Tax Havens

A huge problem for the world economy today is the use of tax havens to minimise and sometimes completely avoid the payment of taxes. Wealthy individuals, and multinational companies in particular are able to set up very complex arrangements, using subsidiaries based in tax havens, to move their profits around and so avoid paying tax in the countries where their profits are actually earned. There are lots of tax havens, but many of them are tiny countries with almost no public finances, which are typified by their willingness to apply minimal tax rates in order to lure large multinationals into setting up an office there – places such as the Cayman Islands, The British Virgin Islands, The Dutch Antilles, and Luxembourg. Some of the ways companies use Tax Havens include:

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With 93,000 registered companies including 279 banks, The Cayman Islands has got more companies than people! Picture © Roger Wollstadt

Have Their Head-Office in a Tax Haven – Non-UK companies that operate in the UK only have to pay tax on the profit they make in the UK. So if a UK company starts to make significant profits overseas, there is a strong incentive to ‘move’ their head-office to a tax haven, and so avoid paying any tax on their overseas earnings. In some cases they don’t actually move their head-office at all, but simply complete documents to re-register their company in the tax haven, even though they may in reality have few or no members of staff working there.

Transfer Pricing – By having subsidiaries in tax havens companies can ‘sell’ goods from one subsidiary to another at a completely false price so as to shift their profits to the country with the lower tax rate. For more on this see the separate section on Transfer Pricing.

Set Up Very Complex Arrangements – A spider’s web of subsidiaries and cross-ownerships in multi-jurisdictions make it very difficult for tax authorities to track what profits are being made and where, and what the legal situation is for any profits that are being made, thus making it very difficult to calculate what the company actually owes. It is made even more difficult by certain tax havens operating a policy of secrecy, refusing to divulge to the relevant tax authorities information on what money is being held and by whom.

Not all tax havens are in exotic locations – recently Holland has been getting itself a reputation for facilitating tax avoidance in other countries. Picture © Shirley de Jong

Other problems with the levels of secrecy and complexity involved are that organized criminals can launder money through them with almost complete impunity.

It is now estimated that over 50% of all world trade is channeled through tax havens, and a total of $21-32trillion is held in tax havens, which works out $3-4,000 for every person on the planet. It is estimated the UK loses £18.5bn in tax each year because of them.

It should be noted that any country that lowers tax rates in order to attract a flow of capital from another country is operating as a tax haven. In this respect the City of London is itself a tax haven as it facilitates the flow of capital from many other countries, particularly third world ones. In recent years Ireland has got itself a bad reputation by offering preferential tax rates to multinationals, most notoriously Google, which relocated its head office to Cork and is now officially an Irish company. Google makes £3bn of sales in the UK, but as it claims all those sales actually take place through its Irish office it almost completely avoids paying any UK tax.

Rethinking Government Assistance: David Cameron
David Cameron – condemned tax havens even though his own family used them extensively. Picture © World Economic Forum

However when countries engage in this so-called ‘race to the bottom’ on tax rates, the only winners are the rich corporates who benefit from ever-lower rates of tax, while the only losers are ordinary people who are forced to foot the bill. As countries see their tax revenues diminish, so their debts increase and they are forced to make cutbacks to public services and the standard of living of ordinary people steadily goes down. The government has a term for this – Austerity. However the government is loathe to act on tax havens as many of them are personally benefiting from them or are being bankrolled by people who are (see the section on Party Funding). It’s probably worth noting at this point that ex-Prime Minister David Cameron’s family wealth* was built up by moving all their money offshore, and shuffling it through the Tax Havens of Geneva and Panama. When Downing Street was initially questioned about this they refused to comment saying it was ‘a private family matter’. However the recent scandal of The Panama Papers put the ex-Prime Minister under much more pressure.

It’s also worth noting that 60% of the world’s worst tax havens are British Crown Dependencies.

There’s a lot more that can be written on the abuse of Tax Havens and the threat they pose to the people of this planet. People who are interested are strongly recommended to watch the 60 minute film UK Gold

… or have a look at the book Treasure Islands by Nick Shaxson.

* Reference: David Cameron’s Family Wealth:


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