Secrecy jurisdictions » Tax Research UK

The need to tackle the substance of tax havens

Cayman, India, Secrecy jurisdictions, Tax avoidance, Tax Havens 32 Responses »

Jan 212012

Vodafone won its tax appeal in India yesterday, saving it a substantial tax bill that India had been claiming was due on its takeover of the Hutchinson mobile phone network in that country. The Economic Times of India has as good a comment on the implications of the case as could be made:

The Supreme Court has ruled that Indian tax authorities have no jurisdiction over Vodafone’s purchase of Hutchison’s interest in its mobile telephony joint venture in India with Essar, as the deal was executed through sale of a holding company registered in the Cayman Islands.

The ruling is a setback not only for India’s fight against tax havens but also for taxation in general. For, the court’s privileging of form over substance, maintaining the corporate veil, could lead to elaborate and extensive tax planning that results in enormous leakage of revenue.

The implication is clear. The judges are interpreting the law as it stands. India needs to rewrite its tax laws, to enable it to deal with commercial practice in a globalising world.

If every ABC Ltd operating in India is henceforth not to be owned through a holding company registered in some tax haven or the other, so as to permit acquisition by XYZ Ltd through its holding company registered in another tax haven without paying any capital gains tax, the language of tax law will have to make it clear that what counts is whether value accrues to the company changing ownership because of its economic activity in India.

Precisely so.

This was a transaction relating to Indian assets that India wanted to tax, and thought it could tax. But it was recorded ‘elsewhere’ in a tax haven structure. And the result is that the legal form of recording it ‘elsewhere’ has meant that Inida’s laws have been subverted and tax is not due. That’s the tax haven issue in a nutshell.

Now it is time for the OECD, UN and others to agree how such abuse can be tackled so that transactions are not taxed where there form is but where their substance is. Because the cost to society otherwise will be enormous, as it is in this case where a developing country has lost out on resources it badly needs.

What Labour has said on tax havens

Guernsey, Isle of Man, Jersey, Labour, Secrecy jurisdictions, Tax Havens 2 Responses »

Jan 162012

The following is a blog post by Shadow Labour minister Owen Smith MP on tax havens, published yesterday. I reproduce it as it seems to be the Labour line on the announcements made this weekend:

These are tough times for families and businesses. Bills are going up, jobs are being lost, incomes are being squeezed.

And as Ed Miliband and Ed Balls have made clear, if Labour was in government now we’d be making different choices.

We wouldn’t be cutting spending and raising taxes as far and as fast as David Cameron and George Osborne. Their reckless plan has choked off the recovery and put more people out of work, which means £158billion more borrowing than planned.

And the reality is that this Tory-led government’s failure on the economy means tough times are set to continue.

But when unfair choices are being imposed on people – like cuts to tax credits, or changes to child benefit – everything needs to be done to ensure those that owe tax pay their fair share.

I have been urging ministers to get a grip of the rumbling controversy about supposed sweetheart deals cut by HMRC with some of the world’s biggest businesses and we will continue to raise questions about that.

And today, Ed Miliband has highlighted another vital issue where rising public anger shows more than ever the need for real action now. Continue reading »

Ed Miliband’s giving an ultimatum to tax havens

Guernsey, Isle of Man, Jersey, Secrecy jurisdictions, Tax avoidance, Tax evasion 47 Responses »

Jan 152012

Ed Miliband is giving an ultimatum to British tax havens. According to the Independent:

Ed Miliband declares war today on the UK’s secretive offshore tax havens which he says could raise £2.4bn for the Exchequer and help to reduce the deficit.

As Ed Balls, the Shadow Chancellor, signals a major shift in economic strategy by admitting that a Labour government would be unable to reverse all of the coalition’s cuts, Mr Miliband will expand on his theme of “fairness in tough times” by making those at the top of society contribute more.

In the Labour leader’s sights are the Channel Islands and the Isle of Man, which shelter UK residents’ cash which would otherwise have to be taxed by HM Revenue and Customs.

European Union loopholes allow UK residents to disguise money offshore held in front companies and trusts. The tax havens are not obliged to let HMRC know which British taxpayer the vehicle relates to.

The EU is attempting to close these loopholes, but Mr Miliband will say that this time-consuming process, which could take years, is allowing billions of pounds to go uncollected.

A Labour source said: “In these tough times, when unfair choices are being imposed on people – like cuts to tax credits, or changes to child benefit – everything needs to be done to ensure those that owe tax pay their fair share.”

Mr Miliband will call on the Government to act as a matter of priority through diplomacy at EU level. The plans are an expansion of his theme, set out in his speech last week, for the deficit to be reduced through fairness – particularly tackling the richest in society, while defending the “squeezed middle” on low to middle incomes.

Tax experts estimate that as much as £2.4bn could be raised by calling time on UK tax havens. Richard Murphy, director of Tax Research UK, said: “Breaking tax haven secrecy is essential to collecting the tax that’s the alternative to cuts.”

The policy, which would be included in Labour’s 2015 manifesto, is designed to show Mr Miliband is acting on reducing the UK’s deficit amid ongoing questions about his leadership and the party’s economic credibility.”

And according to the Observer:

Ed Miliband, the Labour leader, is to demand that the government forcesJersey, Guernsey and the Isle of Man to reveal the identity of British tax evaders with money hidden on the islands.

The tax havens, which are crown dependencies, are costing the government billions every year as the rich protect their money from Revenue and Customs probes through front companies and trusts.

Miliband will this week call for negotiations to begin with the governments on the three islands. He will also demand ministers follow up the talks with threats to shame the islands on the international stage by placing them on a globally recognised blacklist drawn up the Organisation for Economic Co-operation and Development (OECD)..

The move is part of the Labour leader’s attempt to define himself as the foremost campaigner in British politics against the excesses of capitalism. He will claim that every £1m raised by his policy on tax havens is equivalent to a year’s salary for 50 newly qualified teachers.

UK residents with money abroad are required to pay tax in Britain on the income they receive, but many do not declare that they have money stashed away.

Jersey, Guernsey and the Isle of Man have not been co-operating with UK authorities’ requests for the identity of people with money on the islands. Richard Murphy, of Tax Research UK, said the country could recoup £2.4bn.

I have already provided links to my workings this morning. They are likely to be an underestimate as they ignore tax to be recovered on capital hidden offshore.

I do, of course, welcome this move by Labour. My hope is it’s the start of a whole campaign on the tax gap. That though is for time to tell. For now it makes very clear that the claim by the Crown Dependencies that they are transparent and all is now well with them is but a hollow sham: that is far from the truth. Now it is time for them to offer real reform if they are serious in their claim that they do not want tax evaders to use them, something that is all too easy at present.

Ed Miliband says it’s time to come clean to the UK’s tax havens

Cayman, Guernsey, Information exchange, Isle of Man, Jersey, Secrecy jurisdictions, Tax avoidance, Tax Havens 11 Responses »

Jan 152012

Ed Miliband’s announced a new initiative today that is sure to resonate around the offshore world.

As I understand it he, in essence, has said three things. The first is that the UK should push as hard as possible for the European Union Savings Tax Directive (ESTD) upgrade planned for 2013 to be implemented as soon as possible. Second, in the process he suggested George Osborne had put back the whole process by negotiating the Swiss tax deal over which the EU is now threatening to pursue the UK because it does not comply with the requirements of the existing ESTD, let alone the revised one. And third he said that if for any reason the EU can’t deliver the ESTD on time because Austria and Luxembourg continue to try to block it then the UK should go ahead and demand that its Crown Dependencies and Overseas Territories enter into deals equivalent to those required under the ESTD with any reasonable country that wants one.

Now this is radical stuff. The ESTD is about tax evasion, that’s all. It has no other purpose. So this initiative extends the whole debate about corporate responsibility from the issue of company tax into the whole arena of the tax evasion that some companies – and notably banks – facilitate through their offshore operations, whether knowingly or not.

Second, whilst the ESTD has been in operation since 2005 it has been widely acknowledged – even by the EU itself since 2008 - that there are gaping loopholes in it. The Tax Justice Network view of this is here. The key points are simply though. First, the existing directive only applies to cash deposits – and based on my research of offshore portfolios that’s rarely more than 20% of offshore asset holdings – meaning 80% or more of all income escapes the arrangement and so remains untaxed in most cases in the country where it should be declared for tax purposes whilst, second, the ESTD only applies to income held in an individuals name so that cash and other assets held in companies, trusts and other arrangements also avoids or evades tax as well. Put the two facts together and I estimate well over 90% of all income that should be known about in tax havens like the Channel Islands is not advised to HMRC.

Those are loopholes too big to tolerate at a time when tax revenue is the scarcest commodity in the UK economy.

The big question then is, can Miliband do this? My thinking is yes, he could. First, this is about the international relations of the Crown Dependencies and overseas territories, and we are responsible for them, and as such can legislate them if we wish to do so, and opinion that the House of Commons Justice Committee came to in 2010 when reviewing this issue, basing their opinion on the Kilbrandon report. Second, knowing this the Crown Dependencies have actually done all we have ever asked them to do on such issues. That is exactly why they have adopted the European Union Savings Tax Directive and the EU Code of Conduct on Business Taxation despite their reluctance to do so. In practice they knew they had no choice but do so. Third, if they really want to be awkward we could simply remove the exemption from tax being withheld on payments of interest, royalties, dividends and other sums to these places that are in operation at present and they cease to be tax havens overnight and lose their entire financial services industry at a stroke. Given they publicly say they don’t want tax evaders to use them there is no way on earth they’d risk that, but we could impose it, and they know it.

So Miliband, if he were prime minister, would hold all the cards in his hands, and the Crown Dependencies would have the 2,3 and 4 of spades when hearts are trumps. In other words, this threat isn’t hollow; this threat is for real.

And what would we win by doing it? Well, I suggest it could be £2.4 billion a year. That’s best on my 2009 estimates, here and taking just the part relating to the Crown Dependencies into account.

That’s why I applaud this move: it’s a straightforward attempt to tackle tax evasion. That’s exactly what government should be doing now. And it’s a low cost attempt to do so as well. It works by shattering secrecy. After that’s done the pressure on those with these accounts to disclose will be very high indeed – and so the measure is virtually self-policing.

Of course the Crown Dependencies will protest – but if they do so then they’ll be coming out on the side of tax evaders. Is that what they really want to do?

And if their reply is those tax evaders will just move their funds? Then, I suggest, we have to look at regulating the banks involved a lot more aggressively because in that case they will be willingly assisting tax evasion. That’s the next step. But for now let’s note that a politician has taken a courageous line on this issue.

KPMG in the Isle of Man admits the island may be used for egregious tax avoidance

Isle of Man, Secrecy jurisdictions, Tax avoidance, Tax Havens 8 Responses »

Jan 142012

The Isle of Man Today website noted last week:

MOVES by the UK Treasury to introduce a general anti-avoidance tax rule could impact negatively on the Isle of Man.

KPMG island director Greg Jones said it was by no means a foregone conclusion that we would get a general tax anti-avoidance rule (GAAR) in the near future.

But he added: ‘If we did, however, there’s no doubt that it would impact negatively on places like the Isle of Man.

‘Even if the GAAR were targeted as narrowly as the working party report recommends, in my view it would strike out a number of (what has to be admitted are) fairly contrived tax planning arrangements I am aware are promoted from the island.

‘There may be some work for tax practitioners in advising whether a particular planning idea falls within the GAAR’s scope, but on the whole I think we’d lose a certain amount of the business currently being undertaken by some niche service providers.’

As he also explained:

Last year a working party under Graham Aaronson QC was established to look at the scope for introducing such a rule and what form it should take. The working party was comprised mostly of judges and tax academics.

The report produced by the group last November concluded that a GAAR would be a good idea but it should be targeted at situations in which people undertake what are obviously highly artificial arrangements with no real purpose other than to avoid tax – and not at situations in which a taxpayer simply exercises a choice to do something in a more tax-efficient manner.

Good to see that KPMG admit that the Isle of Man is used for such schemes. And remember the GAAR as drafted only tackles the most egregious – or abusive - of schemes.

And they should be worried. The GAAR includes as one of its trigger events:

(g) that the arrangement includes the location of an asset or a transaction, or of the place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result

That might be targeted straight at tax havens.

Disclosure: I represented the TUC in discussions with Graham Aaranson on the GAAR’s drafting including detailed discussions of its scope.

The tax profession, tax havens and fraud: an ongoing saga

Accounting, Corruption, Secrecy jurisdictions, Tax Havens 7 Responses »

Jan 132012

As the Telegraph reports:

The Treasury has closed a tax avoidance scheme that could have cost £1.5bn after a tip off that artificial trading companies were being set up in tax havens.

Wealthy individuals were planning to use a long-standing “post-cessation trade relief” – designed for tradesman and professionals to offset legitimate costs against their income – to artificially reduce their tax bills.

It is understood that tax experts planned to raise fake expenditure requests from a tax haven that could be claimed against by individuals in the UK.

David Gauke, Exchequer Secretary, said the schemes would have put a “significant” amount of money at risk.

“It is unacceptable, at a time when we are trying to bring down the deficit, that there are those who try to avoid paying the tax they owe,” he said.

David Gauke and I don’t often agree: on this one we do.

Let’s not beat about the bush, what was proposed here was fraud.

Who proposed the fraud? Tax professionals did.

Where were they going to locate the fraud? In tax havens.

How were they going to get away with it? Because tax haven secrecy – the total opacity on the ownership, control and accounts of offshore companies that they provide – would have let them do so.

And you winder why I and the Tax Justice Network campaign against tax havens? They remain what they always have been, a home for fraud assisted by a pinstripe mafia of lawyers, accountants and bankers.

Offshore faces a new challenger

Secrecy jurisdictions, Tax Havens 6 Responses »

Dec 132011

It is rare that I have a day as far away from my computer as today, and I readily admit to having enjoyed it.

I’ve been the guest of Copenhagen Business School at a two day seminar to launch a new project to be located there focused on identifying innovations in the offshore world and how they might be tackled. The project is being funded by the Norwegian government, who also ultimately fund part of my work, and the synergies are obvious.

I am not going to recount all that was discussed; that would not interest many readers I suspect, and would also be inappropriate when the seminar was deliberately, and unusually for an academic event, not based upon the presentation of formal papers which too often (in my opinion) focus upon a review of existing literature and too often also within the framework if existing thinking, which discourages innovation. It was instead seeking to be exploratory, innovative and encouraging of the frank exchange of ideas. It succeeded within that framework.

That was not the key point of the event for me though. The first of those was that it was simply taking place. At a time when it would be easy to be despondent this seminar was least in part solution focussed: the aim was to find what could be done to restore equity in finance, regulation and tax so that economies might survive their current stresses.

The second was as personally important, and I am aware that at least some others shared it, which was that it was so encouraging to take part in a research seminar where no one was asking you to justify why you thought offshore was so important. It remains the case that far too few academics, and economists in particular (who were almost inevitably under-represented as a result), understand the enormous impact of offshore on the world economy and the resulting need to regulate them.

The result of seminars like this are rarely apparent when they take place and that was true on this occasion, bar one thing, which is that important new research has begun in Denmark, which is itself looking at becoming a major international participant on this issue alongside Norway, and I think that enormously significant in itself.

The elephant in the middle of the Bank of England’s report

Economics, Secrecy jurisdictions, Tax Havens 8 Responses »

Dec 122011

The Bank of England has issued an important paper today. In summary it says:

The paper sets out three objectives for a well-functioning International Monetary and Financial Systems (IMFS): i) internal balance, ii) allocative efficiency and iii) financial stability. The IMFS has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, the evidence is that today’s system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System, with the key failure being the system’s inability to maintain financial stability and minimise the incidence of disruptive sudden changes in global capital flows.

It is quite literally impossible to argue with that: that’s why the paper is important.

But when it goes on to consider causes and solutions although it considers opacity and although it considers imperfect markets and asymmetry not one does it mention the fact that the offshore world – of which in so many ways London is the hub – is a prime casue of all these things.

And for that reason the paper fails, badly. The BoE has acknowledged a problem. I cannot believe it does not know the solution. It must know to whom the capital controls to which it refers are a threat and yet it cannot say that tax havens are the problem creating this mess in the world’s systems – at massive cost to many countries, as it rightly points out. We have a way to go yet.