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12.49 pm
The Financial Services Secretary to the Treasury (Lord Myners): My Lords, this is a timely debate. I thank the noble Lord, Lord Wallace, for bringing this issue to the attention of the House and, if the noble Lord, Lord Newby, is to be believed, the world.
I want to set out the Government’s actions in addressing the issues that have been raised. My right honourable friend the Prime Minster said to the European Parliament earlier this week that,
- “we can for the first time agree the big changes necessary for co-ordinated action that will signal the beginning of the end for offshore tax havens and offshore centres”.
The UK has been leading the development for this international consensus. As the noble Lord, Lord Newby, noted, there has been a marked change of attitude
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Tax evasion is illegal, and those who engage in it risk prosecution. It is also distortionary, meaning that investment decisions are made in order to evade taxes rather than for reasons of economic efficiency. Secrecy contributes to tax evasion. Improving transparency and the exchange of information by tax authorities is the key to tackling secrecy. It is a global problem, and the UK’s response to it needs to reflect that. We have been using our presidency of the G20 this year to focus on tax havens and to ensure that they do not have a harmful effect on tax revenues and the financial system. The UK wants to see all jurisdictions signing up to international standards on transparency and the exchange of information in tax matters. I agree with the noble Lord, Lord Burnett, that this will require co-ordination and co-operation. It is a tall order but it is achievable. The noble Lord, Lord Burnett, asked a number of questions about the outcome of existing agreements for the exchange of information and I will investigate whether that is a matter on which I might be able to provide him with some further assistance in writing.
In the days leading up to the G20 Finance Ministers’ meeting, there was a flurry of announcements from countries such as Switzerland, Liechtenstein and others who have upheld banking secrecy in the past. They have made commitments to meet the international standards. The key now is to ensure the swift implementation of these commitments. Leaders will review progress at the London summit on 2 April. One of the issues they will no doubt review at that time will be the sanctions that may be required should this voluntary process not deliver the expected results.
In addition to promoting exchange of information through the G20, for a number of years we have been taking similar action in the European Union through the savings directive, which has improved the flow of information between member states. This framework also extends to third countries such as Switzerland. We have also taken action closer to home. As the noble Lord, Lord Wallace, noted, HMRC’s offshore disclosure facility shows that HMRC is tackling evasion through the use of offshore accounts. Set up in 2007 to encourage UK residents with unpaid tax connected to offshore accounts to make full disclosures, it has so far recovered £400 million. HMRC has also been successful in reducing losses in VAT and excise fraud in recent years by about £4 billion. The Government also recognise the wider effects of tax evasion on developing countries. That is why, with the Department for International Development, we are looking at ways to improve developing countries’ tax systems, and why DfID and HMRC provide capacity-building assistance to those countries.
In response to a Question from the noble Lord, Lord Higgins, earlier this week, I spoke about the distinction between tax evasion and tax avoidance. Tax avoidance is not illegal but, like evasion, it can undermine tax revenues and investment in public services.
Last week, my right honourable friend the Chancellor of the Exchequer announced that HMRC will be publishing a draft code of practice on taxation for the banking sector to ensure that banks comply with not
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The UK has taken the EU lead in tackling some of the most aggressive tax avoidance schemes through the EU’s Code of Conduct for Business Taxation. The former Paymaster-General and the Financial Secretary chaired this code group for more than 10 years. During this period, the group identified 66 measures that were considered harmful in the UK’s Crown dependencies and overseas territories. All have now been repealed or are in the process of being abolished. We have also recently seen progress made by the UK’s Crown dependencies and overseas territories—particularly Jersey, Guernsey, the Isle of Man, Bermuda and the British Virgin Islands—in signing tax information exchange agreements. We welcome this, and it is important that this momentum continues. We expect offshore financial centres to go further and to commit to meeting international standards as they arise in the future. Recent financial events have highlighted the need to look at the role the UK’s Crown dependencies and overseas territories have played in encouraging non-transparency in the financial system, which has led to tax evasion and avoidance.
At the Pre-Budget Report last November, the Chancellor asked Michael Foot, a former director of the Bank of England and the FSA, to lead an independent inquiry into the long-term opportunities and challenges facing Crown dependencies and overseas territories as financial centres. The review will release interim findings at the Budget. The noble Lord, Lord Wallace, inquired whether this would be a friendly or an aggressive review. I would like to believe it will be an independent and objective review, which reflects the wisdom and experience of the reviewer, Mr Michael Foot. Tax is only one factor in the review but it is right that we should have an independent assessment of the sustainability of an economic model where one sector—financial services—dominates but which has been attracted there not by intrinsic skills or resources but by other factors, particularly low taxation. A financial services industry based solely or primarily on tax evasion or avoidance is no longer internationally acceptable.
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The noble Baronesses, Lady Noakes and Lady Hooper, referred to the many skills and qualities offshore centres provide which go beyond tax issues. The noble Baroness, Lady Noakes, referred, in particular, to representations made to her by CDC, and I recognise the merits of those arguments. What I am establishing here is that an offshore financial centre which is solely or primarily dependent on tax evasion or tax avoidance is not acceptable. In the same way as we are having to wean the farmers of Afghanistan off the poppy and the farmers of Colombia off coca, we have to wean offshore financial centres off tax if that is the only source of competitive advantage that they offer.
The noble Lord, Lord Bradshaw, referred to the moral role for the UK Government. Proper governance is not incompatible with adopting a code of practice for tax aimed at complying with the spirit of the law. The Government have a role in setting standards. We can provide a policy, an institutional framework, which can stimulate companies to raise performance on tax compliance beyond the statutory minimum in order to benefit the wider community and the longer-term interests of shareholders.
The noble Lord, Lord Burnett, referred to whether we should have tax and information exchange agreements with all countries which involved the automatic exchange of information. Tax information and exchange agreements are effective at providing targeted and relevant information on request and are now widely used. Automatic exchange of information between all countries would probably be highly complex and costly to administer. The key is to ensure we have the relevant information required to achieve the purpose.
Lord Burnett: My Lords, I think that I understand what the Minister says. As he will know, what is important is tracing and finding out who the beneficial owner is. If he could deal with that a little, I would be grateful, unless he wants to write to me about it.
Lord Myners: My Lords, I agree with the noble Lord’s representation. I may well add further comment in a letter, which I will of course copy to others who have participated in the debate.
The noble Lord also asked why we did not just stop avoidance. Avoidance is legal behaviour that goes beyond the spirit of the law; that is why it is so important that we recognise that the letter will not be sufficient here and that the spirit is critical. I have already answered his question about sanctions. The G20 summit on 2 April will no doubt take stock of latest progress. He also asked about withholding tax agreements with EU countries. Three EU countries—Austria, Luxembourg and Belgium—apply a withholding tax rather than exchanging information under a transitional framework, although Belgium recently committed to automatic exchange from next year. We are keen for all countries covered by the EU savings directive framework to move to exchange of information as soon as possible.
The noble Lords, Lord Newby and Lord Burnett, asked about the Stop Tax Haven Abuse Bill in the US. We are closely monitoring that Bill, which was introduced by Senator Levin, and have co-operated with the US Government on the issue through the G20. The noble
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I will not be tactless and refer to Mr Michael Brown and the difficulties that the Liberal party might have in that respect. Nor will I express anything other than mild disappointment that the noble Lords, Lord Laidlaw and Lord Ashcroft, are not in the Chamber; no doubt they would have been able to give us some valuable insights into offshore centres and tax matters—as indeed, in the other House, would the shadow Business Secretary, who would have been able to tell us about his involvement with businesses based in offshore centres. In response to the noble Baroness, Lady Noakes, I say that we must accept that there are legitimate reasons for operating from other centres. No doubt the treasurer of the Conservative Party has good reasons for being involved in businesses that have activities in other financial centres. Frankly, it is a pointless route to go down to try to damage people’s reputations and integrity by implying in whatever cautious language one uses, as has been the case with the press at times, that there is something improper about being involved in other jurisdictions. I for one have no shame about my involvement with Aspen, a highly successful international reinsurance company based in Bermuda, one of the world’s important reinsurance centres—advised throughout on tax matters by the reputable firm of KPMG, with which I believe that the noble Baroness is familiar.
At times, I found the noble Baroness’s speech veering towards her being an apologist on matters that are clearly a great concern to the noble Lord, Lord Wallace, and others who spoke in support. I read in the Financial Times earlier this week that she said that this issue was just a distraction. I do not believe that; there is clear evidence that very large amounts of tax are not being paid, and it is important that we address that. I recommend that she read the recent speech by Mr David Cameron on capitalism with a conscience, which shows that there is a moral dimension to business—it is not all about making money or lining your pockets with as much money as possible, but is about being a responsible member of society.
The Government and other Governments are gripping the issue in a way that has not been done in the past. We are improving transparency. There is an international consensus around spirit in addition to letter, which will pay significant dividends in due course. I hope
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1.06 pm
Lord Wallace of Saltaire: My Lords, I thank the Minister for that useful and constructive reply, and thank all those who took part in the debate. Let me briefly make a few remarks. The sustainability of the offshore financial centre model is a large question. I was in Jersey some months ago talking precisely about how it survives if its offshore financial services go down; that is a real problem.
I am sorry that, in her short and uninformative speech, the noble Baroness, Lady Noakes, did not address many of the issues at stake. I was surprised that there were no speeches from the Labour Back Benches. The Labour Party used to be concerned with social justice and fairness. A number of Labour Members of this House are active members of the All-Party Cayman Islands Group, and I know that they go to the Cayman Islands with their partners on occasions.
This has been a useful debate. We need to continue to follow the issue. We wish the Government good luck in pursuing it further. They need to act now because, if we did have a change of government, clearly a new Government would not wish to take any action in this respect.
Nuclear Proliferation
Debate
1.07 pm
Moved By Baroness Williams of Crosby
To call attention to the potential for nuclear proliferation and the Government’s plans to respond to it; and to move for Papers.
Baroness Williams of Crosby: My Lords, 64 years ago on 16 July 1945, the first test of a nuclear weapon occurred in Alamogordo, New Mexico. As he saw the now familiar and sinister mushroom cloud arise, Robert Oppenheimer, the head of the Manhattan Project to develop a nuclear bomb, said, “I am come, Kali, destroyer of worlds, brighter than a thousand suns”, a quotation from the holy scriptures of Hinduism, the Upanishad, which to this day resonates with those of us who look at the issue of nuclear power.
The world pulled itself together and established a nuclear proliferation treaty, originally signed in 1968 and coming into effect in 1970, which established a system of regulation and control over nuclear power that has lasted extraordinarily well among the disarmament treaties that the world has signed at one time or another. In the 40 years since, the number of nuclear powers has risen from five to nine. That is troubling, but it is in many ways remarkable that the world has managed to restrain the development of nuclear military power to that extent.
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Also in those 40 years, there has been a strong awareness of the dangers and threats constituted by nuclear power. However, the nuclear proliferation treaty was based on a crucial bargain, which is expressed in Articles 4 and 6. Under Article 4, nations have the right to develop civil nuclear power to enable themselves to produce energy from nuclear fuel under strict safeguards. However, each nation state is absolutely free to take the advantages offered by Article 4. Under Article 6, the other part of the bargain, the existing nuclear powers, which by this time were the United States, Russia, China, the United Kingdom and France, committed themselves to energetically and persistently pursuing nuclear disarmament. That is the fundamental bargain on which the NPT rests.
That bargain has unquestionably eroded. In 2005, the preparatory commission for the nuclear proliferation treaty, which has to be renewed in the spring of 2010, was unable to reach agreement because the non-nuclear weapons powers felt that they had been effectively deceived. They regarded the nuclear powers as having failed to carry out their commitments under the treaty.
If we go back to the years between, we can say quickly that in the 1980s there was a remarkable movement forward in disarmament treaties that affected military nuclear power. The long, and in many ways extraordinarily benevolent, American presidencies of Ronald Reagan and George Bush the elder, if one can properly so describe him, produced in START, SALT and the Moscow treaty remarkable disarmament agreements. Under them the world’s supply of nuclear weapons was, very broadly, halved. They deserve credit, as do President Brezhnev and, even more, President Gorbachev of Russia, for the active part that they played in those disarmament treaties.
By the end of the 1980s, it began to look as if the world would be able to control nuclear weapons. Sadly, there succeeded a whole decade of, effectively, lost time. Between 1998 and 2008, the world saw its movement towards control of nuclear weapons moving backwards and not forwards. A large part of the responsibility rested on the Administration of the United States, who pulled out of the Anti-Ballistic Missile Treaty without consulting their allies, let alone their potential enemies, and who essentially weakened the conventions that dominated the control of chemical weapons and biological weapons.
By 2008, Russia still had 14,000 nuclear warheads and does so to this day. The United States had 9,400 nuclear warheads, although it is fair to say that 4,200 of them are due to be dismantled. However, they have not yet been dismantled, or made operative. Finally, the little nuclear powers, which, paradoxically, include China as well as France and the United Kingdom, had between them just over 1,000 nuclear weapons, which constituted only 4 per cent of the world’s supply.
There are now, I think, two major threats. The first is to the existing system under which we live—the new risks. The second is to the nuclear proliferation treaty structure itself. The first of those new risks is familiar: the probable massive expansion of civil nuclear power. At present in the world, there are 439 power stations or, more often, small research centres, mostly based on low-enriched uranium, which are matters of concern
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Perhaps even more important is that a great many of those planned and those under construction are in countries with virtually no experience or knowledge of managing nuclear power. The lack of knowledge and awareness is terribly important. Already, we have in the world a couple of generations of men and women who have no idea of the threat that nuclear power can present and are therefore in some ways rather apathetic about it or even complacent.
Therefore, the first issue is the huge expansion of nuclear power. Does it matter? Yes, it does. The process of producing nuclear power for civilian purposes and for producing nuclear weapons is similar in the early steps. In the first stages of the enrichment of low-enriched uranium or other nuclear materials to the point where they can be used either to produce energy or to produce nuclear weapons, it is difficult to know the intention of a country.
The second major threat to existing structures has been little discussed and debated: the emergence of cyber power in a major way. Cyber power, the capacity to effectively disrupt, alter or diverge information in the computer world and in the world of space, can effectively disrupt and even destroy the command and control systems on which the present controls over nuclear power and nuclear weapons are conducted. This is much more dangerous than people believe. You only have to read a little bit about cyber hackers and others, many of whom are individuals with rather curious intentions, to see how dangerous cyber power can be. It is one of the reasons why China is particularly concerned about the move towards space weapons and the shooting down of cyber satellites. With cyber satellites goes a fully sophisticated inspection system on which we all now depend for our safety.
For reasons of time, I will mention the third danger only in passing, as I have spoken about it already. Put simply, there is a population in both nuclear weapons powers and non-nuclear weapons powers that is fundamentally unaware of the dangers of what it is dealing with.
On the threats to the system, the discussions about the extension of the nuclear proliferation treaty—I repeat that it will expire in the spring of 2010 unless it is extended or renewed—are already in considerable danger because we have seen that the non-nuclear weapons powers are increasingly not prepared to co-operate. What can be done about that? The coming of the Obama regime in the United States, which coincides with what at least seems to be a more questioning regime in Russia, is the best chance, and perhaps the only chance, that we have of controlling this extraordinary multiplication of nuclear power in the world.
What steps should be taken in order to bring that about? The first is passing the Comprehensive Test Ban Treaty. The parallels with the banking crisis are
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