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James Henry: Canadian companies use Barbados as a tax haven to reduce their taxes from 24 percent to 2.5 percent, leaving Barbados with revenue shortage

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JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to the latest edition of The Henry Report.

We’re now joined by James Henry. He’s a leading economist, attorney, investigative journalist who’s written extensively about global issues. He served as the chief economist at the international consultancy firm McKinsey & Company. As an investigative journalist, his work has appeared in numerous publications, like Forbes, The Nation, and The New York Times.

Thanks you so much for joining us, James.


NOOR: So, James, you are in Barbados right now, and you’ve been looking into how Barbados became a tax haven for many Canadian corporations and banks, who’ve poured tens if not hundreds of billions of dollars into Barbados. This money’s being taxed at a very low rate. And you argue it’s having a very detrimental effect on Canada’s finances, Canada’s tax revenue, as well as Barbados. Tell us that story.

HENRY: Well, I came out here to show a film called We’re Not Broke, which is about the U.S. debt crisis and how our unwillingness to raise taxes on wealthy corporations and individuals has contributed to the U.S. debt crisis.

Oddly enough, just as I’m here, we’ve found that Barbados is suffering a serious debt crisis. The IMF is here. Their debt ratio has exploded. They just had a downgrade by Standard & Poor’s to below investment grade for their public bonds. And Credit Suisse has stepped in and said, you know, we will only finance the bailout of Barbados’s government if you agree to go through an IMF sort of cold water program, which means laying off 3,000 or 4,000 government workers at least–that’s about 10 percent of all the people who work for the public sector here–and raising VAT and excise taxes on the middle-class and poor. You know.

So this is a surprise to me. I found that, you know, our film is basically seeing–you know, we’re seeing a foreshadowing of what could happen to the U.S. if there is also unwillingness to raise taxes there as a solution to our debt crisis.

Barbados traditionally has been a very healthy economy. It has a great reputation in the economics literature, and also for having low corruption and high literacy and higher income levels than almost any other country in the Caribbean. Only 275,000 people live here, but they manage to attract more than half a million tourists here every year. And these people here are, you know, tourists who are really truly affluent.

They also have a huge banking executive banking sector, and dominated 75 percent by Canadian banks that own a huge share of the banking system. They’ve also tried to set up an offshore haven for foreign companies that want to set up a subsidiary and Park profits, invest, and park their profits offshore and then reduce the corporate tax rate they pay back home. And Canadian companies, there’s more than 1,000 of them who set up, basically, shell operations here with a very limited staff. Much of the money doesn’t end up in Barbados. It actually is just booked here. But that allows Canadian companies to reduce their tax rates from 23 or 24 percent to two and a half percent. Furthermore, they have very attractive rules for banks that Canadian banks have been able to use, and they’ve also taken advantage of that to lower taxes on very wealthy individuals, who set up personal banks, one-shareholder banks that basically are not taxed on income that they run through the Barbados entities. So this so-called international financial center became a very important part of Barbados’s economic strategy in addition to tourism.

You know, they used to be a big sugar supplier. And if you went back to, you know, 1700, they were actually the largest trading partner for the United Kingdom, bigger than the United States or Canada at that point. But that was based on a sugar industry that has gone away. To replace it, they turned not only to tourism, but also to, essentially, an offshore haven. So there’s about 3,000 people who are employed here as accountants and lawyers and hedge fund managers and bankers out of the total 120,000 people in the labor force in this very high-priced offshore haven.

The problem with that is that when the IMF came here in the late 2000s and recommended that Barbados, to cure its debt problem, its public debt problem, growing dramatically at that point, by raising taxes on this offshore industry from two and a half percent to three or three and a half percent, a modest increase, the bankers, and the Canadian banks in particular, and the offshore industry said, no way are we paying more. And so over time that sort of veto by the ruling elite here is really a major factor behind this current financial crisis.

So just last month, Barbados tried to raise $500 million of public debt in the U.S. market, and they had to withdraw the debt offer. And now they’re really looking at very serious IMF-type conditionality in order to get out of this situation. So, you know, the ordinary middle-class in Barbados is going to experience higher taxes in the form of excise and VAT taxes.

And meanwhile you have this very wealthy elite. I’m sitting in a hotel where the average room is $350 a night. Two doors down from this hotel is a room that–there’s a hotel the charges $4,000 a night up to $12,000 a night with a two-week minimum. You know, they have this just very split-level kind of society where the very wealthy people from all over the planet come to Barbados and enjoy the beaches and the beautiful natural environment, but you have regular Barbadians having to actually pay most of the cost of government through VAT taxes.

The ultimate piece of bad news for ordinary Bajans, as they call themselves, is that their Social Security fund has essentially invested about 80 percent of its assets in Barbadian public debt, which is now almost worthless. And so, you know, we’re looking at a major social catastrophe in paradise here, and, I think, an important thing for us to take a look at in the United States, not because Barbados is a major trading partner in the U.S., but because it is a foreshadowing of what can happen if we are going to be utterly unwilling to raise taxes on big companies and the wealthy in order to help tackle our debt crisis.

NOOR: And I think it’s worth noting the CBC just released this investigative report, and they noted that while this is legal under Canadian law, what’s happening is not really in the spirit of the law that was created that allowed this. And so the Canada Revenue Agency, they could, if they investigated what’s–the creation of these offshore tax havens, they could challenge it in court. Seems like so far they have chosen not to. Do you think this might change in the future as this becomes an increasing–it’s been noted how much this pattern has increased over the last decade.

HENRY: Well, Stephen Harper’s Conservative government in Canada has actually been remiss in terms of cleaning up the situation in Barbados and going after big tax invaders. You know. And he’s actually got–the head of the Canadian Mint was one of the leading international tax lawyers who was advising previous prime ministers on how to hide money in Barbados and avoid taxes.

So, you know, one of the problems with this distinction between legal and illegal behavior when it comes to tax dodging is that it’s a very fuzzy area, and the laws and the interpretations of the laws are very much influenced by the very people who are in power. And there’s a huge lobby on the part of major accounting firms, all of which are represented in Barbados, major law firms, major banks, all the big Canadian banks in the case of this haven, you know, that’s heavily involved in the political side of this. So this distinction between legal and illegal is, you know, something that is a dependent variable.

The key point is that if we’re going to have countries around the world like Barbados have successful long-term employment generating strategies, they’ve got to stop competing with each other for foreign investment. They’ve got to stop basing their strategy on offshore havens. There’s a kind of finance curse, as we saw in Cyprus last year, as we saw in the case of many other smaller havens. This is not a very good strategy. Ireland has gone down, the economy, as a result of betting on being a haven. Barbados is just the latest example of a country that’s bet on trying to be a haven and ended up worse off.

NOOR: James Henry, thank you so much for that report. And we’ll certainly keep following this story.

HENRY: Great. Pleasure.

NOOR: You can follow us on Twitter @therealnews, Tweet me questions and story ideas @jaisalnoor.

Thank you so much for joining us.


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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.