The FT has run an opinion piece this morning in which its author said:
HSBC has set aside $700m to cover possible fines for money laundering. Walmart is facing new allegations from the US Congress that it too was involved in such practices in Mexico. Since the financial crisis, many US banks, such as Wachovia and Citigroup, have run afoul of laundering rules.
Regulators investigate. Hearings are held. Headlines are generated. Reputations are tarnished. But where is the outrage over the day-to-day money laundering that is much greater in size and scope than the alleged practices by the banks?
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Hello Richard
I’m wondering if you can kindly clarify something for me please. I am not at all educated on tax but would like to become more so.
You make a distinction regularly about the difference between tax compliance (i.e. complying with what the government intends) and tax avoidance (getting around what the government intends, even if technically within the letter of the law). This I understand so far.
However, in your recent paper for Class you say: ‘the use of tax havens by UK based multinational corporations is now officially sanctioned and even encouraged by tax law’.
If the use of tax havens is now officially sanctioned, doesn’t it now become ‘tax compliance’ rather than ‘tax avoidance’?
Regardless of our own personal views on the morality of tax havens (I assume we are both equally disgusted), surely it is what the government wants (for better or worse). And therefore taxpayers are entitled to regard use of tax havens as ‘tax compliance’.
Could you please clarify when you have time?
Many thanks
The situation is dichotomous: for individuals most tax haven law is clearly non-compliant, often avoidance and sometimes evasion
The position for companies is moving the other way
With such ambiguous signals a position of the type I take is, I think, the only valid one available.
Thanks for that – sorry to take up your time but not sure I understand your response.
If it is ‘officially sanctioned and encouraged’ as you say in your Class piece, how can it be ‘ambiguous signals’? To give another example, same-sex civil partnerships are ‘officially sanctioned’ and therefore there are no ambiguous signals (from the State at least) on the issue.
Also, I am a bit confused about ‘the position you take’ – is it the position that tax havens are officially sanctioned or the position that use of tax havens is non-compliant?
Also, when you say ‘often avoidance’, are you suggesting there is some use of tax havens that is not avoidance?
Also, when you say ‘the position for companies is moving the other way’, are you saying that tax haven law is making their use legal, according to the will of the State (for better or worse)? If so, then isn’t this ‘compliance’?
Again, sorry for taking up your time and no doubt I am being a bit thick, so I thank you for your time and patience.
I think my answer was quite clear
If the government is issuing very ambiguous signals, which are different for companies and individuals, it is very obvious that I am quite entitled to say that the government position is so unclear that it is entirely reasonable to say that offshore is not sanctioned and is therefore non-compliant
The reason for saying this is simple: there has been regulatory capture of the state regarding corporate tax where most rules are written by major corporations. In that case that fact lets me suggest the laws permitting abuse are themselves non-compliant
But let me be clear: I don’t think you’re being in the slightest bit thick. It is your claim to be so that makes me think you are actually seeking to be disingenuous
I note your second para
Suppose same sex partnership was sanctioned for men and not women
That’s the position we’re in re companies and individuals
That’s why my position is justified
Chris,
You ask “Also, when you say ‘often avoidance’, are you suggesting there is some use of tax havens that is not avoidance?”
I don’t know what Richard had in mind, but there are certainly individuals who use “tax havens” for reasons other avoidance (or worse) of tax.
It has become almost impossible for (British) expats with no UK address to open UK-mainland accounts; if they try they are invariably directed to the offshore arm of the bank in question, where they suffer from the downside of these places, including inferior depositor protection schemes which may or may not work at all when the bank collapses (as mine did in the Isle of Man). Even Richard’s favoured Co-op bank does this. Question for Richard: why do they need to maintain a Guernsey arm when they could just as easily run a special UK branch for their non-resident British customers?
This does not make the indivduals concerned non-compliant provided they are paying the right amount of tax, in the right place (which my not be in the UK; in my case it was in France, where I live) and at the right time.
You are right – some accounts are there because they can be nowhere else
And not all tax haven secrecy is used to abuse tax – other regulation and law can be abused too
Anrigaut, there is also a population on Guernsey who require banking services who utilise the co-op. I would much rather bank with the co-op than other uk banks who are here. They provide excellent service and very competitive mortgages. I’m not the only islander who has moved their business there.
Thanks for this, Anrigaut, useful to know.
Anrigaut, I think my question is more a definition issue: how can use of tax havens be classified as ‘avoidance’ if our government officially sanctions or even encourages it (as Richard has suggested)?
I understand Richard’s point that the fact the government sanctions or encourages it for one group of taxpayers (companies) but not others (individuals) may be unfair. But that is government’s prerogative to make that distinction if it wants to, for better or worse.
And yes, there may be ‘regulatory capture’ going on – but there is nothing new under the sun there. Powerful special interests have been trying to capture their rulers since ancient times. It is (sadly) a feature of government.
Thanks again.
Chris,
I’m neither an accountant nor a lawyer, but with respect to definitions, maybe it’s the term ‘compliance’ which is the main issue here. Or rather, compliance with what?
By definition, tax avoidance is compliant with the law and is thus ‘legal’ while tax evasion is not. But, as you appear to accept, Richard (and many of us here) distinguishes between compliance with the (letter of the) law and compliance with the spirit of the law. This is obviously much harder to define – indeed I would go so far as to suggest it defies definition. That doesn’t mean it isn’t a useful concept, but it does unfortunately mean it’s easier for opponents to attack.
Nevertheless, I think you mis-represent Richard (who will no doubt correct me if I’m wrong) when you say he defines tax compliance as “complying with what the government intends”. My understanding is that it means compliance with what Parliament intends – or more precisely what Parliament (not the government of the day) intended when it passed the law. This seems to me to be an important distinction; the law is made by Parliament, not by the government. If the government disagrees with the law, it is their prerogative to bring forward proposals for change, but not to encourage companies or individual to get around it.
Richard’s somewhat dramatic use of the phrase “officially sanctioned”, while understandable, was perhaps a little unfortunate. Sanctioned by whom? Government officials, regulators, HMRC, … ? Certainly not by Parliament. If the government, directly or through its appointed officials, is effectively sanctioning non-compliance with the spirit of the law, is that not something we should be concerned about? It’s not because there’s nothing new under the sun that we should accept it as immutable.
I actually define tax compliance as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
Note that the will of parliament has nothing to do with this per se.
The problem Chris in Hastings refers to has always been there: some governments have always legitimised abuse internationally. But I conceded, he has made it clear that i need to be tighter on the use of language: what works domestically has to be clearer internationally where it is very clear that corporate capture of the tax system for private gain does not permit the same will of parliament language.
There is nothing odd about this though, or new. It just means that the concept of the ring fence, long discussed when it comes to offshore i.e. where the domestic will does not extend to the offshore abuse (using offshore correctly as defined here http://www.newleftproject.org/index.php/site/article_comments/britains_second_empire ) permitted by governments has to now be used more directly in the debate on what tax avoidance is – making clear that there is inherent in many governments tax policy a duality in approach, something I explored with regard to Gordon Brown here http://www.taxresearch.org.uk/Blog/2007/06/14/brown%E2%80%99s-decade-was-it-taxing/
So you’re right “officially sanctioned” was unfortunate, but only because I did not make the duality clear
Thanks Richard for those clarifications and in particular for the link to your earlier blog about Gordon Brown which I found very clear and informative.
Keeping the language tight on a blog such as this is obviously difficult. But you don’t need me to tell you that any lapses are susceptible to be pounced on by those ready and waiting to pick holes in your arguments. So hopefully this discussion has been useful.
“are you suggesting there is some use of tax havens that is not avoidance?”
yes, a great deal.
Recently a Nigerian official (Mr Richard Ibori) laundered some billions of £s through Guernsey. Since his official salary was meant to be less than £100k pa, it may safely be said that this was not aimed at “tax avoidance” at all !
jj lehto,
Point taken! And it would appear from their website that, unlike the other UK banks, the Coop offers accounts in Guernsey only to residents of the Channel Islands and IOM and to “British citizens living or working abroad” – so a priori not to Nigerian dictators.
But the question remains as to why the Coop, along with other UK banks, systematically direct expat British citizens who reside neither in the UK nor in one of the Crown Dependencies to their offshore arms. I understand this to be because, while the banks are perfectly allowed to open accounts for non-residents in the UK, they don’t want to do so because of the additional amount of checking they are required to do for non-residents to satisfy the more stringent anti-money-laundering rules in place in the UK.
It seems to me that if regulation in Guernsey, Jersey and the IOM was tighter and/or more strongly enforced, this would no longer be an issue. And all honest citizens would benefit. But of course that would hardly suit those in the islands’ financial services who make huge profits from the tax avoidance industry (and thus inevitably facilitate tax evasion and even more serious abuse by large-scale criminals who profit from the secrecy and lax regulation which are the mark of tax havens).
I think that an excellent question, and one to which I do not know the answer