Philip Booth: Tax havens are good - let's make Britain one

Prof. Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

When it comes to the debate on tax avoidance, the coalition seems to struggle in two respects. The first problem is that the government seems unable to articulate the idea that the main contribution of businesses to welfare is not the taxes they pay but the goods and services they provide to consumers. Amazon, for example, makes tiny profit margins on huge sales and has transformed the value we are able to obtain across many retail sectors: the BBC regularly quotes Amazon’s corporate tax figures as a percentage of its huge turnover and not as a percentage of its small profits and the government does nothing to counter the left-leaning bias in this debate.

The second problem is that the government is hypocritical – this is noted in a new paper published by the IEA. On the one hand, the government likes to criticise tax havens as “sunny places for shady people”, a phrase regularly used by one senior minister. Simultaneously, the government is building Britain up to be a tax haven itself. The following three statements, for example, come directly from George Osborne (in the latter case from a Treasury document rather than from his mouth directly):

“We are building the most competitive tax system in the world.”

“I am delighted that Star Wars is coming back to Britain. Today’s announcement that the next Star Wars film will be shot and produced in the UK is great news for fans and our creative industries, and it is clear evidence that our incentives are attracting the largest studios back to the UK. I am personally committed to seeing more great films and television made in Britain.”

“The Patent Box will encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK. It will also enhance the competitiveness of the UK tax system for high-tech companies that obtain profits from patents.”

The government is doing precisely what it is accusing “shady places” of doing. It is not only – quite justifiably – reducing corporation tax, it is creating deliberate tax avoidance schemes so that mobile international businesses – such as film making and those involving technical patents - will move their activities to Britain in order to avoid tax in other countries.

It seems that tax havens are a good thing if they are wet and windy places – such as Ireland, Holland and Britain – but not if they are sunny places.

As it happens, there are some really serious issues about the future of corporate taxation that need to be considered, but the government does not seem interested in addressing them. The issues include, for example:

• Why are business rates so high? Business rates really do put domestic retail businesses at a competitive disadvantage and they are out of all proportion to the value of the services that businesses receive from local authorities.

• Do we need to reform corporation tax entirely? For example should we ensure that the shareholders themselves are taxed on earnings or distributions rather than the companies being taxed on profits that are increasingly difficult to assign to particular jurisdictions. Debt interest is already taxed that way.

These are difficult problems for the government. A reduction in business rates would require significant spending cuts; the second reform would probably require widespread international agreement that would be difficult to achieve. Meanwhile, we might have to work with the system we have, warts and all. But let’s stop vilifying companies who only apply the rules that the politicians design and let’s stop being hypocritical.

We should also applaud our own financial services tax havens that benefit Britain and perform an important function. They prevent very damaging double taxation of investment returns for non-UK investors but still allow the City to supply financial services on an international basis to such investors. Abolishing offshore tax havens would be a disaster for the City. Secondly, tax havens promote financial integration and economic growth, and, according to a recent IMF paper, such financial globalisation is likely to increase government tax revenues.

Indeed, the same IMF paper suggests that general sentiment towards the market economy is the main determinant of national tax rates and not “tax competition”. This suggests that the fears of government ministers who worry about losing tax revenue due to tax competition are over-blown. It also means that supporters of a market economy need to make their case strongly and cannot rely on mobile capital to restrain tax-guzzling governments. Either way, we should stop complaining about companies which are simply obeying the laws designed by the very same politicians who do the complaining.