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Offshore Financial Centers or Tax Havens.

By John Dietz - Email Editor

Date : March 11, 2008

The recent events surrounding Germany and Liechtenstein have the characteristics of a Dirk Pitt story (authored by Clive Cussler) combining Indiana Jones, James Bond and McGyver. The only thing missing is murder and, hopefully, it will stay that way.

For those that have not been following this scandal, please click here for the Business Week article.

The real problem is that investing or moving money tax-free in Liechtenstein is verboten auf Deutschland! (forbidden in Germany)

Let’s back up. Germany has an ipso facto “policy” that claims that anyone who has a bank account in Liechtenstein is guilty of tax evasion. Without delving into the facts of the story, let us first analyze this ipso facto policy and where it has come from.

Ipso Facto – by the very nature of the situation or fact of it.

In 1940, the tax relations between countries were certainly different than they are today. Nations made policies based on their economic characteristics in conjunction with the protective measures that they were instilling. Due to the lack of a global economy, certain measures were placed as restraints, such as ipso facto policies, to protect their national security and to use tax evasion as a way to dissuade foreign trade, thereby increasing security. Using taxation as a trade barrier became one of the best defenses at the time. Discriminatory policies were created for national security to restrict International Trade.

Back to present day.

There are three uncooperative countries in terms of “tax havens” according to the OECD. They are Andorra, Monaco and of course Liechtenstein. Their failure to exchange any banking information has placed them on the blacklist of the OECD. As of this week, Liechtenstein has refused to honor the EU Bank Secrecy Agreement requiring the EU banking system to give up anonymity and enforce the policies of disclosure.

As you can imagine there are back and forth memories of pre World War II banking regimes that hid money in the system without exposing ill-gotten wealth.

So for now, in terms of who the players are and what they did will continue to unfold and may cause “policies” to change (if the good guys win). The German Secret Police, (BND) were authorized by the Finance Minister and Chancellor Angela Merkle to bribe a bank employee at LGT Bank in Liechtenstein. He stole the names and accounts of a number of German citizens (reported as high as 1400) and some citizens of other countries (including the US and the UK) from a data base that he was developing while employed in exchange for an expungement of a previous crime and a sum of cash reported to be 7.3M USD. These citizens were in violation of Germany’s ipso facto policy violating the national Banking Secrecy Laws stating that a citizen is a tax evader for moving money to a third-party tax free because there is a tax imposed on the movement of all assets of value or those that are “interest bearing.”

If you type in the searches you will find many opinions, however, I think that most opinions miss the point. Most of the governments involved have gladly accepted the stolen information and have probably begun their crackdowns. However, one banker in Denmark has it right and has refused to accept “known” stolen material stating that this is not the best way to ensure that taxes are paid correctly.

There are some bigger questions that should be addressed that would have probably passed by the media had the ipso facto policy not trumped justice and due process. Some bigger questions are:

• Is it acceptable for tax authorities to traffic in stolen information?
• Does fiscal policy trump rule of law?
• Will other countries follow the ipso facto policy in pursuing banking information?

The main problem for Germany is a system of taxation that is well above many of its neighbors. Germany’s top personal rate is 45 percent, a health care tax that equates to 14 percent, another 4 percent unemployment insurance tax and a Value Added Tax equal to 20 percent of most purchases. The World Bank ranks Germany’s tax system high on the list as one the worst, 124th out of 178 countries polled.

The age-old adage is that money goes where it gets treated the best. While we are in no way claiming persons should not be responsible and pay their due tax, the wake up call is obvious.

The current political scene in the US is just as ugly. As elections approach and we listen to the house of babble from both sides, one thing that should be glaringly apparent is that we cannot make xenophobic and intolerant decisions disregarding the rest of the world’s taxation systems. This story exemplifies that we now live and conduct business in a global economy and none of us should underestimate the consequences of other countries policies.

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