We Need to Talk About Tax Havens

With issues around tax hitting the headlines in a big way once again, SBT takes a closer look at the latest aspect of this hugely complicated subject to come under the spotlight: tax havens

In the wake of the huge data leak from Panama-based law firm Mossack Fonseca, there have, inevitably, been renewed calls for the government to crack down on tax avoidance. In particular, the government has come under pressure to force British tax havens such as the British Virgin Islands – where Mossack Fonseca registered more than 100,000 companies – to show greater transparency.

So what exactly are tax havens? Quite simply a  tax haven is a country or territory that has a very low rate (or even zero rate) of income tax. A broader requirement is that they also offer a veil of secrecy not available in the home country.

In the case of the British Virgin Islands, which is a British overseas territory – a self-governing territory that relies on the UK for defence and international relations – the authorities in the British Virgin Islands have set the corporate tax rate at 0%, meaning companies are exempt from tax on all sources of income, including capital gains, dividends, royalties and interest. Additionally, the personal income tax top rate is also 0%. A British overseas territory’s autonomy can be removed however; the UK government can impose direct rule if it deems it necessary – as was the case with the Turks and Caicos Islands in 2009.

Of course there are legitimate reasons for using tax havens. The issues raised by the Mossack Fonseca leak is that the majority of what has been going on has been done in an attempt to hide the identity of the true owners of the money, the origin of the money and ultimately, to avoid paying tax on the money. While tax havens themselves are not illegal, and bending the tax rules to minimise the tax one pays is, more often than not, a moral rather than legal matter, tax evasion (deliberately concealing facts or lying about them) most certainly is illegal. It is estimated that tax avoidance and evasion could be costing the UK tax authorities up to £7.2 billion a year. Not an insignificant sum.

With HMRC usually under the spotlight in these situations, Jennie Granger, Director General of enforcement and compliance at HM Revenue and Customs, said: “HMRC is committed to exposing and acting on financial wrongdoing and we relentlessly pursue tax evaders to ensure that they pay every penny of taxes and fines they owe.”

She continued: “We have brought in more than £2 billion from offshore tax evaders since 2010 and the government has repeatedly strengthened our powers and resources with new criminal offences and higher penalties, so we can take even tougher action against the minority who try to cheat the honest majority by hiding their money in offshore tax havens. Our message is clear: there are no safe havens for tax evaders and no one should be in any doubt that the days of hiding money offshore are gone.”

That’s all well and good, and very reassuring but if, as it appears with the Mossack Fonseca case, the majority of what has been done comes under legal avoidance rather than illegal evasion, what is the problem? After all, isn’t it entirely natural for people and businesses to try to pay as little tax as possible, and if tax havens can legally facilitate this, then so be it – right?

Firstly, the sheer scale on which tax havens are being utilised to facilitate tax avoidance is eye watering and raises plenty of moral questions.

Also, from the point of view of small businesses, the tax-avoiding activities facilitated by tax havens – which allow multinationals to so utterly outcompete their smaller and more local competitors – is of grave concern. Of course tax havens aren’t the only reason small businesses are struggling but there’s no denying that they are contributing to the struggle in a big way. In an article written for The Independent, investigative journalist, Nicholas Shaxson made the point: “Tax havens are tilting the playing field for business: people across the political spectrum should oppose this. To be anti-tax haven is, in a very profound sense, to be pro-business.”

Furthermore, if the current UK government truly is as much of a champion of small business as they suggest, then shouldn’t they be doing everything within their power to break down this barrier to competition that pitches the field so far out of favour? Equally, as Mr Cameron has recently discovered, following the rules themselves is essential in convincing the public of their moral standing and legislative aims.

So what is the UK government doing, or not doing, about tax havens? It was reported last December that, in an attempt to increase transparency, the government had struck a deal  with its overseas territories to share information on the ‘beneficial owners’ of companies registered in their jurisdiction, either in centralised registries or ‘similarly effective systems’. However, the government’s original request for publicly accessible registers of these companies was rejected. And demands for the UK and other domestic law enforcement and tax authorities to be given unrestricted access to this information were also denied. Why not exert more pressure? At that time the junior foreign office minister, James Duddridge argued that applying any more pressure on the UK’s Overseas Territories would be counter-productive: “We don’t want to move corrupt money and corrupt practices, we don’t want to move tax evasion and avoidance, we want to eliminate it and we want to do that everywhere.”

It is this apparently ‘soft’ approach that has left many unconvinced by the government’s efforts. The campaign group, Global Witness viewed the development as a small step towards greater transparency but suggested that the UK would lack credibility at an anti-corruption summit to be hosted by David Cameron this May unless it acted more strongly. Campaign leader, Robert Palmer suggested: “Unless the government uses the upcoming summit to force the UK’s tax havens to end anonymous company ownership, our other efforts won’t be effective. We have to clean up our own back yard first.”

Commenting on the Mossack Fonseca leaks Richard Pyle – head of UK Policy at Oxfam – agreed, saying: “The UK is in a unique position to help clean up the murky world of tax havens – starting by ensuring that the real beneficiaries of shell companies registered in the UK’s Crown Dependencies and Overseas Territories, such as the British Virgin Islands, are revealed ahead of May’s Anti-Corruption Summit.”

So it appears that now would be the perfect time for the government to act upon reforming the international systems to increase transparency once and for all. Daniel Hough, Professor of Politics at Sussex University (who also heads the Sussex Centre for the Study or Corruption) has suggested: “Given both the size of the UK’s financial services sector and the fact that many of the tax havens that the likes of Mossack Fonseca use fall under UK jurisdiction, the UK government has an opportunity to push others in to a corner and make a difference.”

He continued: “David Cameron has the choice between watching and worrying from the sidelines, or seeing the Mossack Fonseca case for what it really is – a wake-up call to try to finally do something about the long-outdated rules and regulations that shape international financial transactions.”