news News

Losses to OECD tax havens could vaccinate global population three times over
by ICRICT, Tax Justice Network, ICIJ, agencies
11:18am 5th Oct, 2021
Nov. 2021
Countries are losing a total of $483 billion in tax a year to global tax abuse committed by multinational corporations and wealthy individuals – enough to fully vaccinate the global population against Covid-19 more than three times over.
The 2021 edition of the State of Tax Justice documents how a small club of rich countries with de facto control over global tax rules is responsible for the majority of tax losses suffered by the rest of the world, with lower income countries hit the hardest by global tax abuse. The findings are further galvanising calls to move rule-making on international tax from the OECD to the UN.
The State of Tax Justice 2021 – published by the Tax Justice Network, the Global Alliance for Tax Justice and the global union federation Public Services International – reports that of the $483 billion in tax that countries lose a year, $312 billion is lost to cross-border corporate tax abuse by multinational corporations and $171 billion is lost to offshore tax evasion by wealthy individuals.
The $483 billion loss consists of only direct tax losses: that is, tax losses that can be observed from analysing data self-reported by multinational corporations and from banking data collected by governments.
Uncounted in this estimate are the indirect losses: the chain-reaction losses that arise from tax abuses accelerating the race to the bottom and driving tax rates down globally.
The IMF estimates that indirect losses from global tax abuse by multinational corporations are at least three times larger than direct losses. No equivalent estimate exists for the indirect losses of offshore tax evasion.
Tax Justice Network data scientist Miroslav Palanský said, “The $483 billion lost to tax havens a year is the tip of the iceberg. It’s what we can see above the surface thanks to some recent progress on tax transparency, but we know there’s a lot more tax abuse below the surface costing magnitudes more in tax losses.”
“The $483 billion lost to tax havens a year is the tip of the iceberg.”
OECD countries, not palm-fringed islands, enable most of global tax abuse
Over 99 per cent of global tax losses countries suffer result from multinational corporations and wealthy individuals utilising abusive tax regulations and loopholes in higher income countries.
The lion’s share of blame among higher income countries falls on members of the OECD (Organisation for Economic Cooperation and Development), a small club of rich countries and the world’s leading rule-maker on international tax.
Despite commitments by OECD members on curbing global tax abuse, OECD members were found to be responsible for facilitating 78 per cent of the tax losses countries suffer a year. OECD members facilitate the handing over of $378 billion a year from public purses around the world to the wealthiest multinational corporations and individuals.
The worst culprit among OECD members is the UK, which is responsible for over a third (39 per cent) of the world’s tax loss. The UK is by far the world’s greatest enabler of global tax abuse, which it facilitates through a network made up of British Overseas Territories like the Cayman Islands, Crown Dependencies like Jersey and the City of London. Known as the UK spider’s web, the UK government has full powers to impose or veto law-making in these territories and dependencies and key government positions in these jurisdictions are appointed by the Queen.
The UK spider’s web, together with OECD members Netherlands, Luxembourg and Switzerland are responsible for over half of the tax losses the world suffers (55 per cent), which is why the countries are often collectively referred to as the “axis of tax avoidance”.
The axis of tax avoidance cost the world over $268 billion in tax losses a year, equivalent to more than 18 times the amount of money expected to have been spent globally on facemasks in 2020 and 2021.
The huge role the axis of tax avoidance plays in facilitating global tax abuse means that many OECD members are also among the heaviest losers, in absolute terms. France, for example, cost other countries over $4.6 billion in tax losses a year, but lost over $41 billion a year itself.
Even in countries responsible for the most extreme levels of abuse, few citizens enjoy any benefits as almost all the tax losses their governments enable are pocketed by wealthy multinational corporations and individuals.
Citizens of these countries typically face higher inequalities, a greater threat of corruption of their political systems and the documented consequences of the “finance curse” phenomenon.
Reigning in OECD members’ tax havenry would generate major benefits to people living in both OECD and non-OECD member countries.
Despite the huge tax loss suffering imposed by these countries, no OECD member nor any axis of tax avoidance country appears on the EU tax haven blacklist. The handful of mostly small island nations blacklisted by the EU are responsible for 1.1 per cent of global tax abuse.
Rich countries’ vaccine pledges mask plunder of poorer countries taxes
Global tax abuse enabled by rich countries is hitting poorer countries the hardest. While higher income countries lose more tax in absolute terms, $443 billion a year, their tax losses represent a smaller share of their revenues - 9.7 per cent of their collective public health budgets. Lower income countries in comparison lose less tax in absolute terms, $39.7 billion a year, but their losses account for a much higher share of their current tax revenues and spending.
Collectively, lower income countries lose the equivalent of nearly half (48 per cent) of their public health budgets – and unlike OECD members, they have little or no say on the international rules that continue to allow these abuses.
The $483 billion lost to tax havens a year is enough to cover the cost of purchasing and delivering two Covid-19 vaccine doses for the global population three times over. This is equivalent to vaccinating 1000 people against Covid-19 every second. The taxes that lower income countries lose to tax havens in a year would be enough to vaccinate 60 per cent of their populations, bridging the gap in vaccination rates between lower income and higher income countries.
With their vaccination rates far lower, global tax abuse deals a double blow to lower income countries by robbing them of the funding to protect their populations against Covid-19 and, consequentially, exposing them to an even greater human and economic toll.
Analysis for the State of Tax Justice 2021 reveals that for every $1 OECD countries pledged to the COVAX programme, a worldwide initiative established to address vaccine inequity, they cost the rest of the world $43 in lost tax by facilitating global tax abuse.
Altogether, OECD countries pledged $8.7 billion to the COVAX programme but cost the world $378 billion in lost tax.
If OECD countries had not pledged any money to COVAX but simply stopped facilitating global tax abuse instead, countries around the world could have collected enough tax revenue to vaccinate the global population against the Covid-19 virus 2.9 times over.
Dr Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice said:
“The richest countries, much like their colonial forebearers, have appointed themselves as the only ones capable of governing on international tax, draped themselves in the robes of saviours and set loose the wealthy and powerful to bleed the poorest countries dry. To tackle global inequality, we must tackle the inequality in power over global tax rules. Rules on where and how multinational corporations and the superrich pay tax must be set at the UN in the daylight of democracy, not by a small club of rich countries behind closed doors.”
Urgency grows for UN to step in
Calls for shifting the responsibility of setting tax rules away from the OECD to the UN gained unprecedented traction this year when the High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI) called for a comprehensive overhaul of the global architecture.
The FACTI Panel’s key recommendations draw closely on the work of the tax justice movement, and include the establishment of a UN tax convention, a Centre for Monitoring Taxing Rights at the UN to raise national accountability for illicit financial flows and tax abuse suffered by others, and a globally inclusive, intergovernmental UN forum for the urgent negotiation of further changes to the international tax rules.
The proposal follows years of criticism11 levied against the OECD for its failure to deliver meaningful change in its long-awaited tax reform proposals, and the hypocrisy of its members inflicting huge tax losses on others.
The OECD’s latest global tax deal, which includes a global minimum tax rate, similarly came under fire this year for acquiescing to tax haven members like Ireland. The tax deal is expected to recover only a sliver of tax revenues lost to tax havens and will redistribute most recovered taxes to rich OECD members instead of the countries where the taxes should have originally been paid.
Alex Cobham, chief executive at the Tax Justice Network said:
“Another year of the pandemic, and another half trillion dollars snatched by the wealthiest multinational corporations and individuals from public purses around the world. Tax can be our most powerful tool for tackling inequality, but instead it’s been made entirely optional for the superrich.
We must reprogramme the global tax system to protect people’s wellbeing and livelihoods over the desires of the wealthiest, or the cruel inequalities exposed by the pandemic will be locked in for good. The State of Tax Justice tells us exactly which countries are responsible for the tax abuse we all suffer. It’s time they were held accountable.”
Taxes on wealth and excess profit
In addition to calling for a UN role on global tax, the State of Tax Justice also recommends the introduction of an excess profit tax and wealth tax. The report calls on governments to:
Introduce an excess profit tax on multinational corporations making excess profits during the pandemic, such as global digital companies, in order to cut through profit shifting abuses. Multinational corporations’ excess profit would be identified at the global level, not the national level, to prevent corporations from underreporting their profits by shifting them into tax havens, and taxed using a unitary tax method.
Introduction of a wealth tax to fund the Covid-19 response and address the long term inequalities the pandemic has exacerbated, with punitive rates for opaquely owned offshore assets and a commitment between governments to eliminate this opacity. The pandemic has already seen an explosion in the asset values of the wealthy, even as unemployment has soared to record levels in many countries.
Rosa Pavanelli, general secretary at Public Services International, said:
“Many corporate and political leaders applaud our frontline workers in public; yet in private, they undermine frontline services by continuing to perpetuate tax abuse on a repulsive scale. Ending tax dodging would pay for 1000 people to be fully vaccinated every single second; we could fully vaccinate the world's 135 million health and care workers in just a day and a half. The only way out of this crisis is to end vaccine inequality, and that requires both waiving patents and cracking down on corporate tax dodging, which pulls money away from our frontline health services and into their offshore bank accounts."
Nov. 2021
For Rich Countries to honor their Climate Debt, we must better Tax Multinationals, by Leonce Ndikumana.
It is infuriating to see that the world in the midst of this existential climate emergency has just deprived itself of precious financial resources by adopting a cheap global agreement on the taxation of multinationals.
For once, most of the debtors are not in Africa, but in the North. I am not talking money, but about climate debt, as natural disasters are multiplying and the fight against climate change has become an existential issue. Since industrialized countries have used the available atmospheric space to develop and get rich by exploiting fossil fuels, the United Nations Climate Change Conference (COP26)—that is coming to end in Glasgow right now—must be an opportunity to recognize this climate debt to Africa, and to developing countries in general, and to honor it.
With 4% of global emissions, Africa has contributed very little to global warming. Yet, it is the continent that is already suffering the most from its consequences. Need we remind you, for example, that, just last year, Sudan had to face its worst floods in sixty years, with 500,000 people displaced and 5.5 million hectares of agricultural land destroyed? And this is not an isolated case: according to a recent report on adaptation in Africa by the Global Centre for Adaptation (GCA), the number of floods has increased fivefold since the 1990s.
It is not just about the injustices of the past. Even today, rich countries remain the champions of greenhouse gas emissions. In North America, each person emits an average of 20 tons of CO2 per year, compared to 10 for a European. In China, the average person emits 8 tons of CO2 per year, compared to 2.6 tons in Southeast Asia and 1.6 tons in sub-Saharan Africa.
Honoring their climate debt means that the countries of the North must help developing countries to adapt to climate disasters, which we know will occur, even in the most optimistic of scenarios. Developing countries must also be given the means to make the transition to less polluting energy sources. An effort that amounts to hundreds of billions of dollars.
These funds exist, as the publication of the "Pandora Papers" has just reminded us, and they must be sought where they are: in the accounts hidden in tax havens owned by multinationals and multi-millionaires who, for decades, have not paid their fair share of taxes.
All the more so since, throughout the world, those who pollute the most are also the richest. The World Inequality Lab has just shown that the wealthiest 1% of individuals produce 17% of the world's carbon emissions, while the whole poorest half of humanity (3.8 billion people) is responsible for only 12% of these emissions.
In this context, it is infuriating to see that the world has just deprived itself of precious financial resources by adopting a cheap global agreement on the taxation of multinationals. Imposed by the Northern capitals, following a negotiation that did not take into account the demands of developing countries, this reform has allowed the establishment of a modest global minimum tax rate of 15%. The objective?
To put an end to the devastating competition between countries in terms of corporate taxation, in the illusion of attracting more investment. And for good reason, global nominal tax rates on corporate profits have fallen from an average of 40% in the 1980s to 23% in 2018. If the decline continued at the same rate, corporate taxes could fall to zero by 2052.
To stop this decline, the United States proposed a global minimum tax rate of 21 percent, which would have generated more than US $200 billion in tax revenue. The Independent Commission for the Reform of International Corporate Taxation (ICRICT)—of which I am a member along with economists such as Thomas Piketty, Gabriel Zucman, Jose Antonio Ocampo and Jayati Ghosh—advocated a rate of 25%, which would recover most of the US $240 billion that is lost each year to what is modestly called tax optimization.
In the end, however, it was the lack of ambition that prevailed, with a global minimum rate of 15%, which is barely more than the rate implemented by tax havens such as Ireland, and which should not generate more than 100 billion US dollars in additional resources per year!
At 15%, the risk is that this low global minimum rate will become the global norm, and that a reform that was intended to force multinationals to pay their fair share of taxes will end up doing exactly the opposite, by pushing countries with higher tax levels—such as African ones—to lower them to match the rest of the world.
In addition, the countries signing the agreement commit to refrain from introducing taxes on digital multinationals. It is no coincidence that two African countries, Kenya and Nigeria, are among the only ones to have refused to endorse this agreement, precisely so as not to have to abolish these taxes and deprive themselves of these tax resources.
In the midst of a global pandemic, and after having seen rich countries monopolize and hoard vaccines, this agreement raises doubts as to whether rich countries alone will honor their climate debt.
Africa must now make its voice heard by allying itself with other developing countries and demand a new round of negotiations on the taxation of multinationals that take into account the needs of the South. It is now indisputable that we will not succeed in stopping climate change without tackling inequalities, whether between or within countries!
* Leonce Ndikumana is a Professor of economics and Director of the African Development Policy Program at the Political Economy Research Institute at the University of Massachusetts. He is a Commissioner on the Independent Commission for the Reform of International Corporate Taxation (ICRICT).
Oct. 2021
ICRICT open letter to G20 leaders: "A global tax deal for the rich".
Eight years ago, you mandated the OECD to address corporate tax avoidance by multinationals, which cost countries at least $240 billion a year in lost fiscal revenues. After years of negotiations including 140 countries, the agreement announced last Friday shows that it is finally possible to change a system that was built one hundred years ago.
The agreement recognises the basic principle of the need for a global minimum tax to put an end to the tax havens business model. With a global minimum tax, it doesn’t matter in which countries multinationals record their profits, as these will be taxed at least at the minimum rate.
The agreement also finally recognises the principle that multinationals are unitary businesses, operating across jurisdictions and that their worldwide profits should be taxed in line with their real activities in each country on a formulaic basis, according to the key factors that generate profit (e.g., employment, sales, and assets) and so that multinationals can no longer pick and choose where to record their profits.
However, this reform process has been watered down in such a way that it will overwhelmingly benefit rich countries.
Proposals for a global effective minimum tax of 21% (or even better 25%, as we advocate) have been rejected in the pursuit of the lowest common denominator of 15%, a success for Ireland, a loss for the rest of the world.
A reform that could have delivered more than $200bn in increased fiscal revenues worldwide with a 21% tax rate, will deliver only $100bn with a 15% tax rate. By giving priority to apply the minimum tax to the countries where the headquarters of multinationals are located, the lion’s share of the additional revenue is expected to be received by a small number of rich countries. This leaves aside the application of the principle of fairness you agreed, that corporations should be taxed in the jurisdictions where their profits are generated.
There are legitimate concerns that such a low global minimum will turn out to be the global standard, and a reform that was intended to make sure multinationals pay their fair share will end up doing just the opposite. Developing countries, which rely relatively more on corporate tax income as a source of government revenues, and suffer the highest losses from corporate tax abuse as a share of their current tax revenues, would be big losers. So too would small and medium-sized enterprises in developed countries, which will still pay the full local rate.
Particularly problematic is the proposal intended to address taxing rights, but which will apply to only the 100 largest and most profitable global multinationals and reallocate only a small fraction of their profits. The demand for a commitment from countries to withdraw or refrain from introducing measures to ensure that digital multinationals not covered by the current agreement pay taxes is simply unfair.
Concrete proposals put forward by developing and emerging countries, including some G20 members, to ensure all companies pay taxes in the countries where economic activities take place, and to allow source countries to apply the minimum tax on payment of services and capital gains (the so called “Subject to Tax Rule”), which are used by multinationals to shift profits out of their countries and into tax havens, have been ignored. Repeated concerns with respect to new rules for mandatory dispute resolution have also been given short shrift.
The negotiations are happening in the aftermath of COVID 19, at a time when developed countries are recovering faster than developing countries, who lack adequate fiscal space.
Exacerbating this divergence by failing to provide sufficient revenues to sustain economic growth in developing countries is economically foolish.
To do so during a global pandemic, when the need for revenue to support public health and economic recovery is greater than ever, is also socially inequitable. Coming on the heels of vaccine nationalism and hoarding by the advanced countries, this agreement is hardly one that enhances global solidarity.
Moreover, it goes against global commitments grounded in the United Nations Charter, including those related to human rights and the Sustainable Development Goals, particularly Goal 10 on reducing inequalities within and among countries.
Overall, the current agreement is not grounded on a proper understanding of the economics of corporate profit taxation and reinforces global inequities. From the point of view of developing countries, it can only be seen as an interim solution which they have been forced to live with.
In the absence of sustainable solutions, countries should not be restricted from continuing to pursue alternative measures, such as digital services taxes, which are already generating revenue today, or the solution for taxing digital services that has been developed by the United Nations Tax Committee.
The current negotiations must continue during the presidency of Indonesia in 2022 and India in 2023 but in a different format that recognises the failure of the 2019-2021 process to give effective voice to developing countries. This ultimately must provide the platform for a new, more inclusive, round of negotiations to deliver a new global tax deal for the world.
Addressing the complex global challenges that the world is confronted with today, from the adequate provision of public services to the existential climate crisis, requires visionary decisions that put national self-interest aside in the search for the common good. It means siding not with multinationals and tax havens but with citizens both in the Global North and in the Global South. History will judge you harshly if you miss the chance to get this right.
Oct. 2021
The Pandora Papers investigation lays bare the global entanglement of political power and secretive offshore finance, by Gerard Ryle. (ICIJ)
The Pandora Papers is a leak of almost 12 million documents that reveals hidden wealth, tax avoidance and, in some cases, money laundering by some of the world's rich and powerful.
More than 600 journalists in 117 countries have been investigating the files for months. The data was obtained by the International Consortium of Investigative Journalists (ICIJ), which has been working with more than 140 media organisations on its biggest ever global investigation.
Based upon the most expansive leak of tax haven files in history, the investigation reveals the secret deals and hidden assets of more than 330 politicians and high-level public officials in more than 90 countries and territories, including 35 country leaders. Ambassadors, mayors and ministers, presidential advisers, generals and a central bank governor appear in the files.
The International Consortium of Investigative Journalists (ICIJ) obtained confidential information from 14 offshore service providers, enterprises that set up and manage shell companies and trusts in tax havens around the globe.
The files reveal secret offshore holdings of more than 130 billionaires from 45 countries. Other clients include bankers, big political donors, arms dealers, international criminals, pop stars, spy chiefs and sporting giants.
While owning an offshore company is legal, the secrecy it provides can give cover to illicit money flows, enabling bribery, money laundering, tax evasion, terrorism financing and human trafficking and other human rights abuses, experts say.
Poor nations are disproportionately harmed by the stashing of wealth in tax havens, which starves treasuries of funds to pay for roads, schools and hospitals.
The Pandora Papers probe reveals that international leaders who could tackle offshore tax avoidance have themselves secretly moved money and assets beyond the reach of tax and law enforcement authorities as their citizens struggle.
Reporting by ICIJ and its partners challenges the offshore industry’s claims that service providers judiciously vet clients and strive to act within the law, and it highlights the cost to the public interest of letting the rich and powerful shield their wealth from the law.
ICIJ’s publication of Pandora Papers stories comes at a critical moment in a global debate over the fairness of the international tax system, the role of industry professionals in the shadow economy and the failure of governments to stanch the flow of dirty money into hidden companies and trusts.
Why tax havens are problematic:
Here's how offshore companies work: For prices starting at just a few hundred dollars, providers can help clients set up an offshore company whose real owners remain confidential.
Alternatively, for a fee of $2,000 to $25,000, they can set up a trust that, in some instances, allows its beneficiaries to control their money while being not legally responsible for their actions. A bit of paper-shuffling and "creativity" help shield assets from creditors, law enforcement and tax collectors.
Owning offshore companies and conducting financial transactions through these tax havens are perfectly legal in many countries— but the practice has come under scrutiny.
People who use these companies say they are needed to operate their businesses. Many experts however say tax havens and offshore operations must be monitored more closely to fight corruption, money laundering and global inequality.
According to Gabriel Zucman, an expert on tax havens and associate professor of economics at the University of Berkeley in California, the equivalent of 10% of the world's total GDP is held in tax havens globally.
Lakshmi Kumar, policy director at Global Financial Integrity, told ICIJ and affiliated news outlets that when the rich hide money through tax evasion, it has a direct impact on the lives of people. "It affects your child's access to education, access to health, and access to a home," she said.
How much money funnels to tax havens
Because of the complex and secretive nature of the offshore system, it's not possible to know the exact amount of wealth that is linked to tax evasion and other crimes and how much has been reported to authorities.
The total amount of money funneled from countries with higher tax rates into tax havens with significantly lower tax rates is still unknown. However, according to a 2020 study by the Organization for Economic Cooperation and Development (OECD), at least $11.3 trillion is held "offshore."
Gerard Ryle, the director of the ICIJ, said leading politicians who organised their finances in tax havens had a stake in the status quo, and were likely to be an obstacle to reform of the offshore economy.
“When you have world leaders, when you have politicians, when you have public officials, all using the secrecy and all using this world, then I don’t think we’re going to see an end to it.”
He expects the Pandora papers to have a greater impact than previous leaks, because they were arriving in the middle of a pandemic that has exacerbated inequalities and led governments to borrow unprecedented amounts to be shouldered by ordinary taxpayers.
At least $11.3tn in wealth is held offshore. “This is money that is being lost to treasuries around the world and money that could be used to recover from Covid,” Ryle said. “We’re losing out because some people are gaining. It’s as simple as that. It’s a very simple transaction that’s going on here.”
The Pandora Papers are expected to yield new revelations for years to come.
Oct. 2021
The Pandora Papers and the threat to democracy, by Katharina Pistor. (Project Syndicate)
In demonstrating how some of the world’s most powerful people hide their wealth, the Pandora Papers have exposed the details of a global system.
The ‘Pandora Papers’, a new investigation led by the International Consortium of Investigative Journalists, has fuelled outrage around the world. Politicians, business people, sports stars and cultural icons have been caught in the act of hiding their wealth and lying about it. But how likely is a reckoning for the lawyers and accountants who helped them?
There is nothing new about the practices the ICIJ’s investigation uncovered. True, the sheer scale, sophistication and legal firepower deployed to allow today’s ultra-rich and powerful to game the law may be newsworthy. But the only truly shocking revelation is that it took more than 600 journalists from around the world to expose these practices, often risking their own safety and professional futures.
The difficulty of that task attests to how well lawyers, legislatures and courts have tilted the law in favor of elites.
To hide their wealth, today’s rich and powerful have availed themselves of centuries-old legal coding strategies. In 1535, King Henry VIII of England cracked down on a legal device known as ‘the use’, because it threatened to undermine existing (feudal) property relations and served as a tax-avoidance vehicle. But thanks to clever legal arbitrage, it was soon replaced by an even more powerful device—‘the trust’.
Legally encoded by solicitors and recognised by courts of equity, the trust remains one of the most ingenious legal tools ever invented for the creation and preservation of private wealth. In the old days, it allowed the wealthy to circumvent inheritance rules.
Today, it is the go-to vehicle for tax avoidance and for structuring financial assets, including asset-backed securities and their derivatives.
Functionally, a trust alters the rights and obligations to an asset without observing the formal rules of property law; it thus creates a shadow property right. Establishing a trust requires an asset—such as land, shares or bonds—and three personae: an owner (settlor), a manager (trustee) and a beneficiary.
The owner transfers legal title (though not necessarily actual possession) over the asset to the trustee, who promises to manage it on behalf of the beneficiary in accordance with the owner’s instructions.
Nobody else needs to know about this arrangement, because there is no requirement to register the title or disclose the identities of the parties. This lack of transparency makes the trust the perfect vehicle for playing hide-and-seek with creditors and tax authorities. And because legal title and economic benefits are split among the three personae, nobody willingly assumes the obligations that come with ownership.
Favoured legal device
The trust became a favoured legal device for global elites not through some invisible hand of the market but rather by purposeful legal design. Lawyers pushed existing legal boundaries, courts recognised and enforced their innovations and then lawmakers (many of them presumably beholden to wealthy donors) codified those practices into statute. As previous restrictions were stripped away, trust law expanded its remit.
These legal changes ensured that an ever-greater array of assets could be held in trust and that the role of the trustee could be delegated to legal persons rather than honorable individuals such as judges.
Moreover, fiduciary duties were curtailed, the trustees’ liability was limited and the lifespan of the trust became increasingly elastic. Together, these legal adaptations made the trust fit for global finance.
Countries which lacked this device were encouraged to emulate it. An international treaty, the 1985 Hague Convention on Trusts, was adopted with this goal in mind.
In countries where lawmakers have resisted the pressure to sanction trusts, lawyers have fashioned equivalent devices from the laws governing foundations, associations or corporations—betting (often correctly) that courts would vindicate their innovations.
Tax and legal arbitrage
While some jurisdictions have gone out of their way to be legally hospitable to private wealth creation, others have tried to crack down on tax and legal arbitrage. But legal restrictions work only if the legislature controls which law is practised within its jurisdiction.
In the age of globalisation, most legislatures have been effectively stripped of such control, because law has become portable. If one country does not have the ‘right’ law, another one might. As long as the place of business recognises and enforces foreign law, the legal and accounting paperwork can be channeled to the friendliest foreign jurisdiction and the deed is done.
National legal systems thus have become items on an international menu of options from which asset holders choose the laws by which they wish to be governed. They don’t need a passport or a visa—all they need is a legal shell.
Assuming a new legal identity in this way, the privileged few can decide how much to pay in taxes and which regulations to endure. And if legal obstacles cannot be overcome quite that easily, lawyers from leading global law firms will draft legislation to make a country compliant with the ‘best practices’ of global finance. Here, tax and trust havens such as South Dakota and the British Virgin Islands offer the gold standard.
The costs of these practices are borne by the least mobile and the insufficiently wealthy. But turning law into a goldmine for the rich and powerful causes harm well beyond the immediate inequities it generates. By potentially undermining the legitimacy of the law, it threatens the very foundation of democratic governance.
The more that wealthy elites and their lawyers insist that everything they do is legal, the less the public will trust the law. Today’s global elites might be able to continue to conjure private wealth from law. But no resource can be mined forever. Once lost, trust in the law will be difficult to regain. The wealthy will have lost their most valuable asset of all.
(c) Project Syndicate
* Katharina Pistor is professor of comparative law at Columbia Law School.

Next (more recent) news item
Next (older) news item