I’ve been conducting a thought experiment to come up with a clear-cut positive by-product of the mess in Cyprus, and I think I may have found one.
What’s happening on that benighted island right now may represent more of a step forward in the fight against tax havens than anything the White House or OECD have been able to summon up in the past few years. Consider it: if you’re a Russian with a million euros to stash away, your calculus about where best to put your money has been completely thrown into chaos by this.
The latest indications from Cyprus are that those with deposits above €100,000 may have to pay taxes of as much as 40% on them – possibly even facing double taxation if the money is in a bank that’s about to be restructured. Those with savings over €500,000 (which, according to Barclays accounts for more than 40% of the country’s total deposits – the mind boggles) may face even more punitive rates.
As a result, the attraction of putting that money in a country like Cyprus has instantly diminished – even accounting for the non-tax benefits such as concealing one’s identity and so on. In retrospect, it might even have been more profitable to have (heaven forfend!) left one’s money in the homeland and not shuffled it overseas at all.
At the very least, it’s a reminder to all aspirant tax avoiders that even apparently safe havens for one’s money are still vulnerable to their own domestic crises. In the end, if one’s economy has an enormous banking system but a small economy, and if one faces a sudden capital crisis, it’s logical to try to extract a bit of rescue money from that banking system.
It’s fair to assume that many of those who look to invest their cash overseas for tax and secrecy purposes may now want to reassess those decisions, for fear of facing a similar unexpected levy on their stash.
Now, it would be naïve to assume that this would stem avoidance per se, but it may well force avoiders out of the more remote, more shady islands. It may prompt them to steer clear of the more vulnerable domestic economies – places like the Bahamas or Panama (S&P credit ratings: both BBB) and stash the money somewhere less likely to implode. Happily for disenchanted Russians there are plenty of these places even closer afield than Nicosia – for instance Luxembourg and Liechtenstein, both of which are AAA-rated.
And then there’s Britain. It is now no longer AAA-rated in the eyes of Moody’s, and, one assumes, pretty soon Fitch too, but happily the Isle of Man is still AAA. No word yet on whether they’re preparing for a Russian invasion.