Financial Transparency Coalition

Alistair Darling won a rousing cheer for announcing a crackdown on Lord Ashcroft’s tax haven. But we should read the small print

Alastair Darling has announced he’s going to crack one of the world’s last bastions of tax secrecy – Belize. After the recent revelations about the tax status of one Belize resident in particular, Lord Ashcroft, the move has, of course, lots of political fun attached to it.

But what’s the reality after the moment of intense satisfaction for Labour MPs in the parliament chamber?

I hate to disappoint, but disappoint I must. What the UK is signing is a Tax Information Exchange Agreement (Tiea) with Belize. That sounds good. The reality is far from living up to the title. Tieas (as they are called, to rhyme with “tear”) were first created in 2002, at the low point of the attack on tax havens, when George Bush was riding to their defence. All that the OECD – then charged with the task by the G7 – could do at that time was to create the lowest common denominator possible form of agreement it could establish with tax havens – or secrecy jurisdictions, as experts now prefer to call them – to maintain some momentum in the faltering crackdown on offshore abuse.

The difficulty was that when, in 2009, the G20 demanded more action on the issue, the OECD had not moved its thinking on. So, all they had to roll out were Tieas.

And they don’t work. That’s because no information is automatically supplied under a Tiea. The UK will have to apply for information. It won’t be able to ask for anything from the past – which means that nothing about Lord Ashcroft’s affairs while a non-dom will be open to enquiry – assuming he becomes domiciled in the UK after the election.

And even when an enquiry is made, the obstacles to it succeeding are enormous. That’s because, to succeed, the UK will have to state:

(a) the identity of the person under examination or investigation;
(b) what information is sought;
(c) the tax purpose for which it is sought;
(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information.

The reason for the low number of information requests becomes obvious immediately. If, as is commonplace, those dealing in a territory like Belize hide their funds behind both a trust and then a company, the UK’s tax authorities will have to prove, without the benefit of any registers of trusts or companies being available on public record in Belize, that a UK taxpayer has settled a trust that owns a company that has a bank account at a specific bank in Belize; and they may also need to state the account number.

The implication is obvious. To ask a successful question under the terms of a Tiea means you already have to know the answer.

And this fact is reflected in how few requests have ever been made. The US–Jersey Tiea is one of the few we have been able to observe. We know that between 2002 and 2008, the number of pieces of information supplied under that deal to the US was less than ten.

There’s more evidence, too: when the UK really wanted to crack Liechtenstein, a Tiea was not enough – a much stronger deal requiring that jurisdiction’s active cooperation was created.

And this active cooperation is what we really need now. That must come in the form of automatic information exchange. This is possible and deliverable (I explain how in detail here). As I argue, the information needed from automatic information exchange is relatively limited, but crucial. The UK does not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by or benefiting a UK resident to enable HM Revenue & Customs to make an effective enquiry under a tax information exchange agreement. HMRC simply needs to know from each secrecy jurisdiction, the following:

a) that a structure from which a person resident in the UK benefits exists in that secrecy jurisdiction (a bank account qualifying by itself for this purpose);
b) what each component of the structure (trust, company or foundation) is called;
c) who manages it;
d) where it banks;
e) who in their country (the UK, in our case) benefits from it.

If this data were available, it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tieas. They would then be meaningful, and the mere threat of information exchange of this sort would kill most offshore abuse straight away – because it would shatter the veil of secrecy that allows it to persist. What is more, this data could be made available easily and quickly – states should already have access to all of it for anti-money laundering purposes.

That’s how to blow Belize, and 60 or more other secrecy jurisdictions, out of the tax abuse market. And that’s what we did not hear was going to happen today.

Which makes it an opportunity lost after the pleasure of a brief cheer in the Commons. So there could be Tieas before bedtime, when the reality sinks in.

—

This article originally appeared in the Comment is Free section of the Guardian website.