Wednesday, July 25, 2012

$11 Trillion Dollars in off shore accounts

We applaud the work of the tax justice network's reporting of off shore tax avoidance schemes. The TJN report covered here in the Guardian. Estimates of funds held off shore accounts are around $21 trillion dollars.

There are proposals to use some of the money held in off shore accounts to resolve the global debt crisis.

You then think about how to unwind the off shore accounts.

So let first examine what these shelters are. The are country specific legal entities designed to avoid home country taxes. They use home country tax laws, foreign country sovereignty, international tax treaties and the international banking system to avoid home country taxes. They are operated by resource poor countries to generate jobs and income.

A typical example is a US company set-ups up a Cayman Island(0% income tax) or Irish company (10% income tax. They transfer or sell their assets (like a manufacturing plant) to the new company. So while the assets, site in a high tax country (Germany, France, Italy or UK), the profits accumulate in the Cayman Island (which has no income tax). These profits can be used anywhere in the world to purchase additional plants, equipment or supplies. If the profits were send back to the US they would be taxes at corporate rate of 35%.

Again, the Tax Justice Network reports between $11.5 trillion and $21 trillion in funds is sitting off shore.

So, how do we close down such schemes ? How do we minimize the impact on countries that were "poor" before off-shore banking. How do we make sure everyone takes a hit but no one group takes all the pain.

1) Enforce internal standards of transparency and information sharing
2) Reduce off shore repatriation rates
3) Provide foreign aid or incentives to countries to give up their off-shore business.

For example, the country of the Cayman Island has only 58,000 people yet hold $1.5 Trillion in deposits. There are over 250 banks in the Cayman Islands. Fifty percent of the income and jobs come from the financial services sector.

Unfortunately, the wealth and success come at the expense of the US tax payer.

I would propose tightening regulations and creating a long-term development plan to turn the tax-haven economies into a back office / outsourcing / service center for the banking and financial service sector. Plus additional subsidies for tourism.

Here is the link to the Tax Justice Network website.

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