Creating Turmoil v3 - Tax Research UK .CREATING TURMOIL Evidence submitted ... registered in the

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    Evidence submitted to the

    Treasury Committee

    of the House of Commons by the

    Tax Justice Network UK

    June 2008

  • tax justice network uk



    1. Executive summary 3

    2. Introduction 11

    Section 1: Understanding the Issue

    3. Understanding the issues 14

    4. The use of tax havens 48

    5. The silence of the regulators 74

    6. Regulation and the tax haven response 87

    7. The UK as a tax haven 108

    Section 2 The Treasury Committee Questions:

    8. To what extent, and why, are Offshore Financial Centres important to

    worldwide financial markets?


    9. To what extent does the use of Offshore Financial Centres threaten

    financial stability?


    10. How transparent are Offshore Financial Centres and the transactions

    that pass through them to the United Kingdoms tax authorities and

    financial regulators?


    11. To what extent does the growth in complex financial instruments rely

    on Offshore Financial Centres?


    12. How important have the levels of transparency and taxation in Offshore

    Financial Centres been in explaining their current position in worldwide

    financial markets?


    13. How do the taxation policies of Offshore Financial Centres impact on

    UK tax revenue and policy?


    14. Are British Overseas Territories and Crown Dependencies well regarded

    as Offshore Financial Centres, both in comparison to their peers and

    international standards?


    15. To what extent have Offshore Financial Centres ensured that they

    cannot be used in terrorist financing?


    16. What are the implications for the policies of HM Treasury arising from

    Offshore Financial Centres?


    17. What has been and is the extent and effect of double taxation treaty

    abuse within Offshore Financial Centres?


    18. To what extent do Offshore Financial Centres investigate businesses

    and individuals that appear to be evading UK taxation?


    19. Conclusions and recommendations 158

    20. Bibliography 175

    21. The language of tax 178

    22. About the Tax Justice Network 193

    23. About the author 194 `

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    Tax Justice Network UK and Richard Murphy 2008

    This report was written by Richard Murphy FCA of Tax Research LLP

    It is published by Tax Justice Network International Secretariat Ltd 38 Stanley Avenue

    Chesham HP5 2JG UK

    The author has asserted his moral rights.

    Those persons whose work is noted as having formed the basis of some sections of this

    report have given their consent.

    Any part of this report may be reproduced without the permission of the authors or

    publishers if that reproduction is not for commercial purposes or is for the advancement of

    education. All such use must be attributed.

    Cover photo: The motor yacht Turmoil, registered in the Cayman Islands, photographed in

    Dublins Dockyard Financial Services Centre 9 June 2008 by John Christensen. Aptly named

    and symbolising all the issues that the offshore economy raises.

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    1: Executive Summary

    The Treasury Committee (TC) announced on 30 April 2008 that it had decided to

    undertake an inquiry into Offshore Financial Centres, as part of its ongoing work into

    Financial Stability and Transparency and asked for written evidence to be submitted1. This

    document is the submission of evidence prepared by the Tax Justice Network UK.

    This paper argues that it is a mistake to confuse the term Offshore Financial Centre (OFC)

    with tax haven. These two are quite separate and distinguishable if intimately related

    phenomena that jointly make up the offshore economy.

    We argue that the power in this relationship lies with OFCs and the companies that work

    within them, not the tax havens, so the focus of regulation must shift onto limiting the

    powers and impact of OFC operators within the global economy.

    Tax havens are places that create legislation designed to assist persons real or legal - to

    avoid the regulatory obligations imposed upon them in the place where they undertake the

    substance of their economic transactions. This is not by accident or chance: we provide

    clear evidence that these places, some of them countries, some not, but all with the power

    to pass legislation, set out to undermine the impact of legislation passed in other

    jurisdictions. These are deliberate acts of economic aggression targeted at sovereign


    Offshore financial centres are not the same as tax havens. OFCs are the commercial

    communities hosted by tax havens which exploit the structures that can be created using

    1 accessed 8-5-08

    We feel that this (lack of provision of an effective

    regulatory system) might be a grave omission, since it is

    notorious that this particular territory, in common with

    Bermuda, attracts all sorts of financial wizards, some of

    whose activities we can well believe should be

    controlled in the public interest

    Extract from a memorandum concerning the Bahamas dated 3rd

    November 1961 submitted by Mr W.G.Hulland of the Colonial Office to

    Mr B.E.Bennett at the Bank of England. Memorandum seen in 1997 by

    John Christensen in the Bank of England archive.

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    the tax havens legislation for the benefit of those resident elsewhere. In other words, the

    offshore financial centre is made up of the accountants, lawyers, bankers, plus their

    associated trust companies and financial intermediaries who sell services to those who wish

    to exploit the mechanisms the tax haven has created.

    Until now all attempts to regulate the offshore economy have been focussed on tax havens.

    We argue that this has been a mistake. Tax havens are geographically located and have

    fixed spheres of influence. OFC operators, many of them multinational companies or banks,

    and some like the Big 4 firms of accountants present in every major and most minor tax

    haven jurisdictions around the world, can move their operations to wherever they want at

    a moments notice. They have used this power to threaten to leave any jurisdiction that

    does not comply with their wish to secure the legislation they desire. This has recently

    been used as a tactic in the UK, itself a tax haven.

    The result has been that in the last decade new and highly abusive forms of offshore

    company and trust have been developed. These evolutions have been little documented

    and much less understood, but have allowed both companies and trusts to float free of

    almost any regulatory control. Again, this did not happen by chance. As we show, it is the

    OFC operators who have demanded and secured this benefit on behalf of their clients.

    The consequence is obvious: whilst tax haven regulation is important it is impossible to

    expect the tax haven states to regulate the OFCs that operate from within them. Those

    OFCs hold all the power in this relationship. In effect they have taken these states captive,

    showing in the process complete indifference to the local populations of these places and

    their elected representatives.2 It is not by chance that the degree of compliance with tax

    haven regulation that OFC operators demonstrate in their behaviour is astonishingly low,

    since they appear to consider themselves beyond the law of these places.

    This is not only the case in the archetypal micro-state that populates the tax haven world

    in popular perception. As we are now seeing this behaviour is being replicated in the

    worlds major tax havens, of which, the UK is without doubt the most important. It is no

    longer possible for any objective person to deny the obvious fact that the UK is a tax haven

    and that the City of London is an OFC seeking to exercise control over our state. The

    evidence also shows that the City of London is also intricately connected to a web of

    satellite tax havens spread across the globe, including Crown Dependencies, British

    Overseas Territories and various members of the Commonwealth, which have served as

    conduits for capital flows into London whilst also providing facilities for tax evasion on an

    industrial scale.

    2 See Christensen, J. and Hampton, M.P. (1999) A Legislature for Hire: The Capture of the State in Jerseys

    Offshore Finance Centre

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    The consequences are easy to see. The developing world is denied the capital resources it

    needs to establish stable, self supporting democracies. The UKs tax base is eroded and in

    the process its own democracy is threatened as electors note that large corporations

    representing nothing but the power of money seem more important to those holding office

    than their constituents. Corruption is enabled. Crime can take place almost unimpeded.

    These are the realities of tax havens, even if, as we acknowledge, the race to the bottom

    in taxation has been averted (as yet) as a consequence of the sheer exuberance of the

    boom economy. But that boom has now passed and