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Repeat After Me, Cyprus Is (Was) Not a Tax Haven

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Cyprus is over as an international banking center, which the Financial Times reports was one of Berlin’s objectives for its rescue. However, the business press (and yours truly following them) has referred to Cyprus as a tax haven. That description is part of the PR campaign to justify punishing the island.

By reader Claudius, hoisted from comments

There’s been a general meme in many of the ‘Cyprus comments’ that intimate if not outright discriminate Cyprus’ Financial Center status as a bastion of money laundering and international corruption. This is then used to reason a justification for why Cyprus is simply getting its comeuppance. To be clear, I am neither an apologist for Cyprus’s present predicament nor a belligerent activist against tax havens, such as the Cayman Islands or Isle of Man.

Cyprus is a low-tax jurisdiction, not a tax haven. Cyprus is on the OECD’s ‘white list’ of jurisdictions complying with the global standard for tax co-operation and exchange of information. Its fiscal and regulatory regimes are fully aligned with the acquis communautaire and the Code of Conduct for Business Taxation of the EU and the requirements of the OECD, the FATF, and the FSF. However the Cayman Islands’ maintains only 12 bilateral tax information arrangements; and The Isle of Man, 14. Cyprus an arrangement with all of its OECD bilateral (double-taxation treaty) partners – 46 fully, 6 being ratified.

Within these 52 countries, Cyprus has double-taxation treaties with about every country in the EU, and includes China, the US, Russia and, practically, every Middle East country. All the double-taxation treaties concluded by Cyprus were drafted on the basis of the Organization of Economic Co-operation and Development (OECD) model treaty.

The primary objectives being:

1.) Clarify and determine the taxing rights of each contracting state;
2.) Reduce or avoid the impact of international juridical double taxation; and
3.) Introduce anti-avoidance provisions and mechanisms to prevent tax evasion.

Cyprus is an exemplar of an OECD ‘low-tax jurisdiction’ country (one that the US constantly, it seems, want to emulate) since it combines a low-tax regime with an extensive network of double-taxation treaties (which neither the Cayman’s nor the Isle of Man does).

One of the most powerful ‘tools’ used by entities such as the Cayman Island and the Isle of Man is the (internationally accepted) ‘Passive Dividend Rules’ – where the foreign participation tax exemption applies to foreign dividends onshore.

‘Passive Dividend Rules’ apply, typically, when (the numbers differ):
1.) Investment income, direct or indirect, is less than (say) ‘50 percent’ of the paying company’s activities;
2.) The foreign tax burden on the income of the paying company is not substantially lower than the tax burden on the resident parent company (the shell).
3.) The taxable funds are held by the company within jurisdiction for a period of time (say, 50 days).

So, of course tax avoidance funds/profits are washed through the Cayman’s and Isle of Mann which ‘facilitates’ (in too many ways) nominally, declared high company tax and with zero resident tax and allow ‘bed and breakfasting of funds’ (period end off-shoring at night, back in the morning).

However, Cyprus’ ‘The foreign Participation Tax’ almost wholly mollifies (in that there is a substantive article of tax) the “tax haven-ish” parts of the ‘Passive Dividend Rules’, which it applies to any capital gains realized by a Cyprus-resident company on a sale of shares in a foreign subsidiary, regardless. And to further button it down, ‘Investment income’ is defined as any income which is not derived or does not accrue from any business, employment, pension, or annuity paid by reason or in connection with past employment. None of which is the case with ‘The foreign Participation Tax’ used in the Cayman’s and Isle of Man.

Cyprus’ ‘Foreign Participation Tax’ and use of Passive Dividend Rules are, explicitly, intended to prevent non-resident companies, over which domestic taxpayers have a controlling or substantial interest, from converting passive income into exempt dividend income, while adhering to the principle that anti-avoidance measures should be used only to maintain the equity and neutrality of national and international tax laws.

Additionally, Cyprus’ targets only passive income not derived from genuine business activities. They do not extend to activities such as production, normal rendering of services, or trading by companies engaged in real industrial or commercial activity, and they are not applicable to countries in which the taxation is comparable to that of the country of residence of the taxpayer; it’s not until the subsidiaries start to distribute dividends, that any exemptions become available’. Again, in tax havens, passive dividends are, typically exempt from tax before distribution.

I am sure there are many tax accountants who could, no doubt, find loophole and issues with Cyprus’ tax methodology (or this summary); there always will be – it’s their job. But, the point is intent, and Cyprus intends it not too easy to be seen or used as a tax haven; other Sovereigns boast quite the opposite.

As mentioned before (in another post), I am sure that Cyprus has its own fair share of Banking, AML, Mafia, Drug Smugglers, non-paying dog license owner’s etc. issues. You may not like tax treaties, or tax havens or even Cyprus itself (fine let’s discuss that in general terms for all countries), but, to equate the blatant money laundering and tax evasion of the Cayman’s, Isle of Man or Chinese pawn shops that Romney, GE, Apple, Siemens, and their directors have so effectively used to evade tax, to the vastly more transparent inter-mediation of Cyprus Banks is ill-informed and abusive.

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99 comments

  1. Cujo359

    Meanwhile, it appears that Cyprus’ parliament has passed (Al Jazeera) several measures designed to accomodate the EU’s demands. There will be a ” less than 1% tax on all bank deposits”, plus a banking “restructuring”, whatever that means.

  2. Swedish Lex

    Cyprus is not the Caymans but rather like a sunny Delaware. OK.

    So we are in a situation where the surrounding independent (for these purposes) states, team up against Delaware, which as a banking problem, and will cut off federal funding unless Delaware changes its rules and its business model according to what the other states like.

    This kind of bullying would not be possible in a country like the U.S. that has a genuine federal structure to deal with these kind of situations (incl. bank resolution and federal courts). The EU, on the other hand, has a common currency but lacks all the federal mechanisms that should be in place to deal with the situation. But instead of creating such structures, or acting in a civilised way as if such checks and balances were in place, the lead state, California mit Sauerkraut, bulldozes everything in its way, crushing whatever minute confidence there was left concerning the EU leaders ability to actually build a solid system.

    How many more euro shotgun marriages to not fix the euro problem will Merkel be mother to before this stops?

    1. from Mexico

      What the eurocrats did to Cyprus the US has done to other nations so many times one loses count. As the Mexican writer Carlos Fuentes wrote in The Buried Mirror:

      Our perception of the United States has been that of a democracy inside and an empire outside: Dr. Jeckyll and Mr. Hyde. We have admired democracy: we have deplored empire. And we have suffered the actions of this country, which constantly intervened in our lives in the name of manifest destiny, the big stick, dollar diplomacy, and cultural arrogance.

      The United States, at least up until the sea change that began during the Carter administration, had exhibited a reluctance to colonize others inside the empire. Merkel and the eurocrats, however, are engaged (and blatantly so, I might add) in what Hannah Arendt called “continental imperialism”:

      The chief importance of continental, as distinguished from overseas, imperialism lies in the fact that its conept of cohesive expansion does not allow for any geographic distance between the methods and institutions of colony and of nation, so that it did not require boomerange effects in order to make itself and all its consequences felt in Europe.

      –HANNAH ARENDT, The Origins of Totalitarianism

      So how do Merkel’s and the eurocrats’ imperial ambitions jive with those of the United States? That’s a good quesiton.

      After 1989, the American neocons and neoliberals believed they had achieved their Pax Americana, also variously known as “full spectrum dominance,” “the end of history,” etc. “U.S. National security is a global strategic doctrine, relative to maintaining economic, political, and military supremacy in its zone of influence,” is how Mexican politilogue Adolfo Aguilar Zinser put it. Pentagon spokesman Evan Ellis was even more to the point about the conflation of economic and military goals. In a warning to Latin American countries he threatened: “In an era of globalization, to have Chinese banking advisors is the equivalent of having Soviet military advisors in Cuba and Nicaragua during the cold war.”

      And NATO figures promiently into Pax Americana, as Pepe Escobar explains:

      Yet Brzezinski looks positively benign when you compare his ideas to Hillary Clinton’s recent pronouncements, including her address to the tongue-twistingly named World Affairs Council 2012 NATO Conference…

      Translation; despite being outmaneuvered by a minority Pashtun insurgency for years, neither the Pentagon nor NATO have any intention of rebalancing out of their holdings in the Greater Middle East… Only the terminally naïve would believe the Pentagon capable of voluntarily abandoning such sterling outposts for the monitoring of Central Asia and strategic competitors Russia and China…

      NATO, Clinton added ominously, will “expand its defense capabilities for the twenty-first century,” including the missile defense system the alliance approved at its last meeting in Lisbon in 2010…

      In a nutshell: after going to war on three continents (in Yugoslavia, Afghanistan, and Libya), turning the Mediterranean into a virtual NATO lake, and patrolling the Arabian Sea non-stop, NATO will be, according to Hillary, riding on “a bet on America’s leadership and strength, just as we did in the twentieth century, for this century and beyond.” So 21 years after the end of the Soviet Union — NATO’s original raison d’etre — this could be the way the world ends; not with a bang, but with NATO, in whimpering mode, still fulfilling the role of perpetual global Robocop.

      http://www.tomdispatch.com/blog/175534/

      According to Escobar, François Hollande openly expressed opposition to Pax Americana. As Escobar goes on to explain:

      It will be fascinating to see what the possible election of socialist François Hollande as French president might mean. Interested in a deeper strategic partnership with the BRICS, he is committed to the end of the U.S. dollar as the world’s reserve currency. The question is: Would his victory throw a monkey wrench into NATO’s works, after these years under the Great Liberator of Libya, that neo-Napoleonic image-maker Nicolas Sarkozy (for whom France was just mustard in Washington’s steak tartar).

      No matter what either Dr. Zbig or Hillary might think, most European countries, fed up with their black-hole adventures in Afghanistan and Libya, and with the way NATO now serves U.S. global interests, support Hollande on this. But it will still be an uphill battle. The destruction and overthrow of Muammar Gaddafi’s Libyan regime was the highpoint of the recent NATO agenda of regime change in MENA (the Middle East-Northern Africa). And NATO remains Washington’s plan B for the future, if the usual network of think tanks, endowments, funds, foundations, NGOs, and even the U.N. fail to provoke what could be described as YouTube regime change.

      So how does what is going down in Cyprus figure into this bigger picture?

          1. Swedish Lex

            Indeed, that is why I was careful to compare the EU with the internal situation in the U.S. and avoiding a discussion on Uncle Sam’s extraterritorial exploits.

          2. from Mexico

            @ Swedish Lex

            From my way of thinking, Merkel is taking a wrecking ball to any hopes for European solidarity and unity.

            That said, however, it must be acknowledged that I without a doubt operate in a completely different philsophical tradition than Merkel. Mine is a bottom-up tradition that says that the power of government derives from the consent of the governed. It is a tradition articulated by folks like Montesquieu, who held that the power of government depends on numbers; it is “in proportion to the number with which it is associated.” Tyranny, Montesquieu argued, was the most violent and least powerful form of government.

            But there exists another top-down tradition and another vocabulary no less old and time-honored. It’s notables include C. Wright Mills, Max Weber, Marx, de Jouvenel, Volatire, Clausewitz, Strausz-Hupe, Bodin, Hobbes, and Mill. It was articulated most effectively by Mao Zedong when he said that “power grows out of the barrel of a gun,” or Stalin when he mockingly chided: “The Pope? How many divisions does he have?” Merkel seems to operate in this same tradition that says that force alone is enough, and that moral and intellectual legitimacy is unncessary.

      1. Swedish Lex

        I 100% mistakenly believed that Merkel would be Kohl 2.0., in which case this crisis would have been solved a long time ago.

        The bright spot is the electoral program of the SPD (http://www.spd.de/linkableblob/92664/data/20130311_regierungsprogramm_2013.pdf ) which is night/day compared to Merkel’s “divide and rule and kill us all”.

        The SPD’s program (which in my view has the tacit approval of the French) is the only glimmer of hope right now. Assuming that there will be a CDU-SPD coalition in Germany as of October, that coalition will have to agree on a 4-year action plan, based on the priorities of each party. Europe’s destiny could be sealed in that process. The outcome in Italy is a positive in this regard, incredible pressure will be put on the Germans to change tack and become a lot more “SPD”. The French would however have to pull their heads out of the sand and begin pushing this in the right direction too.

        A voir.

        1. Brick

          “The SPD’s program (which in my view has the tacit approval of the French) is the only glimmer of hope right now. Assuming that there will be a CDU-SPD coalition in Germany as of October, that coalition will have to agree on a 4-year action plan, based on the priorities of each party.”

          I disagree. The SPD is not at all against Merkel. Don’t forget that Merkel cannot make any decision on rescues without the SPD agreeing since too many of her own coalition are against all efforts and the Bundestag must decide. So every EURO decision taken until now, was in part SPD’s decision. Let’s also not forget that until 2009 there was a coalition of CDU CSU and SPD, with Peer Steinbrück the now candidate for Chancellor as finance minister. Laying the ground work for the catastrophy to come.

          THE END OF ALL HOPE.

          1. Swedish Lex

            No miracles can be expected, I agree. But read the text. The heaviest stuff thus far.

          2. Brick

            Tehy have written a lot of stuff but I think it is lacking somewhat in meaning. E.g. they think that the current austerity policy is bad, so they want “Wachstumsimpulse” growth-impulses AKA a little less austerity.
            They think to big to fail is bad; so they want – I assume that is supposed to mean – Basel III which would force Deutsche Bank down to a leverage ratio of 33.3 in 2018 and is coming anyway.
            They want to make “damaging” financial products illigal, but only for private customers.

            Sorry I just can’t read on it is making my head hurt.

          3. Peter

            Perhaps one reason for hope in the long run: eventually the people will rise in one of the corners of Europe.
            EU heads now seriously think they can force an entire population accept a foreign dictate that makes all their savings take a hit. They’ve upped the ante since Greece.

            If they can get away with this, they’ll try harder stuff in the future.

            And it’s already clear in all but the lucky 5-6 countries that the EU isn’t a marriage of equals at all.

      2. 12 trees

        Not quite 30% of Cyprus, the island, is firmly under Turkish control. Last year Turkey terminated its negotiations over entry into the EU (well done!) and instead applied for inclusion within the SCO (Shanghai Cooperation Organization). As a current key member of NATO, but trending toward a similar importance within NATO’s potential arch enemy, Turkey is in a position to play Byzantine intrigue on many levels. Which they may need, just to survive. Look at the map in this post:

        http://nsnbc.me/2013/02/01/the-volatility-of-gas-geo-politics-and-the-greater-middle-east-an-interview-with-major-agha-h-amin-2/

        This purports to reveal a plan for creating a new Kurdish state out of fragments of several countries, not a new idea, but in this instance with Mediterranean coastline. The Med panhandle points directly at Cyprus, whatever that might mean in a corner of the stage already very diva-heavy. Note that the plan savagely dsembowels Turkey. The author, a mid-level Pakistani military officer, suggests that this incredible concept originally came from the RAND corporation (during the Clinton Presidency).

        It is easy to paint Cyprus as some kind of proxy skirmish, cold war redux, between the US and Russia. That could be right, but just one level. We also have the simmering/festering race between NATO, as the flailing enforcer of a flegling New World Disorder, and a completely new and ungauged family of interests, less corporate, more traditionally nationalistic, embodied within the SCO. Somewhere in the shadows, if we look, we may see a blurred pantomime with a distincly Chinese outline.

        A weekend bank holiday is a chance to reflect: What conversations among Turks, Russians, and Chinese might be taking place, about what points of shared benefit?

        1. Glenn Condell

          ‘As a current key member of NATO, but trending toward a similar importance within NATO’s potential arch enemy, Turkey is in a position to play Byzantine intrigue on many levels.’

          Very interesting. I wonder if growing recognition of the threat this poses is part of the backstory of Netanyahu’s apology over the flotilla. It’s hard to imagine that was his own idea.

          It is I suppose not surprising how rarely we hear mention of the SCO, after an initial ruffling of feathers when it began, its prominence being inversely proportional to its importance.

    2. Claudius

      I agree with the sentiment of what you say, regarding US Delaware as a tax haven.

      Please see my reply to Jim Senter, below. It might convey why, irrespective of the climate differences, there is an other distinction between Cyprus (and other low tax jurisdictions) and US Delaware.

    3. DantheGrey

      A genuine federal structure, don’t make me laugh. The only genuine federal structure in regards to banking in the U.S. is to give them whatever they want and to turn a blind eye to every criminal act committed by those same banking institutions should they get caught. LMAO

  3. guurst

    Did it not occur to you that the writer, like most journalists who’ve written about Cyprus, does not understand the difference between a tax haven and a low-tax jurisdiction

    Dear Yves,
    should not that be: the writer, unlike most…, does understand

  4. The Dork of Cork.

    The Irlande jurisdiction and Cyprus have more then a few things in common.
    To follow on from the last capital controls post.

    Both island fiefdoms could enter the worst of all worlds.

    Capital controls without a national currency.

    Looks like I will live in a extreme form of prison soon.

    Where domestic trade / commerce comes to a grinding halt so as to further subsidize international trade /capital flows.

  5. Maurice

    Well, read your piece and it still sounds like a tax heaven to me. Yes, there are worst cases and yes, what they do might be legal, but basically they are asking tax payers from other countries to pay for their low-tax status. I fully understand the resistance of the Germans to do so.

    1. The Dork of Cork.

      @Maurice

      With the rise of the Euro thingy (beginning in the 70s /early 80s) there is huge surplus claims on wealth to recycle.

      Up until 1979 Ireland & its domestic industry was integrated with the UK.
      After we left the Sterling peg the place imploded during the 1980s recession.

      It is all these fiefdoms can do in the present monetary /trade ecosystem.
      These recent extractive operations seem to be a transfer of real resources towards the IMF chief shareholders so that they can continue to buy German & Chinese wage /energy slave arbitrage products.
      For example the UKs physical import trade is dominated by Germany & China.

      Even Irish agriculture is being destroyed to sustain these unsustainable trade connections despite its close geographical proximity to major population centers in the UK.

      Looking back now EU agri policy and its subsidies was used because the growing Euro currency worked to import primary industrial & food products at the expense of domestic agents.
      The subsidy was used to prevent once powerful agrarian political rebellion until they became fully captured by the new post nation state monetary system.

      The Euro has created a world of concentric onion ring like capital flows………..those surplus claims flowed into the Irish & Cypriot fiefdoms.
      They had to flow somewhere …….correct ?

  6. grateful mushroom

    Thanks (Claudius, Yves) for the highlighting the difference between ‘tax haven’ and ‘low-tax jurisdiction’.

    Side note: Was hoping Cyprus would do an Iceland. Naive.

    1. brian

      You were hoping that cyprus would cover its domestic deposits and not even cover the 100,000 guarantee for foreign deposits?

      I think the Russians would be annoyed more than anyone else.

    2. jrs

      Very complex article if you’re not a corporate tax expert, but I get from it Cyprus isn’t as bad as Cayman, Isle of Man. Ok that’s sounds believable enough but so what? Not as bad is still allowing less corporate taxes to be paid than ordinarily would be. Still corporate taxes are not my fight, maybe they should just be eliminated, couldn’t the same result be acheived with truly progressive taxation on individuals that applied to dividends and capital gains and not just wage and interest income?

  7. Chris Engel

    This is a question I’ve been researching and trying to understand to the best of my ability.

    I’ve read the GFI report, the McKinsey report, and even an OECD report on the mechanism of Cypriot banking for Russians.

    It made no sense to me that Putin would be protecting these funds and oligarchs for not paying taxes in Cyprus. Also the spread on corporate tax rates between Cyprus and Russia is rather tight, it never made sense to me why:

    1) Anyone in Russia would risk laundering (and facing the wrath of Putin) just to get a 10% break on taxes. Sure, the costs of the legal fees to set up the entity structures is marginal when we’re talking millions, billions being saved on the tax end. But for tax purposes this claim in the press hasn’t made sense and I have yet to get anyone to give a clear answer to this.

    2) Why would Putin and the Russian state be front and center for negotiations on protecting Russian deposits which are “tax dodges”? There’s no mention from Moscow that they wish to find these deposits to get taxes, it’s more about protecting Russian wealth, not getting taxes.

    So there’s something else going on here, and of all the reports I’ve read it’s still unclear why the oligarchical activity in Cyprus is state-sanctioned and why they would choose Cyprus just to save such a small amount in taxes.

    There’s a better analogy here but I can’t put my finger on it.

    I don’t think it has anything to do with laundering drug money/illicit oil money/human trafficking money. As I understand it the mechanism for that is through the influence cartels have in the banking systems of Latin America in general (and some multi-nationals like HSBC).

    But I can’t get a clear explanation of what’s going on really behind this. Putin wouldn’t be complicit in oligarchs escaping taxes (I’m sure he gives permission to some maybe, but the PR of this would be bad).

    I’ve even used internal databases at work on this subject and the information seems quite guarded.

    1. Susan the other

      Just read some alleged state dept memos re Benghazi and revolution in northern Africa. The detail that caught my eye, whether true or not, was that some rich Saudi sunnis finance this turmoil and it was their money that was funneled into the militia faction that attacked our compound. Same MO for the twin towers essentially. Blaming it on the Al Qaeda network again. It was kinda interesting, but it could also be fabricated. The French are in this up to their eyeballs now too. So much for Hollande. ENI is trying to get back into developing Libyan oil. And Cyprus made the comment that if the EU was going to cut them off they would “appeal to Libya.” That is still a bit cryptic to grok in full. Then there are the Gulf investors (no doubt also rich sunnis) who bought up most of Laiki bank which in turn invested heavily in Greece (real estate?) and then lost its shirt. And the only-once-in-the-msm-mentioned Israeli investment in Greek islands – oil/natural gas property. And Russia fits into all this via Syria (which seems betrayed now) and its former dealings with Gadaffi. But who knows how. How exactly does big oil do its banking?

      1. Susan the other

        And also, not just Russia alone – how does the entire oil/gas industry do its banking in a time of over capacity, overproduction and dead-in-the-water worldwide economies? This looks a lot like consolidation or die.

        1. Glenn Condell

          ‘some rich Saudi sunnis’.. and

          ‘Gulf investors (no doubt also rich sunnis) who bought up most of Laiki bank’

          These generic mentions bothered me too. As you say ‘Same MO for the twin towers essentially’ As if the third rail of the tacit agreement between the US and the ME oil nations (behind ‘we will protect you and let you be filthy rich despots providing 1. you sell us oil at prices we are happy to pay and 2. we can build bases from which to project power) is 3. every so often you will need to serve as scapegoat du jour to cover our tracks, or those of our proxies’

          ‘the only-once-in-the-msm-mentioned Israeli investment in Greek islands – oil/natural gas property’

          Could be a clue, or another red herring.

      2. Yves Smith Post author

        Yes, there is all this noise about Russia when (per the NYT tonight, using Moody’s data) only 24% of the deposits are Russian. I’ve heard there are a lot of Lebanese and Saudi deposits in Cyprus, but you hear nary a peep about that in the Western media.

        1. Lambert Strether

          If we want to know the origins of the crisis, we could do worse than back track the disinformation campaign on this. I know I had mentally equated Cyprus and Russian money laundering and tax haven and so forth, but I cannot for the life of me remember when or where, or how I accepted that as true.

  8. Jim Senter

    This is why Shaxon’s term “secrecy jurisdiction” is much more accurate. There’s a lot more regulation and law evasion going on there, and in places like the Isle of Mann and the Virgin Islands and Switzerland, than tax evasion.

    Low tax rates are an indication that a nation’s legal framework has been restructured to serve the interests of finance in avoiding the application of other nations’ laws. It is only part of the problem.

    The whole world is becoming a secrecy jurisdiction.

    1. Claudius

      Agree. It’s not the nominal tax rate that’s the giveaway, it’s the secrecy.

      During the financial crisis, G20 recognized that the key to tracking tax evaders and tax havens was ‘transparency’ of information (not tracking nominal low tax rates). As Such, the G20 countries obligated tax havens (Switzerland being the guinea pig) to sign bilateral treaties providing for exchange of bank information in an effort to end bank secrecy.

      Shaxson’s (and Christensen’s) research concluded that it resulted in negligible benefit to the G20 countries; as what, typically, happened was that rather than repatriate funds, tax evaders moved deposits to havens not covered by a treaty with their home country.

      The result was a massive relocation of deposits to the least transparent/compliant havens; even when the nominal tax was higher (and, they now charged a ‘secrecy’ premium on the inter-mediation rates, making it even more difficult to track).

      And which tax havens were the greatest beneficiaries of these massive capital flows, in the world? In rank order (1-10), and in the opinion of the Tax Justice Network (as reported by Forbes): U.S. (Delaware), Luxembourg, Switzerland, Cayman Islands, the U.K. (City of London), Ireland, Bermuda, Singapore, Belgium and Hong Kong.

      Delaware!

      1. Peter Pinguid Society

        Delaware does not tax LLCs, as long as they operate in another state. Setting up a shell company (tax haven) in Delaware is easier than applying for a driver’s licence.

        We are the Peter Pinguid Society, we are the 0.01 percent.

        1. Ms G

          Wow. But if that is the case, then why wouldn’t every small business in NYC structure itself as a Delaware LLC? I mean, unless you have to know some secret password or handshake on the Delaware side.

          1. Yves Smith Post author

            NYC Corporation tax is very evil! Doesn’t matter who you are, what you are, if you are physically here and incorporated or a LLC, you pay! Even S corps pay it. I think the only corps that escape are not-for-profits. And they also have an unincorporated business tax.

          2. Ms G

            Well that stinks! So the only way in NYC to not pay extortionate taxation is to label your income carried interest or something? There is no tax justice for the 99%!

        2. Ms G

          Then tha’s the obvious catch. You need a connect (aka “accountant”) to get the Delaware LLC doors to open. Too bad, I was getting my hopes up about easy-as-getting-a-driver’s-license and all.

          1. Peter Pinguid Society

            Sorry ’bout that, Ms G.

            But you know what they say, taxes are for the little people.

            We are the Peter Pinguid Society, we are the 0.01 percent.

  9. hugh fowler

    By being ‘good Eurpeans’ and agreeing to the Eurozone sponsored write down on Greek bonds the Cypriot banks took a 53% loss in their holdings.

    http://money.cnn.com/2012/02/21/markets/greece/index.htm

    Assuming they bought insurance on their CDS and had insisted on steelement as some debtors did they weould have only suffered a loss of 21.5%

    http://www.ft.com/cms/s/0/0997e7f4-71c4-11e1-b853-00144feab49a.html

    Now they are being slandered as money launderers and tax cheats.

    With friends like the Eurogroup Cyprus does not need enemies

    1. Jim Haygood

      If capital controls are introduced, it basically makes Cypriot euros into a national currency. — Jeremy Warner, The Telegraph

      True, but with an odd twist — there’s an unblocked version of the same currency in neighboring countries.

      This sets up a highly profitable arbitrage for those who can smuggle physical euros (conveniently available in €500 denominations) from Cyprus to the mainland, where they are completely fungible.

      Of course, FinCen frowns on large cash deposits. Those who already have laundering arrangements are the natural players. And who would that be? Why, the Mob, of course.

      By smuggling drugs into Cyprus, selling them for discounted Cypriot euros, then redeeming those euros for full value in Greece (or wherever), one can profit on both legs of the venture. Multiple streams of income, baby!

      What a lovely business-government partnership, creating high-paying new jobs.

      1. from Mexico

        @ Jim Haygood

        So let me get this straight. Criminals smuggle drugs into the country, which they sell for euros, all of which is illegal.

        Then those same criminals smuggle the euros out of the country, which with capital controls is also illegal.

        And yet you define this as a “business-government partnership, creating high-paying new jobs.”

        Where is your evidence that the Cypriot government would collude in this enterprise? Or are you saying that anytime criminals break the law, this automatically means government complicity?

        You seem to engage in a great deal of speculation, both empirical and theoretical, that has no basis in anything other than your imagination.

        1. Jim Haygood

          With all your literary acumen, you don’t quite get irony, do you?

          The War on Drugs is what keeps organized crime in business, in both the U.S. and México. This is no speculation.

          Irony (from the Ancient Greek εἰρωνεία eirōneía, meaning dissimulation or feigned ignorance) is a rhetorical device, literary technique, or situation in which there is an incongruity between the literal and the implied meaning.

          http://en.wikipedia.org/wiki/Irony

    2. from Mexico

      @ hugh fowler

      The Greek government bonds sitting on the balance sheets of Cyprus banks are only part of the problem, and maybe not even the biggest problem.

      Cyprus, according to Wolf Richter, like so many other countries since the onset of the GFC has experienced a resendential real estate meltdown. “Turns out,” Richter says, “real estate is Cyprus’ national sport sponsored by dumb money.” And just like the American banks, they evidently played fast and loose not only with the money, but with the title work as well. Just as in the United States, the banks are sitting on top of a title nightmare because of their prior incompetence? Malfeasance?

      http://www.news.cyprus-property-buyers.com/2011/10/30/another-eurozone-country-bites-the-dust/id=009490

      Richter doesn’t say what the total exposure of Cyprus banks to real estate loans is. Is he saying the potential losses amount to $3 to $6 euros? I can’t make it out, but he obviously believes the potential losses are very large.

      1. alex morfesis

        @from mejiko
        cyprus like greece has no title insurance industry so foolishly, foreigners accept the notion that an atty’s title opinion will hold up…and to that extent, the title work much resembles the delphi bankruptcy derivatives problem where parties took counterparty positions and…oops, did not actually own the bonds they took the money for…oh well, modern finance…sell a position for ten times the available bonds…so basically greeks and cypriots are much like the whalepond at 270 park, but hey…jimmy deamond is greek after all so that basically explains how the american taxpayer SHOULD BE on the hook for 90 trillion in derivatives exposure through the fdic…but…I do take a little offense to the notion the USA is the only bad player on this planet…you are not suggesting that the death of Dr. Maria Santos Gorrostieta was some type of “Operation southwoods” and it was actually americans who ordered her graduation to another plane of existance ? And the french, now there is a bastion of civility…they just volunteered to let loose their former colonies like they had agreed to during WW2…that the CIA had to help them along in “letting go” of their colonies…that is not contract enforcement…that just america being “an evil empire”…well charlie the gaul got his revenge wraped up as a little birthday present didn’t he..?…? yup, and the CFA franc…thats not colonialism…they are just trying to help those poor savages along…those noble frencheez…

        1. from Mexico

          alex morfesis says:

          …but…I do take a little offense to the notion the USA is the only bad player on this planet…you are not suggesting that…

          You’re straw manning. I never said the USA is the only bad player on this planet, only that she sits on top of the food chain.

        2. Synopticist

          Most of those foreign buyers will be Brits, and we have barelly heard of title insurance. I didn’t know what it was til I started reading NC.

          The Cypriot Land Registry is the thing Brits woulld think about. People don’t even bother with property deeds anymore. Once the Land Registry gave a guarantee, that would be that as far as they’re concerned.

      2. Yves Smith Post author

        I think Wolf has this one wrong.

        Residential mortgage debt to GDP is 60%, less than the post GFC level for the US of 68%. Remember, there has been a lot of deleveraging in mortgages (much of it involuntary, as in foreclosures and bankruptcies).

        Laiki is the big problem, and what went bust were its GREEK branches.

        And I believe the biggest bank has been buying government debt, it’s basically been the vehicle for the government getting dough from the ECB (bank buys gov’t bonds, pledges them to the ELA, gets cash back).

  10. TC

    The entire trans-Atlantic banking system is insolvent. There will be no stopping the swindle venturing to pretend otherwise until some young Corleone takes Fanucci down. Like that Don, today’s too have nothing but clucking hens hooked on chicken feed backing them up.

    1. OpenThePodBayDoorHAL

      Thank you. Ths is certainly the uber point that Cyprus makes but the other signs are adundant. In a world with too many liabilities and not enough assets, we just play merry-go-round. Eventually assets & liabilities need to match up. Used to be that govt bonds were money good but not so much any more…There’s a huge lump in the carpet at the Fed and the ECB, they’ve been stuffing paper under there for a while, hoping no one would notice.

  11. Paul Niemi

    Cyprus banks were paying 8 percent on deposits held one to five years, up to 11 percent interest on large deposits held for five years or more. Dollars earned slightly higher interest rates than Euros. If these deposits were in use to avoid taxes, would there not be less need for these high rates? In the environment of the rest of the world, where interest rates are very low to near zero, I think the only way the Cyprus banks could pay these rates is through paying older depositors out of new deposits. In other words, they were in competition with Bernie Madoff, tax issues aside, or are appearances deceiving?

  12. zebulon

    Couldn’t agree more. While not every Euro kept in Cyprus might be originating from activities that cannot be labled as illegal in one jurisdiction or another, most people that are using shell companies and off-shore accounts there do this for a perfectly legitimate reason: to protect their hard earned wealth and fortune from the hands of greedy governments that want to deprive them and their families of what’s rigthfully theirs.

    It is a little bit unfortunate that Cypriotic banks somehow managed to evaporate the money entrusted to them. Maybe it has not even dissapeared but just has been heading somewhere else. But that’s how it goes sometimes and its never to late starting to look for the Greater Fool.

  13. allcoppedout

    Cyprus was always a good place to sell that ship you’d just received the insurance money for, or to send container loads of stolen vehicles. I agree the main article, but ‘honest Cyprus’ in reality is as likely as ‘honest Albion’ (small print ‘incorporating mega-offshore’ – the real owners). It’s just the first example of how we should regard any paper constitutional changes in the tax havens – with incredulity.

    Tax havens/low interest economies are not really demarcated by State boundaries. Most of us don’t or can’t benefit from them, suggesting the money-class issue forms the real boundaries – trite of course.

    Criminality aside, the question on Cyprus seems to be whether the low tax system left a hole the EU is being asked to fill and why the money attracted to ‘low tax’ in such multiples of GDP did not blossom to profit for Cypriots but seems ‘invested’ in the dead dog futures of Greek bonds. The rocking horse dropping ‘investments’ have retro-future reality in the sense depositors (or tax payers) are expected to buy them post-failure.

    What no one dares to suggest is taking the money from those who have turned profit on the system. We have few details so far to do more than guess how this situation came about, who is really responsible (is it geopolitical?) and whether it is some part of a longer-term plan to create volatility for asset seizures by the rich. Who is holding a ‘war-chest’ for asset stripping?

    1. Chauncey Gardiner

      Thanks, allcoppedout… “What no one dares to suggest is taking the money from those who have turned profit on the system. We have few details so far to do more than guess how this situation came about, who is really responsible (is it geopolitical?) and whether it is some part of a longer-term plan to create volatility for asset seizures by the rich. Who is holding a ‘war-chest’ for asset stripping?”

      I agree. Aspects of what has occurred here transcend the moment and this particular situation. Both timely analysis and the passage of time will be useful in understanding what really went down here and why. Perhaps the first step is to clarify who has benefited and why they did so. The acquiescence of key players to the actions of the transnational banking cartel are also meaningful in this regard.

      Besides large German banks and the Troika (and hopefully without overreaching or delving into conspiracy theories), some thoughts on others besides those mentioned here by others who might benefit:

      — Major Oil & Gas companies and those who desire access to potential Cypriot oil and gas reserves and other public assets?

      — The City and Wall Street through shutting down an entrepot into Russia and elsewhere?

      — Those holding large positions in Greek bonds or derivatives trades?

      — The Queen’s “safe havens” in the Cayman’s, the Isle of Man, Jersey, etc.?

      — Those who desire templates of how much economic destruction, corruption, and theft societies can withstand?

      — The Putin regime?

      — Others?

      Why is this retrospective analysis important to do, and not just in the case of Cyprus?

    1. Glenn Condell

      ‘And furthermore, we the citizens will criminally prosecute any entity within our jurisdiction, public or private, which has any dealings, inbound or outbound, with any external entity or jurisdiction listed on the Global Avoidance Index we have created for this purpose’

  14. Rupert

    Re: Claudius. It seems Mr. Krugman doesn’t care to learn the finer points of this analysis. Apparently, trying to appeal to what he believes to be prevailing popular opinion, he continues to propagate the idea the Cyprus is a tax haven and a mecca for money laundering–and boy they’re lapping it up. Why deal with facts when you can be glorified by the systematically uninformed who are too caught up in the lust of vilification to question the opinions of a Nobel Laureate.

  15. kevinearick

    Free Money

    Sorry folks, free money doesn’t work. Putting money to work is a sales pitch. Money is debt leverage, which depends upon borrowing from future generations, and the kids are passively revolting, because work, actually doing something productive, doesn’t pay.

    If you want to watch an economy die, which the majority is doing, put money in a bank and live off real estate price inflation, hoping to die before the ATMs run out of money. America is Cyprus/Japan on a very large scale, which is why the latter is the current financial arbitrage prototype.

    The US dollar has fallen from 1/35th of an ounce of gold to 1/1600th. The soup is simply being diluted. Welfare is designed to provide continuing, artificial, demand for corporations, not working people. The corporation is designed to minimize cost, and labor is assumed to be a cost. Free money excludes, replaces, labor revenue, the feed.

    Machines are given accelerated depreciation treatment, the Fed digitally prints and gives money to the banks globally, which becomes corporate revenue at 40X leverage, and the majority assumes the US military will continue protecting the system, while cutting it to pay for social services, which will only contract faster as a result. It’s the greatest ponzi ever built…and it’s collapsing.

    Look around, drug economies don’t work. The only possible outcome is a game of pop-goes-the-weasel, last-man-standing in a closed win-lose regulatory construct, which all participants eventually lose, first their spirit, then their intellect, and then their bodies.

    There is no money of any value in the pension system. It has been diluted to negative cash flow with negative real interest rates, and that money has to come from somewhere. Benanke is a janitor, hosing away recurring middle class income to pay near-term middle class pensions, upon which the landed wealthy depend as a buffer for its own replacement.

    A federal government depends upon state governments, which depends upon local communities, and this (Fort Bragg, CA) and every other community now depends upon patronage to state and federal governments, which can only form a global government in their attempt to temporarily get out from under all the debt, which isn’t being paid, not even the interest, if you look at the system globally, or Cyprus in particular.

    There are all kinds of things that need to be done in your community, and people capable of doing them. The problem is price discovery, all the false assumptions associated with empire economics. Pot, or any other drug, is not an economy, but who am I to say so?

    I am just a guy who has been passing through the gap since the 70s, watching the Jerry Brown crowd, and its insane debt leverage expansion, come to power. America has long passed the ability to enforce contraction on the minority with electronics, to preserve the majority, which is being uprooted accordingly.

    The argument for free money collapses quickly in world war, and the argument in favor of free money can only lead to world war. So far, most of the damage is occurring in Europe, as the Fed contracts it ahead of domestic contraction, hidden behind accounting numbers to maintain the relative status quo, which is all the peer pressure status groups can compute.

    If you want to Celebrate Recovery while bombs are falling on your head, that’s your business. You can’t eat pot, any other drug, or manufactured food to produce health, which is why America has the most irrational healthcare system, the greatest cost for the lowest overall health, on the planet.

    When war comes, and it always does, who do suppose will build the necessary instrument to end it? And who do you suppose will benefit? Have you seen the default rate among universities? They were built to justify income inequality, not to mitigate it, as the positive feedback outcome attests. When time comes, America will not be the beneficiary. History tells you that.

    There are no more growing slave populations on the margin to capitalize, and the real imbalances are growing accordingly. Everyday another house empties and another person is looking from the outside in. Local conditions continue to deteriorate, but the media publishes the economic good news. You might want to get busy and give young people with skills a reason to stick around and have kids, but you do what you want, continue to fight for the best chairs on the Titanic.

  16. Phichibe

    Just wanted to say “Kudos” to all (Yves, Clausius, and the commentators) on a fascinating discussion. I haven’t made up my mind as to this issue, but the level of discourse here is fantastic. Thanks.

    P

  17. simon p gruber

    If the ECB bought all the extremely lousy greek and cypriot bonds, then giving those bonds a haircut now would tell us the quality of the bonds. No wonder we skipped the formal capital structure and went straight for the depositors:

    They already zeroed out the bonds the Troika purchased. This is the next step in the capital structure. This means:

    a) ECB knows there are no money good bonds left

    and

    b) The ECB didnt skip any legal steps, the EU is really that broke (meaning, no one would buy german anything if they understood there was no more good debt in Europe).

    the only reason they say nothing about the bonds is because the Troika bought them sight unseen, and having had a while to look at the quality, determined that any court would simply say, well the bonds are zero, lets move down the capital structure. Troika tells no lies when no riddles are asked. Simply shows you the Troika knows the value of Euro area bonds, and that value is close enough to zero that bothering to take someone to court would cost more than the bonds are worth.

    Either way, cypriot depositors have filed claims for over 70% of their deposits, no fractional reserve bank would survive that run.

    forget the gibberish spewing from the lying face of the Troika (because when its serious, you just have to lie schauble/wiedemann) focus on what will happen to the EU if they had to hit bondholders.

    BS on the ‘tax haven’.

  18. Gobby

    It’s incredible to me that we allow tax havens in the first place. Why does cyprus, luxebourg and Switzerland have differentrates for deposits? They are all in the EU. Why don’t they just standardize the rates by law? Cyprus, Russia, the middle east chappies wanted to play with the financial big boys,it deserves everything it gets coming to it.

  19. RoachHunter

    Cyprus isn’t as much a tax heaven as it is a money laundering center for criminal oligarch cockroaches and other assorted scum. Spare the small-time savers, expropriate everyone who has more than 300k Euros at a Cypriot bank.

    One down, hopefully Luxembourg and the City are soon to follow.

  20. Gray

    The question if a natiion is a tax haven has to be anwered by comparing its tax rates with those of other nations. Corporate tax in Cyprus is at 10 (TEN!) percent!!! That rate is lower than in any other EU nation, including Ireland. That the conditions are a bit more reasonable than in shameless money laundering center Cayman Islands is NO excuse for the brazen and harmful “race to the bottom” policy of Cyprus, which leads to a serious loss of tax revenue in other EU nations. The story by Claudius downplays this by bringing up a phony comparison with the worst tax evader complicit nations of all, instead of discsussing Cyprus in an European context. Imho that’s shameless propaganda and I wonder if that commenter got paid by Cyprus for this!

      1. Claudius

        Gawd! Posted = blank refresh. Cleared the cash, deleted cookies, reassigned the IP. Posted = blank refresh. Reposted = “you appear to have already said that..”. Changed the first line of text (to avoid: “you appear to have already said that” and blank refresh), copied the text into Word, saved at no format txt file. Copied the file into Note Pad, saved, reopened, Posted into comment box. Blank Refresh.
        Re edited the file (good exercise in any event) Reposted. Blank refresh. Changed browser, re posted a “grrr” comment = successful post. Reposted original comment = blank refresh….. I guess, either a comment limitation, word count limitation, external (WordPress, filter by word association) limitation (so it could be any word oe acronym that is not a connective, conjunction definite article or personal pronoun. I know it’s not a profanity (unless CIA, FBI or World Bank count) I should get a better idea id this reply is posted….

  21. Max Stanfield

    This post of Jacques Sapirs has an excellent summary of the Cyprus situation along with some insight on Russia’s involvement and interests. His posts are generally in French but today’s entitled Cyprus between Germany and Russia has been translated. Best I’ve read.
    http://russeurope.hypotheses.org/

    1. John Glover

      Good summary, and which points out that Cyprus’ main role for Russians is not as a place to park money but as a transit point. And this is really where the tax angle comes in, because of Cyprus’ place in the tax treaty network. Cyprus has favorable treaties rates both with EU countries (and the US, among many others) and with Russia/CIS. The result is that almost all investments between the two run through Cyprus. As one post I read earlier this week stated, if you are advising someone investing in Russia and don’t advise them to do it through Cyprus you are committing malpractice.

      At least, you were. Who knows what the future holds on this front….

  22. Theremustbeanotherway

    Hi Yves

    I very much enjoy reading your blog and I’m looking forward to reading your book “Econned”, which I have ordered recently.

    While I agree with 99% of your views, I have to disagree about Cyprus’ status as tax haven, based not only on work done by the Tax Justice Network and the founder of Tax Justice UK, who works TJN, but the OECD and other bodies.

    I’m attaching some links, which I hope are of interest:-
    http://visar.csustan.edu/aaba/jerseypage.html

    http://www.taxresearch.org.uk/Blog/2013/03/24/people-have-described-cyprus-as-a-tax-haven-for-35-years-it-hasnt-changed-now/#comment-area

    All the best,

    Theremustbeanotherway
    UK

  23. Brooklin Bridge

    Claudius, you might want to shoot Bill Black a memo about his take that Cypryus’, “strategic plan for economic development is to be the money launderer for the scum of the earth.” I was quite surprised to see this on the Real News as a March 24th clip. http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=9933 Mr. Black’s assertion certainly doesn’t seem to jibe with your post here nor with Your/Yves’ point that the money laundering meme has been a propaganda set up. I’m surprised that Mr. Black would allow himself to get caught in that ploy… (or am I missing something fundamental here?).

      1. Claudius

        I can’t speak to the strategic intent of Cyprus’ Banks, just that if their intention was to be the world’s money launderer, they clearly did about as much as any financial center could, on the face of it, to walk themselves alongside the path of least resistance (complaint with about every regulatory and supervisory authority out there: acquis communautaire and the Code of Conduct for Business Taxation of the EU and the requirements of the OECD, the FATF, and the FSF etc). And, not even make ‘the’ Forbes top ten list of Tax Havens.

        Perhaps, Bill Black has greater insight and a better understanding of the means, method and mode of Cyprus’ banking – he certainly has the credentials . If he does, I hope he shares it with NC readers.

        I believe most NC readers know that there are no absolutes in truth, just relative terms of reference to common denominators of personal experience. We all learn.

        1. Brooklin Bridge

          Perhaps, but it is also possible Bill Black simply slipped up somewhat, credentials or no. Your post here is pretty compelling, for instance.

          I’m not quite sure what you are getting at by, “I believe most NC readers know that there are no absolutes in truth, just relative terms of reference to common denominators of personal experience. We all learn.”, but thank you for sharing.

          1. Brooklin Bridge

            For that matter, even Yves slipped up somewhat as attested to by the title of this post which I will share with you since you shared your wisdom with me, “Repeat After Me [...]”

            I’m not trying to start a fight and I have the utmost respect for Bill Black. I simply observed Mr. Black making a statement that seems to have been well challenged here by you; so much so, indeed, that Yves went out of her way to post your thoughts.

          2. Claudius

            Nothing profound. Just saying I am not wedded (in a Popperian sense) to my own notion of personal truths.

          3. Brooklin Bridge

            Perhaps not profound, but certainly unusual if you have the consensus of “most NC readers”.

  24. Frank

    Cyprus is mentioned repeatedly in Shaxson’s Treasure Islands as a tax haven, and he notes on p. 46 that it is “among the world’s murkiest tax havens: possibly the biggest conduit for criminal money out of the former Soviet Union and the Middle East into the international financial system.”

    Shaxson has also posted on this blog, I believe.

    1. Claudius

      Apologies Frank (and Brooklyn Bridge). I have tried repeatedly to post a substantive reply (rather than a stunted paragraph – even tried Chris Engles approach: Part1 part 2 ). Frustratingly it’s failing persistently (see my frustration above).

      I will try once more…..

    2. Claudius

      Part one: What’s the diffeence between a Tax Haven and a Low Cost Juristiction? Clue:It’s not the nominal tax rates; it’s the secrecy.

      During the financial crisis, the US in particular and the G20, generally, understood that the key to tracking tax evaders and tax havens was transparency of information (not tracking nominal tax rates jurisdictions). As Such, the G20 obligated tax havens to sign bilateral treaties providing an exchange of bank deposit information in an effort to end bank (or more specifically, depositor) secrecy. Though, (as reader ‘Swedish Lex’ references, above) research by Shaxson (and Christensen) concluded that this resulted in only a negligible benefit – what, typically, happens is that rather than repatriate funds, tax evaders moved deposits to havens not covered by a treaty with their home country. The result is a massive capital relocation of deposits to the least transparent/compliant tax havens (making it even more difficult to track); even though the nominal tax was higher (tagging an additional ‘secrecy’ premium on the intermediation rates).

      So, how to lift the veil of depositor secrecy (domestic banks are, or course, easy targets) especially on cross-boundary (tax haven) transactions? There, clearly has to be a data (transaction) trail in the financial system (which we know is robust, because money gets to where it’s going quite efficiently). The first point of attack might well be a primary source such as the BIS banking statistics, which contain information on foreign bank deposits in 41 countries. For example, the BIS publishes quarterly data aggregated at the country level, showing total deposits held by, for example, US residents in Swiss banks and total deposits held by Swiss residents in US banks. All significant financial centers (low tax jurisdictions, havens and non-havens) report to the BIS including the (undisputed) tax havens.

  25. Claudius

    What’s the diffeence between a Tax Haven and a Low Cost Juristiction? Clue:It’s not the nominal tax rates; it’s the secrecy.

    During the financial crisis, the US in particular and the G20, generally, understood that the key to tracking tax evaders and tax havens was transparency of information (not tracking nominal tax rates jurisdictions). As Such, the G20 obligated tax havens to sign bilateral treaties providing an exchange of bank deposit information in an effort to end bank (or more specifically, depositor) secrecy. Though, (as reader ‘Swedish Lex’ references, above) research by Shaxson (and Christensen) concluded that this resulted in only a negligible benefit – what, typically, happens is that rather than repatriate funds, tax evaders moved deposits to havens not covered by a treaty with their home country. The result is a massive capital relocation of deposits to the least transparent/compliant tax havens (making it even more difficult to track); even though the nominal tax was higher (tagging an additional ‘secrecy’ premium on the intermediation rates).

    So, how to lift the veil of depositor secrecy (domestic banks are, or course, easy targets) especially on cross-boundary (tax haven) transactions? There, clearly has to be a data (transaction) trail in the financial system (which we know is robust, because money gets to where it’s going quite efficiently). The first point of attack might well be a primary source such as the BIS banking statistics, which contain information on foreign bank deposits in 41 countries. For example, the BIS publishes quarterly data aggregated at the country level, showing total deposits held by, for example, US residents in Swiss banks and total deposits held by Swiss residents in US banks. All significant financial centers (low tax jurisdictions, havens and non-havens) report to the BIS including the (undisputed) tax havens.

    Why do they have to report to the BIS? Because all the banks with cross-border positions in excess of a nominal threshold (say, $10 million) are required to report it; and, importantly, the BIS statistics are used widely in global economics and as a national/international balance of payments indicator (which gives an indication as to the size of capital flows) and are key as an econometric indicator.

    The banks do not report data on individual customers’ to the BIS, only aggregate figures as they relate to immediate beneficiaries. So, it’s not possible to know, accurately, what proportion of deposits in tax havens belong to individuals evading taxes and what belongs to, say, multinationals. It’s a best guess (and for too many ‘wonkish’ reasons it’s not easy to model). Almost a quarter of all deposits in tax havens are registered as belonging to other havens, reflecting the widespread use of shell corporations by clients of offshore banks. And, Jurisdictions such as Delaware and Panama stand out because both jurisdictions have very flexible incorporation’ laws that make it simple to create companies in a few minutes (as highlighted in the exchange by readers Jim Senter, Peter Pinguid Society and Ms G, above).

    For example, Switzerland, the second largest offshore center in terms of “non-bank” deposits, the best guess is that 80-90% of the deposits seem to belong to individuals (easily recognized as ‘immediate’ beneficiaries), whereas, say, the Cayman’s has a higher proportion of multinational deposits (ultimate, ‘secret’, beneficiaries). Which might explain why the US/OECD found it easier to go after Switzerland first place (rather the Cayman’s or Delaware) with its high ratio of immediate beneficiary deposits; because while The Cayman’s too report to the BIS “immediate” beneficiary deposit owners (nominal ‘shell’ entities) it, like Switzerland, reports nothing about (ultimate) “beneficiary” deposit, ownership – such that, if a US citizen owns a Delaware deposit through a shell corporation with an address in Singapore, the BIS assigns the funds to Singapore and Delaware remain invisible. Using a shell corporation as nominal account holder puts a layer of secrecy between an account and its beneficial owner: essentially, accounts held through shell corporations are equivalent to a numbered account (which are now ‘verboten’ by OECD countries – Switzerland being oh so 2008).

    An astute observer might point out that the various Treaties require banks, vis-à-vis the OECD’s Financial Action Task Force’s (FATF), anti-money laundering (AML) regulations, to know “at all times” who the immediate beneficial owner of the assets they manage are – and, under the respective treaty agreements they must provide this transaction information (unless you are HSBC) to any bilateral authority that request it. The catch though, is that, again, banks cannot identify the beneficial owners of the deposits held through shell corporations because the data they are mandated to record and report on is based on “immediate” beneficiary (which is indeed “beneficial” immediately to the vast majority of “ordinary’ depositors – and, great if the IRS wants to identify and shut down the local drug dealer or domestic “evildoer”) rather than ultimate beneficiary/owner (the “professional” tax evaders).

    Great, then change the ‘Know Your Customer’ (KYC) AML deposit data set (the AML record) or create a ‘universal’ data set so as to better establish the real (ultimate) beneficial owner(s). If effective, and combined with the risk of prosecution then, in all likelihood, it would have an immediate effect; deposits in the most secretive tax havens would be repatriated almost overnight or flow to more transparent jurisdictions (because they have nowhere, “secret”, to go). However, citing prohibitive cost of implementation, jurisdictional issues, client confidentiality etc., etc. six OECD countries stand out as passive resistors (most recently ‘”condensing” 49 FAFT recommendations down to 40 and moving from a forensic KYC approach to a more ‘risk-based’ approach) to international implement of an AML minimum data set – a reporting requirement that would provide records on beneficial (ultimate) ownership of deposits: U.S. (Delaware), Luxembourg, Switzerland, Cayman Islands, the U.K. (City of London) and Ireland.

    So underwhelming is the UK’s (City of London) and the US’ commitment to global AML, that while being members in their own regional jurisdictions’ FAFT (and the US additionally in the Asia/Pacific Group on Money Laundering (APG, sic)), it’s, perhaps telling that the they are either not members or are only “observers” in the corresponding regional KYC/AML/CFC entities (http://www.fatf-gafi.org/countries/) of: Caribbean Financial Action Task Force (CFATF); Eurasian Group (EAG); Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG); Financial Action Task Force on Money Laundering in South America (GAFISUD); Inter Governmental Action Group against Money Laundering in West Africa (GIABA); Middle East and North Africa Financial Action Task Force (MENAFATF); and (remarkably, given HSBC’s history) Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL).

  26. Claudius

    Part one: What’s the diffeence between a Tax Haven and a Low Cost Juristiction? Clue:It’s not the nominal tax rates; it’s the secrecy.

    During the financial crisis, the US in particular and the G20, generally, understood that the key to tracking tax evaders and tax havens was transparency of information (not tracking nominal tax rates jurisdictions). As Such, the G20 obligated tax havens to sign bilateral treaties providing an exchange of bank deposit information in an effort to end bank (or more specifically, depositor) secrecy. Though, (as reader ‘Swedish Lex’ references, above) research by Shaxson (and Christensen) concluded that this resulted in only a negligible benefit – what, typically, happens is that rather than repatriate funds, tax evaders moved deposits to havens not covered by a treaty with their home country. The result is a massive capital relocation of deposits to the least transparent/compliant tax havens (making it even more difficult to track); even though the nominal tax was higher (tagging an additional ‘secrecy’ premium on the intermediation rates).

      1. Brooklin Bridge

        Sorry to hear you’re having issues with the comment software. Ugg!

        It seems to me that your post is excellent at getting at an otherwise easy to misjudge issue. It very much reinforces Yves’ point about the blitz of “tax haven” propaganda aimed at Cyprus by Germany (and the ECB?) over the last 6 months. The way you present it above, it does not seem so much a “personal truth”, as a very public one that you have argued persuasively with a fine distinction between tax haven and low tax jurisdiction.

        Anyway, I was very interested to hear your further elaboration on the differences between the two so a pox on this unruly comment software.

        Between your post, and another recent one, it seems that judging Cyprus as nothing but a personal piggy bank for the Russian Mafia oligarchy would be, to use your terms, ill-informed and abusive, particularly if such a view obscures an intentional smear campaign by Germany for election purposes.

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