UK Labour Party leader Ed Miliband said yesterday that he had written to the leaders of 10 British overseas territories and crown dependencies to say that a Labour government would press for them to be put on an OECD tax haven blacklist if they refused to co-operate with a drive against tax avoidance.
He said he had told them that Labour would require them to compile a public register of offshore companies registered within their jurisdictions.
“Billions of pounds are being lost in tax avoidance,” Miliband told BBC Television News. “Today we’re serving notice on tax havens linked to Britain that they must open their books within six months of a Labour government, or face international action.”
The places targeted are:
- Territories: Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands, Gibraltar and Montserrat
- Crown dependencies: Jersey, Guernsey and the Isle of Man.
Tens of thousands of companies, many of them special purpose vehicles employing no one that have been created to receive income free from tax, have been set up in the 10. Some are used in complex financing deals supporting mergers and acquisitions.
The Group of 20 leading industrial nations has previously agreed that they would impose sanctions against jurisdictions on the OECD blacklist.
Miliband’s announcement echoes calls from the UK and US government for action against companies paying little tax through tax-minimisation schemes.
On 30 September 2014, the European Commission started an investigation into deals between the government of the Republic of Ireland and Apple that helped the US company avoid tax. If the commission rules the deals are illegal state aid, Apple might be liable to repay billions of dollars it saved in tax in 1991-2007.
The Commission is conducting similar investigations into other deals between European governments and international corporations. They include Fiat, Starbucks and Amazon.
The previous day, UK Chancellor of the Exchequer George Osborne told the annual conference of the Conservative Party, partner in the coalition government with the Liberal Party formed in 2010, that he would use the annual Autumn Statement about British government finances to stop large technology multinationals avoiding tax.
Miliband’s statement represents a significant escalation in this campaign and involves targeting behaviour that has previously been tolerated by UK governments, including Labour ones.
Critics say that Miliband’s proposed measure will be ineffective for several reasons:
- The UK government can’t force the 10 to comply with UK law: they are semi-sovereign entities with a high degree of autonomy from UK law
- There’s no guarantee that putting them on the OECD blacklist will lead to effective sanctions
- Companies facing problems in the 10 have plenty of other options in emerging tax havens.
The conclusion is that the proposal might be popular but won’t raise much more tax or make that much difference.
A more profound critique of Labour’s plan is that it lacks a proper understanding of the implications in the revolution in the UK economy in the past half century. Today, more than 80 per cent of employment is due to service industries producing intangible commodities.
A factory or a warehouse has to be located somewhere and it’s close to impossible to move it quickly from one country to another. It also needs to be near to sources of labour and markets. That is why most factories are still in or close to major cities.
Intangible assets and financial instruments, in contrast, can be moved instantly and almost costlessly with a couple of strokes of a keyboard. All that is needed is for a company’s finance director to convince its auditors that doing so is legal and in line with a reasonable interpretation of accounting codes and for the jurisdiction in which the intangible assets are registered to be compliant.
There is no need for labour because there is no machinery to operate or warehouses to fill. You don’t have to be near markets either since intangible assets don’t have to be where the services they support are created.
The 10 territories and dependencies have become so important because of the rise of service industries in the UK and the explosive growth of intangible capital.
There’s nothing to stop other jurisdictions providing or extending tax shelters. You could try to regularise them all. But with more than 200 sovereign entities, some offering more than one corporate tax arrangement, it is practically impossible to achieve the goal of tax equalisation.
The key to corporations’ capacity to move their place of incorporation is the fact that most of their assets, including equity, is in the form of intangible capital. This is a novel and growing concept and one that has no foundation in economic theory or logic.
But it’s the basis upon which practically every corporation in advanced economies is constructed.
Miliband’s aim is to make sure everyone pays their “fair” share of tax.
He would make more progress by understanding how UK corporate law and intellectual property legislation and codes facilitate the growth of intangible capital.