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One Sausage Too Many – stealing from the poor and giving to the rich

February 12, 2011

“To retain any respect for sausages and legislation, one must not watch them in the making” said Otto von Bismarck. There is a particular chipolata, however, being squeezed out of HM’s Government which cannot be made palatable with all the onion gravy in the world. It concerns banks. “Project Merlin?” I hear you ask. Not entirely. Although, the aptly named Project Merlin is key to the confidence trick that is about to take place. It is the distraction which allows these political conjurers to smuggle a rabbit out of their sleeve with hardly anyone noticing.

The real trick concerns some obscure change in Corporate Tax legislation. Buried in a schedule of the upcoming Finance Bill 2011, put out to public consultation for only eight days since the last changes to it were made, is an amendment to the Tax Act of 1988 which earned it the nickname “the heist of the century” by Monbiot in The Guardian. Although I come from a law and economics background and worked in the civil service for many years, this is not my area and I claim no expertise. But I did a little digging and I will try to explain what I found.

The changes stem from the European case of FII Group Litigation v Revenue and Customs Commissioners which decided in the summer of 2009 that companies based in the UK with subsidiaries elsewhere in Europe would not have to pay additional corporation tax for profits earned through their European subsidiaries and taxed in that European country. So far, so good.

The Finance Bill 2011 seeks to simplify that situation by saying “what applies to subsidiaries of UK companies, will also apply to UK companies with branches abroad”. At least this is what conservative commentators would have you believe. Here comes the clever bit – pay attention: The Finance Bill 2011, stealthily, extends these measures to cover branches held anywhere in the world – not just within the EU. This includes “tax havens” which are outside any international tax agreements. When this legislation comes into effect, the UK will be only the second country in the world to allow this. The other? Switzerland.

The implications are massive. A manufacturing company will be able to transfer goods at cost to its foreign branches, then fill any export orders from there. Anyone providing services will be able to contract them via its foreign branches  and then sub-contract them to its UK headquarters. I suspect this may also facilitate money-laundering and the movement of the proceeds of crime.

Further, the provisions will only apply to the largest corporations. “Large and medium sized companies will be able to opt-in for branches in all countries, including those with which the UK has no tax treaty. However small companies will not be able to opt-in branches located in non-treaty countries because of the risk of the loss of tax through diversion of personal income.” explains firm Macfarlane Gray.

The government’s own summary document predicts that “based on current corporate structures, the proposal should impact on no more than 150 companies owned by large UK multinational groups” and that “the Government expects large financial services companies to make the greatest use of the exemption regime.”

Still with me? Here’s the punchline: Although companies will not pay tax in the UK for these profits from foreign branches, they will be able to claim against their UK tax for funding foreign branches and any losses suffered abroad. No other country worldwide, not EVEN Switzerland, has a similar tax loophole. Added to that, corporation tax is cut from 28% to 24% from April.

Why, you ask, is our government doing this? I have no answer, only some clues:

  • The original committee the government set up “to provide strategic oversight of the development of corporate tax policy” contains almost exclusively corporate executives, including representatives of Vodafone, Tesco, British American Tobacco, Santander, Standard Chartered, Citigroup, Schroders, RBS and Barclays.
  • The working group set up to consider this particular “foreign branch” issue consisted only of government employees and representatives of BP, HSBC and Sony.
  • The latest figures released by the BIJ show that last year money donated to the Conservative Party by companies and individuals connected to the financial industry (£11.4m – almost exactly the amount by which banks have agreed to increase loans to small businesses under Project Merlin) made up more than 50% of all contributions, compared to 25% (£2.75m) when Cameron and Osborne took over.

Let me leave you with this thought: The Office for National statistics just published its initial figures of how much the bailout of the banks will cost the country. The general debt caused by the recession was under £900bn – below the Maastricht treaty limit of 60% of GDP. The debt incurred by the bailouts is £1,434bn, almost 100% of GDP. This is roughly £25,000 for every person in Britain. Because we paid to bail them out, we are all asked to tighten our belts to cope with it. People are getting laid off, small businesses going bust. Meanwhile they are getting the biggest tax break in modern history.

So, next time you see Cameron’s smiling face on TV telling you “we’re in it together”, ask yourselves: What is the worst Mubarak did to the Egyptian people? Is there a difference between a leader that sells an entire country down the river by force and one that does it by stealth?

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