And so we say goodbye to Cyprus, pretty much. The island in the sun, with its troubled past, has now scored a resounding nul points in the European rosy economic outlook contest.Its primary industry – offshore banking – has been dealt a killer blow, and it contemplates a future of economic shrinkage in a massive credit drought.
The justification for punishing Cyprus in a way that no other eurozone member country has been punished is that it is a tax haven chock full of Russian money. Never mind that this is not why the country required a bailout – that was largely because of the restructuring of Greek debt – and never mind that everyone knew what it was when it joined the EU in 2004 and the eurozone in 2007.
This raises some questions. If Cyprus is to be blamed for playing host to offshore Russian money, how come it’s OK for British savers to barrel cash into sundry island dependencies? Or for German savers to have large amounts of money invested in Luxembourg-domiciled investment funds?
As far as the fund industry goes, there are, of course, lots of arguments to show that Luxembourg (or Ireland) is more than just a tax haven – or low-tax jurisdiction, to use the preferred parlance. Ernst & Young, for example, cites eight reasons “Luxembourg is the leading global location for all types of investment funds” on its website. Way down in fifth place is “Ability to achieve tax neutrality for products by considering direct and indirect taxation implications at fund and investor levels” which, I think, means tax breaks.
Fair enough. But let’s be honest here. Cyprus is not the only tax haven in Europe. And that it flourished for a time is not due exclusively to Cypriot profligacy. We all had our heads in the trough.
Tax Justice Network reports that the Big 4 accountancy firms have 16 offices between them in Cyprus with PwC employing 1,000 staff. There are also 142 banks on the island, which has a resident population of just over 1.1 million. Last year, it was being talked up by the Cyprus Investment Promotion Agency as a handy new jurisdiction for investment funds offering “world-class services in a tax-efficient [my emphasis] and stable environment”. They know their market.
The Cyprus bailout is a game changer that gives cause for deep reflection. And as we wonder how single a single currency is if there are capital controls in one place where it is issued but not in others, perhaps we should also ask ourselves why, in a union, we have tax havens.
Writing in the Sunday Times in 2009, Eamonn Butler, director at the Adam Smith Institute, tried to defend tax havens by making them sound all cosy and fair: “The bread and butter of tax havens is people like you or me,” he wrote, “who put their modest life savings into a respected investment company in the Isle of Man.”
The Tax Justice Network takes rather a different view, slamming Luxembourg, for example, as “one of the world’s top secrecy jurisdictions” that “works actively and aggressively to defend financial secrecy, in the face of European efforts to promote transparency”.
What would Adam Smith think? I suspect he would disapprove of the secrecy that is so often part and parcel of tax havens. In the Wealth of Nations, he wrote that the amount of tax a person has to pay and the timing and manner of the payment “ought all to be clear and plain to the contributor, and to every other person”.
What could be fairer than that? Here’s to an end to tax havens, then – and an invisible hand of some sort coming to the succour of poor Cyprus.
Fiona Rintoul is editorial director at Funds Europe
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