As some people are aware, one of my major activities at present is co-directing a research project for the Tax Justice Network which is being funded by the Ford Foundation. This project is called Mapping the Faultlines and the aim is to identify where and how illicit fund flows take place.
One of the initial significant problems that we have faced is in defining the language that is used to describe what is colloquially called the offshore world, even though no one knows what 'offshore' means.
As a result of that effort I tried to offer precise definitions of what I thought the terms tax haven and offshore financial centre might mean in the Tax Justice Network publication, Creating Turmoil, sent to the Treasury Select Committee in July this year. In that report I said:
Tax havens are places that create legislation designed to assist persons - real or legal - to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions.
Offshore financial centres are not the same as tax havens. OFCs are the commercial communities hosted by tax havens which exploit the structures that can be created using the tax haven's legislation for the benefit of those resident elsewhere.
Given that no one seems able to offer more precise definitions than this, and given that these definitions are distinct and have value in use I remain of the opinion that they are a benefit, but it is apparent from subsequent discussion that almost no one is willing to give up their own view of what a tax haven or OFC is. In addition, the IMF has also, since I wrote Creating Turmoil, decided to drop the term offshore because of the ambiguity inherent in the term.
That does not mean the problem that these terms seek to describe has gone away. Far from it: we know that if anything it is becoming more significant, not least because the efforts to close it down are becoming more proactive.
In that case I have begun to develop a new language for the 'offshore' world. And I'm off to Montr?©al today to lecture on the subject, and will be repeating the performance at a conference in London in two weeks time. The paper I am presenting is here, and the slides here.
The point is not just about language though. It's about appreciating that the existing language that has been used has severely restricted the way in which regulation has taken place. That regulation has focused upon the activities that take place within a secrecy jurisdiction (our new preferred term for taxation, and which is also used by the likes of Carl Levin in the USA). The important point about it is that secrecy jurisdictions deliberately create law for use outside their domain and the secrecy providers (that is, the accountants, lawyers and bankers who work within secrecy jurisdictions) use that law to provide secret structures for the use of people resident elsewhere which become wholly unaccountable as a result, and for which they deny any responsibility. These structures do, therefore, operate in what we call the secrecy space, which some might in the past have called offshore, although inappropriately.
This secrecy space is not in the secrecy jurisdiction. In fact, that is the last place to look for it because it is very definitely, and deliberately not intended to be there. But the secrecy jurisdiction also, and deliberately, does not ask where the structures that it creates actually are. As far as they're concerned they are simply "elsewhere". The secrecy space is the " elsewhere" they ignore.
This means that the focus of regulation with in the secrecy world (the combined term for secrecy jurisdictions, secrecy providers and the secrecy space) has to change. It is entirely true that the secrecy jurisdictions are now reasonably well regulated. This however is completely irrelevant if we are seeking to tackle money-laundering, terrorist financing, tax evasion and financial instability. Those activities are all undertaken 'elsewhere' but no one knows where, except the secrecy providers, and as such it is the secrecy providers and not secrecy jurisdiction who now have to be the focus of attention (without in any way reducing the pressure on the jurisdictions themselves).
Read the paper I think you'll get the argument. It is one I will be returning to the time and again. I will also put up a glossary of this language is since I have time available.
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I applaud your efforts to bring attention to the abuses of the offshore/tax havens. I’m Manx and I grew up in the IOM but haven’t lived there for many years. It saddens me to see how the IOM has been changed by the people attracted to live there because it is a tax haven – both the finance sector workers and the tax exiles. Overdevelopment, materialism and indebtedbess to name a few. I’m embarrassed by the naivety or willing collusion of most of the MHKs – they are easy marks for smooth operators.
To get to the point of my email though – I wonder if you have tried to bring your website and daily emails to the attention of American opinion makers (i.e. television hosts) – the CNN shows like Lou Dobbs – or the Comedy Channel’s Jon Stewart who hosts The Daily Show. I think the vast majority of Americans are completely unaware of tax havens – it doesn’t even register as an issue with them. Anyway, that’s my suggestion – try contacting researchers/writers for some of these shows – and with satellite tv these are broadcast worldwide now.
Keep up the good work.
[…] have to tackle the unregulated offshore secrecy space as well if he’s to have any success. As I said in the TJN submission to the UK House of […]
[…] have to tackle the unregulated offshore secrecy space as well if he’s to have any success. As I said in the TJN submission to the UK House of […]
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[…] trouble is that’s not quite true. As I have explained in my paper ‘Finding the Secrecy World’ there is every reason to believe that what happens in Cayman is well regulated. That is largely […]
[…] trouble is that’s not quite true. As I have explained in my paper ‘Finding the Secrecy World’ there is every reason to believe that what happens in Cayman is well regulated. That is largely […]
Dear Richard
Believe it or not, I have only recently come across your website. Such is life.
Having an interest in the KSF IOM affair, where we invested funds for overseas resident grandchildren (there was absolutely no alternative for a tax efficient ISA type investment for them onshore, at least that we could find), I am confused about this debate. I wonder therefore if you would be kind enough to comment on the following:
a) The EU Savings Tax Directive 2005 gave European havens the option of full annual declaration in the member state or the withholding tax option of non name disclosure and a 15% Withholding Tax rising to 20% in July 2008 and 35% in July 2011. As the Isle of Man went for the Withholding tax option does this not mean that there is a gradual increasing disincentive for EU residents (including returning residents) to follow the withholding route and make full declaration in their member state? This would be particularly so if for example the 35% rate meant that in total they paid more tax than they otherwise would in their state of residence due to available offsets.
b) I would like to know what happens to the withholding tax that IOM retain. One source I found seemed to indicate that these funds were remitted to UK, for UK citizens. Can this be right?
c) For UK citizens resident overseas outside the EU, either working or retired, who choose to remain overseas for retirement lets say, are entitled to access their funds plus rolled up gross interest for the purposes of living during retirement. Like a pension, but will be subject to taxation in their country of residence on the earned rolled up interest part of the funds that they bring in the year the funds are brought in? This situation might apply for example if they needed savings to build a house. Is this effective delay of tax correct and legal?
d) For UK citizens resident overseas outside the EU who return to retire inside the EU would not the same situation as c) above apply? We should bear in mind that apart from the UK some EU member states (I am not sure how many) have the ability to access your bank account so there is no opportunity for non-disclosure. If this is right avoidance is impossible.
If all this is true (perhaps it is not) apart from tax timing benefits, where is the big tax avoidance for UK citizens — unless one actually resides in a haven?
And one other issue I am curious about. You refer to “undermining” the UK. But I have always wondered where those offshore deposits go in terms of the loan book and other instruments. I have read that the offshore deposits in the IOM were £53bn at the end of last June, a huge amount of money. It is now emerging that much of KSFIOM’s money was with the onshore company in various financial instruments as part of normal business. If KSFIOM’s onshore/offshore assets ratio of 0.65 is applied to the rest of the IOM deposits in say corporate bonds, loans or whatever, we are talking about a lot of cash coming into the UK. Why is this then undermining the UK? Would there not be some funds there (non UK citizens) that would not normally reach the UK?
Your help in improving levels of understanding would be very beneficial to all. You must be in a much better position than most of us.
Thanks
Terence
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[…] commentator on this blog has […]
Thank you very much for taking the time to comment on the points which I raised on 23 Dec. I have now read all your other stuff. Incredible. So there is no doubt about what you are about, and the justification for it.
One caveat though. With the KSFIOM thing there are some 8000 or so people who, by your standards, were apparently seriously ill advised to put their money there. In many cases it was life savings of people who had worked overseas and are now retired, or are still working overseas. The offshore depositors stress and hardship caused by the Brown government’s seizure and immediate liquidation of KSFUK, which knocked on to KSFIOM, is quite terrible, see
http://www.bbc.co.uk/blogs/ipm/2008/11/a_twist_in_the_expat_tale.shtml
How do you fix all this without mortally wounding innocent people? There is no shortage of financial advisors as well as regular accountants who actively promote the Isle of Man (and others of course). Who bothers to do lots of independent research if you are given advice from your accountant?
Any change has to take account of this, surely. It has to be a gradual rather than a sudden event.
Thanks again for your time.