The language, or rather political language de jour, is for the canvassing potential members of the next parliament (Parliamentary candidates in the UK) to merge two very different concepts into one, in the public’s mind. Those words are tax evasion andtax avoidance. We (at the theMarketSoul) believe we potentially know why, but the consequences might not yet be clearly understood.
At a recent televised debate attended by potential next Business Secretary representatives (politicians who would be in charge of the Business, Innovation and Skills [BIS] department) from the three major political parties, one of the candidates challenged the audience thus:
“You (tax advisers) know the difference between aggressive tax avoidance on the the one hand and tax planning on the other.” No the question was actually this: “Please raise your hand in the audience if you donot know what aggressive tax avoidance is.” From the podium the verdict came that about half the audience raised their hands. And therein lies the problem: Are you making this a moral question now? Because until someone is able to clearly define and explain how morality and tax planning are linked; we at theMarketSoul cannot help but think: Where next in this one sided ‘supposed’ quasi debate?
It really depends on how you ask the question:
Is taxation moral? Is paying tax moral? What level of taxation is moral? Is being moral, paying your taxes? If you don’t pay taxes, are you immoral?
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.
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.
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).
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.
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.
We will continue to develop this theme over the next few weeks leading up to the general election in the UK.
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.
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.
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.
But seriously, how much is too much? There must be value in controlling fiscal policy, monetary policy and (social) employment policy, but is this being done in an integrated fashion and with ‘value maximising’ principles?
We prefer to take a leaf out of Joseph Schumpeter’s book and view the economic cycle as either short (1 – 2 years), medium (around a decade) and long-term (many decades).
The trouble with any form of economic analysis is that taking any temperature readings during any specific cycle is just that – A temperature reading. Meaningless without being set in its proper context. We generally have a major problem in identifying where we are in any given long-term cycle.
It is only with hindsight and the historical perspective that we can truly determine where we were and where we thought we were heading.
It is our belief that we are (still) in the midst of a major paradigm shift, triggered by the innovation wave of the ICT revolution over the last 20 years.
We still have not fully grasped the consequences and full extent of this ‘drift’ to a new equilibrium.
As one of the unintended consequences we are currently facing up to a sovereign Debt balloon and are desperately trying to determine when we will encounter ‘Peak Debt’.
One of the popular libertarian ideals is to cut government’s stake as a percentage of total output of GDP. We endorse this view, but it appears that at the end of the day (because we have forgotten what Laissez faire looks like); we’ll still need someone to keep the lights on, adjust the interest rates and collect our taxes. All this in the name of job creation…
Today’s short opinion piece revolves around the recent rail fare increases announced in the UK.
It strikes us as a very cynical way of rewarding behaviour and policies implemented by previous governments and parliaments to now go and increase the ‘tax’ on rail commuters when the switching policy from road to rail has meant that more rail passenger miles are being racked up versus road miles and supposedly turning off the tax flows into the Treasury from fuel duties, because more rail journeys are being undertaken.
Yet again the pendulum has swung the other way and at the consumer end of the bargain, we are being sent a confusing message us to which behaviours the government wants to encourage us to take.
Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.
Now step back second and consider the tax take flows from these two options:
With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing their net tax take? Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.
Another salvo was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle. Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”