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I understand that small countries like Monaco or Andorra won't be able to offer a competitive advantage unless they offer some fiscal benefits, which they do for the whole country.

However, in the case of the UK (and its Gibraltar, Isle of Man, and Jersey) wouldn't these tax havens be used to compete against their own mainland (or main-island) industries and help British citizens dodge UK taxes? Does the tax bill add up?

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    I believe you're slightly misrepresenting the political status of the territories you list; Gibraltar is a Britsh Overseas Territory, (en.wikipedia.org/wiki/Gibraltar) while Man and Jersey are Crown dependencies (en.wikipedia.org/wiki/Crown_dependencies) and all are self governing. Compare with (e.g.) Andorra having co-princes of the Bishop of Urgell and French President. – origimbo Feb 7 at 0:17
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    Consider that maybe the people who make the decisions are also the ones who benefit. – RedSonja Feb 8 at 9:56
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The slightly cynical answer is that the tax avoidance is something that requires a continual fight as people come up with new schemes, and is often left alone so long as it's only used by a small number of well-connected people. For example the "K2 Scheme" was becoming very popular among all sorts of people from ordinary backgrounds who'd done well, so it got into the newspapers and action was taken.

A systematic review of how the dependent territories relate to mainland Britain, how power is distributed in the UK, and how the tax system should work to discourage them from becoming tax havens, is something that's basically beyond the capacity of the UK political system to manage. The tendency to leave old arrangements alone or tinker with them rather than putting the state on a systematic, democratic, level footing is simply too strong.

People would ask all sorts of awkward questions like "why is the Isle of Man 'self-governing' but Scotland isn't", "why doesn't Northern Ireland have a functioning legislature", "what would an English Parliament look like", "what are the Barclay Brothers doing with Sark", and so on.

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Why would big countries like the UK tolerate their own tax havens?

The territories you mention are not part of the UK (Isle of Man, Jersey) or are self-governing (Gibraltar). This means that the UK government does not enact laws for those territories and has no real control over their taxation levels.

The UK has agreements with those territories that cover things like defence and good governance. As I understand it, those agreements do not permit the UK government to control or interfere in those aspects of local law and taxation that make a place a "tax haven".

In the case of Gibraltar there was a dispute with the EU commission on which the Court of Justice of the European Union adjudicated. In this the court said:

it is clear from the case-files that the United Kingdom retains a residual power of last resort to legislate for Gibraltar but that this power has been exercised only exceptionally and never in matters of taxation. No United Kingdom law in respect of fiscal matters applies, or has ever applied, to Gibraltar.

In a different tax dispute the Court of Justice of the European Union said

The Court confirms that Gibraltar does not form part of the UK.

In short, the EU judiciary have ruled that these "tax havens" are not really the UK's "own" (in the context of tax).

  • I think this is disputable, or "it's complicated"; Gibraltar isn't a small independent country like Luxembourg or Iceland, it's definitely subordinate to the UK. Crucially, Gibraltarians are treated as British for immigration purposes and their passports are British passports with "Gibraltar" written on. – pjc50 Feb 7 at 21:09
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    @pjc50: It is complicated. As is Monaco's relationship with France and Sardinia. Nevertheless, the UK does not control taxation in Gibraltar. – RedGrittyBrick Feb 7 at 23:04
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Sadly there is no evidence for my point, but I'm sure this has to do with the connections between companies/CEOs and politics. Many politicians have good friends in high ranks of large companies. Many political parties have are well connected in the economy, which leads them to pass bills which favors companies.
Sometimes this happens because for politicians, direct information from economists seems like a good idea, sometimes because they want to do their friends a favor, and sometimes because they want to get a well paid job after their time in politics (German examples: Gerhard Schröder, Friedrich Merz).
Keyword: revolving door
Keyword: Vorteilsnahme (german juristical term, similar (but not same) to corruption

Now that that's said, we know governments tend to execute the wishes of exactly those companies who are likely to evade taxes. As long as such tax havens exist, they can argue "If the taxes here are too high, the tax-payers will evade them and the government would get nothing". This is a goto blackmail-argument when it comes to taxes. It is often also the only argument. So IF those tax havens wouldn't exist, it would be more likely that taxes for influential people and companies would rise. So they're most interested in this not to happen.
(Yes, i know, it sound a bit like a conspiracy theory, but the arguments are as hard to refute as they are to prove)

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    Not only is this a conspiracy theory, but it also ignores the much simpler answer given by RedGrittyBrick, that these tax havens are independent and set their own tax policy. – Paul Johnson Feb 7 at 18:11
  • Well, "independent" isn't completly correct, either. Because technically the crown is the head of state for each of those states/countries. So in theory the UK could intervene in the politics of those states. But this would be a very rough way to tackle the issue. But it is an option. Having this option in mind, the UK could negotiate new tax policies on diplomatic ways. Given there's enough interest in doing so. – miep Feb 7 at 23:03
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    @miep: the crown (as you put it) is also head of state for Canada - that does not mean the UK government can make the Queen make the Canadian government legislate tax policies the UK government wants against the wishes of the Canadian government. – RedGrittyBrick Feb 7 at 23:24

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