UK: Overseas UK territories are the ‘biggest enablers of corporate tax abuse,’ tax advocacy group says

Advocacy group the Tax Justice Network has ranked the British Virgin Islands, followed by the Cayman Islands and Bermuda as “most complicit” in helping multinational corporations underpay corporate income tax.

Overseas British territories and the UK cost other countries an estimated $84 billion in lost corporate tax a year, according to TJN.

British overseas territories are the world’s top enablers of corporate tax abuse, according to a ranking by tax advocacy group Tax Justice Network.

The British Virgin Islands is the territory “most complicit” in helping multinational corporations underpay corporate income tax, followed by the Cayman Islands and Bermuda, according to the latest update to TJN’s Corporate Tax Haven Index earlier this month.

“The UK and its network of British tax havens, often referred to as the UK’s ‘second empire,’ are now responsible for a third (33%) of all corporate tax abuse risks measured by the index,” a spokesperson for TJN told CNBC.

Switzerland ranked number four, followed by Singapore, Hong Kong and the Netherlands. Number eight on the list is the self-governing dependency of the United Kingdom, Jersey, while the UK itself came in at number 18.

TJN estimates that the UK and its British tax havens cost other countries an estimated $84 billion in corporate taxes annually.

Defending themselves against the charges made by the advocacy group, spokespersons from some of the governments said they were in full compliance with international tax standards set by the Organisation for Economic Co-operation and Development.

The British government’s Foreign, Commonwealth and Development Office told CNBC that the UK has been abiding by the Common Reporting Standard approved by the OECD in 2014.

CRS is designed to increase transparency about tax matters on a global scale and allow tax authorities to uncover income and assets held overseas by their taxpayers.

FCDO told CNBC it had more than 100 countries sharing CRS information with them, with over 9.2 million accounts reported in total, as of the end of 2022.

The agency added that the Crown Dependencies and Overseas Territories were separate jurisdictions with their own democratically elected governments responsible for their fiscal affairs.

A spokesperson for BVI Finance, which describes itself as “the voice of the British Virgin Islands’ financial services industry,” told CNBC that the territory adheres to global standards, participates in global tax transparency initiatives under the OECD, and fully cooperates with the UK Government and law enforcement agencies in sharing “relevant” information.

Government tax departments of the Cayman Islands and Bermuda did not respond to CNBC inquiries.

Based on the OECD standards for identifying and isolating countries that enable multinational corporations to abuse tax, the British Virgin Islands, the Cayman Islands and Bermuda, are currently rated as “not harmful.”

TJN, which finds standards such as the CRS as insufficient to deal with tax avoidance and fraud, has endorsed efforts by the United Nations to take over regulation of international tax policy.

In August, the UN unveiled a blueprint to develop a universal tax accord for inclusive and effective international tax cooperation.

Broad commitments in the guidelines include equitable taxation of multinational enterprises, addressing tax evasion and avoidance by high-net-worth individuals and effective prevention and resolution of tax disputes.

A total of 110 UN Member States voted in favor of the terms of reference for a new treaty, with 44 abstentions and only eight nations voting against it, including the UK.

TJN has accused the UK of double standards as the country has strengthened its own defenses against global corporate tax avoidance in the past few years, while voting against the UN treaty.

Other nations that opposed the UN initiative were the U.S., Australia, Canada, Israel, Japan, New Zealand and South Korea.

According to the TJN, the world will likely lose $4.8 trillion to tax havens over the next 10 years if the OECD remains the world’s global tax regulator. The UN tax convention is the world’s best shot to avert this loss, the TJN spokesperson said.

The OECD is currently pushing its own policy aimed at better addressing tax avoidance — a global minimum tax deal that would impose a minimum effective rate of 15% on large multinational corporations.

TJN methodology — and pushback
To determine its rankings, TJN evaluated a country’s tax laws based on 18 indicators, including minimum corporate tax rate, tax exemptions and how aggressive a country’s tax treaties are toward other countries.

This is the country’s “Haven Score,” and is meant to evaluate how much “wiggle room” there is for corporate tax abuse. The British Virgin Islands, Cayman Islands and Bermuda received the worst scores across all 18 indicators.

TJN then measured how much financial activity is conducted by multinational corporations entering and exiting the country.

“This means the index ranks corporate tax havens by how harmful they are to other countries in practice, not just in theory,” the TJN spokesperson said.

The Corporate Tax Haven Index has been cited by the European Parliament and the European Commission, along with international organizations such as the UN Human Rights Council and Oxfam.

However, tax experts such as Niels Johannesen, director at the Oxford University Centre for Business Taxation, disagree that the index is an accurate measure for tax avoidance.

Johannesen told CNBC that while TJN’s research is reliable for determining which countries apply which legal measures against international tax avoidance, he doubts the index is credible in measuring how much tax avoidance a jurisdiction facilitates.

“A more meaningful metric is where the shifted profits of [multinational corporations] are booked. The best academic studies with this focus point to Bermuda and the Caribbean jurisdictions as important but estimate that Ireland, for instance, receives more shifted profits than the three of them together,” he said.

Meanwhile, Leopoldo Parada, associate professor in tax law and co-director at the Centre for Business Law and Practice at the University of Leeds, takes issue with the inclusion and framing of TJN’s haven score indicators such as lowest available corporate income tax.

“All countries are using different tools to compete to attract investment. Some have infrastructure, others better tech or cheap labor … countries that have less competitive advantages in some of those areas tend to offer other options, including very low corporate income tax rates and other aspects of the tax system,” Parada said.

“It’s not just because a country has a very low corporate income tax rate that we automatically should consider that a country is open for tax evasion … that country is simply willing to pay the trade off.”