in paradise

Tax havens in paradise

You can see in the eyes of Vanuatu's registrar of companies, Richard Carpenter, the fatigue that any man in his position must have trying to answer the question of the press about tax havens. He knows most journalists want the big story — the drug laundering business, the transnationals avoiding tax, the spy using Vanuatu to defraud poor unsuspecting citizens of his country. There exists in the minds of many journalists a view that there is something necessarily sinister about finance centres and tax havens, in large measure because sinister things have gone on in the past and probably continue to go on.

Most of the activities of tax havens are quite pedestrian, but then that does not make a good story.

What makes a tax haven useful are three peculiar features. The first is the absence of taxes, second is secrecy and the third feature is that they often exist because of the simple differences between laws of different countries. The secrecy provisions about ownership and behave iour of firms can have very innocuous uses. The most pedestrian of all is to stop hostile takeover bids and hide who owns a company. Another example is that in some countries, it is illegal for localjirms to raise capital on foreign markets but it is not illegal for firms which are regis tered overseas to raise money. At another common level, many firms in the service sector which sell things like computer software may actually relocate to tax havens as their business can be just as easily conducted from a tax haven as from any other country.

Some of the uses of the secrecy provisions of tax havens are not, how ever, that banal. The most common use of tax havens remains the legal avoidance or the illegal evasion of taxes. In some countries it is perfectly legal for tax purposes to sell assets at prices that are not exactly fair market prices to related companies. What many multinational companies do is establish companies in tax havens such as Vanuatu and trade

through them, making profits in the tax haven. In many countries this profit is not taxed in the home country.

In 1991 Australia and New Zealand changed their taxation laws which has meant all foreign sourced income earned in tax havens is subject to Australian and New Zealand taxes. The tax payer then has two options he either declares the money he is earning in Vanuatu and stays within the law in Australia or New Zealand, or he does not declare it to the Australian and New Zealand authorities.

If he does not declare in Australia or New Zealand, he has broken the law there but not in Vanuatu because as there is no income or corporate tax in Vanuatu, it cannot be rllegal to avoid it.

The registrar general agreed the

changes in Australian and New Zealand tax laws, which attempt to prevent the use of tax havens by their residents and citizens, have resulted in a significant drop in business from those countries and an increase in Asian business.

One of the fastest growing but little known uses of tax havens has been what is becoming known as “divorce plan

ning”. Secrecy provisions in the legis

lation of many tax havens can assist you in hiding your assets to avoid alimony payments. A common trick has been to mortgage houses and property through the tax haven which effectively leaves the spouse with no real assets.

The problem with such procedures is that increasingly when tax havens are being used to break or flaunt civil laws, judges in the western world are becoming more and more willing to “pierce the corporate veil”, as the lawyers call it.

Judges in common law countries in particular are willing even in civil cases to force individuals to disclose trans actions that occur with related tax haven

companies. Increasingly the judicial sys

tem will not accept the argument of secrecy provisions where there is reason able grounds to think there are breaches of even the civil law.

Vanuatu government officials accept that it would be unrealistic for them to state categorically that no one is using the finance centre for illegal purposes, but where frauds are being perpetrated or money laundering is taking place through Vanuatu companies, the Su preme Court has the power to assist law enforcement authorities in other jurisdic

tions by, for example, ordering the

disclosure of the company’s books and records.

“We are vigilant where we can be,”

Carpenter said, “but in common with other regulatory authorities, we cannot possibly fo!low r the details of every transaction and we rely upon the profes sionals within the finance centre to avoid

illegal transaction.”

There are three particular aspects of tax havens that are potentially danger ous and subject to much more scrutiny than the normal type of tax haven business. The first is the shipping registry which, because Vanuatu along with several other Pacific island countries are flags of convenience countries, has large registered fleets. The potential danger of this type of activity comes from the simple fact that some ship owners, unless they are carefully regulated, may allow their ships to deteriorate to the point where they are a danger to their crew as well as to other vessels.

The issue of ship safety has come to the fore in the last year with the publication in Australia of the parliamentary report entitled Ships of Shame. Last year Austra lian newspapers suggested Vanuatu was among countries registering ships which did not always meet international stan dards of safety and that it was not qualified to judge the quality of the ships that are being registered. Officials in volved in the Vanuatu shipping registry vehemently deny that Vanuatu is in capable of monitoring the quality of the vessels it registers.

The fact is that of the 525 detentions of ships by European countries in 1992 none of the vessels were from Vanuatu.

None of the vessels detained in Australia in 1992 were registered in Vanuatu (or

Cook Islands). The Vanuatu registry maintains comprehensive agreements with some of the world’s leading regis tration societies which inspect their vessels on an annual basis.

The global recession has also had an impact on insurance companies which are one ol the small but potentially controversial sectors of Vanuatu finance centre’s activities. Many companies es tablish off-shore insurance companies in finance centres so as to be able to take a percentage of any insurance premium as profit for the company itself. Most companies will reinsure their assets with a reputable international company but other less reputable companies under financial pressure will not reinsure and will accept risk associated with the insurance policy on their own captive company.

This is all fine until something happens. For example, an airline in another Pacific country decides to insure

its aeroplane through a captive company

in Vanuatu or a mining company decides to insure its tailing dam against bursting and then does not reinsure off-shore to cover the potential of catastrophic risk.

Asked to comment on this Carpenter said, “Although we do require infor mation on and place restrictions on the type and scope of business carried on by insurers licensed in Vanuatu, what you are suggesting could happen. I would expect the civil aviation and mining authorities in those countries who are responsible for controlling those indus tries to satisfy themselves that operators carry sufficient and adequate insurance cover.”

The third and possibly most difficult area of finance centre activities is that of international banking. Having your own bank has fantastic tax advantages in many countries by allowing investors to lend money to themselves. The regu lations for banks are fairly tough in Vanuatu you have to have an absolute minimum of US$l5O,OOO in paid up capital even if you are only trading “in-house”. You have to have experience in the business, references and a whole lot of other things you would never need in many other less responsible tax havens. The reason is that banks, while being able to do things such as lend money to you, are also able to launder drug money, defraud depositors, etc.

Vanuatu does regulate its tax haven activities and as a result the tax haven business has not been growing as rapidly as might have been the case had there been no regulation. The Vanuatu tax haven business is miniscule by interna tional standards with only about 2000 registered companies. But it constitutes approximately 12 to 15 per cent of the country’s GDP. □