2011 December » Tax Research UK

A corporation tax is an essential part of any tax system

Corporation Tax, Economics, Tax justice, Uncategorized 12 Responses »

Dec 192011

There are occasions when even Guardian economists can prove just how closely wedded to the blackboard and how out of touch with reality they are. Phillip Inman did so this afternoon when writing about corporation tax. He said this afternoon:

Soon there will be no such thing as corporation tax. Among the first items on the shopping list of reforms outlined by Spain’s new prime minister Mariano Rajoy on Monday is a cut in the main business tax.

He said more firms would enjoy a 20% rate as a central plank of his mission to make Spain more business friendly.

And from this Phillip moved on to argue:

The TUC and tax campaigner Richard Murphy’s groundbreaking 2008 report The Missing Billions: The UK Tax Gap (pdf), found a £12.5bn difference between what companies should have paid in corporation tax annually and what they really paid.

Some on the left argue, as the TUC did, that government’s should play hardball with companies and make them pay the full charge.

But not only is that a forlorn task against the run of play (when governments across Europe are reducing corporation tax rates), it is wrong headed.

We need to generate taxes to fund social welfare and for that we need to redraw the tax map. I subscribe to the OECD’s recipe for reform. Despite the Paris think tank’s reputation for rightwing, pro-capitalist reforms, in this case it is pretty even-handed.

It would reduce all taxes on income and increase taxes on spending and wealth.

As he continues:

Unfortunately, the proposal leaves most leftists gasping for air. What do you say when a proposal slays the sacred cows you hold dear, but also slays those of the opposition.

The left loses a tax on businesses, and must suffer the regressive nature of high consumption taxes. On the other hand, workers pay less tax and crucially, the owners of wealth, be they rich individuals or corporations, must pay a new tax on their holdings.

The OECD, like most economists I speak to across Europe, subscribes to a tax on land as the simplest and fairest tax on wealth.

He tries to justify his position:

The shift has many positive benefits. They key must be to unlock a desire for work by cutting taxes on incomes. At the moment we lock families into static or falling living standards, partly through the interaction to income tax, tax credits and benefits.

Consumption taxes rise, but there is evidence that skewing VAT away from food to luxuries makes it much less regressive. Land taxes would discourage the wealthy from hoarding land without doing something with it (planning rules permitting). If they want to live in expensive areas of the country or base their businesses in the south-east, then there would be a significant tax charge for doing so, and one they cannot dodge with elaborate schemes or offshore trusts.

Rajoy is, like most rightwing politicians, only tacking one side of the equation. The left should argue the logic of the right’s position on income taxes with demands for taxes on wealth.

We do argue for a wealth tax Phillip, we do. But we do so based on our understanding of the real world, which is what Inman’s suggestion so clearly lacks.

Let’s just address one very obvious problem. About 700 companies pay more than half of all corporation tax in the UK. Details of the £42 billion paid in 2010/11 are here. But this misses the fact that maybe £12 billion is paid by small business - who should also, as I have shown, be liable for much more if only this tax were not so heavily evaded. Inman says we should have no corporation tax but a tax on wealth instead. How is he going to address the taxation of 1 million or probably more small businesses as a result? And how will he stop everyone forming companies to avoid tax henceforth? The naivety of suggesting the abolition of corporation tax to create this potential tax chaos is staggering. The back hole in government finances would be enormous.

Let’s take a second issue. We would lose £42 billion from corporation tax. Inman suggests we recover this from VAT or wealth taxes. First, Inman suggests we skew VAT from food to luxuries. We already zero rate food. That shows how much he knows about that: precisely nothing by the look of it. Secondly, perhaps he does not realise there is no EU provision right now for a luxury wealth rate of VAT – although I would prefer one. So, to recover his VAT we’d need not a VAT rate of at least 28% based on this year’s forecast yield of £100 billion. That’s going to help inflation, isn’t it Phillip? And boost the economy a lot, isn’t it? Whilst of course creating no labour market distortions, at all. Nor will it create any benefits re-rating issues whatsoever, of course. And let’s ignore for a moment the impact on those on pay freezes. The proposal should make every right thinking person shrink in horror. How come Inman thought of none of these issues?

And can we just ignore the suggestion that income tax rates will fall? How does cutting a whole tax raising £42 billion mean income tax rates fall? That’s just fantasy. Making up the deficit will be enough of a challenge. Other cuts is just a ludicrous claim.

As is the argument for a wealth tax. I agree with these. Fundamentally. Completely. I want them. But there are some conditions. Like securing the data to assess them. And whilst we have tax havens that let anyone hide their wealth in offshore companies – which are tax free entities that no authority asks questions about – the chance of collecting wealth taxes is about zero percent. Of course I want to shatter that secrecy but suggesting a wealth tax without mentioning that pre-condition is plain absurd.

As for taxing land. Yes, I agree: that has to be done too. But there’s an issue Phillip. It’s called cash flow in the first instance. Is it reasonable to charge tax when there is no means to pay it? This is the perennial argument with taxing land. How are you going to overcome it? No mention is made? And then there are other problems you ignore. Like finding the owner. Not all land is registered, and much is registered offshore. How do you overcome that? And last, but by no means least – land (despite the Georgists’s claim) is not the sole source of wealth. Cash generating assets are as well, very much so, but it seems Inman wants to ignore them.

I could go on, but won’t. I want radical reform of taxation. But I also want a tax system that works. I find those like Phillip Inman who’re still wedded to the old theories of economics and who have had no real encounter with the real world of tax where the problem of extracting payment is the number one priority putting forward ideas that are barking mad on a blackboard and economic insanity in the real world profoundly annoying. Even if they do work for the Guardian. Especially when they can only increase the wealth gap in society and the opprtunities for tax evasion that corrode social justice.

Inman owes the Guardian and its readers an apology.

Are Vodafone being just a little defensive?

HMRC 24 Responses »

Dec 192011

As I’ve mentioned, the Parliamentary Accounts Committee is reporting on HMRC tomorrow - focusing in no small part on its deal with Vodafone. Yesterday in the Telegraph Vodafone put in a pre-emptive response, saying:

“The Vodafone/HMRC settlement was focused on some of the most complex tax legislation anywhere in the world. It involved nine years of legal argument through two independent UK tax authority appeals, three court cases – before the European Court of Justice, the UK High Court and Court of Appeal – followed by an application to the UK Supreme Court.” He said this was then followed by “a full and rigorous six-month technical and legal review by HMRC”, leading to the final £1.25bn settlement. “Vodafone has no unpaid tax bill in the UK and those who claim otherwise do so without any foundation whatsoever.”

Now of course the last statement is true: the matter has been settled by negotiation and no one is saying anything else. But the Vodafone statement is a little light on detail. First, Vodafone lost the case. They paid £1.25 billion. They paid because they had sought to avoid tax and did not in the end do so.

Second, the statement doesn’t note that Vodafone fought this for nine years and lost. Indeed, as I understand it at the time of settlement Vodafone’s application for permission to appeal to the House of Lords (or Supreme Court) following HMRC’s victory in the Court of Appeal had been rejected. That’s how emphatically HMRC was winning the case.

Third, there seems to be no recognition of that fact that despite this meaning that Vodafone had no further right of appeal a strange deal was done. Now nothing suggests impropriety on Vodafone’s part as a result. I stress that. But it sure as heck suggests something very odd at HMRC, and that’s the focus for the attention. That and the fact that, without doubt, Vodafone were trying to avoid tax. Which makes you wonder why they’re so coy at admitting it when they seem to think it’s their duty to shareholders to do so.

The pressure builds on HMRC as the Parliamentary Accounts Committee report is due to tomorrow

HMRC 3 Responses »

Dec 192011

The Parliamentary Accounts Committee has been investigating the work of H M Revenue & Customs. It has been assisted in its work by HMRC lawyer Osita Mba who decided to tell them the truth about what was happening in his department and the legality of certain claims made by its management. Their report is due tomorrow, and is likely to be highly significant. As the Telegraph reported yesterday:

The National Audit Office (NAO) is poised to investigate “sweetheart” corporate tax deals agreed by HM Revenue and Customs that are alleged to have cut companies’ bills by billions of pounds. It is thought the NAO could examine up to 10 tax deals involving large corporates. Its investigation, which will be led by a judge, will follow this week’s highly critical report from the Public Accounts Committee (PAC) into agreements struck between HMRC and companies to settle tax disputes.

Tuesday’s report centres on agreements made by Dave Hartnett, HMRC’s permanent secretary for tax, with Goldman Sachs and Vodafone – though PAC hearings found two undisclosed companies had also struck similar settlements. Owing to a “mistake” admitted by HMRC, Goldman ended up paying at least £10m less tax than was due on bonus payments. Vodafone settled a long-running dispute for £1.25bn but the PAC heard allegations that the bill should have been £6bn or more.

It’s going to be a fun report. But let’s also be clear what they are calling for: they’re saying we need a tax authority run by a tax authority that believes in tax, the rule of law and the right of the state to recover what’s due to it. The sort of tax authority a Courageous State would run.

The average rate of return on shares in London in the last 10 years is MINUS 0.1% – so why are pensions invested in them?

Economics, Pensions 15 Responses »

Dec 192011

The Observer noted yesterday that:

Highly paid City traders are depriving pensioners and savers of thousands of pounds through high management fees that are often hidden, according to leaked advice provided by consultants to the Treasury. The charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.

This is just about inevitable. Referring to a City of London publication on the equities market, produced in October 2011, shows that the average rates of return on equities have been as follows:

Pension saving is long term. Over the long term the returns, expect in the small German market and even smaller Swiss market, have been negative. Globally they are 0.5%. Annual pension charges are at least 1.5% in most funds. After dealing costs absorb returns they rise well above that.

As I have argued in People’s Pensions in 2003 and more recently in Making Pensions Work, investing pension money n equities did not in 2003 and still does not now make any sense at all. Losses are virtually guaranteed and the City rakes off billions – in my estimate up to £30 billion a year from pension funds – for the privilege of losing it for the ordinary people of this country. This is blatantly capturing the benefit of the common good of pensions for the benefit of a few. No wonder, as I showed in Making Pensions Work, that this industry is incapable of generating any returns at all to pay pensions - which is why all pensions in this country are currently effectively paid for by the state when the cost of pension tax relief is taken into account.

The disaster is that in 2013 millions more people will be compelled to throw money at the City each month. The National Employment Savings Trust – designed in 2006 in another economic era – is intended to force low paid employees to give 4% of their earnings to the City to lose for them month in and month out from 2013 onwards. This will be a disaster for the economy where enforced savings is currently the last thing we want, and it will be a disaster for these savers.

I have met this fund and they refused to consider the alternative of a fund invested in infrastructure as I have proposed. Conventional wisdom has to be followed they say. Which means that these people will be ripped off as are almost all pensioners now, and all to benefit the 1% in the City.

When will we stop this pensions madness?

Making Pensions Work lays out the alternatives.

Blair in Cayman to support KPMG – just the perfect fit!

Cayman, KPMG Comments Off

Dec 192011

The Telegraph reported this weekend that Tony Blair was in Cayman recently to speak at a dinner celebrating the KPMG Legends Tennis Championships.

KPMG, the Cayman Islands and Tony Blair.

Made for each other.

PS They are his accountants.

The City of London – waging economic warfare on Europe and the 99%

Banking, Tax avoidance 17 Responses »

Dec 182011

My friend and now Task Force on Financial Integrity and Economic Development colleague Nick Mathiason also works for the Bureau of Investigative Journalism where he has exposed a new type of tax avoidance activity centred on the City of London today. As he wrote today in a story that also featured in the Observer:

Some of the city of London’s biggest banks are behind a huge tax avoidance trade ‘cheating’ European countries of hundreds of millions of euros a year in a development that sheds fresh light on David Cameron’s decision to wield Britain’s EU veto to protect the Square Mile.

A two-month study by the Bureau has uncovered a discreet $102bn market in European shares whose ‘central’ purpose is tax avoidance. The Bureau’s analysis suggests the European tax loss – mainly to France, Germany and Italy – is up to €595m a year. The scale of tax avoidance will fuel further anger within the EU towards the Square Mile, where the vast majority of the trade known as dividend arbitrage is conducted.

The number, like all such numbers, is an estimate. The point is it’s happening. And London’s arranging it. And UK banks are doing it. And David Cameron’s defending it. As Nick notes:

Dividend arbitrage is complex. But at its heart, a bank or hedge fund lends equities in often high yielding French, German or Italian companies to another institution. The receiving institution then passes the equities through a network of low or no tax jurisdictions before returning the equities to the original owner using a subsidiary in another tax haven. In this way, banks can avoid the 15% average withholding tax levied on dividends in European countries.

For hedge funds based in the Cayman Islands or Bermuda, the trade is particularly useful in slashing tax bills.

There had, of course, to be a tax haven dimension. There always is in London. And a Swiss dimension too. As Nick again notes:

Credit Suisse, the giant Swiss financial services institution, is among a host of international banks and hedge funds involved. The Bureau has seen a Credit Suisse document that details how to implement dividend arbitrage strategies and has received confirmation from a senior derivative executive that the bank was an active participant. When asked whether Credit Suisse engaged in aggressive tax avoidance, the bank declined to comment. Among other banks said by City sources to be major dividend arbitrage players are Barclays Capital, Bank of America and Morgan Stanley. All declined to comment.

There are more details in the article. The key point though is a simple one. The culture of abuse in london has not been broken: indeed, it is flourishing and whilst it is Europe is right to believe London is profiting at its expense as London positively seeks to undermine its claims to tax arising in EU states – who lose most heavily from this arbitrage.

And this has to endif a new economic order that is stable and sustainable is to be built.

It’s as simple as that.

What’s the right word for whistle blowing?

Ethics 25 Responses »

Dec 172011

I retweeted a comment from an associate of mine from many years ago – chartered accountant Richard Morgan @richardDmorgan – yesterday. He said:

@RichardJMurphy. #OsitaMba. Whistleblower – on a par with snitch. New word needed for an honest person with moral compass & conscience.

He’s right. Osita Mba – the HMRC ‘whistleblower’ clearly does not deserve that title. As Osita’s wife said in response:

@RichardJMurphy hear hear! ‘leak’, ‘mole’ also negative words. Make it seem like underhand actions. shouldn’t apply to#whistleblowers

She’s right too.

But maybe it’s just that I’m tired, but I can’t think of a better term as yet.

Any suggestion?

Tax evasion is a case where the threat of prison works

Tax evasion, Uncategorized, USA 11 Responses »

Dec 162011

Reuter’s Purlitzer prize winning journalist David Cay Johnston has written on my work for the Tax Justice Network on worldwide tax evasion. That work estimated a total loss to tax evasion of US$3.1 trillion world wide. The review included an excellent graphic of the top-10 countries by amount of tax evasion, set up against the size of their informal economies:

As David Cay Johnston writes:

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

This graph demonstrates quite well that developed countries are not insulated from the harms of tax evasion. They are losing important revenue right up alongside the largest developing economies.

But the sting was in the tail of the piece, and refers to comparisons between these figures and banking fraud in the USA:

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.

I think that demand appropriate.

But it would be as appropriate to call for more tax fraud prosecutions too. It is the threat of prison that stops tax fraud; nothing much else does, especially with professional advisers. It’s time to get tough.