Examination of Witnesses (Questions 60
TUESDAY 4 MAY 1999
and MR GILES
Sir Peter Lloyd
60. I think they are more or less, although
(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
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
(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.
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
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.
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.
70. If it is the case that such a major
attraction of these havens is a non-tax motivereasons of
efficiency and securitywhy 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
(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.
72. And they ought to be putting figures
(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
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
(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.
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?
(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.