Last February 19, in an unprecedented referendum on tax havens, held in parallel to the general elections, a 55% majority of Ecuadorian voters determined that no elected official or public servant will be able to hold assets or capital in tax havens.

President Rafael Correa proposed this consultation as an “Ethical Pact”, last July, following the Panama Papers scandal, which revealed financial assets of individuals and corporations from across the world – including some Ecuadorians — hidden in tax havens. This sovereign resolution by the Ecuadorian people will mean that, within a period of one year from the official proclamation of the results of the consultation, elected authorities and public servants who hold capital or assets of any kind in tax havens should return them to the country (or place them in other foreign locations).  Refusal to comply would be a motive for destitution. It was argued that, with the clause of a period of one year, the consultation would not affect the result of the elections that took place on February 19, since any candidate who is elected and who has assets or capital in tax havens, would have 12 months to fulfill the popular mandate. Meanwhile, over the same period, the National Assembly should reform the Organic Law of Public Service, the Code of Democracy and other relevant laws, in order to make them congruent with the pronouncement of the Ecuadorian people.

Tax evasion in figures

Studies estimate that close to 7.6 trillion dollars are deposited in tax havens around the world, which in many cases implies an evasion of taxes and puts a brake on development, particularly in countries of the global South, since it subtracts funds from economic progress [1]. Latin America is one of the regions most affected by this problem, since it means the loss of over 50% of income tax revenue. The richest 10% of the Latin American population accumulated 7 of every 10 dollars of regional wealth, and tax evasion amounted to 340 billion dollars. Latin America continues to be the most unequal region in the world, despite the great progress made in recent years.

A report published in January 2017 by Oxfam indicates that 32 million Latin Americans could escape poverty if taxes were paid on a portion of the money from the region that is stashed in these financial havens.  Thus, both in Latin America and the world, the tax havens have become one of the factors that increase inequality, because people from the middle and lower classes pay taxes and finance their countries’ budgets, while the elites do not.

In Ecuador alone, according to the Inland Revenue Service (SRI), 94 consortiums of the 200 largest Ecuadorian economic groups have ties to tax havens. According to data published by the Ministry of Foreign Relations and Human Mobility, over 30 billion dollars have fled this South American country, equivalent to almost a third of the Ecuadorian GDP. Since 2014 alone, 4 billion dollars have left the country to tax havens, evading taxes that could have paid, for example, for the costs of reconstruction of the zones affected by the 2016 earthquake.

Ecuador takes the issue to the United Nations

Ecuador has called for this issue to be considered at the level of the United Nations Organization (UNO), where it is pushing for the creation of an intergovernmental organization in favour of Global Tax Justice that could put an end to the tax havens. This tax body would work on the complicated international network of thousands of tax treaties and parallel international systems, which create holes in the legislation and promotes competition between countries and jurisdictions to reduce their tax rates, that negatively affect the economies of the region. Eliminating this complexity and the inconsistencies would allow for the establishment of clear democratic rules and thus open the way for a more just and egalitarian tax system.

In September 2016, Foreign Minister Guillaume Long presented this proposal in the UN General Assembly. In January of this year, Rafael Correa, in his acceptance speech of the Presidency of the influential G77 Group (that today groups 134 countries), announced that this issue would be a priority during Ecuador’s term at the head of this group. “We shall insist that tax havens be prohibited in order to avoid corruption, money laundering and tax evasion”, he declared. The proposal was well received by the Group that for some time has been posing the problem. However, Correa terminates his period as president of Ecuador next May 24, which means that the continuation of this policy in the G77 will depend on the new government. The right-wing candidate, banker Guillermo Lasso, who holds a large part of his fortune in tax havens, was roundly opposed to the referendum, which he felt was directed against him.  The second round of the presidential elections will take place on April 2.

The roots of the problem are in the developed countries

A number of social organizations from around the world manifested their commitment to work with the Ecuadorian government for tax justice and the eradication of the tax havens, during the international seminar. “Towards an international tax agenda based on human rights: For the end of tax havens and for an intergovernmental UN tax body”, that took place in the Ecuadorian capital, Quito, on February 13 and 14.

Organized by the Latin American Network on Debt, Development and Rights (Latindadd); the LAC Tax Justice Network, the Financial Transparency Coalition and the Global Alliance for Tax Justice, together with the foreign ministry of Ecuador, in the Final Declaration, they describe as positive the international actions of the Ecuadorian State to promote a binding agreement that sanctions transnational enterprises that violate human rights, as well as the creation of an intergovernmental body in the United Nations to deal with tax affairs.

During this seminar, the Argentinian parliamentarian and former Minister of Economics, Axel Kicillof, insisted that the struggle against tax havens is not a question of opposing small island states, but rather of being able to operate from the “appendices of the international financial system that function in the central countries and employ the tax havens as a mechanism to do the dirty work that the speculation system needs in general”.

Andrés Arauz, Coordinating Minister of Knowledge and Human Talent of Ecuador, highlighted the theme of tax platforms that are used as a point of operation by banking institutions to launder money and then reinsert it into the big economies of the central countries of the global North. “The Caiman Islands are not really a tax haven such as Switzerland, but are employed as a place of transit through which capital is laundered. 99% of the banks in the Caiman Islands are US, Swiss and German banks that maintain operations in these islands”.

He insisted that in the case of Latin America, 40% of the liquidity of the region is deposited in Panamanian banks and the rest is in banks that have a subsidiary in Panama.

In the case of Ecuador, nearly 6 billion dollars are deposited outside the country in tax havens, of which 3.2 billion are in the United States and 2.467 billion in Panama, the rest is in banks of Germany, Hong Kong, etc. Arauz showed that – in macro monetary terms – with the Ecuadorian funds now held in these countries, over 85% of the problem of capital flight could be resolved.

(Translated for ALAI by Jordan Bishop)

[1] The figures in this article are based on information published by the Ministry of Foreign Relations and Human Mobility of Ecuador and the Latin American Network on Debt, Development and Rights (Latindadd).

(An earlier version of this article was published by ALAI in Spanish on 21/02/2017).