Felicity Lawrence has written a Guardian article under the above title. Please read it.
It focuses on what for me is one of the big issues of tomorrow's budget - and that's the destruction of the UK's corporate tax base, George Osborne's deliberate promotion of tax haven abuse and his utter indifference to the need of developing countries to collect tax - which he is deliberately harming.
Take just this one section as indication of why you should read it all:
The new goodie given the go-ahead by Osborne is a further exemption which will reduce multinationals' tax bills dramatically: the exemption on profits of offshore finance company subsidiaries.
If a UK-based multinational sets up a treasury company in Switzerland and puts equity into it from the UK, which is then passed on in loans to its other subsidiaries to run its operations, with interest on the loans flowing back in profits to the tax haven. The tax rates on these profits will be a maximum of just one-quarter of the current UK rate.
These new policies have been written by multinationals. Labour established a series of working groups to consult on the CFC reform made up almost entirely of tax directors from businesses with large numbers of offshore subsidiaries.
The monetary assets working group, for example, consisted of Vodafone, Shell, Diageo, Tesco, G4S, International Power and BHP Billiton. The intellectual property group included Kraft, GlaxoSmithKline, Associated British Foods, Cable & Wireless, and the insurance working group had Aviva, RSA, XL Group, Prudential, Lloyds and AIG. The banking group came from banks including Barclays, which is famous for sophisticated tax avoidance.
Under the new coalition government, a senior manager in international corporate tax from accountants KPMG, Robert Edwards, was seconded to the Treasury for 20 months to see through developing the policy on CFC rules. His speciality at KPMG? Advising multinationals on tax-efficient cross-border financing and restructuring.
With stakeholders like this, it's no surprise that tax justice protesters have taken to direct action and occupation.
Daily I grieve on the disaster for the UK of Osborne getting power without having ever won a general election. Rarely has there been a man with so absent a moral compass in high office in this country. New Labour made serious errors - as Felicity Lawrence does not seek to hide, but Osborne is so much worse.
And in the meantime who will pay for this largesse to the largest corporations in the world? Why, ordinary people suffering beenfit cuts, increased taxes and a future with no hope, both here and abroad.
That's why we campaign.
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While I understand the impact of these arrangements on the subsidiary country in terms of tax lost, what is the alternative? The company pays out its equity, often to foreign shareholders and borrows for the subsidairy from a global bank. So the developing country gets no more tax than before (potentially less if the cost of borrowing increases) and the UK loses the tax it would have earned on the equity.
The only real way to stop this is for the developing country to restrict the amount of cross-border funding the multinational can use, but then the issue is that there is generally a lack of domestic funding available.
I have to mit I’m not following your logic
Who is doing what to who is not clear to me
My point is that unless a developing country can provide financing for projects domestically (which most can’t) they will have to allow offshore funding and the deductability of the interest thereon. In which case, a large portion of the profits end up being moved outside the developing country. So the use of treasury companies by UK multinationals won’t result in the developing countries getting any less tax revenue anyway, as without them, the multinational would probably use offshore debt instead.
The real answer for developing countries is to have some sort of revenue lvey on mineral rights, thus avoiding any impact from how it is financed. But then that would result in some project not going forward and jobs/ancillary GDP being created.
Ah, ever heard of thin capitalisation rules
Or transfer pricing?
Clearly not
This was the first article I read this morning, Richard, followed by Polly Toynbee’s piece on inequality. Reading that the head of the OECD was in China giving a talk about the dangers of increasingly unequal societies at the same time as a government in the UK is set to increase inequality in this country even further was something that I wouldn’t have believed possible not that long ago.
But now? Quite obviously the Tory neo-liberal agenda that was so long in the making is being almost fully implemented – despite any protestation to the contrary by ANY Lib Dem (yes, Simon Hughes, Shirley Williams, et al I mean you). Indeed, so desperate are the Lib Dems to hang on to power in any circumstances that we now see naked greed and exploitation parcelled up as ‘policy’ with hardly a murmur from them, thus enabling a party with no mandate to impose policies that will have a devastating and lasting impact on millions of people.
And then there’s the NHS – or was. Shame, shame, shame, Lib Dems – hang your heads in shame.
Indeed
Whereas if the tax rate in Switzerland was the same as the rate in the UK, the amount of tax collected by the UK would be no higher (because of tax credits), and in fact lower if the Swiss profits are eventually repatriated.
There is no tax on repatriation
What are you talking about?
You desribed companies such as Vodafone, Shell and BHP Billiton as having “offshore subsidiaries”. That is hardly an appropriate way of describing them.
These companies have the vast majority of the operations in other countries with often little more that the HQ and the registered office in the UK. What mining activities do BHP Billiton undertake in the UK?
Offshore is not the same as overseas
Shall we get facts right?
That is exactly my point. The term “offshore subsidiary” implies the setting up of a convenient operation in some tax haven.
But if a company such as BHP Billiton has an “offshore subsidiary” what does offshore mean – offshore from where? It operates and generates most of its profits by mining in places such as Australia so is it the UK or Australian govt which is losing tax revenue if transactions are moved offshore.
Indeed what proportion of BHP Billiton’s profits can the UK government legitimately claim to tax?
Oh for heaven’s sake
Offshore is not geography
Go and read about the subject before commenting again
I have read about the subject and perhaps I have not explained the point properly. The situation I am describing was best illustrated by the example of WPP. Alistair Darling tried to change corporate tax rules to ensure that UK registered companies which are multinationals would be liable for more UK tax.
WPP and other companies responded by moving registration for tax purposes to Ireland. This was portrayed by some as some form of tax dodge by setting up an “offshore” operation but WPP pointed out that 90% of its profits are generated outwith the UK.
They were making the point that there is no necessity nor indeed any obligation for them to channel profits generated abroad through the UK.
No – you still utterly fail to differentiate overseas and offshore
And unless you understand that what you’re saying is meaningless
I work in international corporate tax for a Big 4 firm and we use ‘offshore’ and ‘overseas’ interchangeably to mean ‘not in the UK’. The point that D Kane is trying to make is perfectly clear to me – i.e. that it is far too simplistic to start with the premise that offshore/overseas = bad. Many UK groups have significant and genuine economic activity located outside the UK and it does not automatically follow that all of the profits of those activities should be taxed here.
If you are using ‘offshore’ as a shorthand for something more specific – such as choosing to locate financing or other activities overseas that could be undertaken directly from the UK – then fine, but perhaps you need to be more specific about how you are defining your terms.
Then you’re, vey politely stupid
If a tax professional does not know what offshore means then they’re not worth employing
Try reading this http://www.amazon.co.uk/Tax-Havens-Globalization-Cornell-Studies/dp/0801476127
You might be more use to your employers if you know what you’re talking about
I have no interest in reading your book, since your blog is full enough of spurious assumptions, misunderstandings and bluster that I don’t need any more.
Even if offshore means something technical to you, taking the time to explain that to someone rather than being condescending might serve your cause (which I support in general terms BTW) better.
Ah, that’s why the OECD and World Bank wanted to hear me yesterday
Of course. I see
And yes I will be condescending – precisely because you claimed a status you quite clearly do not deserve and then seek to belittle me when you can’t even be bothered to learn the first thing about the issue on which you’re commenting
Very big 4 – but unbecoming.
But since even the most basic of research is beneath you – try this:
There is no agreed definition of offshore. It can only be described. The term has often been used to describe any jurisdiction (regardless of whether they are islands) which provides tax and regulatory privileges or advantages, generally to companies, trusts and bank account holders on condition that they do not conduct active business affairs within that jurisdiction.In its 2008 report ‘Creating Turmoil’ the Tax Justice Network tackled this issue. It suggested that offshore does not describe geography. It most certainly does not refer to island locations. The term ‘offshore’ refers to the location of the customers of an offshore financial centre i.e. those people the tax haven / secrecy jurisdiction intended should make use of the structures they permit under their law. What characterises these customers is that they are not in the tax haven where the OFC is located. They are ‘elsewhere’ i.e. they are located in another jurisdiction. This concept was first recognised in London, and as far as the UK was concerned that ‘elsewhere’ was always ‘offshore’. The term stuck, even when the geography to which it originally related had little or no meaning.What this amounts to is the following: an offshore transaction is recorded in one place (a secrecy jurisdiction) on behalf of parties who are actually elsewhere. Those transactions might have the legal form of taking place in the tax haven in which they are recorded. The reality is that their substance, and benefit, occurs elsewhere. The term ‘offshore’ does, as a result, describe a disconnect between the place where a transaction is recorded and the place where its economic substance occurs. It is for this reason that the world’s secrecy jurisdictions were able to say that the economic crisis that developed from 2007 onwards was not of their creation. By definition that had to be true. Nothing recorded in an OFC actually takes place there. In consequence those secrecy jurisdictions that host OFCs can fairly claim they are not responsible for what is recorded in the OFC for it always takes place elsewhere.
Or:
Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.
Or
http://www.secrecyjurisdictions.com/PDF/SecrecyWorld.pdf
Gillian McKeith is a millionaire and successful TV presenter, but anyone with a decent school-leaver level of science education knows that she is a charlatan with a mail order PhD that wouldn’t know her way around the scientific process with a map and detailed instructions. Just goes to prove you can fool some of the people all of the time.
I genuinely appreciate your explanation, however, and, on reflection, I guess we might use ‘offshore’ to imply something different to ‘overseas’, but not in every situation and the two terms are still commonly substituted. However, my point stands that you are using a fairly everyday word in an esoteric fashion and this has clearly confused some of your readers. Rather than accepting this and offering some explanation, you dismiss their comments out of hand, which to me suggests a rather small-minded approach to the debate.
As for whether I ‘deserve’ my status, surely that’s irrelevant? Either I have worked in CIT (for 13 years) as I claim, in which case my suggestion that you are using a term in a way that is not widely recognised, even within parts of the tax profession, is valid, or I am some sort of internet troll with a very weird predilection for claiming to work in unpopular fields, just for fun.
Of course, there is a debate to be had around the new CFC rules, but it is far more nuanced than you make out.
When you hide behind anonymity I have no idea whether you are what you claim to be, or not. And your email is certainly spurious as is your name so candidly the fact you got on here at all is in violation of a) my moderation policy and b) professional ethics as you may be masquerading as a CIT professional when not.
But the fact is if you don’t understand offshore then it is worrying.
And if you don’t understand that a blog is a narrative flow and that each piece does not have to stand up to scrutiny in its own right then you also fail to understand the medium you are addressing.
And since like it or not I am told I ma one o the world’s experts on offshore, tax havens and secrecy jurisdictions then I assume those who want to engage on the issue will have at least bothered to gain some acquaintance with the issues. I wouldn’t tell a brain surgeon he used the wrong terminology on his blog if I knew nothing about brian surgery -I’d go and look it up first
So candidly, your position was arrogant and condescending and was based on the assumption ‘I’m Big 4 so I’m right’. Well, actually, you’re not.
Just as you’re hopelessly wrong on CFC – where of course the EU is a factor – biut the chosen outcome is as simple as we suggest when saying it’s wrong.
Take the blinkers off, I suggest because you sure as hell are showing you’re wearing them
Well, I don’t give my email out freely because that tends to lead to spam. I also noted that other people have left comments on your blog with only their initials (SF, above) or under a pseudonym (unless ‘roger rabbit’ really does contribute here), so I don’t see the problem there (those are my real initials, by the way, I am not claiming to be a Member of Parliament). I choose to remain anonymous because I don’t want to be misrepresented as representing the firm I work for in this debate. If that means you no longer allow me to contribute, so be it.
Professional ethics has nothing to do with this as I am not using this forum to offer professional services. As someone who laughably claims to be ‘The #1 Economics blogger in the UK’ in order to sell books, I would think you might be more careful about raising questions of ethics.
And my ‘position’, which you have still failed to grasp, was that within a Big 4 tax practice (who ‘like it or not’ are experts in tax avoidance matters) the term ‘offshore’ is not used as distinctively as you make out above. Therefore, others may be forgiven for misunderstanding your point.
I have read the article you linked to, by the way, and the author refers to both overseas subsidiaries and offshore subsidiaries without making it clear whether there is any distinction.
No doubt you will resort to ad hominem attacks again in response, since you seem to think they serve you so well. However, I am intrigued as to how I can be ‘hopelessly wrong’ about the CFC rules when I didn’t actually offer an opinion on them, other than to say there is a debate to be had. Unless your own position is that your view cannot possibly be challenged on any basis, which sounds rather ‘arrogant and condescending’ to me.
Respectfully, and as indication of your ability to deliver ad hominems without research, the claim I am the UK’s number one economics blogger is based on the fact Wikio have said I am for about the last year
When you know anything about what you’re commenting try again.
Right now you repeatedly make yourself look very foolish
I have always understood the concept of Offshore and never been happy with it, even when working with it, and probably suffered career wise as a consequence. However I am concerned about the effect on UK companies if they unilaterally do not use Offshore methods.
Like it or not, Economic competition is nowadays war by other means and like war it is dirty. I just cannot see other countries following suit, moral sensibility does not rank high in many countries as in liberal UK. Is this where your thinking is leading, a moral position, and to hell with the consequences ?
I do not share your view of the depravity of human nature
Morality is inherent in all of us
It’s when we ignore that fact that we get the untold consequences
I had no doubt that you had some meaningless award or other credential to back your claim up. Your book cover doesn’t provide a source for your chosen epithet, though (as most who emblazon such an endorsement would). If that because you know that no one knows, or cares, who Wikio are?
Still avoiding addressing the substantive points I make, I see.
Keep fighting the good fight though. I have just spent an interesting half an hour perusing some of your other entries and find that I agree with your position on many matters (in particular IHT and non-doms) even if I don’t always buy in to some of your ‘right-on’ rhetoric. It is vital that someone keeps the public debate going in this area, so I applaud your efforts in that regard.
It is not that I don’t appreciate the push towards more moral taxation worldwide.
It’s just that I don’t see you making much headway against say the BRIC countries.
At least two of them don’t go much for morality full stop..There are plenty of millionaires in all 4 of these countries operating though Tax Havens. Latin America and Africa are riddled with tax corruption- and you can’t blame the West for all of it, they have home grown talent too. The USA is dominated by the industrial/miltary complex with not insignifcant Mafia connections. The EU is a muddle and The Middle East a basket case. I’m afraid a lot of the world don’t play by the rules- where do you get your optimism?.
India and Brazil are rapidly moving the right way