Paradise and Tax
Dear Mr Corbyn and Mr McDonnell,
(Or should I call you Jez and John?)
Frankly, I don’t agree with the vast majority of your policies, but while you are the leader of Her Majesty’s Loyal Opposition and Shadow Chancellor of the Exchequer, it is clear that there is a possibility that you may in time become Prime Minister and Chancellor of the United Kingdom.
It seems to me that there is an area that you are struggling to understand, so, in a spirit of co-operation, I thought I might try to explain it to you, as I suspect my knowledge of the financial sector is probably a bit stronger than yours; no problem with that, of course, since that’s where I’ve spent my career. No doubt your knowledge of trade unionism is far greater than mine. That’s one of the good things about a broad education system – we can all pool our disparate knowledge to the good of all.
Anyway, we’ve just seen a dump of information which the press is calling the “Paradise Papers”. They are a kind of sequel to the “Panama Papers” of last year. Seems like it’s getting to be an annual event, doesn’t it? Well, I’ve no doubt that you are correct that if we trawl through this mass of documentation, we will find evidence of dubious dealing, which should – you and I would agree – be brought to light and dealt with. However, the particular area with which I think you are struggling a bit, and where I think I can help you, is in international and offshore investment. You see, if I have interpreted your implied comments about the fact that the advisers to the Duchy of Lancaster have chosen to invest some small part of Her Majesty’s personal wealth in offshore funds, you would seem to suggest that you believe that this is per se wrong. But it’s not – necessarily (I will always accept that legitimate behaviour can be perverted).
Look at it this way. A fund is established to invest in international markets; it hopes to attract perfectly legitimate investment from all sorts of different countries and jurisdictions – the UK, the US, France, Germany, Japan, China, India – maybe even Venezuela, Cuba and North Korea (although of course in those countries, after their years of Marxist/Socialist rule, it’s probably only the ruling clique who will have any money left to invest), which all have different tax regimes. So, in order to make the fund viable and avoid the risk of double taxation, it is established in a low tax jurisdiction – what you would call a tax haven. But don’t worry, boys, that doesn’t mean tax is avoided or evaded, because when the fund makes any distribution to its shareholders, in the form of dividends, profit share or whatever, that distribution will be remitted back to their own domicile.
Now, do you remember on your tax return (and here I’m speaking of the UK, although I am confident that pretty much all countries will do something very similar) there is a section headed “Overseas Income”? That’s where the investors we are talking about will record what they have earned from the offshore fund, and the chaps at HMRC know what to do with it and how to assess the tax due – they understand these things very well. And that’s how the tax gets paid.
Let me give you an illustration, from a different area, which may help you grasp the point. All over the world, there are “free ports” or “free zones” within ports. These are areas where goods may be stored without incurring the import duties which would be charged at the point where the goods are imported into a country for consumption. The goods can rest there, but still be available for movement. Then, when the trader or merchant makes a sale of the goods to a specific destination, the import duty is paid as the goods cross the frontier. So you could think of the low-tax jurisdiction as the free zone, and, just as the relevant import duty is paid on the goods when they cross a frontier, so the relevant tax is paid on the money when it is distributed to investors in their home jurisdictions. The goods or money are held unencumbered by duty or tax until the point at which they or it move to be used by their beneficial owner; then the duty or the tax is due and payable. It really is that simple a concept.
Of course, there are two further points thrown up by this. First, I accept that I am addressing one narrow, specific issue, and there may well be others revealed by the “Paradise/Panama Papers” which cannot be legitimately explained. The one I have looked at here, though, is one where I am concerned that – I hope through naïvety rather than wilfulness – your rhetoric has erred on the side of suggesting that investors using this kind of structure are doing something inherently underhand, and should “apologise”. The second issue is that there may well be investors who do not behave as I have outlined, and do not have their benefits remitted back to the UK, so that HMRC remain ignorant of them. They may transfer them to an opaque jurisdiction and use them – untaxed – to purchase assets abroad or – through nominees – within the UK. Well, this would be, prima facie, a criminal act, and quite rightly the law would pursue them as and when it became aware. But I’m sure you would agree that the many who behave perfectly correctly and pay their taxes to help fund public services within the UK should not be tarred with the brush of tax avoidance or evasion because criminal elements are abusing a legitimate investment structure. That would be very unfair.
Anyway, Jez and John, I hope this is of help to you in understanding this particular piece of the financial world. As I said at the beginning, I may not agree with you, but I am always willing to try and help out where my knowledge can be useful, so maybe we can communicate again, if there are other areas where you need some guidance. Or if I start employing people, perhaps you can give me some guidance on trade unionism!
With best regards,