1st August 2017
Until recently, the vast majority of the world’s illegal tax activity was believed to be funnelled through the well-known ‘tax havens’ that we spoke about just last month. However, a new study has shown this isn’t necessarily the case and, in fact, major nations like The Netherlands and the UK appear to be facilitating tax evasion.
UK facilitating tax evasion
Uncovering Offshore Financial Centers: Conduits and Sinks on the Global Corporate Ownership Network, hosted by the academic journal, Scientific Report, revealed for the first time the intermediary countries that companies use to channel their money into ‘tax havens’. It highlighted that countries including the UK and The Netherlands play a crucial – and until now – obscure, role in the global tax arena, acting as conduits for corporate profits as they make their way to tax havens. By taking advantages of loopholes in countries’ legislations and placing operations and certain offices in countries with low tax rates, organisations can reduce their burden down to single figures in many cases. As an example, Apple used a combination of subsidiaries in Ireland, the Netherlands and Bermuda to reduce its tax rate and ultimately paid around 0.005% tax on its profits in 2014.
The scale of the losses created through these creative avoidance schemes are staggering. If multinational organisations’ profits were accounted for where the activity takes place, these firms would pay a combined $500-650bn more in taxes per year, with approximately $200bn of this going to developing countries, which is more than they currently receive annually in development aid ($142.6bn).
The study also identified some of the ‘sink OFCs’ which attract and retain foreign capital. This list comprised many of the ‘usual suspects’, countries we named in our blog last week including Luxembourg, Bermuda and the Cayman Islands, but also Taiwan, a previously unnoticed tax haven.
And by extrapolating its investigation, the study was able to reveal which jurisdictions are used by corporations en route to sink OFCs. These attract investment as a result of their numerous tax treaties, low or zero withholding taxes, strong legal systems and reputations for enabling the quiet transfer of capital without taxation. Each jurisdiction has certain factors that appeal to different types of organisation. The Netherlands, for example, excels in holding companies while Luxembourg favours administrative services. Together, five countries channel 47% of corporate offshore investment from tax havens with the UK contributing to around 14% of this activity, ranking it behind only the Netherlands.
Earlier this year, Chancellor Philip Hammond speculated that the UK could become a tax haven if the EU fails to offer it a good deal. However, in practice, the City is already a major offshore financial centre.
Unfortunately, it appears that the UK is facilitating tax evasion
While some larger firms are currently able to channel investment through the UK, it’s near-on impossible for organisations based here to get away with such behaviour. Although these statistics may not paint a particularly attractive picture, the UK tax arena has become more focused in recent years and legislation has increased substantially. It’s highly likely that, when this situation is reviewed a few years down the line, the gains made by organisations around the world will be substantially reduced as a result of the growing focus on tax compliance. Firms attempting to break the law are taking an unnecessary risk and are almost guaranteed to get caught. It’s highly unlikely that any agency will have the resources that the likes of Apple does, and if your firm wants to avoid unlimited fines or potential prison sentences, it’s advisable to partner with a specialist if at all unsure about your compliance status.