Jon Date and Diego Zuluaga, two people who really disagree with each other, help fill in the gaps on tax avoidance and tax havens.
How you react to stories like the recent Paradise Papers reveal is likely to depend quite heavily on how you feel about tax, business and inequality. So in the interests of fairness, we asked *two* people who know a lot about the subject to answer some of our questions.
We’ve been hearing a lot about paradise recently, and it’s less cocktails on the beach, more tax havens, offshore firms, and shell companies. Please explain
Let’s start with Diego Zuluaga. He works for a think tank called the Institute of Economic Affairs, and to put it simply, he’s pretty pro tax havens. Tax havens all began, he says, as a way of making sure people don’t pay tax twice for operating a business in more than one country (what’s called double taxation), as soon as you get different countries with different tax rules, he says, and people making money in both of those places, you'll have people trying to get round that. “That’s the issue here. We had tax havens emerge as a way to mitigate people being taxed twice.
“It’s been going on ever since there was a discrepancy between taxation of financial income in our own country and other jurisdictions.”
Companies can use tax havens to avoid paying tax on the profit they’re making by ‘moving’ that profit to a different country. They do that through setting up something called a ‘shell’ company in a tax haven. Jon Date, who works for the charity and campaign group action aid puts it like this:
“Say you’re selling a beer or a fizzy drink – you might say the brand is owned by a subsidiary in the Cayman Islands, where you don’t have to pay any tax on any profit that you made. Then you charge your different subsidiaries around the world a fee in order to use the brand – so if you’re selling beer or soft drinks in Malawi, the subsidiary in Malawi would have to send money back to the company that owns the brand in the Cayman Islands, and they’ll send such a large amount of money back that it looks like they haven’t made any profit in Malawi, so there isn’t any tax due.”
“there are 20,000 companies registered at one single address at a building called Ugland House. There are about 30 times as many companies as there are people living on that island. ”
Well that sounds legit (sarcasm). But does it have to be a bad thing?
Zuluaga thinks not. For one, he says, by registering your company in a tax haven you’re providing investment in otherwise forgotten parts of the world: “The money in offshore centres doesn’t stay idle. It’s not a choice between money funding the NHS and sitting under a palm tree. It’s funding innovation by firms, productive activities in developing countries, making workers in those countries richer, who often live in less favorable conditions than we do.”
Date, pretty unsurprisingly, calls bullshit: “In the Cayman Islands, there are 20,000 companies registered at one single address at a building called Ugland House. There are about 30 times as many companies as there are people living on that island. So the companies that are being set up aren’t companies, they’re just shell companies that are being registered there without bringing any economic activity into that country. So assuming the money is going to trickle down is wrong."
There are some small benefits, he says. “Governments can charge fees for companies to register there – but these benefits are vastly outweighed by the cost of tax avoidance that they help facilitate.”
Wow, those rich and famous people are the worst. Good thing I'm not rich, or famous
Not that simple, says Zuluaga. We’re all guilty of tax avoidance (not that he thinks that’s anything to be guilty about). “Some people have ISAs which allow them to save some money and get the returns. Others have pension savings which are also tax exempt. Others buy duty free spirits on holiday. And others, usually higher income people, use tax havens because the fixed costs are too high to take care of,” he says.
“It’s a perception issue. You mention sunny islands, rich people, and celebrities, and people’s ears pluck up. ”
In fact, Zuluaga thinks the government is being two-faced in its outrage, and that people are just getting it wrong: “It’s a perception issue. You mention sunny islands, rich people, and celebrities, and people’s ears pluck up. It’s got entertainment value. I don’t blame people for being confused. But I do blame the political class for being quite two faced about these issues. They’ll speak wonders about ISAs and then speak out forcefully against this stuff even though they probably engage in it themselves.”
Date argues that it’s just not that clear cut, there are occasions when people can legitimately limit the amount of tax they owe, but that doesn’t make all tax avoidance OK: “I think one of the most important principles is that you’re using laws in the way that they’re intended to be used. So you’ll sometimes hear people say that using an ISA for your savings so you don’t have to pay tax on your savings is tax avoidance. It’s not tax avoidance, it’s reducing the amount of tax you owe, but it’s a deliberate policy by the government to incentivise people to save.”
“The problem comes when people or companies try and use laws in a way that wasn’t the way they were intended.
“If they’re shifting money around artificially to reduce the tax they pay, they’re using loopholes for a reason other than the reason they were set up by governments.
“Generally you can tell if a company isn’t paying tax in a country where it’s got a big presence, where it’s a big multinational company, it’s clear that company is making profits globally, that’s when alarm bells should really start ringing.
“There may be some legitimate reasons in some cases, but generally, without those legitimate reasons, they should be contributing tax revenue.”
“Generally you can tell if a company isn’t paying tax in a country where it’s got a big presence, where it’s a big multinational company, it’s clear that company is making profits globally, that’s when alarm bells should really start ringing.
“There may be some legitimate reasons in some cases, but generally, without those legitimate reasons, they should be contributing tax revenue.”
Whether it’s misplaced or not, it’s pretty clear people are pissed off. So how do we make sure people don’t keep on getting pissed off?
Zuluaga thinks we should be focusing on the fact that we all pay too much tax, which is putting pressure on poorer people.
“What we should be talking about is that tax pressure has been going up massively. It’s one of the big factors in increasing the cost of living - their disposable income is successively being eroded.
“It’s not necessarily that we’re not making enough, it’s that the stuff we want and need is getting so much more expensive.”
He also thinks we should be telling a good news story. “The world has become better and fairer in the sense that the people with more means are contributing more, and we are making the poorest better off even as the population continues to increase.
“Tax havens, because of human nature and the ways of the world are going to remain in existence. It’s up to us, whether the policies we choose to try and mitigate the bad things that might happen will undermine the good things which are underreported, or will complement them.”
For Date, the solution is to keep putting pressure on governments to bring an end to tax havens: “I think it’s important for people to talk to their MPs if it’s something they feel is important. There are really clear things the government can do: starting with creating more transparency – public country by country reporting is the idea that governments have to publish the amount of revenue they have in that country for everywhere they do business.
“That would go a long way to helping identify where tax avoidance is happening, where companies aren’t paying their taxes.”