Panorama on Monday is on tax avoidance.
I am in the programme, and it seems in the pre-programme publicity, which on the BBC web site features a major new tax avoidance story, the documentation for which I saw some time ago:
Major UK-based firms cut secret tax deals with authorities in Luxembourg to avoid millions in corporation tax in Britain, the BBC's Panorama has found.
The programme obtained confidential tax agreements detailing plans to move profits off-shore to avoid what was a 28% corporate tax rate at the time.
Those involved include pharmaceutical giant GlaxoSmithKline (GSK) and media company Northern & Shell.
Both firms told the programme they have a duty to be tax efficient.
In the case of GSK, the UK-headquartered firm set up a new company in the tiny European tax haven of Luxembourg in 2009.
In 2010, the new subsidiary lent £6.34bn to a GSK company in the UK.
In return, the UK company paid nearly £124m in interest back to the Luxembourg subsidiary - effectively removing that money from the UK company's profits.
That move meant the money was no longer available to tax in the UK at 28%.
In Luxembourg, tax authorities had agreed a generous deal to levy tax on that £124m at effectively less than 0.5%, or just over £300,000.
As a result, GSK in the UK potentially avoided up to £34m in UK corporation tax.
Richard Brooks, a former investigator with HM Revenue & Customs (HMRC) who now writes for Private Eye satirical magazine, said the documents reveal in detail the machinations of tax avoidance on a large scale with the full cooperation of the tax haven.
"We're seeing really with these, for the first time, exactly how companies avoid tax through a jurisdiction that wants to help them do it," he said.
GSK said it has an obligation to investors be tax efficient and to patients to free up money for research into new medicines
In the case of Northern & Shell, owners of Channel 5, the Express, OK! Magazine and others, before 2009, some of the company's subsidiaries in the UK had been lending each other money totalling £804m.
There was no obvious tax advantage on these transactions to be had in the UK.
Northern & Shell then set up a company in Luxembourg and transferred the loans there. Interest payments on those loans left the UK, leaving lower profits available for taxation by HMRC.
In Luxembourg, that money was effectively taxed at less than 1%, which meant Northern & Shell had sheltered profits which would otherwise have generated £6m in UK corporation tax.
Richard Brooks said of the practice: "The company puts its money into Luxembourg and borrows it back. It just sends money round in a circle and picks up a tax break on the way."
In a statement to the programme Northern & Shell said: "Our strategy is to comply with relevant regulations whilst minimising the tax burden for Northern & Shell and our customers. The board considers it entirely proper that Northern & Shell endeavours to structure its tax affairs in a tax efficient manner."
Tax expert Richard Murphy said of the practice: "All absolutely, without a shadow of a doubt, legal. I am still able to ask the question, is this acceptable? This is purely artificial structuring which is designed to undermine the tax revenues of the UK."
The secret tax deals revealed in the documents, first seen by French journalist Edouard Perrin of TV production company Premier Lignes and then shared with the BBC, were all devised by accountancy firm PriceWaterhouseCoopers (PWC).
In a statement, PWC said all their advice and assistance is given in accordance with UK, European and international tax laws and agreements.
In the UK, the Controlled Foreign Companies Rules were tax laws devised to put a stop to companies escaping UK taxation by diverting profits overseas.
But some companies believed these rules breached European law by limiting economic freedom. It led to a series of court cases and by 2010 around 150 companies were in dispute with the HMRC over whether they should pay UK tax on their foreign profits.
Rather than continue the battle through the courts HMRC began striking deals with major companies over their tax.
GSK negotiated a tax settlement with HMRC and closed down its £6.34bn loan operation through Luxembourg.
In a statement, the company said: "Both the UK and Luxembourg tax authorities are agreed that we have paid all the taxes that are due. We take very seriously our duty to pay tax. But we also have a duty to our shareholders and patients to be financially efficient so that we can maximise returns to investors and fund the development of future medicines."
A spokesperson for the company also stressed that over the period GSK "paid around £1bn in UK corporation and business taxes".
Margaret Hodge MP, who chairs the Public Accounts Committee which questioned settlements HMRC had reached with major companies, expressed concern over the ability of Parliament to scrutinise them.
"Because of the veil of secrecy surrounding all these decisions around tax, and we're talking big numbers here, lack of transparency means that we, on behalf of the taxpayer, cannot be certain that this was a good, honest, proper deal."
HMRC say they are unable to discuss how these cases were settled because of taxpayer confidentiality.
Panorama: The Truth About Tax, BBC One, Monday, 14 May at 20:30 BST and then available in the UK on the BBC iPlayer.
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Hardly “new” tax avoidance – the practice of borrowing money from a company in a tax haven and paying interest has been going on for donkey’s years.
But important to have it documented – and that’s always the hard bit
hi richard,
i hope you guys flagged up the dodgy Vodafone deal that Osborne blessed before Hartnett sealed it just before Osborne went to India in 2010 to beat the drum for Vodafone. plus his decimation of the CFC rules to encourage offshore tax avoidance. so much for moral repugnance!
Well, I mentioned it
Whether it makes the cut is another matter
Do we need documented examples of this when the UK Government is changing legislation to encourage this sort of activity?
As I understand it the changes to the CFC rules are designed to encourage UK companies to set up offshore financing companies as was covered on this blog previously. The message coming from government is pretty clear.
Definitely flavour of the month – whatever can that mean?!
There’s to be a 1 1/2 hour long documentary on exactly the same topic on French public television (France 2) this evening entitled “Paradis fiscaux : les petits secrets des grandes entreprises”. For those who may not know, “paradis fiscaux” is the quaint name the French give to tax havens.
Sadly I won’t be able to watch it as I’m about to leave for a week in UK. But maybe I’ll be able to watch Panorama at a friend’s house in Nottingham on Monday.
So why doesn’t UK do something about it? Oh, I forgot, it can’t discriminate against other EU jurisdictions, and EU law now overrides UK law. There is also freedom of movement of capital.
The sooner that the UK pulls out of the EU, the better. Its the only way to stop this sort of thing. And there are also Holland, Malta and Cyprus offering similar breaks within the EU.
I fear that (with the possible exception of your contribution) this will be sensationalist nonsense produced by journalists who don’t understand the documents they have obtained
Even richard brooks (a former tax inspector) doesn’t seem to understand it (either that or he pretends not to so as to spin the story in the way he wants to)
The presence of informed tax journalism in this country is hugely lacking- although admittedly it is a difficult subject to write about in any appealing way given its dryness and complexity
No I think what you’ll find is that a few of us have made tax highly accessible and comprehensible to many
You just don’t like the result
And odd that the other day you were bragging about this programme and now you’re not
Why’s that?
I had hoped that this programme would be an informed and balanced investigation into the financial arrangements of certain groups. I have subsequently discovered that it is not – as it has been put together by a group of people who don’t really understand tax (contributions from suitably qualified people such as yourself excepted). I assume you contribution is going to be limited to the usual 10 second sound bite?
Another missed opportunity I expect
I recorded for 2 hours
2 minutes of air time would be exceptional
I suspect one problem the BBC now face is that they are being bombarded by the corporate PR and legal machines of the entities concerned who will be trying every trick in the book to rebut and challenge any points raised that they dont’t like and as a result only the most incontrovertible points stand any chance of getting through. I very much doubt that Richard has the time or resources to back up all his points against such an assault. If I were the BBC I would only consider such rebuttals by the corporate macnines on the conditions that they are made on the record and with the other side being allowed to see them in writing beforehand.
you recorded for 2 hours and got less than 10 seconds on the programme – it must be soul destroying
the programme was as I suspected and a missed opportunity. i thought the attempted explanation of ZCB’s was pretty staged (either that or richard brooks must have been the worst tax inspector ever).
I did feel short changed – spent ages recording country by country, CFCs, how group tax worked, transfer pricing and thin cap, the nature of governemtn engagement on the issue, where it was all heading – and as you say not a lot of yield
But I also know some people who were recorded did not make the cut at all
And Martin Wolf got the final comment stages where I’d also recorded material
That’s television
I always tend to find it frustrating – not least because the outcome whilst OK in this case always seems to undersell the argument
With sympathetic respect, it’s not that “that’s television”. Its the infantile standards and techniques of the television we have sunk to. In particular (as in this case) the grindingly boring and narcisistic ‘presenter as hero’ trope. Wasn’t always this bad, doesn’t at all have to be.
“GSK negotiated a tax settlement with HMRC and closed down its £6.34bn loan operation through Luxembourg.”
So in this case even though legal, pressure from HMRC got the setup closed down and GSK paid some extra tax. It would seem everyhting happened that you would want to happen without the Courts and without reprospective legislation, non story….
Richard
do you think HMRC went along to GSK, said “we don’t like your tax structure, you owe us the difference” & GSK said “right-o” & paid ?
GSK set up a tax structure that “saved” them contributing hundreds of millions to the UK’s NHS, Education, Welfare & Defence bills. In order to do so they spent many £ms on legal & professional advice. When it was challenged by HMRC, GSK’s legal & professional advisors argued vociferously it was OK.
Eventually, rather than go to court, they did a deal.
So GSK paid less tax than a compliant multi-national would do & MUCH less tax than a small builder trading through a Co would do.
Tell me again how that meets all the requirements of a fair tax policy ?
It doesn’t
And we all know that
GSK’s tax director once said to me that tax had nothing to do with corporate social responsibility
I think that summarised the company view quite well
Richard,
Luxembourg seems to be unrelenting in its readiness to provide a loophole to undermine any system. Did you hear that Frank Warren and co obtained a licence from Luxembourg Boxing Board to evade a ban imposed by the British Boxing Board of Control? I’m not sure there are real professional boxers in Luxembourg yet thet have a boxing board that provides regulation avoidance service!
“HMRC say they are unable to discuss how these cases were settled because of taxpayer confidentiality.”
If I write to them and give them my NI number they will know I am a tax payer, so they can then write back with the full details.
I know you want to see more country by country reporting – but it is worth noting that which is given in GSK’s 2011 accounts (see Note 6) does raise a few questions as to why the UK operations actually required funding of £6.3bn when it only had disclosed net operating assets within the UK of £2.9bn.
Good point – but that’s not a universal disclosure – hence the need for country-by-country reporting
Weren’t GSK doing the same thing as Vodafone? If so surely the EU really should do something about what Luxembourg is doing – and we could do something similar about financing provided from the Channel Island, the Isle of Man and Gibraltar.
The European Court of Justice did all they could, in the Cadbury Schweppes case, by ruling that the UK CFC rules are lawful and did not breach EU laws. Which was why Vodafone lost their case with HMRC in the Court of Appeal and were refused permission to appeal to the Supreme. So why did Hartnett then do a deal with them for a fraction of the tax due? It’s fashionable to blame the EU but this is squarely a UK problem. Countries like Germany and France don’t have such loopholes. And to underscore this, Osborne watered the UK CFC rules down in the law budget to facilitate such tax avoidance, in the name of ‘competitiveness’.
Quite so
Hartnett’s role has never been explained and I suspect never will be
While I take your point about the laxity of UK CFC rules, it is worth noting that it is not just UK companies that route theri financing through Luxembourg, and I don’t think it can just be explained by Luxembourg City being a nice place fro financiers to live. And Luxembourg is a full member of the EU.
It’s also worth noticing that there was a time when even George Osborne realised that at least some offshore financing was being used to avoid tax
http://www.telegraph.co.uk/news/politics/georgeosborne/5713181/George-Osborne-faces-backlash-over-tax-plans.html
I wonder what or who changed his view?
Andrea, I think you have misinterpreted the Cadbury & Vodafone 2 decisions a little:
In Cadbury the court went beyond just saying that CFC rules are lawful and were not in conflict with the basic EU freedoms:
-The decision held that exercising a fundamental freedom in order to benefit from more favourable legislation, including a more favourable tax regime, does not constitute abuse of that freedom,
-it also established that simply treating the UK parent of a subsidiary established in a low tax Member State differently from the UK parent of a subsidiary established in the UK was sufficient to constitute a restriction on the freedom of establishment (even if the aggregate tax burden on parent and subsidiary might be no greater),
– “the need to prevent the reduction of tax revenue” (i.e. CFC rule in this instance) was not capable of justifying a restriction on a fundamental freedom.
– it did however hold that CFC rules are a valid restriction on the freedom of establishment on the ground of ” proportionate prevention of wholly artificial arrangements”, meaning that the CFC rules may only apply to wholly artificial arrangements and not other arrangements.
-held that in order to determine whether arrangements were wholly artificial, it would be necessary to apply certain objective factors: in particular “the extent to which the CFC physically exists in terms of premises, staff and equipment”, whether the CFC is “a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State”.
Voda 2 held (in referring the matter back to the Tax Court that a further exception should be read into CFC rules to ensure conforming interpretation.
Therefore no charge currently arises in relation to a CFC if it is factually established in another Member State of the EEA and carries on genuine economic activities there.
Frankly I think that HMRC got cold feet and settled rather than lose the matter on the law as the Appeal Court set it out in Voda 2.
The shame is that the ECJ has changed its view on such freedoms quite a lot since then
And in my opinion granting freedoms to companies as if humans is a gross abuse of human rights
Perhaps it should be after the 9.00 pm time given the horrors of it all.
How much UBR avoidance is taking place?
Well there’s a huge amount of govt sanctioned avoidance going on when empty premises with a rateable value of less than £2k are relieved of business rates.
I worked with GSK’s tax director when he was at Coopers and Lybrand Deloitte. An unpleasant character in my view.
I notice criticism of the Labour Government is singularly missing from your left wing chums on this topic. I can reliably inform you that Labour were not interested in consultation
on these matters. The Coalition have been. Now I would be the first to admit that is because the coffers are empty. I know you have been pushing the door open for some time now RM to your credit, but let’s not be naive about this, the door is now being pulled from the other side too for all kinds of reasons.
That’s an odd claim given how long I know it has been discussed by Labour
If you look carefully you will see that there are not a few Labour supporters who like myself accept that our Party got it wrong in going along with the deregulatory/corporates are always right theme of the times. While this may not be enough self flagellation for you – I think I would rather trust a Party that at least recognises what it has got wrong – rather than those who haven’t recognised the original problem. It is worth looking at how little of the additional planned taxes the Government is looking to raise are due to come from the Corporate Sector especially compared with Personal Sector, where the well off are the only ones who need incentives. The real debate should be around what constitutes good/bad regulation and effective/inefffective means of raising corporate taxes – but that just isn’t happening at present.
spot on stephen. osborne, that great political strategist, is turning out to be a copycat that apes new labour in every key policy ranging from sucking up to murdoch to selling out the 100 group on tax. the current regulatory capture of both HMRC and Treasury by big corporation is just one example of osborne continuing the policies established by brown (and balls and milliband). they need to own up to past mistakes and promise to right the wrongs to gain any enduring credbility.
Too bad the Panorama omitted to mention the fact that GSK ended up being double taxed in the UK and US to the extent of US$ 3 billion and that the Mutual Agreement Procedure in the US/UK Treaty failed to resolve the issue – because the two governments adopted a strict interpretation of the treaty’s wording to avoid settling the matter and avoiding double taxation?
Was that fair?
I don’t approve of double taxation
GSK did not prove it happened