In Brexit Tug-of-War, EU Aims at City of London’s Tax-Haven Empire

By Don Quijones of Spain, the UK, and Mexico, and an editor at Wolf Street. Originally published at Wolf Street

The European Commission last year published its first ever tax-haven black list. On it was an eclectic mix of 17 far-flung jurisdictions including Panama, South Korea, the United Arab Emirates, Macao, Bahrain, Barbados, Namibia and Trinidad and Tobago, though eight of them, including Panama, have already been removed.

Conspicuously absent from the list were EU countries accused of facilitating tax avoidance, such as Luxembourg, Ireland, and the Netherlands. Also not included were British Overseas Territories or Crown Dependencies, despite being named in earlier EU lists and some being implicated in the Paradise Papers scandal. But that could be about to change.

According to a new report by The Independent, the screening process is set to restart in “early spring” for British territories including Anguilla, the British Virgin Islands and the Turks and Caicos Islands:

Other British territories – Bermuda, the Cayman Islands, Guernsey, the Isle of Man and Jersey – promised to try and address EU concerns to stay off the list, which will now be reviewed annually.

The Independent has been informed that as things stand it looks like Bermuda will be given a clean bill of health by the EU, but that outstanding questions remain for the Turks and Caicos Islands and Anguilla.

According to one recent study by Berkeley academic Gabriel Zucman, there is £1.4tn of “off shore wealth” located in the UK, Isle of Man, Jersey, Guernsey, Bermuda and Cayman Islands alone.

The City of London is not just a place where the infinite threads of global finance meet, it is also the center of a vast, secretive web of tax havens cast across the globe. The “City of London Corporation” itself has functioned for centuries as an offshore island inside Britain, even inside London, a tax haven in its own right. Each of the sprawling financial web’s sections – the individual havens in the Caribbean and elsewhere (all of them Crown dependencies) – trap passing money and business from nearby jurisdictions and feed them up to the City of London. This is arguably the central plank of its post-colonial business model.

But now that could be at risk. The timing of the EU’s threat to blacklist British tax havens is politically convenient, coming less than two months before crucial Brexit trade talks are scheduled to begin. According to spokespeople at the European Commission, decisions on which jurisdictions to blacklist are taken according to a strict and public criteria and are not subject to any political pressure or consideration in Brexit negotiations. But as The Independent points out, some officials privately acknowledge that the dynamic is shifting, with the EU seemingly willing to use the process as leverage and vowing to pursue the territories for revenue post-withdrawal.

A European Commission source said it was “significant” that none of the territories were mentioned in the joint EU-UK report setting out the phase one Brexit agreement last month. They went on: “The UK has always protected them in the past. That is not going to happen in future. We will go after them.”

The EU’s efforts to stamp out tax havens, in particular those connected to the City of London, would be laudable if it weren’t for the inconvenient little fact that three of the world’s 10 worst corporate tax havens identified by Oxfam are in the EU: The Netherlands (3rd), Ireland (6th) and Luxembourg (7th), most of whose tax-avoidance structures were put in place during EU Commission president Jean-Claude Juncker’s 18-year reign as Luxembourg’s prime minister.

In December the European Parliament agreed that none of these countries, or Malta, could be considered as tax havens. A Socialist group amendment identifying the four EU member states specifically by name was put to a vote but the proposal obtained 327 votes against, 327 in favor and 24 abstentions, which means it could not be adopted since there was no majority.

As such, according to the EU’s own lopsided criteria, the EU is not home to tax havens, despite the fact that the very text compiled by the parliament’s Committee of Inquiry into Money Laundering, Tax avoidance and Tax Evasion concedes that foreign direct investment in Malta amounts to “1,474% of the size of its economy,” while Luxembourg and the Netherlands combined have more inward investment than the US.

According to a team of researchers at the University of Amsterdam, the Netherlands is not just a corporate tax haven but one of the world’s largest, serving as a conduit for a staggering 23% of corporate investments that end in a tax haven. That compares with 14% for the UK, 6% for Switzerland, 2% for Singapore and 1% for Ireland. It is estimated that since 2005, nearly half a trillion dollars of U.S. corporate profits have been safely stashed in the Netherlands by household brands like Nike, Heinz, Caterpillar, General Electric, Time Warner and Foot Locker.

This inconvenient fact didn’t prevent the former deputy prime minister of the Netherlands, Lodewijk Asscher, from threatening a year ago to block any post Brexit trade deal if the UK doesn’t “firmly tackle” tax avoidance. The threat came just as the UK government announced that in the event of a hard Brexit, it was considering extending the City of London’s low-tax, light touch regulation regime to the rest of the UK.

But to what extent is the Netherlands itself tackling its own fiscal transgressions — the same transgressions that won it 3rd place in the Oxfam survey, just behind Bermuda and the Cayman Islands? The answer is likely to be “very little,” especially given that the EU doesn’t even consider the country to have transgressed.

Just as they — together with the UK — have done for years, the EU’s four non-tax havens will do everything they can to frustrate concerted EU action and protect their own tax regimes. And therein lies the crux of the EU’s crusade against the world’s tax havens: until it’s willing to get its own house in order, Brussels is in no position to preach to other countries, let alone police them.

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      1. Eustache De Saint Pierre

        That is welcome, but I imagine that the damage already done to these people & the likelihood that their future career prospects could be adversely effected are I believe, not likely to encourage the further blowing of whistles.

        According to this poll, 81% of respondents stated they had not reported incidents of witnessed corruption :

  1. MisterMr

    “until it’s willing to get its own house in order, Brussels is in no position to preach to other countries, let alone police them.”

    Maybe the EU is in no position morally to preach other countries, but it is in the position of practically policing the UK, and has good reason for this as this might mean more money for the internal ones.

    1. barefoot charley

      Nevada’s becoming America’s capital for evading America’s global tax laws. Any llc, the owners shielded by middlemen, can own anything without declaration–unless you’re American, sorry, Americans can’t enjoy our world-class tax haven from American interference. How unfair is that?

  2. ChrisPacific

    Does anyone know what the “strict and public criteria” actually are? I did a search and found some Q&A documents, one mentioning “over 1600 criteria,” and a white paper that went over ‘selection criteria’ that listed high level categorizations with no information on how they were actually to be reached. The rest of the hits were all news articles.

    Oxfam appear to know, since they made the claims about the Netherlands etc. cited in the article, but they aren’t telling either.

  3. Kat

    And therein lies the crux of the EU’s crusade against the world’s tax havens: until it’s willing to get its own house in order, Brussels is in no position to preach to other countries, let alone police them.

    Well, this is exactly why the EU Commission (as well as several member states) is pushing for the Common Consolidated Corporate Tax Base (CCCTB). The difference is that tax law is not an EU competence [1], so changes require unanimity among the member states; but trade policy with other nations is an EU competence, so the EU institutions have considerably more leverage there. But that doesn’t mean that there aren’t plenty of EU member states that don’t want a race to the bottom, just that it’s difficult to find the necessary unanimity for such changes.

    [1] Aside from setting rules for VAT, and VAT rules have been a policy lever to mitigate tax avoidance of multinational corporations for a long time; VAT is not only resistant to tax evasion, but mostly immune to tax avoidance shenanigans, as it’s taxed at the source at the point of supply [2] and doesn’t allow for deductions and exemptions other than VAT you paid. While VAT is not a tax on corporate profits, it’s not a sales tax, either (though it’s often mistaken for one, as the cumulative VAT is listed on receipts), and it sort of approximates a tax on profits insofar as it’s a tax on value added and value added is correlated with profit (not counting labor and a few other things).

    [2] For example, if you live in France or Germany and order merchandise from Amazon (headquartered in Luxembourg) via a distance sale, then Amazon has to pay VAT to the French or German government, respectively.

  4. RBHoughton

    Let’s be frank, every foot of ground that has a legislature empowered to welcome tax avoidance will line up for a slice of this lucrative pie. We don’t do morality or propriety any more, just money, money, money, and a new name on the list takes 20-30 years to attract the reluctant attention of the bribed parliaments of the world. When Liberland asks the EU for statehood, a tax exemption request will ensure it of success.

    We are not going to make progress as a species until the representatives are cut-off from the merchants and generals. That is the inevitable and essential first step to freedom and justice.

  5. vlade

    “The “City of London Corporation” itself has functioned for centuries as an offshore island inside Britain, even inside London, a tax haven in its own right”

    Please provide evidence. The linked article (which is authors) says only one thing – that in the CoL corporates are also voters. That misses the point, as CoL voters matter squat from the UK-wide perspective- they can decide CoL issues, but NOT UK issues like tax etc. CoL is, in the end, a municipal authority. Yes, it has some “priviledges”, which others don’t – but majority of those are purely ceremonial.

    Westminster can and DOES set up laws for CoL (last time this was brought here, I provided examples of laws that Westminster passed to enable CoL to do some things – but it was Westminster that had to pass the law), HMRC taxes CoL residents (corporate or personal) in exactly the same way as the rest. The ONLY rates that CoL can set are business and residential property rates (and even that is within the boundaries of the UK-wide law, as technically it is only a multiplier and some add-ons) – which is what any council in the UK can do.

    FCA/FSA are the UK-wide regulators as well.

    I’d point out that a large part of the UK finance industry is NOT registered, or even resident in the City. Some of the worst examples of UK financial services – say Northern Rock and RBS were/are not in the City. NC’s Richard Smith did a lot of digging into Scottish LLPs, which I’d say can happily compete with the tax evasion and money laundering done in the City – or even more, since City is the “reputable” part of it (which just means it preferst to deal with “official” embezzlers, not your average Ukrainian mafioso), and that has by definition limited market.

    City of London is a distraction – the significant problems are UK wide. City is a lobby organization, and it’s losing its place to a more specific ones anyways (as I say, a lot of financial services do not have anyting to do with the City).

    1. Outis Philalithopoulos

      The original comment contained the text of the original article – please try in the future to use a link in such cases.

  6. kate

    “The “City of London Corporation” itself has functioned for centuries as an offshore island inside Britain, even inside London, a tax haven in its own right”

    Prof Richard Werner is considered a central banking expert,
    drafted “positive money” bill for parliament way back when,
    similar bill for AMI. But I believe Werner has moved on now to wider fields,
    is a good friend of steve keen, who is an advisor to positive money, even if he doesnt agee with their specific proposal. Ben dyson (formerly positive money) is now working for BOE.

    I cant find the interview now where prof werner makes it very explicit, City is not in EU, nor in UK.
    its somewhere on here, or his website.

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