Tax avoidance » Tax Research UK

Ed Miliband says it’s time to come clean to the UK’s tax havens

Cayman, Guernsey, Information exchange, Isle of Man, Jersey, Secrecy jurisdictions, Tax avoidance, Tax Havens 11 Responses »

Jan 152012

Ed Miliband’s announced a new initiative today that is sure to resonate around the offshore world.

As I understand it he, in essence, has said three things. The first is that the UK should push as hard as possible for the European Union Savings Tax Directive (ESTD) upgrade planned for 2013 to be implemented as soon as possible. Second, in the process he suggested George Osborne had put back the whole process by negotiating the Swiss tax deal over which the EU is now threatening to pursue the UK because it does not comply with the requirements of the existing ESTD, let alone the revised one. And third he said that if for any reason the EU can’t deliver the ESTD on time because Austria and Luxembourg continue to try to block it then the UK should go ahead and demand that its Crown Dependencies and Overseas Territories enter into deals equivalent to those required under the ESTD with any reasonable country that wants one.

Now this is radical stuff. The ESTD is about tax evasion, that’s all. It has no other purpose. So this initiative extends the whole debate about corporate responsibility from the issue of company tax into the whole arena of the tax evasion that some companies – and notably banks – facilitate through their offshore operations, whether knowingly or not.

Second, whilst the ESTD has been in operation since 2005 it has been widely acknowledged – even by the EU itself since 2008 - that there are gaping loopholes in it. The Tax Justice Network view of this is here. The key points are simply though. First, the existing directive only applies to cash deposits – and based on my research of offshore portfolios that’s rarely more than 20% of offshore asset holdings – meaning 80% or more of all income escapes the arrangement and so remains untaxed in most cases in the country where it should be declared for tax purposes whilst, second, the ESTD only applies to income held in an individuals name so that cash and other assets held in companies, trusts and other arrangements also avoids or evades tax as well. Put the two facts together and I estimate well over 90% of all income that should be known about in tax havens like the Channel Islands is not advised to HMRC.

Those are loopholes too big to tolerate at a time when tax revenue is the scarcest commodity in the UK economy.

The big question then is, can Miliband do this? My thinking is yes, he could. First, this is about the international relations of the Crown Dependencies and overseas territories, and we are responsible for them, and as such can legislate them if we wish to do so, and opinion that the House of Commons Justice Committee came to in 2010 when reviewing this issue, basing their opinion on the Kilbrandon report. Second, knowing this the Crown Dependencies have actually done all we have ever asked them to do on such issues. That is exactly why they have adopted the European Union Savings Tax Directive and the EU Code of Conduct on Business Taxation despite their reluctance to do so. In practice they knew they had no choice but do so. Third, if they really want to be awkward we could simply remove the exemption from tax being withheld on payments of interest, royalties, dividends and other sums to these places that are in operation at present and they cease to be tax havens overnight and lose their entire financial services industry at a stroke. Given they publicly say they don’t want tax evaders to use them there is no way on earth they’d risk that, but we could impose it, and they know it.

So Miliband, if he were prime minister, would hold all the cards in his hands, and the Crown Dependencies would have the 2,3 and 4 of spades when hearts are trumps. In other words, this threat isn’t hollow; this threat is for real.

And what would we win by doing it? Well, I suggest it could be £2.4 billion a year. That’s best on my 2009 estimates, here and taking just the part relating to the Crown Dependencies into account.

That’s why I applaud this move: it’s a straightforward attempt to tackle tax evasion. That’s exactly what government should be doing now. And it’s a low cost attempt to do so as well. It works by shattering secrecy. After that’s done the pressure on those with these accounts to disclose will be very high indeed – and so the measure is virtually self-policing.

Of course the Crown Dependencies will protest – but if they do so then they’ll be coming out on the side of tax evaders. Is that what they really want to do?

And if their reply is those tax evaders will just move their funds? Then, I suggest, we have to look at regulating the banks involved a lot more aggressively because in that case they will be willingly assisting tax evasion. That’s the next step. But for now let’s note that a politician has taken a courageous line on this issue.

KPMG in the Isle of Man admits the island may be used for egregious tax avoidance

Isle of Man, Secrecy jurisdictions, Tax avoidance, Tax Havens 8 Responses »

Jan 142012

The Isle of Man Today website noted last week:

MOVES by the UK Treasury to introduce a general anti-avoidance tax rule could impact negatively on the Isle of Man.

KPMG island director Greg Jones said it was by no means a foregone conclusion that we would get a general tax anti-avoidance rule (GAAR) in the near future.

But he added: ‘If we did, however, there’s no doubt that it would impact negatively on places like the Isle of Man.

‘Even if the GAAR were targeted as narrowly as the working party report recommends, in my view it would strike out a number of (what has to be admitted are) fairly contrived tax planning arrangements I am aware are promoted from the island.

‘There may be some work for tax practitioners in advising whether a particular planning idea falls within the GAAR’s scope, but on the whole I think we’d lose a certain amount of the business currently being undertaken by some niche service providers.’

As he also explained:

Last year a working party under Graham Aaronson QC was established to look at the scope for introducing such a rule and what form it should take. The working party was comprised mostly of judges and tax academics.

The report produced by the group last November concluded that a GAAR would be a good idea but it should be targeted at situations in which people undertake what are obviously highly artificial arrangements with no real purpose other than to avoid tax – and not at situations in which a taxpayer simply exercises a choice to do something in a more tax-efficient manner.

Good to see that KPMG admit that the Isle of Man is used for such schemes. And remember the GAAR as drafted only tackles the most egregious – or abusive - of schemes.

And they should be worried. The GAAR includes as one of its trigger events:

(g) that the arrangement includes the location of an asset or a transaction, or of the place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result

That might be targeted straight at tax havens.

Disclosure: I represented the TUC in discussions with Graham Aaranson on the GAAR’s drafting including detailed discussions of its scope.

IRS finds U.S. tax evasion $385 billion per year, suggesting Tax Justice Network numbers are right

Tax avoidance, Tax evasion, Tax gap, USA 2 Responses »

Jan 102012

One of the US readers of this blog, Kenneth Thomas, who writes the Middle Class Political Economist blog, wrote the following and I reproduce it with his permission as it is very apposite here:

On Friday, the IRS released a new report on tax evasion in the U.S. (via Demos’ Policy Shop and h/t to @BlogWood). Using data for 2006 (its previous tax gap report used 2001 data), it found a gross tax gap (income tax due but not paid on time) of $450 billion and a net tax gap (factoring in tax paid late) of $385 billion for 2006, versus $345 billion gross and $290 billion net in 2001. This was due almost entirely to higher income and tax liability, not an increased percentage of cheating. As Policy Shop points out, over 10 years, this will get us to well over $3 trillion in lost taxes.

As I reported last month, the Tax Justice Network estimated that global tax evasion was over $3 trillion annually. TJN’s estimate for the U.S. was $337 billion for 2010, less than the IRS figure of $385 billion for 2006 even though GDP was higher in 2010 than 2006. Thus, the IRS figures confirm the validity of the TJN estimates. Indeed, it is quite possible that Richard Murphy’s estimate in the TJN report actually understates the amount of tax evasion globally.

There are a number of eye-popping numbers in the IRS report, beyond simply the magnitude of tax evasion. Most evasion takes the form of underreporting and underpayment, not non-filing. The amount of dollars lost to underreporting rose by 32% between 2001 and 2006; one-third of that increase came in the corporate income tax.As another sign of growing inequality in the U.S., between 2001 and 2006 corporate income tax due doubled (meaning that profits approximately doubled), while individual income only rose by 15%.

Not surprising, but still striking, is what the report says about who cheats on their taxes. People subject to both information and withholding requirements only underreport 1% of their income; people or businesses subject to information reporting but not withholding misreport 8%, but entities subject to neither information or reporting requirement, “such as business income” [on the individual, not corporate, income tax] has a 56% misreporting ratio. Since middle class taxpayers mainly fall in the first group, it is obvious that most of the opportunities for cheating belong to the wealthy.

To put this in dollar terms, of the $450 billion gross tax gap, $376 billion of it comes from underreporting income. $235 billion is on individual income tax, of which $122 billion is business income (in addition, there is another $57 billion in self-employment tax that is underreported). Finally, $67 billion of corporate income tax due was underreported. (And this is only illegal tax evasion. Abusive corporate tax avoidance, some of which will be declared illegal retroactively, would add many billions more.)

What rich individuals and corporations don’t pay in taxes, shows up as higher taxes on the middle class, bigger budget deficits, program cuts, or some combination of the three. 2006′s $385 billion in net evasion of federal taxes would cover about 1/4 of the FY 2011 budget deficit (and, as Policy Shop notes, it exceeded the $248 billion budget deficit of 2006). As Policy Shop says, the case for giving the IRS further resources for enforcement is a strong one, but Republicans in Congress are actually trying to reduce enforcement resources.

That opposition needs to be overcome.

Time and again people tell me and the Tax Justice Network we get things wrong and time and again we’re proven to be right. I hope H M Revenue & Customs here take note: their claim that the UK tax gap is just £35 billion and is tax lost on 7% of the economy is ludicrous in the light of this US data. My own estimates of £70 billion of evasion and £25 billion of avoidance are the ones they, and government, should be working with, and even then they’re running at a rate little different from the US findings.

You and Yours, Radio 4, 12 noon today

Blogging, Tax avoidance 47 Responses »

Jan 102012

I’m on You and Yours on Radio 4 at lunchtime discussing tax avoidance and abuse.

Martin O’Neill is introducing the philosophy of tax, and tax abuse on the programme, and that’ sure to be good.

Eamonn Butler from the Adam Smith Institute is opposing me, and that’s bound to be bad.

How companies avoid tax – a quick summary in 8,000 words

Tax avoidance, Uncategorized 11 Responses »

Jan 062012

I’ve been asked to give examples of how companies avoid tax.

Now, that’s a mighty big subject. Can I start by suggesting you read chapter 4, here?

For those who don’t want to follow the link, read on here (although I should add, about 8,000 words follow): Continue reading »

Cameron claims the government is tackling tax avoidance whilst Osborne is going out of his way to promote it

Conservatives, Tax avoidance 21 Responses »

Jan 052012

David Cameron claimed today, when speaking about tax avoidance, that:

“With the large companies, that have the fancy corporate lawyers and the rest of it, I think we need a tougher approach.

“One of the things that we are going to be looking at this year is whether there should be a general anti-avoidance power that HMRC can use, particularly with very wealthy individuals and with the bigger companies, to make sure they pay their fair share.”

He said the government was doing its bit to cut the rate of corporation tax – and businesses should recognise they “should pay that rate of tax rather than try to avoid it”.

Well of course I agree. But he either has no clue what he’s talking about or he’s ignoring the fact that his government is one of the biggest supporters of large corporate tax avoidance there’s ever been. As I explained in a report I wrote for the TUC last May, In December 2010 George Osborne announced the biggest tax loophole ever deliberately introduced for large companies by a UK government when he announced that any UK company moving its treasury function out of the UK to a tax haven would have its tax bill on that treasury operation cut to 5.75%. The cost is estimated to be more than £800 million a year, and it was all designed to be a direct shot in the arm for the Crown Dependencies and Cayman.

And Osborne has also abandoned residence based tax – creating vast numbers of new loopholes for multinational corporations.

Cameron has to walk his talk on this issue before we believe him on this issue. Right now no one should. He’s simply not telling the truth.

If Clegg thinks a general anti-avoidance principle will close the tax gap, he has to think again

Tax avoidance 9 Responses »

Jan 052012

Nick Clegg has said this morning on Radio 4, and as now reported in the Guardian, that the Liberal Democrats intend to remain at the forefront of the battle against excessive executive pay, and wants the budget to contain measures to clamp down on tax avoidance.

He said:

he was determined to target the “wealthy elite or large businesses that can pay an army of tax accountants that can get out of paying their fair share of tax. They treat paying tax as an optional extra in which they can pick and choose the taxes they pay.” It left millions of hardworking families angered, he said.

But all he referred to as an answer was Graham Aaranson’s general anti-avoidance principle – and that is only intended to tackle the most egregious of cases.

He’s got to do a lot, lot better than that to close the tax gap of £95 billion.

If the Coalition is serious about this issue it should e talking to the Tax Justice Network now.

Barclays, tax and the cost of fiddling

Banking, Barclays, Tax avoidance 20 Responses »

Jan 042012

Barclays has been a long term target of those of us concerned with tax justice, as you will find by searching them on this blog. Our aim has always been to create reputational risk for the company because of its use of tax avoidance activity that is of harm to society and, I would argue, to is shareholders as well. So it was good to see this in the Telegraph today:

Bruce Packard, an analyst at Seymour Pierce, said Barclays risks “a fierce customer backlash” if it does not reduce its exposure to offshore tax havens or limit legitimate tax avoidance, and focus instead on service.

In an attempt to restore trust in the industry, Britain’s banks “have changed their marketing to appear friendlier”, Mr Packard said. But he warned that in Barclays’ case the marketing may be “inconsistent with the reality” and that although the bank “has stuck to the letter of the law … we can’t help thinking the brand is being tarnished”.

It looks like we’re succeeding.

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

Banking, Tax avoidance 17 Responses »

Dec 182011

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

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

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

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

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

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

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

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

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

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

It’s as simple as that.