Tax Havens – for Whom?

By Marguerite Finn

On Wednesday 4^th April I attended what promised to be a fascinating event at the Kings Centre in Kings Street, Norwich. A “Tax Injustice Question Time” was organised by Christian Aid. The topic for discussion was how the Government should handle the issue of large scale tax avoidance by multinational companies. The evening started with a presentation on the topic by Helen Collinson, a senior member of Christian Aid’s UK Campaigns Team. Questions from the audience were then put to a panel of politicians comprising the Economic Secretary to the Treasury and Conservative MP for Norwich North, Chloe Smith, the Liberal Democrat MP for Norwich South, Simon Wright, and former Norwich Councillor and Deputy Leader of the Green Party, Adrian Ramsay.

The campaign “End Tax Haven Secrecy” was very well presented by Helen Collinson. She demonstrated how tax dodging on a massive scale by some unscrupulous multinational companies is depriving poor countries of the revenues that could fund public services such as basic sanitation, good healthcare and the education of children. Christian Aid estimates that tax dodging costs poor countries US$160bn every year. This is what keeps poor countries poor. The Organisation for Economic Co-operation and Development (OECD) – a body that brings together the world’s wealthiest nations – recognises that developing countries are losing more from tax dodging than they receive in aid.

How does this happen? There are a number of reasons why multinational companies are able to dodge paying their taxes, but a key reason is the lack of transparency in the global financial system. This financial secrecy makes it easy for companies to shift money between different parts of their business around the world. Sometimes such transfers are for legitimate reasons but in many cases they are designed to dodge taxes in the country whose resources are exploited, so that the profits may be enjoyed elsewhere.

One common method of tax dodging is for a company to manipulate its profits and revenues through ‘tax havens’ which combine high levels of secrecy with very low or even zero tax rates.

To get an idea of the strength of the tax haven economy, we have to appreciate that more than half of the world trade (on paper) passes through tax havens. In addition, more than half of all banking assets and a third of multinational company investments are routed through tax havens. As recently as 2010, the International Monetary Fund (IMF) estimated that the money on the balance sheets of small island tax havens alone amounted to US$18tn – about a third of the world’s entire financial wealth.

Multinational companies use tax havens to hold huge sums of money that would attract tax in other countries.

It works like this:

• a company extracts a resource (say diamonds) in a poor country. It creates a subsidiary company in a tax haven to which it sells the diamonds at cost price so there is no profit to be taxed in the poor country of origin.

• The subsidiary sells the diamonds at a profit to a rich country, but as the tax haven charges little or no tax, the company’s profits are huge.

• The identity of the parent company (that owns both the subsidiary and associated bank accounts in the tax haven) is usually kept secret so that the true extent of profits made and taxes dodged remains hidden.

As Christian Aid says: “An end to tax haven secrecy would make it easier for tax authorities in all countries – including developing countries – to detect where tax dodging is going on and claw back the money they are losing.”

Christian Aid’s campaign “Trace The Tax” proposes specific measures to help end tax haven secrecy:

• A multilateral agreement requiring tax authorities all over the world – including tax havens – to exchange information about the assets of companies and individuals within their jurisdictions, with tax authorities in other countries.

• A new international accounting standard requiring multinational companies to report on their profits made and taxes paid in every country where they have subsidiary companies – including tax havens.

To make these aspirations more concrete – a campaign of letter writing took place in February to UK’s business minister, Norman Lamb calling on him to support new EU transparency laws for oil, mining and forestry companies. There is, however, a danger that because of intense lobbying by oil, mining and forestry industries, some MEP’s might renege on their resolution and water down the transparency laws so as to render them useless for stopping tax dodging. One wonders how Christian Aid’s efforts at lobbying compare with those slippery and wealthy multinational giants? And is that fair or democratic?

Europe is important in this campaign because some of the most notorious tax havens are on European territory, such as Luxembourg, and Switzerland (Geneva and Zug) and Ireland. For example, in Zug the tax rate varies between 15% and 16% as against a corporate tax in USA of 35%. Other ‘off-shore’ tax havens offer taxes as low as 3% or even zero tax – such as in the Cayman Islands and Bermuda.

Britain has a key role to play because at least three of the major tax havens are within her jurisdiction: the Isle of Mann and the islands of Jersey and Guernsey. The City of London itself is considered by many to be a tax haven. Part of Christian Aid’s campaign is to target the British Prime Minister, David Cameron, asking him to take a lead at the forthcoming G20 meeting in Mexico and call for tax havens to be pushed to share tax information with developing countries and to call for multinational companies to report their taxes paid and their profits made on a country by country basis. The Prime Minister should also be asked to support and promote the UN Millennium Development Goals.

This was meaty stuff indeed for the event in the Kings Centre but for some reason it never really took off – the questions were weak and did not seem to hold the two MPs to say what they were prepared to do to bring about an end to tax haven secrecy. Chloe Smith MP suggested that keeping taxes low to encourage multinationals to move part of their business to a tax haven could bring welcome jobs to that country. This was to ignore the real problem of cheating the developing country (whose mineral resources were providing the profit) out of the legitimate taxes due to it. Also the problem is hardly one of the tax havens being poor, as Chloe seemed to be suggesting. Are Switzerland or the Cayman Islands poor and needing welcome jobs? They seem to be doing very nicely by attracting so many big companies to use them by reason of their low taxes – but no one took Chloe up on this.

Paying fair taxes would enable a developing country to overcome its poverty by investing in health, education and clean water for its people and eventually to reduce its dependence on overseas aid.

Photo from article on Amazon Books (who pay no corperation tax) in The Guardian this week; poster highlighting Vodaphone by UK Uncut.

For more information on this vital and urgent topic, go to www.christianaid.org.uk