Swiss offshore deal rate likely to rise

 

Changes to the controversial tax agreement between the UK and Switzerland mean that Britons with money hidden in Swiss bank accounts may have to pay more tax.

Under the original agreement, Swiss banks would charge a withholding tax of between 19% and 34% on the bank accounts of Britons and transfer the money directly to the Treasury, without revealing the identity of account holders. The tax is due to start in May 2013.

However, the German tax authorities, who have an almost identical agreement with the Swiss government, have recently negotiated a rise in the withholding tax rates to between 21% and 41% for German residents. 

John Cassidy, tax investigation and dispute resolution partner at accountancy firm PKF, said: “I’d be surprised if the UK authorities didn’t increase the withholding tax rates to match the recently renegotiated German levels. The government wants to claw back as much tax as it can from this deal in the current political and economic environment.”

The changes to the Swiss deal are likely to make a tax disclosure facility with Liechtenstein a more financially attractive option for UK taxpayers with money hidden offshore, experts agreed.

The Treasury has not disclosed how much it hopes to raise through the Swiss tax deal but a source familiar with the agreement told AccountingWEB that it could raise more than £5bn a year for the UK government.

Continued...

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Comments

At best...

Trevor Scott | | Permalink

... the deal still amounts to agreeing to shut the door to the safe after agreeing with the bank robbers that they only have a year to escape before the police may possibly catch them; if they were stupid enough to ignore repeated advice not to drive in their own traceable car.

Something often missed by commentators is the increasingly hostile attitude toward big business within the various Cantons, each with their own often significant social problems that citizens know will only be exacerbated by increasing numbers of relocating corporations. Surely it is this “tide” of feeling that is, for the long term, going to make Switzerland an unwelcoming/uncompetitive place to do business or even “asset or tax haven”.  

The Council of Europe has even voted, strongly, against tax havens and will no doubt push for a continuing popularist policy of punishing supposed tax evaders.

The various estimates of tax to be passed over by Swiss banks varies considerably, unsurprisingly the Governments estimates far exceed the calculations of the banks who actually hold factual information.

 

 

 

 

 

move away from Income to land value taxes

androo235 | | Permalink

Partially closing the Swiss bolt hole will just encourage some to move their money elsewhere as you suggest  (this assumes of course that the Swiss Banks are honest brokers - though we will not have "verifiability").

I sympathise with Richard Murphy's aims and criticisms of the ineffectiveness of the UK tax system (also read Shaxon's Treasure Islands if you haven't already). However Richard's proposed solution of ever tighter control, complex, or at least hard to obtain, international agreements, and ever bigger collection agencies is I think one of diminishing returns and a somewhat sad and bureaucratic vision of how society should operate. The harder you try to tax mobile individuals and ephemeral companies the harder they will try to disguise or hide their income. Moreover the deadweight waste of talented people (tax bureaucracy, lawyers, accountants etc ) engaged in the charade is a not insignificant waste in itself.

I think the solution is Land Value Taxation - cannot be avoided, cannot be evaded. Richard says he supports LVT but seems lukewarm to it to say the least. LVT will capture much, perhaps all, of the excess profits in the economy (land rents) which play a role in the accumulation of most fortunes and in the elevated remunerations in Financial Services and elsewhere.

There are single-taxers, that is those who believe that LVT, as originally proposed by the American, Henry George, should be the one and only tax and that all others, yes that's right all others, VAT, NI, Income Tax, Inheritance Tax, Rates, business rates, corporation tax, Stamp Duty, the lot, will be found to be unnecessary - indeed counter productive so worse than unnecessary.

Don't think LVT could raise enough? I think the Telegraph recently reported on a valuation of residential property in the UK at over £5trn (it was actually trying to say that current levels of private debt are OK, another but a related subject, at less than 40% of this). Commercial property values will likely double this. So we have £10trn of capital value, but LVT (some argue the terminology is wrong it's not really a tax but a charge) is on the annual rental value. Well lets say 1/20th of the capital value that gets us £500bn. That's ball park the current tax take from a single tax that cannot be avoided or evaded.

My above, admittedly back of envelope calculations, indicate why purist Georgist single taxers can reject all other taxes. And, maybe they are right. If LVT can raise sufficient revenue to run public services (and have all sorts of positive micro-economic effects which will help to shrink the public sector while maintaining employment and prosperity) why have another tax, for revenue raising purposes, when one isn't needed?

Like Richard I don't think that LVT should be the "single tax". Certainly there should be sin taxes (alcohol, tobacco,  fats, sugar....) and nudge taxes (carbon, pollutants generally etc) to discourage whatever society deems should be so treated. I also think it likely, and probably desirable, that income taxes be retained on very high incomes at perhaps a flat rate. However I believe, I think unlike Richard, that LVT should be the main source of public revenue and not a bit part player.

landvaluetax.org.uk (Henry George - Progress and Poverty)

I also like positivemoney.org.uk and Steve Keen's Debunking Economics.

 

frustratedwithhmrc's picture

The problem that I have with LVT

frustratedwithhmrc | | Permalink

Although I agree that LVT would be easier to deal with as it taxes the one thing which is immoveable, it also seems to me that it places a deadweight cost on commercial and industrial operations which require identifiable and immoveable properties, but those who trade in the UK from outside would escape these costs.

Equally, I presume LVT would also be chargeable upon domestic properties at similar rates, so once again highly mobile professionals would be able to come in, temporarily rent some dump in the east end of London, fulfil a very profitable financial services contract with one of the banks and then leave the UK to their tax-free home in Monaco, BVI, etc. and essentially pay very little of what was actually earned in tax.

Another perspective would be, what about those who come to the UK driving in their own motor homes, staying only for the maximum 28-days in campsites around London, working in the city and then when they've had enough taking their earnings and returning to France, Spain, Italy, etc. Accepted, these would again be paying some portion of LVT applicable to caravan sites, but this would have to be relatively little, otherwise caravan sites would become extinct.

It's all very interesting, but it introduces its own loopholes and all of a sudden it becomes the decent and honourable that pay the burden and the dodgers that get the benefit without paying for it.

Until someone comes up with a form of LVT that deals with the 'free rider' problem I remain unconvinced.

It is subtler than you give it credit for....

androo235 | | Permalink

I shall return to your point regarding companies in my next post this one is with regards to the points you make about individual workers.

Well, we have to start from the premise, which Georgism does, that the produce of your labour (obvioulsy in the widest sense to include all modern occupations) belongs to the labourer. Hence one could argue, and some do, that any tax on earned income is in effect a form of theft (I know that's an extreme view but it's a logical one).

Now that gets us into the argument as to whether highly paid financial sector workers really "earn" their incomes or whether they are just a result of the the way the system currently is. Arguably much of the high income in that sector is due to the the financial sector existing on the land rent that it sucks up. Henry Law put it well (as he often does - it's why I like the site he helps to run - landvaluetax.org).

" ...the banking crisis, the underlying problem is that the banking system has become an engine for sucking up the economic rent of land, through the issuing of loans secured on land titles. In reality, this is much the same as a sale-and-leaseback arrangement, USING THE BANKING SYSTEMS ABILITY TO CREATE MONEY. It is an abuse of credit, but the banks could not do it if, as we propose, the economic rent of land were collected and used for public revenue. That the banking system is apparently contributing so much to Britain's economy merely shows how successful it is at rent collection, and incidentally, making the point for us, that land matters and that the rent of land is potentially a great source of public revenue."

So. LVT and monetary reform should see the financial sector shrink in importance (my capitals above just to emphasise the financial sectors dual source of privelege and subsidy from the rest of society, I also favour - positivemoney.org.uk - maybe Henry Law does too given this line of his).

However, even if the excesses of today are curbed - I suppose I must still respond to your point that some "foreign" workers may come here, earn large salaries (in whatever occupation) and then choose to live cheaply. Well, if their salaries are large and they work at a commercial premises then their presence there and the economic activity being undertaken will contribute towards the land rental value at that site. If that land is in a city centre, or other desirable and sought after location, then the annual rental value of the land will likely be high - this will go to public revenue rather than into private hands as it does now.

Now the extent to which high earning individuals then choose to live frugally or not is really their business. I suspect that only a minority will choose to live in dingy east-end accomodation, the majority will prefer the shinier newer towers that are now there and other swisher parts of town. Clearly those choosing better accomodation will pay more (directly or indirectly) in LVT. This also goes for the way that person chooses to live. If they live on KFC, Subway and cheap groceries, located typically in downmarket areas then they will, in effect, be minimising their LVT contribution, however, I suspect many will choose a swankier lifestyle.

Persons coming to the UK driving motorhomes. Well, if they are working, essentially the above applies. If they are holidaying here then I can't see that there is an issue (except that their stay at the campsites will generate LVT by adding to or maintaining the rental value of that site).

So, no, I don't see loopholes. I see ways to minimise your LVT contribution by living somewhere cheaply and not ever buying anything in a swankier location where you will pay more for it (ever bought anything around Kensington - a tiny cup cake for £4.00....) and going only to cheap and downmarket shops, pubs, nightclubs, restaurants, cinemas, etc etc etc. You are choosing to live frugally (or poorly - however you wish to look at it). To the unlikely extent that some high earners may choose to do this and then at weekends return with their income to live the high life in, say, Monaco, I don't think that's so different to what happens today (Philip Green springs to mind - however I bet he has, or his wife has, however they have chosen to organise it, a decent UK property portfolio which at present is - as we know - hardly taxed at all).

Finally, I have said that I personally favour the retention of a (perhaps flat) income tax on very high earnings although I add the caveat that if LVT really does produce enough public revenue to run public services and has the positive micro economic and redistributive effects that are argued for it then maybe the single taxers are right, why have another tax? (except sin and nudge taxes....).

 

Henry George - Progress and Poverty.

It really is subtler than you think.....

androo235 | | Permalink

In reply to frustratedwithhmrc's first paragraph, this, "Although I agree that LVT would be easier to deal with as it taxes the one thing which is immoveable, it also seems to me that it places a deadweight cost on commercial and industrial operations which require identifiable and immoveable properties, but those who trade in the UK from outside would escape these costs."

I think a nation unilaterally adopting LVT will find that it brings it advantages analagous to those brought to it by reducing barriers to trade following the insights of Ricardo known as "Comparative Advantage". The UK was among the first to open itself to freer trade and still is among the worlds most open economies and committed proponents of free trade (I nod to those who argue that we have and always have had one sided and unfair trading relationships with developing countries but leaving that aside for the moment). Comparative advantage argued, no, proved, that although it would be better if all countries adopted free trade policies any one country will still be better off by unilaterally adopting free trade even if no-one else does.

Similarly it may be the case that under a system of LVT (no exemptions or exceptions) that some UK sectors may be placed at a disadvantage to overseas competitors that are subsidised in some way. However, overall UK society will gain. Under LVT companies would be paying no payroll taxes, there will be no VAT (of course that has to be squared with the EU, but is a detail) and no corporation tax. So whereas now a manufacturer located in say Teeside, is faced with the same taxation on their activities as a London financial services firm (payroll taxes, VAT, taxes on profits) under LVT, other things being equal, activities at marginal locations will become more not less viable. Overall then I don't think that UK producers will be at any greater cost disadvantage to foreign producers than they are now and, at least in manufacturing, would likely be at an advantage.

But, what about the importer. There are two scenarios,

1.      A UK importer buys from non-Uk producer to sell in UK.

Whatever the tax regime and cost structure is in the source country it will be reflected in the price that the UK importer pays. Presumably the importer will only import a product if it can be sold competitively against the UK produced competition. Now, the importer will need, a distribution operation, that will require land, the product will also need to be retailed that will require land. In summary then to the extent that the product is handled, publicised, marketed, advertised and retailed in the UK so it will pass through a UK value chain that will generate UK land rental value as it goes. That land rental value will accrue in the UK and so the importer will, directly or indirectly find that they are paying LVT in direct proportion to the amount of UK land resource the product generates/consumes as it passes through the UK portion of the value chain on its way to the final consumer. The foreign producer selling to a UK importer will not themselves pay any LVT - and this is no different to today as a foreign producer selling to a UK importer would not pay any UK taxes now.

2.      A Non-UK producer sets up a marketing operation in UK and sells in the UK market itself (either wholesale or retail).

Well, essentially the above applies except that the foreign producer has now setup a UK sales operation and will find that it pays UK LVT in proportion to the extent that the UK value chain forms part of the final value to the UK consumer and the extent to which that draws on the UK land resource. Notice here we don't care about transfer pricing anymore too - it really doesn't matter.

I hope a couple of examples will illustrate.

A.     A high bulk relatively low value item. Lets say wood. Wood will be bought, probably at a globally determined price. It arrives in the UK and is held on low value land probably at dockside. It is likely then delivered direct to the end user - alternatively it may find itself going via a UK builders merchant's distribution network prior to reaching the end user. Either way the land use in the UK will generally be low value as is the value chain it passes through. The product requires little in the way of advertising, promotion, after sales, marketing etc etc. Pretty much the same is true of commercial building wood grown in the UK.

B.     Bespoke and individual items of high value. Lets say high fashion. A similar analysis stands though the value chain is very different. Lets compare two models, one operation where everything except the material and manufacture is done in the UK (i.e. design, and all management, marketing and branding etc) and another operation where the brand is foreign - so almost everything is done abroad except for final marketing, advertising and retailing. The UK value chains of these two operations will generate much more UK LVT (relative to the absolute amount of land used) than the sale of wood (imported or not).

Comparing them, even if they have identical shops next to one-another in Bond Street and take out ads in the same magazines/websites/media etc and have the same target market. Other things being equal the all UK except manufacture operation will generate more UK LVT than the foreign brand as it's strategic management and admin are in the UK too and will be somewhere. It seems to me that this is as it should be.

Lastly I'd like to expand on the point I made about transfer prices. Let's say the non-UK company in the fashion example decides on a wheeze, actually let’s look at both wheezes,

1.      It sets a high transfer price (the price it sells its products to the UK subsidiary at) so as to make the profits appear in the foreign country and so it makes a loss in the UK. Well, we don't care, as long as it needs to maintain a Bond Street address in order to sell it's high end goods then we will keep collecting the LVT. The amount of LVT we can collect is defined by the desirability to high end retailers of the Bond Street retail space. Moreover, we don't really need to know anything about their internal financial management and we really don't care that their UK subsidiary makes a loss provided the foreign parent keeps stumping up the LVT - if they don't their child will be evicted and lose the space to another retailer who will pay the LVT (it also doesn't really matter whether they own the premises or pay a landlord who in turn must pay the LVT).

2.      What if it sets a low transfer price so as to make high profits appear in the UK. Again we don't care (though the home country of the retailer might - unless they operate LVT too of course) as long as they keep paying their LVT.

All in all then foreign entities will pay UK tax, LVT, on their UK activities, directly or indirectly – it will be in their value chain, just as UK entities do. If a foreign producer has a genuine cost or value advantage – then they have it now and still will have under LVT, if they are subsidised (implicitly or explicitly), then that can be the case now too.

In sum then LVT will not place UK businesses at any disadvantage whatever to non-UK businesses.