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TAX NEWS - June 2010

Tax havens

Either they are the mainstays that keep governments honest or they help the rich take from the poor - tax havens get mixed reviews.
During his tenure as president of Nigeria, Sani Abacha had a standing order to pay $15m a day of stolen government revenues into a Swiss bank account that he controlled. In 1999 the Economist estimated that African dictators held $20bn of stolen wealth in Swiss accounts alone - twice the continent's annual debt repayment bill.

Enron, that paragon of US turbo-corporatism, had more than 800 secret offshore subsidiaries, allowing it to create one of the biggest accounting and tax frauds in history.

Offshore financial centres - "tax havens", to use a phrase they don't like - have been on the defensive in recent years. Small wonder.

So is the whole system corrupt and immoral to the core? Should expatriates hang their heads as they arrange for their salaries to be paid into a Jersey bank?

Some people will find the idea of low- or no-tax regimes abhorrent. To the Guardian columnist George Monbiot, the only answer is to close these places down and make everyone publish his or her tax records. If future Sani Abachas were prevented from indulging their hobby of grand larceny, how many people would object?

But the eradication of offshore financial centres will seem draconian to ordinary international workers who simply take advantage of concentrated expertise in places such as Jersey and the Isle of Man. They also want to minimise their tax bills while working abroad. Is that immoral too?

Let's hear from the early 20th-century American jurist Justice Learned Hand: "Anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which will best pay the treasury. There is not even a patriotic duty to increase one's taxes."

Tax evasion is obviously crooked. In so far as the offshore world allows it to happen, it is also immoral. But tax minimisation is a difficult area. As Mike Warburton, an offshore tax expert at the accountancy firm Grant Thornton, notes, even the Inland Revenue and professional tax advisers are not always sure where the line is to be drawn.

Last year a group of MEPs tabled a motion in the European parliament calling for the outlawing of all tax-reduction practices. Can it be reasonable to make tax planning illegal?

"I always use the rule", says Warburton, "that even if what I'm doing is strictly legal, would I be comfortable standing up in front of a Chancery judge and explaining what I'd arranged for a client?" That seems a sensible compromise between the maximalist interpretation of taxation and borderline fraud.

More unsettling is the way multinationals use offshore structures to reduce their tax bills drastically, or eliminate them. Companies such as News International pay, at the time of writing, what seem to be grossly unfair amounts of tax - roughly 5% per year over the past few years in the case of Rupert Murdoch's company.

Figures from the US General Accounting Office show that offshore centres, despite accounting for only 1.2% of the world's population and 3% of its GDP, hold 26% of US corporate assets and 31% of their profits.

A system known as transfer pricing allows multinationals to "sell" goods from one branch of their business to another at vastly disparate prices, the resulting profits being salted away in an offshore centre. John Christensen of the anti-offshore pressure group the Tax Justice Network (TJN) wrote recently of plastic buckets being imported from the Czech Republic to the US for $972.98 and rocket launchers being exported from the US to Israel for $52.03.

Multinationals respond that money not going into national treasuries goes towards increasing economic activity, which benefits everyone. There is some truth in this. Offshore centres seriously stepped up their operations in the 1970s when British tax rates became punitive (the top rate plus an investment income surcharge ended up at 98%). High corporation tax rates drive companies to set up elsewhere. This shouldn't be seen as a war between public virtue and private greed.

Yet groups such as TJN want an end to different tax rates, full stop. So-called tax competition is immoral as well, they say. The offshore world is a link in the tax competition chain a fortiori. However, to assert that all competition should be outlawed is to say that their vision of the state should prevail worldwide, with no argument.

Warburton argues that offshore centres fulfil an important function: keeping governments honest. "They are a warning that governments must not abuse the trust of the citizens. The last time that happened, and income tax levels were punitively high, money simply flowed out of the economy." This is another way of saying that tax competition can protect citizens from predation by the state.

Where, then, is the balance to be struck? There has been a concerted clean-up effort over the past 10 years or so. Supranational organisations such as the Organisation for Economic Cooperation and Development (OECD), the UN, the EU and the G8's financial action task force have been bearing down on illicit tax and secrecy rules in offshore centres. Clearly dodgy places have been shut down. Centres such as Jersey and the Caymans have been forced to disclose more information to onshore tax authorities.

The OECD approach may be the best one. It distinguishes between legitimate and illegitimate offshore. Unacceptable offshore centres are defined as countries that levy little or no income tax, refuse to exchange information with tax authorities in other countries and lack transparency and lack "substantial activities" - meaning a real business purpose aside from avoiding taxes. Offshore centres that offer expertise to international workers are protected. After all, an expatriate will be liable for tax somewhere. Using the offshore world to minimise the bill will still be allowed. Tax competition will stay.

If this approach works, it will lessen the secrecy that facilitates obscene corporate tax evasion and institutional kleptocracy, but will keep the benefits available offshore.

It might be working already, albeit slowly. Just before Christmas 2005 the Monaco authorities announced that Sir Mark Thatcher - house-hunting on the Riviera - will not be welcome back, even though he has had a temporary residence permit for a couple of years. 'I want morality, honesty and ethics to be at the centre of government,' said Prince Albert, head of the principality.
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