We can end the scandal of tax havens – here’s how

The overriding imperative is to end the secrecy. Everything flows from that

Ben Chu
Economics Editor
Monday 06 November 2017 17:51
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Is there an end in sight when it comes to tax evasion?
Is there an end in sight when it comes to tax evasion?

International taxation is a complex subject. And a degree of this complexity is unavoidable. Some individuals work in one country but receive an income from financial assets held in another. Likewise, some multinational companies generate revenues in some states based on investments made or ideas developed elsewhere. The question of where such incomes should be taxed is not technically straightforward, nor morally black and white.

Yet complexity is only justified up to a point. Most of the complexity that attaches to international tax is not inevitable but deliberately manufactured by law firms, accountants, asset managers and banks to create a convenient smokescreen for their clients.

Investigators find themselves wading through a proliferation of shell companies, trusts, cross-border loans and nominees, all designed to confuse the tax authorities and the general public about the extent of the wealth of their clients, the source of the money and the reality of what they are doing with it. Some of this complexity is to conceal the proceeds of outright criminality – money from drugs, arms sales, embezzlement and bribery.

The underlying problem with the international taxation system is not complex. Multinational companies are exploiting the difference in corporate tax rates between countries to minimise their corporation tax bills. And wealthy individuals are exploiting the secrecy offered by tax havens to shield themselves from income and capital taxes in the countries in which they live. Criminals are also exploiting this gap in global governance to conceal their ill-gotten fortunes.

So what can be done about it? The overriding imperative is to end the secrecy. Everything flows from that. The estimable Tax Justice Network proposes three essential planks of policy. The first plank is to mandate the automatic exchange of tax information between all national jurisdictions. If a British resident has a bank account in Belize, HM Revenue & Customs should be told about it by the Belize authorities (and vice versa, of course). Without this reciprocal information exchange national authorities simply cannot know whether their residents are paying the correct amount of tax.

The second plank is to mandate complete transparency of beneficial ownership of all offshore companies, trusts and foundations. There are legitimate reasons for the existence of tax-exempt charitable trusts. But the opportunities these structures create for tax evasion are colossal. The way to address this problem is to create a publicly accessible register of ultimate beneficiaries. We would thus be able to see who stands to gain.

The third plank from the TJN’s programme is to require country-by-country reporting of revenues by multinational companies. This kind of knowledge is a precondition for an equitable international division of corporate profit taxes by governments.

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These reforms in themselves would not guarantee the end of evasion via tax havens. There would still be the laundering of dirty money. Crooked banks would lie about their clients. There would still be squabbles about corporation tax shares. But by tearing down the general veil of opacity they would make the exploitation and tax-dodging much harder. It would turn the tax tables in favour of national tax authorities.

So are we getting there? The OECD club of mainly rich countries has established a new framework of automatic information exchange in recent years. Yet it is hamstrung by the refusal of a key member, the United States, to cooperate and routinely divulge information of foreigners with assets in America.

The European Union has made some steps towards establishing registers of company owners. But only those individuals with a stake of 25 per cent and above are due to be disclosed – an unreasonably high bar. Worse, non-EU tax havens are not covered and, again, the US is not cooperating. On country-by-country reporting, the OECD, again, has made some progress. But, ludicrously, the information is not being made public.

Why is progress towards transparency so slow, so halting, despite the clear public anger over evasion? The answer is that vested interests stand in the way. When proposals to curb corporate secrecy in the US have come before Congress, they have been thrown out, mainly due to lobbying from states such as Delaware, Nevada and Wyoming, which profit from hosting a multitude of anonymous shell companies.

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European Union member state governments are reported to have been dragging their feet lately on company and trust ownership disclosure legislation. Given the secret role played by the European Commission President Jean-Claude Juncker in blocking EU efforts to clamp down on multinational avoidance when he was Prime Minister of Luxembourg (a state notorious for encouraging profit-shifting), that should concern us.

And here in Britain? The former Prime Minister, David Cameron, declared Britain “an absolute leader” in clamping down on tax-avoidance. Yet in 2013 he personally lobbied the EU to exempt trusts from new beneficiary disclosure requirements. This may have had something to do with the fact that, as we now know, Cameron personally benefited from a Panama-based offshore trust established by his father.

The blockage when it comes to dealing effectively with tax havens is not technical. Progress doesn’t stall because of unavoidable complexities. An end to this scandal is achievable. The obstructions are political and personal.

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