Dubai: a Panama in the Gulf

"I was annoyed to see, once again, the UAE being included in the lists of global 'tax havens' trotted out after the Panama data was leaked," Frank Kane writes in a column for the Emirati newspaper, The National. He continues: "To group the Emirates together with the British Virgin Islands, or Jersey, or the Marshall Islands, as a secretive place where wrong-doers can hide their ill-gotten gains is to fundamentally misunderstand the nature of the financial system here."

The UAE, Kane insists, is not a tax haven but "a no-tax regime where rulers and policymakers have made the quite legitimate choice to allow citizens and residents to retain all their income".

Presumably he is not complaining about "misunderstanding" by his own newspaper which has previously described the UAE as "a safe haven" for wealthy investors from "emerging markets such as Russia and China", and reported on Swiss banks trying to develop new business in the UAE "as their business in the western world becomes crimped by authorities chasing tax dodgers".

See also: The Offshore Arabs 
A guide to prominent figures named
in the Panama Papers 

Instead, his complaint seems to be directed at reports like this one on the BBC website and this in Newsweek which pointed out that in the world of dodgy finance Panama is by no means the worst offender. The Financial Secrecy Index compiled by the Tax Justice Network (TJN) doesn't list Panama among the top 10 havens, but it does include three Arab countries: Lebanon in seventh place, Bahrain in ninth place, and Dubai, in the UAE, in tenth place. TJN's accompanying report says:

Dubai is unquestionably one of the world’s best known tax havens or secrecy jurisdictions built on an increasingly complex array of offshore facilities: free trade zones; a low-tax environment; multiple secrecy facilities and lax enforcement. 

In addition, Dubai has a strong culture of an ask-no-questions, see-no-evil approach to commercial or financial regulation or foreign financial crimes. It has consequently attracted large financial flows and some of the world’s most high profile criminals. A significant slice of the inbound money comes in the form of cash or gold.

In the 1960s Dubai became an important centre for gold smuggling and later for money laundering and terrrorism financing. A report last year by the US State Department's narcotics and law enforcement bureau said:

A portion of the money laundering/terrorist financing activity in the UAE is likely related to proceeds from illegal narcotics produced in Southwest Asia. 

Narcotics traffickers from Afghanistan, where most of the world’s opium is produced, are increasingly reported to be attracted to the UAE’s financial and trade centers. Financial networks operating both in and outside the UAE almost certainly control the funds ...

Other money laundering vulnerabilities in the UAE include the real estate sector, the misuse of the international gold and diamond trade, and the use of cash couriers to transfer illicit funds.

In the financial sector, the Tax Justice Network says, Dubai provides several of the "classic" tax haven offerings:

  • Zero tax on corporate income and profits, guaranteed for 50 years.

  • A wide network of double tax treaties, available to UAE incorporated entities (which makes Dubai a "conduit" haven, according to TJN).

  • 100 percent foreign ownership of Dubai-registered corporations is possible; there are no exchange controls; free capital convertibility; and a variety of legal vehicles can be established with "capital structuring flexibility".

TJN's report also highlights a couple of interesting scams. One is the use of fake residency to frustrate information-sharing by other national tax authorities. You can officially acquire residency in Dubai simply by registering a company there. In this way, by pretending to live in the Emirates you can then have all the "shared" information about your tax affairs and assets from other jurisdictions sent to Dubai where – TJN says – the authorities can "be trusted to fail to do anything about it". 

TJN adds that its private conversations with client advisers "have indicated that Dubai has been particularly diligent in reassuring people that their undocumented accounts won’t be investigated".

Another popular scam known as "round-tripping" makes Dubai complicit in defrauding other countries – especially India – of tax revenue. TJN explains:

This happens when locals (in India, say) export capital to Dubai, dress it up in financial secrecy, then return the capital home to India disguised as foreign investment, which attracts corporate tax breaks and various other favourable treatments available only to foreigners. It is substantially for this reason that Indian official data put two-way trade with the UAE at $75 billion in 2012-2013 – compared to just $68 billion and $60 billion with China and the US respectively.

Posted by Brian Whitaker
Wednesday, 20 April 2016