Are Footsie firms addicted to tax havens?

11th October 2011

It's a sensitive subject. In March 2009, Barclays obtained an injunction to prevent The Guardian revealing details of a series of difficult to understand  transactions involving onshore companies raising finance in offshore tax havens. These rejoiced in code names such as BarclaysBrazil and BarclaysBerry. The full story can be read here on Wikileaks.

Responses from the 98 companies in the ActionAid list – all the Footsie constituents except Mexican natural resources firm Fresnillo and financial adviser Hargreaves Lansdown – are thin on the ground, if not non-existent other than "no comment.". Many would have loved to have gagged the charity via injunctions – but as all the material came from public sources such as Companies House, there were no grounds for a ban.

The ActionAid report has been greeted with almost universal approval in mainstream media. Reports such as The Independent's "Charity urges politicians to match rhetoric with action to stop an 'epidemic' of tax dodging" set the tone.

But is there a positive case for tax havens? It's a difficult one to argue in most environments other than the free market blogosphere although knowing their lines is essential for the debate.

The international development charity, said the use of offshore companies had reached "epidemic levels" and demanded that politicians live up to rhetoric about closing tax loopholes. They said tax dodging by multinational companies in the world's poorest countries kept them dependent on aid from countries such as Britain.

It analysed information at Companies House, finding the 100 largest London Stock Exchange groups have 34,216 subsidiaries, joint ventures and associates – a quarter of which are located in tax havens. Advertising group WPP has the most with 611, but the banking sector makes the heaviest use of these firms as the big four high-street banks count 1,649.

Chris Jordan, a tax justice expert at ActionAid, said the research pointed to the need for more coherence in government policy. "Helping companies to avoid tax payments to the same governments that we are supporting through overseas aid is a false economy for British taxpayers."

ActionAid concedes that not all offshore companies are set up for tax reasons. Some have a genuine trading rationale. But it contrasts the use of tax havens by the biggest UK companies with that of the 100 largest US companies. Its research shows FTSE companies are far more addicted to the offshore world – only four of the biggest US companies have more than 100 tax haven companies while the UK figure is 23. Just 12% of US companies have over 50% of overseas companies in tax shelters while the UK figure is 31%. But the Fortune 100 biggest companies concentrates on US concerns – many FTSE 100 constituents are based overseas, often in natural resources.

The charity adds: "The banks are by far the biggest users of the Cayman Islands, where Barclays alone has 174 companies. Even more telling, there are over 600 FTSE 100 companies in tiny Jersey, more than has been registered in massive China; there are 400 in the Cayman Islands and 300 in Luxembourg. BP and Shell have almost 1,000 tax haven companies between them, while British American Tobacco has 200. These are international firms but what is the purpose of offshore firms to UK-only retailers such as Morrisons and Sainsbury's?"

The charity admitted its report, Addicted to tax havens: The secret life of the FTSE 100, does not prove tax dodging. Some 62% of the overseas subsidiaries and other links are not in traditional tax haven territories – some of that number will have a non-tax rationale.

But why do big nations tolerate tax havens – some such as Gibraltar or the British Virgin Islands still dependent on the UK government? In the past, it was argued that these activities brought trade to otherwise barren rocks or islands lost in the middle of the ocean.

There is also the more theoretical, free market version of why a tax haven is a good idea. 

Forbes argues that they can offer individuals, persecuted for race, religion or sexual orientation, with somewhere to hide their money (although that also applies to dictators and their families.)

Blog site Foreign Policy has the same argument but adds that low taxes are generally a good idea – and that developed countries have been dropping rates.

Foreign Policy says: "Tax competition is driving tax policy in the right direction, and tax havens play a key role in this liberalizing process. High-tax countries complain that jurisdictions such as Liechtenstein enable tax evasion, but this sidesteps the obvious point that lower tax rates and tax reform are a much better way to reduce evasion. The truth is, those crusading against tax havens would cost us all much more than tiny little Liechtenstein ever could."

But Left Foot Forward brings the argument back to what most will regard as "earth". It contrasts the money tax havens "save" with the cost of the NHS.

ActionAid also criticised the Government for considering reforms to controlled foreign companies it said would give an £840m UK tax break to firms using tax havens, and make it easier for them to dodge taxes in developing countries. But the Treasury challenged that interpretation.

A Treasury spokesman said: "The Government has demonstrated a clear commitment to tackling all forms of tax avoidance and evasion. Tax avoidance in developing countries dep
rives governments of the vital income needed to build and maintain their public services. The best way to prevent this is by helping these countries develop robust and stable tax systems which enable them to collect the tax they are owed. The UK delivers targeted and effective support to make this happen."

More from Mindful Money:

One nation under one tax: But it's not the rich who should pay more, it's the poor who should pay less

Wealthy call “tax me”! But will their cries be heard?

Class war or a fairer system? – Obama's Buffett rule polarises US opinion

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