Could the UK become a tax haven?

Written by: Kirsten Morel Posted: 08/05/2017

tax haven illoIn the aftermath of Brexit, might the UK start offering low-tax incentives to companies and individuals – and what effect would that have on finance in the Channel Islands?

That the phrase ‘Brexit means Brexit’, which was designed to have no definition, is likely to come to define a period in the UK’s history, shows just how uncertain the nation’s future has become.

In the 10 months since the UK held its in/out advisory referendum on the future of the country’s relationship with Europe, there’s been no shortage of speculative news stories about what that relationship will eventually look like. Will the UK become a close partner to Europe or is it teetering on the brink of becoming the 51st state of the US? 

For several months after the votes were counted, nobody was ruling anything out. ‘Brexit means Brexit’ became Theresa May’s mantra until mid-January, when Chancellor Philip Hammond gave an interview to German newspaper Welt am Sonntag. In it, he clarified remarks about the UK possibly moving outside of “European mainstream thinking”, saying: “We will change our model and we will come back, and we will be competitively engaged.”

The sentence may be almost as elusive as its three-word predecessor, but that didn’t stop pundits and analysts interpreting it as a call for the UK to become a post-Brexit tax haven. In seeming support of her Chancellor’s thinking, May announced that she would pursue withdrawal from the single market and the jurisdiction of the European Court of Justice, seeking a so-called ‘hard Brexit’. 

Finally, those three infamous words had been given definition, but not so much as to halt speculation about what a hard Brexit would look like. People began to wonder whether Hammond’s tax haven scenario could indeed be the shape of the UK’s post-European future. 

Tax haven or low-tax environment?

In today’s world, the words ‘tax haven’ are particularly provocative, not least in the Channel Islands, which continually work to ensure they aren’t blacklisted as such. Given this environment, would the UK really want to go down that road?

Dominic Wheatley, CEO of Guernsey Finance, thinks not. “The idea of the UK becoming a tax haven is unrealistic,” he says. “A tax haven suggests nefarious motives, where a jurisdiction actively enables people to avoid taxes. Hammond was likely referring to the UK becoming a low-tax environment.”

Using the term ‘tax haven’ may be taking it too far, but in his interview Hammond did question the entire European economic model, including the regulatory regimes that provide social and environmental protections – so it’s likely that he was referring to more than just the lowering of corporation taxes.

“One motive behind Brexit is to get away from moves in the EU towards regulation, transparency and the implementation of a new approach to taxation that will fundamentally change the ability for businesses to shift profits [across borders],” says John Christensen, Chair of the Tax Justice Network.

Christensen is referring to plans for the Common Consolidated Corporate Tax Base, which would see companies being taxed in the jurisdiction where revenues are generated. The UK has blocked such plans a number of times, much to the frustration of France and Germany.

The idea that the Chancellor is most interested in the UK carving its own niche with regard to a range of business matters that includes tax and regulation, gathers strength when considered in the context of what the nation will need to do once faced with a lack of access to the single market.

“There’s an element of truth in the idea of the UK as a tax haven,” says Andrew Pinel, Partner at Pinel Advocates. “There’s a possibility of the UK looking to lower its corporation taxes and provide a more compelling all-round proposition for businesses to locate in the UK.”

The main rate of corporation tax in the UK is currently 19 per cent, which is relatively low but still some way higher than Ireland’s 12.5 per cent and an achievable tax rate in Malta of five per cent.

Given that the UK has been the ‘victim’ of profit-shifting into countries such as Ireland and the Netherlands, it could be argued that being a tax haven wouldn’t put the UK on a collision course with Europe unless it adopted a particularly aggressive approach.

“If it lowers its tax rates further, the UK would have to be mindful of Ireland’s Apple case,” says Steve Meiklejohn, Global Senior Partner at law firm Ogier, referring to the European Commission’s order for Apple to pay Ireland €13bn in unpaid taxes.

“On the face of it, we’ve seen that there are limits to what the EU is willing to put up with, and this suggests to me that the UK knows it would be wise not to go down this route.” 
 
UK versus Channel Islands

Only time will reveal how far the UK wants to go down the road towards becoming a tax haven, but the question remains: should the Channel Islands be concerned?

As international finance centres, the islands have a symbiotic relationship with London that may have the potential to blossom should London grow its financial services business in the wake of Brexit.

“Brexit could be beneficial to London and the islands,” says Wheatley. “Jersey and Guernsey are very much complementary to the City of London. About 70 per cent of business in Guernsey comes via London, and it benefits the City to have access to an alternative environment and the niche expertise that the islands offer.”

Another reason not to be concerned about the possibility of competition opening up between the UK and Channel Islands is that a low-tax, low-regulation environment on the mainland would likely have very different aims to similar environments in the islands. 

“If UK tax rates were lowered, you may find it providing competition for other jurisdictions looking to attract large companies, but smaller jurisdictions like the Channel Islands aren’t really in the business of attracting large industry,” says Steve Meiklejohn.

Whilst there may be no direct threat from a UK tax haven in the form of competition, could a hardline stance from the UK in Brexit negotiations lead to Channel Islands interests being affected?

“I don’t think it’s likely EU negotiators will see Jersey and Guernsey as bargaining chips,” says Christensen. “What they’ll be doing is putting matters like passporting rights on hold to see how things develop.”

There’s no doubt the Channel Islands would prefer their affairs not to be caught up in Brexit negotiations, particularly as they weren’t involved in the referendum, but as Christensen points out, passports provide an incentive for the UK to stay in line. 

“If London wants to keep selling financial services to the EU, companies headquartered there will either have to set up branches inside the EU, or the City will have to attain passporting rights, and for that it will have to display equivalence to EU standards of regulation.”

In reality, the tax haven route is the nuclear option and Philip Hammond will likely have known this when he spoke to Welt am Sonntag. There’s an enormous amount of negotiation ahead for the UK, as it finds a compromise with 27 other nations and a union that doesn’t want Brexit to signal its own end.

And, at the time of writing, there’s the additional question of who will be doing that negotiation after the general election on 8 June.

If Meiklejohn is right and Hammond’s words turn out to be no more than “bluster, laying down a marker for negotiations”, then the post-Brexit tax haven scenario may well follow ‘soft Brexit’ into the bin of once-mooted Brexit options. 

Whatever the final deal, Pinel makes a point that all parties would do well to heed. “I hope the shared histories of France, Germany and the UK would lead to a reasonable approach to future relations between the nations.” 

The end of the Double Irish

Following disastrous economic policies of the 1980s and early 1990s, Ireland sought to begin the new millennium on a stronger footing. To do so, it slashed its corporation tax rates in an effort to attract business from overseas. It also created Free Trade Zones, including one in Shannon, and the International Financial Services Centre (IFSC) in Dublin.

These changes had an almost immediate impact. The EU felt happy enough with the new economic direction to invest €10bn in Ireland’s infrastructure. Multinationals saw Ireland’s 12.5 per cent basic tax rate as a huge incentive, and the likes of Citibank were drawn to the 10 per cent tax rate and local tax exemptions offered by the IFSC.

Well, that’s the story presented by Ireland’s economic establishment. Others see membership of the European single market in 1993 as the trigger for the nation’s recent economic success. And some believe it was the opportunity presented by Ireland’s tax haven-style policies that attracted Eli Lily, Google, Starbucks and others. One of the best known of these business solutions was the ‘Double Irish’ arrangement, which took advantage of the ability for an Irish-registered company to be tax-resident elsewhere. As a result, plenty of firms started to use a transfer pricing play that involved little or no tax paid to Ireland as revenues made there were handily moved offshore.

The Double Irish is coming to an end. No new firms could use it from 2015 and those that already do use it have until 2020 to find other arrangements. 

But, credit-crunch and recession aside, Ireland is still faced with the same problem that many international finance centres face. In the rush to reduce corporation tax, the tax burden has moved to the individual. As a result, 42 per cent of tax revenues come from people and just 11 per cent from businesses. It seems that the Irish are no longer happy with the balance. 

A consultation closed in February that’s set to plot a new way forward for this slightly wounded Celtic Tiger.


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