Prof Prem Sikka: British territories are the world’s biggest tax havens, the UK must act

The world's three biggest tax havens are all British overseas territories.

tax-havens

Prem Sikka is an Emertius Professor of Accounting at the University of Essex and a Labour member of the House of Lords

This week, the Tax Justice Network published its latest corporate tax haven index showing jurisdictions complicit in enabling corporations to dodge taxes. Governments around the world are estimated to lose around £308bn to tax abuse each year.

Of this, £177bn is directly lost to cross-border tax abuse by multinational corporations. The organised tax abuses deprive people of much needed revenue for education, healthcare, security, social infrastructure, pensions, security and much more. 

The top three spots of abusers in the corporate tax haven index are taken by the British Virgin Islands, Cayman Islands and Bermuda. These are all British Overseas Territories.

Jersey, a British Crown Dependency, weighs in at number eight and the Bahamas, a British Commonwealth Territory whose final court of appeal is the Judicial Committee of the Privy Council in London, comes in at number twelve. They are closely followed by the UK itself at number thirteen. The UK has a legal and moral responsibility for cleaning-up its fiddle-factories but has done little.

The effects the tax abuses are all too visible at home where even before Covid; 14.5 million people lived below the poverty line. Rather than checking tax abuses, the UK government has found it easier to hit the poor.

Already, the poorest 10% of households paid on average 42% of their income in direct and indirect taxes, compared to 34% by the richest 10% of the households. This month’s budget will increase the amount paid by the less well-off in income tax, national insurance, VAT and council tax. 

There is plenty of rhetoric from the government about checking tax dodging and saying that companies should pay taxes where profits are made, but there is little concrete action. The government is actually creating more opportunities for corporations to shift profits from the UK.

Consider the case of Gibraltar, a British Overseas Territory, listed as the 30th most abusive jurisdiction in the Corporate Tax Haven Index 2021. Gibraltar has a population of around 30,000 and boasts nearly two companies for every person living on the Rock. Gibraltar-based companies have been implicated in smuggling and illicit financial flows

In February 2020, the Council of Europe Expert Committee on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) urged Gibraltar to improve its efforts to combat illicit financial flows.

The financial sector in Gibraltar accounts for around 20% of its gross domestic product and consists primarily of branches or subsidiaries of big corporations. Gibraltar-based companies provide nearly 20% of motor insurance policies in the UK. So the customer is in the UK, sales and profits are made in the UK, but with the full blessing of the UK government they are booked in Gibraltar. This is profitable for companies and their executives because Gibraltar does not levy tax on non-resident companies, unless the source of the income is from Gibraltar. 

The Financial Services Bill currently going through parliament showers even more gifts upon Gibraltar-based companies, without any quid pro quo, by enabling them to sell almost any financial service in the UK. The government was asked to provide an estimate of the profits which would be shifted and taxes lost, but it refused.

It is not just the financial services companies which are enabled by the government to avoid UK taxes. A recent report by the Social Market Foundation reported that most online gambling companies, licenced by the UK Gambling commission, operate from offshore tax havens. The main lure is a lower tax bill, secrecy and regulatory arbitrage. The report noted that Unibet’s servers are based in Malta, Alderney and Gibraltar, that it is registered and licensed in Gibraltar, but it makes profits in the UK.

Paddypower’s owner Flutter, Bet365 and William Hill have subsidiaries in offshore locations such as Guernsey, Gibraltar and the Isle of Man. At least 55% of online gambling in the UK takes place on Gibraltar-based servers. 

 Media investigations have reported that in the last two years Bet365 paid an effective tax rate of 12.7% on profits of £1.4bn, against a headline rate of 19%. William Hill, with six subsidiaries in Gibraltar, is estimated to be paying 12% in corporation tax on its profits for 2020.  At least, one licence for Coral to operate in the UK is registered in Gibraltar and its parent company GVC is estimated to have paid corporate tax an effective rate of 3% on its 2012-2015 profits of £81.5m. Gibraltar-based 32Red is estimated to have paid j £812,000 in corporation tax over ten years, an effective rate of just 3% on its profits.

Some of the practices of financial services and gambling companies cause anguish, mental health problems and even drive some to suicide, but it is left to the rest of society to support and care for vulnerable people. By dodging taxes, such companies fail a make an effective financial contribution to address the social problems caused by them.

There is little chance that the UK government will take effective action to curb profit shifting to tax havens or even end tax abuses at home. The only possibility is a strong left-leaning government that can stand-up to big business and prioritise the interests of the masses over the interests of footloose corporations and wealthy elites.

Correction: This article originally incorrectly said that the Bahamas was a British Overseas Territory. It is a British Commonwealth Territory.

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