GONGS AND TAXES

No doubt much to the irritation of David Cameron and Ed Milibland tax evasion is back in the news – this time in relation to Take That singer Gary Barlow. At the end of the day it is a matter of semantics and legality when it comes to the differences between tax evasion from tax avoidance, one is a criminal act and one is permitted under the law.  

It is a matter of public record that the PM is against aggressive tax avoidance schemes. He has also been pretty forthright in stating that tax evasion is illegal, and that people can be prosecuted for that, and people can go to prison.

It is also a matter of public record that the Con Dem government ill-advised and perhaps ideologically driven public sector spending cuts have seriously cut staffing levels in HM revenue and Customs. The PM interestingly enough was pretty firm when it came to rejecting calls for particular individuals are stripped of public honours for wrong doing. If you started stripping individuals of titles and honours for wrong doings heaven knows where you might end up even the possibility of party donors ending up embarrassed not to mention devaluing legitimate honours awarded to deserving recipients.

Previously various Westminster governments have been a little half-hearted when it comes to clamping down on tax avoidance. The current PM may have slagged off celebrities, for using a tax avoidance scheme in Jersey. Yet he has seemed to be acutely reluctant to deal the tax havens that happen to be UK Crown Dependent territories. 

Most reasonable people accept that there is a real need to deal on a global basis with the problem of off-shore companies and those individuals who are actively engaged in tax avoidance, tax evasion and / or money laundering. It’s all a little embarrassing as the problem is that the UK is at the heart of the problem and has chosen not to regulate its own crown dependencies let alone the periodically iffy if not criminal goings on in the City. 

The scale of the on-going off-shore tax avoidance problem may leave you breathless. The Cayman Islands were home to some 12,000 corporations yet have a resident population of 50,000. They were home to around 70% of the planets hedge funds (as of June 2012). The British Virgin Islands with a population of some 22,000 people just happens to be home to some 823,502 registered companies.

General Electric who paid no tax in 2010, made a $14.2 billion dollar profit. Barclay's had 181 subsidiaries (as of June 2012) registered in the Cayman Islands and paid little UK tax on its worldwide profits. News Corp managed to base 152 subsidiaries in tax havens across the planet (according to the US Government) and yet managed to pay no UK corporation tax between 1998 and 1999.

US President Obama was 100% right to suggest that the governments of the world should jointly tackle the issue of tax evasion and tax havens. By tackling the tax havens, the tax avoidance and the questionable dealings of the derivative traders, hedge funds and the off balance sheet trading then we might go so way towards dealing with the consequences of the worldwide financial crash. Yet that nice Mr Cameron and the other 18 millionaires in the cabinet have pretty much stalled when it comes to closing the tax loopholes.

The BVI has incorporated more than a million such offshore entities since it began marketing itself worldwide in the 1980s. Company owners' true identities are never revealed. Even the island's official financial regulators normally have no idea who is behind them. The British Foreign Office depends on the BVI's company licensing revenue to subsidise this residual outpost of empire, while lawyers and accountants in the City of London benefit from a lucrative trade as intermediaries, claiming that the tax-free offshore companies provide legitimate privacy.

INACTION THIS DAY

Tax evasion and tax avoidance, at least outside of the UK, is rarely out of the headlines with  many heavily indebted governments keen to hunt down every tax dollar / euro / pound that is owed by tax evaders avoiding (unlike the rest of us) paying their fair dues to society. The Westminster elite privately at least regardless of whatever they say publically, appear to pay scant respect to the idea of fair taxation and fair representation, we may be pretty close to being governed by the sons of bankers and the sons of the City.

The UK Government is in up to its neck when it comes to tax evasion, it’s heavily involved in aiding and abetting tax evasion worldwide. British Overseas territories, including the Cayman Islands, help to hide around trillions from pounds from the different nation’s tax authorities. In the belly of the beast lies the City, which may explain Cameron’s reluctance to do anything about the problem as some of the city banks are hand in glove with drug dealers, dictators, rogue states and terrorists when it comes to money laundering and may perhaps also offer comfy lucrative seats on the board to former Westminster politicians further down the line.

Back in April 2013  the International Consortium of Investigative Journalists [ICIJ] based in Washington DC, began in collaboration with international media, publishing  results into their research into tax evasion and off-shore tax havens. The journalists sifted through an electronic mountain of information - literally  millions of records leaked from Britain's offshore financial industry, exposing for the first time the identities of thousands of holders of anonymous wealth from around the world.

The leak of some 2 million emails and other documents, mostly from the British Virgin Islands (BVI), exposed the scale of the offshore tax evasion trade and the identities of tax evaders. It has been estimated that wealthy individuals involved in tax evasion and tax avoidance could potentially have as much as $ 32 trillion dollars (£ 21 trillion pounds) stashed in overseas and off-shore tax havens. The scale of this problem is staggering, if the pot were to be equally divided up then it could be parceled out as around $3000 dollars for every living person on our planet.

No while there is nothing wrong with a company being based in a tax haven does not necessarily mean that a company is avoiding tax or taking advantage of the hitherto pretty impenetrable secrecy that tends to surround tax havens, even if the tax jurisdictions are closely associated with tax evasion. That said, tax havens tend to be masked by secrecy and low taxes, and there have been few attempts to identify them. UK Revenue and Customs does not provide a list of tax havens.

The Con Dem Westminster coalition government at best can be said to have demonstrated a half-heartedly highlighted reluctance to clamp down on tax avoidance. The PM might have publically slagged off a few celebrities, for using a tax avoidance scheme in Jersey but he still appears to be acutely reluctant to deal the tax havens that happen to be UK Crown Dependent territories.  

Most reasonable people accept that there is a real need to deal on a global basis with the problem of off-shore companies and those individuals who are actively engaged in tax avoidance, tax evasion and / or money laundering. The focus on tax havens and tax avoidance is a bit embarrassing as the UK sits at the heart of the problem having consciously chosen not to regulate its own financially useful crown dependent  dependencies and territories.

The scale of the off-shore problem may take your breath away. The Cayman Islands; currently home to some 12,000 corporations has a population of 50,000, yet is home to 70% of the planets hedge funds (as of June 2012). The British Virgin Islands (population 22,000) is home to 823,502 registered companies. General Electric paid no tax in 2010, made a $14.2 billion dollar profit. Barclay's (as of June 2012) had 181 subsidiaries registered in the Cayman Islands and paid little UK tax on its worldwide profits.

The Dirty Digger's News Corp oddly enough managed to base 152 subsidiaries in tax havens across the planet (and that’s according to the US Government) and yet managed to pay no UK corporation tax between 1998 and 1999. US President Obama was 100% right to suggest that the governments of the world should jointly tackle the issue of tax evasion and tax havens. By tackling the tax havens, the tax avoidance and the questionable dealings of the derivative traders, hedge funds and the off balance sheet trading then we might go so way towards dealing with the consequences of the worldwide financial crash. Yet Mr Cameron and the other 18 millionaires in the cabinet have been stalling when it comes to closing  the tax loopholes.

The BVI has incorporated more than a million such offshore entities since it began marketing itself worldwide in the 1980s. Company owners' true identities are never revealed. Even the island's official financial regulators normally have no idea who is behind them. The British Foreign Office depends on the BVI's company licensing revenue to subsidise this residual outpost of empire, while lawyers and accountants in the City of London benefit from a lucrative trade as intermediaries, claiming that the tax-free offshore companies provide legitimate privacy.

In November 2012 a National Audit Office report revealed that of HM Revenue and Customs (HMRC) is struggling to curb aggressive tax avoidance schemes is costing the UK billions of pounds in lost tax. Much to the embarrassment of the Con Dems, tax evasion and tax evaders and the hunt for their concealed cash remains a big issue in the USA, in the UK the impression given is that the Conservative dominated Con Dem Westminster coalition government simply hopes that if we don’t talk about the problem then perhaps the problem will go away.

Across the other side of the pond, the US government’s pursuit of tax evaders led indirectly to the closure of Switzerland's oldest bank, after pleading guilty in a New York court to helping US citizens evade paying their taxes. This was the first foreign bank to plead guilty to tax evasion charges in the USA. Rather rapidly other Swiss banks have taken steps to prevent US citizens from opening offshore accounts to avoid paying tax.

Here in the UK, as part of the public sector budget cuts, the Con Dem Government has reduced the number of staff in Revenue and Customs from around 100,000 to 65,000 and intends to further reduce the numbers to around 50,000 by 2015. So much for taking tax evasion and tax avoidance seriously and ensuring that we pay our fairshare of tax. The problem lies with the so called Westminster elite and their cronies in the City rather than with the ordinary people, few of whom were directly responsible for causing the financial crash in the first place, perhaps we are not all in it together after all.  

MORE SMOKE AND MIRRORS

If you were looking for a classic bit of spin, then David Cameron’s promise to reduce or remove the so called ‘Green levies and subsidies’ of energy bills comes close to being it. This is classic misdirection, it makes DC look good, and distracts people’s attention away from the recently agreed guaranteed (and well above the market rate) energy price for the planned nuclear plants, something that should permanently skew the alleged ‘free market’ for energy.

It also effectively ignores the excessive profits that have been generated by the ‘big 6’ a situation that has been aggravated by a lack of effective regulation. One way of the other we are all paying the price for effectively having a pretty much unregulated energy market. This is one of the legacies of the last Labour government, who spent 13 years in office sitting back and watching this situation develop. 

Excessive profits and Tax evasion - surely not?

The ‘big 6’ energy cartel members, coincidentally ramp up the energy bills as our winter approaches, yet this is only part of the ‘corrupt’ legacy that surrounds the few remaining energy giants. The independent on Sunday (27.10.2013) and Corporate Watch (a not-for-profit research group) have revealed that more than 30 UK companies have cut their taxable profits by racking up interest on debt from their owners.

This minimises or in some cases entirely wipes out their UK corporation tax bill.  As most of the owners are based abroad, 20 per cent of the interest payments would usually have to be sent straight to HMRC, minimising the overall saving. As a result of swift footwork by the accountants, the money is lent via offshore stock exchanges this means that it qualifies for a regulatory loophole called the "quoted Eurobond exemption", no tax is withheld.

Scotia Gas, 50 per cent of which is owned by SSE, the energy giant which is about to put its prices up by more than 8 per cent, has avoided an estimated £72.5 million pounds in tax. UK Power Networks and Electricity North West, responsible for running large sections of Britain's electricity network, have both saved more than £30m. Scotia Gas is the second-largest gas distribution firm in the UK, serving 5.8 million people in Scotland and in the South and South-east of England.

Half of it is owned by SSE, the rest is owned by the Ontario Municipal Employees Retirement System and the Ontario Teachers' Pension Plan. After they bought the networks from National Grid Plc in 2005, the new owners lent the majority of their money – about £530m at a 12.5 per cent interest rate – through the Channel Islands Stock Exchange rather than investing it in shares in the company.

Scotia has since paid interest of £537.3 million pounds on these loans. The £268.7 million pounds  of this that went to the Ontario pension funds cost the UK an estimated £72.5 million pounds in tax revenues. SSE Plc pays full UK corporation tax on the interest it receives as it is based in the UK but will have signed off the scheme.

More than 30,000 people contacted the Citizens Advice Bureau in the 13 days after SSE started the latest round of price hikes. It announced its increase on 10th October and was quickly followed by British Gas, Npower and Co-operative Energy. The massive rise in those contacting the charity represents a 55 per cent increase on the number of consumers normally seeking advice about the best power deals.

The Ontario Teachers' Pension Plan also owns National Lottery operator Camelot and Bristol Airport, both revealed to be using the tax-avoidance scheme last week. It is among several foreign pension funds investing through this legal loophole. Two of Britain's 14 privately run electricity networks – Electricity North West and UK Power Networks – also use the loophole.

A portion of every Briton's electricity bill payment is given to their local power network to pay for the running and maintaining of cables in their area. UK Power Networks, which owns and maintains power cables and lines for eight million people in London, the South-east and East of England, has avoided an estimated £38 million pounds since 2010 from paying £164.4 million pounds via the Cayman Islands to firms controlled by Li Ka-shing, a Hong Kong tycoon and Asia's richest man.

The Cheung Kong group also owns Northumbrian Water, among several water firms that use the quoted Eurobond exemption. Electricity North West owns and operates the region's electricity distribution network, connecting 2.4 million properties to the National Grid. It has avoided an estimated £30 million pounds in tax after sending £107.2 million pounds to its owners, JP Morgan Infrastructure Investments Fund and Colonial First State, since they bought it in 2007.

The Eurobond exemption was introduced in 1984 to encourage third-party investment into UK companies. But analysis of listings on the Channel Islands Stock Exchange and UK company accounts shows firms across the economy are using it to minimise tax bills by borrowing from their owners. More than £2 billion pounds a year has left the UK as interest payments to owners, avoiding an estimated £500 million pounds compared with if loan amounts had been invested in companies' shares.

Considering that other stock exchanges such as the Cayman Islands and Luxembourg also qualify for the exemption, the reality is that the total amount of tax being avoided is likely to be much higher. Incidentally HMRC, who are busy shedding jobs and cutting services to the bone, know that the exemption is being misused and even considered restricting it last year, but they backed down after lobbying from the financial industry. 

TAX TO GO?

News that Starbucks is planning to change the way it operates so that it pays corporation tax in the UK will be a small crumb of comfort to ordinary tax payers. Starbucks despite having around one-third of the UK coffee shop market, has only paid corporation tax only once in the past 15 years. In its simplest form Corporation tax is paid by foreign companies on profits made in the UK. UK-based companies pay corporation tax on their taxable profits wherever they are made. Starbucks, sold nearly £400 million pounds worth of goods in the UK last year, but paid no corporation tax at all, because it transferred some of the money to a sister company in the Netherlands in the form of royalty payments, it bought its coffee beans from Switzerland and paid high interest rates to borrow money from other parts of the business.

Starbucks is throwing in the towel in relation to paying Corporation tax; this may be timely as the House of Commons Public Accounts Committee has produced a report calling for HM Revenue and Customs (HMRC) to "more aggressive and assertive in confronting corporate tax avoidance". Interestingly enough HMRC revealed that in 2011-12, £474.2 billion pounds worth of total tax revenue accrued to HM Revenue and Customs (the Department) which was £4.5 billion pounds higher than for the period 2010-11. Oddly enough there was a decrease in corporation tax revenue of £6.3 billion pounds.

The House of Commons Public Accounts  Committee also heard evidence from heard evidence from Google and Amazon. Amazon has a reported turnover of £207 million pounds for 2011 for its UK Company (Amazon.co.uk), on which it has shown a tax expense of only £1.8 million pound, yet showed a European-wide turnover of €9.1 billion for its Luxembourg based company (Amazon EU Sarl) and a tax of €8.2 million. Amazon.co.uk is a service company in the UK providing services to Amazon EU Sarl for which it receives payment. That company is owned by a holding company, which is a subsidiary of Amazon's group companies.

Amazon subsequently provided a copy of the unaudited accounts for Amazon Europe Holding Technologies S.C.S for 2011 showing a profit of €301.8 million and no tax payments.  Amazon also provided information showing that for 2011, £3.35 billion pounds worth of sales were from the UK, 25% of all international sales outside the USA.  Yet Amazon has over 15,000 staff in the UK, invoices UK customers from the UK, hires UK staff in the UK, has inventory physically in the UK for UK customers and to all intents and purposes has the majority of its economic activity in the UK, rather than in Luxembourg, but pays virtually no corporation tax in the UK.

The inability of HMRC to properly curb aggressive tax avoidance schemes which are costing the UK billions of pounds was flagged up by the National Audit Office (NAO) The NAO revealed that HMRC was dealing with a backlog of 41,000 cases involving individuals and small companies, with up to £10.2 billion pounds at stake. I am sure that the news that Con Dem Chancellor George Osborne plans to introduce a general anti-avoidance rule and hold talks with other G8 developed countries about clamping down on tax avoidance will make us all sleep soundly in our beds – perhaps not!

SIMPLE CRIMINALITY

For most people a crime is a crime and if you got caught you tended to do the time or take the punishment. If the vast majority of us fiddled our expenses, we would be prosecuted, lose our jobs and perhaps (depending on the scale of the fiddle) go to prison. Likewise helping yourself to a bottle of water after a riot can get you 30 days in prison, yet misselling members of the public around £ 3.9 billion pounds worth of PPI results in no real punishment for the people responsible.

Bob Diamond’s partial use of the Nuremberg defence, whereby there was no real problem with fiddling the Libour rate, because he had told someone in the Treasury what was going on, may not work in court because merely informing a superior of criminal acts committed or about to be committed is no excuse for committing the criminal act. The banks aside for a moment, if most of us don’t pay our council or road tax we get prosecuted (and our cars get crushed into the bargain) yet tax evasion largely goes unpunished.

Tax evasion may be costing the UK exchequer some £64 billion pounds a year, the equivalent of £1,000 pound per person within the UK. The shadow economy also hits the exchequer hard and indirectly affects every one of us in the wallet. Non declared income, tax loopholes, simple avoidance or off the books economic activity within the shadow economy adds up to tax free economic activity to the tune of £ 160 billion pounds a year. This is around 10.5% of the UK’s GDP, and is ironically somewhat large than the UK’s deficit which sits at around 8.3% of the UK’s GDP.

Tax Research UK, estimates that this shadow economic activity means that the Exchequer loses out to the tune of £64 billion pounds per year, this is some 16 times larger than the £ 4 billion pounds that the UK Government estimates its misses out on due to tax evasion. That is roughly about £1 pound out of every £8 in the economy. Yet the Con Dem Government in its ideologically driven reckless slash and cut approach to the public sector has reduced the number of staff in Revenue and Customs from around 100,000 to 65,000 and plans to reduce the numbers to around 50,000 by 2015 – talk about a no brainer!

Mind to expect the Tories to seriously tackle tax evasion, is a bit like expecting New Labour to stand up to the Trade Unions or both of them to have an honest debate about Party funding. The UK Government is heavily involved in aiding and abetting tax evasion worldwide, British Overseas territories, including the Cayman Islands, help to hide some £ 1.6 trillion pounds from the different nation’s tax authorities. So it should be little wonder that some of the city banks are hand in glove with drug dealers, dictators and terrorists when it comes to money laundering.

ALL IN IT TOGETHER...

The House of Commons Public Accounts Committee has rightly criticised "cosy" deals between HM Revenue and Customs (HMRC) and big businesses over the way they settle their tax bills. Serious concerns have been expressed by MP’s about just exactly how some of the large tax settlements were reached. MPs believe that potentially there may be some £25 billion pounds worth of outstanding tax issues with some of the UK’s largest companies and they want HMRC to be much more open about its dealing with large firms.

Not surprisingly HMRC has said that the MPs had misunderstood the facts. If the MPs are correct and I see no reason why they should not be as whistle-blower from inside HMRC passed them some interesting information (according to Radio 4 on Tuesday morning). Perhaps they should do some digging to find out how many former HMRC employees have moved to potentially lucrative employment in the private sector.

Coincidentally the tax campaign group UK Uncut is taking HMRC to the High Court (today - Thursday 22nd December) to seek a judicial review to try to get them to reclaim millions of pounds in uncollected tax from Goldman Sachs. It's all a little awkward for David (‘Call me Dave’) Cameron as it either touched a raw nerve or at least exposed the lie at the heart of his much trumpeted “We are all in it together” – apparently not!