When is a Tax Haven Not a Tax Haven?

This question began forming itself in my mind last month when I heard a presentation from Lynne Oats, Professor of Taxation and Accounting at Exeter University, describe how difficult it would be to get a legal handle on the problem of corporate tax avoidance. She drew attention to the accelerating race to the bottom between countries in terms of their corporate tax rates. While to my mind this is not enough to constitute a tax haven, and I am not convinced that this is a technically impossible issue, it is interesting to note that UK corporation tax was reduced again in last week's budget.

But surely there is more to being a tax haven than having very low rates of tax? Doesn't it involve aspects such as not asking too many questions, or allowing companies what we might politely call a lack of transparency in their dealings? Here I think the UK might also score rather highly. Why else is Britain opposing the EU's proposal for a Financial Transactions Tax but for the fact that, in order to tax something, you have to measure it first? The rate is not finally determined but at the level of a fraction of a percent it cannot have bankers shivering in their shoes about the loss of asset value. But the advent of transparency is a different matter.

Which brings me to the issue of Cyprus, a country in our midst, in our very own single European market which is suddenly revealed as being a tax haven. This was not mentioned when Nicosia's communist government took over the leadership of the European Union?.It is only since the new government came into power that the big beasts of the Eurozone have decided to throw Cyprus to the wolves. Yet its problems started because of the Troika policy of fudging rather than solving Greece's bankruptcy. Given the close ties between Greece and Cyprus the haircuts led to massive losses for Cypriot banks. The cover stories about Russian billionnaires being funded by German taxpayers arise from the problems faced by Merkel in the forthcoming elections rather than any serious attempting at analysis or policy-making.

The bloggers as Naked Capitalism make a brave attempt to explain why Cyprus is not a tax haven, but for my money they are not making a very convincing job of it. So given that George Osborne has made it central to his policy to attract foreign investment and to keep the financial sector happy, and that he is deliberately and successively reducing our rates of corporation tax, how long will it be before we will be thinking of the UK as a tax haven?
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What is Going on in Cyprus?

Why is the banktruptcy of a tiny economy in the Mediterranean making headlines across Europe? The answer is that the Cyprus solution is what every saver across Europe fears might be coming their way soon. The awareness that money is not real and that countries are not good for the amounts of money they have guaranteed has been creeping into people's consciousness over the past five years. I know this because I speak to large groups of people about money and this fear is lurking behind their questions about gold and their decisions to put money into renewable energy schemes or socks under the mattress.

It was this fear that drove Alastair Darling to increase the savings guarantee in Britain at the start of the financial crisis: nothing is worse for a banking system than people feeling that their deposits are not safe and withdrawing their money. And nothing spreads this fear as rapidly as governments taking money out of their citizens' bank accounts as the Cypriot government has threatend to do. When the Argentinian government made a similar move in 2001 it precipitated a massive withdrawl of capital and the collapse of the national economy.

I am pleased to see that, although the levy on Cypriots' bank accounts is a policy made in Germany and to please German tax-payers, the Green Group in the European parliament, alhough it is dominated by German MEPs has made its opposition clear. Greens/EFA co-president Dany Cohn-Bendit is quoted stating that:

'The attack on ordinary depositors in the context of Cyprus' bail-out is outrageous and must be urgently corrected. Small depositors should be last in the line of fire in any bank restructuring. This is the guiding logic behind EU legislation providing for national deposit guarantee schemes, as well as draft legislation currently under consideration on an EU deposit guarantee scheme. While the proposed depositors' levy may be legally consistent with the existing legislation, it is a cynical ploy, which totally defies the spirit of the rules and their raison d'être.'

Merkel's decision to crush a tiny and vulnerable economy comes less than a month after the 60th anniversary of the cancellation of Germany's own war debt. By 1953 Germany was still carrying pre-war debts which had been massively increased by the costs of borrowing to fund the war itself. The country was in ruins and was incapable of borrowing to rebuild. Germany's former enemies agreed that for the sake of peace and humanity a significant portion of its huge debts should be written off, sums amounting to a value equivalent to 75% of Germany's exports in 1950. The remaining debt was restructured and interest rates reduced.

The Dublin based Ango: Not Our Debt campaign celebrated the anniversary, which is passing unmentioned in Germany. Its spokesman Andy Storey commented:‘The 53 Accord was signed initially by 22 creditor countries, including by Ireland and Greece.' Anglo: Not Our Debt point out that the amount of debt cancellation received by Germany in 1953 in today’s terms is worth nearly €37bn., similar to the amount of the principal of Anglo debt being paid by people in Ireland over the next 40 years. Indeed, the amount of debt cancellation received by Germany is all the more impressive, as Germany’s economy was far smaller then than today

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