2009 June » Tax Research UK

And the winner of the race to the bottom is….Obwalden

Economics, Secrecy jurisdictions, Switzerland, Tax Havens Comments Off

Jun 232009

The canton of Obwalden is planning to launch "special living zones" for millionaires in an attempt to boost its tax take by luring the wealthiest residents. Like other cantons in the tax haven, Obwalden finds itself short of revenue because it has been competing with other jurisdictions to see who can offer the lowest rate of tax.

The result has been a drastic shortfall in tax revenues as people set up PO box companies to take advantage of the low rates, while contributing nothing to the local economies because they live elsewhere.

Obwalden’s answer is to lift construction bans on land reserved for agricultural use, offering the rich the chance to secure property on protected land, with the promise of spectacular views of lake and alpine landscapes.

There is of course considerable irony in this: like Jersey and Guernsey, Obwalden is heading for bankruptcy because it is offering tax haven tax rates to the wealthy who offer nothing in return. So now they’re actually selling the place – something the Crown Dependencies effectively did long ago when they sold their integrity to the financial services industry.

But, again just as in jersey and Guernsey, there are victims:

The homes would be constructed on land not usually accessible to ordinary citizens, leading to accusations that the policy discriminates against less wealthy inhabitants while rewarding the rich.

"These special living zones are nothing less than a form of apartheid," said Moritz Leuenberger, of the Social Democrats, who is Switzerland‘s environment and transport minister. "Is a racing car driver of so much more use than a nurse?" he asked, referring to the rich personalities such as Michael Schumacher who have moved to Switzerland to take advantage of its favourable tax laws.

Many argue that the drive to draw in the rich is destroying communities as normal earners are forced out by rising prices.

In other words – as we know, tax havens destroy well-being.

And the myth that they do not is also extraordinarily harmful. The Obwaldeners voted to reduce their taxes three years ago, bringing corporate tax down to 6.6% and local income tax down to 1.8% in reaction to pressure from its inhabitants – 90% voted in favour of the move in a referendum. And it introduced a flat tax at the same time. as the Guardian notes, the reaction was predictable:

While on paper it appears that 400 new companies moved to the area as a result of the changes, most are nothing more than PO box companies. They fail to offer employment to locals or boost consumer spending in the region.

Quite. There was no Laffer effect. The place was just being used to undermine the regulation and taxes of other places – classic secrecy jurisdiction behaviour.

So what now? The place is going bust: the sooner a few do the quicker this problem will be solved. It is abundantly clear that the Laffer curve is bunkum, flat taxes do not work, tax haven behaviour and low taxes harm ordinary people – so let’s get rid of these places and make clear there is not, never has been and never will be such a thing as beneficial tax competition.

BDO can breathe again – but what about PWC?

Accountancy, Big 4, PWC Comments Off

Jun 232009

BDO International can breathe again | AccMan .

Dennis Howlett discusses BDO being klet off the hook becasue it proved in court it was a ‘franchise’.

But what of PWC he asks? Can it survive Satyam? There are clear parallels and the answer is not clear, and the risk so much bigger.

Is there a future for Big 4 firms that aren’t, when it comes down to it, firms at all – or so they would have us believe, when it suits them?

The charge sheet against tax havens

Secrecy jurisdictions, Tax Havens 2 Responses »

Jun 222009

The recent Norwegian report on tax havens is impressive in paying out the charge sheet against tax havens / secrecy jurisdictions:

Tax havens increase the risk premium in international financial markets
(they) enhance counterparty risk and information asymmetry between different players, which undermines the working of the international financial markets and contributes to higher costs and risk premiums for all countries.

Tax havens damage institutional quality and growth in developing countries.
They can contribute to weakening the quality of institutions and the political system in developing countries. This is because tax havens encourage the self-interest that politicians and bureaucrats in such countries have in weakening these institutions.

Tax havens undermine the working of the tax system and public finances
This has made it difficult for other countries to maintain their capital taxes, and has thereby contributed to lower taxes on capital. Developing countries have a narrower tax base than rich countries, and also obtain the largest proportion of their tax receipts from capital. Accordingly, lower capital taxes mean either a decline in revenue and / or higher taxes on a narrower base.

Tax havens reduce the efficiency of resource allocation in developing countries
This can lead to a redistribution of resources by the private sector away from activities which yield the highest pre-tax return to ones which give the best return after tax. Such behaviour reduces overall value creation.

Tax havens make economic crime more profitable
Secrecy legislation provides a hiding place for players who want to conceal the proceeds of economic crime. Tax havens thereby lower the threshold for such criminal behaviour.

This is a government sponsored report confirming what we have said, time and again about these places is right.

Good for Norway.

Hat tip for extracting this to John Christensen

Solving the pension crisis

Economics, Pensions 8 Responses »

Jun 222009

I noticed this article in the FT last week:

BT, sponsor of Britain’s largest pension scheme, shocked investors last month by revealing that it would have to increase annual contributions to its pension scheme to £525m for each of the next three years, up from its current rate of £280m.

The sum, equal to almost a quarter of the telecommunications company’s projected free cash flow, stems from an agreement struck with scheme trustees in late 2006 that is legally binding.

BT has a market capitalisation of about £8 billion today. It’s going to pay almost 20% of that into its pension fund over the next three years, more than half of that being to make good a deficit. It’s far from alone in having such a deficit: most pension funds have.

The extraordinary thing is around 50% of pension funds are still invested mainly in equities. Gilts and bonds make up about 30%, property 7%, private equity and hedge funds under 5% and the rest is cash.

All this suggests that what BT is doing might be fine for it, but in a macro sense it is quite illogical. Almost all BT’s free cash flow is going into its pension fund, so reducing its capacity to invest and make profit, at consequent harm to its long term earning prospects. And if all FTSE companies are behaving in broadly the same way (and that is, I know a big assumption, because not all have the sort of pension commitment BT has) then we have the start of another crisis on our hands.

Put simply, BT is destroying profit earning potential to buy shares: second hand shares at that. The shares it will buy are already in the market: they will not generate new investment. Al they do is purchase a property right: a right to receive future income from stock exchange quoted companies in large part; companies just like BT.

Of course in the short term the excess demand for a pool of shares of broadly fixed amount (few companies issue new shares now except in time of crisis indicating poor performance and low investment return) means share prices must go up for a bit. And then the crushing realisation will dawn: there is no extra profit as a result of making these cash injections to actually provide an investment return, so the market will correct, share prices will fall, and the cycle will repeat ad nauseum.

All of which shows that shares are either inherently unsuitable as a mechanism for long term saving when too many funds are invested in them or, alternatively, that the way we’re funding pension funds makes no sense.

Remember of that £1.575 billion BT will pay a significant sum will go in broking fees and the subsequent churn on the resulting investments, and on extraordinarily high paid advice from the City which will produce results of about market average, at best, and somewhere along the way much will be raked off in similar ways. And all the time more will go to a limited few in the City and less to investment in BT, elsewhere, in real jobs and to pensioners. Because let’s be blunt: pension funds are a mechanism for transferring future wealth into current earnings for the City of London. that is their primary purpose right now as far as I can see.

So I was going to suggest a solution of the type Robin Blackburn created a while ago:

A bold strategy would simply require all private employers above a certain size – say a turnover of £10m – to pay 10% of annual profit into a national pension reserve fund. They would be permitted to make contributions in either cash or newly-issued shares. The pension regulator has already allowed cash-strapped corporations to contribute to the PPF by issuing new shares and it is an innovation worth following

I like this: isn’t it obvious that BT should now just issue it’s pension fund with shares in itself so the fund acquires 20% of its worth, with the opportunity to divest over time, and the problem is at least in part solved? If all companies with deficits did the same we’d go a long way to tackling the problem – and would undertake the most massive change in the wealth profile of the UK you could think of. Except the vested interests would yell and howl in protest to maintain their right and deny that of future pensioners.

But then along comes China today proving that the a real alternative is possible:

Every state-owned company that has listed in China since 2005 must transfer stock equal to 10 per cent of the shares offered to the National Social Security Fund, according to a weekend government edict.

A similar requirement already covers listings of Chinese state-owned companies in Hong Kong and has made the state fund the largest institutional investor in the city’s stocks.

Now I know China has all its own problems: but this is a clear move in the right direction. In fact it offers a whole new hope for the way in which pension contributions are managed, outside bank control, without their being the opportunity for being fleeced by the City and without requiring the massive drain on cash that happens now.

Let’s create (as Robin begins to suggest) a national pensions agency. Quoted companies pay at least part of their pension contributions in shares: their pension funds are credited with part of the national pool of pension assets in exchange: they get a share of the index in effect as a return. Average results are guaranteed. And every company would have to do this: no ifs or buts. In unquoted large companies the same could be done: there would simply be a pool of ‚Äòprivate equity’ style investments in them to be shared as well.

This is a viable national pension fund.

It shares future wealth.

It does not constrain current investment.

It does not reduce liquidity.

Now, why not?

A 10% extra tax on banks, and stop tax relief on banker’s pay

Banking, Economics, UK Comments Off

Jun 222009

Goldman Sachs is supposedly having a great year:

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year

I’ve said it before, and I’ll say it again: banks should pay an extra 10% corporation tax for the risk they impose on society when doing this. Call it an insurance premium until we cut the risk they create down to size.

I’d add something else: I don’t think we can make a maximum wage stick. I’d like to, but I can’t see it working. But we can disallow wages for corporation tax purposes. I’d do that for all salaries more than 10 times the average of UK mean and median wages. That provides useful indexing and benchmarking. It also means all pay over about £250,000 now would not be subject to corporation tax relief. More than 99.5% of people should be OK with that – and let me assure you – it would work.

Consider the paradox

Banking, Economics 6 Responses »

Jun 222009

The FT has noted:

Just 8 per cent of the $1,000bn (£605bn) in .. infrastructure investment budgeted worldwide will be ready to start work by the end of next year, according to new research.

The findings call into question whether spending on major public projects can provide the hoped-for stimulus to jolt recession-hit economies back to recovery.

Infrastructure is seen as a crucial channel of economic stimulus because it employs large volumes of labour and materials, and can be easily directed by government spending.

But many large projects depend on private financing, which has dried up in recent months. The UK is particularly dependent on public-private financing for infrastructure. Although some stand-out projects such as the M25 widening scheme have reached financial close in recent months, others, such as London’s Crossrail line, remain open.

The absurdity is obvious: we bailed out the banks so we don’t have the money to pay for the infrastructure we need to create jobs and the baks we gave the money to won’t lend us back to is at a higher rate to achieve the same effect.

Remind me please: why do we need the banks in the equation?

Oh, of course, I forgot. It’s for this reason:

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year

We have an economy that does, of course, run for the benefit of the banks: the banks do not run for the benefit of us. And that’s why they continue to hold us to ransom.

And so they will whilst the Treasury remains committed to this ‚Äògroupthink’. As it is. despite Alistair Darling’s call for reform of the bank’s boardrooms last week he remains committed to the usual culprits. He appointed the board of UK Financial Investments after all, and look what a good job he did:

Glen Moreno – Acting Chairman – ex Citigroup and Liechtenstein banker
John Kingman – Chief Executive – civil servant ex private sector, formerly in charge of financial stability in the banking sector for the Treasury (which he clearly did not get right)
Peter Gibbs – ex Merril Lynch
Michael Kirkwood – ex Citigroup
Lucinda Riches – ex UBS
Philip Remnant – ex Credit Suisse
Louise Tulett – career civil servant

All the bankers are from organisations that failed.

And Darling expects to effect change?

Not a hope – not with this lot.

They’ll do all they can to promote banking – and that’s just not good enough when the real economy needs less banking and more real jobs.

There’s never been more need for change.

So where is the left wing leader who can deliver this?

Country by country – the momentum builds

Country-by-country, Development Comments Off

Jun 222009

The FT has reported:

Stephen Timms, financial secretary to the UK Treasury, will push this week for a move towards “country-by-country” financial reporting for multinationals.

The move comes as finance ministers meet in Berlin on Tuesday to review the international crackdown on tax havens.

The Treasury, keen to expand the campaign to include aggressive avoidance as well as evasion, believes that the additional reporting requirement for multinationals would bring more transparency into their negotiations with developing countries on transfer pricing. This determines the allocation of taxable profits between parts of a multinational.

The idea is largely opposed by business, in part because of the extra compliance burden. Some development experts also question the approach, given the more fundamental problems facing some developing nations’ tax administrations.

A critique of existing research on the country-by-country reporting issue will be published on Tuesday by Britain’s Department for International Development.

Which I admit I find rather odd: as creator of the concept they never sought my opinion, but knew where I was. I wonder how objective it is in that case? Or could the omission be explained by that it was written by my old friends at Oxford:

The study, by the Oxford University Centre for Business Taxation, says tax losses from profit shifting by multinationals due to faulty transfer pricing have been “overestimated drastically”. It also criticises estimates of tax evasion by rich individuals in developing countries, which some reports have put as high as $124bn (€89bn, £75bn) a year.

It says: “Overall, it is fair to conclude that most existing estimates of tax revenue losses in developing countries due to evasion and avoidance are not based on reliable methods and data.”

It also questions the view that tax evasion is the prime motivation for money being shifted out of developing countries, saying that political instability and concerns about property rights may be more important. But the study supports the call by campaigners and aid charities for more transparency, and says evasion and profit shifting are likely to be significant problems.

I’m inclined to note that ‚Äòthey would say that’ of our estimates, but it doesn’t really worry me: the fact is this: if the estimate is wrong but the problem is real now please fund the research to replace that done by us with tiny resources but who have none-the-less dragged this issue onto the international agenda. I suspect this critique got more funding than we have ever enjoyed in combination.

So let’s now work to really tackle the issues. And accept that country-by-country reporting is one of the solutions.

How criminals could abuse UK companies

Corruption 4 Responses »

Jun 222009

I’ve been asked why the UK can’t secure the data it needs to comply with the information exchange demands of Tax Information Exchange Agreements. I’ve also noted what Robert Morgenthau has had to say about abuse of US corporations. So let me take a simple example

Suppose I buy a UK ‚Äòoff the shelf company’ from a formation agent. It’s a pretty easy thing to do.

They send me the forms to register the new shareholders

I may or may not complete them: I probably won’t. The company now has no recorded owners. I suspect this true of the vast majority of small companies in the UK, at least until their first annual return is filed 21 months after incorporation.

I might register the company at a false or nominee address (for example, somewhere offering a postal forwarding service). I may do so in a false name. As the only data that is checked with regard to any of this is that the postcode is real (but not that it is valid) that is easy to do.

I may have (quite easily) provided a false name as a director – no one ever checks.

I can still open a bank account. Banks do not seem to do company searches. The inconsistencies will not matter to them.

And HMRC will not now know where to find me – or who owns the company – and their enquiries will go unanswered.

After 21 months when the first accounts are due I ditch the company – maybe changing its name whilst transferring the original name to a now company, where I repeat the process. I forget to tell the bank about the change of identity and continue to use the bank account I now have with that new company.

Now maybe you might say I have the mind of a fraudster – but I see no way the UK can stop the above at present, and it would be easy to do.

And if I used an Eastern European bank account, which seem readily available, then this would became so easy it would be ridiculous.

My point is this: the UK is a great tax haven, one of the easiest places on earth to open a bank account and has about the laxest regulation there is.

And you still don’t believe me? Consider this: more than 100,000 companies are struck off the UK register of companies a year with no questions asked, many having never filled a set of accounts. Why do we let that happen? Isn’t this laxness one of the biggest recipes for fraud and abuse ever created? And we do it here in the UK.

Criminals use shell corporations

Corruption, USA Comments Off

Jun 222009

More from the Robert Morgenthau testimony to the Senate:

We also receive regular requests from foreign law enforcement seeking to trace money moved through accounts held by U.S. corporate entities. A case indicted in Brazil involved criminal proceeds sent to an account at a U.S. bank. Again, a U.S. shell corporation was created and used to open the account. In this case, the defendants discussed using a British Virgin Island company as the nominee director of the corporation. Consider the following communication from the U.S. incorporating agent to the Brazilian defendant:

The recommendation is to open a US Limited Liability Company (LLC). This entity combine the advantages of a limited with the ones of a partnership, especially about the taxes (we will open “a pass-through entity).”

The instruction is to not mention in the public files the owners’ names.

It is possible to point a Registered Agent to receive the official letters.

The LLC might be managed directly by its owners, but it must be done preferentially by operating managers (equivalent to directors) and that will have duties and responsibilities similar to the corporation’s directors.

The Managers don¬¥t need to be American citizens or to live in United States and their data may, but not necessarily, be disclosure to the public records.

The total cost for the opening procedures is US$ 6,000 including a Nominee Member. Per year the managing will cost US$ 1,600.

This communication, and the examples set forth above, demonstrate how the systems of anonymity in this country’s incorporation processes are being exploited by criminals. They also demonstrate why we need to be able to retrieve beneficial ownership information from the states directly, and not from the sham nominee of a domestic shell company.