Denmark Aid : A smart measure to better direct resources
As I reviewed the daily news I saw this interesting report by Organized Crime and Corruption Reporting Project about a measure taken by the Danish government reported which announced that the US$ 58 Billion in coronavirus aid would not be eligible for companies that register in tax havens, pay out dividends, or buy their own shares.
The news was posted in social media which had one comment in particular that motivated me to write this post.
Tax havens generate value, there are very interesting studies on that, taxes destroy value.
I know that mindset, as once in my short stint in Investment Banking I learned that is how investors and businesses think and operate. And it was true, tax havens do generate value, the problem is that it also takes away value. Let's take a look at a real-world scenario.
For example, one of the biggest challenges to a new mining operation in a remote area is the lack of ancillary infrastructure. The more remote is the area (which tends to be the case), the less likely it is to be easily accessible by land, electricity, water, not to mention emergency services like ambulances or firetrucks.
This mining operation is probably involving serious investment, as well as probably tax benefits due to the investment in the event it is foreign, and furthermore additional benefits would also be in the form of access to public services and infrastructure. It also adds other different support in the forms of assistance and accessibility to institutions.
The reasoning behind this from the government is that they will give you tax benefits since you are investing a significant amount, which is expected to have a positive impact on the local economy generating jobs and secondary additional tax returns. Ultimately, this tax incentive is expected to become net positive as it will eventually return through other channels.
That form of tax incentive is very different from a tax haven, and the strategy is also very different. While in the inherent case of the mining operation, there is a physical product behind the investment, in financial services, money brings money. In other words, your money is generating more money by circulating your money into business through investment pools where your return is part of the returns that mining project generates.
Remember the secondary additional tax returns that is part of the of government strategy to motivate investment? That is what is broken through the tax havens, as the profits are "moved" (there are very complex mechanisms to accomplish this) into these tax havens. This is a secondary revenue stream that is meant to cover the access to public services and additional infrastructure as well as the return in investment from the government.
Denmark is looking at this in a time of crisis and is correctly pointing out that there is a loss of privilege when you use tax havens to not have to pay your share for the benefits for which you would now have access to.
As the economy crumbles and quarantine measures have taken place, with infections and deaths rising every day, a lot of people are starting to re-think about what is value.