2011 May » Tax Research UK

The European Union Savings Tax Directive: halting progress

May 182011

The pugnacity of the Hungarian EU Presidency and of the European Commission did not pay off: Italy refused, on 17 May, to support a compromise on the taxation of savings income in the absence of sanctions for states and operators that “systematically” violate the existing rules. Rome’s refusal in this context targeted Switzerland.

This is unfortunate:

The Hungarian Presidency had proposed that the 27 finance ministers give a green light to the Commission to draft mandates to negotiate with five countries – Switzerland, Liechtenstein, Andorra, San Marino and Monaco. The idea was to ensure that they continue to apply measures equivalent to the EU’s in the area of taxation of savings income. The 27 are considering extending the scope of their directive to new products (investment funds, life insurance, etc) and to certain ‘intermediaries’ (trusts, foundations, etc) that can serve as screens for fraudsters.

Luxembourg ended up approving Budapest’s draft conclusions, which carefully avoid the sensitive issue of abolishing banking secrecy. Luxembourg and Vienna demand to be treated on an equal footing with Switzerland. They refuse to be forced to switch from withholding at the source to the automatic exchange of information between tax administrations if Berne does not follow suit.

That was progress. But Italy was adamant:

Italian Finance Minister Giulio Tremonti accused certain states and economic operators of “systematically” violating existing regulations.

The EU directive on savings taxation “was written by Switzerland, of which the Union has become a member,” he railed. “This is a paper tiger, a text with no teeth. Obligations were imposed on financial institutions and states, but no sanctions were put in place” against those failing to comply.

This “leaves the door wide open to abuse. It’s a scandal,” he added, accusing banks (Swiss in particular) of “using insurance systems or offshore funds” to circumvent their obligations.

This seems misguided ion Italy’s part:” the new European Union Savings Tax Directive would address these issues, so meeting its concerns. But:

Rome consequently refused to make the slightest concession until the Union “undertakes to apply sanctions against non-compliant countries and operators” in the framework of the review of implementation of the EU legislation. The Commission will present a report in June, confirmed Taxation Commissioner Algirdas Semeta, who wants “to use it as an instrument of surveillance”.

I understand Italy’s anger. I’m not sure they’ve expressed it the right way.

But it doesn’t look as though it’s back to the drawing board. Progress is likely, I think.

What happens to Glencore if Jersey fails the EU Code of Conduct?

Jersey 9 Responses »

May 182011

I’ve noted today that I think Jersey will fail the EU Code of Conduct tests for acceptability on business taxation later this year. I may be wrong, of course: I have to recognise that risk. But to date I’ve been right on this issue, when the massed opinion of almost all in the Crown Dependencies was that I was wrong.

As I’ve also noted recently, Glencore, the world’s largest trader in commodities, has launched itself onto the world’s stock exchanges through a Jersey company. It has the right to do so, of course. But as I noted, its prospectus said:

Jersey taxation legislation provides that the general basic rate of income tax on the profits of companies regarded as resident in Jersey or having a permanent establishment in Jersey will be zero per cent and that only a limited number of financial services companies shall be subject to income tax at a rate of 10 per cent. There is no capital gains tax in Jersey.

No doubt this was an extremely important factor in its decision to locate in the island. I would suggest it was fundamental.

The trouble is that indicates that Jersey fails test 3 of the Code of Conduct, which says:

3. Whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages

Let’s presume for these purposes that:

a) Zero tax is considered an advantage;

b) Glencore is not really moving to Jersey – there is no sign at all that it is: it is merely using the location as ahead office address;

c) That means the economic substance of Glencore will remain, as now, in Switzerland;

d) Glencore will not as a result have ‘any real economic activity and substantial economic presence’ in Jersey. I think that’s likely in terms of scale.

Now, I stress, Glencore is doing nothing wrong.

But Jersey has not yet proven it can offer these advantages: the EU has not ruled its tax system that does so is acceptable. Indeed, it has ruled to the contrary.

Of course, no doubt Glencore has been advised that the reforms announced by Jersey yesterday will keep the EU happy. The trouble is Jersey and its lawyers have always got these things wrong to date: they’ve called every shot incorrectly on the EU Code of Conduct.

And then what? What if Glencore finds it can’t enjoy the benefits that it’s been promised? That will be interesting. Firstly for Glencore. Second for its investors. Thirdly for Jersey.

Watch this space.

If Jersey fails the EU Code of Conduct rules so will the Isle of Man

Europe, Guernsey, Isle of Man, Jersey 14 Responses »

May 182011

I’ve just explained why I think Jersey will fail the EU Code of Conduct for Business Taxation rules, again.

Since it is replicating the behaviour of the Isle of Man and the Isle of Man is refusing to budge on this issue, even though it too has failed the EU Code’s tests, it seems certain the Isle of Man will also fail the EU’s rules.

Remember that if they do the UK has to intervene in the Crown Dependencies’ affairs. It has no choice.

Of course they could all say they’re becoming independent. But they have no chance of surviving economically if they do, most especially in the case of Jersey. So that’s not an option.

The fat lady has definitely not yet sung on this one yet.

NB: Guernsey will not fail if it introduces a 10% corporation tax – as it has said it will. I think that’s EU compliant. 0% tax is not. That’s the issue.

Jersey will fail the EU Code of Conduct rules – again

Europe, Guernsey, Isle of Man, Jersey 5 Responses »

May 182011

Philip Ozouf, Jersey’s finance minister said on his blog yesterday:

Supported by the Council of Ministers, I have today announced my intention to repeal those elements of Jersey’s corporate tax regime which were deemed harmful by the EU Code of Conduct Group. A proposal has been lodged to remove the deemed distribution and attribution rules with effect from January 2012. This means that “Zero-ten”, which means most companies pay tax at 0%, will be retained.

Some more followed, but that’s the nub of it. This is an interesting development, backed by interesting claims.

Leaving aside the fact that Jersey could (as on so many other issues) have saved itself a lot of trouble if it had listend to my advice on this issue in 2005, advice which has proved the be exactly right despite all the abuse thrown at me from within the island since then, let me add another note of caution now.

The claim that getting rid of the deemed distribution rules will satisfy the EU is a little rash. To put it another way: I think it may well be wrong. Nothing is certain. It is just possible that this is all the EU requires, but Jersey has hung on vain hope about Europe before to its cost.

What the EU actually said was Jersey failed the first three parts of the Code of Conduct on Business Taxation. The Code has five tests:

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

Removing the deemed distribution rule clearly satisfies test 2. It probably clears test 1.

Test 3 is another issue altogether. Test 3 looks at the motivation for construction of the tax system as a whole: it asks if the the whole system is designed to be abusive? Is it, as a whole, designed to offer advantages to those not present in the island? Note it doesn’t require differentiation between people within and outside the island as do tests 1 and 2. This one is about whether the system is designed to artificially relocate transactions for tax reasons.

This is, of course, reflected in my definition of a secrecy jurisdiction. I say that secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. I usually add that to facilitate the use of that regulation secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so, but that’s not key in this situation.

What is important is that if it is considered that zero/ten as a whole was designed to artificially induce relocation of transactions to Jersey when there is no economic substance to their being recorded there then getting rid of deemed distribution does not keep the EU happy. Far from it in fact. The system can still fail under test three.

That is why the EU quite specifically did not say that deemed distribution was the problem it was addressing when making its decision last November. That is also why it has not said getting rid of deemed distribution will solve this problem. And that is io doubt why the UK has not said that either.

What the EU said was that Jersey has to correct all three failures before its tax system is considered acceptable by the EU. It is addressing two. It seems to be ignoring the third, entirely. I think the reforms to which Senator Ozouf refers will fail to satisfy the EU on Code test 3.

That could be very costly. Not just to Jersey but to its international clients and so to Jersey’s long term reputation.

I hope Sen Ozouf has a plan in place for when that happens. Jersey can’t keep having a tax system ruled unacceptable internationally and keep its status as a well regulated place. But that’s the prospect it faces.

The Joseph Rowntree Foundation report on the Housing Market

Economics 7 Responses »

May 172011

Can I recommend a read of the Joseph Rowntree Foundation report on housing, published today?

This is a vital issue at the core of the concerns of many in our economy, and rightly so. A desire for a stable location in which to love is fundamental to human wellbeing and too many are being denied it.

The key recommendations are:

The UK has one of the most persistently volatile housing markets, with four boom and bust cycles since the 1970s. These cycles distort housing choices, drive up arrears and repossession rates, inhibit housebuilding and heighten wealth inequalities.
Improving housing supply is the key to reducing the risks of market volatility in the longer term but cannot remove them altogether. Moreover, a substantial increase in housing supply is required just to maintain current affordability levels.
Credit controls could be employed and Council Tax and Stamp Duty reformed to reduce the extent of housing market cycles in the short term.
The current system of safety nets for home-owners is inadequate. It should be replaced by a system based on a three-tier approach, comprising more responsible lending and borrowing as well as an effective safety net. This could include a partnership insurance model based on contributions from borrowers, lenders and the Government.
Private renting provides a flexible alternative to ownership for many younger and more mobile households, but it is unlikely to provide a suitable alternative for households requiring longer-term secure and affordable housing – particularly families with children. This highlights the importance of maintaining an affordable social rented sector as a part of the UK’s mainstream housing system.
The social and economic rewards that would accrue from the creation of a more sustainable housing market are considerable, and urgent action is needed to avoid yet another cycle of boom and bust.

I recommend the rest as well based on what I’ve read so far.

NB: I am funded by the Joseph Rowntree Charitable Trust, which is distinct from the Joseph Rowntree Foundation.

There is a way of knowing how much tax Boots paid – it’s called country-by-country reporting

Country-by-country 7 Responses »

May 172011

Nils Pratley comments in the Guardian today:

So now we know, privately owned Alliance Boots paid £240m in tax in the UK last year. It said so in a slide presented alongside yesterday’s annual results that was designed to dispel “any misunderstanding”.

Hold on a minute, the company’s definition of tax in its slideshow is not the one it uses when presenting the financial results themselves. That’s because the £240m includes business rates and employers’ national insurance. Those do indeed represent income for the exchequer. But the fuss is about corporation tax. So, for the sake of full understanding, tell us how much was paid in the UK on that front.

Alliance Boots declines to say, beyond confirming that it did pay some corporation tax in the UK. It is an international operation these days and is under no obligation to give a country-by-country breakdown of its corporate tax payments.

Well, it should make that disclosure. We grant Boots a licence to operate in this country: we have a right to know how much tax it pays in exchange and if it fails to disclose that then by any reasonable criteria it’s failing in its corporate responsibilities.

What is more, there is on the agenda of the European Union, Organisation for Economic Cooperation and Development and International Accounting Standards Board a proposal that would make Boots disclose how much tax it pays in the UK. That proposal is for an accounting disclosure regime that I admit I created: it’s called country-by-country reporting.

Country-by-country reporting is conceptually simple. It says a multinational corporations (and Boots is a multinational) should disclose a profit and loss account and cash flow plus limited balance sheet information for every country in which it trades unless the amounts involved are tiny. That profit and loss account and cash flow would include full details of tax provided and paid. So we’d know how much Boots owed and paid in the UK.

All it needs is political will from our politicians and those in the EU and we could have this data, for the benefit of us all, so we could hold these companies to account and stop their gross misinformation on how much tax they pay.

We might get more tax too as a result. And that would be good.

Full details on country-by-country reporting here.

Publish What You Pay – new briefing on country-by-country reporting

Country-by-country Comments Off

May 172011

I’ve had the pleasure of working with Publish What You Pay over a number of years.

They’ve just published a new briefing on country-by-country reporting – the accounting concept I created to enhance transparency in business, including the extractive industries.

Recommended.

How much did the Isle of Man pay for this?

Isle of Man 3 Responses »

May 172011

I can only presume today’s comment price in the FT on the Isle of Man was paid for.

It cannot be serious journalism.

Just a snippet:

It is the economy’s diversity, for an island of 80,000 people, that has helped it come though the downturn with a slowdown rather than a recession.

That did not come about by accident. The Isle of Man has painstakingly built niches in such areas as e-commerce, e-gaming, web hosting, filmmaking, and registering aircraft and ships to broaden its base and avoid over-reliance on financial services.

Film making, I agree, was an innovation. Full marks. The rest are just more tax haven activities! Who do they think they’re kidding?

Why the UK’s business schools and accounting academics are failing us

Accountancy, Accounting, Uncategorized 16 Responses »

May 172011

I have been in debate on another post with a UK accounting academic. I admit that the debate would not make an edifying read. I have found the commentators’ observations irritating, to say the least. I explained why in a comment I have made on that post this morning but at the same time I have also responded to his suggestion that I should spend my time writing for academic journals. He suggested this because he believes that this would, rather bizarrely, prove my credibility even though I recall reading a while ago that the average UK academic journal paper was read by just six people, and that included the editor, the author and the peer reviewers. Having reflected on this issue I added the following comment, which I think worth sharing more widely (and I’ve edited it a little here):

At the core of your latest comment is an absolutely fundamental error of judgement, and that is that academic accounting has had anything whatsoever to offer to British society for many a long year. As a consequence you think that I should somehow seek academic approval for what I do, and that this would give it greater status. Why on earth would I want to do that? With the notable, and singular, exception of Prem Sikka academic accounting’s track record over the last thirty or more years has been dire, and that is probably being kind to it.

Can you suggest one innovation in accounting that originated in the U.K.’s academic accounting network in that period? Can you name one accountant who was framed public debate in any way, apart from Prem? Is there an academic accountant who is in any way contributed to tax debate, apart from saying cutting it might be a benefit, without reason given?

Imagine what would have happened if I had submitted my work for peer review of the sort you suggest. Would country by country reporting exist? Would it now be on the agenda of the European Union, International Accounting Standards Board, Organisation for Economic Cooperation and Development, and others? Of course it wouldn’t. Peer review would have prevented me publishing a paper on the subject. Academic accounting is about quoting from existing ideas, not developing new ones. That is the poverty of intellectual thought in the UK, exemplified in a discipline like accountancy that has no history of original thinking.

Would the debate on the tax gap, now prevalent in politics, have survived peer review? I very much doubt it. Methodology would have been torn apart forever, but the reality is that because I wrote about the tax gap for the TUC the government was forced to address the issue, whether it liked it or not. We still disagree about methodology, but the debate was created. That did not happen as a consequence of academic accounting.

And what about tax havens? Is the fundamental distortion of markets that they create an issue at your business school? Is the opacity that hiding accounts from public view that they encourage highlighted as an economic distortion? Is the opacity within consolidated accounts that ensures that large corporations can shift their profits without being subject to public scrutiny treated as a fundamental failure of our existing accounting framework within your department? Are academic accountants everywhere jumping up and down saying tax havens must be abolished to ensure that effective markets operate on behalf of all participants, large and small, and whether they’re in business or its stakeholders? If not, why not? What corruption has led to this absolutely absurd position where you teach that markets are the solution to all problems and yet fail to highlight any of the abuses of markets that are promoted to ensure that the ordinary people of the world are exploited?

I will tell you what it is that ensures that these issues aren’t raised. Firstly it is the appointments process. If you disagree with the system, then you won’t get a job. If you do not buy into the absolutely fundamental (and absurd) underlying assumptions of neoliberal economics, even if you are an accountant, then you have absolutely no prospect of a career in a UK university business school or academic accounting department. Second, peer review ensures that this is the case. You must quote the opinions of those in authority, and approve them. If you do not your papers are not published. If you do not publish your career does not progress. The system has been set up to ensure that is the case. The neoliberal hegemony is enforced. Third, funding ensures that this is the case: far too many departments are dependent upon raising money from business or large firms of accountants. Their independence is, as a consequence, fundamentally threatened. Fourthly, and essentially, business wants to make sure that this is the case. It suits them very well have people like you placed in academic departments to suggest that people like me, who question the system, aren’t up to the task of preparing an academic paper. How convenient it is to question my credibility. But they, and you, miss the whole point. I’m not choosing to play that game. I’m questioning the whole system, and the UK’s business schools, in particular, exist for one reason and one reason only and that is to reinforce the neoliberal dogma which is destroying the capacity of UK business to think about anything but short-term trading. That is in turn destroying both our society, and by the destruction of the environment, the world at large.

I am, of course, open to comments but if they do not pass my peer review process they won’t be published.