What becomes of the broken haven?

Much of the current tax debate centres on the use of “tax havens” by certain multinational enterprises (“MNEs”). It is undeniable that some large corporates and high net worth individuals are using such jurisdictions to reduce their tax, hide illicit activity, or both.

And there are a number of initiatives aimed at tackling this. These include country-by-country reporting (“CBCR”) and information exchange agreements.

The aim? To eliminate nefarious activity, and ensure that activities are taxed in the right place, and to the right extent. And who will lose out? Evil MNEs of course. Anyone else?

There are a number of stumbling blocks to effectively ridding the world of the nefarious, while retaining the legitimate.

One of these is how you define a tax haven. Many have tried. None as yet have really succeeded. Former UK government minister Vince Cable took the generalist approach by calling them “sunny places for shady people”. That’s hardly a definition worthy of being the foundation for reform.

There are numerous lists of perceived tax havens in circulation. Some countries have “black lists”. Others have a definition implicit in CFC legislation. NGOs also produce lists. However, none of these lists agree. So what is a “tax haven”?

Anneliese Dodds MEP of the ECON and TAXE committees has frequently called for a standard definition of a tax haven, but even tax campaigner Richard Murphy recently wrote, “No one, me included, could accurately define a tax haven”.

So have we fallen at the first hurdle? I don’t think so.

Defining what we mean by a “tax haven” based on tax rates, regulation and the need for substance in a jurisdiction is very difficult. There are too many variables in this form of analysis. But more importantly, these jurisdictions are by and large sovereign states. As such that have the ability to design a tax and regulatory regime fit for their needs.
It is for this reason that the main focus of campaign groups, and policy makers has been on transparency. To the extent that the activities going on in “tax havens” are nefarious, it is usually accompanied by secrecy. So perhaps secrecy is the hallmark of a haven.

Richard Murphy sets out the following identifiers:

1. Tax havens create economic opportunities for themselves by exploiting their power to legislate;
2. The legislation that tax havens create is not primarily intended for the benefit of those resident in their jurisdiction;
3. The legislation in question is designed to help those using it avoid some aspect of the regulation of the state where they have the substance of their residence i.e. where they are in common sense terms really located;
4. To assist those making use of these laws that tax havens create those tax havens also put in place a deliberate veil of secrecy that makes it harder for the users of their tax haven laws to be identified.

The fourth of these is crucial. It is a definition of what has become known as a ‘secrecy jurisdiction’.

But now to the real question. What is the real objective of all of this effort, how will it be achieved, and who will be the losers?

One aim is to prevent illicit and illegal flows of money to secret jurisdictions, for whatever reason. In some cases this might be to hide those funds somewhere they won’t incur tax.

Transparency and exchange of information initiatives will form part of the solution. Whether this will result in changes to the tax regimes in these “sunny places” remains to be seen, but they will at least be less “shady”.

CBCR is on the way. The OECD CBCR proposals will provide governments with significantly more information than they currently have about the tax affairs of MNEs.

But this brings us to who the losers here will be. Well, quite obviously the intent in that the nefarious MNEs end up paying more tax. So they will lose out.

Should we also spare at least a thought for some of these “haven” jurisdictions?

Some are very wealthy states, populated by high net worth individuals. However, others are less fortunate. Many of the smallest nations in the world are island states with struggling economies. Agriculture and fishing is challenging, and often subject to the risk of natural disaster, including increasingly frequent severe weather events. Tourism requires significant investment and infrastructure. And so some have built much of their economy on financial services; a sector less subject to the challenges posed by nature.

So what of these economies? Who is talking about the impact on these island nations? It may not be the primary aim of the current tax debate, but the developed world is in danger of a new breed of colonialism, taking away the new “industry” of these islands.

I’m not suggesting that the concerns of Vince Cable’s “sunny places” should prevent the work or reforming international tax rules, but at least some voice should be given to those places standing to lose out. Where is their impact assessment?