VAT at UCONN

Posted by Ruth Mason on taxprof/typepad.com:

"Rita de la Feria (Centre for Business Taxation, Oxford) presented The Pitfalls of Accepted VAT Wisdom: Lessons from the EU Experience at Connecticut as part of its Tax Lecture Series. Rather than addressing whether the United States should adopt a value-added tax, de la Feria focused on what the United States could learn from the European experience.

VAT is the world’s fastest growing tax, with 130 countries applying it in some form. De la Feria noted the irony that although the United States is the only major industrialized country without a VAT, Michigan was the first jurisdiction to apply a VAT. While de la Feria noted that the allures of VAT include simplicity, ease of assessment and collection, and effectiveness in raising revenue, she cautioned that certain aspects of the European implementation of VAT have reduced these benefits. Among other recommendations, de la Feria warned that VAT exemptions and rate differentials designed to achieve progressivity or encourage consumption of merit goods have lead to extensive tax planning and difficult line-drawing problems in Europe.

Two cases decided in the British courts illustrate her point. In Jaffa Cakes, the court had to decide whether the popular British confection was a cookie or a cake. If a cake, it would fall under the VAT exemption for food, whereas cookies were subject to the standard rate of 17.5%. With a healthy dose of humor, de la Feria described the case as well as the court’s standard of review. The court declared that the distinction between cookies and cakes could be drawn by reference to what happens when they go stale: cakes go hard; cookies go soft. In another case, relying in part on the fact that Pringles only contain 40% potato, a court found that Pringles should not be subject to the higher rate of VAT applicable to (unhealthy) “potato crisps.” De la

Feria noted the perverse effect of the Pringles ruling: the more filler in the chip, the more likely the exemption!

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.

Taxes Aren't Beautiful: A Singer Moves to Switzerland to Avoid British Taxes

From Taxprof/typepad.com:

"British singer-songwriter James Blunt -- best known for his hit single You're Beautiful -- has decided to establish residence in Switzerland to avoid British taxes. From press reports:
Blunt, who earned £5 million ($9.8 million) from his debut album Back To Bedlam, is the latest in a long line of high-earners to quit their homeland for Switzerland - Phil Collins resides there and French rock legend Johnny Hallyday set up residence in Gstaad only last month.
Patrick Messeiller, director of tourism for Verbier, confirmed a report in the Swiss daily Le Matin that Blunt, who is a frequent visitor to the mountain village, had registered with the tax office there.

Each Swiss canton (state) sets its own tax rates, and can cut special deals with wealthy foreigners that allow them to pay only a fraction of what they would have to pay elsewhere. "

David R. Francis has published an article entitled "Secretly, tiny nations hold much wealth" in CS Monitor:

"Although they have only 1 percent of the world's inhabitants, they hold a quarter of United States stocks and nearly a third of all the globe's assets.
They're tax havens: 70 mostly tiny nations that offer no-tax or low-tax status to the wealthy so they can stash their money. Usually, the process is so secret that it draws little attention. But the sums - and lost tax revenues - are growing so large that the havens are getting new and unaccustomed scrutiny.

For example: When London's Tax Justice Network (TJN) reported a month ago that rich individuals worldwide had stashed $11.5 trillion of their assets in tax havens, it caused a fuss in Europe. "Super-rich hide trillions offshore," blazed a British newspaper headline.


Although that report received little notice outside Europe, there are rumblings of concern in the United States. That's not surprising. Nations lose an estimated $255 billion in tax revenues a year because of the havens, according to TJN. The US alone probably loses $60 billion a year, a tax expert estimates.

The loss hits not only prosperous industrial countries, but also developing nations. As a result, dozens of church groups and other nongovernmental organizations concerned with world poverty are joining tax reformers in what will probably become a major political battle. They aim to stem the outflow of money from poor nations into tax havens - an outpouring that may exceed today's global foreign aid of some $60 billion a year.

"If we are serious about reducing poverty, one of the first things we need to tackle is an international financial system run by the rich, for the rich, at the expense of the poor," states David Woodward, director of the New Economics Foundation, a London think tank.

Corrupt officials in poor nations, illegally, and multinational corporations, mostly legally, siphon huge amounts of money into bank accounts and shell companies in 70 tax havens, such as the Cayman Islands, Bermuda, and Jersey.

"It's going to be the next major issue," forecasts Lucy Komisar, a New York journalist writing a book on offshore banking. She compares the drive against tax havens with the civil rights movement of the 1960s, in which she participated, and the feminist and environmental movements of more recent decades.

Ms. Komisar helped organize a meeting on Capitol Hill April 7 to get an American branch of the TJN going. Representatives of several members of Congress, the AFL-CIO and a few other unions, several prominent tax research groups, and the United Church of Christ attended. About a dozen well-known activist groups were also present, including Public Citizen, Greenpeace, and the National Council of La Raza.

By cracking down on capital flight and corruption in developing countries, "we wouldn't have so much poverty in the world," says Robert McIntyre, executive director of Citizens for Tax Justice. He offered at that meeting to find funding for the TJN group in the US and recruit a paid director.

Not everyone sees it this way. The Center for Freedom and Prosperity in Washington, for example, sees tax havens as "an escape hatch for overburdened taxpayers." It relishes "tax competition" between nations. The center also argues that bank secrecy in countries like Switzerland can protect the money of those who face persecution by repressive regimes.

The tax-haven numbers in the TJN report were calculated by a British research firm from conservative sources - such as Merrill Lynch's "World Wealth Report" and the Boston Consulting Group's "Global Wealth Report." The trillions of dollars reported don't include money parked in tax havens by companies - probably also a massive sum.

There are about 3 million shell companies (set up largely to duck taxes) in offshore tax havens, Komisar reckons. These tiny tax havens hold 31 percent of total world assets and 26 percent of the stock of US multinationals.

"As our economies have globalized, our tax systems remain nationally based and measures that should have been put in place decades ago to improve international tax cooperation have not been put in place," says John Christensen, international coordinator in London of TJN. "So the tax burden has been shifted from those who can afford it to middle- and low-income households, and from businesses to working people and consumers."

In the late 1990s, industrial-nation negotiators reached an agreement to pressure tax-haven countries to stop facilitating money laundering, drug dealing, and tax evasion. The deal was championed by the Clinton administration. But it was squashed by the new Bush administration, keen for tax cuts.

Then came 9/11 and a recognition that terrorists and drug dealers use the same international finance channels as tax dodgers. So the Bush administration "has become less strident in its support for bank secrecy and other nondisclosure policies," notes Mr. McIntyre.

Now, a pioneer opponent of tax evasion through tax havens, Sen. Carl Levin (D) of Michigan, has joined with Sen. Norm Coleman (R) of Minnesota to sponsor the Tax Shelter and Tax Haven Reform Act. It would enable the Treasury secretary to designate a tax haven as "uncooperative" with Internal Revenue Service investigations. Though not a panacea, the bill, soon to be reintroduced in the current Congress, would give tax investigators a weapon: Income from such designated tax havens would lose some tax advantages.