Wake up Britain. You are a #TAX Haven too!!!

Let’s just pause for a moment: #Tax avoidance talk is all the rage at the moment…

In order to redress the balance of negative sentiment, combined with a political(ly) charged environment with electioneering by all major political UK parties posturing new populist policies (say that fast a few times); we thought it a good idea to put a little perspective on the matter of #Tax avoidance (tax planning we prefer to call it).  Remember this is #Election2015 coming up on 7 May 2015.

taxh_2017367c

So HSBC bank (more specifically the Swiss subsidiary of their Private Banking arm) got themselves into difficulty over the past couple of weeks with the BBC Panorama programme revelations as reported by Richard Bilton.
Accused of large scale collusion on tax avoidance or even evasion practices, the liberal and politically left leaning media in the UK have quite rightly got themselves embroiled in a multi-layered debate from both tax avoidance and the morals thereof to standards of editorial judgement, when corporate advertisers are the subject of negative headlines (the Daily Telegraph).
However, to grab a headline back for ourselves (and balance the debate):
Britain, wake-up, you are a corporate TAX Haven” and to cap it off, you are not that popular with other higher taxing G8 jurisdictions.
The overall corporation tax environment in the UK has significantly improved if you are considering a Foreign Direct Investment (FDI) route into the UK over the life-time of this last Conservative-Liberal Democrat led parliament.
 world-tax-haven
With corporate tax rates for both small and large enterprises almost aligned at 20% and 21% respectively from April 2014 onwards, for net profits assessable to corporation tax, the UK is one of the lowest corporate tax regimes in the G20 club.
What are the implications of this?
More FDI is attracted to the UK and therefore the potential to create more jobs and reduce the dependency on government handouts reduced.
What has not yet happened though, is that the tax receipts from corporations subjected to corporation tax in the UK increased significantly.  This is partly due to timing issues; Capital and Investment allowances reducing the overall tax take and further aggressive tax avoidance activities by these Multi-National Corporations (MNC).
English: Tax rates around the world: VAT rate/...
Tax rates around the world: VAT rate/G&S Tax rate (the highest rate) by countries (Photo credit: Wikipedia)
On the whole the average effective corporation tax rate actually paid in the UK is therefore less than the 21% head line rate for large businesses with profits over £300,000.  This is due to the cash tax rate paid by corporations being reduced by capital allowances and research and development credits bringing down the effective rate paid as a percentage of the net profit assessable to corporation tax to well below 21%.  These legitimate reductions are known as reliefs.
For a fuller and official explanation of the UK corporate tax system and reliefs available, we suggest a quick glimpse at HMRC site at this address:  https://www.gov.uk/corporation-tax-rates/rates
PwC put together a league table of effective (most attractive to least attractive jurisdictions on that is called “international tax competitiveness”.  In 2014 the UK ranked 16th, with only Ireland and Denmark, (two fellow EU member states) beating the UK from the EU member state block.
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We will continue to develop this theme over the next few weeks leading up to the general election in the UK.
theMarketSoul © 2015
Please take our anonymous poll below:
PS. To balance our views, please refer to some of these articles for your further reading:

Thoughts on 2014 – Moral Hazard PLUS – Part 1

Reflections on 2014

As a behaviourally focused economics publication we have been very quiet and inactive during 2014. A year of reflection and introspection, however, we are ready to resume service, with vigour. And what better way to start than with a reflective piece and thoughts on the biggest risk we believe are developing under the surface without warning. Our concluding theme of 2014 is that of moral hazard.

As Margaret Thatcher once said: “There is no society”; we state today that there is ‘No Moral Hazard’; in fact there is only Moral Hazard PLUS.

We believe that there is a strong correlation between QE (Quantitative Easing) and economic moral hazard developing a new strain, mutating like an unseen virus.

QE might have saved the financial system of the developed world, but it it only provided a shot in the arm and acted as a stimulus for sustaining moral hazard.

Economics follow a flow and cyclical pattern, as discussed in our article entitled ‘Information Age Irony‘. These patterns and flows weave themselves into the fabric of our lives and affect individual economies in different ways.

It is important to understand where and how economic cycles develop and flow and how much influence they have on our general economic activities on a day to day basis, but we should not become overly obsessed by them, as they can be short-circuited from time to time by policy and policy-maker’s actions, wherever individually or collectively.

In part 2 of this article we will focus on the revelations of QE and the underlying threat of moral hazard returning on a grander and more catastrophic scale, if it goes unchecked and misunderstood.

© theMarketSoul 2014

An Ownership Revolution is required

We have been following the G20 ‘get those naughty multinationals in the tax tent’ debates raging for a few months now, with amusement we have to add; here at theMarketSoul and have the following short thought piece to contribute to the debate.

We know the ‘outrage’ really is all about the what the OECD calls the ‘general erosion of the tax base’, which in our opinion is just a distraction for proper structural reforms in the western democracies contributing to the G20 and OECD coffers.

English: The logo of the Organisation for Econ...
English: The logo of the Organisation for Economic Co-operation and Development (OECD). (Photo credit: Wikipedia)

The real issue is the power of civil society structures, such as multinational corporations, versus nation states. We constantly get an earful on how undemocratic corporations are from a liberal social leftist media and how dangerous unfettered corporate power is.

Yet, multinationals are far more democratic, in both structure and performance, than any sovereign government will ever be. If the corporate governance structure is correctly set up, then every corporate entity has an annual AGM at which point the corporate leaders have to resign, on a rotational basis, depending on individual Articles of Association or Memorandum ofIincorporation provisions (depending in which jurisdiction the corporate entity ‘resides’). How often does a sovereign leader stand down, in comparison and leave it to the popular vote to be re-elected? Certainly not on an annual basis, as is the case for most corporate leaders.

Civitas Foundation for Civil Society logo
Civitas Foundation for Civil Society logo (Photo credit: Wikipedia)

This leads us to the real thought piece of this article, namely the fact that corporate ownership and access to corporate ownership should really be extended to as wide a base as possible, rather than a few ‘monied’ or opportunist participants in the market.

Legislation around employee share ownership schemes are still very cumbersome and rules, rather than principles driven.

The real revolution we require is not around a new tax base or recapitalizing democratic bankrupt nation states; however we require a revolution of democratic corporate ownership to sweep the length and breadth of the land, in order to spread the risk, add additional wealth creation opportunities (and hence a widened wealth tax base) for smaller, leaner and meaner governments to address. This a cry from civil society to the inner ‘goodness’ of political society to sit up, take serious stock and work on longer-term solutions to the erosion of their tax bases, rather than the usual headline grabbing short-termist market distorting interventions the G20 governments are so infamous.

theMarketSoul ©2013

Behavioural Consequences – The UK Bond Market Rigging Scandal

Health Warning: The UK Bond Market rigging issue is all behaviourally driven. We express a personal opinion in this post and do not endorse or condone breaking any jurisdiction’s sovereign laws.

We would like to contribute a very short thought piece on this issue. Our premise basically goes like this and is grounded in behavioural theory:

2012 Behaviour Matrix copy
2012 Behaviour Matrix copy (Photo credit: Robin Hutton)

Take away any sensible incentive (by over regulating the market participants) and you create the disincentive for cheating behaviour to manifest. Simple.

It is a natural competitive behaviour to ‘cheat’ or try to cheat a system that becomes ‘badly’ designed, as in the case of the highly over regulated bond market and an environment of very low yields.

We find is amazing that the popular press only tend to focus on one side of the equation and distort the real issue and underlying drivers that lead tot cheating behaviour.

Illustration for Cheating Français : Illustrat...
Illustration for Cheating Français : Illustration d’une antisèche Español: Ilustración de una chuleta Deutsch: Illustration zum Schummeln (Photo credit: Wikipedia)

The rule of law should be the overriding guiding principle and helping to design markets and market participant behaviours based on properly incentivised interactions is part of any regulatory system. In the recent past, we have forgotten to bear this in mind…

…and then we act surprised when market actors (participants) misbehave?

theMarketSoul ©2013

Related articles

Transaction Cost Economics is ruining everything!!!

…or is it regulation and process not taking into consideration Transaction Cost Economics?

This post is really a little rant.

We just tried to contact a well known global financial services institution in London in order to enquire about the opening of a corporate bank account.

We have a few why questions and cannot figure out if it regulatory or process driven.

1. Why can’t we get the correct number to call off the web site?
2. When we get through to someone and identify the product/service we require, why are we given the incorrect follow up number to call?
3. Once we get through the automated call processing system, why can’t the customer services representative do a simple thing for us, by transferring us to a supervisor or competent person with authority to speak to?
4. Why are the customer services representatives so wedded to a pre-prepared script.
5. Why have the management consultants who designed these systems not taken into consideration the basics of Transaction Cost Economics(TCE)?

…we think the rant should end there; but more on TCE to follow in future posts.

theMarketSoul (c)2013

Risk Management Ideas

Risk has as one of its essential elements TRUST as a foundation.

Trust on the other hand has many other factors that interplay and interact on it.

Markets are created when there are needs that are not immediately met from you local environment and therefore scarcity exists.  Market participants step in to fill this ‘needs’ void.

English: Risk management sub processes
Image via Wikipedia

As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.

Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth.  Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.

Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management.  (For more information or to contact us, please click on the Contact us link or read the article entitled “The Intersection – Where Risk, Value & Reward link by clicking on the embedded link.

Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation a midst the regulatory compliance constraints added to your management agenda.

TheMarketSoul ©2010


Capricious #Markets

The market is capricious.  We are paraphrasing a line from one of Bernard Cornwell’s series of historic novels on 9th century England, where he referred to the ‘old gods’ (pagan gods) of the Danes and Vikings as capricious.

So if the impulsive nature of markets is to be appreciated for what they are, then why are we trying so hard to manage risk completely out of existence?

We will focus on two specific factors today in what we refer to as the ‘dumbing down of risk’.

A strict or narrow definition (old financial language) of risk is possibly that it is a quantifiable number with a probability ranking and we can therefore attach a statistical inference to the occurrence of the risk event.

Yet in The Health & Safety Executives language a risk and “Risk management involves you, the employer, looking at the risks that arise in the workplace and then putting sensible health and safety measures in place to control them”.  So in the common language in the work place the HSE has managed to destroy the proper use of the work risk and risk management with this dumbed-down version.

In our mind, if the risk cannot be quantified and expresses on a scale of probabilities, then it is not a risk, but an uncertainty.  And we can manage both risks and uncertainties, but the emphasis is different.

Maybe any situation or health and safety ‘risk’ can eventually be codified on a risk probability matrix, but the cost involved in getting to this situation is prohibitive, so we shall stick to our guns and call a health and safety issue a ‘Health & Safety Uncertainty’.

English: Contribution and prioritizing threats...
Contribution and prioritizing threats and risks to Risk Management Effectiveness (Photo credit: Wikipedia)

Let’s recap briefly the difference between what risk is (supposed to be) and what uncertainty is:

Risk in investment and market participation is the likelihood of a quantifiable measurable outcome either occurring or not occurring.

Frank Knight In his seminal work Risk, Uncertainty, and Profit, Frank Knight (1921) established the distinction between risk and uncertainty.

… Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term “risk,” as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. … The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. … It will appear that a measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We … accordingly restrict the term “uncertainty” to cases of the non-quantitive type.”

Too summarise therefore, risk should be a measurable and quantifiable occurrence, whereas uncertainty is what the HSE addresses, but misinforms as risk, namely the likelihood of something occurring, but that likelihood is not quantifiable.

So where does this detour into the use of language leave us as far as the Capricious Market is concerned?

We suppose that because market participants are both humans and mechanical systems (eg. ETS – Electronic Trading Systems), one of these participant groups, namely the humans have a level of sophistication and complexity (irrationality) that leaves the best construed risk models in tatters, once the uncertainty element of human emotion and the perception factor unleashed.

Therefore, to construct models of rational behaviours, the outcome and predictability of non-human mechanical systems (in other words more models) should be able to predict the behaviours of other models.  But to extend this to human actors clearly moves us more firmly into the domain of uncertainty and not risk.

Therefore, we conclude that the markets will always be capricious as long as irrational beings are willing and able participants.  Until this ceases to be, let us ensure that we get the use of our risks sorted out from our uncertainties.

theMarketSoul ©2010

English: Diagram illustrating the relationship...
Diagram illustrating the relationship between the three components of risk analysis. (Photo credit: Wikipedia)