11 October 2009

Tax havens: A modest proposal

Posted for the tech-illiterate Hank Scorpio:

1. History

Tax havens date back to medieval Europe and were originally set up as a safe place to bank your cash at a time of civil and international turmoil. If Dan Brown is to be believed, the Knights Templar owed much of their power and prestige to providing financial services to those going on Crusades or pilgrimages to locations where law enforcement agencies were unregulated to say the least.

In modern times, the first recognisable tax haven was Switzerland, which offered a secure home for rich refugees from Bolshevik Russia and Nazi Germany. Its neutrality in the Great War afforded it a unique status in Central Europe inasmuch as it did not have to finance massive rebuilding of its infrastructure, which meant that it was able to keep its taxes much lower than its neighbours. Adopting neutrality again in the Second World War cemented its economic stability and its "no questions asked" policy about the source of the money, or Nazi gold, it sheltered, made Switzerland immensely attractive to investors with more cash than scruples.

2. Tax havens defined

The key features of a tax haven are:

(i) nil or nominal taxes;
(ii) lack of effective exchange of information with foreign tax authorities;
(iii) lack of transparency in legal or administrative processes;
(iv) no pernickety insistence that its "customers" should actually be based in the country;
(v) self-promotion as an offshore financial centre

The OECD has formally identified 72 countries as tax havens, of which 30 are Commonwealth countries or Crown dependencies. These include the Isle of Man, which has no capital gains tax, stamp duty or inheritance tax. The top rate of income tax is 18%, and payments are capped at £100k p.a. Although nominally independent and self-governing, the Isle of Man has no need to worry about including anything in the tax bill for defence spending, as the UK guarantees the island's security. And health and dental care are conveniently provided by the NHS. So, UK taxpayers are effectively subsidising the island, allowing it to attract business away from the mainland by offering cut rate income tax and virtually no corporation tax.

It's not all good news for the Manxpersons though. Jeremy Clarkson lives there.

The UK itself is arguably a tax haven, though it might not feel like it for us poor wage-slaves. The IMF, not exactly a refuge for bleeding heart liberals, has had the temerity to apply the tag to us, thanks to the City's burgeoning role in providing tax avoidance schemes and resisting international calls for greater financial transparency.

3. Globalisation and the growth of tax havens

Deregulation of financial services in the last 25 years has opened the door to a huge expansion of global trade. Capital has become ever more mobile as financial transactions have been made easier by the fax, the internet etc. It is no longer necessary to be physically present in a country to take advantage of its services. As Barack Obama said in 2007

"There's a building in the Cayman Islands that supposedly houses 12,000 US corporations, which means it is either the largest building in the world or the biggest tax rip-off in the world, and I think we know which one it is."

The vast increase in the wealth of a tiny elite is testimony to the "success" of globalisation as it has exploited the mobility of capital with the connivance of tax havens, which shamelessly prize secrecy over decency.

In his 2007 book, 'Capitalism's Achilles Heel", Raymond Baker said

"For the first time in the 200-year run of the free market system, we have built and expanded an entire integrated global financial structure the basic purpose of which is to shift money from poor to rich...In my reading of history and in my judgment, this reality is the ugliest chapter in global economic affairs since slavery."

4. Tax avoidance/ tax evasion

The difference between the two was famously described by Denis Healey as "the thickness of a prison wall", and the truth is that the lines have become increasingly blurred. What is clear though is that the existence of tax havens as a vehicle through which income can be channelled and therefore taxed, disproportionately favours those who are wealthy enough to access the expertise of dodgy accountants.

In 2007, Grant Thornton, an accountancy firm, calculated that the UK's 54 billionaires paid income tax totalling just £14.7M on combined wealth of £126Bn.

According to a report by Christian Aid in 2008, "a full 50% of world trade is reported to take place through tax havens."

Clearly, the good folk in these tax havens aren't doing much in the way of creating the goods and services on which this trade is based. However, the useful service they provide to global corporations is a PO box and a local lawyer to whom contracts can be faxed, and thus the tax (stamp duty, corporation tax etc) is charged at local rates as opposed to those that apply where the corporation is truly based or where the work is actually carried out.

A typical example of avoidance in this area is transfer pricing, by which a corporation will sell goods or services to a subsidiary company in a tax haven. In doing so, the corporation can set the price so that it incurs a loss on the deal in its home jurisdiction while inflating its profit in the tax haven. As the tax haven is likely to have nominal corporation tax at best, the actual level of global profits can be manipulated to ensure that balance sheet losses occur where the tax liability would be heavier.

Given that 60% of all global trade is now reckoned to take place between corporations and their subsidiaries, the amount of tax lost here is immense. The OECD has estimated that anything between $1 trillion and $1.6 trillion is illegally exported by companies and individuals every year, and transfer pricing is one of the predominant means by which it's done.

5. Money laundering

Money laundering involves transferring money between accounts to disguise its true origin, typically that it's the proceeds of crime. Because tax havens have bank secrecy laws, protecting the confidentiality of their clients, they are the most popular route for organised criminals and terrorist groups to launder their money.

It's pactically impossible to calculate how much money is laundered through tax havens each year, although estimates range from $500Bn to $1 Tn.

The social impact is huge: it helps to ensure that crime does indeed pay for drug traffickers and mafia groups, helping them to expand their operations, leading to more drugs on the streets, in turn leading to more violence and crime. The tax lost means that the rest of us have to pay higher taxes to cover the shortfall and to finance the policing of more criminal activity. And of course it means that terrorist activity is better financed and thus more sophisticated and difficult to combat.

When it emerged that nine of the 9/11 hijackers had been financed through money laundered through Dubai, one might have expected the Emirates to have been in for a rough time.

To put it bluntly, Dubya was characteristically wrong when he named the countries forming an Axis of Evil. The War on Terror would have been more effectively waged if he'd trained his guns on Switzerland, the Caymans and elsewhere and told them that they either give up the criminals or face the consequences.

6. The future

The recent G20 conference focussed heavily on tax havens and their complicity in the financial crisis. The OECD has started publishing black, grey and white lists of all countries based on their cooperation with international measures to open up the corporate books. A number of jurisdictions, such as Liechtenstein, Jersey, the British Virgin Islands and the Bahamas have recently signed agreements with the UK Treasury on sharing information.

There are encouragng signs that the days of the tax havens could be numbered as the financial crisis deepens and the wisdom of international cooperation becomes evident. But until every tax haven is required to give up its secrets, the rich and powerful will continue to exploit that secrecy and the rest of us will pay to varying degrees.


  1. "In 2007, Grant Thornton, an accountancy firm, calculated that the UK's 54 billionaires paid income tax totalling just £14.7M on combined wealth of £126Bn."

    This is the figure that chilled me. I am shite at maths, but I make that 11.6% tax. Which is outrageous when you think what the average worker is paying as a percentage of their income.

    And Tracy Emin wants to emigrate to France because...?

  2. Thanks, Hank. At the moment, the only thing I can say is that I'd like to see some heads on pikes.

  3. And Tracy Emin wants to emigrate to France because...?

    She's a self-important, ungrateful cunt?

  4. No, Montana, you've got that wrong.

    She's an untalented, self-important, ungrateful cunt.


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  6. BB

    You're Maths is more than shite, it's a veritable sewage treatment plant.

    14.7 Million on 126 billion is 0.0117% tax. Imagine paying £100 for a meal and tipping the waiter 1 penny plus a piece of fluff from your jacket.

  7. Hank
    I guess the Cayman Islands will be pretty reluctant to cooperate by 'opening up the corporate books' on those Us companies.

    The amount of money is utterly mind-boggling. Especially the money laundering - scandalous sums of cash stashed away.

    And to add insult to injury, the anti-money laundering measures in the UK have also caused much hassle to the ordinary, honest individual wanting to open a bank account who now has to produce more ID than many people actually have.

  8. MF
    Does the maths depend on whether you use the US or the UK billion, the latter having 3 more noughts than the former?

  9. @MF - yeh, but the £126Bn figure is capital, and you don't get taxed on capital. Let's assume that they get a 5% return on their invested capital, which would amount to about £1.1bn, so the tax take should be around £450M.

    @MsChin - the Caymans are in trouble. They are not as independent as they would like, and had to ask the UK govt for permission earlier this year to raise their borrowing levels. UK govt said no, initally but has now relented a little.

    The Miss Cayman contest has been one of the first casualties..


    There are a few influential voices in the Caymans, the BVI and elsewhere who are waking up to the fact that the party's over and that they either start playing the game or they're fucked.

  10. Thanks for this, Hank: I could never have found out that much about the subject.
    I particularly liked this: "The War on Terror would have been more effectively waged if he'd trained his guns on Switzerland, the Caymans and elsewhere and told them that they either give up the criminals or face the consequences."

  11. Glad you liked it, martillo. I would say it's a hobby of mine but it's not really, it's what I get paid for. It was actually quite difficult to write in a fairly restrained manner when I would more happily have just posted a few words:

    "Tax cheats are criminal scum"

  12. This is great Hank - really concisely put together and an education for me. I'd like to see more than a few heads on pikes.

    Hope you'll do some more.

  13. You get paid for this Hank?,0)

  14. Well, I might do, martillo. Montana's made all sorts of vague promises...

    "Hope you'll do some more."

    I could bore for England about this sort of stuff, sheff, so there's every chance!

  15. Ok 3.3%

    More than I'll be paying soon if things go to plan.

    Given up the football btw. Fucked if I'm Paying £65 for telling a cheating cunt he's a cheating cunt..they should be paying me. Got a call from the secretary asking if I intended to appeal. Guess what I said..

    Btw..Don't be surprised if Toynbee 'borrows' the odd quote in her purely coincidental upcoming 'taxhaven expose' thread without any sort of acknowledgement. Seriously, I kid you not...I'm sure the poisonous little cow has got hold of a copy of the monkeyfish guide to derogatory Tory euphemisms..cos I keep reading lines that I'm fuckin sure I wrote. Surprised she hasn't been accused of posting 'obvious obnoxious schtick'.

  16. Oh fuck

    Nice going btw. All needed saying.

  17. Cheers, Mr Fish. Means a lot.

    Keep your chin up, mate.

  18. Yeah, Hank, I've got to say that I'm really impressed that you managed to explain all of this in a way that a numbers-challenged person like me can understand.

    Kinda happier in ignorance, though.

  19. Hank,
    Good piece, very informative.
    Yet we are still easily distracted by straw men such as Griffin and co. who could be, and are pretty much, constrained by the law.
    Unlike the groups you speak of who have taken the precaution of buying the lawmakers.

  20. Colin

    Thanks. And you're right, we are all too easily distracted by the latest bogeyman, but who's to blame for that? Let's face it, we're all busy living, working, raising families etc very few of us have the energy or inclination to seek out the truth.

    And at the risk of entering tinfoil hat territory, the reason we get distracted is that the media is almost wholly owned by the corporations.

    It's no coincidence, in my view, that the anger channelled at the bankers was spiked by the Telegraph running the MPs' expenses scandal.

    The Telegraph is, let's not forget, the house journal of the banking classes and owned by the Barclay Brothers, who live in tax exile in Sark.

    I'm not happy paying for Jacqui Smith's bloke to get his rocks off, but the money I contributed was negligible and will be returned.

    I'm far less happy about coming to the rescue of the banks when they fuck up. That's gonna cost me a whole lot more. And it's even more galling that the guys who fucked up are predominantly City workers exploiting non-dom tax rules who then have the brass fucking cheek to whine that they'll take their "expertise" elsewhere if we tax them at 50% on what little of their income they haven't sheltered offshore.

    Naomi Klein said it first - we have entered a world in which profits are privatised and losses are socialised.

    It's more than a scandal. It's a massive crime, and yet nobody has been banged up for it.

    One of the quotes I left out of my article is a killer, from Warren Buffett, the arch speculator:

    "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." (2006)

  21. #Ok 3.3%#

    Fuck...'number typos'..that should be 1.3%

    14.7 million tax on 1.1 billion

  22. Great stuff Hank

    MF, sounds shite mate. Three months ?? What are the lads going to do ?

  23. Good piece Hank - trust you won't object if we post links to it from time to time.

    Good article by Prem that gives some juicy examples of transfer pricing (that I have misplaced) - when I find the reference I'll post it here as a link.

  24. Hank - after a long search I think the following link may be of interest (if you aint seen it already)


    It's a research/discussion paper by Prem Sikka & Austin Mitchell (Grimsby MP)

    I haven't read it all (59 pages long) - I need some printer ink to print a copy of it. But the first ten or so pages were interesting enuf for me to bookmark it.

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  26. As Prem says:

    "Another tactic is to locate corporate offices in tax havens which provide secrecy, little public accountability or public information.

    The Murdoch empire operates a web of some 800 subsidiaries, many registered in offshore tax havens, such as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands. A trawl through the 101 subsidiaries of Murdoch’s UK holding company, NewsCorp
    Investments, for an 11-year period shows that it generated profits of some £1.4 billion. At the going British corporation tax rate it should have paid tax of over £350 million, large enough to finance seven new hospitals, or
    build fifty secondary schools (The Economist, 20 March 1999).

    In fact, it paid virtually no corporation tax in Britain where it makes its profits from people who pay higher taxes because The Sun, News of the World, The Times and Sky TV aren’t paying their share."

  27. For friends who don't have time to wade through a 59 page paper the following examples from Prem's paper give a flavour of what transfer pricing is all about:

    " ‘Transfer pricing’
    is a key mechanism for avoiding taxes. It enables multinational companies, including both British multinationals and those based in
    Britain, to siphon off profits by deliberately over-pricing imports and under-pricing exports26. Tax authorities in China investigated 9,465 multinationals and found that "Almost 90 per cent of the foreign
    enterprises …….. use transfer pricing to dodge tax payments".

    US examples include paper transactions showing purchase of plastic buckets from the Czech Republic at $972.98 each, fence posts from Canada at $1,853.50 each, a kilo of toilet paper (about four rolls - unused) from China for $4,121.81, a litre of apple juice from Israel for $2,052, a ball point pen from Trinidad for $8,500 and a pair of tweezers from Japan at $4,896 each.

    The artificially low prices which shuffle profits to other countries include selling a toilet (with bowl and tanks) to Hong Kong for $1.75, prefabricated buildings to Trinidad at $1.20 and bulldozers to Venezuela at $387.83 each.

    For the years 1998 to 2001, such techniques enabled US companies to avoid an estimated $175 billion in taxes."

    We all need to use Hanks piece and quote and link to it when we post in opposition to public sector cuts - Are you reading this Polly?

    We all need to express more anger at tax avoidance/evasion at every relevant posting opportunity.

  28. Hank - found the following confusing:

    "@MF - yeh, but the £126Bn figure is capital, and you don't get taxed on capital. Let's assume that they get a 5% return on their invested capital, which would amount to about £1.1bn, so the tax take should be around £450M."

    5% on £126Bn = £1.1Bn ?? - Surely at least £6Bn?

  29. Yeah, I was wondering about that but I figured the phrase 'invested capital' implied not all of it was invested and some just sat around being lived in, grazed upon, adorning gallery walls, maturing in the wine cellar etc.

    Although if the return is 1.1 then that implies only 22 billion was actually 'earning' which seems a bit unlikely. That would leave £104 billion to play with so wouldn't they sorta own everything? Although they probably do what with PFI and everything.

  30. See, this is why the let me use a calculator at work. Yep, well spotted, 5% would be about £6Bn so the tax would be 40% of that, ie £2.4Bn.

    And absolutely right, MF, a fair chunk of that £126Bn will be capital which isn't earning, ie houses, yachts, trophy wives etc.

    You'd need a proper breakdown of the capital assets to really establish how much these guys are underpaying by, but it seems safe to assume that most of them would have at least half their wealth made up of income-producing assets, such as land, shares, bank accounts etc.

    Nice links to Prem Sikka's paper, deano. Some cracking examples of transfer pricing there.

  31. Nice one, Hank. Thanks for adding to my grumpiness.

  32. Hey Hank,

    Brilliant piece and some of those numbers are mind boggling. You are right that people should be getting really angry about this.

    What makes me most angry is places like the Isle of Man - where in effect a low wage worker in Leeds is subsidizing a loud mouth, wankface tele presenter living over there paying fuck all tax but getting NHS healthcare etc.

    BB, this - 'She's an untalented, self-important, ungrateful cunt.' made my day - so, so true!

  33. Great piece! I can bore for britain on this subject as well - but that's mainly on 'domestic' avoidance rather than the global picture, so this was really interesting.

    Just to depress everyone further - the reason your tax affairs, which should, frankly, be very straightforward, are in fact nothing of the sort? Largely down to legislative reactions to avoidance schemes. Bad guys do something moody, but legal, HMRC throw in some barking anti-avoidance legislation, good guys can't fill in an income tax form for £50 external earnings without needing a lawyer. Free market my arse. Anyway.

    brief anecdote - on the Simpsons, they had a 'news spot' on this, only Kent wots-'is-face referred to 'evadance and avoision'. that lasted about half an hour as the title for my piece on carousel fraud for taxline 2000-something before the publishers asked if I'd like to use something a bit more, erm, 'formal'

  34. Thanks guys.

    Philippa - you're right of course about the complexity issue. The accountancy trade journals whine on endlessly about the need for tax simplification, knowing full well that the only need for constant revision and complication of the tax code is to close down loopholes they merrily exploit and market for a fortune.

    HMRC will always be an easy target of course, cos no one likes paying tax, but the public might like to ask themselves why it is that partners in KPMG, PWC etc are on around £750k p.a. Answer: it's because they apply some brilliant minds to constantly finding new ways to cheat the system.

    This is why the whole avoidance/evasion argument is a nonsense. If a loophole is closed because it's been abused, then treat that abuse as non-compliance and hit the abusive tax firms with big fines.

    I'll let you write the piece on carousel fraud btw (-; That's another area where the more the tax authorities react to "avoidance", the more the bastards find new ways of getting round new rules!

    Oh and it's Brockman, by the way. Kenny Brocklestein as was.

  35. Good stuff, Hank, sorry i missed it when posted. Like PFI, the libel laws, and just about everything else in this hole though, no sign of a single thing being done about it. Though Dave the "revolutionary" will of course fix these things...

  36. Thanks, Jay. I don't share your cynicism about Dave tbh. I, for one, welcome our new insect overlords.

    Seriously though, you're still young enough to get out of the country. Do it. I'm encouraging my son to do so. And just as soon as I get offered a big redundancy payment, I'll follow my own advice.

    France, Spain or Italy, I'm thinking. Can't decide between them but they're all at least ten years behind us on the neo-liberal path, and the food and climate are better.

  37. I fancy France, Germany or Spain myself but im dreadful at learning languages and got a lot of friends and family here. If i could get a handful to move with me I'd be off before Xmas without a second thought.

  38. I'll go. We could all move to Barcelona and have a UT commune.

  39. "We could all move to Barcelona and have a UT commune."

    Actually quite tempting. Barcelona is brilliant. We could have big drunken rows every evening followed by cuddly pow wows the next morning.

  40. Come to Montpellier! It's lovely (and I have a very good French teacher, Jay) and the wine is very reasonably priced. Beer drinkers might suffer. Anyway. While I am struggling to sort out the 6 (six) forms of NI I am apparently supposed to be paying, while earning a grand total of €3k last year, I see a lot of benefits.

    And Hank - carousel fraud by definition has to be fraud, surely. Problem is, finding the fraudster - or nicking a possibly conmnected party but not having a cast-iron case to face 'beyond reasonable doubt' rather than 'on balance of probabilities'. The people had up when I wrote that piece looked bang to right to me, but were still only put up before the tribunal, not a judge. Agree that every time a door is closed, some clever little twonk kimmies a window...

  41. Thanks Hank - illuminating piece.

  42. From Guardian 21/10/09:

    "Banks that have reported hefty losses since the credit crisis have stored up tax credits which mean they do not need to pay tax for some time even after returning to profit. Last year US bank Merrill Lynch admitted it had booked £15bn of sub-prime credit losses through Britain which would allow it to avoid corporation tax in Britain for the next 60 years. RBS has £11bn of tax credits although it has been forced to give these up as the cost of enjoying insurance on its toxic assets from the asset protection scheme."

    Avoiding corporation tax for 60 years!!

  43. @deano - a postscript that takes the edge off the optimistic ending I finished the article with....

    HMRC are currently running a disclosure opportunity for people sheltering money in tax havens to come forward and declare in return for no penalties and slashing the interest they should otherwise be paying on overpaid tax.

    The effectiveness of this opportunity has been undermined a little by the fact that, having wrung concessions out of Liechtenstein, ie persuading the bastards that it would be in their interests to join the international community, there is now a parallel "Liechtenstein Disclosure Scheme" under which those who have accounts in Liechtenstein banks don't have to disclose until 2015 or summat like. Google for more info.

    Anyway, in effect, what it means is that tax-evaders who had stuffed their money in Jersey, the Caymans, the BVI, etc no longer need to meet the deadline of 30 November 2009 if they move their money from their Caymans etc accounts to a bank in Liechtenstein for a good few years yet.

    And after that, they can move their money to a bank in another jurisdiction which has yet to sign up to OECD laws about tax evasion, money laundering and all the rest.

    So in effect the iron fist of international revenue authorities has yet again become a velvet mitt stroking the pampered fat arses of rich bastards.

    I'm told that the OECD tried to play hardball with Liechtenstein on this issue but were basically told that they'd play according to their own rules, ta very much.

    And the OECD rolled over and said thanks very much for your cooperation.

    I've suggested before that we should bomb Switzerland. I was only half joking.

    I'm so outraged at this latest stunt that I would quite happily pay a bit more tax if it meant that our tanks started rolling into Vaduz and shelled the shit out of the cocky antisocial fuckers.

    Makes ya fucking laugh doesn't it? The IMF and the World Bank get to dictate to sovereign govts that they get no more credit unless they cut public spending in the war on the poor, but poxy little Liechtenstein is impervious to attack when it stands up for the property rights of the rich.

  44. D'oh - 2nd para - "overpaid tax", as if, should read "overdue tax".

    Been a long day. Had to get a train at 6am today to meet a Jersey-based accountant who was pleading innocence/ignorance on behalf of his multimillionaire taxhaven-based client who didn't understand the difference between capital and income when it came to paying tax.

    Satire's dead. Along with shame, honour, decency and morality.

  45. My initial reaction when you posted the article was to suggest that, perhaps, we could find some way of evacuating the poor people out of the Caymans and then bombing the islands (with bankers and politicians still there) into the sea. Then we could say to Switzerland, Liechtenstein, et al., "You're next. But we're not going to bother evacuating anyone next time."