Tax compliance is paying the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transaction and the form in which it is reported for taxation purposes coincide.
There's not one comment I have read on Merrill Lynch booking its US subprime losses in London that thinks it is tax compliant.
But we have no apparent mechanism to tackle it because as long as they have got the legal form right, in which case the economic substance does not matter.
That's ludicrous.
There's another thing: country by country reporting would help highlight this sort of abuse.
We need radical tax and accounting reform is we're not to be taken for a ride.
And remember: Merrill Lynch is going to cost a lot more than Northern Rock now.
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OK.
Being realistic and simplistic about this, ML have booked a load of losses in their UK subsidiary that didn’t really relate to UK business (I think that much is uncontentious).
But this is a US bank, so what they are really trying to do is avoid US taxes. So to make use of these losses for tax purposes, in future they will also have to book a load of PROFITS in the UK that don’t really belong in the UK.
I can only assume that UK rules on carry forward of losses are more generous than US rules (or else they’d have left the losses to carry forward in the US).
So on a country basis, while the losses didn’t belong in the UK, neither will the profits. If anything, it’s the IRS who are being conned here, not HMRC. So for corporation tax, from HMRC point of view it’s nothing lost. BUT, to be able to use up those losses, ML need a presence here, so they will have more UK employees paying more UK PAYE, overall it is quite possible that HMRC comes out ahead on the deal.
Hmm, I dunno Mark. I think the really interesting question is whether the profits from this activity in previous years were also booked in London rather than the US. Given that we’ve a lower corporation tax rate I rather suspect they were.
It does seem a little churlish to complain about people claiming tax relief on losses when you’ve been happily taking the tax on their profits in previous years.
TW, that is yet another good point. Either way, it’s pretty much a wash as far as HMRC goes.
See http://www.taxresearch.org.uk/Blog/2008/08/17/merrill-lynch-shouldnt-be-booking-the-benefit-of-that-tax-loss-yet/ for a response