2011 March » Tax Research UK

Two questions about Ireland

Mar 312011

Ireland‘s embattled banks need to be bolstered by an extra €24bn (£21bn) – some €13bn of which needs to be used to prop up the troubled Allied Irish Banks (AIB).

It takes the total bill for repairing the hole in the banking sector caused by the bursting of the Irish property bubble to €70bn.

Two questions:

a) How long will it be before civil disobedience breaks out at the cost of this being imposed on ordinary people in Ireland, all to save banks elsewhere?

b) How long is it before Ireland defaults?

The answer is, of course (b) is not long after (a) but I see (a) as distinctly likely now. Why not? What have the Irish to lose any more? This debt cannot be repaid. It is €23,000 or thereabouts a head.

Why on earth was an increase in the number of mortgage defaults “unexpected’?

Economics Comments Off

Mar 312011

The Guardian reports:

The number of households defaulting on mortgage loans increased “unexpectedly” in the first three months of the year, and is expected to rise further, according to the Bank of England.

Hang on:

We have pay freezes

And falls in net household income

And inflation fuelled by government policy

And rising unemployment

And yet the Bank of England did not expect an increase in mortgage defaults? Why on earth not? Has common sense now passed them by?

Driving the Getaway Car: Ireland, Tax and Development

Development, Ireland, Secrecy jurisdictions, Tax avoidance, Tax Havens Comments Off

Mar 312011

When it comes to tax policy, is Ireland a fine example or ahorrible warning?

This new report by Dr Sheila Killian of the University of Limerick argues that Ireland’s corporate tax regime can be abused by multinational companies (MNCs) engaged in tax evasion and illicit capital flows. Despite recent reforms to transfer pricing rules, significant weaknesses remain that provide MNCs with opportunities to create abusive international tax avoidance schemes to reduce tax payments in other countries. The result, according to Killian, is a policy incoherence which, among other things, goes against Irish commitments to ensure that government actions contribute to global development and do not undermine the objectives of Irish Aid.

This policy incoherence cuts to the heart of current thinking on development. As the report illustrates in the following flow chart, external debt burdens are closely linked to weak tax effort (the ratio of tax receipts to GDP) and increased dependence on external loans and aid programmes. The latter typically impose conditions which further undermine tax justice and ultimately contribute to fiscal and economic crisis. Tax competition lies at the very heart of this cycle.

Ireland has famously – and controversially – used its low corporate tax rate as a bait to attract foreign direct investment, and despite its current fiscal and economic crisis, strongly resists external pressures to remove some of the loopholes that allow the tax system to become a vehicle for complex tax cheating schemes. As we have blogged elsewhere, companies like Google are attracted to Dublin not so much by the 12.5 percent tax rate as the ability to use Ireland as a part of a more elaborate tax structure – in Google’s case employing the Double Irish (and Dutch Sandwich) techniques involving the routing of profits through Ireland and the Netherlands.

Despite being a relatively small player in both the European and global contexts, Ireland is able to exert a quite extraordinary influence on international tax policy. This influence derives from very active participation at a number of international fora, including the OECD, the UN Tax Committee and, of course, the European Union. This puts Ireland in a position of choosing between being a force for good in promoting enhanced international cooperation on tax matters, or a force for bad in blocking progress in that direction. In TJN’s experience, for example of observing at sessions of the UN Tax Committee, Irish representatives have in the past more generally aligned with blockers such as Switzerland, Liechtenstein and the United Kingdom.

The big question facing the incoming Irish government is whether – and how – to modify their corporate tax regime in ways consistent with the commitment to “work for a coherent approach to development across all Government Departments.” (Government of Ireland White Paper on Irish Aid, 2006). And can this be achieved without adversely affecting the country’s ability to attract inwards investment? Killian proposes 11 recommendations which, she argues, would strengthen policy coherence while also providing potential net future gains for the Irish economy. These measures include:

- Adjustment to the transfer pricing regime;

- Abolition of tax exemption on patent royalty income;

- Negotiation of tax treaties with a wider range of countries;

- Promoting enhanced tax information exchange, preferably on an automatic rather than on request model;

- Promoting a country by country financial reporting standard for MNCs.

Driving the Getaway Car is a timely and useful contribution to an urgently needed debate. The new Irish government faces tough choices on tax policies. The current situation is unsustainable and a new development strategy is urgently required. They can either opt for further tax competition, which we would argue is harmful to the interests of other countries and ultimately self-defeating (see Sheila Killian’s article in Tax Justice Focus here), or they can strike out in a direction that reduces harmful impacts on other countries and contributes to strengthening internal fiscal sustainability.

As Killian argues in this report, the current tax policy mix is not coherent with existing commitments to avoid causing harm to other countries. Change is necessary, but does the current government have the appetite to take on the vested corporate interests who find the current corporate tax regime, with all its gaps and loopholes, very much to their liking?

NB: Above reposted from Tax Justice Network blog with permission

The Missing Wealth of Nations: Evidence From Switzerland, 1914-2010

Secrecy jurisdictions, Switzerland, Tax Havens Comments Off

Mar 312011

A paper with the above title has been written by Gabriel Zucman of the Paris School of Economics. As the abstract of the pretty technical paper says:

This paper draws on direct evidence from Swiss banks and on systematic inconsistencies in international accounts across countries to document the level of unrecorded wealth in tax havens, its nature and its evolution. I find that 8% of global household net financial wealth is held in tax havens, of which one third is in Switzerland. The bulk of offshore assets are invested in equities, in particular mutual fund shares. For this reason, 20% of all cross-border equities have no identifiable owner in international statistics across the world. Taking into account tax havens alters dramatically the picture of global imbalances: with minimal assumptions, it is possible to turn the world’s second largest debtor, the eurozone, into a net creditor. With stronger assumptions, the largest debtor, the U. S., can be made a balanced economy. Europeans are richer than we think, because a significant part of their wealth has historically been held where domestic national accountants and tax authorities cannot see it.

20% of cross border equity trades have no identifiable owner.

And I’m assured that there is sound regulation in place?

I don’t believe it.

8% of world household wealth is in tax havens?

I do believe it.

In 2000 an academic study suggested that wealth totalled $125 trillion. It’s clearly going up since then. That would suggest $10 trillion in tax havens.

In 2005 John Christensen and I suggested $11.5 trillion. And we allowed for intangibles.

Looks like this paper adds more support to our argument.

Except we now believe we understated.

But however looked at – this figure is enormous and a blot on humanity and its compassion, and is resounding indication of its greed.

79% of people think the government should act to close tax loopholes

Tax avoidance 12 Responses »

Mar 312011

The following data comes from polling done last week by Unison and reported yesterday by the TUC:

The questions gave respondents the opportunity to choose betwen the kind of argument, one a union might put and one the government would put. That can be a good polling technique as it means that you are not trying to devise a neutral non-leading question, but are giving people the choice between two clearly partial statements.

There were fascinating answers on the Big Society (59% think it’s a cover for cuts) and cuts themselves (56% think they’ll cause recession) but I concentrate on tax. The sample was of 2,720 people:

Some people and companies can legally avoid paying some taxes because of the ‚Äòloop holes’ which exist in the tax system. Some say that the Government should close the loop holes in the tax system to ensure that companies and individuals pay more tax. Others say that closing the loop holes will effectively mean a tax increase on some individuals and companies which may reduce the amount of economic investment in Britain and threaten the economic recovery.	Total	Con	Lab	Lib Dem
Do you think the Government should or should not close the tax loop holes?
The Government should close the tax loopholes	79	80	84	82
The Government should not close the tax loopholes	8	11	6	8

87% had an opinion.

79% agree with the arguments that I and the Tax Justice Network, the TUC, PCS and others have been making.

It’s time for action.

GE vs. the NYT: dispatches from the battlefield of tax PR

Corporation Tax, Tax avoidance, USA Comments Off

Mar 312011

I could reproduce an excellent Tax Justice Network blog with the above title here.

Just go to their place to read it instead.

Who is winning in the GE v NYT debate so far. Well look at what the Business Insider says:

“Wow, just when we thought it was over… The NYT may be off the hook, at least on the “federal income tax” assertion. No sooner had we published our conclusion that the NYT’s statement was “flat-out wrong” than the NYT came right back and said there wasn’t a single factual inaccuracy in its article, which was why GE hadn’t asked for a correction. And, more importantly, the NYT sent us an AFP article in which GE spokesperson Anne Eisele–the same spokesperson who wrote the comment below–said the following: “GE did not pay US federal taxes last year because we did not owe any.”
. . . .
It suggests that GE is still trying to find a way, any way, to talk its way out of this, even if that means giving out false information. . . . We have asked Anne and GE, once again, to explain themselves. They’re working on getting us a response.”

We didn’t pay any tax because we didn’t owe any.

I seem to recall that was the Philip Green defence for the fact he hadn’t done tax avoidance. He claimed there was no avoidance because there was no tax due. He ignored the steps taken to ensure that was the case…which was all very convenient, and exactly what this GE debate is about.

The madmen bankers are back in town

Banking 1 Response »

Mar 312011

Yesterday Alan Greenspan was in the FT saying regulation had to be abolished so financial markets could fly again.

As Paul Krugman had to say of his diatribe:

Alan Greenspan continues his efforts to cement his reputation as the worst ex-Fed chairman in history; in today’s FT, he comes out for a repeal of financial regulations designed to prevent a repeat of the crisis for which he, more than any other individual, bears personal responsibility.

To be honest, I didn’t know quite how to respond; I was, very nearly, left speechless by the lack of self-awareness on display.

And as he reightly pointed out, all the old madness was on display when Greenspan claimed:

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

To put it another way we’re back to the old madness. If madness is sufficient detachment from reality to believe in a factional state of being then this is what Greenspan is suffering from. So are all the other neoliberal economists who share his conviction that the world is probabilistic and uncertainties simply don’t happen. Black swans don’t occur is the basis for their mathematical models on the basis of which they trade. And in that maths 2008 could not happen. It dd of course happen, but three years afterwards we now see Greenspan in denial of that reality.

It was a notably rare exception, he said. So it won’t happen again in other words. So we have no reason on that basis to regulate for it. And that is madness.

And maybe it was no coincidence that the FT reports that yesterday:

Jamie Dimon, chief executive of JPMOrganChase, launched a broadside against financial regulation on Wednesday, warning that new capital rules could be “the nail in our coffin for big American banks”.

Regulators are negotiating international capital standards for the biggest banks but Mr Dimon said setting the new requirements too high, or allowing overseas banks to calculate their asset base differently, could disadvantage US banks and was already stifling economic growth.

And maybe no coincidence too that they also report:

Senior Whitehall officials are pushing for a three-way peace deal between government, big banks and the Independent Commission on Banking established last year to examine the industry’s structure.

That effort is to make sure that the Banking Commission does ot rock the pathnto the privatisation of Lloyds and RBS. Or, in other words, to re-establishing the old order.

But that model failed. It did not just fail a little – it failed massively. In any sane market system it should have been consigned to the bin. It was only because these banks were too big to fail that it was not so consigned. It’s in a very real sense a market failure that they still exist.

And if regulation now pushes those banks out of existence it is doing exactly what the market demanded – which is their demise, because they’re not fit for purpose – unless you’re a senior director who has captured such a bank for your own personal gain. But if course, they’re in denail of that too – which is another sign of the madness that persists.

This is not time for weakness- banking has to move on – and without regulation it will instead jump into the abyss. Those are the only options. Those of the madmen have to be ignored – because they have no relationship with reality, and nor do their theories.

Fair pensions debate – why trust beats contract

Pensions 1 Response »

Mar 312011

I have been reflecting further on the Fair Pensions debate on fiduciary duty yesterday evening.

One speaker – and I do not have his name and it’s too early to ask anyone – had the good fortune to follow an appalling speech by Ed Davey MP who showed a complete lack of grasp of all the issues – despite having ministerial responsibility for them. Maybe that’s why I was so inclined to hear what this person had to say, but it was profoundly interesting.

As he pointed out, in the Netherlands a person of 25 with identical earnings and an identical pensions savings pattern to a person in the UK is likely to end up with 50% more pension. Why? Because the state pooled fiduciary duty driven fund is so much more efficient than the UK contract based pension system that fails to recognise fiduciary duty at far too many stages in the pension process and that, in the name of choice, eats pension return at cost to the consumer. Or to put it another way, the market is hopelessly inefficient.

And as another speaker said, that is inevitable. When contract beats fiduciary duty everyone is always defensive and that means that everything is monetised to eliminate all risk of judgement that cannot be defended on the basis of apparent cash flow.

And yet monetisation creates harm: it applauds tax not paid but all pensioners rely on the state and to some degree state pensions (well, I made that point); monetisiation means we ignore the environment and other externalities and so destroy the future we’re saving for; monetisation prevents the exercise of best judgement.

And the result of this neoliberal madness? Worse pensions for all, of course.

Put simply – markets have failed us.

GE says we all got its tax wrong

Corporation Tax, Ethics, USA 8 Responses »

Mar 302011

GE says we all got its tax wrong.

So I‘ll link their correction, here.

As they say:

GE pays what it owes under the law and is scrupulous about its compliance with tax obligations in all jurisdictions

No one ever said otherwise. We said you lobby to change those obligations.

And they say:

The Times erroneously suggests GE makes use of tax “loopholes” or “innovative accounting.” Our accounting and tax positions fully comply with all applicable rules and regulations and are based on sound public policy.

Again, no one ever said otherwise.

We just said you spend a lot of money make sure sound public policy accords with GE’s view of what sound public policy should be.

And we questioned the ethics of that.

And the fact it meant you paid no tax in the US in 2010.

And the article utterly fails to address those lobbying issues.