Rupert Murdoch last week floated his family's £3.8 billion personal investment
company in Bermuda - saving himself £522 million in taxes. Bermuda was chosen
because the media tycoon, who chairs News Corporation, wanted to avoid the taxman
after his firm changed domicile from Australia to the United States recently.
Just prior to the Bermuda float, Murdoch bought a 20-room, three-floor residence
opposite Central Park in Manhattan for £22m. Days later he bought a house
Lakshmi Mittal, the Indian-born, Labour-donor industrial magnate, is the world's
third richest man, according to Forbes. Worth £13bn, he spent £57m
on a 12-bedroom London home next to Kensington Palace and could afford to spend
£31m on his daughter's wedding in Paris, which included a sparkling performance
by Kylie Minogue. Under UK tax laws, he remains exempt from paying a heavy tax
bill by saying his primary residence is overseas. Capital gains tax on UK assets
can also be also avoided by holding them in a foreign company or trust.
The business empire of retail billionaire Philip Green is mostly held in the
name of his wife, Tina, who is resident in Monaco. Taveta Investments, the vehicle
used to acquire Arcadia in 2002, paid out a hefty £460m to its owner last
year. Green, who spends much of his time in Britain, would have been landed
with a £150m tax bill if he owned Taveta; as it is held by his wife, a
minuscule amount of tax is due.
These three examples demonstrate one essential fact: the rich can afford to
minimise their tax bills, while the rest of us have to stump up. This weekend
The Observer can exclusively reveal that the world's richest people are hiding
an astonishing $11.5 trillion in tax havens.
For the first time, research has pieced together the amount of wealth held
in low-tax environments. The annual income that these assets earn totals $860bn.
But what is sure to concern government treasuries the world over is that the
taxable income on $11.5tn could exceed $255bn.
There is nothing illegal in stashing cash in secretive tax havens. Minimising
tax obligations is a way of life for many people in all income brackets. But
these shock figures - established by campaign group Tax Justice Network, a collection
of tax experts and economists - will sound alarm bells that the social contract
between sovereign states and the wealthy is being torn up.
'This is one of the defining crises of our times,' says John Christensen, co-ordinator
of the Tax Justice Network and a former economic adviser to the Jersey government.
'One of the most fundamental changes in our society in recent years is how money
and the rich have become more mobile. This has resulted in the wealthy becoming
less inclined to associate with normal society and feeling no obligation to
Richard Murphy of Tax Research, who co-authored the report, says: 'No one has
tried to calculate a number like this before. To ensure the credibility of our
data, we have only used information already in the public domain and produced
by some of the most authoritative sources in the world. In addition, we tested
our conclusions against three independent sources of information, and all seem
to substantially agree, giving us a high degree of confidence in the conclusions
we have reached.'
The Irish government has said it is losing significant revenue through the
rich stashing their cash in tax havens, while the US believes it could be losing
out on at least $35bn a year.
Jeffrey Owens, director of the Organisation for Economic Co-operation and Development's
centre for tax policy and administration, says: 'High net worth individuals
are enjoying the joys of being offshore, and that has implications for tax bases
not just in OECD countries but in China, Brazil, South Africa and India. All
these countries are saying they want to join us in our drive to persuade offshore
locations to improve transparency and co-operate with authorities seeking information.'
Owens adds that the trend for wealthy individuals to place their wealth offshore
is increasing, but stressed that tax havens are essential for individuals who
live in unstable regimes.
But aid organisations are alarmed that money that should be used for building
the infrastructure of the poorest countries is being hidden in havens by corrupt
politicians and multinationals exploiting tax loopholes. Offshore companies
are being formed at the rate of about 150,000 a year. Whereas in the Seventies
there were just 25 tax havens, now there are at least 63, about half of them
British protectorates or former colonies. Tax avoidance in Britain alone is
estimated to cost the Treasury between £25bn and £85bn a year.
Christensen says: 'For decades, special interests have lobbied governments
to prevent a coherent crackdown. Now civil society is acting globally and demanding
governments put this on the international agenda.'
George Gelber, head of public policy at Catholic aid agency Cafod, says: 'The
people who use tax havens are free-riders on the taxes paid by working people
round the world. They pay little or nothing for public goods such as the rule
of law and security, which have to be paid for by the taxes of much less well-off
'If only a fraction of the taxes due on the trillions of dollars held in tax
havens became available for international development, it would enable most
rich countries to allocate 0.7 per cent of their national income to development
assistance [double what Britain, for example, currently spends], and put the
Millennium Development Goals [on alleviating poverty] within reach of even the
While the Inland Revenue has had more success in chasing up wealthy offshore
fraudsters, a National Audit Office report last year highlighted the growing
number of people - not just the wealthy - using tax haven credit cards and bank
The reportsays: 'The Revenue do not know how many people have tax haven bank
accounts and credit card accounts... probably all of the major banks in this
country offer offshore accounts, but they have not had to tell the Revenue about
clients with an offshore account.'
Investigations in the US showed that one credit company alone had 230,000 offshore
accounts covering 1.7 million transactions.
'The issues of tax havens and tax competition are symptomatic of a much wider
malaise at the heart of the international financial system,' says David Woodward,
director of the Global Economies Programme at the New Economics Foundation.
'This is a critical time for development, and particularly for the achievement
of the Millennium Development Goals. If we are serious about reducing poverty,
one of the first things we need to tackle is an international financial system
run by the rich, for the rich, at the expense of the poor. It is time to rethink
what the system is for - and dealing with tax havens and tax competition could
be an important first step. $255bn of lost public revenues is just part of the
price we pay for our failure."
Meanwhile, multinational companies are increasingly looking at using offshore
havens to avoid or minimise tax payments in a bid to maintain their prof its
and to add shareholder value. Multinationals now see tax departments as profit
centres and, given the risk of detection, the gains to be made through sophisticated
techniques are irresistible.
This may have been why KPMG, the accountant and consultancy firm, cold-called
an amusement arcade firm to sell it a tax-shelter scheme it knew would be considered
unacceptable by Customs & Excise, as revealed earlier this year in The Observer.
The VAT-avoidance scheme, KPMG said, would save the company more than £4.2m
per year. Last January, the European Court of Justice described it as 'unacceptable'.
KPMG's prospectus to gaming company RAL Holdings said: 'In our view, HM Customs
& Excise will regard these planning arrangements as "unacceptable tax
avoidance" and will seek to challenge the arrangements. However a similar
concept for telecommunications ran for nearly four years... before the EU amended
primary legislation and stopped the concept.'
It is thought such practices are far from unusual. It may seem that the wealthy
and big business are running rings round tax authorities. But there are signs
that civil society will soon be demanding a crackdown.