Paradise Papers: Tax Havens Exposed

[takno]

Just to clarify in my mind, does that mean when a payment is sent from the UK to Mr Megarich's account in Taxhavenland a part of it has to be deducted and remitted to HMRC towards his UK tax liability? Presumably not to do so would be tax evasion and therefore illegal.

Not at all. Mr megarich isn't resident in the UK for tax purposes, so the company pays him in exactly the same way they pay all the residents of taxhavenlandia. That means nothing goes to the UK, and all that gets paid is the personal tax rate (two thirds of **** all) in taxhavenlandia.

 

[Bromley boy]

Just to clarify in my mind, does that mean when a payment is sent from the UK to Mr Megarich's account in Taxhavenland a part of it has to be deducted and remitted to HMRC towards his UK tax liability? Presumably not to do so would be tax evasion and therefore illegal.

Yes, precisely. Withholding taxes are levied at source. If a payment flows from country A to country B, country A withholds the tax. It’s exactly the same principle as PAYE, with the employer deducting income at source.

The smoke and mirrors of tax avoidance begins where the same payment is treated differently by the two countries. For instance, consider a payment from country A to country B.

Country A may consider it as a capital payment, not subject to withholding tax. Country B may charactsrise the same payment as an income receipt entitled to a credit for deemed withholding tax by country A. Hence a credit may be paid by country B’s tax authority in respect of withholding tax deemed to have been withheld by country A, irrespective of whether or not it actually has been.

It’s not the easiest concept to wrap your brain around and, trust me, it only gets harder from there!

I used to work in the tax profession, and I miss certain aspects of it, the intellectual challenge being one of them! I’ll also admit it’s not that socially useful - however it’s also very, very misunderstood, as this thread shows!

 

[Bromley boy]

Not at all. Mr megarich isn't resident in the UK for tax purposes, so the company pays him in exactly the same way they pay all the residents of taxhavenlandia. That means nothing goes to the UK, and all that gets paid is the personal tax rate (two thirds of **** all) in taxhavenlandia.

Well, no. Actually, fundamentally wrong.

We don’t know where mr megarich is tax resident. The principle of withholding taxes is what we are discussing here.

I’m guessing you’re yet another person commenting on these matters who has no understanding of how they actually work!

Am I right?

 

[jon0844]

I love the phrase 'fairer society'. Whoever came up with it is a genius.

It can't really be criticised but means nothing in particular and can be interpreted to suit the current message. It can even mean different things to different people at the same time.

It means people earning more than you can be targeted, while whatever you do is fine. That might be evading your fare because 'they can afford it', making false or exaggerated insurance claims because 'you pay all that money in and deserve to get some back', accept cash in hand etc.

All that's fine because it's on a small scale compared to those richer than you. Condor7 makes that point well further back.

I am all for changing the law, but we are now at a point where people are very selective about what's right and wrong, and many feel that breaking the law is somehow getting even or sticking it to the man - hence it being great to talk of the 1% and put everyone in some box that is equate to evil (so being able to have less of a guilty conscience). That's wrong in itself, although I will accept that some people may do things because they're genuinely poor enough to 'need' to, but at the same time there are plenty of people taking the moral high ground while doing bad things themselves.

 

[Bromley boy]

Just to clarify in my mind, does that mean when a payment is sent from the UK to Mr Megarich's account in Taxhavenland a part of it has to be deducted and remitted to HMRC towards his UK tax liability? Presumably not to do so would be tax evasion and therefore illegal.

And another point I omitted from my previous reply.

In respect of withholding tax, the payer, not the payee, would be the one liable for any “tax evasion” or failure to pay the proper amount to the tax authority. This is an obvious compliance/enforcement point.

This is why entities involved in making overseas payments ask their advisors to check for any liability for withholding payments and treasury consent (or equivalent) before anything else.

In respect of payments out of the U.K., the Eurobond regime (an EU withholding tax regime placed on payments to extra EU recipients), and restrictions around moving large amounts of cash offshore (formally known as the “treasury rules”, now replaced by a post transaction reporting regime) are also carefully considered in relation to significant overseas payments.

 

[Dai Corner]

I used to work in the tax profession, and I miss certain aspects of it, the intellectual challenge being one of them! I’ll also admit it’s not that socially useful - however it’s also very, very misunderstood, as this thread shows!

Thanks for giving us the benefit of your knowledge and having the patience to explain to those who seem to post the first thing that comes into their heads instead of doing any research. As when railway professionals post the facts in the main part of the forum I find your posts refreshing.

 

[Xenophon PCDGS]

....taxhavenlandia.

This title sounds as if Sibelius had composed this.

 

[NSEFAN]

This title sounds as if Sibelius had composed this.

It's actually just "Finlandia", except it's played with the instruments of bars of gold, $100 dollar bills and ambiguities between national tax laws.

 

[Tetchytyke]

In the 1970s the top 1% owned about 6% of Britain's GDP. By 2013, after the credit crunch, this has risen to 14% of GDP. The amount of wealth that has moved into their hands with "austerity" is quite staggering. Similar trends have been shown with senior management pay since the mid-80s.

Tax is a small part of this wider issue around inequality, around the fact that most people have nothing. Personal debt levels are another indicator of just how bad things are. The sad thing is that the middle classes who really do suffer from this the most don't realise yet because BMW will give them a HP agreement on that new 3-series and Barclaycard will paper over the other cracks. When that tap gets turned off...

I am fed up of seeing "employers pay tax and NI on their staff" being used as justification. They don't, apart from a relatively small employer NI contribution. The employee pays the NI and the income tax.

As we saw with Philip Green, the current tax regime does not reward "entrepreneurial spirit", it rewards asset-stripping and pension theft, providing you're rich enough to be able to pretend you live somewhere else. Small businesses get shafted. Medium businesses get shafted. And, in the long term, that is unsustainable. An economy reliant on Starbucks playing nicely, and there's MasterCard for everything else, is going to collapse. They got away with it in 2007, and moved money from the middle to the rich through quantitative easing, but hoping to repeat the same trick again would be foolish.

I've no problem with people making a lot of money through hard work, talent, or even luck.

What I do have an issue with is people taking the ****, scrounging off the back of our taxes and then avoiding paying a penny back into the society they live in. They won't leave because London has too much for them; that's why they never left. So they can contribute towards the society they live in. Properly. "Pragmatism" in this case is, really, just a euphemism for letting them take the ****.

 

[Tetchytyke]

The point that’s being made is that the profits of listed companies, maximised through tax efficient planning, flow back to institutional investors such as pension funds and insurance companies.

Except they don't, the fallacy is that these profits are paying my pension. They're not. There's a reason why many big pension funds are in massive deficits and why the pension protection fund in the UK has to pay out so much every year. I remember Equitable Life.

I’m afraid the fact you apparently don’t appreciate this once again belies your own, very poor, understanding of how the financial system works.

Once again, you seem to confuse "disagreeing" with "misunderstanding".

It's interesting how quickly "having a different opinion" turns into what Dai Corner charmingly refers to "saying the first thing that comes into your mind". As though us proles have no clue about what we speak.

I am well aware of how the financial industry tries to justify its own moral bankruptcy. However I think most of their justifications are, to use a technical term, bollocks.

Your insights from working in that sector are interesting and valuable. But please don't assume cluelessness when people disagree with the analysis. And certainly don't assume socialism...

 

[Dai Corner]

Except they don't, the fallacy is that these profits are paying my pension. They're not. There's a reason why many big pension funds are in massive deficits and why the pension protection fund in the UK has to pay out so much every year. I remember Equitable Life.

Where do you think the money to pay your pension comes from if not from the investments made on your behalf?

Do you understand the difference between a defined benefit and a defined contribution pension scheme, which one can be in deficit and why? Which type are you a member of?

Once again, you seem to confuse "disagreeing" with "misunderstanding".

It's interesting how quickly "having a different opinion" turns into what Dai Corner charmingly refers to "saying the first thing that comes into your mind". As though us proles have no clue about what we speak.

I am well aware of how the financial industry tries to justify its own moral bankruptcy. However I think most of their justifications are, to use a technical term, bollocks.

Your insights from working in that sector are interesting and valuable. But please don't assume cluelessness when people disagree with the analysis. And certainly don't assume socialism...

I give more weight to Bromley's posts as he states his credentials as a former tax professional and gives his sources. He gives facts rather than opinions.

I think you said you helped people with debt problems. That obviously requires knowledge of personal finances, loans, the benefits system and so on but it's a world away from what we're discussing here.

I worked in the life assurance / pensions industry some thirty years ago. I'm obviously not completely up to date but understand the underlying principles.. I've helped friends and relatives address the same sort of problems your clients have.

 

[takno]

I give more weight to Bromley's posts as he states his credentials as a former tax professional and gives his sources. He gives facts rather than opinions.

He certainly stated his credentials. I've never known a tax professional worth their salt who claimed to state facts rather than opinions.

What I can't understand is why he moved straight onto withholding tax and paying UK tax-residents abroad when almost all of the previous conversation revolved around people who aren't UK-resident for tax purposes. I have no specific objection to the accuracy of what he said, it was just essentially irrelevant. You can take his highly partial answer to a different question as more valid than my statement if you want, that's entirely up to you, but it doesn't make you right.

 

[Dai Corner]

He certainly stated his credentials. I've never known a tax professional worth their salt who claimed to state facts rather than opinions.

What I can't understand is why he moved straight onto withholding tax and paying UK tax-residents abroad when almost all of the previous conversation revolved around people who aren't UK-resident for tax purposes. I have no specific objection to the accuracy of what he said, it was just essentially irrelevant. You can take his highly partial answer to a different question as more valid than my statement if you want, that's entirely up to you, but it doesn't make you right.

I wasn't referring to your post takno, but I now understand a little more about witholding taxes. Basically, if someone is resident in the UK for tax purposes any money sent abroad for him has witholding taxes deducted. Any money sent to a non-resident is taxed in the country he is resident in instead. Yes?

 

[Tetchytyke]

Where do you think the money to pay your pension comes from if not from the investments made on your behalf?

Some of the money comes from share value, some from interest, some from contributions paid into the scheme by other working age people. But mostly, as with any investment, it comes from the money I pay into the scheme from my wage.

The profitability of a company may, of course, affect the share price. But often it doesn't. Some of the companies with the highest share prices, and the biggest annual increases in value, haven't made a profit since they were created.

The link between my pension value and the tax "efficiency" of a company is tangential at best.

Do you understand the difference between a defined benefit and a defined contribution pension scheme, which one can be in deficit and why? Which type are you a member of?

I do, and I have been (and am) a member of both types.

Deficits come in two flavours. The deficits where a pension supplier can't pay what they promised. And the deficits where you don't get back what you paid in, or what was expected, because of poor investment choices. Equitable Life being the former, endowments being the latter.

In terms of technical knowledge I bow to people who do the job, or have done recently. I don't dispute their technical ability. But that doesn't translate into analysis of the morality and economic effects of how it works. It's a rare person who admits their job is responsible for, or facilitating, some bad things happening.

 

[Bromley boy]

I wasn't referring to your post takno, but I now understand a little more about witholding taxes. Basically, if someone is resident in the UK for tax purposes any money sent abroad for him has witholding taxes deducted. Any money sent to a non-resident is taxed in the country he is resident in instead. Yes?

It’s not really to do with tax residency. Withholding tax looks more at where the payment is going to, rather than who is receiving it.

It is levied on taxable payments between jurisdictions which do not have double tax arrangements in place. It is levied on the payer than the payee (it is essentially a payment in advance, of the tax arising).

A UK resident tax payer who had somehow received a payment subject to U.K. withholding tax would then submit a tax return claiming credit for it so that they weren't taxed twice. It’s hard to imagine how that scenario would arise.

Withholding tax is really an anti avoidance mechanism intended to target payments overseas to non residents who may otherwise simply never pay the tax arising, with no means of enforcement against them. If they duly submit a tax return they will receive a credit for tax paid in advance.

 

[Dai Corner]

Deficits come in two flavours. The deficits where a pension supplier can't pay what they promised. And the deficits where you don't get back what you paid in, or what was expected, be

More or less. In a defined benefit pension scheme, a member's pension is calculated (defined) as a percentage of his salary - typically that in the last year of employment or an average over his entire length of service. He may pay a fixed percentage of his salary (or perhaps nothing at all) and the employer pays the rest. All the money goes into one big pot from which the pensions are paid. The employer takes the investment risk.

Periodically a valuation is carried out by the scheme's actuary to see if what is in the pot plus what is being paid in will be sufficient to meet the promised benefits. If its insufficient the scheme is said to be in deficit, if there's more than enough it's in surplus.

Being in deficit isn't necessarily a problem unless the employer cannot afford to increase its contributions without risking the viability of the company ('our machines have worn out and we can't afford to replace them as we have to top up the pension fund').

Just to make life more interesting, the assumptions used to calculate the deficit/ surplus can make a big difference and are changed from time to time and previous Governments have unexpectedly raised taxes on pension funds and stopped them carrying forward surpluses to see them through the bad times.


In a defined contribution scheme, the employee and employer pay in an agreed amount which is invested and when the employee retires normally the investments are sold and an annuity purchased. This turns the lump sum into a guaranteed income for life. If investments haven't done as well as hoped or the terms for purchasing annuities are worse than expected the amount of pension will be disappointing but that's not a defecit as no promises were made. The employee takes the investment risk.

Endowment policies were not pensions. They were typically sold to pay off mortgages and you could either choose one which was guaranteed to pay what you owed at the end of the mortgage term or one which guaranteed less but had a share of the insurance company's profits which it was hoped would provide enough. The latter was cheaper but the policyholder took some of the investment risk. In some cases investments didn't do as well as had been assumed and people found they had to find extra money to pay off their mortgages.

Equitable Life is interesting in that it made promises to some policyholders but did not make investments to enable it to meet those promises. As a mutual organisation owned by its members/policyholders it had no option but to 'rob Peter to pay Paul' and long arguments ensued about how the assets should be shared out.

​

 

[Bromley boy]

What I do have an issue with is people taking the ****, scrounging off the back of our taxes and then avoiding paying a penny back into the society they live in. They won't leave because London has too much for them; that's why they never left. So they can contribute towards the society they live in. Properly. "Pragmatism" in this case is, really, just a euphemism for letting them take the ****.

Some of the money comes from share value, some from interest, some from contributions paid into the scheme by other working age people. But mostly, as with any investment, it comes from the money I pay into the scheme from my wage.

No, no, no no no. Just no!
It’s difficult to know where to start with the above.

You studied law, right? I despair that you cant do better than the above! Please, apply a little more thought before you make such postings!

It has become apparent, through our exchanges over a few threads, that you like to deal in simplistic sound bites of black and white, moral and immoral. That’s your choice. I prefer to deal in facts and analysis.

In a thread where we have established non doms pay 5% of the total tax take, and the highest earning 25% pay 75% of it, your rant above looks pretty irrational - who exactly is it that is “avoiding paying a penny back”....?!

In terms of the wider tax system and what I previously did for a living, I have absolutely no moral qualms with it at all - no more than I do now with holding Isas and paying into a pension.

You have a hatred of the rich and want the tax system designed to punish them. I’d rather a tax system that is fit for purpose and maximises revenue. There will always be oligarchs, billionaires, racing drivers and those who are wealthy enough to choose where they live and where they pay tax. So let’s work with that rather than against it.

Most tax professionals would tell you the most effective tax system is one that is pragmatic and simple, with tax rates set at a level that eases compliance and doesn’t unduly provoke avoidance. That is also a system that will also maximise revenue.

The smoke and mirrors of tax planning are endless and each door that you close will open a few others. Morals don’t come into it. I would prefer to accept that reality and adopt a sensible, simple and benign tax system which pragmatically seeks to maximise revenue rather than irrationally pursue the rich.

That’s the grown up view of the subject. I’m sure you’ll be along with an alternative opinion shortly...

 

[Tetchytyke]

Where have I demanded punishment of the rich? I've said the exact opposite. Sow and ye shall reap.

The grown up view of the subject is that a capitalist market needs to be relatively fair to be stable. Allowing the highest earners to offshore everything is neither fair nor, more importantly, stable. It distorts the market, it means medium sized companies cannot compete. The taxation not paid by the multi-nationals and the non-doms becomes a burden for others. Income tax rises for those stuck on PAYE, business rates and corporation tax rises for those who can't rent their intellectual property from Bermuda. Reduced public spending.

Put simply, every time Starbucks undercut a local competitor through tax avoidance, the economy destabilises. The ability to enforce tax decreases. Flashing your knickers at the MNCs might work for a bit, as Ireland and the Netherlands seem to think, but it won't last forever. Again, as Ireland and the Netherlands are proving (Apple say bye).

I'm not talking about taxing till the pips squeak. I'm talking about enforcing the rates that we do have. 15-20% corporation tax is a good deal for business. Small and medium business has to pay it. So why should Vodafone be any different? Are you seriously trying to claim that Vodafone would walk away from 80% of their enormous profit in the UK f they had to pay tax on it? Apple seriously will stop selling here? Yeah right.

 

[Bromley boy]

More or less. In a defined benefit pension scheme, a member's pension is calculated (defined) as a percentage of his salary - typically that in the last year of employment or an average over his entire length of service. He may pay a fixed percentage of his salary (or perhaps nothing at all) and the employer pays the rest. All the money goes into one big pot from which the pensions are paid. The employer takes the investment risk.

Periodically a valuation is carried out by the scheme's actuary to see if what is in the pot plus what is being paid in will be sufficient to meet the promised benefits. If its insufficient the scheme is said to be in deficit, if there's more than enough it's in surplus.

Being in deficit isn't necessarily a problem unless the employer cannot afford to increase its contributions without risking the viability of the company ('our machines have worn out and we can't afford to replace them as we have to top up the pension fund').

Just to make life more interesting, the assumptions used to calculate the deficit/ surplus can make a big difference and are changed from time to time and previous Governments have unexpectedly raised taxes on pension funds and stopped them carrying forward surpluses to see them through the bad times.


In a defined contribution scheme, the employee and employer pay in an agreed amount which is invested and when the employee retires normally the investments are sold and an annuity purchased. This turns the lump sum into a guaranteed income for life. If investments haven't done as well as hoped or the terms for purchasing annuities are worse than expected the amount of pension will be disappointing but that's not a defecit as no promises were made. The employee takes the investment risk.

Endowment policies were not pensions. They were typically sold to pay off mortgages and you could either choose one which was guaranteed to pay what you owed at the end of the mortgage term or one which guaranteed less but had a share of the insurance company's profits which it was hoped would provide enough. The latter was cheaper but the policyholder took some of the investment risk. In some cases investments didn't do as well as had been assumed and people found they had to find extra money to pay off their mortgages.

Equitable Life is interesting in that it made promises to some policyholders but did not make investments to enable it to meet those promises. As a mutual organisation owned by its members/policyholders it had no option but to 'rob Peter to pay Paul' and long arguments ensued about how the assets should be shared out.

​

God forbid, this sounds like someone who actually knows what they’re talking about and has provided some factual explanation, rather then opinions and invective!

 

[Bromley boy]

The grown up view of the subject is that a capitalist market needs to be relatively fair to be stable. Allowing the highest earners to offshore everything is neither fair nor, more importantly, stable.

Can you please explain how you think the current U.K. tax regime “allows the highest earners to offshore everything”?

 

[Tetchytyke]

In the corporate world, Starbucks buying all their coffee from their subsidiary in Luxembourg, at a price high enough to cause a small loss, is the perfect example.

Philip Green, and his wife, are the poster children for offshoring the gains of their asset-stripping. As are the hedge fund financiers behind Boots.

It's fascinating how any attempt to argue against Starbucks and Apple's behaviour is immediately spun as an attempt to create some high-tax socialist dictatorship...

 

[Bromley boy]

I'm not talking about taxing till the pips squeak. I'm talking about enforcing the rates that we do have. 15-20% corporation tax is a good deal for business. Small and medium business has to pay it. So why should Vodafone be any different? Are you seriously trying to claim that Vodafone would walk away from 80% of their enormous profit in the UK f they had to pay tax on it? Apple seriously will stop selling here? Yeah right.

I’d agree with what you say above, sensible rates and then enforce them.

The Vodafone deal I believe you’re referring to was a case of the treasury accepting over £1bn for a possible £4bn+ which likely wasn’t legally owed in any case.

Pragmatism comes into it.

 

[Bromley boy]

In the corporate world, Starbucks buying all their coffee from their subsidiary in Luxembourg, at a price high enough to cause a small loss, is the perfect example.

Philip Green, and his wife, are the poster children for offshoring the gains of their asset-stripping. As are the hedge fund financiers behind Boots.

It's fascinating how any attempt to argue against Starbucks and Apple's behaviour is immediately spun as an attempt to create some high-tax socialist dictatorship...

Starbucks is a multinational which will maximise returns where possible and they will be duly paying tax on UK Profits chargeable to corporation tax, as will Apple. The UK profits figure will be calculated in accordance with relevant legislation and accounting standards. We've discussed Philip Green. A very self serving individual but he apparently did nothing illegal.

I'd always say, blame the system rather than the individual.

There will always be cases at the margins where the rules are stretched to breaking point. let's focus on creating a tax system which is simple and benign enough to achieve decent revenues and not disincentivise enterprise.

That will also maximise tax revenue!

 

[Dai Corner]

There will always be cases at the margins where the rules are stretched to breaking point. let's focus on creating a tax system which is simple and benign enough to achieve decent revenues and not disincentivise enterprise.

That will also maximise tax revenue!

Hear hear!

If I had to sum up my view in a soundbite it would be something like "Let's welcome international companies and wealthy individuals and have them spend some money here and pay some tax, even if it's not as much as some people would like"

 

[Tetchytyke]

I'd always say, blame the system rather than the individual

I always say the same thing too.

The issue, for me, is that when Starbucks and Vodafone and Apple run everyone else put of business, what then?

As I said, it's not about taxing the pips. It's about making everyone play by the same rules. And yes, I do blame (successive) governments who are not prepared to do so because of their own self-interest.

 

[Dai Corner]

The issue, for me, is that when Starbucks and Vodafone and Apple run everyone else put of business, what then?

I doubt if they will, but perhaps we should try not to depend too much on taxing multinationals? If they pay less corporation tax they will probably pay higher dividends to their shareholders and Governments can get their revenue that way?

 

[Bromley boy]

I always say the same thing too.

The issue, for me, is that when Starbucks and Vodafone and Apple run everyone else put of business, what then?

As I said, it's not about taxing the pips. It's about making everyone play by the same rules. And yes, I do blame (successive) governments who are not prepared to do so because of their own self-interest.

Not taxing until the pips squeak is an eminently sensible approach! (although, I’d observe your first paragraph is more of a competition law question than a tax question ).

We are finally getting somewhere! Ironically you and I probably wouldn’t disagree on what we want out of the tax system, although we may disagree about how best to go about it.

I agree it’s about making people play by the same rules (but that means accepting Lewis Hamilton can claim VAT relief for his jet, if he can persuade the tax authorities its a business asset, just as a plumber can on his van purchase).

But crucially it’s also about making those rules simple and benign enough that:

a. Tax payers can easily follow them;

b. There isn’t too much incentive to spend money on expensive advisors in order to avoid them.

As a general rule, simplification and transparency is the way forward, in order to maximise revenues, when it comes to tax!

 

[Bromley boy]

Hear hear!

If I had to sum up my view in a soundbite it would be something like "Let's welcome international companies and wealthy individuals and have them spend some money here and pay some tax, even if it's not as much as some people would like"

Abso-bloody-lutely! Very well said.

 

[DarloRich]

Funny that, despite all of the information released, the Torygraph only saw fit to complain about Labour party finances and the Sun only saw fit to complain about Gary Lineker. Private Eye will tell you why.

 

[Dai Corner]

Funny that, despite all of the information released, the Torygraph only saw fit to complain about Labour party finances and the Sun only saw fit to complain about Gary Lineker. Private Eye will tell you why.

I've subscribed to Private Eye for many years and enjoy the inconvenient truths they publish. Looking forward to it dropping through the letterbox tomorrow.