Climateer Investing: What's the Scam? Why Did Deloitte Set Up Their Art & Finance Practice In Luxembourg?

Saturday, October 24, 2015

What's the Scam? Why Did Deloitte Set Up Their Art & Finance Practice In Luxembourg?

Following up on this morning's "Super Wealth: Barron's Penta Calls For Avoidance Of Geneva-style Freeports", we don't have the specific answer for the domicile, and are not intimating that Deloitte is scamming, but more generally, we'll let FT Alphaville's Matthew Klein explain:

The case against Luxembourg

This is Jean-Claude Juncker, currently the president of the European Commission:

Before he got that job, he helped transform the Grand Duchy of Luxembourg into something of a rogue state that allegedly helps the ultra-rich steal trillions of euros from law-abiding taxpayers across the rich world. At least, that was one of the main takeaways we got after reading Gabriel Zucman’s excellent The Hidden Wealth of Nations this weekend (here’s the FT review).

Zucman:

An economic colony of the international financial industry, Luxembourg is at the heart of European tax evasion and has paralyzed the struggle against this scourge for decades…Imagine an ocean platform where the inhabitants would meet during the day to produce and trade, free of any law or any tax, before being teleported in the evening back home to their families on the mainland.

No one would dream of considering such a place, where 100% of its production is sent abroad, as a nation…If Luxembourg is no longer a nation, it no longer has a place in the European Union…Nothing in the treaties, in the spirit of European construction or in democratic reasoning, justifies allowing an offshore platform for the global financial industry to have a voice equal to that of other countries…It is essential that Luxembourg go backward.

Why is he so angry?

Each year financial secrecy — the lack of effective exchange of information between offshore banks and foreign authorities — deprives governments around the world of about $200 billion. It’s important to understand that we’re not talking about tax competition, but of theft pure and simple: Switzerland, Luxembourg, or the Cayman Islands offer some taxpayers who wish to do so the possibility of stealing from their governments. It is their choice, but there is no reason that the United States, Europe, or developing countries should pay the price for it. Financial secrecy — like greenhouse gas emissions — has a costly impact on the entire world, which tax havens choose to ignore.

The $200bn number is an annual estimate based on foregone tax receipts from capital income, inheritance, and wealth taxes, based on 5 per cent real returns on hidden assets worth about $7.6 trillion. That number, in turn, came from Zucman’s observation that the world’s financial liabilities are worth about $7.6 trillion more than the world’s financial assets. Roughly $6.1 trillion of these extra liabilities take the form of equity and long-term debt, with the other $1.5 trillion held in low-yielding deposits and money-market funds.

There are only three explanations: aliens have been accumulating trillions of dollars of claims against Earthlings, innocent mistakes by statistical agencies add up to an enormous gap, or, most believably, the world’s ultra-rich have squirrelled away trillions of dollars from the authorities to avoid paying tax.

If the distribution of the “errors” were random across countries, the gap between assets and liabilities could be blamed on measurement challenges and honest blunders. Yet the gap is concentrated in a handful of countries known for being tax havens.

For example, foreign investments in Luxembourg, as reported by the Luxembourgish statisticians, are worth trillions more than what you’d get from adding up what the rest of the world’s statisticians think their citizens have invested in Luxembourg. Add that to the gaps attributable to hidden investments in Ireland and the Cayman Islands, and you’ve explained much of the global imbalance between reported assets and reported liabilities.

Laundering it in Luxembourg

While Ireland does have legitimate attractions for multinationals looking for a European base, particularly its educated, English-speaking workforce and a developed pharmaceutical industry — no one is investing in Luxembourg or the Caymans because they are attracted by the risk-adjusted returns of stakes in local businesses. They’re just pass-throughs for investors keen on minimising tax. Zucman again:

Luxembourg does not owe the success of its conversion to its so-called stability or its highly qualified labor force, as its proponents claim. In reality, inflation there has been almost as high as in France since the 1970s and much higher than in Germany. Economic activity fluctuates violently depending on the jolts of international finance: between 2007 and 2009, the GDP per worker was lowered by 10% (as opposed to 2% in France); it has not gone up much since. The only stability is that of power…

As for the national labor force, it is ageing and has nothing unique to sell: not steel, not ancestral tradition for wealth management as in Switzerland, nor prestigious university diplomas as in Great Britain…GDP per worker has grown by only 1.4% per year since 1970, a very mediocre result that places Luxembourg at the back of the line of developed countries…Educational performance, according to PISA (Programme for International Student Assessment) surveys, is among the worst of the countries of the OECD and scholastic inequalities among the highest....

...MUCH MORE