Europe’s tiny tax havens should be left in peace

There has been little mistaking the fury of German Chancellor Angela Merkel. Over the past few weeks, she has been leading an all-out assault on her tiny neighbor Liechtenstein.

Its crime? Not cooperating in Germany’s investigation of alleged tax evaders.

The tussle between Germany and Liechtenstein is just the overture to a wider battle between the big European nations and the tiny low-tax principalities. Next up: Monaco and Andorra.

And yet, the attacks are completely unfair.

Places such as Monaco and Liechtenstein have a right to keep banking secrecy and shouldn’t be forced to act as tax enforcers for other countries. Germany should spend more time worrying about why so much wealth is fleeing its borders—and less time picking on places a mere fraction of their size.

The row doesn’t show any sign of going away. It started when German investigators paid €5 million ($7.6 million) to a former employee of the Liechtenstein bank LGT Group for computer disks containing the names of people holding accounts there. The information has already led to the resignation of Deutsche Post AG chief executive officer Klaus Zumwinkel, and more than 190 others have confessed to tax evasion, according to the German authorities.

German Finance Minister Peer Steinbrueck plans to lead a wider European Union crackdown on tax havens. Merkel has already raised the issue with Monaco’s Prince Albert, and an attack on his Mediterranean enclave now looks certain. The anomaly of small, low-tax principalities on a high-tax continent may finally be coming to an end.

Britons in Monaco

You can see why the tax havens are an irritation for the big European governments. In a world of increasing mobility and better communication links, it has become easier for the wealthy to shift their base to a more tax-friendly environment. Half the British corporate establishment seems to be based in Monaco these days. Plenty of Germans appear to be storing money away in Liechtenstein.

“Liechtenstein is a clear example of a pirate state,” said John Christensen, director of the Brussels-based Tax Justice Network, a research group that promotes awareness about offshore finance. “When elites remove themselves from the tax regime, they subvert democratic processes and undermine respect for the integrity of laws and institutions.”

That appears to be what the German and other governments believe. And yet, Liechtenstein and Monaco have no obligation to provide a list of foreign investors to German, French or British tax authorities, as long as money laundering and terrorism aren’t suspected. Here’s why such demands are contradictory.

Two wrongs

First, how can the German government justify paying Heinrich Kieber, the former LGT Group employee, for details of private accounts, and then sell the stolen property around the world? It doesn’t matter if the disks revealed tax evasion, which, incidentally, has yet to be proved. Two wrongs don’t make a right. Presumably the German, UK, French or Swedish governments, which bought the data, will have no objections if an EU member-state starts stealing information from their banks.

Next, while they may not be full-blown nations, these are sovereign entities. Germany has a right to set whatever laws it likes for people living in Germany. If it wants to ban its citizens from holding accounts—or setting up trusts and foundations—in other countries, it can do so (and deal with the flight of people and capital). But it can’t harass other countries into changing their practices.

If people invest in low-tax countries or in legal structures such as foundations, their tax liability is their business, not the responsibility of the host nation. For most legitimate investors, low-tax principalities provide a useful alternative to the high-tax, big-government consensus that suffocates much of Europe.

Unfair competition

Lastly, it is ludicrous to say that this kind of tax “competition” is unfair. All competition is unfair. These are small nations entitled to make their living any way they want to. It is no more unfair than Germany’s proficiency at making cars, or the French aptitude at making wine. Should the Germans shut down their luxury-car industry because it makes life difficult for auto workers in the rest of Europe? Of course not. So why should Liechtenstein close its financial-services industry?

Naturally, tax havens should make sure they aren’t harboring assets for criminals or terrorists. And yet, that is a red herring. Mounir el-Motassadeq, the only person to stand trial over the September 11 terror attacks in the United States, operated out of Hamburg, not Liechtenstein. One of the suspected hijackers used accounts in Florida, not Monaco. In reality, terrorists use everyday banks because they attract less suspicion.

Maybe the German government and others paying for stolen information should spend more time thinking about making their own countries more attractive for their tax-paying citizens.

OVER the past couple of years or so, Filipinos who feel they need to take a break from the blood and gore in the political arena have turned to economic developments as a source of good news.

For a fleeting moment, the rather large crowd (were there really 75,000?) that gathered at the central business district (CBD) of Makati on Friday seemed reminiscent of the start of the French Revolution of 1789-95. For a fleeting moment, I say, because the crowd that converged at the CBD was made up mostly of students.

Just recently, a lawmaker proposed that Congress pass a bill lowering to 55 from 65 years old the compulsory retirement age of government workers.

Matthew Lynn: Europe’s tiny tax havens should be left in peace

There has been little mistaking the fury of German Chancellor Angela Merkel. Over the past few weeks, she has been leading an all-out assault on her tiny neighbor Liechtenstein.

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