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Thursday, June 20, 2019

Taxing times for offshore havens

by Linda S. Heard

Source: Shutterstock

Taxation isn’t a topic people lucky enough to work in the UAE have to worry about with the exception of nationals of states that tax their citizens’ income wherever it’s earned in the world. Until now, many expatriate business people, companies and corporations place their money in offshore accounts hidden from the prying eyes of revenue collectors. But cash-strapped nations are working to introduce new rules enforcing transparency. Linda S. Heard has the story...

A storm of moral outrage over tax avoiders is brewing in European capitals making fiscal and welfare cuts to ward off recession. To be clear, there is a difference between tax avoidance also known as tax mitigation - a legal manipulation of the system via loopholes - and tax evasion whereby tax payers fraudulently misrepresent their income. The little guy pays a larger percentage of tax than the mega-rich and is subject to being hassled by tax authorities whereas multi-national corporations are able to afford the services of top notch tax accountants and set-up complex shell companies. I’m one example. When I was self-employed in my early 20s, I received a visit from a grim-faced Inland Revenue Inspector who declined my offer of a cup of tea. “I’ve come to collect an outstanding amount of income tax,” he told me. “How much?” I asked with trepidation, thinking of my diminutive bank account. “£6.20” (AED 36.70), he told me with a straight face, which was less than the cost of his time and transport.

Currently under fire in Britain are Starbucks, Google and Amazon, accused by the chairwoman of the House of Commons Parliamentary committee as “ripping off taxpayers” by “using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK.” For instance, Amazon’s 2011 turnover was reported as £207 million (AED 1.2 billion) but it was only required to pay £1.8 million (AED 10.65 million) in tax. Starbucks’ sales were in the region of £3.1 billion (AED 18.3 billion) over the last 13 years out of which just £8.6 million (AED 50.9 million) ended-up in the Treasury’s coffers.

Google posted £2.5 billion (AED 14.8 billion) UK sales last year and paid just £3.4 million (AED 20.1 million). The committee has also blasted H.M. Revenue and Customs for being “far too lenient” and has slammed the lack of international cooperation. France and Italy have been more aggressive. Google’s Paris office was raided by authorities who seized documents before Google was ordered to pay $2.18 billion (AED 8 billion) in tax, substantially more than the $252 million (AED 925 million) Google claimed was due. And after going through Google’s records, Italy has accused Google of under-declaring its income and under-payment of Value Added Tax (VAT).  Microsoft is also in the eye-of-the-storm. A US Senate committee condemned the corporation for avoiding $4.5 billion (AED 16.5 billion) in US taxes during the period 2009-2011. The danger is that if governments vigorously pursue multi-nationals, effectively shut-down tax havens or tighten up rules, international corporations will ultimately be scared away.

Earlier this year, the Tax Justice Network announced that hidden assets held in tax havens amount to between $21 and $32 trillion (AED 77 and AED 117.5 trillion) or up to 40 per cent of annual global output. The Network’s director John Christenson said, “It’s not just income tax that is being evaded but capital gains, inheritance tax and others. At a time when governments are piling on debt, the burden on middle and lower income citizens is increasing. Meanwhile, governments are forced to cut back spending and lack the resources to boost the economy.”

A recently leaked paper indicates that Britain is set to require the Channel Islands, the Isle of Man and the Cayman Islands to automatically disclose names and details of their banks’ account holders to the Inland Revenue (currently such information is given in response to a specific request). If the plan proceeds, the islands’ prime source of income will decline as investors flee to places like Hong Kong and Singapore. Residents of Jersey worry that they will be reliant on exporting potatoes and “bucket-and-spade holidaymakers” from the mainland. London’s City will also take a hit as banks there currently handle those havens’ transactions. The UK Exchequer has further signed a treaty with Switzerland that is claimed to be the “largest tax evasion settlement in British history” expected to bring-in £5 billion (AED 29.6 billion) within six years, drawn from the Swiss bank accounts of British residents.

Prime Minister David Cameron is determined to crack down on tax avoiders and evaders as a priority and is out to gain consensus when the UK chairs the G8 – the richest Western economies – next year. He is out to close the door on tax dodgers, especially corporate and is likely to get a sympathetic reaction from nations that control 40 per cent of the world’s tax havens. Squeezing more out of those who can afford it is a popular refrain on the streets of Europe and the US that have spawned occupy movements. However, not everyone is in favour. One of the UK’s top 20 accounting firms UHY Hacker Young believes Britain’s taxpayers are burdened by exorbitant tax rates (34 per cent of GDP as opposed to a 29 per cent average throughout the G8) that inhibit growth and motivate legal tax avoidance. Such high taxation puts the UK at risk of “losing jobs and investment to overseas competitors,” the firm contends. Britons moan that they receive little in return for their taxes. Swedes pay up to 70 per cent of their salaries in taxes (average over 50 per cent) but they are well looked after by the state from cradle to grave.

It’s little wonder that skilled expatriates are drawn to the UAE where they can not only take home their pay packets untouched by the long arm of the taxman but also benefit from world class hotels, restaurants, leisure and sporting facilities, airports and airlines. Although it’s not true to say that the UAE is entirely tax free as there are what’s known as a user-pays system that includes highway tolls, parking fees, an annual levy on rentals etc., that help pay for infrastructure.

UAE nationals and residents have greater disposable income than many of their counterparts in Europe and the US, which oils all sectors of the economy. I suspect that most expatriates in the UAE are too busy letting the good times roll to concern themselves with the spectre of taxation once they return home. In the meantime, they might be wise to reflect on the best place to deposit their savings given that hungry for cash Big Brother is on the rampage.

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