Home > real-world economics review > RWER issue 57: Richard Murphy

RWER issue 57: Richard Murphy

Tax havens, secrecy jurisdictions and the breakdown of corporation tax

Richard Murphy

United Kingdom: a case history

             In March 2011, the Chancellor of the Exchequer, the British cabinet minister who is responsible for all economic and financial matters, announced in his budget statement three major changes to UK corporation tax.

             The first was that the rate for large companies in the UK was set to fall to 23%. The second was that the UK would move to a corporate tax system where only the profits of companies arising in the UK would be subject to UK corporation tax; this representing a compete reversal of the situation that existed prior to 2009 when UK companies were (albeit convolutedly) taxable on their worldwide income. And thirdly he announced that if in the future a UK company runs its internal banking arrangements through a tax haven subsidiary then that company will benefit from a special UK tax rate of just 5.75 per cent of the resulting profits.

             Such a thing has never happened before. First, the Chancellor has swept aside a tradition dating from just after capital account liberalisation took place in the UK[1] in 1979. In 1984 the UK  introduced what are known as Controlled Foreign Company (CFC) rules[2]  into its tax code. These allowed it to deem subsidiaries of UK parent companies located in tax havens to be UK tax resident, and so UK taxable. The whole purpose was to prevent a company relocating its profits, and most especially those arising on financing charges, to tax havens. And yet the new UK law is designed to encourage precisely this tax haven activity by UK owned parent companies by allowing it to be undertaken and to be deemed to be in the UK but to then be taxed at a new tax rate that is exceptionally low: the lowest indeed offered on corporate profits anywhere within the European Union or Organisation for Economic Cooperation and Development[3]. Extraordinarily, this activity has always been considered aggressive tax avoidance to date.

             As a result in one announcement Osborne summarised a change in attitude in UK taxation that will delight corporate tax avoiders everywhere: what he was saying was that the UK will now condone tax haven activity undertaken by UK parent companies in locations such as the Cayman Islands, Jerseyand the Isle of Man. By 2016 it is expected that more than one sixth of UKcorporation tax will come from the offshore activities of UKcompanies[4]. It is an astonishing change in attitude to tax haven activity.

 Definitions of ‘tax haven’

             It’s all the more astonishing because no one has yet offered a definition of ‘tax haven’ on which everyone can agree[5].  The IMF, the OECD and the other main agencies tend to adopt the language they think acceptable to their own constituency. The term ‘tax haven’ is too obviously value laden, as the French translation (paradis fiscal) makes clear. ‘Offshore’, too, conjures images of island paradises, and besides, some of the locations involved –Liechtenstein, for example – are landlocked. ‘International financial centre’, a creation of the financial services industry, seems designed solely to give an air of respectability.


[1] See, for example,   Quinn, D. and Voth, H., 2007, Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001   http://www.cepr.org/meets/wkcn/1/1688/papers/Voth.pdf accessed 25-5-11

 

[3] Based on a review of rates noted in KPMG’s annual survey of corporate tax rates at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Corp-and-Indirect-Tax-Oct12-2010.pdf

 

[4] Table c.3 of HM Treasury March 2011 Budget Statement http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf , accessed25-5-11.

You may download the whole paper at:  http://www.paecon.net/PAEReview/issue57/Murphy57.pdf

[5] Palan, R., Murphy, R., and Chavagneuc, C. 2010 ‘Tax Havens: How globalisation really works’, Cornell University Press, pages 18 – 30.

 

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