07 April 2016
Tax Havens and Panorama
The question Panorama didn’t answer.
by John Watson
I have always thought that there might be something in guilt by association. If you know that someone runs with a bad crowd it is often wise to keep them at arm’s length. Birds of a feather, that sort of thing. Monday’s Panorama tried to exploit that prejudice by throwing together everyone who used offshore tax havens. The implication was that it didn’t matter what they used them for; in the end it was just different degrees of shadiness. Yes, of course there was the caveat that not everyone mentioned in the files from Mossack Fonseca was up to no good but, at least as far as those fingered on the program were concerned, well, if they were mentioned on the same program as people hiding the proceeds of crime, sophisticated people would know what to think. “À la lanterne!” as they used to say in France in happier days, and quite right too.
So I thought as I sat watching the program on my sofa, marvelling at the investigative journalism, revelling in civic indignation. Then something odd happened. The clock struck 13. No, not actually of course, that is only a metaphor, but something was said which wasn’t right and it raises new questions in addition to those so skilfully asked by Richard Bilton. The thirteenth stroke of the clock was the suggestion that it was somehow wrong to use tax havens to set up funds.
Now here’s the thing, as they say in the tabloids. You can only get investors to invest in a fund if the structure of the fund doesn’t add anything to the tax they would pay if they invested directly in the assets. Let’s illustrate that to make it quite clear.
Suppose investors decide to make a direct investment in some form of US shares or securities. Then they would expect tax in two places. The US would collect the amount, if any, which it charges overseas owners. Then the investors themselves would pay tax in their own jurisdictions according to their local rules.
So if you set up a fund, investors will accept that it pays some tax where the investments are made and will expect to pay tax in their own jurisdictions on their profits from the fund when they get their money out. What they will not accept, however, is an extra layer of tax imposed in the jurisdiction in which the fund is managed. Why would they? It is an unnecessary layer of tax which could be avoided by using a fund managed in a more easy-going jurisdiction.
It follows from this that if a country is to be a centre of fund management, there have to be mechanisms by which funds can be managed from that country without adding a layer of tax. For the UK, at the centre of the fund management world, this is pretty important and, over the years, the government has worked with the fund management industry to make sure it can be done. The upshot of that is something called the investment manager exemption and it was deliberately put in place by parliament. It is very well known and HMRC guidance as to how it operates can be found in paragraphs 269010 to 269200 of their International Tax Manual.
In essence, the idea is quite a simple one. If your fund is a company set up somewhere where it will not be charged tax, say in the Cayman Islands or Bermuda or possibly in Ireland or Luxembourg, then the investments can be managed from the UK without profits being taxed here provided that firstly the directors of the company make their decisions overseas (that’s what establishes that the company actually is in Cayman , Bermuda, Ireland or Luxembourg) and secondly that the conditions for the fund manager’s exemption are met, the most important of those conditions being that a customary rate of remuneration is paid to the manager. That, of course, is designed to see that the UK gets its tax on the profits generated by the management activity.
It is no purpose of mine to focus on the detail of the investment manager’s exemption or the circumstances in which funds do or do not need to comply with its conditions. Some do and some don’t, depending on the business which they carry on. Nor do I want to discuss the fact that the rules were recently changed to allow tax free funds to be set up wholly in the UK. My point is different and simpler. The fact that arrangements were made for the board of a fund to meet offshore isn’t an indicator of tax evasion, tax avoidance, deceit, wickedness or even general scuzziness. It simply means that those managing the fund were following the normal method of enabling it to be managed from the UK without adding a layer of tax.
Oddly, that isn’t what you would think from listening to Panorama. There, arranging for directors to meet overseas to establish a fund in a tax haven is lumped together with money laundering and financial crime as part of a general exposé. An accident, perhaps? One of those little mistakes a research team makes under pressure. How did it happen?
I really don’t suppose that it was deliberate. The BBC simply isn’t the sort of place where they cynically mislead the viewers to “improve on” the story even when it was David Cameron’s father who attended the board meetings. Yes, it must have been oversight. Gosh, the BBC must be dreadfully underfunded if they cannot afford to talk to a tax adviser before putting out something of this sort. Almost any tax advisor would have known something as basic as this.
Traditionally the Panorama program asks questions of people by chasing them with microphones. We don’t do that but there are some I would like to ask. Are the contents of this article news to them? Did they know that use of tax haven companies was an officially accepted way of creating a fund when they put together their programme? If they did know that, why did they not tell the viewers?