The true price of paradise

The so-called Paradise Papers have highlighted the use of far-flung remnants of the British Empire as tax havens. The bargain tax rates are looking increasingly costly, says Simon Wilson.

What’s happened?

The “Paradise Papers” – a huge data breach from Appleby, a leading offshore law firm – have once again highlighted the questionable (but not illegal) ways in which some people and corporations seek to minimise their tax liabilities. As ever, much of the coverage has confusingly conflated three things: (illegal) tax evasion, (morally questionable) tax avoidance, and (run-of-the-mill) offshore funds in which almost all large pension schemes – the BBC’s included – invest some of their money.

These kinds of revelations – particularly those pertaining to avoidance by highly profitable multinationals such as Apple – have added to the pressure to shut the loopholes in the patchwork of rules and treaties governing transnational business taxation – loopholes which the OECD group of wealthy nations estimates cost governments $240bn a year in lost revenue. But they have also thrown the focus specifically onto offshore financial centres under UK jurisdiction. 

What is the status of these places?

It varies. There are 14 British Overseas Territories, including key offshore financial centres such as Bermuda, the Cayman Islands, the British Virgin Islands and Gibraltar. These are former bits of the British Empire which for one reason or another – mostly because their residents prefer it that way – remain under the UK’s jurisdiction and sovereignty (until 2002 they were known as British Dependent Territories). Some of the smaller ones are uninhabited, or solely used as military bases. The inhabited ones are internally self-governing, with the UK in charge of defence and foreign relations.

The UK has unlimited power to legislate for the territories, and all their laws must be approved by the sovereign on the advice of her privy council. The political reality, though, is that the relationship with the UK is one of partnership and consent, rather than “rule”. The territories’ freedoms include the freedom to manage their own economic and tax policies – and some have specialised in low-tax, low-transparency regimes.

What about closer to home?

The “Crown Dependencies” (Isle of Man, Jersey and Guernsey) are different. They are not parts of the UK, nor British Overseas Territories, but rather self-governing possessions of the Crown (a legal status that is defined independently in each jurisdiction). They are not sovereign states, and the power to govern them rests with the government of the United Kingdom on behalf of the Crown. However, they each have their own legislative body (the Isle of Man’s Tynwald, established in 979, is the world’s oldest continuously functioning parliament) and UK legislation does not apply without their consent.

Indeed, some legal opinion in the dependencies considers that the right of the UK to “take back control” has fallen into “desuetude” and is no longer enforceable. It is that kind of constructive ambiguity in their legal status that has helped these islands to become major financial centres (Jersey’s financial sector accounts for half of its economy). They have the legal and political stability associated with the UK, and yet the freedom to operate their own “zero-ten” tax policies (0% corporation tax, 10% for banks).

So what could the UK do?

In 2014, then-prime minister David Cameron promised to push for public registers of company and trust ownership in the Overseas Territories so as to “rip away the cloak of secrecy”. In other words, the UK could force local governments to publish data on who owns what company where, and who owns what trust. However the islands and financial firms successfully lobbied against that course of action – a process that critics say was itself opaque and unsatisfactory.

“We need the release of all government papers dealing with the decision not to clamp down on offshore tax havens,” says the former business secretary Vince Cable of the Lib Dems. “Only in this way can we ensure there is full public confidence in the tax system.”

What comes next?

UK-linked offshore centres are under growing pressure, not just from the UK government, but from the sustained threat of further leaks, media coverage, and the changing public mood. In the coming weeks, Brussels is due to publish an updated “blacklist” of tax havens – adding to the build-up. Indeed, some of those involved, such as Guernsey’s chief minister Gavin St Pier, believe the timing of the Appleby leak was part of a deliberate effort to ramp up pressure on the UK government ahead of the EU report.

“The offshore centres are caught in a pincer movement between NGOs and the media on the one hand and regulatory pressure on the other,” says Jason Sharman, a Cambridge professor of international relations. Banks, for example, have become less willing to open accounts for firms in offshore jurisdictions. “Reputation damage has increasingly translated into commercial damage” – and that’s a situation that doesn’t look sustainable for long.