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Finance: Offshore Centres

Volume 710: debated on Thursday 7 May 2009


Asked By

To ask Her Majesty’s Government what is their response to President Obama’s proposals for tighter regulation of offshore financial centres, and to the implications for offshore centres under United Kingdom sovereignty.

My Lords, President Obama and Secretary Geithner have this week set out proposals to reform the US approach to international corporate taxation. All advanced economies face the challenge of protecting their tax bases. Like the US, we have acted and will continue to act to tackle avoidance and evasion activity, which puts our public finances at risk. British offshore financial centres know that they must engage constructively with the major economies. The Government have launched an independent review of British offshore financial centres which is being undertaken by Mr Michael Foot. It will assess the long-term sustainability of OFC business models and consider changes in the global economic and regulatory environment as part of its analysis.

My Lords, does the Minister accept that many of us on these Benches were puzzled by the Government’s happiness with the Bush Administration’s rather lax approach to the development of offshore financial centres which, as the Financial Times said yesterday, has clearly been part of the global financial boom? Now that the Obama Administration have shifted gear very sharply and specifically mentioned a number of offshore financial centres under British sovereignty in their measures, will the British Government take a much tougher approach to the need for sharper financial regulation, or will we continue as the Government have done over the past 12 years?

My Lords, we certainly are taking a tough line. Tax evasion is pursued with great vigour by the authorities. In 2004, we introduced a pre-clearance requirement that requires those pursuing or marketing tax avoidance strategies to disclose the details to the Inland Revenue in order that it may consider the consequences. We believe that, as a consequence of action taken in the light of such information, some £11 billion of revenue has been protected. We are also about to announce a code, on which we will consult, relating to bank involvement in tax avoidance and aggressive tax management, which I think will throw further light on these issues. President Obama’s approach is primarily addressed at protecting onshore domestic US industry against offshoring.

My Lords, is my noble friend arguing that the question of tax avoidance through tax havens can be tackled only through international agreement? Is he saying that without it, we cannot act?

My Lords, I am saying that tax avoidance can be tackled on a unilateral basis through tax and information exchange agreements that increase the flow of information. However, as one source through which tax avoidance can take place is blocked, if you are not careful, other sources arise. The G20 initiative recognising the importance of this issue marks a significant change in the attitude of the developed world towards centres that rely primarily on tax for their source of competitive advantage. Moreover, the scale of sign-up to tax and information exchange agreements since the period immediately before the G20 and now is indicative of a fundamental change in the relationship between the developed world and offshore financial centres.

My Lords, clearly I am right in thinking that there was a commitment in principle reached in the G20 to extend regulation to offshore centres. How is that commitment in principle being taken forward in practice?

My Lords, there are two important aspects to this. I refer first to the work of Mr Michael Foot, who is looking at regulation and resolution procedures in Crown dependencies and offshore financial territories. I think that he will come up with some positive recommendations about improving regulation and the processes for dealing with regulatory failure. The OECD also has an important role to play in this. The Prime Minister has recently written to the OECD urging continued action to address its own co-ordinated programme towards transparency of transactional behaviours and the opening up and improvement of regulation. It is also worth noting in this respect that British Crown dependencies and offshore territories rank rather well by comparison with a number of other centres in terms of the quality of their regulation as judged by the OECD and the IMF.

My Lords, the Minister has referred to the work of Michael Foot and will no doubt have read the interim report which he produced and which was helpfully published on Budget day. Does he share my concern that Mr Foot seems more concerned about the British offshore financial centres remaining successful economically than about ensuring that they no longer rank among the major centres in the world for tax avoidance and evasion? As Mr Foot moves towards his final report, will the Minister ask him to concentrate on that issue?

My Lords, I shall certainly convey the noble Lord’s views to Mr Foot. He has comprehensive terms of reference, which include addressing tax issues as far as they relate to these centres. It is clear that these questions have become more elevated as a result of the agreement now within the G20 countries on the need to address tax evasion and wilful tax avoidance.