Examination of Witnesses (Questions 1
TUESDAY 4 MAY 1999
and MR GILES
1. Welcome. We are very grateful to you
for coming. We are going to ask you some questions about the issue
of so-called tax havens. May I ask you two very general questions
first which might help us focus our minds? First, what is the
definition of a "tax haven"? Secondly, what are the
advantages and disadvantages of them?
(Mr Troup) Thank you very much, Chairman. Can
I just declare a small interest in this matter in that my firm
is giving some advice to some offshore jurisdictions and is also
doing some work for the European Commission in relation to some
of these matters. I do not think it affects anything I may say
but I thought the Committee should be aware of that.
2. Which matters? The Code of Conduct?
(Mr Troup) The Code of Conduct and in relation
to the OECD report.
3. Are you personally involved in that work?
(Mr Troup) Yes, I am.
4. In what sense?
(Mr Troup) In relation to the offshore jurisdictions,
assisting them, putting their representations to the OECD. In
relation to the European Commission, some work on the administrative
practices potentially forming part of the competition, that sort
Sir Teddy Taylor
5. I thought you were a lawyer.
(Mr Troup) I am.
Chairman: He is a
Sir Teddy Taylor
6. So basically what you are saying is that
the Commission are asking you for information about the legal
status of tax havens? Is that right?
(Mr Troup) No, about the way in which administrative
practices work in different jurisdictions in relation to tax matters.
7. Including, say, the Channel Islands?
(Mr Troup) No. In relation to the European Union
itself, the main Member States. I do not think it is directly
relevant to the tax havens issue.
8. Are you going to answer my questions?
(Mr Troup) Yes, I am very happy to answer the
questions. If you ask what a tax haven is, you have probably identified,
apart from geographical location, that it has low taxes, that
there is a degree of confidentiality, which might be regarded
as secrecy, in relation to business operated there, and they will
frequently offer flexible legal structures to allow people to
do business there, and that may or may not be accompanied by a
lighter degree of regulation than you might find onshore. Those
are in essence the easy ways of identifying tax havens.
9. Are there any dissenting views on that
(Professor Devereux) I would not disagree with
Mr Troup about that definition. That is the kind of definition
which has been given by the EU and the OECD. I do have some difficulties
in just thinking about the whole issue of tax havens and harmful
tax competition and whether there really is any meaningful sense
in which one can identify harmful tax competition with tax havens
as defined in that kind of way as opposed to any other kind of
10. Explain yourself please.
(Professor Devereux) There are at least two ways
in which countries can compete with each other in tax matters.
One is to try and tax real activity, productive activity, financial
activity. Another is essentially to attract taxable profit by
a number of means across different jurisdictions. Either of those
one can think of as being tax competition. The first of these
is a kind of activity which most countries engage in. We try and
attract inward investment to the United Kingdom. Other countries
do the same. The extent to which we use the tax system to try
and do that, for example by reducing the corporation tax rate,
one might think of as being tax competition, but we would not
want to call the United Kingdom a tax haven. The question of whether
there is harmful tax competition as opposed to, say, beneficial
tax competition is a difficult one. It is very difficult to think
of a case in which there is beneficial tax competition, so if
you are thinking of tax competition generally, you might want
to include all kinds of competition rather than specific forms.
11. Did you say it is very difficult to
see that there would be beneficial tax competition?
(Professor Devereux) That is right.
12. Could you explain yourself? You keep
coming out with these statements and letting them rest there.
You must explain yourself.
(Professor Devereux) Let us take an example. Suppose
the United Kingdom decided to try and attract inward investment
by reducing the corporation tax rate to 25 per cent. In the short
run at least that may be beneficial for the United Kingdom if
it succeeds in attracting investment. But that is probably going
to be at the expense of some other countries because that investment
would probably be relocated from somewhere else. In the long run
it is likely that the competitor countries will respond in the
same way by reducing their tax rates. The theoretical economics
of this shift, for what it is worth, suggest that this process
is going to end up with tax rates down to zero on mobile activity
such as capital which can flow across the world between countries.
That seems to me to be probably not a situation which you would
want to get to. Certainly it is the case that most countries do
attempt to tax their capital income at the moment for a number
of different reasons. A process of competition which essentially
prevents them from doing that in order to compete with other countries
is therefore likely to be harmful to them.
Sir Peter Lloyd
13. Surely it just means that taxes are
going to be somewhat lower than they would otherwise be across
a group of countries that are competing and that could be beneficial
all round, certainly beneficial for industry?
(Professor Devereux) They would probably be lower
for some kinds of activity, for example taxes on the income from
mobile capital, and they will not be lower on other kinds of activities.
The level of tax rates is clearly an issue which is important
for a number of governments and is important at election time
in the United Kingdom as in other countries. Individual countries
have the right to set whatever level of tax they want. If they
are forced to set some lower tax rate I start from the proposition
that that is likely to be harmful rather than beneficial because
it is not the tax rate they would otherwise have chosen.
14. I thought that in your work you distinguished
between low taxes to attract inward investment, which you have
said has a beneficial effect on the countryis that
(Professor Devereux) No. Clearly it may have some
beneficial effect for the country which does it so long as it
can maintain a differential with other countries. Ireland is an
obvious example which has a low tax rate on manufacturing at 10
per cent, and has clearly attracted a lot of inward investment.
It is difficult to argue that that has not been beneficial for
Ireland. What I am talking about more generally is that other
countries are likely to respond to that in some way. If Ireland
has a low tax rate then perhaps the United Kingdom has to lower
its tax rate in order to prevent it from losing inward investment
to Ireland instead of it going to the United Kingdom.
15. Is there a balance to be struck? You
might say that some levels of corporate taxation were too high
and you have taken the other extreme which is a zero rate.
(Professor Devereux) Certainly some levels of
corporate taxation are too high. It seems to me that it is up
to national governments to decide what that level ought to be.
If they are constrained in doing that, then they are constrained.
They are going to have fewer options in terms of setting tax rates.
(Mr Troup) Can I take a slightly different view?
16. I thought you would.
(Mr Troup) I do agree that in relation to mobile
factors if countries are allowed to compete it will tend to drive
down the tax rate overall, so that if we cut our rate of tax on
companies and companies can relocate or new companies can set
up elsewhere, then that may drive down corporation tax rates generally.
I would suggest that that is not necessarily a bad thing because
if we are taxing a mobile factor we probably should not be, because
if you tax something which can move people will tend to move away.
If there can be competition for corporation tax, then perhaps
we should not be taxing corporations; we should be taxing something
which does not move away, like property, like consumption, like
employment, because by and large people do not emigrate because
of tax rates unless they get extremely high. It is not necessarily
a bad thing. I would possibly agree with the suggestion behind
Sir Peter Lloyd's question, that in some areas there could be
some benefit simply in ensuring that the tax system taxes those
things which it ought to be taxing, that is, more immobile things,
and leaves alone those things which, if it does tax them, will
tend to move away.
17. You seem to be suggesting that previous
to this current climate there has not been a propensity amongst
governments to have a sort of international perspective when they
are setting corporate tax rates.
(Professor Devereux) The idea of competition between
countries has probably always been around. It is probably more
important now over the last 20 years or so than it was before
that with the abolition of exchange controls in 1979 and subsequently,
but certainly the process of competition has always been there.
Can I respond to Mr Troup's point?
18. All right. Let us have a little internal
(Professor Devereux) I do not disagree with that
principle. I am not saying that corporation tax rates ought not
to be any lower. I am not saying what corporation tax rates ought
to be. Indeed, I agree that there is an argument that corporation
tax rates should be a lot lower than they are. Part of that is
precisely because of the things that Mr Troup mentioned. It may
be worth referring to a document by the European Commission which
had a picture of tax rates on capital going down over time and
tax rates on labour going up over time and the European Union
wanted to draw the conclusion that it is a process of tax competition
which has brought tax on capital down. Governments have had to
respond by increasing taxes on labour, and that has had an impact
on unemployment and that is essentially one of the factors generating
unemployment in Europe. I think that argument is mistaken and
the reason it is mistaken is that taxes on capital are not necessarily
borne by the owners of capital; they are passed on to other factors
of production such as labour in the form of lower wages. If we
have a high tax rate on capital we are likely to drive capital
out of the country and that is going to reduce the amount of economic
activity in the country and in the end it will reduce employment.
In some ways I agree that it is better to try and tax immobile
factors rather than mobile factors.
Sir Teddy Taylor
19. I have been a little horrified to hear
this. It is a fact, I think you will accept, that the level of
tax as a share of GDP in Britain is a lot lower than that in the
rest of the continent, but of course you have very high unemployment
levels and a great deal of economic misery. Is your suggestion
that Britain should not be permitted to do this because we do
damage to the other countries of Europe and, if we do not spend
money because we are more efficient, why should we be asked to
pay more in taxes?
(Professor Devereux) No, I am not suggesting that
Britain should not be permitted to set its own tax rates. In fact
I am suggesting the opposite in a sense. I am just saying that
a process of competition which drives down tax rates is essentially
constraining governments in their choice of being able to set
their own tax rates and therefore it may lead to tax rates which