Show Hide image Ideas 18 December 2020 The end of empire and the rise of tax havens How decolonisation propelled the growth of low-tax jurisdictions, with lasting economic implications for former colonies. By Vanessa Ogle Sign UpGet the New Statesman’s Morning Call email. Sign-up In November, an investigation into the financial assets held by Chancellor Rishi Sunak and his close family revealed that Sunak’s wife, Akshata Murthy, owns shares in a restaurants business that funnels investments through a shell company in the tax haven of Mauritius. The arrangement potentially allows the company to avoid taxes in India, where it plans to build a chain of restaurants. Since the 1990s Mauritius has become an important tax haven for money flowing into low- and middle-income countries, particularly in sub-Saharan Africa. It exemplifies an often overlooked aspect of tax havens and the damage they inflict on societies around the world: that corporate and individual tax avoidance through artificially shifting profits to low-tax jurisdictions hits revenue-strapped developing countries especially hard. When compared to the amount of tax collected overall, lower-income countries suffer higher losses from avoidance and evasion. Moreover, a recent study by the Tax Justice Network identified these proportionally different effects in terms that illustrate the troubling implications of missing revenue during the Covid-19 pandemic: lower-income countries are losing the equivalent of more than 52 per cent of their public health budgets to corporate tax avoidance per year. In higher-income countries, this figure is 8.4 per cent. Part of the reason tax avoidance disproportionately drains the wealth of countries in the global South is that modern tax havens are quintessentially colonial and imperial institutions: the uneven effects of tax-haven activity are in many ways a legacy of the era of decolonisation, to which the rise and proliferation of tax havens is intimately linked. People everywhere have long invented ways to get around paying taxes, tariffs and other levies imposed on them, be it through smuggling, cheating or outright tax revolts. However, it was the introduction of more widely applied income taxes in the late 19th and early 20th centuries that prompted the emergence of tax havens as an institutionalised form of evasion. They appeared on a moderate scale in the final decades of the 19th century in certain Swiss cantons and US states, but it wasn’t until the 1920s and 1930s that progressive income taxes raised during and after the First World War led to a significant expansion of tax havens. Wealthy individuals and companies immediately sought to evade the steeper tax rates. It was in these interwar years that the tax havens of Switzerland and the British Crown Dependencies of the Channel Islands – Jersey and Guernsey – began to cater to a growing clientele. The second era of significant tax-haven expansion followed the Second World War, as taxes were once more raised in many countries, fuelling demand for means of avoiding them. Lawyers and bankers fanned out in force to expand tax-dodging opportunities, or to create new ones in places such as Hong Kong, Singapore, the Bahamas, Bermuda, the Cayman Islands and the British Virgin Islands. Mauritius is a product of a third and final period of expansion, lasting roughly from the 1970s to the 1990s, when a number of jurisdictions in the Indian Ocean and Pacific, such as the Seychelles and Vanuatu, became tax havens. The growth phase of the 1950s and 1960s was arguably the most important in making the system of tax havens what it is today. These decades saw the geographic scope of the offshore world grow dramatically, as well as the full evolution of the typical cast of actors populating tax havens: the lawyers, bankers, accountants and political elites connecting these locations to global financial centres and clients around the world. These players passed laws tightening bank secrecy, put company and trust registration services in place, and advertised their business in newspapers and shiny brochures featuring the mandatory picture of palm trees, blue waters and white sands. In the late 1960s, the Financial Times and the industry publication the Banker began running regular multi-page spreads and special sections detailing the latest developments in offshore destinations, often blurring the line between reporting and free advertising for the tax-avoidance industry. *** The 1950s and 1960s was also the era of decolonisation, as many Asian and African colonies of the British, French and other European empires fought for, and achieved, independence. The proliferation of offshore tax havens just as the colonial empires were coming undone was no coincidence. Many Europeans in the colonial world, especially those who owned land, farms, factories and other enterprises, began fretting about what the end of white rule would mean for their business interests and personal wealth. After decades of coercive and violent European conquest and colonialism, European elites feared that vengeful new leaders might impose taxes and restrictions on their business activity, investments and capital movements after independence. Worse, the new leadership could expropriate and nationalise European property without compensating its former owners. [see also: The history of the British empire is not being taught] Savvy and well-connected, the better-off among the European colonists decided not to leave matters to chance. Lawyers and bankers in London, Nairobi and Nassau eagerly rushed to help. White Britons and other Europeans with colonial investments and property liquidated their assets – assets previously extracted from the land and labour of their colonised subjects – and, where possible, sent the proceedings abroad. An enormous outflow of money from the late colonial world began – much of it fuelling the expansion of tax-haven business. White settlers in the British colonies of Kenya and Rhodesia began sending funds to the Bahamas and the Channel Islands, thus contributing to the growth of tax-haven activity there. Often, former colonial officials and businessmen not only sent their money to low-tax jurisdictions but decided to settle there themselves: in the early 1960s, affluent Britons retreating from empire settled in Jersey, while later in the decade, Malta, another tax haven to emerge from the folds of the British empire, sought to attract imperial returnees as permanent settlers through special tax incentives. Similar developments unfolded in other European empires. In the French empire, it was above all the sizeable settler colonies of Tunisia, Morocco and Algeria that sent money to tax havens. Wealthy Frenchmen had for centuries relied on Swiss bankers to conceal their riches from prying tax authorities and revolutionary fervour alike. During the years of decolonisation, former residents of French colonies and investors in the empire quietly moved their liquid funds to low-tax Switzerland, and some, like their counterparts in the British empire, chose to relocate entirely to a tax haven, in this case, Monaco. The tiny principality had seen some small-scale tax-haven activity in the interwar years, but really took off in the 1950s, partly as a result of funds and settlers from French North Africa and Indochina. As European elites pondered where to stash their money after decolonisation, their choices were shaped by fiscal circumstances in both the colonies and the imperial metropoles. By the time former colonies were gaining their independence in the 1950s and 1960s, tax rates in metropolitan countries like Britain and France had reached considerable levels, particularly for wealthy earners, with revenues used to finance welfare states and to effect moderate economic redistribution. Repatriating colonial assets to metropolitan Britain would have meant incurring some of these higher rates. In the colonial world, on the other hand, taxes on white Europeans had generally been much lower, with settlers, supported by lobbyists back home, opposing progressive tax regimes across the empire for as long as possible. When higher taxes finally arrived, Europeans proved adept at cheating: officials often complained of the difficulties of collecting colonial taxes among the white population. *** The pervasive reluctance of white settlers and businessmen to comply with taxation, and the connections forged by departing Europeans with bankers and lawyers in the Bahamas, Channel Islands and elsewhere in the offshore world, saddled newly independent countries with a difficult economic legacy. The late colonial money panics that descended on European empires on the eve of decolonisation led to what was in effect capital flight on a huge scale. As a consequence, newly independent states hoping to jump-start programmes of economic growth found themselves in dire need of investments and foreign capital, and increasingly dependent on foreign aid and loans from international institutions, often on disadvantageous terms. An even bigger problem was that local wealthy elites in the global South soon discovered the advantages of a Swiss or Nassau bank account for themselves. The same bankers and lawyers who had previously recruited European tax evaders now turned to the fresh cadres of political and business elites in newly independent countries. The difficulties arising from the loss of tax revenue and the need to access external loans have been exacerbated by the unprecedented pressure the pandemic has placed on government budgets. Deprived of the fiscal space from which advanced economies benefit, lower-income countries have found themselves dependent on the IMF for access to new loans and interest-payment relief on existing ones. The ways in which decolonisation helped propel the growth of tax havens has had lasting implications for the economic and social fate of former colonies. Many countries in the global South are held back by low levels of tax enforcement, and by corruption and capital flight, practices which have their origins in the late colonial period. But the history of tax havens shows that those seeking to conceal wealth from tax authorities have long relied on a sophisticated network of various professional groups, who aggressively advertise, recruit and facilitate tax-dodging at every stage. Moreover, the bulk of the network of lawyers, consultants and other white-collar professionals who make up the tax avoidance industry is based in Europe and the United States. *** Governments in the global North have so far lacked the political will to move forcefully against tax havens and their enablers. One reason, surely, is that these governments are yet to get their own houses in order. The Netherlands and Ireland are among the biggest corporate tax havens in the world. The US state of Delaware is another low-tax sanctuary for companies. [see also: Why the end of Google’s “double Irish” tax avoidance will come with a nasty hangover] Most importantly, any determined move by the UK against the avoidance industry would raise uncomfortable questions about why and how places like the Bahamas, Bermuda, Hong Kong, the Cayman Islands, the British Virgin Islands and the Channel Islands became tax havens while either under British colonial rule or holding the status of British Overseas Territories and Crown Dependencies. Tax Justice Network’s recent study estimates that the “spider’s web” of offshore jurisdictions under the UK’s control is responsible for 29 per cent of corporate taxes avoided each year. The Cayman Islands, a British Overseas Territory, is the single biggest contributor of all offshore jurisdictions to other countries’ tax-avoidance losses. The UK’s long history of harbouring tax avoiders, intimately connected to the British empire and its unravelling, is far from over. Vanessa Ogle is Associate Professor of History at the University of California – Berkeley, and currently a Leverhulme Visiting Professor at King's College, London. She is writing a book on the history of tax havens and the offshore economy. Subscribe To stay on top of global affairs and enjoy even more international coverage subscribe for just £1 per month!