AN ANALYSIS OF THE EXTENT

TO WHICH CRITICISM OF THE

USE OF OFFSHORE TAX
STRUCTURES BY UK BASED
MULTINATIONAL
CORPORATIONS IS JUSTIFIED
BUSINESS PROJECT

THE CASE OF THE CAYMAN ISLANDS AND JERSEY FINANCIAL INDUSTRIES

Acknowledgements

Thank you to my parents and certain family members who have provided moral support
throughout the challenge of writing this report. I thank Christian Röell for making himself
available as an additional project advisor. I am tremendously grateful to Anthony Travers,
OBE, Richard Teather and Jersey Finance for providing responses to interview questions for
this research. I also thank my project supervisor Robert Manderson for offering regular
meetings and academic ideas on how to improve my project.

1
Abstract

Purpose – To investigate the validity of the criticism of offshore tax structures giving a
balanced view and using the Cayman Islands finance industry as a case study.

Design/ Methodology/ Approach – Qualitative primary research in the form of semi-

structured interview questions and secondary-based journal articles, news and organization
reports.

Findings – Benefits of offshore tax structures include their legality, convenience for foreign
investors and their stimulation of non-haven (onshore) investment. Onshore taxation issues
should be the primary focus of governments and the illegal gathering of private client data
in leaked documents is never justifiable. The negative impacts, although some subjective, of
offshore tax structures include their usage for toxic avoidance, unfair competitive advantage
over immobile companies, and the problem of enforcing ethical standards. Analysis of the
Cayman Islands and Jersey showed that some offshore countries have adequate and more
robust regulation to prevent tax evasion than onshore financial centers. However, further
research upon the effects of the existence of low tax and zero tax jurisdictions is needed to
assess the impact on global welfare.

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Table of Contents

Acknowledgements ............................................................................................................1
Abstract .............................................................................................................................2
1. Introduction, Project Aims and Identification of Business Issue .................................4
1.1 Introduction .................................................................................................................4
1.2 Project Aims ................................................................................................................4
1.3 Identification of Business Issue ....................................................................................4
2. Literature Review.......................................................................................................4
2.1 Benefits of Offshore Tax Structures .............................................................................4
2.1.1 Legality .................................................................................................................4
2.1.2 Tax Structures .......................................................................................................5
2.1.3 Stimulation of Non-Haven Investment and Social Benefit .....................................6
2.2 Onshore Taxation Issues ..............................................................................................8
2.3 Negative Impacts of Tax Havens Usage .......................................................................8
3. Analysis of Case Examples: Cayman Islands and Jersey Financial Industries .................9
4. Ethics: Is it Acceptable for UK Companies to Use Offshore Structures?....................... 10
5. Conclusion .................................................................................................................. 12
6. Recommendations ........................................................................................................ 13
7. Bibliography ................................................................................................................ 13
8. Appendices .................................................................................................................. 16
Appendix A- Interview consent form from and letter to Anthony Travers, OBE ........... 16
Appendix B –Interview response questions from Anthony Travers, OBE ..................... 18
Appendix C –Interview response questions from Jersey Finance*. ............................... 19
Appendix D: Interview response questions from Richard Teather, Bournemouth
University Tax Law Senior Lecturer and Strategy Consultant ...................................... 24
Appendix E: Interview Consent form from Richard Teather ......................................... 26
9. Personal Learning Statement ........................................................................................ 27

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1. Introduction, Project Aims and Identification of Business Issue

1.1 Introduction

The use of offshore tax structures dates back to 1950 in Switzerland (Palan, 2018). Since then,
offshore financial centers have expanded all across the world creating corporate tax
competition between nations. Multinational Corporations or MNCs that have branches in the
UK often use offshore jurisdictions for a variety of reasons (Lynn et al., 2018). This
investigation compares the net social benefit of onshore UK companies keeping capital
onshore versus using offshore tax structures. From a utilitarian perspective, the idea of acting
in the greater good for society, MNCs should behave in a way that benefits the most people
(Bird-Pollan, 2016). On the other hand, absolutist principles define actions as being right or
wrong in themselves and MNCs may justify tax avoidance in several ways which are discussed
in greater detail.

1.2 Project Aims

• To investigate the ethical implications of corporate tax avoidance

• To outline the main arguments for and against using offshore structures.
• To conduct a case study on the moral attitudes of industry professionals towards
unethical practices.

1.3 Identification of Business Issue

The business issue of this project is whether the use of offshore jurisdictions by companies
that operate within the UK can be justified. Businesses must manage their corporate structure
in a way that is beneficial to society, this includes paying their fair share of tax.

2. Literature Review

2.1 Benefits of Offshore Tax Structures

2.1.1 Legality

The first argument to demonstrate that it is acceptable for UK corporations to use offshore
tax structures is because they are legal. If we assume that each country should have
sovereignty over setting its own laws, it should also be able to set its own tax rate (Lynn et
al.,2017). The UK government must be held accountable for setting their own laws and HMRC
for enforcing them. If a particular structure is deemed to be unethical then it can be ended
by HMRC. The UK, a non-tax-haven, could end all usage of tax havens by corporations simply
through imposing an immediate pure worldwide tax on corporate income (Roin, 2007). This
includes the prohibition of income deferral and repatriation. The fact that this has never
happened in any country in the world to date suggests that non-tax havens derive a social
benefit from corporate usage of offshore tax structures (Dharmapala,2008).

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 2.1.2 Tax Structures
Another reason why pooling money into offshore funds is ethically sound is because often,
the funds that are parked offshore, are there for efficiency when collecting investors’ money
from multiple countries and not for avoiding any tax (Pragnell, 2017). An example of this
would be an investment fund1 structure as shown on the right-hand side of diagram A. The
diagram illustrates funds structured from the U.S.A but the principle is the same for U.K
companies. The funds are then collected and invested into companies in different countries.
If the fund is based in a jurisdiction with no taxes, the fund can pay the profits out and the
investors pay taxes where they are resident. However, if the fund was based in the UK, the
foreign investors would have to pay British income tax from income deriving from the fund.
These investors then have to wait up to a year just to claim back this money they are owed
from HMRC (Lynn et al., 2017). This is very inconvenient for investors. Therefore, domiciling
the fund in the UK would thus be inefficient and inconvenient for any investor who is not from
the UK. It is thus illogical to house a fund targeting foreign investors in the UK. Further, the
idea that much of the media have decided it is acceptable for goods and services to move
across borders without friction but unacceptable to move capital across borders is
nonsensical.

(Tunkel,2013)

Although not subject to corporate tax, it is also worth clarifying the treatment of UK investors
into offshore funds. If any investor who is resident in the UK has investments in an offshore
fund, the UK government charges tax so that ‘realisations of interests in offshore fund
investments to tax as income rather than capital gains’ (UK government, 2016). Therefore,

1
Diagram A illustrates a U.S. fund, but for a U.K company the structure is the same.

5
investing using compliant offshore structures does not necessarily mean any tax is being
avoided because due tax is paid when repatriated onshore to the UK.

2.1.3 Stimulation of Non-Haven Investment and Social Benefit

For reasons already stated regarding where funds are incorporated, many pension funds
choose to operate out of low tax jurisdictions. For example, the UK’s labor party has
investments in the ‘parliamentary contribution pension fund’ which invests in Google,
Amazon and Apple (Donohoe, 2016). All of these companies use offshore tax structures.
Furthermore, the BBC pension fund invests in these same companies in addition to Facebook,
another company with a history of UK corporate tax avoidance, and two funds based in Jersey
and the Cayman Islands (Wood, A. 2017). Despite this fact, the UK media, including the BBC
were quick to hypocritically criticize Queen Elizabeth II as a result of the ‘Paradise Papers’ leak
for her offshore investments (Lynn et al., 2017).

Dharmapala (2008) notes that although a disproportionate share of Foreign Direct

Investment or FDI flows through low tax and zero tax jurisdictions, this does not necessarily
reduce social welfare onshore. In fact, by contrast, it is suggested that the use of tax havens
lowers aggressive tax competition between nations (Desai, Foley and Hines Jr., 2005). This is
because it is more efficient for countries to tax immobile capital such as that of domestic
entrepreneurs and firms in which the cost of setting up offshore is too high, than it is to
attempt to tax mobile capital such as that of multinational companies. Through the usage of
tax planning by way of offshore structures, the cost of investing in non-haven countries such
as the UK is diminished. Therefore, tax havens actually increase investment into the UK
economy (Dharmapala, 2008).

Additionally, corporation tax which is much higher in the UK (19%), than the Cayman Islands
for example (0%), is a burden that is often passed onto other stakeholders such as workers in
the form of lower wages and consumers, in the form of higher prices (Milanez, 2017).
Therefore, if low tax jurisdictions were not available to multinational MNCs, consumers would
be paying more for the same products. This is a net negative for the economy (Gordon, 1986
as cited by Dharmapala,2008).

When comparing the social benefit between keeping capital onshore, thus generating tax
revenue for the government, and the usage of offshore structures, Dharmapala (2008) uses a
payoff matrix. Each country’s pay-off is defined as the pre-tax profit plus the social benefit of
the tax revenue. The benefit from the profit includes the amount of domestic capital
employed and the wages of the workers.

Diagram B: Dharmapala (2008)

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The matrix shows two onshore countries. Country A and Country B are not competing
aggressively to set corporate tax rates lower due to the existence of Country C (not shown in
matrix), the offshore or indeed onshore (e.g Delaware) tax haven. Thus, the Nash equilibrium
in this example is each country setting their rate at 50%. Therefore, tax havens mitigate
aggressive tax competition. This study also illustrates that the presence of tax havens is a
driver of onshore economic growth due to the positive social benefits resulting from
reinvestment of capital and higher salaries for workers onshore.

As shown in diagram C, that in spite of US FDI into tax havens increasing slightly over a 12-
year period, US federal corporate tax income increased. This suggests that the negative effect
of tax havens on corporate tax revenue are somewhat exaggerated. Although the data is for
the U.S.A, the idea of tax havens stimulating investment into the UK is the same.

Auerbach (2007), cited in Dharmapala (2008), show the decline of US federal corporate tax
revenues between 1960 and 1990. Since the global emergence of tax havens (Post 1990) this
trend of lower revenues has reversed, thus showing the positive effect of tax haven FDI.

Diagram C: Dharmapala (2008)

Most recently the case of Apple’s repatriation led to tax payments of $38 billion to the IRS, a
$350 billion onshore spending plan and employee increase of 20,000 (Reuters,2018). The fact
that so much economic output is generated by Apple onshore in terms of employment, tax
payment and infrastructure spending show the offshore structure is used to benefit the
American economy.

Furthermore, a Netherlands based study showed that multinationals were not avoiding tax
any more than domestic firms were. This could be due to the fact that the Netherlands is
already considered a tax haven with corporate rates of 20% and therefore companies that
locate there have a lower incentive to avoid tax (Hammer, 2017). Thus, the Netherlands as a
country benefits from the tax money raised in the same way that the USA has benefitted from
Apple’s capital repatriation.

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2.2 Onshore Taxation Issues

Tax Evasion

Although much of the media responded in a sensationalist and emotional way to the Paradise
Papers, The Financial Times recently published an article detailing evidence of £80 billion tax
evasion and money laundering in London (Houlder, 2017). The report shows how only 6 staff
at Companies House, in London oversee four million companies. With this scale of tax evasion
in London, it shows that the most salient issues with inadequate tax regulation are onshore.
The focus of the government should be cracking down on illegal activity before legal, tax
avoidance is even addressed. Furthermore, there is little evidence of tax evasion offshore.
Jurisdictions such as Jersey, Isle of Man and Mauritius were recently rated by the OECD as
more tax compliant on exchange-of-information than the U.K, U.S.A, Brazil, Canada, Australia,
Germany and India, seven of the world’s largest and emerging economies (OECD, 2017).
Therefore, this leads to the question of why tax competitive jurisdictions are implicated in
any way when several of them are more tax compliant than the leading economies of the
world today. After all, the Crown dependencies are leading the way in combatting tax evasion,
money laundering and terrorism finance (Pragnell, 2017).

Data Theft

The popular fallacy of offshore secrecy should not be confused with privacy as noted by
Pragnell (2017). In the same way each individual has the right to keep their own bank
statements, income and family financial structures private, so should companies have the
right to keep their financial details away from public viewing. The only third party with the
right to access such sensitive financial information should be and is HMRC. The Panama
Papers and the Paradise Papers had a combined total of 4 Terabytes of data which were
leaked illegally (Bernews, 2018). This highlights the fact that the investigative media deemed
it ethical to use stolen financial information in programs such as BBC’s panorama. This is not
only controversial but in the case of the Paradise Papers, has led to a court case against the
BBC and the Guardian as a result of breaching client privacy (States of Guernsey, 2017). It is
therefore evident that there is an important distinction to be made between what is ‘in the
public interest’ and that which is merely interesting to the public. The result of this case as of
the time of writing is yet to be determined.

2.3 Negative Impacts of Tax Havens Usage

Usage for Toxic Avoidance

There are clear benefits of using offshore structures for MNCs with a UK presence. In
combination with these benefits and issues with policing corporate taxes onshore, it is also
important to consider the negative impacts of offshore jurisdiction usage to give a more
balanced analysis. Although tax evasion, which is illegal avoidance of taxes, appears to be less
of a problem offshore than onshore as previously mentioned in the section above, abuse of
legal structures by MNCs continues to be an issue (UK Government, 2017). These toxic tax
avoidance structures can be said to be unethical because they exploit loopholes ignoring the
intent of the legislators who wrote the tax laws. Large MNCs have resultantly made gesture

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payments to tax authorities globally. For example, in the UK, Google struck a deal in 2016 with
HMRC and paid £130 million (The Telegraph, 2016). This may appear to solve the issue but
ultimately MNCs continue to take advantage of different tax regimes. Ultimately, whether or
not these one-off payments adequately compensate for the tax revenue avoided is
inconclusive.

No Level Playing Field for Domestic Companies

Toxic avoidance by MNCs is a problem because it places a reliance on immobile companies to

foot the tax bill. Such companies include entrepreneurs and startup companies who face an
uphill battle against MNCs who are paying much less tax and therefore have lower costs.
These domestic firms have ‘much tighter cash flows’ and have less liquidity available for
reinvestment (de Colle and Bennett 2014). Furthermore, if the consensus among companies
is that MNCs are avoiding tax, then a culture of non-compliance of the tax laws by other firms
may develop.

Difficulty Enforcing Ethical Standards

Furthermore, the usage of global structures makes it difficult to police as it relies on the
cooperation of different countries. Some offshore countries may depend upon tax avoidance
structures for revenue through company registration, licensing fees for offshore companies,
work permits and other charges. It also helps employ their labor markets (Littlewood, 2004).
Therefore, the need for a third-party organization as an independent mediator such as the
OECD is clear given that each tax haven is financially incentivized to remain in the market. If
some tax havens exit the global marketplace, this leaves a ‘larger share of the accounting
profits’ from nonhaven countries for the remaining havens (Keen and Konrad, 2014).

3. Analysis of Case Examples: Cayman Islands and Jersey Financial Industries

The reason for choosing the Cayman Islands and Jersey as case studies for analysis is because
they have been regularly highlighted in the media as an example of tax haven used by UK
companies for offshore structures. The interview questions focus on the new Base Erosion
Profit Shifting (BEPS) rules introduced by the EU and how these will affect the jurisdictions.
The semi-structured interview data and general comments were provided by various
authoritative sources. Firstly Anthony Travers, OBE Former chairman of Cayman Finance,
current Chairman of the Cayman Islands Stock Exchange and Senior Partner at International
Law Firm Travers Thorpe Alberga answers questions relating to the Cayman Islands (See
appendix B for full interview).

Jersey Finance and Richard Teather, a tax professional and senior lecturer at Bournemouth
University, provided separate responses relating to Jersey Finance Industry (see appendix C
and appendix D respectively). These interviews are analyzed and compared with each other
and to the secondary data analysis from the literature review.
Much of Mr. Travers’ response corroborates analysis in section 2.1. The reference to
Controlled Foreign Corporation (CFC) rules and tax law corresponds to the secondary data in
section 2.1.1 where the legality of offshore tax structures is discussed. Secondly, Mr. Travers
then highlights the fact that these laws ensure tax is paid domestically where it is due. This

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is also mentioned in section 2.1.2 in the example of foreign investors in an offshore fund.
Question one explains the reasons for the BEPS rules and the problems caused by double
tax treaty agreements. Question two then makes reference to the fact that trillions of
dollars are transacted daily showing that freedom of movement of capital is necessary in the
modern world. This is pointed out in section 2.1.2 where the freedom of movement of
goods and services is accepted as moral and ethical therefore not accepting the free
movement of capital is a non-sequitur. Additionally, the response to question three
highlights ‘the legitimate right to privacy’ for companies in both the UK and the Cayman
Islands. Section 2.2 similarly addresses this in the Data theft section of onshore tax issues.
Question four then clarifies how the Cayman Islands goes above and beyond that of onshore
regulators in financial transparency through the ‘applied Financial Action Task Force rules
which are not required in the United Kingdom.’ It is therefore not surprising to note that the
Cayman Islands may take no further part in BEPS reporting requirements.

Jersey Finance immediately highlighted the various agreements already in place to support
the BEPS initiative including the MCCA in 2016 and the MLI in 2017. The latter was the
signing of a multilateral convention related to the implementation of tax treaty measures.
As referred to earlier in the report, Jersey are more compliant than the UK in relation to
information exchange, anti-money laundering, tax transparency and financial regulation.
This is pointed out along with an insightful study showing that Jersey, along with the
Cayman Islands are more Know-your-Client (KYC) compliant that the Entirety of USA, UK,
Ireland and Switzerland combined. It can be inferred that money laundering through US law
firms is in fact easier than through offshore jurisdictions. In question three as said by Mr.
Travers, Jersey Finance noted how confidentiality is key and even suggested that without it
‘kidnapping and extortion’ of wealthy individuals could occur. Further, they mention that
the UK’s public register is of dubious value because no ‘meaningful checks’ take place to
verify information and money launderers can simply not comply with self-reporting
requirements. This validates the onshore tax evasion in section 2.2 of this report. Jersey
Finance, similar to Mr. Travers, believe that financial crime agencies [such as HMRC as noted
in section 2.2 on data theft] should be responsible for monitoring financial crime in the same
way that criminal investigations are entrusted to public bodies.

The final question “Is profit shifting ethical?” has different responses from all of the
interviewees. This highlights the subjectivity of the question, but each response has
commonalities. Jersey Finance claim to not support profit shifting (toxic tax avoidance) and
the island’s position as a ‘substance jurisdiction’ as noted by Mr. Teather, will enable
companies to prove real economic activity is taking place. However, Mr. Teather points out
in question four that intangible assets such as intellectual property and innovative financing
are not dealt with under the BEPS initiative. Similarly, Mr. Travers mentions the ‘wholly
inept’ handling of the taxation of royalties and interest deductions by the BEPS rules. It
follows that Mr. Teather states that profit shifting is ethical in his view given the complexity
of the topic and the legitimacy of transfer pricing. Therefore, Jersey and the Cayman Islands’
ethical view of profit shifting is not significant in the eyes of the law.

4. Ethics: Is it Acceptable for UK Companies to Use Offshore Structures?

10
The Pros and Cons of using offshore structures have been discussed above without
referencing ethical theory directly. However, the case of Base Erosion Profit Shifting in the
Cayman Islands and Jersey raises the ethical question of where the boundary lies between
ethically acceptable tax avoidance and overly aggressive tax avoidance. Assessing whether
these legal offshore structures are ethically sound is more complicated than it may seem. As
pointed out by the OECD, ‘[tax] avoidance is a term that is difficult to define’ cited in Colle
and Bennett 2014.

As previously discussed as a benefit of offshore tax structures, the legality of the structures
is what makes them acceptable (Houghton, 1979). However, ethically, many reject this as a
weak argument. The fact that less than a century ago tax avoidance was not viewed as
immoral, highlights the subjective nature of the topic. Previous literature establishes that tax
avoidance lies somewhere in between tax mitigation, or the lowering of the tax burden and
tax evasion, avoiding tax illegally (Prebble and Prebble, 2010). de Colle and Bennett (2014),
propose a three-part ethical framework for determining whether tax avoidance is ethically
acceptable or not. The paper is helpful because in many of the cases where offshore
structures are set up, a lower tax bill is not the primary reason for using the structure, as
discussed in the benefits section of this paper. The paper also brings clarity as to what is
meant by the term ‘aggressive’ tax avoidance. The three questions they ask are to distinguish
between acceptable and unacceptable structures are whether the structure is state-induced,
strategic or toxic.

In the case of state-induced tax avoidance, this alludes to onshore taxation relief systems set
up by the government. These are not just legal but also encouraged by the state. Strategic
and toxic avoidance refer to the use of offshore structures. Strategic avoidance relates to any
commercially viable business strategy where the tax reduction is not the primary objective.
This type of tax avoidance is fully transparent and legally compliant. However, whether the
strategy complies with the spirit of the law (the intention of the regulators) depends on the
strategy in question. Lastly, the term ‘toxic avoidance’ is aimed at any structure that has the
following three characteristics:

1) Has an opaque and artificial structure

2) Acts against the intention of the regulator
3) Involves transactions and valuations that have no business purpose

Although the paper does not explicitly point out what is ethically acceptable, it does suggest
that toxic avoidance is unethical. The examples given for this are profit shifting via use of
transfer pricing setups, artificial payments to subsidiaries and loophole exploitation to
achieve double non-taxation. Overall, this paper gives a much more balance ethical analysis
than previous literature which groups tax avoidance with tax evasion as being equally
unethical and ‘one phenomenon’ (Prebble and Prebble cited in de Colle and Bennett 2014).

Denis Healey, a labor Chancellor of the Exchequer in the 1970s said “The difference between
tax avoidance and tax evasion is the thickness of a prison wall” cited in Ellife, (2011). This
research and quote suggest that aggressive toxic tax avoidance schemes can be close in
nature to illegal schemes and the definitive line of legality becomes blurred. Toxic tax
avoidance schemes are ethically dubious and provide evidence as to why HMRC was

11
successful in 22 out of 26 corporate tax avoidance litigation cases in 2016-2017 (UK
Government, 2017).

Overall, it can be inferred that if offshore structures are used primarily for toxic avoidance,
this is considered to be unethical. However, and in light of Mr. Travers’ response to his view
on the ethics of profit shifting, ethics cannot be the focus for ‘suggesting taxes’ given their
subjective nature based on ‘religious moral and other beliefs’ (Travers,2018). Whether
offshore tax structures are being used unethically does not signify that offshore tax structures
themselves are unethical. A common misconception is that by companies merely having an
offshore presence means that there is some moral wrongdoing is false.

5. Conclusion

This report set out to investigate the ethical implications of corporate tax avoidance, outline
the main arguments for and against using offshore structures and to conduct a case study on
the moral attitudes of industry professionals towards unethical practices. The literature
review begins at section 2.1 with analysis of the benefits of offshore tax structures including
their legality, the structural differences and significance of onshore versus offshore structures
and that the existence of offshore jurisdictions stimulates non-haven investment. The next
section, focusses on onshore taxation issues and how these should be the primary focus of
governments and that the illegal gathering of private client data is never justifiable. Section
2.3 then discusses the negative impacts of offshore tax structures that are the usage for toxic
tax avoidance, the difficulty for domestic companies in remaining competitive with MNCs,
and the problem of enforcing ethical standards.

In several cases, as in the case of the Cayman Islands and Jersey, offshore jurisdictions have
more robust regulation to prevent tax evasion than onshore financial centers have. It is not
up to the public to police taxation payments and the assessment of taxation payments should
be and is carried out by HMRC. The next section is the interview and analysis offshore
jurisdictions: The Cayman Islands and Jersey, from the perspective of a very experienced
industry professionals. Section four then discusses a suggested ethical framework for
categorizing offshore structures. Overall, given the limited, if not anecdotal evidence and
academic research to the contrary, it can be deduced that criticism of offshore tax structures
and their existence is often invalid. However, some points addressed in this paper such as the
fact that domestic UK companies who cannot afford to incorporate offshore or are otherwise
immobile may end up paying a higher percentage of tax than MNCs. Therefore, further
research upon the effects of the existence of low tax and zero tax jurisdictions is needed to
assess the impact on global welfare. Although such research is unlikely to be conclusive, it
would nevertheless be interesting to see the impact on global welfare of the existence of low
tax jurisdictions. The more so, given each country’s sovereign right to set their own tax rates
as discussed early, it is equally unlikely that such research would dissuade UK MNCs from
making use of offshore structures. It can also be concluded that this work brings balance and
a rationale for the existence of offshore jurisdictions that is so often overlooked in bad press
by the media.

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6. Recommendations

The purpose of this report is mainly for informing the general public, UK companies and media
regarding offshore structures. However, the main recommendations for the UK government,
The EU, financial regulators and academics that this report alludes to are as follows:

Firstly, UK companies should not engage in toxic tax avoidance to prevent prosecution by
HMRC and because this is considered to be morally unacceptable in contemporary society.
Although the effect of such toxic structures on global welfare needs further study. Further, if
increased transparency for all offshore jurisdictions is needed, then transparency onshore
must be given equal importance. Scrutiny of offshore jurisdictions should be the same
onshore as offshore, given that the dangers of tax evasion are no higher offshore than
onshore as shown by this research. Additionally, the need for adoption of an ethically
objective benchmark for assessing whether offshore corporate structures are acceptable or
not should be introduced in the UK. Much of the literature backs up this viewpoint in the need
for an ethical benchmark (de Colle & Bennett, 2014). This is also shared by offshore centers
themselves who regularly deal with a misinformed public viewpoint (States of Guernsey,
2017). Finally, BEPS and other regulations should be improved so that intangible assets such
as intellectual property and the taxation of royalties are dealt with appropriately.

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Kadet, J., & Koontz, D. (2016). Profit-Shifting Structures: Making Ethical Judgments
Objectively, Part 1. Tax Notes, 151(13), 1831-1843

Keen, M. and Konrad, K. (2014). International Tax Competition and Coordination.

Littlewood, M. (2004). Tax Competition: Harmful to Whom?. Michigan Journal of

International Law, 26(1), p.469-477

Lynn, M., Lynn, M., Moore, C., Jones, P., Lynn, M., Neuding, P. and Spectator, T. (2017).
Who decided that keeping money in ‘paradise’ is a crime? We should all thank havens | The
Spectator. [online] The Spectator. Available at: https://www.spectator.co.uk/2017/11/who-
decided-that-keeping-money-in-paradise-is-a-crime-we-should-all-thank-havens/ [Accessed
12 Feb. 2018].

Milanez, A. (2017). Legal tax liability, legal remittance responsibility and tax incidence |
OECD READ edition. [online] OECD iLibrary. Available at: http://www.keepeek.com/Digital-
Asset-Management/oecd/taxation/legal-tax-liability-legal-remittance-responsibility-and-tax-
incidence_e7ced3ea-en#.WoYLgoLLhQI#page2 [Accessed 15 Feb. 2018].

OECD (2017). Ratings - Organisation for Economic Co-operation and Development. [online]
Oecd.org. Available at: http://www.oecd.org/tax/transparency/exchange-of-information-on-
request/ratings/ [Accessed 16 Feb. 2018].

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Oxfam.org. (2016). World’s worst corporate tax havens exposed - Oxfam report reveals
dangerous race to the bottom on corporate tax | Oxfam International. [online] Available at:
https://www.oxfam.org/en/pressroom/pressreleases/2016-12-12/worlds-worst-corporate-tax-
havens-exposed-oxfam-report-reveals [Accessed 2 Mar. 2018].

Palan, R. (2018). History of tax havens. [online] History & Policy. Available at:
http://www.historyandpolicy.org/policy-papers/papers/history-of-tax-havens [Accessed 12
Feb. 2018].

Pragnell, M. (2017). ‘Paradise papers’ divert attention from real tax issues. [online] The
Telegraph. Available at: http://www.telegraph.co.uk/business/2017/11/09/paradise-papers-
divert-attention-real-tax-issues/ [Accessed 16 Feb. 2018].

Prebble. Z. M., and J. Prebble. 2010. The Morality of Tax Avoidance. Creighton Law
Review 43(3): 693–745.

REUTERS. (2018). Apple plans new U.S. campus, to pay $38 billion in foreign cash taxes.
[online] Available at: https://www.reuters.com/article/us-apple-tax/apple-plans-new-u-s-
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just-a-low-tax-jurisdiction.html [Accessed 2 Mar. 2018].

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from-Guernseys-Chief-Minister-on-so-called-Paradise-Papers [Accessed 2 Mar. 2018].

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UK Government (2017). Measuring tax gaps 2017 edition. [online] Available at:
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8. Appendices

Appendix A- Interview consent form from and letter to Anthony Travers, OBE

Monday 9th April 2018

Dear Mr Travers,

I am undertaking a Business Project as part of my Undergraduate Business

degree at the University of Roehampton Business School. My Business
Project is titled ‘An analysis of the extent to which criticism of the use of
offshore tax structures by UK Multinational Corporations is justified’ and it has
the aim of assessing the ethics of UK companies using offshore structures.

I assure you that any information you give me will be treated with complete
confidentiality if you so wish. In addition, if you wish, the name of your
institution and those of any individuals can be changed or omitted. The final
report will be seen by two examiners from University of Roehampton and one
from another university but will not be publicised further. If you would find it
useful, I am happy to provide you with a summary of the findings.

Yours sincerely

Oliver Tonge
Business Management student, University of Roehampton

16
 RESEARCH PARTICIPANT AGREEMENT FORM

Title and brief description of the research project:

‘An analysis of the extent to which criticism of the use of offshore tax structures by UK Multinational
Corporations is justified’

Name and contact details of researcher:

Name: Oliver Tonge

Address: 10 Market Street, Suite 384, Camana Bay, KY1 9006
Email: tongeo@roehampton.ac.uk or olivertonge@gmail.com
M: +447823888054 or Cayman M: 345 329 1178 or H: 945 4844

Statement of Agreement:

I agree to take part in this research and am aware that I am free to withdraw at any point. I understand
that the information provided will be treated in confidence and that the Business Project Report will
be seen by two examiners from University of Roehampton and one from another university but will not
be publicised further.

I have been informed that I will have the opportunity to check the contents of my interview and any
material attributed to my organisation before it is included my Business Project Report.

I agree to the interview being recorded. I understand that the data will be kept securely and that it will
be destroyed after the examination process is completed.

Name Anthony Travers, OBE*

Signature……………………………………….

Date 11th April 2018

If you have any concerns about this research or any aspect of your participation in it please contact
my supervisor:

Name: Robert Manderson

Email: r.manderson@roehampton.ac.uk

17
Direct telephone number: +44 (0) 20 8392 3723

* Although Mr Travers did not sign the form directly, he gave consent for me to use the
information provided via email.

Appendix B –Interview response questions from Anthony Travers, OBE

Initial Comments by Mr. Travers, OBE:

“Given that the United Kingdom has a history of international trading activity dating back
some 200 years, the [project title] question is surprising. The more so, in the light of the fact,
post Brexit UK based companies will need to develop better trade with international links
outside of Europe.

The simple fact is, that UK tax law fully envisages and promotes all such trading activity, it
being recognized that offshore subsidiaries are an essential part of that structuring. For that
reason, Controlled Foreign Corporation Rules have long been incorporated into United
Kingdom, and similarly United States, tax law with a view to ensuring that the profits and
gains of offshore subsidiaries international trading activity is taxed domestically in the
United Kingdom. Notably, the United States provisions until the Tax Cuts and Jobs Act 2017
gave specific tax deferral to such subsidiaries to ensure that US corporations would not be
rendered uncompetitive by double taxation and the UK tax provisions have the same
philosophy. So, the problem we have with the project title is that you must be very certain of
the nature of the criticism that is being leveled and I suspect whoever formulated the
question, is not.

Interview questions:

1. How will the Cayman Islands respond to the EU’s new Base Erosion Profit Shifting
(BEPS) rules?

The Base Erosion and Profit Shifting Rules are simply a band aid introduced by the OECD to
attempt to solve the massive problems created by the fact that the OECD Double Tax Treaty
Network which has been developed over 40 years is wholly inept, fails to deal with the
taxation of royalties and international property, and interest deductions, and has resulted in
massive tax avoidance being effected between Double Tax Treaty jurisdictions, particularly
those in Europe and notably, Ireland, the Netherlands and Luxembourg which have
deliberately gamed the system by use of structures such as the Double Irish and the Dutch
Sandwich. Notably, tax avoidance of the sort practiced by Google, Starbucks and other
major corporations requires the Double Tax Treaty Network. The question of whether or not
this is regarded as abusive is highly subjective. The fact of it is these corporations have been
complying with the Double Tax Treaty provisions. The problem is the Double Tax Treaty
provisions do not work as intended and are not fit for purpose. Cayman has complied with
the first level reporting requirements under BEPS but may go no further.

2. The EU have introduced a real economic activity test; how will Cayman prove each shell
company engages in ‘real economic activity’?

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The EU test for real economic activity in relation to financial transactions is an
unsupportable fiction. International financial transactions can be effected through the
medium of computers and indeed are routinely done so in the trillions of dollars daily. The
real economic activity test is no more than retrospective engineering by the EU and the
OECD, designed to arbitrarily and unjustifiably attack small jurisdictions which specialize in
structuring for international capital flows. The central point in relation to any such capital
flows, is the fact that taxes are paid in the jurisdiction that profits are made as indeed, is the
fundamental point of the BEPS principle.

3. What are problems with the public company register for Cayman? If the UK has a public
register, why is it a problem for Cayman to produce one?

Law enforcement and tax authorities have access to the beneficial ownership records of
Cayman Islands companies. Any greater disclosure contravenes the legitimate right to
privacy which is enshrined in law in the UK and indeed, the Cayman Islands.

4. In a recent FT article, it stated ‘The Cayman Islands has branded the UK’s transparency
drive as “pointless” because it did not require the information on the register to be
verified. It said it had a better system because it required company service providers to
collect and verify the information.’ How Is this information verified? Why is Cayman’s
system more efficient than onshore? How is it better regulated?

There are extensive provisions under the Cayman Islands FATF applied rules which require
documentary verification which are not required in the United Kingdom.

5. Is profit shifting ethical in your view?

Ethics are a ludicrous basis for suggesting taxes have been paid as they are a function of
religious moral and other beliefs which are highly subjective. Taxation arises by way of an
expropriatory statute and must be construed strictly against the taxing authority in
accordance with recognized legal principle.”

Appendix C –Interview response questions from Jersey Finance*.

*Jersey Finance did not sign the consent form but gave written consent for
me to include their responses in this report.

1. “HOW WILL JERSEY RESPOND TO THE EU’S NEW BEPS RULES?”

Jersey is fully supportive of the BEPS project and has already responded to the
relevant recommendations, as can be seen from the timeline below:

On 16 June 2016, Jersey became a BEPS Associate and Member of the BEPS
Inclusive Framework at its inaugural meeting. As a BEPS Associate, Jersey
contributed to the overall development of the project through policy dialogue and

19
exchange of information – participating on an equal footing with OECD, G20 and
many other countries and jurisdictions.

On 21 October 2016, the Chief Minister, Senator Ian Gorst, signed an agreement for
Jersey to enter the Multilateral Competent Authority Agreement (MCAA), which
provides for automatic exchange of information in accordance with country by
country reporting by large multinational enterprises.

Before the signing of the MCCA in 2016, Secretary General Gurría confirmed to
Senator Gorst that the OECD recognised Jersey's high level of compliance with
international standards set by the OECD. Particular mention was made of Jersey's
contribution to the work of the Global Forum on exchange of information and to
Jersey’s leading position on transparency of beneficial ownership.

Jersey’s government published regulations on country-by-country reporting by large

multinational enterprises (MNEs), which are in line with the OECD’s international
standards and impose a reporting requirement on MNEs with an annual consolidated
group revenue of €750m or more for accounting periods on or after 1 January 2016.

Senator Gorst said:

"The signing of the agreement is further evidence of Jersey's commitment to the

BEPS programme and to our continued compliance with the international standards
set by the OECD, and other relevant international bodies, on transparency and
exchange of information for tax purposes."

On 8 June 2017, the Chief Minister, Senator Ian Gorst, joined representatives of
more than 60 jurisdictions at the OECD Headquarters in Paris for the signing of a
multilateral convention to implement tax treaty related measures, designed to
prevent BEPS.

The Multilateral Instrument (MLI) will modify existing bilateral tax agreements to
make them BEPS-compliant, allowing Jersey to strengthen its tax treaty network in
an efficient and comprehensive manner, without the need for costly and time-
consuming bilateral negotiations.

The Chief Minister commented:

“I am delighted to have joined with jurisdictions from around the world including
members of the G20, the OECD and the EU in signing the MLI on behalf of the
Government of Jersey. In doing so we have further demonstrated our internationally
recognised leading position in complying with the international standards on financial
regulation, anti-money laundering and tax transparency and information exchange."

2. “THE EU HAVE INTRODUCED A REAL ECONOMIC ACTIVITY TEST, HOW

WILL JERSEY PROVE EACH SHELL COMPANY ENGAGES IN ‘REAL
ECONOMIC ACTIVITY’?”

We would like to draw your attention to a major academic study entitled ‘Global Shell
Games’, authored by Michael Findley, Daniel Nelson and Jason Sharman under the

20
auspices of the Centre for Governance and Public Policy at Griffith University
Australia[1].

Their project undertook the most comprehensive and rigorous testing of anti- money
laundering and fighting financial crime defences ever attempted, with results being
published in October 2012.

The study involved researchers posing as fictitious consultants representing various

risk profiles who, via email, made over 7,400 solicitations for shell companies. These
requests were sent to in excess of 3,700 corporate services providers across 182
countries.

The research was designed to test how effective international Know-Your-Client

rules are by analysing whether a shell company was offered and which identification
documents, if any, were requested by respondents.

The authors of the report conclude:

‘Against the conventional policy wisdom, those selling shell companies from tax
havens were significantly more likely to comply with the rules than providers in
OECD countries like the United States and Britain. Another surprise was that
providers in poorer, developing countries were also more compliant with global
standards than those in rich, developed nations.’

Their research also demonstrated that Jersey’s application of anti-money laundering

laws and beneficial ownership requirements was 100% effective within the context of
the study, ranking No 1 in compliance terms whilst the UK ranked 43rd out of 55
countries (only those countries with a sufficient response rate were ranked).

[1] http://www.griffith.edu.au/business-government/centre-governance-public-
policy/research- publications/?a=454625

21
In December 2017, the EU Code of Conduct Group on Business Taxation (the Code
Group) determined that Jersey is a cooperative tax jurisdiction, and will work with the
Island throughout 2018 to ensure that this position is maintained.
The Chief Minister, Senator Ian Gorst, said:

“This outcome reflects the Island’s commitment to the highest standards of tax
transparency and information exchange. We cooperated fully with the Code Group
throughout the screening process, and have actively pursued a good neighbour
policy in our relations with the EU. These positive interactions have borne fruit.

“I have every confidence that the Island will continue to be an international financial
services centre of choice, working as a partner with the EU and other global
organisations to meet the highest regulatory standards.”

In order to secure its continued status as a cooperative jurisdiction, Jersey has made
a written commitment to address concerns identified by the Code of Conduct Group,
by the end of 2018. These concerns specifically relate to a perceived lack of legal
substance requirements that could lead to profits being registered in Jersey that do
not demonstrate real economic activity.

The Chief Minister confirmed:

22
“I am pleased that Jersey has been rightly acknowledged for its cooperation in
international tax transparency and compliance with BEPS requirements. We have
committed to working with the Code Group on their concerns over economic

substance and they have fully accepted that commitment. I look forward to entering
into substantive dialogue in the New Year.

“Our discussions may include creating enhanced reporting obligations or changes to

our legislation on economic substance. We have already begun the necessary
preparations, having regard to the Code Group requirements and Jersey’s best
interests. I am committed to ensuring that, working with the finance industry, this
process will be completed by the end of 2018.”

Jersey has a visible financial industry in its capital, St. Helier, and employs a quarter
of the local workforce. It’s expert and highly-skilled workforce works with key
stakeholders to develop products and services that add value to local and global
economies, as well as the futures of individual investors. In over five decades,
Jersey has developed a breadth and depth to its range of products and services that
competing jurisdictions find difficult to match.

3. “WHAT ARE THE PROBLEMS WITH THE PUBLIC REGISTER FOR JERSEY?
IF THE UK HAS A PUBLIC REGISTER, WHY IS IT A PROBLEM FOR JERSEY TO
PRODUCE ONE?”

Jersey has captured beneficial ownership information on a corporate registry since

1999 and this information is available to law enforcement agencies. Its Financial
Services Commission (JFSC) regularly undertakes rigorous on-site examinations of
businesses to assess compliance.

Moreover, Jersey has signed up to all cooperation and information sharing

mechanisms, including BEPS and the Common Reporting Standard, and we have a
central register of beneficial ownership that meets international standards, to help
share information with tax authorities globally.

In 2017, Jersey was assessed by the Peer Review Group of the OECD Global
Forum on Transparency and Exchange of Information for Tax Purposes and Jersey
was rated fully compliant in all ten of the areas reviewed.

While it is crucial that law enforcement agencies and tax agencies have access to
information that is relevant to how they discharge their responsibilities on a domestic
basis, individuals also have a right to keep their personal financial information
private, and there are many valid reasons why an investor or business would wish to
do so.

Corporates need to ensure that data which reflects business plans, trade secrets,
and strategic decisions remains confidential from its rivals, while wealthy individuals
in many parts of the world will understandably want the size and location of their
wealth to remain private to avoid exposing them or their families to undue risk or
kidnapping and extortion.

23
From a practical standpoint, it is arguable that the UK’s register provides data of
dubious value, as the criminal fraternity and individuals misusing companies to
launder money are unlikely to comply with the self-reporting requirements. The data
is unreliable as there are no meaningful checks in place on the quality of information
being captured. In addition, those looking to get around the rules, or those who
simply wish not to disclose their information, could incorporate non-UK companies
which would not be covered.

Given there is ready access and availability of beneficial ownership information to

foreign fiscal and investigative authorities, there appears little further benefit in
pursuing a public register.

While it is certainly true that there are genuine concerns over tax evasion, money
laundering and criminal uses of money, there is no question that financial privacy is a
right that has to be balanced against public interest concerns.

In the same way that we entrust criminal investigations to public bodies, we should
trust financial crime agencies to appropriately use the increasingly available amount
of data provided by existing information exchange agreements.

More detail in respect of Jersey’s central register can be found in our Factsheet,
entitled: “The Jersey Model”. We have posted a copy to your residential address.

4. “IS PROFIT SHIFTING ETHICAL IN YOUR VIEW?”

Jersey does not support profit shifting. Our commitment to the BEPS programme,
continued compliance with the international standards set by the OECD, and other
relevant international bodies, on transparency and exchange of information for tax
purposes is evidence of this.

Our tax system offers tax neutrality and ensures that tax is paid where it needs to be
paid - we leave all the profits on the table for the country with taxing rights to tax it in
full, it’s just that Jersey doesn’t take any of that tax for itself. It’s a transparent system
that, far from enabling abusive tax avoidance, is actually enabling countries to tax
their citizens properly. In fact, through the common reporting standard (CRS) we
proactively provide countries with information enabling them to collect the tax.

Jersey remains one of the best regulated international finance centres, recognised
by some of the world’s leading bodies including the OECD. The likes of the IMF,
World Bank and MONEYVAL have also all seen fit to grant us their endorsements.

Appendix D: Interview response questions from Richard Teather, Bournemouth University

Tax Law Senior Lecturer and Strategy Consultant

1. How will Jersey respond to the EU’s new BEPS rules?

Jersey has been positioning itself as a “substance jurisdiction” for several

years, with international companies located there having (in general) more of a
real presence than they do in some offshore finance centres. I expect this trend

24
 to increase under BEPS, and for Jersey’s previous positioning to put it in a good
position under BEPS.

2. The EU have introduced a real economic activity test, how will Jersey
prove each shell company engages in ‘real economic activity’?

See above; Jersey’s position as a “substance jurisdiction” should mean that,

overall, international companies located there have more of a real presence
than they do in some offshore finance centres, so it should, on average, be
easier for Jersey companies to prove real economic activity. However, that will
depend on what sector companies are operating in and on how the EU views
“real economic activity”.

3. What are problems with the public company register for Jersey? If the
UK has a public register, why is it a problem for Jersey to produce one?

The media storms over various leaked information from offshore finance
centres (Panama Papers, etc.) have shown that the press are unable (or
unwilling) to take a balanced view of offshore investing. We have seen people
criticised for holding offshore investments without any understanding of
whether anything unethical has taken place. A public register for Jersey will
simply allow the media to smear anyone in the public eye who has any
connection with Jersey entities.

4. Is profit shifting ethical in your view?

Yes, within the limits of the transfer pricing rules. Modern multinationals, and
modern business, are complex, and profit is made in many different ways. The
focus of BEPS and CCCTB on the location of physical plant and employees is
outdated and does not take account of the way that profits in the modern world
are based more on ideas, intellectual property, innovative financing and other
factors that are not given sufficient weighting under BEPS (and are given none
under CCCTB). So long as the transfer pricing is correct, acknowledging the
contribution to profit of these factors, and taxing them where they are located,
is entirely legitimate. And where those factors are mobile, a multinational’s
decision to locate them in a low-tax jurisdiction is a legitimate choice.

25
Appendix E: Interview Consent form from Richard Teather

RESEARCH PARTICIPANT AGREEMENT FORM

Title and brief description of the research project:

‘An analysis of the extent to which criticism of the use of offshore tax structures by UK companies is
justified’
Name and contact details of researcher:

Name: Oliver Tonge

Address: Clos de La Blanche Pierre, La Rue de La Blanche Pierre, St Lawrence, Jersey JE3 1EX
Email: tongeo@roehampton.ac.uk or olivertonge@gmail.com
M: +447823888054 or Cayman M: 345 329 1178

Statement of Agreement:

I agree to take part in this research and am aware that I am free to withdraw at any point. I understand
that the information provided will be treated in confidence and that the Business Project Report will
be seen by two examiners from University of Roehampton and one from another university, but will
not be publicised further.

I have been informed that I will have the opportunity to check the contents of my interview and any
material attributed to my organisation before it is included my Business Project Report.

I agree to the interview being recorded. I understand that the data will be kept securely and that it will
be destroyed after the examination process is completed.

Name Richard Teather ( Senior Lecturer in Tax Law, Bournemouth University)

Signature

Date 24th April 2018

If you have any concerns about this research or any aspect of your participation in it please contact
my supervisor:

Name: Robert Manderson

Email: r.manderson@roehampton.ac.uk
Direct telephone number: +44 (0) 20 8392 3723

26
9. Personal Learning Statement

The key skills improved upon during the research were time management, organization,
report writing and primary and secondary data gathering and analysis. Firstly, with regard to
organization, having six other modules over the course of the academic year has proved
challenging. However, monthly meetings with both Robert Manderson and Christian Röell
have helped to work out an estimated timeline of how fast I should be progressing. The value
of these meetings derived from brainstorming more in depth about my topic and what to
include in the project. Furthermore, the supervisors have been helped me identify areas that
need clarification and improvement. With regard to organization, regular email contact has
helped me to improve discipline as a life skill. Clearly the most challenging part of the project
has been gathering primary data. I emailed an independent tax advisor, Smith & Williamson,
PwC, Jersey Finance, Cayman Finance, the Cayman Islands Monetary Authority, and Jersey
Business School several times requesting responses to my request for interview questions
either by phone or in writing. Ultimately, I was extremely fortunate to have a response from
a leading International lawyer with over 30 years of experience, Chairman of the Cayman
Islands Stock Exchange and OBE, Anthony Travers, a tax professional Richard Teather and
from Jersey Finance. The use of LinkedIn was extremely beneficial in making contact with the
interviewees.

Additionally, the analysis of secondary data was also challenging for several reasons, firstly
the articles I needed from the Financial Times were not accessible without subscription or
buying the physical newspapers. I was fortunate that the University library keep each daily
edition backdating three months. At the time the articles that I needed were all less than
three months old. I have learned that for future projects it would be better to do a trial
subscription with the FT, as the search time of finding the physical copy of the articles was an
inefficient use of time.

Another key learning point was organizing the report into congruent sections. This is a clear
takeaway skill given the freedom of the content of the project. It was also difficult to know
how much of business ethics theories I should include in the project. This is because much of
the offshore tax literature does not reference ethical theories directly. Assessing the volume
of writing to include in each sub section was something that I learned needs careful
consideration and consultation. Flexibility depending on available data is another skill I
improved on. In hindsight, I was very fortunate to receive any data at all for the interview
given that there was little incentive for the companies contacted to provide any answers.

Finally, given the difficulty governments have themselves in appeasing all stakeholders of
offshore tax structures, it was clearly difficult for me to give advice on how UK companies
should approach their tax affairs. If I were to do a similar project in the future I would focus
on a specific company that is open to providing data rather than an entire industry in a foreign
country where data may be harder to collect. This would also make giving specific
recommendations easier as oppose to more general suggestions for UK regulators and the
government.

27