Brexit: Is Britain On Way To Becoming The Next Big Tax Haven?

United Kingdom
United Kingdom

Post diversion of the United Kingdom from the European Union, the notion aroused in many, that the country would take up the role of tax haven to lure in investments. But the proposition seems dubious if we analyze the tax structure of the country. Also, according to an internal memo created by the body responsible for the drafting of international tax rules, as reported by Reuters, the prospect of the country converting themselves to tax haven is highly “unlikely”. Several reports also red flags the country and claims that it might become the next center for money laundering.

What is “Tax Haven”?

Tax Haven
Tax Haven

“Tax Haven” is the term coined for the countries around the globe that are most convenient for foreign investors to invest in. They constitute distinct, easy to spot features that make it easier to recognize them among the vast pool of nations. More often than not “tax havens” or “offshore financial centers” are small, well-governed tax jurisdictions that either do not or sparsely have substantial domestic economic activity and impose low or zero tax rates on foreign investors. They collect fees, charges, and also sometimes levy small tax rates from the foreign capital to raise the country’s revenue. They also have minimal reporting of information, lack of transparency obligations, lack of local presence requirements, and marketing of tax haven vehicles to make it easier for the offshore investors.

Some of the tax haven countries are Netherlands, Switzerland, Singapore, Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, The Island of Jersey, Hong Kong, The Isle of Man, Mauritius, Lichtenstein, Monaco, Panama, St. Kitts, and Nevis. Although there isn’t an ironclad rule to classify a country as a tax haven, there are several regulatory bodies that monitor tax haven countries. Namely, the Organization of Economic Cooperation and Development (OECD) and the U.S. Government Accountability Office.

How the governments of the “tax haven” countries earn money?

Although on paper it states that the “tax haven” countries are completely tax-free, mostly it is not. Almost all countries levy tax. The amount differs a lot as a tax haven country generally opts to keep their tax rates lower than any normal country. However, any loss in revenue is indirectly covered by the country as they charge high customs or import duties.

The tax haven countries also require offshore companies to renew their registration yearly to keep them valid. Also, they charge a registration fee for every new company coming to invest in their country. With this, there might also be additional fees charged to the companies stating them as license fees. These fees, altogether, create a recurring income for the government of the country.

Also, when a country lures in foreign investment with however low tax rate it might be, they create a substantial amount of income via tax revenue. This income is more than the country is normally capable of. The investments in the country also benefit the citizens of the country. The business operations created by the investments create job openings and provide jobs source to the citizens.

Key takeaways:

  1. The country attracts capital to its banks and financial institutions which helps them to organize the country’s economy and to develop a thriving financial sector.
  2. Businesses save tax as the country offers from zero to minimal tax rates.

Looking at some “Tax Haven” countries:

Netherlands: One of the most popular tax haven, popular among the top Fortune 500 Businesses’ profit from the government provided tax incentives in return for the investments in the country. According to reports, one such incentive cost an estimated 1.2 billion euros in 2016 to the Netherlands.

Bermuda: The worst corporate tax haven in the world as claimed by Oxfam in 2016. The country has a zero percent tax rate and no personal income tax.

Mauritius: The country offers a low corporate tax rate and no withholding tax.

Switzerland: They attract top investors with their full or partial tax exemptions. However, the amount of tax exemption depends on the bank used by the company.

Luxembourg: Companies or individuals looking to avoid tax benefits from tax incentives and zero percent withholding taxes of the country.

London at risk to become a hotspot for “dirty money”

 London at risk to become a hotspot for “dirty money”

London at risk to become a hotspot for “dirty money”

A report has warned the United Kingdom of many risks that await in the future as the country steps away from the European Union.

The Tactics Institute for Security and Counter-Terrorism opines that the United Kingdom should not try to follow countries like the United Arab Emirates and create a low regulatory economy. They also claim that the country’s government and administrative bodies are “most mature in Europe” and suggests that they should not scrape regulations to chase behind “superficial benefits”, as reported by express.co.uk.

The report also says that regulatory bodies like the Bank of England, Financial Services Regulation Authority, HMRC and other institutions, together create one of the most advanced regulatory system of the world which has added to the success of London as one of the most “preeminent financial sector” of the world. Although the existence of such an efficient structure the country still runs a risk of becoming a prominent center for money laundering.

As the transition period will come to an end with the ending of this year, the country would thereafter be capable of independently making its own rule unless a prior engagement is put in place. The country, however, wants full independency to create or torch their rules by themselves without any intervention from the union.

The media house, express.co.uk also reported comments of Thomas Charles, director of the Tactics Institute, as he said, “This report should act as a deterrent against a slash and burn approach to the UK’s financial regulation. If our warnings are ignored, it will leave London dangerously exposed to money laundering. This is exactly what has happened in Dubai, which [has] become an enabler of global corruption, crime, and illicit financial flows.”

He added, “Addressing this will take concerted action by both the rulers of the UAE, the international community, and will take years. Hence why we argue for enhancing regulation, oversight, and transparency across the entire EU, while London maintains its current standards.”

Comments of Treasury spokeswoman was also published as she claimed, “The United Kingdom Government is committed to ensuring financial integrity in UK markets, and is internationally recognized as having some of the strongest controls in the world for tackling money laundering and terrorist financing. We are committed to strengthening, not weakening our position at the end of the transition period, and will continue to utilize our position as a world leader in both setting and implementing robust international standards for combating financial crime. Our ambition to build on the progress made so far, and work with our friends and partners in Europe and beyond to combat illicit financial flows, is made clear through our ambitious economic crime plan.”

Another popular website eastlondonadvertiser.co.uk also published another report by Dr. Anna Damaskou from Queen Mary’s and Dr. Angelos Kaskanis from Greece’s Democritus University as they also claim that if the regulations are not strict, the country has a high risk of becoming an epicenter for money laundering. They also say that if the country cuts regulations and gets “hooked on attracting foreign money”, they might also add criminal and terrorist activity.

Dr. Damaskou says, “There are concerns that Brexit will make London a center for money laundering.”

UK “unlikely” to become a “Tax Haven”

Reuters reported the head of tax at the Organization for Economic Co-operation and Development to claim that the country could aim to become tax haven by putting an ax through its corporate tax rates after they achieve freedom from the European Union. It was also warned that the government of the country might have to pay a heavy political price if they choose that route.

OECD’s head of tax, Pascal Saint-Amans said in the memo, details of which were seen by Reuters, said, “The negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer. A further step in that direction would really turn the UK into a tax haven type of economy.”

The United Kingdom has already taken steps to cut down its corporate tax rates to 17 percent whereas most of the other OCED members have a corporate tax rate of around 25 percent. The country also targets to become one of the top 20 major economies on tax. They also added tax breaks to fulfill their dream. This would benefit the companies as they would be allowed to pay lower tax rates on some income and no tax on earnings from tax haven subsidiaries.

To make themselves more lucrative to companies they need to slash down its tax rates more and put in a generous tax ruling, according to OECD. European Union law does not let countries to offer companies a one-off tax deal. After the end of the transition period, the country would be free to take that option under consideration to attract businesses.

Multinational companies like Google and Starbucks follow complex tax structures to avoid paying taxes. Recently, this has become a focal point in British politics.

Protest in London against Starbucks corporate tax policies. Photograph: Antonio Olmos/The Observer
Protest in London against Starbucks corporate tax policies. || Photograph: Antonio Olmos/The Observer

Saint-Amans wrote in the memo, circulated to senior OECD officials saying that the British public is not in a mood to pay more money to the multinational companies.

The United Kingdom already has several disadvantages that come in the way of becoming tax haven. In a small country which is a tax haven, lowering tax rates adds to the revenue as most of the profits of the company were earned overseas and not in the country. UK’s disadvantage comes as multinational companies perform big sales within the country and making a tax cut would do nothing but hurt the revenue of the country. The other disadvantage comes in population. The introduction of big multinational companies in small countries creates job openings however with a larger population than those countries, only a minority of the total population would get benefitted from this.

Value Added Tax is a kind of sales tax offered by countries under the European Union which the companies pay for inputs like office supplies and equipment. Reuters reported that OECD points out to get an advantage over its rivals in the continent, the country can alter the VAT rules and go for a different approach.

The VAT memo said that United Kingdom could now remove the VAT burden which would add to their advantage. Also, after they leave the European Union, keeping the tax would only mean adding burdens and costs on themselves.

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