The Daily Mirror has echoed my call on this blog yesterday for and end to the exemption for companies that means that their dividends received from their foreign subsidiaries are treated as tax free in the UK. They quote me:
“The aim of this relief was to encourage the use of the City as a mergers and acquisitions base.
“We now know that was a socially useless activity by socially useless people that failed to add economic value to this country.”
That about sums the rationale up.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
if they abolish it then that activity will move to one of our european neighbours who virtually all have the exemption. is that what we really want when we are in recession? even if the activity itself generates no tax, it likely will create some (although probably small) amount of employment but will generate significant professional fees which UK tax is paid on.
Sorry – but that’s nonsense
Investment holding companies do not generate employment
Human endeavour and customers do that and no one will ignore the UK market because of tax
Can we get real on this issue?
Holding companies will generate some employment – very little admittedly, but some. Probably immaterial in the scheme of things.
For example, the companies that relocated out of the UK (Shire, WPP etc.) may have moved the ‘holding company’ abroad, but many of the UK people employed by the UK head office, remain and are still employed in the UK. I imagine the offshore holding company has very few employees – Though I admit I don’t actually know that for a fact, I am just best guessing.
The point on professional fees isn’t quite right either. Just because there is a UK holding company, it doesn’t follow that it will give rise to a lot of UK professional fees/profits taxable in the UK. It is likely that the overseas group will be more interested in its domestic international tax rules and will use their local advisers for that not UK advisers.
Ok some UK firms will have to be used – routine compliance for example – but it isn’t a given that having a UK holding company will generate substantial UK taxable income in the form of UK advisers fees.
And I am sure a lot of people reading this wouldn’t really want the Big 4 to be making even more money anyway 😉
It’s nice the government wants to encourage investment in the UK, but do we really want to encourage investment in the form of shell holding companies (with 2 directors and admin assistant)? What we really want surely is ‘real’ business that will boost the real economy and generate real jobs?
I agree with your last point – strongly
“It’s nice the government wants to encourage investment in the UK, but do we really want to encourage investment in the form of shell holding companies (with 2 directors and admin assistant)? What we really want surely is ‘real’ business that will boost the real economy and generate real jobs?”
Then that means making energy cost far, far less than it does now. For example, thanks to levies imposed by HMG on large energy users, it costs about £25 more per tonne of manufactured steel in higher electricity costs in the UK than it does in the rest of Europe.
I suspect that some might think that £25 per tonne doesn’t sound a lot but multiply that when a site makes about 3.3m tonnes of steel per year. That’s a huge cost disadvantage just to start with.
These things are transitory
trust me, its the UK advisors who come up with these schemes and generate UK fee income as a result.
RM – you havent addressed the other issue about this activity just moving out of the UK. Look at the Apple situation, huge cash reserves sitting outside the US, never remitted and US tax never being paid on it. They dont even need to remit it to the US to pay a dividend with it, they are borrowing in the US to pay the dividend (presumably using the cash as unofficial collateral) and in the process reducing their US tax bill even further with interest payments on the borrowing !
So we have to tax worldwide income again
Problem solved
@ Ant – I know what you mean re UK advisers. But it isn’t always UK advisers that make the bucks on the advice. It’s very much a group speficic thing I guess.
In some groups I’ve worked for/with, UK advisers are viewed as too expensive – UK charge out rates are much higher than many of their EU counterparts – and so non UK advisers are used wherever possible.
Certainly the Government claimed the dividend exemption was enacted to boost the UK’s competitiveness. However it is highly debateable this was the real reason. The High Court had just confirmed exempting dividends from UK subsidiaries but taxing dividends from European subsidiaries was contrary to EU law. If the UK wanted to avoid further judgments that would cost many £bn then it either had to exempt dividends from EU subsidiaries or simply exempt dividends from all subsidiaries (which is what of course happened). I suppose there would have been a third option of taxing dividends from UK subsidiaries (subject to a tax credit) but the resultant complexities would have been a huge headache for taxpayers and HMRC alike. I don’t see a fourth option…
My personal view is that the extension of EU law into such areas of UK tax is outrageous, and something should have been done many years ago to allow us to maintain our tax sovereignty. But given nothing was done, by 2009 there was really no choice.
The third option was the way it should have gone, of course
The third option was the obvious choice for any government keen to ensure that at least single taxation took place
Richard/Ciaran
I’m not sure that option 3 (ie reintroducing an imputation basis more or less as we had pre would necessarily give you that much of a benefit (in terms of tax take) over the exemption. If you have a look at the 2009 Red Book the estimated cost was £150m in 2009/10 rising to £350m for 2011/12. Why so small? Well because most of the dividends would come up with underlying tax that covers most/all of the UK liability (given that our CT rate is relatively low). You would probably have picked up something from the Verizon proceeds (if you set up the hypothesis that the same distribution would have taken place without the CTA09 exemption). I say something because it could well be less that the £12bn Richard estimates because that estimate makes no allowance for the DTR that would be available on such a hypothetical dividend(apologies if it does and I’ve missed it); so the £12bn figure is most likely an upper limit rather than what would have appeared in practice – I’ve got no idea how much DTR there would have been so I’m just guessing. Now I’m not saying that that means that option 3 would not be the right way to go but just that it would need careful consideration. I’ve got a lot of sympathy for the people at HMT/HMRC trying to steer new legislation past the EU treaty obstacles.
My guess it’s rather more
But we’ll never know
I suspect the 2009 estimate was massively understated for political reasons
Where UK companies were held through offshore holding companies, there used to be a rule that allowed credit for the UK tax in the way you describe – But it was abused to boost foreign tax relief!
What this highlights is is that getting the rules right to give a fair relief (especially to ensure UK profits are not double taxed or not taxed at all) and not being open to abuse is a problem. But I would hope not beyond the wit of man.
The real problem as you point out is the EU effectively having power over our tax rules which has led to a lot of our tax rules being diluted to comply. The whole EU system needs an overhaul – My opinion!
This ‘EU issue’ is likely to cause some difficulties for the BEPs project too I suspect. Especially with regard to CFC rules which the EU had diluted to the extent they may as well be non existent.
Except the EU mood on this has changed now – dramatically
It’s not just that there used to be a such a rule, there still is. The DTR rules remain because not all overseas dividends fall within one of the exempt classes and because you can elect out of the exemption (which you may need to do in the case of some treaties that have a “subject to tax” clause in jurisdictions with a high withholding tax rate). The boosters you describe don’t work anymore, but that’s due to specific changes in the legislation.
It’s interesting that Richard says below that the EU mood is changing because although much of the existing tax agenda has been driven by the Commission, a series of ECJ decisions (eg Cadbury Schweppes and the FII GLO) are strongly derived from fundamental treaty freedoms (mainly of establishment and movement of capital) so I’m not sure that the ECJ would change direction without treaty change. Your overhall would need a new treaty. Likely?
That said, on BEPS in isolation, introducing CCCTB within the EU probably wouldn’t need treaty change if individual states adopt it but I’d be amazed if there was unanimity across the EU28. Otherwise it will be interesting to see how a BEPS-proof regime could be introduced.
Unanimity is not needed – the FTT has proven that
The mood of the politicians in Brussels doesn’t matter – this is about 30 years of European court caselaw that has severely limited our ability to tax. I appreciate this hasn’t been your focus, but given that it drove both the dividend exemption and the CFC changes it may be something you wish to cover at some point.
Either the EU will change – or new cases will be brought, I think
It does all look like smoke and mirrors to me. I would like to see some of the brains in the City turned over to driving uk manufacturing businesses to greater success.
@ The Roofer
Alas, many of the “brains” in the City don’t know their ass from their elbow when it comes to the real economy.
That I would agree with Andrew. Likewise much of the engineering talent at Imperial College when I was there went off to be traders, accountants and such like. Can’t blame them as the money was better but there is an opportunity cost to the nation of training graduate engineers and then letting them go and gamble in The City (may be being a bit unfair there but that’s how I feel). If The City was not there many of these people would have gone off to be a success in industry.
You are right
@ Roofer – very true. And I was one of them. Given the choice of being an Aero engine designer and an accountant, and I ended up an accountant – D’oh.
Way to good to pass up:
http://www.zerohedge.com/news/2013-09-04/guest-post-three-types-austerity
It’s a plea for Austrian economics. It asks us to believe that that state spending is crowding out private investment.
Hi Richard,
Many in Jersey at the moment are blaming the recent blacklisting by the French on Deputy Tadier and his interview with the French Newspaper.
Obviously this is total nonsense and clearly politically motivated because Tadier is a centre-left politician which these anti-democrats will sink to any low to eliminate from political discourse in Jersey.
It would be nice (if you have time obviously) if you could perhaps do a short blog to defend him and demonstrate further why the move by the French government is totally rational and justified.
Thanks,
Mark
Richard
Leaving aside the question of whether the FTT is a good idea or not, it’s not an encouraging example of where you get to with a lack of unanimity. Look at how slowly the enhanced cooperation procedure is working. Then take a best guess at what the final
directive is going to look like and it’s quite possible that all you might get is a mini stamp duty on equities raising, say, €3bn across the zone. Not worth all the effort.
That’s for something easy like an FTT. How long for a CCCTB? And which states would sign up?
Adding to Stephen Bill’s reference above about austerity, here’s Paul Krugman highlighting Simon Wren-Lewis’ blog on France. I would class the corporate invaders of public positions as are not just socially useless (if only they were!), but socially destructive!
http://krugman.blogs.nytimes.com/2013/09/03/the-austerian-mask-slips/?_r=0
I fear PK has hit the nail on the head, with the following paragraph:-
“But the larger point here, surely, is that Rehn has let the mask slip. It’s not about fiscal responsibility; it never was. It was always about using hyperbole about the dangers of debt to dismantle the welfare state. How dare the French take the alleged worries about the deficit literally, while declining to remake their society along neoliberal lines?”
Returning to the Zerohedge summary (Stephen refers), personally I take issue with the Austrian’s approach and think there is evidence from “the Golden Age” of capitalism to cast doubt on their assertions and work done by Mariana Mazzucato indicates that there is a role for the state in “real” wealth creation.
http://ineteconomics.org/paradigm-lost/mariana-mazzucato-how-state-drives-innovation
Mariana is spot on