Tax deal supports financial secrecy

George Osborne says: ‘my message to those who try to hide their incomes from the Revenue in offshore bank accounts and false declarations is simple: we will find you and your money.’

A senior official at the Indian Central Board of Direct Taxes says: ‘money laundering or illegal commission are a criminal offence. So, our effort will be to not just bring back the money but also prosecute the owner.’

President Obama says: ‘if financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly. And to ensure that the IRS has the tools it needs to enforce our laws, we’re seeking to hire nearly 800 more IRS agents to detect and pursue American tax evaders abroad.’

On the face of those statements you would think that the UK, India and the US would take the same approach to tax dodging. However, despite talking tough on tax evaders, George Osborne has broken ranks with countries like the US and India and concluded a deal, branded disgraceful by Christian Aid director Loretta Minghella, that rewards those who have been avoiding paying tax in the UK on wealth held in Switzerland.

The tax deal

The deal requires the Swiss to levy a withholding tax on UK assets held in Switzerland, and the Swiss will pass on the money to the UK. Those holding the assets will pay a lower rate of tax than if they had declared them directly to the authorities in the UK as part of a tax return, and the UK will not be entitled to receive information about those on whom the taxes have been levied.

The upshot is that it rewards those who hide their money in Switzerland, giving them both a discount on their taxes, and allowing them to keep their finances secret. By signing up to this deal, Osborne has made sure that despite condemning those hiding their money in Switzerland, the UK authorities will not find them, nor their money, and those who declare all to the authorities will continue to have to make up the gap.

Global effect

Even worse is the damage that this could do to efforts to stop tax dodging globally. The best way to stop tax dodging is for information to be shared, so revenue authorities can trace the taxes they are owed. For several years global efforts have been intensifying to require just such information sharing.

By striking this deal with Switzerland, the UK appears to be breaking ranks on these efforts, and will encourage those seeking to retain secrecy to try and get others to split too. Should this happen the worst affected will be the developing countries, as they lack the political and economic clout to get any kind of deal with Switzerland.

By striking a deal to get less than they are owed, the UK government has also made it much less likely that developing countries will ever be able to get the taxes owed to them from tax havens.

This is not an insignificant issue for developing countries: in 2008 it is estimated that illicit outflows from developing countries reached $1.26 trillion. Christian Aid estimates that developing countries lose $160bn a year in lost tax revenue - significantly more than they receive in aid.

UK in minority

‘If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly.’
President Obama

So why has the UK broken ranks? It’s not that the UK can claim that there aren’t other big hitters willing to fight for global action; only Germany has signed a similar deal, while countries like the US and India are committed to taking action.

The US has passed legislation requiring information on US accounts of over $50,000 held outside the US to be passed to the IRS, while India has made clear, ‘India will not go for such a treaty. Rather, we would prefer criminal investigation and action thereof’.

The world’s biggest economy and one of the fastest growing emerging economies are committed to getting 100% of what they are owed, yet Osborne has gone it alone and settled for significantly less.

What next?

If Osborne is serious when he says that tax evaders are ‘leeches on society’ he needs to make it clear that he is committed to taking action that will stop them, both in the UK and globally.

The only way to do that remains a multilateral solution. The G20 is the best place to start, and a firm commitment to ending tax haven secrecy by the G20 would begin to repair the damage Osborne has caused.

Take action!

Call on David Cameron, Nick Clegg and Nicolas Sarkozy to end tax haven secrecy at this year’s G20.  Click here!

Cross-posted from the Christian Aid blog…

Despite that just one in three companies in the UK pay tax. The data is based on the year to March 2010. All the details on how I got the data is in a report here. The facts are:

a)     There were about 2.6 million companies on the Register throughout most of that year.

b)     Of these about 500,000 claimed to be dormant.

c)     That leaves 2.1 million potentially taxable.

d)     But I guessed at least 180,000 of the companies likely to be formed that year would never trade and so would not owe tax.

e)     That left 1.92 million trading companies.

f)      HM Revenue & Customs asked for tax returns from 1.88 million companies. It looks like they got to the same place as me, working from different data.

g)     Unfortunately they only got 1.18 tax returns back (yes that’s 63% near enough bothered to reply). Of those 915,000 paid tax (almost exactly 33% of the peak number of companies in existence during the year).

h)     That left (depending on whether you start from my number or their number for taxable companies) about 730,000 companies that should have submitted corporation tax returns that did not.

i)      I accept that some of those companies would have made a loss and owed no tax. Based on the ratio of loss making companies amongst those that did submit returns that would still leave 536,000 taxable companies that should have submitted returns and did not.

j)      The average corporation tax paid by small companies in the year was about £10,000 (a remarkably consistent figure over time).

k)     That means that more than £5 billion of unpaid corporation tax a year probably arises for this reason: that is more than the entire cost of running H M Revenue & Customs a year.

l)      In addition it’s logical to assume that if a company did not submit a corporation tax return they also failed to pay PAYE and VAT as well. Based on extrapolation of HMRC data these other taxes might have been £20,000 a company for that year.

m)   That means the total tax loss was, on this basis, maybe £16 billion.

That’s more than the tax raised by increasing VAT this year.

And all that happens because H M Revenue & Customs is committed to cutting the number of people it employs at HMRC.

This is a choice: it is not a necessity.

By choice our politicians are leaving business unregulated.

By choice our politicians do not collect enormous sums in tax.

This issue could be tackled, cost effectively and easily. Some ways of doing so are included in Caroline Lucas’Tax and Financial Transparency Bill, but ministers are showing no enthusiasm to even recognise this issue.

We need to ask: why is that?

Originally published on the Tax Research UK Blog.

I’ll declare an interest: they asked me to help the investigation, and I did.

The findings? Google has avoided £3 billion of tax worldwide over the last five years. It’s tax rate outside the USA is just 3%.

In 2009, if Google had declared profits in proportion to sales in the UK in the ratio that the worldwide accounts showed (about 35% profit pre tax) then the expected UK tax bill would have been about £190 million.

They actually paid £3 million.

Now if that isn’t evidence that a) Google does harm even if all it does is legal b) Google is not corporately socially responsible c) Google  condones the massive worldwide tax avoidance industry d) H M Revenue & Customs’ estimate of the tax gap is nonsense as they would not pick up this difference in their calculations, meaning that they drastically underestimate the tax gap, as I have always claimed.

It’s annoying that the Sunday Times is behind a pay wall: this latest expose of Google’s tax is further evidence that the issue of tax avoidance is still one that deserves campaigner’s attention.

Update: You can get the Google tax avoidance story – free from The Australian – here.

Britons with billions of pounds hidden in Switzerland will pay tax at 50 per cent under a groundbreaking deal that will legitimise their undeclared assets, according to a source familiar with negotiations between the Swiss and British governments.

The agreement, which is expected to be announced this month, marks a shift in emphasis in the international crackdown on tax havens. Over the past two years, the focus has been on lifting bank secrecy and exposing evaders.

Under the deal, £3bn is expected to be raised over the course of this parliament and investors will also pay a one-off retrospective levy in recognition of past unpaid tax.

The move by the Swiss authorities to “regularise” hidden accounts by taxing them on behalf of the UK government is a sign of the intense pressure they have faced from cash-strapped foreign governments angered by the role of Swiss banks in facilitating evasion.

Britain’s willingness to legitimise secret accounts on a “no names” basis is likely to be controversial because it will treat users of secretive havens more leniently than other taxpayers and because it tacitly accepts limits in the drive towards more transparency.

I’ve written about this grubby deal before.

It’s not just a tacit acceptance of the limits to transparency.

And nor is it just blatant biased favouritism towards the criminals who have used Switzerland, and those who have assisted them in doing so.

It’s not even that it’s a massive slap in the face for honest British taxpayers who see those who have abused the rules walk away without penalty.

Worst of all, this deal outsources the collection of tax due in this country by British residents to another country. One that has a proven record of facilitating crime, and being utterly indifferent to it. And that has consciously and deliberately withheld information from other governments for decades.

And our ministers and our senior tax officials trust the Swiss depsite this.

Which says exactly why we should not rust those ministers and why HMRC’s staff are right to have no confidence in those in charge of their organisation.

Only a fool would do such a deal. And that’s what it seems we’ve got in charge.

Originally published on the Tax Research UK blog.

First of all, as I’ve already noted, the  government has a massive problem in agreeing how big this issue is. That does not help them politically, and undermines much of the forward.

Whatever the issue then is, the strategy is laid out in four parts, each being allocated a chapter in their paper.

Chapter one says there is a strategy. It’s a little hard to work out what it is due to use of a weird graphic, but in summary HMRC says it will (to quote the report):

• prevent avoidance at the outset where possible;

• detect it early where it persists; and

• counter it effectively through legislative change or challenge by HMRC.

And if I’m candid I’m having real problems spotting the changes from anything I’ve heard in the last decade or so.

So. Let’s move to chapter 2. This says HMRC will work on:

• a new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes;

• a new rolling programme of reviews on high risk areas of the tax code;

• work in hand on a GAAR; and

• the targeted tax measures that sit alongside this strategic work to address specific avoidance risks that have emerged.

The first is good – it basically says a taxpayer can’t string a dispute out to simply avoid paying. That’s neat – but is it compliant with natural justice? Wait for that to go to court, I suggest.

The second one simply means there’s going to be more consultation.

The third is a consultation already in progress – but indicates welcome support for a general anti-avoidance principle which I have long argued for and which is in the Coalition programme partly at least because I persuaded the Lib Dems of its merits, whilst the fourth means that, as ever, loopholes will be closed as spotted.

So in this chapter the only real change is bullet point one. Worthy, but not exciting and open to dispute, in summary. And all a long way off in legislative terms by the way. Years away in some cases.

Does chapter 3 offer more? No, none at all. It says H M Revenue & Customs will challenge avoiders and litigate where necessary. I won’t mention the word V***f**e in this context. OK, there’s welcome stuff about working on high risk cases. But let’s also be blunt, this has been going on for years with the result that those working on medium and small business have been deprived of resources – with consequent increases in tax evasion. I really don’t see much new and the fact that much of the chapter is used to summarise the focus of past litigation suggest the authors don’t either.

Finally, there’s chapter 4. And this says the government will publish as much of the Finance Bill as early as it can  to allow for consultation – something they’re already doing. And it says they’ll try to limit the number of changes to the law made between budgets – restricting them solely to cases where it is necessary to protect revenue, just as now.

In other words, bar the first, rather minor and challengeable bullet point in chapter 2 there is nothing new of any consequence whatsoever in this so called strategy.

Instead what the government did do yesterday was provide a massive boost for the tax planning industry. It really makes me think Osborne really should rename the Treasury the Ministry of Truth.

George Osborne said this was a budget to tackle avoidance. How wrong he was. Lawyers and accountants all over the country must be jumping for joy this afternoon – unless they’re in the Channel Islands.

Employee benefit trusts – often based in Jersey – are going to be hit hard by this budget, and rightly so. These are last remnants of the age-old pursuit of avoiding PAYE. If they’re consigned to history Osborne’s done at least one thing right.

And Osborne gets full marks* for tackling another abuse long overdue to be abolished – which is the absurd industry shipping CDs, DVDs, computer memory and other items from the UK to the Channel Islands and then straight back again simply to avoid VAT. At least £200m a year was lost in this way – and countless fuel wasted. This is a reform that will cost consumers a little, cost Jersey and Guernsey a lot, and which will put jobs back on the high street.

But after that it was almost all good news for tax avoiders. The new charity rules sound open to massive abuse – and the Charity Commission and HM Revenue & Customs will need massive resources to police them, which they haven’t been given.

The inheritance tax rules on gifts will be keeping will writers in business for years.

A new 5.75% tax rate on the treasury functions of large corporations in tax havens (yes, you read that right – 5.75%) will see corporate money flowing out of the UK faster than it will be possible to count.

And big business gets more tax cuts for its foreign operations which will increase their tax planning opportunities almost endlessly.

The same will be true for non-domiciled people – now able to bring money into the UK tax free through a new loophole for investment.

Will this budget help beat tax avoidance? No, it won’t. It’s the biggest boost in the arm for the tax abuse industry that it’s had in a long time. Osborne knows who his friends are.

* Written before I’d read all the detail – now reduced to 5/10

David Gurteen/Flickr*

Tax Research UK published a new report this weekend on the administration of the UK’s Register of Companies by Companies House, the agency responsible for it on behalf of the UK government’s Department of Business, Innovation and Skills. The report extended the review to look at the administration of corporation tax returns by H M Revenue & Customs, the UK’s tax agency. In combination these are the two main agencies with responsibility for registering and regulating companies in the UK. The Task Force on Financial Integrity and Economic Development funded the study.

The UK is an important location to study when it comes to limited companies. Firstly, it has many more limited companies than is commonplace. There were more than 2.7 million in 2009, for example – a ratio much higher at 4.5 per one hundred people than is found in Germany, France and the Nordic states, for example. Second, as the country responsible for a great many tax havens it would seem important that the UK set a clear example of good practice in the running of such a Register.

Unfortunately, as the research showed, the UK does not set a good example. In the year to March 2010 some 500,000 companies were removed from the Register of Companies in the UK with out being liquidated. They were, to use the terminology commonplace in the UK, ‘struck off’ the Register without being formally liquidated.  Of that number more than 325,000 were struck off at the request of Companies House itself, almost entirely because they had failed to submit documentation due for delivery to the Registrar, as required  by law.  In most cases the missing document was the annual return form, detailing the current directors, shareholders, share capital and trade of the limited company.  Research did also show, however, that only about 20% of the companies struck off at current trading accounts on file at the time they were dissolved. In combination these failures reveal that little effort is made to ensure that UK-based limited companies file the documentation that the law requires them to place on public record and which would ensure reasonable transparency with regard to their ownership, control, and trading. This widespread makes a mockery of the U.K.’s laws on corporate transparency

The catalogue of maladministration does not end with Companies House. The report also shows that H M Revenue & Customs requests corporation tax returns from fewer than 70% of UK companies and that just 33% of UK companies actually settled corporation tax liabilities in the year to March 2010. This is a ratio exactly consistent with that found in the USA  a year or so earlier when research on this issue was undertaken by the GAO.  In the UK this implied that, once more, at least 500,000 companies were likely to be ignoring their obligations to make Corporation tax returns and pay their taxes.

These failings have enormous implications. Together with other findings in the report they mean:

1. That UK companies can be easily used by those seeking to undertake tax and commercial fraud and other criminal activity without risk of their activities being disclosed even though UK companies are meant to publish their accounts on public record;
2. That UK companies can be formed without ever disclosing the real owners of the company and the real identity of the directors. These processes are facilitated by the fact that no signatures are now needed to form a company, no checks are undertaken on those forming companies to prove they are real people, and no proof that a company is really trading from the address given when it is incorporated is required. UK company formation is as a result akin to an invitation to undertake identity theft because of the opportunity it provides to undertake trade without being identified. The risk of fraud is high as a result.
3. That the UK is now a haven for those seeking to hide their identity behind a company in order to open secret bank accounts to move their funds around the world, hidden from regulatory view. This includes corrupt foreign politicians looking to launder stolen state funds, and terrorists seeking to fund their activities.
4. There is enormous risk of tax fraud at cost to the UK government in this process. Tax Research LLP has estimated the cost to the UK Exchequer from failing to administer companies incorporated in the UK at some £16 billion a year.
5. Those UK companies that do seek to comply with the law are likely to be trading at a competitive disadvantage to those that ignore their obligations. The market is distorted as a result.

The report, which has already attracted UK press coverage, seeks to do more than catalogue failings. Most importantly, it wants to create access to data so that regulatory authorities can ensure those who of their own free choice use limited liability companies to undertake trade fulfill the obligations imposed upon them when doing so. For this reason it makes a series of recommendations, the first of which are:

1. All banks in the UK must report to both H M Revenue & Customs and Companies House if they open or close a bank account for a UK limited company. If this information is known by H M Revenue & Customs they will know which companies are really trading in the UK, meaning that accounts can be demanded from all those that are trading;
2. No application for the striking off of a company which has a bank account should be accepted by the Registrar of Companies until it has received up to date accounts to support that application and is satisfied that H M Revenue & Customs has received all tax owing to it;
3. It should be illegal for anyone in the UK to assist, directly or indirectly, a UK company to open a bank account with a bank outside the UK without that person who provides assistance having notified both H M Revenue & Customs and Companies House of the fact that they have done so, with full details of the account opened being supplied ;
4. UK banks should be required to provide full and direct disclosure to H M Revenue & Customs of the bank statements of companies that fail to submit either their accounts to Companies House on time or their corporation tax return to H M Revenue & Customs on time. They should also be required to provide the full names and addresses of all those authorised to operate that account;
5. The tax liabilities of UK limited companies should become the personal responsibility and liability of their directors if their companies have failed to submit either their accounts to Companies House on time or their corporation tax return to H M Revenue & Customs on time, with this liability only being avoidable if all documents are filed and payment is made or if a proper liquidation of the company takes place with it being shown that the inability of the company to pay arose through no fault of the directors.

The focus of these recommendations is very clear: access to data held by those with reason to believe it is reliable must be created so that companies can be held to account for their actions.

It is only when companies (and other structures such as trusts and foundations) created y statute law can be held accountable for their actions by linking them to the bank accounts that they use, and to the people who really manage them, that we can tackle illicit financial flows in the world and local economies.

It is very clear that the UK has a long way to go in creating such a Register. It is equally clear that its failure is costing it dearly at a time when it is in desperate need of taxation revenue. The economic, ethical, legal and business cases for reform are compelling. That is why the Task Force on Financial Integrity and Economic Development took on this issue.

* Image license:  Some rights reserved by  David Gurteen

As they say:

These new penalties come into force from 6 April 2011 and apply to Income Tax and Capital Gains Tax.

The legislation can be found in Schedule 10 of Finance Act 2010.

The new penalty is an enhancement of the penalties for

• failure to notify
• inaccuracy on a return
• failure to file a return on time

Under the new legislation, these penalties will be linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country will be higher.

There will be three new levels of penalty:

• where the income or gain arises in a territory in ‘category 1′, the penalty rate will be the same as under existing legislation
• where the income or gain arises in a territory in ‘category 2′, the penalty rate will be 1.5 times that in existing legislation – up to 150 per cent of tax
• where the income or gain arises in a territory in ‘category 3′, the penalty rate will be double that in existing legislation – up to 200 per cent of tax

So far, so good.

But then note the lists of places that are in categories 1 and 3. Guernsey and the Isle of Man are in category 1.

Jersey is in category 2.

What are H M Revenue & Customs trying to tell us?

And what’s the official response of Jersey to this? Surely they must have one?

–

This post was originally published on the Tax Research UK blog…

Photo by Ian Britton

Transfer pricing, specifically the abuse-thereof, has found itself in the spotlight recently.  This highly technical accounting procedure, which multinational corporations use to shift assets between subsidiaries, went years without much media or congressional attention.  That all seems to have changed.

(Of course, not all transfer pricing is abusive, but I’m not going to try to explain the intricacies of transfer pricing in this post—my colleague Collin Swan did a pretty good job of that here last week.)

Abusive transfer pricing is a serious problem which began to seriously attract media attention after Jesse Drucker of Bloomberg News wrote an article this past May detailing how U.S. companies utilize transfer pricing to avoid paying $60 billion in U.S. taxes every year.  The Bloomberg piece led to a feature on ABC World New with Diane Sawyer and several other follow-up articles probing this topic.

Then, just last month, Congress took hold of the issue as the Joint Committee on Taxation (JCT) released a report detailing the nefarious transfer pricing practices of 5 real/unnamed companies, and as the U.S. House of Representatives’ Ways and Means Committee held a full hearing on the issue of transfer pricing.

Now, this focus on transfer pricing has spread to other countries and other industries.   The Daily Mail reports yesterday that the UK’s HM Revenue & Customs is currently investigating Starbucks Coffee for potential transfer pricing abuse.  From the Mail:

Now it seems the taxman is looking into how much the British Starbucks pays its American parent for coffee beans and other supplies.

In a note to its annual British accounts, Starbucks said: ‘The company is in discussion with HM Revenue & Customs regarding its transfer pricing policy.’

According to the accounts for the year ending September 27, 2009, the Starbucks Coffee Company (UK) received a tax credit last year of £115,000, up from a tax bill the previous year of £20.6 million. The company’s overall loss for the year was £52 million, up from £26 million the previous year.

The notes in the accounts state that if its transfer pricing policy was adjusted by the taxman, ‘the company believes it has sufficient unrecognised deferred tax assets that it could utilise’. In other words, it could cope with a bigger tax bill.

But the company is defending its position. A spokesman said: ‘We are in discussions with HM Revenue & Customs regarding Starbucks’ transfer pricing policy, which we believe to be reasonable.’

Whether or not Starbucks abusively manipulated its accounting for tax avoidance purposes, this is good news for both honest-paying citizens and tax justice campaigners alike, as the spotlight continues to grow on this harmful practice.    As most of you who regularly read this blog know, the best way for us to curtail abusive transfer pricing is through an international country-by-country reporting standard, which is slowly gaining strength around the world.  The more attention paid to abusive transfer pricing, the sooner we’ll achieve country-by-country reporting.

Keep up the good work.

A leading adviser on research and development tax credits has leapt to the defence of HM Revenue & Customs (HMRC), claiming its officers are right to crack down on those trying to exploit the system.

Peter Denison-Pender, managing director of Alma Consulting, refuted claims made by accountancy Grant Thornton earlier this month that tax inspectors were being unfairly tough with companies seeking R&D tax credits.

“HMRC is not the bad guy here,” Denison-Pender said. “All they are doing is clamping down on production masquerading as research.”

Good for him.

Bad for GT.

And how good to see someone saying that cheating and then blaming HMRC is unacceptable.

perhaps there are ethics out there, after all, in amongst the self promotion