The phrase "tax haven" conjures up images of an idyllic tropical island, with yachts moored beside golden sandy beaches. This exotic picture certainly rings true when it comes to some of the most notorious. The British Virgin Islands, for example, is home to more than half of the shell companies set up by the law firm Mossack Fonesca, exposed in the Panama Papers earlier this year.
But it’s a nation’s policies rather than its quota of palm trees that give it the hallmarks of a tax haven. While I’m not suggesting Scotland is a tax haven, it’s extremely concerning an outdated loophole in our tax law is reminiscent of secrecy rules common to havens. Scottish Limited Partnerships (SLPs) mean companies are not required to disclose their annual accounts or the names of the people who control them. Ownership can be masked through faceless "partners", often based in havens like the Marshall Islands and Belize.
Cayman Islands
Not all SLPs are being used for mal-intent. However, this loophole is clearly being exploited by some unscrupulous businesses and money launderers. An investigation last year revealed one eighth of Moldova’s GDP had disappeared in a $1 billion swindle, with a key role in the complex fraud traced to SLPs registered in an Edinburgh flat.
NEWS: The huge rise in SLPS
Such dodgy practices that benefit an elite minority at the expense of the poorest have no place in a progressive and inclusive Scotland. Encouragingly, the First Minister has branded tax dodging “obscene and immoral” and has promised a “zero tolerance” approach to tax avoidance. The Scottish Government says its new tax collection agency, Revenue Scotland, is adopting a harder stance on avoidance than Her Majesty’s Revenue and Customs. A similarly strong approach is needed to address weaknesses within SLPs.
Justice Secretary Michael Matheson has said he is open to reviewing SLPs. However, with company law reserved to Westminster, it is essential for the Scottish and UK governments to work together to close this loophole and end the blatant abuse of our tax rules.
Beyond this, the question of "what is a tax haven?" continues to be a vexed one. A globally-agreed blacklist could be useful, as it would mean other countries could impose sanctions on havens to protect themselves, and companies and investors mindful of reputational risk could choose to avoid funnelling business through them.
But simply identifying tax havens won’t prevent tax dodging robbing the world’s poorest people of billions each year. A third of Africa’s wealth is hidden offshore, costing $14bn in lost revenue annually that could pay for healthcare to help save four million children's lives a year and get every African child into school. And it’s estimated wealthy British tax-dodgers cost the Treasury around £5bn a year – money that could help those in poverty here including the almost one in five people in Scotland.
In May, more than 300 top economists – including Edinburgh-born 2015 Nobel prize-winner Angus Deaton – warned there was no economic justification for allowing the continuation of tax havens that distort the working of the global economy. They urged world leaders to lift the veils of secrecy that allow havens to harbour hidden assets or encourage profits to be booked by companies that do no business there.
There are three key steps countries can take to fight back against tax havens, starting with more transparency so governments around the world can claim what they’re owed. That means closing the SLPs loophole, and ensuring British Crown Dependencies and Overseas Territories such as the Caymans join the UK in introducing public registers that show who really profits from companies registered there.
Panama, one of the most notorious tax havens
Secondly, companies should be required to comprehensively report on their activities in every country where they operate, so it’s easier to detect when profits are shifted to dodge the taxman.
Finally, leaders should avoid a damaging race-to-the-bottom on corporate tax rates.
Post-Brexit, there has been much discussion about how the UK and Scottish governments can ensure everyone feels they get a share of growing prosperity. An overhaul of our broken tax system would be a very good place to start, to begin shaping a more human economy that benefits the interests of all citizens – especially the most vulnerable, here and abroad – not just a privileged few.
Jamie Livingstone is Head of Oxfam Scotland
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