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NEF - Anti-corruption summit: the UK’s chance to close down tax havens

This week UK Prime Minister David Cameron is hosting a big anti-corruption summit in London, and tackling global tax avoidance and evasion is likely to be high up the agenda.

The world is still reacting to the huge Panama Papers data leak from one month ago, with the whistle-blower responsible slamming the governments of the world for utterly failing to address the spread of global tax havens in another recent leak.

The webpage of the anti-corruption summit lauds the UK government for having ‘led the way’ in tackling tax evasion and avoidance, as well as being the first G20 nation to create a public register of beneficial ownership. It’s true that the UK government has taken some limited action, but the time for small tweaks is gone.

We need to focus on the big picture: that tax havens do not play an essential or positive economic function, that they lead to huge amounts of money being hidden, especially in developing countries, and should be closed down.

What is a tax haven?

The best definition is: 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’ – as used by Nicholas Shaxson in his brilliant book Treasure Island.

People can squabble over definitions but what’s important to understand is tax havens are not only found in tropical islands or small countries like Panama – we have one here in the UK, the City of London.

When a country’s financial sector is relatively large in relation to its whole economy, you can be fairly sure that you’re dealing with a tax haven since the provision of services to hide money and assets ensures a lot of work for the domestic financial sector.

The IMF used this to correctly identify the UK as a tax haven in 2007, while it means the US and a host of other OECD member countries, including Ireland, the Netherlands and Luxembourg here in Europe, are also tax havens. These countries allow individuals and companies from other jurisdictions to avoid tax through their policies and practice.

The fact that tax havens stem from the policies in big OECD economies suggests it will be a challenge to close down the network of accounts, lawyers and other professionals that have emerged throughout the globe to facilitate tax avoidance and evasion – but it also suggests there’s something that can be done about it.

Are Tax Havens necessary?

No. This week 300 leading economists published an open letter confirming that tax havens serve no useful economic purpose.

They write: “territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there are distorting the working of the global economy”.

So, can tax havens be closed down?

Yes – through effective legislation. The UK government could make laws that would prevent its overseas territories from providing tax haven services, as confirmed by Dominic Grieve, the UK’s former Attorney general, on the Today Programme.

The example of Monaco and France shows how quickly and selectively seemingly fixed policies can change. Prior to 1962, French citizens who lived in Monaco paid no taxes. French President at the time Charles De Gaulle wanted this changed, but Monaco’s Prince Rainer didn’t.

France didn’t have the authority to force Monaco to change its rules, but in October 1962 De Gaulle instructed his customs officials to re-establish the border between them. By early 1963, Monaco, scared by the potential loss of trade and free movement, changed its policy and all French citizens living there have been treated the same way as those living in France ever since.

Of course, Monaco remains a tax haven for citizens from all other countries, because the French government had no interest in having the rules changed for them. But it shows pressure can be applied on territories highly dependent on trade and movement, even where policy changes cannot be forced.

This applies with the City of London too and should change the way that it handles the affairs of those who are not domiciled in the UK. In fact, the UK has a stronger influence over many of its overseas territories than France did over Monaco, and could force legislative changes.

The non-British controlled territories that are unwilling to change their tax systems, and can’t be forced to, should be shunned from the wider global economy through trade tariffs and imposed sanctions.

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