Offshore Financial Centres - Treasury Contents

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 by:

    —  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 exchange.

  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 areas:

    (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.


  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.[380] 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.[381] 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.


How should an OFC be defined?

  11.  The Committee's inquiry focuses on Offshore[382] 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."[383] 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 havens—those that not only have the requisite lax regulatory environment and low taxes but also successful financial sectors—and (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 in London.[384]

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.[385]

  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 multinationals:

    —  To create incredibly complex structures that are very difficult for tax authorities to investigate—for example, BP has over 3,000 subsidiaries.[386]

    —  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 five agreed.[387]

  18.  Secondly, they facilitate aggressive tax avoidance—where 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.[388]

  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.[389]


  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 action.

  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 level.

    —  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 flight.

  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 countries.

    —  Push OFCs directly linked to the UK to adopt the principle of automatic exchange of information.



    —  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?

June 2008

380   Baker, Raymond. 2005. Capitalism's Achilles Heel. John Wiley & Sons. Hoboken: New Jersey Back

381   Elson, Diane. 2006. Budgeting for Women's Rights: Monitoring Government Budgets for compliance with CEDAW. UNIFEM. Back

382   Not all OFCs are "offshore" in the literal sense-Liechtenstein, Switzerland etc Back

383   Murphy, R., J. Christensen, and K. Kimmis. 2005. Tax us if you canBack

384   See Closing the Floodgates, Tax Justice Network, commissioned by the Norwegian Ministry for Foreign Affairs, 2007, P136-137 Back

385 Accessed 13-6-08 at 17:32 Back

386   Closing the Floodgates, Tax Justice Network, commissioned by the Norwegian Ministry for Foreign Affairs, 2007, p43 Back

387   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

388 Accessed 13-6-08 at 17:59 Back

389   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 SeamBack

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