Spotlight on Tax Havens

Article published: Friday, May 1st 2009

Dave Tovell spills the beans on tax havens…

Office cleaners often pay more tax than the executives whose floors they scrub. Exactly how do these CEO’s get away with it? Dave Tovell spills the beans on tax havens…

Most people are
looking for ways to cut back on what they spend. This includes the
government, which aims to limit the yearly growth in public spending to
under £30 billion. They’re not helped by the Royal Bank of Scotland,
having already thrown more than £20bn into the bank, and committed to
paying former chief executive Sir Fred Godwin a £16 million pension.
RBS were happy to take taxpayers’ money now, but when times were good,
they were masters of avoiding paying taxes. It recently emerged that
the bank cost the UK and US treasuries over £500m in non-paid tax
through complex avoidance schemes. It’s not the first outrage over
uneven tax burdens. But how do they get away with it? The short answer
would be tax havens. But what are tax havens? Who uses them? Why
should I care? All will be revealed below:

A tax haven, put simply, is a place with low tax rates that is also
commonly referred to as an ‘offshore’ zone. Individuals and companies
are supposed to pay taxes in the places where they make their money,
which forces them to give something back to society they live in – like
everyone else. Tax havens undermine this. In fact 90 percent of all tax
haven companies have no business at all where they are incorporated. 
Or as Barrack Obama put it during his presidential campaign: You’ve
got a building in the Cayman Islands that supposedly houses 12,000
corporations, thats either the biggest building or the biggest tax
scam on record.

The International Monetary Fund (IMF) estimates there are 42 tax
havens worldwide. Stereotypically they are tiny islands in the
Caribbean or English Channel but they also include large countries like
Switzerland and Austria and can apply to places like the Republic of
Ireland or Russia due to their low rates of corporation and income
tax. The British truly lead the way though, as around 30 tax havens are
UK overseas territories or Crown dependencies. The IMF even classes
London as an ‘offshore’ due to the ‘light touch’ regulatory regime
pursued to boost our financial services industry.

Despite their dodgy reputation, using tax havens is surprisingly
mainstream. The secrecy that surrounds tax havens makes knowing the
full scale of the problem impossible, but authoritative studies suggest
many major UK companies use them.

Research by The Guardian for its Tax Gap series found that many of
the UK’s top 100 richest companies paid less tax than their earnings
would indicate. Similarly the Trade Union Congresss report Missing
Billions reveals that, on average, the 50 largest companies almost
always pay 5 percent less tax on average than they declare. The World
Bank estimates £12bn pounds is lost to tax havens annually from the 700
largest UK corporations. All this means that the burden of taxation has
fallen ever harder on ordinary people. Between 1989 and 2003, taxes
paid by individuals have doubled, while taxes paid by corporations have
increased by only 2.8 percent.

Wealthy individuals can play the system too. Registering themselves
as ‘non-domiciled’ and declaring business interests outside the UK,
they enjoy paying almost no income tax. Registering as a ‘non-dom’ can
be achieved while actually living in the UK for a fee of £30,000,
thanks to reforms brought in by Labour two years ago. A great example
of one of the estimated 100,000+ ‘non-doms’, is the multi-millionaire
Lord Rothermere, owner of the Daily Mail. His Bermudan-registered
Rothermere Continuation Ltd. allows dividends earned over the years
from the Daily Mail to be classed as ‘overseas income.’ Rupert Murdoch
– owner of The Sun, The Times and Sky News – pays no net corporation
tax in the UK. Bear that in mind next time you hear their newspaper
slamming ‘benefit cheats’ or ‘scrounging’ asylum seakers. The UK’s
richest man, steel magnate Lakshmi Mittal, is also a ‘non-dom’, as is
Harrods owner Mohammed Al-Fayed, and Chelsea Football Club boss Roman
Abramovic.

Tax havens have played a key role in the credit crunch, aiding the
rise of the ‘shadow banking system. Mainstream banks used
subsidiaries companies, often registered in tax havens, to take both
profits and debts off their balance sheets. This helped tax avoidance,
and prevented investors and regulators seeing the scale of the risks
they were taking. All the major casualties of the credit crunch were
heavily involved in this practise. Additionally, the threat of moving
money to tax havens allows banks and wealthy investors to put great
pressure on governments to lower regulatory standards. The effects in
the UK and USA are all too clear now.

Tax Havens are also a major problem for developing countries
though, as they struggle to claw back some of the wealth taken from
them by large multinationals. Indeed, Angel Gurria, General Secretary at the Organisation for Economic Cooperation and Development stated in 2008 that "developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid."
U2 front man and ‘anti-poverty campaigner’, Bono, brought unexpected
attention to the issue. Having frequently called for the government of
his native Ireland to give more money to Africa, Bono chose to deprive
the Irish government of a sizeable chunk of the $110 million his band
earned in 2005. In the same year the Tax Justice Network calculated
$11.5 trillion had been put in tax havens by wealthy individuals like
Bono. One third of this money would be enough to meet the Millennium
Development Goals. 

Tax havens ultimately create inequalities by shifting the tax burden
away from the rich. It’s crucial the burden of the bailouts is born
proportionately, but that means giant changes in tax justice. There are
some steps in the right direction, suggesting the super rich are losing
some of their power. Switzerland, the world’s biggest tax haven, has
announced it will no longer keep the details of wealthy depositors
secret. Liechtenstein is doing likewise. There is however, a very long
way to go.

For more information on these issues visit www.taxjustice.net

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