Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

TUESDAY 4 MAY 1999

PROFESSOR MICHAEL DEVEREUX, MR EDWARD TROUP and MR GILES CLARKE

Chairman

  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.

Mr Cousins

  3.  Are you personally involved in that work?
  (Mr Troup)  Yes, I am.

Chairman

  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 of thing.

Sir Teddy Taylor

  5.  I thought you were a lawyer.
  (Mr Troup)  I am.

Chairman:  He is a tax lawyer.

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.

Chairman

  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 definition?
  (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 tax competition.

  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.

Chairman

  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 country——is that right?
  (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.

Jacqui Smith

  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?

Chairman

  18.  All right. Let us have a little internal debate.
  (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———


 
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