As many will know I have been campaigning for country-by-country reporting of accounting and tax data by multinational companies for overcast decade. As a result of that work, and campaigning by many others, this issue reached the international taxvagendalast year, and then the fight back began.
At the OECD those multinational businesses – whose trading information whether at group or subsidiary level should, in my opinion, be on public record because of the limited liability they enjoy – have been saying two things. The first is that this is an infringement of their right to privacy and the second is that tax authorities can't be relied upon to protect the private nature of this data.
I have to date dismissed both concerns.
However, now we know that the UK government is apparently planning to sell tax payer data to commercial organisations and researchers (although the latter is just PR; they won't be able to afford it). So the very same companies who object to filing information on their tax affairs that will ensure they pay the right amount of tax in the right place at the right time will now be able to buy information on the tax affairs of people who do just that.
You really could not make up such staggering hypocrisy from both big business and HMRC.
On hang on: given who is on the board of HMRC they are of course virtually one and the same thing.
If Labour does not commit to sweeping this board clean on coming to office we've no hope of having a decent tax authority.
I have been asked to comment on James Galbraith’s review of Thomas Piketty’s book, Capital in the twenty first century, because Galbraith is critical of both the ideas and policy recommendations made in the book unlike, for example, Paul Krugman, who is broadly in agreement with Piketty’s thinking.
Now I should stress I have still not read all of Piketty, but I am accumulating a good collection of reviews. Others include Martin Wolf’s review and Brad Delong‘s. There will, I have no doubt, be many more to come and I am not proposing to make this a review of reviews.
What it does appear to me that Piketty is supposedly guilty of is of proposing what Wolf calls ‘a simple economic model’. That might appear odd in a work of 700 pages but as I mentioned in my own first blog on this issue, the essence of what Piketty is saying is that if the rate of return to capital is greater than the rate of growth in the economy then the result has to be increased inequality because that increased accumulation of capital has to arise as a result of a reduced return to labour. Piketty contends that this historically has been the case, and is again now after a period when this was not true.
The criticisms then appear to have four broad thrusts to them. Galbraith suggests that Piketty is using an inappropriate definition of capital. In Galbraith’s view capital remains plant and machinery – the stuff with which the proverbial widget, much beloved of economic textbooks, are made. I have to say I think Galbraith is both naive in thinking that this is what capital is in an era when such assets make up a small proportion even of corporate balance sheets. Second, I think Galbraith is guilty of a standard macro-economist’s failing: he simply has not comprehended the role or money and so of financial power within an economy. It is an astonishing fact that macroeconomics really does not have an adequate theory of money or of its impact in the real economy. As a consequence it has no way of managing the role of financial capital about which Piketty is rightly concerned because of its impact in the real world. Galbraith’s economic criticisms largely fall apart at this point.
Delong’s critique is potentially more interesting. He argues that Piketty has considered the wrong rate of interest. He says that of the four options for interest rates that could have been used Piketty considers what he calls r2′ which is the real interest rate that is the actual average return on wealth in the society and economy when he should have considered r3′ which Delong defines as the real interest rate that is the average risky net rate of accumulation–what capital receives, minus the risk of confiscation or destruction or taxation, plus appreciation in valuation multiples, minus what is spent in order to keep the world in the appropriate social position. I have not thought this through as yet, and need to, but suspect there is an issue here that does need to be explored if true, but which also might be capable of being dismissed entirely because I suspect that r2 and r3 tend to the same number in the long run which Piketty is considering.
Third, Wolf makes the criticism that Piketty asserts that inequality matters but does not say why. I reiterate, without having read it all I cannot say whether that is fair or not, but I also think it a red herring. Piketty does not, surely, need to cover ground already comprehensively covered by others and there is a growing literature on this issue that seems to me to more than comprehensively deal with this point.
Fourthly, the nature of Piketty’s recommendations comes in for a lot of attention. You could say Piketty did not help himself here by saying that his propsoal for a worldwide wealth tax was unrealistic. I would disagree: in a platonic sense knowing the ideal form of a solution does not appear to me to be a bad thing even if that knowledge is then only of use in establishing a goal against which any pragmatic outcome can then be measured for effectiveness. As such I defend Piketty’s idealism.
I also think Piketty is right to talk tax. He very clearly wrote this book to promote a paradigm shift in thinking, not least on this tax issue. For Galbraith to say that a tax solution is not possible because pre-paradigm shift thinking precludes it is to deny that this book is in itself a change agent. I confess I am surprised by this poverty of both aspiration and thinking on his part.
But that is not to say that Galbraith and Wolf, who also has concern regarding the recommendations, are wrong to say that more practical thinking may also be necessary. Some of that will be on how wealth taxes can be created. That is a task I certainly want to be involved in: I think that this book opens that opportunity just as it also creates an economic framework that justifies much of the work I and others have done on tax havens over the last decade or so. There is much to do here. Associated with other work with which Piketty has been involved in with regard to higher rate taxes, there is also work to do on that issue.
But I also accept that tax alone cannot deal with this issue or inequality and if that is the focus of most of Piketty’s recommendations much as I welcome that pushing of an agenda with which I am involved I would also very clearly have to say that other regulation is essential. We do need living wages. We can cap higher pay. Land value taxation is clearly a way of addressing financialisation of capital, and resulting speculation. We need to redesign incentives in the tax system that reward capital growth such as low capital gains taxes and penalise labour, such as national insurance charges. We need to address issues that allow capital concentration, such as the free flow of capital. The fact that effective tax rates on investment income are so much lower than on wages is absurd. All these are issues to address, as are others.
Piketty is guilty of dreaming, but I do not criticise him for that. Dreamers change the world. But we should not necessarily expect him to deliver all the solutions. That would be unreasonable.
Piketty has provided a theoretical framework, which will no doubt develop, for considering this issue. That’s an amazing achievement. Now it will need to be refined and, more pragmatically, thinkers with other experience will need to offer real world solutions for the issues he identifies. If his own solutions are but bench marks then they have use, as I have noted. But that use will be in assessing the relevance of offered solutions that can deliver real social change that permits the redistribution of wealth that I think Piketty is saying is now the condition for market economies and democracy surviving. Offering those solutions is now a task to be taken on. Galbraith has suggested some solutions, but i think there are more. The great merit of this work, if it proves to be enduring, is that it provides that opportunity for change. That, surely, is an enormous achievement? The rest may be nit-picking.
I am intrigued by reaction amongst the tax profession to what I wrote about Starbucks yesterday. You won’t be surprised to know that those who have commented have said what I wrote was wrong. That always seems to be the case, so there was nothing new there.
For the record, the error it was claimed I made was to suggest that either a) a UK company is not taxable on its worldwide royalty income and / or b) suggesting a UK company is not more broadly taxable on its worldwide income.
The explanation for the alleged error is very simple. When I talk and write about a company using a generic term such as the normal corporate identity by which it is known (such as Barclays, BP, Google or Starbucks) then I am considering an economic entity as a whole or the specific part of it that is relevant e.g. Shell in Nigeria. That is what, of course, most people would do, because that is a reflection of the economic substance that is being considered. It has become habitual for me to do this: it is one reason why I support the concept of unitary taxation.
Tax professionals do however live in an artificial world where transactions are segregated not with regard to their economic substance but according to the legal form in which they are constructed. So, company in this context means a specific entity.
In that case when tax professionals saw me refer to Starbucks in the UK they presumed I was referring to just one entity. I did not think that way or as a consequence seek to suggest that. I would have thought it self-evident that if Starbucks moves its European HQ to the UK there will be more than one company owned by Starbucks in this country: I cannot imagine why anyone should think that would not be the case. Not do I imagine that such a move would mean that the whole HQ function will exist solely and only in one UK based operation if there is tax advantage to splitting parts of it, if only for legal purposes. Again, I cannot imagine why anyone should think that would be the case when I imagine that to find a situation where that was not true would be nigh on impossible. What I was implicitly referring to – presuming it would be understood as I intended – was the whole structure of entities that will now be controlled from the UK as a result of the European HQ being relocated here could achieve the result I suggested. This may well, of course, be by way of controlling the existing structure in the Nethelands; we have no way of knowing at present.
But, to be explicit, that means that when I said that I thought Starbucks could arrange its affairs in the UK so that it did not pay tax in the UK resident company that might manage its affairs in Europe on income arising outside this country this meant that I thought that a structure of companies could be out in place to achieve that economic goal. It did not mean I thought this possible using just one entity.
Why do I think that this goal could be achieved? Very largely because it seems that many of the changes in corporation tax over the last few years have been made precisely to help achieve this goal. Those who remember the minor spate of corporate evits from the UK in about 2007 and 2008 that so spooked Gordon Brown and Alistair Darling might also recall that many of the companies had significant IP interests held offshore that they thought might fall within the scope of UK tax as a result of potential changes then in the offing regrading UK controlled foreign company rules as a consequence of EU pressure for reform.
That exodus, which cost the UK almost nothing in lost revenue at the time precisely because most of the companies involved paid little UK corporation tax because they were then holding much of their IP offshore and were not remitting the profits made on them back to the UK, gave rise to an absurd panic reaction.
First Alistair Darling relaxed the rules on intra-group dividends from non-UK subsidiaries, exempting them from tax in the UK.
Second under the Coalition the controlled foreign company rules of the UK were largely gutted to eliminate the threat that most management of intellectual property from sources outside the UK could be brought into the UK tax charge.
And, thirdly, territorial tax was introduced with the specific aim of ensuring that no UK based group of companies would pay tax in the UK on income arising to it from outside this country if they structured their affairs with that goal in mind.
Put these changes together and the reality was that the threat to UK companies owning actively managed IP offshore ( which in this case simply means outside the UK) that this income might be brought within the scope of UK tax virtually (one should never say absolutely) vanished. I do not think that was by chance: that was by trumpeted design. Because of the changes at least some of those who left the UK have now come back whilst the use of the UK as a tax haven does seem to be increasing because of the effective ring fence excluding the possibility of non-UK income being subject to tax here that these rules now permit.
It was this broader context in which I commented. I find it absurd, to put it nicely, that the literalism of some in the tax profession appears to deem it inappropriate that I should view groups of companies in this way and that I should be denied the chance to presume such structuring will take place when it is the completely routine practice of that profession to suggest structures designed to achieve such goals.
If someone wants to still suggest that such structuring is not possible I will be intrigued to know how and why the UK has apparently created a tax system where all UK companies are taxed on their IP income from the whole world wherever it might be legally received, but I really do not expect that counter-argument to be offered because I do not believe that to be true. It is quite clear that the UK now has no intention of imposing such charges if the appropriate structures to prevent such a charge happening are now put in place – the creation of which opportunity being precisely what I criticised George Osborne for.
In that case I’ll suggest, unless convincingly corrected, that my comments were correct and that supposed criticisms were based on quite inappropriate assumptions.
Let’s say it very clearly: of the 239,000 new ‘jobs’ last quarter just 19,000 were full time employments
The headline employment data today looks good. 239,000 new jobs.
However, self-employment accounted for 146,000 of the increase. But as I have shown, firstly no one really knows how many self employed people there are and secondly, they earned an average of £10,400 each in 2011-12, on a steadily falling trend. These people will be living below the breadline.
So will those in new part-time work, where the figure rose by 74,000.
There were, therefore, just 19,000 new full time jobs. I bet most of those were minimum wage and zero hours contracts.
The exploitation of the UK goes on.
This is no cause for celebration.
As some will know, I have been advocating the use of local government bonds to fund local Green New Deals for as long as I have been involved with tax justice campaigning. It was good therefore to note a new post on the Climate Bonds web site that reports that the French region of Ile de France, which includes Paris, has issued its second green bond for €600 million. Tellingly, it was so popular that more was subscribed than originally expected and the offer had to be closed after an hour because by then it was fully subscribed. The interest rate was 18 basis points (0.18%) over French government bond rate – which is attractive to savers but vastly below the cost of the Public Finance Initiative, which is the only option available in most cases to UK local authorities.
I believe that such bonds are a vital part of the devolution of the powers of government to local authorities. With funds borrowed at relatively modest rates local authorities could once again become major house builders to meet local need – as is so obviously necessary. The rent paid would, of course, service the debt obligation.
But this bond finance could also, of course, be used to regenerate the local economy. It is possible to share the savings resulting from domestic green investment. And it is, of course, with capital investment possible to considerably expand the reach of such schemes whilst investment in local sustainable transport infrastructure would be (and should be) sufficient justification to raise the modest sums needed to service debt through council taxes, but with obvious tangible benefits being visible to justify the payment to local electorates.
The examples could go on, but the point is a simple one. In the UK we are suffering massive regional disparity in economic fortunes. It is only by reinvigorating local economies that this can be done, and capital is needed for that purpose. Local bonds could deliver that capital with local savers investing directly or via ISAs and pension funds in the development of the communities where they live.
Isn’t there any better investment option than that?
In that case, why aren’t we seeing this in the UK?
PS These bonds could also be used to buy out crippling PFI contracts, I think, and save the burden these are imposing on so many communities.
Starbucks Corp said it decided to move its European headquarters to the United Kingdom from the Netherlands following criticism over its low tax payments in Britain last year, The Times reported.
The world’s largest coffee chain said the relocation was primarily to get closer to Britain, its biggest and fastest-growing market in Europe, the British daily reported, quoting Starbucks’ president of Europe, the Middle East and Africa, Kris Engskov.
The obvious question is, why would Starbucks want to do that? Thankfully, there are some obvious answers, but not if you don’t know little bit about the changes that George Osborne has made to the UK tax system since he came into office.
First, of course, is the fact that Osborne has cut the UK corporation tax rate from 28% to 21%: the UK now offers a lower tax rate than the Netherlands. Some journalists who have phoned me have presumed that this is the motive for Starbucks, but let me assure you, it is almost irrelevant.
The real reason, I’m sure, why Starbucks moving is because George Osborne has changed the UK from having a corporation tax system that charged UK-based companies to tax on their worldwide profits to one where he only charges UK companies to tax on the profits that they earn in this country. This is the so-called territorial basis for taxation. This has enormous advantage to a company like Starbucks. That is firstly because one of the major functions of its European head office is to route the royalties earned on the use of the Starbucks name from each operating country through to Starbucks in the USA. Because of the UK’s new territorial tax system all the royalties now received in London from every country in Europe will now be entirely tax-free in the UK because of George Osborne’s largesse. Although the Netherlands is generous with regard to its treatment of royalties for taxation purposes, nothing is as generous as to be not charging tax at all, and yet that is the offer that the UK now makes to any multinational company who wishes to use London as its headquarters location.
Second, we know that Starbucks’ Netherlands operation had a forward pricing agreement with Switzerland with regard to the price paid for coffee. Recent evidence is that the UK is willing to sign similar such deals with companies that have a record of apparent tax avoidance. The Daily Mail recently highlighted the fact that Microsoft has signed such a deal to which the UK has acquiesced. I am fairly sure that however generous the deal the Netherlands offered to Starbucks was, similar arrangements will have now been agreed with HMRC to ensure that no more taxes paid here that it was Holland. All in all, that means it highly unlikely that any significant tax will be paid on the margins made on coffee sales in the UK.
So, why does Starbucks say that it might pay more tax in the UK? The obvious answer to that is that this relocation would seem to give rise to a tax charge in the UK on the profits previously paid as royalties to the Netherlands, but otherwise I think it unlikely that any additional tax to be paid. My guess is that the additional tax paid in the UK will be less than the overall tax paid to date in the Netherlands: I’m presuming that Starbucks are being nothing less than coldly rational about this move, whatever their PR hype says.
I’m also told by journalist that Starbucks has said that no more than 10 employees will be relocated to the UK as a consequence of this move: let’s not celebrate any massive coup with regard to additional PAYE for the UK as a consequence of this relocation.
Instead this deal represents Osborne’s deliberate achievement, about which most were sceptical when I had a few others said that it was his objective to turn the UK into a tax haven, which is exactly what he has done. Where once a multinational company would have had to locate in a place like the Netherlands and Switzerland, which deliberately exploited their small size to create a corporation tax system that had all the characteristics of an offshore haven, the UK now offers a system that is even more abusive in what otherwise appears to be a respectable trading location.
That, I am sure, is why Starbucks are moving to London.
And let’s not celebrate this: what it represents is outright tax abuse promoted by George Osborne the benefit of multinational companies at cost to all the rest of us.
More on corporation tax as a tax on transactions – and the opportunities it gives to design a better tax system
I wrote a blog yesterday suggesting that despite the impression given by law and practice direct taxes, such as corporation tax, are not in fact taxes on profits, as is implied by their description, but are in fact taxes on specific transactions. The inevitable adverse reactions were received, suggesting that I had, as usual, got everything wrong. Since this is, however, the inevitable reaction of those with a vested interest in the existing system on every occasion that was to be expected, but in practice the comments made suggested to me that if anything my theory is closer to the truth than I had expected.
As example, let’s just look for a moment at the potential sources of revenue for a UK company. This diagram helps:
The revenue of the company, by no means all of which will be reflected in its turnover, but all of which will, eventually, contribute to its profit, can come from a wide variety of sources, some of which are noted above. And, as this simplified diagram notes, quite a range of those revenue sources can, even though they give rise to what are described as realised profits (that is, cash in the bank) give rise to no UK tax liability.
I stress, that is not because the profit is outside the scope of tax: it is because the source of income is outside the scope of tax. So, for example, dividends received by one UK company from another UK company are not taxed, and this now applies to intra-group dividends received from companies outside the UK. Similarly, the proceeds of sale of significant shareholdings by one company in another company are not subject to any tax, even though they can give rise to significant capital gains. Most tellingly, revenue now earned by an overseas branch of the UK company is also outside the scope of UK tax.
Many of these exemptions ( or loopholes, if you like, for that is what they are) are recent innovations and only a very few ( such as the receipt of dividends from other UK companies) have any obvious theoretical justification. The distinction between realised and unrealised gains is also new: this aberration, which has fundamentally undermined the reliability of all financial statements, basically dates from the adoption of International Financial Reporting Standard as the de facto accounting standards for the UK in 2005.
The reality is that when corporation tax was introduced I think it was, as the law describes, intended to be a tax on profits. The fact is that this is no longer the case: we now have a tax on specific transactions undertaken by companies, less the costs that are allowed by law to be offset against them. That is something very different indeed but what it does do is open the opportunity for those with an interest in tax policy design to ask some very relevant questions. These include the very obvious ones, such as why have we chosen to exempt those types of income for the currently untaxed, and should we reform that approach? Likewise, the opportunity to ask about the costs that should be offset against taxable revenues is now very clearly within the scope of policy debate.
Once the linkage between profit and tax is broken, as I think it has been in the case of corporation tax, and to some extent income tax, them we need to look at the whole basis of tax design again. It is something I intend to do because the opportunities that this opens for the taxation of what might be described as ‘bads’ whilst exempting those transactions that we think to be of benefit to society is one that is too important to miss.
Mid tier chartered accountants Mazars are staging a debate on the Fair Tax Mark tonight. Against the advice of those who have concern for my health I am taking part. This is what I intend to say in my opening comments (click the image for a bigger, easier to read version):
If you talk to tax practitioners they will tell you that tax is divided into two broad types.
Firstly there is direct tax, which, they say, is charged on things like income and profits. Examples would, of course, be income tax and corporation tax but capital gains tax also very clearly falls into this category, as does National Insurance.
The second type of tax is, perhaps unsurprisingly, called indirect tax. These are taxes on specific transactions. The obvious example is VAT, but there are plenty of others. Excise duties, fuel duty, all carbon taxes, insurance taxes, landfill tax and many other taxes fall into this category.
The more I think about it though the more artificial I think this divide is, and the less helpful thinking about tax in this way has been for the creation of good taxation policy. This realisation has, in part, been fuelled by a survey work I have undertaken on 147 different corporation tax systems. The outcome of that work is not yet published but the finding was unambiguous: there isn’t a single corporation tax system that I can find in the world (and the survey covered the corporation tax systems of more than 98% of the world’s GDP) that charges that tax on anything like accounting profit.
Now, of course, we know that in the UK, but then we are reputed to have one of the more complex tax systems. To replicate that finding literally everywhere was, if not surprising, then at least an eye-opener because what this means is that a so-called direct tax is actually no such thing. Corporation tax is, in fact, a tax on specified transactions, just like VAT. If confirmation were needed, when the European Union with drafting the articles for its proposed Common Consolidated Corporate Tax Base it had to be explicit on this issue. In article 10 of the draft CCCTB it says:
The tax base shall be calculated as revenues less exempt revenues, deductible expenses and other deductible items.
You only have to think about that for a moment to realise that what it is saying is that specific transactions are taxed, or are tax allowable: it is not profit that is the basis for this proposed European corporation tax. This is not peculiar to the CCCTB; in effect what I now realise is that this is the commonplace basis the tax assessment for what are supposedly called profits (and in effect, income) around the world. We may start all tax computations with a figure for income, or profit, but that is in itself misleading. That figure is only an approximation to the revenues that are taxable, and even more so, to the expenses that are deductible, and the process of adjustment is not one that comes up with an alternative profit figure; it is an exercise to identify the chargeable and allowable transactions that are within the scope of tax. That is something quite different.
Now, maybe I am slow in realising this, but if I am, then I suggest that I’m far from alone. This suggestion is one I have not seen made. The appreciation does, however, have significance. Once we begin to think that we’re charging transactions to tax it becomes very much easier to think about alternative ways of taxing. It was many years ago that I recall reading the new economic thinker James Robertson suggesting that the object of a tax system was to tax the ‘bads’ in an economy whilst leaving the ‘goods’ alone. This idea is very difficult to reconcile with any concept of taxing either profit or income, but it is very easy to reconcile with a transaction-based approach to taxation: any transaction-based tax necessarily allows for this opportunity, and the truth is that we may only have transaction-based taxes.
The same realisation is also important for another reason, and that is in tackling tax avoidance. The CCCTB definition is very interesting here, and contrasts with the logic of UK jurisprudence on this issue, at least until the introduction of the General Anti-Abuse Rule. That is because the EU rule works on the basis that everything is taxable unless exempted whereas UK taxation law has worked on the basis that nothing is taxable unless specifically charged. Again, a transaction-based approach allows for a change of emphasis.
It does more than that though: it also changes the way in which we need to look at accounts. As I have often noted in the past, the IFRS Foundation have specifically stated that the International Financial Reporting Standards that they publish are not a suitable basis for the preparation of tax calculations, even though they are the only accounts that many companies might produce. Those accounts focus upon a profit figure, which we know to be inherently unreliable. If accounts are, however, to be useful for taxation purposes then there may well be a need for a different focus that seeks to identify particular forms of transaction that may, or may not, be taxable, but that then opens the question as to who will produce those accounts, and who will set the standards for their production.
I don’t have answers to these questions is yet: I would be interested in informed comments.
Many people are now realising that inequality matters. Even economists have caught up with the issue. So too has the FT. As it reports this morning the widely reported claim that neoliberalism has solved poverty is little more than a myth:
More than one-third of the world lives on between $2 and $10 a day, making this “fragile middle” the world’s biggest income group. Some 2.8bn people – 40 per cent of the world’s population – were earning $2-$10 a day in 2010, the latest year for which data are available from the World Bank’s income distribution database.
Adjusting for inflation and purchasing power, the share of those living below $2 per day has dropped markedly since 1981 from 70 per cent of those living in developing countries to two in five, but the bulk of those lifted out of poverty remain only just above the line. About 1.5bn people were earning between $2 and $4 a day in 2010, and this $2-$4 group has grown more quickly than any other across the income spectrum.
But as the FT also notes:
Put in a global context, the number of solidly middle-class people remains small, while the fragile middle has grown exponentially.
Data show 2.8 billion people in the developing world sit just above the poverty line, at risk of slipping back as emerging market economies slow
A Financial Times analysis of more than 30 years of World Bank data from 122 countries in the developing world illustrates this change in fortunes. As poverty has fallen, the number of people clustered in a narrow band above the poverty line has grown. But only a relatively small number of people tend to make it beyond that. The result is that four in 10 of the word’s people now live in its fragile middle.
Many of those in that fragile middle swap positions with the poor, often.
We are a long way from solving the problems of poverty. But we could solve them.
We could tax the world’s wealth.
We could really make the world’s multinational corporations pay tax where they earn their profits.
We could tackle tax havens.
We could have progressive taxation.
These would all help, enormously. Tax can, quite literally, liberate people if paid in the right place at the right time.
But the world’s wealthy don’t want these things to happen. By implication, and the causality is direct, they want the world’s poor and fragile people to remain in that state.
We have a choice whose voices we listen to. I say it should be those hardest hit by poverty. What about you?
A quiet revolution is going on in economics. It’s down to one man in particular. His name is Thomas Piketty. His new book is called ‘Capital in the 21st Century’.
I’m not claiming to have read it all as yet, but it seems pretty clear that in his enormous work there is one central idea, ultimately summarised in one graph, reproduced in Paul Krugman’s review in the New York Review of Books. This is it:
In this graph ‘r’ is the rate of return to capital and ‘g’ is the rate of growth in the economy.
If r is greater than g, and you’ll note that expect for the period in the last century it has been, than the return to capital accumulates faster than the growth in the economy as a whole. The result has to be increased inequality because that increased accumulation of capital has to arise as a result of a reduced return to labour.
That, Piketty compellingly argues is the situation we now face. The 1% (or less) are, very literally, taking the rewards due to the rest of us.
What I like is that Piketty is brave enough to say there is a solution. It comes, as I often think solutions come, in the form of tax. He says we have to tax wealth inequalities out of the system out of the economy and we have to tax high incomes because they are not earned. I agree. Quite literally, future prosperity demands that we do so.
Now all we have to agree upon is how to do it.
And then we have to do it, soon.
If we want a new criminal tax penalty demand disclosure of all bank accounts, and target those who don’t report
As some will have noticed, I have been critical of George Osborne’s plans for new tax penalties over the weekend. There have been three reasons for doing so.
First, I am wary if his explanation for this move. I am not convinced this is a real change in policy and is much more a PR exercise.
Second, without staff at HMRC to bring cases any such move is irrelevant and HMRC is scheduled to lose many thousands of staff over the next year or two.
Third, I have problems believing the legal interpretation given to justify the move that it is hard to prove intent in tax evasion cases. I do not agree. What I do think is that some very poor cases – such as the Redknapp case where the defence was there was no taxable income – have been chosen for prosecution and this has seriously undermined HMRC’s position.
Some have, however, interpreted this as me being soft on those who are tax evading. Far from it: I want many more prosecutions, but if we are to have them then let’s get rid of the ambiguities so that cases can be more readily dealt with. There are, of course, ways to do this, but I fear HMRC will not take them.
Let me offer an obvious solution. I would require that a tax return should demand that a tax payer disclosed all their bank accounts. This is, if course, just about the first information always demanded in a tax investigation so it is important. Most of us don’t have many. And it’s not hard to list them all. Then it becomes a relatively simple matter to prosecute someone for failing to disclose a bank account if that is appropriate. No intent need be proven: it’s error that could trigger the penalty. Of course some guide lines would be needed: failing to disclose an account that has not been used for years and has less than, say, £500 in it which has not accessed during a year should not be a crime, but above that a penalty could be imposed – and a criminal one if need be.
And there could be personal penalties for failing to disclose that the individual was a signatory to a corporate bank account. I know for a tiny number of people this will require considerable disclosure. So what? Good governance requires that people know this sort if thing.
And penalties should, of course, relate to domestic as well as offshore abuse. Both are important.
Make this one simple change and motive disappears from the question of culpability: fact determines the issue. Penalties could be geared (I suggest very heavily) to the sums involved. That is tax justice.
What we would then have is a new disclosure mechanism with penalties attached for three issues: offshore tax evasion, tackling the self-employed shadow economy and for using companies for tax evasion purposes. We could get all this in one go, and all with criminal penalties attached. And for most people the cost of compliance would be tiny.
I am not expecting such a neat solution from HMRC this morning when they issue their consultation on this issue. But if I were in the Treasury this is what I would do. And it would work.
The Guardian notes today:
Catastrophic climate change can be averted without sacrificing living standards, according to a landmark UN report published on Sunday. It concludes the transformation required to a world of clean energy and the ditching of dirty fossil fuels is eminently affordable.
I, and the other members of the Green New Deal group, have been saying so for some time.
Now is the time for delivery. The era of fossil fuel is over. This is the time to release what we call ‘the carbon army‘ to transform our economy.
I am intrigued that the government is saying that it is going to ensure GP services are supplied by people's normal doctors seven days a week, twelve hours a day, with the over 75s guaranteed access to their own personal doctor, and all that for an annual cost of £50 million.
To put that in context, that's £2,000 a doctor – maybe the cost of upgrading them all to the secure email system they're all supposed to consult on in the future.
Politely, this is nonsense. Now, I admit my expertise in this area is second hand as I am married to a GP, but I have as a result seen the detailed workings of a number of GP practices over the years and have discussed GP services with a wide range of doctors. There are three obvious points to make.
First, the proportion if NHS resources going to GPs is already falling, significantly. It is now less than 9% of all resources when it was over 10%. So the service is already underfunded.
That is compounded by increasing demand. I can remember only fifteen years or so ago when an average of four consultations per patient in a GP's list was normal: now it's over five and still rising. That is an enormous change.
Third, there is a desperate shortage of GPs to work in the existing system, largely because of the considerable demands made, long hours and massive stress.
Now please don't get me wrong: there are fat cat GPs in the existing system who treat the NHS as a market and profit making opportunity and so abuse it. And I am well aware that some GPs seem to think that a full time working week is four days, or that they need a half day off in a five day working week. For these doctors I think their time of using the system is over, and that's to be welcomed. But they're not a majority of GPs. Most already work very long hours and can physically do little more than they do now. Which is precisely why recruiting GPs is very hard indeed: young doctors rightly see little appeal in working in this way.
In that case can what Cameon and Hunt will be offering be delivered? I do not think there is any hope if it.
But more importantly, I think it would be very dangerous to try: pushing healthcare professionals beyond their limits is not a way to deliver safe care.
Section 2 of the Fraud Act lets offshore tax abuse be prosecuted now: so what else is Osborne going to do?
The government is claiming it cannot prosecute offshore tax evaders at present without proving intent on their part to evade tax if they omit information on their offshore bank accounts from their tax returns.
I have already said I do not agree. Nor do HMRC. This is the declaration on the 2013 tax return:
Now, let’s think about this for a moment, shall we?
If the tax payer knows they have an offshore bank account on which income has been earned and they fail to declare it then very clearly they have evidenced intent to evade tax. What further evidence is needed of intent?
And if they don’t declare it HMRC already say they can be prosecuted.
But HMRC say it’s hard to prove intent and new law is needed. Self evidently both claims are wrong or the statement they printed on the 9 million or so tax returns they issued in 2013 is wrong.
And what is the crime they can be prosecuted for now? It’s simple: it’s fraud. At one time it was called cheating the Revenue. The offence is described in section 2 of the Fraud Act 2006:
Everything needed to prosecute someone submitting a false tax return is there. The signature on a false tax return is the fraudulent declaration. The gain is the tax evaded. And I do it think subsection 2 is an obstacle: the requirement that the taxpayer appraise themselves of what must be declared is already imposed by law. Ignorance is not an excuse.
I make clear, of course I want prosecutions. I have been calling for them for a long time. But I cannot help but think that today’s claims by Osborne, lamely defended by Gauke, look even more like posturing to me tonight then they did this morning.
My prediction is unambiguous: this new law, if passed, will change nothing.
One of the underlying important themes that the Tax Justice Network and I have emphasised over the last decade has been the continual shift of the burden of taxation from capital onto labour. As if evidence were needed that this trend is continuing, this was the headline from an email that I received this morning from the OECD:
Of course, the situation varies from country to country. It is the trend that is important, and that is a continuing explanation for the crisis that our economy, and that of the world at large, faces. Growth without a rising share of labour income is not possible: inequality prevents it.
George Osborne is planning to make it easier to impose jail terms or heavy fines on British residents using offshore tax havens to cheat the exchequer out of billions in revenue.
The chancellor, who is in Washington at the International Monetary Fund’s spring meeting, has drafted a criminal offence of failing to declare offshore income as he steps up a long-running campaign to crack down on tax dodging.
At present, HMRC has to prove a British resident has deliberately sent funds abroad to dodge tax. The need to prove intent has undermined several prosecutions and allowed those under investigation to escape with only light fines, Treasury officials said.
Now, I am not someone who is likely to oppose a clampdown on offshore tax evasion, but this statement is very odd.
First of all, there is already a criminal offence for failing to declare offshore income. That offence occurs when a tax return is submitted without the income included upon it. Making a false declaration that the tax return that has been submitted without that information is complete is, in itself, an offence, and therefore it seems hard to see why another offence is needed.
Secondly, it is not necessary to prove intent in the case of tax evasion cases: failure to declare the income is sufficient to prove that evasion has taken place. I do agree that there are offences relating to the movement of assets offshore where intent is a factor, but to suggest that these cover all tax evasion situations is misleading.
Thirdly, I will be curious to see what the proposed offence is. It cannot be the case that having an offshore bank account is, in itself, illegal. That would be contrary to EU law, and even I have never argued that having an offshore bank account is, in itself something that should be considered an offence. It is the use of those accounts that is important. But, in that case, Osborne is going to have to fall back on some form of failure to declare to create the offence that he wants: I suspect that failure to notify the existence of an account will now be an offence, but if that is the case this is no different in substance from failure to notify income arising on that account on the tax return, which is already an offence, as I note above.
In that case, whilst I have an open mind until I see the consultation document, this looks very much more like a PR exercise than it does to be a serious attempt to tackle offshore tax abuse.
And let’s remember, some of the most serious offshore tax abuse which is of greatest public concern relates to the use of tax havens by multinational companies, and this is something that George Osborne has gone out of his way to encourage. The duplicity of his approach is staggering.
The new person charged with stopping transfer pricing abuse is a KPMG partner – another fox in the hen house
It’s odd how much happens in a week when you just don’t feel up to writing.
Some are big, but many are small and yet deeply symbolic. Take the appointment of a new head of transfer pricing at the OECD as an example. It is not mainstream news stuff – but in a world where tax abuse by multinational companies is rampant and the demand that they be brought to book dominated many political agendas throughout 2013 this is important.
And that new head of transfer pricing at the body that is meant to set the rules to eliminate abuse is Andrew Hickman. No, I’d never heard of him either until now. But all you need to know is that he was a tax partner at KPMG in London. And that he replaces someone who was formerly a tax partner at PWC.
The Big 4 accountants continue to capture the world’s tax authorities so that they can continue to play their games of abuse – abuse they permit by being in all the world’s major tax havens, for a start. Now we have a head of OECD transfer pricing from KPMG and a chair of HMRC from KPMG, and something pretty similar is going on in Australia, if I recall correctly.
These people are not there to reform the system. These people are there to ensure the system is maintained as it is because those who profit most from it are, almost certainly, the Big 4 who have a monopoly in providing advice on how it, supposedly, works (even though, very obviously, it does not work at all – except for their benefit).
I’d like to say you could not make this stuff up, but you can. This is what neoliberalism delivers – the corporate state, run by business for the benefit of a few in business. In that case is it any surprise that right now it appears that the OECD is not making any real progress at all on Base Erosion and Profit Shifting? All that politics is now being shredded by those inside the system to ensure that the burden of tax continues to be shifted from capital onto labour – which is you.
Now you know why the fight for tax justice has to go on. It’s core to our freedom. We thought we saw some progress last year. Right now 2014 looks to be the year when business is fighting back hard – and so far, it’s winning.
A little tentatively, I am back at my desk.
I’ve learned a lot in the last week. I have learned I can go a week without blogging, or even writing. It’s a very long time since that last happened. But I needed to stop.
I have learned that until I have an operation I am going to be in pain. That’s not fun.
As a result I have learned what restricted mobility feels like.
To my sons’ amusement, I have learned what it is like to beg them to slow down, rather than speed up.
I think really low fat diets are very boring, already.
I have explored the inside of my eyelids, a lot. And I have taken time to think. And read a bit. I realise I really like short books. I’d love to write a really effective one.
But actually, I’ve realised I want to be fit again and getting on with what really mattes to me – which is a fight for social justice for most people, who are denied it. And I’m still, very strongly of the view that tax is an essential component in delivering that justice.
It’s not bad to take a week off to realise that, with some tweaks here and there, what you’re trying to do is pretty much on the right track.
The OECD is asking developing countries to tax on the basis of make believe, and that’s not good enough
During the last week the BEPS Monitoring Group of NGOs and civil society organisations, of which I am a member, made a submission to the OECD on the Base Erosion and Profit Shifting paper on transfer pricing. The key issues within the submission were as follows:
In our view, the Report is disappointing. It is inadequate and unhelpful for developing countries. The Report:
- assumes that developing countries should use transfer pricing methodologies which have been found deficient even by OECD countries, and are currently being revised, especially through the project on Base Erosion and Profit Shifting (BEPS);
- prioritizes the use of comparables, although these methods have been shown to be deficient in both theory and practice, especially for developing countries;
- obscures the real problem, which is not the absence of data but lack of appropriate comparables, due to the integrated nature of multinational firms;
- fails to provide any information about what databases are available, or an evaluation of whether or how the data that they provide is supposed to be helpful for the purposes of auditing transfer pricing;
- encourages developing countries to use methods which are likely to require case-by-case negotiation to ameliorate the fundamental deficiency of data without acknowledging the asymmetries of knowledge and power between developing country tax administrations and both tax advisers and developed country tax administrations; and
- provides only a superficial consideration of alternatives to the use of comparables.
In our view methods based on either comparable prices or comparable profits are unsuitable for developing countries, and likely to lead to either over- or under-taxation, because:
- the lack of appropriate comparables means that appropriate assessments require detailed examinations, specialist knowledge, and subjective judgment;
- such assessments are time-consuming, and require skilled specialists, who developing countries find it hard to recruit and retain;
- the subjective judgments involved leave officials open to undue pressures and temptations to corruption;
- relying on data-bases can result in the use of inappropriate comparables, which may become generalized as firms also rely on them to avoid disputes;
- conversely, the adoption of aggressive adjustments by officials, which may also result from performance incentives, resulting in counter-claims by firms, can lead to an adversarial culture, and sometimes excessive litigation;
- the subjective and often arbitrary nature of adjustments based on comparables makes it hard to resolve conflicts if they arise between states other than by equally discretionary bargaining.
Our recommendations are that developing countries should:
- learn from the mistakes of the OECD countries, and build on their own experience, for example the `sixth method’, or the Brazilian approach;
- anticipate rather than await reforms likely to result from initiatives to combat BEPS, such as country-by-country reporting;
- establish methods which are clear, transparent and easy to administer without the need for significant ad hoc investigation or subjective judgment;
- coordinate transfer price scrutiny with other anti-avoidance measures such as denial of deductions for inappropriate payments to related entities.
Let’s not beat around the bush here: we think the OECD has got its whole approach to this issue wrong. It is absurd to ask developing countries to adopt and use a system of profit allocation between states that very obviously does not and cannot work. However well trained officials from these countries might become in this system nothing within their supposed new competence will overcome the fact that the OECD transfer pricing system assumes that companies within multinational corporations are independent of each other, when very obviously they are not, and that there are comparable free market prices available with which their trades can be compared when we very obviously know that is not the case, not least because up to 70% of all world trade is now thought to be undertaken on an intra-group basis.
Asking people to tax on the basis of make believe is not just absurd; it’s also a recipe for abuse. That’s what we’ve got and that’s what we’ll keep whilst this system is perpetuated by the powers that be in the OECD, the Big 4 accountants and big business that has everything to gain from continuation of this abuse.
- Grand Chamber judgment Kuric and Others v. Slovenia - question of pecuniary damage decided in 'erased' people case
- Arrêt de Grande Chambre Kuric et autres c. Slovénie - question du préjudice matériel à octroyer aux 'personnes effacées
- Grand Chamber hearing Tarakhel v. Switzerland
- Audience de Grande Chambre Tarakhel c. Suisse
- Arrêt Howald Moor et autres c. Suisse - maladies causées par l’amiante et règles de péremption ou de prescription