Tax Havens » Tax Research UK

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.

Outflows, Not Aid, Must Be Curtailed to Fight Poverty

Development, Tax Havens 1 Response »

Jan 122012

The following is by my Task Force on Financial Integrity and Economic Development colleague, Raymond Baker, and is reposted from the Huffington Post:

We learned some devastating news last month. A new study from Global Financial Integrity revealed that despite the onset of the global financial crisis in late 2008, the developing world still suffered nearly $1 trillion in illicit financial outflows in 2009, a number that is almost 10 times larger than the official development assistance they receive each year from Western economies like the United States, United Kingdom and Norway.

These outflows — the proceeds of crime, corruption and tax evasion — bleed developing economies of much-needed tax revenue, exacerbate income inequality, and fuel the underground economy. They undermine the rule of law, entrench corruption, and shrink developing nation economies at a time when they can least-afford it.

Of course, this juxtaposition of foreign aid and illicit outflows naturally raises the question: why should Western powers, which are currently struggling with their own economic problems, continue giving aid to developing economies if so much money is just going to flow back out illicitly? Are we wasting our money? Or worse, are we fueling the problem?

The simple answer is that research does not find any connection between foreign aid investments sent to a particular country and illicit money flowing out of that same economy. Aid money tends to be highly monitored, and it is generally directed toward poverty alleviation and improving social services — efforts which, if anything, would likely curtail illicit outflows, which are driven in part by income inequality. Indeed, a prime example of this non-connection is China, which suffered illicit outflows of $291 billion in 2009 — several times more than any other nation — while only receiving about $1 billion in development assistance.

A more nuanced analysis of the issue reveals that, while officials in developing nations are not innocent in the matter, financial structures created and maintained by Western economic powers are the main factor facilitating the illicit flow of money out of the developing world.

A shadow financial system consisting of tax havens, secrecy jurisdictions and anonymous corporate vehicles makes it easy for corrupt dictators, terrorists, drug traffickers and tax evaders to quietly shepherd their funds out of the developing world and around the planet without notice.

The problem is endemic, with more than 60 tax havens scattered across the globe offering low to no taxes on profits booked in non-functioning entities. Nearly all of these jurisdictions, which include economic powers like the United States and United Kingdom, offer secrecy services enabling entities to form behind trustees and nominees such that no one, including law enforcement, can figure out who are the real owners.

As long as this tax haven secrecy exists, developing economies will continue to hemorrhage vast sums of money. Yet, just as developed Western economies created this opaque financial system, they can dismantle it.

The world’s leading economic powers, like the G20, have the ability to introduce transparency measures banning the use of anonymous shell companies, requiring multinational corporations to account for their sales and profits in every jurisdiction in which they operate, and sharing tax information automatically between countries. Representing 85 percent of the world’s economy, they carry the heft necessary to exert enough pressure on these secrecy jurisdictions to ensure that the world moves towards transparency and away from a system pillaging the pockets of the world’s poorest people.

Certain Western countries have already taken the lead in bringing about much needed transparency on an international level. The 10 government members of the Task Force on Financial Integrity and Economic Development have placed the issue of tax haven secrecy and illicit financial flows on the global agenda. At the same time, Western aid for schools, hospitals, and farm programs has contributed to improving the lives of millions worldwide struggling with the devastations of war, famine, and extreme poverty.

Of course, the end goal is a world in which official development assistance is obsolete — a world without poor countries and rich countries, a world that consists entirely of developed economies. Until that day, foreign aid remains an essential tool in the battle against poverty.

Simon Jenkins on tax justice

Cayman, Jersey, Tax Havens, Tax justice 8 Responses »

Dec 212011

A decade ago an article like this would not have happened.

It does now.

Don’t say changing moods is not possible.

This is Simon Jenkins in the Guardian today (edited, of course):

Osborne is the scourge of public sector unions and condemns tax avoidance, yet he refuses to end the scandal of crown tax havens, from Jersey to the Caymans, that enjoy the benefits of British citizenship while enabling individuals and corporations to evade British tax. Last week the European Union lectured Britain on financial regulation, while harbouring on its borders such fiscal black holes as Monaco, Liechtenstein and Switzerland. The thesis, accepted by governments of all parties, that the rich should be allowed to escape tax for their “wealth-creating potential” has surely been exploded by the credit crunch. It is not the kind of wealth Britain can afford. If Goldman Sachs dislikes paying British taxes it should go to Dubai, not just the first-class lounge at Heathrow.

The control of public expenditure is never perfectly equitable. It is war by other means. But when large sections of the public are being asked to bear the burden of cuts in their standard of living – largely through the action and inaction of government – they are entitled to see at least a semblance of fair play.

Just because lobbyists say bonuses and tax havens are “essential to Britain’s recovery” does not mean they are. The government’s tolerance of both is more than stupid. It induces cynicism in the public realm and recruits fair-minded people to the cause of St Paul’s protesters and public sector strikers. Nothing is more crucial to national wellbeing at a time like this than a sense of equality of misery. The British government derides Greece and Italy as countries where taxpaying is “voluntary”. It appears to be voluntary in Britain too.

He’s right.

Creating this awareness has taken a lot of effort. Now we need action to address the issues. When will people get serious about the Tax Gap? It’s entirely possible to do so. But only the Greens take it seriously as yet. That’s to their credit, and none to anyone else.

Despite Global Financial Crisis, Illicit Financial Outflows from Developing World Remain High

Task Force on Financial Integrity and Economic Developm, Tax evasion, Tax Havens 2 Responses »

Dec 152011

Developing countries lost US$903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008, finds a new study by Global Financial Integrity (GFI), a Washington-based research and advocacy organization and partner of Tax Research UK in the Task Force on Financial Integrity and Economic Development.

The new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2009.

“This is a breathtakingly large sum at a time when developing and developed countries alike are struggling to make ends meet,” said GFI Director Raymond Baker. “This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

While US$903 billion marks a drop from the US$1.55 trillion¹ that illicitly flowed out of the developing world in 2008, the study finds the decrease is almost entirely attributable to the global financial crisis rather than any governance improvements or economic reforms.

The study, which was co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, tracks the amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009, and it ranks the countries by magnitude of illicit outflows. According to the report, the 20 biggest victims of illicit financial flows over the decade are:

China ………………………………………$2.74 trillion
Mexico ……………………………………..$504 billion
Russia ……………………………………..$501 billion
Saudi Arabia ……………………………$380 billion
Malaysia ………………………………….$350 billion
United Arab Emirates………………$296 billion
Kuwait ……………………………………..$271 billion
Nigeria …………………………………….$182 billion
Venezuela ……………………………….$179 billion
Qatar ……………………………………….$175 billion
Poland ……………………………………..$162 billion
Indonesia …………………………………$145 billion
Philippines ………………………………$142 billion
Kazakhstan ……………………………..$131 billion
India ………………………………………..$128 billion
Chile ………………………………………. $97.5 billion
Ukraine …………………………………..$95.8 billion
Argentina ………………………………..$95.8 billion
South Africa …………………………….$85.5 billion
Turkey……………………………………..$79.1 billion

For a complete ranking of average annual illicit financial outflows by country, please refer to Table 5 of the report’s appendix.

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.

Why aren’t we tackling tax havens?

Tax Havens 1 Response »

Dec 052011

This is worth another outing:

There’s more at the Tackle Tax Havens web site.

You can say it’s small beer, but it’s not in the grand scheme of things

Tax evasion, Tax Havens 23 Responses »

Nov 272011

You can say it’s small beer that council tax is not being paid on more than half of the flats on One Hyde Park, the most expensive development in London and maybe the world. But it’s not. That’s because, as the Observer reports:

Only nine of the 62 apartments sold in One Hyde Park – the world’s most expensive residential block – have been registered for council tax.

The ownership of the Knightsbridge apartments, which range in price from £3.6m for a one-bedroom flat to £136m for a penthouse, is now under investigation by Westminster city council, which is determined to pursue the monies owed by the secretive owners of the apartments. However, the myriad offshore companies protecting the identities of residents are, according to sources at the council, likely to defeat them.

An analysis of the records by the Observer shows that 25 of the flats’ registered owners are companies in the British Virgin Islands. Other offshore tax havens used to purchase the properties include Guernsey, the Cayman Islands, Liechtenstein and Liberia.

Council officials are now expecting to canvass the apartments door-to-door, although sources said there were concerns that the building’s security, including its SAS-trained doormen, could prove an obstacle.

The sums involved are, of course, small – partly because council tax is so stupidly capped so that properties such as these are wholly inappropriately taxed. That is not the issue for the moment though: the issue is that the culture of offshore is to be seen writ large here. There is secrecy. There is tacit aggression: the SAS trained doormen are mentioned as an obstacle to entry. And there is the contempt for law that tax havens and their clients show. Plus the complete veil of secrecy that tax havens – or secrecy jurisdictions as I prefer to call them – throw round their clients to help them evade their responsibilities.

Remember, secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

So what can be done? Here’s a list:

1) Require that no property can be owned through an offshore company without the warm-blooded beneficial owner being named. If there is no such owner the property cannot be acquired.

2) No offshore company can own property in the UK without appointing a UK agent – and a named, warm-blooded person and not a company at that – being named as being liable to pay the obligations it owes in the UK. They must be proven to be UK resident.

3) In the event of breaches of obligation the penalty should be a charge 10 times the tax owing, levied on the property as a charge with the right to foreclose on the charge and have the property sold if not settled in two years.

That should stop that abuse.

We need to tackle tax havens, now.

This is a small step. But an important one because it shows the importance of shattering their secrecy.