Banks employ large teams of highly paid people to devise transactions mainly for the purpose of avoiding tax. These activities seem to be far more profitable than the humdrum business of managing payments and channelling savings towards investment. Why ?

The answer shows the close link between tax avoidance and the speculation that has fuelled financial instability for 30 years. There were clearly other causes of the current crisis but the faults of the international tax system were a big contributory factor.

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Take hedge funds, for example. The tax authorities in the US and the UK have accepted a lax interpretation of residence and source rules, accepting that these funds are resident and their profits sourced offshore (mostly in the Cayman Islands) - even though they are effectively managed from London and New York. Not only are the funds’ gains treated as realised in Cayman, and hence not taxable, but their distributions are not subject to withholding tax - a great benefit for their investors. The funds’ location in a secrecy jurisdiction facilitates tax avoidance and is an open invitation to evasion.

For multinationals and rich investors the point is the same : returns on financial transactions are ultimately taxed at a low or zero rate, making them far more profitable than genuine business endeavours. This distortion of the tax system has greatly fuelled the excess of liquidity channelled into largely speculative financial transactions. The offshore secrecy system has been a main element of the opacity that has undermined corporate and financial regulation.

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