Liechtenstein the new tax haven?

Liechtenstein is a small principality that borders Austria and Switzerland. It has a population of around 35,000. It’s peaceful and quiet, and is currently home to the latest tax evasion scandal to rock Europe.

Liechtenstein’s reputation as a tax haven for Europe’s wealthy has been built on its strong principles of secrecy in banking, principles that they’re not willing to sacrifice, despite the scandal. Crown Prince Alois has defended their right to maintain their banking practices by stating that they’re a sovereign state, quite capable of self governance. He adds that it’s to be hoped that we live in a time where might doesn’t equal right, but where people value international law and agreements.

He does have a point. As a principality they are quite entitled to enact laws that foster the growth of their economy, and that reflect their principles and not those of the world at large. How can it possibly be their fault if their tax laws are more appealing to Germans, than Germany’s tax laws are? Surely the fact that so many people use Liechtenstein as a tax haven is some indication that there is something wrong with the taxation in their countries?

At least this is one of the arguments being bandied about in partial defence of Liechtenstein. Dieter Ondracek, who works for an organisation that represents the staff of Germany’s financial administration, says that the lack of transparency in the German tax system is partly to blame for the problem. He also cites the lack of tax investigators in the propagation of tax evasion.

However, one also has to consider the fact that Liechtenstein is one of three states that has been blacklisted by the Organisation for Economic Cooperation and Development (OECD). The reason they’re blacklisted is that they consistently fail to endorse and implement regulations that have been designed to address dodgy tax practices. One of the other countries blacklisted is Liechtenstein’s fellow principality, Monaco. We all know Monaco’s reputation as a playground for the rich and famous. We also know that many of the rich and famous choose to live there precisely because of the tax benefits that Monaco offers.

Does that mean that Monaco faces a potential tax evasion scandal in the near future? Or will the world take pity on the already beleaguered royal family and look the other way should any untoward evidence crop up?

More people are making use of tax havens as online financial transactions become more commonplace, and financial markets operate in the relatively borderless region of cyberspace. All you need to do is click your mouse and you can transfer your entire life’s savings into an invisible account across the world. Tax havens have been referred to as the downside of globalisation. And that is why it’s important that international agreement on taxation policies exists.

Liechtenstein’s biggest transgression might not be that they were complicit, however unintentionally, in helping several wealthy Germans avoid paying tax in Germany. Its biggest transgression could simply be that it stepped on Germany’s toes and denied Germany access to money to which it believes it has an unalienable right.

Exhorting people to pay their share of tax because it’s in the interests of the common good is not going to inspire many people to do so. Neither will it appease those who feel that they are being unfairly taxed by a system too complex for the average citizen to understand. Most people prefer to hang onto their hard earned money rather than deliver a fair chunk of it to the taxman. Perhaps this scandal provides an opportunity for Germany to rethink its tax laws; after all, it came 102nd out of 102 countries surveyed on the efficiency of their tax systems.

Countries considered to be tax havens don’t necessarily do anything wrong, they don’t go out of their way to contravene any international taxation standards. They simply have policies that suit their ways of life. To be punished for a system of governance that works seems rather harsh, especially considering that there aren’t all that many systems in place that do work well, or worse, work against the people rather than for them.

Prince Alois said that in Liechtenstein, fiscal interests aren’t placed above the law. His uncle, Prince Nikolaus, said that they are committed to transparency in banking, and are moving towards meeting the regulations set out by the OECD. But he added that they will not be bullied into anything before they are ready.

Liechtenstein has one of the highest per capita incomes in the world; unemployment is at less than 3%. I may be playing devil’s advocate, and I’m biased towards the common man, but those statistics seem to speak for the credibility of all financial policies that are in place. 35,000 people can’t be wrong, can they?

Recommended sites:

http://www.dw-world.de/dw/article/0,2144,3137075,00.html

http://www.iht.com/articles/2008/02/19/business/tax.php

http://www.iht.com/articles/ap/2008/02/20/news/Germany-Liechtenstein-Tax-Evasion.php