An introduction to tax havens
Richard Murphy from the Tax Justice Newtork explains exactly what a tax haven is.
In March 2011 budget George Osborne announced that if a UK company runs its internal banking arrangements through a tax haven subsidiary it will benefit from a special tax rate on profits of just 5.75%. The same activity undertaken in the UK is taxed at 23%.
It is a change that will delight corporate tax avoiders everywhere: the UK will now condone the use of tax havens in locations such as the Cayman Islands, Jersey and the Isle of Man. It is expected that by 2016 more than one sixth of corporation tax will come from such offshore activities.
There are four primary uses for ‘tax haven’ locations.
- First, they are used by those wishing to avoid or evade their obligation to pay tax. Tax avoidance is legal, but contrary to the spirit of taxation law, while tax evasion – non-disclosure of a source of income – is always illegal.
- Second, they are used to hide criminal activities from view. That criminal activity might be tax evasion itself, but might also be money-laundering or crimes generating cash that needs to be laundered.
- Third, they are used by those who want their activities to be anonymous, even if legal. Some people wish to hide wealth from their spouses, for example.
- Fourth, they are used by those seeking somewhere cheaper to do business, to avoid the costly obligation to comply with regulations.
The need for anonymity is common to all these activities, which take place in what one might call the ‘secrecy world’. Secrecy is a property right like any other. To create and protect it requires the rule of law. Governments that choose to create laws allowing it to exist must have status as international jurisdictions (though not necessarily as countries, as the British Crown Dependencies demonstrate). Since no jurisdiction willingly undermines its own laws, the secrecy so created can be used only by people residing outside its own domain.
The regulations created by these ‘secrecy jurisdictions’ are designed to undermine the legislation or regulations of another jurisdiction. To facilitate matters, a legally backed veil of secrecy ensures that those making use of them cannot be identified as doing so.
Secrecy jurisdictions raise revenue by collecting fees from registering companies, or for regulating local financial services, and income tax on anyone working in that industry. All this is possible because secrecy jurisdictions create the structures that the financial services industry sells access to. Typical among these are tax haven companies.
These are extremely secretive: no information about them is made available on any public register, and very often the local tax authorities know nothing about them either. Yet even that level of secrecy tends to be insufficient for those engaged in ‘offshore’ activities.
The tax haven companies are almost invariably owned by trusts, which are also registered ‘offshore’ and are run by the local financial services industry. The trusts are completely anonymous: there is no record of them on any public register and local tax authorities know nothing about them. Neither the person creating them nor beneficiaries are identified.
An offshore company owned by an offshore trust presents an almost impenetrable barrier to inquiry: not least to law enforcement agencies and tax authorities. Tax havens may call themselves ‘offshore finance centres’ or ‘international finance centres’, but that is misleading. Secrecy is what they are selling.
The customers for secrecy will never be found in the tax haven jurisdiction. They are always located ‘elsewhere’. This allows secrecy jurisdictions, secrecy providers (the bankers, lawyers and accountants), and their customers to maintain the claim that they are conducting legitimate, well-regulated activities; because the transactions always take place ‘elsewhere’.
The spurious argument
Secrecy jurisdictions argue that because the transactions take place ‘elsewhere’, they are not taxable within the secrecy jurisdiction: such places choose not to tax transactions happening outside their domain. They then insist that declaring these transactions is the responsibility of their clients. That way the secrecy providers are able to argue that they are fully tax compliant. But transactions undertaken ‘elsewhere’ will also escape regulation in the jurisdiction where the activity is actually taking place. That of course is the intention.
The truth is that multinational corporations do not really have what most think to be real offshore operations: they simply record some transactions in the secrecy space provided by tax havens. George Osborne’s corporation tax reforms give the clearest possible indication that the Treasury has accepted the legitimacy of this secrecy space.
Osborne’s changes will inevitably result in a loss of tax revenue to the UK. But just as important, what are the implications for governance when a government and major corporations condone the use of a space that exists only as a legal fabrication? Who will regulate the resulting trade? For those who benefit from tax havens their capital increases exponentially quicker than others’ as a result. How can we even estimate the associated risks? The question is: who is paying the price?
Richard Murphy is founder of The Tax Justice Network and blogs at www.taxresearch.org.uk. His new book ‘The Courageous State: Rethinking Economics, Society and the Role of Government’ is available from www.searchingfinance.com