Britain's tax system 'not fit for purpose

Britain's tax system is not “fit for purpose” and must be overhauled if companies are to pay their “fair share” of tax, leading UK chief executives have warned.

Sparking the start of a fightback on tax by businesses, PwC’s Annual CEO Survey has revealed that 73pc of UK bosses believe the present tax system is unfit for the 21st century, and 72pc say efforts to reform it will be in vain.

Business leaders believe it is up to politicians to sort out the system but have little confidence that processes backed by Prime Minister David Cameron will bear fruit.

Globally, the PwC survey revealed that 75pc of CEOs questioned believe that paying a “fair share” of tax was important to their company.

“There’s been a lot of criticism around the tax arrangements they [companies] have put in place,” Ian Powell, UK chairman of PwC, told The Telegraph on the eve of the annual World Economic Forum in Davos.

But actually, it’s become a political question, because as long as countries are trying to use tax rates as a way to bring jobs into their own country, you are going to get tax arbitrage.

“What CEOs are asking for is: can we get some clarity on this, and can we get more consistency on tax arrangements, which would make it a lot easier for them to handle their affairs.”

More than two-thirds of UK chief executives said they believed current OECD attempts to reform the international tax system would be unsuccessful in the next few years, far higher than the average of 40pc across the globe.

Multi-national companies such as Amazon and Google have come under fire in recent years and have been criticised by MPs for how they handle their international tax affairs and for a lack of transparency.

However, the survey showed that 66pc of UK chief executives believed that companies with international divisions should be required to publish the revenues, profits and taxes paid for each territory in which they operate.

Google boss Eric Schmidt has made it clear that his company abides by all tax laws and that it is up to politicians to change the rules - an opinion backed by the survey.

Mr Cameron made tax reform the centrepiece of both his appearance at Davos last year and the most recent G8 summit in Northern Ireland, of which the UK was president.

Although the UK survey results were based on a small sample of 43 CEOs, it highlights that tax policies and competitiveness of tax regimes are becoming increasingly important issues and that CEOs want them to be urgently addressed.

“Virtually every business that operates on an international basis now operates through the internet,” said Mr Powell. “The tax arrangements that are in place at the moment make it virtually impossible to allow companies to know where they should be paying tax, not what tax they should be paying.”

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Facebook caught in controversy over earnings exported to Cayman Islands

Irish government collected £4.4m last year from world's largest social media company that earned estimated £645m in UK

Facebook is facing a fresh controversy over its tax contributions after company filings revealed the social network exported an estimated £645m earned in the UK and other overseas markets to the Cayman Islands tax haven last year.

Facebook uses a subsidiary in Ireland to collect advertising revenue from around the world. Accounts filed in Dublin this week show that business is booming, with international earnings rising to £1.5bn in 2012, up from £840m in 2011. But the Irish government collected just £4.4m in tax from the world's largest social media company last year.

Using a complex web of subsidiaries in a tax structure known as the "double Irish", employed by a number of American multinationals, Facebook shelters much of the money it earns outside its home market from governments around the world.

Facebook and Google account for around half of the £6bn expected to have been spent on advertising on the internet in Britain this year, according to eMarketer. But Facebook has put most of this income out of reach of the taxman.

The company paid no tax in Britain last year, despite earning an estimated £223m in one of the Europe's biggest advertising markets. Facebook takes full advantage of London's status as a hub for European advertisers. Its European vice president, Nicola Mendelsohn, formerly chair of the well-respected Karmarama ad agency, is based in the capital, near to the headquarters of WPP, the world's largest buyer of advertising space.

A Facebook spokesman said: "Facebook complies with all relevant corporate regulations including those related to filing company reports and taxation. We have our international headquarters in Ireland that employs almost 400 people and a series of smaller local offices providing support services all over Europe. Dublin was selected as the best location to hire staff with the right skills to run a multilingual hi-tech operation serving the whole of Europe."

Facebook's UK operating company employs more than 120 staff, many in advertising sales, but advertisers are actually billed via the Dublin-based subsidiary, Facebook Ireland Ltd. Accounts show the business employed 382 staff last year, some of them in Ireland and some abroad.

The subsidiary collected revenues of £1.5bn last year, but this was wiped out by two items – the cost of sales and payments made to other group companies. Large sums go directly to the US, with £670m being paid to the listed parent company last year. But £645m was paid to Facebook Ireland Holdings for use of the platform.

This second subsidiary is based in Ireland but does not file full public accounts. This means the final destination of any payments out of Facebook Ireland Holdings is untraceable. However, there are clues to its ownership – filings show Facebook Ireland Holdings is owned by a number of Facebook subsidiaries based in the Caymans, a jurisdiction that does not levy corporation tax.

The ownership structure suggests Facebook may be diverting much of its international income to the tax haven. The company declined to comment on this aspect of its accounts.Margaret Hodge, who chairs Parliament's influential Public Accounts Committee, has criticised Facebook's tax record, accusing the company of apparently "deliberate manipulation of accounts of economic activity to deprive the British taxpayer of a rightful tax contribution".

Political leaders around Europe have urged Dublin to do more to tackle tax avoidance scheme. The G20 group of countries and the OECD are working to close loopholes, while prosecutors in Italy have initiated proceedings against Apple for similar arrangements to those being used by Facebook.

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UK property taxes highest in developed world, says thinktank

Policy Exchange calls for at least one new 'garden city' and changes to planning rules to deliver 300,000 houses a year

British people pay the highest levels of property taxes in the developed world and more than twice the average for the 34 rich countries in the Organisation of Economic Co-operation and Development (OECD), according to a thinktank report.

The right-of-centre Policy Exchange said politicians should reject new levies on property – such as the "mansion tax" on residences worth over £2m favoured by the Liberal Democrats and Labour – and instead pledge to bring down housing costs by building 1.5m new homes by the end of the decade.

The report called for at least one new "garden city" and changes to planning rules to deliver 300,000 new houses a year.

Councils that fail to hit their own housing targets should be forced to release land to local people who want to design and build their own homes, said the thinktank.

The report calculated that property taxes including council tax, stamp duty, inheritance tax and capital gains tax amount to 4.1% of GDP in the UK – the highest in the OECD and well above the average 1.8%.

By comparison, Canada levies 3.5% of national income in property taxes, the US 3%, Japan 2.8% and Germany 0.9%.

Alex Morton, head of housing and planning at Policy Exchange, said: "No other developed country taxes property more heavily than the UK. Yet rising house prices and falling levels of home ownership have led to many calling for an increase to land and property taxes.

"But these issues will only be solved by genuine reform of the outdated planning system, not a tax raid on peoples' homes. Politicians cannot try to do everything at once and must focus on the most crucial issues.

"The evidence shows where excess credit and under-supply exist, taxation or subsidy can only have a limited impact. That is why policymakers should ignore calls for a new round of property taxes and instead commit to spreading the benefits of home ownership and stabilising the UK economy by building at least 1.5m new homes over the course of the next parliament.

"This means serious reform of the planning system and creating new ways to deliver housing."

Article Source : http://www.guardian.co.uk
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IMF piles pressure on US to reconcile differences and prevent debt default

Shares and oil prices rise in hope of six-week extension as OECD warns US deadlock threatens world economy

Shares and oil prices rose strongly on Thursday amid hopes that policymakers in Washington were buckling under the global pressure for them to settle their differences and prevent a US debt default.

The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) both issued sharply worded warnings to Republicans and Democrats amid signs that America's Asian creditors were becoming alarmed at the potential consequences of the impasse.

Reports in Washington that the Republicans would agree to a six-week extension of the debt ceiling from next week's 17 October deadline led to a 323-point rise in the Dow Jones average. Brent crude was up by $2 a barrel and the FTSE rose by 92 points as the Republican leader in the House of Representatives John Boehner said it was time for meaningful talks with President Barack Obama.

After discussions with Republican leaders on Thursday night, the White House said Obama had held a "good meeting" but that they failed to reach an agreement to end the budget crisis despite earlier hopes that a deal may be in sight. Ninety-minute discussions between Obama and Boehner broke up with little apparent progress or press announcement, although there was a marked change in tone on both sides that suggested a deal may still be close.

Speculation about a deal had emerged after Jack Lew, the US Treasury secretary, said there would be chaos if the US defaulted – a message rammed home by IMF managing director Christine Lagarde and the OECD's secretary general Ángel Gurría.

Lagarde said there would be very dangerous consequences for the US economy and elsewhere if the default was not prevented.

She distanced herself from the infighting in Washington, noting: "The IMF does not make recommendations about how, politically, this can be resolved. We don't take a political view. We just look at the economic consequences.

"When it affects the largest economy in the world, we are bound not only to look at the immediate domestic consequences but at what happens elsewhere, so that we can have a dialogue with our members to help them prepare.

"I hope we will be able to look back in a few weeks and say what a waste of time that was. But we have to look at the risks no matter how unlikely they are to materialise."

Lagarde said there were two channels through which a debt default in the US would spread to the rest of the world. "One would be the trade channel, caused by a reduction in economic activity in the US from the third quarter onwards.

"The second would be the financial channel – the result of uncertainty and material issues. We are likely to see volatility, uncertainty and consequences for the rest of the world."

Lagarde said some of the warning signs of stress in financial markets – such as the VIX index of volatility and the price of insuring financial instruments – were flashing. "It's not helping the US to have this uncertainty and protracted way of dealing with fiscal and debt issues."

Gurría said: "The current political deadlock in the US is needlessly putting at risk the stability and growth not only of the US but also the world economy."

He added there was a risk that the west could be plunged back into recession by a default. "If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown. The magnitude of further possible negative feedback effects can only be guessed at."

The ongoing political impasse in Washington has sparked fears the US could default on repayments of its bonds, prompting banks and clearing houses to take preventative measures against such an unprecedented event.

In Hong Kong, the body which stands behind trades on the Hong Kong futures and options exchanges has concluded that some US Treasury bonds posted as collateral are more risky than in the past.

The US government needs to be able raise the nation's $16.7tn (£10.5tn) debt ceiling on 17 October otherwise it might not be able to make payments on bonds it has issued in the past, unleashing turmoil in the financial markets. About $120bn of debt needs to be repaid that day with another $200bn before the end of the month.

"Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut [discount]," the clearing house, Hong Kong Exchanges & Clearing, said.Neil Shearing, chief emerging markets economist, at Capital Economics said: "This is uncharted territory. Depending on the scale of default and the response of policymakers, regulators and the ratings agencies, substantial financial market dislocation could follow."

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

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UK GDP growth limited to 1% in longer term, economists warn

IEA paper predicts a post-crisis era of sluggish growth, tempering recent good economic news stories

Britain's economic growth will be limited to just 1% in the longer term as higher government spending, dwindling North Sea oil stocks and an ageing population all take their toll on the country's potential output, a group of economists has warned.

Tempering the recent spate of upbeat news on the UK and chancellorGeorge Osborne's assertion that the economy has "turned a corner", a new paper predicts a post-crisis era of sluggish growth.

The long-term, sustainable growth rate in the UK may be only 1%, compared with the 2.5% that the Treasury thought standard from the 1980s to the 2000s, according to a discussion paper for free-market thinktank the Institute of Economic Affairs (IEA). "Until 2008 the UK had got used to our economy doubling in size every 25 years: unless action is taken it will now only double in size every 70 years," says the group of economists, which includes former Treasury adviser and UK Independence Party candidate Tim Congdon, and Andrew Lilico, the managing director of Europe Economics, an economics consultancy.

They highlight the weakest recovery in "industrial history" and blame a lack of growth for the government's deficit reduction plan being off target.

Commenting on the analysis, the IEA's editorial director, Philip Booth, said: "People shouldn't get too excited about better growth figures and recent forecasts from groups such as the OECD [Organisation for Economic Co-operation and Development]. We still have a long way to go before we recover the loss of output from the 2008 crash. Furthermore, the medium-term prospects for growth do not look healthy unless the government determinedly reduces government spending and regulation."

Following a string of positive indicators on the fledgling UK recovery, the OECD has lifted its forecast for the country's economic growth in 2013. The upgrade to projected growth of 1.5% this year came after stronger-than-expected growth of 0.7% in the second quarter, falling unemployment, and survey evidence suggesting the strongest growth in manufacturing output for almost two decades.

But the economists writing in the IEA paper painted a gloomier current economic picture, noting that five years on from the start of the financial crisis in 2008, GDP is still 3% below its peak. "That is unprecedented in 170 years of shocks that have hit the UK economy since industrialisation," sais the paper, "Will flat-lining become normal?"

Predicting sluggish growth rates, the IEA authors blame higher government spending and tax as a proportion of GDP, more regulation of energy and financial services, the depletion of North Sea oil, higher debt levels for government, business and households relative to GDP. They also note demographic pressures from an ageing population as well as the effects of "low-productivity immigrant workers being added to the working population", though the IEA stressed this was an analysis of the impact of much of the UK's immigrant labour being relatively unskilled, not an argument against immigration.

The paper advocates "bold" reforms if the UK wants to get back to sustainable growth rates of around 2% or more over the long run, including: the rolling back of government activity and influence; the regeneration of affordable credit channels to unencumbered households and businesses; and the implementation of radical supply-side measures.

Booth added: "Britain's growth problem is a productivity problem and not a problem caused by insufficient government borrowing. The government should take note. The solutions lie in its hands."

The comments from the free-market thinktank contrast with remarks from the leader of the UK's trade union movement, Frances O'Grady, on Monday. In her first speech to the annual congress as TUC general secretary, O'Grady called for the implementation of a political action plan to stimulate growth, paid for by taxing the rich, whose wealth had increased dramatically in the past few years.

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

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US blocks crackdown on tax avoidance by net firms like Google and Amazon

France fails to win backing for tough new international rules targeting online companies in run-up to G20 summit

France has failed to secure backing for tough new international tax rules specifically targeting digital companies, such as Google and Amazon, after opposition from the US forced the watering down of proposals that will be presented at this week's G20 summit.

Senior officials in Washington have made it known they will not stand for rule changes that narrowly target the activities of some of the nation's fastest growing multinationals, according to sources with knowledge of the situation.

The Organisation for Economic Co-operation and Development (OECD) has been told to draw up a much-anticipated action plan for tax reform at the gathering of G20 finance ministers this Friday, but the US and French governments have been at loggerheads over how far the proposals should go.

While the Americans concede that the rules need to be updated, they are understood to be pushing for moderate change. They are believed to want tweaks to the existing wording of international tax treaties rather than the creation of wholly new passages dedicated to spelling out how the digital economy should be taxed.

This has put the US at odds with several G20 nations, particularly France, which in January published radical proposals for new concepts in international tax treaties designed to counter some of the avoidance measures deployed by internet firms. Officials at the G20 governments have been working closely with the OECD, a club for the world's industrialised nations, over the proposals.

Google chairman Eric Schmidt and French president François Hollande, who has been targeting internet companies that pay little or no tax in France.Despite opposition from the US, the French position – which also includes a proposal to link tax to the collection of personal data – continues to be championed by the French finance minister, Pierre Moscovici.

The OECD plan has been billed as the biggest opportunity to overhaul international tax rules, closing loopholes increasingly exploited by multinational corporations in the decades since a framework for bilateral tax treaties was first established after the first world war.

The OECD is expected to detail up to 15 areas on which it believes action can be taken, setting up a timetable for reform on each of between 12 months and two and a half years.

Among the areas expected to take longest to produce results is in which jurisdiction a multinational group should pay tax on its business activity, under "permanent establishment" rules. Many internet firms' tax structures, such as those of Google and Amazon, exploit loopholes in this area.

While the case for broad reform of the international rules has been made repeatedly by top politicians around the globe, in many areas there is limited common ground on what shape new rules should take.

As a result, because of its consensus-driven nature, the OECD action plan is expected to contain watered-down recommendations in some areas.

Nevertheless, the OECD has already made clear it regards aggressive tax engineering by internet multinationals to be among six "key pressure areas" it will address.

In a report to the G20 in February it said: "Nowadays it is possible to be heavily involved in the economic life of another country, eg by doing business with customers located in that country via the internet, without having a taxable presence therein.

"In an era where non-resident [corporate] taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere."

However, tensions are thought to have surfaced in the OECD working party looking at how to address the permanent establishment rules in the light of the burgeoning internet economy. This working party is being jointly led by US and French teams – representing the extremes of opinion among G20 nations.

France has been among the most aggressive in responding to online businesses that target French customers but pay little or no French tax. Tax authorities have raided the Paris offices of several firms including Google, Microsoft and LinkedIn, challenging the companies' tax structures.

In the case of Google, in 2011 French tax officials demanded €1.7bn (£1.47bn) in back taxes. In February this year Google settled the case, agreeing to paying €60m to help France with digital innovation and other issues. The French president, François Hollande, said it was "a model for effective partnership and is a pointer to the future in the global digital economy."

In the UK, outcry at internet companies routing British sales through other countries reached a peak in May after a string of investigations by journalists and politicians laid bare the kinds of tax structures used by the likes of Google and Amazon.

Margaret Hodge, the chair of the public accounts committee, called Google's northern Europe boss, Matt Brittin, before parliament after amassing evidence on the group's tax arrangements from several whistleblowers.

After hearing his answers, she told him: "You are a company that says you do no evil. And I think that you do do evil" – a reference to Google's corporate motto, "Don't be evil".

Last month, the Treasury minister David Gauke told backbench MPs who had called a short debate on multinationals and tax avoidance that the government did still hold out hope that shortcomings in international tax guidelines – specifically in what constitutes a business taxable in the UK under permanent establishment rules - would be addressed by the G20.

"We are leading the way in encouraging the OECD to look at what needs to be done to ensure that the tax rules are brought up to date for the internet world," he said.

Writing in the Observer in May, the Google chairman, Eric Schmidt, appeared to drop his previously unapologetic defence of existing international tax rules.

In the face of building public anger, he conceded that rather than taking up tax incentives offered by governments, his firm and others had built tax structures that had not been foreseen by those who drafted the rules decades ago before the advent of the internet.

"Given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform," he wrote, describing this week's OECD action plan as "hotly awaited".

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

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OECD under pressure to devise new corporate tax regime

Paris-based thinktank co-ordinating international tax agreements expected to publish strategy document this week

The pressure is on OECD secretary-general Angel Gurría to formulate a taxpayers' charter that resolves the current disputes over corporation tax payments.

The Paris-based thinktank has accepted various duties over the years, and co-ordinating international tax agreements is one of them.

On Wednesday all eyes will be on its HQ near the Eiffel Tower, where it is expected to publish its latest paper on the subject, and, within its wordy shell, present a coherent strategy.

Google boss Eric Schmidt claims all he wants is a level playing field. He says his firm must play the system to minimise tax and use every available lever to please its shareholders. Only when the rules clearly stop him will he resist the temptation to end his tax dodging ways.

Google boss Eric Schmidt, who says his company complies with all British tax law.

 The problem centres on the role royalties play in international company structures. At the moment Google can charge its various subsidiaries a royalty for using its brand and a host of other goodies developed in California. Stopping this legitimate practice is going to be difficult.

In the past the OECD has proposed moving away from corporation tax in favour of sales taxes and wealth taxes, which would apply to a good deal of the assets and transactions carried out by corporations such as Google.

But whatever scheme is devised will need to win international support. Just a couple of weak links would undermine the entire project. Ireland, for instance, is unapologetic, despite the many recent examples that show US companies fail to even pay the 12.5% corporation tax Dublin charges. Turkey has long given up any pretence of charging foreign companies corporation tax. Even manufacturers can escape as long as they export their goods.

For every country that can say it is tough on international businesses, such as Norway, there are 10 that turn a blind eye.

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