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- [00:01]
A
Across the UK, this is BBC Radio 5 live. Apple Night with Dotson Adebayo.
- [00:08]
B
Luxembourg, seen as one of the EU's tax havens, says it will consider greater transparency in its banking sector. Although Luxembourg is the second smallest country in the eu, it's one of the wealthiest banks and other financial institutions there have assets worth more than 20 times the country's economic output. That's raised concern that it could become the next Cyprus. Alex Cobham is a senior fellow at the center for Global Development in Washington. How serious a concern is that, Alex, that Luxembourg could go the way of Cyprus?
- [00:45]
A
Well, good evening, Dalton. It's quite a serious concern, as you say, Luxembourg, on that ratio of bank assets to gdp, looks much more vulnerable than Cyprus. But having said that, we should remember that Cyprus suffered, or rather its banks suffered, from the middle of 2011 from its particular exposure to the problems in Greece, whereas the Luxembourg banks have been doing relatively well over the last couple of years. But I think it's clear that, you know, increasingly, politicians are waking up to the risk that's encapsulated by that ratio of bank assets to gdp. And at the same time, the pressure on tax havens has never been greater. Luxembourg is one of the last two countries in the European Union to hold out against exchanging tax information automatically with other members, Austria being the other. And I think the fact that we've seen Luxembourg start to shift its position is indicative of the kind of pressure that's on now. People know that the behavior of Luxembourg and other jurisdictions is really undermining tax revenues at a time when that's really vital. And I think we're seeing the start of a process that will ultimately lead to automatic exchange of information. And that's really, in many ways, going to be the beginning of the end of tax havens.
- [02:13]
B
And is Luxembourg a tax haven simply because it doesn't reveal its financial or the financial secrets of the depositors to its bank accounts?
- [02:27]
A
Well, I'd say at the center, we prefer the term secrecy jurisdiction, because really, it's not so much about a low tax rate, it is about secrecy. And on that basis, Luxembourg certainly qualifies. It has one of the strongest banking secrecy setups in the world. On the Financial Secrecy Index produced by the Tax Justice Network, which is really an index of tax havens, Luxembourg comes in third, even though that's third globally, even though this is a country that only has a population of around half a million people. That shows you just how strong its secrecy is and how big, how important a jurisdiction it is in terms of Secretive financial flows.
- [03:10]
B
Apologies if you're having to explain things which are grade one economic education, but why is greater transparency so important? What, what difference would it make to, for example, the British government if they knew who had invested money in Luxembourg banks?
- [03:32]
A
Well, here's the thing, the way things stand, if a UK citizen has money in, let's say in a German bank, then that will be automatically declared to the UK authorities, to Revenue and Customs. So let's say somebody has an income, you know, interest on their savings of a million pounds a year in their German bank account, then they should be paying, let's say, 40% of that in tax. If it's, if they're a UK citizen and this is where their income is recognized ultimately. If, on the other hand, that money is being held in a bank account in Luxembourg, then there simply won't be any exchange of information with the uk. Now, there may be some withholding tax being held. In the absence of any transparency, it's actually impossible for anybody outside to know whether the right amount of tax is being paid. But also it's impossible for anyone to know whether the money in that bank account was legitimately come by. And as we've seen this week with the release of a set of leaks about secretive companies in the British Virgin Islands and the Cook Islands, very often when you lift up these stones of well established financial secrecy, what you find is exactly streams of income and assets where in fact we would have serious concerns about their legitimacy. So it's really, it's a tool, the transparency we're talking about, the transparency that Luxembourg doesn't offer is a tool for authorities not only to make sure that the right amount of tax is being paid in the right place, but also to look at all kinds of other crime, from money laundering of all sorts, the proceeds of the, of drug trafficking, for example, but also to take action against the financing of terrorism and so on. Being able to see the financial flows between jurisdictions has never been so important as in this period of accelerated globalization. And I think with the pressure that a number of rich country governments are facing in terms of austerity, we're finally seeing, if you like their politics, catch up with the politics of developing countries, where in fact, these arguments have been being made for a long time, but they haven't had the political power, those countries, to hold countries like Luxembourg to account. Finally, it seems that balance may be starting to shift.
- [06:04]
B
Alex, many thanks. Alex Cobham there, senior fellow of the center for Global Development in Washington.