How Britain’s remnants of empire lead the world in avoiding tax

The Paradise Papers have shone a light into the murky financial world of high net worth individuals and multinational companies, and will intensify demands for greater transparency.

IN the wake of last week’s Paradise Papers revelations, there is fresh attention on the vexed topic of global tax transparency. While the disclosures in the 13.4 million documents are financial in nature, they have already had significant political ramifications in London, Washington and elsewhere, especially after the release of the Panama Papers last year.

The Paradise Papers have shone new light on hundreds of high net worth politicians and other individuals across the world, and many multinational companies. But it is actually the internal workings of numerous UK territories that are at the heart of the affair.

During the process of decolonization, Britain held on to a global network of islands, which either voted to remain UK territories or have not chosen independence. Among these are 14 overseas territories and three British dependencies, and it is these remnants of empire that are among the world’s leading centers of international tax avoidance.

London has taken action in previous years to ensure that these islands have fairer and more open tax systems, but this remains a work in progress. Last Tuesday, Labour Shadow Chancellor of the Exchequer John McDonnell described the Paradise Papers disclosures as the “biggest tax scandal of this generation” and called for a UK public inquiry. Prime Minister Theresa May has insisted she wants “greater transparency,” but has refused to commit to such a public probe.

Last year, after the Panama Papers releases, Labour Party Leader Jeremy Corbyn proposed that the government impose direct rule on any of its territories that do not comply fully with UK tax laws. London has cracked down in the past in similar ways, so this is not inconceivable. In 2009, for instance, it imposed direct rule on the Turks and Caicos after local officials were accused of selling government land for personal gain. The islands had home rule restored only after the local government enacted laws that required tax information to be shared with the British government.

After the Panama Papers revelations last year, the UK government did not take any comparable measures for any of the territories that have been named in them, but international and domestic pressure to act is mounting. In Brussels, the European Commissioner for Economic and Financial Affairs, Pierre Moscovici, has promised since the Paradise Papers disclosures to look into the matters swiftly and potentially expedite an EU blacklist of offshore tax entities.

In Washington, Democrats have called for an investigation into the Paradise Papers, including allegations that the Commerce Secretary Wilbur Ross has ties with Vladimir Putin’s sonin-law through a shipping venture in Russia. Sen. Bernie Sanders, the former contender for the US Democratic presidential nomination, has attacked what he believes is an “international oligarchy in which a handful of billionaires own and control a significant part of the global economy” and has called for congressional consideration of Donald Trump’s proposed tax reforms to be halted.

Even further afield, in the AsiaPacific region, the Australian tax office has said it will investigate and work with partner agencies across the world after the Paradise Papers disclosures. And in India, the tax department confirmed it is already investigating numerous so-called tax havens.

While the UK imposing direct rule on its territories is, in principle, a relatively straightforward process, critics have pointed out that a consequence of seeking to close down these centers of tax avoidance would be that people and companies simply move their money from one jurisdiction to another where there might be even fewer tax regulations and less transparency. Many have therefore argued that what is needed is greater harmonized global moves toward tax transparency.

In May 2017, the UK hosted an international anti-corruption summit and has been at the forefront of recent global debate on tackling international tax avoidance and evasion. The 2013 G8 summit in Northern Ireland, for instance, resulted in the Lough Erne Declaration, which urged countries to “fight the scourge of tax evasion.” Leaders agreed, for instance, to measures that would combat the illegal evasion of taxes, as well as the use of tax havens and loopholes.

And Britain was the first member of the G20 to establish a public central registry of company beneficial ownership information. It has also introduced some of the world’s strictest legislation on bribery, in 2010, making it for instance a criminal offense for a company to fail to prevent a bribe being paid. Moreover, London also co-chaired a UN panel that put tackling corruption at the heart of the new UN Development Goals.

Nonetheless, the Paradise Papers are ratcheting up pressure further to increase tax transparency. While dramatic action in coming days is unlikely, campaigning at national and global levels for new measures to tackle this issue are likely to intensify as new revelations continue to surface.

QAndrew Hammond is an associate at LSE IDEAS at the London School of Economics.