Hurricanes wreck tax havens (Part 3): Who should pay for the damage?

Tax haven aid, who should pay?
Donald-Drysdale By Donald Drysdale for ICAS

27 October 2017

In this the third of three articles on the plight of storm-ravaged British Overseas Territories in the Caribbean, Donald Drysdale raises some tax questions which others might be wary of asking. Any views expressed are his own and not necessarily those of ICAS.

What are taxes for?

A primary purpose of tax is to fund public services. In many cases a secondary purpose is to achieve a redistribution of resources. The importance of each objective varies with differing political persuasions. For every prudent government, a further crucial purpose of tax should be to provide insurance against unpredictable or unexpected future events.

Responsible governments should try to levy taxes to meet all their needs. Where low-tax jurisdictions fail to do so and are exposed (as many of them are) to dangerous extremes of climate, this begs important questions.

Surviving hurricanes

The British Overseas Territories worst-hit by the recent hurricanes in the Caribbean are the British Virgin Islands (BVI), Anguilla and the Turks and Caicos Islands (TCI), described in the first article of this series.

These countries operate as tax havens, attracting income flows greater than they might have expected had they restricted their activities to tourism and agriculture. For them, tax haven status has been a logical development, fuelled by the demands of individuals and organisations seeking to avoid or evade taxes elsewhere. By adopting low-tax or no-tax strategies, the islands have earned revenues – but these fall drastically short of the prudent housekeeping that would be needed to survive repeated natural disasters in Hurricane Alley.

Prudent housekeeping

Arguably BVI, while not self-sufficient, has not been imprudent. By December 2016 it had built up a reserve fund of US$59.5m and planned to put away a further US$12.5m in 2017. It would then have held a sum equivalent to 25% of its annual recurrent expenditure in liquid assets, ready to provide against unanticipated disruptions in revenue streams or shocks to the economy. However, it is unclear why it didn’t also arrange catastrophe insurance.

With smaller economies than BVI and high debt burdens, Anguilla and TCI seem even less resilient to natural disasters. Nonetheless, unlike BVI, they have both made responsible attempts to self-finance disaster risk by paying for catastrophe insurance which is providing some immediate help.

Within 14 days of the damage wrought by Hurricane Irma, Anguilla and TCI had received US$6.6m and US$14.8m respectively from the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC), a regional insurance fund giving member governments cover for earthquake, hurricane and excess rainfall catastrophe.

Unfortunately, the combined reserves and insurance recoveries of each of the affected islands fall woefully short of what will now be required to meet the costs of rehabilitation and reconstruction – costs that cannot possibly be fully quantified yet.

Raising more funds

Issues relating to international aid are discussed in the second article of this series. To become less dependent on such aid, perhaps the territories should seek greater self-sufficiency by strengthening liquid reserves or negotiating extended catastrophe insurance.

Where they have developed financial services by creating no-tax or low-tax environments, they might consider increasing tax rates or charges to enhance revenues – so far as they can safely do so without losing business. In this regard, BVI would have greater taxable capacity than Anguilla or TCI.

In BVI there are several target communities on which more tax might be levied: first, the predominantly unprosperous Afro-Caribbeans forming some 83% of the population; second, affluent tourists visiting, generally on cruise ships, and already contributing through consumption-based taxes; and third, the mainly expatriate professionals running the financial services industry whilst enjoying high salaries, low tax and (from November through June) an enviable climate.

Another obvious option would be for the islands to impose extra taxes or charges on the huge number of offshore companies and trusts registered there to avoid tax. This levy would have to be enough to raise the funds required, but not enough to chase business away.

Climate change

Climatologists are not of one mind, but many have attributed the current frequency and intensity of hurricanes to climate change. Multinational solutions are difficult to negotiate, but perhaps a global tax on major industrial producers of greenhouse gases (such as those identified in CDP Carbon Majors Report 2017 should be explored as a way of raising funds for worldwide humanitarian aid.

Getting buy-in to any such initiative would be an uphill struggle when the government of the USA – the world’s largest economy and its second largest producer of CO2 from fossil fuels – is currently in denial about the existence of climate change.

Diverted profits tax

Whilst building stronger reserves might help the Caribbean islands to cope with future emergencies, their financial well-being is being threatened by global pressures to outlaw tax havens. The UK (seemingly acting as poacher and gamekeeper) imposes a diverted profits tax (DPT) to claw back tax advantages which businesses obtain by operating through tax havens. Australia does the same, and other countries may follow suit.

DPT is a no-win situation for tax havens.Tax that might otherwise have been avoided becomes payable to the country levying DPT, not to the tax haven.

If DPT were to become the norm, existing tax havens might retain some existing offshore business by adopting acceptable low-tax regimes as distinct from no-tax regimes. Deciding what extra tax to charge would be a very fine balancing act.

Practitioners beware

Tax advisers generally and ICAS members in particular are expected to adhere to the guidance on Professional Conduct in relation to Taxation (PCRT) published jointly by ICAS and other professional bodies.

PCRT addresses the differences between tax planning, which is legal, and tax evasion which is not. Tax avoidance falls somewhere between these two and is an evolving area that can depend on the tax legislation, the intention of Parliament, interpretations in case law and the varying perceptions of different stakeholders. Tax avoidance is often hard to recognise, but in some cases the use of tax havens and offshore entities are obvious telltale signs. PCRT focuses primarily on UK taxes and perhaps this is not wide enough.

Where UK individuals or entities enter into tax avoidance schemes that fail, they and their tax advisers may face serious financial and criminal penalties. These sanctions should discourage improper use of offshore financial centres from the UK. Nevertheless, the financial services sectors in BVI and other British Overseas Territories appear to be booming.

Immediate action needed

The UK population of 65.6m has broad shoulders, and as a nation we have a strong record of supporting humanitarian aid projects. Individuals are quick to respond to such appeals, and perhaps that is why our politicians are criticised when they don’t seem to act swiftly enough.

Residents of the Caribbean region are in desperate need and are calling for help. This is not the time to discriminate against them because their governments have encouraged dubious tax practices. Please consider supporting any charity seeking to help the victims.

Article supplied by Taxing Words Ltd


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