Peter Geoghegan: The City has no interest in closing tax havens

THE UK may claim it wants to stop avoidance, writes Peter Geoghegan, but its actions tell another story

Politicians love buzzwords. For Tony Blair it was “progress”, Barack Obama had “change”, and when George Osborne needs a mot juste, there is one word he reaches for time and again: “fair”.

Welfare cuts have to be “seen to be fair”, people on benefits who, as Osborne put it, pull down their blinds while others go to work is “unfair”. As the Chancellor told this week’s Conservative party conference: “It is not just about the money, it comes back to fairness and to enterprise.”

Osborne has been using this opaque language for a while now. Back in June 2010, when he emerged blinking into the Downing Street sunshine to deliver his first emergency budget, he promised to be “tough” but “fair”.

Two years down the line, such pledges look increasingly shaky. A putative five-year austerity programme will now run until 2017 and is likely to 
be extended further. Another £16 billion will need to be found by 2015, either in cuts or tax rises, if the Chancellor is to stick to his austerity plan. And a fresh round of cuts targeted at the young and vulnerable hardly scream “fairness” or, in another of Osborne’s favourite phrases, that “we are all in this together”.

There is, however, one obvious gap in UK regulation that is both grossly unfair and which would, if fixed, provide all the savings that Osborne needs without any further cuts: tax avoidance in offshore havens.

Each year, individuals and companies in Britain funnel tens of billions of pounds into offshore accounts in locations such as Switzerland, Luxembourg and the Cayman Islands.

The practice, pernicious but not explicitly illegal, costs the Treasury at least £18bn a year, according to research published by the pressure group Tax Justice Network.

The Conservatives keep saying that they are getting to grips with tax havens. In March, Osborne exclaimed that aggressive tax avoidance is “morally repugnant”. A few months later, David Cameron described the tax affairs of comedian Jimmy Carr, who 
used a Jersey-based trust to shelter his income from the Treasury, as “morally wrong”. But, despite all this talk of morality – redolent of the faux outrage in the face of details of bankers’ malfeasance – little has been done to cut off the money supply to secretive tax havens since the coalition came to power.

“There has been a lot of smoke but not a lot of fire, a lot of talk but not a lot of action,” as Nicholas Shaxson, author of Treasure Islands: Tax Havens and the Men Who Stole the World, told The Scotsman recently.

Take the tax deal agreed recently between the UK government and Swiss authorities. Under the so-called Rubik arrangement, due to come into force next year, Swiss banks will have a duty to assess and collect tax from UK resident tax clients who refuse to disclose the existence of Swiss accounts to HMRC. The Swiss payment will negate any obligation to declare the income in the UK.

The then permanent secretary for tax at HMRC, Dave Hartnett, said, when the Rubik deal was signed, that it will raise “between £4bn and £7bn”. HMRC will struggle to recoup a tenth of that figure, says Nicholas Shaxson.

At the same time, the UK has handed over control of tax collection to a clandestine Swiss banking system that is, at best, “morally” equivocal. Far from tackling the problem of UK residents hiding funds in anonymous Swiss accounts, the new deal is “the perfect mechanism for not just avoidance but evasion of tax 
on the original sum deposited”, said Richard Murphy, a chartered accountant and tax expert with the Tax Justice Network.

Rubik isn’t just bad news for Britain. It’s bad news for efforts to clean up banks across Europe. Instead of a co-ordinated, Europe-wide response to the problem of tax avoidance, the UK is complicit in an agreement that is every bit as shadowy as the practices it ostensibly seeks to tackle.

The problem for Osborne, and others in Westminster, is that tax havens are now a massive global industry,with the City of London at its heart.

At least £13 trillion, if not almost twice as much, has 
been deposited in banks in countries such as Switzerland and the Cayman Islands, according to The Price of Offshore Revisited, a report released earlier this year by the Tax Justice Network.

This wealth is “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries”, says the report’s author, James Henry, former chief economist at the consultancy McKinsey. Many 
of these “enablers” are either based in, or have connections with, the City of London.

The political pressure not to clean up the City is immense, particularly on the Chancellor. Unproductive financial activity, such as transferring funds to offshore accounts, has become the lucrative lifeblood of the City. Without it, business – and bonuses – would be much smaller.

“The City likes tax avoidance. The City likes tax havens,” says Shaxson. “There is this constant charade of ‘Look how clean we are’, ‘Look how transparent we are’, but behind the scenes [the banks] are doing the exact opposite.”

Westminster plays an important role in maintaining this fiction. While condemning tax avoidance as “morally repugnant”, Osborne used this year’s budget to introduce a proposal to change the tax laws to make it much easier for British-owned companies to shift profits from business in the developing world into tax havens. The measure is expected to deprive developing countries of around £4bn in tax revenue a year.

There is, however, an alternative to the secretive world of tax havens and “race to the bottom” tax rates: a common consolidated corporate tax base (CCCTB) for the EU.

Under such a scheme, companies would be taxed based on the size of their business in a given country: 
so if a multinational did half its business in the UK and 1 per cent in Luxembourg, it would pay half its tax here and 1 per cent in the Duchy. Such a scheme has already been successfully adopted by a number of US states.

An effective CCCTB regime, with a minimum tax rate, would provide a lasting solution to a UK tax regime that fuels inequality and costs billions in revenue.

If Osborne genuinely wants fairness, he would do better to look more at the City and the tax havens it facilitates, and less at his neighbour’s windows.