UK Bosses Urge Leaders To Tread Carefully With Low Tax Jurisdictions

by Robert Lee, Tax-News.com, London

29 July 2009

Tax haven bashing, while politically popular during a time of worldwide recession, may not be the most economically-sensible course of action for world leaders to take with a view to restoring longer-term global prosperity, the UK’s Institute of Directors (IoD) has warned.

In a new paper released on July 27, the IoD criticized the “obvious” response of the G20 nations at the London summit in April to the worldwide financial crisis – namely more cooperation between the powerful high-tax states and a renewed push to purge the world of low-tax offshore financial centres – warning that these “may not be the most productive” choices.

The Institute argues that states should be left to set their own rates of tax – either very low or high – and that the principle of national sovereignty must be accepted by the more influential G20 members, such as the United States and Western European nations.

“A state is perfectly entitled to set very low tax rates if it wants, although other states are equally entitled to respond with legislation that would eliminate tax savings for their own residents,” stated the IoD, which counts 52,000 directors and company bosses ranging from small enterprises and voluntary organizations to large corporate among its membership.

”Many of the obvious responses would involve co-operation between higher-tax states,” the IoD noted. “Some co-operation can be beneficial, but some would damage the economy because it would amount to a cartel between states. Even co-operation that merely lessens the pressure to reduce administrative burdens can be damaging.”

The paper goes on to argue that low-tax jurisdictions can have positive roles to play in the global economy by “allowing specific profit-sharing structures between joint investors to be implemented without affecting overall tax burdens one way or the other.”

“There are some bad jurisdictions, which facilitate tax evasion or worse crimes,” observed Richard Baron, Head of Taxation at the Institute. However, he added that: “we must also recognise that low-tax jurisdictions can oil the wheels of commerce. It is perfectly reasonable for other states to act to protect their tax revenues, but they must be careful not to throw grit into the mechanism.”

”Low-tax jurisdictions are also a constant reminder to us that tax burdens do not have to be high,” Baron said, concluding that: “the most constructive response to them would be to chart a gently downward course for tax rates, thereby promoting economic growth.”

The communiqué adopted by the G20 nations following the London Summit warned that its members “stand ready to deploy sanctions to protect our public finances and financial systems," going on to declare that: “the era of banking secrecy is over.”

What form such sanctions would take has not been elaborated upon, but British Prime Minister Gordon Brown and French President Nicolas Sarkozy are keen to emphasize that such measures are not an empty threat, and that low-tax jurisdictions will have to go beyond the commitments they made following the London Summit (to sign up to a minimum of 12 OECD tax agreements) if they wish to avoid the collective wrath of the G20.

“It is essential that we maintain the momentum set by the London summit,” Brown and Sarkozy stated in a joint declaration earlier this month. “We are therefore clear that where jurisdictions have not reached the standard of information exchange agreement by March 2010, they should be subject to coordinated international counter-measures agreed in London.”

If progress stalls, they warned, “we will expect the threshold to rise above 12” relegating territories which have made it onto the OECD’s ‘white list’ of compliant territories back down to its ‘grey list.’

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