The growing pressure for tax transparency

In Greek mythology, curiosity led Pandora to open a container left in the care of her husband, releasing a host of physical and emotional evils upon humanity.

From this fable has grown the idiom that to “open Pandora’s box” is to start something that will cause many unforeseen problems. This must be a sentiment shared by political, business and cultural leaders whose private tax affairs have been exposed by the Pandora Papers and earlier data leaks such as the Panama and Paradise Papers.   

The release of the Pandora Papers last month brought global exposure to the financial secrets of about three dozen current and former world leaders, plus more than 330 politicians and public figures in more than 90 countries and territories. The impact has already been significant, not least in last month’s close election in the Czech Republic after billionaire Prime Minister Andrej Babiš was named in the disclosures. 

While the international fallout has been far reaching, only a relatively small number of UK territories have traditionally been among the key centers of international tax avoidance. During the process of decolonisation, Britain held on to a global network of islands that either voted to remain UK territories or did not chooseindependence, including 14 overseas territories and three British dependencies.   

To be sure, these remnants of empire are far from the only territories that lie at the heart of the problems that the Pandora Papers expose. Witness, for instance, the modern role of several US states, including sparsely populated South Dakota and Delaware, which have become major destinations for foreign assets. 

However, the role of UK territories has long drawn much scrutiny, with the gradual ratcheting up of pressure to increase tax transparency. While Prime Minister Boris Johnson sought to shrug off the Pandora Papers revelations, previous governments in London have taken action to ensure fairer and more open tax systems.  

In May 2017 the UK hosted an international anti-corruption summit, and has been at the forefront of recent global debate on these issues. The 2013 G8 summit in Northern Ireland resulted in the Lough Erne Declaration, which urged countries to “fight the scourge of tax evasion” with leaders agreeing to measures that would combat the illegal evasion of taxes, as well as the use of tax havens and loopholes. 

The UK was also the first member of the G20 to establish a public central registry of company beneficial ownership information.  It has introduced some of the world’s strictest legislation on bribery, making it a criminal offence for a company to fail to prevent a bribe being paid. London also co-chaired UN initiatives that put tackling corruption at the heart of the new UN Development Goals. 

However, these actions remain a work in progress, and political pressure for further reform rises periodically, such as after the Paradise Paper revelations in November 2017, which Labour shadow finance minister John McDonnell described as the “biggest tax scandal of this generation.” In 2016, after the Panama Paper disclosures, opposition Jeremy Corbyn proposed that the government impose direct rule on any of its territories that did not fully comply with UK tax laws.   

London has cracked down in the past in similar ways so this is not inconceivable again in the future.  In 2009, for instance, the UK government imposed direct rule on the Turks and Caicos after local officials were accused of selling government land for personal gain. The islands had home rule restored only after the local government passed acts that required tax information to be shared with the UK government. 

While the UK imposing direct rule on its territories is, in principle, a relatively straightforward process, critics have pointed out that a consequence of seeking to close them down in this way is that people and companieswould simply move their money from one jurisdiction to another where there might be even fewer tax regulations and less transparency.  Many have therefore argued that what is needed is greater harmonised global moves toward tax transparency.  

While such dramatic international action may be unlikely, campaigning at national and global levels for new measures to tackle these issues is unlikely to fade away.  Indeed, especially if new revelations continue to surface, and the Pandora’s box of global tax secrecy continues to open, the pressure for increasing tax transparency is only likely to grow. 

• Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics