Offshore Finance and the Politics of International Tax Co-Operation

This paper argues that offshore financial services have differentiated effects on the ability of states to finance themselves and that these differentiated effects are a thus far overlooked piece in the puzzle of why international cooperation against aggressive tax planning is difficult. International taxation literature usually considers offshore tax planning an extreme case of international tax competition. This perspective is correct in many aspects but overlooks the specific nature of offshore financial centres as tax havens and banking hubs. This dual nature of offshore financial centres is no accident, but the consequence of the intrinsic connection between tax and credit through sovereign money creation. As a result, the existence of offshore financial centres affects an individual state’s ability to finance itself differently: some states lose significant amounts of tax revenue, while others gain much needed access to credit for themselves and ‘their’ corporations. Yet other states experience both effects simultaneously. That is, offshore financial services have differentiated effects on different states. Depending on the nature of these effects, states evaluate the need to regulate offshore international tax competition differently. To advance this argument, the paper proceeds in four analytical steps. First, it makes a theoretical argument about the cycle between tax, credit and sovereign money creation and shows what happens when this cycle moves offshore. Second, the paper provides a detailed comparative case study of the uses and abuses of offshore finance in Germany and Brazil, determining how each country is affected by offshore tax haven and banking services. The case studies are based on a mixed-methods approach combining descriptive taxation and banking statistics with qualitative data collected through 35 in-person interviews. In the third step, the paper shows how those differentiated effects of offshore finance help explain the case study countries’ position in the OECD/BEPS process. In the final step, the paper discusses what the findings may mean for international co-operation in tax matters considering the completely separate international governance structures for taxation and banking.