Cashing in on a paradise island

International efforts to stem the erosion of national tax bases are unlikely to have any real impact until at least 2006. While most states identified as tax havens have given limited commitments to the OECD, seven remain on a list of ‘unco-operative’ jurisdictions.

Vanuatu is one of those jurisdictions. A string of eighty-three islands in the South Pacific, Vanuatu’s website describes its indigenous people, the Ni-Vanuatu, as ‘a peaceful, gentle race, who enjoy life’s simpler pleasures in a country of unique and diverse customs and culture’.

The cyclones that have torn through neighbouring islands in recent weeks have grabbed the headlines, but there are other forces at work in Vanuatu.

Vanuatu online’s offshore business section promotes offshore international companies offering ‘complete privacy’, bank accounts that can be set up within two days, and debit cards allowing worldwide access to funds. Last February Vanuatu’s prime minister expressed ‘very serious reservations concerning various central aspects of (the OECD’s) initiative’.

PKF, ranked eighth in the Accountancy Age Top 50 league table, is one of the firms that continues to promote the islands’ services. PKF Vanuatu’s web site says ‘Vanuatu is one of the few pure tax havens in the world … Confidentiality is essential for a tax free offshore centre … There are no tax treaties with any country’.

An inquiry at PKF’s UK offices was directed to PKF Vanuatu, where partner Andrew Neill said it was ‘unreasonable for the OECD countries to suppress economic competition for tax-efficient business structures’.

A second firm BDO, ranked six in the Accountancy Age Top 50 table, is another of accountancy’s international networks that operates from the islands.

BDO Vanuatu’s web site states: ‘Confidentiality is assured … as strict secrecy provisions contained in legislation ensure that your privacy is protected’. Frans Samyn, CEO of BDO International, said BDO Vanuatu, ‘like any other firm in the BDO network’, was undergoing strict quality assurance reviews.

Samyn added: ‘If such review would indicate that BDO Vanuatu is not complying with the (BDO) manuals or would otherwise offer services which are incompatible with the core services offered by BDO worldwide, it will be obliged to discontinue such activities immediately.’

Growing tax leakage to tax havens concerns bodies like the OECD because it hampers the efforts of nation states to levy fair taxes on resident individuals and businesses.

It hits developing countries particularly hard. An Oxfam paper says: ‘… at a conservative estimate, tax havens have contributed to revenue losses for developing countries of at least $50bn (#31bn) a year. To put this figure in context, it is roughly equivalent to annual aid flows to developing countries.’

Oxfam says that the estimate was a conservative one, and adds: ‘It does not take into account outright tax evasion, corporate practices such as transfer pricing, or the use of havens to under-report profit’.

The OECD says that ‘fair’ tax competition is not under attack, but ‘some tax practices are anti-competitive and undermine public confidence’.

It adds: ‘Tax avoidance and evasion have the potential to adversely impact important policy objectives established by governments. They lose revenues and so taxes on those who do not escape the tax net must rise to plug the gap’.

The Association for Accountancy and Business Affairs has complained that ‘the costs are dumped on to ordinary people’, and it warns that such activity discourages compliance among the wider population.

Measures to promote transparency – requiring laws to be applied ‘on an open and consistent basis among similarly situated taxpayers’ – and wider exchange of information were proposed in the OECD’s 1998 report on harmful tax competition. A country on the OECD’s original list of tax havens is not considered ‘unco-operative’ if it has committed to transparency and effective exchange of information.

A 2001 OECD report Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes drew attention to the misuse of corporate entities for ‘money laundering, bribery and corruption, shielding assets from creditors, tax evasion’ and other illicit activities.

The US Internal Revenue Service has noted a ‘proliferation in the use of (offshore financial centre) trusts and corporations in tax evasion schemes due to the difficulty in tracing their beneficial owners’.

The veil of secrecy provided by corporate entities in some jurisdictions ‘may also facilitate the flow of funds to terrorist organisations’, it says. The OECD is urging governments to share information about ownership and control with law enforcement authorities domestically and internationally.

However, the Society of Trust and Estate Practitioners challenges the OECD report. Colin Sharp, chairman of STEP Worldwide, voices ‘very serious concerns’ that models proposed by the OECD and the Financial Action Task Force on money laundering do not meet a number of requirements, including ‘client privacy’.

He says: ‘It is understandable that the state may need to invade privacy in the name of the war on terrorism, but it is more difficult to see why one should accept incursions in the name of tax efficiency. Honest people, it is said, have nothing to hide. But that assumes that governments (or at least the people within them) are honest too. Honest people might have good reason to protect themselves from dishonest governments. We cannot assume that all banking information will not be misused.’

In a joint report with the International Tax and Investment Organisation, the society warns that business could migrate to jurisdictions insulated from pressure for change.

The report calls for ‘new regulation premised on a truly level playing field, one in which all countries conducting cross-border financial services participate on an equal basis in setting the new standards which will affect them’.

Some progress has been made.

Two years ago Oxfam called for a more inclusive approach and last October the Cayman Islands hosted a meeting of the OECD Global Forum on Taxation.

The OECD said it brought about an ‘enhanced sense of inclusive partnership amongst OECD and non-OECD countries’.

Certain countries, in particular the UK, have a special responsibility because many tax havens are UK dependencies or associated territories. There is still a long way to go, but in the meantime ordinary taxpayers and smaller businesses are picking up the tab.

  • Andrew Goodall is a freelance writer specialising in tax matters.


Vanuatu is a ‘Y’-shaped chain of 83 islands lying 2500km northeast of Sydney, 2000km north of Auckland, and 800km west of Nadi, Fiji.

The islands range from towering volcanic cones to others covered in dense rainforest to yet others which are raised coral islands with wide beaches and deep natural harbours.

The people of Vanuatu, a name which means ‘Land Eternal’, are predominantly Melanesian. And you wouldn’t expect tax issues to be at the forefront of their minds.

According to travel experts from Lonely Planet: ‘Divers are delighted at the pristine waters, coral reefs and accessible shipwrecks; vulcanologists’ eyes go misty at the mere thought of its many smoking peaks; and naturalists lust after its untouched forests, reefs and extravagant bird life.

‘The islands shimmer with a green that almost hurts the eyes amid an ocean so blue you’d think the picture was doctored.’

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