International Tax-Shelter Plot Thickens; Mogul Sues UBS

International Tax-Shelter Plot Thickens; Mogul Sues UBS
Posted by Dan Slater on September 17, 2008

"Back in May, the Feds unsealed an indictment against a former UBS banker, Bradley Birkenfeld, for allegedly helping one of the world’s richest men, Igor Olenicoff, evade taxes on $200 million held in Swiss and Liechtenstein bank accounts. When Birkenfeld pleaded guilty, a month later, he explained that he participated the alleged scheme to help Olenicoff evade taxes. “I was employed by UBS,” said Birkenfeld, “I was incentivized to do this business.”

Yesterday, the UBS-Olenicoff plot thickened, when Olenicoff, a billionaire property developer, sued UBS and nearly a dozen current and former executives of the bank in federal court in Santa Ana, Calif. Here’s the NYT report.

The suit reportedly accuses UBS, a small Swiss firm, and two private firms based in Liechtenstein and their employees of luring Olenicoff into becoming a client and a participant in a deceptive investment scheme intended to cheat the IRS of millions in taxes. The suit also contends that Birkenfeld, the former UBS banker, received a large settlement from UBS after complaining that it had encouraged its private bankers to violate U.S. tax laws.

The suit claims that UBS turned over Olenicoff’s name to the IRS, a move that would have been surprising for a Swiss bank that follows a centuries-old tradition of banking secrecy. Olenicoff is accusing the defendants of fraud and breach of fiduciary duty, among other things.
UBS said it had not seen the complaint and thus could not comment upon it.
In December, notes the Times, Olenicoff pleaded guilty to criminal charges of tax evasion and lying on his tax returns, all in connection with his offshore private banking accounts. He agreed to pay $52 million in back taxes.

Using tax to lure business away from London

"London rivals 'cherry picking' business"
An article published by Vanessa Houlder in Financial Times on September 10 2008

London's rivals are using tax to lure business away from the City, a leading City policymaker has warned.

Stuart Fraser, chairman of policy at the City of London Corporation, said the government must fight back by tackling the uncertainty and complexity of Britain's tax regime.

He warned that rival jurisdictions were "cherry picking" London's most lucrative activities. He cited Switzerland's attempt to attract wealth managers and hedge funds and a move by Paris to attract private equity firms. "They are very keen on taking us on. What they want is our business". He called for greater clarity and predictability in the UK tax system. "People need certainty. They want to be confident that if they stay here the system will not change."

His comments follow recent decisions by Krom River, a London hedge fund to move to Zug in Switzerland and five large companies to shift their holding companies to Ireland or Luxembourg. Mr Fraser said the corporate moves were symptomatic of the dissatisfaction with the tax system, although the establishment of "brass plate" operations abroad did not pose an immediate threat to jobs or the City.

The UK still attracts the largest number of headquarter functions of any European country, but its share fell from over 40 per cent to 30 per cent last year, the lowest figure yet recorded by Oxford Intelligence, which compiles data for Ernst & Young's European Investment Monitor. Peter Lemagnen, director, said the relocation trend primarily affected larger companies where there was scope for significant tax savings.

Some advisers warned that a continued exodus of holding companies from Britain would damage the City.

Peter Wyman, global head of policy and regulation at PWC, the professional services firm, said that shareholder pressure for tax savings meant that "a slow trickle is likely to become a faster trickle if not a flood". He said the likely impact of more relocations was "a mixed picture, conceivably over time a big loss". "Undoubtedly, if you move your headquarters somewhere other than London you are likely to get an increased amount of advice from where you are now based."

Chris Morgan, an international tax partner at KPMG, the professional services firm, said it was inevitable that over time financial services would move to the country where the company was managed and controlled. "I think they should be incredibly worried about it."

James Bullock, a partner at McGrigors, the law firm, said that if the trend for headquarter relocations continued, the City was likely to lose out. "It is all about key relationships. If board and strategic directors are in Switzerland, the partners [of accountancy and law firms] will want to be there too."

The Irish government has already told companies considering relocations it wants to see "real substance" in its investment, rather than merely "brass plate" operations.

Corporate tax cut in UK has little impact, but low VAT raises reputation

Rate cut has little impact on global ranking
Article published by Vanessa Houlder in Financial Times (www.ft.com) on September 8 2008.

This year’s cut in the corporate tax rate has failed to push the UK decisively up the international rankings, according to a new survey that shows Britain’s efforts to improve its tax competitiveness have been blunted by similar efforts elsewhere.

The UK now has the 20th lowest corporate tax rate of the 27 European Union member states, a slight improvement for businesses on last year’s 21st position, according to the survey by KPMG, professional services firm.

The UK’s struggle to close the gap with smaller European competitors is likely to fuel criticism from businesses and opposition politicians.

KPMG said: “This continued downward pressure on worldwide and European corporate tax rates will add to the pressure on the UK authorities to address the UK’s perceived lack of competitiveness on tax.”

The impact of April’s 2 percentage point cut to 28 per cent was tempered by cuts elsewhere, which pushed average global and European corporate tax rates down by 1 percentage point. The UK’s corporate tax rate remains higher than the global average of 25.9 per cent and the EU average rate of 23.2 per cent.

But the UK is facing tough competition for holding companies from smaller low-tax European rivals, particularly Ireland, Luxembourg, Switzerland and the Netherlands, as demonstrated by recent moves out of the UK announced by Shire, UBM, Henderson, Charter and Regus.

These moves recently sparked an angry exchange between Alistair Darling and George Osborne, shadow chancellor, who called for a cut in the rate to 25 per cent which “would go some way towards undoing the damage the government has done by failing to keep pace with European tax rates”.

Mr Darling rejected Mr Osborne’s criticisms of the competitiveness of the business tax system as “wrong”.

Chris Morgan, head of international corporate tax at KPMG, said the relocation of headquarters was not driven by concern about the tax rate although bringing down tax rates was an important long-term objective. The argument was instead focused on the question of whether foreign profits should be taxed in the UK, he said.

The intensity of international tax competition was underlined by the finding that – for the first time since 1994 – no country in the 106-strong sample had raised rates. Competition has been particularly intense in the EU over the past 10 years, moving average corporate tax rates from the highest to the lowest of any group of countries in the OECD.

The relationship between tax rates and overall competitiveness is complex, with many other factors including political stability, infrastructure, access to new markets and a skilled labour force playing an important role. Sue Bonney, KPMG’s head of tax said: “Undoubtedly, the corporate tax rate is an important factor for businesses but it is far from the only factor.”

Big industrialised countries such as the UK typically have much higher rates than small countries. Countries such as Malta, Luxembourg and Switzerland have far lower effective rates than their headline rates as a result of exemptions and special rulings.

In May, Mr Darling acknowledged the challenge facing the tax regime, saying “Business does have a choice. Business is increasingly mobile. Tax rates have to be globally competitive.”

The UK’s corporate rate cut ensured that it continued to have a lower rate than Germany at 29.5 per cent, preserving the Treasury’s goal of having the lowest rate in the G7.

Low VAT raises reputation

Britain has the fourth lowest rate of value added tax in the EU, according to KPMG which said this relatively low rate underpinned the business-friendly reputation of the indirect tax system .

Britain’s 17.5 per cent VAT rate is well below the average in the EU of 19.49 per cent, in contrast to its position on corporate taxes. KPMG said this was in line with the “generally accepted idea” that indirect taxes compensate for reduced corporate tax yields.

This notion was partly supported by the contrast between the EU’s low corporate tax rates and its high VAT rates. Against a global average indirect tax rate of 15.7 per cent, the EU’s average rate was 19.49 per cent.

The UK’s relatively low rate, together with its stability over recent years, helped secure the UK top position in a KPMG survey of the best countries in the world to deal with from an indirect tax perspective.

The survey found that indirect tax rates have remained relatively stable, in contrast to the declines in corporate tax rates. KPMG said if indirect tax yields were compensating for declining corporate tax yields, this was being achieved by widening the indirect tax base and applying rules more strictly.

A Multilateral Solution for the Income Tax Treatment of Interest Expenses

Michael J. Graetz (Yale; moving to Columbia in '09) has posted A Multilateral Solution for the Income Tax Treatment of Interest Expenses on SSRN. Here is the abstract:

Recent developments - including greater taxpayer sophistication in structuring and locating international financing arrangements, increased government concerns with the role of debt in sophisticated tax avoidance techniques, and disruption by decisions of the European Court of Justice of member states' regimes limiting interest deductions - have stimulated new laws and policy controversies concerning the international tax treatment of interest expenses. National rules are in flux regarding the financing of both inbound and outbound transactions.

Heretofore, the question of the proper treatment of interest expense has generally been looked at from the perspective of either inbound or outbound investment. As a result, the issues of residence countries' limitations on interest deductions on borrowing to finance low-taxed, exempt or deferred foreign source income, on the one hand, and of source countries' restrictions on interest deductions intended to limit companies' ability to strip income from a higher-tax to a lower-tax country, on the other, have generally been treated as separate issues. A fundamental contribution of this essay is to demonstrate their linkage and to call for a multilateral solution that would address both of these problems.

The complexity, the incoherence, and the futility of countries acting independently to limit interest deductions are now clear. Worldwide allocation of interest expense by both source and resident countries would eliminate a host of problems now bedeviling nations throughout the world - problems that have produced varying, complex, and inconsistent responses among different countries, responses that frequently may result in zero or double taxation. Given the flexibility of multinational corporations to choose where to locate their borrowing and the difficulties nations have in maintaining their domestic income tax bases in the face of such flexibility, achieving a multilateral agreement for the treatment of interest expense based on a worldwide allocation should become a priority project for both source and residence countries.