Why we have the right to interfere in tax haven’s affairs

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There has been a great deal of traffic, and a lot of comments on this blog over the last day or two about whether the UK car or any other major developed nation has the right to interfere in the affairs of the world's tax havens.

The answer is simple, and straightforward. It is that we do have that right, and there we have it for a very particular reason. As I have demonstrated in my paper called Finding the Secrecy World tax havens are in fact best described as secrecy jurisdictions. Secrecy jurisdictions are places that facilitate the problem of illicit financial flows. They do this by creating regulation for the primary benefit and use of those not resident in their geographical domain. They support this process by creating 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, and for example, the vast majority of trusts and companies that are created in either Jersey, Guernsey or the Isle of Man are not resident in those places. We do, of course, know this true. There is no significant local market for these structures. That is something the British Virgin Islands demonstrates best. They have incorporated more than 800,000 companies, of which no more than 10,000 actually trade in the place.

Those companies that are actually incorporated in and trade in the British Virgin Islands can be considered for regulatory purposes to be located in what I call 'here' i.e. there is coincidence between their place of registration, which provides them with their licence to operate, and the place in which they trade to which they might pay tax. Obviously, this is the normal situation for a UK company.

However, I would add that there is nothing intrinsically wrong with creating a structure that can be used by a person in another location. I know, for example, that some Scandinavians used UK companies because minimum issued share capital of a company incorporated in the UK is much lower than that required for the Scandinavian equivalent. So long as those in Norway who use UK companies do so legitimately, place their accounts on UK public record, and pay their tax in the UK and in Noway as they should, then I cannot object to this. As I have again demonstrated in the Secrecy World paper these companies can be described as being regulated ' somewhere'. That place of regulation, which will primarily be the Scandinavian country where they trade, is not the same as the place where they are registered, but that leaves the place where they are registered knowing that that regulation is being undertaken in another place. The combination of location may make regulation are little harder, but it is in existence.

This situation must, however, be directly contrasted with the situation found in the Channel Islands and the Isle of Man, and Cayman, the British Virgin Islands and other secrecy jurisdictions, come to that. In those places it is normal for the structure created artificially by law to be run on behalf of the warm human being who actually directs it by nominees whose sole purpose is to disguise the ownership and control of the asset in question. In reality, most of those nominees would never, however intense the questioning, ever be able to answer a question about the true nature of the assets they managed. But nor will they be able to answer another question, because that is the question they will have deliberately failed to ask about where those assets are actually managed.

There is good reason for this. There is a long established principle in all these places that a company or trust may be incorporated and managed from that domain but not be tax resident within it. So be it, but in that case the obvious regulatory question is "where is it tax resident?" because it is of course in that other location that it should be regulated. But that question is not asked, as far as I can tell, ever.

The consequence is that it is simply assumed that companies and trusts incorporated in these places and managed by their professional nominees are regulated 'elsewhere' but without enquiry being made or record kept as to where 'elsewhere' might be. And that is because those nominees know that the structure in question is being used to undermine the taxation revenues of another state. If the professional nominees asked this question, and knew the real answer, they would of course have implicated themselves in the resulting fraud. They choose instead to turn a blind eye to the question, so that they can claim innocence. It is a perverted form of innocence.

An example might be found in the case of Lichtenstein where structures were deliberately created to undermine the taxation revenues of Germany, and many other places but were of absolutely no benefit at all to a Lichtenstein residence, and had to declare their total worldwide income to the local tax authorities. These will have been run by local professional people. That is why they are culpable.

It is this combination of deliberately creating structures that can only be of benefit outside their own domains, deliberately providing secrecy and being completely indifferent to the regulation of those entities outside their own domains (however well they might be regulated within them) that creates the legitimate basis for attack on the secrecy jurisdictions from places such as the USA, Germany, France and, I hope in due course, the UK. You cannot declare economic warfare on another state, as the secrecy jurisdictions do, and expect there to be no consequence.

Nor can you claim that the issues in question are only of your domestic concern when that is clearly not the case.

The secrecy jurisdictions have questions to answer. They refuse to answer them. They refuse to create the transparency that is required about the structures that they create for use in other domains. And they refuse to regulate the use of those structures in those other domains, however many entirely meaningless checklist are completed with regard to the actions of the nominees in the place in which these structures are incorporated. They do instead deliberately turn a blind eye to this situation and the actions of the professionals who are located within their domain who make their living from turning back blind eye. Whilst these situations persist the countries whose regulation is undermined as a result , such as the USA , will have no choice but to take action to eliminate this threat to their well-being, and that of their law-abiding citizens. And it is entirely legitimate for them to do so.