Tax Havens are threatening our Democracy

Following the writing of the US constitution in 1789, Benjamin Franklin famously wrote:

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

But increasingly, as the recent revelations about Jimmy Carr and Gary Barlow remind us, taxes are becoming much less of a certainty for the internationally mobile, super-rich. The financial crisis has thrown the issue of tax avoidance and tax evasion to national and international prominence, as the majority are paying the price of recession and austerity, while the richest few are paying almost nothing at all.

Politicians around the world have gone out of their way to condemn tax avoidance and tax evasion since the financial crisis. David Cameron has declared Jimmy Carr’s tax arrangements are “morally wrong”, whilst George Osborne once claimed, “tax evasion and indeed aggressive tax avoidance as morally repugnant”. Vince Cable has gone further still:

Much of the shadow banking sector, a major contributor to the economic crisis, was also only possible because of tax haven secrecy… Tax avoidance and evasion is unacceptable at the best of times but in current recession is utterly offensive. Every pound lost in revenue through avoidance and evasion has to be made up through higher taxes paid by others.

Nicholas Sarkozy has stated, “We want to put a stop to tax havens. We want results on this, with a list of tax havens and a series of consequences”. Angela Merkel has argued, “Every reasonable person knows that tax evasion needs to be uncovered”. Barack Obama, before becoming President, was signatory on US legislation trying to crack down on tax evasion. He said, “We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged”.

Yet, very little has changed. In this post I want to first discuss how tax avoidance and tax evasion works. Then I will look at how widespread it is, among different countries, and how it is almost universally practiced by the largest businesses. Then I want to look at how tax avoidance leads to criminality and corruption, and analyse why governments are so totally unable or perhaps unwilling to tackle the problem. Finally, I want to argue that its time to put pressure onto governments to stop tax noncompliance now.

Table of Contents

A Few Definitions

Before going further, it’s probably worth clarifying what is meant by tax avoidance and tax evasion. Generally speaking (although the terms are often misused, and sometimes used interchangeably):

  • Tax avoidance is the legal manipulation of someone’s tax regime in order to minimise the amount of tax paid
  • Tax evasion is the illegal manipulation of a tax regime in order to minimise the amount of tax paid
  • Tax Noncompliance is a general term that is used to refer to both tax avoidance and tax evasion

It would also be useful to clarify what is meant by a Tax Haven. Different authors have use quite different definitions of the term, but they all have a few general features in common:

  • Zero, or almost zero, effective tax rates (at least for some)
  • Secrecy and protection of the personal financial information from scrutiny- often including severe punishments for whistle-blowers
  • Little or no effective sharing of information with foreign tax authorities
  • Lack of transparency in the government

There are no universally accepted lists of which countries or territories constitute tax havens, but those normally included fall into a few categories. There are British overseas territories, relics from the days of Empire, such as Bermuda,  the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands. The Netherlands Antilles (owned by the Netherlands), and the US-owned Puerto Rico and American Virgin Islands are also often classed as tax havens. There are also the British Crown Dependencies, such as the Isle of Man, Jersey and Guernsey. There are small European states, such as Andorra, Ireland, Liechtenstein, Luxembourg, Monaco, San Marino and Switzerland. There are a few small developing nations, such as the Bahamas, Belize, Mauritius, Panama and the Seychelles. There is Jebel Ali Free Zone, in Dubai, in the United Arab Emirates. And there are a few less expected tax-havens: the Netherlands, the US state of Delaware, and the United Kingdom, which is often counted as a tax-haven for non-domiciles due to its unusual tax laws. The City of London’s unique local government arrangements have allowed it to establish close connections with many of these tax havens, scattered around the globe.

How Tax Evasion Works

Tax avoidance schemes are becoming ever more sophisticated and complex, as more money is put into them, and as the regulatory authorities gradually crack down on them. Commonly used schemes include Transfer Pricing arrangements, Cross-border tax arbitrage, Hybrid debt instruments, Thin capitalisation, Thick capitalisation, Tax-efficient supply chain management and Debt dumping. More exotic schemes include the “Dutch sandwich”, “Swiss Roundabout” and the “Double Luxembourg”. For example, the Double Luxembourg scheme allowed advertising company WPP to shift income for one Luxembourg subsidiary received from another to be classed as “local”, and still escape the UK tax net. As a result, instead of a UK taxation of £126m, WPP paid only £27m.

According to Professor of Accounting,  Prem Sikka, transfer pricing, the manipulation of prices charged by different parts of transnational organisations for the transfer of goods and services to divert profits into low-tax locations, is the biggest tax avoidance scheme of all. He writes:

Tax authorities believe that multinationals manipulate the import and export prices to avoid taxes. China is an interesting case. It has enticed foreign capital by offering low taxes and other incentives. Foreign Direct Investment (FDI) has flooded in. Despite the perks, over 70% of multinational companies claim to be making losses. If so, why do they insist on making investment in China? … The public may be horrified to learn that companies have priced flash bulbs at $321.90 each, pillow cases at $909.29 each and a ton of sand at $1993.67, when the average world trade price was 66 cents, 62 cents and $11.20 respectively

Tax havens provide a number of secretive arrangements to shield tax figures from scrutiny. According to the Tax Justice Network, in its evidence to the House of Commons:

Trusts are a feature peculiar to Anglo-Saxon (English) law but have become commonplace in many jurisdictions, especially in the tax haven world… Trusts provide secrecy because they do not require  any form of registration in most jurisdictions and even where registration is required (as it is with HM Revenue & Customs in most cases in the UK) that registration is not placed on public record. Nor is the trust deed which regulates management of the trust placed on public record, which might in any event not be possible in some cases: it is still possible for a trust to be created verbally and to be adhered to on that basis… Trusts are very commonplace in the offshore world, and some jurisdictions, such as Jersey, Cayman and the BVI specialise in supplying them.

Accounts are almost never on public record in a tax haven. In most tax havens they need not be sent to any regulatory authority, including those responsible for tax because no tax is due by most tax haven companies.

…whilst [limited liability partnerships] legally exist in the tax haven they have no tax residence in that place and the embers of the entity are instead taxed as if they undertook the limited liability partnerships transactions.

In effect a  [Protected cell company] operates as if it were a group of separate companies except all are part of the same  legal entity. There is, therefore a ‘parent level’ which provides management services for the company but in addition there are a number of further segregated parts called cells. Each cell is legally independent and separate from the others, as well as from the ‘parent level’ of the company.

Tax avoidance by the wealthiest individuals is also widespread. A report found that the UK”s 20 biggest tax avoiders have used three main loopholes to legally cut their their income tax bills by a total of £145 million in a year. Income tax could be halved by writing off business losses in one of their companies against their income tax bill. The cost of business mortgages or borrowing on buy-to-let properties could also be offset against income tax bills. To partake in the popular K2 scheme, used by around 1,000 wealthy tax avoiders to shelter £168million, the tax avoider quits their job and is hired by an offshore company, which hires out the UK high earners services and invoices out their services from the offshore company. The high earner is then either paid a minimum wage by the UK company or the offshore company which is declared to HMRC in the normal way.

A related tax-avoidance scheme is the employee benefit trust (EBT). The tax avoider’s wage was paid into a (often Jersey-based) employee benefit trust. The EBT then gave gives out non-taxable low-interest loans. Also related are employer-financed retirement benefit schemes (EFRBS), involving almost untaxed pension schemes to offer loans. if the company pays the director just £50,000 and puts the other £1,950,000 into an EFRBS, and then the next day he or she borrows £1.9m from the pension scheme to spend as they like, the tax bill will be almost nothing.  Often the loans are then written off altogether. Other schemes involve partnership subsidies or the direct use of tax-havens as a residence. According to the Daily Mail:

Billionaire retailer Sir Philip Green paid his wife Tina a £1.2billion cash dividend in 2005. As Lady Green is officially domiciled in Monaco, she paid no income tax on this huge sum, avoiding £285 million in tax.

Tax Noncompliance is widespread… But nobody knows how widespread

By definition, it’s almost impossible to calculate how much is lost by tax avoidance and especially tax evasion. By one estimate, tax havens account for about 2-3% of the world’s GDP, but British journalist Nick Shaxson, author of  Treasure Islands: Tax Havens and the Men who Stole the World, estimates that about half of all world trade passes through them. He estimates that at least $11.5 trillion, a quarter of the world’s wealth, goes untaxed in tax havens, based on data published by major banks and financial services institutions in 2004. If banks and companies were included, it would be perhaps twice this amount. Economists Ronen Palan, Richard Murphy and Christian Chavagneux have estimated in Tax Havens: How Globalisation Really Works, estimate that more than half of all banking assets and a third of multinational company investments are routed via tax havens.

The United Nations and World Bank, considering only illegal tax evasion, cross-border corruption and criminal activities, put the figure at around $ 1-1.6 trillion per year.

This tax avoidance amounts to a huge loss of revenue by national governments. In 2007, Senator Carl Levin put forward the Stop Tax Haven Abuse Act in 2007, with then Senator Barack Obama, and Norm Coleman. Their report estimated that the US was losing close to $100bn per year to tax havens. An alternative estimate puts it at $170bn.

In the UK estimates of the tax gap differ even more widely. A freedom of information requestin 2005 forced HMRC to offer a tentative stab at somewhere between a missing £3.7bn and £13.7bn, using an extremely narrow definition of tax avoidance, and looking at corporation tax alone. Since 2005, HMRC has narrowed its definition of the tax gap further. The TUC, having done its own analysis, claims that £12bn of tax a year may be being lost from the UK’s 700 largest corporations alone, thanks to planning and avoidance. It looked at the accounts of just the top 50 companies over a seven-year period. Vince Cable suggested in 2009 that as much as £22bn could be lost to tax avoidance. The Tax Justice Network has an estimate of the gap from tax avoidance alone at around £70bn.

It seems likely that the actual figure lost could be much higher than estimated. According to the Public Accounts Committee of HMRC, some £25.5bn remains uncollected from disputes with 2,700 companies. The Vodafone dispute of 2010 was, according to economist Richard Murphy, rumoured to be over around £6bn, although this has been denied by both Vodafone and HMRC. In the end, they settled for £1.25bn.

Tax noncompliance hits the poorest countries hardest of all. Christian Aid estimate$160bn per year lost by developing countries to tax havens. The Tax Justice Network estimate that the developing world could be losing around £800bn in stolen capital. The OECD admits that developing countries lose almost three times more to tax havens than all the aid they receive each year. Spent effectively, this sum would easily be sufficient to achieve the Millennium Development Goals. Every $100 million recovered could fund full immunisations for four million children or provide water connections for 250,000 households.

The scale of tax noncompliance is vast. Although nobody knows how much is lost, it is clearly in the tens of billions nationally and hundreds of billions globally, perhaps far more. Every pound lost in tax avoided by the international, mobile super-rich and powerful corporations is a pound that must be made up by the ordinary people, who are unable to avoid their tax. This devastates public services in developed countries and is a disaster for the poor in the developing world.

Almost All Major Businesses Take Part

Tax avoidance is not something only undertaken by a minority of shadowy businesses. It is almost universally practised. This is no surprise: if one business can gain an advantage in profits by avoiding taxes it can out compete another business that does not do so, and especially businesses too small to do so. As a result, almost all large companies take part in tax noncompliance of some form. Very many also break the law, in illegal tax evasion, or by concealing the scale of their avoidance.

It has been estimated that 83 of largest 100 US companies use tax havens. In the UK, 98 of the FTSE-100 companies use use tax havens. The FTSE-100 companies comprise some 34,216 subsidiary companies, joint ventures and associates. 38% of their overseas companies are located in tax havens. Banks are the biggest uses: the biggest four banks alone have over half of their 3,067 overseas subsidiaries located in tax havens. HSBC has 556 subsidiary companies: 156 are registered in the state of Delaware, more than in the rest of the USA. Barclays has 174 companies registered in the Cayman Islands alone, whilst the Lloyds group has 97 companies in the Channel Islands. There are over 600 FTSE subsidiaries in Jersey- more than in the whole of China, 400 in the Cayman Islands and 300 in Luxembourg. Nine of the FTSE-100 are listed in London but are themselves registered offshore, and are only obliged to disclose their ‘principal’ subsidiaries in their annual accounts.

Big4

From addicted to tax havens: the secret life of the FTSE-100, Action Aid report

FTSE 100

From addicted to tax havens: the secret life of the FTSE-100, Action Aid report

Other big users include oil and mining companies. BP and Shell together have almost 1000 subsidiaries located in tax havens, including more than 100 in the Caribbean.  The mining company Anglo American has 30 companies registered in Luxembourg alone. According to Action Aid, “The names of some of these companies – Anglo Venezuela Investments Sarl and Kumba West Africa Sarl – hint at the links between these tax haven vehicles and the developing countries in which the mining activity really takes place”.

Developing countries are estimated to have lost up to £20 million to brewing company SABMiller’s  tax planning, enough to put a quarter of a million children in school. SABMiller paid zero income tax in Ghana between 2008-10 after shifting millions of pounds into notorious tax havens such as Switzerland and Mauritius. Accra Brewery, Ghana’s second-biggest beer producer, supplies £29 million of beer a year and rising. Despite this, the brewery made a loss between 2007-10 and paid corporation tax in only one of those four years. In contrast, SABMiller worldwide showed pre-tax profits of about 16 per cent in 2009.

The single biggest tax-avoider in the FTSE-100 was advertising company WPP, whose Sir Martin Sorrell was knighted by the Blair government in 1999. It has instead made acquisitions and piled up debt in the UK, enabling it to claim large amounts of tax relief on the interest. WPP’s £200m tax payments went almost entirely to other countries. It has successful organised series of elaborate avoidance schemes, involving billions in assets held in Luxembourg, Ireland and the Netherlands.

Glaxosmithkline, Astrazeneca and Shell are all major tax-avoiders. They have  placed their most valuable assets, their trademarks, such as that for the top-selling diabetes drug Avandia, in tax havens like Switzerland, Puerto Rico and Ireland, charging other parts of the groups, including in Britain, royalties for their use. This shifts the profits from the UK to the tax-haven. In 2008 despite a 30% corporation tax rate in the UK, Glaxo’s worldwide profits were £7.4bn, the company’s actual UK tax bill was only £450m- a rate of around 6%. In 2006, it finally agreed to pay the US £1.7bn to settle a huge dispute over sales of the ulcer drug Zantac and others produced in the Puerto Rico factories. The US is still demanding a further $680million to be paid. The company was locked in a lengthy fight with the British tax authorities, described as being over “transfer pricing” and “controlled foreign company” issues, in which Glaxo was accused of piling up too many profits abroad.

Despite average annual profits of almost £2bn over the last decade, Diago plc (owner of Guinness and Smirnoff Vodca) paid just £43m a year in average UK corporation tax charge: a tax rate of about 2%. This is in spite of the fact that 6,500 workers in Britain, accounting for about 30% of the company’s production. The company is registered Henrietta Place, central London, and its £3.6m-a-year chief executive, Paul Walsh, lives in Sussex. Subsidiary companies in the Netherlands were used to transfer its brands, worth billions of pounds out of the UK.  The company’s global tax rate has been just  18% since 1999, according to its own figures.

Use of tax havens is almost certainly growing. Evidence submitted to the House of Commonsby the Tax Justice Network suggested that between 2003 and 2006, the number of Hedge Funds located in offshore tax havens rose from 40% to 55%. The absolute value of funds had also risen by this date from US$800 billion to about $1.5 trillion, meaning that by 2006 there were more offshore hedge fund assets than there were total hedge fund assets in 2003.  An  estimate in 2009 guessed that the Cayman Islands alone were now responsible for 9,000 private equity firms and 80% of the world’s hedge funds, with deposits bigger than the whole of New York. Meanwhile,  private wealth management was found to be located almost entirely offshore, dominated by Switzerland, London and a number of satellite locations. 80% of the main UK private equity earners were found to be domiciled outside the UK.

Since 1975, banking deposits kept in Jersey have increased rapidly, as the evidence by the Tax Justice Network reveals.

According to the National Audit Office, in 2006 more than 60% of Britain’s 700 biggest companies paid less than £10m corporation tax, and 30% paid nothing. A detailed Guardian report on the tax of the largest UK companies revealed that a third of FTSE-100 companies paid no tax in 2005-2006, and another third paid a minute proportion of their operating profits. Thanks to avoidance, HMRC says 12 of the UK’s largest firms “extinguished all liabilities in 2005-2006”.

Illegal practices are widespread, even by the largest companies. In 2009, at least 14,000 undisclosed tax avoidance schemes by 90 promoters were under investigation in the UK. UK law compels companies to report all of their subsidiary companies, together with their country of registration. When Actionaid looked for this information in early 2011, they discovered that over half of the FTSE 100 were not complying with this legal obligation. A Guardian report in 2009 found that five leading companies: the state-backed HBOS bank, Tesco, UBM, BAE and HSBC were breaking the law by not publishing their subsidiary companies. The identity of Tesco’s numerous offshore entities in Luxembourg, some of which assisted the retailer to avoid corporation taxes, did not appear on their official filings. The magazine conglomerate United Business Media, which has now shifted its tax residence to Ireland, similarly ignored the law, despite setting up a string of offshore entities with unclear purposes. HBOS did not post the list of subsidiaries which would make it possible to identify whether it was running offshore tax avoidance vehicles. Meanwhile, BAE’s multimillion-pound cash flows through secretly-owned entities in the British Virgin Islands and the Channel Islands  used to make secret payments to foreign middlemen and politicians.

EU rules demanding “freedom of establishment” anywhere in any member state have often been exploited for tax avoidance purposes. In 2006, HMRC was overruled by the the European Court of Justice over two financial subsidiaries of Cadbury Schweppes in Dublin. The HMRC argued they had been illegitimately set up to avoid British tax. The European Court of Justice ruled that they were legitimate, as long as the business operating there was not “wholly artificial”. Vodafone have also benefited, winning a ruling allowing them to run their German telecom firm Mannesman, via a proxy company in Luxembourg.

The pay of Roger Jenkins, Chief Executive of Barclays Capital’s Private Equity Group until 2011, was undisclosed because he did not sit on the board, but was reported to exceed £40million. Jenkins negotiated a  tax-efficient emergency capital raising deal from Abu Dhabi and Qatar. He was able to organise a circular scheme with the Irish Gas Board via Jersey and the Isle of Man to save the company £30million (diagram below). In 2003 the Law Lords ruled the scheme permissible.

Barclays circular scheme

A Diagram of the Barclays circular scheme, from the Guardian

Another Barclays circular scheme was involved US bulldozer manufacturer Caterpillar.  According to a Guardian report on the scheme:

The firm transferred ownership of £165m worth of plant to a UK subsidiary, Caterpillar International Leasing LLC, which then sold it to a Barclays company called BMBF (No.24) Ltd. This Barclays “special purpose vehicle” immediately leased the kit back to the UK Caterpillar company, which itself then rented it back to original owner Caterpillar Inc

At all times the plant remained at Caterpillar’s Illinois base, while most of the price that Barclays paid over was deposited back with Barclays in Bermuda. The only purpose was to generate UK tax allowances worth around £50m. That scheme did fail, in the appeal court.

Another reported Barclays tax scheme involved selling its customers payment protection insurance via low-tax Ireland. The policies, from Barclays Insurance (Dublin) Ltd and Barclays Assurance (Dublin) Ltd, generated profits up to £200m a year, taxed at just 10%.

One of the leading consultancies on tax-avoidance strategy is OneE Tax, based in Manchester. It’s website used to saythat, while HMRC says “tax doesn’t have to be taxing,”, for OneE clients, “tax doesn’t have to be”. Unsurprisingly, they follow their own advice. According to the company’s own financial statements, directors were paid a total of just £55,435. However, they paid £7.5m into an EFRBS. The accounts also list a number of loans to directors, with no terms attached. It paid a total of just £120,000 in corporation tax in just one year.

What we see is that tax avoidance is widespread, and almost all large companies take part in tax non-compliance, including illegally concealing the scale of their tax avoidance, on a massive scale. This is not a fringe practice, but mainstream, standard behaviour by almost all large companies, especially those in the UK.

Corruption is rife in Tax Havens

tax haven taxes

From Addicted to tax havens: the secret life of the FTSE-100, Action Aid report

In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill.

Senator Carl Levin 

No fewer than 30 havens are in crown dependencies, British overseas territories or Commonwealth countries

Vince Cable

The highly secretive nature nature of tax havens inevitably helps not only legitimate business, but also corrupt and illegal companies and organisations. Dictators, drugs and arms smugglers and criminal gangs have all made routine use of tax havens. Almost all tax havens are politically corrupt. This corruption in turn breeds further crime, secrecy and corruption.

The economy of tax-havens is skewed towards one thing: holding vast reserves of the world’s wealth and protecting its secrecy at all costs. The total amount of money managed by offshore organisations in Dublin’s financial centre, much of it channelled through obscure conduits, quadrupled between 2000 and 2006 to nearly 1.6 trillion euros – more than ten times as much as real foreign direct investment in Ireland. The British Virgin Islands now have 30,000 citizens and 457,000 registered companies. In the Cayman Islands, 18,857 companies are registered at one single address. Lawyers and accountants now make up a tenth of the population of the Cayman Islands.

One building in Delaware is the legally office home of over 200 companies, including Google and Coca Cola; however, the majority are shell companies, without any assets and which do not do any business except as a vehicle for secret transactions. Many employ just one lone clerk who may be working for several hundred shells at a time. Delaware is home to 50% of the United States’ quoted firms and 650,000 companies, around one company per resident.  In the U.S. accounts for slightly over 21 percent of the global market for offshore financial services, making it a huge player in the secrecy jurisdictions underworld

Secrecy is at the heart of how tax havens operate. The vast majority of tax havens do not have information sharing agreements of any sort with the UK or elsewhere. As journalist Nick Shaxson, author of Treasure Islands: Tax havens and the men who stole the world puts it:

 Tax havens aren’t just about tax. They are about escape – escape from criminal laws, escape from creditors, escape from tax, escape from prudent financial regulation – above all, escape from democratic scrutiny and accountability.

The Tax Justice Network rated Delaware top of its Financial Secrecy Index in 2009. Delaware offers high levels of banking secrecy and does not make details of trusts, company accounts and beneficial ownership a matter of public record. Delaware also allows companies to re-domicile within its borders with minimal disclosure, and allows the existence of privacy-enhancing “protected cell” or “segregated portfolio” companies, among many other stratagems useful for protecting the identity of those who do business there.

Also high ranking was the City of London, able to act as a hub of  many tax havens due to its unique form of local government.  The City acts as the centre of a large, secretive financial web stretching across the globe. Of the 73 jurisdictions in the 2011 Financial Secrecy Index, almost half are connected to Britain and the City of London. Jersey alone provided £135bn in bank deposits to the City. Jersey Finance, the tax haven’s promotional body stated: “Jersey is an extension of the City of London”.. Unlike other local authorities, people in the City are not the only voters, businesses can vote too, in proportion to their size, with a company of 3,500 people or more being allocated the maximal 79 votes. Those bosses of each company appoint those who will get to cast these votes. New Labour’s new law in 2002 strengthened this: Nick Shaxson writes:

Before 2002, the 17,000 business votes (only business partnerships and sole traders could take part) already swamped the 6,000-odd residents. Blair’s reforms proposed to expand the business vote to about 32,000 and to give a say, based on the size of their workforce in the Square Mile, to international banks and other big players. Voting would reflect the wishes not of the City’s 300,000 workers, but of corporate managements. So Goldman Sachs and the People’s Bank of China would get to vote in what is arguably Britain’s most important local election.

Severe sentences await almost anyone who discloses bank information in most tax havens. In the Cayman Islands, this can be a lengthy prison sentence. The City of London has never transmitted even the smallest piece of usable evidence to a foreign magistrate with regards to tax avoidance or illegal tax evasion. In Switzerland, a 1934 law is used to jail those who leak information. Whilst most countries regard tax evasion as a crime, Switzerland insists that it is no crime at all unless it involves active fraud, such as the forgery of paperwork.

In 1997, Christoph Meili discovered that the biggest Swiss commercial bank, Union Banque Suisse (UBS) was burning the record of Jewish Holocaust victims. When he reported this fact, he was accused of breaching the law and was forced to flee the country, after the US granted him political asylum. An ongoing battle is being fought in the Swiss courts over Rudolf Elmer. who posted internal paperwork on internet sites which, he claims, reveals tax evasion and money laundering by individuals. Elmer was held in prison for 30 days and told he would be charged for breaking the secrecy laws. Elmer says:

People don’t know how the system works. They may hear of some case, but the big picture always disappears into bank secrecy, professional secrecy with lawyers and accountants, and tax secrecy. But they need to know that this is a system which undermines our society, our democracy.

Bradley Birkenfeld, a UBS employee arrested in America alleged that UBS staff routinely broke laws forbidding foreign bankers to tout for business among wealthy Americans. They travelled to US golf, tennis and yachting events sponsored by UBS, lying on their visa forms about the purpose of their visit, armed with laptops with heavily encrypted files and deploying counter-surveillance techniques for which they were specially trained. The bank helped thousands of clients to dodge this by shifting their money into offshore companies. UBS advised clients to destroy evidence of their accounts and offered to store their banking correspondence for them in Zurich. UBS helped 30,000 US taxpayers to shelter $18bn.

Such havens of secrecy inevitably breed crime and corruption. The Tax Justice Network reports “Corruption is endemic within offshore financial centres”. Dictators from Mugabe to Gadaffi, Mubarak to Fidel Castro, are all reported to have made widespread use of tax havens. Switzerland has been persuaded under heavy international pressure to allow investigations where a crime can be linked to the account holder. As a result, Robert Mugabe and others have now moved to Arabian and Asian tax havens.

One document released by Elmer was on the Carlyle Venture Partners fund, put together 67 wealthy companies and people to invest about $230m. Investors included the Saudi prince Talal bin Abdul-Aziz ($1m); two companies advised by Prinz Michael von und zu Liechtenstein ($7m); the late Akram Ojjeh, who earned a fortune brokering arms deals in the Middle East ($2m); the Kuwaiti state’s sovereign wealth fund ($10m); and London-based Saudi companies linked to the Bin Laden family construction group ($2m).

Arms and drugs smugglers also exploit their secrecy laws: Viktor Bout used Gibraltar as a centre for centre of drug money laundering. According to Nick Shaxson, in the 1990s, the US spent millions helping former Soviet Union countries improve security at their nuclear power plants. Much of the money went missing, and was eventually tracked down to anonymous shell companies in Delaware and Pennsylvania. The International Narcotics Control Strategy Report reported: “Illicit cash is consolidated in the UK and then moved overseas where it can readily enter the legitimate financial system.” It adds: “Drug traffickers and other criminals are able to launder substantial amounts of money in the UK despite improved anti-money laundering measures.”

The corruption of tax avoidance in turn breeds other forms of corruption. All of these activities, legal and illegal are connected, through the secretive tax havens. The network of criminals, dictators and tax avoiders are all connected through these secretive states.

Tax Authorities and Courts are Failing

It’s clear that tax authorities and courts are failing to deal with the problem on an epic scale. Tax noncompliance is a widespread, mainstream practice, employed by almost all large businesses. Governments are losing tens of billions of pounds, and the problem is growing, yet almost nothing is being down to stop it.

According to one source at HMRC, “There are less than 100 inspectors actually tackling avoidance, against thousands of professionals advising companies on how to do it”. In the United States, there are just 500 full-time inspectors to pursue transfer pricing issues. In Developing countries, the situation is far worse: Kenya can only afford between three and five tax investigators for the whole country. The figures speak for themselves. Ernst & Young alone employs over 900 professionals just to sell transfer pricing schemes.

An Oxford Business School’s  survey highlighted concerns about “a particular dearth of people who have the technical ability to deal with the challenges presented by large business”.  An internal HMRC paper in 2005 said inspectors thought they were “not resourced for a challenge on the lesser [avoidance] schemes”.

Meanwhile, staff numbers are being cut. In the UK, numbers have fallen, from nearly 100,000 in 2004-5 to 68,000 by June 2010, with numbers likely to fall further to 55,000 by 2015. President of the Association of Revenue and Customs, Gareth Black has stated that these job losses have contributed to a failure to collect a further £1.1bn in taxes, which was also echoed in a public accounts committee report. According to the Guardian:

 The government has promised to reinvest £917m of savings back into HMRC but Black said cuts to the department – including the further 25% cut in expenditure announced in the spending review – would “further erode staff capacity, staff morale and HMRC’s overall ability to close the tax gap”… The union called for an additional investment of £260m over the next four years in key areas, including corporate tax avoidance, which would allow it to recoup an extra £6bn in currently lost tax.

Meanwhile, the 2010  public accounts committee report on HMRC lamented the cosy relationship with large companies.  HMRC attended numerous lunches, dinners and receptions organised by PricewaterhouseCoopers (PwC), KPMG, Deloitte and Ernst & Young.

Big business routinely uses high wages to lure Revenue staff, in order to help its tax avoidance schemes. A middle-ranking tax inspector earning £60,000 could easily find his salary rising by £40,000 this way, says one former inspector. Eight staff in the division responsible for collecting tax from Britain’s biggest companies were recruited in 2007 by the big four accountancy firms. In the three years to 2009, HMRC has approved 390 applications from staff to join a company, accountancy firm or outside body.

Unlike its counterparts in the US, HMRC has never prosecuted  major accountant over tax avoidance. It says: “Selling an avoidance scheme would not normally involve activity that amounts to a criminal offence”. HMRC is itself a highly secretive organisation. Its interpretation of the law grants public companies the same level of total confidentiality as private individuals, about anything to do with their tax affairs. It often turns down freedom of information requests.

The Guardian was defeated in a high court challenge to lift an emergency gagging order imposed on the publication of Barclays Bank documents alleged to detail huge tax avoidance schemes. Vodafone, Cadbury Scweppes and British American Tobacco have all launched high profile legal challenges to tax evasion claims. British American Tobacco won a recent high court victory on behalf of 20 other companies over whether they should pay UK tax on dividends received from their European subsidiaries. If appeals fail, the Treasury may have to repay the companies up to £5bn in total.

However, in the US too, authorities are often reluctant to deal with even the most severe cases of tax evasion. The Madoff scheme, probably the largest Ponzi scheme ever detected (at about $65bn), was not just ignored for years by the Securities and Exchange Commission (SEC), the SEC helped destroy 18,000 records. Indeed, many of the files that had been wiped off the record over the years involved companies and individuals who were later central to the financial crisis of 2008.

Even if they are caught, the law is skewed in the tax avoiders’ favour. As Senator Levin has noted,

Under Section 6701 of the tax code, these aiders and abettors face a maximum penalty of only $1,000, or $10,000 if the offender is a corporation. This penalty, too, is a joke. When law firms are getting $50,000 for each of these cookie-cutter opinion letters, it provides no deterrent whatsoever. A $1,000 fine is like a jaywalking ticket for robbing a bank.

It’s clear: the tax authorities and courts are both siding with the tax avoiders they are supposed to be stopping. There is an extremely intimate relationship between the two, and the laws are skewed in order to help the tax avoiders. Not only do they share frequent, informal meetings with each other on a routine basis, but often, the tax authorities and tax avoiders are the very same people, from the same organisations. Perhaps this explains why so little is done to stop tens of billions of pounds being lost by governments to tax avoiders every single year.

Why Politicians won’t stop Tax Noncompliance

The cosy relationship is not just confined to tax inspectors, it also extends to politicians. It’s worth examining the nature of this relationship: through the revolving door between the political and business establishments, through the influence of tax avoiders on think tanks and lobby groups, as well as the media, shaping the political agenda, and through their financing of the political process. The result of this is politicians, often personal friends of the wealthiest tax avoiders, or tax avoiders themselves, writing laws that are skewed in the tax avoiders’ favour.

Britain’s major accounting firms, such as PricewaterhouseCoopers (PwC) are widely involved in the tax avoidance industry. KPMG has admitted to being involved in criminal tax evasion deals worth £2.5bn, in addition to its legal tax-avoidance work. In 2007, the US justice department charged four Ernst & Young (E&Y) current and former partners on eight counts “with tax fraud conspiracy and related crimes arising out of tax shelters promoted by E&Y”. It is these accounting firms that make tax avoidance and evasion possible, and profit hugely from it.

Many former ministers now act as advisers to these accounting firms: Lord Mandelson has been an advisor to Ernst and Young, while Lord Digby Jones and Lord Norman Warner of Brockley have advised Deloitte. Jacqui Smith is a consultant for KPMG and Malcolm Rifkind has been an advisor to PwC.  Sir Nicholas Montagu, a former chief of the Inland Revenue joined PwC before moving on to other business ventures.

PwC partners are regularly appointed by the government. For example, Richard Abadie has been the head of PFI policy at the Treasury whilst former PwC partner Amyas Morse was appointed UK comptroller and auditor general and became responsible for directing the National Audit Office. John Whiting was made the director of the Office of Tax Simplification, whilst Chris Tailby one-time tax partner at PwC became head (until 2009) of anti-avoidance at HMRC. Mark Hoban, Conservative MP and financial secretary to the Treasury is also a former employee of PwC. His current responsibilities include financial services policy including banking and financial services reform and regulation, financial stability, city competitiveness,wholesale and retail markets in the UK, Europe and internationally and the Financial Services Authority (FSA). Such examples are only “scraping the tip of the iceberg”, according to TaxResearch UK.

Meanwhile, In July 2010, partners from KPMG, Ernst & Young, Grant Thornton and BDO became members of the government appointed Tax Professionals Forum to help shape UK tax law.

Tax avoiders have been prominent in lobbying the government and to fight battles all the way up to the European courts.  The CBI and Hundred group have both been vocal in calling for changes to the tax law in businesses’ favour. The group had around 20 meetings with the government over the issue, according to an industry source. Conglomerates engaged in tax avoidance – Astra Zeneca, WPP, Glaxo and Diageo – were prominent among the lobbyists.

Tax avoiders are major funders of political parties in both the US and the UK. In the US Congress 47% of members are millionaires, including some who own hundreds of millionaires of dollars. Due to the PAC system, it is hard to know precisely who is really funding campaigns, however, since the Citizens United vs Federal Election Commissionruling in 2010, it has been deemed unconstitutional to limit the corporate and Union political donations. PACs can now make unlimited expenditures independently of a candidate or political party.

In the UK, the Conservative Party has been revealed to receive over half its funding from the City- some £11.4 million.  Lord Ashcroft, for many years the single biggest Conservative Party donor, pays no tax in the UK, and has been repeated mired in scandals about his business affairs in Belize, a tax haven. Another non-dom, Lord Paul, is a major donor to the Labour Party. Hedge Fund Manager George Robinson has an estimated wealth of £215 million. He gave the Conservatives more than £250,000 (enough to attend prestigious party events with David Cameron as part of the Leader’s Group), was in 2009-2010 director of a company called Romangate, along with Jimmy Carr and around 500 others. The company was a grand tax avoidance scheme, but was closed down before its members could claim any tax relief, following an investigation by HMRC. George Robinson is also a trustee of the influential Policy Exchange think tank.

Financial consultants Matthew Jenner and Anthony Mehigan, founders of Romangate, also run a consultancy firm called NT Advisors. NT advisors was behind a lobbying attemptthat attempted to wreck the Labour government’s Finance Act of 2008. NT Advisors hired a lobbying firm, the Whitehouse Consultancy, and briefed officials and politicians to press for parts of the bill to be dropped, arguing it would unfairly affect 600 individuals who benefited from legitimate tax avoidance schemes. NT Advisors wrote to politicians threatening to seek a judicial review of the act which they claimed breached Article 1 of the European Convention on Human Rights, the right to peaceful enjoyment of possessions. In 2009, the Conservative Party tabled an amendment to prevent a retrospective clause of the act being extended. David Gauke, the Treasury minister, declared “the risks of retrospective legislation are very considerable” because “it damages stability and certainty in the UK tax system”.

The Taxpayers’ Alliance, arguably the most powerful pressure group in the UK provides another example of the political power of tax avoiders. In 2008 the group was cited by the most popular newspapers, the Sun 307 times and the Daily Mail 517 times, and it has frequently appeared on popular news and current affairs programs like Newsnight. Yet the group’s chief executive, Matthew Eliott, has been forced to admit that he does not pay tax in the UK. One of their biggest donors, Sir Anthony Bamford (personal fortune around £950 million), also a major Conservative party donor, was blocked from receiving a peerage by HMRC, although HMRC refused to explain why. It seems likely that he was avoiding taxes on a colossal scale. Perhaps the Tax avoiders’ alliance would be a more appropriate name?

Clearly, tax avoiders wield enormous political power and influence. Under such circumstances, it is perhaps not surprising that the law is written in favour of the tax avoiders, and that governments over decades have done almost nothing to tackle the issue. Around 30 offshore tax havens are under British jurisdiction. The British government for decades has done nothing to close them down. Moreover, the laws have been passed for the specific purpose of helping wealthy individuals and businesses avoid taxation.

In one bizarre scheme, the British government allows those who invest in the film industry to avoid taxation. £150,000 invested in a film could generate £1m of tax relief, regardless of how successful the film is. The product is in effect irrelevant. The government has failed to enforce disclosure rules in the Companies Act under which details of all offshore subsidiaries, which can be used for tax avoidance, must be publicly registered. A loophole in the 1985 Companies Act allows a firm to claim that full information on its subsidiaries would be of “excessive length”. Instead of listing them in its annual published accounts, it can file a separate return to Companies House. This can easily be ignored because Companies House makes no effort to enforce it. The registry in Cardiff told the Guardian that they never check, and no one has ever been prosecuted.

Rich individuals are also allowed to conceal their ownership of property in the UK. They can list their country mansions or grouse moors in the names of unidentifiable offshore companies or trusts. Despite protests by the Land Registry that this makes a mockery of supposedly public records, the government refuses to take action.

We therefore see the reason so little is being done to stop tens of billions of pounds being lost to tax noncompliance. There is a revolving door between the treasury and the largest tax avoidance firms. The politicians have close personal relations with the largest and most powerful tax avoiders, and the political parties are in hoc to their donations. Tax avoiders dominate lobby groups and think tanks. There is an intimate alliance between the political and business establishments. Through their networks and finances both are helping each other to maintain their grip on power.

Time to Tackle Tax Havens

Globalisation has enabled a computer microchip company to design its products in country A, manufacture in B, test in C, hold patents in D and assign marketing rights to a subsidiary in country E. Such a structure gives corporations huge discretion in allocating costs to each country and shift profits through internal trade. Around 60% of the world trade consists of transfers internal to multinational corporations. This gives them numerous opportunities for shifting profits across borders

Prem Sikka, Professor of Accounting, University of Essex

To really end the secrecy tax havens offer, there must be effective information sharing between havens and all countries where their account holders are resident or are citizens. A truly global deal where this information is shared automatically would help countries rich and poor alike.

Vince Cable

Tax Havens are the ultimate expression of globalised capital. An internationally mobile ultra-rich elite now exists, independent of any particular state, but parasitically exploiting the state, whilst paying almost nothing. Governments, without global reach, or international organisations strong enough to deal with this elite, are becoming increasingly powerless. Tax avoidance deprives them of hundreds of billions of dollars, but it also represents a weakening of the state in the globalised world, as a few elite corporations are increasing in power.

But governments are not powerless. Economist Richard Murphy gives a number of simple suggestionsthat could be used to reduce the problem of tax havens.  As Vince Cable says,

New accounting standards are also needed to force multinational companies to declare publicly the profits they make, and the taxes they pay, in every country in which they operate. That way anomalies would be quickly spotted.

The power behind the vested interests of tax avoiders currently means that governments are unwilling to even begin tackling this problem. Instead, despite their repeated claims of moral outrage, they are in alliance with these wealthy elites, and are helping them to avoid paying their taxes. It is up to we, the people, to make sure that tax avoidance is stopped.

3 comments

  1. […] Yet, many of the firms that profit most from PFI also hold influence over the treasury. The relationship between the PFI firms and the government is extremely close indeed- many of the people responsible for PFI policy have profited from it hugely. This, perhaps, provides another explanation of why the government and Treasury have been so enthusiastic to pursue a policy that can only be described as hugely wasteful. Jeffrey Spence used to work for the bank HSBC, now he’s on his third stint at the Treasury. Richard Abadie came on secondment from the City accountants PwC and has since returned there. Charles Lloyd was also loaned out by PwC. He too has returned there.  Many of these firms are precisely the same as those that seem to be influencing the treasury over tax avoidance, as I mentioned in an earlier post. […]

  2. […] and 2003. Freddie Mac was fined $125 million for accounting fraud in 2003.  UBS (as mentioned in a previous article) was fined $780 million for illegal tax evasion. It was forced to release information which […]

  3. Good post to for understanding finance in guernsey, but what’s more important is that we should understand the different taxation slabs before going ahead.

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