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 for trusts while guaranteeing secrecy, tax havens seem to be springing up all over the place.
Among the latest developments, Oxfam has coordinated a letter from 300 leading economists from leading countries warning that there is no economic justification for allowing tax havens tax haven, and urging governments to lift the veil on offshore secrecy. The letter to world leaders comes ahead of the UK Government’s anti-corruption summit in London this week.
While an end to secrecy might make many individuals and corporations think twice about whether their chosen tax and structuring strategies would withstand scrutiny in the court of public opinion, it’s notable that neither Oxfam nor the 300 leading economists appear to have considered what a world without tax havens would look like.
This is worth thinking through.
If we assume that governments in developed and developing nations, along with economists and campaigners, were all successful in eliminating secrecy through vigorous disclosure requirements, and disregarding for one moment the possibility that some tax haven jurisdictions might choose not to respond to these calls so risking international pariah status in return for the economic benefits that might accrue, where would this leave us?
Some points are obvious. The places currently called 'tax havens' would not disappear from the map. Many would increase personal and corporate income tax rates charged on non-resident individuals, trusts and companies, and perhaps on residents too. This would lead to several years of instability in tax rates but these would eventually settle down.
Without a doubt, there would still be tax competition between countries. We already see that in the G20, with the UK consciously striving to offer the most favourable business tax regime of any G20 member nation. So, 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. Rate-shopping would be as important as it is now.
So, while zero tax-rate havens might become a thing of the past, low tax-rate regimes would flourish and prosper. 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?
If the answer to that question is in the affirmative, tax authorities and campaigners will chorus 'job done!'
If however the answer is negative, what next? A global tax system? A global set of tax rates? The bitter strife surrounding European attempts to implement a common consolidated corporate tax base is an insipid foretaste of the difficulties which would be encountered in operating a single set of global tax rates, or even stamping out harmful tax competition between nations. And then there is the question of the democratic right of citizens to vote on the way they are taxed. No taxation without representation.
No taxation without representation?
That takes us straight back to the USA which is where we came in.
If you would like any more information on this issue please contact George Bull.