Jun 14 2013

New report into the UK’s Overseas Territories and developing countries

Posted by: Nick Shaxson in: Thoughts

Cross-posted with the Tax Justice Blog and the EU Observer blog. This nicely complements what I’ve written about in Treasure Islands, particularly in the chapter entitled “The Deep Drains of Development.”

Christian Aid and the IF campaign have a very important and topical new report available, entitled Invested interests: the UK’s Overseas Territories’ hidden role in developing countries.

Tortola, British Virgin Islands

It is becoming increasingly recognised that huge amounts of investment in and out of developing countries is being routed via tax havens. Former UN Secretary-General Kofi Annan has remarked, accurately:

“When foreign investors make extensive use of offshore companies, shell companies and tax havens, they weaken disclosure standards and undermine the efforts of reformers in Africa to promote transparency. Such practices also facilitate tax evasion and, in some countries, corruption, draining Africa of resources that should be deployed against poverty and vulnerability’.”

Many of the world’s most important tax havens – between a third and a half, depending on how it is measured – are British Crown Dependencies or Overseas Territories, partly independent from Britain, but also closely linked to the UK via a web of constitutional links.

The crucial part to know here is that Britain has complete power to disallow the offshore secrecy (and other) legislation that these places put in place. In a very important section entitled The UK’s role, it notes:

“In the most recent White Paper on the BOT [British Overseas Territories] it was confirmed that ‘[As] a matter of constitutional law the UK Parliament has unlimited power to legislate for the territories’.

The UK has hitherto chosen not to intervene, in almost every case – but there are isolated cases, not related to offshore secrecy, where the UK has forced the islands’ hands.

So it is wonderful that influential organisations are now starting, for the first time (spurred in part by long-running work by TJN and by books such as Treasure Islands) to take a long hard look at Britain’s role in development. The new report notes that it:

“attempts, for the first time, to quantify the role that tax havens to which the UK is constitutionally linked play in facilitating the flow of FDI into developing countries, dwarfing that of the BRICS nations.”

Anything like this is, as we have noted in our own research, an exercise in night vision, so precision is hard to get. But this is a very useful piece of new research.  And it’s topical too, as the report’s author Joseph Stead notes:

“The UK as G8 chair has never been in a stronger position to end the grave injustices caused by tax havens – if the UK  succeeds in putting its own house in order first. The Prime Minister must do everything he can to get UK havens agreed on a tax deal before he arrives in Northern Ireland, so he can push the G8 to end the tax scandal.”

Quite so.

There is an absolute ton of useful information in here. We will merely scratch the surface, and highlight a few fascinating details, such as this one:

Three of 14 British Overseas Territories, in particular the British Virgin Islands (BVI), Cayman Islands and Bermuda emerge as among the biggest global sources of FDI. Together with the Crown Dependencies of Jersey, Guernsey and the Isle of Man, they were in 2011 the largest provider of FDI to the developing world

. . . and this remarkable fact is backed up by an equally remarkable table:

We’ve seen isolated information on this before — such as in this French report, for instance — which was surprising enough, but we’ve never seen the data collated like this.

In short, tax havens are conduits for a large share of foreign direct investment around the world – but the share is much bigger when just developing countries are considered. Nearly half the investment from the highly secretive British Virgin Islands, for instance, goes to developing countries, and outward FDI from the BVI was equivalent to over 860 times (NB, that’s not 860 percent, but 860 times!) the BVI’s GDP. (By comparison, the UK has a ratio of around 1:1 and the US around 0.2:1.) That is astonishing.

The report outlines a number of reasons why the tax havens may be so important, ranging from a desire for a more secure legal environment to the more nefarious round-tripping, tax dodging and corruption. Secrecy automatically facilitates and promotes these.

The report notes that the IMF and others have been woefully lax in collecting data on this; the report’s authors had to go to individual countries to find out the totals. Shame on them. The OECD, it says, has the overwhelming role in designing international the corporate tax system – but this is highly problematic given that while the OECD is a club of rich countries, it is the poorer countries that are disproportionately the victims of this. Much more transparency is obviously needed too.

An extremely useful overall contribution to the literature.

6 comments so far

George 6th June, 2013 11.18 am

Hi Nick have you seen the offshore database leaked from the network of investigative journalists? thoughts?

http://offshoreleaks.icij.org

Nick Shaxson 6th June, 2013 8.34 am

Yes, i briefly looked at this. But the world’s media and others will be swarming over it right now, and i would be in a very crowded field, no point my spending time on it.

Matt 7th July, 2013 10.05 am

Hi Nick. There is a lot of (righteous) upset and activity with regards to tax havens – primarily because of the lack of transparency. What are your thoughts about islands such as Barbados, who have recently introduced (end 2012) a Special Entry Permit for High Net Worth individuals to enter? If you can demonstrate that your earnings are non-Barbadian sourced income the tax rate is around 2.5%, and even that is only on what you choose to bring in to the island to live on. You do have to live there (182 days min) and be able to validate your income stream. How do you see Barbados in comparison to these other ‘treasure’ islands?
regards
matt

Nick Shaxson 7th July, 2013 3.15 pm

Matt,
I wasn’t aware of that change in Barbados, thanks for the info. This is of course offshore-like activity, and it’s just part of the same global pattern whereby the tax charge falls off the shoulders of the wealthy, onto the shoulders of everyone else. Sorry for the brief reply
All the best
Nick

Matt 7th July, 2013 10.03 am

Hi Nick thanks for the reply, brief is fine : ). Im confused though. I am following the letter of the law and only ‘shopping around’ as to where to live. I choose Barbados because of its tax incentives and yet in doing so fall into the camp of tax-villain, even though i am paying all due taxes and declaring everything. How is that different from people using go compare to shop on the internet and then choosing to buy from the most cost efficient retailer? I am only going with the flow in a competitive market. Am i wrong to do so, or is Barbados wrong to be offering this tax level (when it sorely needs more people like me to swell its economy by spending my disposable income there)? I dont think there is a right answer here.
best regards
Matt
by the way, check out my website http://www.sepbarbados.com if you need any more info on the subject of Barbados. It seems to have been ‘invisibly marketed’ – pretty typical for the caribbean islands.

Nick Shaxson 7th July, 2013 8.02 am

Matt, thanks, and it’s a good question. There are various different perspectives to look at this from. One is the point of legality: and you’re kind of in a similar position to, say, a UK non-dom who can live in London and (if you sort your affairs out this way) pay precious little tax. And it’s all legal. (I met a very wealthy non-dom the other day who said she felt uncomfortable about it, but not enough to rearrange her tax affairs to maximise tax payments!) But another perspective is the economic one: if wealthy people are going to do this, then they won’t be paying their fair share to the societies that made them rich (through their educated workforces, etc. etc.) This is a pretty clear and straightforward perspective too. We at TJN generally take the economic perspective, over and above the legal(istic) one, and we make an argument that most reasonable people agree with, on both the left and the right of the political spectrum. The non-dom thing is even more egregious, i think, because (though I don’t know Barbados’ rules) it is discriminatory within the UK.
Update: I remember that you mentioned Barbados’ HNWI special entry permit – that does sound discriminatory. What do the (genuine) locals think about it?

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