Is this the end for treasure islands?

Tax havens are under threat because cash-strapped states need all the money they can get their hands on. So what counts as a tax haven, what can be done about them, and can they resist the pressure to open up? Simon Wilson reports.

Tax havens are under threat because cash-strapped states need all the money they can get their hands on. Can they resist the pressure to open up? Simon Wilson reports.

Why are tax havens in the news?

After a couple of high-profile cases involving Liechtenstein bank LGT (where German intelligence paid a whistleblower €4.5m for a disk full of client details) and Switzerland's UBS, which America accuses of letting US citizens hide $18bn, it's clear that tackling tax havens has become a top political priority. Once seen as an inevitable fact of life, policymakers now blame them for facilitating some of the exotic investments that triggered the financial collapse and want to bring them to heel as part of the backlash against 'casino capitalism'. Added to that, America's new president has a long record of supporting a clampdown: during his campaign, Barack Obama attacked Ugland House in Grand Cayman a modest office block that appears, Tardis-like, to house 12,000 American corporations as the "biggest tax scam on record".

What counts as a haven?

There's no universal definition: 'tax haven' is a contested concept and no half-decent tax haven would admit to being one. There are just three states on the Organisation for Economic Co-operation and Development's (OECD) official blacklist of "unco-operative tax havens" Monaco, Liechtenstein and Andorra. By contrast, the US Stop Tax Haven Abuse Act just beginning its passage through Congress names some 40 countries. (Critics point out that 60% of the Fortune 500 choose to register in tiny Delaware, with its business-friendly taxes and regulation.) Still, most definitions agree that tax havens offer low or zero taxes, combined with secrecy of personal information and a lack of transparency in the legal framework governing the tax regime.

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Is that a bad thing?

It depends on whether you think businesses and wealthy individuals should be allowed to avoid paying the same share of tax as everyone else. Avoiding tax by channelling losses through high-tax regimes and profits through low-tax ones is now a routine part of life for global businesses indeed, some would argue it is part of their duty to maximise returns to shareholders. Lloyds TSB has more than 100 "subsidiaries and other undertakings" in Jersey, the Cayman Islands, Gibraltar, Panama, the British Virgin Islands and the Bahamas. RBS has at least 128 and Barclays 125. This is the legal face of tax havens. But the bald truth is that tax havens deliberately set out to undermine legislation passed in other jurisdictions. As such, at the least they foster secrecy and complexity, and at worst they enable money laundering, organised crime networks, and terrorism.

What's Britain's view?

Gordon Brown has been something of a heel-dragger, given the City of London's close relationship with several key tax havens. (This has led to charges of hypocrisy from the Lib Dems' Vince Cable and others.) But in the past few weeks the mood has changed perhaps because, like most governments, he's suddenly desperate to grab every bit of revenue he legally can. Tax havens are high on the agenda for the London economic summit next month, and in his big speech to the US Congress Brown called for the world to come together to "outlaw tax havens" echoing Obama's rhetoric.

Can you 'outlaw' tax havens?

Well, as Richard Murphy of Tax Justice Network wryly puts it, "you can't just tell Luxembourg it has been outlawed". Tax havens are independent states and can make their own laws: it's one thing to encourage other countries to clamp down on tax evasion, but quite another to stop them encouraging business and wealthy individuals to their shores by offering a low-tax, light-touch environment. Defenders would argue that plenty of what goes on in tax havens is legitimate, that a globalised economy benefits from discreet offshore centres acting as conduits attracting capital to their larger neighbours (such as the Channel Islands), and that tax havens are small countries that would otherwise be poor (such as the Cayman Islands).

So what can be done?

General Charles de Gaulle once lost patience with Monaco over tax fraud and cut off its water supply. It quickly backed down. If the US and EU wanted to play hardball, they could shut down tax havens by threatening to sever banking connections. That's unlikely, as a shock on this scale isn't what the banking system needs right now. But there's no doubt politicians are determined to force a long-term change in the global tax system, obliging all secrecy states to be more transparent about the identities of the super-rich and corporations who use them. Still, it's unlikely small states who see this as an advantage will give it up without a fight.

How much do tax havens cost?

If there's little agreement on what constitutes a tax haven, there's even less on how much revenue states lose each year courtesy of the treasure islands. The Guardian cites an estimated £13trn of untaxed wealth held in offshore centres. Recent estimates of the resulting tax loss to national governments include $160bn (Christian Aid), $255bn (the Pope) and even $900bn (Global Financial Integrity). The US Treasury says it loses $100bn a year. In Britain, Revenue & Customs puts the loss in corporation tax to tax havens at between £3.7bn and £13bn. What is certain is that a third of FTSE 100 companies paid no UK corporation tax in 2005-6, and another third paid a miniscule percentage of their profits.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.