The tax havens hoarding billions

Tax havens have come under scrutiny as governments scramble to fill their coffers. What, if anything, should be done about them? Simon Wilson reports.


Ratcliffe has moved to Monaco to avoid £4bn in tax

What's happened?

Tax havens are back in the news following the UK government's decision last week to pull a bill that would have compelled the UK's "crown dependencies" Jersey, Guernsey and the Isle of Man to publish information about the beneficial owners of businesses registered there. Then, also last week, The Times published a major investigation that found that a third of British billionaires (28 out of 93) have quit the UK for offshore low-tax jurisdictions in recent years.

You can see what's in it for them. People who become non-UK resident for tax purposes can keep their ownership of companies based in the UK, while avoiding 38.1% income tax on dividends and 20% capital-gains tax on the sale of shares. There are no HMRC figures on how much tax is lost to the UK's coffers in this way, but estimates put it in the billions.

Who are we talking about?

The biggest name of all is Sir Jim Ratcliffe, the wealthiest person in Britain (worth £21bn), who owns 60% of chemicals multinational Ineos. He has moved to Monaco, allowing him to avoid paying £4bn in tax. Other fans of Monaco among the UK's top-ten billionaires include Andy Currie and John Reece (£7bn each) who each own 20% of Ineos; David and Simon Reuben (who made their £15.1bn fortune in aluminium trading); and Eddie and Sol Zakay (£3.4bn, property and hotels).

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Elsewhere in the top ten, Sir David and Sir Frederick Barclay (£7.4bn) favour the Channel Islands and Sir Richard Branson (£4.1bn) lives in the British Virgin Islands. Joe Lewis (£3.9bn) enjoys the Bahamas.

What exactly is a tax haven?

There's no universally accepted definition. It is a pejorative term and no half-decent tax haven would admit to being one. But most definitions agree that tax havens are jurisdictions offering low or zero taxes, combined with secrecy (or at least strict privacy) about personal information, and in some cases also a lack of transparency in the legal framework governing the tax regime.

James Hines, the most cited academic author in the field, says that "tax havens are typically small, well-governed states that impose low or zero tax rates on foreign investors". Many are islands the Bahamas, British Virgin Islands, Cayman Islands, Channel Islands and the Isle of Man also Monaco and Belize. Switzerland tops the Tax Justice Network's 2018 Financial Secrecy Index ranking countries according to the "secrecy and scale of their offshore financial activities".

How did tax havens arise?

According to the political economist and historian of tax havens, Ronen Palan, the exploitation of differing tax laws between jurisdictions, for the purpose of paying less tax, is probably as old as taxation itself. In Ancient Greece, for example, sea traders set up schemes to avoid the 2% tariff on imported goods imposed by the city state of Athens by using zero-tariff islands as depositories.

The Channel Islands date their tax independence back to the Norman Conquest. But in its modern usage, the idea of a tax haven dates back to the early 20th century, and in particular the aftermath of World War I, when many European countries ramped up tax rates and neutral Switzerland, followed by Liechtenstein, emerged as low-tax jurisdictions offering cross-border services to wealthy foreigners.

How much wealth do they hold?

Credible estimates in recent years have ranged between $7trn and $32trn. One widely cited academic study from 2017, which is based on data from the Bank for International Settlements, suggests that tax havens hoard wealth equivalent to approximately 10% of global GDP. However, this figure masks big variations.

Russian assets worth 50% of GDP are held offshore, while for countries such as Venezuela, Saudi Arabia and the United Arab Emirates this figure climbs into the 60%-70% range. By contrast, the UK and similar European countries come in at 15%, but Scandinavia at only a few per cent. These figures are not exhaustive, however, since they draw only on banking data, not on securities and other assets.

Can you outlaw them?

It's hard to outlaw Switzerland. Or, indeed, Delaware. Tax havens are autonomous states and make their own laws, and tax competition is an integral part of the modern globalised economy. It's right that the international community (the EU and International Monetary Fund, for example) has in recent years ramped up efforts aimed at encouraging governments to clamp down on (illegal) tax evasion. But at the same time it's perfectly legitimate (and indeed a mainstay of both UK and Irish policy for decades) for states to seek to attract businesses and wealthy individuals into a country by offering a low-tax environment.

So tax havens should be left alone?

That depends on whether they obey the law. Defenders would argue that plenty of what goes on in tax havens is legitimate, that a globalised economy benefits from offshore centres acting as conduits attracting capital to their larger neighbours (such as the Channel Islands), and that tax havens are typically small countries that would otherwise be dirt poor (such as the Cayman Islands).

In a landmark 2014 study, Global Shell Games, three academics set up anonymous shell companies around the world (or tried to). They found that offshore havens were among the most likely to be fully compliant with international laws requiring people registering new companies to prove their identity. Jersey, the Isle of Man and the Cayman Islands had compliance rates of 100%, 94% and 100% respectively. The rate in the UK proper, by contrast, was a mere 51%. We can conclude that if policymakers really want to tackle secrecy and corruption, tax havens might not be the best place to start.

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.