Tax havens are most often associated with tax evasion and the rich, but as the panellists at the Frontline debate on the 4th January confirmed, the work of most offshore financial centres is as a hub of global financial settlements. The leading offshore financial haven for this type of business is the Cayman Islands which is the fourth/fifth largest in the world; the first being the UK.
Professor Ronan Palan said that the demand for commercial settlements offshore is huge; $25 trillion. One fifth of this goes through London. However, if included in the London’s figures are its Crown dependencies, dependent territories and former colonies, which would include, Cyprus, Hong Kong, Singapore, Mauritius, Jersey, Guernsey etc, this figure would rise to one third.
So what is so special about the UK and its satellite offshore jurisdictions to attract such huge settlement sums? It is the trust which is the linchpin for global settlements of all types and sizes.
A trust is a tripartite legal concept. A gift is made by a settlor to another person, a trustee, which places an obligation on that person to hold and manage the gift not for its benefit, but for the benefit of a third party, the beneficiary. Take for example a pension. Contributions are received by the pension provider as trustee to hold and manage for the pensioner, when he or she retires from work. Very often the pension fund is held offshore – why? Because offshore it does not pay tax on accumulated profits.
There are numerous commercial uses for trusts offshore. If a contract, provides for payment to be made, but not until the happening of an event and if the event does not happen then payment will be made to another person. It is convenient for the payment to be held in trust offshore pending the happening ornot of the event.
Professor Anastasia Nesvetailova pointed out that the use of trusts is not only a tool in the global settlements commercial kit box, but is also useful in preserving privacy and saving tax. If Company A is negotiating with Company B on an investment to which both parties are committed, both companies can transfer monies for the investment into a trust. The investor is then the trustee which is investing for the benefit of undisclosed investors, Company A and B.
Interposing a trust in a low tax jurisdiction such as Ireland or Cyprus can save significant tax. In my note in September I wrote about the taxation of Apple. Although a US company, its headquarters are based in Ireland and it has negotiated with the Irish tax authorities to pay only a proportion of the 12% Irish tax rate, paying the balance to an offshore financial jurisdiction with a zero rate of tax. Is this kleptocracy? No, just another face of capitalism.
The third panellist was John Christensen the founder of the Tax Justice Movement. He called the UK duplicitous in arguing for offshore transparency while tolerating low or zero rates of taxation in its satellite jurisdictions. But is the UK able to interfere with the tax rates imposed by a sovereign state? Having observed the UK and its dealings with offshore jurisdictions, I can say with confidence, that it has little power over its Crown or dependent territories let alone former colonies. Each of them sets their own rates of taxation for individuals, trusts or companies resident in its territory.
Furthermore, directors of companies, such as Apple are under an obligation to make the maximum return for their shareholders, which includes paying the least tax possible. The only justification for companies paying more tax than they strictly need to, is to keep customer loyalty.
The other goal which John expressed a desire to see was for a public register of persons with significant influence over companies. This is something to which I am opposed. Article 8 of the European Convention of Human Rights makes it clear that privacy is a human right, which is echoed in Article 12 of the Universal Declaration of Human Rights. Whereas, I can understand the logic behind the worldwide exchange of financial information so that governments can check that their residents are paying the correct amount of tax on their offshore funds, I can see no good reason for making a register of persons with significant influence over corporate entities public.
Furthermore, it would act as a disincentive for some very knowledgeable and experienced people from taking up an influential office if they knew that to do so would become public knowledge.
If you have a comment on any of the above, I would be delighted to hear from you or if you would like to meet with Caroline or any of her team please contact Svetlana on 020 3740 7423 or e mail on svetlana@garnhamfos.com
Caroline’s book ‘When you are Super Rich, who can you Trust’, can be bought from Amazon or ordered directly from Svetlana.