The FT notes:
Spain was forced to pay big premiums to sell new debt as investors warned the country’s cost of borrowing had risen to unsustainable levels amid a deepening of the eurozone debt crisis, the FT reports.
Ireland was mere chicken feed compared to this risk.
If Spain is in trouble then the game changes. The approach has to change in that case. Sticking plasters won’t work with an economy that size. Iceland, Greece and Ireland are all sores. This will be an open wound.
Theresa May clearly shares George Osborne’s understanding of economics. The FT has reported:
Britain will make it easier for wealthy individuals to immigrate, the home secretary has said, in a policy that aims to promote the UK as the destination of choice for rich foreigners seeking a new home.
Theresa May said on Tuesday that she would exempt “high-net-worth investors” and entrepreneurs from the government’s new cap on non-European migration, to be introduced in April. “I will not limit the number of these wealth creators who can come to Britain,” she said.
I think that safely pre-ordains the outcome of the domicile review promised to Vince Cable (and requested by him after discussions with me).
But there’s something much more sinister in this – it is the wholly mistaken assumption that the wealthy are wealth creators. No they’re not. most inherited it. And these days the vast majority of the rest will have got it by being in exceptionally safe employment in which they never took a risk – as bankers or as major company directors.
Two things to note. Once wealthy people cease to be wealth creators: they become wealth preservers. With rare exceptions they have two obsessions. The first is making sure they keep their wealth – so they cheat and abuse to stop paying tax, for a start.
Second they are determined others should not catch up with them. being wealthy is about being different – and they don’t want to give that difference up. That’s why trickle down was never going to work.
But this explains something else: these people will never be wealth creators because they have no appetite for risk. Their appetite is for maintaining the status quo. It’s the hungry who are the entrepreneurs, not the wealthy. And it is small business that creates jobs and wealth, not big business as evidence has shown time and again. And wealth puts up all the barriers it can to small business.
So this policy will not work, unless of course May’s plan is to increase inequality in the UK – with all the outcomes we know only too well now.
Since I think this is the plan I find this profoundly worrying.
Martin Wolf’s take on the Irish crisis is predictably intelligent. As he says:
It was not the public but the private sector that went haywire in Ireland and in Spain.
The crisis is a huge challenge for Ireland, which should surely convert unsecured bank debt into equity rather than force its citizens to bail out all the improvident lenders. But the Irish case also shows that the German view of how the eurozone should work is mistaken: fiscal sloppiness is not the main problem and fiscal retrenchment and debt restructuring are not the sole solutions. One cannot learn from history if one does not understand it.
To put it another way, as Philip Stephens said in the FT yesterday – you can’t cut your way out of such a crisis. The Germans and vast numbers of economists have to earn that. When they do the crisis will be over. Until then it will get worse.
I said much the same thing in my early comments here.
The FT has a headline this morning that says:
JP Morgan ready to axe £1.5bn London HQ
I guess it was designed to make it look like another “banker quitting London story”.
Except it isn’t. As the story continues, it’s:
opting instead for the former UK premises of Lehman Brothers.
In other words – bad news for construction, no doubt. But otherwise a misleading story giving the impression of bank instability in London when there is none.
The Big 4 are giving evidence to the House of Lords right now on auditing.
I missed the start but the admissions are amazing.
First Deloitte at least signed off bank audit reports saying they were going concerns in 2008 because they assumed the government would bail the banks out. They didn’t say so. But that was the reason for their unqualified opinions. I think their Lordships were surprised.
Second, PWC said Northern Rock had a clever business model everyone knew about.
Third, they have confirmed that IFRS did not allow a loss to be recognised as a provision – only when it had occurred. So as Tim Bush has said time and again – IFRS allowed profits to be recognised when not realised but did not allow losses to be recognised until realised – so building in massive overstatement of profits – and they all signed off on this basis.
Oh, and KPMG have said that they might have assumed a bail out because the government wanted them to do so and not mention it.
The arrogance, lack of flair, incompetence and sheer smugness is staggering.
If you wanted to know why the system is broken watch these four make fools of themselves.
During a meeting of the European Economic and Financial Affairs Council (Ecofin) in Brussels, Giulio Tremonti, Italy’s Minister of the Economy, declared that he was wholly against the bilateral agreements for the exchange of tax information which some European Union (EU) member states were negotiating with Switzerland.
Tremonti has, for some time, been concerned at the level of information and/or tax remitted between countries under the [European Union Savings Tax] Directive, and had already threatened, at the beginning of this year, an Italian veto on all EU tax matters unless clarification was forthcoming on tax recovery.
He has now said that the agreements being negotiated with Switzerland compromise, and are “plainly against the spirit of”, the existing EU regulations. He said that Italy could not agree to the EU Directive being “violated” by bilateral agreements. He pointed out that he is awaiting a reply within Ecofin on their unacceptability, and that “without a reply, there could not be unanimity”.
While there have also been further rumblings recently, particularly in the Swiss press, that there could be movement shortly towards a signing of the DTA between Italy and Switzerland, it will be seen that Tremonti, on whose shoulders would rest any decision to proceed, would need to move some way in his present opinion before any signing could be contemplated.
He’s right.
And it’s great to see an EU member state standing up and saying so.
Good on Italy, for a change.
And shame on the UK.
I have been blogging the increase on traffic here over the last few months, noting that it hit 6,000 in a day in September and 9,000 for the first time on 17 November.
Yesterday it reached a new peak – 12,000 reads in a day.
That’s a pretty massive leap, for no one reason. Ireland was one cause, the EU Code of Conduct and the Crown Dependencies another – but the general economic environment seems to be the major contributor.
Thanks to all who have visited.
Informed sources tell me that the word in St Helier this morning is that Jersey is looking for a territorial tax solution to its failure of the EU Code of Conduct.
I’m sorry to inform them that this won’t work. As I wrote recently:
Any new tax system in these islands must remove all differentials between the local population and those who seek to use these locations for tax abuse. A consistent tax rate must now be applied to business transactions, and that consistency must overflow into any personal tax system. In other words, the tax base for business and personal transactions must be similar. It is, I think, very obvious that the argument that they can be different has now been rejected by the Code of Conduct group. The decisions that have been reached would not have been possible if that were not the case.
There are some immediate advantages in this for the islands. Some glaring anomalies, such as UK High Street stores trading being untaxed in St Helier when their locally owned competition is taxed must go. But since there is no prospect, whatsoever, that Jersey could balance its budget without imposing a positive local rate of tax on companies this does imply that a consistent positive rate of tax will be applied to all profits arising in Jersey from now on.
This means, at the very least, that a territorial basis for taxation will be adopted in the Crown Dependencies, with all income arising in these places being subject to local taxation. But, remember, that these places do currently apply a residence basis of taxation to their warm blooded populations. To be consistent, and avoid the risk of abuse falling foul of the Code, a territorial basis might also be necessary with regard to the human population of these islands as well, especially if the corporate tax rate is lower than the income tax rate. That would have massive impact: the local population could easily ship income out of the local tax base if this were introduced. I think this may be a major constraint on the potential for a territorial basis for tax, at least with differential tax rates.
And there are, in any event, other risks. Take for example the recent trend for UK quoted companies to be incorporated in Jersey but be tax resident in a location such as Ireland or Switzerland. The assumption here was that the Jersey company would avoid all tax: that is not so obviously the case if a territorial system were to apply. The immediate of certainty which was the underpinning of these arrangements will have been blown apart.
And then there is something more significant still: if it were possible under a territorial taxation arrangements for a Crown Dependency company to still enjoy a 0% tax rate, which would be a significantly different rate from the standard rate of tax in the Crown Dependencies then the preamble test inherent in the Code of Conduct, which suggests that if there are major differential tax rates available to non-resident companies the existence of abuse does prima facie exist, will continue to be a problem, indicating that the Code may not be complied with if a territorial basis for tax is created with this deliberate intention of offering 0% tax to some companies.
I think there is a real chance this will be the case, and this shatters the complacent assumption in the Crown Dependencies that territorial tax will solve all their problems because none of the tax abuse they promote supposedly takes place on the islands – all of it, in the mysterious make believe world of the secrecy jurisdiction, supposedly taking place “elsewhere” (a concept I explain here).
Finally, territorial tax will, in any event, increase pressure on the Crown Dependencies to exchange information with other tax authorities. The simple fact is that if a company incorporated in one these places claims to have no trade arising in that place then its trade must be somewhere else. The Crown Dependencies would in that case be beholden to determine where that other place is and, I think, exchange information with it. If they did not then the opportunities for abuse would be enormous, and they would be deliberately facilitating it.
None of this puts the Crown Dependencies in a pretty situation. But I am not going to get upset about that. This is a problem of their own making, and one that they could have avoided if only they had been willing to listen.
Of course Jersey can ignore my opinion on this issue. It has done so before. The trouble is I’ve always been right and they’ve always been wrong – as have others who have advised them, such as John Whiting then of PricewaterhouseCoopers and now of the Office of Tax Simplification who told Jersey at a cost of £50,000 in 2004:
The 0/10 company tax proposals are sensible and are acceptable to the relevant authorities.
How wrong can you be?
Philip Ozouf, Jersey Treasury Minister, issued the following press release this morning:
EU Code Group
The EU Code of Conduct Group met in Brussels on Friday (19 November) to give further consideration to the Island’s 0/10 tax regime. The Group considered a paper prepared by Commission officials that was concerned solely with whether the deemed distribution provision and the combined effect of taxation at company and shareholder levels came within the scope of the Code as business taxation.
The Commission’s view is that Jersey’s anti-avoidance measure does come within the definition of business taxation rather than personal taxation, is discriminatory and therefore in conflict with the Code.
Representatives from Jersey have contested both points and their view remains that Jersey’s anti-avoidance measure is personal taxation and not within the scope of the Code. At the same time Jersey has offered to consider alternative anti-avoidance measures that would be more in accord with the practice of the member states and therefore not open to dispute.
Jersey has been informed that there has not yet been a formal assessment by the Code Group and that there is a further process to go through before a final conclusion is reached.
It is understood that the Code Group is proposing a review by a High Level Tax Group, which will determine what the Code means by business taxation and whether this definition goes beyond corporate tax to include shareholder taxation. Jersey has been told that there was consensus on the part of Code Group members in support of the Commission’s paper and that the present 0/10 regime, as it stands, was harmful.
Treasury Minister, Senator Philip Ozouf, said "We believe, from the information we have received, which is supported by previous statements made by ECOFIN in 2003; from the nature of the discussion at the Code Group meeting in September that Jersey attended; and from the Commission’s paper discussed at the Code Group meeting last week, that the focus is on the deemed distribution provision.
“With the exception of that provision, the 0/10 tax structure has not been formally addressed by the Commission or the Code Group. Therefore, with the exception of this anti-avoidance measure, nothing has been conveyed to the Island authorities that would indicate that the present 0/10 tax structure is in conflict with the Code criteria. This is fully in accord with the view expressed by the Island authorities to the Code Group and the Commission."
It seems only fair to let him have his say.
Now let’s tear that to shreds. Remember there are five criteria for assessing compliance with the Code. They are:
1. Whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents
2. Whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base
3. Whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages
4. Whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD
5. Whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way
I predicted, based on reliable information received that Jersey had failed on 1 and 2, and probably 3. My logic on tests 1 and 2 was as follows:
It is very obvious that if a company trading in Jersey is not taxed if it is owned by non-residents but is forced to distribute dividends that are taxed if it is owned by a Jersey resident person that there are clear tax advantages provided to non-residents. The failure of the first test was so predictable it is amazing that anyone in any of the Crown Dependencies, or in London, thought that they could get away with this abuse by arguing that the discrimination existed in personal tax, not business tax, which was the defence they used.
It has to follow on the same logic that test two also fails: the only reason for enforced distribution must have been to protect the national tax base by solely charging the domestic market to tax when the international market was not charged.
The same link explains in more detail why test three has also failed, but let’s concentrate for now on the first two items – because remember that failing any one test means that Jersey has failed to comply with the Code – as I claimed.
Ozouf might say “that the focus is on the deemed distribution provision”. Well of course it is. It’s the deemed distribution provision that means that advantages are accorded to non-residents that are not given to residents (meaning failure of test 1) to ensure that tax advantages are ring fenced from the domestic market (test 2). This ring fencing is at the core of what the Code of Conduct attacked and if, as the EU is clearly saying, and as i said as long ago as 2005, what Jersey has done is to maintain this ring fence, openly, deliberately and provocatively by using nothing more subtle than an excuse that the Code only relates to business tax and Jersey has shifted the ring fence into personal tax – then of course it has failed the Code tests. To say this means nothing else has been assessed is meaningless: the Code looks for ring fences. And it found them.
And actually, my sources also tell me that the EU has done the other tests – and it did fail three and pass four and five. Why Jersey does not know that is not known to me.
But let’s blow apart Ozouf’s excuses. What Jersey is doing is claiming it has a minor issue when the whole ring fence issue – which it sought to maintain with zero / 10 – is now blown apart. The zero /ten system only worked if the zero did not mean zero for local people. That’s because Jersey has to maintain substantial income from companies. It’s funding is dependent on this:
25% of state earnings are from companies. And with the ring fence removed this will fall heavily. What is more, any Jersey resident will be able to put money in a company and shelter it from tax. This is the conundrum at the core of Jersey’s aim to remain a tax haven despite the EU Code – a task that has so far proved impossible to resolve.
So Ozouf may say this is a minor issue. In reality it has the potential to blow Jersey’s budget apart – and undermine viable government in the island. This is not a minor anti-avoidance issue. It’s the deceit at the core of Jersey’s tax system which is essential to maintaining any form of government in the island. He either knows that and is spinning for all he’s worth to deny the truth or he’s not to be trusted with the job.
And either way my forecast was right. yet again, I might add.
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