A firm specialising in AML work has seized on the crackdowns against Russian oligarchs to say how much revenue is lost to those both using offshore accounts and who aren't full citizens – and taxpayers in certain nations. The firm's points have been criticised as wrong by those talking to this publication.

Claims that the UK is near the top of rankings for jurisdictions leaking tax revenues to offshore centres have met with a mixture of puzzlement and derision. Even so, whatever the figures say, the use of countries by Russian oligarchs has cast a shadow over cross-border financial flows more broadly. 

The UK government announced a few weeks ago that it was freezing assets of Russian oligarchs and those deemed to be linked to the regime of Vladimir Putin following Russia’s invasion of Ukraine. 

The actions put the wealth management industry in the cross-hairs of regulators. It is not easy to judge where to draw the line when casting clients out (see this publication’s editorial on the issue, here.) And it also puts more focus on anti-money laundering and know-your-client controls.

According to a press release sent to this publication last week, “Research by AML experts, Credas Technologies, has revealed that the level of UK GDP lost in tax revenue to offshore wealth is one of the highest in Europe, with just Luxembourg, Cyprus, Ireland and Malta ranking higher.”

“The Ukraine conflict has drawn focus to the illicit activities of some super-wealthy individuals and entities within the UK, but it’s fair to say that this is certainly a two-way street and the tax lost to offshore wealth of UK citizens alone is quite staggering. That’s not to say that all offshore wealth is illegal but the financial secrecy it provides is often the defining feature that enables, and encourages, non-residents to hide their assets and even their identity while laundering money and abusing their tax responsibilities,” Tim Barnett, CEO of Credas Technologies, said. 

Barnett’s firm uses data from the World Bank and the Tax Justice Network for its figures. (The TJN, for those who may not follow the offshore world closely, is a campaigning organisation claiming that offshore centres draw off revenues from governments at the expense of the poor and those unable to easily avoid tax. Avoidance is not illegal.)

For example, Credas Technologies said “it’s estimated that offshore wealth owned by UK citizens totals a huge £845.5 billion ($1.11 trillion), by far the highest total compared with any EU nation, with Ireland ranking second at £431.6 billion. This also means that the UK ranks top when it comes to the estimated tax revenue lost as a result of offshore wealth, totalling £19.2 billion.

Luxembourg is the worst offender for revenue losses, where total offshore wealth is valued at £339.2 billion with the nation losing £7.8 billion in tax revenue as a result. This lost tax revenue is equivalent to 14.03 per cent of Luxembourg’s GDP, Credas Technologies said. 

Question marks
Tim Worstall, who has written for WealthBriefing on tax matters, said that a corporation has to get money to the shareholders. If a corporation is in a haven it could avoid tax – for a while. But if the holding corporation is in a more “onshore” jurisdiction then the profits must go from the offshore company to the holding company. They are then declared as profits, taxed, and then can be paid out as a dividend. The UK’s Controlled Foreign Companies rules deal with this sort of issue. Back in 2017, when US President Donald Trump slashed US corporate tax rates – then among the world’s highest – he also made Apple and other big firms pay tax on offshore profits even if money wasn’t repatriated.

Turning to individuals, Worstall said that it is again not enough that money is offshore. 

"It's also necessary that it not be declared at home," Worstall said, pointing that a decade ago when the UK government inked a deal to regularise matters with Swiss banks to recover revenues, the amount recovered was "pitiful." "The vast majority of Swiss account holders either didn’t owe tax in the UK (they might have been expats) or had been declaring earnings and were paying tax," he said. 

A figure in the Luxembourg wealth management industry, who asked not to be named, was unimpressed by the figures Credas Technologies used.

“I struggle to understand the methodology, rationale and relevance of these figures’ sorting exercise, and also the ranking where another way to read it is that Luxembourg managed to establish itself as a major and credible financial centre over the time, and I understand that all the followers are jurisdictions that are obviously competing with Luxembourg and very keen to catch up… I am afraid, this way of operating when confronted to unbeatable factual elements such as those below, is weighing heavily on this organisation’s credibility,” the person said. 

With the use today of automatic exchange of information agreements, such as the Common Reporting Standard framework, this system “ensures de facto that all individuals’ assets (including those of UK’s citizens) are tax compliant,” the person said. “Our experience with HNW individuals and especially ultra-UHNW individuals is that their financial surface is so substantial that they very often want to comply even more than necessary to precisely avoid any naming or shaming,” the person said.

Double-tax treaties – signed by many countries – also need to be taken into account when considering such figures, the person said. “These are made to prevent the economic double taxation of the same revenue, which means that once again, any upstream distribution to one of those individuals has very often already suffered corporate taxation,” the person added. 

Credas Technologies said Cyprus ranks second in its revenue leakage charts where the £845.2 million in lost tax revenue equates to 4.55 per cent of national GDP, with Ireland (3.22 per cent) and Malta (2.71 per cent) also ranking above the UK.

At the behest of US President Joe Biden in October 2021, the Group of 20 group of major industrialised nations, agreed to set a minimum corporate tax floor of 15 per cent – at odds with Ireland, for example, where the rate was even lower. Defenders of the move said it would prevent “harmful” tax competition; opponents have likened such steps as trying to frame a global tax “cartel.”