A staggering estimate of the amount of wealth hidden in secretive tax havens is included in a major study written by James Henry, former chief economist for management consultancy McKinsey, for the Tax Justice Network. Mr Henry says that his estimate of $21 trillion is conservative, and could be as much as $32 trillion (a trillion is 1,000 billion).

The estimate is based on data from bodies such as the IMF, the World Bank and national governments, and relates only to bank and investment accounts, not property assets and chattels such as yachts. However, it should be said in the interests of fairness and balance that Tax Justice Network is an organisation that campaigns against tax havens, and therefore has some interest in playing up the extent of their involvement in large scale tax evasion.

The figures are accounted for largely by the activities of the ‘super rich’, who Mr Henry says move money around the globe through an “industrious bevy of professional enablers in private banking, legal, accounting and investment industries.  He claims that since the 19790s $7.3 to $9.8 trillion of ‘unrecorded offshore wealth’ had been amassed, by a total of less than 100,000 people, and that the 50 leading private client banks manage more than $12 trillion of cross-border invested assets for private clients.

If even a fraction of what Mr Henry claims is true, there may be large untapped resources of taxable income and wealth potentially available to help stimulate the world economy, but which is unavailable  for that purpose because of its illicit nature in terms of the global tax system.

John Whiting, director of the Office of Tax Simplification, casts some understandable doubt on the figures in question, asking why tax havens are not more conspicuously wealthy than they appear to be, and how that amount of money could possibly be invested, laundered etc.

One potential feature at play here could be the complex residence and domicile status of many of the ‘super-rich’, who often have properties in a number of countries as well as ocean-going yachts, and who often structure their personal affairs so as to be resident for tax purposes nowhere other than one or more tax havens. In such a case it is possible for them to entirely legitimately generate income in tax havens without suffering any tax liability on that income. In the case of the UK, even if a taxpayer is resident here but not UK domiciled, at a tax cost of only £30,000 or £50,000 per year it is possible to escape UK tax on income arising outside this country. It is for this reason that I find the current tax regime on non-UK domiciles completely unacceptable, amounting as it does to a charter for the super-rich to avoid massive tax bills by paying an annual amount that to them amounts to small change.

It is also possible for non-domiciles to effectively avoid UK inheritance tax by placing their non-UK assets into trusts outside the UK; this remains the case even if they subsequently become domiciled or deemed domiciled in the UK for tax purposes.

Thus I suspect that the amounts identified by Mr Henry, even if correct, are a mixture of funds legitimately held offshore by non-residents and non-domiciles and illicit funds generated and invested without the knowledge of the world’s tax authorities. Given that this is a global problem, the (no doubt unwelcome) solution for politicians is clear; they need to adopt a global strategy to combat it. There are various problems with this:

  1. There are a significant number of countries that generate a major part of their national product from operating as tax havens. From the local Isle of Man and Channel Islands, via Switzerland, Gibraltar, Monaco and Liechtenstein to more exotic locations such as the Cayman Islands, the British Virgin Islands and Panama, there are many states with a vested interest in keeping tax haven status and protecting those who choose to invest with them. Bringing those states into line with some sort of global tax system would be extremely difficult.
  2. Certainly in the UK, we have great difficulty in reconciling ourselves to adopting many of the measures adopted by the European Union, of which we are a leading member state. To expect national governments to compromise their tax sovereignty to the extent of agreeing to an international direct tax regime is optimistic in the extreme.
  3. The current regime for non-domicile taxation in the UK is ample evidence that many countries are anxious to attract the super-rich to their shores, and are prepared to compromise many of the principles of a fair and equitable tax system to do so. Whilst individual countries take this sort of attitude it will be impossible to co-ordinate any international action to ensure that the super-rich pay their fair share of the tax burden.

So, in conclusion, do I agree that the problem is likely to be on the scale alleged by the study? No, not without further and better evidence.

Do I believe there is a significant problem with cross-border tax evasion. Yes I do.

Is that easy to deal with in a world with many secretive tax havens? No it is not. 

Is there a will among those countries which are not tax havens to take collective action to   ensure that the ‘fiscally mobile’ pay a reasonable overall rate of tax on their worldwide income? No there is not.

So will the super rich continue to plan to minimise overall tax exposure, whether by fair means or foul? Yes they will.

You will gather that I am not optimistic of positive developments in this area of tax.