Tuesday, July 02, 2013

On Jersey's 'contribution' to the United Kingdom

Jersey Finance, the marketing arm for the British Crown Dependency of Jersey, has issued a new report entitled Jersey's value to Britain: Evaluating the economic, financial and fiscal linkages between Jersey and the United Kingdom. (This shorter summary is in easier-to-read pdf format.)

It is a lobbying document and, as such, contains plenty of statements such as this:
"There may be some offshore centres that provide secretive shelter from other jurisdictions’ domestic taxes, but not Jersey." Which is patently untrue, and part of the standard and strenuous 'theatre of probity' that Jersey and other secrecy jurisdictions routinely engage in, as part of their efforts to whitewash the financial centre - in order to appear 'clean' and to thus attract more money.
Jersey, according to our last Financial Secrecy Index, has a secrecy score of 78, which puts it somewhere towards the higher end of the secrecy scale: significantly worse than other large secrecy jurisdictions such as Luxembourg, Singapore or Cyprus. Just as one indicator here, Jersey (unlike Guernsey or the Isle of Man) has fought long and hard against the 'automatic information exchange' under the European Union Savings Directive, which is a clear indication of the importance it attaches to secrecy. Its bread-and-butter business of providing discretionary trusts - particularly abusive structures that have enable large numbers of wealthy people to escape paying tax - is another clear sign of where Jersey's heart is. Finding hard evidence of tax-evading money in secrecy jurisdictions is always extremely tough, but when the UK's HMRC discovered the details of HSBC's Jersey clients last year, The Telegraph revealed:
"among those identified on the list are Daniel Bayes, a drug dealer who is now in Venezuela; Michael Lee, who was convicted of possessing more than 300 weapons at his house in Devon; three bankers facing major fraud allegations and a man once dubbed London’s “number two computer crook”.
. . .
The HSBC Jersey client list is understood to be heavily dominated by senior figures in the City."
Despite the falsity of many of the report's broad-brush claims, it does contain some interesting statistics, some of which we have not seen before - such as:
  • Jersey is custodian of £1.2 trillion of wealth: £200bn in banks, £400bn in trusts established by private individuals; £400bn in specialist structures for businesses and institutions, and £200bn in administered or managed funds.
  • Slightly differently, an estimated £400 billion of private individuals’ assets and £450 billion of corporate and institutional assets have been settled in Jersey trusts or similar vehicles.
  • Three quarters of this wealth originates from "depositors, investors and trust settlors" (that is, initial contributors to a trust) who are not domiciled in the United Kingdom – with North America, Asia Pacific and the Middle East all being major contributing regions. 
  • Over £150 billion are the foreign assets of individuals currently resident in Britian but not liable for tax there on their foreign source income, the so-called ‘non-doms.’
(That £1.2 trillion is worth a little over $1.8 trillion at current exchange rates; it seems that there is some doubt over some of those numbers.)

But then the report goes on to make some remarkable claims. Here is one:
"Overall, Jersey’s financial services sector intermediates almost one pound in every twenty of investment by foreigners into the United Kingdom. This scale of investment could potentially support 112,000 jobs.”
It then adds other sectors to conclude that:
"On the basis of our broad calculations [Jersey] could be supporting in the order of 180,000 British jobs." 
Now this is devious. Imagine what a newspaper headline-writer might make of that. Get rid of Jersey's tax haven industry, it might read, and 180,000 British jobs would be at risk. Horrors!

But of course this is not what these calculations say  - not at all.

For one thing, these are a gross figures, not net figures. This alone renders all the estimates for Jersey's 'contribution' meaningless. This is exactly the same reasoning employed routinely by the City of London Corporation (via, for example, TheCityUK,) to present itself as a massive 'contributor' to the UK economy - when in fact we have demonstrated clearly that the 'oversized' part of the UK financial services centre has made an overall negative net contribution. (Our Finance Curse document, particularly Sections 2.4 and 2.5, explains this in great detail.)
What is happening here is that Jersey is serving as a conduit for financial flows to and from the United Kingdom. Some of those flows have real investments attached to them, with real jobs. That much is true. But to then say that nobody would make that investment if Jersey were not there is to make an assumption of unrivalled heroism. They then make an assertion of similar boldness:
"Jersey’s practitioners believe that four-fifths of their business would leave the sterling zone if the CDs [Crown Dependencies] didn’t exist and relocate to other offshore centres (sic)."
They then use this number to turn the gross figures (which they hope the headline-writers will use) into a figure for what they call a 'net additional jobs supported' (on p14 here.)

This is also patently nonsense. Crucially, this 'four-fifths' assertion is merely an unsubstantiated, unsourced speculative number inside a paid-for lobbying document. The estimate can be dismissed out of hand.

The true figure - not that it's ever going to be possible to measure it -- would be a small fraction of that: because there are wider points to be made here.

As a general rule, if there is an after-tax return on an investment to be had in a country like the UK, the investors -- whether domestic or foreign -- will come. That, after all, is the "magic of the market." Increase the tax rate within reasonable limits, and the after-tax return is still there. Bringing the investment in via offshore platforms may change the amount of investment at the margin, and may well change its nature, but if it’s a genuine business opportunity then the investment will happen. This is especially in the current economic climate: after all, corporations are currently awash in idle cash: there's no shortage of 'dry powder' investment capital around.

Even if you were to take Jersey's made-up figures as true and conclude that most of the Jersey practitioners' business would leave sterling zone, others would quickly move in to take up those profitable opportunities.

And, to the extent that this is financial business, the Finance Curse demonstrates clearly that those sectors that are particularly dependent on offshore finance tend effectively to 'crowd out' other sectors and, in the long run, cause long-term damage to the United Kingdom as a whole. We urge you to read the Finance Curse document to get a sense of the scale of the damage here. It really is one of the great untold stories of Britain's economy.

Then there's the question of tax revenues. Jersey Finance asserts:
"Overall, we judge that, based on 2011 data, a maximum of £0.6 billion per annum of British taxes can leak through evasion or avoidance using Jersey vehicles."
Leaving aside the fact that this £0.6 billion is a lot of money, and that this constitutes a clear admission that Jersey has been facilitating substantial British tax evasion, in contrast to the earlier assertion that it wasn't, there is more to say.

First, a large amount of the funds held via Jersey involve what one might call 'non-dom legal round-tripping.' Wealthy 'non-domiciled' UK tax residents are given the unjustifiable privilege of generally not paying tax on their foreign-sourced income - so what they stash in Jersey won't get taxed. This is usually the case even if the Jersey structure owns assets in the UK. A huge amount of tax is avoided through this route, and Jersey is facilitating that - but they don't count that in their figures, because it's not illegal. We have always maintained that while legality matters, this must always be viewed through an economic perspective, which demonstrate the abusiveness of what's going on. And in any case, the non-doms are not the only part of this. As Tax Research concludes on this point:
"What this  data shows is that we’re looking at nothing more than a classic round tripping operation where funds leave the UK for Jersey only to return almost immediately to the UK with Jersey’s role being to strip tax out of the return on these funds that are really earned in the UK."
He concludes that some £500 million is lost on UK income taxes alone. (And that isn't the end of the story either: in this low interest rate environment, lost inheritance taxes and capital gains taxes, and others, may be just as great.)

But Jersey finance here takes yet another step too far. They take the 0.6 billion figure for tax losses, then add:
"Meanwhile, the Westminster government benefits from the taxes it levies on the jobs and economic activity stimulated in Britain through Jersey’s financial and trade links. Indeed, the tax receipts from the Jersey-catalysed activity alone could be in the order of £21⁄2 billion per annum – substantially outweighing any tax leakage." 
Until this point, the document has never quite gone as far as to say explicitly that these gross numbers are in fact net numbers: they are merely hoping that the headline-writers will do that job for them. But in this paragraph, the 'substantially outweighing', makes the claim explicit. Essentially, it is saying that you subtract one from the other.

Sloppy? Devious? You decide.

This 'Jersey-catalysed activity' is, as the above paragraph explains, merely a description of UK jobs that are linked through to Jersey structures. They do not in any sense demonstrate that Jersey has in any way 'created' these jobs. The true gross tax contribution will be a fraction, and most likely a small fraction, of the taxes suggested here -and once that smaller fraction is then weighed against that £600 million annual tax losses (taking the Jersey lobbying figure at face value, which is a gross underestimate) it is likely that a negative tax contribution will be reached.

Conclusion

In summary, this document contains some interesting statistics, notably on the breakdown of assets it says are held through Jersey structures.

But when it tries to move from these figures to paint a picture of Jersey's 'contribution' to the United Kingdom, it quickly veers off into fantasy land. 

Finally, another question emerges. Jersey, like many other secrecy jurisdictions, has been perpetrating tax and criminal abuses around the world, not just in Britain. The charge sheet here is far bigger, and far nastier. It's interesting to ask why Jersey has produced a selective report.

The more conspiratorially minded might suggest that this report is an effort to divide its critics, between those (such as development NGOs) who are angry at the abuses perpetrated against developing countries and others, and those who are more concerned with losses only to the UK.

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