Oxfam on How Tax Havens Perpetuate Poverty: Why Nonprofits Should Care

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April 3, 2016; Oxfam

NPQ has published quite a bit over time about why nonprofits need to pay more attention to tax structures, and as the Panama Papers continue to roll out, this is an opportunity to remember why this issue is so centrally important.

An Economy for the 1%, a briefing paper that Oxfam published in January of this year to coincide with the World Economic Forum in Davos, explains why we should all be concerned about tax havens and offshore financial centers (OFCs) even when they are not explicitly illegal. Those who author and influence the rules governing OFCs are, after all, generally not nonprofits acting in the interests of, or representing the rights of, lower-income people.

Oxfam is of the opinion that these structures are a major driver of extreme poverty, eroding national tax bases and the mechanisms to collect taxes.

This system is exploited by highly paid and very industrious professional enablers in the private banking, legal, accounting and investment industries, who take advantage of an increasingly borderless, frictionless global economy. It is the wealthiest companies and individuals, who in a progressive tax system should be paying the most in tax, who have the biggest incentives to exploit this architecture to avoid paying their fair share in taxes, and who can afford to hire the enablers.

The report advances the argument that multinational corporations (MNCs) write these strategies into their business plans.

Companies can artificially shift the ownership of assets or the real cost of transactions to paper subsidiaries in low-tax jurisdictions or jurisdictions that do not require disclosure of relevant business information. Profits disappear from countries where real economic activity is taking place, to exist only in tax havens.

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Companies that reduce their tax bills (including through legal avoidance and illegal evasion) can gain a significant advantage over domestic competitors and small and medium-sized enterprises (SMEs). The offshore system and harmful tax competition are also costing governments billions of dollars each year. While the exact sums involved remain something of a mystery, it is clear that this is a significant problem…The use of tax havens and other tax-dodging practices affects countries of all income levels, including the poorest countries. It is estimated that tax dodging by MNCs costs developing countries around $100bn annually.

The total cost to tax systems globally has been estimated at closer to $200 billion. Oxfam estimated in January that 8 percent of individual financial wealth is hidden offshore, totaling $7.6 trillion going untaxed. Income taxes on that sum would produce $190 billion for global government use every year. In 2013, Jeffrey Sachs described the situation as a time bomb:

And how absurd and dangerous this system has become. The Caymans’ 56,000 people host 92,000 companies. The hedge fund industry, managing trillions of dollars, is largely domiciled there. The Bank of International Settlements, which collects data on cross-border banking assets, estimates that $1.4 trillion in bank assets and liabilities are there, around $25 million per person! This is a time bomb, not a financial system. Not surprisingly, the so-called “boards” of these companies, which are supposed to “govern” them, are routinely filled with individuals who sit on dozens, or even hundreds of boards. The situation is absurd, dangerous and out of control.

“The world’s most powerful countries have a unique responsibility,” writes Sachs. “They created this destructive system. It’s now their job to end it. Taxes worldwide need to be paid.”

The politicians of rich nations who protect the exorbitant privileges of bankers and hedge-fund managers, who wink at mega-tax evasion by billionaires, and who tolerate unpardonable games played by major companies, are playing with fire. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.

Tax havens like these certainly do not drive poverty and inequality on their own, but they do serve as cogs in a very destructive set of mechanisms geared to create economic injustice.

That said, these are not the only outcomes of the offshore industry. For more on its support of outright criminality, ICIJ, which coordinated the investigative effort based on 11.5 million leaked financial and legal records, has prepared this video as a short introduction of the depth of the problems caused by hidden billions.

In “Talking About Taxes,” Kim Klein took the sector to task for not getting out ahead of these core structural questions. She observed, “Peter Maurin, a teacher of Dorothy Day who also founded the Catholic Worker Movement, said that our job is to ‘create a society in which it is easy to be good.’ Such a society has many elements, but it presumes a commitment to a rough social equity that is partly achieved by a progressive tax system. The nonprofit sector is key to insisting on this, or it will be the primary victim of its absence. It is our choice, and it must be made quickly.”—Ruth McCambridge