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Documenting and investigating offshore centers

“The Offshore world is the biggest force for shifting wealth and power from poor to rich in history... It harms the big wealthy nations too,
even those that have turned themselves into tax havens.” from Treasure Islands by Nicholas Shaxson.

Undeveloped countries are looted of their own wealth, while developed countries face growing poverty, cuts to social services and unaffordable education. These shifts are facilitated by systematic mechanisms that multinational firms and global banks use to transfer and hide wealth in legal loopholes, made possible with the complicity of the governments of the UK, US and Europe. Offshore centers are not a marginal phenomenon. Today, using them is central to finance and the global economy.

Through the following interviews, produced for this project, major experts unveil significant issues of abuses of the offshoring system, as well as offer solutions to tackle offshore centers.
Video excerpts of interviews with experts of offshore centers
12 minutes long of selected excerpts. Full versions next to this.
John Christensen
founder of Tax Justice Network UK
William Brittain-Catlin
author of The Dark Side Global Economy
Jack Blum
leader Tax Justice Network U.S.
Chris Taggart
founder of Open Corporates

The statistics
98% of top 100 UK companies (FTSE) use tax havens. 6 of 10 top tax haven countries are controlled by the UK [1]. Over the 83% of top 100 U.S. companies (Fortune) use tax havens [2]. The use of offshoring has increased vertiginously, at a rate of illicit financial flow growth of 18% a year. The top 0.1 per cent of US taxpayer saw their effective tax rate fall from 60 per cent in 1960 to 33 percent in 2007, while their income soared. In 2007, the 700 biggest businesses in UK paid no tax at all on the previous year, which was a boom. However, the banking sector makes the heaviest use of offshoring. Figures show that, in 2010, Barbados, Bermuda and the British Virgin Islands received more foreign direct investment than Germany or Japan [0].

Some numbers
A December 2012 report found that from 2001 to 2010 developing countries lost US$5.86 trillion to illicit outflows [3]. The same organization unmasked that misinvoiced trade between Chinese companies and the United States just from 2005-2011 is roughly US$2.83 trillion, flowing illicitly out of China [4]. The Tax Justice Network in a 2011 report revealed estimates of tax evasion for 145 countries around the world, covering 98% of world GDP. They lost $3.1 trillion to illegal tax evasion between them [5].

Some names
The financial sector has the greatest presence with the 'big four' UK banks – HSBC, Barclays, Lloyds Group, and RBS – accounting for 1,649 companies located in jurisdictions classed as tax havens [6]. This is the case also for American banks such as JPMorgan, Chase, Goldman Sachs and Bank of America [7]. Just a few multinationals paying taxes on less than 10% of their income: Coca-Cola, Intel, Del Monte, Seagate, Oracle, Pfizer [8] and American Airlines, Apple, Berkshire Hathaway, Cargill, Ford, General Electric, Google, Facebook, Amazon, Wal-Mart, Vodafone, Starbucks [9], among others.


Offshoring in detail, and what offshore means


It’s not only to hide money and avoid taxes or manipulate prices. Sometimes it’s to hide debt, or often to manipulate ownership, to misuse intellectual property, or to insure against high environmental risks. After painstaking research, the artist assembled the following list concerning the use and various instruments of offshore centers.

- Toxic financial products. Most of the banking sector uses offshoring not only to hide assets but also to conduct unregulated speculations through special financial instruments, often “toxic” and damaging to real economies. The system of so-called "shadow banking," blamed for aggravating the global financial crisis, grew to $67 trillion globally in 2011 [10].

- Price manipulation, technically known as Transfer Pricing or Misinvoicing. Multinationals can shift profit into a low-tax haven and costs into high-tax countries, where they can be deducted against tax. For example: Apple produces iPhones in China for a low production cost which is invoiced through an offshore subsidiary. Then it sells the iPhone to rich countries by invoicing a price a little lower than the retailers price, not paying tax on the huge difference between the production cost and the retail price. This loophole is very common for manufacturing industries and especially for raw material from undeveloped countries [11]. Developing countries lose $98 to $106 billion each year solely due to misinvoicing [12].

- Patents, Trademarks, and Intellectual property. Many multinationals register patents of their technology or trademarks in offshore centers in order not to be taxed. Major Internet companies make strong use of offshore by transferring patents for technology or offices to offshore centers. Example: Google, a US company located its European head office in Dublin, where corporate income taxes are low. Google Ireland is owned by a company based in Bermuda where corporate profits are not taxed. As a result, the company cut its taxes by $31 billion in the last three years, moving foreign profits through Ireland and the Netherlands to Bermuda [13].

- Hiding capital. There is an estimated hundreds of billions of dollars hidden in tax havens. Example: A study has uncovered a discreet $102bn market in European shares whose central purpose is tax avoidance, operated only in the City of London. The analysis suggests the European tax loss – mainly to France, Germany and Italy – is up to €595m a year [14].

- Debt and bad investments. Offshore centers are also used to hide the huge debts of bankrupted companies. Scandals like Enron were possible because the companies hid huge amounts of debt in offshore accounts. Example: Two of Greece’s largest banks, Piraeus Bank and Eurobank, have moved significant non-performing loans to offshore entities [15].

- Illicit payments and money laundering. Most of the bribery in the political and corporate world happens through payments made offshore, in addition to the huge money laundering activity managed in secretive offshore bank accounts.

- Asset manipulation. Often, companies with subsidiaries offshore are able to issue financial products offshore to speculate on their own assets. In some other cases offshore subsidiaries are used to simulate losses to have bigger gains onshore [16].

- Real estate speculation. An example in the UK: In 2011 alone, more than £7bn of offshore money flooded into potentially tax-exempt purchases of UK houses, flats and office blocks [17]. Buying in this way, which is entirely legal, grants the purchaser total anonymity and confidentiality in UK records, and – as the registered owner of the house does not change – also allows the buyer to avoid
paying stamp duty [18].

- Bankruptcy and Insolvency. Some subsidiaries are opened in offshore centers in order to declare bankruptcy without future legal consequences or repayment obligations. Example: bankruptcies in Ireland must wait 12 years before they are discharged from their debts, but in UK everyone can be free of debts within 12 months [19].

- Concentration of ownership and monopoly. Many multinationals split ownership of different companies in the same industrial sector through offshore subsidiaries, and thereby monopolize sectors of the market [20].

- Insurance for risking operations. Most of the oil-drilling companies have insurance issued offshore. Example: Transocean’s platforms that leaked in the Gulf of Mexico were insured in the Marshall Islands and they attempted to limit the legal responsibility to that jurisdiction [21]. The pharmaceutical sector also uses offshoring to insure against health risks, avoiding social responsibility in the places where the companies operate.

- Pharmacy and chemical licenses. Corporations in the chemical and biological industry acquire licenses for risky and toxic products through offshore centers in order to produce and sell the product onshore.

- Vulture funds are private companies that try to scavenge profit from the debts of some of the world's poorest countries. In 2010 the Debt Relief Act was passed which severely restricts the actions of vulture funds in the UK. But this law does not apply to Overseas Territories and Crown Dependencies where law firms already forced debt repayments from countries like Congo and Libya [22].

- E-commerce selling exemption. VAT-avoiding websites based in Jersey and Guernsey, allow the sale of hundreds of millions of pounds of CD, DVDs and other goods over the Internet [23]. Other Internet companies book their worldwide selling in offshore centers to avoid taxes everywhere else. Example: Amazon.co.uk is based in Luxemburg, as well as PayPal.com.

- Data Centers and information technology. Offshore centers can be considered jurisdictions with lax digital data protection, like the different privacy regulations between U.S. and Europe, or for content tied to illegal activity like pornography and online casinos. Recently, offshore centers have been used to evade copyright protection of digital content. Example: Antigua is planning to open a website selling media and software without paying any fees to American copyright holders [24].

- Libel haven. It’s possible to register “Image Rights” and protect them under the offshore legislation, which may result in oppression of free of speech onshore [25].

* Through this investigation it has been created a lists of the countries considered offshore and numbers of the offshore companies. Look at the document here.


Suggested books, websites and movies


Books

Treasure Islands: Tax Havens and the Men who Stole the World. By Nicholas Shaxson.
http://www.amazon.co.uk/Treasure-Islands-Havens-Stole-World/dp/1847921108

Offshore: The Dark Side of the Global Economy. By William Brittain-Catlin.
http://www.amazon.com/Offshore-Dark-Side-Global-Economy/dp/0374256985

The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big Business. By Richard Brooks.
http://www.bookdepository.com/Great-Tax-Robbery-Richard-Brooks/9781851689354

The Courageous State: Rethinking Economics, Society and the Role of Government. By Richard Murphy.
http://www.amazon.co.uk/Courageous-State-Rethinking-Economics-Government/dp/1907720286

The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It.
By Emile van der Does de Willebois
http://books.google.co.uk/books?id=WdTJ6LPhBxYC

Video documentaries

- This collection of video documentaries is a introduction to the problem of the use of offshoring today:
http://www.youtube.com/playlist?list=PL0CF14495A4952B2B

- We're Not Broke
The flagship U.S.-based tax avoidance documentary
http://werenotbrokemovie.com
Free to view here: http://www.hulu.com/watch/442931

Websites of resources and organizations against offshore businesses

Taxjustice network
http://www.taxjustice.net

International Consortium of Investigative Journalists
http://www.icij.org/offshore

Tackle Tax Havens
http://www.tackletaxhavens.com

ActionAid UK
http://www.actionaid.org.uk

Global Financial Integrity
http://www.gfintegrity.org

European Network on Debt and Development
http://www.eurodad.org

Robin Hood Tax
http://robinhoodtax.org

Citizens for Tax Justice
http://ctj.org

Business and Investors Against Tax Haven Abuse
http://businessagainsttaxhavens.org

Jubilee Debt Campaign UK
http://www.jubileedebtcampaign.org.uk

Tackle Tax Havens Canada
http://tackletaxhavens.ca

Stop Paradis Fiscaux
http://www.stopparadisfiscaux.fr

Transnationale.org: analysis of the world's largest companies.
http://www.transnationale.org

Offshore Watch
http://visar.csustan.edu/aaba/home.html

Open Corpotates
http://opencorporates.com


Notes

[0] OECD calls for crackdown on tax avoidance by multinationals.
http://www.guardian.co.uk/business/2013/feb/12/oecd-crackdown-tax-avoidance-multinationals
[1] ActionAid Research 2011; Addicted to tax havens: The secret life of the FTSE 100.
[2] US Government Accountability Office (GAO), Treasure Islands book page 8.
[3] Illicit Financial Flows from Developing Countries: 2001-2010
http://iff.gfintegrity.org/iff2012/2012report.html
[4] Chinese Economy Lost $3.79 Trillion in Illicit Financial Outflows Since 2000, Reveals New GFI Report.
http://www.gfintegrity.org/content/view/581/70/
[5] Collect the evaded tax, avoid the cuts by Richard Murphy.
http://guardiannews.com/commentisfree/2011/nov/25/evaded-tax-evasion-cuts
[6] Tax havens and the FTSE 100: the full list by ActionAid
http://guardiannews.com/news/datablog/2011/oct/11/ftse100-subsidiaries-tax-data
[7] How Delaware Thrives as a Corporate Tax Haven
http://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html
[8] Coca-Cola, Oracle, Intel Use Cayman Islands to Avoid U.S. Taxes
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aWoQkk2WY1oc
[9] Five businesses running rings round HMRC
http://www.taxresearch.org.uk/Blog/2012/12/07/5-business-running-rings-round-hmrc/
[10] Task force says global shadow banking hits $67 trillion
http://www.reuters.com/article/2012/11/18/us-shadow-banking-regulation-idUSBRE8AH0FW20121118
[11] Are Nigerians paying a high price for tax havens?
http://www.guardian.co.uk/global-development/poverty-matters/2011/oct/11/nigeria-ftse-tax-haven-development
[12] February 2010, Global Financial Integrity published a report.
http://www.taxjustice.net/cms/upload/pdf/GFIP_1002_Reinvoicing_-_Hollingshead.pdf
[13] Eurodad (European Network on Debt and Development), publication 2011, Exposing the lost billions. How financial transparency by multinationals on a country by country basis can aid development.
[14] City banks ‘cheat’ Europe in €600m tax avoidance trading scheme
http://www.thebureauinvestigates.com/2011/12/23/city-banks-cheat-europe-in-e600m-tax-avoidance-trading-scheme/
[15] Competition Issues in the Financial Sector -- 2011 - OECD
http://www.oecd.org/dataoecd/52/46/46040053.pdf
[16] Barclays Allegedly Took Losses to Make Bigger Gains
http://dealbook.nytimes.com/2012/11/01/how-barclays-allegedly-took-losses-to-make-bigger-gains/
[17] How secret offshore firms feed London's property boom
http://www.guardian.co.uk/uk/2012/nov/26/secret-offshore-firms-fuel-london-property
[18] How buyers of luxury London homes can avoid millions in tax.
http://www.guardian.co.uk/uk/2012/dec/16/london-property-tax-avoidance-offshore
[19] Ireland turns to bankruptcy tourism
http://www.guardian.co.uk/business/2011/feb/18/ireland-property-crash-bankruptcy-tourism
[20] Offshore: The Dark Side of the Global Economy By William Brittain-Catlin Pag 213.
[21] Interview with Jack Blum and Paolo Cirio, Washington DC 2012.
[22] Financial 'vultures' poised to swoop on Africa through Jersey's offshore loophole – video
http://www.guardian.co.uk/global-development/video/2011/nov/15/financial-vultures-africa-jersey
End the Vulture Culture. Jubilee Debt Campaign.
http://www.jubileedebtcampaign.org.uk/?lid=2893
[23] Channel Islands make last bid to save VAT-free music retailing
http://www.guardian.co.uk/business/2012/mar/11/channel-islands-last-bid-vat-free-retailing  
[24] Antigua set to bypass US copyright law with WTO green-lit media, software sales website
http://rt.com/usa/news/antigua-copyright-us-wto-778/    
[25] Island of Guersney moots becoming a "libel haven" where rich & powerful can sue & silence critics
http://boingboing.net/2012/03/03/island-of-guersney-moots-becom.html

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