Financial Transparency Coalition

I am at the conference of the Task Force on Financial Integrity and Economic Development in Bergen for the next couple of days. I’ll be talking on at least a couple of issues – country-by-country reporting being one of them, this morning.

It’s in that context that the debate on the relocation of Wolseley plc in the Uk is interesting. As the Guardian reports this morning( apart from quoting this blog, from yesterday):

[Wolseley] finance director John Martin said the government needed to end the uncertainty surrounding the taxation of profits in foreign subsidiaries to keep Wolseley in the UK. Switzerland offered the opportunity to repatriate foreign earnings to a centre with exceptionally low tax rates.

It was a row over profits generated overseas that prompted the first exodus of major businesses in 2008. Martin’s claim that the move to Switzerland will save around £23m is likely to spark fears in the government that more firms are set to leave despite a promise to cut corporation tax to one of the lowest rates in the G20.

The dispute centres on the way the earnings of foreign subsidiaries are taxed under the controlled foreign company rules.

Companies with large overseas operations must send their profits back to the UK. If the overseas subsidiary is subject to a lower level of tax than the UK would charge, it must make up the difference, unless the tax rate is within 25% of the UK’s. Tax experts said in the early part of the decade that many employers exploited loopholes to minimise their tax. A crackdown by Labour forced up the effective tax rate.

This is no minor issue, as some suggest. Nor is it simply an issue of certainty, or admin complexity as others suggest. This is something much bigger than that. What is at stake here is the right of the state to tax the multinational corporation.

Let me explain. Fundamentally there are two bases for taxing companies: residence and source bases. Residence says the company is taxed on its worldwide income in the country in which it is resident. Residence is of course technically defined – and I have blogged the illogicality of the UK pension on this.  The alternative is the source basis – that the country where the income arises has the right to tax the income first.

Double tax agreements have always tried to resolve the dilemma that a country may be resident in one place and have income arising in another. Or it may own a subsidiary which is resident in a country different from that in which the parent is resident. Double tax rules have developed to ensure that tax paid at source in both cases is credited against tax due in the place of receipt where there is residence so that to the greatest possible degree double taxation is avoided – and most of the time it is.

The trouble is that accountants abuse all rules and the rules designed to prevent double taxation are abused. This is most especially done via tax havens / secrecy jurisdictions. The whole logic of such places is that nothing really happens there. I repeat: these are places where transactions are booked but they actually have their economic impact elsewhere. That is the definition of offshore. So there can be no source tax in a tax haven: there is no source!

And although these places very deliberately offer the veneer of residence that again is just a veneer. In many cases it is achieved using the UK method of definition of residence – that the holding of directors meetings in such places may give the veneer of residence although it is also true that so long as the corporation in question can show the transactions it manages take place elsewhere they usually end up paying no tax in such locations – on the basis that the source is not there.

The result of course is that no tax is paid in tax havens on a source or residence basis.

And this is known of course. And multinational corporations have tried to exploit this for years.

Three weapons prevent the abuse of the tax base of a state that wants to tax its corporations from tax haven activity.

The first is transfer pricing rules, trying to prevent assets and transactions being incorrectly priced into and out of tax havens.

Second,  we need controlled foreign company legislation that says that if a resident corporation relocates income to a tax haven without there being economic substance when doing so then that tax haven subsidiary will be taxed as if it resident in the location where its parent is resident. This is vital.

Third, there is the taxation of dividends received from subsidiaries. This too is essential. If options one and two fail then option three is the back stop that completes the armoury that ensures corporations can be taxed.

And it is this structure that is being attacked, by secrecy jurisdictions such as Jersey and Switzerland in the case of Wolseley. And it is the structure of OFC legislation that is being attacked by corporations – as the above quote shows. What they’re doing is legal. But that’s not the point. The attack on taxing dividends is an ongoing fight by corporations. The UK has recently partly succumbed to pressure on this issue.

But undermine this three part mechanism – any one part of this three part mechanism designed to tackle the movement of profit out of the tax net – and that profit will flow out of the tax net – exactly as the major multinational corporations of the world and their friends in government want.

And they want to do this so that the burden of tax is shifted from capital – business profits in this case – to labour. And this is part of the process of reallocating wealth from the poorest to the richest in society.

So what Wolseley is doing is not a politically neutral act. And nor is it all it claims – a move against regulation. This is about shifting power. From people to capital. From countries to corporations. From poor to rich.

And to prevent this we have to assert the right to tax corporations.

That’s what I think part of the agenda of the Task Force on Financial Integrity and Economic Development is and should be.

And it’s a reason for country-by-country reporting.

And it is a reason for suggesting alternative bases for taxation – such as unitary apportionment.

The alternative is very uncomfortable indeed, unless you’re well off, of course. Because they’ll still have health care, education, a safety net and security. But if the tax is not available to pay for those things for the rest in society these things will become increasingly optional – or simply unavailable.

And I think that is unacceptable.