2010 September » Tax Research UK

‘Making Pensions Work’: don’t duck the issues

Sep 282010

I am intrigued by some early responses to ‚ÄòMaking Pensions Work’ I have received on this blog and have read in some (typically abusive) commentary on the right wing blogosphere to which I do not link.

Without exception the commentary ducks the issue, which I find fascinating. The key issues that raises are:

1. The private pension sector has received a subsidy of £300bn a year over a decade and has appeared to lose it;

2. The private pension industry pays out less in pensions each year than the state subsidy it receives;

3. The assets in which the pension industry chooses to invest do not reflect the fundamental pension contract.

4. Many of the assets in which it has invested have persistently generated negative rates of return, despite which its investment behaviour has not changed.

5. The choice of investment it has made has resulted in speculative saving activity as the core focus of pension fund management when the economy has required investment to stimulate new economic activity, employment and innovation to tackle the real issues we face as a society.

It is these issues that motivated the recommendations made in ‚ÄòMaking Pensions Work’. But the concerns raised have been along the following lines (with the challenge in italics and the response in plain text):

a. The proposal to redirect investment into productive activity will deny financial markets essential liquidity. But is it the states job to subsidies the liquidity at cost to future pensioners, is my response? And if this market cannot generate such liquidity itself why should we give it the biggest state subsidy any industry has ever received in the UK to overcome its structural defects? Shouldn’t the market resolve that defect itself?

b. The rate of return is not so bad. What? 1% before allowing for inflation and after receiving a massive state subsidy is not so bad? By this definition, what is bad? I am suggesting something better.

c. I’m promoting a massive private equity bonanza. No I’m not. I’m promoting investment in new economic activity. The fact that those making this comment think this only arises through private equity venture capital investment is itself significant: they’re saying in effect that the larger quoted companies in the UK are actually unrelated in terms of their capital funding to the stock markets that supposedly serve their needs but which in reality act as casinos for speculation. And anyway, much of this money will go into government bonds and related products. So this is wrong.

d. I’m breaching EU rules on capital mobility. No I’m not. There is a long history of UK tax reliefs being available for UK investment only. But if the investment base has to be broadened – so what? In marketing terms I am sure that the offerings made available will actually be UK based if the transparency I am seeking is also made available. The market will solve this problem.

e. Pensions are just income deferral. So is interest on that basis on a deposit account. But it does not deserve and does not get tax relief. Pensions are not deferred income. They are saving for old age. That’s it. If we are to subsidise the saving of the best off then we have a right to attach conditions.

But I note there has been no attempt to justify the subsidy.

Or to defend the obvious failure of this market.

Or to explain why half the deficit at the start of this crisis related to subsidies to pensions in the previous decade.

Because, I suspect these are indefensible.

This issue will, I suspect, begin to grow. Give it three years and I think this issue will be a major item on the UK political agenda – even a key focus for the next election. And hwy not when it is so important?

Asserting the right to tax corporations – like Wolseley

Corporation Tax, Ethics 10 Responses »

Sep 282010

I am at the conference of the Task Force on Financial Integrity and Economic Development in Bergen for the next couple of days. I’ll be talking on at least a couple of issues – country-by-country reporting being one of them, this morning.

It’s in that context that the debate on the relocation of Wolseley plc in the Uk is interesting. As the Guardian reports this morning( apart from quoting this blog, from yesterday):

[Wolseley] finance director John Martin said the government needed to end the uncertainty surrounding the taxation of profits in foreign subsidiaries to keep Wolseley in the UK. Switzerland offered the opportunity to repatriate foreign earnings to a centre with exceptionally low tax rates.

It was a row over profits generated overseas that prompted the first exodus of major businesses in 2008. Martin’s claim that the move to Switzerland will save around £23m is likely to spark fears in the government that more firms are set to leave despite a promise to cut corporation tax to one of the lowest rates in the G20.

The dispute centres on the way the earnings of foreign subsidiaries are taxed under the controlled foreign company rules.

Companies with large overseas operations must send their profits back to the UK. If the overseas subsidiary is subject to a lower level of tax than the UK would charge, it must make up the difference, unless the tax rate is within 25% of the UK’s. Tax experts said in the early part of the decade that many employers exploited loopholes to minimise their tax. A crackdown by Labour forced up the effective tax rate.

This is no minor issue, as some suggest. Nor is it simply an issue of certainty, or admin complexity as others suggest. This is something much bigger than that. What is at stake here is the right of the state to tax the multinational corporation.

Let me explain. Fundamentally there are two bases for taxing companies: residence and source bases. Residence says the company is taxed on its worldwide income in the country in which it is resident. Residence is of course technically defined – and I have blogged the illogicality of the UK pension on this. The alternative is the source basis – that the country where the income arises has the right to tax the income first.

Double tax agreements have always tried to resolve the dilemma that a country may be resident in one place and have income arising in another. Or it may own a subsidiary which is resident in a country different from that in which the parent is resident. Double tax rules have developed to ensure that tax paid at source in both cases is credited against tax due in the place of receipt where there is residence so that to the greatest possible degree double taxation is avoided – and most of the time it is.

The trouble is that accountants abuse all rules and the rules designed to prevent double taxation are abused. This is most especially done via tax havens / secrecy jurisdictions. The whole logic of such places is that nothing really happens there. I repeat: these are places where transactions are booked but they actually have their economic impact elsewhere. That is the definition of offshore. So there can be no source tax in a tax haven: there is no source!

And although these places very deliberately offer the veneer of residence that again is just a veneer. In many cases it is achieved using the UK method of definition of residence – that the holding of directors meetings in such places may give the veneer of residence although it is also true that so long as the corporation in question can show the transactions it manages take place elsewhere they usually end up paying no tax in such locations – on the basis that the source is not there.

The result of course is that no tax is paid in tax havens on a source or residence basis.

And this is known of course. And multinational corporations have tried to exploit this for years.

Three weapons prevent the abuse of the tax base of a state that wants to tax its corporations from tax haven activity.

The first is transfer pricing rules, trying to prevent assets and transactions being incorrectly priced into and out of tax havens.

Second, we need controlled foreign company legislation that says that if a resident corporation relocates income to a tax haven without there being economic substance when doing so then that tax haven subsidiary will be taxed as if it resident in the location where its parent is resident. This is vital.

Third, there is the taxation of dividends received from subsidiaries. This too is essential. If options one and two fail then option three is the back stop that completes the armoury that ensures corporations can be taxed.

And it is this structure that is being attacked, by secrecy jurisdictions such as Jersey and Switzerland in the case of Wolseley. And it is the structure of OFC legislation that is being attacked by corporations – as the above quote shows. What they’re doing is legal. But that’s not the point. The attack on taxing dividends is an ongoing fight by corporations. The UK has recently partly succumbed to pressure on this issue.

But undermine this three part mechanism – any one part of this three part mechanism designed to tackle the movement of profit out of the tax net – and that profit will flow out of the tax net – exactly as the major multinational corporations of the world and their friends in government want.

And they want to do this so that the burden of tax is shifted from capital – business profits in this case – to labour. And this is part of the process of reallocating wealth from the poorest to the richest in society.

So what Wolseley is doing is not a politically neutral act. And nor is it all it claims – a move against regulation. This is about shifting power. From people to capital. From countries to corporations. From poor to rich.

And to prevent this we have to assert the right to tax corporations.

That’s what I think part of the agenda of the Task Force on Financial Integrity and Economic Development is and should be.

And it’s a reason for country-by-country reporting.

And it is a reason for suggesting alternative bases for taxation – such as unitary apportionment.

The alternative is very uncomfortable indeed, unless you’re well off, of course. Because they’ll still have health care, education, a safety net and security. But if the tax is not available to pay for those things for the rest in society these things will become increasingly optional – or simply unavailable.

And I think that is unacceptable.

Labour has to oppose cuts

Labour Comments Off

Sep 282010

I am amused by all the comments about Ed Miliband being a gift to the Tories.

Let me spell out the reality. If the ConDems cuts deliver economic panacea nothing Labour can do will get them back into office at the next election. Period.

If those cuts do not work, as I predict, then offering more of what the ConDems offer will be no reason to chose Labour at that election. So they won’t get back into office by doing that. Period.

So the only viable option for Labour is to offer a significantly different programme. That was why Ed Miliband had to be the choice and the risk could not have been taken on David Miliband. It is also why Ed Balls will I hope be shadow chancellor.

Nuancing the ConDems (as Alistair Darling still want to do) will not be effective opposition in that case and cannot be a recipe for winning.

This is a time for conviction and EM has nothing – repeat nothing – to lose by going for it. The only viable choice is saying cuts are wrong. Partly because they are. Partly because nothing else puts Labour back in office.

So neoliberals like George

Conservatives, Economics, Ireland 6 Responses »

Sep 272010

The Guardian has reported that:

The International Monetary Fund today said the UK economy was on the mend after its deepest postwar recession and praised the coalition government for its hardline approach to cutting the budget deficit.

In its annual health check of Britain, the Washington-based fund said George Osborne’s planned cuts in public spending were unlikely to derail growth.

I think this is about as newsworthy as reporting Alex Fergusson thinks Manchester United think MU are going to win the Premier League.

The IMF is neoliberal and always demands reduced government spending to tackle deficits.

The ConDems have done that.

The IMF say well done.

Purrlease tell us news.

OK: try this, which was Larry Elliott in the Guardian this morning:

Th[e ConDem approach] has always been a contentious strategy – owing more to orthodox neo-liberal theory than to conditions on the ground – and it looks more and more questionable as the months roll by.

Three pieces of evidence are relevant here. First, the recovery in the global economy lasted from spring 2009 to spring 2010 but is now running out of steam. Second, the outlook for the UK has deteriorated markedly since the burst of growth in the second quarter of this year. Activity in the housing market is back to the levels of spring 2009; credit flows to business have fallen for five months, high-street spending is weakening and unemployment is rising.

Finally, there is the dire state of the Irish economy, back in recession after just one quarter of expansion. The financial markets ought to be impressed by the tough fiscal stance of Brian Cowen’s coalition government. In reality, long-term interest rates are going up because the markets believe – rightly – deficit reduction is being impaired by the economy’s poor growth prospects.

That’s the objective reality of this, on the ground.

Oddly an IMF employee I was talking to today agreed‚Ä¶..

Filling the gap

Conservatives 11 Responses »

Sep 272010

It’s been depressing to watch the Tory press over the weekend.

You’d think Labour had elected Lenin, such has been their reaction.

And I sat next to an idiot at Heathrow this morning stating very loudly that Ed Miliband was 14 and was elected without a plan.

Well, I agree, it’s odd to have all major party leaders somewhat younger than me now – but I think he ha a plan, and can improve it (as is quietly being said – and will be loudly once Alistair Darling is consigned to history).

The plan should be to say that cuts are not needed in the UK. But growth is. And that the combination of attacking the tax gap, raising £20 billion in the first instance, and ensuring £20 billion of new investment in the UK economy by Making Pensions Work, fills the gap Baroness Warsi says he had to fill.

Job done.

Now let’s go for sustainable regeneration of the ULK economy.

Worth watching

Secrecy jurisdictions 1 Response »

Sep 272010

The long awaited BBC Panorama on Lord Ashcroft is to be broadcast tonight, it seems, having been kept under wraps since before the election, if the rumours are true. I presume it is 8.30, BBC1.

It should be worth watching. Even if it’s an iPlayer job for me. I’ll be in Bergen by tonight.

Time to change the corporate residency laws

Corporation Tax 15 Responses »

Sep 272010

Wolseley, the UK quoted builders merchant, is to move its place of incorporation to Jersey and tax residence to Switzerland according to the BBC this morning.

Not that it is actually a big deal. First, it’s a loss making company. Second, it’s been shedding UK business. Third, the tax impact is therefore small.

But the message is none the less that tax cheating is acceptable: no one on earth can think this structure anything but artificial. And that alone means that this, and other such moves, says the time to act on corporate residence has arrived. The non-sensical UK approach that the location of board meetings determines the residence of a company is an anachronism from the age of the steam ship and telegrams. It is in urgent and obvious need of updating so that corporate residence reflects economic reality – not a silly game that boards of directors can play.

The change that is very obviously needed is that a company must be considered resident where the economic substance of its management is located. And yes, that can be determined. It’s where a majority of the board and their senior management team work day in day out.

Closing in on the tax evaders

Banking, ConDems, Switzerland, Tax evasion 10 Responses »

Sep 272010

The BBC has reported:

Hundreds of wealthy UK taxpayers have been sent letters by HM Revenue & Customs over possible large-scale tax evasion, the BBC has learned.

It is understood HMRC has acquired a list of high net-worth individuals with accounts at the Swiss division of HSBC.

The list was stolen by an employee and passed to the taxman by the French authorities. The bank is not accused of any wrongdoing.

The campaign comes after the government announced a crackdown on tax avoidance.

This is good news. And let’s have none of the nonsense that the list was stolen. We’ve always paid informers to tackle crime.

As for the bank’s behaviour, I note what the BBC says. But it always baffles me as to how a bank can be innocent in these cases. It has a duty to make sure it is not handling money laundered funds. Tax evaded money is money laundered in my opinion.

Also note this is HSBC. Why’s that relevant? Why, because of the Rev Stephen Green, of course! This is him:

I’m sure he delivers a great sermon. No doubt he asks his congregation to admit and repent of their sins, regularly. But a Stephen Green is also the chairman of HSBC. This is him:

Yes, they are the same guy.

And extraordinarily there’s been a chap called Stephen Green who has been chair of HSBC Private Banking Holdings (Suisse) SA. Yep, that HSBC’s Swiss private bank. This is him:

Same guy. He’s busy, isn’t he?

And then note that a chap called Stephen Green is shortly to become Lord Green and become Trade Minister in the ConDem government. Who could it be? No, surely not:

Oh yes it is.

Perhaps in his new role he’s like to tell HMRC where they should be looking.

‘’Making Pensions Work’: dealing with the obvious questions

Pensions 14 Responses »

Sep 262010

Finance for the Future’s report ‚ÄòMaking Pensions Work’ raises a lot of questions and makes many recommendations. This naturally gives rise to a whole range iof potential queries which the report itself does not address, but which I look at here:

Are you suggesting that there should be no more tax relief on pensions?

No, not at all. What we are saying is that there should be conditions on being given that tax relief, and the condition is that at least one quarter of the funds subscribed should be invested in new economic activity in the UK. So long as the fund meets this condition then it will continue to attract tax relief.

How could we be sure that these conditions are met?

In two ways. First, pension regulators will need to check this. Second, those seeking to attract pension fund cash will have to have the investment opportunities they offer approved as suitable to meet the new pension fund investment conditions. All new government bonds would qualify as a matter of course. Anything else would need approval. That, however, increases the degree of scrutiny of what pension funds are doing. Second, we’re recommending that pension funds must publish accounts and make them readily available to their members, which is almost unknown at present. This will increase their degree of accountability.

How do you stop a person like the late Robert Maxwell abusing these new rules?

At present pension funds are almost entirely opaque: it is almost impossible to find out what is happening in them. We’re proposing making them a lot more transparent and making what they investor in the subject to regulator scrutiny. In combination the risk of abuse should reduce, significantly.

Won’t pension trustees just refuse to do this?

Of course trustees could refuse to invest as directed by the proposed changes to the law we suggest. But if they did their fund,and those making contributions to it would not enjoy any tax relief.

Won’t trustees say they have a legal duty to resist this change in case if does not maximise pension fund returns?

Given that existing pension fund returns have been so abysmal for so long it is hard to see what justification for refusing these investments they could have on this basis. But it is true that at present pension fund trustees do believe they have a legal duty that over-rides all ethical and other considerations (in most cases) however they might do so – including (or in most cases, almost exclusively) by speculating. However the changes we recommend would change that legal duty with regard to part of their fund and so they could not be in breach of their duty by investing as we suggest.

What’s the risk pension returns will suffer as a result of this change?

There is very little risk that pension returns will suffer as a result of the recommendations we’re making. Firstly, investment returns by pension funds over the last decade have been so abysmal over the last decade because of the dedication of pension fund mangers to holding their assets in the form of shares, which have on average lost value at the rate of 2% per annum during that period, meaning that any fixed rate of return will increase pension returns. Second, pension funds will still be allowed to invest 75% of their incoming funds in their current chosen mix under the proposed new arrangement. Thirdly, there i no reason why shares cannot qualify for the new type of investments to which pension funds must subscribe – it is just that they must be new shares issued to create new jobs, products and assets. There is every prospect that this new structure, by requiring a focus on long term investment will increase pension fund returns.

How much will be invested in new jobs as a result of this proposed change?

Currently more than £80 billion a year is invested in pension funds. £20 billion or so of this would have to be invested in new type investments if all existing funds wished to keep their tax reliefs. That’s a massive boost for UK business – indeed, it’s the sum the CBI recently called ion the UK government invest to stimulate the economy.

What sectors are likely to benefit from this investment?

Given that business is in the doldrums right now we suspect that much of this money will be invested in the public sector at present. It could, for example, deliver much of Labour’s now abandoned school building programme through the issue of hypothecated bonds, avoiding the need for expensive and costly PFI schemes. It could deliver the Green New Deal. It could provide the capital for a Green Investment Bank. And all these could pay the necessary rates of return required, without difficulty. And of course it could also deliver a wave of new innovation by providing essential new capital to new private sector enterprises.

Are there risks?

Compared to existing pension arrangements, no.