Memorandum from ActionAid UK
1. ActionAid International is an international
NGO working in 50 countries worldwide, and our positions and recommendations
reflect the experiences of our staff and partners in Africa, Asia,
the Americas and Europe.
2. We welcome the Treasury Committee's decision
to conduct an inquiry into Offshore Financial Centres (OFCs),
commonly known as "tax havens". We believe that under-regulated
OFCs have very harmful impacts on developing countries, largely
through their role facilitating tax evasion and aggressive tax
avoidance, which seriously undermine the ability of the poorest
countries to raise the finance necessary to combat poverty. This
lack of finance is one key reason behind Africa being off track
to meet the Millennium Development Goals (MDGs) which are a cornerstone
of the UK's international policies.
3. The problem is twofold. Firstly, the
secrecy and special legal entities and company structures provided
by OFCs allow tax evasion by multinationals to go undetected on
a massive scale, and greatly increase the resources needed for
authorities to actively prevent this evasion. Secondly, OFCs allow
multinationals to aggressively exploit grey areas in tax regulations,
and the differences between different jurisdictions in order to
avoid tax. As a result multinationals can effectively choose when
and where to pay taxes. Taxation no longer occurs at the point
of economic activity but at the point most beneficial to the company.
4. The UK is at the heart of this problem
for two reasons. Firstly, many OFCs are UK supported, including
Overseas Territories such as the Cayman Islands, and Crown Dependencies
such as Jersey. Secondly, the City of London is at the centre
of the global financial system, and much OFC business is undertaken
or facilitated by people working there. Therefore the UK can and
should lead the way in pushing for solutions to these global problems
Supporting the adoption of the principle
of automatic exchange of information between all tax jurisdictions
for all kinds of actor.
Signalling its intent to take these
issues seriously by joining the UN taskforce on illicit financial
flows, and pushing UK-supported OFCs to adopt automatic information
5. Undertaking these vital reforms would,
we believe, mark a sea change in global efforts to tackle tax
evasion and aggressive tax avoidance. They would result in huge
benefits to the world's poorest countries who could begin to "plug
the leaks" that cost billions of dollars of urgently needed
finance in the fight against poverty.
6. In this submission, we focus on four
(a) The impact of OFCs on Developing Countries.
(b) How OFCs facilitate harmful practices.
(c) Solutions and recommendations.
(d) Key questions for the UK government.
7. Whilst our focus is on the benefits of
tackling this issue for the developing world and the global fight
against poverty, we believe that there would also be commensurate
benefits to governments and citizens in the developed world.
A: THE IMPACT
8. Each year, hundreds of billions of dollars
flow out of developing countries, much of which passes through
OFCs. The best available figures, used by the World Bank and the
UN are provided by Raymond Baker of the Center for International
Policy, who estimates that £500-$800 billion is lost annually.
This is made up of:
Capital flight, not least from proceeds
of corruption (3% of the total) and crime (30%).
Tax evasion and aggressive tax avoidance
by multinationals (60%).
9. It is unsurprising that tax evasion and
avoidance is by far the largest share of this total, as the OECD
estimates that 60% of world trade takes place within multinationals.
It is because of the scale of this problem and the fact that multinationals
often use OFCs to avoid or evade tax that we have decided to focus
our submission on this critical issue.
10. The impacts for developing countries
are severe. First, and most obviously, this represents a massive
loss of urgently needed finance for development. The estimated
$160 billion of taxes lost each year is more than one and a half
times global aid. Secondly, because developing countries are unable
to raise as much as they should through corporate taxation, they
often have to increase other taxes, such as VAT, which hit the
poorest hardest. In South Africa, research shows that households
from the lowest income quintile pay 10% of their annual income
in VAT, while those in the highest income quintile only pay 7%
of their annual income in VAT.
In effect, developing countries cease to be able to choose their
own tax policies, and have to resort to taxing those who can least
afford to pay.
B: HOW OFCS
How should an OFC be defined?
11. The Committee's inquiry focuses on Offshore
Financial Centres, which are more commonly known as "tax
havens". There are no universally accepted definitions of
either term, but in common practice they are often used interchangeably.
12. The Tax Justice Network defines a tax
haven as "any country or territory whose laws may be used
to avoid or evade taxes which may be due in another country under
that country's laws."
Two problems arise. Firstly, the lawyers, accountants, bankers
and others who provide the services for any particular tax haven
are highly mobile and may not even reside there. In this sense
the "offshore financial centre" is more than just the
particular tax haven jurisdiction and its geographic location.
Secondly, not all jurisdictions that set themselves up as tax
havens are successful in attracting customers and may therefore
be tax havens in name only.
13. To avoid confusion, we therefore adopt
a broader understanding of the term OFC, which encompasses both
(a) "successful" tax havensthose that not only
have the requisite lax regulatory environment and low taxes but
also successful financial sectorsand (b) and the people
who work in the tax haven's financial sector, regardless of whether
they actually reside there or not. In practice, because of its
pre-eminent position in international finance, many are based
Harmful services provided by OFCs
14. There are two main kinds of harmful
OFC services that are attractive for companies and individuals
seeking to aggressively avoid or evade tax:
15. Secrecy: The laws of OFCs are designed
to provide clients with the maximum amount of secrecy in their
business dealings. Many OFCs, such as Switzerland have laws that
enshrine banking secrecy. Secrecy also extends in many cases to
the ownership and accounts of companies, trusts or other special
legal entities such as protected cell companies. For example,
the British Virgin Islands registers 60,000 new companies a year,
but does not place requirements on them to file their accounts,
or disclose ownership details.
16. Legal structures that facilitate evasion
and aggressive tax avoidance: the creation of special purpose
vehicles such as trusts, Protected Cell Companies and International
Business Corporations allow multinationals to maintain a fiction
that subsidiaries are in fact separate legal entities. This allows
To create incredibly complex structures
that are very difficult for tax authorities to investigatefor
example, BP has over 3,000 subsidiaries.
To hide company transactions, facilitating
transfer pricing abuse. The most egregious examples of abuse in
this area are often in the realm of ownership of intangible assets
such as brands, patents, trade marks and logos.
17. There are two principle detrimental
impacts of these services for developing countries. Firstly, they
facilitate illegal tax evasion. They make it extremely difficult
for authorities to investigate companies to ensure that they have
paid the correct amount of tax. This is particularly problematic
for developing countries whose tax authorities are unlikely to
have the capacity to investigate the complex web of financial
arrangements facilitated by OFCs. The scale of the problems that
arise is shown by the fact that the UK Treasury has a large team
devoted to investigating instances of transfer pricing abuse by
multinationals. Such capacity is simply not available to developing
countries, who suffer disproportionately from this damaging practice.
For example, in 2004, Chile asked 34 tax havens for cooperation
on exchange of tax information on the same (limited) basis as
with the tax havens have with the OECD. Only 10 replied, and only
18. Secondly, they facilitate aggressive
tax avoidancewhere multinationals and rich individuals
use tax haven services to structure their companies to minimise
their tax burden, breaking the spirit, if not the letter of tax
laws in the other countries in which they operate. This means
that real economic activity is delinked from paper activity, and,
in effect, companies can "choose" where they are taxed,
rather than paying taxes on the basis of their actual economic
activities. This is a widespread, global problem, as shown by
the recent decision by Shire, previously the UK's third biggest
pharmaceutical company, to move its tax base to Ireland, which
offers a lower corporate tax rate, even though it admitted it
had not changed its actual economic activity in any way.
19. This means that, in reality, tax "competition"
is often not about countries competing to provide the most favourable
environment to attract business investment, but instead competing
to attract companies to nominally declare themselves resident
in one country, regardless of what their real economic activity
is. In the case of many African countries, where low employment
extractive companies are often the main multinational investors,
this means that countries may be left with many disbenefits such
as environmental degradation, without the benefits of gaining
tax revenues. Zambia offers the lowest royalty tax rate in the
region at just 0.6% of the total production value. As a result
the World Bank estimates mining companies contribute only around
12 percent of all corporate tax revenues, despite accounting for
nearly 70% of export revenues.
20. Tax evasion and aggressive tax avoidance
are a global problem, but UK can take specific actions to support
solutions, and use its influence to push for global or European
21. Firstly they can push for reform at
European and international level to:
Establish a principle of automatic
information exchange between all tax jurisdictions. This should
be applicable to all actors, including trusts, and to all jurisdictions.
This would force tax havens to collect and share information that
would allow tax authorities to investigate effectively.
Expand the European Savings Directive
to include companies as well as individuals. As the ESD already
operates on the principle of automatic information exchange, this
would set an important precedent which could be followed at international
Improve International Accounting
Standards to make the operations of multinationals transparent,
particularly their operations in OFCs. This could be done by adopting
country-by-country accounting standards through the IASB. This
would provide tax authorities in developing countries with invaluable
information that can be used to tackle illicit flows and capital
22. The above will require international
action in the medium term, which ActionAid believes the UK should
press for. In the short term, the UK government should take the
following steps to show that they want to put an end to OFC practices
which undermine development:
Join the UN taskforce on illicit
flows, chaired by the Norwegian government, which will report
to this UN Conference on Financing for Development this November.
Work with others to improve the data
on the scale of the global problem, and the impacts on developing
Push OFCs directly linked to the
UK to adopt the principle of automatic exchange of information.
D. KEY QUESTIONS
Does the UK support the principle
that taxes should be levied according to the real economic activity
conducted in each country?
What does the government estimate
to be the scale of resources lost to developing countries through
practices facilitated by UK-sponsored OFCs, including Overseas
Territories and Crown Dependencies?
Will the government join the Norwegian-led
UN taskforce on illicit financial flows as a first step towards
an international solution to this problem?
Will the government push for the
upcoming review of the EU Savings Directive to include companies
as well as individuals?
Will the government support the principle
of automatic information exchange between jurisdictions and push
the UN and OECD to support such a principle?
380 Baker, Raymond. 2005. Capitalism's Achilles
Heel. John Wiley & Sons. Hoboken: New Jersey Back
Elson, Diane. 2006. Budgeting for Women's Rights: Monitoring
Government Budgets for compliance with CEDAW. UNIFEM. Back
Not all OFCs are "offshore" in the literal sense-Liechtenstein,
Switzerland etc Back
Murphy, R., J. Christensen, and K. Kimmis. 2005. Tax us if
you can. Back
See Closing the Floodgates, Tax Justice Network, commissioned
by the Norwegian Ministry for Foreign Affairs, 2007, P136-137 Back
13-6-08 at 17:32 Back
Closing the Floodgates, Tax Justice Network, commissioned
by the Norwegian Ministry for Foreign Affairs, 2007, p43 Back
Concept Paper on Tax Havens-A contribution prepared by the GT-7/
Chile for the Technical Group Gt-7 Meeting, 10-11 January 2007,
Santiago, Chile. Back
Accessed 13-6-08 at 17:59 Back
2003 Foreign Investment Advisory Service, Zambia: Sectoral
Study of the Effective Tax Burden, FIAS/International Finance
Corporation/World Bank, December 2004. quoted in Christian Aid.
2007. A Rich Seam. Back