The Offshore Wrapper: a week in tax justice #29

The Offshore Wrapper is written by George Turner, c/o Wrapper Towers

Scotland to become Europe’s latest tax haven?

People in Scotland have already started voting in the referendum on whether to separate from the United Kingdom and become a separate country. But as well as becoming Europe’s newest country, could Scotland also become Europe’s newest tax haven?

That is the accusation being leveled at supporters of independence by the UK Labour Party. Iain Grey, a Labour party finance spokesman, speaking at a debate on Scotland’s independence told an audience, “If you deliberately set your corporation tax, not at what you think is right, but less than the country next door to you, what you’re doing is trying to create yourself as a tax haven.”

His remarks were targeting the Scottish Nationalist Party’s plans to set the Scottish level of corporation tax at 3% lower than the UK rate on winning independence.

But Mr Grey’s remarks strike a different tone from Ed Balls, his boss. Mr Balls is the current Labour party Shadow Chancellor of the Exchequer and was a minister in the Treasury during the previous Labour government.

In a speech to a group of business leaders earlier this summer Mr Balls, not wanting to be outdone by the Conservative government’s recent slashing of corporate tax rates, reminded everyone that it was the Labour government that started the UK’s race to the bottom. Labour, he said, “left Britain with the most competitive rate of corporation tax in the G7 and we are committed to maintaining that position.”

So apparently, while it is OK for the UK to undercut other countries’ tax regimes in order to attract tax avoiding multinationals, it is a bad idea for Scotland to attempt this on their own.

As pointed out by commentators at the time of Mr Ball’s speech, engaging in tax wars is actually bad for everyone, that is apart from the company directors whose share options are boosted in value by these political give-aways.

Australia’s banks dragging their knuckles on tax avoidance

Australia’s banks are stalling on automatic information exchange, an important tool in combatting tax avoidance. Automatic exchange means that tax authorities would automatically gain access to information about funds held by their citizens overseas and is one of the key reforms agreed by the G20, which is currently being chaired by Australia.

Despite 40 countries, including the well known tax haven of the British Virgin Islands having signed up, Australia has said it needs to consult business first. Business, and Australia’s banks in particular are predictably not too hot on the idea, criticising it as being costly and of no benefit. They are calling for the measures to be watered down.

What happens next is anyone’s guess, but the delay might make for some interesting discussions at the G20 meeting that Australia will be hosting at the end of the month.

Kenya reintroduces Capital Gains Tax

For many years Kenya has been the only country in East Africa without a capital gains tax, having suspended CGT in 1985. The stock market and property has boomed providing more riches to the rich, but government revenues have remained poor. The Kenyan government is expected to run a $2bn deficit this year.

Earlier this year accountancy firm PKF called on the government to reintroduce capital gains tax to improve government finances. Michael Mburugu, director of the firm hit the nail on the head – “If I am selling my house for 30m shillings, there is absolutely no reason why I should not pay taxes, when I am asking someone buying bread in Kimira to pay taxes through VAT”.

Now after a long battle the Kenyan parliament has voted to re-introduce the tax at 5%, significantly lower than other countries in the region, but at least something. Value Added Tax is 16% in Kenya, which means bread is still taxed at a higher rate than the increase in value of stocks and shares.

Obama about to take action on corporate tax dodging?

Corporate inversions continue to plague the US tax system. The latest controversy surrounds the US drugs company based in Illinois (Illinois seems to have a particular thing with corporate inversions, see Wrapper 26). Abbvie will be known to older readers of the Wrapper as the maker of Humira, an anti-arthritis drug. Arthritis is big business with Abbvie selling $10bn of Humira last year.

Abbvie is seeking to take over Shires. Shires is incorporated in Jersey, has its headquarters in Ireland and manufactures in the UK, so Abbvie wanted to relocate its headquarters as part of the deal it would seem to have a real smorgasbord of tax havens to choose from.

This stream of corporate inversions has attracted the ire of the Obama administration. The President has urged Congress to end the practice and has said he will look at what administrative powers he has to hinder firms looking to offshore. Secretary to the Treasury Jacob Lew has said he will give a speech on the practice on September 8^th setting out the President’s approach.

However, a report from Barclay’s this week shows some of the difficulties Obama will face. The bank said that even if Abbvie keeps its corporate headquarters in the US, by buying Shires the company will still see $500m a year in tax savings.

This is because in recent years Abbvie has had to repatriate some of its offshore profits to pay down the larges debts it holds. Shires, despite its various homes in the British Isles generates 85% of its sales in the US. By taking over the company Abbvie can use Shire’s US cash to pay off its debt, and keep Abbvie’s income offshore. A fuller explanation of the Barclay’s report can be seen here.

The Abbvie case demonstrates just some complexities of the international tax system. A simple and fun explanation of the favourable treatment received by companies comes from this article in the Washington Post which asks what if people were treated like corporations in the tax system?

Keeping bad company

The end of Swiss banks as we know them?

Last week accountancy firm PWC published a study that said that over $100bn had been withdrawn from the Swiss banking system in order to pay fines for various financial misdeeds following the international crackdown on tax evasion.

This comes hot on the heels of another report published by KPMG looking at the impact on Swiss private banks in 2013. The result is devastating. A third of banks had set aside money to cover potential fines and consultancy fees arising from the US action. The total amount set aside was over $1bn. For a quarter of banks the amount set aside represented over half their annual profits.

This is of course from a county which claims to be “not a tax haven”.