The hostility to tax havens is not new. Many of these jurisdictions have already taken steps to open up their affairs and they are likely to continue to prosper.

Offshore tax jurisdictions have featured strongly in the crescendo of media coverage leading up to the G20 summit in

London that is now underway.  Both Gordon Brown, the
UK prime minister and

US president, Barack Obama, have been pushing for a clampdown on tax havens and offshore jurisdictions which have been blamed for their role in the global economic crisis.

As ever, the noise and fury of the debate has drowned out other voices. The facts are that firstly, there are perfectly legitimate reasons for individuals and companies to bank and to do business offshore. 

Secondly, the real issue should not be about tax havens per se, but rather with the degree to which these jurisdictions co-operate with the authorities to eliminate tax evasion.  And in this, Tax Information Exchange Agreements have already shown the way forward.  They provide a firm commitment from tax havens of their willingness to work with the authorities and to comply with international standards for data sharing.  In short, the critics and policy makers are already pushing at a partly open door.

Pressure on tax havens is not new.  In 1996, the Organisation for Economic Cooperation and Development began the process of identifying various jurisdictions engaged in “harmful tax practices”. A “tax haven” was defined as a country where tax rates are low or indeed zero and which gives opportunities to taxpayers to avoid or evade tax in their home countries and from which other countries find it extremely difficult to obtain information for tax purposes.

Ascertaining the scale of the problem arising from these perceived abuses is extremely difficult. Estimates of the value of assets held offshore in tax havens range widely from $1.7 trillion to $11.5 trillion and the

US is estimated to be losing in the region of $100 billion annually in tax revenue. 

In 2000, the OECD produced a black-list of thirty eight tax havens which embarrassingly included seven UK Overseas territories such as Bermuda and Gibraltar and three Crown Dependencies – Jersey,
Guernsey and Isle of Man. It is interesting that

Switzerland was not included on that list, although its bank secrecy rules have been the subject of much comment in recent weeks.

Over the course of the two years following the publication of the report, the OECD procured commitments to implement its standards of transparency and exchange of information from most of the countries on the list. Only
Andorra,
Monaco and

Liechtenstein declined to cooperate and remain on the list.

However,

Monaco has moved to accepting such exchange of information agreements. And the permanent secretary for tax at HMRC said that negotiations are about to begin with Liechtenstein which will be asked to close down and disclose the accounts of

UK resident customers who decline the offer of an “amnesty” in relation to funds held there.  This would be a ground-breaking initiative for the tiny principality and would be every bit as astonishing as the recent divulging of bank information to the

US authorities by UBS.

On a practical level, the

UK tax authority suffers from a lack of resources. It will have to radically increase staffing to meet the requirements of the proposed amnesty and the second Offshore Disclosure Facility announced a few months ago.  Finally, reports suggest

Switzerland is considering radical changes to its bank secrecy rules. However, such changes would require domestic legislation and will take years rather than months to implement.

It has taken some time for those jurisdictions which were removed from the blacklist to honour the commitments they gave. Most strikingly, many have entered into, or are in the process of so doing, bilateral TIEAs with a number of OECD countries. The
UK, for instance, has reached such agreements with Jersey, Guernsey, British Virgin Islands, Isle of Man and
Bermuda. Only the latter has so far been fully implemented having been ratified by Parliament.  Typically these agreements cover UK Income, Corporation, Capital gains and Inheritance Taxes and say that:

The competent authorities of the Territories shall provide assistance through exchange of information that is relevant to the administration or enforcement of the domestic laws of the Territories concerning taxes covered by this Arrangement. Such information shall include information that is relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.

Information will only be exchanged where there is evidence of serious tax fraud and significant amounts of tax are at stake. Speculative “fishing” enquiries will not be entertained but revenue officials will, in appropriate circumstances, be able to go to the territories concerned to interview individuals with their prior agreement.

In order to make possible the maximum degree of transparency there is a wide spectrum of information which may be divulged. Tax authorities, provided they can substantiate good grounds for their requests, will be able to obtain information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity; and also regarding the ownership of companies (other than those which are publicly listed), partnerships, collective investment schemes, trusts, foundations, "Anstalten", "Stiftungen" and other persons including:

·         ownership information on all such persons in an ownership chain;

·         in the case of collective investment schemes, information on shares, units and other interests;

·         in the case of trusts, information on settlors, trustees and beneficiaries;

·         in the case of foundations, information on founders, members of the foundation council and beneficiaries and equivalent information in the case of entities that are neither trusts nor foundations.

Just to add to the relentless pressure on tax havens, the US Congress is likely to enact, within the next few months, the Stop Tax Haven Abuse Act originally sponsored by the newly elected Mr Obama. This legislation will allow US authorities to impose financial sanctions on territories which are perceived to be assisting abusive tax practices.

In summary, it is worth emphasising that it is not illegal to conduct business in or through offshore jurisdictions.  The issue lies in the government’s ability to clamp down on tax evasion in these jurisdictions without exacerbating an already difficult world economic climate.  TIEAs should be capable of providing transparency in tax havens, albeit rather slowly but effectively.

Considering this, Gordon Brown should focus on pushing TIEAs forward and speeding up the system by which they are implemented and ratified.