BREXIT: Corruption implications to UK

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Commentary

BREXIT: Corruption implications to UK

British dilemma

By Kenya Confidential Economic Analyst – Nairobi, June 2, 2016

Internationally, the wider implication of the UK’s economic pressures is that the political climate for clamping down on tax avoidance might stall

Britain on deciding to exit EU membership, the UK is at a crossroads. She is faced with serious consequences whose solutions Brexiteers had not thought through when Brits went to polls on the fateful June 23rd. Those consequences include undermining the leading role that Britain has taken in the global fight against corruption with the potential of transforming Britain into an even greater tax haven for multinationals and Third World corrupt leaders.

According to a recent report by the British Treasury, £36 billion would be sucked out of the UK’s financial sector by 2030 due to the economic costs of pulling out from the EU. Taxpayers will be forced to pay 8p more in income tax on every pound earned, and the economy risks shrinking between 3.4 percent and 9.5 percent by 2030 depending on the exit strategy it chooses.

With these numbers in mind, how will Brexit affect the global financial transparency agenda, particularly in terms of tackling tax avoidance? Domestically, the UK could feel a great deal of pressure over time to use its tax system more aggressively to attract and retain capital so that the revenue losses are offset.

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Massive demonstration in London against Brexit and anti-immigrant racial hate in UK

An obvious policy choice could be to further reduce corporate tax rates from the current 20 percent rate or the planned rate of 17 percent by 2020 to compete with the 12.5 percent level that is present in Ireland, for example.

With fewer political implications attached to its national tax legislation, the UK could also be freer to market itself as a freewheeling hub for emerging-market finance—a sort of Singapore on steroids. However, this could lead to multinationals engaging in tax avoidance by shifting their profits into the UK, which would hardly offset the loss of domestic revenue given the low tax that corporations would be offered.

Internationally, the wider implication of the UK’s economic pressures is that the political climate for clamping down on tax avoidance might stall. Britain has been playing a leading role in tackling global corruption and as such, it is crucial that a country with some of the largest financial firepower in the world should have remained on the right side of the agenda. According to Tax Justice Network, the UK is 2nd to the United States in terms of the size of its financial industry and the amount of financial services that it provides to non-residents.

Stop Corruption UK

After leaving the EU, Britain will now see its ability to exchange and collect information on tax abuses significantly reduced in scope. Britain will lose its participation in various intra-EU information exchange treaties to combat tax avoidance, such as the recent EU proposal on Country by Country Reporting. If adopted, the rule will require multinationals to publicly disclose how much tax they pay in each EU member state, among other things, but the UK will not be included.

Related story – Corruption as Evil as Slave Trade

What will remain unchanged however, is the UK’s extensive network of bilateral treaties on double taxation along with its membership of the OECD. In this sense, it will still be subject to the number of agreements that it has adopted, such as the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters. But these agreements are narrower in scope than the corresponding EU laws, providing a greater amount of loopholes for corporations to take advantage of.

Being inside the EU, therefore, not only guaranteed that the UK can continued pushing Europe ahead in countering tax avoidance, but also gave the UK considerable leverage in its tax dealings with large corporations. Whether pressure from the EU could still influence the UK after leaving will depend on the post-Brexit arrangement that will govern the EU-UK relationship, but nothing has been set in stone yet. Foresighted Scotland is determined to stay within EU and server relations with the rest of UK sooner than later.

With UK inside the EU meant that the political will in favour of addressing corporate corruption was not jeopardized by losing one of its crucial players. That is no more. Only through proper cooperation will the international community start seeing the real detrimental effects that corporate profit shifting has on the developing world.

Breaking away in isolationism will prove to be a rejection to take advantage of the momentum that has built around fighting global tax avoidance. The result will be detrimental to the UK, the EU, and the rest of the world.

Wind of Change

The exit forced mainly by the English came hardly a month after Prime Minister David Cameron hosted an international Anti-corruption Summit in London at which heads of government committed themselves to fighting the social vice. The exit could very well dampen the Wind of Change on the sails set by Cameron.

Cameron had hoped he would drive a global war on corruption with Britain curbing operations of off-shore illicit financial outflows and money laundering havens within her jurisdiction. It may not come as no surprise that global racketeers had a hand in influencing the high turn out of Brexiteers around the financial capital of London.

Cameron committed the UK to a public register of beneficial ownership, saying that secret offshore owners of British property will be made public. Five other countries announced that they also agreed to similar measures in their own territories: Afghanistan, Kenya, France, the Netherlands, and Nigeria.

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Over 30,000 Londoners demonstrating against Brexit

All that may be River Thames water flowing under the London bridge where Londoners are demonstrating against Brexit and urging a second referendum before invoking article 50 to commence the exit process. Reality is dawning upon many Britons that they may have more to lose as a people and a country than gain by bundling themselves in isolation from mainland Europe and more demonstrations are expected beyond London.