Despite plans for a crackdown, tax avoidance is increasing
Last week, the leaders of the UK’s Overseas Territories — tiny islands such as Bermuda, the Caymans and the British Virgin Islands — gathered in London to meet the Prime Minister.
These far-flung British outposts hold the promise of sun, sea and sandy beaches. But their allure goes much further: a twin offer of financial secrecy and rock bottom tax rates is attracting a clientele featuring some of the world’s biggest companies.
Despite bold claims of a crackdown on profit shifting and tax avoidance the UK sits at the heart of global network of tax havens which is fuelling corporate tax dodging on a truly staggering scale.
To mark the launch of our ‘Make Tax Fair’ campaign ActionAid has investigated the role tax havens play in the global economy. Despite being little more than specks in the ocean — with a few notable exceptions like the Netherlands — we found that in 2015 an astonishing $12.5 trillion of foreign direct investment (FDI) stock was channelled via tax havens.
This accounts for 44 per cent of the global total and is an increase of $700 billion in the space of just two years.
The tax havens channelling the most corporate investment included UK Overseas Territories such as the British Virgin Islands ($1.1 Trillion), Bermuda ($710 billion) and the Cayman islands ($568 billion).
What makes this increase all the more notable is that it coincides with a period of corporate tax scandals, public anger and tough promises from business leaders and politicians. It was 2013 when G8 leaders gathered in the UK to commit to tackling tax avoidance. The then UK Prime Minister, David Cameron, promised there would be ‘nowhere to hide‘.
Tax dodging is high on the political and public agenda. However, a point that is frequently missed is that it is the world’s poorest countries which suffer the most when companies shift their money offshore in the name of ‘tax efficiency’. Less able to police corporate behaviour and often trapped in unfair tax deals they are vulnerable to unscrupulous behaviour by some multinationals.
ActionAid estimates that $106 billion of corporate investment in Indonesia and $35 billion in Nigeria was routed via tax havens in 2015. These countries are those that can least afford to lose tax revenue.
Nigeria has one of the highest maternal mortality rates in the world with 814 women dying for every 100,000 live births. More than one in ten children die before the age of 5. Lives could be saved if more money was available to fund maternity services.
Tax havens worsen poverty and inequality. We campaign for tax justice because poorer countries are the biggest losers in this global game of smoke and mirrors, with women and girls paying the price as schools and hospitals are starved of funding.
The UK has shown leadership on tax transparency. It introduced public registers of company owners and when Theresa May became Prime Minister she promised to do more to tackle tax havens.
However, the political landscape moves quickly and she has recently floated the idea of turning the UK into a tax haven after Brexit.
This would be an irresponsible choice, entirely incompatible with her vision of a fairer Global Britain.. As the UK prepares to leave the EU the Prime Minister should instead make clear that the UK will be a champion for the world’s most vulnerable people.
She should start by ruling out turning the UK into a tax haven. The corporate tax rate is set to fall to 17 per cent by 2020, its lowest ever rate. Part of a damaging race to the bottom which has seen corporate tax rates fall across the world, this is pressuring poor countries into offering ever lower rates.
The UK also needs to recognise its responsibility with regard to the Overseas Territories. The countless shell companies they host can be used to hide money from the taxman as well as facilitating corruption. The Prime Minister should set a deadline by which all UK-linked tax havens must publish a register revealing the real owners of these companies. That way we could see who is stashing their cash offshore.
Corporate transparency is also key. After a recent change to the law championed by Caroline Flint MP, the Government now has the power to demand companies publicly reveal how much tax they pay in every country where they do business, including tax havens. They should make use of this power to provide a huge boost to transparency.
These measures would be a good place to start but tax havens are an insidious and ingrained part of the global economic system that require a comprehensive response. Their rock bottom rates and secretive tax codes drain money from all over the world.
The Government should develop a long term plan to end the use of tax havens for good. They must be supported to transition to a new type of economy. Deterrents must be put in place to stop companies shifting money offshore.
The world is in a unique period of flux. Much is changing. Theresa May has a chance to chart a new course for the UK and champion tax justice. Cleaning up UK-linked tax havens and reforming unfair tax rules would be a good place to start.
Charlie Matthews is head of advocacy at ActionAid
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