The changing face of tax havens

For areas that, by definition, are shrouded in secrecy, actual definitions can be hard to come by. Nicholas Shaxson, in his book Treasure Islands: Tax havens and the men who stole the world, defines a tax haven as a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.

"Another way to spot a secrecy jurisdiction is to look for whether its financial services industry is very large compared to the size of its local economy. The IMF used this tool in 2007 to finger Britain, correctly, as an offshore jurisdiction," says Shaxson.

Shaxson also lists the Netherlands, Austria, Belgium, Liechtenstein and Monaco as European havens of banking secrecy.

"The world's most important tax havens are not exotic palm-fringed islands, as many people suppose, but some of the world's most powerful countries," says Shaxson.

He quotes Marshall Langer (described by Shaxson as a prominent supporter of secrecy jurisdictions) who he says neatly outlines the gulf between perceptions and reality: "It does not surprise anyone when I tell them that the most important tax haven in the world is an island. They are surprised, however, when I tell them that the name of the island is Manhattan. Moreover, the second most important tax haven in the world is located on an island. It is a city called London in the UK".

And, since the 2007 IMF fingering that Shaxson refers to, the UK has devoted significant effort towards making its tax regime more attractive for businesses. This has led others to label jurisdictions such as the UK as tax havens.

"Describing the UK as a tax haven obviously depends on your perspective but also on the context," says Sandy Bhogal, head of tax at Mayer Brown in the UK. "There is no agreed definition of what a tax haven is, and therefore the term can be thrown around for political purposes when countries become embroiled in discussions about tax competition, which is another pejorative phrase. It has been argued that the UK, together with its network of crown dependencies, form a wider network for the avoidance of tax but in isolation it cannot be denied that the UK has a wide tax base. Even recent moves to reduce the corporate tax rate and amendments to the controlled foreign companies (CFC) regime and dividend taxation (which move to a more territorial system) should not detract from that fact. The network argument also misses the central point that making a regime attractive for business is not the same as being a tax haven."

The lack of definition for the term 'tax haven', coupled with its emotiveness and traditional connotations, means it can be bandied around at the behest of whoever, or bent to fit a certain viewpoint or preconception, in a similar way to the nebulous and ideological concept of 'tax fairness'.

"In every discussion of transparency, we should move away from ideological or instinctive justifications and into a more careful consideration of purpose and impact to ensure the overall outcome is indeed positive and proportionate," says Alan McLean, executive vice president, tax, at Shell.

The International Financial Centres (IFC) Forum says the term 'tax haven' summons to mind two unrelated concepts: bank secrecy and low taxes.

"A confused public perception of linkage between (wrongful) tax evasion and (generally beneficial) tax diversity and competition undermines clarity in the debate over the role of international financial centres in the global economy," says the IFC, which adds it unreservedly condemns the use of foreign jurisdictions to evade home country tax, but that it welcomes tax competition.

"International tax competition encourages economic growth and efficient delivery of public services. Businesses operate best when in competition. The same is true for governments," says the IFC. "Government cartels to maximise income through attacks on (tax) competition should be discouraged, just as similar behaviour to constrain competition between corporations is rightly curbed. Governments are the ultimate monopoly supplier and so have a natural tendency to inefficiency in the absence of pressures to deliver value for money."

The IFC goes on to say the public is rightly suspicious of "private behaviour which tries to suppress competition to the prejudice of consumers" and that government moves to maximise taxes by challenging jurisdictions with low tax policies (including international financial centres) should similarly be regarded with scepticism.

"Tax diversity and competition promotes growth and should be encouraged."

But tax competition should not be misconstrued as "how-low-can-you-go" competition.

"The key reason for discounting "race to the bottom" concerns in modern economic analysis is empirical: the feared effect has simply not materialised in fact," says the IFC.

Despite the UK lowering its corporate tax rate to 20% by 2015, analysing the measures implemented to raise the attractiveness of the UK alongside the jurisdictions' anti-avoidance legislation and in the context of multilateral measures to curb base erosion and profit shifting (BEPS), suggests the haven moniker may be wide of the mark.

"It is also worth noting recent moves to combat perceived cross-border tax avoidance that have been harnessed in the BEPS Action Plan as well as other OECD and EU measures. If you look closely at these initiatives, you will note that most of the recommendations are already enshrined in UK tax law," says Bhogal. "The sheer volume of UK tax legislation (and the proportion of this which is anti-avoidance legislation) should be adequate evidence that the UK is not a tax haven."

Regardless of any difficulties in defining the term 'tax haven', the rise of tax competition between and among many governments is plain to see.

Scandinavian country Denmark is about as far from the typical image of a tax haven as you can get. It is traditionally associated with high levels of taxation, strong collection and enforcement, and you will struggle to find a palm tree anywhere within its borders. But the country has lately been finding itself on various tax haven blacklists.

Denmark is increasingly being promoted as a holding company jurisdiction, largely thanks to its favourable rules regarding the tax treatment of limited liability partnerships (LLPs).

"The network argument also misses the central point that making a regime attractive for business is not the same as being a tax haven"

LLPs can be set up by one general unlimited partner and a limited partner (or partners). The terms governing the regime are not stringent. Disclosure requirement are minimal (particularly where income was earned outside Denmark), the limited partner can be resident in any country, while there is no minimum requirement for paid-up capital. Such partnerships are tax-exempt and a layer of secrecy is also present in that the owners (apart from the general partner) are not listed on the Danish company register. According to a P1 Radio documentary, 170 LLPs with international affiliations share just two registration addresses. The OECD's Global Forum on Transparency and Exchange of Information says the regime is concerning: "A lack of transparency makes it possible for tax evaders to establish companies in Denmark to be used for evading taxes in other countries, which as a result can suffer serious consequences," says Monica Bhatia, head of the secretariat at the OECD's Global Forum.

Jonas Dahl, the country's former tax minster, ordered a tax authority investigation into the rules governing partnership taxation earlier this year.

"It is a problem if Danish limited liability partnerships are being used as part of tax evasion constellations. I have asked Skat to look into the issue because there should be no doubt that the government is taking this very seriously," said Dahl.

A Danish tax official told International Tax Review they very much disagreed with Denmark being labelled as a tax haven.

"It is simply completely off the mark," says the official.

The argument against the UK being a tax haven is not necessarily a new one, but the policies of the incumbent government have perpetuated such claims.

Shaxson's Treasure Islands quotes Robin Leigh-Pemberton, Governor of the Bank of England (BofE) between 1983 and 1993, who he says neatly encapsulated London's "see-no-evil offshore ethic" when he said that the present system of supervision "has served the community well...If we closed down a bank every time we found an instance of fraud, we would have rather fewer banks than we do at the moment".

"That statement," says Shaxson, "should have been evidence enough that the City of London was already the world's premier offshore centre."

This assessment comes at the end of a passage detailing the case of Bank of Credit and Commerce International (BCCI), which lawyer Jack Blum (working for US Senator John Kerry) exposed as what Robert Morgenthau, Manhattan District Attorney, described as "the largest bank fraud in world financial history". The bank was headquartered in the City of London, and the BofE shut it down after intense pressure from Kerry and Morgenthau. The BofE said there had been no solid evidence of fraud until 1991, hence why it did not shut the bank down earlier. Shaxson rejects that claim.

"Indictments in the US implicating BCCI in fraud dated back two and a half years; one stated that money laundering was part of its "corporate strategy"," says Shaxson, referencing 1992's False Profits: The Inside Story of BCCI, the World's Most Corrupt Financial Empire authored by Peter Truell and Larry Gurwin.

"There is no agreed definition of what a tax haven is, and therefore the term can be thrown around for political purposes when countries become embroiled in discussions about tax competition"

A Price Waterhouse qualified audit report on a BCCI subsidiary from 1989 uncovered fraudulent activity and the firm sent the findings on to the BofE. The full report remains unpublished, however. Shaxson explains that Prem Sikka, professor of accounting at the University of Essex in the UK, had a freedom of information request to publish the report turned down by Britain's Information Commissioners in 2009. "It is very clearly in the public interest that the UK maintains strong and effective relations with its international partners," says the Freedom of Information Act Decision Notice dated December 14 2009.

Shaxson describes that response as "a clear admission that London is a tax haven," and "a clear defence of tax haven London".

More than two decades on from the BCCI affair, the UK's tax policy, particularly those aspects of the tax regime brought in under the banner of the Conservative government's Open for Business agenda, have led to the tax haven label once again being attached to Britain.

Big business repudiates the claim that the UK is on course to become a tax haven, arguing that a low rate and other incentives are a vital part of maintaining tax competition and ensuring the UK does not lose investment opportunities to other countries because of its tax code.

Tax justice campaigners agree the UK is not on course to become a tax haven – they claim it already is one.

Areas of the UK tax code that have been reformed to help create the "most competitive corporate tax regime in the G20, while protecting manufacturing industries" include: reducing the main rate of corporation tax from 28% to 20% by 2015; introducing a patent box regime which taxes qualifying income at 10%; a CFC regime that is generous by international standards, particularly the 5% rate for finance companies; a substantial shareholding exemption (SSE) and generous treatment of interest deductibility.

"If that's not aggressive competition, I don't know what is," says Michael Devereux, director of the Oxford University Centre for Business Taxation (CBT), which hosted a conference on tax competition earlier this year.

On the other hand, the UK has low capital allowance rates, though the impact of this has been mitigated by an increase in the annual investment allowance.

"The UK is engaging in aggressive competition," reiterates Devereux. "It is competing over patent income through the introduction of the Patent Box but it is not competing over capital allowances, which are less generous in the UK than in Chile."

The downward spiralling trend of corporate tax rates is not a new phenomenon, though. The average rate across the OECD has fallen from 47% to 26% since 1983. The UK had a role in kickstarting that trend of decline under the policies of Nigel Lawson, chancellor of the exchequer in the Thatcher government.

"In 1999 Gordon Brown cut the corporate tax rate to 30%, saying very similar things to what George Osborne is saying now," says Richard Collier, tax partner at PwC.

So it can be argued that, rather than being aggressive, the policies of Cameron and Osborne are merely a continuation of a pattern that has been developing for years. And the trend is by no means UK-specific. In 2005 alone, 14 OECD countries cut their corporate tax rate.

"The world’s most important tax havens are not exotic palm-fringed islands, as many people suppose, but some of the world’s most powerful countries" - Nicholas Shaxson

Richard Murphy, director of Tax Research UK, says relaxing UK tax rules for businesses was evident, for example, in 2007 and 2008.

"Those who remember the minor spate of corporate exits from the UK in about 2007 and 2008 that so spooked Gordon Brown and Alistair Darling might also recall that many of the companies had significant IP interests held offshore that they thought might fall within the scope of UK tax as a result of potential changes then in the offing regarding UK CFC rules as a consequence of EU pressure for reform," he says, adding this gave rise to an "absurd panic reaction".

He refers to Darling relaxing rules on intra-group dividends from non-UK subsidiaries, exempting them from tax in the UK, then relaxing CFC rules, and introducing territorial taxation.

"Put these changes together and the reality was that the threat to UK companies owning actively managed IP offshore (which in this case simply means outside the UK) that this income might be brought within the scope of UK tax virtually vanished," says Murphy. "I do not think that was by chance: that was by trumpeted design. Because of the changes at least some of those who left the UK have now come back whilst the use of the UK as a tax haven does seem to be increasing because of the effective ring fence excluding the possibility of non-UK income being subject to tax here that these rules now permit."

Ian Brimicombe, vice president of corporate finance at AstraZeneca, takes issue with the argument often put forward that the UK Patent Box is an example of the jurisdiction's haven status, saying it does not represent a giveaway for companies.

"The UK is competitive but I don't qualify it as haven status. The Patent Box is not a gimme – there needs to be substance," says Brimicombe.

Regardless of whether such policies, however far back they can be traced, constitute the UK becoming a tax haven, the country is certainly engaged in tax competition. But not all jurisdictions are adopting the same approach to competitive tax policy.

"There is no clear consensus among states on tax competition," says Collier. "Germany has no focus on tax competition and has no respect for, or tolerance of, countries that do. While at the other end of the spectrum you have Ireland, the UK, Luxembourg."

Germany has been vocal in its opposition to, and condemnation of, patent box regimes including those of the UK and Netherlands, leading a challenge (on the basis that it feels such intellectual property regimes breach EU laws) at European Commission level.

"The UK position is not generating complete goodwill from other participating states," says Collier, who added that the politicisation of the debate is also not helping.

John Gapper, of the Financial Times, speaking at the Oxford CBT conference, likened this to a chant sung by fans of Millwall Football Club, which featured the line: "no one likes us and we don't care".

It is hard to imagine such a stance does the UK any favours when it comes to trying to take the lead on multi-jurisdictional efforts to address tax evasion and aggressive avoidance.

"Google, Starbucks and Amazon were lynched by Margaret Hodge [chairwoman of the UK Parliament's Public Accounts Committee] at the same time as the government pursues an aggressively competitive corporate tax regime," says Gapper.

And Eric Schmidt, Google executive chairman, publicly defended his company's tax affairs by saying it was merely taking advantage of such competition for investment among European countries.

"It is for governments to determine the rules. And when they do, companies will respond."

While it is fairly easy to see how the UK stance could be perceived as contradictory, it is not a corollary of an attractive regime that compliance should fall by the wayside.

Brimicombe explains this by summing up the UK government and tax authority attitude as: "If we have a competitive tax regime, we expect high compliance".

This sentiment was aired by George Osborne, chancellor of the exchequer, in the foreword to a March 2014 document prepared by HMRC and Treasury outlining the UK approach to, and priorities for, tackling aggressive tax planning in the global economy in light of the G20-OECD project for countering BEPS.

"When it came to our approach to businesses, I was clear that we would cut their taxes to help them grow, but in exchange we would expect them all to play by the rules," says Osborne.

"Our approach is simple – we are doing everything we can to help companies compete in the world but we expect them all to pay the tax they owe," he adds.

By and large, the UK is succeeding in its aim to create the most competitive tax regime in the G20. A survey conducted by EY found that in 2013 the UK saw 15% growth in foreign direct investment (FDI) projects, compared with 4% growth across the EU. The UK also came out of the survey ranking first for FDI job creation that year, and launched 52 R&D projects, which was 20% more than Germany.

Tax competition works. James Hines, American economist, professor and author on the topic of tax havens, claims that between 1982 and 1999 countries with low tax rates grew two and a half times faster than high tax countries.

Recent inversion transactions such as AbbVie's $54 billion acquisition of UK-based Shire indicate the attractiveness of the UK regime in particular.

Jacob Stein, partner at Klueger & Stein, sums up the level of the UK's pulling power, saying this of inversions:

"There is a growing trend of US companies moving their operations overseas to cut corporate taxes. This corporate migration is not to the Cayman Islands, Gibraltar or even Ireland; it is to the United Kingdom."

However, while the mainstream media and populist vote-seeking politicians in the US cry foul at the trend, let's not get carried away. The number of companies to have redomiciled in the UK in the past year stands at less than 20.

Tax competition should not be misconstrued as “how-low-can-you-go” competition

"It's a bit like window shopping," says Sandy Bhogal, head of tax at Mayer Brown in the UK. "There have likely been plenty of businesses who have considered or are considering inversions as part of their ongoing strategy but the actual number of (announced) inversions is still relatively limited. Given the technical and commercial requirements to make it work, you cannot pursue an inversion just for the tax benefits."

But, like genuine window shopping that occurs on London's Oxford Street, most companies are simply considering their options, seeing what is available. Just as it takes a beautiful dress to tempt a woman into the shop to buy, or (as is quite likely in London) torrential rain to drive them in for shelter, it takes a very attractive regime to pull companies in, or a very burdensome and unattractive one to drive them away. It is fairly plain to see that the London rain represents the outdated US tax code in this analogy, driving companies into other shops by soaking them with compliance complexities and seeking to take a slice of the action going on in other shops around them by flouting the almost universally accepted principle of territoriality.

If countries like the UK and Ireland jump out into the street with an umbrella to escort companies over the road to a shop offering a more hospitable environment to be in, what is wrong with that? The economic theory of competition can just as easily apply to tax regimes as it can to supermarkets or shoe stores. Governments need to make sure sufficient revenue is coming in, sure, but this is not dissimilar to the way companies must ensure profits keep coming in, however competitive they choose to be.

Again perpetuated by difficulties including in the area of definitions, there is plenty of confusion and misconception surrounding international financial centres often assumed to be tax havens.

A June report written by Richard Gordon and Andrew Morriss, professors at Case Western Reserve University and the University of Alabama, respectively, attempts to dispel a number of views regarding the role of financial centres in tax avoidance.

The report, Moving Money, says international financial centres promote international investment and market efficiency and that accusations such centres allow significant illicit capital flows are based on "poor data and analysis, and on mistakes about how financial transactions, international taxation and anti-money laundering rules actually work".

In defence of the UK, specifically, while there are many aspects of the UK tax regime that are cited as evidence of tax haven status – a low corporate tax rate that is getting lower, the Patent Box intellectual property incentive regime that has been attacked for pandering to large pharmaceuticals such as GlaxoSmithKline and which has been challenged by the European Commission at the request of Germany – other rules and requirements run counter to the label.

"There is no clear consensus among states on tax competition. Germany has no focus on tax competition and has no respect for, or tolerance of, countries that do. While at the other end of the spectrum you have Ireland, the UK, Luxembourg"

In November 2013, for example, UK Prime Minister David Cameron announced a proposal for a register of company ownership, to "shine a spotlight on who owns what and where money is really flowing". The G8 committed to establishing a central register of companies' beneficial ownership, but the UK statement went further, saying it will also be open to the public.

However, the mere need to introduce such a register lends weight to the notion of the UK tax haven network. Ed Miliband, opposition Labour party leader, writing for The Independent in June 2013, said "Britain – which has responsibility for arguably the biggest network of tax havens in the world – needs to be prepared to use all its considerable legal power and authority to ensure all the UK overseas territories and crown dependencies which act as tax havens sign up".

And former Austrian finance minister, Maria Fekter, in 2013 said she would not change her country's laws until the UK ends tax haven and banking secrecy laws in its offshore centres.

"Great Britain has many money laundering centres and tax havens in its immediate legal remit – the Channel Islands, Gibraltar, the Cayman Islands, Virgin Islands. These are all hot spots for tax evasion and money laundering," said Fekter.

She also previously described Britain as "the island of the blessed for tax evasion and money laundering" and has compared the UK to Cyprus, writing in Austrian newspaper Kurier: "Just as we urged the abolition of sealed foundations in the Cyprus rescue to drain the money laundering swamp, we must demand the same of the UK".

"We want a trust registry for the Channel Islands, but also for countries where British law applies, such as the Cayman Islands, the Virgin Islands or Gibraltar. These are all areas that are tax havens for tax evaders," she added.

Despite movement to address such concerns, the UK's core conflict is difficult to overcome. Cameron and Osborne frequently peddle the same rhetoric that tax evasion and aggressive tax avoidance are unacceptable and must be clamped down on, but it is hard for tax justice campaigners to accept that this is any more than mere lip service, given the changes to the tax code that their government is implementing. Messages are bound to differ depending on the audience they are being delivered to, but what is being said and promised to business cannot run directly counter to what is being said and promised to the public. That is not a basis for good government.

Governments too often separate the issues, crying foul at 'creative schemes', or 'aggressive and innovative' tax planning on the part of multinationals, but ignoring the role of aggressive tax competition from governments in driving this behaviour. One would not exist without the other and in this era of full disclosure and transparency, there should be more acknowledgement of the interconnectedness of such actions.

Rather than the face of the tax haven changing, it is perhaps more accurate to say that countries – or, more precisely, national governments – are now more willing to be two-faced about tax policy and rhetoric, and balancing the need to attract investment with a need to be seen as strictly enforcing compliance at a time when public interest in corporate tax affairs has never been higher.

However, the government defence is that while they may implement attractive tax provisions aimed at stimulating investment, they still expect compliance, perhaps even more so. An attitude of "we're being generous in the provisions we have made available, now don't push your luck" is fine in theory and, as Brimicombe says, there remains a recognition that there must always be substance, but if companies and the public believe their government is saying one thing while doing another, companies will not value the importance of compliance, and the public will not believe there is a genuine intention to enforce it.