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.

US Tax Holidays

Posted by Nanette Byrnes, from Business Week. (http://www.businessweek.com/careers/managementiq/archives/2008/08/tax_holidays.html )

It’s August, so you may be on vacation. But for an awful lot of corporations operating in the US, every day is a tax holiday. So says a report out today by the US General Accounting Office highlighting the number of US- and Foreign-controlled companies that have claimed zero tax liability in recent years.

The GAO’s study was ordered up by Senator Carl Levin, Democrat from Michigan and chairman of the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Government Affairs. Its conclusions focus on the fact that large foreign corporations are more likely to avoid taxes than US companies.

Like most of these studies, the GAO’s report looks at taxes as accounted for on the corporate income statement, not the cash taxes actually paid. (By that measure, 42 of the companies in the S&P500 had an actual tax rate of less than 10% over the past 5 years, another 58 paid less than 16%, and neither group paid anything like the statutory corporate tax rate of 35%).

According to the GAO, in recent years the gap in the number of US and foreign companies enjoying a tax free year has significantly narrowed. Though the authors didn’t go into exactly how both groups are sidestepping the tax man, they did indicate that transfer pricing looks to be a culprit. Transfer pricing is how much one part of a company charges another for something.

In a 2003 story on corporate taxes, we dug up and example of how this worked for hotel chain Hyatt.:
In one U.S. tax court case that is still pending, the IRS accused hotelier Hyatt International of paying too little for the Hyatt brand and other services provided by its U.S. parent. The IRS alleges that from 1976 to 1988, various Hyatt companies underreported income by $100 million because of those lowball fees. In an October, 1999, ruling on some aspects of the case, U.S. Tax Court Judge Joel Gerber ruled that the $10,000 one-time fee International had paid for each hotel bearing the Hyatt name was far too low. Hyatt declined to comment because the broad case is ongoing.

Tax economist Martin Sullivan, thinks half of the sharp drop in the foreign tax rates of U.S. multinationals — from 49.6% in 1983 to 22.2% in 1999 – is the result of similar shifting of income from foreign countries with a higher tax rate to those with lower rates.
Beyond shedding some light on the impact of transfer pricing, the report also shows:
• Fewer large foreign-controlled companies are paying no taxes today than in the past. That figure has declined since its 2001 peak of more than 50%.

• More US companies (large and small) reported zero tax liability in 2005 (the most recent year included) than foreign-controlled companies.

• 72% of foreign-controlled companies reported no tax liability some time between 1998 and 2005, while 55% of US-controlled companies did so.

• The biggest tax breaks come from deductions for salary and wages, and from a category called “other” that includes travel expenses, legal fees, and insurance, as well as dividends paid on stock owned by employee stock ownership plans.

The Rise and Fall of Chinese Tax Incentives and Implications for International Tax Debates

Jinyan Li (York University) published in the Florida Tax Review, Forthcoming CLPE Research Paper No. 5/2008, the paper "The Rise and Fall of Chinese Tax Incentives and Implications for International Tax Debates".

Here is theAbstract:

China had no foreign direct investment (FDI) before 1979. Now, it is one of the world's largest recipients of FDI. China has been generous to a fault in granting tax incentives to foreign investors. As of January 1, 2008, however, these FDI-specific incentives are abolished or phased o ut. What explains the rise and fall? Were the tax incentives not effective in attracting FDI and promoting China's economic growth? What are the implications of the Chinese experience for international tax debates? This article examines these questions.

SSRN: http://ssrn.com/abstract=1087382

Taxing the 'Not-So-Rich' Rich

Taxing the 'Not-So-Rich' Rich



http://www.businessweek.com/magazine/content/08_24/b4088081624555.htm



Many of America's affluent, squeezed already, worry they will be burdened with higher taxes

by Jane Sasseen



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June 16, 2008



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The Grunskis: He fears his $147,000 salary will be taxed at a higher rate Brad Swonetz/Redux





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By any measure, Dr. Howard Hammer and his wife, Hope, have a comfortable life. Hammer, 40, has built a thriving practice as an ear, nose, and throat specialist, while Hope, 39, has switched to part-time work as a real estate lawyer after years at a big firm in order to spend more time with Arielle, 7, and Matthew, 9. Home is a four-bedroom house in the Philadelphia suburbs, and between them, they bring in over $300,000 a year. "We can't complain," he says. "We're certainly not struggling."



But are they wealthy? That's far more debatable. Hammer, who feels the same pressures squeezing Americans up and down the income ladder, says he's anything but. Ever-rising prices for gas, health insurance, and other expenses are hitting hard, as are the $3,000-a-month mortgage and the $2,000 he still pays monthly to whittle down his $160,000 medical school debt. A six-year residency gave Hammer a delayed start saving for retirement, so he worries if he's stashing enough in his 401(k). By the time the couple contributes to the children's college fund, there's little extra at the end of the month.



The Hammers and their like may have more to worry about come January. As he criss-crossed the U.S. battling Senator Hillary Clinton (D-N.Y.) for the Democratic Party Presidential nomination, the presumptive winner, Senator Barack Obama (D-Ill.), talked up plans to cut taxes for the middle class. To pay for the expansive new programs he's offered voters, Obama has pledged to boost taxes only on the wealthy. Recently in Indianapolis, Obama promised to save the average family $2,500 in annual health-care premiums. "That's real relief, but we can only pay for this if we finally roll back the Bush tax cuts for the wealthiest 2% of Americans, who don't need them and weren't even asking for them," he said.



Such rhetoric leaves Hammer steaming. "I don't mind paying my fair share, but people act like they're just talking about Bill Gates," he says. "We would definitely feel a hit if our taxes went up." Although a year ago he would not have considered voting Republican in November, now he's not so sure: "Do you vote your heart, or do you vote your wallet?"



Just what does it mean to be wealthy these days? When it comes to raising taxes, it's far from clear exactly where the line will be drawn. While Obama has said only couples making more than $250,000 will pay more, many analysts believe that number could change. "Rates at the top end are going up, but what does that mean for those making $200,000, $225,000, or $250,000?" asks Anne Mathias, the head of Washington policy research for the Stanford Group, an investment advisory firm.



Like Hammer, many facing higher taxes don't consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.



But many also live in high-cost areas with expenses to match—and feel burned by talk of "taxing the rich" that doesn't recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. "There is a huge difference between what politicians define as rich and what many Americans would call middle class," says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.



The soaring deficit, along with the fact that the Bush tax cuts expire at the end of 2010, provide much of the impetus for the coming fight over high-end taxes. If Washington doesn't act, tax rates on income, capital gains, dividends, and other areas will return to the higher rates in effect before the cuts were enacted in 2001 and 2003. Senator John McCain (R-Ariz.), the presumptive GOP Presidential nominee, has said he would extend the cuts for everyone, while Obama says he'll maintain them for all but the wealthiest. If Obama wins, some taxes could go up as soon as 2009.

Taxing the 'Not-So-Rich' Rich

Taxing the 'Not-So-Rich' Rich

by Jane Sasseen, from Business Week (http://www.businessweek.com/magazine/content/08_24/b4088081624555.htm)

Many of America's affluent, squeezed already, worry they will be burdened with higher taxes

By any measure, Dr. Howard Hammer and his wife, Hope, have a comfortable life. Hammer, 40, has built a thriving practice as an ear, nose, and throat specialist, while Hope, 39, has switched to part-time work as a real estate lawyer after years at a big firm in order to spend more time with Arielle, 7, and Matthew, 9. Home is a four-bedroom house in the Philadelphia suburbs, and between them, they bring in over $300,000 a year. "We can't complain," he says. "We're certainly not struggling."

But are they wealthy? That's far more debatable. Hammer, who feels the same pressures squeezing Americans up and down the income ladder, says he's anything but. Ever-rising prices for gas, health insurance, and other expenses are hitting hard, as are the $3,000-a-month mortgage and the $2,000 he still pays monthly to whittle down his $160,000 medical school debt. A six-year residency gave Hammer a delayed start saving for retirement, so he worries if he's stashing enough in his 401(k). By the time the couple contributes to the children's college fund, there's little extra at the end of the month.

The Hammers and their like may have more to worry about come January. As he criss-crossed the U.S. battling Senator Hillary Clinton (D-N.Y.) for the Democratic Party Presidential nomination, the presumptive winner, Senator Barack Obama (D-Ill.), talked up plans to cut taxes for the middle class. To pay for the expansive new programs he's offered voters, Obama has pledged to boost taxes only on the wealthy. Recently in Indianapolis, Obama promised to save the average family $2,500 in annual health-care premiums. "That's real relief, but we can only pay for this if we finally roll back the Bush tax cuts for the wealthiest 2% of Americans, who don't need them and weren't even asking for them," he said.

Such rhetoric leaves Hammer steaming. "I don't mind paying my fair share, but people act like they're just talking about Bill Gates," he says. "We would definitely feel a hit if our taxes went up." Although a year ago he would not have considered voting Republican in November, now he's not so sure: "Do you vote your heart, or do you vote your wallet?"

Just what does it mean to be wealthy these days? When it comes to raising taxes, it's far from clear exactly where the line will be drawn. While Obama has said only couples making more than $250,000 will pay more, many analysts believe that number could change. "Rates at the top end are going up, but what does that mean for those making $200,000, $225,000, or $250,000?" asks Anne Mathias, the head of Washington policy research for the Stanford Group, an investment advisory firm.

Like Hammer, many facing higher taxes don't consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.

But many also live in high-cost areas with expenses to match—and feel burned by talk of "taxing the rich" that doesn't recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. "There is a huge difference between what politicians define as rich and what many Americans would call middle class," says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.

The soaring deficit, along with the fact that the Bush tax cuts expire at the end of 2010, provide much of the impetus for the coming fight over high-end taxes. If Washington doesn't act, tax rates on income, capital gains, dividends, and other areas will return to the higher rates in effect before the cuts were enacted in 2001 and 2003. Senator John McCain (R-Ariz.), the presumptive GOP Presidential nominee, has said he would extend the cuts for everyone, while Obama says he'll maintain them for all but the wealthiest. If Obama wins, some taxes could go up as soon as 2009.

By "wealthiest" Obama means married couples earning more than $250,000; for a single taxpayer, the equivalent income would be roughly $200,000. Today, taxpayers making that much fall into the top two federal income tax brackets, paying rates of 33% or 35%. Their rates would revert to the 36% and 39.6% top rates used in 2000. The same households would also see a bump up in the rates they pay on capital gains and dividends, both of which now stand at 15%.

Austan Goolsbee, Obama's top economic advisor, points out that only a relatively small number of high-end earners would be tapped, while the majority of Americans would see their taxes fall or remain the same. "Income growth in that group has been extremely rapid, while it's been stagnant for everyone else," says Goolsbee. "It's hard to argue they face the same struggle to get by."

Yet for many close to that $250,000 cusp, what sounds like a lot of money often doesn't feel like it. "Depending on where you live, $250,000 is middle class, at best," says Michael Ginn, 49, a longtime media executive who lives with his wife, Dafne, 34, and 3-year-old daughter, Erin, in the New York suburb of Pelham; their second daughter is due in July. Though his income has topped $300,000 for more than a decade, Ginn says he's never felt so stretched. With the cost of everything from health insurance to upkeep on his 90-year-old home surging, even as he takes on new expenses for his growing family, Ginn can't stash away anything near what he once did for retirement, let alone save for college. "We're just dog paddling now," he says. He argues that if Washington is going to raise high-end taxes, then the local cost of living should be taken into account.

STILL NOT ENOUGH
Yet limiting tax hikes to the $250,000-and-up set probably won't pump enough money into the U.S. Treasury to pay for new spending programs and deal with the ballooning deficit, even when combined with proposed corporate tax increases. Analyst Daniel Clifton of Strategas Research Partners has tallied some $350 billion in promised new annual spending by Obama. He has outlined plans to pay for new programs without increasing the deficit, but budget analysts are skeptical. "Targeting just a fraction of the population [for an increase] is not going to generate the revenues they need," says Roberton Williams, an ex-Congressional Budget Office staffer now with the independent Tax Policy Center. Adds Clifton: "They are going to have to find a way to get more from the middle class."

That prospect has many well below the $250,000 threshold convinced that they, too, could be coughing up more to Uncle Sam. Ken Grunski, the CEO of international cell phone provider Telestial, lives with his wife and two young children in San Diego—a pricey area where, he points out, plumbers make upwards of $90,000. Grunski brings home $147,000 a year; enough to live in a modest three-bedroom house, but no more. Every time he hears politicians talk about targeting high-end earners, he feels like he's right in their sights. "I'm resigned to having my taxes go up, but we're not living extravagantly here," he says.

Obama could lose support if too many people who see themselves as stretched members of the middle class get tagged as wealthy. "If they draw the line in the wrong place, they risk alienating an important constituency," says Mathias. That's a prospect McCain, who has lost no opportunity to remind voters that he would cut taxes while the Democrats would raise them, would be only too happy to exploit. Yet even if McCain is elected, analysts say taxes at the top end will probably rise. With the Democrats likely to wield a stronger grip on Congress after the election, there's little chance they'd agree to a renewal of all the Bush cuts. "People think the President can just extend the cuts, but he can't," says Stanford Group's Mathias. All of which explains why Mathias has been warning her clients that the next couple of years "will be a very bad time to be rich." Whatever, precisely, that means.

Intercompany Loans and Profit Shifting

Intercompany Loans and Profit Shifting – Evidence from Company-Level Data
Thiess Buettner (Ifo Institute for Economic Research and CESifo) and Georg Wamser (Ifo Institute for Economic Research) published this paper on March 2007 at CESifo Working Paper Series No. 1959.

Here is the Abstract:

This paper is concerned with tax-planning strategies of multinational corporations. A theoretical analysis discusses the choice of the capital structure in a setting where intercompany loans can be used to shift profits to low-tax countries. Empirical evidence is provided using micro-level panel data of virtually all German multinationals made available by the Bundesbank. This comprehensive dataset allows us to exploit differences in taxing conditions of almost eighty countries during a period of nine years.

The empirical results confirm a robust impact of tax-rate differences within the multinational group on the use of intercompany loans, supporting the profit-shifting hypothesis. However, the implied tax-revenue effects are rather small, suggesting that costs related to adjusting the capital structure for profit-shifting purposes are substantial.

Available at SSRN: http://ssrn.com/abstract=981120

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment
Qing Hong (University of Toronto) and Michael Smart (University of Toronto) published this paper for the CESifo (Center for Economic Studies and Ifo Institute for Economic Research)CESifo Working Paper Series No. 1942

Here is the Abstract:

The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous.

Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a "race to the bottom" in corporate tax rates may be misplaced.

Available at SSRN: http://ssrn.com/abstract=976577

E-Commerce and International Tax Planning

Carla Carnaghan ( University of Lethbridge) and Kenneth J. Klassen (University of Georgia) posted the paper "E-Commerce and International Tax Planning"

Here is the Abstract:

This paper investigates whether the increased flexibility afforded by e-commerce has allowed firms to increase their tax planning activities. We specifically address whether multinational firms that make greater use of e-commerce have greater sensitivity to tax incentives relative to firms making less use of e-commerce. Using proxies for e-commerce activity, we find that the relation between exports and tax incentives is increasing in the e-commerce measures.

Alternative tests of foreign tax expense and country-level trade activity corroborate the main test. This research is an important first step in understanding the larger impact of e-commerce on international tax planning behavior.

Available at SSRN: http://ssrn.com/abstract=557124 or DOI: 10.2139/ssrn.557124

International Tax Planning in the Age of Ict

Christoph Spengel (Centre for European Economic Research) and Anne Schäfer (Centre for European Economic Research) published the ZEW - Centre for European Economic Research Discussion Paper No. 04-027

entitled "International Tax Planning in the Age of Ict"

Abstract: The increased use of information and communication technologies (ICT) leads to new ways of doing business internationally. Nowadays, firm-specific intangible assets as well as services often constitute the most important factors for the creation of value. Besides, geographic distances tend to be less relevant. The main objective of international tax planning consists of minimising the effective tax rate of the whole company or group. In this paper, it is examined for several instruments of international tax planning whether new chances of minimising the effective tax rate emerge with the use of ICT and to what extent new risks occur.

The analysis comprises the (re)location of a company's residence, the (re)allocation of functions and risks, the implementation of a transfer pricing system, the choice of the form and location of investments abroad as well as hybrid forms of co-operation. For each instrument, both current and non-current tax issues are considered. We conclude that, due to ICT, it is easier to make use of the international tax differential by choosing the optimal location and form of investment and by allocating functions and risks. Thus, companies can pay more attention to the tax-optimal choice between international locations and the importance of this instrument to reduce the effective tax rate is further strengthened by the use of ICT.

Available at SSRN: http://ssrn.com/abstract=552061 or DOI: 10.2139/ssrn.552061