Can a tax haven model make up for the loss that Brexit will cause?
- Majlinda Aliu
- Jun 1, 2017
- 9 min read
Last year was an "earth quake" in political terms. 2016 created a new era for the UK and a new precedent for the old continent, as the Britons voted to leave the European family. The decision shocked not just the EU and UK citizens but the whole world.
Also, many were shocked that in a 2016 Great Britain, high profile officials still could hide vast amount of money from the ordinary citizens, keeping it hidden in “ghost like” companies, abroad. It appeared in the Panama Papers leak that shed light to offshore-industry. While everybody is still shocked, the ever-growing concern is, will Britain itself become one of the tax havens?
This may sound crazy, but Alex Cobham, chief executive of Tax Justice Network says it is already on the cards and the author of the Panama Papers, Bastian Obermayer, considers that this would be a mistake.
Whatever is the reason behind the UK’s government policy, whether it is to get a better Brexit deal with the EU or to improve Britain’s economic standard, my research proves that by turning the country into a tax haven the UK would lose money and friends.
How it all blow-up?
In April 2016, the British Prime Minister David Cameron experienced the worst week of his premiership. The Panama Papers revealed that an offshore fund set up by Cameron’s late father Ian had paid no British tax for three decades.
The biggest leak in history about the offshore world showed that many powerful people were hiding their money or avoiding taxes by using tax havens.
At the time, Downing Street refused to answer questions about the then Prime Minister’s tax affairs saying they were a “private matter”. Finding himself trapped, David Cameron decided to release a public statement and tried to distance him from the scandal by creating a line between him and his predecessors.
“I chose to take a different path from my father, grandfather and great-grandfather, who were all stockbrokers, and I’ve got nothing to hide in my arrangements and I’m very happy to answer questions about it.” –David Cameron, April 7th 2016
David Cameron- Former British Prime Minister
Photo credits: Lee Davy
This scandal put the British government under pressure to respond to the Panama Papers issue. They were seeking to urgently show the public that progress was being made in addressing the abuses of anonymous ownership, revealed by a whistle-blower “John Doe” who released millions of documents from Panama law firm, Mossack-Fonseca.
Change was already on its way in the UK. Plans for a public register of beneficial ownership were in advanced stages, and the controversy surrounding the Panama Papers only served to ease the passage of the law.
But Alex Cobham, chief executive of the advocacy group, Tax Justice Network, says it led the government to redouble its efforts to obtain wider international support.
Alex Cobham-chief executive of Tax Justice Network
interviewer: Majlinda Aliu
camera operator: David Bransbusy
UK is positioned at the head of the biggest global network of financial secrecy jurisdictions: the Crown Dependencies such as Jersey and Overseas Territories such as the Cayman Islands.
Cobham thinks that both David Cameron’s government and that of his successor Theresa May, have been completely unwilling to impose requirements for greater financial transparency.
However, although many things changed after the Panama Paper revelations, eradicating the offshore world is not enough, said Panama Papers author Bastian Obermayer in an exclusive interview for this research.
Obermayer said that the UK government should play a bigger role to impose transparency in these jurisdictions.
But is transparency enough?
Helen Miller, Associate Director of the Institute for Fiscal Studies does not think transparency is a fundamental solution to “catch” tax avoiders.
“If the policy is to shame people into complying, that can only work for a small group”-Helene Miller
As part of the 2017 Spring Budget, the UK Chancellor of the Exchequer Philip Hammond announced a set of new rules to address these problems. He promised to legislate to tackle tax avoidance, evasion and aggressive tax planning with 35 new measures.
By taking these measures the government expects to raise revenues up to £820 million over the forecast period.
HM Treasury declined to further comment on these measures as the election is approaching. Sara Albores Nodar, Head of Tax Communications, said “it wouldn’t be appropriate for the civil servants to speculate on future government policy.” This is due to the upcoming election on the 7th of June.
Deepash Patel, a corporate tax lawyer at SCA ONTIER in London said that the UK government has led the way in combating tax avoidance.
“The UK is an early adopter of Base Erosion and Profit Shifting in part, having already implemented some of the proposed measures into UK law. Other major nations have also looked to adhere to the BEPS projects so that there is a concerted effort to combat certain global aspects of tax avoidance,” said Patel.
Since 2013, the UK has also implemented a General Anti-Abuse Rule (GAAR), which applies to the UK tax code and empowers HMRC to investigate the legitimacy of taxpayers’ tax planning and mitigation arrangements.
One of the most important laws that tackle money laundering and corruption, passed its final stage in the parliamentary process on April 27th just before parliament was dissolved, and became the Criminal Finances Act 2017.
Although the Act has now become law, key aspects such as the new Failure to Prevent Tax Evasion offences require a separate commencement order before coming into force, says analysis released by Osborn Clarke, an international law firm.
While the offence is primarily aimed at businesses providing tax advice within the financial services sector, the Act is clear that it covers all types of business, in all sectors. All companies should therefore be taking steps to prepare for it by widening their risk assessments to ensure they remain compliant. A plan to tackle the risks should also be implemented, according to Osborn Clarke.
This is a tricky policy to get right says, Helen Miller of the IFS. According to her, tax advisers are becoming reluctant to give advice.
Alex Cobham questions the ability of the justice system to implement such a law. “It is not clear that it will be possible in practice to prosecute any of these professional enablers. It is not clear that the government is willing to resource anyone to go after those people who might falsely declare their company profits.”
With this plethora of regulations to prevent tax avoidance in the UK, there may be a U-turn ahead.
The British Prime Minister Theresa May, who is in charge of driving the UK out of the EU, is now facing many obstacles on this path. Recently, indirectly, she has threatened to turn the UK into a tax haven if the EU makes the process of leaving difficult.
“We would have the freedom to set the competitive tax rates and embrace the polices that would attract the world’s best companies and biggest investors to Britain. If we were excluded from the Single Market we would be free to change the basis for the UK’s economic model.”-Theresa May, January, 2017.
British Prime Minister, Theresa May, at the Lancaster House in London
photo credits: Jim Mattis
Now, she has called a snap general election, in order to bring an end to “the division and uncertainty at Westminster.” In this election, Theresa May intends to gain more power to lead the Brexit negotiations. So far her campaign is focused on the importance of a Brexit deal for UK economic security.
This is the most divided UK election for the last twenty years on the question of tax. The party in power, the Conservative Party, is reducing corporation tax from 19 per cent, promising to get to 17 per cent by 2020. Meanwhile, the largest opposition parties, Labour Party and the Liberal Democrats are proposing a much higher rate than the original 19 per cent.
What is a tax haven and how the UK would benefit from it?
The Brexit tax haven threat seems incompatible with domestic measures such as the Public Register of Companies’ Beneficial Ownership; and the commitment to seek multilateral agreement on publication of multinational companies’ country-by-country reporting. These measures would lay bare the extent of profit shifting to the UK and everywhere else.
Bastian Obermayer describes tax havens as a complicated system, because at first, a country can benefit by attracting many corporations with a low corporation tax, but there are countries that apply protection tax against tax havens. “So, if you form a company in British Virgin Islands, then they will assume that you don’t pay taxes, so they will tax you where you are,” he explains.
Strangely, the protection tax will be applied against the UK if the country is considered as a general tax haven.
“If every country wants to give a lower rate of tax, they can, but in the end there is no more money for the society because everybody is going lower and lower”-Bastian Obermayer, author of the Panama Papers.
In the book, Tax Haven - How Globalization Really Works, Richard Murphy explains how companies avoid taxes by using tax havens. Here is how it works:
Graphic designer: Marco Guevara
While relatively transparent itself, the UK continues to encourage and to accept financial flows from its much more secretive Crown Dependencies and Overseas Territories.
All these jurisdictions are big problems, says Bastian Obermayer, who has dug deeper into the financial system, with the support of International Consortium Investigative Journalists-ICIJ.
“British Virgin Islands is a huge tax haven, the most shadowed tax haven, so I think there is still a long way to go for the UK,” says Bastian.
In addition, despite the UK suffering profit shifting by multinational companies to other jurisdictions such as the Republic of Ireland and Luxembourg, the UK also positions itself to attract profit shifting from elsewhere, says Alex Cobham. For him, the idea of converting the UK into a tax haven is “the craziest idea ever from British officials.”
To pursue the threat, the UK would need also to turn its back on the international leadership on financial transparency that David Cameron sought to establish. At the same time, the EU would have effective counter-measures including blacklisting a newly financially opaque UK, and refusing access to UK-based financial services providers.
Britain has the most competitive corporate tax regime in the G7
Since 2010, the UK has pursued an extremely aggressive path of cutting its statutory corporate tax rate well below the level of equivalent economies.
The intention is that by reducing the headline tax rate and providing various sectoral or regional tax incentives, the UK will be able to attract foreign investment.
Following Brexit, it is expected that the economy will suffer but the financial impact of this may be softened by increased investment from overseas businesses and individuals.
“This injection of cash will lead to the creation of new jobs and corporate taxpayers, which in turn should generate tax revenue for the government and help to improve living standards,” said corporate lawyer Deepash Patal.
As the country is about to leave the EU, it appears that the UK now needs new strategies to attract new investors and maintain those it already has.
The fact that the UK will have a lower rate doesn’t automatically mean qualifies a tax haven.
“There are lots of ways we look very different to tax havens. We have a higher tax regulation, we have a broader tax base we don’t have bank secrecy rules as some other countries do. I personally wouldn’t call the UK tax haven right now,” said Helen Miller, Head of Tax at the IFS.
In the fight against tax evasion, there are two key measures.
[if !supportLists]-The first is the elimination of anonymous ownership through a public registers of beneficial ownership for companies, and also for trusts and foundations.
[if !supportLists]-The second is elimination of undeclared offshore bank accounts and other financial instruments through the automatic, multilateral exchange of financial information between jurisdictions.
These two measures are now at the heart of the global policy agenda, and the Tax Justice Network, with its allies, has played an important role in driving this agenda forward.
“What is crucially lacking is the extension of ownership transparency to trusts and foundations, which are serially abused for tax evasion, money laundering and other forms of corruption worldwide; and the will to require the Crown Dependencies and Overseas Territories to meet these same standards,” chief executive of Tax Justice Network Alex Cobham concludes.
Starting this year and expanding in 2018, there will be automatic, multilateral exchange of financial information from more than 100 jurisdictions including all the major financial centers except the USA.
Public registers of beneficial ownership for companies at least are being introduced across the EU and more than 50 countries that are members of the EITI (Extractive Industries Transparency Initiative) – making the resistance of the USA and smaller secrecy jurisdictions increasingly hard to maintain.
While the UK still has work to do, its delivery of a public register of company beneficial ownership is a major step forward, and its approaching engagement in automatic information exchange will be another.
On the other hand, as long as tax havens exist, journalists will likely have enormous work to do. As the tax system is very complex and chasing tax avoiders, besides being difficult, often can be dangerous. Journalists need public support to combat this phenomenon.
“The main thing we have achieved in term of journalism is that, we showed the world that if you collaborate you don’t lose but you win.”-Bastian Obermayer, the Author of the Panama Papers.
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