Friday, 8 April 2016

The Panama Papers

The leak of the so-called 'Panama Papers', have implicated a number of high-profile global politicians in tax avoidance. The firm in question is now also implicated in tax evasion, money laundering and breach of international sanctions. It all looks a bit nasty, and is the subject of several official investigations in various jurisdictions.

One of the things that seems to be implied is that 'tax havens' - jurisdictions with particularly opaque or relaxed tax regimes - have been involved. Various tax havens around the world are British Overseas Territories or Crown Dependencies - places like the British Virgin Islands, the Cayman Islands, the Channel Islands etc. It's also been confirmed that David Cameron owned holdings in a Panama-based Investment Trust, a type of offshore collective investment. Panama itself is a 'tax haven' - it has a very low tax regime, and so companies or investment funds based there enjoy low tax rates on their profits.

Now, it is important to remember the difference here between tax avoidance and tax evasion:

  • Tax Avoidance - arranging your financial affairs to as to minimise any tax due, either by using legally permissible reliefs and expenses to offset against the tax due, or by timing or framing transactions. Tax avoidance is perfectly legal and above board;
  • Tax Evasion - misinforming or not informing the authorities about funds and/or transactions in order to mask the true extent of a tax liability. Effectively, not paying tax which is owed. Tax evasion is illegal. By law, that tax is due and belongs to the State.
The two ludicrous suggestions from the Left so far on this story is that:
  1. Direct rule should be imposed on the Overseas Territories and Crown Dependencies; and
  2. David Cameron should resign.
Let's deal with them in turn.

Imposing direct rule on the Overseas Territories and Crown Dependencies (let's call them offshore territories) is laughable. Firstly, they have their own democratically elected assemblies, and do not elect members to the House of Commons. Having our Government muscle in on them just because a bunch of basket-weaving Lefties want it would be basically imperialist. Our Government has no accountability at all to the people that live there.

Secondly, many of the offshore territories are pretty small places, usually remote islands with low populations and tiny economies. The only thing that makes these places viable in their own right at all is the fact that their low-tax regimes attract international finance. If we imposed direct rule, you would get huge amounts of capital flight as all that lovely international money scrambled to avoid Her Majesty's Revenue and Customs, and buggered off to other tax havens outside our jurisdiction. This would result in at least half of their tax revenue drying up, and the only way that they could continue to fund their public services is by a UK bailout. And we're still borrowing about £75billion a year.

Not to mention the fact that having an unaccountable government, no representation and de facto rule by decree would represent a significant change in the constitutional relationship between the offshore territories and the UK, and with no mandate from the people living there. Indeed, all the evidence (including recent referenda in Gibraltar and the Falkland Islands) suggests that the locals are happy with the status quo. Direct rule would revert them to the status of colonies, whereas they are at the moment self-governing territories in free association with the UK.

So whilst imposing direct rule is technically and constitutionally possible, it is undemocratic, imperialist, unaffordable, economically ignorant, divisive and regressive.

Next is the suggestion that David Cameron should resign.

For what, exactly? What great misdemeanour has he conducted which warrants his resignation? Let's look at the facts, shall we? He and his wife invested about £30,000 in an offshore Investment Trust run by his father and domiciled in Panama. The reason it was domiciled in Panama was because of the comparatively low tax rates on company profits, which means that its investors can receive higher returns. There is nothing illegal about moving your money out of the UK to pursue better returns. This fund was legitimately established and commercially available.

Shortly before he became Prime Minister, he and his wife sold their holdings and repatriated the cash. When they did so, they paid Income Tax on the share dividends, and the capital gains they had made were within the annual Capital Gains Tax allowance. In other words, they paid all the taxes they were required to by law. David Cameron's 'crime' seems to have been seeking better returns on his money.

It's got sod-all to do with tax, and everything to do with jealousy. Most people calling for his resignation are just pissed that they don't have £30,000 to play with in offshore funds. If they did, they'd probably do the same. He made a bit of profit for himself through intelligent and legitimate investment. Good for him. If you're arguing that the UK should have a bigger slice of revenue from international finance, I agree. What attracts international finance to tax havens is their low tax rates. So if we cut our taxes, we'll get more foreign investment, and therefore more revenue.

Excellent, let's abolish Corporation Tax and introduce a flat Income Tax rate of 20%.