Apart from the obvious losses to the Australian tax revenue it seems worthwhile to refer to the less obvious results which flowed from the tax avoidance activities in Norfolk Island
To the extent that such activities succeed they effectively increase, to quote Viscount Simon28, pro-tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these maneuvers’.
Successful and unchecked legal tax avoidance strikes at the uity of the tax system, and weakens the system of voluntary compliance on which a tax system is crucially based.
Another not insignificant cost to Australia is represented the manpower (and other) resources which have had to be employed.
The Australian Taxation Office in combating the development of Norfolk Island as a tax haven. For several years a team of skilled investigation officers had to be used full time on this work instead of other tasks and the team was supplemented from time to time.
Other harmful effects for Australia arise when foreigners,,no invest in Australia are able to avoid or evade Australian tax. One is that it increases the cost to Australia of the foreign investment in this country. Another is that foreign interests may be placed in a more favourable competitive position as compared with Australians or for that matter with other overseas interests thus distorting the conditions of competition.
The continued existence of a tax haven under Australian jurisdiction could be damaging to Australia’s relations with other countries having regard particularly to the legislative action taken by Australia itself to counter tax haven resort to places outside Australian jurisdiction. As mentioned earlier, during negotiations for double tax agreements, representatives of several countries expressed their concern at Norfolk Island’s emergence as a tax haven and sought to ensure that the Island could not be used, together with the double tax agreements, to avoid their homeland’s taxes. Although there was no direct evidence that any country other than Australia lost revenue as a result of the tax avoidance schemes based in Norfolk Island, it is nonetheless possible to infer that losses to New Zealand’ revenue also occurred.
5.Alleged benefits of using the Island as a tax haven
Most of the companies incorporated in Norfolk Island were ‘paper’ companies which did not conduct economic activity there and so did not add value to the economy in this sense Nor was it usual for the companies to invest directly in the economy of the Island or make capital available to those who did However the tax haven business did have some impact on the economy of the Island.
The Island’s revenue did receive a significant boost from the registration fees paid by the large number of companies incorporated in the Island This fact has been referred to earlier Also there was probably increased postal and telephone revenue flowing directly from tax avoidance activities.
Income was earned by Island—based practitioners and people residing there who acted as either shareholders or directors of tax haven companies or provided registered offices or other facilities for the companies From a random examination of cases it appears that the income accruing to a practitioner’s office each year in respect of each company it acted for would in the normal type of case of an active company be of the order of $500 to $700 The remuneration received by an Islander for act as a shareholder or providing a registered office was usually a standard amount of some $10 in each case and small amounts of dividends could have been received Since each company had to have a minimum of seven shareholders who were usually all Islanders, each company registered in the Island could be expected to distribute income including that accruing to practitioners of approximately $600 to $800 per year in the Island In addition practitioners could derive substantial fees for setting up a scheme or for legal advice The total amount which would have accrued yearly to those relatively few persons resident in the Island who participated immediately in revenue from these tax haven ‘activities’ would have been several hundreds of thousands of dollars, and may have exceeded the total public revenue available for the administration of the Island.
Other direct beneficiaries from visits made to the Island by mainlanders for the express purpose of arranging tax avoidance/ evasion schemes (and who did not displace regular tourists) would have included various businesses, such as airlines, hotels and stores. Indirect benefits may also have accrued to various individuals as a consequence of extra employment that may have been created solely because of tax haven activity — such as typists or bank officers - from local spending of the extra income.
In summary it can be said, therefore, that a few individuals in Norfolk Island derived many hundreds of thousands of dollars arising out of the use of the Island for tax avoidance/evasion. A slightly larger number of people received smaller sums for lending their names to transactions, and some received employment which would otherwise not have been available. Some businesses would have gained extra revenue from taxpayers and advisers visiting the Island solely to set up or maintain schemes. The majority of the population received no direct benefits.
The price, however, of putting this money into the pockets of a few people in Norfolk Island was the loss to the Australian people of millions of dollars of what could otherwise have been tax revenue. The bulk of that money went, of course, into the pockets of those who instigated the schemes. To the extent that it went to the direct or indirect benefit of Norfolk Island (or even affected the amount of Australian expenditure in the administration of the Island) it did so in a haphazard, uncertain and inefficient way. There is no reason to support a contention that any benefit - realised or potential - to Australia or the Island from the tax haven activities could balance the detriments to the Australian tax system.