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Tax Justice Focus

The latest edition of the Tax Justice Network’s newsletter, Tax Justice Focus, is out.

It’s essential reading for all with an interest in this subject.

£3.5 billion – the cost of tax avoidance

The Wall Street Journal article referred to below concerns an obscure Delaware corporation, Augustus Funding LLC. It so happens however that the LLC in question traded in the UK so we know rather more about it than normal.

One thing we know is how much it’s UK parent, Sixtus Funding Limited put into this scheme, presumably on behalf of its ultimate parent company, Barclays Bank plc. The issued capital of Augustus Funding LLC was US$6,354 million (yes, that’s $6.3 billion dollars).

Translated into sterling that’s about £3.5 billion. Which gives it a market worth of about the same sum since this is a solid asset backed company.

So where does that place this obscure LLC in the pantheon of UK companies? Well, at about 87 in the FTSE 100, for starters (data as of 30 June). It’s worth more than Schroders, Capita, Enterprise Inns, Johnson Matthey, Tate & Lyle and Rentokil, for example. It’s worth only very slightly less than Persimmon, the UK’s biggest house builder, and Royal Sun Alliance, one of its bigger life insurers. In fact, it’s worth about 10% of the whole value of Barclays.

This gives some perspective to the resources the banks will throw at tax avoidance. When we say we think it’s a core part of their business, we mean it. And this is the evidence.

Managing without ethics

Why do we have a crisis in tax?

Simon Caulkin gives some guidance in his article for the Observer.

His explanation:

In effect, all professions have come to be judged not in their own terms but on the criteria and rules of another: management. The irony is that the chosen uberprofession has fewer claims to professionalism than almost any other. There is no accepted body of management knowledge, as there is in, say, medicine, and in practice its accounting calculus is deeply fallible: see Enron or any number of other corporate scandals. On a conservative estimate, any corporate profits statement could vary 10 per cent either way and still remain within the increasingly lengthy guidelines. Not only do managers not take anything resembling a Hippocratic oath, in the authorised version of management ‘professed’ in the UK and US – shareholder value – they are actually prohibited from taking ethical concerns into account.

That’s why we have a crisis in tax management; it’s a simple absence of ethics. And it’s noticable that accountants aren’t amongst those Caulkin says are suffering the morale malaise. Is that because they are used to operating without ethics? I wonder.

Tax incentives produce perverse effects – another nail in the Celtic Tiger’s coffin

The Irish Sunday Times ran an interesting article today. Anyone should read it for the mixed package of messages it offers.

First of all ordinary Irish people are paying more tax then they need to. They suggest that’s because they don’t understand the tax system and so don’t claim the reliefs that are due to them. I will be more prosaic. It’s because middle income PAYE earners can’t afford accountants and accountants can’t be bothered to market their services to them in a way they can afford. There’s also the real chance that they are actually behaving rationally – the reliefs aren’t worth claiming at their level of income. Which suggests that in this case those who support flat tax have an argument – complexity can favour the rich. Just be careful not to relate this argument to the UK though. We can’t claim deductions for medical expenses and bin collection charges here, so that does not work.

Second. They point out that the average tax rate paid by the top 400 taxpayers in Ireland has fallen from 28.9% to 24.4% – a depressing confirmation that around the world the rich are getting richer at the expense of the population in general.

Third it suggests that in the last six months 150 people paid tax penalties amounting in all to €55 million. As it says “On the list were prominent priests, jazz musicians, hurlers, publicans, farmers and conventional businessmen, many of them pillars of society.” No surprise there then. The biggest penalty appears to have been a pair of builders. As it says “The €22m in tax and penalties the Baileys paid to the Revenue Commissioners is just a small fraction of the wealth they accumulated during the years they used unpaid tax to fund their business expansion.” Experience in the UK says small offenders pay much higher rates of penalty than large ones. There is no level playing field in this area of taxation.

But perhaps most significant is the fact that 6 of the richest people in Ireland paid no tax at all due to tax schemes that are available for them to exploit. Ireland offers very generous tax reliefs for investment in property. The result is obvious. As the article points out “Reputable independent consultants have calculated that property reliefs may have cost the state €2 billion in foregone revenue. They also resulted in unnecessary construction in unsuitable locations, solely so rich people could claim tax relief. And they contributed to rampant inflation in property prices.” Put it another way – far more than the tax collected from Microsoft in Ireland has been given away in tax relief to Ireland’s already wealthy elite.

And as the article makes clear, rampant property prices are the result of wholly inappropriate tax reliefs given at considerable cost to the state with the benefit going to the few.

And that’s only the direct effect. Ireland is losing out enormously from the tax driven distortion of its economy. House price inflation has forced wages up as property inflation has increased the cost of living. And tax driven property inflation has denied many the opportunity to simply buy their own home. This is the external cost of giving tax subsidies to the rich. Those on ordinary pay – teachers, health professionals, civil servants, small business people, middle income earners – let alone the poor, all bear the cost of subsidising the rich each and every day through the extra cost of living they suffer.

It’s happened in Jersey. It’s happening in Ireland. Please don’t call it the Celtic Tiger. And please don’t say it’s a success story. It’s just a story of what happens when greed takes over an economy.

The WSJ – on Barclays and its tax trick

The WSJ – on Barclays and its tax tricks

The Wall Street Journal has published an article on the tricks that a team at Barclays bank have been playing to reduce the tax bills of some of their major multinational clients. A story stub is available on the WSJ site.

The story starts as follows:

The Wall Street Journal via Dow Jones – Glenn Simpson
LONDON — At Barclays PLC, a British bank steeped in 300 years of tradition, the work of a team led by banker Roger Jenkins is far from traditional. For instance, in 2003 his team set up a company with no employees, no products and no customers — just a mailing address in Delaware and a slate of British directors, mostly employees of his office. It was co-owned by Barclays and U.S. bank Wachovia Corp.
The following year, according to documents filed in the United Kingdom, the jointly owned company had $317 million in profits. It paid U.K. taxes on them. Barclays and Wachovia were both able to claim credit for paying all of the tax.
This was one of at least nine such structures Mr. Jenkins and his team have set up involving U.S. banks, which also included Wells Fargo & Co. and Bank of America Corp. The complex transactions involve a strategy called tax arbitrage, which plays off one nation’s tax system against another to reduce the banks’ tax bills.
Barclays is the leader in this esoteric field. It collects hundreds of millions of dollars in revenue generated by Mr. Jenkins’s group. His team of lawyers and bankers has helped turn Barclays from a sleepy Main Street lender into an investment-banking power.
Critics of tax arbitrage are blunt about it. “This is just a complete and utter construct to get around the rules at both ends,” says Richard Murphy, an accountant and professor who works with a London nonprofit called Tax Justice Network and has consulted for the U.K. government on financing.

You will note I am quoted (although I should add, Glenn overstates my academic credentials). I had the privilege of working with Glenn on this story. And by work I mean work. It takes months to get such a story to publication and hours of fathoming out just what is going on when companies structure deals o this sort.

As the story says, to be effective these arrangements are supposed to have economic substance. And the banks involved claim they have, but if I was a judge deciding the issue I’d say otherwise.

What I do know is that extraordinary effort is being expended by Barclays, with extraordinary rewards being paid to undertake an activity whose main purpose appears to be to seek tax subsidy for bank finance. And I have one simple comment to make about that, which is that it makes a mockery of this claim:

Corporate Responsibility for Barclays is embodied by the concept of ‘responsible banking’. Responsible banking is an integral part of the way we do business, and a central element of our overall strategy to make Barclays one of the world’s leading banks. Responsible banking means making informed, reasoned and ethical decisions about how we conduct our business, how we treat our employees and how we behave towards our customers and clients. You can find more about our activities on these pages.

There is no Celtic Tiger

OK, I’m an Irishman (after all, what did you expect with a name like Murphy?). Alright, I was brought up in the UK, but 27 million of the world’s 30 plus odd million Irish passport holders were born outside the place, but we remain Irish all the same. And unlike a lot of them I’ve run a real company in Ireland, for seven years, so I know something about its economy and its taxes. So, let me respond to Dennis Howlett’s comments on my article on the Taxpayer’s Alliance, below, from that view point.

And let me make one thing clear – there is not, and never has been a Celtic Tiger! Nor are there leprechauns, by the way, but if you believe one you might also believe the other, so I thought I’d better add that just to make sure.

So let’s look at what I said – which was to suggest that Ireland has “the intent(ion) … to undermine the income stream of other nation states”. Which I contend to be true.

What’s the evidence? Well, let’s take this from on article on Microsoft’s tax in the Wall Street Journal on 7 November 2005 (to which, I admit, I contributed quite a bit of the research, and which did quote me). It gave these stark facts (which are facts):

1. Microsoft’s subsidiary Round Island One Limited is Ireland’s biggest company;
2. It had gross profits of $9 billion in 2004;
3. It paid tax of $300 million in Ireland in 2004 – not bad in a country with about 4 million resident people;
4. In the rest of Europe Microsoft paid just $17 million of tax in 2004 – although those countries had populations exceeding 300 million.

So let’s be clear – massive profits are being declared in Ireland (by implication of the tax paid they must be at least $2.5 billion) but the domestic revenue in Ireland is vastly lower than that. And almost no profits are being reported elsewhere – including in the UK where it looks likely from Round Island One’s accounts the turnover is around the billion dollar mark (give or take). The same pattern is true, broadly speaking for Google, NCR, Oracle, Pfizer, Dell, Apple and Intel, amongst others in Ireland.

This means that Irish GDP is being massively inflated not by real economic activity being relocated there (NCR are believed to have less than 100 employees there, but book about half their world wide profits in the country) but by profits being booked there. It so happens this boosts GDP because GDP includes profits coming in – even if they then flow straight out again. And that’s true even if the profits are not generated by local labour but by patent and copyright royalties on licenses transferred from the US, which like the revenue authorities of all the European countries where Microsoft appears to have paid less than you would expect based on relative turnover, also loses out from this wholly artificial, tax driven booking of profits in Ireland.

So the evidence is clear – this is not real growth in Ireland. For that to be the case real trade would go there. But what’s actually happening is transient profits are going there from which they cream off a bit. Which is why no one else can replicate this – as it would lead to tax war, not tax competition. It explains why Ireland is a tax haven that should be denied the benefit of international tax recognition by treaty, and it’s why the Celtic Tiger is just an accounting trick, not a matter of economic substance.

If the economic miracle were based on something of such substance – like Guinness – I’d be all for it. But it isn’t. It’s a con. So please don’t buy it.

Tax professionals should know better

Peter Penneycard, National Director of Tax at PKF, is quoted as saying “There is a huge gap between fraud and tax planning but the Government’s attitude is that they are merely different sides of the same coin.” on Shout 99.

Well, if he really said that (and I have little doubt that he did because it looks like press release language) then he should be ashamed of himself. The reason is simple: in my opinion he must know that’s not true, and to so massively overstate his case in that way can only undermine any case he wants to make.

Let’s be clear, on a scale of 1 to 5 my recent work for Sustainability suggested you could rate attempts to not pay take like this:

1. tax compliance – seeking to claim only those allowances and reliefs obviously provided for in law;
2. tax avoidance, making tax driven decisions between incentives clearly provided by the law but where tax distorts the decision making process;
3. aggressive tax avoidance – pushing the boundaries of the law into the grey area where certainty as to its intent is unknown, legality cannot be guaranteed and artificial, tax driven structures are adopted purely to secure a tax benefit;
4. tax evasion – what happens when the boundary of aggressive tax avoidance is crossed and it turns out the planning was not within the boundaries of the law;
5. tax fraud – knowingly suppressing information to secure a tax benefit e.g. not declaring income, misrepresenting the nature of a transaction and so on.

You can play with the wording as you like – but few would disagree with the scale. And however you look at it fraud is nowhere near planning, and nor have the Revenue at any time suggested anything remotely like that. Sure, they think aggressive tax planning is so close to evasion its sometimes hard to spot the difference (and they’re right – it often is) but I happen know some of the people at the top of HMRC, and quite a few more in the echelons below them, including many who tackle aggressive tax avoidance and these people are all too familiar with the difference between avoidance and evasion, and the games the profession, lawyers, bakers and others play to disguise that thin dividing line between the two. Which justifies my opinion that Penneycard is quite straightforwardly wrong.

I hope he has the sense to comment more appropriately in future, because he does no credit to his firm by speaking in this way.

Taxpayer’s Alliance whistling in the wind

The Taxpayer’s Alliance and others have called for the Treasury to develop a dynamic model of taxation at the weekend. But as is so often the case when the self interested talk about tax there are a number of serious flaws in their logic.

Firstly, they are a little naïve to assume that the Treasury do not take the consequences of their decisions on the tax code into account when undertaking their economic forecasting. To the best of my knowledge they do, and in a dynamic fashion. What they might not do, however, is assume that any cuts in tax rates automatically lead to growth, which is the assumption that the Taxpayer’s Alliance are asking be built into the Treasury’s work. The absence of any sophisticated analysis suggesting that this assumption is true might explain the reluctance of the Treasury to adopt it and the very limited resources the US is willing to dedicate to investigating it.

Secondly, it is disingenuous to ask for a model dedicated to modelling dynamic impacts of taxation decision making that would only be asked to consider the possibility that tax cuts do lead to growth. Such a narrow focus is clearly inappropriate. The consequences of changes in the tax code are much wider than any implication they have for growth. Dynamic modelling should also consider questions relating to:

1. the distribution of the tax burden within our society;
2. the impact on different types of business and the long term implications of that with regard to attracting sustainable inward investment to the UK rather than transient profit flows;
3. foreign relations if the intent of any change is to undermine the income stream of other nation states as Ireland has done,
4. whether taxation will, if inappropriately used as an incentive result in the misallocation of resources by some sectors in society resulting in an overall reduction in welfare in the UK and internationally.

I would welcome dynamic modelling that addresses these issues, but that of the type requested by the Taxpayer’s Alliance appears to be a policy prescription blinkered by a failure to consider the wider implications of taxation policy, and that can be of no benefit to the Treasury, the UK or the world at large. As such, it is not a serious policy suggestion but is instead, rather like the same organisations proposals for a flat tax, a simple bit of wishful thinking.

Jersey VAT abuse

The Forum of Private Business in the UK, inspired by a remarkable record shop owner turned campaigner Richard Allen, has been campaigning against the VAT abuse where CDs and DVDs are shipped from the UK in bulk to Jersey in the Channel Islands to be returned in separate packets the next day to UK customers, VAT free, in response to sales generated on UK websites.

They’ve now got a mass campaign of smaller record retailers together to stop this tax abuse by the larger chain stores, as this link shows.

Good luck to them I say.

It’s time the UK government stopped this. Their estimate is that this is costing the UK £200 million a year.

And it’s time the Jersey government stopped the business in its tracks, which it has said it will do, but from which it does in the meantime profit enormously since the trade generates about £6 million of profit annually for Jersey Post, which is State owned, according to internal documents I happen to have seen.