Forty-two years ago when former assessor of income tax Mark Solly published ’The Isle of Man: Anatomy of a Tax Haven’, tax havens were places where there was lower taxation than you had at home, where you could set up your trading company or family trust or even move in yourself.
The motivation of those early users of tax havens was simply to pay less tax.It was an innocent age, and if money laundering, criminal financing, bribery and corruption were in existence – and throughout the ages, everywhere, they have been – these did not feature in the commentaries on tax havens.
’Tax havens’ meant low or no tax, and nothing much else. But times changed, and the world became a much darker place.
Low tax rates are available in many countries, and low tax is no longer the determining factor. Instead, what sets a jurisdiction apart and marks it out as a tax haven today is secrecy, lack of transparency, the use of bizarre and artificially designed forms of companies, trusts, foundations, charities, insurance structures and the like; lip service paid to financial services regulations; and even a willingness to grant judicial immunity to those whose business they want to attract.
This sounds odd. Why would any government want to become largely dependent on income derived from such questionable activities?
Why would it enact legislation to make this possible, when that legislation would certainly not be something its people wanted, needed or even understood? Yet it is not a question of wanting to become dependent. It becomes something which cannot be resisted.
The phenomenon is known as ’finance sector capture’, and today’s true tax havens have all been taken prisoner in this way.
Whilst they are not necessarily mere palm-fringed sand spits called into international existence at the whim of taxation-averse plutocrats, kleptocrats and amoral corporations, in many cases tax havens have indeed been created of necessity from failing marginal or subsistence economies.
The IMF searched for what it called an ’operational definition’ in 2007 and concluded: ’Regardless of the motivations for non-residential financial dealings with OFCs (local savoir faire, zero taxation, lax regulations, etc) and the nature of the activities undertaken (banking, insurance, special purpose vehicles, or otherwise), the setting up of an OFC usually results from a conscious effort to specialise the economy in the export of financial services, in order to generate revenues that often constitute a critical proportion of the national income.’
Once this step has been taken, the dependence grows and grows.
Suddenly, the governments find themselves pressured into passing legislation which is designed to meet the expectations of the finance sector (an accusation which BBC Panorama has levelled against the members of Tynwald back in 2004).
By this point, so many residents are employed in the finance sector that any threat on its part to ship out to a friendlier, more accommodating jurisdiction would spell economic disaster.
So the weird legal structures are put into law, registers of their existence are abolished, questions about who owns and controls them go unasked, financial regulations becomes perfunctory at best, and huge financial penalties (even prison sentences) are imposed on anyone whistleblowing – the Bahamas, the British Virgin Islands and Switzerland take a very dim view of whistle blowers.
In this climate, these true tax havens can then drop any pretence of serving legitimate commercial purposes, and can offer their services to the highest bidder, promoting illicit fund flows, draining the treasuries of vulnerable nations, depriving whole peoples of the means to create health and education infrastructures, in short, promoting misery and want just in order to make a fat living out of a morally bankrupt ultra-wealthy privileged class.
The Isle of Man has a large financial services industry, but it has not been captured by its finance sector.
Votes in Tynwald are not for sale.
Legislation is not passed with a gun to their heads. The island has a diverse economy, the bulk of which exceeds the finance sector in income and employment.
The finance sector is not the Manx equivalent of the English car plant or steel works or mine whose every demand must be met if the town is not to be plunged into economic ruin.
Its absence would be keenly felt and there would undoubtedly be hardship for a time, but the country has not contorted itself to meet the expectations of the finance sector to the point where it could not exist without it.
What of the low tax jurisdictions – the offshore finance centres – which have not been captured?
Is there a legitimate reason for them to exist? In last week’s Spectator Matthew Lynn writes that there are lots of perfectly legitimate reasons for offshore centres to exist.
It does not make those who use them automatically ’a tax dodger, a gangster or a money launderer’ and he adds ’And we shouldn’t automatically assume that it does.’ He sees the offshore centres as an integral part of a globalised economy enabling money to move across borders relatively easily – in effect, a series of well-regulated clearing houses.
Though not captured, the Isle of Man does offer low to zero taxation. It does so as part of the workings of a global economy. Is the mere possibility of enjoying lower taxation of itself morally wrong?
Because that’s really all that BBC Panorama has had to say on the subject: they talk about taxation in isolation from any other tax haven issue.
They allege accepted standards of behaviour have been trashed by the Isle of Man, but are vague about what those standards should be.
They seem unaware of the idea of finance sector capture and all which that implies, and argue on the superficial level (which makes very good television) that it permits low tax and VAT refunds for the benefit of champagne swilling hoorays in business jets. I seriously doubt that Lewis Hamilton is a threat to world peace and stability.
BBC Panorama raises morality, but does not analyse it at all.
Yet the moral argument is straightforward.
Since 1948 and the Universal Declaration of Human Rights, we know what we mean by human rights, and we know an abuse of human rights when we see one.
The finance captured tax havens and the genuine offshore financial centres are all in the same boat when it comes to their human rights obligations. They are all bound by international human rights treaties.
What sets them apart is that the finance sector captured tax havens now do harm way beyond their borders: the misery and want they facilitate abroad are human rights breaches.
If we need to fight them on moral issues, all we need to do is confront them with those breaches.
The Isle of Man has not been captured by its finance sector. Its laws do not cause harm and misery beyond its borders. It functions legitimately as part of the global economy.
Yes. The Isle of Man is a paradise. But not in the sense implied by BBC Panorama.
Paul Beckett is an advocate with MannBenham. The views expressed here are his own and do not necessarily reflect the views of MannBenham.
Source: IOM Today