As the leak of 11 million confidential documents related to the clients of a Panama-based law firm, Mossack Fonseca, to the International Consortium of Investigative Journalists plays itself out in various ways, this essay attempts to contextualise the leak vis-à-vis a Caribbean perspective which seems to be emerging for over a decade now as far as the issue of tax haven and tax competition in the Caribbean is concerned. Is the on-going ‘Panama Papers’ controversy, this essay further asks, one of those fragile moments with systemic nature that have sought to determine the terms of negotiation for the small island developing states (SIDS) in the Caribbean? This question surfaces logically when the operational identity as well as an agreed definition of a tax haven remain elusive, there are efforts internationally to reduce the entire Caribbean region into a ‘tax haven’ by highlighting some of its sovereign islands and the remaining European colonies there as part of the continuing controversy.
Tax Haven vs. Offshore Banks
Confronted by the need of a settled definition the Organisation of Economic Co-operation and Development (OECD) outlined the following criteria to identify a tax haven in its noted 1998 report titled Harmful Tax Competition: An Emerging Global Issue: a) no or nominal taxes; b) lack of effective exchange of information; c) lack of transparency; and d) no substantial activity or attempt to attract investment or transactions and that are purely tax driven. Moreover, the OECD employed, too, its stated criteria of a tax haven and went ahead in identifying and eliminating what it called harmful tax practices internationally and formally (black)listed some islands and colonies in the Caribbean (among others elsewhere) as tax havens in its released document in 2000 titled Towards Global Tax Co-operation. These islands and colonies were Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Island, Commonwealth of Dominica, Grenada, Montserrat, Netherlands Antilles, San Marino, St. Lucia, St. Kitts and Nevis, St. Vincent and Grenadines, Turks and Caicos Islands, the United States Virgin Islands and, of course, Panama.
What is notable are the strong responses that had generated in the Caribbean SIDS, especially by some of Prime Ministers in the states listed in the OECD list and even the President of the Caribbean Development Bank. Those responses were in the language of strong protest by calling the OECD actions as double standard, neo-colonialism, abuse of power, desire to recapture loss business, mission to destroy the emerging money markets in the Caribbean etc. These responses are well-documented in Vaughn James’s 2002 article ‘Twenty-First Century Pirates of the Caribbean’ and Andrew Copper and Timothy Saw edited 2009 book The Diplomacies of Small States. These responses have gradually taken the form of an emerging perspective from the Caribbean and are being rigorously articulated through the research institutions and university departments for over a decade. Further, this view is more inclined to see the OECD criteria of tax havens critically and redefine them as offshore banks or offshore financial centres (OFCs).
Issue of Secrecy
One may call it a tax haven or an offshore bank, the core that lies in both the OECD move and the emerging Caribbean perspective is the issue of secrecy but with differing vantage-points. While the OECD would bring its own understanding of harmful tax practices to underpin that something is undisclosed, the Caribbean entities would attack the very ‘foreign’ criteria of secrecy that may hinder the international tax competition in their offshore banks. The issue of secrecy looms so large on the Caribbean islands that the invocation of the term of ‘Panama Papers’ seeks to convey more about the Caribbean as an area of ‘tax haven’ than about a Panama-based law firm. May be that is how the tools of identity construction are employed to shape a perception. This perception is likely to be guided by tight rope between the OECD move on tax secrecy and the Caribbean take on its marginal legitimacy. This tight rope plays out vividly in Barney Warf’s expression in his 2002 work ‘Tailored for Panama: Offshore Banking at the Crossroads of the Americas’:
Should their [OFCs] laws and regulations offer too much secrecy, the centre [OFCs] may suffer reputations as haven for illegal funds, a force that may discourage legitimate investors (McKee et al. 2000). Conversely, should the centre prove too transparent to auditors and international watchdogs, even investors with legal assets (e.g HNWIs [– high net worth individuals]) may be frightened off. Thus, offshore banking centres are continually poised at the knife-edge of marginal legitimacy.
It is worth recalling here that according to an old estimate the entire Latin America and the Caribbean (LAC) region alone accounts for US$ 0.7 trillion out of the total global HNWIs amount of US$ 9.0 trillion in these tax havens/ offshore banks. This is the immediate meat in the tight rope between secrecy and legitimacy even on the on-going ‘Panama Papers’ controversy, though one can add the probable amount of industrial units and fatten the meat.
The Open Secret of Resource Curse
The tax havens are specially designed to cater to the routine and customised needs of the foreign customers and the local persons and companies are not allowed to invest in the local offshore centres though they may avail the same in a foreign offshore setting; allowing to maintain a distinction between the domestic and the ‘offshore’ jurisdictions. It precisely indicates that the tax havens in the Caribbean are run by foreign (read the American and the Eueopean) hands for the customers who mainly belong to the same foreign area – the ‘first world’. Even then, the Panama Papers controversy seems to be bringing bad names to the ‘resource deficient’ Caribbean islands in the characteristic ‘pirates in the Caribbean’ style.
Hence, nothing else but the open secret that these islands lack natural resource in the ordinary/ conventional sense of the term helps to understand the emerging perspective of tax competition in the Caribbean SIDS. Apart from the resource deficit, these islands are small in size with very limited products that do not allow them to develop a domestic market sufficient in scale. An extensive exposure to outside world, moreover, had encouraged an outward and open economic orientation and that, too, with concentrated market to sale. Economic dependence, as a consequence, continues to be the single most overpowering problem in the regional life of the Caribbean. Redefining these tax havens as offshore banks, therefore, appears appealing to the Caribbean research institutes and university departments because the resource curse does not come on its way as these are managed by cutting-edge technologies and knowledge-intensive skills.
The islands are assigning considerable importance to those technologies and skills as they are striving to move to a high premium services economy and particularly since Antigua and Barbuda, a very small twin-island in the Caribbean, have recently won a consequential cross-border internet gambling and betting services dispute (with several shared offshore-like features) at WTO against the United States claiming compensation in millions of dollars.
And Yet the Latest Threats in Row?
The Caribbean protests in response to the OECD moves in 1998 and 2000 are noted with the impression that the OECD could not achieve what it had targeted initially. The impression, however, may not be similarly sound if inquired about the balance-sheet if available with the Caribbean islands of their total national gains and losses out of these offshore financial centres. The absence of adequate data and information is always present in these islands although this absence should not come on the way of the emerging perception from taking note of another important development that has been surfacing clearly over these islands with a time period at least similar to that the emerging perception, that whether these tax havens/ offshore banks have surfaced as the latest threats to the Caribbean small island development states.
It is not to be ignored that the Caribbean SIDS are the immediate neighbours of the United States, a powerful OECD member, and these states together form the ‘third border’ of the America, a view that has been repeatedly expressed by the American Presidents. It was only an American endeavour to coin the term ‘Caribbean Basin’, a geopolitical term, for the entire Caribbean region while keeping the dominant colonial perception in mind that these SIDS are small and thus unviable. Moreover, these are dangerous and vulnerable. This perception has grown thicker after the 11 September 2001 terrorist attack in the United States that these ‘unviable Lilliputs’, and their ‘offshore channels’ in particular, are subject to manipulations by any rival state or a malevolent non-state actor. The United States therefore sees these channels being possibly mastered for money laundering etc. to pose security threats in its homeland.
Let that remain a possibility at best for the United States. But what has turned out to be the ground actuality is that such a perception has securitised the Caribbean SIDS and has rendered them further vulnerable. This securitisation had already turned off many economic opportunities in this region when international tourism and out-going migration in the Caribbean had suffered drastically post-9/11 (see, for example, Abdul Nafey’s 2004 work ‘Security and Geo-politics in the Caribbean Basin: Post-9/11’).
Logically, it is no surprise when the US President Barack Obama referred to the Panama (read Caribbean) leak and uncritically uttered the OECD concern that global tax avoidable is a huge problem. News has started pouring that the OECD has started exploring mechanism for co-operation in tax administration in a joint network. Meanwhile, the Caribbean Community and Common Market, the inter-governmental multilateral body in the Caribbean, has also started expressing the concern that its 15 member states and associates are being incorrectly labelled as ‘tax havens’ following the Panama leak and is further urging caution from ‘unjust labelling of the community’s financial services centres’. Therefore, it is the high time for the emerging Caribbean perception to be watchful of its own resource curse so that the ‘Panama Papers’ are not turned into latest threats to the Caribbean SIDS.