Thursday, July 05, 2007

Tax Ghosts

The Tax Justice Network has been getting increasingly concerned with a worrying trend in international taxation called redomiciliation, which has been apparent in the last few years. It is one of the main concerns that TJN drew to the attention of the US Senate last week, in response to claims by the British tax haven of Jersey that it had cleaned up its act. (This is part of a wider pattern of bogus claims by tax havens, parroted in an error-strewn piece in The Economist recently, that tax havens, once dirty, have cleaned up.) Senator Walker, Jersey’s chief Minister, claimed that “it is no part of Jersey’s policy to assist directly or indirectly the evasion of taxes properly payable in other jurisdictions. Such business is actively discouraged.” It sounds good. But it is not, for Jersey is seeking to perpetrate a confidence trick: while they will comply with certain outside requirements for information exchange with other jurisdictions, they will then make sure that the information to be exchanged is simply not available in the first place – thus nullifying the effect of co-operation. One way of pulling off this spooky disappearing trick is through the art of redomiciliation. An excerpt from the TJN submission explains how this works:

Redomiciliation allows a company registered in one place to apply to be removed from registration in that location and to be re-registered in another country or territory. The company is not dissolved in the process. What happens is that, for example XYX Limited of Malta with company number 444555 in that location becomes XYZ Limited of Jersey with company number 777888 in that new location. The company carries on trading without change, it has simply shifted the country to which it owes legal duty by way of registration.

(Richard Murphy explains more about redomiciliation in a video and in a blog about TJN's submission.)

Redomiciliation (not to be confused with the non-domicile scandal in Britain) is a bit like a lock-stock-and-barrel version of flee clauses, which allow money to be spirited away from a territory at the first hint of investigation. But with redomiciliation it is not just the money, but an entire company, that disappears, wraith-like, into the byzantine corridors of the international financial system.

“We have been worried about capital flight for a long time,” TJN’s John Christensen says. “Now we have to worry about corporate flight as well. As pressure mounts for tax havens to exchange information, they are ensuring that they either do not have that information, or by providing new mechanisms make sure that data is harder to secure and that it is easier for it to flee. Once a company has shifted it becomes almost impossible to know where it is, unless you happen to chance upon it. If a company shifts from the British Virgin Islands to Cyprus – how would you find it there? Legitimate and proper investigation is totally stymied. This is an open invitation to criminals. What legitimate purpose could it serve?”

The forces of law and order should worry. Following her eight years leading an investigation into the “Elf Affair” in Paris, Europe’s biggest corruption investigation since the Second World War, the Norwegian investigating magistrate Eva Joly expressed her frustration with getting co-operation from foreign authorities on crime. The problem is the barriers erected between countries, which, like semipermeable membranes, let crooks through, but not the police or tax authorities who chase them. “The magistrates are like sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande,”she wrote. “They taunt us—and there is nothing we can do.”

Redomicilation makes the crime-fighters’ work even harder: it not only puts the bandits out of reach, but allows them to disappear as soon as they are spotted.

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