Tax Research UK

I have been asked to do a video on transfer pricing.

Actually, I did, a couple of years or so ago (I can tell from the glasses). So rather than repeat the operation, here it is, with apologies to the several thousand who seem to have watched it in the meantime:

Richard Murphy Tax planning, Transfer Pricing, Transparency

I’ve been asked:

In your view, is there any room for legitimate “tax planning”? In a “perfect” world what would the role of the tax profession be?

Sorry if this has been previously dealt with, as I said in the other post, I am quite new to your blog.

My answer is an emphatic ‘yes’.

Tax planning must, I think, be tax compliant. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means  that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

To put tax compliance another way – it means you can place all your cards face up on the table in front of your tax authority and know thee is nothing there they would want to challenge. Everything you have done is legal, above board and in compliance with the spirit of the law.

All of which allows enormous scope for tax planning because the law in most states, and most certainly in the UK, allows many options and choices that match those available in the commercial world. So, and taking a simple example, a new piece of equipment may be bought or purchased by a business. The law provides tax relief in differing ways for different businesses when these choices are made. It is quite appropriate to ask what those choices are and to decide between them and to claim the relief in any case is justified if the transaction has actually been undertaken in the form for which relief is claimed. The law intends that this should happen.

What is wholly unacceptable is deciding to create structures abusing those same laws so that the deal is treated as leased in some places and acquired in others with more than one tax advantage secured along the way across an international divide. That does not accord with the economic reality of the transaction: the location of the deals may also be artificial.

There are two stages required to undertake this planning. One is good knowledge of the law. The other is a moral compass. Some lack the former; many seem to lack the latter. A general anti-avoidance principle is needed for those who lack the second. Either a moral compass or a general anti-avoidance principle should ensure we get tax compliance, but that does not mean the end of tax planning. It just imposes upon it the ethical process we all expect of or MPs and professional tax advisers alike.

Richard Murphy Tax compliance, Tax planning

Budget 2009: £3bn raid on top earners’ pensions buried in small print - Telegraph.

If those 1% or so on the highest level of earnings, who benefited most from the economic boom that prceded the credit crunch and recession are not going to pay most for it, who is?

There’s an incredible poverty of thinking here

And the argument that thyey’re worth so much that they’ll leave is ridiculous. As I saw it described in one London evening free paper last night - this won’t be a brain drain - it will be a vain drain.

They’ll come back when they realise just how low the quality of life is away from home if they only leave for money.

Richard Murphy Economics, Ethics, Tax planning

AccountingWeb has an article in which it is claimed that 95% of accountants may be negligent with regard to tax planning because they do not tell all their clients of all the tax planning schemes that might be available to them.

I think that an absurd suggestion and have said so on that site, saying:

This debate has been around for a long time. Let’s deal with the tax avoidance thing first. Most people are risk averse, especially when they know the facts. Kite G has outlined some of them. Most accountants are risk averse, especially when they know that the cost of a tax investigation on a scheme they sold to a client will probably fall to their account (and don’t always rely on insurance). In that case, and given the ethics of tax avoidance (or rather, the absence of ethics in tax avoidance which means that in my opinion a professional person has a duty not to partake in that activity) then the accountants position can be made abundantly clear to a client at the outset of the relationship - and can be summarised in the engagement letter. It can be stated that arrangements that the accountant thinks to be tax avoidance will not be offered to the client for consideration on the basis that the risk inherent in them is always considered unacceptable for either accountant or client to consider. Use David Ulph’s definition of tax avoidance if it helps:

Using artificial or contrived methods of adjusting taxpayers’ social, economic or organisational affairs to reduce their tax liability in accordance with the law while not affecting the economic substance of the transactions.

That gets one contentious issue out of the way. Completely.

Let’s now get back to the point. Does an accountant have a duty to advise a client on every tax compliant planning opportunity available? No, of course they don’t. To say they do is complete cop-out of professional duty. Client’s engage accountants to take stress of their shoulders in an area they do not understand: in our case accounting and tax. They do not choose to have an accountant to be the recipient of endless unrequested advice on complex issues they do not comprehend and on which they are not qualified to form an opinion. They paid an accountant to do that.

So, it’s an accountants duty to use their professional judgement to suggest opportunities to clients that might be suitable for them. But that has to take into account the broad range of knowledge an accountant has.

Let’s take an example. It remains true that limited companies can, theoretically, save tax for a lot of self employed people, most of whom have no regard for the corporate veil, the need to account for tax whenever funds are withdrawn from a company, and who believe that any account with money in it is theirs to raid. It is completely negligent of an accountant to recommend the use of a limited company to a person who does not have the discipline to operate it within the constraints of the law and so expose that client to all sorts of risk. So why do it, to then follow up with a comment which basically says ‘You could do this apart from the fact that I think you far to negligent to manage the arrangement?’ Is that good client relationship management? I don’t think so.

In other words, the accountant has a duty to exercise their own judgement. That is what being a professional person means: exercising judgement. The solution recommended here is a technical solution designed to alienate clients. I’d suggest giving it a very wide berth.

But as for the glaringly obvious advice everyone should supply, why aren’t you doing that by email, web site, in routine letters, even (hard to imagine they’re relevant anymore, but someone must do them) newsletters? If the client refuses to take the service, so be it. Make sure it’s been offered. Then liability risk is removed.

That is being proactive.

I get very annoyed by accountants who claim they have no choice in what they do. They have. They’re not technicians who deal in certainty. They’re professionals who deal in uncertainty. That means choice is an essential part of their work. To deny that is seriously misleading, at best. It is as often irresponsible because it creates an entirely false impression of what a practicing accountant can and should do.

And what they should do is form judgements. This article appears to deny that essential truth. As such it is very poor advice indeed.

Richard Murphy Accounting, Ethics, Tax avoidance, Tax compliance, Tax planning

The Times has reported this morning that:

Some of Britain’s biggest listed companies, including several that have threatened to redomicile abroad, paid little or no corporation tax in Britain in 2007.

Research by The Times shows that FTSE-100 companies - Cadbury, Standard Chartered and British American Tobacco, which have a combined market capitalisation of £75 billion, employed almost 11,000 UK staff and generated more than £6 billion in global profits, - paid zero corporation tax in Britain last year.

As the report goes on to note:

Richard Murphy, an accountant with Tax Research UK, who contributed to the research, believes that the system is in urgent need of reform. He said: “Why does the UK have a tax structure where you can have significant operations in the UK but pay all your tax overseas? We have an extremely generous corporate regime, which needs to be reexamined if this is the case.”

And:

Mr Murphy cited Rolls-Royce, the jet-engine maker, which employs 22,900 of its 38,600-strong global workforce in the UK but paid only £13 million in British taxes last year because the majority of its £733 million pretax profit was earned from overseas sales. Rolls-Royce, which says that it has no plans to relocate overseas, pointed out that its UK manufacturing and research operation was costly.

However, Mr Murphy said: “This cost structure is inevitable, but international rules for pricing within a group of companies allow for this and should usually result in tax being paid where the profit is generated. I’d usually expect that to be where most of its people are, especially in an R&D-based company.”

This analysis was all undertaken by the Times using data in the companies’ own accounts.

The analysis of Rolls Royce simply applies a unitary overview to what then seems an odd result.

But the strangest comment was by BAT, which paid no tax in the UK in 2007:

A spokeswoman for BAT, the twelfth-biggest company in the UK by market value and the owner of the cigarette brands Lucky Strike and Pall Mall, said that its head office operated at a loss and that 99 per cent of its profits were earned overseas.

There is only one commercial response to this. If a head office loses money it cannot add value. In that case the group is not worthwhile mainatining and should be broken up on commercial grounds. Shareholder value must be increased in this case if it were.

I await BAT’s response.

Richard Murphy Accounting, Tax avoidance, Tax management, Tax planning

It’s a fact that we cannot do without taxes. That’s because we cannot do without government. And we cannot do without markets either, at least in the world as we know it. The relationship is symbiotic: governments provide the structure in which markets can work: markets need government as their insurer of last resort: populations need governments to protect them from the excesses and failings of the market. Those who argue for one as opposed to the other will always be on a losing ticket: they ignore the obvious fact that as we have structured our society this is an indivisible relationship, not a matter of choice.

But relationship carries obligations. One is that each plays an appropriate part. The other is that outsiders are held at bay and not allowed to interfere to the point that they harm the process which ensures a continuation of the productive benefit that flows from reasonable harmony.

What’s the relevance of this? Simply that unfair taxation harms the relationship between a government and markets. Take the example of Setanta’s relocation of its subscription TV service from Ireland to Luxembourg. It has saved £17 million in VAT as a result as Luxembourg has a 3% VAT rate on such supplies, apparently. Ireland charges more. But what is absurd is that this is happening within the single market of the European Union where such anomalies are meant to be eliminated and the free movement of capital is not meant to be either encouraged or hindered by taxation.

It’s clear that Luxembourg’s VAT abuse needs to be tackled.

But there’s more to it than that. Setanta is a substantially Irish company. Half of its staff are there. That’s likely to make it the core of its activities. They’re not in Luxembourg. So this is an artificial move. As such it contravenes section 1b of the TJN / AABA Code of Conduct for Taxation which says:

1b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

Luxembourg is not honouring its international obligations to other states.

Setanta is also in breach of sections 3b and 3c of the Code:

3b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

3c. No steps are put into a transaction solely or mainly to secure a tax advantage.

I also think they’re in breach of 4c and 5b:

4c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

There’s a great deal of unacceptable conduct taking place here. Relationships rarely survive such behaviour. That’s why we’re worried when this sort of abuse takes place. It’s bad for the economies that suffer, it’s long term unsustainable for the compnaies involved, eventually consumers usually lose as a result, but worst of all, it’s bad for the whole effectiveness of the market which is best sustained when each party accepts their duties and obligations to each other and to those they relate to outside the immediate relationship.

This isn’t pie in the sky stuff: this is about creating well-being. And that, at its core, is what economics is meant to be about.

It’s accountants who think economics is about market abuse.

NB: Hat tip to Dennis Howlett.

Richard Murphy Code of Conduct, Dennis Howlett, Tax management, Tax planning, VAT

Not my suggestion, I got this one from the TaxProf Blog in the USA:

Google Norway does its best to avoid paying Norwegian taxes, but is this illegal?

The Norwegian newspaper Dagens Næringsliv reports today that Google does its best to avoid paying taxes to the Norwegian government.

Google Norway had an official turnover of NOK 33.6 million last year (US$ 6.2 mill). However, as Dagens Næringsliv points out, that is only a fraction of the unit’s real revenue. Unnamed media companies estimate that Google sold pay per click text ads in Norway for NOK 200 million last year (approximately US$ 37 mill), and is expected to generate twice as much this year. Still, last year Google Norway paid only NOK 1.5 mill in taxes.

How does Google do this? According to Dagens Næringsliv the income is turned over to Google Ireland. It is Google Ireland that bills the Norwegian AdWords customers. …

Of course, if Google were subject to unitary taxation and had to report on a country-by-country basis much of this abuse would be a) apparent and b) prevented.

The blog is worth looking at by the way - it also deals with allegations about Google in China.

Richard Murphy Accounting, IFRS 8, Tax avoidance, Tax management, Tax planning, Transfer Pricing

I’m on record as saying I think the cut in Capital Gains Tax to 18% is a straightforward disaster. But at least I have done so for reason of principle. I was amused to read the follwoing in The Telegraph this morning:

Furious insurers are demanding urgent talks with the Government after it emerged that they will lose billions of pounds in lost revenue should the Pre-Budget proposals for a flat rate of capital gains tax at 18 per cent come into force.

The Association of British Insurers fears sales of investment bonds - worth more than £20bn in 2006 - will grind to halt. Returns on life insurance-based products will continue to be classed as income and so higher-rate taxpayers will pay tax at 40 per cent. On the other hand, returns on products such as unit trusts will be treated as capital gains and taxed at 18 per cent. One senior insurance insider called it “a cock-up” and added: “This could be a disaster - we’re buggered.”

Or as another put it:

As a private investor, especially a higher-rate taxpayer, why would you invest in a bond now? The Pre-Budget Report has thrown financial planning into chaos.

It seems that these financial advisers aren’t all that keen on tax cuts after all. It’s the loopholes they like.

So much for the supposed desire of the Right for flat taxes, simplicity and low rates. They clearly don’t suit them. It’s one of the few lessons worth noting from this.

Richard Murphy Flat tax, Tax avoidance, Tax management, Tax planning

The RMT issued the following press release this morning:

Private rail industry profits from £1.3 billion in unpaid tax

Companies using deferred-tax loophole to fund leap in dividends

THE PRIVATE rail industry is profiteering on £1.3 billion in unpaid tax and is using a deferred-tax loophole intended to encourage investment to fund massive increases in dividend payouts to shareholders, Britain’s biggest rail union reveals today.

Nearly half of the £1.5 billion in dividends paid out in the last five years by nine private train operators and rolling-stock companies has been funded by unpaid tax, according to a detailed analysis for RMT by tax expert Richard Murphy of Tax Research.

Almost £1.3 billion of deferred tax is owed by the biggest six train-operating companies (Tocs) and the three rolling-stock leasing companies (Roscos) - but this is tax that will most likely never be paid, and is effectively a hidden subsidy that dramatically increases cash profit levels.

The report shows that the nine companies’ declared profits almost doubled from £435 million in 2002 to £810 million in 2006, but their declared tax charges remained almost constant at about £190 million a year throughout the period. The declared percentage rate fell from 43 per cent in 2002 to 24 per cent in 2006.

This though hides the real story. Tax is not paid on accounting profits. The accounts charge for goodwill is not, for example, allowed for tax. And the charge for tax in accounts includes ‘deferred tax’ - which this survey shows is never likely to be paid, as well as the current tax bill the company expects to settle in cash.

Comparing pre-goodwill profits and current tax charges that will actually be paid shows that these companies’ profits rose from £584 million in 2002 to £894 million in 2006, and that the tax they actually paid plummeted to £109 million in 2002 and just £71 million in 2006, at a rate of just 7.9 per cent in that year.

The study also reveals that by 2006 one pound in every three used to fund the private-sector rail operators was represented by deferred tax - which is in effect a tax-free loan from the government, with no repayment date.

“Deferred tax is supposed to be an allowance against investment and amounts to a hidden subsidy for rail firms, but it is being exploited to increase dividends to shareholders,” said report author Richard Murphy.

“Rail companies are hiding behind accounting rules when presenting their figures that let them suggest they’re paying more tax than they are, and that means the massive hidden subsidy the tax system gives them is not apparent. It should be,” Richard Murphy said.

“It might be legal but it shouldn’t be,” RMT general secretary Bob Crow said.

“Passengers are facing a future of massive fare increases and the government is cutting direct subsidy to the rail industry by £1.5 billion over the next six years, yet these private companies are sitting on a tax-break nest-egg worth £1.3 billion.

“This is money that should be funding railway engineering, but it is being used instead for financial engineering and turning hidden subsidies into pure profits for shareholders.

“At the very least the government should tell these companies to stump up the £1.3 billion they owe in tax and use the money to reverse the planned funding cuts.

“Better still they should face the fact that the private sector’s involvement in the railways is a barrier that stands in the way of delivering the growing, affordable people’s railway that our economy and environment desperately need,” Bob Crow said.

The companies whose accounts are analysed in the report are: First Group PLC; Go-Ahead Group PLC; Stagecoach Group PLC; Arriva PLC; National Express Group PLC; Virgin Rail Group PLC; Porterbrook Leasing Company Limited; HSBC Rail (UK) Limited, and Angel Trains Limited.

The report that backs up these findings is available here.

PS: 10am 5.10.07. The FT, Mirror, and at least 40 regional papers have covered this story this morning.

Richard Murphy Accounting, Economics, Ethics, Tax management, Tax planning

Accountancy Age reports that Michael Parkinson has dropped out of the totally artificial tax planning schemes organised by UK accountants Vantis.

The schemes involved four companies set up by Vantis in which people invested. The companies were then floated on the Jersey Stock Exchange (which is a farce if ever there was one), after which there prices mysteriously rose substantially. Not just a bit I add, but phenomenally. One such company was called Your Health. Once this price increase had happened (by some mysterious chance) the investors gave their shares to UK based charities and claimed gift aid tax relief on the value of the shares donated so generating substantial tax refunds for themselves whilst dumping wholly worthless investments on the charities in question who then had to write their value off as a cost in their accounts.

To put it nicely the whole scheme stunk and those behind it deserve to be drummed out of any professional organisation of which they are a member for unethical conduct whether or not it was legal.

Accountancy Age report that Parkinson’s agent said:

He certainly put his money into Your Health to get tax relief. We were assured it was approved by the Revenue. The minute we realised it wasn’t kosher we dropped [it]. We took the hit. We were very sensitive, extremely upset with the advice we got. It came up that the underlying charities were not over the moon about [the gifts].

The agent added that all the advice on the scheme came from Vantis.

To be fair Parkinson has done the bets he can to get out of sticky mess. But three things come out of this:

1) You can’t tax plan and expect to come out smelling of roses, because you won’t.

2) Greed and charity don’t mix.

3) The accountancy profession continues to be dragged through the mud by the far too many within it who appear to have no conscience at all.

Richard Murphy Corruption, Jersey, Tax Havens, Tax planning