Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

TUESDAY 4 MAY 1999

PROFESSOR MICHAEL DEVEREUX, MR EDWARD TROUP and MR GILES CLARKE

Sir Peter Lloyd

  60.  I think they are more or less, although reluctantly.
  (Mr Troup)  It seems an odd conclusion but in a sense, if you go back to the Eden where there was no tax, and you say how would the resources have been allocated if there were no taxes in the world, of course we cannot answer that question. What we do know is that as soon as you start imposing taxes, which are necessary for the reasons we all know, it drives business away and to the extent that it creates tensions, if we can find ways of reducing those tensions without reducing the overall tax yield, that is going to help move back to this Eden where there were no taxes. It seems to me that the conclusions of Professor Devereux, who is the economics expert, would seem right, although taken in isolation and saying, do tax havens help economic efficiency worldwide, it seems an odd question to answer yes to, but if you look at it in the wider context it seems entirely plausible.

  61.  Taxes are necessary but there is a price to be paid?
  (Mr Troup)  And they help reduce that price.
  (Mr Clarke)  One does not want to emphasise too much the reason they may be helpful is because of low or zero taxes in these jurisdictions. A lot of the reason why money is held through them———

  62.  Yes, you have made that point very well: out of convenience.
  (Mr Clarke)  —— is convenience and further that small jurisdictions have a flexibility of response to changing economic and commercial demands that you do not get in larger jurisdictions. If commercial requirements are going in a particular direction or maybe some legislative change is needed both to accommodate that and to regulate it, a small jurisdiction is normally going to be able to respond much more quickly to that and much more flexibly to that without any loss of regulatory protection than a large jurisdiction. That is quite an important factor.

  63.  Can I ask finally what is the flow of investment from offshore jurisdictions into the United Kingdom? Are there any figures for that? If so, what sort of size are they? Is it growing? Is it diminishing? Is it important? How much do we benefit?
  (Mr Clarke)  There is a very specific respect in which I think we do benefit, which is that virtually all the major offshore jurisdictions are under the jurisdiction of the British Crown to a greater or lesser extent, if you think of the ones I enumerated, and the only one that is not is Liechtenstein.

Chairman

  64.  Yes, but that is a rather symbolic benefit, if I may say so.
  (Mr Clarke)  That is not the point I am seeking to make. The point I am seeking to make is———

Mr Cousins

  65.  The cricket effect.
  (Mr Clarke)  Not even that. The legal framework they have is———

Sir Teddy Taylor

  66.  A very high standard.
  (Mr Clarke)  —— is ours and first of all it means it is a very high standard which gives the users of them confidence in it but, much more important, a great many services that those jurisdictions need to buy in to enable them to provide them, are bought in from this country. I have cases I am involved in where the underlying commercial operation and the underlying individuals have no connection whatever with the UK and yet because companies and trusts are based in British territories using the English legal system a great deal of back-up service is provided out of the United Kingdom.

Chairman

  67.  So it helps City law firms?
  (Mr Clarke)  It helps City law firms, certainly like Mr Troup's, but it is wider than that. It is difficult to quantify but it certainly helps.

  68.  I have heard it argued by offshore jurisdictions that in fact their existence directly helps the City of London?
  (Mr Clarke)  Yes.

  69.  And indeed they have put quantification on this. Can you help here?
  (Mr Troup)  I certainly cannot quantify it, but I can tell you that a significant part of my firm's practice is in advising US investment banks in London who are doing what are called re-packaging, which is taking assets of financial receivables, rents, oil sales, cash flows, telecom receivables and packaging them up and borrowing money against the strength of those, and they use offshore vehicles to do that even though the deal is done in the City of London, London lawyers are used, London services are used and the vehicle is usually based in one of the Caribbean jurisdictions, and the bonds which are issued are sold to investors back in the UK and back in the US. There is no tax motive in that, it is simply finding a convenient packaging, and that does bring a lot of activity into the City of London which my firm and a lot of other City firms benefit from.

Dr Cable

  70.  If it is the case that such a major attraction of these havens is a non-tax motive—reasons of efficiency and security—why do not the high quality tax havens raise their taxes in order to improve their revenue base since they would lose little business by doing so?
  (Mr Clarke)  I suppose the short answer is that they do not need to.

Dr Cable:  I thought there was always a need to.

Sir Peter Lloyd

  71.  This is very interesting about services, the benefit to the City and the additional advantages we may gain from them, but are there any figures suggesting how much money is internationally mobilised in the jurisdictions which finds its way into investment in British companies in the United Kingdom? Presumably it is invested somewhere, but the assumption is that it whizzes out of this country, the people who own it do not pay tax and it is invested in some distant parts of the world. But in fact it may be that quite a lot of the movement is the other way, that money raised in other parts of the world finds its way in to investment in the United Kingdom. Do we know anything about that?
  (Professor Devereux)  It could be, I am afraid I do not have any figures on that at all, but I would agree with you that the comments made earlier about global efficiency are exactly that; global and not specifically national. It could be any individual country could gain or lose.

Chairman:  You would have thought that someone in the offshore jurisdictions, if there is good news here, ought to be saying so.

Sir Peter Lloyd:  Yes.

Chairman

  72.  And they ought to be putting figures on it.
  (Mr Clarke)  Certainly. What I have certainly heard said, and this is admittedly anecdotal, is that a great deal of money is placed in offshore jurisdictions. As you say, then it has to be invested somewhere, and if the investment is portfolio investment it has to be managed. I have been told the main places the money is actually invested are the United States and here, and certainly a lot of the management services are here and in the USA.

Sir Teddy Taylor

  73.  One very brief question. The question which Jacqui asked was about slippage and leakage and the answer seems to be that we are not terribly sure about this, so could I ask our three experts if by any remote chance the Committee was foolish, which it would not be, and thought these offshore jurisdictions were nasty, vicious groups of people who were trying to deprive us of revenue, is there anything we can actually do about it? The reason why I am asking this is because there was a rumour, and I saw a lovely headline in a paper from a place called Guernsey, there was the possibility of something called a withholding tax being introduced somewhere in some way. It seems the result of that was that immediately vast sums of money shot out of Guernsey and went to a place called Switzerland, which is also involved in this kind of business. If we did take the view that something dreadful has happened and that this strong and competitive Government was going to take urgent action, and have its photograph taken in so doing, what would they actually have to do? My fear is that even if something terrible was happening, which it is not because we are now convinced that they are wonderful centres for the creation of capital, what can you actually do? I think the answer probably is nothing at all because if we were to be horrible, would the money not simply go elsewhere? I am told apart from Switzerland, which is apparently a wonderful country, there are other such places where the money could go?
  (Mr Troup)  Trying to unpick the elements of that question, and coming back to what I identified the tax havens or offshore jurisdictions being used for, in terms of what one would call the legitimate business, it seems we would not want to be horrid anyway, so we are really talking about the extent to which there is avoidance of UK tax liability or evasion, ie simply hiding an activity away, and those two concerns effectively underlie the OECD initiative I think. On the first of those, as Giles Clarke said, the UK legislation, as with the US legislation, is extremely robust, it is very difficult for UK residents or companies actually to reduce their tax bill legitimately through any offshore means. We have had decades of improving our rules to make sure that we collect the tax we want to. On evasion and fraud, we have to accept that there are some people who will not pay tax or are prepared to devote some time to illegally not paying tax, and clearly that will take place, there are UK residents and people subject to UK tax who are criminally evading their liabilities, and it is difficult to know what action to take. I think your suggestion is, were we to say this was happening in the Channel Islands, and I have no factual information it is——

  74.  Certainly not, no. I was not suggesting that.
  (Mr Troup)  — if we were saying that, simply closing down the Channel Islands would, as you suggest, effectively result in some degree of displacement of that activity elsewhere. You referred to the EU initiative on withholding tax, and that of course is driven very much by tax evasion, although it is often referred to as a tax avoidance measure. A number of citizens, particularly in Germany, do not declare to the tax authorities the income they have and there is a loss of tax as a result, simply through non-declaration. The withholding tax is supposed to stop that by saying, "You put your money in Luxembourg but you will suffer the withholding tax so there is no point in you not telling us about it because you will pay tax on it anyway". The criticism which has been made of that measure is that all that will happen is that those German citizens, if it is the German citizens who are not paying the tax, will simply move their deposits from Luxembourg to Switzerland, or if Switzerland joins the club they will move them to whatever the nearest regime is. The response to that is, "People will only go so far. If you close down all these jurisdictions in the Western Atlantic people in the UK or Germany will not put their money into Vanuatu or in places in the Pacific because it is too far away." I think that response is naive: those who are determined to evade tax will do so. I certainly do not condone the evasion of tax but simply being beastly to a few nearby jurisdictions is not going to solve the problem. What is going to solve the problem, and to this extent I support the OECD approach, is to generate a culture where we do not dictate tax rules to other countries but we do encourage them to exchange information to tell us what is going on, so if they have citizens from the United Kingdom placing money in banks there they are obliged, if we ask them the question, to tell us about it. I believe that is the way forward, the exchange of information to deal with the illegal aspects of the jurisdiction. But the other aspects which I think are legitimate and necessary should be left alone.

Sir Peter Lloyd

  75.  On the topic which Edward Troup is talking about now and the actual proposals of the OECD and the EU, I wonder whether you and your colleagues here could indicate what you see as the significant differences between their approaches, or are they trying to do exactly the same things in a similar way?
  (Mr Troup)  I shall try to be brief. The EU code of conduct addresses the location of business activities, which is principally dealing with real investments within the European Union alone, and looking at tax regimes which, let us say, provide a low rate of tax for manufacturing or distribution and are designed to attract specific forms of activity. It is in a sense an extension logically of the existing State Aids provisions of the Treaty of Rome which are designed to prevent Member States helping particular businesses coming to their jurisdictions. The OECD approach explicitly does not refer to real investments and if you look at paragraph 6 it says that it does not address regimes designed to attract investment in plant, building and equipment, in other words it is concerned with financial flows and not with re-investment flows. So there is that distinction between the two. Nevertheless, what they have in common is a desire by the tax authorities both in the EU and in the OECD to ensure their tax revenues are not eroded in a wide variety of ways. What I regret particularly about the OECD proposal is that it does not look wider to what is causing the shift of activities with which they are concerned, nor propose any plan or think forward as to how the tax regimes of the developed countries could adapt, because this is an attempt by the OECD to effectively impose a cartel in a world where I do not think you can create a cartel of tax-raisers. I think we have to accept, as Giles Clarke has indicated, there are large parts of the world where tax is not raised, whether it is the Middle East or elsewhere, and our tax systems must be robust to deal with that.

  76.  Taking the EU first, and I would be interested in Mr Clarke's and Professor Devereux's views as well, if it is brought in and enforced as far as it is possible to enforce it, how far would it be successful in achieving what is intended?
  (Mr Troup)  I think you have to make some assumptions about what is intended. Within the Member States themselves, ie leaving aside the dependent territories, it seems to me that its aims are entirely sensible. As I say, they are the extension of the State Aid provisions and they are designed to prevent Member States in the club which constitutes the EU distorting activity through special regimes in the tax system which they would not be permitted to do through the use of cash State Aids. Where it is more difficult to see where it is going is where the code is extended to the dependent territories and how exactly it will apply to the Channel Islands, the Isle of Man, Madeira and the other tax favourable jurisdictions within the ambit of the EU. It seems to me for the reasons we have discussed this morning it is unlikely to be successful in that.

Chairman

  77.  And that includes places like Liechtenstein and so on, does it?
  (Mr Troup)  I have to say I am not entirely sure, and I defer to Giles Clarke, what the status of Liechtenstein is, but as part of Switzerland it is presumably not covered——
  (Mr Clarke)  The only light I can shed on it is that it is part of the European Economic Area. In contrast to Switzerland which is not, Liechtenstein is.
  (Mr Troup)  I am sorry, I do not know the answer how it fits into this at all.
  (Mr Clarke)  Beyond that, I cannot help you.

Sir Peter Lloyd

  78.  Could you give some thoughts as to what you think the effects will be, beneficial and not beneficial?
  (Mr Clarke)  Of what the European Union is doing?

  79.  Yes.
  (Mr Clarke)  As I understand it, what the European Union is doing is a voluntary code, in other words governments are enjoined to adopt it rather than be compelled to.


 
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