The biggest tax haven in Europe is not what you might expect
By Matthew Lynn
September 13, 2007
LONDON: What is the
biggest tax haven in Europe? Monaco, perhaps? Andorra or Liechtenstein?
No, it's Britain.
Under an obscure piece of British tax legislation, anyone who lives in
Britain but was not born there, can choose "non-domiciled" tax
status. That means billionaires like Lakshmi Mittal, born in India, or
Hans Rausing, born in Sweden, need pay tax only on the small amount of
money they bring into the country every year, and not on their worldwide
In effect, that has made London a tax haven for everyone from Russian
oil tycoons to international investment bankers.
Now that law is under increasing attack and presenting a tricky political
problem for Prime Minister Gordon Brown. The trade unions are gunning
for the loophole. So are politicians from the Labour Party and, more surprisingly,
columnists for conservative newspapers.
They have a point. It does not make much sense for a highly taxed country
- the top income-tax rate is 40 percent - to exempt a small group of wealthy
people. It does not seem fair to the native population.
The trouble is, it is too late to change it. London and, by extension,
the rest of the British economy have become dependent on the megarich.
It would make as much sense for Saudi Arabia to shut down its oil industry
or for Seattle to attack the software business as it would for Britain
to abolish the "non-dom" rule.
There is no denying the impact the rule has had, or the growing debate
about its consequences. According to figures compiled by the British Treasury,
there were about 112,000 people claiming non-domiciled status in the year
through April 2005. Although they reported a total of £9.8 billion,
or $19.9 billion, in earnings, their wealth from overseas income would
be much more.
That is a lot of people with a lot of money. Monaco has a population of
about 32,000, Andorra has 70,000 people, and Liechtenstein about 34,000.
So it is no exaggeration to describe Britain as the biggest tax haven
Some people are not happy about that. In a report last week, the Trades
Union Congress, which represents seven million workers in 66 unions, argued
that closing the loophole could help raise the £4 billion the government
needs to meet its pledge of halving child poverty by 2010.
The Liberal Democrats, the third-biggest political party, have called
for stiffer rules for "non-dom" residents. So have Labour politicians.
"The reputation of Britain as a tax haven and the concern being expressed
by tax authorities in the United States is something that must be addressed,"
Jim Cousins, a Labour member of Parliament, told the House of Commons
Even on the right of the political spectrum, there have been rumblings
of disquiet. Readers of Charles Moore in The Daily Telegraph or Rachel
Johnson in The Sunday Times would have seen attacks on the unfairness
of the "non-dom" rule in recent months. When even The Times
and The Daily Telegraph, two conservative, free-market newspapers, say
people are paying too little tax, something is up.
"I am not convinced that the financial services industry is dependent
on tax breaks for a handful of individuals," Adam Lent, head of economic
and social affairs for the Trades Union Congress, said in an interview.
"After all, many of them are City workers, and both they and the
businesses they work for have deep roots in the U.K. Where else are they
going to go?"
In a world where people and capital are increasingly mobile, and where
multimillionaires are being minted by the second, the attraction of "non-dom"
status in Britain will only grow.
Other tax havens are wacky, obscure little places: Monaco is the only
one that is really livable, and even that is pretty sleepy. But London
is one of the most exciting, vibrant cities in the world. It is a great
place to do business. Why pay punishing taxes in Paris, Munich or Stockholm
when you could be paying virtually nothing in London?
The City, as London's financial district is known, has come to rely on
the status of Britain as a tax haven. That is one of the reasons it is
so successful. If you get rid of the rule now, business might start to
drift away to Zurich.
There is certainly a good case to be made for lowering taxes for the native
British. If Britain had a flat tax of, say, 15 percent, there would be
fewer complaints about how little the super-rich were paying.
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