Panama Papers is the biggest data leak in history, shining a light on tropical tax havens and the world of offshore banking. Here, two Open University academics – one an expert in personal finance, the other in law – share their views…
‘Dynamic tension’ and reining in of the Duke of Westminster principle
By Jonquil Lowe, a lecturer in personal finance
The Panama Papers have triggered near universal condemnation of tax evasion and those who grow fat by enabling such crimes. However, the reaction to possible tax avoidance – which unlike evasion is not illegal – has been more divided. Hardly surprising, perhaps, considering its history.
In 1936, the UK courts endorsed tax avoidance when judge, Lord Tomlin, stated: “Every man is entitled if he can to order his affairs so that the tax attaching… is less than it otherwise would be.” The case concerned the Duke of Westminster (who won). Instead of paying his staff wages in the normal way, the Duke had arranged to pay them once a year through a ‘covenant’, an arrangement which back then gave the Duke tax relief.
There have been many tax cases and fresh legislation since that have reined in the Duke of Westminster principle. Yet, tax avoidance has remained a prime example of what OU economists call ‘dynamic tension’, where the regulated perpetually look for loopholes in the law – with offshore arrangements being fertile soil – and the regulator, HM Revenue & Customs (HMRC) in the UK, plugging the gaps as fast as it can.
However, in 2013, the HMRC armoury was boosted by a different sort of weapon: a General Anti-Abuse Rule (GAAR). It enables HMRC to nullify any tax gain from arrangements where “action taken by the taxpayer aims to achieve a favourable tax result that Parliament did not anticipate… and, critically, where that course of action cannot reasonably be regarded as reasonable.”
It’s not clear that the HMRC intends to use the GAAR often, but it sends a clear warning that tax avoidance is no longer fair game. This was reinforced by Chancellor George Osborne in 2012 who, announcing the GAAR, said he regarded: “aggressive tax avoidance as morally repugnant”. No wonder the Panama Papers have made better-heeled MPs nervous!
How blockchain could be used to make trusts more transparent
By Robert Herian, a lecturer in law
Amid the outcry over David Cameron’s tax affairs is the UK prime minister’s intervention in 2013 to block EU transparency rules regarding offshore trusts. It was decided that trusts should not be held to the same standards as companies when it came to making the end owners and beneficiaries publicly known.
But now the Panama Papers raise important questions as to whether trusts ought to be more open to public scrutiny. A major reason for this relates to fairness when it comes to paying taxes. Blockchain may provide a solution to this problem, enabling trusts to be more transparent, while ensuring the security of their holdings, too.
Trusts are often highly complex legal arrangements; but they tend to work on the same fundamental basis. First conceived many hundreds of years ago, trusts provide a unique method of property management. This uniqueness relates to how wealth is used, and relies on the separation of beneficial ownership from the responsibilities of property management that come with holding legal title.
Trusts come in both public and private forms. But their history points to an intimate desire for individuals and families to be able to preserve their wealth and, importantly, pass it on to the next generation.
One popular story of how trusts came into being involved the Crusaders of the 11th and 12th centuries who, before leaving to fight in the Middle East, arranged for their land to be tended and managed by a friend in trust (a trustee), on behalf of their family (as beneficiaries). This method of property management and transfer had not previously been recognised by Common Law, which viewed the friend as taking the land absolutely when given charge of it. But Equity, at the time a separate body of law in England and Wales, saw things differently.
You can read the rest of Robert’s article on The Conversation here.
