Tax Research UK

The collapse of the Dunfermline Building Society proves:

1. The urgent need for a Glass Steagall Act in the UK to enforce a split between routine banking based on deposit taking and speculative activity. It was speculative activity in buying second-hand mortgages and in property related speculation that seems to have brought this building society down.
2. The urgent need for a People’s Bank in the UK. Please support the campaign.
3. The need for action to bring directors of how organisations, including banning them from being directors of other organisations for considerable periods of time. I watched with absolute astonishment the CEO of this failed building society blaming the government for its failure on Sunday night. He ruined this building society. Having imposed a cost of more than £1 billion in all likelihood upon the state he should never be allowed to direct another company in the UK again.
4. The weaknesses in the Turner report. I do not think that Turner would have stopped this abuse.

When will we learn the lesson?

When will we stop a tiny minority of people acting in pursuit of their own greed from abusing the common property of millions of other people, and the taxpayer?

Where, apart from Vince Cable, is the politician in a position of serious authority with the nerve to say this?

Richard Murphy Banking, Code of Conduct, Corruption, Regulation

I drafted the Tax Justice Network and Association for Accountancy and Business Affairs Code of Conduct on taxation. This is available here.

The actual Code is just two pages long and reads as follows:

A Code of Conduct for Taxation

Objective

This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.

Scope

This Code applies to:

1. Governments and their agencies in their role as tax legislators, assessors and collectors;
2. Taxpayers, whether individuals, corporate bodies or otherwise;
3. Tax agents, whether they are undertaking tax planning or assisting with tax compliance.

Application

It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.

The Code

The Code is divided under six sections, each of which includes three statements of principle.

1. Government

a. The intention of legislation is clear and a General Anti-Avoidance Principle (‘Gantip’) is in use;

b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.

2. Accounting

a. Transparent recording of the structure of all taxable entities is available on public record;

b. The accounts of all material entities are available on public record;

c. Taxable transactions are recorded where their economic benefit can be best determined to arise.

3. Planning

a. Tax planning seeks to comply with the spirit as well as the letter of the law;

b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

c. No steps are put into a transaction solely or mainly to secure a tax advantage.

4. Reporting

a. Tax planning will be consistently disclosed to all tax authorities affected by it;

b. Data on a transaction will be consistently reported to all tax authorities affected by it;

c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5. Management

a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.

b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

c. Taxpayers will settle all obligations due by them at the time they are due for payment.

6. Accountability

a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;

b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:

c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.

Enforcement

States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.

Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.

Richard Murphy Accounting, Banking, Code of Conduct, Economics, Ethics, Tax avoidance

I’d draw attention to some articles I wrote about Barclays.

All suggestion the legal and ethical underpinning that could make a Banking Code on tax viable.

These dealt with the need for a change in the way the law on tax is interpreted. I argue we do not need to be constrained by 19th century thinking. 

We also need a general anti-avoidance principle.

Lastly, we need a robust and public code for all companies, and government. I have drafted such a Code for the Tax Justice Network and for the Association for Accountancy and Business Affairs in 2007. This is available here.

And before you dismiss the thinking I’d advise you that those drafting the Banking Code are familiar with what I think – I’ve presented this stuff to them at their request. They have copies.

Richard Murphy Banking, Code of Conduct, Ethics

It’s G20 week. Many hopes have been pinned on it. Many – depressingly- hope it will fail. The braggers will be out i force later this week saying it has not delivered.

And of course it won’t deliver all I want. No politician could deliver all I want yet. But as I’ve said time and again to cameras from around the world (and will again, at lest three time today) we’re in the opening bars of the overture in the new saga of overseas regulation – and it’s performed in at last three acts. It will be some time before the Fat Lady sings. I’ll be in this game to the end.

But I’d also caution those who think that the G20 is the end to look around them. The signs of change are everywhere. I’ll be drawing attention to to some of them over the next week or so, but let’s start with one highly significant one. The FT has said this morning:

Banks operating in Britain will be banned from using tax havens if they sign up to a draft code of practice drawn up by the government to address a row over their aggressive tax planning.

The draft, which also gives the tax authorities the final say over whether they consider a deal to be avoidance, is more radical than businesses expected when it was announced by Alistair Darling last month.

As it notes:

Some senior bankers who have seen the draft code, to be published in next month’s Budget, have been alarmed by its emphasis on paying tax in accordance with the “spirit as well as the letter of the law”, a subjective concept that would alter fundamentally the balance of power between banks and Revenue & Customs.

And then we get the usual suspects defending the status quo – which is destroying prospects for life, let alone a decent life in the developing world. I name the lawyers:

In recent weeks, corporate lawyers have fought back against the perception that the use of tax havens is inherently suspect, arguing they are valuable for their tax neutrality and for the ability to sidestep irrelevant complications in the tax code. Miles Walton, a partner of Allen & Overy, a law firm, said they “played a helpful and beneficial part in the world of international finance and investments”.

And I name Oxford University Centre for Business Taxation:

But the attempt to invoke the spirit of the law has shocked some legal experts. Judith Freedman, a professor of tax law at Oxford University, said: “There is a fundamental issue here about the rule of law in how we attempt to control the behaviour of taxpayers. It is whether we use legislation or whether we use the discretion of unelected officials.”

And the Tories

Baroness Noakes, shadow Treasury spokesman, said last week that the complexity of the tax code meant it was difficult to identify its spirit.

“I believe that taxation needs to be imposed by clear law,” she said.

These are the dinosaurs. On this one I’m with Paul Myners

Lord Myners, City minister, told the House of Lords this week that tax avoidance was a moral issue: “We can no longer hide behind the excuse that there is no acceptable definition of avoidance.”

The code defines tax avoidance as any outcome which could “reasonably be expected to be unintended by parliament or tax authorities” in a move likely to infuriate businesses.

Don’t doubt it: this Code should infuriate business. That reflects what needs to happen. Abuse has to end. Banks have to pay tax. Developing countries must collect the tax they are owed. Redistribution of wealth to the poor must happen within and between economies. Justice must be done. And it will be.

My suggestion is simple: sign or lose your banking licence. It is possible. Don’t doubt it.

Richard Murphy Accounting, Banking, Code of Conduct, Ethics, Tax avoidance

I’ve been discussing how to tackle Barclays Bank’s tax abuse. I’ve suggested we need a change in the way we interpret tax law. This would create a purposive approach to the interpretation of tax law.  If this were done then a key component in any system promoting tax compliance should be a General Anti-Avoidance Principle as a central component part of taxation law.

It is stressed that a principle and not a rule should be used: a rule pre-supposes a legal interpretation of statute; a principle an equitable construction.

The idea behind a General Anti-Avoidance Principle is simple: if a step is added to a transaction with the sole or principal aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored for tax purposes. In other words, it tackles pre-meditated attempts to subvert the intention of the tax system and is consistent with the management approach towards the regulation of taxation proposed here. Barclays has, of course, undertaken very heavily pre-meditated tax avoidance activity with almost every step in the transactions undertaken being there solely for the purpose of saving tax.

I suggest that once enacted  a General Anti-Avoidance Principle (now generally called a “GAntiP”)[1] would be applied to all tax decisions taken thereafter. This is not a case where transitional arrangements would apply.

There is another advantage: a GAntiP allows a government to pass purposive legislation. This is legislation that states the intention of the law that is being created and devolves responsibility for the detailed rules that actually make it work to the status of regulations. This offers a number of advantages:

1. Few politicians fully understand the details of the laws that they are asked to pass; it is much more likely that they will understand and be able to discuss purposive taxation law;
2. The purpose of law will be clearer: taxpayers will have greater chance of understanding and complying with the law;
3. The detail of regulation can be devolved to those with appropriate expertise;
4. Appeal arrangements are needed to ensure that those who claim that regulation does not accord with the purposive legislation can be heard, and can have the claimed conflict ruled upon. This is a necessary judicial over-ride for the administrative function of the State which is almost always responsible for the detail of tax legislation;
5. Where a government intends to use legislation or regulation in a way that was not anticipated it will be obvious, and appeals should succeed. There will, therefore be greater obligation on governments to disclosure their intent as to how they propose to use the legislation available to them and to not subsequently change it, which should increase certainty for taxpayers.

The result will be simpler, and better, law.

In combination a Gantip, purposive legislation, equitable interpretation of the law, and a clear framework of the responsibilities of all parties that a Code of Conduct implies, provides the following benefits:

1. Clarity as to the purpose of the law;

2. The opportunity to adopt a management based approach to taxation, overcoming the almost insurmountable difficulties in determining the difference between tax evasion, avoidance and compliance;

3. An enhanced prospect of practical compliance with legislation designed to achieve that purpose;

4. A fairer method for appraising culpability when errors occur;

5. The chance for a taxpayer to object to inappropriate regulation through use of the Court system;

6. Greater certainty within any tax system.

It is these benefits that our proposed Code of Conduct is intended to promote.

As usefully, such a programme would stop the likes of Barclays undertaking their repugnant activities, and that is essential. .

[1] See Freedman, J 2004. “Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle” available in British Tax Review 332 http://denning.law.ox.ac.uk/tax/BTR_version_inaugural_lecture.pdf accessed 21.12.06

Richard Murphy Accounting, Barclays, Code of Conduct, Ethics, Regulation, Tax avoidance, Tax management

I have suggested there is much we can do to tackle the abuse that Barclays is perpetrating.

One thing we can do is promote a Code of Conduct for Taxation in the UK. This would not be the weak customer service agreement that HM Revenue & Customs are currently proposing under pressure from the professions through the Chartered Institute of Tax which will then be used as the basis for claiming compensation from them and which serves no identifiable public purpose. It should instead be a robust Code demanding significant standards of achievement from all parties.

I have drafted such a Code for the Tax Justice Network and for the Association for Accountancy and Business Affairs in 2007. This is available here. The actual Code is just two pages long and reads as follows:

A Code of Conduct for Taxation

Objective

This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.

Scope

This Code applies to:

1. Governments and their agencies in their role as tax legislators, assessors and collectors;
2. Taxpayers, whether individuals, corporate bodies or otherwise;
3. Tax agents, whether they are undertaking tax planning or assisting with tax compliance.

Application

It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.

The Code

The Code is divided under six sections, each of which includes three statements of principle.

1. Government

a. The intention of legislation is clear and a General Anti-Avoidance Principle (‘Gantip’) is in use;

b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.

2. Accounting

a. Transparent recording of the structure of all taxable entities is available on public record;

b. The accounts of all material entities are available on public record;

c. Taxable transactions are recorded where their economic benefit can be best determined to arise.

3. Planning

a. Tax planning seeks to comply with the spirit as well as the letter of the law;

b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

c. No steps are put into a transaction solely or mainly to secure a tax advantage.

4. Reporting

a. Tax planning will be consistently disclosed to all tax authorities affected by it;

b. Data on a transaction will be consistently reported to all tax authorities affected by it;

c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5. Management

a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.

b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

c. Taxpayers will settle all obligations due by them at the time they are due for payment.

6. Accountability

a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;

b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:

c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.

Enforcement

States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.

Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.

You will notice that this Code is as tough on government as it is on taxpayers: we need to demand an improvement in standards all round.

But I suspect that Barclays have failed all of sections 2, 3 and 4. They should have suffered penalty as a result. That is the intention of this Code. It meant to separate the sheep from the wolves and then punish the wolves.

I’m happy to be a sheep on this occasion.

Richard Murphy Accounting, Barclays, Code of Conduct, Regulation, Tax Havens, Tax management

Tax compliance is paying 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 transaction and the form in which it is reported for taxation purposes coincide.

There’s not one comment I have read on Merrill Lynch booking its US subprime losses in London that thinks it is tax compliant.

But we have no apparent mechanism to tackle it because as long as they have got the legal form right, in which case the economic substance does not matter.

That’s ludicrous.

There’s another thing: country by country reporting would help highlight this sort of abuse.

We need radical tax and accounting reform is we’re not to be taken for a ride.

And remember: Merrill Lynch is going to cost a lot more than Northern Rock now.

Richard Murphy Accounting, Code of Conduct, Corporation Tax, Tax avoidance, Tax management

The committee set up by Alastair Darling to consider the future of corporation tax, and in particular the taxation of foreign profits, meets for the first time on Monday 9 June even though the consultation paper that gave rise to the furore that caused its establishment has now been withdrawn.

I admit that this means that if I was on the committee I would now be proposing one thing, which is that the committee should also be put on hold whilst it is reconstituted to include a rather broader representation of interested parties, including the professions, small business and civil society, all of which are excluded right now. But I can’t see that happening and in that case it’s worth thinking about what this committee should be addressing, and doing.

The first point to make is the glaringly obvious one that in the real economy the UK does not compete on tax. Companies don’t leave the UK as such when they go for what they claim are tax reasons. The evidence is that they are moving HQs and related finance and intellectual property functions out of the UK and into the unreal economies of those tax havens called Jersey and Ireland. But they stay firmly in the real UK economy with regard to selling, manufacturing, having people on the ground, doing R & D and so on. They do remain present, therefore.

In that case the foreign taxes debate is an artificial one: the fact is that the existing arrangements for taxing foreign profits raise little for the UK and we know it. The argument is not therefore how to tax foreign profits. What is more, in truth, we should have no claim to foreign profits. We would, I think, prefer that tax was paid on those to the government to whom they are due. That seems fair and appropriate. We should not be purloining what is not ours.

Instead the terms of this debate should actually be about how to make sure that tax is paid in the UK on what companies earn in the UK, and that what is earned in the UK is not taken out of the UK. This will remain an issue whatever arrangement arises on foreign profit, and whether or not the likes of Shire and UBM have Irish tax residence or not. Unless this is appreciated all else that is discussed is irrelevant.

The key issues for debate then relate to why the UK does not collect what it expects is due to it, as is too obviously the case. There are a range of issues here where policy initiatives would radically help the UK protect its tax base in the interest of all its residents (and that seems to me to be the basic duty of the UK government). These are

1) The overly generous UK tax treatment of interest paid where interest is tax relieved in the UK even if used in a foreign enterprise owned by a group has to go. This is simply using the UK tax system to subsidise foreign operations, and that is absurd.We should only give tax relief for funds used to finance UK activity. Of course there are problems of definition that result from this e.g. is buying an overseas subsidiary a UK activity or a foreign activity? I accept that. But it’s universally agreed that our system is more generous than most in the world and we clearly need to review this and develop an unambiguous and robust strategy for changing this rule in the near future.

2) We need to commit to cooperation on bolstering the tax base. So we must work with the EU on the CCCTB and on moving towards methods of unitary apportionment of profits. We must fully commit to methods of stopping tax abuse: for example we should support measures to ensure that companies are brought within the scope of the EU Savings Tax Directive to ensure that information is automatically exchanged on financial earnings of companies earning funds in locations in which they are not resident. At HMRC level I think there is good cooperation on tax: at Treasury level there is resistance. This has to end.

3) We need to know where companies are, and what they are doing in each location in which they operate. This is vital. The UK must back a call for Country-by- Country accounting which can provide enormous benefits by showing just what global companies are doing, and so make them accountable. This accountability of corporations to countries is absent now, and some are claiming it does not exist. That is not true. This is a way of reclaiming it. And it will help show who is, and who is not, paying their taxes, and where. Philosophically this is vital to this process. The argument that capital can roam unfettered and feckless around the world has to be challenged.

4) We need a general anti-avoidance provision in UK law to provide the flexibility to kill the more esoteric forms of tax planning as they happen, and not retrospectively. TJN has proposed this and a change to the way we interpret tax law to use an equitable basis of interpretation so that the will of parliament is respected (as it should be). We’re not alone though. So has Prof Judith Freedman at Oxford University.

5) We need to strengthen transfer pricing provisions on payments to offshore if it cannot be demonstrated that the IPR located there was generated in the place to which payment is made. This is key: IPR is not created offshore, it is relocated there. If IPR cannot be shown to have arisen to the place in which payment is to be made then as a matter of course the UK should not allow tax relief on the payment being made.

6) We need research to be done on the use of formulaic apportionment as either the basis for UK corporation tax, or as the basis for an alternative minimum tax to stop excessive tax avoidance. Mike Devereux at Oxford has shown that the UK will be 8% better off as a result of using formulaic apportionment. This must stimulate more work.

This is just an opening agenda of necessary tax and other ideas that should be pursued. But I stress in suggesting them: we’re not fighting to artificially keep companies here. We win real jobs, real opportunity and real profit by having great infrastructure and well educated people, largely paid for by tax. Our job is to make sure that corporate profits earned here are taxed here and we should leave these corporate profits really earned elsewhere to be taxed in those places. The loss of jobs from HQ relocation will be tiny when purely tax driven, as UBM and Shire have shown. The issue is therefore about UK tax and not artificial relocations.

One final vote winner though: corporation tax should be reformed so that small companies have a quite different, separate tax altogether. These small companies would be those not owned by PLCs or entities registered outside the UK or qualifying as ‘large’ companies as defined in company law. That’s probably 97% of all UK companies and they need their burdens reduced to encourage real economic activity. At present they are being hindered by the rules created for the tiny majority in the small number of large companies who are creating most of our corporate tax problems. By splitting these groups into a quite different types of legal entity we can provide UK companies with separate tax and regulatory solutions that reduce the burden on the growth of those entities that make real contribution to the UK, so making their taxes fairer and more transparent whilst leaving the rules for corporations that are really separate from their owners quite distinct, and appropriate to their needs. I’ve already suggested how this could be done.

Do this lot and there’s not just a vote winning strategy in here: there’s a real tax strategy for the UK and those who really engage with it.

Richard Murphy Accounting, Code of Conduct, Economics, IFRS 8, Tax Havens, Tax Justice Network, Tax avoidance

Is this justice?:

If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute.

That’s basically been UK law since 1869.

There is an alternative. This has been law in Australia since 1901 (tax excepted):

In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

Which do you think is likely to give the best result?

I think it’s obvious that it’s the latter.

That’s why we argue for purposive legislation.

Richard Murphy Code of Conduct

In view of my recent comment on Delaware LLCs the following, issued yesterday, is significant:

Today Senator Carl Levin (D-Mich.), Senator Norm Coleman (R-Minn.), and Senator Barack Obama (D-Ill.), Chairman, Ranking Minority Member, and Member of the U.S. Senate Permanent Subcommittee on Investigations, introduced the Incorporation Transparency and Law Enforcement Assistance Act to help law enforcement stop the misuse of U.S. corporations.

Currently, nearly two million corporations and limited liability companies (LLCs) are formed within the United States each year. The States generally form these corporations without asking for the identity of the corporation’s beneficial owners, and numerous law enforcement problems have resulted when some of these corporations have become involved with money laundering, tax evasion, or other misconduct. The bill being introduced would require the States to obtain beneficial ownership information for the corporations formed under their laws and to provide access to this information to law enforcement upon receipt of a subpoena or summons.

As the press release notes:

Criminals are hiding behind U.S. corporations while committing all sorts of crimes - from terrorism to money laundering, fraud, and tax evasion.

As Carl Levin said:

The bill we are introducing today will strike a blow against corporate secrecy, strengthen law enforcement, and curb the misuse of U.S. corporations

That’s great.

But there’s still a problem. Why is a subpoena needed? Society grants limited liability. Shouldn’t society be protected from its abuse by requiring those to whom the benefit has been granted to acknowledge the fact on public record? After all, I know of no human right that says you can abuse your creditors, but that’s exactly what limited liability lets people do. That’s why we say this is essential.

So, full marks for trying. But only 7/10 overall for failing to finish the task.

Richard Murphy Accounting, Code of Conduct, Corruption, Tax Havens