Professor Richard Murphy: Why freeports are basically tax havens

I have been involved in tax justice campaigning for more than 20 years now, which is about as long as anyone on the planet has been. In that time, I have become increasingly aware of how dangerous the deeply cynical proposals made by right-wing politicians for the creation of entities like freeports really are.

The narratives that the proponents of such things use is always alluring. They are, however, always based upon the idea that freedom from regulation and taxation is the foundation for prosperity. This is total nonsense.

It is not chance that the most taxed and regulated countries in the world are all also the most prosperous, but that is always the case, most especially if we take the more obvious tax havens like Luxembourg, Ireland, the Netherlands, and the Cayman Islands out of consideration.

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It is also very obviously true, on the basis of even the most superficial observation, that those countries with low levels of taxation and regulation are almost always associated with high levels of crime, low levels of income for the population as a whole, unstable government, and corruption.

Regulation and the taxation that supports it are necessary. Without them, world trade competes without rules, and mayhem results.

A sporting analogy helps here. As we all know, every sport is dependent upon rules and regulations. Sporting competition only exists because there are umpires, referees, and others to monitor compliance with those rules.

Markets are the same. They, too, require regulation, but the whole logic of freeports is to pretend otherwise. They try to create artificial advantages for one team over all others as if your favourite team could always play with 12 people on the pitch when opponents were restricted to 11. Rigging the rules does not help competition. It destroys it.

That is bad enough, but in practice, freeports are even more insidious than that. As those who promote them know, there is a very particular practical problem with them. In the academic field of political economy in which I work we call that a boundary issue.

If you look at the map of where Scotland’s freeports are located [see below], you will see that they cover remarkably large areas. You will also note that there are no natural boundaries around these territories. So, the obvious question arises, which is how do we know what happens within a freeport, and what happens elsewhere?

When what happens in a freeport is favoured, with the rules heavily biased in their favour, this question matters. For example, is a company employee who works at two locations in the course of their work (which is easy enough to do), with one in a freeport, and the other not, subject to the tax exemptions that the freeport provides to their employer, or not? Who decides? And who monitors the decision-making on this issue, or a free-for-all result?

In reality, if freeport problems were all as simple as that, we might find solutions for the problems that they create. However, by definitions freeports exist to facilitate trade, and trade means flows of goods and services. At present there are relatively few advantages for locating these in a freeport, but you can be sure that it is the intention to change this.

When I took part in freeport consultations with the Westminster-based HM Treasury before they were introduced and questioned what they might eventually be used for, I was told to presume that if I could imagine something being done in a freeport then one day that might happen. I base my comments on that suggestion.

In that case, politicians desperate for growth at any price will, almost inevitably, succumb to the voices in their ears, whispered by highly paid lobbyists, to eventually allow concessions relating to trade, tariffs, VAT and other issues within freeports. When that happens the problem with freeports will snowball.

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In particular, how will we know where the boundary of that freeport is, and whether the right amount of tax has been paid in the right place, at the right rate, and at the right time? This will be especially the case if regulation of this issue has been outsourced to the free market promoter of the freeport itself, which would be unsurprising when HM Revenue and Customs has almost no offices in Scotland now. The opportunities for abuse will expand many times over, and I am quite sure that this is the intention of those who promote these activities.

Freeports exist to create borders when none naturally exist, based on the certain knowledge of their promoters that borders always create an opportunity for tax and regulatory abuse. I am hardly being radical when saying so. The centuries-old history of smuggling, customs abuse, and much else confirms what I am saying.

The result is that freeports can result in the creation of what can be best described as a criminogenic environment. That is a place where the effective operation of law might be suspended because no one has the willingness or capacity to enforce what regulation there is. In that sense freeports are exactly like tax havens, as evidence from Europe confirms.

Forget the greenwash and forget the supposed hype about job creation in that case, not least because freeports only relocate jobs, at best. Freeports are about giving employers and companies a free ride at cost to the people of Scotland. The history of tax-motivated regulatory abuse makes that clear. Scotland would be very wise to take note.