Capital Gains Tax » Tax Research UK

India and Vodafone: a welcome case of substance over form

Sep 092010

In a welcome decision India’s courts have decided that the Indian tax authority does have the right to demand tax from Vodafone that it says that company should have withheld from Huthinson telecom when Vodafone bought Hutchinson’s Indian mobile phone network.

As the New York Times reports:

Indian tax authorities argued that Vodafone should have withheld capital gains taxes from the $11 billion it paid to Hutchison Whampoa for its 67 percent stake in Hutchison Essar, which is now known as Vodafone Essar, India’s third-biggest cellphone company by subscribers.

Indian officials contend tax is owed on the deal because the assets sold are based in India ‚Äî a position that the court affirmed on Wednesday ‚Äî and that Vodafone, as the buyer, was responsible for remitting the money to the government.

But Vodafone has maintained that no tax was owed on the transaction because it took place between offshore corporations ‚Äî Vodafone and Hutchison ‚Äî and the entity that was acquired was legally registered in the Cayman Islands.

The question was therefore one of substance over form.

The sale was of Indian assets. They were organised so that the entire transactions passed India by – which is obviously an abuse of the substance of the deal.

India has claimed the right to tax the deal – and I warmly welcome that. This is an act in pursuit of tax compliance – which is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The deal as legally constructed did not do that.

The case is not over yet – Vodafone can appeal – but with $2.6 billion at stake for India I sincerely hope they win out in the end. It will be an enormous step forward for developing countries.

And we should follow suit. Capital gains on UK based assets should be settled in the UK.

Isn’t that what I said George?

Budget, Capital Gains Tax, TUC Comments Off

Jun 212010

The Guardian reports that George Osborne said to Andrew Marr yesterday:

What’s controversial with some in my party is raising CGT. Here is a tax where at the moment we see massive income tax evasion, we see people shifting their income ‚Ä¶ and that’s not fair given the current situation, so we’ll deal with that.

George, have you been reading the TUC’s “Missing Billions”?

Or the TUC’s Capital Gains Tax report?

Because it sure as heck sounds like it.

Glad to know we’re on the same hymn sheet sometimes.

TUC calls for increase in Capital Gains Tax

Capital Gains Tax, TUC 1 Response »

Jun 182010

The Press Association has reported:

The TUC called for an increase in capital gains tax, claiming it was used by the rich to avoid paying their proper share of tax.

General secretary Brendan Barber said: "The vast majority of taxpayers never come into contact with capital gains tax as they are simply not wealthy enough to buy and sell the assets that bring capital gains. But most will find it incomprehensible that they pay more tax on the wages they earn from putting in a full day’s work than the wealthy do from sitting back and watching their assets increase in value."

The full TUC briefing on the need for an increase in Capital Gains Tax is available here and references official figures which clearly show that CGT is the ‘tax dodger’s tax of choice’:

33 per cent of all tax liable capital gains were held for less than a year.
As 60 per cent of all capital gains tax bills are paid by people with little or no income, and the poor do not have the wealth to purchase assets on which they can gain, the strong suspicion must be that assets are being transferred to non-earning spouses to take advantage of a second CGT allowance. It is quite reasonable therefore to think that half of all CGT bills are evidence of tax dodging.
Hedge fund and private equity managers are notorious for taking income as ‘carried interest’ on which they pay CGT – this is why they can pay less tax than their cleaners.
Capital Gains Tax is an ‘honesty box’ tax – the volume of trades in London shares suggest the CGT tax take should be significantly higher and that many capital gains go unreported to an understaffed HM Revenue and Customs (HMRC).

The TUC says that the Chancellor should increase CGT rates so that they are the same as income tax rates, and that the annual allowance for gains before tax is due should be cut from £10,100 to £2,000 a year as the Liberal Democrat manifesto proposed.

The TUC also says the Chancellor should crack down on abuse of the exemption for business sales. While there is a good case for treating people disposing of a business they have built up over many years as a special case, the current low 10 per cent rate for the first million pounds gain on a business asset is abused by hedge funds and private equity.

There also needs to be a major anti-avoidance and evasion programme with more tax inspectors and new requirements to register asset sales. Capital gains on any asset held for less than two years should be taxed under income tax rules, says the report.

With all of which I, unsurprisingly, agree.

Disclosure: for those who don’t know, I advise the TUC on tax issues

Pressure mounts on Treasury to bring back capital gains tax

Capital Gains Tax, Development Comments Off

Jun 072010

Business Daily: – Company Industry |Pressure mounts on Treasury to bring back capital gains tax.

No not in the UK – we already have one, albeit charged at the wrong rates and far too rarely on corporate gains – this is in Kenya:

The recent sale of multi-billion shilling Kenyan businesses without any revenues accruing to the government has sparked pressure for the reintroduction of capital gains tax – 25 years after it was suspended.

The tax – usually charged on profits from the sale of assets held for at least 12 months – was suspended in 1985 as part of measures to make Kenya more attractive to foreign direct investment, but tax experts now argue that it should be reintroduced to put the country in line with global trends.

Kenya also eliminated foreign exchange controls and allowed profit repatriation as part of the measures to make the economy more attractive to foreign capital but the conclusion of multi-billion shilling deals that left the government without a penny in revenues has raised eyebrows among ordinary Kenyans and raised a furore in high public offices.

“We are losing a lot of revenue by simply not taxing wealth made from capital gains leaving the working class to carry the country’s financial burden,” said Martin Kisuu, a tax expert and partner at audit firm PFK.

Mr Kisuu reckons that the suspension of capital gains tax to encourage investment has outlived its purpose and needs to be reintroduced to enhance equity in tax payment.

“We need to tax wealth such as capital gain to broaden the revenue base and nurture an equitable tax regime,” said Mr Kisuu.

And the article then goes on to recount losses amounting to hundreds of millions of dollars.

Good for PFK in that case for asking for change. Although I do wonder if they really meant PKF. Either way, if this is the profession doing the right thing in Africa it makes a very pleasant change to note that fact.

Perhaps the profession should take careful note of its duty in the UK to argue for a fair sharing of tax burdens and the removal of inappropriate reliefs.

But I can’t see it happening. Not yet.

Capital gains tax WILL raise extra money

Capital Gains Tax 9 Responses »

May 292010

Capital gains tax will not raise extra money, economists say – Telegraph.

The Telegraph reports:

The Adam Smith Institue, studing CGT changes in America from 1955 to 2006, has calculated that every time the rate was cut revenues went up, and every time.

Now I wonder why they looked at the USA when the proposal being made here is that CGT be changed so that it is paid at the taxpayers highest marginal income tax rate.

Nigel Lawson did that in 1988. As a result we have a case study on whether it worked or not reasdilty available.

The stats are here.

The yield rose by 68%.

Odd that the Adam Smith Institute didn’t spot that.

And odd that a body that campaigns against tax should so vigorously oppose an increase that they say will not increase yield.

Could it be that the ASI aren’t letting on to what they really know?

CGT rise is NOT the first big test for Cameron coalition

Capital Gains Tax, Conservatives 3 Responses »

May 282010

FT.com / UK / Politics & policy – CGT rise first big test for Cameron coalition .

Get a grip over at the FT, I suggest.

To claim that “CGT rise first big test for Cameron coalition” is ludicrous.

The world economy falling apart all around it whilst the ConDems put in place policies designed to ensure we have a depression in the UK will be the first BIG test for the coalition.

CGT is a minor spat in comparison.

One they have to win, of course.

But let’s keep a sense of perspective. Tax due on second homes is a non-issue compared to the devastation of millions of lives – which is what the ConDems are promising.

Vodafone lose in India: you can use a tax haven, but you can’t hide there is the message

Capital Gains Tax 3 Responses »

Dec 042008

The FT has reported that:

The Mumbai High Court on Wednesday dismissed a challenge by Vodafone against a $2bn tax [charge]. Vodafone had challenged whether Indian tax authorities had the right to assess the tax on the UK group’s $11bn acquisition of a local mobile company, Hutchison Essar. In February last year, Vodafone bought a 67 per cent stake in Hutchison Essar from Hutchison of Hong Kong. India’s tax department argued that even though Vodafone was the buyer and Hutchison was the seller, the UK group should have withheld an estimated $2bn of capital gains tax on the deal on the government’s behalf.

Vodafone countered by saying the sale of shares took place between foreign companies, which under past practice would normally have exempted the transaction from taxation in India. Under the Hutchison Essar sale, a Dutch company controlled by Vodafone paid the $11bn to a Cayman Island entity run by Hutchison, for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator.

The substance of this issue is, of course, simple in essence. An asset whose value was created in India by the existence of Indian customers (because no business has value without customers) should, when sold, in the eyes of the Indian tax authorities give rise to a capital gain chargeable in India. It seems an entirely reasonable proposition, and one that Hutchison clearly tried to avoid through the use of an offshore structure, a process in which Vodafone were quite obviously a willing participant or the deal could not have been structured in that way.

India has chosen to strike back. Hutchison has gone, but Vodafone owns a continuing asset within India, and India has therefore say that Vodafone should have ensured that the tax liability was paid by withholding the likely liability from Hutchison and accounting for it to the Indian tax authorities.

There are many nuances to this, I am aware, one of which is whether the relevant legislation was in place to require Vodafone to do this at the time, albeit that it definitely is now. But the point of principle is the issue that concerns me, and that is that India is saying that capital gains can be taxed on the source or arising basis in the jurisdiction where the asset which gives rise to the value is located, whatever the legal form of the entity in which it is wrapped for transactional purposes and where ever that legal form of transfer takes place.

I warmly welcome India’s approach. I sincerely hope it is adopted elsewhere. It would have profound implications of the private equity business and hedge funds, for a start.

Why Low Capital Gains Rates Punish Family Business Ownership

Capital Gains Tax Comments Off

Jun 242008

This is from the States again, but is another article that translates well:

The hoariest of tax chestnuts is that capital gains need to be taxed at a lower rate than labor to encourage capital formation and grow the economy. Because US economic growth depends on the growth of family businesses and entrepreneurs, rather than international corporations whose stock is publicly-traded, lowering capital gains threatens economic growth not enhances it. Low capital gains rates lower the cost of capital for international corporations by raising the price of publicly-traded stocks. Family business owners and entrepreneurs rely on bank financing to start and usually finance growth from their earnings. Under current law, however, grocery store owners, for example, would pay a 35% income tax on any profits from reinvesting in their own businesses, but only a 15% tax if they invested in one of their large public company competitors like Walmart or Target. This shows the failure of the current tax system.

I know that small enterprises in the UK do enjoy the lowest capital gains tax rates, but that rate only applies at the point of sale. Very few small businesses are created with a sale in mind. It is a distortion resulting from the involvement of private equity in this market that has given rise to the notion that every entrepreneur starts their business with an exit route in mind.

Most are unincorporated and pay tax at rates of up to 40%. Capital gains derived from sharedealing are taxed at 18%.

As has been pointed out in the US article noted above, this makes no sense and must mean that capital is misallocated to sharedealing when it would be better used promoting small business.

That’s another good reason why capital gains should be charged at income-tax rates.

How to pay for the 10p tax rate clawback

Capital Gains Tax, Tax avoidance, Tax compliance, Tax evasion, Tax management 6 Responses »

May 122008

I have been asked this question yet again today. I have a five step plan:

1) Increase the tax threshold at which tax is paid by £1,000 for everyone. For most people this will reduce their tax liability by £200 – the value that (near enough) the 10p band gave them;

2) Reduce the standard rate band by £1,000. This will increase the tax take for those on higher rate by £200. This will leave them no better or worse off by these changes. That’s fair. This is not meant to effect them, but will save more than £2 billion in tax.

3) Ensure all capital gains made on disposals of assets held for less than a year are subjected to income tax without offset of the CGT allowance. This might easily raise £1 billion: I suspect rather more since I have shown in the Missing Billions that 17% of all capital disposals are of assets held for less than a year;

4) Deem that all asset sales by a spouse or civil partner who received the asset as a gift from their spouse/partner in the year preceding sale are treated as being disposals by then original owner to stop gains shifting between partners. I suspect this will raise more than £0.5 billion.

5) Ensure that every stock broker in the UK has to automatically supply data on share sales made by a UK resident person to HMRC. At present share sales of little more than £5 billion a year are reported to HMRC, which is implausible when more than £250 billion of shares are held by UK resident individuals. Automatic reporting would massively increase capital gains compliance. I suspect more than enough would be raised to pay for the cut in income tax for all taxpayers now on the basic rate band, costing about £4 billion a year.

It’s radical, simple and progressive. It’s what the Labour Party should be doing. I suspect someone else will propose it.