Tax haven network makes UK the top ‘secrecy jurisdiction’, says TJN

The United Kingdom would ‘easily’ take Switzerland’s place at number one in the Financial Secrecy Index if the ‘British network of secrecy jurisdictions’ were considered, according to an influential campaign group.

The international Tax Justice Network (TJN), whose membership includes the Association of Revenue and Customs, representing senior HMRC officials, as well as many leading charities, published the 2011 edition of the index on 4 October.

Last week ActionAid, the anti-poverty charity, revealed what it called ‘the secret life of the UK’s biggest companies listed on the London Stock Exchange’. All but two of the FTSE 100 companies were using tax havens, it claimed. There were over 600 subsidiaries of FTSE 100 companies in Jersey and 400 in the Cayman Islands, ActionAid said.

Arguments ‘pall’

The Financial Secrecy Index has received a good deal of press coverage, reflecting growing concern over tax evasion as governments struggle to reduce deficits.

The Economist observed on Saturday that defenders of tax havens argue that a company’s legal duty to shareholders ‘necessitates using offshore finance to reduce and simplify taxes’, or that offshore jurisdictions ‘provide the tax and regulatory competition that keeps grasping governments and officials in check’.

The article noted, however, that ‘as public faith in the universal benefits of markets and globalisation wobbles, and public coffers empty, such arguments pall’.

Small firms were ‘angry that clever offshore schemes favour their bigger competitors’, it said, and policymakers were ‘readier to hear a broader case: that offshore finance skews the global distribution of wealth, away from poor countries and those that levy taxes to pay for public goods (including the ones that benefit companies)’.

‘British havens’

The TJN report noted that Britain’s network of ‘satellite secrecy jurisdictions’ accounted for about a third of the global market in offshore financial services.

‘Ten secrecy jurisdictions on [the TJN’s list of 73 jurisdictions] are either British Crown Dependencies (such as Jersey) or British Overseas Territories (such as the Cayman Islands or Bermuda) while many others are members of the British Commonwealth,’ it said.

‘These jurisdictions generally share British common law [and] deep financial penetration by British financial interests, typically use British-styled offshore structures such as trusts, usually have English as a first or second language, and mostly have their final court of appeal in London.’

In Treasure Islands: Tax havens and the men who stole the world, published earlier this year, Nicholas Shaxson described a ‘hub-and spoke array of tax havens centred on the City of London’, a grouping that had been estimated to account for ‘well over a third of all international bank assets’.

This network gave the City a global reach, he argued. Much of the money attracted to ‘British havens’, and the business of handling that money, ‘is funnelled through to London’.

The Crown Dependencies ‘are substantially controlled and supported by Britain but have enough independence to allow Britain to say “there is nothing we can do” when other countries complain of abuses run out of these tax havens’, Shaxson wrote.

‘This British spider’s web lets the City get involved in business that might be forbidden in Britain, providing sufficient distance to allow financiers in London plausible deniability of wrongdoing.’

The web was in part, he said, a ‘laundering network’, and ‘by the time the money gets to London ... it has been washed clean’. 

Mark Field, the Conservative MP for the Cities of London and Westminster, has argued that ‘offshore financial centres’ are unduly criticised. Bloomberg quoted Field last November as saying at a London debate that they sent ‘massive capital flows’ to London and their ‘benefits’ were misunderstood.

But Richard Murphy, director of Tax Research, told the debate that tax havens caused the UK government to lose revenue. ‘Tax havens benefit the City of London financial district rather than the nation,’ he said.

John Christensen, director of the TJN, is a former economic adviser to the UK and Jersey governments. He takes issue with the UK government’s line that British dependencies and overseas territories are responsible for their own tax systems. ‘No law is passed in Jersey without the approval of the Privy Council,’ he told Tax Journal, adding that key Jersey officials are appointed by the British monarch.

Jersey

The Economist article noted Jersey’s close links to the City of London and the island’s ‘impenetrable’ offshore trusts. The island charges no capital gains tax and operates a favourable corporation tax regime.

The TJN report noted that ‘many jurisdictions, while merrily signing up to [information exchange agreements], have quietly been adding stronger and more devious new secrecy facilities to their already ferocious offshore arsenals’.

It added: ‘Moves by the likes of Jersey and Guernsey to allow the use of foundations, for instance, constitute just one of many areas of concern.’

Jersey Finance promotes the island as an international finance centre. According to its latest quarterly report, the net asset value of investment funds under administration was £196bn during the quarter to June 2011. Bank deposits were estimated at £165bn.

Geoff Cook, CEO of Jersey Finance, claimed that the Financial Secrecy Index was ‘lobbying disguised as research’.

‘The reality is that it is a selective interpretation of subjective information designed to further the Tax Justice Network’s specific agenda,’ he said.

‘Jersey’s ranking in the Index is nonsensical. Jersey is one of the safest and best regulated international finance centres, as demonstrated by credible, independent assessments by internationally accepted organisations like the OECD and the IMF. The reality is that IFCs like Jersey are engines of economic growth and, particularly in these straitened times, make an important and positive contribution to the world’s economy.’

Subsidiaries

ActionAid’s research found that the FTSE 100 had fewer companies registered in the whole of China (551) than on the ‘tiny island of Jersey’ (623).

The charity said: ‘While it is true that some of the FTSE 100 subsidiary companies do some business with real economic substance in tax havens, in most cases the huge number of subsidiaries in a given location does not reflect the actual level of business carried out. This suggests another motivation for their choice.

‘While the people of Jersey must benefit from a few retail outlets and offices belonging to these groups, that can’t explain why around 200 Jersey companies, belonging to at least 26 different FTSE 100 groups, are registered at a single address [the office of a law firm].’

Responding to the ActionAid report, Cook said Jersey played a valuable role in supporting the British economy, with ‘international deposits taken by Jersey banks being upstreamed to their UK parents, providing many billions of pounds of liquidity to the market’.

‘The world has changed’

An HM Treasury spokesperson said in response to the TJN report: ‘The Government has demonstrated a clear commitment to tackling all forms of tax avoidance and evasion. At Budget this year we published Tackling Tax Avoidance, which sets out the government’s strategic approach, placing emphasis on tackling avoidance at the root to address the problem, rather than just treating the symptoms.

‘The Global Forum on Tax Transparency set up by the G20 in 2009 now has over 100 participating jurisdictions and over 600 bilateral tax information exchange agreements have been signed. The world has changed over the past three years and continues to do so, and the government is committed to keeping up momentum as more needs to be done.’

Responding to the ActionAid report, the Treasury spokesperson told Tax Journal that the UK was ‘among the first countries’ to sign a protocol in May 2010 to ‘help developing countries benefit from exchange of information without having to negotiate large numbers of bilateral treaties’.

She added: ‘Companies must obey the law and pay any taxes due in the countries in which they do business. Tax avoidance in developing countries deprives governments of the vital income needed to build and maintain their public services. The best way to prevent this is by helping these countries develop robust and stable tax systems which enable them to collect the tax they are owed. Through DfID and HMRC, the UK delivers targeted and effective support to make this happen.’

Progress

The Economist’s Schumpeter blog observed last week that ‘some progress’ was being made in improving transparency. ‘The European Union is inching towards requiring country-by-country reporting, of a sort. The Obama administration is pushing for greater openness on company ownership. The Isle of Man has become the first of Britain’s offshore dependencies to exchange tax information automatically, as opposed to merely on request. Guernsey may follow, though Jersey remains implacably opposed, fearing a loss of “competitive advantage”.’