Short Cuts

Daniel Finn

There was an awfully genteel protest organised by the Tax Justice Network in Jersey earlier this year. The TJN had joined up with a group of Jersey campaigners who would like the island to wean itself off its dependence on the more creative aspects of modern finance. Christian Aid have estimated that Southern countries lose at least $160 billion every year in unpaid taxes as a result of dodgy accounting by corporations operating on their territory. According to the OECD, there is $5 trillion (or more) parked in offshore tax havens, beyond the reach of impertinent governments and their demanding citizen bodies.

How to get at it? The business of tax avoidance, like the trade in derivatives, is ferociously complicated, and intentionally so: the fewer the people who understand what is going on, the easier it is to play the financial equivalent of a three-card trick and whisk your money off to a safe location. Tax dodgers have quite a sense of humour – or so it seems to me. Take transfer mispricing. One of the commonest forms of tax evasion, it accounts for much of the $160 billion. I could explain that this particular stunt involves transnational corporations exaggerating costs and minimising profits when they file their tax returns. I could mention surveys which estimate that more than 60 per cent of international trade takes place within TNCs, allowing companies to make up prices that suit their purposes. But the story wouldn’t be complete without mentioning the firm that officially paid $972.98 for each plastic bucket it imported, or the toilet gloves which were priced at $4,121.81 per kilo.[*]

Then you have the ‘big four’ accountancy firms – KPMG, Ernst and Young, PricewaterhouseCoopers and Deloitte – whose expertise is indispensable for anyone hoping to diminish their tax exposure. Writing in an Irish magazine, a KPMG partner spelled out the mindset:

A worrying tendency seems to have emerged among external stakeholders to make ‘moral’ judgments about tax planning and to expect companies to manage their tax affairs in a ‘moral’ way … Let’s be clear about this. Tax is a cost to business. As with any other cost, the board members owe their shareholders a duty to manage that cost by the legal means afforded to them.

KPMG gave us a sense of its attitude to legality when it paid a fine of $456m in the US for ‘designing, marketing and implementing illegal tax shelters’. The big four have now set up a body to regulate themselves called the International Accounting Standards Board (IASB). Not only do the accountancy firms appoint representatives to the IASB’s committees, they actually fund it themselves – through a foundation registered in a tax haven.

Best of all, perhaps, are the tax havens themselves. Much of the heavy lifting is done by European microstates which we normally notice only when our national teams are drawn against them in football tournaments: the Republic of Ireland’s nil-nil draw with Liechtenstein in the mid 1990s may have been a low point, but the RTE commentator was happy enough to inform us that there were 20 people signing on in the entire country. Other interesting facts: Liechtenstein is now the only absolute monarchy in Europe, after its king decided he was bored with the old constitution and wanted his princely liberties back. At least Hans-Adam II actually lives in the country, unlike the co-princes of Andorra (Nicolas Sarkozy and a Catalan bishop, since you ask). I sometimes wonder if the microstates play up this side of their polities, deliberately making themselves appear odd so that nobody will scrutinise their affairs too closely.

Perhaps to lower its profile, Jersey hasn’t joined FIFA or UEFA (though it does compete in a biennial tournament called the Island Games, along with Rhodes, Saint Helena and many other insular entities, and tops its all-time medal list). Jersey doesn’t give itself an outlandish title, like the Most Serene Republic of San Marino. Its head of state is your very own Queen Elizabeth II (though she exercises authority on Jersey as the Duke of Normandy). The local currency is the Jersey pound, convertible on a one-to-one basis with its mainland namesake. In fact, there’s nothing much that would make you sit up and take notice of Jersey, unless you were in the habit of tracking financial flows in the global economy.

Fittingly, perhaps, the protest was polite: a public meeting on the Thursday evening, to be followed by a ‘guided tour’ of St Helier the following morning which would stop at all the major international banks that have set up shop there. The local police and media were very concerned about the promenade protest – financial workers had reportedly been warned ‘not to dress like bankers’ – but the walking tour gave little cause for alarm. The Jersey police were bemused to see the hooligans waiting for the light to turn green before crossing the road. The nearest thing to a disturbance came early on as a large contingent from Attac configured themselves so that the letters on the back of their jackets would read paradis fiscal, enfer social (the ‘o’ kept wandering off just as the photographer was about to get his shot). We paused outside each bank (Citigroup, BNP Paribas, Deutsche Bank, AIB) but only for a brief presentation about some of the dubious antics of the parent banks. By the end, the officer managing the protest was giving us advice about the quickest way to complete our route. At the public meeting the night before, we heard from a few members of the States of Jersey, the local parliament, who have been fruitlessly criticising the island’s dependence on financial services for years and seemed pleased to have a sympathetic audience for once. Apparently the traditional core of Jersey’s economy – tourism and agriculture – has been squeezed into irrelevance by finance, leaving the island exposed to every shift in the wind.

It’s not really Jersey’s fault it’s a tax haven. Almost half the tax havens in the world are Commonwealth Dependencies, which remain under the jurisdiction of HMG. Jersey, Bermuda and the rest are just filling a niche knowingly created by politicians and bankers in London. It may be helpful to think of the financial networks that converge on London as a recharged version of the British Empire, held together by modems rather than gunboats and overseen by the mother of all anachronisms, the British political system. As with the original empire, there’s a good chance that the colonials will now be left to clean up the mess.

[*] ‘Addressing Development’s Black Hole: Regulating Capital Flight’ (European Network on Debt and Development, May 2008).