For the last few years, the offshore world has been coming under increasing pressure from governments and international bodies of all stripes. The OECD relies on its Financial Action Task Force as an attack dog. The European Union regularly criticises offshore jurisdictions for engaging in ‘harmful tax practices’ and has spun together a new law, the Savings Directive, intended to claw back tax from offshore investors and savers. National governments have put pressure on the offshore world as well, claiming that they facilitate money laundering and, again, ‘unfair tax competition’.

Many people have come to believe a form of conspiracy theory to the effect that developed-world governments are planning to move towards eventual tax harmonisation, where governments are in a position to coordinate their efforts and slice the same amount out of their citizens’ pay packets – with nowhere to run. Hence the need to neuter or destroy the offshore word.

Something like that may be the case, and until we are privy to the sorts of discussions that go on inside the Elysee Palace, the Bundestag, Brussels and Whitehall we won’t know. But a more immediately prosaic truth is that domestic governments are just not very good at collecting taxes at the best of times, and the offshore world is a good place for them to start if they want to change that. Hence the pressure.

Poor tracking
Let’s just look at the UK as an example. The British Inland Revenue likes to keep this sort of fact out of the public domain, for obvious reasons, but the brute truth remains that it has been astonishingly poor at pursuing tax evaders and is astonishingly under-resourced in its efforts to do so.
Some figures: it is estimated that UK multinational companies avoid paying £20 billion per year in corporation tax. The Revenue manages to track down and reclaim 7.5 per cent of this. While the Revenue claims to have ‘queried’ 300,000 tax returns in 2003 and recovered £1 billion in owed tax, just 400 serious fraud investigations were carried out and only 60 prosecutions were brought. There are 30 million UK taxpayers. The Revenue’s annual report for 2001/02 showed a dramatic drop in tax collected from investigations and compliance work – just £1.5 billion, down from £2.1 billion the year before. The stats go on, but the picture is clear.

In what must have been a painful inquiry session in front of a Commons Public Accounts Committee in 2003, the head of the Inland Revenue was – let’s be polite – ‘strongly criticised’ for his institution’s failures. In its January 2004 report, the committee concluded that the Revenue simply did not know the true scale of tax fraud. The ‘tax gap’ between how much should be paid in tax and how much actually was paid was ‘not known’ by the Revenue. To those involved in fraud, said the committee, the chances of getting caught “appeared minimal”. “I urge the Revenue to step up considerably their fraud investigation work,” the chairman of the committee forlornly concluded.

Has it? The first thing to realise is that the figures and criticisms outlined above have not been lost on the organisation. If steel can be said to enter an institution’s soul, it has done so with the Revenue. At the time of the Public Accounts Committees’ report, a new finance act, passed in 2000 and designed to make it easier for the Revenue to pursue miscreants, had only just begun to bite. It now has tracked down some suspects and prosecutions are flowing through the courts (although the first two appear to have been a minicab driver and a salsa teacher sentenced to 12 months conditional discharge and nine months in jail respectively).

An inspector calls
The Revenue itself received £66 million extra financing for its anti-fraud work in the 2003 budget. It used the money to employ 50 extra fraud investigators. It has established new links with the UK’s nascent FBI – the National Criminal Intelligence Service – with its own team in the organisation’s Financial Intelligence Unit. Although the primary focus of this new effort is money laundering, tax evasion is part and parcel of its work. The NCIS passed 700 reports to the Revenue in the first six months of 2003 (the latest period for which figures are available) where there was a suspicion of tax evasion.

The Revenue has not forgotten about the offshore world either. It has put in place structures that are considerably stronger than those that it made do with before. Charles Hall, an investigations expert at accountants Grant Thornton and an ex tax-inspector himself, says that the last two years have seen the Revenue step up its investigations into offshore assets. According to the Revenue’s own Spring 2004 report, these measures brought in an extra £100 million. How much of a dent that makes in the world of offshore tax evasion is a moot point, but the intent is clear.

New snoopers
Special focus is being aimed at people who place funds into offshore trusts in order to avoid inheritance tax. Financial intermediaries who deal in the offshore world – lawyers, tax specialists, accountants – are caught under new legal rules that say they now have a duty to inform on tax-evading clients whereas before they would merely have been under an obligation to ‘advise’ clients to come clean. Now they themselves will be liable if they fail to report any wrongdoing. The Proceeds of Crime Act of 2002 was amended specifically to make it an offence for professional intermediaries “not to report knowledge or suspicions of a client’s tax evasion”. That has far-reaching implications. It means that such intermediaries are now effectively forced to act as the Revenue’s eyes and ears.

“We are ruthless in our pursuit of evasion and of unacceptable avoidance schemes,” said the Revenue’s head, Sir Nicholas Montagu, no doubt stung by the heaped-on criticism his organisation has had to endure in the past couple of years.

There is some truth in the accusation that the offshore world eats away at government revenue. When Robert McIntyre, director of Citizens for Tax Justice, a campaign group dedicated to fighting what it sees as corporate tax evasion, investigated the tax payments of 275 Fortune 500 companies, he found that the average rate of tax paid was less than half the statutory US level of 35 per cent. Eighty-two of the firms paid no tax at all and some were actually in net receipt of government money. The FT recently carried out a similar investigation and found that the situation in the UK was similar.

There is equally strong evidence that wealthy individuals have increasingly used offshore structures to avoid domestic taxes. There is, equally, a strong temptation among the not-so-wealthy to get on the ferry and deposit cash in an offshore island with the idea that it will therefore remain outside the Revenue’s purview. That is becoming a far less solid assumption.

Listen to what the Revenue and the government have been saying since the late 1990s and it is clear that the distinction between legitimate tax avoidance schemes and what is considered tax evasion is becoming more and more blurred – at least in the eyes of domestic governments. The crackdown has just started to get going, but it is unlikely to stop.