Prem Sikka The UK government has finally responded to public anger about organised tax avoidance. The key policy is that from April 2013, potential suppliers to central government for contracts of £2m or more will have to declare whether they indulged in tax avoidance. Those with a history of indulgence in aggressive tax avoidance schemes during the previous 10 years, as evidenced by negative tax tribunal decisions and court cases, could be barred from contracts. Their existing contracts could also be terminated. The policy is high on gimmicks and empty gestures, and short on substance.
The proposed policy only applies to bidders for central government contracts. Thus tax avoiders can continue to make profits from local government, government agencies and other government-funded organisations – including universities, hospitals, schools and public bodies. Banks, railway companies, gas, electricity, water, steel, biotechnology, motor vehicle and arms companies receive taxpayer-funded loans, guarantees and subsidies, but their addiction to tax avoidance will not be touched by the proposed policy.
The policy will apply to one bidder, or a company, at a time and not to all members of a group of companies even though they will share the profits. Thus, one subsidiary in a group can secure a government contract by claiming to be clean, while other affiliates and subsidiaries can continue to rob the public purse through tax avoidance. There is nothing to prevent a company from forming another subsidiary for the sole purpose of bidding for a contract while continuing with nefarious practices elsewhere.
Starbucks, Google, Amazon, Microsoft and others can continue to route transactions through offshore subsidiaries and suck out profits through loans, royalties and management fee programmes and thus reduce their taxable profits in the UK. Such strategies are not covered by the government policy and these companies can continue to receive taxpayer-funded contracts.
The policy will not apply to the tax avoidance industry, consisting of accountants, lawyers and finance experts devising new dodges. Earlier this week, a US court declared that an avoidance scheme jointly developed and marketed by UK-based Barclays Bank and accountancy firm KPMG was unlawful. The scheme, codenamed Stars – or Structured Trust Advantaged Repackaged Securities – enabled its participants to manufacture artificial tax credits on loans. This scheme was sold to the US-based Bank of New York Mellon (BNYM). The US tax authorities launched a test case and a court rejected BNYM's claim for tax credits of $900m. The presiding judge said that that avoidance scheme "was an elaborate series of pre-arranged steps designed as a subterfuge for generating, monetising and transferring the value of foreign tax credits among the Stars participants" (page 25). It "lacked economic substance" (page 53) and was a "sham" transaction (page 54). Whether equivalent schemes have been used by UK corporations is not yet known.
The above case highlights a number of issues. The UK-based organisations causing havoc in the US, Africa, Asia and elsewhere will not be restrained. They can still secure taxpayer-funded contracts in the UK. Now suppose that the Bank of New York Mellon scheme was applied by Barclays Bank to its own affairs and declared to be unlawful by a UK court. If so, possibly Barclays may be deterred from bidding for a central government contract, but there will be no penalties for KPMG as accountancy firms are not covered by the proposed rules.
The recent inquiry by the public accounts committee into the operations of PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young noted that the firms are the centre of a global tax avoidance industry. Even though a US court has declared one of these schemes to be unlawful, the UK government does not investigate them, close them, or recover legal costs of fighting the schemes devised by them. No accountancy firm has ever been disciplined by any professional accountancy body for peddling avoidance schemes, even when they have been shown to be unlawful. The firms continue to act as advisers to government departments, make profits from taxpayers through private finance initiative, information technology and consultancy contracts. There is clearly no business like accountancy business.
The proposed government policy will not work. It expects corporations who can construct opaque corporate structures and sham transactions to come clean. That will not happen. In addition, a government loth to invest in public regulation will not have the sufficient manpower to police any self-certifications by big business.
An effective policy should prevent tax avoiders and their advisers from making any profit from taxpayers. It should apply to all the players in the tax avoidance industry, regardless of whether their schemes are peddled at home or abroad.
This article first appeared on Guardian Comment is Free
The proposed policy only applies to bidders for central government contracts. Thus tax avoiders can continue to make profits from local government, government agencies and other government-funded organisations – including universities, hospitals, schools and public bodies. Banks, railway companies, gas, electricity, water, steel, biotechnology, motor vehicle and arms companies receive taxpayer-funded loans, guarantees and subsidies, but their addiction to tax avoidance will not be touched by the proposed policy.
The policy will apply to one bidder, or a company, at a time and not to all members of a group of companies even though they will share the profits. Thus, one subsidiary in a group can secure a government contract by claiming to be clean, while other affiliates and subsidiaries can continue to rob the public purse through tax avoidance. There is nothing to prevent a company from forming another subsidiary for the sole purpose of bidding for a contract while continuing with nefarious practices elsewhere.
Starbucks, Google, Amazon, Microsoft and others can continue to route transactions through offshore subsidiaries and suck out profits through loans, royalties and management fee programmes and thus reduce their taxable profits in the UK. Such strategies are not covered by the government policy and these companies can continue to receive taxpayer-funded contracts.
The policy will not apply to the tax avoidance industry, consisting of accountants, lawyers and finance experts devising new dodges. Earlier this week, a US court declared that an avoidance scheme jointly developed and marketed by UK-based Barclays Bank and accountancy firm KPMG was unlawful. The scheme, codenamed Stars – or Structured Trust Advantaged Repackaged Securities – enabled its participants to manufacture artificial tax credits on loans. This scheme was sold to the US-based Bank of New York Mellon (BNYM). The US tax authorities launched a test case and a court rejected BNYM's claim for tax credits of $900m. The presiding judge said that that avoidance scheme "was an elaborate series of pre-arranged steps designed as a subterfuge for generating, monetising and transferring the value of foreign tax credits among the Stars participants" (page 25). It "lacked economic substance" (page 53) and was a "sham" transaction (page 54). Whether equivalent schemes have been used by UK corporations is not yet known.
The above case highlights a number of issues. The UK-based organisations causing havoc in the US, Africa, Asia and elsewhere will not be restrained. They can still secure taxpayer-funded contracts in the UK. Now suppose that the Bank of New York Mellon scheme was applied by Barclays Bank to its own affairs and declared to be unlawful by a UK court. If so, possibly Barclays may be deterred from bidding for a central government contract, but there will be no penalties for KPMG as accountancy firms are not covered by the proposed rules.
The recent inquiry by the public accounts committee into the operations of PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young noted that the firms are the centre of a global tax avoidance industry. Even though a US court has declared one of these schemes to be unlawful, the UK government does not investigate them, close them, or recover legal costs of fighting the schemes devised by them. No accountancy firm has ever been disciplined by any professional accountancy body for peddling avoidance schemes, even when they have been shown to be unlawful. The firms continue to act as advisers to government departments, make profits from taxpayers through private finance initiative, information technology and consultancy contracts. There is clearly no business like accountancy business.
The proposed government policy will not work. It expects corporations who can construct opaque corporate structures and sham transactions to come clean. That will not happen. In addition, a government loth to invest in public regulation will not have the sufficient manpower to police any self-certifications by big business.
An effective policy should prevent tax avoiders and their advisers from making any profit from taxpayers. It should apply to all the players in the tax avoidance industry, regardless of whether their schemes are peddled at home or abroad.
This article first appeared on Guardian Comment is Free
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