Singapore’s future as a financial centre: Part II

Chee Soon Juan

Tax havens are not a new phenomenon. They have been around for decades, acting as shelters for wealthy individuals wanting to avoid paying taxes in their home countries. Singapore has gotten in on the business only recently compared to other places.

But since the advent of the financial crisis a few months ago where some western banks have been wiped out and others left on life-support, some governments have hardened their stance towards offshore banking secrecy. As they find themselves bleeding cash, many of these governments are turning to other means to shore up their finances, one of them being to stop tax monies flowing to offshore secret jurisdictions.

The mood changes

In February 2007, a young US Senator co-sponsored a bill with two of his colleagues to stop tax havens from exploiting loopholes in the US tax structure. They rather straightforwardly called the proposed legislation the Stop Tax Haven Abuse Act.

The proposed legislation describes how Offshore Secrecy Jurisdictions, or tax havens, undermine the integrity of the US tax system, robbing the Treasury of more than US$100 billion each year. It aims to “shut down a lot of these abuses.” These jurisdictions, the bill claims, “make it nearly impossible for U.S. authorities to gain access to needed information.”

At that time, the young senator said about the legislation: “This is a basic issue of fairness and integrity. We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged.”

In November 2008, this senator was elected President of the United States. Now President-elect Barack Obama seems intent to crackdown on international tax havens when he assumes power on 20 January 2009. He is expected to introduce wide-ranging tax-reform laws “within weeks” of taking office that “could end years of financial secrecy that have protected the super-rich and international businesses as they move money from one jurisdiction to another.”

The US is not the only country intent on resolving the tax haven problem. In 2005 the European Union adopted the Savings Tax Directive to combat taxes lost to tax havens. European countries like Austria, Luxembourg and, of course, Switzerland have come under pressure to stop their tax haven practices.

The Organisation for Economic Co-operation and Development (OECD) is also hot on the pursuit of tax havens. The OECD lists four factors to determine if a jurisduction is a tax haven or not:

• Whether the jurisdiction imposes no or only nominal taxes.
• Whether there is a lack of transparency
• Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
• Whether there is an absence of a requirement that the activity be substantial

“The political climate on the issue of tax havens has changed dramatically over the past three months,” says Jeffrey Owens, director of the Centre for Tax Policy Administration at the OECD. Owens has spearheaded the organisation’s drive to crackdown on international finance secrecy for more than a decade and says that the financial crisis has intensified the attack on havens.

At the G20 summit convened in Washington DC last month, leaders there agreed that the matter of tax shelters “should be vigorously addressed.” They pledged to cooperate on international regulation of the financial system which included a promise to work together to “protect themselves against ‘noncooperative’ offshore tax havens.”

They also wanted to impose controls on hedge funds and ratings agencies, and also “force all the world’s secrecy and tax havens to cease and desist their resistance to disclosure.”

French President Nicolas Sarkozy said: “We are in the 21st century and the French view is that we cannot continue into the 21st century with a system established in the 20th century.” He wanted more regulation of the international finance — including tax havens.

Germany’s De Spiegel reported Chancellor Angela Merkel as saying: “We want to further develop policies against tax havens and will support France in this during the [EU] presidency,” said Merkel. And this was in April 2008 before the financial meltdown.

The international effort seems to be producing results. Last month clients of top Swiss Bank UBS buckled under pressure and agreed to cooperate with the US Inland Revenue Service to pay back taxes evaded in past years. In return, the US tax authorities would grant the offenders amnesty and not proceed with criminal prosecution. It is believed that some 20,000 US citizens have worked with bankers at UBS to avoid paying taxes.

Singapore not far away

As the squeeze on traditional tax shelters like the Isle of Man, Cayman Islands and Switzerland intensify, tax evaders are moving their money to Singapore which many say is one of the last holdouts against the global drive for transparency. While some jurisdictions may be moving towards becoming more transparent (for example Aruba, the Dutch Antilles, the British Virgin Islands, Bermuda) and others have made political commitments to do so (Cayman Islands and the Bahamas), Singapore has been adamant in its non-cooperation.

In fact, as described in Part I, the Singapore Government has played the role of Switizerland’s heir apparent to perfection, energetically persuading the wealthy from all over the world to come and park their funds here.

The PAP disavows such a claim. “Singapore is not a tax haven,” Foreign Minister George Yeo insists, “We are a low-tax country but not a tax haven. We’re an international financial centre so banking secrecy is very important. It is protected by law. But at the same time we do not condone drug money or terrorism money or money laundering — these are crimes.”

But the world doesn’t seem to believe him. US Senator Carl Levin, one of the three co-authors of the Stop Tax Haven Abuse Act, lumped Singapore with the world’s leading tax havens. The American lawmaker said of his proposed bill: “In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill.” He identified a list of 34 jurisdictions as tax havens:

• Anguilla
• Antigua and Barbuda
• Aruba
• Bahamas
• Barbados
• Belize
• Bermuda
• British Virgin
• Islands
• Cayman Islands
• Cook Islands
• Costa Rica
• Cyprus
• Dominica
• Gibraltar
• Grenada
• Guernsey/Sark/
• Alderney
• Hong Kong
• Isle of Man
• Jersey
• Latvia Lichtenstein
• Luxembourg
• Malta
• Nauru
• Netherlands
• Antilles
• Panama
• Samoa
• St. Kitts and
• Nevis
• St. Lucia
• St. Vincent and
• the Grenadines
• Singapore
• Switzerland
• Turks and Caicos
• Vanuatu

Forbes magazine reported that the OECD had named four countries Austria, Luxembourg, Switzerland and Singapore that were not making sufficient effort to counter tax evasion and still had retained restrictions on access to banking information for tax purposes.

Another report added: “Interestingly enough, Singapore is the jurisdiction that has been favoured by many seeking to remove assets from the European Union and the other nations that signed up to the EU Savings Tax Directive.” It warned that Singapore needs to be careful how it pushes the boundaries of secretive banking as “the influence and far reaching authority of the Organisation for Economic Co-operation and Development should never be underestimated.”

The EU itself is exerting pressure on Singapore to lift its shield on information on European tax evaders. Germany’s foreign minister was in Singapore earlier this year and had a “heated debate” on the subject of tax evasion.

“The subject is being discussed with a certain amount of emotion in Germany, and rightly so,” the German minister said at a news conference, “because (European) states are losing substantive assets when large entities avoid being taxed. I trust this is being understood here. In questions of tax law and tax secrecy Singapore and the European Union are not always of the same opinion. About that we unfortunately have to talk about.”

Even the chairman of the Swiss Bankers’ Association, Mr Urs Roth, is pointing (hypocritical) fingers at Singapore. Comparing his country and ours, Mr Roth noted that Singapore’s banking secrecy provisions are even stronger than the ones in Switzerland. He pointed out that while Singapore is not getting as much attention at the moment compared to Switzerland “I would guess that it is a question of time.”

Jeffrey Owens of the OECD summed up the matter for Singapore most cogently: “The political climate is changing and I do not think that Singapore is correctly reading the political signs that a change is about to come.”

Part III (concluding) of this analysis will discuss how the PAP’s move towards turning Singapore into a tax haven has hurt Singaporeans and Singapore’s interests.