Don Quijones: Mini Tax Havens – How Europe’s 1% Gets to Pay Only 1%

Yves here. Don Quijones describes some the mechanisms by which Europe’s wealthy get to achieve tax haven level treatment of their funds, at the very same time that ordinary citizens are being broken on the rack of austerity.

By Don Quijones, a freelance writer and translator based in Barcelona, Spain. His blog, Raging Bull-Shit, is a modest attempt to challenge some of the wishful thinking and scrub away the lathers of soft soap peddled by our political and business leaders and their loyal mainstream media. Originally published at Testosterone Pit

Something completely out of the ordinary happened in Spain this week: a politician resigned. His name is Willy Meyer and he was, until Wednesday morning at least, a Member of the European Parliament  (MEP) and European Parliamentary leader for Spain’s ostensibly far-left party “Izquierda Union.”

The reason for Meyer’s resignation is that he was caught funneling his parliamentary pension contributions into an EU-sponsored investment fund commonly referred to as a SICAV (standing for Société d’Investissement à Capital Variable) – an investment vehicle that Meyer’s own party has long pledged to ban.

A SICAV is an open-ended collective investment scheme that is common throughout Western Europe, especially in Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France and the Czech Republic. In all of those countries SICAVs receive preferential tax treatment. In Spain, for example, investors must pool together a minimum of 2.4 million euros and pay only 1 percent tax on annual returns. Meanwhile, in banker-friendly Luxembourg – where the EU-sponsored SICAV just happens to be based – the funds are taxed at a measly 0.05 percent rate.

Meyer is not the only Spanish politician to have invested in the mini tax haven of the SICAV. According to the financial daily El Confidencial, a total of 39 Members of the Spanish Parliament, MEPs, and government ministers signed up to the SICAV. They include Spain’s current finance minister, Cristobal Montoro, the man who over the past two years has hiked direct and indirect taxes on both workers and small businesses to confiscatory levels.

Lax Legislation and Limp Enforcement

Thanks to lax legislation and limp enforcement, SICAVs have effectively become mini-tax havens allowing many of the country’s best-heeled individuals and families to avoid paying almost any tax on their investment earnings. One way they do that is by not cashing in their dividends or selling their shares in the funds, since that would accrue taxes of 19 percent and 21 percent respectively. Instead, what they do is execute regular draw-downs on their capital investment. By withdrawing just part – rather than all – of their initial investment, they pay just 1 percent tax on their earnings.

What’s more, by law each SICAV must have a minimum of 100 stockholders. Most funds avoid this rule, however, by naming a series of straw-man investors, commonly known as “mariachis,” so that each SICAV is effectively controlled by only one person or one family.

Six Bourbons and Hundreds of Mariachis

A perfect case in point is the SICAV owned by the sister of Spain’s recently abdicated King, Juan Carlos II. As Lo Que Somos reported in an initially censored article from 2012:

Pilar of Spain, Duchess of Badajoz, Grandee of Spain, Dowager Viscountess de la Torre (…) has five children (…). Those five are the only shareholders that appear registered on the SICAV. (…) The rest of the stockholders don’t even appear. In order for the SICAV to be legal, a minimum of 100 is necessary, and the Labiérnago 2000, as the fund is called, has plenty: 237, according to the National Securities Market Commission (CNMV), but it is not known who 231 of them are (…)

(…) At the end of the 2001 fiscal year, the SICAV assets had already surpassed 4.3 million euros (…) Labiérnago 2000 earned [in 2009] 392,970 euros, on which 930 euros were paid in taxes, according to the financial statements that feature in the records. No zero is missing. To put this in perspective, if an ordinary company earned this profit, it would have to pay some 100,000 euros in corporate taxes. If a person received that from working, more than half of the earnings, some 200,000 euros, would go to the Ministry of Economy and Finance. (Translation courtesy of Global Voices Online)

It’s not just royalty that’s in on the act. So too is the Catholic Church and prominent members of the business community, including Amancio Ortega, Europe’s richest man and owner of global fashion giant Inditex. Also at it are politicians, members of the nobility, bankers, TV and film personalities, footballers, singers, tennis players and bullfighters (this is Spain, after all).

Indeed, so serious and widespread are the abuses of the financial vehicles that in 2004 it prompted a full-scale investigation by Spain’s tax office. What it found was that of the 3,100 SICAVs in operation in Spain, 58 were plainly illegal. The vast majority of them (2,650) were, in the words of the tax inspectors, “highly dubious” since more than 90 percent of the shares were controlled by just one individual or family.

But before the tax office could take legal action and claw back some of the tax owed, Zapatero’s government of caviar-socialists stepped in, granting legal immunity to the owners of SICAVs and handing over exclusive regulatory authority to the Commisión Nacional de Mercados de Valores – a Spanish version of the Security and Exchange Commission (which should more or less tell you all you need to know about where this story’s heading).

Just to give an idea of how thorough the Commission’s regulatory oversight has been, one of the people responsible for overseeing the SICAV industry is the CNMV’s vice-president, Carlos Arernillas – a man who until recently spent much of his spare time running a 9-million euro SICAV of his own, of which he owns 99.25 percent of shares.

The Eternal Global Race to the Bottom

Indeed, rather than tackling the abuses of the SICAVs, the Commission seems far more inclined to kowtow even lower to the demands of industry representatives, who argue that even less – indeed, preferably zero – tax should be paid by SICAV investors while the rules demanding at least 100 participants should be scrapped altogether.

The logic is simple: if Spain doesn’t offer the best possible conditions for investors, they will simply up sticks and take their money elsewhere, including to pseudo tax havens such as Luxembourg. In other words, in order not to lose the financial patronage of Spain’s wealthiest individuals and families, the government and financial regulator need to replicate the favourable conditions and opacity offered by tax havens.

And it’s not just Spain that’s playing this game. SICAVs are everywhere in Western Europe. As Nicholas Shaxson reports in his book Treasure Islands, the world’s biggest tax haven has long been the sovereign City of London. Thanks to the creation of the Euro-Dollar market in the post-war years, it became the favourite place for foreigners to park their money, no matter who they were or where it came from [Click here to see two fascinating Democracy Now interviews on tax havens with Shaxson and John Le Carre].

The main beneficiaries of this global race to the bottom have not been the top 1 percent, but the top 0.1 percent of the population, who in the U.S. alone have seen their share of national wealth surge from 2.7 percent in 1974 to 13 percent today – and thanks in no small part to the luxury of tax-free living.

None of this has happened by accident. As Jacob Hacker and Paul Pierson document in Winner-Take-All Politics, it happened because law-makers and public officials allowed it to happen – not because international markets or globalisation made it inevitable. It was a choice, driven by the pressure of lobbyists and other organisations to create an environment much more hospitable to the needs of the very rich.

Fiscal Suicide

The problem today is that the very rich are now rich beyond their wildest imagination, while most of the rest of us struggle with declining real wages. At issue is not just the question of justice or fairness. Nor is it, as defenders of the current system claim, about envy. What’s at stake is fiscal sustainability.

The super-rich are not only the primary beneficiaries of offshore havens and vehicles such as SICAVs; they are also the primary – if not exclusive – beneficiaries of today’s deeply-flawed model of money creation, whereby new money is injected into the economy at strategic points, creating a few winners and countless losers along the way. Those with access to the new money (namely those already endowed with vast financial wealth and power) gain immeasurably while vast majority, far from the free-money spigot, continue to lose purchasing power and end up having to pay more in taxes to boot.

As this process escalates, all talk (whether from governments, economists, central bankers or the IMF) of the need to rebalance government fiscal accounts is cruelly disingenuous.

European governments can (and no doubt will) continue to privatise what remains of their national industry, infrastructure and natural resources; they can (and no doubt will) ramp up taxes on the incomes of what little remains of the middle classes; they can even – as the Spanish government has just decided to do – begin taxing bank deposits. But as long as the individuals and companies that possess the lion’s share of the financial and resource wealth can get away with contributing next to nothing to public coffers, the fiscal health of our governments is doomed to continue its terminal decline.

Also by Don Quijones: Quietly, the rules governing global trade and financial markets are being changed. Despite the enormous impact they have on our lives, the public is not consulted. Most people are not even aware it is happening. Read…. The Global Corporatocracy Is Nearing Completion