Tiny tax havens singled out for naming and shaming

PARIS - France and Germany are leading a charge for a Group of 20 summit to blacklist tax havens and offshore finance centres blamed for scams and dodgy investments.

Their plan is fuelled by anger at the tiny, well-heeled territories fingered as a cause of the global recession and their mood is now strongly mirrored in Washington.

Jurisdictions that cast a veil of secrecy over foreign bank accounts or refuse to co-operate with regulators will be named and shamed and open to retaliation, according to the Franco-German plan.

"We want to act with determination against unco-operative places in fiscal, prudential or money-laundering matters," French Economy Minister Christine Lagarde said in Paris this week alongside her German counterpart, Peer Steinbrueck.

They called for a trio of watchdogs - the Financial Action Task Force on Money-Laundering, the Financial Stability Forum and the OECD - to define the criteria of "non-co-operation" and name pariah countries.

Their blueprint will be put to the April 2 London summit, where 20 major and emerging nations will debate a stimulus for the global economy, controls on "shadow banks" such as hedge funds, and beefing up banks' capital requirements.

The Franco-German plan would require G20 states to tear up bilateral treaties with countries "that refuse to incorporate the highest standards of the OECD and the United Nations", said Lagarde.

Banks and insurers would also be required to disclose, in their annual reports, their use of tax and regulatory havens.

The size of these commitments would determine their level of capital requirements. In other words, the company would have to build a stronger safety net if it decided to invest through these riskier vehicles, and would thus incur a higher financial cost by having to set aside more capital.

The Paris-based Organisation for Economic Co-operation and Development (OECD) calculates that between US$5 trillion ($10 trillion) and US$7 trillion are salted away by individuals or companies to evade taxes or political instability in their home countries.

At present, only three places - the European micro-states of Andorra, Liechtenstein and Monaco - feature on its list of "unco-operative" tax havens.

At the weekend, French President Nicolas Sarkozy was asked whether Switzerland would also be appropriate for that list. "Based on the actual state of things and on the rules, it could be, yes," he said, in remarks that left Switzerland reeling.

France and Germany have campaigned for years for international tax loopholes to be closed up. Germany alone believe it misses out on 30 billion ($75 billion) in tax revenue each year through evasion.

Efforts to close tax havens in the European Union have in the past run into opposition from Austria, Belgium and Luxembourg.

The three countries claim exemption from European Union rules under which member-states swap information about bank accounts held by each other's citizens in order to avoid cross-border tax evasion.

Instead, the trio deduct a withholding tax, now 20 per cent but set to rise to 35 per cent beyond 2011, on interest from bank deposits held by other EU nationals. They send the tax back to the holder's country, but do so anonymously.

But change is coming, driven by the enormity of the financial crisis and governments' need to claw every cent of tax revenue, especially from those perceived as fat cats.

Belgium says it is considering automatic exchange of tax data with other EU states. The finance ministers of Austria, Luxembourg and Switzerland, which is not an EU member, will meet on Sunday to co-ordinate a response.

In Washington, which estimates it loses US$100 billion each year from tax haven abuse, the Obama Administration has vowed to pry open "secrecy jurisdictions" and is besieging the tax fortress of Switzerland, pressuring the Swiss bank UBS over accounts held by rich Americans.

In January, a report to the US Congress said more than 80 per cent of the top 100 publicly-listed US corporations had set up units in territories with low or zero tax, including financial giants that have been bailed out by the taxpayer at a cost of hundreds of billions of dollars.

British Prime Minister Gordon Brown has traditionally defended Britain's light-touch financial market and protected UK havens such as the Isle of Man, Jersey, Gibraltar and the Cayman Islands.

But, if his words are true, Brown has become a convert to cracking down on black money. Last month, he spoke of the hope for "a global deal, a grand bargain".

"We want the whole of the world to take action," Brown said. "That will mean action against regulatory and tax havens in parts of the world which have escaped the regulatory attention they need. The changes we make will have to apply to all jurisdictions around the world."