LONDON – British Chancellor of the Exchequer George Osborne has declared his intention of cracking down on the ways in which rich people in Britain avoid paying their fair share of taxes. He regards tax avoidance by rich people as immoral.
British voters will generally back his efforts but he will not find it easy to rein in the accountants and tax lawyers who devise ever more subtle ways of ensuring that their clients pay as little tax as possible. These firms have created a tax avoidance industry.
One of the most scandalous tax fiddles has been the avoidance of stamp duty on expensive houses and of capital gains tax on sales of such properties by registering the houses in the names of shell companies registered in notorious tax havens such as the British Virgin Islands (in the West Indies) or in the Channel Islands and the Isle of Man — British dependent territories that fix their own taxes.
Until the recent budget, exemptions from tax was accorded to these arrangements on the specious grounds that this attracted capital investment into Britain.
Not surprisingly perhaps, Russian billionaire oligarchs and other wealthy foreigners as well as rich British people took advantage of these arrangements. Mega-rich foreigners have seen Britain as a stable country under the rule of law and London as a capital city with all the amenities sought by the wealthy.
Prime properties in London have accordingly been in great demand by overseas buyers. Prices have shot up and London has been plagued by a spate of basement developments as the mega-rich vie with one another to install underground swimming pools, gyms and cinemas, which are regarded as status symbols for the pampered few. In fact many of the houses and luxury apartments bought under these schemes remain unoccupied for much of the year, while their owners, who have other properties, enjoy themselves in the Caribbean, Florida and Monaco.
These tax avoidance schemes will be clobbered by the proposals to subject such company-owned properties to an annual stamp duty of 7 percent on all properties valued at over ￡2 million. But the lawyers are already working hard to find ways around the new rules. And, of course, the wealthy, who will be affected, have been decrying these measures on specious grounds in the hope that before they are enacted they will be watered down.
The government also announced that it would limit other tax breaks to not more than one quarter of an individual’s total income. This limit was designed to stop wealthy people avoiding paying tax by, for instance, investing in certain types of enterprises that are subject to lower tax rates, but it also caps the amount that can be claimed against tax in respect of donations to charity.
British charities and arts organizations, which have in recent years benefited from the refund to them of taxes on gifts out of taxed income, have protested volubly, but the limit will only affect the mega-rich who can afford to give more than a quarter of their income to charities.
Another tax-avoidance measure that is popular with the British mega-rich is to migrate to a tax haven such as Monaco. If they do not spend more than 90 days a year in Britain they can claim non-domiciled status and avoid paying U.K. tax on their worldwide income.
A notorious case involving such tax avoidance is that of Sir Philip Green, a British multimillionaire retailer. His wife, who is a resident of Monaco and pays minimal taxes there, receives huge dividend income from her husband’s retail empire, on which she does not pay higher rate tax. He remains resident in Britain for tax purposes but ensures that his taxable income is relatively modest.
Another case, which has been in the spot light recently, is that of Bob Diamond, the chairman of Barclays bank, who apparently received some ￡25 million last year. Part of this amount (said to be ￡5.7 million) was for extra payments to cover his U.S. tax liabilities when he moved to Britain. Even the usually supine insurance companies and pension funds, who dominate the share registers, found this difficult to swallow and are reported to have protested.
A British Sunday paper has declared that executive greed is making a mockery of British Prime Minister David Cameron’s vow to curb soaring pay. In many large companies in Britain, executive pay has soared despite the lackluster performance and often declining share prices of the companies that they manage.
But while the mega-rich in Britain are the focus of increasing efforts to ensure that they pay their taxes, it seems clear from reports from the United States that top salaries on Wall Street and in big U.S. companies have not been reduced to reflect the recession or to respond to popular criticism of excessive pay and tax avoidance.
The expanding number of Russian billionaires, who have grown rich by at best dubious means and at the expense of the Russian people, poses problems for other countries. The recent attempted murder of a Russian banker in London, the ownership of a British football club and of British newspapers by Russian oligarchs and the misuse of British courts in an attempt to settle their disputes show that we must maintain our vigilance.
We are now also seeing an increasing number of Indian and Chinese mega-rich. The Indians are less of a problem than the Chinese. Corruption is endemic in both countries but in India there is an independent judiciary and a free press. This is not the case in China. The triads may not be under the influence of the Chinese Communist Party but they operate under cover in most countries where there is a significant population of Chinese origin.
Governments in democratic countries need to take ever more effective measures to curb tax avoidance and limit the power of the mega-rich.
Hugh Cortazzi served as British ambassador to Japan from 1980-1984.
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