There is obviously a lot of debate about off shore investments and their tax implications. So, what is off shore investment and what are tax havens? Well let’s put it simply for all of us to understand. When people have more money than they can consume, they can invest the excess. However, they will need to pay tax on the ‘profit’ from those investments. Depending on where they invest, they may pay very little tax or no tax at all. There are some countries which charge very little tax or no tax at all to any incoming investments in order to attract investments, and so many rich people and businesses have invested in these countries and this is perfectly legal.
So, what is the fuss? Well to start with, this scheme has been surrounded by secrecy and there is no one to scrutinise it. And because of that it has attracted money from questionable sources and unstable countries and has become a preserve of the rich. Many people have acknowledged that this is a problem including Barack Obama when he was President.
Most of the people who invest in these countries are rich people. So, the issue is not the legality but rather a moral one. The idea is that governments need taxes to provide social services and so in theory no one should shun paying tax, understanding what tax is for. The social services such as education and health are most needed by the very poor in society who cannot afford private health and education. Yet the rich can afford that. So, if on top of all they can afford, they also avoid to pay tax, how should governments fund these services? Tax the poor to fund social services for the poor? Is that fair?
These investors also hire accountants and lawyers to find loopholes in regulations about limits in repatriation of profits and use that to avoid paying tax. This is what advocates for the poor people and poor countries are up against. Tax is not a punishment on any business or an individual, it is for a purpose. That is why governments promote businesses so that they can create employment for people and in turn receive taxes from these businesses and thereby grow the economy.
In 2012, it was revealed that Starbucks had not paid tax in the UK for the previous 3 years. Even though this was perfectly within legal limits, the public protested by stopping to buy from them. In an attempt to win back customers, Starbucks volunteered to pay £10m in taxes over the next two years. They also said they were not going to ‘claim tax deductions for royalties or payments related to intercompany charges’ (Neville and Treanor, 2017).
‘The Paradise Papers was a special investigation by the Guardian and 95 media partners worldwide into a leak of 13.4m files from two offshore service providers and 19 tax havens’ company registries. The files reveal the offshore financial affairs of some of the world’s biggest multinational companies and richest individuals, and set out the myriad ways in which tax can be avoided using artificial structures’ (Hopkins, 2017). The whole purpose is to force rich people to pay a fair amount of tax like everyone else.
By J Mwanza
(BAcc Hons, Student-MSc Investment Banking and Finance)
Neville, S. and Treanor, J. (2017). Starbucks to pay £20m in tax over next two years after customer revolt. [online] the Guardian. Available at: https://www.theguardian.com/business/2012/dec/06/starbucks-to-pay-10m-corporation-tax [Accessed 15 Nov. 2017].
Hopkins, N. (2017). Why we are shining a light on the world of tax havens again. [online] the Guardian. Available at: https://www.theguardian.com/news/2017/nov/05/why-shining-light-world-tax-havens-again-paradise-papers [Accessed 16 Nov. 2017].