Mon | Oct 22, 2018

David Jessop | Taxation, economic globalisation and the Caribbean

Published:Sunday | December 10, 2017 | 12:00 AM
In th is April 3, 2016 photo, a security guard sit outside the the Mossack-Fonseca, the law firm at the centre of the Panama Papers that leaked information on offshore investments. There is now increasing pressure to shut down Caribbean and other 'tax havens'.

No one likes to pay taxes. Despite this, there is widespread recognition that their imposition is necessary if citizens are to be provided with social services such as education, health care and pensions.

For most Caribbean countries taxation is problematic. Small populations, relatively low levels of economic activity, high levels of debt, weak administration, and severe and costly challenges, such as that posed by climate change, mean that the domestic tax base in much of the region is unlikely ever to cover the cost of all recurrent and capital expenditure.

The consequence has been that governments have turned to seeking new, extraterritorial sources of income.

At its most obvious this has involved encouraging foreign investment, but it has also led governments to oblige visitors to pay multiple taxes and levies, introduce creative but controversial policies to sell citizenship, and to reposition their countries as offshore financial centres charging registration and other fees.

All this has happened against the background of economic globalisation and the largely unrestrained international movement of capital, enabling companies and wealthy individuals everywhere to recognise that their domicile is no longer necessarily relevant in terms of taxation.

Not only has this meant they can make use of whatever the lowest tax environment benefits them or their enterprise, but they can keep their money offshore too, and with good professional advice, minimise their tax liability in almost any jurisdiction.

This has led to the now familiar scenario where major global brands, such as Starbucks or Microsoft, wealthy individuals, and even domestic utility companies such as Britain's Thames Water, have so structured their interests that they are paying very low levels of tax in relation to earnings or income.

For most individuals who pay income tax, consumption and property taxes, and for those who own small companies that pay corporation and other taxes domestically, this is hard to accept. It not only causes anger and incomprehension and a social backlash, but means ultimately that governments are unable to provide the basic social services citizens have come to expect. For example, most in the anglophone Caribbean are aware of governments' declining ability to fund adequately secondary education, public hospitals and infrastructure.

 

Potentially toxic

 

Notwithstanding, it is quite possible that this potentially socially toxic situation may become more complex.

Over the last decade, nations from France to Japan have seen their tax base eroded by transnational and multinational companies and individuals using offshore financial centres, usually in quite legal ways, to reduce significantly their tax liability.

Such governments have also become concerned that organised crime, terrorist organisations, and corrupt political and business figures are using offshore jurisdictions to hide, launder or manipulate the often-huge funds they possess.

In response they have sought to limit the activities of offshore centres globally.

On December 5, the European Union published decision which contained a list of what it described as 'non-cooperative jurisdictions in taxation matters'. It was compiled by the EU's Code of Conduct Group on Business Taxation, in parallel with similar initiatives being pursued by the OECD and the G20, to maximise efforts to prevent tax fraud and tax evasion.

As has been widely reported, the Caribbean figures highly on this list.

The EU list of non-cooperative jurisdictions for tax purposes includes Barbados, Grenada, St Lucia and Trinidad. These the EU said, "failed to take meaningful action to address deficiencies identified and did not engage in a meaningful dialogue on the basis of the EU's criteria" and "made no such commitment at a high political level".

At the same time, Anguilla, Antigua, The Bahamas, the BVI, Dominica, St Kitts, Turks and Caicos, and the USVI were suspended from the screening process until the end of 2018 in recognition of recent hurricane damage.The document also contains multiple other references to commitments by nations from Jamaica to Curacao which it is monitoring.

 

Sanctions

 

The 38-page council decision makes clear the extensive range of sanctions that EU states might apply if the changes they require are not made. These include halting development assistance, but take no account of the reputational damage caused.

Europe's response comes as the international groundswell of popular support grows for addressing what is known as tax base erosion and profit shifting. Spurred by leaks of confidential information contained in the Panama Papers and more recently the Bermuda Paradise Papers, many politicians globally have begun to call for an end to what they describe as 'tax havens'.

For the Caribbean and especially for those states that see a legitimate role for themselves as offshore financial centres, the growing desire by developed countries to exert authority over them places governments a quandary.

They want to be good global citizens, but ministers question how as small nations they can in future raise revenues and earn income,if their attempts to develop services based industries and find competitive advantage, continue to be eroded without any recognition of the consequences.

They point out that the viability of commodity agriculture virtually ceased when preferential trade arrangements with Europe ended; citizenship programmes are under scrutiny; tax holidays and incentives granted to foreign investors are being questioned; they have been largely graduated out of development assistance; other jurisdictions in Europe offering similar financial services are being treated differently; and there is a limit to which the tourism product in the region can justify further increases in visitor taxes.

Barbados Trade Minister, Donville Innisss, has rightly pointed out Europe's latest demarche requires a Caricom response.

It also suggests that alternative longer-term sustainable economic solutions are required if small nations are to be able to be able to raise the revenues they require to be able to function. It implies too that new thinking is needed about future pathways to economic growth - whether in relation to incentivising agriculture to meet domestic demand, finding new ways to support and provide free education and health care, or developing creative, knowledge and content-based services able though much improved internet connectivity,to leap the constraints of smallness and geography.

- David Jessop is a consultant to the Caribbean Council. david.jessop@caribbean-council.org