This weekend, 11.5 million files were leaked from Panama-based law firm Mossack Fonseca. They have been dubbed the “Panama Papers.”
The documents include sensitive financial information, and apparently implicate 72 former or current heads of state. Among them is David Cameron, who has admitted to profiting from his father’s offshore trust Blairmore Holdings, which is alleged to have paid no British tax for thirty years after its foundation in the early 1980s. Elsewhere, Iceland’s Prime Minister stood down on 5th April after the Papers revealed his wife owned an offshore company with multimillion-pound claims on three Icelandic banks that have collapsed in recent years.
Tax evasion is often viewed as being morally problematic. But will tax havens always exist? If so, how can we ensure that people pay their fair share? Experts offer their views.
Tell us something we don’t know
Giles Wilkes, writer for the Financial Times
The Panama Papers remind me of the gusts of outrage that greeted Thomas Piketty’s Capital in the Twenty-First Century: it was a huge amount of paper, telling people what they felt they already knew, and were already angry about. In the case of Piketty it was chronic inequality, here it’s the relentless efforts of the wealthy to keep their riches out of view and lightly taxed.
This explosion of transparency will boost the impetus to change. But it would be brave to predict a sharp tilt in the balance of power away from the rich. This is a political struggle. Some (clearly not all) of the £11tn allegedly booked through offshore centres is there for defensible reasons. That many trillions has a powerful voice. Disruption of international investment scares politicians.
And “clamping down” on avoidance or evasion is the classic squeeze-the-balloon problem—the money is chased someplace else. Look at the places used by Mossack Fonseca and you see US states among them. Will America yield up its secrets as happily as the Cayman Islands are being asked to.
Avoiding costs is human nature
Diego Zuluaga, Research Fellow, Institute of Economic Affairs
It is human nature to arrange one’s affairs in the least costly way, and that includes legally reducing one’s tax bill. Some do it by buying a month’s supply of cigarettes whilst on holiday in Spain. Others with greater means set up offshore accounts. However, trying to curb avoidance by limiting the movement of financial capital would be the wrong way to go. Offshore havens serve many uses which are not only legal but also productive and useful. For instance, pension funds often operate through tax havens to facilitate cross-border investment and to ensure their returns are not doubly or triply taxed in various countries.
On the other hand, there are ways in which opportunities for tax avoidance can be minimised without side-effects. One beneficial reform would be to tax shareholders directly, instead of corporate profits as we currently do. It is crucial to distinguish between legal tax avoidance as a result of bad incentives in the system, and illegal evasion and money laundering by corrupt politicians and their cronies. The second set of practices should face the full force of the law.
It may be up to the next Labour government
Seema Malhorta, Shadow Chief Secretary to the Treasury
The UK should be leading the global fight to clamp down on aggressive tax avoidance and tax evasion. Not obstructing it, as David Cameron did in 2013 when he intervened to oppose the beneficiaries of off-shore trusts being named under proposed European Union money laundering rules. After the Global Financial Crisis in 2008 the then Labour government was leading international efforts in clamping down on tax havens. Under David Cameron and George Osborne, Britain’s leading role has come to a halt.
International action is the only way to clampdown on tax avoidance and evasion—and there is strong appetite in the European Union to tackle the problem. Sadly, the Tories have been fighting these proposals. Labour believes the UK Government should compel UK Crown Dependencies and Overseas Territories to introduce full, publicly accessible registers that show the owners of companies and the beneficiaries of private trusts registered in those jurisdictions. If they won’t act the next Labour Government will.
Waking up to the problem
Paul Collier, Professor of economics and public policy at the Blavatnik School of Government, University of Oxford
Reform of international tax law is not just possible; it is timely. The OECD report on base erosion and profits shifting has created momentum. The impetus for the report is that word “erosion”: the situation has been deteriorating as international companies have nudged each other into yet more shameless avoidance. Poor countries have been suffering for years, but now the core OECD governments are waking up to the fact that they are all losing out. Just as the problem has deteriorated as companies have collectively shuffled into avoidance, so governments need collectively to push back.
Like the continuous process of “the changing of the locks” in the battle of the body against disease, so tax authorities are in a continuous battle against tax planning corporate lawyers. The question is not whether it is a war that can ever be decisively won; it can’t be. But we need to start winning battles.
Different problems require different solutions
Judith Freedman, Professor of taxation law at the University of Oxford
Is reform of international tax law possible? Of course, and it is happening now via the OECD. Things have moved on since many of the transactions recently complained about in the news took place, and some international tax structures are being modified. We cannot be complacent; the reforms are not complete or ideal. In a perfect world, we would start again with a more conceptually coherent system.
But in the absence of complete global agreement and a world tax authority, the OECD and EU are doing what they can. Just like theft, evasion cannot be stopped—but the opportunities can be reduced through regulation and international cooperation. “Avoidance” is a much more complex problem. It covers a range of behaviours. Jurisdictions need to be clearer about their objectives at a national and international level, and to improve legislation. But it is clear that lumping evasion and different types of avoidance together will not result in good tax reform in the long run, because different problems require different solutions.
Act, before memories fade
Tony Yates, Professor of Economics at Birmingham University
There are two basic problems with international finance and tax. First, the incentive that territories have to compete for funds by offering low rates of tax. Second, the temptation these same territories have to offer unusual benefits of opacity in financial structures.
We will never have a global state and a global tax collection authority. But if the major powers could agree on a sufficiently stringent regime of sanctions to punish errant smaller territories and ride out the objections that their elite political clients might raise, we could make it much harder for money to be laundered, tax evaded, and the financial hypocrisy of politicians to be hidden. I don’t know how far we will progress, but the Panama Papers leak will hopefully spur reform for long enough before memories fade.
This week’s “Big Question” was put together by Alex Dean and Thomas Seal