In June 2021 world leaders gathered at the G7 summit in Cornwall and agreed
something historic.
They would create a minimum global corporation tax of 15%
to stop multinational companies from avoiding taxes by shifting their profits to countries
with much lower rates than where they do most of their business.
These so-called tax havens
cost governments at least $245bn each year in lost revenue.
You can find them all over the world,
but a large number of them have one thing in common – they're British.
So how did Britain become responsible for nearly a third of the world's lost corporation taxes?
As of 2021, four of the top 10 biggest enablers of corporate tax abuse are British.
Even Britain itself is emerging as a corporate tax haven, with over 5% of global corporate
tax losses channelled directly through the UK.
But what makes a tax haven and why are so many British?
A classic tax haven is made up of three ingredients:
it allows companies to easily register in a country without being a resident there,
it offers legally protected secrecy and most importantly it provides low to zero tax for non-residents.
So, if you're a big company operating in multiple countries across the world,
you can set up your headquarters in the Cayman Islands which is a British, overseas territory,
and your company won't have to pay tax there.
And because their laws protect the secrecy
of all your transactions, no one will ever know what you're doing.
It's no surprise then
that a single office in the Cayman Islands is the official headquarters of
19,000 different companies and, that these islands alone are responsible for 6%
of all lost corporation taxes – that's the second highest in the world.
Britain has been instrumental in the development of tax havens since the late 1920s
when British courts set the stage by allowing companies to avoid taxes by registering their
businesses in countries without being residents there.
But it wasn't until after world war two,
as the British empire was crumbling, that a new financial empire developed with former colonies
being encouraged by the British government to become tax havens.
This guaranteed these small,
newly independent nations and dependencies an income stream and released the British
exchequer from potentially expensive financial support.
And in 1957, the Bank of England ruled
that any transaction made in London between two non-residents using a foreign currency
would not be subject to British regulations.
This was known as the Euro-dollar market and
it effectively created an offshore space without any regulatory regime.
Britain's former colonies
became a ready-made worldwide network feeding business transactions back to the city of London.
Over the last 50 years, tax havens have boomed, globalisation has created huge multinational
companies with worldwide reach and mind-boggling profits.
Apple, Microsoft, Alphabet,
they've posted combined profits of over $55bn in just the first three months of 2021.
So it's no wonder
that big corporations want to maximise their profits and reduce their tax bills.
But the success of tax havens has come at our cost.
All this profit shifting means governments are
left with less money to spend on vital public services,
hitting the hardest in lower-income countries,
which lose about 5.8% of their total tax revenue.
The result being that the billions of dollars lost by low-income countries each year
equates to 52% of their combined public health budgets.
Richer countries like Britain are also victims, losing $24bn in tax each year
year to profit shifting by big corporations.
That's nearly double its overseas aid budget.
So is this the end of tax havens?
No.
A minimum tax of 15% will reduce the lucrative corporate market,
but it doesn't stop rich individuals from using tax havens to hide their assets.
It's still estimated that wealthy private individuals currently have between $8.7tn and
$36tn hidden away in tax havens.
And over a third of that private wealth is held
in tax havens under British control.
But what it does mean is that an international consensus on corporation tax,
which was previously unthinkable, is now becoming a reality.
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