$32 trillion hidden in offshore tax havens

“This new report focuses our attention on a huge ‘black hole’ in the world economy that has never before been measured private offshore wealth, and the vast amounts of untaxed income that it produces,” said Henry, senior advisor at Tax Justice Network. “This at a time when governments around the world are starved for resources, and we are more conscious than ever of the costs of economic inequality.”

The report, entitled The Price of Offshore Revisited, estimates that there’s between US$21-32 trillion held in offshore tax havens, excluding non-financial assets such as real estate, yachts and gold. These financial assets are being held virtually tax-free, according to the research, in more than 80 “offshore secrecy jurisdictions”.

The estimates are based on data from the World Bank, the International Monetary Fund (IMF), the United Nations, central banks and the top 50 global private banks, which includes three Canadian banks: Toronto-Dominion Bank (TSX:TD), Bank of Montreal (TSX:BMO) and Royal Bank of Canada (TSX:RY).

According to the paper, the top 50 private banks alone collectively managed more than $12.1 trillion in cross-border invested assets for private clients at the end of 2010. This is up from $5.4 trillion in 2005, representing an average annual growth rate of more than 16%. The three private banks handling the most assets offshore on behalf of the global super-rich are UBS (NYSE:UBS), Credit Suisse (NYSE:CS) and Goldman Sachs (NYSE:GS), the research shows.

“It turns out that this offshore sector which specializes in tax dodging – is basically designed and operated, not by shady no-name banks located in sultry islands, but by the world’s largest private banks, law firms, and accounting firms, headquartered in First World capitals like London, New York, and Geneva,” Henry said.

Indeed, the report suggests that various financial industry firms and advisors, or “enablers”, are playing a key role in facilitating the growth of offshore tax havens.

“Investing and securing large amounts of private wealth across borders is complex, requiring specialized skills in tax, financial planning, banking, entity structuring, and estate planning. This is not something that most wealthy people undertake on their own,” the report says. “A global services industry of law firms, accountants, insurance companies, and especially private banks has grown up to cater to this cross-border market.”

The impact of the offshore industry is “staggering”, according to Henry. Indeed, the research suggests that if the offshore funds had been reported and taxed, they would have provided governments with a significant chunk of extra revenues. Even if the funds had earned a modest rate of return of just 3%, and that income was taxed at 30%, this would have generated income tax revenues of between US$190-280 billion.

“The lost tax revenue implied by our estimates is huge,” commented Henry. “It is large enough to make a significant difference to the finances of many countries.”

The research paper accuses multilateral financial institutions of having paid almost no attention to the growing offshore industry.

“It is scandalous that official institutions like the Bank for International Settlements, the IMF, the World Bank, the OECD, and the G20, as well as leading central banks, have devoted so little research to this sector,” Henry said. “For reasons of their own, they have tolerated the growth of the offshore sector for far too long, out of sight.”