Global Policy Forum

The Offensive Secrecy of Tax Havens



By Vince Cable

September 23, 2009


The leaders of the world's wealthiest industrialised nations, the G20, meet in Pittsburgh this week to discuss their ongoing response to the economic crisis, and the changes needed to stave off future meltdown. The meeting is an opportunity to press for root and branch reform of huge global as well as domestic significance.

The one target on which our prime minister should train his sights is the secrecy that tax havens offer. This will not be easy, for no fewer than 30 havens are in crown dependencies, British overseas territories or Commonwealth countries, but the issue must be addressed. Gordon Brown should stiffen his resolve and lead international calls for a curb on their activities.

A year after bailing out the banks, and with tax revenues collapsing in the wake of the recession, the UK is facing a huge domestic deficit. The grim truth is that with public sector borrowing forecast to hit £175bn this year, spending cuts are inevitable.

Tax avoidance and evasion is unacceptable at the best of times but in current recession is utterly offensive. Every pound lost in revenue through avoidance and evasion has to be made up through higher taxes paid by others. It is now estimated by the government themselves that the extent of avoidance and evasion is around £22bn annually.

The truth is, the tax avoidance industry has continued to blossom under Labour, with accountants devising increasingly aggressive tax avoidance schemes for companies and individuals wanting to dodge their tax responsibilities.

The impact of this industry goes far beyond our shores. In the world's poorest countries where tonight 850 million people will go to bed hungry, governments lose billions each year to international companies dodging tax. Christian Aid, which is campaigning on the issue, estimates that at least $160bn (£98bn) goes missing each year - money that could be spent on healthcare and education.

They calculate that if allocated according to current spending patterns the money, nearly one and a half times the combined aid budget of the rich world, would save the lives of 350,000 children under the age of five annually.

Tax dodging generally involves companies that are trading internationally artificially depressing their profits in the poorer countries where they operate to minimise their tax liabilities. Full use is made of the secrecy offered by tax havens to hide assets from the eyes of regulators and tax authorities

Much of the shadow banking sector, a major contributor to the economic crisis was also only possible because of tax haven secrecy. At the G20 summit in London earlier this year, what some saw as the beginning of the end of the tax havens was agreed, with sanctions proposed for those that fail to comply with international standards. Yet the standards that have been set are hopelessly lacking in ambition and largely exclude developing countries.

A tax haven black list was established by the Organisation for Economic Co-operation and Development, but to have its name removed from the list, an "unco-operative" tax haven has simply to sign bilateral agreements to exchange information about those using its services with 12 other countries.

In practice, it is only rich nations that benefit from such treaties as only they have the necessary leverage to persuade tax havens to play ball, and only they have the revenue, expertise and resources to satisfy the onerous demands for proof of wrongdoing that tax havens insist on before they impart information.

To really end the secrecy tax havens offer, there must be effective information sharing between havens and all countries where their account holders are resident or are citizens. A truly global deal where this information is shared automatically would help countries rich and poor alike.

New accounting standards are also needed to force multinational companies to declare publicly the profits they make, and the taxes they pay, in every country in which they operate. That way anomalies would be quickly spotted.

Gordon Brown has made valiant efforts to build a legacy of caring for the poor in developing countries by prioritising debt cancellation and overseas aid commitments. An end to tax haven secrecy may be his last opportunity to ensure that legacy endures. He should seize the chance at the G20 to make the case persuasively.


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