Never has there been so much discussion around tax havens since the recent ‘Paradise Papers’ fiasco which saw more than 13 million financial documents leaked. And these documents were pretty significant.
In fact, extremely significant as they gave an insight into the questionable and often murky world of offshore finance and the super-rich. Among the super-rich involved, there’s been suggestions of celebrities, sports personalities, politicians – and even the Queen – using complex structures to avoid higher taxation of their wealth.
1. What Are Tax Havens And Who Uses Them?
A tax haven is a country offering businesses and foreign people a minimum tax liability.
The country will benefit from a politically and economically secure environment and it doesn’t usually have to share financial information with tax authorities based abroad.
For the countries classed as tax havens, the main benefit is that a healthy financial sector is developed due to the capital invested in their banks by those who have accounts with them.
For those with accounts in a tax haven, the main benefit is that its laws can be used to avoid the tax laws elsewhere.
Many super-rich individuals and companies channel their wealth into tax havens – a practice that’s been going on for years.
2. What Countries Are Tax Havens?
Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands and the Cayman Islands. There’s also the Cook Islands, Honk Kong, the Isle of Man, Mauritius, Lichtenstein, Monaco, Panama and St Kitts and Nevis.
3. How Does The Scheme Work?
There isn’t just one way that tax havens enable tax avoidance; there are many – and they can be complex. For this reason, specialist tax professionals are often used to advise super-rich clients and companies about how to store their money offshore.
For companies, a popular method of tax avoidance is called ‘corporate profit sharing’, where a multi-national company will register its headquarters in a country where corporation tax is low. It then reports its profits there, instead of the country in which the sales are made. Google and Facebook (amongst other companies) do this to decrease their global tax liability.
For individuals who want to avoid paying higher taxes, they may become a resident of a lower-tax country. Racing drivers earn eye-watering amounts and there are many that reside in Monaco, a prominent tax haven.
But that’s not the only way to benefit from a tax haven. An individual could still live in the UK but keep their assets in a trust (managed by a third party) and so will legally escape having to pay capital gains tax (profits from the sale of investments or property) in the country in which they reside.
4. Tax Havens Aren’t Illegal So What’s The Problem?
The financial dealings in tax havens aren’t particularly transparent. If they’re used for tax avoidance, then that’s usually legal, but what isn’t legal is tax evasion which involves hiding wealth from the government.
The secrecy inherent within tax havens appeals to money launderers and other purveyors of criminal activities who use the ambiguity entrenched in offshore finance to hide their dodgy dealings.
There’s also the moral issue. Shouldn’t everyone pay their fair share of taxes – particularly those who earn vast amounts?
The tax avoidance issue is one that conjures up resentment from the majority of the population and feeds into an idea of a capitalist system where the rich get richer whilst the poor get poorer. The wealthy elite have a distinct unfair advantage compared to those of us that aren’t able to hire wealthy taxation consultants.
We have no advice on how to avoid paying high taxes, so simply pay what we have to; why should others who can, get away with it?
5. How Big Is The Tax Avoidance Problem?
Very big. Massive, in fact.
It’s estimated that the big US tech companies, including Apple and Microsoft have £1.4 trillion of profits held offshore, mostly in tax havens. And that’s just the US tech companies alone!
Although personal tax avoidance is a bigger issue. It’s estimated that £7.6 trillion (8% of global wealth) is held offshore, which is an increase of 25 per cent in the last five years. It should be noted that not all of that money will be held for dubious tax purposes, but it’s assumed that a significant share of it will be.
6. Can Anything Being Done?
6.1 Corporate Tax avoidance
Two solutions have been identified:
1) Governments all over the world need to agree a fair formula on how to tax multinational companies based on their employee numbers, investments and sales in several countries. Thus, forcing the closure of tax havens as no corporate activity would occur.
2) Whilst making dispensations for its local costs, exports and investments, governments could tax an individual multinational’s revenues, doing the same for each multinational.
6.2 Personal Tax Avoidance
The solution identified is complete and total public transparency about the beneficiaries of offshore trusts.
It’s been suggested that the collective EU governments could pressurise tax havens into compliancy. Indeed, many tax havens are also British crown dependencies such as the British Virgin Islands and Bermuda so the UK government already has a certain degree of power in those countries.
But can we really blame people for taking advantage of what is essentially a legal loophole? And does the blame for tax avoidance ultimately lie with the governments who allow it to happen?
The real issue here is that the murky world of offshore finance attracts criminals and perpetuates criminality, as in these ‘paradise Islands’ they have a relatively safe haven in which to launder money.
As long as a huge proportion of the financial dealings in tax havens remain secretive, and as long as there isn’t much pressure on the hosting countries to be transparent with their finances, offshore tax havens won’t be going anywhere soon.
