AVOIDING TAX AVOIDANCE
TWS Policy Paper
Tom Pocock
BACKGROUND: CURRENT INFORMATION ON TAX AVOIDANCE MEASURES
Basic Numbers
• The estimated loss due to non-domiciling to the U.K. is around £4bn per annum – including all forms of tax avoidance, this figure rises to as much as £18.4bn1
• “About £8.2 trillion of private wealth currently sits in havens, undeclared by its owners in their country of residence. That represents £180bn in lost tax - more than double the world’s global aid budget. Tax avoidance costs the UK treasury £25bn a year.”2
• Richard Murphy of Tax Research UK identifies the £18 floor on VAT qualification under Low Value Consignment Relief as a significant drain on tax revenue, saying that “The Treasury says this cost the UK at least £80 million a year”. Stephen Timms MP (Financial Secretary, HM Treasury) informed the House of Commons on 27th January 2009 that this is the result of an EC directive, that, upon introduction in 1983, saw £18 equivalent to €22, then the threshold. This has now been reduced to €10.
Tax Evasion For Beginners
Non-dom status: Taxpayers are registered as being ‘domiciled’ in another country. They are deemed to be domiciled in the state in which a person has, or intends to make, their permanent home.
o The United Arab Emirates and British Virgin Islands offer zero tax on income and capital gains, and offer null corporation tax; other offshore centres with low level tax (including zero inheritance tax) include crown dependencies Jersey, Guernsey and the Isle of Man. Other well-known havens are Switzerland and Lichtenstein.
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http://www.taxresearch.org.uk/Blog/2009/03/02/tax-havens-cost-the-uk-at-least-4-billion-a-year-2/
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o Citizenship of the place of domicile (these are subtly different) is often established, where no tax is levied for income or capital gains. This does not preclude citizenship of the United Kingdom.
o An individual who has been non-dom for seven of the past ten years will thereafter pay a levy of £30k to maintain non-dom status (announced in 2008 Budget following Conservative Party’s proposal to the tune of £25k). Transparency, following policy U-turns, ended up being unaffected.
o When 17 of the past 20 years have been spent as a non-dom in the UK, HM Revenue & Customs will deem UK domicility thereafter.
o Domiciling is not automatic, and should tax disputes be brought before a court, the accused would have to prove intended domicility with provable actions.
Offshore trusts: In many low-tax locations, trust law is a highly developed area.
Crown Dependencies Jersey, Guernsey and the Isle of Man are examples. Trusts separate the ‘beneficiary’ from ownership by placing assets in the hands of trustees, who are charged with duty of care. They are often paid professionals. The ‘pros’ and ‘cons’ from the avoider’s point of view are as follows:
o Advantages: Gives the beneficiary of the trust complete freedom – there is no compulsion to prove domicility, residency or citizenship.
o Disadvantages: Often high-cost – trustees will often consist of an accountancy or trust or law firm, and experienced financial ‘experts’. Set-up is often expensive, and dismantling a trust is often a lengthy and expensive process. It removes a significant amount of financial freedom from the beneficiary.
Offshore companies: So-called shelf companies can be created to ring-fence assets, paying investment dividends and bank interest (when applicable!) into the company, so that the directors/shareholders (often the same people) only pay tax on the nominal fees
that they are required by law to be paid for their ‘services’ – crucially, not on the corporate profit. These are of use in low-tax jurisdictions. Limited companies can also be used as the general partner of a limited partnership to limit a partnership’s liability. The Jersey authorities claim that ‘Jersey has not traditionally allowed the setting up of Shelf companies’3
CURRENT MEASURES AND ATTEMPTED MEASURES AGAINST TAX AVOIDANCE
EU Savings Tax Directive: UK dependencies signed up to this under pressure from the Treasury. It gives the choice between:
1. Information Exchange: Countries report interests and yields paid to the citizens of other Member States to those States' tax authorities, without anonymity.
2. Withholding Tax: The country of domicility taxes citizens of other Member States at a given rate (currently 20%), 25% of which will remain in the country of domicile, and the rest returned to the country of citizenship. Individual disclosure unnecessary. It should be noted that in 2011 this rate will rise to 35%, making non-dom status virtually redundant within the EU, although it will have no effect on company or trust regulation, so the Crown Dependencies will be able to side-step this. Of course, it leaves the United Arab Emirates and other states outside the EU entirely unaffected.
The seven-year rule: Outlined earlier.
In the US: In February 2007, Senators Levin, Coleman and Obama brought the Stop Tax Havens Abuse Bill 2007-2008 before Congress to ‘restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation’. The bill ultimately failed, having called for high levels of transparency for all persons resident in the US. It was defeated due to fears that it might deter banks and investment houses from operating out of the US, in favour of other finance centres, such as the UK.
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PROPOSALS
Proposal 1: Cut the threshold on Low Value Consignment Relief from £18 when the pound has hit a forecast low. In the mean time, levy a tax by way of charge through Royal Mail, only if Royal Mail remains nationalised.
o The long-run proposal would cease operations in the Channel Islands and ensure that purchases, where made, would contribute VAT to the Treasury. Sales may subside as a result, but employees reliant on this would not be UK based. Since the Treasury is losing out on this by such a margin, this is a necessary manoeuvre in the interests of the UK taxpayer.
o Unfortunately, making this cut without risking contravening EC regulation is difficult. The pound has been falling in value against the Euro.
o Cutting the threshold may also result in a significant rise in paperwork for declaration of VAT – both in Jersey and the UK. This risk needs to be assessed.
Proposal 2: Royal Mail should raise charges on all imported goods exempt from VAT under LVCR, by a percentage on the value of the item, to bring it into line with competitive UK prices.
Proposal 3: The Government should investigate possible legal proceedings against offshore companies under the EU law on LVCR stipulating that “exemptions on importation can be granted only on condition that they are not liable to affect the conditions of competition on the home market”4– this currently appears to be breached
by several UK and Jersey companies.
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