Thursday, February 19, 2009

Fox to lead global effort to tighten henhouse safety

We are heartened to see this headline in the Financial Times: Britain urges crackdown on tax havens. This is good news, and it highlights how far the political agenda has shifted in the recent past, from a policy of ignoring tax havens, to a headline issue. We can claim a lot of credit for helping this shift - though the global economic crisis has undoubtedly helped focus minds.

We don't yet know all the details of what Brown is planning. But given his background, and the fine details of what's in the press, we are not encouraged. Let's start with a couple of quotes of his, from the past (from our quotations page.) He said this, as shadow chancellor (opposition finance minister), in 1994.

"The Chancellor should end the tax abuses which reach to the heart of our public finances by indulging the super rich at the expense of all the rest of us."

There are various other quotes of his on that page, in a similar vein. Brown then went on to become chancellor in 1997, before he became Prime Minister ten years later. All through that period, he has been absolutely steadfast in defence of tax havens, which are Britain's forte. Britain and its City of London is at the centre of the offshore world, offering lax regulation, secrecy, a lack of international co-operation, and zero taxes for clever people and companies, the world over.

That's not to mention Britain's role in effectively running some of the world's most important tax havens - from the Crown Dependencies like Jersey, Guernsey and the Isle of Man, to its Overseas Territories like the Cayman Islands, Bermuda, and so on.

Now let's look at what has just been reported. The Guardian says that Britain will target Switzerland in particular. Big mistake. Switzerland is important, to be sure - but the bank secrecy it offers is nothing like as pervasive or perniciously devious as the trust structures that Britain and its satellites offer - these structures tend to involve secrecy that is far harder to crack.

In this vein, the newspaper reported:

"One senior British figure said that a lengthy EU campaign to rein in savers who attempt to avoid tax had eventually identified a trail leading to Switzerland."


He is doubtless talking about the EU Savings Tax Directive. Switzerland has certainly played its part in undermining it (by facilitating tax evasion, which is criminal, not avoidance) but Britain has played a more powerful role - by lobbying constantly behind the scenes to water the directive down, and joining with Switzerland, Luxembourg and others to stymie efforts to tighten up. Most notably, Britain powerfully lobbied against the Directive tackling trusts - the dirty British secret. This is the big loophole through which the criminal tax dodgers happily stepped. We occasionally directly see British officials lobbying behind the scenes - and it isn't pretty.

Here is another nasty little clue as to how serious Britain is again from The Guardian.

"Focusing on corporations that use tax havens. . . . Britain and other leading countries are expected to proceed cautiously in any attempt to restrict the financial manoevring of corporations."


Here's something else:

"Sources say it is important that everyone pays their fair share of tax but no country will want to damage the economic competitiveness of major companies."


Competitiveness. The heart of the problem. This statement, alone, also signals - if it reflects core UK policy as it says it does - that Britain is not serious, not serious at all. The article is talking about the competitiveness of major companies - but all along the drumbeat from British policy-makers, when talking about tax havens, has been about the "competitiveness" of countries - a very different concept. The two types of competitiveness are inter-linked, and it is likely that competitiveness of countries is what the official had in mind. This is all about tax competition and regulatory competition. It's nothing to do with normal market competitiveness. It is about a race to the bottom. Read more here.

Britain now knows that others have cottoned on to the giant offshore tricks it has been playing along - and it is starting to feel the heat. How to respond? The best approach, of course, is to lead the initiative! That way you can control it, of course. Shift the targets away from Britain towards other countries, and you can then get ahead in the race to the bottom - by making the others slow down! Could this be what is happening?

More and better regulation will come, of course - which is inevitable in light of what is happening. We await more details, but this is what it looks like from where we are sitting.

But here is how Britain and other tax havens protect the system. Whenever problems emerge, they announce initiatives to tackle them. "The problem is solved!" they cry. And too many people, unfortunately, believe them. The latest announcement will certainly have a very powerful effect in this respect. Here's an example from 1998, in the UK parliament:

"While the Chancellor huffs and puffs in the House trying to pretend that the previous Government did not take action on offshore trusts, the view of the operators of the trusts is that the legislation passed by the Conservative Government removed so many tax advantages that they have no fear that Labour can make it much tighter."

The story is, you see, that it's all been tightened up. Don't worry. And after this, the games continued merrily as before, only in different ways.

As we said in our headline, the fox is seeking to lead a global effort to tighten henhouse safety. It is a brave or foolish person who decides that it is time to trust the fox now, especially on this evidence. If there is a global crackdown on tax havens - maybe the last country that should be leading it is Britain.

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