Will Britain Need To Bail Out Offshore Tax Havens?

In quite a funny article published in the Guardian this week it is alleged that the UK will need to begin bailing out its fourteen overseas dependencies such as Jersey, Guernsey, the Isle of Man and Gibraltar.  These are detailed in the article as ‘tax havens,’ and the author of the piece alleges that among other issues, these havens have badly mismanaged their fiscal situation so significantly that they will be looking to the British taxpayer to bail them out.

This is an incredibly serious allegation and one that has very far-reaching consequences in terms of how these locations are thought of – both by those who are onshore in the UK and potentially paying their taxes towards any proposed bailout, as well as those legitimately using such offshore centres for banking, investing or business purposes.  So, we decided we should investigate a little more to determine whether Britain will indeed need to bail out offshore tax havens as intimated.

After all, the ‘news’ that locations such as Bermuda, the Cayman Islands and the British Virgin Islands are so desperately in need of the UK’s financial help needs to be substantiated if we’re to take it seriously.  And I’m afraid - for the author of the article in the Guardian - these claims cannot be wholly substantiated and amount to little more than a personal diatribe against offshore financial centres.

The foundation for the Guardian article entitled ‘Britain may be forced to bail out tax havens’ is a claim that the Cayman Islands are facing bankruptcy and have applied to the British Government for a bank based loan of roughly 190 million pounds.  Firstly please note that this loan has been refused so far and then secondly, please note that the fiscal issues that the Cayman Islands are suffering from have got very little if anything to do with their status as an offshore financial centre.

The author of the Guardian article states the following: “Any suggestion that Britain will have to rescue offshore financial centres would be extremely controversial as tax havens drain the UK economy of an estimated £25bn annually through their role in aggressive tax avoidance and evasion.”  Why therefore is the author the one making such a controversial claim, because you don’t see anyone else claiming that the UK will have to bail out the likes of the Cayman Islands a) because of their alleged financial mismanagement and b) because they are a tax haven?

It’s time to get to the bottom of all of this and pull out a few facts: -

1) Tax havens or offshore financial centres – call them what you like – are used legitimately by governments, multinational conglomerates, your average business and even individuals as places to bank, invest and do business.  The vast majority are not in the business of encouraging “aggressive tax avoidance and evasion” simply because they would end up on the OECD blacklist of uncooperative havens and face devastating international sanctions.

2) There is no irrefutable evidence to prove that the UK’s economy is drained of 25 billion pounds annually because of the existence of any tax competitive nation - full stop.

3) The Cayman Island’s fiscal issues stem from the fact that it entered into an extended and over-ambitious programme of infrastructure improvements designed to improve the lives of every day people.  The money was spent on schools, public health services and even social services – and it was a ‘gamble’ the island’s government took based on the fact that its tourism industry was booming and international financial services businesses registered in the nation were expanding at that time.  With regard to the latter, the government charges such institutions a license fee that directly relates to the number of employees it has.  As soon as the American recession began to bite, so tourism revenue fell away dramatically and so too did the number and size of financial institutions in the nation.  This is why it is suffering financially speaking – it is gaining significantly less revenue from both sectors of the economy.

4) The government in the Cayman Islands is actively considering many viable approaches to solving the underlying issues that have brought it to the brink of bankruptcy – such as imposing property taxes on the super wealthy who like to call this stunning location home for example.

5) The government sought a bank backed and based loan from the British government not a bail out.  What’s more, this loan has been so far refused anyway.

Hopefully having put that issue to bed as far as the loosely veiled allegations in the Guardian article are concerned, it is time to turn our attentions to whether the British taxpayer may have to bail out any other so-called tax havens that are overseas territories under the Sovereign rule and care of Great Britain.

According once again to the Guardian article: “Britain could be forced to bail out one or more of its offshore tax havens at huge cost, according to early drafts of a Treasury report, because the economic crisis has wrecked their finances.”  The report being referred to is being produced following an independent review of British offshore financial centres by Michael Foot, as announced in the Pre-Budget Report in 2008.  The purpose of Mr. Foot’ s review was to look at “the immediate and long-term challenges facing British offshore financial centres in the current economic climate,” and at no time was the review into whether such offshore financial centres have mismanaged their own economies as badly as the UK for example!

It seems that the tone and angle the author of the Guardian article has taken is to allege that British territories that act as international financial centres are nothing more than rogue states that siphon money away from the UK in tax revenue, and that they have all mismanaged their own affairs to the point at which they will now require bailouts.  The fact of the matter is far from this alleged ‘truth.’  First of all tax havens offer an essential business service that corporates, governments and individuals alike use 100% legitimately.  Yes, offshore financial centres sometimes allow for tax optimisation - but this is no more illegal than someone in the UK having an ISA for the exact same purpose!

Mainstream media such as the Guardian is publishing what we would perhaps suggest is somewhat misleading information – after all, even the ‘worst’ offshore centers have actually faired far better than the UK itself where major banks are now to all intents and purposes nationalised!  Of course we’re not naïve enough to believe or suggest that there has been no mismanagement in such jurisdictions, but it’s nothing worse than we’ve seen our own high street banks do in the UK, and these offshore financial centres are no more or less likely to look to the UK for help than the Falkland Islands or the Pitcairn Islands.

The pending Foot Report will hopefully highlight underlying issues that each individual location may have with their economic structure so that preventative measures can be adopted to ensure that economies remain viable even in the face of a massive global downturn such as the one we are facing.  It is a positive report to be looked forward to and learned from – it should not be being used to scaremonger or suggest that there are locations out there that siphon wealth from the UK.  The UK’s fiscal problems are 100% its own and perhaps it should look towards tax competitiveness itself as a way forward and out of deep debt – but that’s another discussion for another article another day!