2010 November » Tax Research UK

Siphoning profits

Country-by-country, Development 5 Responses »

Nov 292010

The world’s second-largest beer company, SABMiller, is avoiding millions of pounds of tax in India and the African countries where it makes and sells beer by routing profits through a web of tax-haven subsidiaries, according to a report published by ActionAid today.

The company, whose brands include Grolsch, Peroni and Miller, and African beers Castle and Stone Lager, is accused by the development charity of siphoning profits out of developing countries and parking them offshore.

The report is available here.

Of course, country-by-country reporting would largely resolve this issue by removing the opacity behind which this abuse con take place. Action Aid rightly say that in their report.

Good grief

Ireland Comments Off

Nov 292010

Ireland’s fate is sealed.

I’m not sure this video is 100% right on the detail, but it’s a lot closer than most mainstream commentary:

Hat tip to Chris Hopkins.

Bad news for Africa – Barclays is coming

Banking, Barclays, Development, Secrecy jurisdictions, Tax Havens Comments Off

Nov 292010

From the FT this morning:

Barclays will place the booming African market firmly at the centre of its growth strategy over the coming years as it plans to shake-up a business that has so far failed to make the most of opportunities in the continent.

This is bad news for Africa.

Expect more tax haven abuse to follow. That’s the core of Barclays’ plan for the continent.

Politicians just don’t get it about banking

Banking, Economics, Politics 8 Responses »

Nov 292010

It is very clear that politicians still don’t get the rightful public anger about banking and bankers.

The Observer did this weekend:

Before the financial crisis, bankers justified their enormous bonuses on the grounds that their industry was a world champion that created jobs and wealth for the whole nation. Now what is their excuse?

They continued:

[T]he City’s performance in recent years is no success story. Had the banks been subjected to strict market discipline, they would have collapsed altogether. To further heap cash rewards on their failure is economically unsound and politically noxious.

They rightly call for greater pay equality in the UK, and action to enforce it. I support that call. But this issue is even more serious than that. As the Daily Mail has noted (hat tip to TJN), this out of control group in society thinks it is above most law, including tax:

Britain’s leading banks are in talks with the Treasury about contributing £1.5billion to community projects to avoid being hit with new taxes. The cash will be used to create a ‚ÄòBig Society Bank’ which will make money available to charities, social enterprises and voluntary groups. As part of a far-reaching deal with the Government, Britain’s biggest banks are also discussing plans to slash pay-outs in the next round of City bonuses. . . .the reputation-building initiative has been nicknamed ‚ÄòProject Merlin’.

And in exchange for this?

In exchange for making cash available for community projects and slashing bonuses, ministers may agree not to impose any bonus or transaction taxes on the industry on top of a £2.5billion-a-year levy announced earlier this year.

As TJN notes:

This seems like a win-win for banks, and a lose-lose for the rest of us. Apart from the promise to "slash pay-outs" which would be a good thing if (repeat if) this is genuine, and not an elaborate trick, this seems to be a way for the British government to use public spending in a way that it serves to rehabilitate the justly appalling reputation of City of London banks. This is an extraordinary display of cynicism. As Lord Oakeshott, spokesman for the coalition Liberal Democrat party puts it:

"If the banks think that Government policy can be bought for £1.5billion, they have got another think coming.”

Except that there is plenty of evidence that such policy is for sale.

Alistair Darling makes clear it is in the FT this morning:

It is imperative that the independence of the Bank remain absolute. It cannot afford to enter the political fray. Of course the governor is entitled to his views on the government’s fiscal policy. I never had any problem with Mervyn King expressing a view. But when members of the monetary policy committee and, it seems, the Conservative chairman of the Treasury Select Committee believe that a political line has been crossed, then the Bank must think long and hard about what it says. To become identified with one political party would be fatal to its reputation.

He thinks he is political point scoring but in the process he reveals something much more significant: that he believes that banks are over and above government. I do not believe in independent central banks with a mandate to impose harsh monetary policy on economies beyond the remit of politics so that it is always true that the ordinary people of the IUK suffer economic sanctions to preserve the value of capital and money itself to benefit banks and those with wealth. And yet that is the system Alistair Darling is supporting. He is saying that the preservation of capital is more important than politics, full employment, social policy or anything other issue: this is an issue where bakers rule supreme over the state.

They don’t.

They must not.

The granting of independence to the Bank of England was in this respect a disaster – it gave bankers a claim to be above the due processes of politics and the law in the UK and elsewhere.

No wonder we’re in the mess we’re in.

It’s time that policy was reversed, that the Bank was brought back under political control and that its mandate was amended to require the creation of full employment above all else. Then we’d have a Bank worth fighting for. Now we have a Bank for bankers.

No wonder we’re in a mess.

Knickers to tax

Tax gap 17 Responses »

Nov 262010

A lot of organisations – unions, NGOs, journalists, others – have asked me questions about the tax gap of late and who seems not to be paying their fair share.

I mused on this, looked at the data I have and come up with a surprising example. It’s Marks & Spencer plc.

Here’s the relevant data:

For those who want more, it’s in a PDF, here.

The yellow line shows the headline tax rate for M&S – which is really rather comfortable. For 2003 to 2008 the headline tax rate in the UK was 30% and then in 2009 it was 28%. M&S hovers around that figure – and all very good it looks.

But underneath that comfortable marketing line from the profit and loss account is the much, much lower current tax line – and that’s the figure the company actually expects to pay. This is low: lower than that for Tesco, Sainsbury’s and Morrisons, with whom it might be fairly compared in the FTSE 100, and even that for Barclays Bank – who some consider a tax avoider with its many subsidiaries in tax haven locations.

I ask the question in the PDF:

How come a UK High Street retailer that is supposedly committed to the UK has a lower current tax rate when compared to its pre-tax profits than a bank with hundreds of subsidiaries in tax havens? And a lower tax rate than another retailer, Tescos, that has attracted considerable attention for its tax affairs? Its rates are, in fact, overall lower than those of IKEA, which is opaque, private, and dominated by activity in tax havens according to at least some reports. It had tax charges of 13.1% in 2009 and 19.3% in 2008.

Some answers are clear. M&S has surprisingly profitable overseas operations – much more profitable than its UK ones. And they seem to be in low tax jurisdictions. The average rate of tax on these operations in 2009 was about 4.4%. What is more as M&S says:

Deferred tax liabilities are not provided in respect of undistributed profits of non-UK resident subsidiaries where (i) the Group is able to control the timing of distribution of such profits; and (ii) it is not probable that a taxable distribution will be made in the foreseeable future.

That’s worrying for its shareholders. As I note:

This means (when compared to the balance sheet ) that about 18% of the total reserves of Marks & Spencer are not now available to their shareholders for distribution as dividends because of M&S’s low tax policy. This obviously gives rise to questions about the sustainability of the future income stream the company and the judgement of the management in allocating resources in this way.

But that’s not the whole story – which is hard to find in the accounts. As I also note:

Marks & Spencer will say that the most significant reason for the non-payment of tax is the allowances they are given for spending on capital equipment such as shop fittings, computers, and the like where they make them last a lot longer for accounting purposes than the tax system assumes likely, giving them up front tax relief and so reducing the overall rates of tax. The difficulty with this explanation for Marks & Spencer’s is that other retailers, such as Tesco, Sainsbury’s and Morrisons do not appear to be enjoying anything like the same relief. This is not to say that M&S are wrong, but it does not appear a complete explanation, any more than pension fund tax consequences are.

There’s nothing, I stress, in the slightest illegitimate about this: M&S don’t need to say more if they don’t want to, and I’m sure they’re finding entirely legal means of reducing their tax bill. But as I conclude:

When this [low tax rate] has happened so persistently and for so long there have to be reasons – and they have to be policy reasons. Based on what’s said in the accounts that policy appears to be that M & S have said “Knickers to Tax”, and they’re getting away with it.

Which is fine for them. But let’s put it another way: if M & S had paid tax at the UK headline rate from 2005 to 2009 (five years) then they would have paid £589 million more in current tax. If it had just paid the tax it declared on its profit and loss account it would have paid £492 million extra.

This needs putting in context: it apparently costs £162 million a year to provide school sport, or about £810 million over five years. M & S could have paid for 72% of that if it had paid the full rate of UK tax on its profits or 60% if it had just settled the total tax it provided on its profit and loss account.

And that is an issue for us all. Ministers might say:

As a Government we’re not interested in large hikes in business taxation.

But the people of this country would like to know we’re all in this together. And it’s still not clear to me that we are.

And that’s all I’m saying.

It’s the tax havens, obviously

Secrecy jurisdictions, Tax Havens 3 Responses »

Nov 262010

This comes from the Tax Justice Network blog this morning:

Sometimes, a picture speaks more clearly than words can. Now, courtesy of something that FT Alphaville has just pointed out, we bring you this (click to enlarge):

Look at all those jurisdictions inside the black circle. The accompanying text in the relevant IMF report, from where this graph comes, says:

"An illustration of Greece‚Äòs interconnections in cross-border funding flows reveals why funding strains in Greece in the first half of 2010, despite being by itself small, might have translated into pressures on other Euro Area peripherals. Recall that banking exposures to Greece were relatively small in the context of banks‚Äò balance sheets; yet, concerns about the strength of balance sheets and the ability of other Euro Area peripheral countries with fiscal and financial vulnerabilities to finance themselves increased as the Greek situation worsened. Using the funds‚Äò data, Figure 10 presents four clusters (i.e., countries that together form more of a closed system), centered around a set of core connections that are closely linked to Greece: (i) a red cluster of countries with access to funds domiciled in Luxembourg; (ii) a black cluster with access to funds domiciled in the offshore centers of British Virgin Islands, Jersey, Cayman, Guernsey, and the Isle of Man; (iii) a blue cluster with Ireland at the core; and (iv) a green cluster of the U.S. with several key European and other countries. Greece is interconnected with each of the central nodes of these clusters. This close interconnection across other core countries suggests why asset re- allocations and flows might have been large systemically, with potentially significant impact on countries such as Ireland."

Contagion: it was the tax havens wot dunnit. (And you can be sure that the "United States" will have heavily featured Delaware, a tax haven inside the U.S. that has been the securitisation jurisdiction of choice; the "United Kingdom" means the City of London, that state within a state that is arguably the world’s most important offshore jurisdiction.) We haven’t yet fully digested the contents of this report. We will get back to you before too long.

Aid to tax havens

Banking, Development, Secrecy jurisdictions, Tax Havens Comments Off

Nov 262010

As the Guardian notes this morning:

Hundreds of millions of pounds of European Union aid to help the poor in Africa is being handed over without public scrutiny to banks and private equity companies and funnelled into tax havens, a new report claims.

Counter Balance, a group of non-government organisations, has investigated the €1.1bn (£932m) of annual aid from the taxpayer-funded European Investment Bank to Africa and the Caribbean. It alleges that the cash disappeared into African banks, a Luxembourg tax haven and a Nigerian bank whose managing director was under investigation for fraud.

Nothing about this surprises me: it’s just another example of state cash flows being captured for the private benefit of elites – the standard business model emerging throughout the world economy right now as our major multinational corporations fail to generate any new wealth of any significance.

The report is available here.

Stop the nonsense: no one is independent

Economics 1 Response »

Nov 262010

The Bank of England’s Monetary Policy Committee are having a squabble about independence.

Adam Posen claims that Mervyn King was excessively political by supporting the coalition and that independence is essential.

King has dismissed this as “not serious”.

Neither is right. Posen wants to play at the neoliberal game of the economist being an objective observer. That is nonsense: we will come with our prejudices, baggage, experience, likes ,dislikes and preferences attached. No one, not even a neoliberal economist, can get rid of them. They just pretend they can. And that, like everything else about their prescription, is false.

There is on the other hand, the duty that a senior civil servant has (and yes, the Governor of the Bank of England is a senior civil servant) do not state their opinion, and to offer the advice they think is appropriate.

King undoubtedly fail that test.

So Posen has a point, but for all the wrong reasons.

We’ve crossed the Rubicon

Economics 16 Responses »

Nov 262010

It feels to me like we’ve crossed the Rubicon. I knew we had in August 2007 when it became apparent that Northern Rock’s shadow bank, Granite,was going to pull the edifice down. It felt the same way in the summer of 2008 when it was clear that the banks were heading for bust. This morning it feels that the euro is heading the same way.

Yields on Euro denominated bonds from Ireland, Portugal and Spain reached record levels yesterday. In other words, the Irish austerity package has done nothing to calm the markets. The neoliberal prescription has failed. Worse, talk of contagion now spreads to Belgium and even the Netherlands and France.

I can see no rational reason for most of this: the Irish economy is, I admit, a basket case. US businesses such as Intel, Pfizer and Microsoft are all saying this morning that Ireland must resist pressure from France and Germany to raise corporate tax rates: but they would, wouldn’t they? What do they care about Ireland? As Simon Johnson, the former chief economist at the IMF notes in the New York Times:

At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P.

Northern Rock had a shadow bank. Ireland has more than one shadow economy: there is, of course, the illicit sector that every economy suffers but in its case there is this second shadow – the efficiently condoned but entirely uncontrolled (or is it uncontrollable?) Corporate shadow that supposedly lifts income and well-being and Ireland but in fact merely made passes through, leaving hardly a taste of tax or employment behind.

It is these shadows that are bringing economies to their knees. Ireland has lost the ability to manage its economy,to make choices in the best interests of its people,to impose tax where tax is due, and all because of this shadow.

States as large as France are subject to doubt as to their ability to pay, not because there is anything fundamentally wrong with their economy but because the shadow of international finance – the bankers, the hedge funds and investment managers who are supposed to represent the best interests of their customers, such as your pension fund and my pension fund – that shadow has fallen across their debt, and so we must all suffer.

I admit, I am worried. I was worried in September 2008: worried enough to buy reserve stocks of food at that time. I’m not doing that, just yet. But in some ways this situation feels even more troubling. The shadow seems now to be out of control, and to be bringing about the very crisis that could bring its own destruction. It will only take one major sovereign debt failure, a failure not caused by underlying economic reality, but by the impact of the shadow of banking, for bank contagion to spread like wildfire. If Ireland failed then so would banks in the UK, Germany and Belgium. Belgium, currently without a government since last April, could then fail in turn due to failure to support its banks. And the process could spread.

This situation has developed for obvious reason: we did not nationalise banks when we should have done in 2008. The resulting opportunity to reform the banks has been missed . The political will did not exist. Tax haven activity has been allowed to continue. And those fault lines are at the core of the current crisis.

Can we get through the next few weeks? We can, but there are big caveats. First, there has to be a willingness to close markets when they threaten stability. Markets do not come first.

Second, there has to be a willingness to say that the banking system of the world is failing and only by bringing it into state control, probably without compensation, can we reclaim necessary control of economies from the irrationality of those who seek to destroy them. If both sound like wartime measures then so be it: that’s how serious I consider this situation to be.

Third we have to be willing to pump any amount of money into the economy to maintain liquidity, and that will mean hard cash on occasion when people demand it. I sincerely hope the printing presses are running.

Fourth,whilst talking of printing money, the European Central Bank will have to undertake quantitative easing, purchasing the debts of Ireland, Spain, Portugal and any other country risk of default to achieve four goals. The first is liquidity,the second is the reduction of interest rates in these three states, the third is the protection of the Euro and the last is the creation of orderly markets. It is very worrying that Germany appears not to comprehend these needs at present.

These measures might work. The first two, at least, are drastic,but so is the current crisis. We are in the death throes of capitalism 3.3 as Anatole Kalestky calls it. The death throes of an economic order are usually associated with war.That is something we to avoid. But we also have to be aware of the risk of that massive disruption, and embrace that idea when accepting the radical reordering of the economic organisation of society that we require. I have no doubt that what will emerge will be capitalism: indeed, it should be. But it will not be the same capitalism as we have now, and it will recognise its strong underpinnings in the foundation of democratic states to which it is accountable.

I believe that is possible but I will also be honest: I am worried, just about as much so as I was in September 2008.