Tax Research UK

Reuters has reported that:

Brit Insurance [has] said it [it] planning to move its tax base to the Netherlands and that it would put detailed proposals to shareholders in the coming months.

Here we go again is the obvious reaction.

The Treasury is taking steps (quite illogical steps in my opinion) to change the UK tax code to appease corporations on the basis that there is a valid model of tax competition in existence in the world when it is glaringly obvious that is not true, and despite that here we have another lemming fleeing over the edge to a small location without the financial muscle (and in this case I am quite sure, without the inclination) to bail it out when all goes wrong leaving policy holders exposed to risk for the sake of a few pence off the tax rate.

So why is the Netherlands a tax haven? I and my co-authors largely answered this question in this publication, but let’s summarise why. First, although it’s headline tax rate is 25.5% it has numerous deliberate loopholes in its tax system that allow companies to avoid tax. In particular it deliberately offers companies who would not otherwise seek to be resident within its territory the means to reduce their tax charges on interest, royalties, dividend and capital gains income
from foreign subsidiaries.

This is largely through an arrangement they call a ‘participation exemption’ that exempts dividends and capital gains from subsidiary companies abroad from corporate income tax in the Netherlands. A second reason is the unusually large Double Taxation Treaty (DTT) network that substantially reduces withholding taxes on dividend, interest and royalty payments between treaty countries and the Netherlands which in combination with the participation exemption means that investment income enjoys very low rates of tax in the Netherlands. A third reason is the advance tax ruling system that gives certainty to
multinationals about how the income of their Dutch subsidiaries will be taxed.

Other reasons include new rules designed to attract group finance companies (in company banks, by any other name) which will also enjoy low tax rates in the Netherlands.

As a result it is thought that at least 20,000 ‘mailbox’ companies use the Netherlands as a tax haven – little short of places like Jersey and probably with more money involved.

It deserves to be on any tax haven list as a result.

Richard Murphy Corporation Tax, Netherlands, Tax Havens, Tax avoidance

One of the commentators on my article in Comment is Free today said:

I haven’t paid much attention to the UBS case. Clearly if they were telling their customers that their accounts could be used to evade tax then they are complicit, and should be charged.

If however they were merely providing their customers with facilities that allowed those customers to be dishonest if they so chose, I am struggling to see how UBS are not being “fit and proper” - they are not their customer’s keepers, after all.

I have replied as follows, arguing that the banks are very definitely responsible for the tax evasion of their customers in places like Jersey - and already have a legal duty to stop it, which in my opinion they are ignoring:

I am afraid that you have a rosy view of a bank’s responsibilities with regards to their customer’s money laundering. I would stress, tax evasion is money-laundering.

Every single person who is registered as an adviser with a money laundering authority must at all times be aware of the risk that their clients may be tax evading. If they ever have suspicion that this might be the case then they are duty bound to report that suspicion to their relevant money laundering authority. I stress, they do not need to prove that their client is money laundering. They only need to have a suspicion that they might be.

Now let us put ourselves in the position of a bank operating a portfolio of investments on behalf of UK-based person with that fund being based in a place like Jersey. The UBS website for the UK, linked above, implies that it sells a substantial range of products from Jersey to its UK-based clients. If they manage their clients assets in the same way as do many portfolio managers than a component of the funds that they manage will be kept in cash. On average 18% of a high net worth individual’s portfolio is cash based according to Merrill Lynch. And let’s be clear, what I’m saying here is not UBS specific - it could apply to any bank in Jersey, or another Crown Dependency tax haven.

When cash is held by a bank in Jersey on behalf of an individual the EU Savings Tax Directive comes into play. Although Jersey is not a part of the EU it and our other havens are deemed to be so by the EU for the purposes of this Directive for the good reason that for all practical purposes they are an integral part of the United Kingdom, with all its legislation being approved by London before coming into effect. As evidence that London has complete control of these places it did, without much difficulty, impose this Directive and the EU Code of Conduct on Business Taxation upon them all. The STD has been in operation since July 2005.

Since then any UK resident person holding a bank account in Jersey has a choice. They can either elect that details of the interest paid be sent to HM Revenue and Customs so that their tax declarations can be checked by that authority, or they can opt for tax at 15% (until July 2008) and 20% now to be deducted from that interest when it is paid to them, but in that case no information on that interest or their account is sent to HM Revenue and Customs. According to data published by Jersey at least 70% of account holders to whom the STD applies have elected to have tax withheld so that data is not sent to HMRC.

Now put yourself in the position of the bank’s money laundering officer. They have to decide whether they have suspicion that the person making this choice is tax evading or not. What would you think if a person said that they would voluntarily pay tax early, albeit at a rate somewhat lower than that which would be due on their income in the UK, in exchange for information on that income not being sent to their domestic tax authority? You have to appraise this choice in the light of the clear and unambiguous stated intent of the EU Savings Tax Directive - which was to prevent tax evasion on cross-border interest payments. It has no other purpose. You have a simple decision to make. You can decide that you do think this person may be evading tax as a result of their decision, or you can decide that you have no suspicion of them evading tax. Any suspicion is enough to justify reporting in each and every case.

I will tell you what I think every single money laundering officer in every single bank in every jurisdiction to which this choice applies should do. I think they should send a list of every single customer who has elected for tax withholding to their money laundering authority on the reasonable grounds that they think the customer in question might be evading tax. After all those customers have issued a specific instruction that information should not be sent to their tax authority. Tax evasion explicitly requires that information not be sent to such authorities. Does telling you to not disclose give you any clear indication of their intent to make disclosure? How could anyone think it does when you also know that the choice they have made will provide them with sufficient anonymity to evade tax on the difference between their highest marginal tax rate in their home jurisdiction and the tax withholding rates applied to the interest in the place in which payment is made?

To put this in the context of the UK, from 2005 until 2008 a UK resident could, by opting for withholding, not tell HM revenue and Customs about the income they had received, which suffered tax at 15% as a result. However as a result the could evade the almost certain higher rate tax liability at 40% which would arise on declaration requiring the payment of an additional 25% in the UK. The possibility of this evasion would be eliminated by the person opting to exchange information. It is created by choosing withholding. How could any money laundering officer anywhere not suspect their client was potentially tax evading as a result? And I stress: that suspicion is enough to require that a report be submitted, anywhere.

And yet I can say with near certainty that no bank’s money laundering officer has formed this opinion. My evidence comes from the Jersey police report for 2006 that showed that during that whole year not a single suspicion of money laundering was reported to the police in that place and unsurprisingly as a result not a single case was detected. I have blogged this here. http://www.taxresearch.org.uk/Blog/2007/03/02/jersey-officially-a-money-laundering-free-zone/

I should add that the following year, in 2007, the UK tax amnesty, targeted solely on customers of Barclays, Lloyds TSB, RBS, HBOS and HSBC resulted in over 40,000 people admitting that they use accounts with those banks for tax evasion purposes. Over £400 million of tax was paid. The Revenue say that a further 80,000 people are still subject to ongoing investigation. But I add, not one of those banks reported a suspicion of criminal money-laundering in the form of tax evasion in 2006 in Jersey although it is highly likely that up to half the accounts investigated were in that location.

Can the banks deny responsibility for reporting suspicion of this evasion? Unambiguously money-laundering law makes it clear that they cannot. And unambiguously they had the data on which to reasonably form that suspicion in 2006. And yet they made no reports.

What does this say about banks in the Crown Dependencies? I leave you to form your own opinion. I know what I think.

Now please prove (and I mean prove) me wrong.

Or start complying.

Richard Murphy Banking, Corporation Tax, Jersey, Tax evasion

The Guardian has concluded its Tax Gap series. In a closing editorial it said:

Denis Healey had his own definition of tax avoidance. It differed from outright evasion, he said, in only one respect: “the thickness of a prison wall”.

Professionals do not call it avoidance; they prefer tidy names such as “tax-efficient supply chain management”.

Yet Mr Healey’s observation remains in essence true. Whatever one’s choice of euphemism for the now near-epidemic engineering of minimal taxes, there is no mistaking the harm. In rich countries, the poor and the middle classes shoulder more of the burden of paying for essential services. In poor countries, governments are weakened. In an era in which strong, wise government is needed to contain market panic, tax avoidance just looks out of place. This is a truth to which politicians have belatedly tumbled. Barack Obama has railed against tax havens, while even Labour has commissioned (yet another) Treasury review into their use. At last, the tide appears to be turning. The public is not in a mood to look indulgently on ever more artificial ways of avoiding dues which the rest of us can’t duck.

I, unsurprisingly concur.

Perhaps equally unsurprisingly (given I was consulted on the issue) I concur with what the Guardian thinks might be done to tackle the issue:

Here are some things Messrs Brown and Darling need to consider: a General Anti-Avoidance Rule; country-by-country reporting; the removal of secrecy from all British-controlled tax havens, replaced with the requirement for offshore companies to publish accounts and beneficial ownerships; harmonisation of the corporation tax regime within the EU (this does not mean identical tax rates, but a common basis for assessing taxes); the employment of many more tax inspectors; the penalisation - if not prosecution - of big business tax avoiders plus the blacklisting from government contracts of accountancy firms that sell artificial tax avoidance schemes; amending the Companies Acts to require companies to publish (a) the actual annual payments of corporation tax to HMRC (b) the details of avoidance schemes they have disclosed to HMRC (c) a full list of subsidiaries appended to the annual report, regardless of length; amending of land registration law to require the disclosure of the beneficial owner of land and property; and the public listing in advance of pending tax tribunal cases.

Will Hutton addressed the issues like this:

Over the years I have had many heated arguments with “tax planners”. Always it gets to the same core point: the state has no right to have my cash. Big Government is a moral bad and, worse, will necessarily squander my money on ill-conceived projects creating welfare dependency - for that is what governments do. I can spend my money better than it can. I am the buccaneering libertarian fighting an important moral battle in avoiding tax.

It is this ideology, generated and fanned by American neoconservatives, that the tax avoider tells him or herself as they purchase or devise the latest scheme.

It is first cousin to the ideology that justified financial liberalisation: Big Government had no place telling financial institutions how to organise and regulate their affairs, because markets of private financiers will always tend to deliver efficient results.

Much of the “deregulated” business of the structured investment departments of our big banks - the epicentre of the credit crunch - was driven by tax avoidance, justified by an appeal to the same set of ideas.

The economic wreckage is now all around us. [And] it is only because of the derided state that we have even the semblance of a functioning financial system. We now know that capitalism without the state is inoperable.

[T]he scale of tax avoidance could be radically reduced. What is required is the will. Neoconservatism has collapsed. The western financial system is bust. The need for the state, and for international collaboration, is now evident to all. President Obama is keen to act. If we cannot slay tax avoidance now, we never will.

On the same theme the Guardian editorial concluded:

Where there is complexity and secrecy, we need transparency. For all the laudable aims of the corporate social responsibility movement, it has been ineffective at pushing businesses to pay their way. A fair tax system may need new means of enforcement, but the principle is an old one. It was outlined centuries ago by Adam Smith, who called on “subjects [to] … contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state”.

Perhaps the last word should go (as it did in the paper) to my Tax Justice Network colleague John Christensen:

“There are a significant minority of companies who agree that paying tax is a key part of corporate responsibility, if not the core corporate responsibility to society,” Christensen says. “Tax is where CSR begins.”

It is. That’s the argument, in a nutshell.

And it’s why, as we have, perforce, to build a new style of capitalism attitudes to tax will be transformed.

Richard Murphy CSR, Corporation Tax, Tax Havens, Tax Justice Network, Tax avoidance

The FT has reported:

France on Friday will press for tighter controls on hedge funds, urging other big industrialised nations to strengthen regulation of the industry and compel banks that lend them money to hold more capital.

Paris wants the European Union, and eventually all leading economies, to beef up indirect regulation of hedge funds via their prime brokers, the banks which provide them with loans and other services.

Quite right to.

But as part of this process let’s stop the hedge fund sham that they re managed in Cayman: where up to 80% claim to be domiciled. They’re not there. A few nominee directors might be. And another might fly in once in a while for some snorkeling and to sign some pre-agreed minutes. But the reality is that these people are in London, New York, Paris and Frankfurt. It’s time to say so. It’s time to stop the obvious charade. It’s time to regulate them where they are.

It’s time to stop the stupidity that an acquaintance of mine who advised hedge funds described to me as “advice to London, bill to Cayman”. Even he found it annoying that this avoided the VAT charge.

Enough is enough: we can call a halt to this by changing the rules on residence of companies to ensure that a company is resident not where a few nominee directors meet, but where its real management (people, doing the job) are. This would transform this industry for good.

Come on OECD: why not take this on board now and announce the change?

Richard Murphy Cayman, Corporation Tax, Regulation, Tax Havens

The Guardian concentrates today on UK companies tax dodging in Ireland. It will be a familiar theme to those who read this blog.

And as they show, many of those who now claim to be headquartered in what the Lib Dem Treasury team rather imaginatively called ‘Liechtenstein on the Liffey’ have a pretty notional claim to be present there. Which does not surprise me at all. I’ve been saying as such for some time.

The important thing then is the action point: the farce that the location of a board meeting proves whether central management and control of the company is has to change. This was fine on the day of the steamship. It is not OK in the day of commuter aircraft.

Let’s look at substance not form. If we did every single one of the companies that has relocated to Ireland would still be tax resident in the UK.

Richard Murphy Corporation Tax, Ireland, Tax avoidance

Mike Devereux and Judith Freedman of the Oxford University Said Business School Centre for Business Taxation had an article in the Guardian this morning. I thought it curious they forgot to mention the close links between the Centre and the FTSE 100 Group of Finance Directors, but I’ll leave that aside. I’ll just note that the Guardian subtitled the article:

Rather than knock firms for minimising their tax bills, we should focus on reforming the rules

It is a line that I suspect their sponsors will enjoy.

That I disagree with much of what they say is unsurprising. As is well known, Mike and I don’t always see eye-to-eye. I was not surprised as a result to see that he and Judith took a swipe at the Tax Gap idea. However, what they do not tackle is the data it produces, which shows the following, quite dramatic trend:

In fact it is very difficult to work out what they did actually intend to say in their article: it appears profoundly confused until near the end when out of the mish-mash of digs at the Guardian an idea emerges:

So what should be the basis for taxing multinational corporations?

They ask. And then say:

A corporation is a legal person, but in practice most corporate groups are made up of a network of companies. The group typically has shareholders across the globe, and assets, employees and customers scattered throughout many countries. In a system based on taxing profits, it makes sense for the group to move its profits to where the tax is lowest. The way to combat this is to find a new basis for taxing corporate groups, based on factors such as where assets are located, employees work or sales are made. The European commission has been working on proposals for such a system, but they are difficult to formulate and agree. A worldwide solution needs even broader international co-operation.

Now here, despite all their digging, they’re moving onto ground which we share. What they describe, but will not name is unitary taxation. That is exactly what the Tax Justice Network is calling for in the UK. It is a system of tax which country-by-country reporting is designed to support.

So despite it all Mike Devereux seems to be on the side of the Tax Justice Network. I wonder if he wants to join? He and Judith would be welcome on one condition: a commitment to corporate taxation is pre-requisite. If the argument that the current system won’t work is matched by the one that the ideal replacement is not possible which then means we shouldn’t try at all is the disguised line (and I think the article makes that possible) then we’re still at logger heads.

For once I’d rather hope we’re not.

Richard Murphy Accounting, Corporation Tax

From the Guardian blog by Vince Cable:

In the case of the UK-based global banks, we have also painfully discovered in recent weeks that the UK taxpayer has vast exposure as a result of the government’s role as lender (and, now, investor) of last resort. To see these catastrophically mismanaged institutions going cap in hand to the government while simultaneously organising tax avoidance schemes at the expense of the UK taxpayers beggars belief. One of the important supplementary arguments for the government assuming direct control of the banks it has rescued is to bring such practices to an end.

And:

[T]here is a strong case for a more aggressive approach to tax avoidance. The systematic and widespread avoidance of stamp duty land tax by corporate vehicles can be stopped quickly. More broadly the idea of a General Anti-Avoidance Rule is that tax is applied wherever there is an intention to avoid it, even if the loophole hasn’t specifically been identified in advance by the Inland Revenue.

There is only so much governments can do in isolation. Tax arbitrage involves playing off one state against another. Governments can limit that game by co-operating. The British government’s dogmatic opposition to any EU tax harmonisation has inhibited sensible, practical initiatives like agreement on a common EU tax base (not harmonisation of rates but agreement to treat depreciation and other accounting conventions in a similar way). Britain has formed a bizarre alliance with Ireland and the Baltic states to block co-operation.

And:

Tax havens are the big challenge for the UK, which has spawned a substantial number in its dependant territories. There has been limited progress in stopping the grosser abuses, such as money-laundering, but non-criminal tax-dodging continues apace. There is now a mood in the Obama administration and the EU to crack down on havens through such measures as withholding taxes to prevent leakage outside the main jurisdictions. The UK has traditionally dragged its feet on measures to curb tax havens, on the basis that these helped the City of London to attract business. It is to be hoped that straitened fiscal circumstances and a less credulous approach to the City will now persuade the government to turn its guns on the tax havens and tax-avoidance industry.

You can see why this man is thought to have the best economic brain in British politics.

Richard Murphy Accounting, Banking, Corporation Tax, Economics, Tax Havens, Tax gap

I note that Tim Worstall is persisting in his claims that my methodology used in the TUC report, The Missing Billions, is flawed.

I have already dismissed his arguments on tax incidence. They are substantiated only by the false assumptions he makes about the reality of transparency in the corporate world. Let me now deal with this second, false, allegation.

Worstall’s argument appears entirely dependent upon rhetoric. If ever there was a man to split hairs it is him. I am reasonably confident if there was no person left on earth to argue with Worstall would take issue with a lamp post, and it has to be said that argument with Worstall is totally pointless because it continues ad nauseum without any benefit arising. As a result, candidly, I will not bother. Far too many people of sound mind had been convinced by my argument to need to engage with him in that way.

I do instead issue a straightforward challenge. As my research has shown, using the data published by the 50 largest companies in the UK in the period from 2000 to 2006 and considering just the current tax charge and profits with goodwill added back, because the goodwill charge in a set of accounts is almost never allowed for tax, an extraordinary trend is apparent. In 2000 the ratio of current tax declared to pre-goodwill profit was 26.1%. By 2006 it was 22.5%. On a trend basis the decline was just over 3.5% during the seven year the period even though the UK corporate tax rate throughout this period was flat at 30%.

Throughout this period the current tax rate was almost exactly 5% less every year than the declared tax rate placed upon the proper loss account of the companies in question: in other words, always and persistently the companies paid at least 5% less in tax than they declared on their profit and loss accounts. The resulting graph looked like this:

In addition in 2000 there was under £9 billion of deferred tax liability on their balance sheets. In 2006 it was almost £47 billion, an increase in unpaid tax of £38 billion in seven years from just 50 companies.

I’m well aware that Deloittes tried to brand this finding ‘just rubbish’ but unfortunately for them they audited a significant amount of the data I used to reach this finding. All they managed to do as a consequence was questioned the credibility of their own audit procedures, for these are facts. Whilst the tax rate in the UK was not falling, and whilst the weighted average tax rate around the world taking population as the basis of weighting hardly fell at all, the overall declared corporate tax rates of these companies fell dramatically.

I say that was because of a significant and deliberate increase in the abuse of the world’s tax systems by these companies through the undertaking of tax avoidance. Worstall disagrees.

My challenge to Worstall is simple. Produce the data that can show any other explanation for this trend, but I warn you in advance: do not use KPMG’s survey of corporate tax rates because that is a simple statistical analysis which takes no account of the population size of the countries in question, or of the size of their GDP and therefore of their relative economic significance. As I noted above, when these factors are taken into account this cannot explain this trend, as I proved in earlier research.

Tim Worstall can nitpick, but I have produced answers and he has not. That is the difference between us and right now I can find no alternative explanation of the evidence I created and which others can now reproduce.

That’s why I stick by my work, its methodology and its findings and the obvious inferences that can be drawn from it.

The numbers tell this story loud and clear. That’s enough to justify action.

Richard Murphy Corporation Tax, Tax gap

The Guardian is launching a series of articles on Monday on the Tax Gap. As Polly Toynbee says in her article in the Guardian today:

On Monday the Guardian reports on its investigation which reveals corporate tax avoidance on a gargantuan scale. Respectable FTSE 100 companies, household brands that are cornerstones of Britishness, have for years deprived British citizens of potentially billions - all done legally by battalions of super-accountants and lawyers.

As company wealth ballooned during the boom, the money going into Treasury coffers should have grown proportionately. But between 2000 and 2007 the proportion of tax paid by top companies fell. Where did it go? The very clever people who devised fiendish debt devices that blew up the banks also applied their brains to byzantine new tax avoidance strategies.

Of course, this builds on two things. The first is the Tesco / Guardian debacle of a year ago. The Guardian got a part of their story wrong and Tesco sued. They also, undeniably, and as I pointed out very strongly on this blog, got the story absolutely right: Tesco were deliberate tax avoiders. Thankfully Private Eye joined the debate and Tesco won a very hollow victory against the Guardian as a consequence.

Second, at the same time as the Guardian were talking about Tesco the TUC published my report ‘The Missing Billions’. It’s that report that let’s Polly say with conviction that the corporate tax rate of FTSE companies has fallen persistently this decade. But what is clear is that the Guardian was bloodied by the Tesco fight, but not bowed:

Delving into the truth of company taxes has taken the Guardian team months of digging, talking to whistle-blowers, and following the knotted strings that lead through a labyrinth of subsidiaries in secretive tax havens.

And as she says:

Public companies are anything but public about tax. Annual accounts are opaque, not obliged to spell out how much tax was paid where, or the tax-advantageous deals between their subsidiaries.

But this we know: a third of FTSE 100 companies paid no tax in 2005-2006, and another third paid a minute proportion of their operating profits. Thanks to avoidance, HMRC says 12 of the UK’s largest firms “extinguished all liabilities in 2005-2006″.

Of course, as the Guardian’s lawyers point out, everything unearthed that looks to the naked eye like a breathtaking affront to ordinary PAYE payers is legal. But that does note mean that there is nothing that can be done about this abuse. All that is required to effect change is imagination and political will. Polly’s prescription is clear:

The EU and the US united could effectively shut down havens and force them to reveal secretive accounts: if they refused to comply, all banking connections could be cut.

There should be a common international tax regime with no loopholes, while still letting each country set its own rates.

Start with transparency: make all companies consolidate their accounts to report which countries their profits arise from, where taxes are paid, and the precise dealings between subsidiaries.

All are of course prescriptions readers of this blog will be familiar with. The accounting reform was originally authored by me.

But she agrees with me: this will require political will. She argues:

[C]ulture change starts with words and outrage, with naming and shaming, withdrawing peerages and knighthoods, refusing honours to any with dubious tax histories. [But i]nstead, governments woo business regardless of tax behaviour. Downing Street is the ever open ear, quaking at company threats to relocate.

And all the while those companies say they are committed to corporate social responsibility. But as Polly says:

The way to prove they are the “good corporate citizen” they claim to be is by paying the modest 28% that is the starting rate for all companies.

Maybe culture change won’t happen until we get out there with saucepans to rattle and bang some shame into those inside corporate headquarters.

Now there’s an idea.

Read the rest of the reports as they roll out over the coming fortnight.

Disclosure: I have advised the Guardian on tax related issues

Richard Murphy Corporation Tax, Tax Havens, Tax Justice Network, Tax avoidance, Tax management

KPMG has published its latest survey on the UK’s tax competitiveness.

It’s message is clear: it says the UK is slipping behind.

But look who it compares us to:

Let’s be blunt: Ireland, Luxembourg and the Netherlands are all small states who are tax havens. It’s an impossible business model for the UK to emulate. It’s also like asking us to move in the direction of Iceland. This is, to be blunt, economic madness.

Sue Bonney of KPMG says in the report that:

At a time when both the state and business are having to work closely in an unprecedented way to help us through the credit crunch, perhaps the feeling that we are all in this together will lead to increased mutual understanding and a better working relationship in the future.

She quite clearly does not understand the term “we”.

Alex Cobham of Christian Aid does (see earlier today).

We don’t want to be a tax haven. We know the harm they cause. We suffer the impact. KPMG may not. We do. That’s my point. That’s why they are so wrong. That’s why they’re the last people to help reform the tax system, economy or anything else right now.

Richard Murphy Corporation Tax, Ireland, KPMG, Netherlands, Tax management