Well yes, apart from...

DC emailed me a link to an article about Luxembourg. Somebody had leaked/published details of tax deals arranged between PriceWaterhouse Coopers and Luxembourg. Instead of doing something about the tax evaders, Luxembourg charged the whistlebower with theft and other criminal offences.

The countries who think they've lost out are all complaining like mad and demanding that Luxembourg stops this nonsense, but the best part is right at the end of the article:

Luxembourg’s finance minister, Pierre Gramegna, struck a conciliatory note on the international stage, telling a meeting of European finance ministers: “We are a country that wants to combat abuse … If we want to find solutions to this issue we have to tackle it together.”

Speaking to a domestic audience, however, he has described the affair as “the worst attack Luxembourg has experienced in its history”.

Reminds me a bit of the famous George W Bush quote from 2002:

My trip to Asia begins here in Japan for an important reason. It begins here because for a century and a half now, America and Japan have formed one of the great and enduring alliances of modern times. From that alliance has come an era of peace in the Pacific.

No, seriously, there was one excellent proposal in The Budget

The one single proposal worth celebrating was the one to bring the UK into line with just about every other European country (except Ireland) and exempt dividends from overseas subsidiaries from UK corporation tax (pdf), which has always been part of the MW manifesto, e.g. point 2 here.

Seeing as the UK gives credit for overseas withholding taxes and underlying tax (in most cases), the additional UK tax burden is a paltry £1 billion or so, but it is no end of administrative hassle and a deterrent to locating a holding company in the UK. Being an attractive location for holding companies generates considerably more than £1 billion of 'invisible export' income, so that's a win-win.

Let's not forget that the UK scrapped withholding taxes on dividends back in 1999 (which is the other half of the equation, so fair play to them, Labour have done a few things right over the years) and the proposal (see the same pdf) to restrict tax relief for interest costs dovetails nicely with all this (and is also in the MW manifesto, of course), which is still more generous that the rules in most other European countries.

Ultimately, the best way of sorting all this out would be a further radical simplification and simply disallowing interest as an expense and not taxing the recipient on the income (which I believe some other European countries already do), but hey.

Outbreak of commonsense ...

... at HM Treasury!

I have been pointing out for ages that VAT is The Worst Tax Of All, to little avail. Happily, the CEBR got a lot of coverage recently with their suggestion that the standard rate of VAT be reduced from 17.5% to 12.5%. Former Chancellor Ken Clarke suggested in an interview in today's Times that the best thing that The Badger could propose in his much vaunted Pre-Budget Report next Monday would be to reduce VAT to 15% (as a good EU-phile, Fatty Clarke knows that the EU demand that each country has a standard rate of no less than 15%), and hey presto ...

From The Times (breaking news): "Gordon Brown to cut VAT as winter recession bites" (note: not "Alistair Darling to cut VAT ..."). A similar story has appeared on The Telegraph's website.

Equally heartening, another of the bullet points in that article suggests that there'll be: "A tax exemption for foreign dividends, designed to persuade UK-based multinationals not to relocate abroad."

I have also been saying for ages (e.g. item 2 here) that the UK ought to exempt foreign dividends from tax, just like all other civilised European countries (i.e. all of them except the UK and Ireland).

The static 'cost' per annum of these two eminently sensible tax reduction simplification measure would be around £12 billion for VAT and £1 billion for the foreign dividends, the dynamic 'cost' will be less than half of that, i.e. about one per cent of current government spending, one-fifth of which is pure waste and corruption anyway.

Henderson and Charter relocate to Ireland (short version)

My previous post ended up offputtingly lengthy (it is Saturday, after all), so here's the summary:

If we want to stop holding companies relocating from the UK to Ireland, the best and simplest solution is to exempt dividends from overseas subsidiaries from corporation tax, which is what most other European countries do. The fall in corporation tax revenues would be about £1 billion per annum (or 0.16% of all government tax receipts), which might be more than offset by the increase in other UK revenues (salaries, PAYE, office rents etc).

Henderson and Charter to relocate to Ireland

Here's a fair summary from The Grauniad:

Asset management firm Henderson and engineering group Charter have followed other companies in announcing plans to relocate to Ireland for tax reasons, rekindling fears of an exodus of British businesses. Others are considering their options, including Brit Insurance, which said this week it was "actively considering the issue of tax domicile". Henderson said yesterday it would set up a new holding company in Ireland to keep its tax rate to about 20%*. The company has enjoyed a low tax rate in recent years but this is due to rise next year to the normal UK corporation tax rate of 28%."

George Osborne, who doesn't understand tax has reacted with tiresome predictability:

George, the Shadow Chancellor, blamed the exodus on the confusion created by Labour's dithering over the business tax regime and the fact that we have some of the highest corporate tax rates in the EU**. He called on Darling to adopt our plans to reduce the main rate of corporation tax from 28% to 25% and simply [sic] the business tax system***

Which was echoed across the Tory blogosphere. Here's what I posted at The Daily Referendum:

Sorry, that is inaccurate. Lord Forsyth pointed out [in the tax reform paper that he did for George Osborne] two years ago exactly how to fix this issue at minimal overall cost (approx £1 billion per annum or thereabouts static tax loss). The relevant background, from the point of view of the holding company of an international group (with relatively little UK or Irish-source income, e.g. Charter) is as follows:

There are two ways of taxing dividends from overseas subsidiaries;

1. Exempt them entirely (or exempt 90% or 95%, possibly with a disallowance for interest costs if they relate to the investment overseas), which is what most European countries do, or...

2. Tax them at the normal rate, with a credit for underlying overseas tax, which is what the UK and Ireland do. Obviously, there are lots of countries with an effective rate of less than 28% but very few with an effective rate less than 12.5%, so in practice, the Irish-resident holding company of an international group pays little tax in Ireland (its subsidiaries pay the same amount of overseas corporation tax, of course)

Lord Forsyth's solution**** (perfectly sensible and long adopted into the MW manifesto) is to do like most other European countries and just exempt dividends from overseas subsidiaries entirely, this would on the face of it reduce corp tax receipts by £1 bilion (the net corp tax, once reduced by credit for overseas tax) but of course we'd make up most of that in other taxes (like PAYE and so on).

There is absolutely no need to cut UK corporation tax to 12.5%. Ireland got away with it because it is a small country (4 million pop.) so if it loses half the revenue from domestic companies, it can make this back by getting holding companies to relocate there - it is a tax haven.

This scam would not work for the UK because there are simply not enough international holding companies to go round*****. So we'd lose more than we'd gain by halving corporation tax - but the cost of exempting overseas dividends is well worth paying.

Further, if you want to cut taxes on business in the UK, it's VAT and Employer's national insurance (that between them raise three times as much as corporation tax) that are the real killers.

I have explained this before in the context of Shire Pharmaceuticals.

* All this explains why Henderson would expect its overall tax rate to fall to 20%, not all the way down to 12.5%; 20% is presumably the average rate that all its overseas subsidiaries pay.

** A tiresome and irrelevant factoid. I could reply that 28% would be the lowest rate of all G7 countries (assuming the rates haven't changed since I researched this post).

*** I agree that, for a given total level of taxation, dithering is bad and simplicity is good. I am a simplification campaigner if nothing else.

**** Another really good bit in Lord Forsyth's report was scrapping the 10% income tax band and just increasing the personal allowance by £2,000. There was plenty of nonsense though.

***** For example, UK corporation tax receipts approx £40 billion, Irish corporation tax receipts approx £4 billion. If we halved our corporation tax rate we'd 'lose' £20 billion (ignoring Laffer effects, which would be minimal as 28% is not particularly high, historically) and gain, what, £2 billion? Would we be able to get half of all Irish corporation tax payers to relocate to the UK?

"Toxic investments give Merrill £16bn tax break"

Says the headline in The Guardian. OK, that's mathematically incorrect - what they are talking about is £16 bn of allowable losses that ML have booked - rightly or wrongly - through its UK subsidiaries, so the value of the tax break is 28% of that, or £4.5 bn. However, the bones of the story appear to be correctly reported, as the FT says much the same.

As somebody who works in international tax, I can only begin to guess why ML booked its losses through the UK rather than claiming them in the US, but here's what I posted at everybody's favourite retired accountant:

OK. Being realistic and simplistic about this, ML have booked a load of losses in their UK subsidiary that didn’t really relate to UK business (I think that much is uncontentious).

But this is a US bank, so what they are really trying to do is avoid US taxes. So to make use of these losses for tax purposes, in future they will also have to book a load of PROFITS in the UK that don’t really belong in the UK. I can only assume that UK rules on carry forward of losses are more generous than US rules (or else they’d have left the losses to carry forward in the US).

So on a country basis, while the losses didn’t belong in the UK, neither will the profits. If anything, it’s the IRS who are being conned here, not HMRC. So for corporation tax, from HMRC point of view it’s nothing lost. BUT, to be able to use up those losses, ML need a presence here, so they will have more UK employees paying more UK PAYE, overall it is quite possible that HMRC comes out ahead on the deal.

With my professional hat on, it seems like a very high-risk strategy to me (and they ought to sack their advisors for letting this be splashed all over the papers). The strategy only works if the IRS allow ML to cheerfully transfer future US-source profits to the UK. Don't forget that the IRS make HMRC look positively gentlemanly - under transfer pricing rules, the IRS are almost certain to turn a blind eye to the fact that losses were transferred out of their jurisdiction, but will sing a different tune once ML start making profits again and try to shuffle those offshore.

So worst case, ML will pay tax on future profits in the US (because the IRS won't let them shift profits offshore) and in the UK (because HMRC might disallow the carried forward losses on the basis that they relate to a different trade or because of some cunning re-classification between trade losses and deficits on trading/non-trading loan relationships etc.)

Ah well.

Economic illiterates of the day (7)

While perusing the IFS site for the original press release on which this story was based, I stumbled across a fine piece of f***wittery entitled "Globalisation demands reform of UK corporation tax".

*Sigh* let's look at a few basic facts, first:

1. Globalisation is a good thing, it has been around since the globe was invented, whatever rules you invent, 'globalisation' (aka free markets) will adapt and work its way round them.

2. If you can choose from different countries where to set up a business, tax is not top of the list. Depending on the type of business, you ask: Does it have a stable legal system, rule of law, security, honest government officials? Then you look at costs - what are wages, rents and raw material prices? How good are transport links (for people or finished goods)? How reliable are banks, telephones, power supplies? If a country ticks all those boxes, only then do you worry about the tax system - and its not just the headline rates that matter, simplicity and stability is just as important. For example, corporation tax is higher in India and China than in most of Europe and they don't much adhere to the 'rule of law', but the wage differential is so huge, that doesn't matter much. Similarly, corporation tax is higher in the USA than in most of Europe, but their Sales Tax is much lower than European VAT (the worst tax of all).

3. Before we worry about 'encouraging FDI', let's worry about existing UK businesses. If the UK is an attractive place to do business, then we don't need to worry so much about FDI - there'll be plenty of UK businesses expanding here, rather than relocating abroad. If they locate manufacturing in the Far East, there's not much you can (or should) do to stop them. If you're worried about UK businesses relocating largely for tax reasons, then I've got a list of the main changes that would make the UK more attractive here.

4. There's one tax I missed off that list - and which the IFS press release doesn't even mention - Business Rates. Let's assume that we stripped out the buildings element from the valuations and harmonised the rates for occupied and unoccupied sites and allowed local councils to keep all the proceeds (rather than it being pooled nationally). Let's bung in Stamp Duty Land Tax and corporation tax on capital gains for good measure and rename it 'Site Value Rating'.

5. Now, there are plenty of things on a business' checklist (see point 2 above) that local councils can influence. Let's take for example Crossrail. Let's imagine that Bill Gates, in a moment of generosity, stumps up the £12 billion it will cost to build, and off we go. Who benefits? Will businesses benefit? Well, yes, of course, but by the same token, their rents (actual or notional) will go up. So who benefits most? People who own land and buildings around where the stations are, as they'll be able to charge higher rents (or sell their land for higher prices).

6. So why not do a proper cost-benefit analysis. Assuming an annual running cost (operating losses, interest payments and amortisation) of £1 billion, would the rental value of properties in the Crossrail 'catchment area' go up by more than £1 billion? If yes, it's worth building, if no then it isn't. If the potential increase in rental values seems low, then assume that planning permission will be more generous and re-run the exercise.

7. Let's assume that it is worth building, then as long as Site Value Rating (and Land Value Tax on residential land) collects the bulk of the increase in rental values, the project is self-financing! And if the extra proceeds exceed the cost, they can be used to reduce other, more damaging taxes (VAT and National Insurance).

8. Now, going back to a business thinking of setting up in the Crossrail catchment area. Has the area got good tranport links? Yes, obviously. Are the rents value for money? Well, they probably are, as they are market rents . How about taxes on production? Well, they've just been reduced and simplified (the landlord has to absorb the SVR - he can't charge more than market rent, can he?), so that makes the area more attractive as well. (and yes of course, gummint spending and the corresponding tax burden is far too high, but I'm trying to explain why Site Value Rating is the least-bad tax).

Trebles all round!

But, getting back to the IFS press release, it kicks off by saying "Corporation tax should be reformed or replaced by a higher VAT rate (offset by lower National Insurance contributions) to reduce disincentives to invest in the UK..."

*Bleurgh*

There are a couple of bright ideas, like harmonising tax rates between corporate and personal income, but this is cancelled out by the other dross, a lot of which is self-contradictory anyway.

PS, I did find the press release on the education funding story, but apart from giving a wonderful opportunity for the inevitable sarcastic remark, it wasn't particularly interesting.

"Advertiser WPP may join tax exodus"

Another one bites the dust.

This exodus could be stemmed easily and cheaply, see here for short answer or here for more detailed policies.

"Publisher deserts UK tax regime"

"UK publishing and events firm United Business Media has proposed creating a new parent company based in Ireland, where taxes are lower than in Britain. The 90-year old firm, which owns trade titles Property Week and The Publican, said it reflects that 85% of its profits now come from abroad."

It's the "85% of its profits now come from abroad" that is the key to all this. Remember that it makes no difference to your overseas tax bill where the holding company is located. The relevant bit is how those profits are taxed when the overseas subsidiaries pay up a dividend to the holding company.

The UK and Ireland are the only major countries in Europe which tax overseas dividends in full*. The UK gives a credit for overseas corporation tax already paid, so extra tax is due if the holding company receives dividends from countries with an effective rate less than 28%. The same applies in Ireland, of course, but they only pay further corporation tax if the overseas subsidiary pays corporation tax of less than 12.5%, which is very few countries indeed.

Lord Forsyth's Tax Reform Commission reckoned that moving to the European system, whereby overseas dividends are either 100% exempt (or 95% exempt in some countries) would cost less than £1 billion**, i.e. chickenfeed in the grander scheme of things.

* See AGN European Parent Companies Survey.

** See Proposal 20, page 143. Also interesting is Figure 23 on page 75.

Shire Pharmaceuticals relocates to Ireland

Here is a good summary. Before the right-wingers start yapping on about Ireland's 12.5% corporation rate, and before the Socialists start dreaming up ever more regulations, let me explain why the other changes in the MW manifesto are far more important:

The most recent figures available from Shire show it paid £8.8m in UK taxes in 2006, of which £4.2m was corporation tax.

1. The balance of tax it paid would be largely Employer's National Insurance, which will be scrapped, with a minimal overall cost to the Exchequer, but a huge boost to UK plc and employment figures.

2. Income from foreign subsidiaries will be exempt from tax, instead of being taxable in full with a corresponding credit for most of the corporation tax paid overseas. Loss to Exchequer after double-tax relief, maybe £1 bn or so, as Lord Forsyth's commission calculated back in 2006. As a quid pro quo, any spurious payments for interest payments, management charges or patent royalties to overseas subsidiaries will be disallowed for corporation tax.

3. Shire's UK source income would of course still be subject to UK corporation tax under either current rules or the MW manifesto. If it has a legitimate Irish business, then of course that will pay 12.5% over there, but a UK based holding company would pay no further UK corporation tax on dividends therefrom.

4. And VAT will be phased out anyway (once I've dragged us out of the EU), as it is the tax that distorts the economy most. This is far more important than reducing income/corporation tax rates.

5. The rule for short-term residents will be as in other European countries, for example, for the first five years, seconded employees will be taxed on UK salary only.

6. Stamp Duty on share transactions will be scrapped (as in most other European countries), static cost £4 bn, dynamic cost much less than that - we'd stop losing business to e.g. Dublin.

7. Capital Gains Tax on share sales will be scrapped (revenues £2 bn or so), as would, to be fair, R&D tax credits (cost £2 bn or so), but the cut in Employer's National Insurance on scientists' salaries will compensate for that*. Net overall cost to the Exchequer - minimal.

That's that fixed. Next problem.

* Scientist's salary £100,000. Employer's NIC around £12,000. R&D tax credit for large company is worth 25% x 30% x £112,000 = £8,400. Net cost of that scientist £103,600. Under MW manifesto, net cost £100,000.