Why It's Getting Harder to Evade Taxes

By ADAM SMITH

Politicians don't usually like being interrupted during interviews. But sometimes it's worth making an exception. During a sit-down conversation with TIME last week, British Prime Minister Gordon Brown happily broke off to read a faxed letter handed to him by an aide. As anticipated, the note, from the Swiss President, brought welcome news: Switzerland was finally relaxing its decades-old banking-secrecy laws. "That is a major step forward," Brown enthused, brandishing the fax between his fingers. "This," he said, marks "the beginning of the end of tax havens."

That may be too optimistic. There will always be some corner of the globe offering itself up as a place people can squirrel away their money. But Brown is right that Switzerland's decision to share information with other countries in cases of suspected tax evasion is revolutionary, not least because the Alpine nation's identity is so closely tied to its famously discreet banks. And Switzerland wasn't the only one making concessions last week. Andorra, Austria, Liechtenstein and Luxembourg all pledged to meet the same international standards on cooperation. Singapore and Hong Kong had promised much the same a few days earlier.

They had to do something. With the global downturn squeezing tax revenues, and state bailouts putting taxpayers on the hook for billions of dollars, patience for banking systems that offer shelter to tax dodgers has finally run out. U.S. and European officials have been falling over each other with their promises to go after tax cheats. With the issue on the agenda for next month's meeting in London of the Group of 20 (G20) nations, change was almost inevitable. "Given the crisis, and the imminence of the G20 meeting," says Angel Gurría, secretary-general of the Paris-based Organisation for Economic Cooperation and Development (OECD), which drew up the international standards for transparency and information exchange on tax in 2004, "it was time to move. The important thing is they all moved together."

It's hard to feel sorry for the jurisdictions being squeezed. Offering low or no taxes to foreign firms and individuals parking money with them; snubbing requests for information from overseas tax authorities; or indeed both, offshore financial centers provide the perfect conditions for anyone who wants to hide cash illegally from the taxman back home. That cheats governments out of money to build roads and schools and hospitals, not to mention the funds to bailout banks. Accurate estimates for the value of assets held offshore are as hard to pin down as the havens themselves. The Tax Justice Network, an independent London-based group, thinks the figure could be as high as $11.5 trillion, while U.S. Democratic Senator Carl Levin, who introduced an anti-tax-haven bill in Congress earlier this month, estimates that the U.S. government loses some $100 billion in revenue every year because of offshore tax dodges.

Governments have sometimes managed to claw back lost income. UBS, Switzerland's biggest bank, last month paid $780 million in fines and handed over the names of about 300 U.S. clients to American authorities after admitting the Swiss bank helped customers evade tax. And data bought by German authorities from a whistle-blower in Liechtenstein last year revealed hundreds of cases of suspected tax evasion. One of those caught out: former Deutsche Post boss Klaus Zumwinkel, who was convicted of tax evasion in January and received a suspended sentence and a $1.3 million fine.

Keen to clean up its image in the wake of the scandal, Liechtenstein agreed in December to share information with U.S. authorities in cases of suspected tax evasion by U.S. citizens. That's unusual. In the past, requests for data from offshore financial centers have mostly fallen on deaf ears. In Switzerland, tax fraud is considered a crime, but tax evasion is not. That's meant that bank secrecy can be waived in suspected cases of fraud but not in cases of suspected evasion.

Until now. Under the OECD's standards for cooperation, information is shared with foreign authorities on a case-by-case basis, and only where requests for data are targeted and justified as part of an ongoing investigation. In other words, "it doesn't mean I can send you the Yellow Pages and ask you to give me information on every name that appears," says the OECD's Gurría. The procedure "doesn't lend itself to frivolous requests."

Some argue that going after tax havens is nothing more than a distraction from much bigger issues with which the G20 will be grappling — pesky things such as stabilizing financial markets, reforming the global financial system and returning the economy to stable growth. Focusing on tax havens would be "nothing short of a catastrophe, when you've got an opportunity to make a difference," Martin Broughton, president of British employers' group the CBI, told the Financial Times this month. Tax havens, said Broughton, are "totally irrelevant" to getting out of the current slump.

But the OECD's Gurría scoffs at the idea that tax havens are red herrings. Tackling secrecy in offshore centers "is part of the process, part of the effort," he says. "If we're getting together to save the banks, if we're getting together to give guarantees and we're getting together in order to coordinate stimulus packages, how is it possible we can't agree on the fact that we all treat each other in a relatively comparable way when it comes to taxes?"

That's true. But another possible reason for the cleanup's timing is that politicians know that getting tough on tax evaders won't lose them any votes. With taxpayers shouldering enormous bailouts in recent months, tapping into their feelings of unfairness is a popular move. "There is a real sense that the tax burden is not falling on the richest" in Europe, says Nicolas Véron, a finance scholar at the Bruegel think tank, in Brussels. "At the same time, a number of governments know they will have to raise taxes, and are trying to get some of it back into the country."

A recent OECD update on progress toward meeting international standards chided Austria, Singapore and Switzerland, among others, for not doing enough. The threat of blacklisting by the G20 and of retaliatory measures, such as tougher financial-reporting requirements for companies engaging with offshore centers, was apparently enough to make the holdouts see the light.

The OECD says it will now consider removing Liechtenstein and Andorra from its list of "uncooperative" jurisdictions and also hints that even Monaco — the third member of that list — "may be prepared to move in the same direction." But the organization will need to keep a close eye on the countries pledging greater openness. Dozens of jurisdictions have promised to move on transparency and information sharing in recent years, but not all have followed through. Panama, for one, has done little to honor its commitments to the OECD. Gibraltar, too, has shown similar disdain for the standards.

Authorities in such places might do well to consider the thoughts of Anne Bolomey, a retired civil servant in the small Swiss town of Morges, many of whose citizens work for banks in nearby Lausanne and Geneva. Switzerland's decision to relax its precious banking secrecy means the country avoids "isolating ourselves even further from our European neighbors. And in any case," says Bolomey, sipping tea in a local café, "having a reputation as a tax haven is not something Switzerland should be known for." With reporting by Helena Bachmann / Morges, Leo Cendrowicz / Brussels and Catherine Mayer / London

Secret Stash

$100 billion Annual tax revenues the U.S. is estimated to lose to offshore tax abuse

$11.5 trillion Estimated value of assets taxpayers in all countries hold offshore

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