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Richard Murphy on tax and economics
Updated: 54 min 5 sec ago

The Diverted Profits Tax: first thoughts

Wed, 12/10/2014 - 12:01

I’ve now read the proposed legislation that will create the Diverted Profits Tax, which is here for those with the willpower to go through it.

Let me offer a first summary of this tax.

First, this reads as if it is a giant targeted anti-avoidance provision whose aim is to bring within the scope of UK tax profits that are not presently chargeable because a foreign company has taken steps to avoid creating a permanent establishment for its UK sales.

Second, this only applies to larger companies. The foreign company must have UK sales of at least £10 million and if the UK activity would be considered a small or medium sized company for UK accounting purposes this new law does not apply. It also does not apply to one off transactions and it seems likely (although I have not checked in detail as yet) as though many financing arrangements will be outside the scope of the arrangement.

Third, the tax looks to see if either UK costs have been inflated or UK sales have been reduced such that there is a tax mismatch between what seems likely should actually reported in the UK and what is reported in a foreign company. The concept of mismatch is key.

Section six of the new legislation says how the diverted tax is calculated:

The tax reduction mentioned in section 3(b) is the amount  of reduction in UK tax compared to any increase in foreign tax due as a result of the diversion. This has to be 20% of the UK tax that might have been due for the charge to apply. Losses and some other issues are ignored when estimating foreign tax due.

So, in summary (and there is a lot more that could be said) the UK is introducing a law here that will bring within the scope of UK tax profits that it claims have been diverted from the UK by avoiding creating a permanent establishment in this country. This targets Google, Amazon, Apple, Facebook and others, quite explicitly. Almost all companies likely to be impacted are US owned. Phone lines to DC will be very hot today.

Second, this only applies to large companies, which is logical.

Third, the test does not challenge the right to incorporate in another country. I think that is clear. What it does challenge is the right to avoid tax by doing so. That is a fine distinction and will, I suspect be the subject to years of litigation under EU law.

Next, will it work? It may for the time being: a right to collect estimated tax is included in the law and so recovery will take place. Bit will it stick under legal challenge? I really do not know. There are real problems in EU law with this. I would like it to do so, but I cannot be confident. All the reservations I had under EU law remain in the draft I have read.

Last, do I welcome it? Not unambiguously, no. First, this is heavily targeted and as Luxleaks shows abuse is much wider than this. This is a useful move, maybe, but very narrow in its focus. The omission of financing arrangements looks serious to me, and undermines much of the effectiveness if my interpretation that this is the case is correct. And a host of other problems, such as transfer mispricing are untouched, where an absence of resources is the issue. Which brings me to a key issue, which is whether HMRC will even have the capacity to enforce such a tax. But perhaps, most of all, I have reservations on the impact on the BEPS process. I will be preparing a separate blog on that for Economia magazine, which I will link to soon.

Noted: Updated at 13.50 re the 80% test

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Diverted profits tax: still in the dark

Wed, 12/10/2014 - 11:02
Initial guidance on the new Diverted Profits Tax in the overview of new legislation for the Finance Bill 2015 was not exactly helpful when published this morning:   I am hoping that TIIN, when available – and I have not found it as yet will tell us more. jQuery(document).ready(function($) {$(".no-break").append('36Like Post');});

Make believe and tax avoidance are pretty much the same thing

Wed, 12/10/2014 - 09:27

The latest Luxleaks revelations on the tax arrangements of Skype show just how far make believe and tax avoidance have coincided, especially, it seems in the case of Ernst & Young (or EY as they now prefer to call themselves).

As the Guardian reports, Skype did a deal with the Luxembourg tax authorities, arranged by EY, in which they were taxed in Luxembourg on the basis of it being assumed that 95% of the income of a Luxembourg company was paid as a dividend to an Irish intellectual property owing company from which that income then returned as dividends. As a matter of fact the dividends weren’t paid but Luxembourg was asked to tax the company on the basis that they had been – on other words on the basis of a pure fiction. And Luxembourg agreed.

The consequences should be obvious. First an EU Competition Commission enquiry should follow.

Second, Skype has to confirm if this is still happening.

Third, questions have to be asked of EY’s ethics. If it can promote tax schemes that are a pure fantasy then it clearly has answers to provide on how it conducts its tax practice.  In my opinion this is profoundly unethical. If that is the case, who is going to bring them to book?

Fourth, as I have long argued, we now have to accept that much tax avoidance is simple fabrication of the truth with transactions concocted purely for tax gain. Although in this case it got even worse than that. Here fantasy and tax avoidance coincided taking us into new realms of  abuse.

This is greta work by all the journalists involved. But the question remains; will anything happen as a result?

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Luxleaks 2: now it’s time for action against the Big 4

Wed, 12/10/2014 - 06:49

The next batch of leaked tax papers that reveal the extent of ax abuse engineered with the active connivance of the Luxembourg tax authorities has been published.

The leaks have moved beyond PWC. What they prove is that all the Big 4 firms did this, not that there is much surprise there. They’re all as bad as each other, and all are complicit in this organised attempt to deny elected governments the revenues they are owed in a combined assault on democracy.

The leaks also add more names to the list of companies engaged in this abuse. I welcome that. Column inches for tax abusers are always welcome.

But we already have the counter claims that these people are just playing by the rules, from the US Ambassador to London for starters.

And Margaret Hodge attacked PWC on Monday but I do not think the systemic nature of the issue has yet been explored.

So what we really need is action. I doubt the Google tax is going to deliver that; for a start it is not forecast to raise much money.

Nor can I see the EU ganging up on Luxembourg yet.

So who are the appropriate targets of action? The Big 4 are, of course. We have a scheme for high risk tax promoters in the UK. As drafted it would not go nowhere near what these firms do, or these arrangements. That’s all very convenient and cosy for them. It even helps cement their positions by removing some competitors from the scene. But the truth is that it is these firms that are the real high risk promoters and they should be the targets for action now because they are, by their universal presence in tax havens, the one single and consistent agent that facilitates tax abuse in tax havens by multinational corporations without whom this process could not take place. And that’s precisely why they now need to be the focus for attention.

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The IFS has realised that austerity is a choice

Wed, 12/10/2014 - 06:30

I have long argued that austerity is a choice. It is welcome that some who have long seemed in denial on this issue are now beginning to agree. Take this comment from the Guardian this morning:

The Institute for Fiscal Studies said the coalition government made “remarkable choices” to cut income and corporation tax that shifted the burden of balancing the budget to already hard-hit areas of government spending.

IFS director Paul Johnson said the move had also limited the Treasury’s scope for bringing Britain’s mounting debts under control.

“It’s been very striking over this parliament how £12bn or so is being spent on increasing the personal [income tax] allowance [and] something like £7bn-£8bn on reducing corporation tax,” Johnson told MPs examining Osborne’s autumn statement delivered last week.

I actually think the corporation tax cut is slightly bigger at about £10 billion, but let’s not split hairs. The key point is that tax cuts that are remarkably ineffective in achieving their stated goals (because very little of the benefit of income tax allowance changes goes to those on low income whilst corporation tax cuts have quite clearly not boosted the economy or even business investment which has been turgid, at best) have been given whilst the dogma of austerity has been pursued.

First, Paul Johnson is right to say this is a choice.

And he is also right to imply it is a very bad choice when the consequences for the services the government can supply are so significant.

It is as if, he might be implying, this government may not want the state to function in the way that most people expect it to. And if that’s what he’s really saying he’s right. I think it fair to say that he has at last rumbled that this government’s goal is not the delivery of services but the dismantling of the mechanisms of state for the benefit of a few. If he has reached that point, welcome to the enlightened Paul. You’re a valuable addition to the team.

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If the US is not going to stand up to tax abuse then we’re all in trouble

Wed, 12/10/2014 - 06:17

The FT has reported this morning that:

The US ambassador to London said on Tuesday he believed Facebook, along with other US companies such as Amazon, Google and Starbucks, were doing nothing wrong by using legal methods to cut corporation tax bills in the UK.

Asked if such companies were “tax dodgers”, Matthew Barzun said: “No. These companies are clever about using international rules that exist as written by all of us — UK and US officials. We made these rules and they are playing by them.”

This is worrying.

First the pretence that officials write the rules and companies use the is either naive or its disingenuous. The comment ignores the enormous amount of lobbying effort that many companies put into getting rules that suit their purpose. I have seen companies engaged in such efforts. For the Ambassador to suggest the companies are innocent parties is simply wrong.

Second, to suggest that the rules are written solely by UK and US officials is also either naive or disingenuous. Profit shifting exists with the active assistance of governments of outright tax havens like Luxembourg or places like Ireland and the Netherlands, which are as culpable. That’s the whole point of profit shifting: money ends up where it does not belong. The Ambassador is denying reality.

Third, it’s not clever to avoid tax: tax avoidance is anti-social behaviour of the highest order. It may require the application of intelligence to achieve its goal but to suggest that it is clever implies it is also wise and it is very far from that.

But the most important thing about these comments is that I very much doubt that the Ambassador made his comments without them being sanctioned in advance. The context  may be the ‘Google Tax’ on which we may hear more today. He says he hopes US companies will comply but he has also said tax has been a thorny issue in US – UK relations, and I strongly suspect that the Google tax will create more problems within that relationship.

To some extent that is why I think what George Osborne is doing is unwise because whatever the detail is what he is doing with the Google tax has the capacity to undermine the OECD’s BEPS process to which the US is supposedly committed, but with much less enthusiasm than EU based countries show for the process. If the Ambassador is actually signalling the US is not committed to BEPS or is flying early flags of protest on the Google tax then we all need to take note. The US is no lover of demands that its corporations pay tax outside that country, absurd as their logic might be. Tax wars could follow if they do not cooperate with attempts to stop abuse by such corporations though. And tax wars can be as destructive as tax competition, of which they are just a variant. These comments, and the misrepresentations they include are then, if they truly represent US thinking, worrying as a result.

 

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Juncker has to show his colours in the fight on corruption

Tue, 12/09/2014 - 08:32

This letter was in the Guardian this morning, and I warmly endorse its message:

As investigative journalists, we believe in the critical role of the media in holding institutions to account, exposing corruption, and challenging threats to the social contract between states and citizens which are so critical to democracy.

The “Lux Leaks” scandal (Revealed: tax deals saving firms billions, 6 November) is a recent example of the kind of corrosive deals that big companies are able to extract from countries when they think no one will see. Sweetheart deals, facilitated by accountants and law firms, are depriving European states and countries around the world of billions of euros at a time when austerity is undermining the ability of governments to provide basic public services.

Investigative journalists seeking to challenge corruption rely on the courage of whistleblowers. But equally, we need access to timely information on how companies and trusts are used to funnel corrupt money through the European financial system. The EU anti-money-laundering directive offers an opportunity to ensure that information on the ownership of companies and trusts is available to the public, allowing journalists, NGOs and indeed anyone to monitor the links between suspected criminals and their use of these currently secretive legal structures.

On International Anti-Corruption Day, we urge Jean-Claude Juncker to ensure the EU takes this critical step in the fight against corruption, which undermines the rights of people in Europe and around the world and threatens the credibility and integrity of the European market.

Austin Agbonsuremi Director, political desk, AIT Parliamentary, Abuja, Nigeria
Fabrice Arfi Mediapart, France
Tamás Bodoky Editor-in-chief, Atlatszo.hu, Hungary
Simon Bowers Senior financial reporter, the Guardian
Richard Brooks Reporter, Private Eye magazine, UK
Stefaans Brümmer M&G Centre for Investigative Journalism (amaBhungane), South Africa
Santorri Chamley Journalist, UK
Umar Cheema Special investigative correspondent, the News, Islamabad and founder, Center for Investigative Reporting, Pakistan
Susan Comrie Carte Blanche, South Africa
Osama Diab Anti-corruption advocate and investigative journalist, Egypt
Abjata Khalif Kenya Pastoralist Journalists Network, Kenya
Francis Kokutse West Africa correspondent for Indo Asian News Service, columnist for the Finder and Weekend Sun, Ghana
Naomi Fowler Taxcast, UK
Parwiz Kawa Editor-in-chief, Hasht e Subh daily newspaper, Afghanistan
David Masunda The Mirror, Zimbabwe
Nick Mathiason Illicit Finance Journalism Programme, UK
Emmanuel Mayah Reporters 360, Nigeria
Jeff Mbanga Business editor, the Observer, Uganda
Craig McKune M&G Centre for Investigative Journalism, South Africa
Jeanne van der Merwe Media 24, South Africa
Moses Michira Investigative reporter for Standard Media in Nairobi, Kenya
Nadine Marroushi Freelance journalist, Egypt/UK
Patrick Mayoyo Investigative journalist, Kenya
Eric Mwamba Wealth Magazine, former president of the Forum for African Investigative Reporters, DRC
Edegbe Odemwingie Senior correspondent, Leadership newspaper, Abuja, Nigeria
Rachel Oldroyd Editor, Bureau of Investigative Journalism, UK
Sandeep Pai Investigative reporter, India
Philipus Parera Managing editor for investigation desk, Tempo Magazine, Indonesia
Tata Peklun Radio Liberty and Anti-Corruption Action Centre, Ukraine
Priti Patnaik Financial journalist, Switzerland/India
Juliana Ruhfus Senior presenter, al-Jazeera
Rana Sabbagh Executive editor, Arab Reporters for Investigative Journalism
Márton Sarkadi-Nagy Investigative reporter, Atlatszo.hu, Hungary
Natalia Sedletskaya Radio Liberty Ukraine
Khadija Sharife Coordinator, African Network of Centers for Investigative Reporting, South Africa
Nicholas Shaxson Author and journalist, Berlin
Drew Sullivan Editor, Organized Crime and Corruption Reporting Project, Sarajevo/Bucharest/Tbilisi/Washington
Minh Thi Luong Reporter, Vietnam
Bassey Udo Business editor, Premium Times Media, Nigeria
Lara Whyte Journalist, UK
Wong Joon Ian Journalist, UK

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PWC’s disingenuity blights all accountants

Tue, 12/09/2014 - 08:11

Margaret Hodge got vey angry with PWC yesterday over its Luxembourg tax practice. She accused the firm of lying because it had previously told her committee that it did not mass market tax avoidance schemes. Not surprisingly she concluded that well over 500 fairly similar schemes looked like mass marketing to her.

PWC’s defence was to say if had not lied, of course. What else could it say, whatever the truth? But what it added was much more damning. Its senior UK tax partner said:

At the heart of the Luxembourg economy now is an economy that is based around businesses going there to finance [and] to hold investments. The tax structure, the system that they have created, facilitates that happening, along with all the other infrastructure. I’m not here to change the Lux tax regime. If you want to change the Lux tax regime, the politicians could change the Lux tax regime.

This would have made me very angry. Kevin Nicholson, who said this, knows that it is beyond Westminster’s power to change law in Luxembourg. He knows his firm has exploited that fact. And he knows his firm has been a primary architect of many tax haven practices, advising government’s on how to create these. It is  not a neutral agent on these issues. And he knows his firm chose to sell these structures when it need not have done so. That option did exist. His firm’s disingenuity on these matters is unbecoming, at best. It blights the accounting profession. And it rightly taints it all as being far less trustworthy than it should be.

Shame on PWC and all others involved in such activity, I say. I deeply resent the assumption that many will make that this is what accountants do because that’s not true.

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We know inequality matters: what we do about it now we know matters more

Tue, 12/09/2014 - 07:56

The OECD has published a new report that says it is now quite sure that inequality matters and has a significant impact on the economic growth that a company enjoys. There are reports on what they have to say in the Guardian and FT this morning, and a slide summary of their findings is available here.

There will, I know, be academics wedded to the neoliberal model who will say that this research, like that from the IMF which produced broadly similar findings earlier this year,  is either inconclusive or wrong, and no doubt they will trawl their way through the minutiae of the data to try make their case. I have little time for that: the fact is that statistically based findings such as these can at most support observable hypotheses formed by astute observers of what is actually happening in society. Research of this type does not create reality: it confirms what is known and as such is inherently normative whoever does it and whatever the outcome is. That does not mean it is not useful: it is, and can be persuasive, but usually to those inclined to believe it by pre0disposition.

So does it matter? Yes, of course it does. There are many reasons for saying so. First, this represents part of a major change in world leading organisations on this issue. They should have realised long ago from the type of astute observation I describe that trickle down economics, where increasing inequality was tolerated as all are supposedly better off as a result, does not work for a very wide variety of reasons, but the reality is that this conclusion is only now being reached and the fact that it is overdue does not mean it is not welcome.

Second, the bluntness of the OECD conclusion, and the fact that they recognise it is normative in this slide, which is part of the presentation made, is important:

 

What that slide effectively says is that policy implications flow from the judgements made on this issue and that they have significant impacts on the societies in which they prevail. So, in many societies, such as the UK, where there have been significant increases in inequality over the last 30 years or so, not only have their been significant growth impacts as a result (with the UK losing maybe 7% of current GDP as a failure to tackle this issue over the last 30 years) but the decision to pursue policies that focus on “incentives” has had major implications.

This philosophy is seen throughout the current government’s attitude towards what it calls welfare and I call social security: in itself a major difference of significance to those in receipt of the payment. Welfare is treated as if a handout to those not willing to take initiative for themselves; social security is the provision of support to those in need at a time when through no fault of their own they need it. Philosophically that difference is enormous.

In practice that is seen in the narrative of the welfare “scrounger’ who stays in bed whilst hard working families go to work. And it’s seen in practice in such policies such as the bedroom tax, sanctioning and welfare caps, all of which are meant to provide the incentive to make people want to work.

The difficulty within this narrative is that, as the OECD  has now noted, getting work is an impossibility in practice if there are very real structural impediments to work which neoliberal economists assume do not exist. I stress, they really do assume that such impediments are not real and that is because in their economic modelling they do, automatically and almost without thinking about it assume all have equal access to capital, markets and knowledge for example. Because they are so used to making these somewhat ludicrous assumptions in their theoretical work it never occurs to them to notice that in the real world they do not hold true.

Fundamentally, this is what the OECD is saying: it is suggesting that the neoliberal model is wrong. It s saying that not just for the very poorest in society (the bottom 10% of income earners) but for all in the bottom half of the income profile (and remember, this is a concentrated and who in the UK earn less than about £21,000) there is a very real problem of access to the means to change a person’s situation.

They make clear that reallocation of wealth and resources through tax can work, but a progressive tax system is not enough. The impediments to work are structural. This, they say, is most obvious in education and training and so in the opportunity to gain well paid employment, or employment at all. Fundamentally, many people are being excluded from the market for work and for prosperity and that creates a significant cost.

But in that case, as is widely noted, trickle down economics does not work because at best that only reallocates a small part of wealth through the spending the rich promote. What is need is an interventionist state to both reallocate wealth via taxation and, at least as importantly, to overcome the market failure created by inability to access education and training because the resources needed to access them are not available to many people.

That is free education. And it is regulated training. And it is support to those participating in them. This means supporting sixth formers where appropriate; student grants; ending tuition fees; scrapping the hideously unfair student loan repayment arrangements that are blighting many lives, causing untold social and economic harm, and it means funding the facilities that can provide education appropriately as if education were a social good and not a product.

And it means a narrative on social security that sees it as a force for social good.

Perhaps most of all it means ending stories that suggest the poor can’t cook with the recognition that far too many are prevented from cooking for reasons that are no fault of their own, starting from a lack of infrastructure (cookers, fridges, freezers and more), or access to the means (yes: fuel is dear), a lack of training and a lack of access to the market (try buying for one: without serious capacity to store food it can be pretty uneconomic) and so on, and on. Pointing a finger is inadequate: only offering solutions is acceptable.

That’s what I think the OECD is saying and our government falls a very long way short of what is required by this standard. Worse, it backs the wrong narrative and that is beginning to look like straight prejudice now, which, of course, it is.

 

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