Tax avoidance » Tax Research UK

This Thursday in Norwich

Development, Tax avoidance, Tax Havens No Responses »

Feb 062012

‘U STOP Poverty – How Many Multinationals are Keeping the Poor, Poor’ on Thursday 9 February, 7.30 pm – 9.00 pm is part of a series of events in the city organised by Christian Aid to inspire and inform those working to relieve poverty, and to begin a process of networking which will lead to ongoing mutual support.

Richard Murphy (pictured), who is an anti-poverty campaigner, tax expert and the author of‘The Courageous State: Rethinking Economics, Society and the Role of Government’, will explore how the current economic situation can be changed so that developing countries no longer lose out in aid from companies avoiding the payment of tax.

Julian Bryant, of Christian Aid, explains: “£101 billion a year could fund the UNs’ Millennium Development Goals several times over, eradicate malaria or make significant differences in relation to solving major issues of poverty in developing countries. Yet, it has been estimated that £101 billion is being denied to developing countries by various multinational corporations that use tax haven secrecy to avoid paying taxes.

“Developing countries are losing more from companies avoiding the payment of tax than they receive in aid. Imagine what a difference it would make to a developing country to actually receive the tax they are due?”

The event is free and open to all with no booking necessary. For more information contact Julian Bryant, Christian Aid on 07940 848829 or email jbryant@christian-aid.org.

Kings Centre (Kings Church), Kings Street, Norwich, NR1 1PH

Tax haven UK could hide money laundering in football

Companies House, HMRC, Tax avoidance, Tax evasion 4 Responses »

Jan 312012

Bloomberg has reported today that:

European soccer ruling body UEFA is asking U.K. authorities to investigate two so-called letterbox companies that helped Porto (FCP)fund a player transfer.

For Gool Co. and Pearl Design Holding Ltd. provided finance for the two-time European champion to sign Brazilian striker Walter da Silvafor 6.2 million euros ($8.1 million) in 2010, according to Porto’s latest quarterly statement.

As banks ratchet up lending requirements, soccer clubs are seeking alternative ways to raise funds, often in return for a share of a player’s future transfer fee, said Sandalio Gomez, who teaches sports management at IESE business school in Madrid. UEFA officials said this increases the risk of money laundering because it’s unclear who owns the letterbox companies, which have mailing addresses in the U.K. and seemingly nothing else.

“We are urging state authorities to look into it,” UEFA Secretary General Gianni Infantino said. “Because we are a private company, an association, we cannot go to a company when it is a letter box saying ‘please tell us who you are and what you’re doing.’ They will tell us: ‘Who are you to ask me?’”

This is a massive problem facilitated by the UK.

Whilst we in the UK offer limited companies for sale for only a few pounds and utterly neglect the need to then regulate or tax these companies – as I have shown to be the case here – then the UK is undoubtedly losing out heavily to tax evasion as I have suggested (my estimate is £16 billion a year) and may, as UEFA seem to be suggesting, provide opportunities for money laundering.

That’s utterly negligent behaviour by successive UK governments and is all designed to ‘save’ costs for Companies House and H M Revenue & Customs whilst ignoring altogether the tax foregone and the massive cost to the UK of the tax foregone and crime permitted.

If we want responsible business in the UK we start by making sure each and every company files its accounts, delivers a tax return and pays its tax. It’s really not too much to ask. But our government refuses to do it. Why is that?

The tax reforms needed if globalisation is to work

Economics, Task Force on Financial Integrity and Economic Developm, Tax avoidance, Uncategorized Comments Off

Jan 302012

IPPR produced a report on globalisation last week. With a forward by Lord Mandelson the report was written by Will Straw and Alex Glennie.

I admit I don’t agree with either Mandelson or Straw; they have a political perspective I don’t always share but this report has merit to it, as others have also noted since its publication. It represents a clear change of heart on Peter Mandelson’s part, and that I welcome.

The report is especially strong on the need for corporate tax reform. Having noted that profits are rising as a trend t also notes that there is a steady fall in corporate tax receipts as a proportion of profits and realises this is an issue that has to be addressed. It dismisses the alternative to corporate tax proposed by Oxford University and Mirrlees, which is a form of Value Added Tax. As the report rightly notes there is no doubt this would be regressive and so unacceptable. Instead it suggests five reforms, as follows:

First, the European Union should implement the Common Consolidated Corporate Tax Base (CCCTB). Under the current tax regime, multinationals file separate accounts for each country in which they operate; under the CCCTB, each company would compute only its EU-wide consolidated profit, on a common definition of the tax base. This profit would be allocated to member states on the basis of an apportionment formula containing factors such as shares in employment, payroll, assets and sales. Each member state would retain autonomy to tax its allocated share of profits at its own tax rate. This approach would allow countries to retain their own tax rate and pursue healthy tax competition. But within the EU, companies would have to actually move their staff and physical capital to the lower-tax regimes, rather than relying on the accounting mechanisms outlined above. In time, other jurisdictions could be encouraged to join, paving the way for an eventual global consolidated tax base.

Second, the EU and its member states should begin discussions with the International Accounting Standards Board to introduce a requirement that all multinational corporations report sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns in what is known as country-by-country reporting. Country-by-country reporting discloses the profits that companies record in each jurisdiction in which they operate and the taxes that they pay on them. This means that they can be held accountable for what they do and do not pay. The requirement would complement the CCCTB by providing simple transparency on the activities of multinational companies in jurisdictions outside the EU.

Third, other jurisdictions should be encouraged to adopt the EU Savings Taxation Directive as a means of creating an automatic exchange of taxation information. Since 2005, the directive has ensured that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. In Cannes, Indian prime minister Manmohan Singh called for the G20 to take a lead on the issue ‘in the spirit of our [2009] London Summit that [said] “the era of bank secrecy is over”’ . But the communiqué only committed to ‘consider exchanging information automatically on a voluntary basis as appropriate’. The EU should also adopt an amendment to the savings directive which would close existing loopholes and prevent tax evasion by stopping taxpayers from channelling interest payments through trusts and intermediate tax-exempted structures.

Fourth, as the Financial Action Task Force has already recommended, the beneficial ownership of companies, trusts and foundations should be on the public record. This would prevent multinational corporations from using networks of international subsidiaries to transfer profits and reduce their tax liability. This reform would also have the added benefit of making money laundering and the handling of illicit funds more difficult.

Fifth, bilateral and multilateral donors should support developing countries in building their tax collection and enforcement agencies.

Taken together, these measures will act to reduce the power of tax competition and lower the incentives on companies to execute tax arbitrage strategies.

There is much in here that is based on my work, that of the Tax Justice Network and colleagues in the Task Force on Financial Integrity and Economic Development. I welcome that.

I welcome Peter Mandelson and Will Straw seeing the merit of these ideas over those that were technically presented to them by economists as superior, but which ignored the political realities of taxation.

The tide is turning: the merit of international cooperation on tax is becoming apparent. It will help get us out of the mess we’re in: that’s now indisputable by all those except the governments of those states that promote tax evasion and those who benefit from it.

The Vodafone India decision – and what we can learn from it

India, Tax avoidance, Tax Havens 6 Responses »

Jan 292012

I wrote the following article for the Indian tax website Taxsutra, but I’ll share it here. It does, of course, consider India’s recent loss in its case against Vodafone:

The Supreme Court decision in the recent Vodafone case must be considered a body blow for Indian taxation, India as a whole and the necessary onslaught on tax haven abuse that I and many others are involved in.

First, it is important to note that this was always an unusual case: Vodafone was being sued for tax which it was said it should have withheld from a payment it made to Hutchison Essar Limited for a stake in that company’s Cayman subsidiary that in turn owned its Indian mobile phone operations. Vodafone did not, as a result, ever make a profit in this matter: it was being sued for tax that might have been due by a third party if that third party had made its gains in India. It did not make that gain in India for what might (to simplify matters) be considered a straightforward reason, and that was because it had ensured that ownership of the Hutchison Essar mobile phone network in India was not recorded in India at all, but in the Cayman Islands. The claim was Vodafone should have withheld the tax due on the capital gain as a result.

The ruling on this case is over 250 pages long and cannot all be considered in detail here. What is interesting to me is the discussion on whether the structure used by Hutchison was reasonable tax planning or an unreasonable arrangement subject to challenge by India. The principles on which this decision was made where all defined in English taxation law and effectively required comparison of three cases and the principles within them. Everything effectively turned on whether the legal form of the transaction in Cayman should prevail or its substance in India should be taxed.

The first critical case considered was, as a result, the 1936 decision in what has become known as the Duke of Westminster case. In this now notorious decision the House of Lords defended the right of a person to arrange their affairs howsoever they wished so long as it was legal and there was, they said, nothing the tax authorities could do to challenge the outcome in that case. This is in turn built on an 1869 decision which confirmed that tax in the UK has to be charged in accordance with “law”[1] as a result of it being said in the House of Lards that:

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.

This was the issue at stake in the Westminster case, and this was the matter also at stake in the Ramsey and Dawson cases from the 1980s also discussed in the decision on Vodafone, both of which were considered to have to some degree over-turned the Westminster ruling (although with subsequent restrictions also being applied in the UK, it should be noted). The unfortunate fact is that the judge in this case has, I think, clearly favoured Westminster over Ramsey, calling the latter a simple ruling on interpretation and treating the former as being law. Given the facts of this case, and their relative similarity with Dawson, that is surprising, but it seems he refused to see beyond the law of contract and address the underlying issue as both Ramsey and Dawson allowed.

In that case his failure to interpret the law in what seems to me to be the correct way leads us straight into consideration of whether India now has need for a general anti-avoidance rule (GAAR).

If all tax were about one action and one consequence then tax law would be easy, and determining if tax law applied or not would generally be relatively straightforward. But some tax is not like that at all. Aggressive tax planning is about putting together a string of transactions, each legal in their own right (or they would not be tax avoidance but would become tax evasion) but with the series, in combination, achieving a result quite different from that which parliament might ever have intended. It is this unintended outcome in combination that a GAAR is designed to tackle, especially in those cases where, despite the best will of judges, there is nothing at all to make the resulting tax avoidance illegal.

Graham Aaranson QC has suggested the UK should have a limited form of GAAR. Personally, I would have liked him to go further: stopping the most egregious schemes a he suggests such a GAAR should be limited to is not, in my opinion, enough. I was consulted by Graham Aaronson during the course of his review.

What is more worrying is that I am not sure as yet that Aaranson’s tackled the biggest problem, internationally, with these GAARs, and that’s simply whether or not the judges will embrace them or not. In Australia they by and large have and so they’ve made some gains. In Canada the judges virtually refused to operate a GAAR. The result has been a GAAR that’s failed to deliver. All of which has always left me thinking that an essential component of a GAAR is a change to the basis on which tax law is interpreted from a legal (literal) basis to an equitable (common law) basis.

The Australians almost got there (but not for tax) a long time ago with their law of 1901[2] on legal interpretation which said:

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.

This seems to get to the very core of the problem in the Vodafone case. It seems to me that what we want our judges to do when looking at tax law is to assess the substance of the transaction and to ignore its form. The result has a massive advantage: it is about as comprehensible as most law can ever be. If the man on the Clapham Omnibus could see that the substance and form of the transaction were the same (an asset in India is sold and tax is payable in India) then they’d know they would have complied with the law. If the substance and form do not coincide i.e. an asset is sold in India and tax is payable, if at all, in Cayman, they’d know they were in trouble. What can be more certain that that?

Ancient law, designed in an age of steam ships, is crippling India as it is crippling other countries in the age of the internet. It’s time we changed these laws now. Only that way can we get tax justice – and that’s a situation where the right amount of tax (but no more) is paid 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.

[1] Partington v. Attorney-General (1869), L.R. 4 E. & I. App. 100, per Lord Cairns at p. 122.

[2] Section 15 AA of the Acts Interpretation Act, 1901 downloaded from http://www.austlii.edu.au/au/legis/cth/consol_act/aia1901230/s15aa.html

Hartnett is right, and yet so, so wrong on the tax gap, for which he’s the main culprit

HMRC, Tax avoidance, Tax evasion, Tax gap, Uncategorized 9 Responses »

Jan 282012

The Telegraph reported yesterday that:

People who receive cash-in-hand payments for goods and services are harming the economy, according to HM Revenue & Customs (HMRC) most senior taxman Dave Hartnett.

Speaking to the Daily Telegraph, he criticised tradesmen and other workers who try to get out of paying tax by asking for their payment in cash and said there will be a crackdown to catch individuals who do so from April 2012 onwards.

Mr Hartnett claimed evading VAT or income tax is ‘diddling’ the economy and will lead to further cuts for things like hospitals and schools.

“Tax provides the funding to run the country: hospitals, schools and everything else. Every time someone pays cash in order not to pay VAT, the nation gets diddled,” he remarked.

Of course Hartnett is right: the tax gap, about which I have campaigned for years, and which I forced (via the TUC) onto HMRC’s agenda and in turn into national debate, is of course a major factor in the management of the deficit. Given that the gap is £120 billion that has to be true.

But let’s be clear, welcome as Hartnett’s recognition of this obvious fact is, he has ultimate responsibility for the fact that the gap is this big for two reasons.

First of all, he’s denied the size of the gap, persistently – and the propaganda his department put out under his direction about how small the gap supposedly is in his view has been used by him and his colleagues to leave this matter alone and to deny its significance. HMRC say the tax gap is just £35 billion right now (see the table, here). The numbers are grossly inaccurate for reasons I explain here, here and at length here. The consequence is obvious: too little attention has been paid to the issue and that is because HMRC worked persistently to hide its own incompetence to hide the fact.

Second, using the incorrect data his department produced Hartnett justified reducing the staff in HMRC. The numbers will fall from 100,000 in 2005 to about 50,000 in 2015. And like it or not collecting criminals requires human activity to detect and prove the crime. Tax evasion is a crime and there aren’t enough people now employed to detect much of it – so the tax gap has grown. Hartnett is responsible for that. And we see the result in cuts in services, pensions, disability living allowances, education, health, defence and so much more.

So sure, Hartnett’s right – people should not pay in cash knowing the cash will not be declared to tax authorities. But the biggest culprit by far in the creation of the massive UK tax gap that threatens our pubic services is Hartnett himself – and he’s just trying to deflect the truth by making the claims he’s now seeking to make in valedictory effort to justify his actions.

It looks like the UK Swiss tax deal is in trouble

Switzerland, Tax avoidance, Tax evasion, Uncategorized 13 Responses »

Jan 232012

For the second time this morning, I pick up a significant change in sentiment in a news story that suggests real change is afoot. First it was the NHS, now it is about the UK Swiss tax deal, and importantly, the change in mood music is coming from Swissinfo, which has reported:

The tax deals which Switzerland reached last year with Britain and Germany could yet fail in the face of opposition in Europe and in the countries concerned.

The agreements use the so-called “Rubik” model for dealing with the undeclared billions held by foreign customers in Swiss banks.

It is quick and easy: the countries whose taxpayers have tried to hide their assets get an inflow of money straight away, and Swiss banks remain relatively attractive to the super-rich who prefer to keep a low profile.

It works by levying a withholding tax on the assets held in the banks. In other words, a tax is automatically levied on the interest they earn, and then remitted to the country concerned. But no information about the identity of clients is provided.

And that is the sticking point: the European Union is insisting on “automatic exchange of information”, so that tax evaders can be tracked down.

Apologies to them for a lengthy quite but it’s necessary to get a sense of how Swiss sentiment is changing. And changing it is because this deal is beginning to look dead in the water.

It contravenes EU laws in the European Savings Tax Directive.

It undermines EU solidarity against tax evasion.

It helps preserve the concept of Swiss banking secrecy that was designed to assist tax evasion, and still does so.

And it’s very obviously a tawdry deal.

Osborne and Hartnett went for it. But it looks like the EU will kill it, as a very few of us suggested possible. And that will be good news for the EU as a whole.

The need to tackle the substance of tax havens

Cayman, India, Secrecy jurisdictions, Tax avoidance, Tax Havens 32 Responses »

Jan 212012

Vodafone won its tax appeal in India yesterday, saving it a substantial tax bill that India had been claiming was due on its takeover of the Hutchinson mobile phone network in that country. The Economic Times of India has as good a comment on the implications of the case as could be made:

The Supreme Court has ruled that Indian tax authorities have no jurisdiction over Vodafone’s purchase of Hutchison’s interest in its mobile telephony joint venture in India with Essar, as the deal was executed through sale of a holding company registered in the Cayman Islands.

The ruling is a setback not only for India’s fight against tax havens but also for taxation in general. For, the court’s privileging of form over substance, maintaining the corporate veil, could lead to elaborate and extensive tax planning that results in enormous leakage of revenue.

The implication is clear. The judges are interpreting the law as it stands. India needs to rewrite its tax laws, to enable it to deal with commercial practice in a globalising world.

If every ABC Ltd operating in India is henceforth not to be owned through a holding company registered in some tax haven or the other, so as to permit acquisition by XYZ Ltd through its holding company registered in another tax haven without paying any capital gains tax, the language of tax law will have to make it clear that what counts is whether value accrues to the company changing ownership because of its economic activity in India.

Precisely so.

This was a transaction relating to Indian assets that India wanted to tax, and thought it could tax. But it was recorded ‘elsewhere’ in a tax haven structure. And the result is that the legal form of recording it ‘elsewhere’ has meant that Inida’s laws have been subverted and tax is not due. That’s the tax haven issue in a nutshell.

Now it is time for the OECD, UN and others to agree how such abuse can be tackled so that transactions are not taxed where there form is but where their substance is. Because the cost to society otherwise will be enormous, as it is in this case where a developing country has lost out on resources it badly needs.

Isle of Man ‘not worried about Labour threat’

Isle of Man, Tax avoidance, Tax evasion, Tax Havens 10 Responses »

Jan 162012

It’s reported in the Isle of Man this morning that:

The chief minister has dismissed demands from Labour leader Ed Miliband for talks with the Isle of Man and the Channel islands ‘over tax evasion’.

In the United Kingdom press at the weekend, it was reported Mr Miliband would call for negotiations to begin with the governments of the Crown dependencies.

It was also claimed he would demand ministers follow up the talks, with threats to shame the islands on the international stage by placing them on a globally recognised blacklist.

Allan Bell says he has only just received assurances from the UK government that it is happy with the way the Isle of Man is regulated.

Perhaps Mr Bell hasn’t noticed that Miliband is, I presume, disagreeing with the government on this issue and saying Labour would do something different? In which case he needs to wake up and smell the coffee.

Ed Miliband’s giving an ultimatum to tax havens

Guernsey, Isle of Man, Jersey, Secrecy jurisdictions, Tax avoidance, Tax evasion 47 Responses »

Jan 152012

Ed Miliband is giving an ultimatum to British tax havens. According to the Independent:

Ed Miliband declares war today on the UK’s secretive offshore tax havens which he says could raise £2.4bn for the Exchequer and help to reduce the deficit.

As Ed Balls, the Shadow Chancellor, signals a major shift in economic strategy by admitting that a Labour government would be unable to reverse all of the coalition’s cuts, Mr Miliband will expand on his theme of “fairness in tough times” by making those at the top of society contribute more.

In the Labour leader’s sights are the Channel Islands and the Isle of Man, which shelter UK residents’ cash which would otherwise have to be taxed by HM Revenue and Customs.

European Union loopholes allow UK residents to disguise money offshore held in front companies and trusts. The tax havens are not obliged to let HMRC know which British taxpayer the vehicle relates to.

The EU is attempting to close these loopholes, but Mr Miliband will say that this time-consuming process, which could take years, is allowing billions of pounds to go uncollected.

A Labour source said: “In these tough times, when unfair choices are being imposed on people – like cuts to tax credits, or changes to child benefit – everything needs to be done to ensure those that owe tax pay their fair share.”

Mr Miliband will call on the Government to act as a matter of priority through diplomacy at EU level. The plans are an expansion of his theme, set out in his speech last week, for the deficit to be reduced through fairness – particularly tackling the richest in society, while defending the “squeezed middle” on low to middle incomes.

Tax experts estimate that as much as £2.4bn could be raised by calling time on UK tax havens. Richard Murphy, director of Tax Research UK, said: “Breaking tax haven secrecy is essential to collecting the tax that’s the alternative to cuts.”

The policy, which would be included in Labour’s 2015 manifesto, is designed to show Mr Miliband is acting on reducing the UK’s deficit amid ongoing questions about his leadership and the party’s economic credibility.”

And according to the Observer:

Ed Miliband, the Labour leader, is to demand that the government forcesJersey, Guernsey and the Isle of Man to reveal the identity of British tax evaders with money hidden on the islands.

The tax havens, which are crown dependencies, are costing the government billions every year as the rich protect their money from Revenue and Customs probes through front companies and trusts.

Miliband will this week call for negotiations to begin with the governments on the three islands. He will also demand ministers follow up the talks with threats to shame the islands on the international stage by placing them on a globally recognised blacklist drawn up the Organisation for Economic Co-operation and Development (OECD)..

The move is part of the Labour leader’s attempt to define himself as the foremost campaigner in British politics against the excesses of capitalism. He will claim that every £1m raised by his policy on tax havens is equivalent to a year’s salary for 50 newly qualified teachers.

UK residents with money abroad are required to pay tax in Britain on the income they receive, but many do not declare that they have money stashed away.

Jersey, Guernsey and the Isle of Man have not been co-operating with UK authorities’ requests for the identity of people with money on the islands. Richard Murphy, of Tax Research UK, said the country could recoup £2.4bn.

I have already provided links to my workings this morning. They are likely to be an underestimate as they ignore tax to be recovered on capital hidden offshore.

I do, of course, welcome this move by Labour. My hope is it’s the start of a whole campaign on the tax gap. That though is for time to tell. For now it makes very clear that the claim by the Crown Dependencies that they are transparent and all is now well with them is but a hollow sham: that is far from the truth. Now it is time for them to offer real reform if they are serious in their claim that they do not want tax evaders to use them, something that is all too easy at present.