Thursday, December 16, 2010

The Daily Mail gets stuck into thin capitalisation

Our last links blog just mentioned a long (and excellent) article by the Daily Mail, a right-of-centre popular British tabloid newspaper looking at the snowballing tax protests. We have long been told that our issues, especially on the subject of tax, are too complex to interest the vast majority of people. Tax is certainly complex - and international tax more so. It may be that tax professionals use some of the most awful names to describe what are often very simple principles: (try "unitary taxation with formulary apportionment," for example.)

The Mail looks at the case of Alliance Boots, which was bought up by a private equity firm in 2008 and shifted (at least its legal base) to a nondescript building, 94 Baarerstrasse in Zug, Switzerland. A company which had a tax bill of £89 million in the last year it was quoted on the stock exchange cut its tax bill to a tenth of that amount now - even though sales and trading profits have consistently grown. The trick it used was an abusive transfer pricing trick known as 'thin capitalisation.' It's a horrible name, but the Mail explains it very simply, and very clearly.
As part of the takeover, Alliance Boots borrowed almost £9billion from various banks. That debt incurs interest, and interest payments can be offset against profits when calculating the company’s taxable income. A higher interest bill means lower profits — and less tax to pay.
And of course the place where it realises those profits are in Switzerland - where the taxes on those profits are small. Very simple to understand.

There's surely plenty more to the tax story than this - other jurisdictions will presumably have been involved too - but the basic point is entirely valid. This is straightforward, unadulterated, abuse: a transfer of wealth from taxpayers to extremely wealthy private equity officials.

The Mail also explains transfer pricing, again very clearly:
a device which allows multi-national companies to lower their overall tax bill by making bigger profits in countries with lower taxation rates than they do in high ‑tax countries.
Indeed. And we have a lot more on that here. The article also looks at AstraZeneca (of course,) Starbucks, WPP, Shire, Experian, Wolseley, Kraft and Cadbury, and others. And the Mail digs up more dirt on Philip Green and one of his businesses, BHS.
Between 2002 and 2004, Bhs paid dividends totalling £423million. Virtually all of these went to offshore companies linked to Green’s wife. But no tax was paid on dividends to these companies. Had Tina Green been living in Britain, the tax bill would have been at least £100million.

Furthermore, the dividends from both Bhs and Arcadia were possible in part because the companies increased their borrowing to fund the payouts. That meant higher interest bills on their debts. And that, once again, meant that, in turn, the companies reduced their taxable UK profits — and thus faced smaller corporation tax bills.

On top of this, Bhs has done business with Carmen Properties, a firm based in the tax haven of Jersey and controlled by the Green family.

In 2001, Bhs sold a clutch of its stores to Carmen for £106million. Carmen thus became Bhs’s landlord, and over the subsequent seven years received £81million in rents, providing a further source of income for the Green family. It also reduced Bhs’s profits, thus cutting its tax bill.

And there's more. Read it. As we have so often said, our campaign is - like the fight against corruption, not a left- or right-wing issue. It's for everyone.


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