in a person's home country to be carried out legally, easily and cheaply offshore. Considerable money can be made by states that recast the desires of the rich into laws, which they then defend in terms of the apparently neutral doctrines of the sovereign equality of states.
OFCs have diffused across the Pacific Islands region. They give greater sovereign reality to Pacific Islands microstates, particularly when they generate substantial revenues or make a significant impact on the world. Examples include billions of dollars flowing into Cook Islands asset protection trusts (APTs) or Nauru offshore banks, and the Marshall Islands having the world's third largest shipping fleet under its flag.
The right to tax (or not to tax) is at the core of sovereignty, and tax havens sharply reduce their clients' tax liabilities. They frequently minimise costs in other ways also – reducing labour costs aboard FOC vessels, protecting assets from litigators and plaintiffs or providing cheap access to interbank or insurance markets. Taxation shapes society, and taxes have always been at the centre of politics. Disputes between metropolitan governments and their citizens or residents using tax havens often become conflicts between the laws of states. The growing number of sovereign states in Oceania (defined in terms of full, partial and candidate sovereignty) is an expression of the modern world-system's trend toward making the state the general political form and toward extending the interstate system globally (Wallerstein 1991: 140).
The world-system creates states and sovereignties, which provide the framework in which property rights are defined, upheld and enforced. Markets are based on exchange contracts governed by a constant succession of legal relations which must be located in a sovereign state – placing sovereignty at the centre of the world economy (Palan 2003: 85–87). The sovereignty of tax havens restrains other states from exercising their sovereignty over economic transactions, thereby promoting a reconciliation of the seemingly contradictory principles of state sovereignty and economic liberalism. Global capitalism enlists tax haven sovereignty to serve its purposes.
Some degree of sovereignty is necessary to play the tax haven game. Almost all the original OFCs were European before World War II, when few jurisdictions with substantial sovereignty existed outside Europe and European settler countries. Liberia was one of the rare non-western sovereign states and one of the first developing world OFCs. In the postwar era, and particularly since the early 1960s, non-European governments have gained sovereignty to compete on the global playing field but not necessarily in the same league. This more inclusive but hierarchising development in the interstate system parallels the evolution of OFCs. The postcolonial era has seen more players, growing segmentation and increasing competition.
In the previous period of economic austerity, after World War I, the traditional European OFCs of Switzerland, Liechtenstein and (to a much lesser extent) Monaco expanded and solidified. There was an extraordinary increase in international tax-evading movements and capital flight as well as a general doctrine of 'liberal fundamentalism' (Eichengreen 1992, 1996: 45–92; Helleiner 1999: 62–63). Offshore development was subdued during the great boom from 1945 to 1967, when a version of global Keynesianism severely restricted tax-avoiding financial movements and capital flight. The newer Caribbean and Pacific Islands OFCs became prominent in the current (1968–present) era of austerity, creating today's expanding and competitive market for tax haven services.
There is a dialectic between sovereignty and tax haven development in the Pacific Islands (see Map 1, Table 1). The most successful Pacific Islands tax havens (PITHs) have been internally self-regulating without subservience to any metropolitan power hostile toward haven development. On the other hand, full sovereignty (in the sense of complete political independence) has not necessarily been a crucial advantage. It may even have been associated with a lack of proper security (such as that underwritten by a core power) and have attracted sleazy operators and clients, as in the case of Nauru's offshore banks and Tonga's FOC. Furthermore, some fully independent Pacific states (Papua New Guinea, Fiji and the Solomon Islands) have been too politically unstable to develop viable OFCs. Nevertheless, the OFCs of Samoa, Vanuatu, the Marshall Islands and the Cook Islands have developed continuously through elaborating legal structures favouring the internationalisation of capital. Their OFC laws valorise individual appropriation rather than public distribution, minimise state regulation and privilege private ownership. Compared to the second, contrasting group of PITH jurisdictions which we consider next, these states have relatively full sovereignty.
The OFCs of Norfolk Island, the Northern Marianas, Niue, Palau and Guam have developed unevenly. They have been constantly influenced by the conflicting prohibitions and requirements of the metropolitan states to which they are closely attached – Australia in the case of Norfolk Island, New Zealand in relation to Niue, and the United States for the other three. Frustrations for OFC promoters have come from the great influence which core powers have over how they legally define the rights and character of property. A sixth, erratic OFC (in Nauru) has far more sovereignty but has been strongly and effectively attacked by the international community for promoting money laundering, tax evasion and financial instability. All these offshore centres have sometimes been beset by a sense of crisis and ruin.
For a map of the Pacific Islands, please refer to the image on page xii.
Norfolk Island's emergence as Oceania's first offshore centre, in 1966, constituted an initial and relatively insignificant challenge to a global regime in which a high proportion of property ownership was defined and regulated by core states' laws, which postulated and largely enforced an associated set of rights and duties. The substantially different contemporary world comprises a vastly expanded number of states, intense ethnic nationalism daily making further claims to sovereignty, and a growing volume of dynamic stateless capital domiciled in offshore centres, which have proliferated around the world and in the Pacific Islands.
OFCs increase the power of transnational corporations (TNCs) over the global system by proposing new stateless financial instruments and arrangements which internalise transactions within the firm and make them less accessible to regulators, taxation officials and competitors. They help TNCs to maintain control over valuable knowledge about the world on the most advantageous financial and political terms. They facilitate international mergers which vertically integrate TNCs. They encourage capital to use cheaper developing world labour and threaten protected workers in the core. They enhance TNCs' bargaining power in relation to nation-states by offering capital unparalleled mobility and flexibility. They encourage developing world elites to place assets internationally rather than locally, making them less likely to be nationalist competitors with TNCs and more inclined to be investors in them. They actively compete with each other, regionally and internationally, to produce laws and services that promote ever greater control of the world by TNCs and the rich.
OFCs are used to minimise the power of governments which attempt to tax 'their' TNCs and rich citizens on their worldwide incomes. The taxation agency is the state to a significant degree, and it is strong in the core and weak in the periphery. Offshore centres have become targets of international (and particularly American) offensives against terrorism, narcotics trafficking and other criminal activities. This has been used to justify violations of the sovereignty of developing world states (including OFCs), often placing them on the defensive. Worldwide taxation and anti-money laundering legislation of the US and other countries have produced major conflicts about the definition of offshore jurisdictions' sovereignty in international law.
Only international cooperation has been effective against offshore centres generally. But even anti-OFC countries such as the US and Australia have done very little to stop the inflow of flight capital coming from the developing world through offshore centres. Metropolitan taxation and regulatory systems are sometimes incompatible or contradictory. Covert action by governments through OFCs can frustrate national efforts against them, such as the CIA's alleged support of the Cook Islands' tax haven, while the Internal Revenue Service opposed it (Wilkes 1987a, 1987b, 1987c, 1989). It is unlikely that there will be any immediate extensive decriminalisation of narcotics trafficking or other illegal activities that inject funds into offshore centres, or a substantial decline in their use to avoid and evade foreign exchange controls and taxation through them.
OFCs facilitate tax avoidance and evasion and erode tax morality. They promise a privacy that is unavailable domestically, which may be suspended only in relation to some criminal offences such as money laundering for narcotics trafficking, massive fraud or affiliation with terrorist groups. They depend vitally on a form of trust that is not always honoured and can be legally unenforceable (as in the numerous bank frauds that have afflicted a number of PITHs). Generally, OFCs encourage short-term planning and liquid (rather than durable) capital formation. They increase the speed of capital to take advantage of opportunities and to avoid taxation, regulation and even discovery.
PITHs' and other offshore centres' secrecy and tax provisions can be used to obscure troubled companies' financial positions and even allow them to claim tax-free profits, thereby deceiving shareholders and creditors. Many of the largest Australian and New Zealand companies which used the Cook Islands' OFC extensively during the 1980s are either bankrupt or greatly diminished – for example, Bond, Ariadne, Equiticorp, Linter, Euro-national, Renouf, Judge, Industrial Equity, Bell Group and Bell Resources. PITHs and OFCs elsewhere in the world facilitate delaying actions that may artificially defer collapse in the short term but make the ultimate resolution of the problems more costly. In a time of declining rates of real profit, such as the period from 1968 to the present (Brenner 1998: 5–8; Crotty 2003: 273; Thurow 1996), PITHs and other offshore centres facilitate forms of mystification which may be crucial to corporate strategies.
The amount of capital domiciled in offshore banks is estimated to have grown from $11b in 1968 to $2tr in 1996 and to over $5.7tr in 2009, while total assets in OFCs are said to have risen from $500b in 1986 to $5.5tr in 1996 and to $11.5tr in 2005 (Bank for International Settlements Quarterly Review 6/10; Diamond, Diamond and Kaplan 1997; FT 7/6/96; US Senate 2006). Some funds flow through OFCs without staying there. It is estimated that about $2.1tr was laundered in 2005, mostly through OFCs (Economist 24/2/07). It is widely believed that a substantially greater quantity of 'grey' money was mediated through OFCs to minimise taxes, avoid economic sanctions, evade currency control laws, finance covert operations and espionage, and provide security for wealthy people in unstable regions, occupations or personal circumstances.
Banks are the most important intermediaries to tax havens, and a tax haven's strength is closely related to the depth of international banks' involvement. Until 2000 it was relatively easy for rich people and corporations to establish their own banks in offshore centres to strengthen their position in interbank transactions, gain anonymity and substantial tax advantages, avoid exchange controls and escape regulations on such matters as maximum interest rates and minimum reserves. But this financial secrecy and lack of accountability increased risks of money laundering, tax evasion and volatility in the international financial system and helped to explain the increasingly successful attempts by international organisations and metropolitan regulators to impede offshore banking development, especially in the Pacific Islands.
Metropolitan countries' attempts to limit OFCs have generally been inconsistent, with little or no restriction on the agents or representatives of offshore centres operating within their borders or on their own financial institutions operating in OFCs. Financial institutions' interest in offshore centres has varied markedly: of the largest four banks in Australia, ANZ and Westpac (each with operations in Vanuatu, the Cook Islands and Samoa) have been far more important than National Australia and the Commonwealth. Banking tends to be a very lucrative business in PITHs, with high profit margins (see Chapter 2).
Strict anti-tax haven measures have been approved and computerised surveillance accelerated by most metropolitan countries, but extremely low rates of prosecution and conviction for tax evasion using offshore centres persist. It is important to emphasise that OFCs have grown on the basis of a tax assessment ideology of 'domicile' or 'residence', which capital-exporting core governments have defended adamantly and which gives priority to the place of residence or domicile of the owners of capital over the place of labour and production. This is significantly related to geopolitical conflict and unequal exchange with the developing world, where tax officials understandably prefer tax assessment by 'source' of income. Metropolitan actions against OFCs are hampered since opportunities for companies nominally domiciled in tax havens arise from loopholes and unintended consequences within the core's own predominant ideology of 'residence', even when core states assess 'residents' on their worldwide incomes. This is oriented around the larger hegemonic ideology of a world of equal sovereign states in which a person or company can reside.
Taxation and regulation based on 'residence' and a system of equal sovereignty have made extraterritorial approaches and even intergovernmental cooperation between metropolitan states and OFC jurisdictions problematic. Mutual legal assistance treaties with tax havens, if negotiated, may be ineffective. Profits often metamorphose (for example, from dividends to interest to royalties) as they cross borders. 'Interest' or 'royalty' payments may even be tax-deductible, perhaps in one or more countries, making further problems for metropolitan taxation officials.
Until 2000, countermeasures against Pacific Islands OFCs were generally on a bilateral basis, between a single metropolitan country (usually a blacklisting tax agency) and a Pacific Islands' microstate. Frustrations with the difficulties of bilateral approaches have recently led to warnings of extreme action against non-cooperating OFCs. The greatest threats to OFCs (mostly microstates in the Pacific and elsewhere) have come from international organisations representing the most powerful states.
Since the mid-1990s, five major trends in the contemporary world-system (Krisch 2003) have weakened Pacific Islands state sovereignty:
a concentration of power in the international community in core states
exclusion of non-core states (particularly 'rogue states') from an increasing number of powerful international organisations and informal networks
erosion of sovereign immunities
increasing unilateral creation of certification standards and sanctions by domestic legislation in the US, which effectively establishes global rules (for example, about OFCs, money laundering, international tax policy and terrorism)
far fewer inhibitions on the use of military, economic and other forms of coercion.
Excerpted from Tax Havens and Sovereignty in the Pacific Islands by Anthony van Fossen. Copyright © 2012 Anthony van Fossen. Excerpted by permission of University of Queensland Press.
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Table of Contents
ContentsPREFACE AND ACKNOWLEDGEMENTS,
MAP OF THE PACIFIC ISLANDS,
CHAPTER 1 — THE POLITICAL ECONOMY OF TAX HAVENS AND SOVEREIGNTY IN OCEANIA,
CHAPTER 2 — DEVELOPMENT,
CHAPTER 3 — CREATING SOVEREIGNTY: SECESSIONIST TAX HAVEN MOVEMENTS,
CHAPTER 4 — FLAGS OF CONVENIENCE,
CHAPTER 5 — THE BUSINESS OF RISK: OFFSHORE GAMBLING, INSURANCE AND ASSET PROTECTION,
CHAPTER 6 — COUNTERMEASURES,