[Originally published in the Vanuatu Daily Post’s Weekender Edition.]

A prominent US liberal blog recently ran a story, titled “So Go Already” that captured in a nutshell the deep resentment that many, Americans especially, are feeling toward those captains of enterprise who continued to receive massive payouts even as the financial service companies they guided were foundering in bankruptcy.

Reacting to a rather blithe and blinkered editorial on tax havens published by the right wing Washington Times, the article ranted, “If you don’t like paying taxes here on the millions you’ve made or that someone made for you, you’re free to take your shekels and move.”

Both Right and Left utterly miss the point.

These ill-informed rants paint tax havens as a place to hide one’s (possibly ill-gotten) riches. That might have been true in the past, but following the events of September 11, 2001, reporting requirements have changed significantly. New rules proposed at the recent G20 summit in London would make reporting requirements even more stringent than they are today.

Righteous anger felt by many hard working individuals toward financial managers who received multi-million dollar rewards for having failed so spectacularly at their job is venting in all directions. And now, some in Vanuatu feel they’re being made to pay for others’ sins.

Not so, says Nikunj Soni, Executive Director of the Pacific Institute of Public Policy (PiPP). While the Pacific region is home to 6 of the 38 formally declared tax havens in the world, not all of them will be affected by the proposed new reporting requirements mooted at the G20 summit.

The only nations facing significant sanctions are Malaysia, the Philippines and Costa Rica, members of the notorious OECD ‘Black List’ – tax haven countries that are subject to sanctions as a result of their non-compliance with international taxation and reporting standards.

A PiPP press statement notes, “the G20 communiqué does not seek to punish tax havens – only ‘non-cooperative jurisdictions’ – that is, only those countries on the black list.”

Vanuatu is not entirely out of the woods. As a member of the so-called Grey List of countries who have committed to international tax standards, but who have yet to conclude any bilateral tax treaties, Vanuatu would be subject to monitoring. Sanctions might eventually come into play if we don’t show willing when new reporting and information sharing requirements are put forth, but that’s not terribly likely.

When the pressure starts, Soni says, “it is in the industry’s interest to become more open about its activities.”

That should not present a problem. The point of tax havens is not money laundering, nor is it tax evasion. Some have tried to abuse the system for those purposes, and in fairness, lax standards did in the past make such abuse far easier than it should have been. But no longer.

The rationale for acting as a tax-free jurisdiction is simple: Given a lack of sustainable industry, a small economic base and few prospects for international trade, tax haven status is one of the few avenues available to countries like Vanuatu to attract foreign currency. By enticing money and people into the country, the government is able to derive income from import tariffs, license fees and other activities that don’t unduly burden either investors or ni-Vanuatu.

Some degree of visible, verifiable probity is required for such a role, and cooperation will no doubt be expected from neighbouring nations as they pursue individuals playing fast and loose with the rules. But this should not be cause for alarm. We don’t want people investing here who only see the rule of law as an encumbrance.

Nonetheless, we’re facing a strong, even unreasonable backlash, which is directing itself in part at some of the punier members of the international community. Great care, and large helpings of wit and diplomacy, will be required as we sit down with OECD member nations to discuss the issue.
On the one hand, we need to show willing in terms of information exchange, but on the other, we cannot afford to give away entirely one of our only means of attracting foreign investment.

The same week this news was announced, Vanuatu embarked on the opening movements of a multilateral dance between its Pacific neighbours and local economic heavyweights Australia and New Zealand. With our two largest donor partners leaning on us to reduce trade tariffs on the one side and the OECD on the other pressuring us to move into line on tax policy, Vanuatu cannot afford to assume that everything will be hunky-dory.

Says Soni, “If the industry is to get Pacific governments to support its cause on the international stage, it will need to demonstrate the contributions to economic growth, which in turn will require a degree of openness and trust.”

It’s a fine balance, but a manageable one, if all parties play nicely. A fair amount of cooperation will be required, and some of that may feel a little uncomfortable to financial management companies here. Foreign governments are going to be looking at them askance, and the people of Vanuatu cannot afford to sacrifice much for either side’s benefit.