Overseas Tax Havens

[buntysammy]

Front page of the Metro today, check out the online version if you missed it...

Can someone explain to me how companies get away with not paying taxes by using overseas tax havens? It seems obvious to cut down on the amount companies can "hide" so why does it not happen?!

[DaveR]

The use of tax havens (at least by big companies) is not primarily about 'hiding' anything, but organising your business, particularly where you own assets and where you carry out transactions, to take advantage of generous tax provisions in some overseas jurisdictions. Tax havens market themselves to multinationals for precisely this purpose. Tax authorities in countries like the UK try to close loopholes so that UK tax law catches activities that ought to be taxable here, but there are lots of smart tax lawyers looking for new loopholes. Easy to say "something must be done", but not so simple in practice.

[Chippy Minton]

Not sure if this is where the Metro sourced its story from (I didn't read the article) but Action Aid released this report today http://www.actionaid.org.uk/doc_lib/addicted_to_tax_havens.pdf showing "just how embedded the use of tax havens is in the structures of nearly all Britain?s biggest companies."

They suggest it happens because "the lack of transparency makes it difficult for developing country tax authorities to identify and collect taxes owed by global companies operating in their countries."

[Mick Mac]

Relatively recent UK tax cases have focused on the management and control of offshore operations so its now much harder to have operations in offshore jurisdictions without a real legitimate presence there. Hence ensuring only legitimate operations benefit from the tax benefits of having operations there, otherwise UK taxes are payable.

But you can't go around imposing higher taxes on legitimate operations in other countries. Funny enough the other jurisdictiont want to raise their revenues too.

Most offshore tax havens are making agreements with other countries with whom they do business to ensure the operations there are legitimate ones. Channel Islands operations are now highly regulated.

[DaveR]

The Action Aid report is interesting, although not that surprising. It doesn't take account of the fact that HMRC is both a lot better informed than they are, and has pretty draconian powers, so there is a much greater level of scrutiny than they may think, as evidenced by the slew of litigation that Mick refers to.

What it shows is a massive transfer of value from UK taxpayers to shareholders in big UK plcs, but then there is a very significant overlap between the two (most of the shareholders are pension funds etc.). So the real question is do you want your pension to be a bit smaller in order that more tax is paid, whether to the UK government or elsewhere?

Slightly surprisingly, I'm inclined to answer 'yes', for two reasons. Firstly, I think 'pure' tax avoidance, lawful or not, is pretty anti-social and ill becomes big companies (more ruthlessly, they may benefit from marketing themselves as 'tax ethical'). Secondly, time and money spent on tax avoidance is essentially non-productive, and the profits are false profits. I'd rather see that effort directed to activities that genuinely create value through better products, more efficient processes etc.

[Huguenot]

Eh what?

I agree with the sentiment, but tax efficiency isn't false profit. Look it up.

Neither is it non-productive unless the money isn't reinvested.

Unemployment benefit is non-productive.

I think you're trying to get cheap plaudits on an anti-business platform there DaveR.

I don't even pay myself a salary in my own business, because every snotting jot goes to pay my guys who all want a regular salary and perks that I can't even give myself.

SMEs are over 50% of UK GDP, so a bit of support wouldn't go amiss.

[ibilly99]

Except you're in Singapore voting with your feet and helping their economy methinks ?

[Huguenot]

I'm in Singapore because I ended up here, probably same reason you're in ED.

I left the UK 6 years ago whilst it was still booming, and Alan Dale was on this forum trying to persuade everybody to get involved in a buy-to-let frenzy that could 'never fail'.

At that point tax and economies had no impact on my decision - I needed, as you do, to work.

I'm not in any hurry to get back to the UK, because as an outsider looking in I can see a nation that is becoming increasingly negative, self-destructive and depressed - and a population that is denying its own role in finding solutions. It's a nation that whines relentlessly about the loss of democracy, but when given the opportunity to take a small step forward 60% vote against change.

I don't want to come back to the UK because it's psychologically unhealthy and blames everyone else for its lifestyle choices.

[DaveR]

H, I'll ignore the (by now somewhat tiring) patronising tone and the nonsense about my 'anti-business' platform and try and engage on the issues.

Forget about what happens to the money you get back/don't pay out. There is a significant cost involved (in cash and human terms) in setting up these schemes, but the accounting cost to the firm does not represent the true opportunity cost for the activity, because it does not include the loss to the public purse.

Alternatively, to put it in terms that even you can understand, I know a guy who is a tax partner with E&Y. He is a very smart guy who spends all his time dreaming up and implementing avoidance schemes. His clients are big businesses who operate factories, shops, banks etc, but when they come to see him they're not thinking about that, they're thinking about avoiding tax. The UK economy would be more productive overall, I suspect, if both he and his clients applied themselves to thinking about how to manufacture or supply products or services more efficiently instead.

[Huguenot]

I'm sure there are examples of misbehaviour, but that doesn't support your argument.

I don't think it's relevant to talk about these figh-falutin' situations when they're a minority of transactions. The fact is that SME makes up more than 50% of the UK GDP, and these tax benefits are critical.

Not going to the exchequer doesn't make it non-productive. Not using it makes it non-productive. The 'loss to the public purse' is irrelevant - the question is was the money used.

Citing 'cost involved' is also irrelevant, unless you can demonstrate that the exchequer would have spent the money more productively at a lesser cost than private investment.

Since the government sets tax incentives to pursue legitimate public objectives, it's not reasonable to assume that taking advantage of these schemes is a misdemeanour.

[Undisputedtruth]

Interestingly, SME's makes up 99.2% of all enterprises in the UK and yet the larger enerprises accounts for around 40% of employment.

[DaveR]

H, you think it doesn't support my argument because you (still) don't understand my argument. I'll try again.

I'm not talking about misbehaviour, I'm talking about economics. Every business is in the business of creating value* i.e. making products or supplying services that are worth more than the cost of the labour and capital required to produce them. If they didn't there would be no such thing as economic growth and no nice things in the shops. Tax avoidance in itself is inherently incapable of creating value - it just moves a fixed sum of money around between the business, the government and some lawyers and accountants - and is thus an inherently inefficient use of labour and capital.

It may well be the case that businesses will make better use of the money than governments, but that is an argument for lower corporate tax rates, not avoiding taxes.

*This is not a technical term but is my approximation of a whole load of economic theory

[nashoi]

SMEs are over 50% of UK GDP, so a bit of support wouldn't go amiss.

Huguenot, the Action Aid report points out that it's the SMEs having to make up the shortfall. An example of who's currently getting the support here.

What it shows is a massive transfer of value from UK taxpayers to shareholders in big UK plcs, but then there is a very significant overlap between the two (most of the shareholders are pension funds etc.). So the real question is do you want your pension to be a bit smaller in order that more tax is paid, whether to the UK government or elsewhere?

Only half the people in this country have pensions. The number one reason given for not having one is affordability. Full rate pension contribution tax relief is enough of a subsidy from the poor to the rich. Does the government have better things to do with the money? Yes, of course it does.

[DaveR]

"Only half the people in this country have pensions. The number one reason given for not having one is affordability. Full rate pension contribution tax relief is enough of a subsidy from the poor to the rich. Does the government have better things to do with the money? Yes, of course it does."

I agree - see my conclusion above.

[Undisputedtruth]

DaveR Wrote:

-------------------------------------------------------

> H, you think it doesn't support my argument

> because you (still) don't understand my argument.

> I'll try again.

>

It may be fruitless having a debate with Hugo since he has a blinkered view on matters where it doesn't support his own views.

Some years ago, the New Economics Foundation published a report which similarly pointing out that Tax Advisors and Bankers were destroying value in the economy.

[Huguenot]

I'd be happy to consider the substantiated findings of any organisation that can identify itself beyond a website full of unattributed opinion.

Looking forward to it.

[Undisputedtruth]

My dear Hugo, the New Economics Foundation isn't a website it's a political think tank. All the political parties have been using think tanks for a number of years.

[Huguenot]

Oh right, it was the way you used the word 'report' to imply they had information - it's just opinion and speculation is it? As long as that's clear.

So, to clarify, some years ago a goup of people published some opinion and speculation on a poorly laid out website that said they didn't like bankers, and you'd like to use it as evidence of me having a blinkered view.

Disagreeing with you doesn't mean I'm blinkered UDT, and agreeing with wishful thinkers doesn't make you visionary.

[Undisputedtruth]

http://www.neweconomics.org/about

Oh dear Hugo you really are out of your depth. And I thought you were just blinkered on your mainstream thinking.

The New Economics Foundation is a think tank that has been advising governments from around the world including the UK & EC since 1986.

Their report included a 'quantitive analysis' that said that Bankers and Tax Advisors destroyed value in the economy.

[Huguenot]

I'd be happy to consider the substantiated findings of any organisation that can identify itself beyond a website full of unattributed opinion.

Looking forward to it.

[Undisputedtruth]

See no evil hear no evil, hey Hugo. ;-)

[mikeb]

Now Hugo and I had have our disagreements but maybe here he does have a couple of points.

New Economics Foundation - I'm sure not everything it says / reports is wrong or biased, but I don't think 'nef' should be viewed as an objective organisation independent of political connections - in fact, isn't that the whole point of it? I do wonder if it will receive less income from "local, regional and national governments" (p4 of its 2010 annual report) after the 2010 election. So I'm happy to read its reports but keeping in mind the objectives of the Foundation, much as I would something published by Rowntree or the Adam Smith Institute. P30 and p34 of the 2009 report are the relevant pages. It's a nice attempt but the result is largely determined by three key and questionable asumptions: (a) cost of financial crisis measured in lost output from 2008 to 2014 (incorporates persistent forecasting bias and assumes 2008 levels were sustainable) (b) cost / benefit is a point-in-time calculation e.g. you could include much of the bubble-led growth in 2004-2008 as a benefit from banking © tax 'saved' through planning is tax that 'should' have been paid.

I'm sure we can all agree that generally the tax advice / avoidance industry is a massive waste of time and resources on all sides. Being a tax adviser is quite well-paid by City standards but extremely dull. We have a crap corporate tax system, though maybe not quite as bad as the US. It is overengineered by both the Government for 'incentives' and HMRC for 'anti-avoidance'. As a result, each year there is another 500+ pages of Finance Bill which interacts with the other 1,000s of pages of primary legislation plus case law. All of this presents difficulties for compliance and opportunities for planning.

A simpler tax system would benefit the govt in terms of monitoring and focusing on real abuse, companies in terms of admin and speed, and probably (in the long run) tax advisers who would be forced to consider more interesting / socially useful forms of employment.

But given the tax system, you need to spend money on tax advisers. As a company, you are obliged to maximise shareholder returns. This doesn't mean you leave the country (e.g. GSK is still based here despite the UK being a v small part of its profits).

Just for fun, what are the arguments for taxing companies at all? Companies are artificial constructs that eventually belong to someone. Why tax a legal construct - why not tax the owners instead? (and if they're overseas, then how about some withholding tax?)

[Mick Mac]

Just for fun:

We need to tax companies as they are not necessarily distributing all their profits, but we still want to collect tax on their profits each year, whether they distribute or not.

But we can't tax the owners/shareholders on the company profits on an arising basis as in some cases the company cant distribute as it needs its excess funds to run the business in the future,

If the company has enough to distribute, its taxed as a dividend on the shareholders, so I guess its all been thought through before.

If you own your own personal company, you get taxed on the company income on an arising basis as if its your own , subject to you having many customers, risk etc.

[to answer another question: You may not easily simplify the tax system as the tax advisers are extremely complex people and the government needs to constantly develop anti avoidance]

[Undisputedtruth]

@mikeb,

Well it's known that the government have used NEF but Huguenot was claiming they were just a website with mere opinions. Also NEF pointed out assumptions made with the bankers calculations. No one knows for sure how long the slow down will last and it could be argued that NEF were generous to the bankers with their assumptions.

Personally, I'd rather have a taxation system that recognises social justice.

[Marmora Man]

Personally, I'd rather have a taxation system that recognises social justice.

What the hell does this mean?