The corporate tax systems of developed countries are a labyrinthine mess that often leads to double or even triple taxation of investors. Companies can pay corporation tax on their profits; if the shares are held by investment funds further tax can be paid; and the ultimate owners of the shares or units in investment funds may pay tax again.

If profits are retained within the company and the share value goes up, then capital gains tax will often be added to the corporation tax that has already been paid on those profits.

Countries have double taxation treaties to try to deal with these problems, but they are imperfect. Tax havens are vital to ensure that companies’ owners avoid double taxation, and to ensure that those who live in low-tax jurisdictions, or those who should not be paying tax, are not over-taxed.

This situation can be illustrated by that long-standing campaigner against tax havens: the Guardian newspaper. The structure that owns the Guardian – GMG – has used tax havens to ensure that it does not pay more tax than is legitimately due on certain transactions and investment income.

What is reasonable for the Guardian is reasonable for other companies too – tax havens are generally used to ensure that owners pay the right amount of tax given their underlying tax status and place of residency.

Many commentators point to the murky activity that goes on in tax havens. Some of this criticism is valid. However, we should not blame the tax havens for this.

Readers will probably be surprised to learn that typical values for the size of the shadow economy in OECD countries are around ten per cent of GDP. Academic work suggests that a major cause of black market activities is tax and regulation.

Read the rest of the article on the London Loves Business website.

Also, watch Mark Littlewood, IEA DIrector General, discuss tax havens on Channel 4 News here.

Philip Booth 154x154
Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

9 thoughts on “Is it acceptable for UK companies to use tax havens?”

  1. Posted 20/10/2011 at 09:18 | Permalink

    Perhaps the guardian would explain to us its support for high taxation on the UK population to fund all the out of control immigration, the bloated nhs, the quite frankly bias bbc and the benefit culture … while “quite legitimately” not paying the legally set tax in the UK that the little working people (with no access to tax havens) BY LAW have to pay! Hypocrisy perchance?

  2. Posted 20/10/2011 at 10:00 | Permalink

    “What is reasonable for the Guardian is reasonable for other companies too”

    Rubbish. Anyone who campiagns against tax avoidance should set an example.. and do as they say.

    They set an example – of utter hypocrisy.

    Fairly typical of newspapers . and MPs..

  3. Posted 20/10/2011 at 11:15 | Permalink

    Hypocrite. Pure and simple if you argue that tax havens are bad and then use them you are a hypocrite. The only way to maintain a sensible position is if you state openly that you you them, at the same time publish accounts showing the effect of not using them i.e double taxation, you campaign for the law to be changed such that you would not have to use tax havens.

    You have to be open and honest – else you are a hypocrite

  4. Posted 20/10/2011 at 12:57 | Permalink

    I’m not sure I’d be quite so unkind to the Guardian. Many people might object to some benefit (for instance, child benefit or winter fuel allowance) but still take it up.
    I must say the blog by John Christensen is pretty feeble. It keeps going on about paying taxes where profits are generated, but this is naive where a company imports inputs and exports outputs. Any allocation of profits to national jurisdictions is arbitrary.

  5. Posted 20/10/2011 at 14:38 | Permalink

    “If profits are retained within the company and the share value goes up, then capital gains tax will often be added to the corporation tax that has already been paid on those profits.”

    About 65% piffle. Capital gains tax is not paid on the shares until they are sold if ever, so the tax is at best deferred, probably indefinitely. Furthermore although there may be a pound for pound increase in the value of the shares according to the amount of tax saved, the amount of tax recaptured on the eventual sale will be that increase multiplied by the applicable rate of taxtion.

    So if the tax lost is £100, eventually the exchequer might get £100 x the tax rate, but probably not for many years and quite likely never.

  6. Posted 20/10/2011 at 15:04 | Permalink

    If tax avoidance is not illegal it’s not unacceptable. One’s tax liability is a matter of (often disputable) law, not of morality or ‘social responsibility’. Philip has put his finger on one key point, namely the overall level of tax. But even if the overall level of tax were lower, there might still be particular taxes where the rates rise to ridiculous levels. For example, for more than half my lifetime, the top marginal rate of income tax in Britain has been over 90 [ninety] per cent. Not only that, but during most of those forty years all three main political parties seemed to think there was nothing wrong with that state of affairs, even though the top rate probably raised negative net revenue. As far as the overall level of taxation is concerned, let’s bring on a race to the bottom!

  7. Posted 20/10/2011 at 15:36 | Permalink

    Its corrosive … it’s what causes rust on bridges!

  8. Posted 20/10/2011 at 16:12 | Permalink

    Alex – reasonable point: it is not cgt plus corporation tax that is paid but corporation tax plus cgt*(1-corporation tax) deferred. But even if my point is somewhere between 30% and 65% piffle that is still a lot of extra tax given that corporation tax rate is already higher than the income tax rate. It can also catch people who are not good tax planners (and can be avoided by those who are). I would prefer the abolition of cgt and corporation tax with earning per share being attributed to shareholders and taxed at their marginal rate.

  9. Posted 20/10/2011 at 19:32 | Permalink

    The Guardian are a bunch of revolting hypocrites – tax avoiding, phone hacking, police information paying – its all OK if it’s the Guardian doing it.

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