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On 22 April last year, I was fortunate enough to secure a debate on inheritance tax and capital gains tax. Before that debate, I advised the participants that I would say a few words about international tax evasion and avoidance. I stated in that debate:
“There is reason to be reasonably confident that major economies in the world are becoming more enthusiastic about dealing with international, corporate and individual tax avoidance”.
I pointed out that some of the tax avoidance schemes that were being used were on the cusp of evasion, if not outright evasion. I said then and state again now:
“I believe in international tax competition as long as international conglomerates and individuals pay their fair proportion of tax in the countries in which they operate”.—[Official Report, 22/4/08; col. 1457.]
In this country, we have made some sensible attempts to tackle these problems, with control of foreign companies legislation, other anti-avoidance legislation and legislation to deal with abuses such as transfer pricing. Nevertheless, with growing financial deficits in the major world economies, especially the USA and Britain, and with a major financial crisis bearing down on the world, it is imperative that far more compelling efforts are brought to bear to eliminate tax fraud and tax avoidance.
I wholeheartedly agree with the Minister’s comment the day before yesterday in reply to a question asked by the noble Lord, Lord Barnett. The Minister stated:
“There needs to be international co-ordination”.—[Official Report, 24/3/09; col. 555.]
I would add to that: we also need international co-operation. Too frequently, the fraudsters and money launderers can conceal their ill-gotten gains and proceeds of crime by the use of complex nomineeships, trusts and companies with special tax status, all in obscure and opaque jurisdictions, often using a number of these jurisdictions further to conceal their activities.
In a debate last year, I reminded the House that in the United States in, I believe, 2007, three senators introduced the Stop Tax Haven Abuse Bill. I do not believe that the Bill became law. Of the three senators who sponsored the Bill, one was a Republican and two were Democrats. One of the Democrats is now the President of the United States. One of the thrusts of the Bill was to impose restrictions on foreign jurisdictions, financial institutions and international transactions which raised money-laundering concerns or—this is a very important addition—impeded United States tax enforcement.
Other countries, such as India and Germany, are deeply concerned about leakage of tax from their jurisdictions. The German Chancellor, Angela Merkel, visited both Monaco and Liechtenstein in early 2008 and made it abundantly clear that Germany expected
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Before I discuss those efforts, which I strongly support, I should add that I would like to hear from the Minister exactly what the Government aim to achieve. Is the Government's aim to have full information-sharing arrangements with every jurisdiction in the world and, if so, to what extent? That appears to me to be one of the ideals. Presumably it would mean that all jurisdictions worldwide which are involved in this co-operation should refuse to take any deposits or securities in any of the banks, law firms or other organisations in their jurisdictions unless and until they have full and proven beneficial ownership details with money tracing. That jurisdiction would then have to report back to the country or countries of origin, domicile, residence and ordinary residence of that beneficial owner, or beneficial owners, be they individuals, companies, partnerships, limited liability partnerships or whatever. As the Minister knows from his previous experience, that is a very tall order indeed. I am anxious to know the level of international co-ordination and co-operation that the Government and leading economies seek to achieve. Will the Minister also spell out—this is an important point—what sanctions will apply to jurisdictions and states which fail to co-operate?
Adverting to the 2005 orders, I have the following questions. What has been the outcome of those orders? Would the Minister let us know how frequently the orders have been invoked and used? What level of co-operation has there been from Guernsey, Jersey and the Isle of Man? Is there any estimate of any tax saving as a result of those orders? Have the Government measured the success of the orders and what is their measure? The orders were approved under powers introduced in 2000 to enable the United Kingdom to enter into agreements that concerned the exchange of tax information. They are bilateral agreements relating to the European Union savings directive. Will the Minister spell out what agreements have been signed with other dependent and overseas territories? The genesis of the agreements was the 1999 Helsinki European Council, which agreed that,
- “all citizens resident in a Member State of the European Union should pay the tax due on all their savings income”.
To their credit, the United Kingdom Government have done some admirable work in this sphere, although they found it difficult to reach agreement that exchange of information is the right way to counter tax evasion.
The day before yesterday, as reported at col. 556 of Hansard, my noble friend Lord Maclennan of Rogart asked the Minister the relevant question whether he believed that the European Union would speak with one voice on this subject. My more specific question to the Minister is this: exceptionally, the European Union accepted that three member states, Austria, Belgium and Luxembourg, may levy a withholding tax for a transitional period before moving to the automatic exchange of information. Has that transitional period now expired? Is there now full co-operation with all European Union countries in relation to these matters? Obviously, the weakness in this system is that
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It would be wrong to have a debate of this nature without saying a few words about tax avoidance and the possible introduction of a purposive rule in our tax affairs. In an excellent article in the Times on 21 March this year, Matthew Parris described the appallingly complex nature of our tax system and the convoluted and extremely expensive efforts that taxpayers and HMRC expend to deal with these matters. He referred to “loophole-seekers”. I do not entirely agree with his solution; nevertheless, it is surely time that HMRC introduced a consultative document on these matters and a full public discussion, including debates in both Houses of Parliament, on the effectiveness or otherwise of taking these steps and pursuing a purposive rule in taxation.
There is much more to be said on these matters, but there is insufficient time to deal with further details. Nevertheless, I conclude my speech by making one further point. It was hinted at by the noble Lord, Lord Baker of Dorking, in his question to the Minister the day before yesterday, reported at col. 555 of Hansard. It was also hinted at by my noble friend Lord Oakeshott. The Minister said that he had been assured by Her Majesty's Revenue and Customs that it was confident that it had resources in terms of number of staff and skills to deal with these matters. I am not sure that that is the case, especially in terms of tax fraud. Now would be a good time to recruit some very able specialists into HMRC, the Security Service and other agencies, including the Serious Organised Crime Agency, to get to the bottom of what are very complex and convoluted steps taken by fraudsters on an international scale and to bring them to justice.
I hope noble Lords will forgive me for quoting from a leading article taken from yesterday’s Financial Times:
“Either government makes use of the expertise that former bankers and other financiers can bring to bear, or it draws only on professional politicians and paragons”.
“Hiring poachers to become gamekeepers means picking candidates with rabbits and pheasants in their past—otherwise there is no point in employing them. But they must then be defended if and when their previous careers cause controversy”.
I believe that the Minister comes from Cornwall, so he has quite a bit going for him.
12.29 pm
Lord Newby: My Lords, let no one say that debates in your Lordships' House have no impact outside it. Since my noble friend Lord Wallace put this debate down on the Order Paper, the whole edifice of global tax havens has started to crumble. It now looks likely that the G20 will take action that was inconceivable until relatively recently. Indeed, the G20 Finance Ministers meeting a couple of weeks ago urged the G20 as a whole to develop a toolbox of effective countermeasures against such havens.
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It is ironic, however, to hear the Prime Minister talk about UK leadership on the issue when his role has been one of studied followership. Two key developments have spurred him into action. The first was when the German Chancellor and Government discovered the degree of tax avoidance and evasion happening via Liechtenstein and took action there and followed it up by action, or certainly pressure, on Monaco and Switzerland. The second was, as my noble friend Lord Burnett mentioned, the fact that the new American President, while still a senator, introduced the wonderfully entitled Stop Tax Haven Abuse Act to the Senate, and has made it clear that he intends the principles embodied in it to be implemented by his Administration. I commend it to the Minister; it is a splendid document. The US estimate that if it were implemented fully, they might save as much as £50 billion of tax revenue, which gives some idea of the scale of the problem. I commend it to the Treasury and to the Minister as essential reading.
It was those examples of leadership that resulted in the Prime Minister springing into action. Despite a record of almost total inactivity as Chancellor, he is now setting himself up as the global scourge of tax havens. He has done that because he can now see an opportunity to have an impact. We hope that his fellow G20 leaders take a collective leap forward on tax havens when they meet next week.
Today's debate is concentrating on those tax havens that, in one way or another, fall under the British Crown. Although many features of tax havens are common across the world, we bear especial responsibility because so many of them are, to a greater or lesser extent, under UK jurisdiction. In the case of some of the most notorious tax havens, especially in the Caribbean, the UK has allowed or even encouraged territories to develop their offshore financial services sector to reduce the likelihood of the UK having to give them financial assistance.
At one level, that has been extremely successful. Mention has already been made of the Cayman Islands, where per capita income is now higher than that in the UK. The Cayman Islands are the largest offshore banking centre in the world. That is not absolutely surprising when you look at their tax policies. There are no corporate, capital gains, VAT, profits or other taxes on Cayman companies, and there are no withholding taxes on dividends or payments of principal or interest. It is hardly surprising that that is an attractive place to set up a company.
In other territories, such as those in home waters, we have let things drift, either because of lack of interest or because there were always enough powerful individuals and companies that benefited from using those tax havens to make it politically too controversial for Governments to act. Fortunately, that now seems to be changing. Of course, not all tax havens are the same, as the noble Baroness, Lady Hooper, pointed out, and not all the financial activity that takes place there is equally reprehensible.
Of course, there is a distinction to be made between avoidance and evasion. On evasion, either by companies or individuals, the key is transparency and the UK’s ability to get the information it needs about UK
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The Government have at least taken, or may be about to take, decisive action in the case of the Turks and Caicos Islands, where the Auld report pointed out that there were systematic corruption and serious dishonesty by the Government there. I hope that in taking action there, the Government will not be put off by some of the bleats by some of the offenders in the Turks and Caicos, who claim that any action we take is a colonialist venture. Robert Mugabe tries that, and we know how much logic there is in that.
Even if we conclude acceptable tax information exchange agreements with all our tax havens and they do the same with all other countries whose nationals use their financial services, we will have gone only part of the way, because tax avoidance using tax havens is almost as pernicious, if not more so, as tax evasion. There was nothing illegal about Tesco using a Cayman Islands subsidiary to avoid paying tens of millions of pounds of stamp duty on some of its property transfers. There was nothing illegal about at least some of the schemes referred to by my noble friend Lord Oakeshott which Barclays Capital dreamt up and made such a lot of money on, just as there is nothing illegal about individuals who have made their wealth in the UK retiring to the Channel Islands to reduce their tax liability.
However, we feel a sense of moral outrage and a justifiable sense that something should be done to stop such behaviour, because its purpose is to allow the wealthy and the powerful—companies and individuals alike—to avoid their responsibilities as citizens and to take the benefits of living and operating in a well ordered society without paying their share of the costs that the state needs to incur to enable society to function. My noble friend Lord Burnett referred eloquently to that.
If the conclusion one draws is that more needs to be done, what might that programme consist of? One thing that is clearly not possible, even if we wanted to do it, is to require those countries to set tax rates at levels which are more nearly those in the UK, but there is a raft of things that we can do either on our own or in co-operation with our international partners. I strongly agree with my noble friend Lord Burnett’s proposal of a purposive rule for tax avoidance schemes. Over the past decade, we have seen a huge volume of legislation introduced in Finance Bills to try to deal with schemes on a case-by-case basis. One is always one step, if not more, behind the avoiders, so a purposive rule has a lot to recommend it. I am curious why the Government do not take a tougher line with the banks that they now effectively own or that are seeking or may seek government support, requiring them to stop running tax avoidance schemes.
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One would like to see shareholders asking more questions of the companies in which they invest. I was interested to see the initiative taken by Aviva Investors earlier this year, which said that it will be a much more active shareholder across a whole raft of corporate governance issues. I hope that that is followed.
There should be a requirement that all non-doms who choose to remain in the UK for more than a set period should pay UK tax on all their global earnings, thus not just generating more tax income but closing another gigantic loophole. Noble Lords have referred to the Foot review on tax havens. Like others, I would welcome an update from the Minister on where that is going and when we may expect something back from it.
Finally, I return to the broad principle that my noble friend Lord Burnett discussed. We want to push for full information exchange agreements not just with our tax havens, as it were, but with those elsewhere in the world. We hope that that will be one of the outcomes of the G20 discussions.
There was a very effective summary of the situation in tax havens in this weekend’s Financial Times in an article by John Kay, who wrote:
“If you operate in the penumbra of legality, as havens do, it is easy to slip outside the bonds of legality altogether. Where there is legal avoidance of tax and regulation, illegal avoidance of tax and regulation is rarely far behind, and often hard to distinguish: where there is secrecy the motive is frequently impropriety; where there is impropriety, criminality is rarely far behind”.
We agree. We now want the Government to take action.
12.40 pm
Baroness Noakes: My Lords, I congratulate the noble Lord, Lord Wallace of Saltaire, on securing this debate. Despite the additional focus that tax havens have attracted from the G20 and, indeed, from President Obama, this is not the most important issue facing our country. Indeed, I have not even put it in the top 10. As my noble friend Lady Hooper pointed out, the report last week of the Lord, Lord Turner, found that offshore financial centres were not a cause of this financial crisis.
The Prime Minister has jumped on to the tax haven bandwagon precisely because it is a good way of diverting attention from the real problems that our economy faces and from his own role in creating them. To use the words of Mr Martin Broughton, the President of the CBI, this is a “red herring”. The Motion refers to tax avoidance and tax evasion, but as has already been pointed out, only tax evasion is illegal. As Lord Clyde said in the 1929 Ayrshire Pullman Motor Services case:
“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores”.
I look forward to hearing whether the Minister regards that as continuing to be good law.
We condemn tax evasion, and we have absolutely no desire to encourage tax avoidance. It reduces tax revenues and penalises other taxpayers. But we equally
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Offshore financial centres are only one aspect of the problem of tax avoidance and tax evasion. The Motion refers only to those under the British Crown, but the issues that the noble Lord has raised are relevant to financial centres, whether offshore or onshore and whatever their constitutional arrangements and allegiances. We see nothing wrong with a territory having low or zero tax rates. The OECD recognises that it is for each individual country—not the global community—to determine how it raises the revenues that it needs. We do not condemn tax competition between nations. We support the autonomy of the nation state in tax matters, which includes defending our own tax system against constant attempts by the EU to interfere in direct tax matters for which it has no competence.
We are also aware of good reasons for the use of offshore financial centres. I have received some briefing from CDC group, formerly the Commonwealth Development Corporation. Noble Lords will be aware that CDC channels development money into businesses in emerging markets, particularly in Africa and the Indian sub-continent.
CDC often uses offshore financial centres for the vehicles that it sets up to create this worthwhile investment. It has a number of reasons for that, including the availability of a legal infrastructure, which does not exist in all developing countries, and access to financial markets that are not open to developing countries. In addition, offshore financial centres offer tax neutrality so that no additional taxes are borne by the vehicle set up to pool investment funds. My noble friend Lady Hooper also set out how centres such as the BVI are beneficial not dens of iniquity.
We certainly do not support the secrecy that is often associated with offshore financial centres, though not, as my noble friend pointed out, the BVI. We do not believe that secrecy should be allowed to be a competitive advantage. Secrecy has much wider implications than tax. Transparency makes ill gotten gains from corruption more difficult to conceal and hampers those who gain from organised crime or who wish to finance terrorist activities. These are the most important reasons for putting pressure on all countries to abandon secrecy.
Today’s debate is particularly important as it allows us to ask the Minister some questions about the Government’s position on offshore financial centres. We have learnt over the last week that the Minister has
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“But how much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and offshore tax havens?”.
Does the Minister join in the Prime Minister’s condemnation of the use of offshore tax havens? Should people who use them now be regarded as outlaws? During Oral Questions earlier this week, the Minister seemed rather proud of his involvement with a business based in the tax haven of Bermuda. He told the House that,
- “since inception it has paid $360 million in tax, the majority of which has been paid in the UK at an effective tax rate of 24 per cent compared with UK tax rates of 28 per cent”.—[Official Report, 24/3/09; col. 556.]
That of course leaves open the question of how the group shaved 4 per cent off its tax rate—or indeed 6 per cent—before our corporation tax rate came down from 30 per cent last year. On the Minister’s figures, that is between $60 million and $90 million less tax paid to the UK than we would have expected.
I have also had a quick look at the financial statements for the company concerned, Aspen Insurance Holdings Limited. They show an overall current tax rate—that is the cash tax rate—of less than 20 per cent, so another 4 per cent or so is not actually being paid in taxes. There must have been some impressive tax planning going on somewhere, presumably using the tax holiday from which the group benefits by being based in Bermuda. Can the Minister say whether the UK Government think that it is justifiable to use tax havens like Bermuda to avoid UK tax?
When the Prime Minister addressed Congress, was he referring to arrangements like those in which the Minister has been involved? I repeat, does the Minister endorse the Prime Minister’s condemnation of the use of tax havens? He did not appear to do so on Tuesday. Put simply, will the Minister in his response to this debate give a simple answer—yes or no—to one very basic question? Is it justifiable to avoid UK tax by using tax havens such as Bermuda? These questions must be answered when the Minister responds, in view of the Prime Minister’s clear declaration to Congress that offshore tax havens must be outlawed.
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