The George Monbiot had a first-rate article in the Guardian today. In it he wrote:
At the moment tax law ensures that companies based here, with branches in other countries, don't get taxed twice on the same money. They have to pay only the difference between our rate and that of the other country. If, for example, Dirty Oil plc pays 10% corporation tax on its profits in Oblivia, then shifts the money over here, it should pay a further 18% in the UK, to match our rate of 28%. But under the new proposals, companies will pay nothing at all in this country on money made by their foreign branches.
Foreign means anywhere. If these proposals go ahead, the UK will be only the second country in the world to allow money that has passed through tax havens to remain untaxed when it gets here. The other is Switzerland. The exemption applies solely to "large and medium companies": it is not available for smaller firms. The government says it expects "large financial services companies to make the greatest use of the exemption regime". The main beneficiaries, in other words, will be the banks.
But that's not the end of it. While big business will be exempt from tax on its foreign branch earnings, it will, amazingly, still be able to claim the expense of funding its foreign branches against tax it pays in the UK. No other country does this. The new measures will, as we already know, accompany a rapid reduction in the official rate of corporation tax: from 28% to 24% by 2014. This, a Treasury minister has boasted, will be the lowest rate "of any major western economy". By the time this government is done, we'll be lucky if the banks and corporations pay anything at all. In the Sunday Telegraph, David Cameron said: "What I want is tax revenue from the banks into the exchequer, so we can help rebuild this economy." He's doing just the opposite.
Monbiot is exactly right. I warned of this last December. Richard Brooks of Private Eye advised George Monbiot on the article. I think it technically accurate. And the warnings that are made are also appropriate: this is an enormous and deliberate tax heist, unavailable to small companies but deliberately designed to make sure that the largest companies obtain substantial tax benefits which can only be used to firstly boost bonuses and directors remuneration and secondly to increase the worth of the already enormously rich tiny minority in the country who own the majority of such companies ( yes, including through their pension portfolios).
I'm also delighted to note George Monbiot's comments on Nick Shaxson's book 'Treasure Islands'. As he says:
I used to think of such processes as regulatory capture: government agencies being taken over by the companies they were supposed to restrain. But I've just read Nicholas Shaxson's Treasure Islands — perhaps the most important book published in the UK so far this year — and now I'm not so sure. Shaxson shows how the world's tax havens have not, as the OECD claims, been eliminated, but legitimised; how the City of London is itself a giant tax haven, which passes much of its business through its subsidiary havens in British dependencies, overseas territories and former colonies; how its operations mesh with and are often indistinguishable from the laundering of the proceeds of crime; and how the Corporation of the City of London in effect dictates to the government, while remaining exempt from democratic control.
Both Nick and George are right. As Monbiot concludes:
Ours is a semi-criminal money-laundering economy, legitimised by the pomp of the lord mayor's show and multiple layers of defence in government. Politically irrelevant, economically invisible, the rest of us inhabit the margins of the system. Governments ensure that we are thrown enough scraps to keep us quiet, while the ultra-rich get on with the serious business of looting the global economy and crushing attempts to hold them to account.
I would love to disagree with that, but it is increasingly hard to do so. You only have to stand back and look at what this government is doing to realise that whilst George Monbiot may use evocative language he is also describing a situation that exists.
No wonder people are angry. When the odds are blatantly stacked against them, is there any surprise that some least, and I suspect over time a growing number, will become increasingly frustrated by the injustice within this system?
A wise government would take action now to prevent that sense of injustice. My concern is that I doubt that we have a wise government.
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Unfortunately, the Labour party is not going to do anything either.
With the three major parties stocked to the rafters with millionaires, each of who is mainly interested in getting richer by any means, I foresee no chance of any change to the status quo.
As minor parties get to be major parties, their members also get to be richer and become part of the problem.
The gravy train rumbles on.
Monbiot highlights a key issue.
Forget CFC reform – this is a side issues as most multinationals have enough losses not to significantly worry about any settlement reached with HMRC (and ongoing settlement discussions are tending towards HMRC agreeing 65% of the liability before losses somewhat contrary to their litigation strategy).
The bigger issue as Monbiot hints at is the fact that we will have a ‘territorial system’ as far as exempting profits (and losses) of overseas operations goes but groups can take massive interest deductions against their UK tax base to finance these exempt operations. The result is that no UK multinational group will pay UK corporate tax (as most don’t at present) as financing costs will vastly exceed UK profits, and excess losses are generated to shelter naughty offshore planning (if HMRC even challenges).
Corporates will point to the worldwide debt cap and say that excess debt is already limited – not much use if UK is 25% of your global operations but you can effectively deduct 100% of your group’s borrowing costs.
Progressives need to be arguing for an interest limitation system. They have this in Germany which is growing well thanks to medium sized enterprises.
I can’t help but think that the fact that large groups can effectively pay no UK corporate tax means that it is more difficult for them to be challenged by smaller operators (who can’t plan to this extent). Would be interesting to see some research on this.
“No wonder people are angry. When the odds are blatantly stacked against them, is there any surprise that some least, and I suspect over time a growing number, will become increasingly frustrated by the injustice within this system?”
The PSG is among the growing number who are increasingly “angry” about inequality, injustice and partiality on the Isle of Man, Jersey and Guernsey. And the group will continue to bring matters into the public domain.
@W T Ramsay
I agree
I’ll plug it
@Richard Murphy and JohnM
You we)are grappling with two “establishments”.
1) The island establishments of entrenched governments in the “independent” secrecy jurisdictions of Jersey, Isle of Man and Guernsey.
2) The UK establishment that depends on the secrecy of these islands to protect and increase its wealth.
These two “establishments” are bonded to each other in a reciprocal pact for mutual enrichment.
Recognising this arrangement goes some way towards dismantling it.
I had a look at Nick Shaxson’s wikipedia page. He lives in….Zurich, Switzerland. Triples all round, as some might say!
Richard
Over the last year you have also increasingly used evocative language, as you note George Monboit does (and has done for some while) – and is routinely criticised for doing – as you often now are by those who read this blog and disagree with you.
However, as you point out in this blog, and in many others, and as many of us who read your post would agree, I’m sure, this is ENTIRELY justified by the scale and scope of the deceit behind developments in almost every policy domain in the UK currently (e.g. education – see the reports yesterday on the funding of free schools; NHS, see Ben Goldacre’s piece on evidence in the Guardian last Saturday; and the Big Society, listen to the interview with Dame Elisabeth Hoodless of CSV on Radio 4 yesterday, etc ,etc).
The long and short of it is you have an audience and a standing that can be used to be heard, most of us don’t, so we have to rely on the likes of you and George Monboit to be heard, even if at present that voice is largely swamped by the cheerleaders of ‘chaos’ in politics and the press.
@Roger Wright
You’re quite right – that is where he lives
His partner works for Reuters and is currently based in Zurich. So?
And doesn’t that also mean he’s well placed to see the real impact of what is happening?
@Ivan Horrocks
That’s something I have become aware of
I use it whenever possible
It’s why I was at this desk at 5.30 this morning – and will be here for a long time today
@Richard Murphy
“His partner works for Reuters and is currently based in Zurich. So?”
So he’s likely to be paying practically bugger all tax on the profits of a book which criticises low tax jurisdictions. Is the irony really lost on you?
I had assumed, as someone calling for country-by-country reporting, that you would welcome this. The substance of the transaction takes place in Island X, tax is paid in Island X, and no further tax is due in the UK.
There is a complete contradiction between residency based taxation and territorial taxation.
@Roger Wright
I have no knowledge of Nick’s tax affairs
But it is apparent he is taxable in Switzerland as he is resident there
And in Zurich tax rates on personal world wide income are at rates up to 40%
That looks not dissimilar to the maximum rate I can imagine Nick would pay on any foreseeable income in the UK
Please get your facts right
Tax havens are not usually tax havens for those who live in a place – or who have very high income indeed
@Patrick Lindon
The you really don’t get country-by-country reporting
CBC is designed to show where transactions are recorded
It is at the same time intended to show where their substance is – where sales go to, where people are, where assets are
So it is designed to show the games corporations play to hide the substance of their transactions behind offshore form so that tax is not paid
And that suggests unitary tax is the right way to go – as I am sure it is – as is alo the European Union with its Common Consolidated Corporate Tax Base
Monbiot’s article borders on hysterical (“Dirty Oil plc”?).
The difficulty with this type of article is that people will read it, accept it as fact, and go off cursing how evil the government is. It is deliberate misinformation.
The original consultation on this was clear that similar situations existed in other European countries, and that measures would have to be put in place to prevent artificial diversion of profits to exempt branches. Additionally, the analogy is clear with dividends from overseas subsidiaries generally being free of UK tax.
In the final version (http://www.hmrc.gov.uk/budget-updates/autumn-tax/tiin1030.pdf), I don’t know what is unclear about “No relief will be available for foreign branch losses”. Rather, there is nothing unclear about it, but more clearly Monbiot has not troubled himself with following this up.
The measures are a pragmatic response to other countries situations and ensuring the UK does not actively deter investment. We are indeed fortunate to have a government that does not lower itself to base and uninformed populism.
@Chris
With the very greatest of respect, the supplier of misinformation in this case is you, beyond any shadow of doubt.
First, who took place in the consultation? All the big businesses who would benefit, who demanded those benefits as a consequence. Let’s not have any pretence to the contrary. How did they take part in the consultation? Because the government invited them to sit on the committees that undertook this review. Yes, I know the TUC was represented on some committees, but it was the single representative of civil society when it was invited to attend. That is absolutely absurd. This was a review stacked by the government to ensure that this was the outcome.
And so what that some countries have this alternative system? Does abuse in one place justify abuse and another? Is this your standard of comparison? if so, you do of course support the regulatory race to the bottom, the abolition of corporation tax and the shifting of the entire burden of tax onto those least able to pay it? Thank you so much. We are truly grateful.
And oh dear, there is to be no relief for foreign branch losses. But then, given the collapse in transfer pricing legislation which now has no effect because there is no consequence of abusing the UK when the profits can be brought back tax-free, there never will be losses in foreign branches. They can always be relieved by transferring the cost back into the UK in the first place by manipulating the costs of finance. We aren’t stupid you know.
Thanks for the response. Perhaps I should be clear about where I’m coming from. I certainly don’t support a shifting of tax burdens onto those least able to pay it, quite the opposite – direct tax shouldn’t impact on those lowest down the pay scale.
I do have a bit of a thing about corporation tax though. Large companies will always be the most organised players and have the most resources, and for these reasons they are most likely to be able to employ advisors to find loopholes and exploit them. I don’t like to use the word ‘abuse’ in this context but I understand why it is used. I’ve mentioned this before, and was slightly told off for saying corporations aren’t real. I hadn’t been clear: a corporation isn’t a living thing, and it is the people who own and run them that benefit from their profits, and ideally I think it is them who should get taxed on the profits, not the corporate entity itself. This is to remove the incentive for well-resourced and organised corporations to use wild and wacky schemes to avoid tax.
In the meantime I appreciate there is no current appetite to look at that, and that it’s easier that corporate profits will be subject to tax before any distributions can take place.
Until this change was brought in, there was a mismatch between how profits are taxed in foreign subsidiaries, (ie, not subject to UK tax) and how they are taxed in foreign branches. This change seeks only to try and make sure that one legal structure for foreign operations is not artifically punished by tax law. I really can’t see the big deal. Many of these branches will be in what we might term ‘normal’ tax jurisdictions in any case. Branches in particular are far more likely to be true operations – you can’t set up a branch to be a holding company in a dubious jurisdiction as the legal personality is that of the UK company.
It is entirely correct that the treatment of expenses should follow the treatment of income – I’m not complaining about that and I wouldn’t suggest it should be different. I am complaining about the original article’s assertion that it was the case, as it was a central plank of the hysterical criticism, and also factually incorrect. At present, branches can relieve foreign branch losses against UK profits under group relief: companies that take up the election will no longer be able to do this as far as I can see.
Last, I don’t think that tweaking the UK system slightly so that treatments are broadly similar to our European neighbours is some kind of race to the bottom, and certainly not ‘semi-criminal money laundering’ as GM described it. It’s an enormous over-reaction to a pragmatic tidying up of the corporation tax law currently in place.
Having read the document, I have to agree with Chris, that it is largely about bringing the treatment of branches in line with that of subsidiaries. Before this change, any company that has a branch could have changed it to a subsidiary and not paid any UK tax on the subsidiary. From what I have read, it seems that the reason this change is needed, is that certain types of business are often required to operate under a branch structure in certain foreign countries due to regulatory reasons and hence cannot convert to a subsidiary.
As for your point on consulation, well given the change is expected to have an effect of £100m, I am not sure it is really material enought to be widely consulted on. If every tax change needed this, nothing would ever get done.
I don’t understamd why so there is so much focus on corporations tax avoidance when having read your work on tax avoidance, it appears that most avoidance/evasion is by small business and individuals? surely we should be putting more focus on why there is a large cash economy in certain small business types to avoid VAT and tax?
@Zed
Nonsense
8% tax is not a minor change
It is massive
And yes branches are not a massive issue – but tax haven abuse is
These comments are simple dissembling
@ Richard Murphy
Not following you on the 8%?
I agree tax haven abuse is a problem, but that has nothing to do with this tax change, it was there before and will be there after. My concern over the article by Monbiot, was that it is unlikely he had taken the time to even read the HMRC documents before writing a reactionary article. And if he did read the documents, then he clearly either didn’t understand them or chose to deliberateyl misrepresent them.
You didn’t answer my previous question re your work on the tax gap, was I right that the tax avoidance/evasion is predominantly from self employed individuals and small business?
@Zed
if you do not know where the 8% tax comes from it is quite clear that you have no understanding UK corporation tax, or developments in it, and I’ve not read sufficient information. You accuse Monbiot of this, but seem entirely guilty of the crime you suggest he has committed. Please do not bother to comment again.
OK, so this measure is to harmonise the treatment of branches and subsidiaries. But then it was only a couple of years ago that we changed from a credit system to an exemption system for foreign dividends. But why did we do that? It was presumably to harmonise with other countries and created an opportunity to avoid tax on dividends routed through tax havens. Do two wrongs make a right?
@Malcolm James
In a tax abusers eyes, yes
Both Monbiot (and you) comment that the measures cannot be used by small companies – But that’s not correct. The exclusion at section 18C says:
“If the company is a small company at any time during a relevant
accounting period, there is for that relevant accounting period no
relevant profits amount or relevant losses amount in relation to any
relevant foreign territory that is not a full treaty territory.”
So provided the branch is in a full treaty country a small company could make use of the legislation. Perhaps not a huge point but pretty obvious to anyone who has spent more than a few minutes looking at the proposals and since Monbiot claims that it’s all been explained to him by senior tax officials, I wonder how such a blooper got made.
I’m also baffled at his idea that companies will as a result of the proposed legislation will shift business out of the UK. If they wanted to, they could already do this by setting up a subsidiary. What has changed?
@Andrew
Small companies have to prove they are not moving assets overseas to secure a tax advantage
That’s hard when the only advantage that rises is tax
“Small companies have to prove they are not moving assets overseas to secure a tax advantage
That’s hard when the only advantage that rises is tax”
If you’re referring to the ‘motive tests’ at 18F they apply to all sizes of company not just small. It refers to ‘transactions’ rather than moving assets overseas. The suposition in subsection (8) of 18F requires a artificiality in which:
“… if the company did not carry on business
through the permanent establishment and there were no related
companies—
(a) the whole or a substantial part of the receipts which are
reflected in the profits attributable to the permanent
establishment would have been received by the company
otherwise than through the permanent establishment”
I don’t see how 18F could apply to normal trading of an overseas branch and, as I say, it applies to all sizes of company.
If it isn’t the motive tests at 18F, what are you referring to?
@Andrew
The old s739 and s740 tests
“The old s739 and s740 tests”
I see. 714 et seq ITA 2007. But, again, this doesn’t apply to ‘small companies’ (it’s Income Tax anti-avoidance) and besides, I can’t see how a genuine business transaction in setting up a branch would be caught, given the exemptions at secions 736-738 ITA 2007. So I’m still not sure why you think small companies with genuine transactions are excluded. 738 seems clear enough that if the branch was set up for business reasons and on an arms length basis, the legislation doesn’t apply. If that really was HMRCs intention, they could have written 18C to simply specificaly exclude small companies.
I’m still unconvinced that this is a tax ‘heist’, as Monbiot claims. It’s wrapped round with plenty of anti-avoidance provisions and CFC type legislation will apply. I can’t challenge or support the £100m figure given by the Treasury but unless someone else can, then Monbiot’s article seems to me be an over-reaction. His assertion that companies will BECAUSE of this legislation all de-camp to other territories for tax reasons makes no sense as they can already do that with subsidiary companies. And then on the one hand he’s saying the UK is fast becomeing a tax haven, on the other he says these new rules will make companies leave the UK to save tax.
@Andrew
Then bluntly they’ll all be doing it then
In which case we will certainly need the anti-avoidance mechanisms – that i think exist
And a tax haven is not a haven for its own residents – which shows how little you know. That’s why people from here will leave if allowed to
“Then bluntly they’ll all be doing it then
In which case we will certainly need the anti-avoidance mechanisms – that i think exist
And a tax haven is not a haven for its own residents – which shows how little you know.”
So are you accepting my point that 714 et seq ITA 2007 wouldn’t disbar a small company from the ‘branch’ legislation if it was a genuine business transaction? If so, presumably you accept that Monbiot was wrong in saying the proposed branch legislation didn’t apply to small companies?
As for ‘how little I know’, my comment on tax havens was a direct ripost to Monbiot’s contadictory comments that under this legislation, the UK was becoming a tax haven and that companies would leave the UK. You say a tax haven is not a haven for it’s own residents but whether people (or companies) seek to leave or reside in a country is affected by its tax rules (why is why the CI, as an obvious example, has limits on inward migration).
I’ll ask again for your comments on Monbiot’s assertion that this new legislation wuld leave to a mass exodus of companies when such a possibility already exists by the use of subsidiaries. How does this proposal change that?
I’ve said that Monbiot’s comments are a wild exageration of what this legislation is and have yet to have anyone show why my view is wrong.
@Andrew
The difference is obvious
We now have a tax environment that is going to encourage large companies, in particular, to shift income out of the UK – as all objective commentators agree, with a simultaneous dropping of many of the anti-avoidance masures to prevent it
You seek a purely technical response – but that is absurd
Even if a small company could construct an argument to use offshore the vast majority are wholly in the Uk – so they could never do so, so will pay more tax and suffer a competitive disadvantage
And nor could they afford to argue – which makes it a barrier to entry
In your make believe world there is equity
In the real world there isn’t
That’s the neoliberal construct
“We now have a tax environment that is going to encourage large companies, in particular, to shift income out of the UK”
‘Now’? Hasn’t such an environment always existed? That’s why CFC, transfer pricing and a multitude of other anti-avoidance legislation exists. I’ve asked how the branch legislation changes all this compared to existing subsidiary legislation but beyond assertions that “it has” I still don’t seem to have an answer.
“You seek a purely technical response – but that is absurd
Even if a small company could construct an argument to use offshore the vast majority are wholly in the Uk – so they could never do so”
What’s absurd about a technical response? This is tax legislation. Monbiot (and you) said that small companies CANNOT use the proposed branch legislation. I say they can. I seem to be correct. I hope I am as I’m currently working on a client who is ‘small’ by definition that is tendering for a contract that will involve setting up branches in South Korea and Singapore. It’s really not an uncommon event. That’s not make believe. You say they can’t ‘afford to argue’? There’s nothing to argue about! It’s a commercial contract to oversee an engineering contract with a foreign company. I can’t see any circumstances where the anti-avoidance legislation you quoted (ITA 2007, 714 et seq) could apply. We have treaties with both Singapore and Korea, so 18C of the proposed legislation gives my client the option. Whether they take it depends on tax rates and where the profits are likely to arise but the OPTION is clearly there.
It’s a real world example, not the first similar situation I’ve dealt with and won’t be the last.
@Andrew
An exception does not prove a rule
What rule was I trying to ‘prove’? Oh, yes, that small companies could take advantage of the proposed branch tax rules, something you and Monbiot said couldn’t happen. Actually, I think that DOES prove the rule. Because it’s not an ‘exception’. It’s an everyday occurance.
(And given the hassle I had getting all the E101/A1 forms for their employees I’m surprised that yesterday I forgot about another client currently doing demolition work through a branch in Hungary. Another small company with an overseas branch. That’s two on the go at the same time for one tax advisor in a medium sized accountancy firm)
Anyway, there’s no point continuing this debate (such as it is). You have your opinion and although I feel I have demonstrated that it is factually incorrect you have chosen neither to explain why you think I am wrong nor admit that I am right. Instead, you chose to focus on one point of many that I made in my last post and given a one line non-sequiter response to it. Quite clearly, my ‘South Korea/Singapore’ client wasn’t an exception, simply an example in practice of my interpretation of the legislation (in other words, ‘the real world’).
@Andrew
Respectfully, and as ever when engaging with neoliberal apologists, you ignore my economic argument
And that argument shows you’re wrong
Reiteration of old questions does not add to debate
For that reason this comment has been deleted
The editor’s decision is final
It may be wise to give some background on Andrew above. He is a regular blogger on nick robinsons newslog where he regularly boasts about how much money he makes and how as a tax adviser he uses tax schemes to reduce tax liability for higher rate taxpayers to just 3.5 % . Among his other moronic posts he has also suggested building camps for unemployed people.
@chris
Thanks for the tip
I’m not surprised
Not that it matters, but although I do blog on the BBC, I have never boasted about how much money I earn, nor ‘boasted’ about using EBT schemes, merely explained how they worked, and I did once suggest that hostels might be a reasonable solution for housing problems as they already exist for many groups. Richard, I’m surprised you allow missleading personal attacks on here. Not sure how that adds to the debate.
@Andrew
Well, actually I thought it very relevant to know
Was it a misleading attack? I don’t know. Much less than most I let on about me, I suspect
And vastly less than most made about me on many web sites which are pure fiction
All from your friends on the right I suspect