International Monetary Fund warns on quantitative easing costs

Eonomists at the IMF found the Bank of England could sustain losses of anything up to 5.5% of GDP, or almost £80bn, when it sells the government bonds back into the market

The Bank of England's recession-busting policy of quantitative easing could end up costing the Treasury up to £80bn – more than outweighing any profits it will make from the scheme, according to new research by the International Monetary Fund.

Policymakers have become increasingly concerned about their "exit strategy" from the unprecedented measures they have used to cushion their economies from the impact of the financial crisis over the past five years.

In a study of the impact of "unconventional" policies, including the Bank's £375bn bond-buying programme, economists at the IMF found the Bank could sustain losses of anything up to 5.5% of GDP, or almost £80bn when it sells the government bonds back into the market.

The Treasury announced last November it would appropriate the interest payments from the Bank's holdings of government bonds, in a move that helped to flatter the public finances. Recent Bank research suggested those cumulative gains could eventually add up to £60bn.

The Bank of England on Threadneedle Street in central London.

 But once the economy looks healthier, the Bank is likely to want to unwind the emergency policy, by pushing up interest rates and selling off its bonds.

The IMF suggests that as soon as central banks signal that they are readying themselves to halt QE, bond prices are likely to fall sharply, as investors "run for the door". Interest rates, which move in the opposite direction to bond prices, would jump and central banks might be forced to push up rates even further to prove they have not lost control of inflation.

"The potential sharp rise in long-term interest rates could prove difficult to control and might undermine the recovery (including through effects on financial stability and investment). It could also induce large fluctuations in capital flows and exchange rates," the IMF warned.

The research analyses the potential losses to central banks under three possible scenarios, from a relatively benign one percentage point rise in interest rates, to a much more dramatic six percentage point increase in short-term borrowing costs.

Under the most extreme scenario the losses to the exchequer would be £80bn, so even if the Bank is right about the £60bn gains for the Treasury from QE, that could still blow a £20bn hole in the public finances.

Economists stressed that any direct costs of QE should be weighed against the wider benefits to the economy. Erik Britton, of City consultancy Fathom, said, "the losses could be large - that much is true, and they would be borne by the taxpayer; but that would only be in a scenario where we were back in growth, and the benefits to the Treasury of that would outweigh those costs."

The IMF's researchers stressed that the prospect of losses on central banks' balance sheets should not prevent them from unwinding their unconventional policies, but warned that, "the path ahead will be challenging, with many unknowns."

The Bank of England questioned the IMF's results, however, saying, "as the IMF report acknowledges, the analysis ignores capital gains and coupon income from bond holdings: that makes the results very misleading".

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Article source : http://www.guardian.co.uk

Tax: how Amazon passed the Slough test and prospered

HMRC believes Amazon has no fixed place of business in the UK. Perhaps it needs to look again at what goes on in Berkshire

The way companies are taxed has changed with the way corporations have developed in the last 100 years, expanding beyond national borders. The emergence of substantial international trade in the 1920s prompted countries to agree tax treaties in an attempt to ensure profits were appropriately taxed where they were generated.

Despite these efforts, tax engineers have caused problems for exchequers around the world for decades as they have built clever corporate structures to mimimise tax bills for their multinational corporate clients. The advent of the internet has opened up a new front in this battle for tax fairness.

A new generation of cyber-corporations have been able to tell the taxman they do not carry out taxable activities in territories from which they generate billions of pounds in sales.

The Amazon distribution warehouse just outside Milton Keynes.

The British tax authorities appear to agree that Amazon can avoid paying corporation tax on the profits it made on the £12bn of sales the internet giant has generated in the UK over the last four years.

Whether Amazon EU Sarl, its Luxembourg operation, amounts to a "permanent establishment" in the UK that can be taxed by HMRC is down to a combination of laws and accounting protocols set out in double taxation treaties, the HRMC rule book and OECD guidelines.

The Guardian has discovered that Revenue & Customs has four tests it applies to an overseas company to establish whether that company is liable to corporation tax on its activities.

• Is there trading activity by the non-resident company?

• Does that trading take place in the UK?

• Does the non-resident company have a fixed place of business in the UK?

• Is the trade carried on through that fixed place of business? Or, if there is no fixed place of business, is the trade carried on through a dependent agent?

If the answer to all of these questions is yes, then HMRC can levy corporation tax on the non-resident company.

Despite Amazon EU Sarl's extensive activities in the UK, it appears that HMRC inspectors – for reasons we cannot know – have accepted the retailer's insistence that this business is not captured by these four tests.

Amazon EU Sarl trades through Amazon.co.uk, and all purchases made by UK customers are invoiced from the company in Luxembourg. This trade is distinct from the activities of the Amazon UK resident company, which provides only "fulfilment [that is, warehouse operations] and corporate support services".

The Guardian has learned that Amazon EU Sarl trades in the UK by securing contracts with British publishers and traders to provide the crucial goods and services it needs for its website.

The trading takes place in the UK not just through sales made on the website but also through the procurement and development of products and services.

The company indicates on its website it carries out a wide range of activities from his corporate offices in Slough in Berkshire. It says: "UK Corporate Offices – Slough, Berkshire, England. Since 1998, our teams have developed a genuinely British site with the same commitment to customers, cutting-edge technology and rich editorial content that has made Amazon.com such a success. Our Slough teams manage all corporate functions, including buying, marketing, software development, sales and legal."

Amazon EU Sarl appears to carry on its trade through its fixed place of business because book supply contracts, setting out the terms on which publishers will sell books to Amazon, are negotiated by executives based in the Slough head office.

The Guardian has seen extracts from a contract that confirm it is made between the publisher and Amazon EU Sarl.

However, a UK publishing executive, who asked not to be named, confirmed that the contract had been negotiated, on behalf of Amazon EU Sarl, by staff based in Slough.

"The contract may be with Luxembourg," the executive said, "but it is the people from Slough who thrash out the crucial details of the contract such as the discount we agree to give them. There are also people in Slough who are charged with overseeing that the contract is properly executed.

A spokesman for HMRC said: "HMRC cannot comment on specific cases for legal reasons. A non-resident company is only chargeable to UK corporation tax if it is trading in the UK through a permanent establishment. Both UK legislation and international tax rules agree on this."

Significant elements of Amazon EU Sarl's trade in the UK provide content for the website by negotiating contracts with publishers and traders. HMRC's own manual says: "One of the ways in which a permanent establishment of a foreign enterprise may be brought into existence is where an agent … acting on behalf of the enterprise has, and habitually exercises … an authority to conclude contracts in the name of the enterprise."

The existence of a permanent establishment would bring all Amazon EU Sarl's activities in the UK into the UK corporation tax net because the contracts for purchases made from Amazon's UK website would be deemed to be made in this country.

Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike for more info visit our site Azure Global and join us On Facebook

Article source : http://www.guardian.co.uk