Are tax havens good for the UK economy?

Late last year, AAT Comment examined the debate over tax havens. In this second part of our investigation, Accounting Technician reporter Leon Walker weighs up their contribution to the UK economy

Tax avoidance by Mitt Romney, Starbucks, Amazon and the now infamous Jimmy Carr have forced the issue of tax havens – or international finance centres (IFCs), to use the centres’ preferred term – into the public eye.

And with the spotlight increasingly focused on offshore locations offering cost-saving workarounds to those that can afford it, public pressure to crack down on them is also on the up. With the UK struggling with a slump and an economic deficit, should these tax shelters be allowed to flourish or should increasing calls for regulation be heeded?

A recent report found that by 2010 at least $21tn had been squirreled away by millionaires and corporations in offshore finance centres. The Trades Union Congress says corporate tax avoidance is hurting the UK’s tax take to the tune of £25bn a year.

This situation is not just unfair, it is actually hurting the UK economy, according to Jon Christensen, director of pressure group the Tax Justice Network.

‘Tax havens played a large part in the global financial crisis and in undermining the promises of globalisation,’ he says. ‘While their supporters claim they are key cogs in the globalisation machine, in fact they slow economic growth, reduce job creation, increase inequality and – worst of all – damage democracy.’

Christensen says that the argument in favour of tax havens was always predicated on the idea of trickle-down economics – the theory that tax breaks for the richest will eventually filter down and benefit less wealthy groups and, as such, society as a whole.

But, he argues, the change in focus of national tax systems has shifted in such a way that the use of havens actually has the opposite effect – and inhibits job creation.

‘Over the last 40 years the tax charge has been shifted from capital on to consumers and labour,’ he says. ‘As this shift has occurred and wage rates have remained broadly static, people have become far more indebted, and labour has become more expensive – as it has to pay more to subsidise the light taxation of capital.’

And Christensen adds that tax avoidance has vastly favoured big business over smaller enterprises – the organisations that politicians of all hues regularly tout as the engines of the economy.

Interestingly, finding someone to argue in favour of the continued light regulation of the offshore finance centres is surprisingly difficult. Despite numerous calls to tax advisory firms and tax havens themselves, AAT Comment found no one willing to argue the case in favour.

However, Conservative MP Mark Field has recently made some pro-international finance centre arguments. He says that corporate tax avoidance via international tax havens is ‘significantly’ less than the £25bn claimed by the TUC. There is a close constitutional relationship between the UK and many international finance centres – the Isle of Man, Guernsey and Jersey are dependencies of the Crown, although they are not part of the UK.

Given this relationship, Field argues that it is ‘essential that the UK plays an active role to ensure that any international regulation is appropriate and does not place unnecessary burdens on the UK financial sector, or on the wider UK economy which is a major recipient of investment capital raised through small IFCs’.

In the second quarter of 2009, such centres provided net financing to the UK banks of $332.5bn, Field says. Sounds good, right? Not so fast. Nicholas Shaxson author of Treasure Islands – a book that critiques the hidden world of tax havens – suggests that Field’s analysis is flawed.

‘Tax havens hoover up business from around the world and feed it into the City of London,’ he tells The Daily Telegraph. ‘This is a major reason why the City of London has become so powerful, so separate from the real economy, and so hard to reform. It is nothing to boast about.’

Leon Walker is a contributor to Accounting Technician magazine.