The Big Debate: How Credible are Tax Haven Blacklists?

By Alex Cobham, Chief Executive, Tax Justice Network, Oxford (31/07/2018)


Not at all; although this is hardly surprising, as the entire concept of a ‘tax haven’ blacklist is flawed. But as the Tax Justice Network has demonstrated, it is possible to construct a meaningful assessment of secrecy jurisdictions based on objectively verifiable criteria, which could be used as the basis for powerful counter-measures – and this is the international direction of travel.

There are three main flaws in the concept of a tax haven blacklist. First, there is no agreed definition of a ‘tax haven’ – in fact, extensive literature supports the view that such a definition is not possible. The key state behaviour that causes damage to others is not in the choice of sovereign, domestic tax policies. Rather, it is the provision of financial secrecy that allows unscrupulous users to hide their abuse of tax and other regulations in other places. For that reason, the approach of our Financial Secrecy Index   is to focus on ‘secrecy jurisdictions’.

Second, the idea of a simple division into tax havens (bad) and all other states (good) is not enormously helpful. When we compile the range of international assessments of states’ transparency and cooperation into 20 key financial secrecy indicators, we find instead that there is a secrecy spectrum. Few states achieve an overall secrecy score below 40, where zero would indicate complete transparency and 100, complete secrecy. All states, without exception, have work to do. None can yet claim to be fully financially transparent.

The third flaw is perhaps the most important. The lack of an agreed ‘tax haven’ definition has historically given rise to blacklists based on opaque, subjective assessment.  Inevitably, this has resulted in political bias. The old lists of organisations like the IMF and OECD were laughably skewed towards the smallest, least politically connected states – while major players like the United States were absent.

And so, the Tax Justice Network created the Financial Secrecy Index (FSI) in order to make explicit the argument for a level playing field, assessing all jurisdictions equally against objectively verifiable criteria. These largely reflect our 'ABC' of tax transparency: automatic exchange of financial information, beneficial ownership transparency, and country-by-country reporting by multinationals, publicly. We laid this policy platform out after our formal establishment in 2003 to widespread scepticism and even ridicule – but by 2013, the ABC had become the basis of the global policy agenda at the G20, the G8 and the OECD. Progress has been slow, but unstoppable.

The overall FSI ranking, which in 2018 has Switzerland in the top spot, with the United States second and closing, reflects both the secrecy of jurisdictions and their global scale – which together provide a measure of the risk posed. For individual jurisdictions, the secrecy score alone provides the key measure of how much progress there is to be made and in which areas.

The EU list of non-cooperative jurisdictions, in its initial phase at least, is a missed opportunity. Having published three criteria, of which two were objectively verifiable, the EU produced a list, followed by a set of revisions which hung significantly on the other completely opaque criterion. And the two transparent criteria relate to compliance with OECD initiatives, so are heavily weighted against non-OECD members (i.e. the smaller jurisdictions and lower-income countries of the world). In addition, the EU excluded its own members from consideration – although our assessment   of their criteria suggests six members, including the soon-to-Brexit UK, would likely have been blacklisted.

But watch this space, because as of September 2018 all the world’s financial centres of any size will be exchanging financial information automatically under the OECD’s Common Reporting Standard. All, that is, except the biggest of all: the United States. If the OECD can bring itself to say so, the EU may find that its criteria require the blacklisting of the financial secrecy superpower …