19 April 2012 Weekly Press Report

The United States

The IRS and the US Treasury Department released new rules and guidance requiring US financial institutions to report interest earned by foreign depositors, with the data then being shared with US information exchange partners, the Wall Street Journal, Accounting Today, Bloomberg, and Tax News reported. The regulations downplay the impact on non-resident investors in the US as well as concerns regarding client confidentiality. They also state that “a jurisdiction’s willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents”.

The United Kingdom

The Wall Street Journal and Bloomberg confirmed that the City of London Corp set up a working group tasked with laying out the ground for turning London into a leading centre for Yuan offshore trading. With the London-based financial sector holding over US$17 billion of customer and interbank deposits in Yuan, Europe's biggest bank HSBC has already announced its plans to issue a yuan-denominated bond in London, Reuters reported.

According to This is Money and International Adviser, the UK Chancellor wrote a letter to HMRC’sChief Executive and Permanent Secretary Lin Homer setting the target of raising a further £3.1bn in collections from tax evaders over last year’s figure. The letter also calls for more effective management of “complex tax affairs of the largest businesses” while expressing that “there should be further investment in “tackling tax avoidance, evasion and criminal attack”.

The Telegraph analyses why the suggestion that MPs publish their tax return, which met with a lukewarm response, ay not suffice as evidence to indicate their real contribution to the taxman. The article highlights that key facts such as the following will remain undisclosed: “second home allowances and other expenses average more than double the MPs’ basic salary of £63,291 and are not subject to tax” and, in 2009 “MPs avoided an average of £54,000 a year tax on parliamentary expenses which, according to official figures at that time, usually exceeded £135,000 each”.

According to the Financial Times, Barclays’s tax arrangements will be under examination at a US court in a legal case into cross-border transactions structured by Barclays over the last 10 years. The IRS deems these to be abusive tax practices, generating up to US$1 billion in tax revenue losses. This is the first of a range of lawsuits filed by the IRS to come to trial and questions are focused on the foreign tax credits generated by “structured trust advantaged repackaged securities” (starts) deals between US banks and Barclays between 1999 and2006. The Telegraph reports on the bank’s plans to liquidate 49 of its 181 Cayman subsidiaries.

The Financial Times reported on HMRC’s plans to cap tax reliefs used by high-income earners to reduce their tax bills as part of the government’s drive to curtail tax avoidance. With limitations of either £50,000 or 25% on the offsetting of business losses, interests on certain loans and donations to charities due to become applicable next year; tax practitioners warn that mounting scrutiny of tax arrangements by both private individuals and high-profile politicians may make tax planning more complex.

Debate on corporate tax avoidance

The Independent examined the implications of engaging in aggressive tax avoidance for large corporations. Experts believe that such behaviour exposes them to increasing reputational damage and significant compliance risks. According to Mark Robertson, from investment research provider Eiris, “few UK ethical funds have specific investment policies to address tax avoidance, but this will change as governments and the public step up their pressure on companies to tackle the issue."

The Guardian published critical commentary on the UK Treasury’s proposals to reform controlled foreign company (CFC) rules. The article claims that changes in the scope of taxation for UK multinationals’ subsidiaries will encourage the use of “tax havens” for the shifting of profits, thereby reducing the tax take of both the UK and developing countries where companies operate.

Aida Kiangi, country director of ActionAid Tanzania, claimed in the Guardian that the tax contributions of large UK corporations operating in Africa, and Tanzania in particular, are significantly reduced by their decision to locate their subsidiaries in ‘tax havens’, which in turn reduces the development finance available to African countries. The article objects to tax competition as a damaging practice for developing countries.

Debate on tax fairness and competition

An opinion article in the Telegraph analyses the politics of “tax fairness” in the US and the UK, and examines the policies introduced in this respect. The commentator questions the concept of tax fairness driving the “Buffet Rule”, warning of the deleterious effects on business competitiveness of such measures and noting that raising tax on investments to the same level as income tax rates contradicts “a basic precept of modern free-market economics: that the accumulation of capital for the purpose of reinvestment is a necessary and good thing because it allows the economy to expand, thereby creating new wealth, more jobs and wider prosperity.”

Commentary in the Guardian traces the UK government’s recent moves to tackle aggressive tax avoidance and the debate on tax fairness in the US. The article argues that governments need to pay heed to increasing “resistance and resentment” against modern capitalism, aggravated by aggressive tax avoidance.

N. Gregory Mankiw, Harvard Professor of Economics and adviser to Mitt Romney, considers the advantages of regulatory and tax competition in the New York Times, drawing in particular on the US federalist framework. Professor Mankiw argues that if the vision of the government’s role is about it providing effective public services, a competitive tax system should be pursued, in contrast with a concept of the state as primarily responsible for redistribution, in which case the idea of designing competitive tax systems is compromised.

The Wall Street Journal analysed the tax burden in the US. Citing figures by several sources including the Congressional Budget Office, the Institute on Taxation and Economic Policy, and the Tax Policy Center, the article notes several key facts: the top 20% of income earners paid 70% of federal taxes in 2007, people in the lowest 20% of income earners paid about 17% of their income in federal, state and local taxes in 2011, 46% of taxpayers don’t pay income tax, and 7.7% of the income of the top 1% of earners was paid in corporate taxes as compared to 0.4% for taxpayers in the lowest fifth of the income bracket.

U.S. Senate Republicans blocked the so-called “Buffett Rule” bill, BBC News and the Financial Times confirmed. Since the main purpose of the proposal was to oblige Americans earning US$1 million or more annually to pay 30% of it in income taxes, President Obama noted that Republican lawmakers “cho[se] once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class”. Reuters published a Q&A on the proposed legislation.

The Telegraph reported on fresh figures released by the UK government showing levels of tax avoidance by top earners. Treasury estimates indicate that 6% of people earning more than £10 million pay less than 10% in tax and less than 75% pay more than 40%, intensifying pressure on the government to deliver on its commitment to tax fairness.

Reuters and the Wall Street Journal reported on the total tax estimated to be paid by US republican presidential candidate Mitt Romney in 2011, bringing the issue on tax fairness into sharp focus amidst an increasingly tax-centred electoral debate. With income mostly deriving from investment profits, dividends and interest, Romney’s tax liability is estimated at US$3.2 million - an effective tax rate of about 15.3% - in contrast to the tax returns of President Obama and his wife, which show a US$162,000 tax bill with an effective tax rate of 20.5%. The New York Times looked at the way in which the tax affairs of the candidates for the White House have taken centre-stage in their campaign strategies.

British Overseas Territories

According to the Independent, the Labour Party has asked the Commissioner for Standards that an inquiry be conducted into Lord Blencathra’s role as lobbyist before the British government for the Cayman Islands. The investigation would seek to establish whether the British politician has been in breach of the Guidance on the Code of Conduct for Members of the House of Lords in his role as director of the Cayman Islands Government Office in the United Kingdom. The Independent previously published an article examining Lord Blencathra’s professional endeavours and noting MPs’ criticisms of his being both a member of the House of Lords and a representative of a “foreign government”.

Tax News notes Bermuda’s globally competitive edge in the reinsurance industry, citing the fact that eight highly-capitalized reinsurers have established operations on the Islands in the past five years. While facing competition from Cayman – which is not seeking equivalence with the EU Solvency II Directive - the Bermudian government has reaffirmed that it “is determined to ensure that Bermuda is welcoming to international business, and that Bermuda is open to and open for business.” Meanwhile, Royal Gazette reported on fresh figures released by the Association of Bermuda Insurers and Reinsurers (ABIR) showing the impact of recent natural disasters on Bermuda insurers’ profits.

British Crown Dependencies

The Telegraph and BBC News reported on the loss of pension business for Guernsey as a result of new HMRC regulations regarding Qualified Recognised Overseas Pension Schemes (QROPS). 300 schemes domiciled on the Island no longer enjoy QROPS status, seriously affecting their competitiveness. Guernsey’s situation contrasts with that of the Isle of Man and Jersey, which still have 173 and around 150 schemes respectively on the list of QROPS. BBC News, Tax News and International Adviser cited the head of Guernsey Finance describing HMRC’s move as an “unfair attack” on the island.

Europe

The EU Commissioner for Taxation and Customs Union Algirdas Šemeta called on European governments to ratchet up pressure on “tax havens”, Bloomberg reported. In his statement at the European Parliament, the EU official noted “We need to leverage the economic and political muscle of the union to ensure that we defend ourselves against non- cooperative jurisdictions and others that do not play fair”. Meanwhile, the European Parliament adopted a resolution on tax fraud and evasion, the details of which were published by the EU Parliament News Service.

Bloomberg confirmed that a withholding tax agreement was signed between Switzerland and Austria, which allows for the regularisation of untaxed assets held by Austrian residents in Swiss banks. The deal provides for the taxation of existing assets at flat rates of 15-38% and a 25% levy on future investment income, on the basis of preserving client anonymity. The Swiss Finance Ministry noted that this “should strengthen the competitiveness and reputation of Switzerland's financial centre in the long term. Switzerland does not want any further untaxed assets in the future”. The Swiss Bankers Association noted the waiving of “an upfront payment”.

The Financial Times reported on what has been described as a new and rigorous regulatory regime proposed by the Swiss government for the fund management sector, which experts warn is due to have a far-reaching impact on hedge fund managers and Swiss investors. The overhaul – which is aimed at bringing Swiss rules into line with the EU’s regulations and “in some instances going further” is expected to include rules and tightened oversight on tax and asset transparency. It will be an object of debate at the Swiss Parliament and is analysed here. In the meantime, the Financial Times cited figures to dispel the view that an exodus of asset managers from London is likely.

Bloomberg reported on the investigation launched by French prosecutors of UBS’s tax practices. Following a preliminary inquiry examining the bank’s transactions between French accounts and undeclared Swiss accounts, UBS has stated that it is ready to collaborate with the probe.

Asia

Reuters looks at the market trend of family offices moving to Singapore for wealth and investment management purposes as regulatory pressures lessen the appeal of Europe and the US. Highlighting a bright outlook for Singapore as a financial centre – in particular as a result of luring wealthy families - Campden Wealth estimates that “up to 10 European family offices have moved to Singapore since the financial crisis in 2008, bringing $5-$10 billion worth of assets with them”.

The Wall Street Journal, the Guardian and The Telegraph confirmed that Vodafone has notified the Indian government of its plans to start arbitration proceedings to reassert its tax position regarding its 2007 acquisition of a 67pc stake in Hutchison Whampoa's Indian mobile unit for $10.7 billion. This comes as a result of the Indian Finance Minister’s announcement of the taxation of certain cross-border transactions on a retroactive basis.

NGOs

Richard Murphy blogged on a debate on tax evasion in the EU Parliament, followed by a vote of a resolution tabled by the Socialists & Democrats Alliance calling for the EU savings taxation framework to be rapidly enhanced.

19 Apr 2012