Time to tackle the offshore trusts

A fascinating debate on tax avoidance and evasion took place in Westminster yesterday, at the request of David Taylor MP (North-West Leicestershire). You can find the transcript here. And you will find a link to Paul Sagar (TJN's man on the spot) here.

It is well worth reading through the entire transcript to get a feel for the degree of cross-party support for tackling the secrecy space created by many tax havens (though perhaps we might invite Conservative Tony Baldry MP to widen his reading just a little). It is heartening to note that TJN's work, and especially that of Richard Murphy, who directs the majority of our research programmes, gets honourable mentions on more than one occasion.

Dr Vince Cable, in his intervention, pin-pointed three issues of fundamental concern to TJN: the case for automatic information exchange rather than the 'by request' approach favoured by the OECD; the need for enhanced corporate accounting transparency through an international standard requiring country-by-country reporting; and the urgent need for the British government to address the lack of transparency relating to trusts created in the UK and its tax haven satellites. The latter is especially important: the international community, rightly, wants to take action against banking secrecy. This is long overdue. But anyone with inside knowledge of the tax evasion industry knows that trusts and foundations provide the underpinnings for the vast majority of sophisticated tax evasion structures. This issue can no longer be ignored by Britain or by the OECD.

Here is the related extract from Dr Cable's speech:

The big question that the hon. Member for North-West Leicestershire asked was, what do we do about it? It is partly about taking international action and partly about domestic policy. Internationally, the fundamental issue raised by the G20 was transparency, and he raised two of the three key issues, the first of which is the automatic exchange of information. The current OECD white list is very good at creating transparency, but it leaves substantial hurdles when it comes to getting information from tax havens. Information exchange has to made automatic to be effective. As he mentioned, the Government are resisting such a measure. There are good reasons for resisting automatic exchange in some cases—one would not want automatic exchange of information with, say, Mugabe’s Zimbabwe, for human rights reasons—but, as a general principle, between countries that have satisfactory human rights, automatic exchange of information should be the norm.

The second transparency issue that the hon. Gentleman raised was country-by-country accounting. As several hon. Members mentioned, it is an issue for the IASB. There is a lot of foot-dragging, and political leadership is needed, but that is the way to stop the systematic abuse through transfer pricing, the manipulation of profits and the minimisation of corporate tax payment.

The hon. Gentleman did not mention the third transparency issue, namely the identification of the beneficial owners of trusts and companies. A lot of tax avoidance through tax havens takes place by hiding the names of the ultimate owners. The EU savings directive precludes that, but it is not being enforced. One difficulty that the UK has in being righteous about the matter is that our trust system is incredibly opaque. Many trusts are never registered and other countries might reasonably ask, “Why are the British getting heavy-handed about this when their own system of tax law in relation to trusts is so opaque?” Until we deal with that problem, it will be impossible to crack down effectively on the tax haven system.

In recent years some tax havens, the Crown Dependencies, for example, claim that they have taken effective steps in the direction of making trusts and offshore companies more transparent. This claim is based on the fact that they now require trust and company administrators to keep record of the beneficial ownership of the trusts and companies they administer (note: extraordinary that they might not have done so beforehand) and to make this information available to the regulatory authorities on request. The notion that this improves on transparency is risible. Like the 'by request' tax information exchange agreements favoured by the OECD, this approach requires any third party agency (i.e. a revenue authority) with a legitimate interest in the affairs of a resident, to be able to establish a link between that person and a trust created in a jurisdiction thousands of miles away, without there being any public records of the existence of that trust.

We have nothing against the principle of the trust (disclosure: a significant part of the funding for our activities originates from the Joseph Rowntree Charitable Trust). But we see no reason why details of the settlors, trustees and beneficiaries of trusts should not be registered on public record, and trustees should be made responsible for notifying income and capital distributions via automatic information exchange processes. And we strongly object to the erosion of the concept of trusts, based in English Common Law, which allows for the creation of what are essentially 'sham' trusts: a trend driven by the British Virgin Islands in the past decade, with Jersey piling in on the action in 2006.

The British government wants to take a leadership role in tackling tax havens. We applaud that . But good leadership will require that Britain puts its own house in order before taking others to task on banking secrecy, which means tackling the secretive arrangements surrounding trusts. To do otherwise would demonstrate a bias in favour of those parts of the tax evasion industry which use trusts as the principal mechanism for creating secrecy.