Archive for the ‘Tax avoidance’ Category

Aggressive Tax Avoidance

The use of tax havens and other devices by international corporations, which was waiting in the wings when the third edition of Corporate Governance: Principles, Policies and Practices was written in 2015 (page 404), has now come centre stage.  The corporate governance debate on the topic of, so-called, aggressive tax avoidance seems to have consolidated into two main strands.

On the one hand are those directors and their professional advisers who argue that their role is to maximize their shareholders’ wealth in the long-term, running their organizations while keeping within the regulation and law of each country in which they operate. ‘Tax strategies such as transferring profits from high to low (or no) tax regimes by moving head office domicile, re-routing orders, or charging licence fees, are completely legal or we do not use them’, they say. ‘If governments and regulators do not approve of such strategies, they must change the regulations or the law.’

On the other hand, a growing school of thought argues that the board of a company owes a duty to a wider range of stakeholders than just their shareholders. If a company shifts profits out of a country in which it has earned those profits, the taxpayers of that country are denied the tax benefits that should accrue from the revenues they have generated. Though such a transfer may be legal, it is not fair and could be considered unethical.

In the UK, both the business and popular press have highlighted cases in which large companies and wealthy individuals have failed to pay UK tax. For example, London jeweller Mappin and Webb, holder of the silversmith warrant from Her Majesty the Queen, was shown to have paid no tax for five years on profits of £66 million. It transpired that Mappin and Webb was bought in 2013 by US private equity firm Aurum, which has a base in Luxembourg, a pivotal tax avoidance hub, even though a member of the European Union. Cadbury, the chocolate maker, was also shown to have paid no UK tax in 2015, although it generated over £2 billion in revenues. Cadbury had been sold to US corporation Kraft. The UK tax authorities have also challenged a number of schemes designed by tax accountants and lawyers to reduce or eliminate income tax for rich individuals, including sports stars, media personalities, and business people.

In the United States the Foreign Account Tax Compliance Act (FATCA) is intended to detect tax evasion by US citizens who hide money outside the US. The act requires all financial institutions, wherever they are, to report on the existence of all accounts and financial transactions of US citizens. This call for greater transparency has had unexpected consequences: some UK financial institutions now refuse to accept US clients, because the reporting requirements and the penalties for non-reporting are too great, and some American expats have begun the long process of renouncing their citizenship.

But tax havens are usually far more than vehicles for reducing tax. In fact it would be more appropriate to call them safe havens. Some companies incorporate in safe havens legitimately, even though they have no operations there, to reduce regulation and filing requirements, thus keeping their ownership and financial details unobtrusive. The majority of Hong Kong based companies listed on the Hong Kong Stock Exchange are incorporated in safe havens, many in the BVI. But others, of course, use safe havens as a bolt hole to hide the proceeds of crime or to launder money. Then, of course, there are those who use safe havens to reduce or avoid tax. So, some safe haven users are legitimate and legal; others suspect and, possibly, cloaking illegal activities.

The following table lists most of the significant safe havens. There are a few more minor ones.

Tricker post table

The classic safe haven has been Switzerland, with its banking secrecy laws. Although in recent years, Swiss banks operating in some countries, including the US and the UK, have been pressurized to provide information. Panama has recently come into prominence because of the leaked ‘Panama Papers’ from law firm Mossack Fonseca, which gave explicit details of many firms and individuals involved in offshore financial arrangements. The US state of Delaware provides no protection from US federal taxes, but does have a business friendly court and is less bureaucratic than many other states, which is why so many US corporations are incorporated there.

The British safe havens that are Crown Dependencies or British Overseas Territories have the Queen of England as Head of State and their final court of appeal is the UK Privy Council. Most are also members of the British Commonwealth, as are the Bahamas and the Cook Islands.

Just before being replaced, UK Prime Minister David Cameron held an international conference in May 2016 in London, which brought together many (but not all) of the safe havens with representatives of major economies. The main conclusion was of the need for more transparency, including information about the ultimate owners of companies resident in tax havens.

Bob Tricker, July 2016