Clamping down on offshore financial centres would not raise tax revenue

The popular account of offshore financial centres as hotbeds of tax evasion is an outdated caricature that bears little resemblance to how OFCs operate.

A new report from the Institute of Economic Affairs debunks a number of myths surrounding OFCs – or tax havens – and outlines the important economic function they play in a globalised world. Their role in facilitating individual and corporate tax planning, which is entirely legal but politically controversial, has come under the spotlight, and prevented a measured conversation about their economic role.

Clamping down on offshore centres would not raise tax revenue and preserve existing levels of investment. Instead, it would change investment flows by politicising investment decisions.

Myths surrounding OFCs:

• OFCS are not hotbeds of tax evasion – by mitigating instances of double and triple taxation, offshore centres raise aggregate investment. Their existence is also associated with better economic outcomes in the countries that surround them.
• OFCs do not adversely affect the revenue-raising ability of other countries. For example, average corporate tax revenue as a share of all taxes collected has grown slightly OECD countries since 1980.
• It is not true that OFCs levy no taxes. Their average tax revenue as a share of national income is only six percentage points lower than across the OECD.
• Many OFCs do not meet the OECD’s definition of a ‘tax haven’. They tax their residents to an extend comparable with Western countries; they are transparent with foreign tax authorities; and they comply with international tax treaties.

Key points:

• OFCs have emerged to harness the benefits of a modern financial system – diversification, risk transfers and maturity transformation – when doing business in a world of sovereign nation states.
• The recent growth in the number and size of OFCs can be explained by three developments: an increase in the stock of investable capital, new investment opportunities outside Western Europe and North America, and, crucially, the growth of tax and regulatory intervention by governments.
• As more investment capital is allocated across a diverse range of jurisdictions from investors around the world, the potential for multiple taxation increases. The role of OFCs in eliminating excessive taxation has a positive impact on investment returns which compounds over time.
• Undermining the existence of OFCs would harm investment, economic growth and international capital flows, while the promised benefits from intervention are unlikely to materialise.

Commenting on the report, Jamie Whyte, Director of Research at the Institute of Economic Affairs, said:

“Offshore financial centres are a vital part of the modern global economy.  Clamping down on them would not raise tax revenue, but see investment flows being shaped less by investment opportunities and more by political factors. Too often the debate around ‘tax havens’ generates more heat than light. It’s time for a rational debate around tax policies.”