Alex Cobham is now a regular commentator for the Guardian newspaper in the UK.
He has an article out today on private equity. He argues that
“The longer the government delays a crackdown on private equity tax-dodgers, the more divided a society we’ll become.”
I think he’s right.
Paul Wolfowitz is to join the American Enterprise Institute, according to the FT. Having been drummed out of the World Bank for his unethical practices (or whatever lese you might wish to call them). I note that on the home page of that body there is right now reference to their publication on “the inefficiencies of raising taxes for the top 1-2 percent of taxpayers”. The article argues that:
Economic analysis, however, shows that rate increases at the top are likely to impose significantly greater economic harm than other tax increases
Which just about says it all for his commitment to the poor, and his commitment to ensuring that the rich get richer.
We’ve just had a paper on the possible impact unitary tax would have on EU member states. It suggested that this might give an 8% increase to the UK corporation tax take.
The “off the cuff” response from HMRC? It was “we wouldn’t welcome that. This might make the UK look less attractive”.
Actually, that’s completely untrue. But it is an interesting insight into their approach to the whole issue of international tax of corporations. The other interesting insight into which is that the proposed reforms are planned to be revenue neutral. But as the existing arrangements raise almost no tax that must mean the new ones won’t either. Ho hum.
PS (added 2-7-07). I should clarify: If on the basis of the assumptions in the study the UK could get 8% more tax it could cut its tax rate and still achieve the same level of tax as now. This accords with UK policy. This was the reason why I was bemused by the response from HMRC.
I’m always willing to give credit where it is due. The Oxford tax conference has moved to international tax issues today, and the first session looked at issues relating to the recently announced consultation on the taxation of foreign source business income in the UK. Mike Williams, head of international tax at HMRC introduced the consultation paper. I admit, this remains an issue I’m going to largely ignore for now. This HMRC paper has issues inherent within it which trouble me a lot. What I want to mention is the more theoretical discussion, because it was more interesting.
What Mike Devereux did when introducing the session was to suggest that what tax competition has done is to force headline rates of corruption tax down in Europe over the last decade or so. The fall in rates is true. The fact that tax paid has fallen little is also true, although as a percentage of GDP it has, in the UK at least. What Mike suggested was that this trend will continue unless action is taken. And, this is the first thing where I agree with him, the new UK proposal will encourage this trend. The reason is obvious. The suggestion is that we move from a basis of taxing foreign dividends on receipt here with credit given for underlying tax to a position where all dividends received from foreign companies substantially owned by UK larger entities will be free of tax here, subject to a more robust controlled company rule to prevent abuse. This effectively shifts the UK from a residence based tax system for these companies (i.e. their income is taxed here at our rates) to a source basis (i.e. their income is taxed in the country where it arises at whatever rate they choose and is not taxed again here). Pure financial income is basically excluded from this system. What this means is that those territories offering low tax rates for “real” businesses undertaking real trades can be sure that the benefit of those rates will flow into the UK. Of course this will fuel tax competition. That is inevitable. As worrying to me, this will encourage conduit companies and abuse of tax holidays in developing countries, the benefit of which will now be easier to remit to the UK, only exacerbating the loss these countries will suffer from being forced to offer these arrangements.
As Mike suggested, and again I agree with him, this suggests there is no limit to the fall in tax rate that might occur. Indeed, this dedication to a system of nationally based taxation of corporations means that there is a real possibility that tax rates could reach 0% over time. This is inevitable in the structure of tax that we have in the wold right now, and to which the UK is wedded, where each country fends for itself.
These is an alternative. It is called unitary taxation. This was introduced at this conference by Reuven Avi-Yonah, one of the giants of world wide tax thinking. A paper by him on this subject is here, and I can tell you without breaking any confidences that the US Democrats are looking at this and it is, of course, at the core of the EU Common Consolidated Corporate Tax Base. In this the net income before tax of a group of companies is allocated to each of the countries in which it operates using a formula based on third party sales, employment (or some say employment costs) and the value of physical assets in each country. The bias in the formula tends to be towards sales, i.e. towards where the market is (which results in tax being paid in populous places). Each country applies tax at its own local rate once the profit has been allocated.
Of course there are problems. We have to agree common accounting rules (but IFRS is doing that). Then we need common tax adjustment rules (but there is increasing convergence on this). Then the formula has to be agreed, and so on. But think of the benefits. Reduced admin: one set of accounts to agree: elimination if transfer pricing issues and so on.
The UK is adamant right now that this is a threat to sovereignty. But I’m going to agree with Mike once more. If they are serious about collecting taxes from corporations then they might have to change their view on this sooner or later, with sooner being much ore likely than they expect. The chance to link EU reform on this with the US under a new Democrat administration is really important. It will be theme I will return to.
There’s one other link to my thinking. The IFRS I have designed on country-by-country reporting provides the perfect base for doing an initial allocation formula for unitary taxation. You might call that a coincidence. I couldn’t possibly comment!
The theme of the first day here at Oxford was tax avoidance. Although an international conference the focus was on the UK. The new relationship between HMRC and large business was at the core of discussion. As a result key words were trust, transparency, real time disclosure and cooperation.
The aim of HMRC is simple. If large businesses want to work openly and disclose the transactions with tax risk inherent within them to HMRC as they happen they will get the rulings they need on their tax effect in reasonable time scale to ensure they can work with a high degree of certainty. For these people the days of having 15 years of tax assessments still open and subject to negotiation will be history. They may also see less of the Revenue at times that do not suit their convenience. 10 to 20% of the FTSE 100 are expected to be low risk. The Revenue would like that to reach 40%. The reaction has apparently been good, coupled with a request that the Revenue do not get too distant. They like the relationship. From those in the room it seemed likely that Aviva either are or would wish to be in this category. They made clear that they will not do artificial planning: when forced to do so on stamp duty because the whole market is they only did so with the greatest of reluctance. That was a breath of fresh air, although I am aware that they do operate offshore.
For those who are high risk the relationship will be quite different. They will see a lot of the Revenue, whether they want to or not. The Revenue will seek cooperation, and will expect to get it, whether willingly or not. Have no doubt about it: Dave Hartnett is a tough operator who came to his job through the Enquiry branch, the toughest department in the Revenue. I am quite convinced he means what he says. If business goes for this scheme, and cooperates, they will win. For those who don’t play ball (and he didn’t say this because he did not need to) I think life is going to be tough.
How will the Revenue decide the difference? Risk assessment is one basis. As Jon Symonds, still with Astra Zenecca at the moment said though, transfer pricing in pharmaceuticals is always going to be high risk. He was, therefore, I think a little too cynical of the scheme. Others suggested the Revenue had a simple duty to presume that big tax bills were high risk, by definition. Dave Hartnett was emphatic. That is not true. Of course cash is an issue, but the core of this is about the relationship that the company chooses to create with HMRC. If there is trust and openness and an absence of game playing even complex issues can be resolved in real time working. Call it good corporate governance as the deciding factor, if you will.
I believe him. I believe that the benefits for all sides will be high in time saved, tax collected, and the ability to focus on more important issues.
Some did not agree. One US observer said “I can’t imagine the notion of trust in the US tax system.”
A Canadian said: “I don’t want my tax authorities to be trusting. I want them to be sceptical and smart so they can tell the difference between a tax avoider and tax evader.”
A UK finance director told an anecdote about buying companies. In this case he started with the assumption that you should “trust and verify” but with experience he had come to the point where he now believed you just verify. He thought the Revenue would do the same. He’s right. In some cases they will. But an alternative basis of working for others is a model worth pursuing.
What would be really useful would be if the companies did, or were even required to publish their Revenue risk rating in their annual accounts. That would be very valuable information indeed.
As amusing was another reporting consequence of this. One tax director mused on whether he only wanted a year or two’s tax assessments open at any time. If that were the case how could he smooth his tax charge by manipulating the tax reserve for liabilities arising in past years? Might he want to be higher risk just to have this opportunity available to him? He might have made one of the most honest submissions of the day.
Andrew Dilnot was director of the Institute of Fiscal Studies for many years. Now he’s Principal of St Hugh’s College Oxford and the university’s pro-Vice Chancellor.
This evening he made a complete fool of himself as the after dinner speaker at the Oxford Centre for Business Taxation’s dinner. He took it upon himself to address his comments to Alastair Darling, who was not present, of course. He suggested that that a Chancellor should not make policy for presentation purposes, have a reason for all policy and think through the consequences of that policy before enacting it. In principle that might be sound, but it was delivered with a political subtext that was as unwelcome as it was unfunny and which confirmed (again) the lack of objectivity of this place, and the IFS come to that.
But worst of all, he used as example of an ill thought out policy the 0% corporation tax rate small businesses enjoyed for a period in the UK. I agree with him, this was poorly thought out. But it’s his analysis that led him awry. He said he presumed this policy was created because it was assumed that small businesses were either a) new or b) entrepreneurial or c) this was actually a disguised social policy for the poor engaged in such activity. His claim was that the reality is much simpler. Small businesses, he suggested are simply bad at what they do. They have to be or they would not be small.
I’m sure that I wasn’t the only one who thought that he should a) not make statement for presentation purposes b) have a reason for all he says and c) think about the consequences before doing so.
What made this especially odd was that his opening “funny” referred to his annual speech to new students in his college. He apparently assures them that now thy have arrived in Oxford they no longer need to try to be cool. They can just be nerds, because that’s what Oxford wants. Well, I can tell you, his college has certainly got one.
I have been asked by senior academics at the above Centre to clarify my blog, posted on Monday.
They have made clear to me none of the existing leadership of the Centre were involved with the management of the Said Business School when cash was accepted from Wasif Said.
I am happy to publish that clarification.
Heather Self, a partner in Grant Thornton in the UK has probably come out with the quote of the day at Oxford (so far). She said:
Tax is just cash. I can’t see nay link between that and things like hospitals or those sorts of things that people like to claim.
Even in this audience that went down like a lead balloon.
I was the first respondent, to no one’s surprise. Dave Hartnett was next. I’m not sure which if us was more angry.
It was amusing to hear Loughlin Hickey try to dig the profession in which Heather had dumped it. And to be candid he didn’t do badly. He actually made the point that tax shouldn’t wag the tail anymore, but it has, and it’s the professions job to realise that.
It’s odd to find myself agreeing with him. Mind you, he didn’t explain as a consequence why KPMG is still in more than 30 tax havens but not the Isle of Wight.
Down here in Oxford an academic took me aside to discuss my comments on Mike Devereux’s work, published hereon Monday. His argument was that a company can pay tax, but can’t bear it. In other words, he argued in support of Mike that the tax charge on a corporation can be passed on to labour, customers, or whatever. As such it is an economically neutral issue.
I responded by saying that this is not true. Companies can decide within quite wide parameters where they will pay tax. And they can decide when they will pay tax. And as a result they can decide how much tax they might pay. All of these issues have been agreed upon here at Oxford today. That means companies decide who benefits from the tax they pay. If that is the case then they are doing two things. First they are acting as principals in their own right, and not as agents for anyone, be it for the shareholders or someone else. Second, they are pursuing a political activity when making these decisions.
This is far removed from the neutral economic claim that is usually made for corporation taxes. Second it shatters the myth that corporations have no social responsibility in this matter. They have. If you undertake political activity, even by proxy, then you have responsibility in the exercise of that action. This is why tax is at the core of social responsibility – and why every multinational company should recognise it as such.
I have to say that I was surprised by the reaction to my comments. The academic said he had changed his mind.
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