The agreements reached at the Group of 20 summit in London to try to close down tax havens and clamp down on tax avoidance have been welcomed by all except those who have benefited from such activities. But it would be foolish to think that the agreements will lead to speedy changes in the way in which wealthy individuals and companies operate or soon lead to greater transparency and higher tax revenues.

European tax havens such as Monaco, Liechtenstein and Andorra may pay lip service to demands from the European Union for information and greater transparency, but they know that their only real raison d’etre is that they are places where wealthy individuals can reside while avoid paying taxes in the places where they have earned their wealth.

British islands such as Jersey, Guernsey and the Isle of Man will resist attempts by the British government to change their tax laws, and while the British authorities may manage to get them to make some concessions on the amount of information they are prepared to pass on to the British and European tax authorities, they are likely to drag their feet and argue that the British government, having conceded powers to them, cannot arbitrarily rescind these powers.

The British government will also not find it easy to control British island dependencies in the Caribbean such as the Cayman Islands, Bermuda, Turks and Caicos Islands, British Virgin Islands and Anguilla, which are among the more notorious tax havens. Britain, having conceded measures of self-government to these territories, cannot simply issue a fiat, but must rather persuade the governments of these territories that it is in their long-term interest to cooperate with financial institutions elsewhere and end their “pariah” status.

But for some of these territories the provision of off-shore financial facilities with low or no withholding taxes and minimal transparency is the main means of livelihood for their small populations.

Britain is not the only country with responsibility for tax havens. Switzerland, Singapore and Hong Kong all provide forms of tax havens. The Swiss have reluctantly made some concessions over their laws on bank confidentiality, but it remains to be seen how far the tax authorities in EU countries will be able to extract details of the Swiss bank accounts opened by their nationals. Hong Kong is well known for its low income tax and position as an advanced financial center in the Far East.

The French and the Germans would like to see tax rates in EU countries equalized or at least brought closer into line, but this has been resisted by many European states that have, for instance, used low corporate tax to attract companies to set up European headquarters in their capitals.

Ireland was very successful in recent years for this reason, although the Irish economic “miracle” has tumbled like a house of cards. The worst crash has been in Iceland, whose banks have collapsed, causing significant losses to British organizations.

European countries have competed against one another to attract foreign investment by claiming to have the lowest corporation tax and the most flexible and loose financial regulation. Although this sort of competition may decrease it is unlikely to be eradicated and will complicate the task of developing effective international regulation of banks and financial institutions that the G20 agreed was necessary. But it is far from clear how such controls will operate.

In Europe what will be the role of the European Commission? What part will the Bank of International Settlements play? The decision to strengthen the International Monetary Fund by providing extra facilities should help developing countries, but the IMF is not geared or staffed to act as a super financial regulator.

The French and the Germans at the G20 were particularly concerned to see effective controls placed on hedge funds, which they saw as one of the major causes of the financial crisis. There is much popular support for this view. Hedge funds, which shorted bank shares, are thought to have started or at least encouraged the fall in bank shares, which in turn exacerbated the problem of bad bank debts.

Hedge funds have also been accused of ratcheting up the preceding boom. When investors see share prices falling they feel tempted to sell and when they see prices rising they are tempted to buy. Hedge funds are thus thought to exacerbate booms and busts.

Hedge fund managers, on the other hand, argue that their actions help to smooth out the swings. Many laymen will sympathize with the views of the late Akio Morita, founder of Sony, who deplored the way financiers, instead of making things, made money out of shuffling bits of paper.

The British financial boom and the lenient tax treatment accorded to foreigners, who choose to live and work in Britain, attracted many rich people to buy properties here. Many of these have flaunted their wealth and pushed up the prices of houses in the more affluent parts of London. The government was recently persuaded by the opposition to bring in a tax of £30,000 a year on “non-doms” (not domiciled in Britain) who had been here for over seven years.

As non-doms they were able to avoid paying tax on income which they earned overseas. The argument against this tax was that it would lead the non-doms, who held important positions in the banks and made Britain such an important financial center, would pack up and go elsewhere. In fact the charge only applied to a few and did not cause much of a flutter to the billionaires who might have to pay what was for them a mere trifle.

After the huge losses of British and foreign banks in the London market, for which at least some of these non-doms were partly responsible, many British citizens would like to see tax privileges for non-doms abolished and would be happy to see them leave.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.

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