Is ending offshore anonymity the answer to tax evasion?

Added 10th May 2016

International efforts to end the secrecy of offshore tax havens – seen by governments as the solution to tackling tax evasion – may lead to some undesired side-effects, according to experts in the industry.

Is ending offshore anonymity the answer to tax evasion?

Removing the anonymity of people or companies using offshore jurisdictions could actually increase the use of tax havens with places like the US setting even lower tax-rates in a bid to attract money, says George Bull, a senior tax expert at RSM.

“Rate-shopping would be as important as it is now.

"With the US now being described as the world’s largest offshore centre, and South Dakota fingered for offering zero personal and corporate income tax rates.

“In an environment of full disclosure, there would be significant differentials in tax rates around the world.

“These in turn would continue to be attractive to individuals and companies who wanted to mitigate their tax liabilities and were prepared to do so despite the scrutiny of tax authorities and the public,” said Bull.

"Would the pressure of transparency be sufficiently great to deter individuals and companies from organising their affairs so that they are taxed in low-rate jurisdictions?"

Economists' letter

The comments were made in response to a letter, coordinated by Oxfam and signed by more than 300 leading economists, urging world leaders to end the secrecy of offshore tax havens.

The letter, published ahead of ahead of the UK government’s Anti-Corruption Summit this week, said there is “no economic justification” for allowing tax havens to exist.

However, Bull argues that although increasing transparency may make zero tax-rate havens a thing of the past, low tax-rate regimes would flourish and prosper as a result.

“The places currently called ‘tax havens’ would not disappear from the map. Without a doubt, there would still be tax competition between countries.

“The question then becomes a very simple one: would the pressure of transparency be sufficiently great to deter individuals and companies from organising their affairs so that they are taxed in low-rate jurisdictions which are generally not where they do business?” he added.

Reputational risk

However, Markus Meinzer, a senior analyst at think-tank the Tax Justice Network (TJN), told International Adviser that although improved transparency may not initially increase tax revenues, forcing companies to disclose profits in each country, coupled with the public outrage over tax dodging, it will in the long run have an effect.  

“Country by country reporting of profits made by companies will in the long run lead to a tangible increase in tax revenues as companies become more sensitive to reputational risk,” he said.

On Monday, the TJN revealed that more than $12trn (£8trn, 10.5trn) has been taken out of emerging economies such as China and Russia and stashed in offshore accounts.

The advocacy group, launched in 2003, urged politicians attending the Anti-Corruption Summit to publish their tax returns as well as calling for a further crackdown on the banks, lawyers and other professionals who facilitate financial secrecy.

Tax havens serve a 'useful' purpose

Meanwhile, Philip Booth, a professor of finance, public policy and ethics at St Mary’s University, told City A.M on Tuesday that contrary to the economists’ letter, tax havens do serve a useful purpose.

He argued that investors often use them to avoid being double-taxed and although they may pay a lower rate of tax than in the country in which they live, they do not avoid all tax.

Booth described the secrecy of offshore jurisdictions as a “double-edged sword”, explaining that despite the public perception that corrupt officials and dubious oligarchs set up anonymous accounts in far flung places to avoid paying tax, in the reality many cases involve tax havens being used by legitimate businessmen to shelter their money from plundering political regimes.

In fact, he added, one of the advantages of tax havens is that they encourage government accountability by making it possible for businesses to avoid “crazy tax systems”.

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About Author

Monira Matin

Senior Reporter

Monira joined International Adviser in March 2016 from Informa Global Markets where she worked as a eurobond reporter for over two years, covering fixed income markets. She has previously held a number of editorial positions covering politics, insurance and technology. Monira has a degree in Journalism and Economics from City University.



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