Saturday, January 05, 2013

Tax Havens

Review of Nicholas Shaxson, Treasure Islands: Tax Havens and the Men Who Stole the World (Vintage, 2011).

Of the books I read over my Christmas break, one made me cry (Jeanette Winterson’s Why Be Happy When You Could Be Normal?) and one made me angry.  Nicholas Shaxson takes the dry and complex subject of tax and turns it into something with the energy of a thriller.  The first page of chapter one contains some worrying figures – 85% of world trade passes (on paper) through tax havens; small island financial centres have a balance sheet of $18 Trillion (a third of the world’s annual production); 99 of the top 100 companies in Europe have an offshore subsidiary.  Tax havens profoundly affect the way that we live – they enable large companies to make huge profits without contributing to the society in which those profits are made.  They have contributed to a huge transfer of wealth from the poor to the rich, both globally and within the richest countries.

One of the features of Tax Havens, unsurprisingly, is that they offer very low, or even zero, rates of tax.  But more than this they offer secrecy.  This secrecy can take various forms, and usually combines with refusal to co-operate with others in exchanging information.  Secrecy is such an important part of the make up of a tax haven that Shaxson uses the term ‘secrecy jurisdiction’ interchangeably with ‘tax haven’.  This combination of low tax and secrecy enables them to help people get around the laws and rules of other places.  Indeed that has become their purpose.  Tellingly, they don’t treat their own citizens the same way, taxing them fully which allowing their clients to pay little or no tax.  For Shaxson this is ‘a tacit admission that what they do can be harmful’ (p. 9).

To see how Tax Havens work, consider a banana.  Every banana in your fruit-bowl has taken two simultaneous paths to be there.  One is the path of the actual banana.  It is picked by a worker in, say, Honduras.  It is packed up and shipped to the UK, where it is sold to a supermarket who sells it to us.  At the same time the banana takes a more circuitous route, but only on an accountant's piece of paper.  Shaxson takes up the story.  "The accountants can more or less make it up.  They might, for example, advise the banana company to run its purchasing company from the Caman Islands and run its financial services out of Luxembourg. The multi-national might locate the company brand in Ireland; its shipping arm in the Isle of Man, 'management expertise' in Jersey and its insurance subsidiary in Bermuda.  Say the Luxembourg financing subsidiary now lends money to the Honduras subsidiary and charges interest at $20 million per year.  The Honduras subsidiary deducts this bill from its local profits, cutting or wiping them out (and its tax bill). The Luxembourg's subsidiary's $20 million in extra income, however, is only taxed at Luxembourg's ultra-low tax haven rate. With a wave of a wand, a hefty tax bill has disappeared, and capital has been shifted offshore" (p.11).

It is clear from this example that Tax Havens have a huge impact on the developing world.  Straightforwardly, developing countries lose substantial amounts of revenue from tax.  In fact in 2006, $1 trillion flowed out of the developing world into Tax Havens.  That is ten times the amount of foreign aid flowing into the developing world.  It is easy to see how this is detrimental to developing countries simply in terms of the amounts of money being taken out of them.   It is also clear that it increases developing countries dependence on foreign aid and prevents them being able to determine their own futures. But the impact of Tax Havens goes further.  The secrecy involved is corrosive, and has enabled corruption, asset stripping, fuelled conflicts and propped up illegal trade.

But recent news stories in this country should remind us that it is not just the developing world that suffers from the role played by Tax Havens.  That Amazon, Starbucks, Google and others do not pay much tax in this country is also a result of Tax Havens and the accounting manoeuvres they enable.  Tax Havens strike at the basic rules of economics, undermining the openness of markets and the trust in those with whom one is dealing.  They also undermine the structures of democracy, allowing the power of money to be unaccountable and replacing transparency with secrecy.  But one of the striking things about the banana story is that so many of the Tax Havens are in the UK and Europe.  My image of Tax Havens was of Caribbean islands, palm trees and sand.  In fact, the UK (especially the City of London) is the fifth biggest secrecy jurisdiction in the world and the United States is the largest.  Our own country is enabling this, but not (of course) for its own citizens.

Cue the most surprising part of Shaxson's book.  There has, he reports, been very little resistance to the operation of Tax Havens.  But there have only been two private citizens in living memory who have confronted the City of London Corporation, one of whom is an Anglican priest, Father William Taylor (no relation).  In the heart of a book on the economic systems and injustices of our world there is a reflection of the way in which the powers of good and evil work on a spiritual level.  There has not been a great deal of resistance from the Church, and Father Taylor was a very lone voice, to our shame.

I commend this book highly, it is exceedingly readable - more like a thriller than a work of economics.  But I want to finish by asking what we might do.  This will occupy my thinking for some time, but here are three things for starters.  First, if secrecy is so important to Tax Havens, then we should talk about them.  Can we make tax an issue at the next General Election?  Find out about this and ask some questions.  Second, join in with people who are already involved in examining this issue.  Christian Aid have been running a campaign on tax for a couple of years; the Tax Justice Network is fighting to bring Tax Havens to account.  And finally, if there is a spiritual dimension to the way in which money and power operate (and I firmly believe that there is) then let us think about how we might pray for a re-ordering of the powers of the world.  Walter Wink, whose work on the powers is cited by Father Taylor in Shaxson's book, said that "history belongs to the intercessors".  Let us pray ...


Unknown said...

Are you thinking of raising the matter with the Bishop of Sodor and Man?

Paul Hitchcock said...

Isn't the Church of England tax exempt? Surely high taxes are a result of an inefficient government that has insatiable and unbridled spending habits?
A more interesting case study however would be whether a tax haven collects more tax via it's attractive lower rates as opposed to the financially crippling tax rates the UK has to offer today.
I can't help but see the overwhelming anti tax fraud movement currently being waxed into public consciousness as a smoke screen to not hold the government accountable for poor accounting.