Friday, July 31, 2009

Tax specialists - in indecent haste?

We linked to this FT story a couple of days ago but now feel it's worth dwelling on. It notes that the IMF, worried about the economic crisis, has concluded that

"financial innovation has been driven primarily by the search for new ways to allocate risk, but also by tax avoidance”

And the article notes:

Amid the wreckage of the financial crisis, there are few areas of banking less tipped for a comeback than the baroque world of tax-driven structured finance. . . (one opportunity lies in) the breathtaking scale of bank losses – coupled with many countries’ strict rules on how they can be used, particularly after mergers. That prompts a need for heavy structuring of losses and, with it, a need to get the tax specialists back on their feet. With indecent haste, some might say.

Oh dear. And look how bad it has been:

"In 2006, the UK Revenue identified a share-dealing scheme that had the potential to wipe out a year’s corporation tax liabilities for the entire banking sector. In 2007 the US identified a significant threat from “foreign tax credit generators” which it viewed as “particularly abusive” because they are designed to generate credits in any amounts the taxpayers desire."

And yet it should also be noted that

"the complexity of this issue means that regulators are at an early stage of thinking about it."

Well, governments are not alone in not finding it easy, figuring out what the banks are up to. Lots of people in the banks don't understand what the banks are up to either. The article is rather gloomy about finding solutions. But we note, in this context, something in a hard copy of the Guardian from July 24th - though we can't, strangely, find the link:

"Bank bosses who allow their firms to devise schemes to help customers avoid paying tax could face sanctions from the Financial Services Authority.

This was raised at the regulator's annual public meeting. A new voluntary bank code of conduct is out for consultation, the article notes. An official at the meeting, Nigel Harper,

"was particularly referring to the structured finance operations of banks, which often specialise in tax planning, when asked whether individuals employed by banks not signing up to the code would still be considered "fit and proper" under the FSA's rules.

Lord Turner, the FSA chairman, said

"The whole overlap betweeen tax and regulatory arbitrage and the fit and proper test is one we are still thinking about."

Voluntary codes are nowhere near enough, though they can at times have a place, as long as they don't whitewash and legitimise the illegitimate. At least brains are, at long last, starting to whir on this crucial subject.


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