Removing the anonymity of people or companies using offshore jurisdictions could actually increase the use of tax havens with places like the US setting even lower tax-rates in a bid to attract money, says George Bull, a senior tax expert at RSM.
“Rate-shopping would be as important as it is now.
“With the US now being described as the world’s largest offshore centre, and South Dakota fingered for offering zero personal and corporate income tax rates.
“In an environment of full disclosure, there would be significant differentials in tax rates around the world.
“These in turn would continue to be attractive to individuals and companies who wanted to mitigate their tax liabilities and were prepared to do so despite the scrutiny of tax authorities and the public,” said Bull.
Economists’ letter
The comments were made in response to a letter, coordinated by Oxfam and signed by more than 300 leading economists, urging world leaders to end the secrecy of offshore tax havens.
The letter, published ahead of ahead of the UK government’s Anti-Corruption Summit this week, said there is “no economic justification” for allowing tax havens to exist.
However, Bull argues that although increasing transparency may make zero tax-rate havens a thing of the past, low tax-rate regimes would flourish and prosper as a result.
“The places currently called ‘tax havens’ would not disappear from the map. Without a doubt, there would still be tax competition between countries.
“The question then becomes a very simple one: would the pressure of transparency be sufficiently great to deter individuals and companies from organising their affairs so that they are taxed in low-rate jurisdictions which are generally not where they do business?” he added.
Reputational risk
However, Markus Meinzer, a senior analyst at think-tank the Tax Justice Network (TJN), told International Adviser that although improved transparency may not initially increase tax revenues, forcing companies to disclose profits in each country, coupled with the public outrage over tax dodging, it will in the long run have an effect.
“Country by country reporting of profits made by companies will in the long run lead to a tangible increase in tax revenues as companies become more sensitive to reputational risk,” he said.
On Monday, the TJN revealed that more than $12trn (£8trn, 10.5trn) has been taken out of emerging economies such as China and Russia and stashed in offshore accounts.
The advocacy group, launched in 2003, urged politicians attending the Anti-Corruption Summit to publish their tax returns as well as calling for a further crackdown on the banks, lawyers and other professionals who facilitate financial secrecy.
Tax havens serve a ‘useful’ purpose
Meanwhile, Philip Booth, a professor of finance, public policy and ethics at St Mary’s University, told City A.M on Tuesday that contrary to the economists’ letter, tax havens do serve a useful purpose.
He argued that investors often use them to avoid being double-taxed and although they may pay a lower rate of tax than in the country in which they live, they do not avoid all tax.
Booth described the secrecy of offshore jurisdictions as a “double-edged sword”, explaining that despite the public perception that corrupt officials and dubious oligarchs set up anonymous accounts in far flung places to avoid paying tax, in the reality many cases involve tax havens being used by legitimate businessmen to shelter their money from plundering political regimes.
In fact, he added, one of the advantages of tax havens is that they encourage government accountability by making it possible for businesses to avoid “crazy tax systems”.
“No legitimate reason”
In stark contrast, Meinzer, believes there is no valid reason to funnel wealth through offshore centres, describing Booth’s reasoning as “constructed arguments” used to justify tax evasion.
“I would object to the notion that there are legitimate reason to stash your money abroad. Even in developing countries or nations like Russia, the tacit agreement that it is legitimate to move money offshore and not declare it is not valid.
“Those stashing money abroad shift the tax burden of unjust regimes onto the rest of the population which are often the least equipped to deal with it. While those with the means to actually change something find ways to take their money out of the country so that these regimes no longer affect them,” he said.
Anti-corruption summit
Referring to the upcoming Anti-Corruption Summit, to be held in London on 12 May, Isle of Man’s chief minister Allan Bell told local media, “It’s going to be a pretty torrid week for the offshore finance centres.”
Aimed at stepping up global action to expose, punish and drive out corruption in all walks of life, the conference, hosted by British Prime Minister David Cameron, will be attended by politicians from 40 countries as well as World Bank and IMF representatives.
According to The Times, Cameron is expected to announce further measures to crack down on tax evasion including forcing foreign firms, which hold billions of pounds worth of property in the UK, to declare who actually owns them.
Panama Papers and increased transparency
Last month, millions of documents – dubbed the Panama Papers – were leaked from Panamanian law firm Mossack Fonseca, revealing how the rich and powerful around the world set up offshore shell companies in places like the British Virgin Islands (BVI) to avoid paying tax in their home countries.
Mounting scrutiny in the wake of scandal lead to several countries announcing a host of transparency measures in a bid to tackle tax evasion.
Cameron revealed that all crown dependencies and overseas territories will now provide company ownership data to UK tax and law enforcement authorities.
He also unveiled a new tax evasion law, making companies criminally liable for employees who aid tax evasion.
Furthermore, the Isle of Man and Gibraltar have joined Europe’s five largest economies — Germany, Britain, France, Italy and Spain — and 17 other jurisdictions in signing up to a confidential beneficial ownership register which would automatically share information on the ultimate owners of companies.
Meanwhile, last week it emerged that the US government has adopted a new ‘due diligence’ rule which means that banks and other institutions will now have to verify the identities of any people who own 25% or more of a company for which it provides an account.
