The publication last week of leaked confidential papers from Appleby, a Bermuda based legal and financial service company specialising in offshore incorporation, has again raised the issue of supposed tax havens and of the legal practice of tax avoidance.
The Paradise Papers, as they have come to be known, shed light on the operation of what is today termed Britain’s Offshore Empire — a collection of British overseas territories and Crown dependencies, including Bermuda, the British Virgin Islands, Jersey and Guernsey, that accommodate a bespoke legal and financial services industry for overseas capital.
This is not new. As a young student I recall reading an essay by VS Naipaul that highlighted what seemed a post-war British policy: for colonies with no potential for a self-sustaining traditional economy to become financial centres with the lure of low taxation.
It was hoped that in time and as a more mature financial economy evolved, skills would prove the attraction and tax rates would return to normal. Naipaul saw this as foolishness, and warned of the problems that would lie ahead.
After the release last May of the Panama Papers, a similar cache of leaked papers from the offices of the law firm Mossack Fonseca, I asked a friend working as a lawyer in the industry for his views. I remember in particular the first point he made, which even then I felt cut to the core of the issue:
“The leak only reconfirms what we already know, but what many people wish they did not.”
Then as now what I believe most people find so disconcerting is not what has been exposed, but a sense that central to a system we actually value and cannot practically dismantle is an inherent grey area of contradiction between the law and ethics.
A year and a half on, not one person has been prosecuted in association with the leaked Panama Papers. From what I have so far read of the Paradise Papers, I do not see any actual evidence that anyone has broken the law. This no doubt will be enough for those lawyers working in the industry to satisfy their sense of professional ethics.
However, one is still left feeling that some of these papers reflect a legal injustice. There is clearly a disconnect between the law and what the common man would consider to be just, and around this inefficiency has grown an industry that feels to the majority to be ethically questionable in its motivation.
It is also morally difficult as it runs contrary to what is objectively fair — that as members of society we should pay our dues.
The argument that only the law can define ethics fails to understand a fundamental point: that ethics is foundational to man. The law is derived from ethics, not ethics from law.
In the case of the provision of offshore financial services, as ethics is an issue we must consider motivation. What motivates those who set up offshore vehicles?
Mark Pragnell of Capital Economics argues that such Crown dependencies and overseas territories offer “tax neutrality” that is attractive as a stable, secure and neutral jurisdiction for cross-border economic activity. This fails to explain why other equally stable, secure and neutral jurisdictions with more just and robust tax systems are not used.
This is not to say that there are no morally legitimate needs for such services. However, given the public’s view of the matter, perhaps unfair but reinforced by such practices as obfuscating ownership, and avoiding the accountability afforded by transparency, it could be a mistake to risk so much opprobrium for a little actual benefit.
This is a simple calculation which advisors of the Duchy of Lancaster, who manage the Queen’s estate, now no doubt regret they did not consider.
Then there is legal responsibility. Lawyers must of course advise clients merely on the word of the law. But the truth is, as almost everyone today knows from dealing with practicing members of that most esteemed profession, we expect and lawyers are more than happy to give more than purely legal advice: advising not only on the law, but on its most favourable application.
And here again motivation must be considered, and a human judgement called. While a legal proposal does not constitute a criminal offence, the line between what is lawful and what we personally consider to be ethical is easily tested by a common thought experiment: you make the situation personal.
For example, former British Defence Secretary Michael Fallon’s wandering hand, though not illegal nor even considered by the journalist in question to be worthy of a genuine complaint, was nevertheless inappropriate. We could ask Sir Michael if he would be comfortable if it was his daughter who had endured the experience.
Finally, we face a painful choice, which threatens a basic principle of the modern state and our personal sense of what is just.
We can eliminate “tax havens” only by standardising tax rates worldwide. But this would imply giving up states’ rights to choose their own tax arrangements in the light of local views of what is just and fair.
What has been personally disappointing has been the media coverage, not for the sides taken but for the sides that the media has chosen to show. The viewpoints of justice activists and practising tax lawyers are reported, but no comments from the more neutral and comprehensive perspective of legal philosophy.
Today we have a vast library of knowledge, but often seems to lack skill in choosing what question to ask.
I found my tax lawyer friend’s opening line most insightful, though perhaps not quite in the way he intended. While we disagreed about many things, I do find myself drawing the same conclusion; that the question we should be asking is not what do we do about supposed tax havens, but how do we legislate in our own jurisdictions to better represent what society considers to be just.
In other words, how might we reform our own tax systems to cope with the existence of an international industry devoted to tax avoidance? And how can this be done without violating other standards and rights?