Corporate Watch have published the latest work to reveal a company using debt financing to shift all their profits out of the UK. As they note:
This is Global, the UK's biggest commercial radio company with stations including Heart, Capital and Classic FM, has not paid any UK corporation tax in the last five years, after sending more than £200 million through tax havens, an investigation by Corporate Watch, revealed in the Sunday Times today, has found. The company also owns Xfm, Choice, Gold and LBC and manages bands including The Wanted and Lawson through its Global Talent business. Its music publishing division has The Vaccines, Ellie Goulding, Corrine Bailey Rae, LMFAO and The Waterboys on its books.
As they also note:
Thanks to the revenues from its radio and other businesses, Global made an operating profit of £33 million in 2012, on a turnover of £209 million. But Corporate Watch has found that huge interest payments on loans it has taken from its owners through the Channel Islands Stock Exchange have wiped out its taxable profits in the UK.
Global's UK companies are ultimately owned and controlled by the Jersey-based company Global Radio Group Limited. The UK companies' accounts show they have borrowed £233 million from their owners at a massive 15% interest rate, with another £252 million at 10.5% from another company only described as a “connected party”.
In 2012, interest payments of £60 million on these loans helped turn the £33 million profit into a £29 million loss, leaving Global with a UK tax credit of £257,000 for the year. Previous years' accounts also show either no tax paid or credits received. In total, more than £200 million has left the UK as interest payments to the owners since Global was founded in 2007.
And this pays, of course, because the vast majority of the proceeds appear to flow through tax havens:
Jersey does not charge companies like Global Radio Group Limited any corporation tax. The Jersey Company Registry shows Global Radio Group Limited is itself 99% owned by a British Virgin Islands-registered company called Global Radio Worldwide Limited. The BVI also has a zero corporation tax rate. The other 1% is owned from London by Ashley Tabor in a personal capacity.
Global has said:
A statement from Global in response to questions from Corporate Watch said this is all because of the “significant and legitimate investment” in the business: “once the cost of this investment is taken into account, Global has not made a taxable profit”.
Corporate Watch in response correctly note:
But high interest loans through tax havens are not the only way investors can put their money into a company. They could, for example, have invested their money as equity and received dividends based on the company's performance. But dividends are paid after a company is taxed and so do not reduce its tax bill.
This is exactly the same point that I have made about nPower. Using debt funding money can flow, untaxed, out of the UK quite legally. We all lose as a result.
And the trick in this case is, undoubtedly, tax avoidance. Corporate Watch are right to note that:
Keen Corporate Watch readers will recognise this as the quoted Eurobond ruse, beloved of water and healthcare companies, and many others.
Global's owners can receive the interest payments tax-free because they have issued the loans as “quoted Eurobonds”. Normally, when a UK company pays interest to a non-UK company, it has to “withhold” 20% of the payments and give it to the UK tax authorities. But if the loans are issued as quoted Eurobonds on a “recognised” stock exchange, such as the Channel Islands' or the Cayman Islands', they benefit from an exemption that means no withholding tax is taken off.
So this is deliberate structuring to get a tax result. And I'm afraid I am quite sure the General Anti-Abuse Rule won't go near it. This is now considered 'normal practice' and the GAAR goes nowhere near that.
The result is that one company is mopping up large parts of the local radio business, and all with the help of an implicit tax subsidy - precisely because local radio stations pay their tax and those structured like Global can avoid that obligation. It's legal, no doubt. But it's not ethical. And worse it is undermining markets.
This is yet another sign of the massively harmful impact of tax avoidance on competition and the world we live in.
And is another reason why the General Anti-Abuse Rule is not good enough and a general anti-avoidance principle is needed.
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How on earth can your GAAP apply if the misapplication of WHT on interest on Eurobonds is specifically provided for in s882 ITA.
This is no different to investing in an ISA, are you suggesting your GAAP will apply to people investing in ISA’s solely to gain a tax advantage?
Incidentally, this is no unintended loophole either – HMRC, in 2012, specifically looked at WHT on Eurobond interest where the holder of the bond is a related party – they decided to retain the status quo.
The GAAP applies to the abuse of law
As does the GAAR
And so therefore irrelevant in this instance.
Still doesn’t explain why you seem to think your GAAP will have the effect of somehow reversing the effect of the Eurobond interest.
Isn’t this just another example of non-expert rabble-rousing against corporates without any attention to the rule of law.
The abuse of law is now an acknowledged principle in tax
A general anti-avoidance principle would like at whether the Channel Islands arrangement had economic substance to it. If it did not it would fail
Not that hard to understand, I’d have thought
Well of course it has substance, a Eurobond was placed in Jersey and acquired by a related party. That is substance in the general sense of the word.
Anyway, your own GAAP cannot touch this arrangement as Section 2 provides:
Arrangements are not tax arrangements if–
(a) the arrangement was specifically permitted by legislation or regulation relating to any of the taxes referred to in section 1(3) or is clearly 5 consistent with principles on which the taxes referred to in section 1(3)
are based whether express or implied, or
That is not substance
That is the charade of substance
And my GAAP is only a draft – I am under no illusion that it is perfect
It’s also because Ofcom is designed as a light-touch – some (me) might say soft-touch – regulator. Ofcom have allowed Global and its predecessors to slowly remove all their public service obligations and their regional content, save the breakfast shows, which even then have often been merged into larger regions (example: HEART Oxfordshire, formerly Fox FM, has been merged with HEART Berkshire, formerly 2-TEN FM, formerly Radio 210, to form HEART Thames Valley). The larger groups have gained greater efficiency, to the point where effectively they operate national stations by stealth.
Through the use of tax havens, the larger groups could claim that they were unprofitable or barely profitable, and so claim to Ofcom that they would not be able to continue running if certain restrictions were not removed. Each time it seemed like a small change, but the net effect over years was to eliminate all locality and independence from Independent Local Radio.
The IBA could resist these salami-slicing tactics, but its replacement, the Radio Authority (under Thatcher, no surprise) was too weak, and Labour’s creation of Ofcom did not really beef up what the regulator was allowed to do.
“Normally, when a UK company pays interest to a non-UK company, it has to “withhold” 20% of the payments and give it to the UK tax authorities. But if the loans are issued as quoted Eurobonds on a “recognised” stock exchange, such as the Channel Islands’ or the Cayman Islands’, they benefit from an exemption that means no withholding tax is taken off.”
Just curious. Why would Eurobonds gain an exemption. Wht was the rationale for that?
It was originally an abuse of rules on regulated stock exchanges – which supposedly the stock exchange is
And lobbying has kept it in place
the GAAR wont touch this – it is very enlightening looking at the examples given in the GAAR guidance as to what is and isnt ok, im surprised at what is deemed acceptable to be honest.
as for the eurobond exemption – well HMRC consulted on this a month or so ago and decided not to change it as changing it would cause numerous tax issues for very standard corporate structures (eg if you had a UK treasury/cash pooling vehicle for an international group for example) – presumably the theory was that we wanted to attract that type of activity into the UK.
I dont know why they dont just abolish interest withholding to be honest, its basically an optional tax in the corporate world anyway there are so many ways around it.
The GAAR is far too narrow in scope
I have said so before and I will say so again
And it will change
interesting comment – it appears to be far far narrower in scope than anyone (even the most optimistic commentators) thought it was going to be. I know you cant answer this, but it appears that the guidance panel is nothing more than a sham and that it was really Aaronson and Steve Edge who wrote the guidance (you can tell who wrote which bits as the writing style changes)
Im not surprised you got a thank you letter from HMT to be honest – I read it as more of a “thank you for blessing our very narrow GAAR and thanks for agreeing to be captured” !
I don’t think those on the committee thought I was captured
Equally votes could have been 10:1
As for the scope – I was never under any illusion – even during the process I said this would not work
I think part B was a win though – and worth my while
Part D reveals all the weaknesses and why this needs reform
As does the reasonableness test – I could not have been clearer on that
i agree the reasonableness test is a complete muddle – so much for the big simplification project !
If a GAAR case goes to the court of appeal and HMRC win 2 judges to 1, then in fact the taxpayer wins, such is the ridiculousness of this double reasonableness test !?!?
We agree