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Moving Wealth Offshore

Offshore tax avoidance or evasion is nearly the exclusive preserve of the global elite. Eighty percent of all offshore wealth belongs to the top 0.1% of earners worldwide, while 50% belongs to the even smaller group of the top 0.01%. We wonder: Which set of countries has more than half of its GDP in offshore tax havens?

A. Russia, China and India
B. United States and Mexico
C. Spain, Italy, France, Germany and the UK
D. United Arab Emirates, Venezuela and Saudi Arabia

A. Russia, China and India … is not correct.

Countries that fail to crack down on offshore tax evasion by the wealthy often struggle to fund their nation’s budgets.

Russia has a global reputation for its billionaire oligarch expats, but it has not yet reached the 50% mark for the share of wealth shifted offshore, according to a 2017 National Bureau of Economic Research (NBER) working paper, based on data as of 2007.

When Russian-owned overseas real estate is factored in, the share of wealth kept abroad amounts to an astounding 47% of Russia’s GDP – just shy of half and significantly greater than the 13% from financial assets alone.

For China, where a growing class of the very rich also holds real estate offshore, there is no comparable data analysis available yet. Moreover, the special status of Hong Kong and Macau partially mask the equivalent of offshore holdings as being held “within” China.

As of a decade ago, China’s financial assets held in traditional offshore tax shelters indicated that just 2% of China’s GDP had been shifted overseas to evade tax. But, as with Russia, a more comprehensive accounting will likely discover a higher share.

India also ranks low, with just 3% of its GDP in offshore financial tax havens. Fellow “BRICS” countries Brazil and South Africa also have smaller offshore wealth shares than Russia – at 6% and 12% of GDP, respectively.

B. United States and Mexico … is not correct.

Financial wealth being held in offshore tax shelters represents about 7% of GDP in the case of both Mexico and the United States.

One big distinction with offshore U.S. wealth compared to most other major economies, the United States offers its wealthiest a large number of options for what can best be called legalized tax avoidance. These monies are nearly all reported to the government, unlike countries where the offshore wealth is more concealed to evade the government authorities.

Simply put, wealthy Americans devote more resources than their peers in other major economies toward politicians, attorneys and legal defense to keep offshore wealth in a gray area. Moreover, U.S. regulations that do exist tend to be lightly enforced due to under-resourcing by the government.

Switzerland pioneered offshore wealth shelters in the 1920s. In recent years, however, Asia-based tax shelters – such as Hong Kong, Singapore or Malaysia – have overtaken Swiss firms for the largest share of sheltered offshore financial assets.

While globally a quarter of sheltered wealth remains in Switzerland, one-third is now placed in Asian institutions. A further 23% is in non-Swiss institutions in Europe – such as Jersey or Cyprus – and 17% is in tax havens in the Americas – such as the Cayman Islands, Panama or the United States itself.

C. Spain, Italy, France, Germany and the UK … is not correct.

Rich people living in the five largest economies of the European Union have shifted between one-tenth and one-sixth of their GDPs into offshore financial tax havens, according to the 2017 NBER working paper. They are Spain (11%), Italy (12%), France (15%), Germany and the United Kingdom (16% each).

The continental European average is around 15%. This relatively high percentage is best explained by geographic proximity to Swiss institutions, which used to be the only global providers of offshore wealth management until the mid-1980s.

Scandinavian countries, however, have shifted only a few percentage points of their GDPs into offshore havens, despite the high tax levels prevailing there.

D. United Arab Emirates, Venezuela and Saudi Arabia … is correct.

The three mid-to-large-sized economies that have shifted more than half of their GDPs into offshore financial asset shelters are the United Arab Emirates (73%), Venezuela (64%) and Saudi Arabia (56%).

The average GDP share moved offshore from a broader set of smaller economies in the Middle East and much of Latin America is 60%.

At the opposite end of the scale, South Korea and Poland are among the mid-sized economies with the lowest levels of offshore financial wealth, at just 1-1.5% of GDP – lower than any major economy.

The global average of offshore financial wealth is 9.8% of global GDP.

Editor’s note: The globe-spanning set of data was compiled by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman and published in a NBER working paper. The researchers analyzed not only traditional audits and tax amnesties, but also tax shelter leaks such as the 2016 “Panama Papers” on shell companies.

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