2010 February » Tax Research UK

Let’s blow this myth apart: companies do pay tax

Corporation Tax, Economics 9 Responses »

Feb 232010

Overseas businesses put off by UK tax regime, Brown told | Business | guardian.co.uk .

There was a conference yesterday at which Gordon Brown and Lords Mandelson “welcomed 250 international leaders to London to reassure them the UK remained a competitive place to do business despite the turmoil of the financial crisis and recession.”

The response of business may be typified by that of George Buckley of 3M (maker of the post it note – which the world could easily survive without) who said:

Britain has a stable government and good education and innovation, but it also has high taxes and the trains and roads are not as good as in continental Europe

So George wants the state to provide him with the infrastructure so he can make money. But as he argued:

Companies are not taxpayers, but tax collectors

So let’s be clear then: he thinks business does not pay tax so what he’s demanding is that the people of the UK provide him with the opportunity to make money in the Uk from which he has no intention of paying a return to them as his company does not, according to him pay tax. It’s a one way deal on that basis, isn’t it? Why should we bother if this is true?

Well, for one good reason – which is that he’s wrong. Let’s say it loud and clear: companies do pay tax. I agree – they do their best to pass the bill on to others. Some goes to shareholders. Some claim it’s passed on to customers, but given that’s only possible in the odd world of the economists who argue companies don’t pay tax if you’re a monopolist there are other more important issues to address in that case. Some argue that companies pass on the cost to labour – but the paper that claims to prove this by Mike Deveruex at Oxford has to assume to get to this result (quite extraordinarily) that a company facing a strike can move its production from the UK to another country without disruption to output and without cost incurred – showing how absurd the hypothesis is in the form in which economists present it (although I do not deny that in some situations – such as when a financial transaction tax might be imposed on a bank such a situation might arise).

The reality is that Buckley is pushing a line of argument that is not true that has been created by economists who have propagated the delusion, based on misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. In the real world companies pay tax.

How do I know this. I do so for three reasons. First they think they do. That’s pretty powerful evidence. Either business is staffed by people who are all deluded or economists are: this may be a genuine case of one or t’other.

Second, if business did not pay tax it would not spend nearly so much time trying to avoid it. There’s no evidence they do so on behalf of shareholders to whom they have no relationship. They appear to only do so on behalf of management who wish to command resources which they otherwise perceive as lost to them i.e., yet again they act as if they know they cannot pass the bill on elsewhere so they must avoid the bill itself.

Third, if tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes then we can say with some assuredness that business spends a great deal of time seeking to pay too little tax in the wrong place and later than they should by ensuring that the form in which transactions are declared is inconsistent with their economic substance. That’s because companies pay tax.

Mt Buckley denies an obvious truth. What credence should we give to anything else he said?

Monbiot on what we need to do to make bankers leave

Secrecy jurisdictions, Tax avoidance, Tax Havens Comments Off

Feb 232010

I don’t always agree with George Monbiot, but he’s on form this morning, writing:

It’s a bitter blow. When the government proposed a windfall tax on bonuses and a 50p top rate of income tax, thousands of bankers and corporate executives promised to leave the country and move to Switzerland. Now we discover that the policy has failed: the number of financiers applying for a Swiss work permit fell by 7% last year. The government must try harder to rid this country of its antisocial elements.

Executive flight is the corporate world’s only effective form of self-regulation: those who are too selfish to pay what they owe to society send themselves into voluntary exile. It’s an act of self-sacrifice for which we should all be grateful. It’s hard on the Swiss, but there’s a kind of mortal justice here, too: if you sustain a crooked system of banking secrecy and tax avoidance, you end up with a country full of crooks and tax avoiders.

As he concludes:

These efforts [to tackle tax abuse] scarcely scratch the problem. International attempts to close down tax havens remain halfhearted. But if, by some miracle, these measures were to succeed, one haven – let’s say St Helena – should be kept open. It should be furnished only with rudimentary homes. All who chose to could live there in peace. Every penny they possessed would remain safe from the taxman, as long as they never set foot in another land. They could sit in their cells and count their money for the rest of their lives. Parties of schoolchildren would be brought to the island to goggle at these hermits, and learn some lessons about the follies of wealth.

And I’ll guarantee you this, there are plenty enough sad people that there would be queues to live there. The world would, as George rightly says, be a better place without them.

TUC argues for takeover reform

Economics Comments Off

Feb 232010

Cadbury shows takeovers need reform | ToUChstone blog: A public policy blog from the TUC.

Brendan Barber of the TUC argues:

[W]e need a new kind of economic test handled by an independent mergers and takeovers commission. It would make bidders show that a takeover would be good for the target company. It would take into account the interests of the wider economy, employees, suppliers and local communities. Takeovers funded by unrealistic debt or driven by speculation would be unlikely to pass. Those that make industrial sense would.

Employees should have a proper say and better protection. European requirements for information and consultation are not working properly, and do not even apply to take-overs of solely-owned private companies. The worst reason for a takeover is that it makes it easier to reduce the terms and conditions of the staff once they have a new owner. This is why we have Europe-wide rules of transfers of undertakings, but they do not apply to the takeovers that take place by share transfer – common in the UK, but rare elsewhere. This, too, must end.

It certainly would not mean that there would never be another takeover again. But we need a new balance. It is not even quite right to say that company ownership has become a chip to be played in casino capitalism, for at least gambling is regulated, and there is a limit on what the house can take.

And if this encouraged companies to grow by investing in new products and new services that customers want to buy, rather than by financial engineering, we would all gain.

I advise the TUC: I am not linked to this piece. But I agree with it. The illusion that we profit by financial engineering is just that, an illusion.

We need to move to real business to generate real wealth, just as my Tax Justice Network colleague said elsewhere this morning.

Brown criticised over fat-cat tax exemptions

Economics 1 Response »

Feb 232010

Brown criticised over fat-cat tax exemptions / Britain / Home – Morning Star.

From the Morning Star:

Tax reform campaigners poured cold water on government plans yesterday to reward businesses investing in Britain with tax breaks and other financial incentives.

Speaking to a global investment conference in London attended by more than 250 representatives of the world’s biggest brands, Gordon Brown said he was committed to re-establishing Britain as a “low debt economy” and to maintaining London’s position as one of the world’s premier financial centres.

The Prime Minister said a range of tax measures and “firm and tight” limits on the growth of public spending were already in place to bring Britain’s debt down.

In a move which showed no change in his methods to salve the British economy following the financial crisis, Mr Brown said that, despite the recession, he was “committed to maintaining London’s central position as a world-leading financial centre, remaining competitive and attracting the best talent.”

Unveiling the new investors’ charter and a new tax framework for business, Mr Brown said he had a strong commitment to supporting private business.

The measures failed to impress tax reform campaigners, who accused Mr Brown of “repeating the same mistakes of the past.”

Tax Justice Network director John Christensen said: “Britain offers far too many tax exemptions to business – especially socially useless businesses like the city of London.”

Questioning the idea that low taxes lead to more foreign investment, Mr Christensen said: “Real entrepreneurs that invest in new technology and job-creating manufacturing are looking for a high level of educational training.

“Worl-class infrastructure and high levels of productivity are achieved through huge public-sector investment – including research and development.”

Calling for a massive expansion of investment in “social capital,” Mr Christensen added: “The PM must reject the siren calls of business calling for tax breaks and push a tax policy that creates sustainable public sector investment.”

The TUC is also backing a campaign to increase investment in public services, Don’t Risk the Recovery, together with organisations 38 Degrees, the Fabian Society, Left Foot Forward and the IPPR.

Apologies to the Morning Star for reproducing the whole thing but what John Christensen said to them seemed too important not to be give full justice.

Surely we’re not going to make the same mistakes all over again?

Who blew up the economy?

Economics Comments Off

Feb 222010

The Real World Economics Review has announced the winners of the Dynamite prize – awarded to the economist readers thought to have blown up the economy. as they report:

Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first–and hopefully last‚ÄîDynamite Prize in Economics.

They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.

Most than 7,500 people voted‚Äîmost of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast. The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.

Dynamite Prize Citations

Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.

Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modelled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.

Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

I’m happy. I voted for two out of the three.

Do they honestly expect anyone to believe this?

Trusts Comments Off

Feb 222010

The Lawyer magazine has published an article by David Harvey, who is chief executive of the Society of Trust and Estate Practitioners Worldwide. The likely bias in his opinion can be surmised from their name. He wrote:

The reality is that trusts are open to official scrutiny and are thus neither ’secret’ nor ’anonymous’. Trusts are subject to strict anti-money laundering regulations and information is available to governments on the source, owners and beneficiaries of trust funds. This information is shared, when appropriate, with other countries under terms of tax information exchange agreements (TIEAs).

This, very politely, is balderdash. It’s for good reason that the Swiss protest that a trust located in one jurisdiction owning a company located in another that banks in a third is now, and has always been for all practical purposes impenetrable and creates effective banking secrecy.

I do not believe STEP do not know that.

So why spin a story that is so very obviously misleading? Do they think they fool anyone? Or is it just self-reassurance?

Swiss minister questions tax evasion rule

Switzerland Comments Off

Feb 222010

Swiss minister questions tax evasion rule | Reuters .

Switzerland’s justice minister questioned on Sunday whether tax evasion should continue to be treated as a misdemeanour rather than a crime, in another blow to the country’s cherished banking secrecy.

Switzerland has already abandoned the distinction between tax evasion — failing to declare your income or wealth to the taxman — and tax fraud — deliberately misleading the revenue — for foreigners investing money in the country.

More signs of progress.

Yes I know it will need a referendum to get through – but without leaders willing to make the case for even putting the question to a vote that can’t happen.

So this is real progress.

Flat taxes are just an excuse to make the rich richer

Conservatives, Tax avoidance, USA Comments Off

Feb 222010

The Tax Justice Network blog has an entry on an old b?™te noire of mine, flat taxes. As they note:

Citizens for Tax Justice in Washington has another excellent short paper, this time about the flat tax. It begins:

Since 1995, Senator Arlen Specter of Pennsylvania has introduced legislation to create a federal “flat tax” in every session of Congress, including this session. This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

Now what’s wrong with the flat tax?

Well, for starters, there is the fact that the people who dreamed up this gimmick in 1983 admitted that a flat tax "will be a tremendous boon to the economic elite” and that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.” This table provides the evidence:

And CTJ’s time tested number crunching has analysed the proposal, and worked out that it would involve:

Enormous tax cuts for the richest five percent of taxpayers, including an average tax cut of $209,562 for the richest one percent in 2010.
Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.
Low-income Americans would lose the refundable credits that they receive under the current income tax.
The form of income that mostly flows to the wealthy ‚Äî investment income ‚Äî would be exempt from the personal income component of the flat tax, while all compensation for work, including wages and even employer-provided health care benefits, would be taxed.
There would be little simplification in taxes for the majority of Americans. Replacing progressive tax rates with a single rate has nothing to do with simplicity, because progressive rates are not what makes the current system complicated.

What actually makes the tax system complicated are the various loopholes and special breaks that mostly benefit businesses and higher-income individuals. Capital gains income (which wealthy investors tend to have) is currently taxed at a lower rate than the wage and salary income that constitutes almost all income for most Americans.

Many wealthy people therefore have an incentive to use various schemes to disguise what is really compensation for work as capital gains income. But instead of addressing this by taxing all income the same way, the Specter flat tax makes capital gains income entirely tax-free!

As CTJ concludes:

Senator Specter’s flat tax is not so much about eliminating loopholes as it is about consolidating loopholes for the rich.

—————

To which I would add just one thing: remember it was not long ago George Osborne was flirting with this idea. Why was that, I wonder?

The Channel Islands’ VAT scam continues

Guernsey, Jersey, VAT 1 Response »

Feb 212010

The Guardian, working I am sure with the irrepressible Richard Allen, have reported:

The controversial online sale of VAT-free CDs exploded at the end of last year, driving one in three purchases by British music-lovers on to the web. The surge in sales casts doubt over Treasury claims to be tackling the tax dodge, already thought to be costing the exchequer £110m a year and rising.

Websites operated by HMV, Tesco, Amazon, Play.com, Asda, WH Smith and Woolworths structure almost all their online CD and DVD transactions as personal imports from the Channel Islands. As a result they are able to offer unbeatable VAT-free prices, threatening the futures of music stores and sapping tax revenues.

Data from market research firm Kantar shows that 16.5m CDs were bought by British customers over the internet in the last three months of 2009 at an average price of £7.80. Over the same busy pre-Christmas period, 26.6m DVDs were bought online at an average price of £9.36.

In most cases, customers remain unaware of the extraordinary lengths online firms are going to to ensure the buyer avoids the 17.5% VAT charge they would pay on the same product bought from their local store. What appears a simple online purchase exploits a 27-year-old European tax directive that waives VAT charges on low-value personal imports from outside the EU. In the UK, the VAT relief applies to goods bought for £18 or less.

This is not a victimless sham:

Tax-free internet sales from the Channel Islands have been steadily ballooning over the past 10 years while the Entertainment Retailers Association claims 1,600 shops selling music have closed in the last five years. Among the high street names to have failed, or to have disappeared altogether, are Fopp, Our Price, MVC, Music Zone, Virgin Megastores, Tower Records, Zavvi and Woolworths.

It’s a sham in my opinion none the less. It is impossible to explain the activity undertaken but for the tax saving generated. That makes this activity about as far removed from tax compliance as it is possible to be if tax compliance is defined as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. Despite this, and inexplicably, the Treasury appears to persist in denying the scale of the issue – which now costs the government hundreds of millions in revenue a year – as much as was lost to the Isle of Man on its VAT arrangements.

All this is despite the fact that, as the Guardian notes:

In fact, the Guardian investigation had found that all but one of the companies involved in the VAT dodge were controlled by UK-registered parent businesses. Maidenhead-based HMV Group and Swindon-based WH Smith – both stock exchange-listed – push much of their online sales through subsidiaries HMV Guernsey and WH Smith Jersey.

Amazon has an arrangement with Indigo Starfish, a Jersey company owned by Glasgow-registered parent Indigo Lighthouse, while Tesco, Asda, Argos and WH Smith have struck outsourcing deals with Cheshire-based The Hut, which operates through Jersey and Guernsey subsidiaries. The only genuinely Channel Islands-owned company using the VAT loophole is Play.com, founded by islanders Richard Goulding and Simon Perree. The Guardian has been unable to find any mainstream website that does not offer CD or DVD sales via the Channel Islands VAT loophole.

The Isle of Man VAT abuse has been shut down. Now it’s time to do the same for the Channel Islands. There is no excuse for not acting left. This one is overdue for reform. As I’ve previously noted:

This problem could be solved overnight. If every packet from Jersey and Guernsey was opened to check values were under £18 and a £5 handling charge for doing so was levied on all who received those packets then the market would be closed in days.

That would be legal, and appropriate in the face of blatant tax avoidance. What is holding them back?