Tax message hides a darker truth
By David Jessop
You are the Premier of the Cayman Islands or the British Virgin Islands.
You have been trying your hardest to continue to develop your nation’s economy.
With British support and encouragement over a long period, the nation’s financial services and tourism sectors have flourished.
You and your predecessors have been hugely successful in achieving this and have within all relevant laws attracted investment, offshore funds and many tens of thousands of visitors.
Despite the small size of your country, your economy is performing well, you have a global name to protect, and your innately conservative fellow citizens are pleased that successive governments have largely run the country well.
Some in other parties may disagree about the detail, but for the most part your country has an upward trajectory, a high per capita income, full employment and a quality of life unmatched in the rest of the region.
Threats from afar
It is early on a Saturday morning and you wake up to hear that the news that the leader of the opposition in Britain - the country that, despite continuing differences with ministers and officials there, you feel closest to - has issued a diktat.
His remarks, made for domestic political reasons in the run up to a general election, threaten to derail your economy and hand a significant part of its offshore business to nations that have opaque jurisdictions and have not signed up to an internationally agreed approach on those who hold trusts and funds offshore.
This in effect is what happened on 5 February when the Leader of Britain’s Labour Party, Ed Miliband, decided to launch a poorly informed attack on Britain’s overseas territories in the Caribbean and the UKs near-shore crown dependencies.
In a statement, Mr Miliband said that he was serving notice that under a Labour government these small states will have six months to publish publicly accessible central registers of beneficial ownership of offshore funds and trusts if his party wins the UK’s general election to be held on 7 May.
If they fail to meet this deadline, he said that he will ‘withdraw the protection they get from international scrutiny and ask the Organisation for Economic Co-operation and Development to place them on its tax haven blacklist’.
He also said he was setting this out in a letter to heads of government in the Overseas Territories. One week on, this has still to be received.
Apart from a seemingly neo-colonial approach to Caribbean overseas territories, almost all of which have advanced constitutions and are responsible for the management of their own economies and financial services regime, the Labour Party’s leader and his advisers appeared to have little grasp of the nature of what has already been agreed with the OECD.
He seemed also to fail to understand that all of the Overseas Territories and Crown Dependencies have been working towards an international standard on transparency; a process that has been slow in making progress because some EU states have been reluctant to conform.
In fact, the Overseas Territories maintain complete records on ultimate beneficial ownership to an international standard set by the OECD.
Moreover, the British authorities have the right to seek, through each of the Governments concerned, full details of ownership information which presently is kept privately by regulated company incorporators that by law must and do provide details when legally requested by the authorities.
Even more surprising was Mr Miliband’s assertion that this is an issue that Britain can act in isolation on when most OECD nations do not have central registers and some nations including the US have more opaque regimes.
What was also particularly galling for Overseas Territories' leaders is that since December 2014 they have been seeking a meeting with the Labour Party’s leadership to discuss the issue.
Mr Miliband’s remarks reflect a trend in politics in developed countries, while also hiding something far more fundamental that may make many nations increasingly hard to govern in future.
At one level, and beyond short term political opportunism, Mr Miliband’s remarks reflect a belief that the way people vote is now more about perception rather than the facts. The unfortunate consequence is that the reputation of the Overseas Territories is seen as easy game and that the collateral damage does not matter.
This is despite the fact that the offshore business in Britain’s Overseas Territories is legal, legitimate and supports employment and wealth creation in international financial centres like the City of London.
However, Mr Miliband’s decision to try to blame the overseas territories for Britain’s economic woes also obscures a darker truth.
That is that most governments in the western world now recognise that economic globalisation and tax arbitrage mean that pan-global companies and seriously wealthy individuals, in comparison to ordinary citizens, have the ability to legally move their profit, income, tax and domicile, in the process paying little or no tax.
This means that if in future Governments cannot find ways to tax huge corporations in a single sovereign environment at standard corporate tax levels, they will be faced with either a diminishing budget for education, health care and all else that citizens have come to expect, or they will have to increase taxes for ordinary citizens on income, consumption, and property.
This presents a major but largely unspoken political and economic challenge.
As economic globalisation sees wealth increasingly accrue to smaller numbers of individuals it carries with it the danger that governments and politicians in particular will come to be seen by voters in democracies as antipathetic to their needs.
Put another way, cutting public expenditure or increasing taxes suggest that traditional voting patterns will break down and social instability may emerge.
Mr Miliband’s basic message implies that for the Overseas Territories it may be time to begin to question, albeit reluctantly, just how sustainable their long- term relationship with the UK will be.
But it also more broadly indicates that every Government needs to give much greater long term consideration as to how they intend ensuring they do not see their tax base diminishing.
David Jessop is the Director of the Caribbean Council and can be contacted at
Previous columns can be found at www.caribbean-council.org
15 February, 2015
For more background articles on Caribbean and global issues, check out Intelligent Thinking.