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By Ali Qassim
Nov. 9 — U.K. plans to hold companies criminally liable for facilitating tax evasion must extend to British crown dependencies and overseas territories—which include the British Virgin Islands, Bermuda and the Cayman Islands—to be effective, a cross-party group of parliament members warned.
MPs are also warning that the new corporate offenses of failure to prevent tax evasion will be meaningless if the government fails to ensure that the U.K.’s tax office—Her Majesty’s Revenue and Customs—has the resources and political backing to enforce against tax fraud.
The calls for changes to the Criminal Finances Bill come as MPs prepare to debate the proposed legislation Nov. 15 during the committee stage in its passage through parliament.
The bill, which includes measures to combat corruption and money laundering, is part of wider efforts the government is taking to reduce the estimated 5.2 billion pounds ($5.9 billion) lost every year to tax evasion. The bill’s two new tax-related offenses are featured in clauses 37 and 38: “failure to prevent facilitation” of evasion of both U.K. and foreign tax evasion.
Opposition Labor MP Margaret Hodge described the omission of U.K. tax havens from the bill as a “grave error”—the U.K.’s overseas territories and crown dependencies were second only to the U.S. on a World Bank list of countries that provided shell entities involved in corruption cases between 1980 and 2010.
“This problem must be addressed. Otherwise there is a risk that the bill and law enforcement agencies’ ability to investigate crime will be weakened,” she told Bloomberg BNA, underlining that more than half of the 200,000 corporate entities exposed in the recent Panama Papers were registered in the British Virgin Islands.
John Christensen, executive director of advocacy group Tax Justice Network agreed that “to be effective,” the bill needs “to send strong signals” that the current government is serious about curbing tax evasion both domestically and in London’s satellite tax havens such as the Cayman Islands, Jersey and the British Virgin Islands.
Brandon Lewis, the minister of state for policing, defended the government’s efforts during the latest parliamentary debate by by announcing that the BVI has publicly committed to the initiative on beneficial ownership. He also pointed out that all the overseas territories have agreed to have central registries, accessible to law enforcement authorities.
But Simon Kirkland, who is Christian Aid’s Senior parliamentary and political adviser, argued that the U.K. could go much further in forcing territories to introduce public registers.
“Government ministers already have power to require changes in the territories by using orders in council to require the same level of public transparency as the U.K., and set a timetable by when this must happen.”
He told Bloomberg BNA the government “could also work with the territories to make sure this happens and, only if necessary, could impose legislation if action has not been forthcoming by the time the deadline is reached.”
Hodge, who also chairs the All Party Parliamentary Group on Responsible Tax, said she is confident the government will consider what she described as “sensible, pragmatic” amendments.
Even if changes are not raised at the bill’s next stage in a week’s time, the House of Commons could debate these amendments early next year, she said.
A spokeswoman for the Home Office, the government department that oversees crime, declined to comment on proposals to extend the rules to U.K. overseas territories and crown dependencies.
Christensen said another important amendment to the bill would be to introduce “penalties for individual directors and partners who enable financial crimes such as tax fraud.” He argued that the “threat of custodial sentence will exert a powerful discipline over individuals who have often abandoned professional ethics in favor of the huge financial awards that aggressive tax planning can provide.”
Hodge added that the bill currently focuses “too narrowly” on tax evasion but fails to punish companies or individuals for “aggressive tax avoidance” from which HMRC estimates it loses more than an annual 2.2 billion pounds.
León Fernando del Canto, managing director of barristers firm Del Canto Chambers, said that a key issue is the budget allocated to investigations and how the coordination between the HMRC Prosecution Office and The Crown Prosecution services—which came together in 2010—will continue working.
Del Canto added this is particularly an issue, “specifically at an international level, which is where the majority of tax evasion crimes occur.”
Asked about the concerns over HMRC’s enforcement abilities, an HMRC spokesman told Bloomberg BNA that more than 30 individuals and companies are being investigated for tax fraud-related offenses by the Panama Papers task force—a cross-agency task force that includes the HMRC.
In a Nov. 8 written ministerial update to the House, the chancellor of the exchequer and the home secretary reported that the task force has also identified 26 offshore companies whose beneficial ownership of U.K. property was previously concealed.
According to David Sleight, a partner in the London-based law firm Kingsley Napley, there are “growing concerns from those who defend HMRC prosecutions that the governmental pressure to crack down on tax evasion is resulting in HMRC applying its criminal investigation policy in an inconsistent manner.”
Cases that would previously have been deemed “civil” in nature “are now being pursued as criminal investigations, despite the fact that they generally take longer, are more resource-intensive and do not guarantee any financial return at their conclusion,” he told Bloomberg BNA.
“The pursuit of big ticket prosecutions against corporates and professional ‘enablers’ creates great headlines, but ignores practical and financial realities,” he said. “Spending time and resources prosecuting cases criminally that previously would have been dealt with under the civil regime is not cost-effective and is arguably counterproductive.”
For companies, the new offenses also pose significant challenges. “Businesses are quite rightly concerned that policing the ‘failure to prevent foreign tax evasion’ offense will be a compliance nightmare,” Sleight said.
In particular, for U.K. companies working in foreign jurisdictions, “it will require an additional layer of compliance that could put them at a commercial disadvantage to those operating locally,” he said.
More importantly, he added, is the question of whether these investigations are going to assist the U.K. in plugging its reported tax deficit.
“Why should the U.K. be spending significant resources in enforcing the laws of foreign jurisdictions with respect to the tax which is ultimately payable in that jurisdiction?” Sleight asked.
Under clause 39 of the bill, the chancellor of the exchequer must publish guidance for corporations about procedures that relevant bodies can put in place to prevent these offenses, similar to other provisions in the U.K., such as under the Bribery Act 2010.
“How this guidance will assist those companies who do business in jurisdictions with novel tax legislation remains to be seen,” he said.
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The Criminal Finances Bill as introduced is available at http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0075/cbill_2016-20170075_en_1.htm
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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