“For transparency to be just, it must always be considered in relationship to power”

by George Hatjoullis

The title of this piece is a quote from an article in the FT written by Heather Brooke. It is a profound but perhaps not obvious observation. Transparency for the sake of transparency may not only be pointless but might also be dangerous. Transparency should distribute power away from the already powerful and not diminish the power of the already weak. This is the thrust of this excellent article. Intrusions into the average citizen’s privacy merely diminishes the power of the average citizen. Intrusions into the life of powerful people distributes that power more widely. Anyone interested in supporting a pluralist democracy should favour the latter and not the former.

Another important point is made in the comments section of this article. Transparency can also be an illusion that obscures. The publication of tax returns is a good example. What does it achieve? Tax returns are that which you have chosen to declare. They are subject to scrutiny and challenge by HMRC. By definition they represent legitimate transactions. They may involve legal transactions of which large parts of the population disapprove but that does not render them illegitimate. There is very little to be gained from publishing tax returns (unless there is distrust of HMRC) and quite a lot to be lost because it creates the illusion of transparency. It does not address what fundamentally is of concern. It does not reveal what is hidden or obscured from HMRC.

The key to transparency is beneficial ownership. Who benefits from the transactions behind the listed entity? If HMRC (and other official agencies) know then they can, and will, hold them to account. It is in beneficial ownership that we need transparency. This is the problem of the offshore trust or company. If official agencies cannot prove beneficial ownership then there is a scope for tax evasion, fraud, and the laundering of the proceeds of crime. There is also more scope for aggressive tax avoidance.

Aggressive tax avoidance is a rather opaque concept. It relates to otherwise legal activity for the sole purpose of avoiding tax. The key to identification is whether there is any legitimate economic basis to the structure involved. If you invest in an ISA you avoid some taxes. However, you do not do it simply to avoid taxes. You would have invested in any event and you take advantage of a feature of UK tax law that allows you to shelter this investment from some taxes. Beneficial ownership is transparent. Aggressive tax avoidance usually involves transactions and structures that have no natural economic logic. They are for the express purpose of avoiding jurisdiction tax and would never be undertaken if the tax advantage was not there. The authorities have rightly been clamping down on such activity so obscuring ownership becomes necessary.

You may also invest in a fund, possibly via this ISA, that is based offshore. There may be some logic to the fund being so located. If investors come from many jurisdictions with different tax regimes then it makes sense to locate somewhere which enables the fund to operate clean and rely on investors to declare their interest to their respective authorities. So long as jurisdictions have access to to beneficial owner data they can follow up and make sure appropriate declarations are made.

The key is transparency of beneficial ownership to the relevant jurisdictional authorities. It is not necessary to insist on full public transparency, unless of course one has no faith in these agencies. The clamour for politicians to publish their tax returns starts to make more sense if one raises the possibility that the citizens do not trust these authorities and in particular HMRC. In the UK there is no basis for distrusting the honesty of such agencies. There is obviously some doubt however about their competence. If there is an issue in the area of competence (and I think not) it is down to resources.

Transparency does not require a complete lack of privacy. It requires that the relevant authorities can access the necessary information for laws to be enforced. It is more important that such transparency is enforced on the powerful than the weak but it should be enforced thoughtfully. Making public what is already known to the authorities merely creates an illusion of transparency.