2010 July » Tax Research UK

Tax avoidance, evasion, compliance and planning

Tax avoidance, Tax compliance, Tax evasion 17 Responses »

Jul 072010

I have published a new Tax Briefing that offers definitions of each of the above terms, which are frequently abused. The briefing says the following:

Introduction

The language of the tax gap and all issues relating to it is confusing for many lay observers of the tax world. This briefing seeks to tackle one major cause of confusion, which is the difference between tax evasion, tax avoidance, tax compliance and tax planning.

Tax evasion

Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.

Tax avoidance

Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking international transactions.

The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.

Tax compliance

Tax compliance is different from tax avoidance and tax evasion because it 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. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).

Tax planning

Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.

So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.

As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.

Scrap the Office for Budget Responsibility now – by giving it a real job to do

ConDems Comments Off

Jul 072010

From the Guardian:

As it stands, the new government’s much-trumpeted new fiscal watchdog has no permanent home, staff or clear lines of accountability. Now it has lost its chief. It is now a figleaf for Mr Osborne’s plans to slash spending. The chancellor would be wise to rethink his new institution, and give it some real resources and a better mandate. Far better would be an Office for Economic Responsibility charged with protecting growth as well as the public finances. It should be accountable to parliament, and answer queries from select committees. A head that hung around for a bit would be an idea, too.

I’d agree with all of that.

Save us from these bankers, fast

Economics, Regulation 11 Responses »

Jul 072010

Global Geo-Politics Net is carrying an important article by David Cronin highlighting the desperate need for a civil society campaign to counter the might of financial lobbying by banks and hedge funds. Besieged by legions of well-funded financial lobbyists (reinforced by columns of financial journalists acting as mouthpieces for the City of London and other offshore financial centres), politicians are fighting an uneven battle to protect public interest from endless lobbying to water-down regulation and protect tax privileges — and there are virtually no organised campaigns to oppose this relentless pursuit of self-interest.

A cross-party alliance of European parliamentarians has issued a call for the creation of an international civil society campaigning organisation to work on systemic financial market problems in the same way that Amnesty International has worked on human rights issues and Greenpeace on environmental issues. Citing Tax Justice Network’s research into how hedge fund activity has been driven by the constant search for innovative ways to avoid taxes, the article explains how the pressure placed on politicians by financial lobbyists threatens to de-rail attempts to regulate against a repeat of the crisis:

"According to the MEPs, the pressure they have been placed under by the financial industry is so intense that it represents a threat to democracy, especially as public interest groups have generally lacked the means or the expertise to mount a robust counter- offensive to the banks’ efforts. "

A major part of the problem lies with the lack of independence of thought within the mainstream political processes. The majority of mainstream political parties, whether in government or opposition, have long since fallen to laissez faire economics. All too often their policy making apparatus – the think-tanks and advisory teams that feed through new ideas – are similarly captured by economic ideas that have failed to protect public interest. In far too many cases these "independent" bodies are funded by vested interests and staffed by secondees from banks and accounting firms: the very people who caused the crisis in the first place. And to make matters even worse, there is a plethora of "independent" academics whose academic chairs are funded by banks and such-like, and who act as hired guns for the vested interests.

An example from BBC’s Today programme illustrates the extent of this capture of political processes. In a short news item about a new report on the affordability of public pensions in the UK, BBC journalists cited two "independent" think-tanks as the source of this "independent" report: who were they? The Institute of Economic Affairs and the Institute of Directors. Objective and politically detached? Both are political lobbyists representing City of London interests.

Completely unrepentant about their role in precipitating the worst financial crisis since the 1870s, and determined to preserve the de-regulated model which has successfully transferred huge volumes of wealth upwards from ordinary people to the super-rich class who operate from offshore secrecy jurisdictions, financial lobbyists are working over-time to bamboozle politicians and re-write laws to suit their purposes:

"MEPs had to wade through 1,600 suggested amendments to the law on that occasion. Although only MEPs themselves can sign amendments, it is common practice for industry lobbyists to act as "ghost-writers". More than half of the amendments in this case were written by the financial services industry, according to Parliament insiders.

The hedge fund industry ‚Äî financial speculators largely based in the City of London ‚Äî has literally been seeking to write the rules it should play by itself. In April, the Parliament’s main committee for economic affairs voted on its response to the proposed law. MEPs had to wade through 1,600 suggested amendments to the law on that occasion. Although only MEPs themselves can sign amendments, it is common practice for industry lobbyists to act as "ghost-writers". More than half of the amendments in this case were written by the financial services industry, according to Parliament insiders."

The world stands on the edge of a precipice. The impetus for reform that followed in the wake of the financial crisis has been slowed by the relentless pressure from financial lobbyists. The burden of paying for the crisis has been almost entirely shouldered by ordinary people. Public and private debt burdens remain high, but earnings for the majority are stagnant or falling (director’s pay being a major exception). The situation will undoubtedly deteriorate as the impact of European austerity packages hits the people in Europe and in other regions that trade with Europe. Unless measures are taken to re-regulate financial services, and especially the crucibles of toxic innovations that caused the crisis in the first place, we are headed for another, even more disastrous crisis in the not-too-distant future. The call from European politicians for civil society action should not go unanswered. TJN, for one, is keen to participate.

Note: cross posted from Tax Justice Network

The world’s best (or is that worst?) tax havens

Secrecy jurisdictions 4 Responses »

Jul 072010

My latest column in Forbes is out and says:

Even if you’ve worked for some years trying to prevent the problems caused by tax havens, people will still ask you which places are the best in the world to shield your money from taxes. Working with the Tax Justice Network I set out to provide a definitive answer.

"Best" is, of course, a pretty subjective term, so it needed definition. We used two. The first was a measure of a place’s opacity, or how secret it is. There’s good reason for that. Some time ago I gave up trying to define what a tax haven is, as that proved to be a pretty thankless task. Instead I suggested that unless a place is a secrecy jurisdiction, which means that regulation is intentionally created for the primary benefit and use of those not resident there, it really can’t operate as a tax haven. In effect, secrecy jurisdictions create regulation that is designed to undermine the legislation or regulation of another jurisdiction.

To facilitate its use, secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that shields the identities of those making use of its flexible regulatory system. This is important. Even though people who use secrecy jurisdiction claim their activities are perfectly legal, it seems they don’t want people to find out about them. So secrecy is a key.

Secondly, enjoying secrecy in a place that does not have the know-how to handle money is not of much use if, like most users of secrecy jurisdictions, you want to move money without too many questions being asked. That’s why we added another criterion, a pretty simple one: To be considered significant, a place had to have the capability to move money in serious quantities, or it just didn’t rank.

These two characteristics, when combined, create an index of secrecy jurisdictions, or tax havens if you prefer, called the Financial Secrecy Index.

The research was fascinating. First we had to determine what places were secrecy jurisdictions. To do this we created a "list of lists" looking at tax haven listings over a period of more than 30 years and selecting for testing, broadly speaking, all those that came on two lists or more over that period. Then our team researched data on a wide range of issues–about 200 variables per location (See all the results, available here.)

Twelve criteria were then selected as key indicators of opacity, varying from whether there was formal banking secrecy or not, to whether accounts were required to be on public record, to how many tax information exchange agreements the jurisdictions had. The place got a mark for being opaque and none if it was transparent. This produced a list of the usual suspects:

Switzerland, Malaysia (Labuan), Barbados, Bahamas, Vanuatu, Belize, Brunei, Dominica, Samoa, Seychelles, St. Lucia, St. Vincent and Grenadine, and Turks and Caicos.

Next we had to determine the amount of cash flowing through each location using International Monetary Fund data. The top 10 here were:

The U.K. (City of London), the U.S. (Delaware), Luxembourg, Switzerland, Cayman Islands, Ireland, Hong Kong, Singapore, Belgium and Bermuda.

Of course we’re not saying that all of this cash is illicit–far from it–but if you’re going to hide illicit cash, where better to do it? Where it stands out from the crowd, or where it can be lost like a needle in the proverbial haystack? Big numbers help the owner of dubious cash lose theirs in the crowd, and the places named above are big.

Combine the two rankings (deploying a little mathematics along the way, I admit) and you get the overall top 10 list. These are the 10 most significant secrecy jurisdictions in the world, in the opinion of the Tax Justice Network:

The U.S. (Delaware), Luxembourg, Switzerland, Cayman Islands, the U.K. (City of London), Ireland, Bermuda, Singapore, Belgium and Hong Kong.

That final list is going to surprise, shock or even annoy a lot of people, but there is good reason for listing places like London and Delaware as tax havens among those which might be considered the more usual suspects.

Secrecy is not something, as many like to think, that happens "over there." It is really happening at home too. Delaware provides a degree of corporate secrecy for those who operate there that makes it highly significant. Incidentally Nevada and other states also offer this feature, but because more companies use Delaware, it stood out from the crowd.

London richly deserves its place on the list too. It’s not just because many of the more "usual suspect” jurisdictions–everywhere from Jersey to the Cayman Islands–are all beneficiaries of British protection and support. The truth is that each of these operates as a branch office for the City of London, the square mile that is the epicenter of finance in London.

The City is almost a government in and of itself, within the U.K., wholly captured and controlled by the finance industry that holds for ransom the rest of its economy. From there untold flows move around the world, many hidden by that ultimate British secrecy invention: the trust. Because of the financial power of the City–seen time and time again during the current economic crisis–the government of the U.K. seems quite unable to challenge it, and the transactions the City wants to execute.

Click here for a look at The Top 10 Tax Havens with each of their special attributes.

India demands better information exchange

Development, Secrecy jurisdictions, TIEA Comments Off

Jul 072010

From the Economic Times of India:

India will pitch for deeper tax information exchange agreements at the G-20 to make such pacts more effective in facilitating the flow of crucial data on tax evasion.
New Delhi is expected to present a detailed paper on the issue at the forthcoming Seoul meeting, urging that domestic laws of countries must support such agreements for effective information exchange.

“These agreements should ensure that there is actual flow of information and benefits for countries entering them (agreements) in checking evasion,” said a finance ministry official privy to the discussions. In some countries, for instance, domestic laws relating to privacy protection tend to come in the way of sharing information with other countries, defeating the very purpose of such pacts.

India also wants improvement in the quality of information that is shared under TIEAs to make such agreements more meaningful.

Good for India.

They’d do well to pursue this agenda.

Kay and Wolf – voices of reason at the FT

ConDems, Economics 1 Response »

Jul 072010

Being grey haired is meant to make you old, grumpy, withdrawn and resentful of all around you if you believed the popular press – or at least Grumpy Old Men on BBC2.

It can also let you recount of your wisdom, as John Kay and Martin Wolf are at the FT this morning. John Kay first:

If you ask people in the industry to justify recent financial innovations, they will explain that they allow risks to be managed more effectively. Yet if you asked people in the street whether recent developments in financial markets had made them feel more secure, they would assume you had taken leave of your senses

As his headline outs it, rather well:

Finance spread its own risks but left ours alone

And as he notes:

The principal financial risks faced by individuals are loss of employment, breakdown of relationships and illness.

Quite so. Nice of finance to do that, wasn’t it? And boy are we going to be paying the price by the bucket load. Especially as, as John Kay also notes:

The risks of ordinary life are mainly handled by families and social institutions, and the contribution of markets to handling such risks is generally diminishing.

Now there an argument for progressive taxation if ever I saw one.

Turning to Martin Wolf, discussing the causes of the current collapse in demand in the private sector in so many countries says:

Maybe, the collapse in private spending in the wake of the financial crisis was caused by terror of the fiscal deficits to come. Maybe, the moon is made of green cheese, too.

It’s refreshing to note I am not the only one driven to sarcasm by the madness of those arguing the economically absurd at present.

Wolf, as usual, has serious research to back up his point since, as he notes “There is also next to no sign of crowding out in capital markets.”

First on interest rates:

On Monday, the yield on 10-year government bonds was 1.1 per cent in Japan, 2.6 per cent in Germany, 3 per cent in the US and 3.3 per cent in the UK (see chart). Based on yields on index-linked securities, real interest rates on borrowing by these governments are very low (1.2 per cent, or less, in the US, Germany and UK). Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation.

Again, quite so. Indisputable, really.

And then regarding demand:

Why should it be so easy to fund such huge fiscal deficits even after central banks have stopped their buying of government bonds? In response, here is a calculation that can be derived from the figures for fiscal and current account balances in the latest Economic Outlook from the Organisation for Economic Co-operation and Development: the private sector – households and corporations – of advanced countries is forecast to run an excess of income over spending this year of 7 per cent of gross domestic product. In round numbers, this is $3,000bn. In the US and eurozone, the implied private surplus is about $1,000bn, in each case. In Japan, it is about $500bn. In the UK, it is $200bn.

Focus on the $3,000bn: this is the amount by which the private sectors of the advanced countries are forecast to increase their net claims on governments and foreigners in 2010. That means massive private retrenchment, with corporations particularly frugal at the moment

Put simply: people are choosing not to spend. Emerging economies are also in surplus (mainly China, it has to be said) and so, inevitably, someone has to absorb that cash. Guess who is doing so? Governments are! This is where the finance for deficits is coming from: people are choosing to invest in them. And until there is economic recovery hat’s what they’ll continue to do. And then that recovery happens they’ll pay more tax and the deficit will go away. When will that happen? as Wolf concludes:

My conclusion, then, is that the advanced countries remain highly short of demand.

At the summit of the Group of 20 countries in Canada, leaders pledged to “halve fiscal deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016”. It would make far better sense for governments to focus their efforts on altering the long-term trajectory of spending. They may hope that retrenchment now will spur on private spending. But what is their plan if it turns out that it does not?

As it will not – as Martin Wolf knows.

As I know.

Then government has the duty to use those funds entrusted to it wisely – by expanding the economy, and not crushing it as the ConDems plan.

Alan Budd on Tory class politics

ConDems, Economics 2 Responses »

Jul 072010

And then he let himself be used again in the same way.

But this time he saw the light.

Or did he always do it with the intention of upsetting the apple cart?

Why did Alan Budd go?

Conservatives, Economics 4 Responses »

Jul 062010

Sir Alan Budd has quit the Office for Budget Responsibility and left George Osborne’s Treasury in a shambles.

First David Laws. Now Sir Alan. Watch out Danny Alexander –= it can’t be long.

But there will be a difference in each case. Laws want because he was unethical. Alexander will go because he’s clueless. Budd? He’s gone because, I suggest, he just couldn’t face the disaster he’s seeing unfolding before his eyes.

You only need an iota of economic understanding to realise what Osborne is doing ahs no economic justification at all, is pure, nasty social engineering and is intended to crush most in society for a generation to come.

Budd has an iota of economic understanding. And he’s gone.

Was he pushed? I can’t for one minute imagine it.

So he went – because he did not believe the unemployment figures? Because he believed Osborne is pursuing an agenda that makes no sense? Because he believes cuts won’t work? All three? I don’t know yet. But I suspect the last.

The shambles is developing faster than I ever expected.

The IMF is still prescribing pro-cyclical policies that constrain public spending at cost to all bar the 1%

Development, Economics, IMF 1 Response »

Jul 062010

The Third World Network has reported that despite pledges to address the crisis in flexible and innovative ways, the IMF’s key objective in crisis loans remains “macroeconomic stability” through the “tightening of monetary and fiscal policies.”

Since the onset of the financial crisis in 2008, IMF crisis loans have required policies such as:

‚Ä¢ lowering fiscal deficits and inflation levels;

‚Ä¢ buffering international reserves (as they fell to dismal levels from the impact of the trade shock in this financial crisis);

‚Ä¢ reducing or restraining public spending (through public sector wage freezes and pension freezes, cutting minimum wages, eliminating subsidies to fuel, gas and power, and hiking utility tariffs and tax reforms);

‚Ä¢ increasing official interest rates or restraining the growth of the money supply;

‚Ä¢ preventing currency depreciation; and,

‚Ä¢ providing financial sector liquidity where needed.

Instead of increasing government expenditure and boosting domestic demand, local employment and economic activity to overcome the recession, the IMF is cutting spending and increasing tariffs and taxes in already contracting economies for the purpose of maintaining low inflation and fiscal deficit rates, flexible exchange rates, and trade and financial liberalization. The burdens of these questionable policies, intended to maintain investor confidence, access to external capital and sustainable debt situations, fall squarely on the shoulders of local taxpayers and consumers.

As I have argued time and again, and as Krugman, Wolf, Galbraith at al do likewise, time and again, these policies not openly make no sense, they are utterly counter productive.

The neo-liberal agenda of oppressing the poor for the relative benefit of the well off continues unabated.

And in the end we all pay for that – even the better off. See The Spirit Level if in doubt (can’t get link right now).

And that’s why the IMF is either seriously misguided or so deliberately blind to the consequences of its actions in pursuit of the interests of a tiny minority.

I fear the latter, because that appears to be the whole neo-liberal agenda in a nutshell: screw the 99% in the interests of the 1% is the best summary of it there is.